Record settlement for Credit Sails investors
A $60 million settlement obtained for Credit Sails investors is the biggest cash payout ever achieved by the Commerce Commission.
The regulator's general counsel Mary-Anne Borrowdale said reaching a landmark deal was hugely satisfying after more than a year of tough negotiation.
"It was a long road - it really was," she said. "The outcome is a very satisfying one to the commission. It's our largest cash settlement under any of the acts we enforce."
Credit Sails raised $91.5m from about 3000 small investors and charitable trusts in 2006 and was marketed as a safe, high-yielding stock with AA-rated capital protection. But by 2008 it was virtually worthless after its structure was decimated by the financial crisis.
Under the agreement announced yesterday companies involved in marketing Credit Sails - broker Forsyth Barr and French merchant bank Credit Agricole Corporate & Investment Bank - will pay $60m into a fund to compensate investors for losses estimated at $70m.
Neither company admitted liability.
Borrowdale said the commission's investigation had focused on how Credit Sails, a complex product involving credit default swaps, was sold to investors. During the probe the commission forced Forsyth Barr and others to reveal internal marketing documents.
"There were decisions taken about the prominence of messages [to investors] about risks," said Borrowdale. "We found some of those messages and communications very troubling."
After starting the investigation in mid-2010, the commission decided to pursue legal action in September last year.
Although it had the option to prosecute criminal charges against the firms involved, Borrowdale said it was decided civil action would get more money back for investors.
"If someone is willing to engage with us to make good a good proportion of loss then we'll talk to them about that, and that's what happened here," she said. "It was over a year of negotiation basically."
Although the payment represented recovery of only about 85 per cent of losses, investors were likely to be better off taking the deal than fighting for more through the courts.
"Our proceedings tend to take a long time - three or four years is par for the course," said Borrowdale, "so to get 85 per cent now, people see the real merit in that."
Investors reacted to the settlement with a mixture of relief and anger.
"I'm obviously very pleased," said Dunedin investor Andrew Cunningham. "I'll take the money and I'll never deal with those people again."
Retired businessman Grant Waterhouse, who stands to recover more than $100,000 of a $150,000 investment, said news of the payout was reward for the heartache.
"It's just good," he said. "Despite the fact these pricks don't admit liability, the fact they've coughed up $60m has got to say something.
"And it's good they've been held to account. They would have just squirmed their way out of it if the Commerce Commission hadn't got the bit between their teeth."
The commission's investigation and settlement followed a vociferous campaign on investors' behalf by Wanaka-based fund manager Greg Marshall, principal of Logic Funds.
"I feel quite good - a little bit proud," he said.
He had talked to about 100 clients about the settlement so far, he said, including a Southland couple in their 80s who had put the proceeds of a farm sale into Credit Sails.
"They were dancing on the table," said Marshall. For many investors, news of the payout was "a life-changing event".
It was nevertheless disappointing that the institutions behind Credit Sails had not accepted responsibility.
"The most powerful words are 'that's my fault, I'm sorry", and they still don't appear in this. 'We pay $60m but we disagree'? Please."
Cunningham said the only other thing he'd like to see would be resignations at Forsyth Barr, "but I suppose they'll manage to crawl under a few stones until the dust settles."
Waterhouse said the firm had fed him "bullshit" about Chinese walls between the firm and the NZX as regulator of the listed Credit Sails notes.
"You can quote me on this - the Chinese walls were about as thick as the condoms they used to shove it up the shareholders' arses."
Forsyth Barr managing director Neil Paviour-Smith said the settlement was "a generous pay-out".
"We have always believed that we have complied with the Fair Trading Act and do not accept the commission's views that some representations may have been construed as having breached the Act."
In a statement to clients, the firm said it was pleased to announce the deal after being "unable to defend itself against various accusations in the media and by external third parties due to strict confidentiality agreements with Credit Agricole."
Herve Martin, managing director global markets at Credit Agricole CIB in Sydney, said: "I cannot make any comment. Thank you, goodbye."
Payouts from the settlement are expected to begin in March next year.