How a $40m bank in the making mushroomed to staggering $80m

Friday 10th August 2001

SPECIAL INVESTIGATION

MARK BURTON: Warned of possible regulations breach

Important questions for Securities Commission chief John Farrell

How quickly will you move on Act MP Rodney Hide's complaint?
When will you require Jim Anderton to explain his television comments?
How long will it take to identify alleged breaches of securities law?
What action will you take against Mr Anderton for alleged breaches?
Should Mr Anderton step down as a minister pending the outcome of your investigation?

By Jock Anderson

The public can thank Deputy Prime Minister Jim Anderton's blundering for ensuring the People's Bank costs twice as much to set up as it should have.

Instead of costing $40.8 million of taxpayers' money - with the balance coming from a public redeemable preference share float - Mr Anderton's gaffe means the bank's establishment now has an $80 million price tag.

Eighty million dollars is the figure the government has used officially since February 20, which indicates Mr Anderton's comments sunk the share float proposal.

Here's how the minister of economic development and Alliance champion's big mouth scuttled a bank funding plan that would have saved the taxpayer $39.2 million, minus the cost of a public float.

During an appearance with National finance spokesman Bill English on the Holmes television show on June 13, 2000 Mr Anderton promoted his perceived benefits of a People's Bank.

After slagging off the established banking community Mr Anderton, describing how the People's Bank might be funded, said: "Well, the thing about buying redeemable preference shares is that you don't risk them, you get an interest payment on them, and they're redeemable at any time by the company if they want to buy them back at the price that you paid. And you can trade them if you want. But basically there's very little risk. Is anyone seriously suggesting New Zealand Post is in the business of going broke? I don't think so ..."

Officials immediately went into a tail spin, raising concerns at ministerial and cabinet level that Mr Anderton's reference to securities offerings in relation to the potential involvement of New Zealand Post in banking breached the Securities Act.

In a "state of the play" report dated June 16, 2000, a copy of which was obtained by The National Business Review, officials from the Crown Company Monitoring Advisory Unit (CCMAU) signalled to State-Owned Enterprises Minister Mark Burton their concern over "comments in the media" about New Zealand Post's (NZPL) potential involvement in the People's Bank.

Officials told Mr Burton government-sourced comments related to securities offerings "may cause the Crown to breach the Securities Act. Such comments might also impact on NZPL."

After taking additional and fuller legal advice officials reported to Mr Burton on June 29, 2000.

In that report, a copy of which was obtained by NBR, officials told Mr Burton where they believed Mr Anderton broke the law.

* They said his statements along the lines that there might be an offer of redeemable preference shares to fund a bank venture could be "caught" by the Securities Act definition of "offer."

* They explained that s3(6) of the Securities Act set out "very strict limits" on what could be said without an "offer" being made and that the "public comment made to date regarding NZPL's potential involvement in banking has gone beyond these restricted matters."

* They warned that any further comment about the issue of securities should be restricted to what was allowed under s3(6).

* They argued Mr Anderton's statement on the Holmes show was effectively advertising that the planned redeemable preference share was "safe or free from risk."

* By making such an "advertising" comment officials considered Mr Anderton and the Crown were in breach of the Securities Regulations.

* Assuming no certificate had been completed in accordance with the regulations in respect of Mr Anderton's "advertisement" those comments "probably amount to a technical breach."

(In May 1998, Securities Commission chief executive John Farrell warned the public about putting money into investments that claimed to be "safe" and "free from risk." Mr Farrell warned that a person promoting securities to the public in a manner which did not comply with the law may be personally liable for repayment of investors' money and may face criminal charges.)

Officials warned Mr Burton of the danger any formal offer of securities to fund the banking venture by NZPL might be linked back to public comments by Mr Anderton and others.

"This may cause the Hon Jim Anderton, the Crown and potentially any director of the banking venture (which may in effect be the directors of NZPL or NZPL itself) to be in breach of the Securities Act and the Regulations."

"There is potential civil liability for any such breach and depending on the circumstances, even criminal liability with a fine of $15,000," officials warned.

They said s56 of the Securities Act provided for civil liability in respect of untrue statements. "Further, s55 of the act essentially deems a statement to be untrue if it is misleading."

"On this basis the statement made by the Hon Jim Anderton that any redeemable preference shares offered would be without risk is untrue," the officials said.

"In order to avoid liability under s56 each director of NZPL as well as any relevant minister of the Crown, and someone on behalf of the Crown, would have to publicly disclaim the statement of the Hon Jim Anderton before the redeemable preference shares are subscribed for."

Officials recommended that nothing specific should be said about the terms or potential terms of any public offering of securities that NZPL may make in the future to sustain its involvement or potential involvement in banking.

They also recommended their advice be referred to all ministers party to discussions with NZPL, so they were aware of the legal ramifications of statements they made connected to potential securities offerings by NZPL or the Crown.

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