The Shareholders Association has applauded the Financial Market Authority's decision to take legal action against Diligent founder Brian Henry.
The FMA today began civil proceedings over Henry's alleged "market manipulation" of shares in the NZX-listed company, dating back to 2010.
It is the first case of its kind since new sanctions came into force in 2008.
Shareholders Association chairman John Hawkins said the action sent a clear message that the regulator was able to thoroughly investigate inappropriate behaviour, even if it dated back some time.
"The reality is that those who fail to play by the rules are going to find there is no place to hide," he said.
Henry was a founding member of corporate governance software seller Diligent Board Member Services but left in March 2009.
The six claims against him allege certain orders and trades he made in 2010 breached the market-manipulation provisions of the Securities Markets Act.
The maximum fine for breaching the provisions is $1 million for each contravention.
Henry said he would respond "vigorously" to the proceedings through his New Zealand lawyers.
The New York-based entrepreneur said in a statement that he was disappointed the FMA was pursuing the matter more than three years after the alleged breaches took place.
He said he immediately raised the matter with the regulator's predecessor, the Securities Commission, in 2010 when he realised he had made the errors.
He said the commission discussed the matter with him and took no action.
"The trading I brought to the attention of the Securities Commission in 2010 had a minimal effect on the market, inadvertently lowering and then raising the price of the stock by a matter of cents," he said.
"The net effect of these trades at the time was about $1500." Diligent listed on the NZX in 2007 and now has a market capitalisation of $527 million.
Diligent shares were about 55c at the time of the alleged manipulation.
They are now worth $6.40, falling 1.5 per cent in early trading after the FMA announcement.
Henry set a record during the Diligent float when he spent just 24 hours in the chief executive role before resigning.
Controversy erupted over his failure to disclose past links to Energycorp, one of many companies that toppled after the 1987 stockmarket crash.
Energycorp collapsed owing $20m and Henry was subsequently bankrupted.
He also did not initially disclose that his brother, Energycorp director Gerald Henry, had been imprisoned for fraud in the United States in 1996.
On his website www.brianhenry.net, Henry says he was "stung" by the criticism.
"This stuff was so ancient that both myself and my legal advisors concluded that such a disclosure was irrelevant," the site reads.
"You can be sure that I've picked myself up and won't be making that mistake again."
FMA head of enforcement Belinda Moffat said market manipulation interfered with the integrity of New Zealand's financial markets and harmed the function of open, transparent and efficient capital markets.
Regulators are notoriously slow at investigating the issue, with an NZX inquiry into Blis Technologies stretching into a second year.
The practice has carried civil and criminal sanctions only since February 2008, when an amendment to the Securities Markets Act came into force.
Insider trading has also been illegal for four years, without a single case being taken.
The FMA has examined six complaints in the past year involving trading before price-sensitive market announcements, with some of the trades involved for as much as $60,000.
Nothing illegal was found in four cases, and two are still being investigated.
- Brian Phillip Henry of Auckland, Barrister, and Managing Director of US50 Fund Limited, Goldman Henry Capital Management Limited and AmanahNZ wishes it to be recorded that he is not the Brian Peter Henry named in the FMA's press release today confirming that it has filed and served civil proceedings against said Brian Peter Henry.