Feltex appeal reprises 'squeeze the lemon' email
Lawyer Colin Carruthers QC opened for shareholders in the Feltex Carpets appeal by reminding the court that the Securities Act is a law to protect consumers and allow them to rely on a prospectus, whereas he said an email from the vendor showed they saw the failed company as a lemon to be squeezed.
Carruthers QC is leading the Court of Appeal hearing for shareholders led by Eric Houghton who lost in the High Court in a 2014 lawsuit that had sought to hold directors and promoters liable for alleged disclosure failings in the 2004 prospectus. In the Wellington High Court in September 2014, Justice Robert Dobson cleared the former directors of misleading investors in its prospectus, while noting some criticisms of the offer documents.
"Examination of the prospectus must be through the eyes of the investors and the focus must be on disclosure," he said. Good disclosure from those raising capital "is the best protection for the public."
Mr Carruthers said the "glossy" Feltex prospectus had been "a marketing document more than proper disclosure." Carruthers and his two offsiders face five teams of lawyers in Courtroom One, representing the former directors, vendors Credit Suisse, and Credit Suisse First Boston Asian Merchant Partners, and the two brokers that managed the sale, First NZ Capital and Forsyth Barr.
Part of the appeal argument is that the directors relied on budgeting methodology that changed in April 2004 and led to practices such as booking sales in advance of them being received and allowed them to make revenue projections in the prospectus that were at odds with monthly sales data held by management.
Mr Carruthers also questioned JusticDobson's judgment on the company's 2004 results, which showed it had missed its top-line revenue target but still managed to post a bottom line profit that included the reversal of management incentive payments and the delayed sales. He gave a "potted history" of what had been an unprofitable, private equity-owned company that had turned to the bond market to repay bank debt before tapping equity investors via the 2004 IPO, only to fail at the end of 2006.
To underline his argument that the Feltex prospectus was a marketing brochure that failed to alert potential investors to "adverse trends" in the business, he cited an email from former executive director Peter Thomas to a Credit Suisse executive after the float. "There's some goodness left in the lemon but we squeezed most of it out. Not bad for a company that was bankrupt 18 months ago," Mr Thomas wrote in the email that also featured in the High Court case.
For the appeal, the focus is "necessarily on the untruths in the prospectus," he told the court. That included statements that were untrue in themselves and also in the way they were included or excluded, he said. He cited repeated references to Feltex being a long-standing and successful company, with a successful operating history, excellent investment features, and solid earnings and potential growth, saying "my submission (is) that is plainly not true."
The shareholder group tapped Mr Carruthers for the appeal, having employed Austin Forbes QC for the substantive High Court hearing. A spokesman for the shareholders, Tony Gavigan, said the Canterbury earthquakes had meant the High Court trial ended up in Wellington, rather than Christchurch, where Mr Forbes has his practice.
But also, Mr Carruthers was acknowledged as an accepted expert on securities law, having acted for the prosecution in South Canterbury Finance, Lombard Finance and Investments and Nathans Finance, and for the defence in the Bridgecorp prosecutions, Gavigan said.
Mr Houghton's appeal is again being bankrolled by the London-based Harbour Litigation Investment Fund, protecting the claimant group with funding and insurance, even though the directors and promoters in the High Court case were awarded $3.1 million, with total costs at $5 million once disbursements were included.
"That's encouraging for us after losing the first round," Mr Gavigan said. "They had to write a big cheque for the High Court trial."
Mr Houghton sued the former Feltex directors, owners and sale managers in a representative action on behalf of 3639 former shareholders seeking $185 million over what he said was a misleading 2004 prospectus. Rival Australian carpet maker Godfrey Hirst ended up buying the assets of the failed group.
The five-day hearing is continuing.