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What price a good name? Unpacking the Hanover 'crooks' case

How much is your good name worth? About $3.5 million apiece, if you're Eric Watson and Mark Hotchin and the chairman of the Shareholders' Association has called you a “crook” on television.

Georgina Bond
Wed, 10 Oct 2012

How much is your good name worth? 

About $3.5 million apiece, if you’re Eric Watson and Mark Hotchin and the chairman of the New Zealand Shareholders' Association has called you a “crook” on television.

The former Hanover shareholding frontmen – Mr Hotchin was a director and Mr Watson a promoter – are suing now former shareholders' association chairman Bruce Sheppard and the association over his allegations they behaved criminally and fraudulently as businessmen and deserved to be imprisoned.

These were serious allegations which the already beleagured Hanover pair say are wrong and went too far.

They reached for Queen's counsel Julian Miles, the country's leading defamation brief, and writs were issued.

About 36,500 investors were affected when Hanover Finance froze $550 million of assets in July 2008.

In a High Court defamation trial next year, which Mr Sheppard wants held before a jury, he says he will rely on honest opinion and qualified privilege to defend his statements about the pair – some broadcast in a November 2009 television interview with Close Up presenter Mark Sainsbury.

These include allegations that each man was a “crook” and they misled Hanover investors by falsely stating that $10 million of their own money would be put into a debt restructure programme.

Further comments by Mr Sheppard which Messrs Watson and Hotchin say attacked their reputation are in their statement of claim below.

Mr Sheppard was of the view Hanover’s debt restructuring proposal was largely to the benefit of the pair themselves, and their obligation to inject $10 million as part of a settlement with creditors was conditional only.

As the mouthpiece for an association which advocates for shareholders, Mr Sheppard believes it was his job to expose allegedly dubious practices perceived to threaten the interests of investors in public companies, and make comment to regulatory authorities and the media.

It should be no surprise media lawyers will watch the trial closely, as Mr Sheppard may well provide a test case they have been looking for to extend the boundaries of qualified privilege open to the media when defending defamation claims.

Reputation already damaged?

A key question to be answered at the trial is whether Mr Sheppard can plausibly argue the reputations of Messrs Watson and Hotchin were already so bad that his statements wrought no further damage.

A preliminary ruling by Auckland High Court has allowed Mr Sheppard to present evidence of previous alleged misconduct by the Hanover duo, which, he argues, meant their reputations were already tarnished.

These include brushes with authorities involving the following share trading transactions:

  • That in December 1998 Mr Watson was censured by the Securities Commission for buying shares in McCollam Print while negotiating its takeover by an entity related to him.
  • In relation to the same issue, the United States Securities Exchange Commission found that Mr Watson had breached a section of the Securities Exchange Act in the US, in that there was an omission of material facts by buying and selling McCollam shares at the same time as negotiating the purchase of McCollam for Blue Star.
  • That in 1999 Mr Hotchin had breached Securities Commission guidelines on insider trading in relation to the sale and purchase of shares of a company called Pacific Retail Group. Pacific Retail admitted a breach of the guidelines but stated that the breach was not ill-intentioned.

Lawyers for Messrs Watson and Hotchin moved immediately to try and reverse Associate Judge Jeremy Doogue’s decision to allow these transactions to be produced as evidence, arguing in part they were historic and no longer relevant.

An application for judicial review of the decision was made this week, and will be heard in December.

The Hanover duo say the transactions took place a decade before Hanover failed and could not be relevant to the state of their reputations at the point when Mr Sheppard’s comments were made.

But Mr Sheppard’s lawyer, Philip Grace, successfully argued the history was relevant to their reputation as businessmen under section 30 of the Defamation Act.

This requires that matters relate to the same area of reputation as the defamatory comments. For example, if theft is alleged, the relevant sector is the character for honesty, not character as a motorist.

Stephen Todd, in his book The Law of Torts in New Zealand, illustrated the point: “If an allegation is made about the competence of the plaintiff as a journalist, the matters related to the plaintiff’s driving record or marital history should not be admissible in mitigation of damages.”

Associate Judge Doogue said the Hanover duo’s standing was closely linked to whether they had a reputation for being persons who can be trusted.

“That reputation will have already been damaged by any previous underhanded dealing, whether it is of the kind that amounts to a contravention of the criminal law or not,” the judge said in his reserved decision.

 “I am of the view that the insider trading allegations and the negative effect they must have had upon the reputations of the plaintiffs would not inevitably be disregarded as irrelevant by the court when assessing the proposition that publication of the defamatory statements caused substantial diminishment of reputation.”

But he agreed the share trading transactions, if proved, demonstrated much less egregious misconduct.

"The social consequence of being branded a criminal fraudster who ought to be behind bars boded worse for future employment prospects than share trading derelictions – which might be considered by the same third party as equivalent to a breach of ethics which should not automatically close the door on employment.

“Whatever a person’s previous lapses, a divide is plainly crossed at the point where that person acquires the reputation for having behaved fraudulently.”

Associate Judge Doogue also pointed out there would be cases where a plaintiff who did not have an entirely satisfactory reputation may suffer additional loss to their reputation by defamatory statements.

It will be up to the court to decide next year whether the share trading transactions had, in fact, caused antecedent damage to the reputations of the men as businessmen.

Statement of claim: Areas of Watson and Hotchin’s reputation under attack

The areas of reputation Messrs Watson and Hotchin say they have been attacked on, and are suing Mr Sheppard on, are:

  • That the plaintiffs had dishonestly misled investors.
  • That the plaintiffs were “crooks”, meaning criminals or criminals who should be imprisoned.
  • That there was good reason to believe that the plaintiffs had participated in GST fraud and received or were to have received a fee in exchange for committing GST fraud.
  • More generally that the plaintiffs were involved in “malfeasances” being criminal or dishonest conduct.
  • That the plaintiffs had misappropriated cash belonging to a Hanover company.

How do you define a ‘crook’

In his ruling Associate Judge Doogue only made one comment concerning Mr Sheppard’s statements – the reference to Messrs Watson and Hotchin being “crooks”.

“An allegation that a person is a ‘crook’ would generally be understood as meaning that the person has, in the past, carried out acts that involved a criminal element of dishonesty – whether or not the person in question had a conviction entered against him,” the judge said.

Just what Mr Sheppard meant by "crook" is likely to be debated at the trial: Was it said to mean someone guilty of a crime or someone whose behaviour is morally and ethically unsound but whose criminality is yet to be established?

It will be up to Messrs Watson and Hotchin to specify what meaning they attribute to the word. The court will have to decide whether it accepts that meaning.

A reader of NBR ONLINE suggested a more creative solution to defamation this week, leaving the following comment on a report about the court proceedings.

“Penn and Teller from the USA have the best solution to defamation. Calling someone a liar or a fraud opens them up to defamation, so they just call their targets ‘ignoramus’. ‘assh*les’ and ‘spineless b*stards’, which is more colourful and less actionable.”

Defence of qualified privilege

Mr Sheppard porposes to argue he had an obligation as an advocate for shareholders in companies to bring to the attention of the appropriate authorities what, in his view, amounted to misfeasance on the part of company directors.

Messrs Watson and Hotchin’s response will be that obligation did not justify him voicing his concerns via the news media. They say Mr Sheppard could have approached the regulatory authorities privately.

Associate Judge Doogue indicated he sided with the Hanover duo on this point, signalling qualified privilege does not cover people talking to the media.

“I consider the plaintiffs’ analysis has substance to it,” the judge said.

However, it is understood a number of lawyers have been looking for a test case to extend the boundaries of qualified privilege to the media.

It could be argued Mr Sheppard, given his public role at the time, provides the perfect case to do just that.

Mr Sheppard has also been given assurance at least part of his legal costs will be met if he succeeds in defending the claim – with an order for Messrs Watson and Hotchin to pay security of costs of $100,000.

Associate Judge Doogue said Messrs Hotchin and Watson were men of financial substance.

“There is little doubt that they will be able to comply with an order for security for costs,” he said.

He also indicated the pair’s $7 million joint claim for reputational damage was “very much at the outer limits of what is likely to be awarded”.

If the trial goes ahead it is guaranteed to be a major drawcard for investors and public alike.

As star performers – and whether people love them or hate them – Messrs Hotchin, Watson and Sheppard will give evidence and be cross-examined.

It is here the spectre arises of defamation being a double-edged sword.

Which is one of the reasons judges and lawyers work out in advance what course the trial will take, what is open for examination and what is not, and how much the jury gets to hear.

So folk expecting an anything-goes, warts-and-all examination of the Hanover Duo may be disappointed.

And because most defamation claims are settled out of court – partly because of the high legal fees involved and a risk something  more damaging might emerge – do not be surprised if this case doesn't make it to the courtroom door.

Meanwhile, in legal action brought by the Financial Markets Authority, Messrs Watson and Hotchin are to appear in court next year to defend charges they made misleading statements in Hanover's last prospectus in December 2007 and in the March 2008 prospectus certificate.

Fellow Hanover directors and promoters Greg Muir, Sir Tipene O'Regan, Bruce Gordon and Dennis Broit will also defend 10 civil actions under the Securities Act.

If the FMA is successful, the Hanover Six could be ordered to pay up to $5 million each in penalties.

A Serious Fraud Office investiation into matters relating to the Hanover Group is continuing.

Georgina Bond
Wed, 10 Oct 2012
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What price a good name? Unpacking the Hanover 'crooks' case