How to restrain the 'pet liquidator'

COMMERCE SELECT COMMITTEE INQUIRY

BY ROB STOCK
Last updated 05:00 06/12/2009
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Can we fix them? In terms of failed finance firms, the answer is a firm yes according to the flood of suggestions to the commerce select committee inquiry.

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THE RECEIVERSHIP industry has been slated for its conflicts of interest and close-lipped attitude by frustrated investors and finance professionals in written submissions to the commerce select committee investigation into finance companies.

Those calling for law changes included forensic accountant Murray Lazelle, who said shareholders and directors of finance companies should also not be allowed unfettered right to select a pet liquidator to help them cover up their wrong-doing.

"In many instances a liquidator appointed by the directors is appointed for the particular purpose of ensuring that probing investigations are not undertaken," said Lazelle.

If creditors get together in sufficient numbers they can have a liquidator replaced, he said, but a better solution would be to give the Securities Commission power to replace liquidators.

Lazelle said often there were conflicts of interests for receivers and liquidators, and that may be helping trustees who "fell asleep at the wheel" escape being called to account for their professional failings.

"The large accounting firms that are traditionally appointed as receivers rely on appointments from the trustee companies themselves. There is a natural conflict here – the firms rely on business relationships with trustees in order to get lucrative receivership appointments and they are naturally reluctant to then investigate the inadequacies of the trustee."

It was not just directors who were potentially benefitting from pet recievers, Kapiti Coast sharebroker Chris Lee told the committee in his written evidence.

"There is no evidence that receivers/liquidators or supervisors of moratoria are pursuing trustee failures in a bid to get compensation for investors.

"It should be noted that the trustees generally select the receivers of liquidators. There is obvious conflict of interest implied in this selection process."

That was despite there being: "countless examples known about trustee failure to make reasonable inquiry about suspicious transactions, most of which stem from Covenant and Perpetual Trust", he claimed.

It was not just conflicts of interest that were pointed out to the select committee.

Private investors were angry at what they saw as poor performance by receivers and woeful communications which leave investors with more questions than answers.

Wellington investor Clare Jonas suggested: "The select committee should inquire as to why companies such as PriceWaterhouseCoopers are taking years to recover anything or nothing from the lost funds in failed finance insitutions."

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Investor JHodges wrote to the committee: "Our experience has been that liquidators do not keep in touch sufficiently with those that have lost money in a failed company because it is time consuming for them and costs money, but we need to know what is going on and when we will get some of our money back."

She called for quarterly reporting, not the terse mandatory six-monthly reports receivers and liquidators currently issue.

CALLS FOR CHANGE

The commerce select committee inquiry into finance company failures is looking for ways to ensure the collapses of finance companies are not repeated. Suggestions have flooded in from ordinary investors to experts in high finance. The Sunday Star-Times surveys some of the calls for action:

The Institute of Directors called for a deeper inquiry to look at issues like limiting related party lending and extending the legal duties of finance company boards to act in the best interests of not only shareholders but also depositors, so that confidence can be restored in the non-bank sector.

Levin investor John Patrik Wikstrom, 64, called for a rocket to be put under regulators and law enforcement agencies: "It has taken two years of lobbying to `deaf' ears by investors on government agencies for no legal action to date for those directors and managers who have gained investor funds by deceit. Until agencies learn to act swiftly nothing much will change. For those investors who invested in failed companies between 2006 and October 2008 and collectively lost up to $6 billion and numbered up to 240,000 investors, it will have taken up to three years to visit their problem by this committee, which is insulting."

Forensic accountant Murray Lazelle said moratorium votes did not present all the relevant information investors needed, especially those that benefit directors and shareholders of the finance companies. "In some instances the principle advantage of a moratorium is the benefit of the delay which takes any preferential arrangements outside the period in which they can be challenged." He said a moratorium might also lead to highly relevant inactions, "for example a decision by incumbent directors not to investigate a matter, not to press for repayment or not to litigate against associated parties."

Legal firm Bell Gully in its submission wanted "streamlined procedures" to make it easier for investors to get together to take class actions. Others called for the Securities Commission to be mandated and funded to take cases on behalf of investors.

"Risky financial institutions should not be allowed to use well-known figureheads, eg Sir Colin Meads, to advertise and mislead people into investing in such risky ventures," said Wellington investor Claire Jonas. Meads fronted Provincial Finance adverts and former newsreader Richard Long led Hanover's advertising campaign.

Among a raft of suggestions, Kapiti sharebroker Chris Lee suggested directors be forced to hold an insurance bond so there's cash available if they are sued. He also called for trustee duties to be enshrined in law with civil and criminal penalties for failures. Financial advisers should pay $5000 each a year to fund an ombudsman similar in power to the Banking Ombudsman.

Among those making calls for lifetime director bans, Rotorua investor Kathy Gordon: "The law does not deal adequately with directors or any other employees who have been implicated in inappropriate activity in respect of finance companies and advisers. They should not be allowed to start up other companies. They are criminals and gamblers of ordinary New Zealanders' life savings."

Wellington investor Geraldine Murphy said it was time to end the ability to hide assets in trusts: "The law must be changed to enable trusts to be accessed to retrieve monies that have been intentionally diverted/transferred to the trust." Legal firm Bell Gully called for laws regulating a true trust from a sham.

Perpetual Trust, the trustee for numerous failed finance companies including Hanover, said low levels of financial literacy was much to blame, but did join calls for professional indemnity insurance for finance company directors to be made compulsory.

PriceWaterhouseCoopers' David Bridgman said more needed to be done to ensure investors faced with moratoriums got truly independent assessment of the proposal, adding some finance companies had "placed exaggerated emphasis on the level of financial support" and "presented overly optimistic projections about likely future outcomes" to encourage investor support for restructuring.

Bridgman also called for "an automatic requirement that all (dividend) distributions made within a period of two years prior to failure" by a closely-held finance company be investigated by the Companies Office.

- Sunday Star Times

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