Norman Stacey
by Susan Edmunds
Norman Stacey
Watson and Stacey were in the Auckland High Court in July.
Stacey said Watson breached her fiduciary obligations to him when she entered into negotiations for the sale of Diversified Investment Strategies and Diversified Wealth Management’s assets in return for an offer of employment from Fisher Funds.
He was particularly concerned at the “super salary” on offer of $200,000 a year plus a bonus of up to 30%, and a buy-back right that gave Watson the ability to buy back clients at the same price, should she be made redundant by Fisher.
Stacey said the contact gave her significantly more security about her future employment, gave her an advantage through the buy-back clause and incentivised her to sell customers at a below-market price.
Stacey’s legal team argued that Diversified Investment Strategies was worth $700,000 but sold for $172,795. They said Diversified Wealth Management was worth $400,000 but sold for $145,216. They argued he should be compensated for half of the loss, or almost half a million dollars.
The Diversified sale happened because of concerns about the Law Retirement KiwiSaver Scheme’s (LRKS) fees, run by Diversified. From 2013, the Financial Markets Authority required fund managers to supply details of KiwiSaver funds’ total expense ratio. The LRKS fees were high because it was a “fund of funds” and was small.
Diversified was eventually given an ultimatum to solve the TER problem by March 31, 2014, or have the scheme closed by the FMA. That meant Diversified needed an influx of investors, or to divest or merge the scheme.
There were flow-on effects to other Diversified Wealth Management funds because without the LKRS, the percentage of total FUM held by certain investors would increase and lead to some breaching rules around maximum investor interests.
Stacey and Watson received offers from a number of parties. Craigs Investment Partners and Elevation made offers at 1% and 2% of FUM, respectively. Diversified received a non-binding term sheet from Halifax.
But by the end of March 2014, an agreement still had not been signed and Diversified was given another three months by the FMA to find a solution. The court was told FMA suggested it approach Fisher Funds.
While discussions were under way about the terms that the sale would be done under, Stacey was approached by Devon’s Paul Glass, looking to purchase the non-LRKS business.
He thought the terms were better than those offered by Fisher but Watson was angry at what she said was “reneging” on the Fisher deal.
He backed out of further negotiations with Glass and the deal with Fisher continued - driven by Watson. Stacey said he thought the price was low but had been dictated by the market.
As Stacey was getting ready to leave the country on holiday, he received a copy of the draft sale and purchase agreements for the Fisher deal. For the first time, these contained details of the buy-back clause offered to Watson. He did not see that amendment.
It was not until some months later that Stacey found emails on Watson’s computer that revealed the extent of the salary she was to be paid. He then went through the agreements and saw the buy-back right, too.
Justice Faire ruled against Stacey, in a judgement released last week. He said Watson did not have a fiduciary duty to him, and he was not convinced that Watson's conduct had been unfair - nor by the “super salary” argument.
“Given that Ms Watson’s remuneration was agreed on after the purchase price was agreed, that she has greater and different responsibility at Fisher Funds than she had previously at Diversified, and that she was seen to be a valuable acquisition to Fisher Funds’ business, the plaintiffs are unable to show that Ms Watson received a salary disproportionate to what she was worth to Fisher Funds,” Faire said.
He also said it was unlikely to be correct that the buy-back clause was inserted at the last minute to hide it from Stacey.
“In my view, Mr Stacey allowed himself to be swayed by Ms Watson’s preference for a sale to Fisher Funds as he perceived that it would be difficult to back out of the negotiations and pursue another angle. He then did not pay close attention to the terms of the sale and realised at a late stage that Ms Watson was obtaining more benefits from the sale than he expected. At this stage, Mr Stacey experienced seller’s regret.”
Judgement was entered for Watson and her co-defendants. Costs were reserved.
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