Victory for Blue Chip investors

Some investors in the disastrous Blue Chip property scheme have been given another chance to escape agreements to buy units in three Auckland apartment blocks.

The Supreme Court has unanimously allowed the group’s appeal, finding the sales and purchase agreements with three third-party apartment developers were not legal.

The argument, earlier heard in the High Court and Court of Appeal, centres on whether the Blue Chip investment equated to an offer of securities to the public.

A group of about 300 investors, led by Neil Hickman, David Lester, Anthony Collingwood and Norman Herrick, have been awarded costs of $75,000, to be paid by the developers.

Their participation in the Blue Chip scheme, led by Mark Bryers, involved commitment to buy apartments in one of three proposed developments on land which originated with associated Blue Chip companies but, in two cases, was sold to independent, third-party developers.

The developments were:

# The Barclay development on Albert St – developed by Greenstone Barclay Trustee (directors John Abel-Pattinson and Kevin Cox).

# The Bianco – proposed apartment building on the corner of Turner and Waverley streets. Developer was Turn and Wave (director Tim Manning).

# Icon Central – proposed for St Martins Lane, Auckland (Bryers was the sole shareholder and director).

The investors were told they would never have to buy the apartments when they put their money into the scheme.

They were all short-term investors only, as it was proposed Blue Chip would find a second purchaser for each apartment.

They now want to be excused from completing the sales after Blue Chip failed and its financial commitments to the investors were not honoured.

It was argued Blue Chip marketed its investment schemes and offered debt securities to the public without meeting the associated requirements of the Securities Act.

Five Supreme Court judges heard the case last year.

In a lengthy decision, overturning decisions in the High Court and Appeal Court which earlier required the investors to fulfil purchases, the Supreme Court has found the agreements to be unenforceable.

“There being no prospectus and no trustee having been appointed, the marketing of the investment products was in breach of s33(1) and (2) of the Act,” it said.

The Blue Chip developers may yet make an application to the High Court seeking relief against the breaching of the Act, according to one of the barristers who represented the investors, Daniel Grove.

The ruling may have implications for other structured property investments.

Blue Chip’s collapse left more than 2000 investors some $84 million out of pocket.

Bryers received a $A33,750 fine and 75 hours’ community service in 2010 after pleading guilty to 34 charges relating to the company’s mismanagement and improper accounting.

The Serious Fraud Office dropped its investigation into Bryers, saying it did not have sufficient evidence.

How the investment scheme worked

The investment schemes involved three Blue Chip products – a joint venture agreement, a premium income product, and a put and call agreement.

All were variants of a single theme, which involved Blue Chip marketing apartments in the three proposed buildings on behalf of developers.

The purpose was to generate sufficient pre-sales to allow funding to be drawn down for the construction of the apartment buildings.

Underwriting fees were payable to Blue Chip.

The appellants were all short-term investors as it was proposed that Blue Chip would locate a second purchaser for each apartment whose purchase payment would enable the original investor to be taken out.

The returns for the joint venture and premium products investors came in the form of fees which were functionally similar to interest, the ruling says.

The return for the put and call was a share of the underwriting fee.

Blue Chip failed and its financial commitments to the appellants were not honoured, the court said.

The Supreme Court has unanimously agreed that the marketing by Blue Chip of its investment products involved offers of securities to the public for the purposes of the Securities Act.

This is on the basis that Blue Chip was an “issuer” under the Act; and that the investment products Blue Chip was marketing were “debt securities” because they conferred on the investors the right to be paid money that was to be owing to them by Blue Chip.