PM's cowboy-chaser fails to nail her woman

Friday 3rd May 2002

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www.sec-com.govt.nz

As ironies go it doesn't get much better. Prime Minister Helen Clark, having blackened the name of New Zealand's securities markets by branding them "the Wild West," hires a bulldog - Jane Diplock, of the indisputably tough Australian Securities and Investments Commission - to run the cowboys out of town.

And Diplock's very first investigation is into a recommendation made by the PM last September that Air New Zealand's small shareholders should hang on to their shares.

The commission's report has taken seven months to produce. That's three months longer than the Stock Exchange market surveillance panel's rigorous and detailed report on other aspects of the Air New Zealand fiasco.

Yet the list of people the commission needed to talk to to pursue its inquiry is no longer than the panel's. Perhaps the long delay is evidence it is under-resourced.

That's ironic in itself because the commission found itself probing the conduct of the head of the government it now has to ask for funding appropriate to its new, beefed-up role.

Given that conflict of interest it's arguable the commission should not have had the job at all.

Its report may yet be tested by the courts. Catharine Franks, the wife of Act New Zealand MP Stephen Franks, has asked the commission, under its empowering legislation, to appoint a barrister to investigate whether insider trading took place in Air New Zealand shares in September last year. Dare it refuse?

Stephen Franks has questioned the commission's acceptance of Clark's insistence she didn't realise her comments to a television journalist on September 25 were likely to move the airline's share price.

Asked for her recommendation to "mum and dad" shareholders, she said; "I'd recommend they hang on to them because I am absolutely convinced Air New Zealand has a viable future."

As well she might be. Only two hours previously she attended a meeting of an ad hoc ministerial committee in which it was agreed the government would pump in, subject to conditions, $700 million of equity and $150 million of convertible notes.

For the prime minister not to know disclosure of that information would affect the bombed-out share price of a struggling airline is a terrifying prospect.

She did not, of course, disclose the information directly but the shares, during the next trading session, rose 26% on heavy volume.

The commission somewhat fudges the link but quotes sharebrokers saying their phones rang "red hot" after the PM's "marvellous signal."

The commission says the PM was an insider. And under section 9 of the Securities Amendment Act (the "insider tipping" rule) an insider "who advises or encourages any person to buy or sell securities in a public issuer" is liable under the act's provisions.

The commission's dismissal of Clark's comments as "inappropriate but not illegal" employs lines of reasoning that would make a Byzantine courtier gasp with admiration.

It rejected, rightly, one of the more superficial defences the Crown's lawyers put up. They suggested the PM spilled the beans to "every person," not the "any person" of the act. Making a statement to the news media, the commission found, doesn't make the information publicly available.

It also rejects as a defence the proposition Clark's recommendation was to "hold," not to "buy or sell" as the act specifies. It finds a recommendation by an insider that shareholders should hold can, in some circumstances, constitute tipping - although the act doesn't actually say that.

The central plank of the commission's finding Clark did not break the law concerns the words "advises or encourages" any person to buy or sell.

Its report devotes several pages to the question of whether Clark encouraged trading. It says it accepts her comments were not intended to encourage investors to buy the shares but they had that effect anyway. It also, inevitably these days, blames the media for the context in which the comments were reported.

It says the three important elements of "encouragement" are that some active step must be taken to encourage, that the step must be "directed at a person or persons and not to the world at large" and that it must have been capable of conferring an advantage.

Clark's comments didn't satisfy those elements. In fact there is nothing in the act about advantage. And element two looks indistinguishable from the "every person" argument, which the commission had already dismissed.

All this serves to distract attention from the commission's single-sentence dismissal of a word which is definitely in the act: advises. Clark's words began: "I would recommend ... " Throughout the report the commission refers to her "recommendation."

What is the difference between advising somebody to do, or not to do, something and recommending it? Are there any circumstances in which you could recommend a course of action but advise against it?

A storm in a teacup? Perhaps. Mere semantic hair-splitting? No, there's more to it than that.

Nobody disputes the valuable role the Securities Commission - with broad new powers and extra funding - should play in bringing New Zealand securities markets policing into line with international best practice.

But absolving its political mistress by relying on the letter, not the spirit, of the law won't help the public perception of the commission's steadfastness.

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