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Credit Sails – an underlying issue in the markets?

May 31, 2011

It’s about the Customer, Stupid

Tim Hunter

Business Day

30 May 2011


With some really big public share offers on the horizon it will be more important than ever to ensure confidence in the process.

The good news is the stock exchange has conducted a review of broker conduct in relation to IPOs after reports of poor behaviour in 2009.

The bad news? The review remains under wraps, secret and for industry eyes only.

This is a shame. If brokers want to be seen as professional, ethical and trustworthy – as they mostly are – sweeping their shortcomings under the carpet is hardly the way to do it.

We know a little about the NZX’s concerns from the Securities Commission’s last oversight report on the NZX. It seems the NZX was worried about “IPOs in 2009 that had either progressed but not been as successful as could reasonably have been anticipated or did not proceed at all.

“NZX had become concerned that participants were not acting in a manner which promoted participation in IPOs by the market and retail investors.”

Whatever it was brokers were doing – and the report doesn’t say – the NZX decided to deal with the problem by threatening to introduce a guidance note. Yes, really.

The commission, now the Financial Markets Authority, thought that was a bit lame and said if there was to be some intervention it would prefer actual rules rather than mere guidance.

Intrigued, I made an Official Information Act request of the FMA seeking more details on this issue. On Friday I got the response – no further information would be released.

The FMA said: “We withhold the further information received from NZX about this matter.  The reasons for this is that to conduct the Oversight Review we receive highly sensitive information which NZX as a non public entity is not obliged to release.  Receipt of candid and sensitive information forms the basis of our oversight review.  It is essential we have access to this information to undertake an effective review.  For these reasons it is important we maintain the confidentiality of this information.”

What’s more, the FMA was legally barred from releasing the information disclosed to it under any financial markets legislation – a restriction which probably covers everything the FMA does.

So, the upshot is there was bad behaviour of some kind and it seriously affected the success of IPOs, but we’re not allowed to know what it was.

It also appears no formal action has been taken and the NZX is relying on brokers changing their ways.

This is in advance of the biggest chunk of IPO activity this country has seen in two decades.

The irony here is that despite the secrecy we can probably guess at least some of what the NZX was worried about.

In 2009 the big float that never happened was Synlait, the South Island diary processor.

Synlait issued a draft prospectus seeking to raise $165 million from an issue of new and existing shares late that year, but it never went ahead. What went wrong was never clear, but there was gossip at the time it was partially the fault of brokers – either lead manager First NZ Capital on its own or as a result of in-fighting with rival Goldman Sachs.

That and more was written about and commented on in 2009 by several journalists including myself, so for NZX and the FMA to continue to draw a veil over the affair looks more like a culture of secrecy than a genuine need for discretion.

Keeping it under wraps

That secrecy is the default setting covering broker misbehaviour is reinforced by the treament of broker Forsyth Barr over a disciplinary matter.

In March this year, Forsyth Barr was fined $5000 and ordered to compensate a client for losses after failing to execute a sell order.

That much was unremarkable – in broking such oversights happen from time to time. A few years ago I lost out myself when a broker failed to execute my instruction to sell index futures in a timely fashion. People are not infallible and you have to consider the odd lapse in the context of a broker’s overall service.

The strange thing in this case was one detail kept secret – the fact that the sell order was for Credit Sails, a complex derivative product also lead managed by Forsyth Barr and featuring in many of its clients’ portfolios.

A year earlier an almost identical disciplinary action by the Markets Disciplinary Tribunal against Goldman Sachs was happy to disclose that the firm’s failure to place a sell order on market was for Babcock & Brown subordinated notes in February 2008.

On that occasion no compensation was ordered for the client, mainly because the lack of a sell order made no difference to the outcome – no-one was buying the notes anyway. But Goldmans was fined $30,000, six times the Forbar fine.

Back to Credit Sails – when the client asked Forbar in writing in March 2008 to liquidate his entire portfolio there was indeed a market for the Credit Sails notes. Yet while other stock was liquidated, that one was not.

The failure to sell led to a loss of about $4000 for the client, hence the order for compensation.

However, when I revealed that it was Credit Sails involved in the disciplinary proceeding the tribunal threatened to withdraw the compensation order, saying it was a breach of tribunal secrecy to name Credit Sails.

So, client loses out because of broker failure, client battles to win compensation, then client’s rightful payout is threatened because the broker – who caused the loss – wants a detail kept secret.

I ask you – is that fair?

Clearly Forbar has reason to want Credit Sails mentioned as little as possible – after all, the thing has cost investors tens of millions, but it’s high time the default setting for the stock exchange was protection of client interests, not protection of broker interests.

Industry players often talk about restoring investor confidence in the markets. Affairs like this show some of them have no idea what that means.

– BusinessDay

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