Suspicious share trading overshadows Fletcher Forests news

By NZPA

Wednesday 15th January 2003

A strong suspicion of insider trading blackened Fletcher Challenge Forests' (FCF) announcement today of a big forestry cutting rights sale and $140 million capital repayment.

The Securities Commission said it would investigate trading in FCF shares ahead of the announcement following a request by the Stock Exchange.

"The Securities Commission has confirmed that they will be looking at whether there may be any evidence of insider trading ahead of the company's announcement," the Stock Exchange said in a statement.

The exchange will hold its own separate probe into the trading "to ensure that all parties involved have complied with the new NZSE conduct rules," including the new continuous disclosure requirements.

FCF announced it had sold cutting rights for 8940ha of forests to UBS Timber Investors for $US65 million ($NZ122 million) and would return 25 cents per share to investors as a result.

Brokers said there was more than a whiff of insider trading in yesterday's share trading ahead of the announcement.

The head shares closed 7 cents higher at $1.08 yesterday and at one stage rose as high as $1.10. Today, they rose a further 10 percent to $1.19 before easing back to $1.18. There was similar action in the prefs which gained 10 cents to $1.16 today.

FCF company secretary Paul Gillard described the share price rise yesterday as "coincidental" but brokers said it stank.

One, who did not wish to be identified, said there was "very, very aggressive" buying by three brokers first thing yesterday which he described as "abnormal".

The buying was initiated by JB Were, hoovering everything on offer at $1.03, two cents above Monday's close. Its bidding was soon trumped by Salomon Smith Barney which came in at $1.05 and then Forsyth Barr Frater Williams which bid at $1.08.

"Within the first 45 minutes of trading, the share price moved 8 cents -- that's a pretty impressive movement for a stock like that. There's definitely a smell there," the broker said, adding he had some angry clients.

Such transactions as the one with UBS Timber, a unit of fund UBS Global Asset Managagement New York and ultimately, Swiss Bank UBS, involved lawyers, bankers and consultants and information could leak without the deal makers being inside traders, the broker said.

He believed two of Fletcher's major owners, Rubicon with a 17.6 percent stake, and Guinness Peat Group, were unaware of the deal before its announcement.

The commission was unable to say how long its investigation would take while the exchange said it would act swiftly.

Mr Gillard denied any leaks at FCF.

"There were some analysts' reports over the prior few days, plus some buying out of the United States which we think had something to do with the stock's rise. We don't think the two are linked at all."

The analysts' reports mostly referred to a more positive for forest products.

But there was more than talk in the market of an upturn in commodity prices yesterday. Several brokers spoke of a capital return, separate from the $50 million buyback previously announced and replaced by the capital return.

It is not the first time Fletcher Forests or its former holding company Fletcher Challenge, has been caught in an insider trading scandal.

Last March, Fletcher Forests settled a $75,000 claim out of court with alleged insider traders Paul Hyslop, Keith Stewart and Liz Corby. That scandal involved manipulation of Fletcher Forests' share price in May 1999 and was investigated by the Securities Commission.

And in December 1999, former Fletcher Challenge chairman Kerry Hoggard resigned after it was revealed he had bought nearly $635,000 of Fletcher Challenge shares the day before the company's major restructuring was publicly announced.

Mr Hoggard paid up to half a million dollars in an out-of-court settlement after Business Roundtable chief executive Roger Kerr and Cathy Franks, wife of ACT MP Stephen Franks, took a case against him. That money, after costs, went into a trust fund set up to fight insider trading.

Mr Franks said it was early days, but the trust's funds of $350,000 were intended for cases when the authorities failed to act.

He said there was possibility that investors came across the information legitimately and the fault was with the company for failing to announce earlier.

Insider trading issues aside, analysts generally applauded today's deal which values FCF close to the $1.85/share at which it was valued during last year's abortive Citic/Rubicon deal.

FCF will still manage the forests over the 13 years of the UBS deal, will retain land ownership, and purchase rights to half the trees.

Chief executive Terry McFadgen said the deal was consistent with the new strategic direction outlined in November when the company said it was no longer pursuing ownership of the Central North Island Partnership's massive Kaingaroa forest.

Today's deal will result in an accounting loss of approximately $15.8 million (after tax) but he said the book value was less important than the share price.

"Relative to where the share price has been sitting, namely around the dollar mark, it is an extremely good deal and it is one of the primary drivers for it."

Shares in Rubicon, which will receive nearly $25 million from the capital return, rose 2 cents to 75 cents.

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