FMA’s case against Hanover revealed
The Financial Markets Authority has revealed its case in its civil proceedings against former directors and promoters of Hanover Finance.
Friday, April 13th 2012, 6:52AM 
1 Comment
While no criminal charges have been laid over the collapse of the finance company, the FMA has gone to court seeking compensation orders and pecuniary penalties against Mark Hotchin, Eric Watson, Sir Tipene O'Regan, Greg Muir, Bruce Gordon and Dennis Broit.
Brian Dickey, the lawyer representing the FMA, has filed a statement of claim in the High Court that outlines the FMA's case that Hanover misled investors about the state of its finances in the lead-up to it being placed in moratorium and eventually bought by Allied Farmers.
Its first cause of action was that a prospectus registered in December 2007 and extended in March 2008 left out important information about declines in Hanover's liquidity during this period
In particular its total secured deposits declined from $825.9 million in June 2007 to $651.9 million in December 2007, down further still to $569.3 million in March 2008.
Meanwhile, its reinvestment rate fell from 81% in June 2007 to 28% in March 2008, and cash holdings shrank from about $150 million in June 2007 to just $54 million six months later.
FMA said the prospectus also omitted forecasts that Hanover Finance would breach its 7% liquidity buffer during the next 12 month period.
Its second cause of action relates to an investment statement also issued in December 2007, alleging Hanover made untrue statements regarding liquidity and Hanover's principal source of funds.
Its third, fourth and fifth causes of action all relate to advertisements FMA says contained untrue statements.
One, in summer 2008, claimed "the outlook is very positive for larger, well managed businesses such as Hanover and we are in a strong position to benefit."
However, according to the FMA the ad didn't mention Hanover was "regularly forecasting shortfalls in projected loan maturities against deposit maturities and therefore not regularly maintaining a balance between the maturities of loans and investor deposits."
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When I first heard the FMA talking last year about their intention to take a civil case against Hanover Directors, my thoughts were that this case would be ripe for a voluntary payment with no admission of liability in return for FMA withdrawing the case, a la the Tranz Rail "insider trading" case.
I was surprised that FMA chose to publicly launch the civil suit on Q+A on Sunday morning TV. I was even more surprised to hear Sean Hughes opening words to the effect that "I am pleased to announce...."
The only people who are going to get fat on this suit are the lawyers. And very fat indeed they could get.
At most, this suit affects $35 million of debenture holders. Anyone who invested or reinvested prior to the prospectus in question will get no direct benefit.
Awards in civil cases are based on the losses resulting from proven causes of action against the defendants.
I think the prosecution are going to have a major difficulty proving material quantum. Recall that by a very narrow margin, debenture holders agreed to exchange the balance of their original $1 debenture (from memory 90 cents) for 72 cents worth of Allied Farmers shares. Those shares are well nigh worthless now, but how will the prosecution show that the Hanover Directors were responsible for that subsequent debacle? Especially when there were expert reports showing that that deal was "fair" - (A Tui's billboard if ever I heard one). And I hardly imagine the Allied Farmers Board fessing up to having bought such a pup
If this train of thought is right, the maximum loss that might be able to be sheeted home against the Directors would be only 18 cents in the $ of the affected $35 million i.e. $6.3 million.
A long trial, with six separate defendants and lots of complexities will cost millions.
So why wouldn't the defendants offer a few million on a no admission of liability basis, and the FMA respond as Sec Com did in the Tranz Rail case?
I ceased a long time ago to believe that the law was about justice. I think it often is more a battle about relative economic power.