Some awkward disclosures look on the cards for the Mighty River Power prospectus.
OPINION: Chalkie is fortunate to have grown up before the advent of Facebook, Twitter, phone cameras and computers. There are, therefore, no incriminating photographs of your correspondent's youthful indiscretions lurking in cyberspace.
Some details of history are best neglected, left to crumble into dereliction, overrun by weeds and feral cats.
In this modern age, however, skeletons rarely stay in their closets and even company directors are now obliged to disclose their less-flattering career details when soliciting money from the public.
This is all to the good. Chalkie doesn't care if a fine upstanding member of the board once had an embarrassing incident involving tequila and transvestites, but he does care if their professional life shows periods of poor judgment.
These new disclosure guidelines haven't had much of a test drive so far - the Financial Markets Authority published its final guidance note only last June - so it will be interesting to see how they are handled in the Mighty River Power prospectus.
The awkward detail here involves the career history of MRP director Trevor Janes.
Between March 2005 and October 2006, Janes was a director of Capital + Merchant Finance, one of the worst of the finance company failures.
Capital + Merchant collapsed into receivership in November 2007, a year after Janes left the board.
The first receivers' report noted the company had assets supposedly worth $200 million and liabilities of $189m, of which $167m was owed to debenture investors and $20.6m owed to corporate financier Fortress.
The Fortress debt had priority over debenture holders based on a deal agreed on October 5, 2006, and it was repaid in full, with interest. However, debenture holders, who included many elderly investors, have had zero so far and can expect zero in future unless the distant prospect of legal action produces results. For them, Capital + Merchant caused 100 per cent loss.
Since 2007 it has become apparent that the company was not the mere victim of economic circumstances. Last August, three of its directors - Neal Nicholls, Wayne Douglas and Owen Tallentire - were jailed after being found guilty of fraud charges brought by the Serious Fraud Office.
The three, along with fellow directors Colin Ryan and Robert Sutherland, have also been charged with criminal offences by the Financial Markets Authority, which alleged they made untrue statements in prospectuses dated August 2006 and September 2007.
Tallentire, Ryan and Sutherland have pleaded guilty to those charges. The trial for the others is due to begin on Monday.
The thing is, the charges relate to alleged breaches of section 58 of the Securities Act, which says: "Subject to subsection (4), where a registered prospectus that includes an untrue statement is distributed, every person who signed the prospectus, or on whose behalf the registered prospectus was signed for the purposes of section 41(1)(b), commits an offence."
But not everyone who signed the August 2006 prospectus was charged. Of the four director signatories, Janes and Kelly Wright were not prosecuted but Nicholls and Douglas were.
This is obviously a relief for Janes and Wright, but it has led to some muttering around the market about why Janes, in particular - who serves as chairman of Public Trust, deputy chairman of ACC, deputy chairman of MRP and as a member of the NZX markets disciplinary tribunal - should be spared the courtroom's test of his role.
At this point, Chalkie should point out that although section 58 creates a strict liability criminal offence and the Crown doesn't have to prove intent, there are defences available. As subsection 4 says: "No person shall be convicted of an offence under subsection (3) if the person proves either that the statement was immaterial or that he or she had reasonable grounds to believe, and did, up to the time of the distribution of the prospectus, believe that the statement was true."
This was an important part of the defence run by directors of Lombard Finance, for example, although all were found guilty a year ago of charges relating to making untrue statements in a prospectus.
Chalkie notes that subsection 4 requires a person to prove reasonable grounds for believing statements to be true if they are to avoid conviction. So maybe Janes and Wright were able to prove they had reasonable grounds to believe the prospectus was true.
Is that why they were not charged?
When Chalkie asked the FMA, the answer was: "Following a thorough investigation and based on the evidence, the Securities Commission took action against those individuals it considered were responsible for the alleged untrue statements in the various offer documents.
"Decisions on which parties to prosecute in this matter preceded FMA's establishment on 1 May 2011."
So the commission decided who to charge based on their perceived responsibility, not on their proven defence under subsection 4.
This is perfectly acceptable under the solicitor-general's prosecution guidelines, which include evidential and public interest tests before prosecution takes place.
In essence, it appears Janes and Wright were seen as being not to blame for any alleged untruths in the prospectus.
Fair enough. Chalkie has no reason to believe otherwise.
Still, given the scale of the disaster at Capital + Merchant it would have been nice to have that decision made openly by the court, rather than privately by the commission and Crown Law.
All that unpleasantness may be in the past for Janes, but it will be a delicate subject for the people drafting the high profile prospectus for MRP, due to float this year. FMA guidance on disclosure requirements notes: "Where you are highlighting the skills, knowledge and expertise of a particular director or senior manager, you should disclose any other relevant factors so a balanced view of that individual is presented. You should consider disclosing information about any legal or disciplinary actions against either the person or any entities of which they were a director at the time to the extent this is likely to be material to an investor."
Mighty River chairwoman Joan Withers said all the appropriate prospectus disclosures would be made. "Any board going through any sort of process like this has a very clear understanding of what the requirements are, and we certainly have that."
It sounds like Janes' less than heroic tenure at Capital + Merchant will at least get a mention in his prospectus profile, but Chalkie hopes to see a sparing use of the airbrush.
Chalkie is written by Fairfax Business Bureau deputy editor Tim Hunter.