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FMA in talks to cut deal with Strategic Finance directors

The Financial Markets Authority is in talks with the board of failed lender Strategic Finance in a bid to cut a deal, while the receiver for the financier has extended its own settlement discussions.

The market watchdog, which in February said Strategic probably breached securities law, is in "confidential settlement discussions with the directors with respect to the FMA's claim", a spokesman told BusinessDesk.

There is no indication yet as to when the discussions will be completed. 

The FMA gave the board the opportunity to respond as it prepared to file civil proceedings against directors including Kerry Finnigan, Graham Jackson, Marc Lindale, Timothy Rich, Denis Thom and David Wolfenden.

It dropped its investigation into former director the late Jock Hobbs in mid-2011 as the extent of his illness became apparent.

The negotiations come as Strategic's receiver, John Fisk of PwC, told investors in a May 9 update that "substantial progress has been made" in their settlement talks over potential breaches of the Companies Act and that it was "worthwhile continuing with the settlement process whilst certain matters are worked through".

That process has an agreed timetable and the receiver anticipates making another announcement early next month.

"The receivers acknowledge that investors are keen to see a resolution in respect of any claims against directors and, at this stage, we consider the settlement process provides the best opportunity to maximise recoveries for investors," the update said.

Warranted greater scrutiny

Early on in the receivership, Mr Fisk identified "several transactions undertaken during February 2007 to August 2008" which warranted greater scrutiny from the legal team.

Some 10,000 Strategic investors owed $367.8 million when the lender failed got a Christmas Eve distribution of 1.5 cents in the dollar, taking their return to date to 10 cents, and Mr Fisk estimates they will get between 12 percent and 20 percent of their principal back.

The FMA's predecessor, the Securities Commission, began investigating Strategic Finance in 2009 when former Act Party MP John Boscawen told Parliament the finance company misrepresented about $68 million worth of debt which it classified as second mortgages when they were effectively a third-ranking security.

Former Commerce Minister Simon Power subsequently referred the matter to the regulator.

Strategic was sent to the receivers in March 2010 by trustee Perpetual Trust, ending a moratorium arrangement that had been in place since December 2008.

The finance company missed its milestone repayment in January of that year when it failed to generate enough loan recoveries.

It had tried to get out of trouble in a Hanover-style debt-for-equity swap with South Canterbury Finance that would have given Strategic investors a mix of SCF debentures, shares and preference shares, but Perpetual chose to call in the receivers instead.

(BusinessDesk)

Comments and questions
16

Yawn

The Strategic directors and shadow directors seem to be controlling this process with the receivers and the FMA - nothing has changed since the company went into receivership.

The settlement will be a joke compared to what should occur in reality but the receivers and the FMA will pitch to the public what a great success they have achieved in getting a paltry amount out of these guys.

The Strategic directors must be having a good old laugh at everyone's expense.

What they need to sort this out is a good consultant.

Good consultants are hard to come by - especially at Strategic Finance.

Bloody marvellous! The FMA is in the business of "cutting deals".
Translation: Circumventing the law for the sake of expediency.

"Cutting a deal" No Shuns, is done when the probability of success in any action is marginal. Common business sense would suggest that some arrangement is made, since getting something, is a whole lot better than getting nothing and having to pay out costs. Think on that.
"Circumventing the law for the sake of expediency" - what utter drivel.

Sounds as if the old boys' club, including the regulator (read government) is running around ensuring that no one is ever under oath and on a witness stand to answer for anything.

Very disappointing. The SFO capitulates on Hanover and now the FMA on Strategic. It's a long battle but a bit of perseverance is warranted, given how much damage these companies did.

One Law for the rich and connected, and one for everyone else

Or perhaps the case is not that strong against the directors. Have you thought of that, Anon? I note that PwC is even trying to settle. The implication is that the probability of success in any action against the directors is 50/50 at best. That, along with the costs and the amounts that they may recover if successful, makes "cutting a deal" the best option. Something that I'd not expect someone who has no business sense to understand. The law is the same for all.

Correct me if I am wrong, but the Strategic directors sold half of the company to Allco in about 2006-07 for $150m.

If they received 4% interest on average from then to now they would have $36m (non-compounding) interest alone from these proceeds - that's also not allowing for any capital gain they made by using that money.

So for the FMA and the receivers to be punishing them instead of prosecuting them they would need to achieve a payment of $50m to $75m minimum to make the exercise worthwhile or fair to the investors and to justify not prosecuting them or via civil action.

Anything less would be pathetic and a weak result for the FMA.

Meanwhile, many of the investors who are retired die from stress and lack of income while the FMA and the receiver pontificate.

The FMA and receivers should ensure that whatever the penalty or settlement is - it's in addition to any insurance cover the directors and Consultant have in place.

Otherwise its not a punishment or penalty of any subsequence.

Who oversees the FMA? Is there any oversight of substance?

And the government wonders why the middle class continue to invest in property

It's not paletable that is, for sure, but you have to decide on balance what is the best outcome, and who gets to decide what "best" is. Would love to see some of these directors getting a taste of porridge, actually, but if FMA and receivers get a good financial outcome for the investors (and less further waste on lawyers and due process) then I'm prepared to go with that.

In a more robust legal and responsibility framework the directors and associated family trusts would be held truely accountable and our comments would be mute.

As an investor I ask what does this mean? Is the law so weak that a deal has to be cut, at much lower return to investors?

Why is all this done in secret? What's wrong with good old transparency and accountability on all parties?

Am I meant to get excited about getting 12-20 cents in the dollar back? Who are the well-connected who will get the other 80-88 cents of my money (besides the receiver/liquidator)?

Just another list of reasons why the finance markets in NZ are so out of control that investors have no where to go except safe low yields that lose money after inflation and tax and risk premiums, or property that will be subject to capital gains tax soon.