FMA sinks teeth into Whimp

Bernard Whimp has provided the Financial Markets Authority (FMA) with an easy first scalp in Financial Markets Authority v Carrington Securities LP1 and in the exercise of its new powers to deal with predatory low ball offers.

This is a good result for the FMA as it seeks to win public confidence in the new regulatory regime.

The context

The litigation related only to the most recent offers made by Whimp. These offered a price higher than the current share price but with payment spread over ten years in equal annual instalments. During that time, any dividends would go to Whimp.

The offered price was headlined at the front of the offer together with a favourable comparison to the recent market price on NZX and emphasis on the 'first in first served' limited period for the offer. Other important terms (including the spread payments) were set out in much smaller print on the reverse side of the document.

An earlier interim court order had required Whimp to send notices to all accepting shareholders requesting that they affirm their agreement to sell. Seventeen affirmations were received by the FMA and 132 by Whimp (notwithstanding that the order required that they be sent to the FMA).

In addition to the court proceedings, the FMA also used its new power under section 49 of the Financial Markets Act to require Whimp to disclose to potential 'investors' specific warning notices issued by the FMA in any future unsolicited offers.

The FMA's second cause of action in relation to misleading aspects of low-ball offers sent by Whimp before Christmas has been adjourned for later determination.

The case

The FMA argued that the deferred payment offers breached section 13 of the Securities Markets Act 1988. Section 13 prohibits conduct, in relation to any dealings in securities, that is misleading or deceptive or is likely to mislead or deceive.

It is not necessary to prove either that the deception was deliberate or that anyone was actually deceived by it (although the Court was clear that both were manifestly present in this case).

The Judge, Gendall J, found that the offers were misleading because they created the impression that full payment would be made immediately or promptly and that the offer price exceeded the current share trading price. Further, the offer document did not convey clearly:

"that the consideration for the acquisition of the shares was, to the extent of 9/10ths an unsecured loan to Limited Partnerships about which no information...