Four of the Hanover directors and promoters involved in an $18 million settlement with the Financial Markets Authority say it’s the best outcome for investors and taxpayers, and the regulator would have failed in court.
In a written statement, Mark Hotchin, Greg Muir, Tipene O’Regan and Bruce Gordon said they decided to settle because of the cost and burden of litigation lasting for many more years and because their insurers and former insurance broker made it possible to provide a payment to investors.
“We are pleased this result for the investor has been made possible,” they said.
The four, along with former shareholder Eric Watson and Hanover director Dennis Broit, denied any admission of liability in the settlement. Watson is not contributing to the settlement.
“We do not believe the FMA would have succeeded at trial. Hanover ceased business in July 2008 because of the effects of the GFC (global financial crisis) on Hanover’s borrowers, not because of any mismanagement, We regret the loss of investors’ money,” the four said.
Accountant Bruce Sheppard, a member of the Financial Markets Authority establishment board, has criticised the settlement as being too weak.
The FMA settled for just under half its $35 million civil claim which was due to go to court later this year alleging misleading and untrue statements were made in prospectuses and advertisements distributed by Hanover between December 2007 and July 2008 about the financial position of the companies in that period.
Around 5,500 out of 16,500 investors in Hanover Finance, United Finance, and Hanover Capital, are expected to get a share of the settlement, with payouts ranging from an estimated 5 cents in the dollar up to 20 cents, depending on which company they invested in.
Sheppard, who reached a confidential settlement with Hotchin and Watson last year in order to call off their defamation case against him, says he’s a big fan of restorative rather than punitive justice so it made sense from that perspective for the FMA to reach a settlement that would see investors get some money back.
But he said the FMA has a regulatory function to oversee wrong-doers in the market and the lack of any admission of liability by those involved in this case sent the wrong signals. The FMA also recently made a $1.5 million settlement with Milford Asset Management over a market manipulation case without the firm making an admission of liability.
Sheppard said in helping set up the FMA he “wanted to have a regulator with a lion’s heart and belly full of food to chase prey, not to have a pussy cat sitting under a tree.”
When asked if his criticism didn’t run counter to his own settlement, Sheppard said he was an individual rather than a Crown-funded entity with a duty set out in its statement of intent to hold people publicly accountable.
“This gives a signal to people like Eric and Mark that if you brazen it out and throw enough at it, you can eventually beat stuff,” he said.
The FMA said it had taken a number of cases against failed finance companies to court along with reaching some settlements. Settlements mean that any dirty laundry doesn’t get aired in public through a court hearing which can act as a deterrent to those breaching the law.
But FMA chief executive Rob Everett said the $18 million deal provided a better and earlier outcome for investors than going to court where the outcome was uncertain and the costs of taking the case could have eaten into the sum investors would have ended up with.
“It was clear throughout this process that an admission of liability was not going to come as part of the settlement process. We have to balance these objectives and this is where we have come out,” he said.
Auckland University law lecturer Professor Peter Watts QC said he thought the settlement was “not a bad outcome” given the uncertainty and costs of any court action.
“It’s incredibly expensive once a trial starts and the costs of so many lawyers in the courtroom would be enormous. The longer it goes on for, the more those costs go up,” he said.
The FMA said the investigations into Hanover, including taking asset preservation orders against Mark Hotchin which have now been lifted, had already cost $3.5 million and a further 10,000 hours of the market watchdog’s staff time.
The settlement includes Hotchin, Muir, O’Regan and Gordon undertaking not to act as directors of a bank or non-bank deposit-taker until May 2018 without FMA approval. Watson and Broit have told the FMA that they do not intend, now or in the future, to act as directors of a bank or non-bank deposit-taker.
Everett admitted the undertakings fall short of a management ban that may have been handed down in a successful court decision where they would have been banned as directors of any company. He said it was still an important part of the settlement that they couldn’t be directors of a similar company for the next three years.
FMA head of enforcement Belinda Moffat said in discussions with affected investors, most said they wanted certainty now and given a court trial could have taken two years to complete, with appeals taken into consideration, a settlement was the quickest and most certain way of providing an outcome now.
Sheppard said he thought some of those investors would have wanted “a head on a stake and would feel they haven’t been vindicated” while others would say “thanks” for getting a little bit of money back.