Appeal court lifts veil on FMA action to recover $25M in Pyne Gould related-party loans

Thursday 5th July 2012

The Court of Appeal has turned down a bid by Pyne Gould Corp to keep details of an investigation into related-party loans to George Kerr's Torchlight fund under wraps.

In a judgment delivered yesterday, Judges Susan Glazebrook, Ellen France and Lynton Stevens dismissed an appeal by Pyne Gould subsidiary Perpetual Trust to keep in place a confidentiality order over proceedings. The decision upheld a ruling by Judge Paul Heath in the High Court in Auckland on June 26 which discharged the confidentiality order.

Financial Markets Authority chief executive Sean Hughes welcomed the decision, which let it confirm it is engaged with Perpetual Trust to recover some $25 million in related party loans made by the Pyne Gould subsidiary as trustee of the Perpetual Cash Management Fund. As at June 23, some $13 million remained outstanding. The watchdog had previously indicated it was looking at Pyne Gould's related party transactions.

In May, Pyne Gould's auditor KPMG quit over unresolved differences as to what should be considered related party loans. That was a week after the wealth manager's managing director John Duncan unexpectedly departed, having joined the firm in 2009 after a 15-year career with Macquarie.

The loans were made to Torchlight Fund No 1 LP, a fund managed by Pyne Gould managing director George Kerr, something the FMA deemed wasn't in the best interests of investors in the Perpetual funds.

"The authority now has little confidence in the ability of Perpetual to achieve repayment of the loan in a timely fashion and seeks to revoke the confidentiality orders so that there is transparency in the market about what has occurred," Judge Heath said.

"Revocation of the order would enable market participants to make informed decisions about their investments, with knowledge of the behaviour of those responsible for making decisions that allowed the Torchlight loans to be made," the judgment said.

Perpetual intends to dispute the market watchdog's position, and considered the "interfund facility provides superior first ranking security and provides a good return," Pyne Gould said in a statement."

Kerr requested a financial facility from the Perpetual cash fund in February, and needed board approval as it breached the fund's investment and credit criteria, according to the June 26 judgment. An $18 million loan was approved, with security over five properties in Queenstown and Wanaka worth $21.6 million given by Torchlight.

The loan prompted Perpetual Trust corporate manager Matthew Lancaster to raise concerns it was to a related party and not permissible.

Judge Heath said further advances were made beyond the initial loan of $18 million without any evidence of similar board approval, and by April, the Perpetual cash fund's statutory supervisor, Trustees Executors, raised concerns that the Torchlight loans were a "significant risk to the unitholders or investors in the cash fund."

"The lack of judgment and understanding of the role of a trustee of funds of this nature, evidenced by the circumstances in which the loans came to be made, is striking," Judge Heath said. "The failure of Perpetual to procure repayment of the loans by Torchlight in accordance with its own suggested timetables adds to my concerns."

The loans were made as Kerr and US hedge fund Baker Street Capital wrapped up a takeover bid for Pyne Gould via Australasian Equity Partners No 1 LP, securing 76 percent of the company in a 37-cents-a-share takeover bid that closed in March.

Kerr became involved in Pyne Gould in 2009, taking a cornerstone stake after the company faced large writedowns on the value of its Marac finance unit's property loan book, which has since been divested.

Since his involvement, Pyne Gould has taken stakes in the Kerr-managed Torchlight funds, which specialise in squeezing value out of distressed assets, and its board approved increasing the capital available to Torchlight to “seek modest investments beyond the Torchlight fund.”

Those investments included a $7.5 million stake in an overseas equities fund, the management contract of ASX-listed IEF Real Estate Entertainment Group, and the debt of the ASX-listed RCL Group, which invests in residential properties across Australia and in Queenstown.

Pyne Gould's shares last traded at 29 cents yesterday, valuing the company at about $60.7 million.

BusinessDesk.co.nz

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