Court asked to back insider-trading case

By Deborah Hill Cone

Friday 8th February 2002

The High Court at Auckland was yesterday being asked to allow one of the country's few insider-trading cases to proceed.

A group of former shareholders in oil exploration company Southern Petroleum is asking the court to clear the litigation to go ahead, at Southern Petroleum's expense.

The case, which relates to the 1996 takeover of Southern Petroleum by Petrocorp subsidiary PIL, has had a tortuous history to this point.

It was originally taken by New Zealand Petroleum, which became Eldercare but that plaintiff settled with Fletcher Energy for about $1.3 million last February.

The intended plaintiffs who chose to push on with the case are shareholder Rosemary Haycock, Stuart Cairns (of broking firm D F Mainland), Green & McCahill Properties and John Oakley.

They want Southern Petroleum to take the insider trading case against former Fletcher Challenge Petroleum CEO Jim Patek and Fletcher Challenge Energy Taranaki as first and second defendants.

The plaintiffs claim a review, known as the Deep Gas Study, which found promising information about the Mangahewa gasfield in the Taranaki basin, was kept from them at the time of the takeover.

The alleged inside information included an evaluation of the Mangahewa structure estimating it was potentially bigger than the substantial Maui gasfield, the plaintiffs claim.

The team preparing the deep gas report in 1995 also found the Mangahewa structure was suitable for the use of new technology called hydraulic fracturing and that it was probable the gas could be recovered at an economic return at the highest level by accepted industry standards.

The deep gas team proposed drilling an appraisal well, Mangahewa 2, the following year, 1996.

The shareholders claim this was inside information which was kept from them at the time of the takeover.

"It is self-evident that information of the discovery of a "world class" field or a field larger than Maui would have affected or been likely to have affected materially the price of Southern Petroleum's shares if it had been publicly available," plaintiffs' counsel Colin Carruthers QC said.

"Mr Patek did not disclose to [John] Oakley the existence of or information gained from the Deep Gas Study or of the proposal to drill a well in [Mangahewa]," Mr Carruthers QC, said.

Jim Farmer QC, representing Southern Petroleum, said although there was a splurge of publicity about Mangahewa suggesting it was "a real find," that optimism later dissipated. Mangahewa was now in production but not regarded as a major field, Dr Farmer said.

Mr Carruthers said Mangahewa was "better than that."

Dr Farmer said until the Mangahewa information reached a point it was incontestably demonstrated it would not have affected the price of the shares.

Justice Robert Fisher, who frequently interjected and appeared to have a close grasp on the complex case, questioned Dr Farmer on that point, saying "don't the great unwashed, the public investing in oil exploration shares, have a kind of gamblers' interest? The psychology of it is that they think they have a ticket in Lotto prepared to pay to get the ticket - anything that looked like it went from a one in a hundred chance to a two in a hundred chance would excite interest wouldn't it?"

Justice Fisher said: "It would be a matter of expert evidence as to how the market behaves in oil exploration investments."

Mr Farmer said "There's a lot of evidence debate as to whether or not there would have been a difference in value ... But the likely effect of Mangahewa information of the price of the securities ... we need to be quite clear about what we mean by inside information," Dr Farmer said.

He said much of the alleged inside information did not exist at the time of the Southern Petroleum takeover.

Mr Farmer asked that evidence claiming the alleged inside information would have been likely to materially affect the price of Southern Petroleum's shares, should be struck out.

Act New Zealand MP Stephen Franks, a securities law specialist, said the case was extremely significant.

There has never been an insider trading case in New Zealand which has proceeded to a conclusion in the courts - they have all been settled before then.

"If they get a green light to take it at the company's expense it does not say it has been established ... but they know they can go ahead and get the court's assistance to get any other information they need," Mr Franks said.

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