Court decides FMA's Perpetual Trust raid unlawful

The Financial Markets Authority can keep documents seized from Perpetual Trust in its related-party lending investigation, even though the High Court has declared its raid for information was unlawful.

Perpetual Trust, the wealth management unit of Pyne Gould Corporation, challenged the FMA’s search powers at Auckland High Court last month.

The search was part of the FMA’s formal investigation into a $28 million loan from Perpetual’s cash fund to related party Torchlight, the investment vehicle of PGC boss George Kerr.

On April 26 the FMA served notices on individuals and entities associated with Christchurch-based Perpetual, issued under section 25 of the Financial Markets Act 2011.

The notices required immediate supply of documents and electronic files including credit policy guidelines, board agendas and minutes, risk management policies, correspondence with auditors and internal and external communication regarding the funds assets.

Failure to comply can attract a fine of up to $300,000.

Perpetual argued the notices were dressed up as search warrants and challenged the timeframe given for compliance.

A reserved decision of Justice Paul Heath found the section 25 notice was unlawful, but exercised discretion in favour of the FMA and did not remove its ability to use the information obtained under the unlawful notice.

This was because he considered the information was not obtained unfairly.

“In my view, the notices were issued unlawfully because they failed to specify the time within which the information or documents should be produced or supplied,” Justice Heath said.

Immediate production or supply of everything listed in the notice was both “unnecessary and impracticable”, he said.

But he found there was no unfairness in the way the FMA obtained the information.

“While the issue of urgency might be capable of debate, it is clear that by April 26, 2012, the authority had grounds to suspect a potential breach of Perpetual’s duties as a trustee and a possible breach of s 58 of the Securities Act.

“While criticism might be made of the FMA for seeking, among the documents listed in the s 25 notice, some that were publicly available, had the FMA required supply or production of the various classes of documents within a time that was reasonable in the circumstances, there could have been no complaint about the lawfulness of the notices.”

The outcome means the FMA can continue to use copies of the Perpetual Trust documents for its ongoing investigation.

It is understood the Serious Fraud Office also has a clone of the documents.

FMA chief executive Sean Hughes said it was the first time a court had ruled on a question about the authority’s ability to give a notice of this kind since the FMA was established in May 2011.

“FMA accepts the judgment and welcomes the clarification from the court on how it expects FMA to use this power going forward,” Mr Hughes said.

Confidentiality orders keeping the FMA’s investigation of PGC’s related-party lending top secret were revoked by Justice Heath in July, despite a desperate bid by PGC to keep it under wraps.

The FMA argued time was up for Perpetual to recover the money and the evidence should be available for public inspection, in the interests of market transparency.

Torchlight has since repaid the loans and PGC has announced it will sell its wealth management unit and itself seek an offshore listing with Torchlight as its main asset.

PGC said today it was weighing up its options after the High Court ruled the raid was unlawful.

PGC shares were unchanged at 30c on the NZX, having shed 12% this year.

More than 75% of PGC is owned by managing director Mr Kerr and US hedge fund Baker Street Capital.