Financial Markets Authority v Hotchin
[2014] NZHC 2732
•4 November 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2012-404-1771 [2014] NZHC 2732
BETWEEN FINANCIAL MARKETS AUTHORITY
Plaintiff
AND
MARK STEPHEN HOTCHIN First Defendant
GREGORY JOHN MUIR Second Defendant
TIPENE GERARD O'REGAN Third Defendant
BRUCE PATRICK GORDON Fourth Defendant
ERIC JOHN WATSON Fifth Defendant
DENNIS JOSEPH BROIT Sixth Defendant
Hearing: 6 August 2014 Appearances:
N S Gedye QC & Ms Corr for applicant
J Anderson for second defendant DCS Morris for fourth defendant R Sussock for fifth defendant
B H Dickey, Mr Cairney & Ms Wilson for plaintiff
Judgment:
4 November 2014
JUDGMENT OF WINKELMANN J
This judgment was delivered by me on 4 November 2014 at 4.00 pm pursuant to
Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar
FINANCIAL MARKETS AUTHORITY v HOTCHIN & ORS [2014] NZHC 2732 [4 November 2014]
A Introduction
[1] The Financial Markets Authority (FMA) brings these proceedings against the defendants in their capacity as directors of Hanover Finance Ltd, United Finance Ltd and Hanover Capital Ltd (HFL, UFL and HCL respectively). Mr Mark Hotchin was a director of HFL, UFL and HCL when each entity issued prospectuses and published advertisements in connection with offers of debt securities to the public. The other defendants were similarly directors of some or all of these companies. The FMA alleges that during 2007 and 2008, various prospectuses, investment statements and advertisements distributed by UFL, HCL and HFL contained untrue statements, as did directors’ certificates issued to obtain extensions of those prospectuses. The directors signed or authorised each of these documents and advertisements. The FMA seeks the following:
(a) declarations that the directors are liable for civil liability events in respect of the untrue statements;1
(b) pecuniary penalty orders against the directors;2 and
(c) orders that the directors pay compensation to subscribers who invested in debt securities in reliance on the untrue statements.3
[2] This judgment addresses various applications Mr Hotchin makes (supported by the second, fourth, fifth and sixth defendants) in connection with discovery of the FMA’s documents. It also deals with an application by the FMA as to trial phasing of the multiple issues between the parties. The appropriate trial phasing issues turns upon a limitation argument, centring upon the proper interpretation of s 57E of the
Securities Act 1978.4
1 Pursuant to ss 55C and 55E of the Securities Act 1978.
2 Pursuant to s 55C of the Securities Act 1978.
3 Under s 55G, compensation may be ordered for the loss or damage that subscribers have sustained by reason of the untrue statements.
4 This section was amended in 2011, but the interpretation in this case focuses on the pre- amendment Act.
B Discovery issues
Background
[3] Mr Hotchin seeks orders that:
(a) The FMA provide further and better discovery of the FMA’s record of a meeting at which a memorandum for members by the FMA’s chief accountant Mr Boult dated 8 December 2008 was considered.5
(b)Other documents for which the FMA claims confidentiality be produced, if necessary on terms to ensure the non-publication of those documents.
(c) The reports prepared by investigating accountants Grant Thornton for Securities Commission and FMA dated 15 November 2011 and all correspondence between the FMA, its legal advisers and Grant Thornton in respect of the matters in those reports, be produced as open documents.
(d)The communications between the FMA (its members, staff, in-house counsel, solicitors or other legal advisers) and the external accountants (HFK Ltd, and in particular Mr Crichton), between 8
December 2010 and 30 April 2011 in respect of which litigation privilege has been claimed, be produced as open documents.
[4] Mr Hotchin says that these documents are relevant to a limitation defence relied upon by all defendants, and some also will be relevant for general defence purposes, such as the Grant Thornton documents. He argues that the FMA’s confidentiality concerns are overstated and to the extent they are legitimate, can be
met by non-publication orders. As to the Grant Thornton documents, Mr Hotchin
5 For part of the time period relevant to these applications the relevant regulator was the Securities Commission, the FMA’s predecessor. The FMA was established in 2011 by the Financial Markets Authority Act 2011 thereby replacing the Securities Commission, as well as taking over some of the roles of the Ministry of Economic Development and the Registrar of Companies. For ease of reference I refer to the Securities Commission as the FMA throughout this judgment.
argues that litigation privilege did not attach until November 2011, the earliest that it could be said that litigation was reasonably apprehended.
[5] The FMA resists the applications on the grounds that: (a) The documents are not relevant.
(b)They are, in any case, confidential. The FMA seeks orders under ss 69 and 70 of the Evidence Act 2006 that the documents not be disclosed in the proceedings.
(c) Some of the documents are subject to either or both legal advice and litigation privilege.
[6] Before considering the discovery application it is helpful to first outline the limitation issue, as this is necessary to determine issues of relevance raised by the FMA, and is relevant also to the FMA’s application as to trial phasing.
The limitation argument
[7] At the time relevant for these proceedings s 57E of the Securities Act 1978 provided that:
(1) An application for a pecuniary penalty order may be made at any time within 2 years after the date on which the matter giving rise to the civil liability event was discovered or ought reasonably to have been discovered.
(2) The usual time limits apply to all applications for compensation.
(3) However, an application for compensation in respect of the civil liability event may be made at any time within 6 months after the date on which a declaration of civil liability is made, even if the usual time limit has expired.
[8] The defendants plead that because of the time limit imposed by s 57E, the FMA’s claims for declarations of civil liability and pecuniary penalties were time barred — they were not brought within two years of the date on which the matters giving rise to the civil liability events were discovered or ought reasonably to have been discovered. Although the Securities Amendment Act 2011 amended the
limitation period to three years, s 31(2) of that Act provides that the new period did not apply to any application for pecuniary penalty order that was time barred before the commencement of that section: 1 May 2011. It is therefore common ground that the critical date for limitation purposes is 30 April 2009. If the civil liability events were discovered or ought reasonably to have been discovered by 30 April 2009, they would have been time barred. If not, then the three year time limit applied.
[9] Mr Hotchin says that at trial it is likely that the issue of limitation will be approached on the following basis:
(a) That the FMA either discovered or ought reasonably to have discovered the matters giving rise to the alleged civil liability events by 30 April 2009.
(b)The “matters” which needed to be discovered were the distribution of prospectuses or offer documents which contained untrue statements.
(c) In terms of the FMA’s knowledge, the issue will be whether it was more probable than not that the offer documents contained the allegedly untrue statements.
(d)Concerning what ought reasonably to have been discovered, the test is what steps a notional reasonable regulator should have taken not what the FMA actually did.
(e) The Court will look at how a regulator would act if it had adequate but not unlimited staff resources.
(f) The regulator will be assumed to be motivated by a reasonable but not excessive sense of urgency.6
6 Mr Hotchin relies upon the following authorities Commerce Commission v Carter Holt Harvey Ltd [2009] NZSC 120, [2010] 1 NZLR 379 at [28]–[31]; Amaltal Corp Ltd v Maruha Corp [2007] 1 NZLR 608 (CA); and Hook v Gulf Harbour Pond Centre Ltd (in liq) HC Auckland CIV-2002-404-1931, 2 March 2007.
Relevance
Argument
[10] Mr Hotchin submits that given this legal framework the following categories of documents are relevant to the issues:
(a) Documents from 23 July 2008 (the date on which the HFL, UFL and HCL prospectuses were suspended) to 30 April 2009 which show what steps the FMA took to obtain information and investigate the Hanover companies following the suspension of the prospectuses.
(b)Documents from 23 July to 30 April 2009 which show the level of knowledge and awareness of possibly untrue statements the FMA had. This includes any documents indicating concern by the FMA about the accuracy of statements in offer documents.
(c) Documents from 23 July 2008 to 30 April 2009 which show the steps the FMA took to investigate Hanover, and, to the extent that it did not, the reasons why not.
(d)Information relevant to possible untrue statements in Hanover offer documents obtained up to 30 April 2009 from the Ministry of Business, Innovation and Employment (Companies Office) and any other body or regulator. This could tend to prove not only what information was passed to the FMA, but also may show what other regulators had been able to discover prior to April 2009, and hence what the FMA could have discovered. This may include documents after 30 April 2009 to the extent they throw light on what had been communicated or provided to the FMA earlier than 30 April 2009.
(e) Complaints from 23 July 2008 to 30 April 2009 by investors coming to the attention of the FMA which suggested the existence of untrue statements.
(f) Media reports or inquiries from 23 July 2008 to 30 April 2009 which raise the possibility of untrue statements.
(g)FMA documents after 30 April 2009 which show the steps the FMA took in the period after 2009. The defendants contend that what was achieved by the FMA once it commenced its investigations, provides good evidence of what could have, or should have, been achieved by
30 April 2009.
[11] Mr Hotchin says that a number of issues will have to be determined at a limitation hearing, including a more precise formulation of the fact or facts that had to have been discovered or ought reasonably to have been discovered for the purposes of the issue described above. For example, is it a particular probable untrue statement in a particular offer document or just the underlying facts which give rise to the allegations of untruth set out in the statement of claim? Mr Hotchin argues that the extent of these unresolved issues requires that the scope of discovery accommodate all reasonably arguable approaches to the issue of limitation.
[12] The FMA’s argument proceeds on the basis that Mr Hotchin’s outline of the limitation argument provides the framework for assessing relevance for the purpose of this application (while not conceding the argument or the correctness of any of the propositions for the purposes of trial). They agree that the key date for the limitation defence is 30 April 2009: if the matters giving rise to this prosecution were not reasonably discoverable by that date, then the limitation defence must fail. Therefore, for a document to be relevant it must have a tendency to prove or disprove reasonable discoverability before 30 April 2009.
[13] Prior to the hearing of these applications the parties worked together cooperatively to attempt to narrow the scope of issues. The FMA reviewed and re- reviewed its documents, resulting in a substantial reduction of the number of documents subject to confidentiality claims — now only 88. It has also disclosed 50 of these on a counsel-only basis, some with redactions, thereby providing the defendants’ counsel with the opportunity to view some of the documents which are claimed to be confidential. Nevertheless, counsel for the defendants’ ability to make
submissions in connection with the discovery issues has been constrained in respect of the documents they have not seen, and in respect of documents they have seen, but which have redactions. I have therefore inspected all documents.
Analysis
[14] If the documents are not relevant, then the claims to confidentiality need not be addressed, as the documents are not discoverable. To define what is relevant for the purposes of discovery, it is necessary to refer to the definition of what is required for standard discovery, in terms of the r 8.37 of the High Court Rules. That provides that each party must disclose documents that are or have been in its control that are:
(a) documents on which the party relies; or
(b) documents that adversely affect that party's own case; or (c) documents that adversely affect another party's case; or (d) documents that support another party's case.
[15] I accept Mr Hotchin’s argument that my approach to this assessment should take into account the need to ensure that what will be a complex determination of both fact and law on the issue of limitation is not starved of the necessary documentary evidence, or in other words, that I should proceed on the basis of all reasonably arguable approaches to the issue of limitation. The complexity of this case is such that it is not feasible or desirable to resolve the correct approach to that issue at an interlocutory stage.
(a) 8 December documents
[16] Dealing first with the 8 December 2008 documents, the FMA argues that these are irrelevant as they relate to a different issue than that pursued in the claim – general market compliance relating to E20 of Appendix E of NZ IFRS (New Zealand International Financial Reporting Standards) 7 titled “Financial Instruments Disclosures”. This paragraph of the appendix to IFRS 7 requires that in certain circumstances financial institutions provide expected, in addition to contractual, maturity information.
[17] The allegations pursued by the FMA in these proceedings include the allegation that prospectuses and extension certificates issued were misleading because they failed to disclose a number of things that, individually or collectively, showed declining liquidity. The alleged material non-disclosure includes the failure to disclose an increasing level of impaired and overdue loans.
[18] The FMA’s argument that these allegations raise different factual and legal issues to those raised in the 8 December memorandum, overlooks the fact that when a loan is overdue or impaired there is or is likely to be a mismatch between the contractual maturity date and the expected date of repayment. For this reason, the issue addressed in the memorandum has obvious relevance to the issue of liquidity. Although the memorandum addressed a whole of market issue, it focused upon HFL. One reason given in the memorandum as to the importance of ensuring such reporting was the risk that otherwise investors would be denied important information. It seems to me that it is information which would have been important because of its relevance to the investor’s assessment of liquidity. For these reasons this document (and perhaps related documents although I note there are no related documents in the folders) is directly relevant to the FMA’s allegations against the defendants.
(b) Other categories of documents
[19] The FMA does not dispute the relevance of the other categories of documents as described in [10] above with one exception. It says of the category of document described at [10](g), that events after the cut off date for the limitation argument (after 30 April 2009) cannot bear upon what was or ought reasonably to have been discovered by them.
[20] I accept the defendants’ point that it is difficult to assess reasonable discoverability without regard to what was ultimately discovered. The test is a mixed subjective/objective test; both what the FMA did discover and what it reasonably ought to have discovered. Documents after the 30 April 2009 date may be relevant because they show what the FMA knew earlier and what it could have found earlier if it had looked, and finally how quickly it could reasonably have
discovered the alleged untruths given the pace of investigation actually achieved. Each limb therefore necessarily entails consideration of the whole time period up until the FMA had assembled the information it considered tended to prove the untrue statements. From a review of the documents it seems that point was reached by late 2010, early 2011.
[21] When reviewing the documents to assess relevance I have adopted this approach.
[22] I consider that all of the counsel only documents are relevant as tending to
prove the available pace of investigation, the FMA’s knowledge prior to and by April
2009 and the existence and availability to the FMA of relevant information prior to that date.
[23] I have inspected each of the 38 documents, and have assessed the following as not relevant to the FMA’s knowledge as at 30 April 2009, information available as at that date or to the available pace of investigation:
150.0019
(27.8.10)
Shows the flow of information from the FMA to an external
agency and reveals nothing of substance as to the state of
FMA’s knowledge or the pace of investigation.
150.0043 (3.11.10)
Internal discussion regarding witnesses for likely hearing, so not relevant to pace of investigation, knowledge of facts or available information.
150.0067
(31 May 2010)
Internal administrative arrangements affecting the Authority, not the investigative team.
150.0071 (9.6.10)
Discussion with person from another agency as to how to answer media inquiries.
150.0076
(7.9.10)
Provision of technical information to another agency to assist
their investigation.
150.0088 (8.9.10)
Discussions with another agency regarding public statements as to investigation.
150.0102 (23.8.10)
Record of discussion with external agency regarding its investigation of issues outside the scope of this litigation.
150.0114 (9.9.10)
Internal discussion regarding media release.
150.0115 (9.9.10)
Internal discussion regarding media release.
150.0169 (11.10.10)
Shows the flow of information from the FMA to an external agency, and reveals nothing of substance as to the state of
FMA’s knowledge or the pace of the investigation.
Confidentiality claims
[24] The next issue for determination is the FMA’s confidentiality claims in respect of the documents determined by me to be relevant. The FMA applies for orders that these documents not be disclosed in the proceeding because of the confidential information contained in them. It relies upon ss 69 and 70 of the Evidence Act 2006. Section 69 provides as follows:
69 Overriding discretion as to confidential information
(1) A direction under this section is a direction that any 1 or more of the following not be disclosed in a proceeding:
(a) a confidential communication: (b) any confidential information:
(c) any information that would or might reveal a confidential source of information.
(2) A Judge may give a direction under this section if the Judge considers that the public interest in the disclosure in the proceeding
of the communication or information is outweighed by the public interest in—
(a) preventing harm to a person by whom, about whom, or on whose behalf the confidential information was obtained, recorded, or prepared or to whom it was communicated; or
(b) preventing harm to—
(i) the particular relationship in the course of which the confidential communication or confidential information was made, obtained, recorded, or prepared; or
(ii) relationships that are of the same kind as, or of a kind similar to, the relationship referred to in subparagraph (i); or
(c) maintaining activities that contribute to or rely on the free flow of information.
(3) When considering whether to give a direction under this section, the
Judge must have regard to—
(a) the likely extent of harm that may result from the disclosure of the communication or information; and
(b) the nature of the communication or information and its likely importance in the proceeding; and
(c) the nature of the proceeding; and
(d) the availability or possible availability of other means of obtaining evidence of the communication or information; and
(e) the availability of means of preventing or restricting public disclosure of the evidence if the evidence is given; and
(f) the sensitivity of the evidence, having regard to—
(i) the time that has elapsed since the communication was made or the information was compiled or prepared; and
(ii) the extent to which the information has already been disclosed to other persons; and
(g) society's interest in protecting the privacy of victims of offences and, in particular, victims of sexual offences.
(4) The Judge may, in addition to the matters stated in subsection (3), have regard to any other matters that the Judge considers relevant.
(5) A Judge may give a direction under this section that a communication or information not be disclosed whether or not the
communication or information is privileged by another provision of this subpart or would, except for a limitation or restriction imposed by this subpart, be privileged.
[25] The FMA says that for the purposes of this analysis the documents can be broadly divided into two categories.
(a) Correspondence or records of communications between government agencies (such as those between the FMA and the Commerce Commission, the Serious Fraud Office and the Ministry of Business Innovation and Employment). This is correspondence which was subject to either express or implied obligations of confidentiality at the time. If made public following this application, there is likely to be a chilling effect on inter-agency co-operation whereby these agencies either do not disclose information to the FMA or disclose less information. This is not in the public interest as it will hamper FMA’s main objective, as prescribed by statute, which is “to promote and facilitate the development of fair, efficient and transparent
financial markets.”7 Section 69(2)(b) and (c) are therefore engaged.
(b)Documents that reveal information about internal investigative processes used by the FMA which the Commission says would not normally be known by the public, and which should not be known by the public. The FMA says that as a result of the significant media interest in the case, these documents are likely to receive media coverage. The risk is that publication of this information will prejudice the maintenance of the law by making it difficult to prevent regulatory offences in future. Section 69(2)(a) and (c) are therefore engaged.
Relevant principles
[26] Section 69 involves a two limb test:
7 Financial Markets Authority Act 2011, s 8.
(a) an assessment of whether the documents contain confidential information (or constitute confidential information); and
(b) a balancing of the
(i) public interest in the confidentiality, against
(ii) any competing public interest in disclosure.
[27] As to the first limb, the issue is whether there was a reasonable expectation that the information or communication would be kept confidential.8 It is not necessary to establish the existence of a confidentiality agreement or of a relationship that implies obligations of confidentiality although of course the existence of such an agreement is material to the assessment of whether the documents contain or constitute confidential information.9
[28] As to the second element, s 69(2)(b) provides that a judge may decline to give a direction if the public interest in disclosure is outweighed by the public interest in any of the matters set out in s 69(2)(a), (b) or (c). In Port Nelson Ltd v Commerce Commission the Court of Appeal said:10
It must be apparent from the document in question or shown by other evidence that disclosure would be likely to prejudice the party in some significant way. Even the possibility of prejudice may be sufficient, but that will depend on the seriousness of the possible prejudice and the significance of the documents to the issue in the proceeding, and the extent to which limited disclosure may enable the concerns of both parties to be accommodated.
[29] In R v X the Court of Appeal characterised this last balancing step as requiring an approach based on proportionality, whereby the validity of both interests is recognised without diminishing those competing interests (as opposed to weighing up one against the other).11
[30] The FMA also invokes s 70 of the Evidence Act which provides as follows:
8 R v X (CA553/09) [2009] NZCA 531, [2010] 2 NZLR 181 at [48].
9 At [48].
10 Port Nelson Ltd v Commerce Commission (1994) 7 PRNZ 344 (CA) at 347–348.
11 R v X, above n 8.
70 Discretion as to matters of State
(1) A Judge may direct that a communication or information that relates to matters of State must not be disclosed in a proceeding if the Judge considers that the public interest in the communication or information being disclosed in the proceeding is outweighed by the public interest in withholding the communication or information.
(2) A communication or information that relates to matters of State includes a communication or information—
(a) in respect of which the reason advanced in support of an application for a direction under this section is one of those set out in sections 6 and 7 of the Official Information Act
1982; or
(b) that is official information as defined in section 2(1) of the Official Information Act 1982 and in respect of which the reason advanced in support of the application for a direction under this section is one of those set out in section
9(2)(b)to(k) of that Act.
(3) A Judge may give a direction under this section that a communication or information not be disclosed whether or not the communication or information is privileged by another provision of this subpart or would, except for a limitation or restriction imposed by this subpart, be privileged.
[31] Section 70 allows a Judge to make a direction that documents related to matters of state not be disclosed in a proceeding. The FMA says that the confidential documents constitute matters of state in the following respects:
(a) Under s 6(c) of the Official Information Act 1982, there is good reason to withhold official information if providing that information would prejudice the maintenance of the law, including the prevention, investigation, and detection of offences. The FMA says there is a risk of harm to future investigations by FMA if the documents are disclosed. While the FMA has not commenced criminal proceedings for offences in this case, it has the ability to do so in future investigations.
(b)Under s 9(2)(ba) of the Official Information Act, there is good reason for withholding information if providing it:
(i) Would be likely to prejudice the supply of similar information, or information from the same source, and it is in the public interest that such information should continue to be supplied; or
(ii) Would be likely otherwise to damage the public interest.
[32] The grounds invoked by the FMA under s 70 essentially replicate the grounds relied upon in s 69. Again s 70(1) contemplates a weighing of the competing interests in disclosure and in refusing disclosure.
[33] The defendants respond to the plaintiffs’ application under ss 69 and 70 (based in part on their analysis of documents in the “counsel only” category) with the following points:
(a) Production of the documents will not, as claimed, prejudice any of the maintenance of law, the effective conduct of FMA affairs or compromise or prevent the supply of confidential information to the FMA by other departments or organisations.
(b)If it is found that there are any legitimate public interest/confidentiality claims made out for any documents, protective orders can be made to address these.
(c) Consideration of counsel only documents suggests an inconsistent and overly broad approach to claims to confidentiality.
(d)Many of the counsel only documents are clearly relevant to the limitation defence. In such circumstances it is argued that careful scrutiny of the documents is justified.
Factors relevant to s 69 and 70 assessment
[34] The first issue is whether the claims for confidentiality are made out. I consider that the claims to confidentiality are made out. First, absent a limitation issue, the details of the progress of an investigation within the FMA would not normally be relevant. There would have been a legitimate and well founded
expectation within FMA that internal communications, where staff worked through and discussed the day to day minutiae of their investigation, would not be made public. The same is also true of communications between agencies. It is clear from a review of the documents that views and opinions were at times frankly and casually expressed in a way they would not have been were there any expectation of publication.
[35] Moreover some of the documents and information provided by external agencies was provided under express terms of confidentiality. The FMA entered into memoranda of understanding with at least the SFO and Commerce Commission (it may have had a similar agreement with MBIE, but that was not provided to me). The memoranda with the SFO and Commerce Commission obliged the FMA to observe the strictest “secrecy” (agreement with SFO) or “confidence” (agreement with Commerce Commission) in relation to information or materials supplied under the memorandum of understanding, including information derived from or based on that information. However, both agreements provided that the agencies would not disclose the protected information unless disclosure was required by law or authorised by the other party.
[36] I also note that in both categories of documents there are aspects of information where particular privacy concerns arise:
(a) Information provided by private individuals or entities to the investigators or information which reveals the fact of co-operation by those individuals. (For convenience I refer to these individuals in this judgment as informants).
(b)Views about the liability of parties other than the directors. Some of the views expressed are clearly casually made, again in expectation that those views would go no further.
[37] In terms of undertaking the s 69 and s 70 assessment I have also taken into account the likely extent of the harm which will flow from publication:
(a) I accept that maintaining confidentiality will tend to encourage the free flow of information within the FMA and between it and other agencies. The free flow of information is necessary for these agencies to undertake properly their investigative functions. But I do not consider that this can possibly justify a blanket ban on disclosure of any kind. Indeed the FMA has already provided disclosure of some of its documents. It is necessary to consider the type of information contained in a document to assess the extent of the harm that will flow from disclosure.
(b)Confidentiality concerns are much less acute where the document contains recitations of fact, and/or where it is a formal communication such as a memorandum or a report to the Authority.
(c) Disclosure of inter-agency communications or other information showing agencies doing what they would be expected to do is unlikely to have a chilling effect upon future activities. I consider it relevant that the FMA, SFO, Commerce Commission and MBIE are public agencies that can be expected to co-operate.
(d)Information which tends to identify informants, or the information they have provided raises particular confidentiality concerns. Disclosure of information provided by informants may deter future informants from providing information. Any disclosure, including to the defendants could have this effect.
(e) Where a communication is informal it is more likely to be an unguarded communication. There is a public interest in investigators being able to have informal exchanges, including exchanges of opinions about matters arising from an investigation. Care is not taken over the content of such exchanges in the expectation they will be private. An example is the expression of opinions as to potential liability of non-parties. Disclosure to anyone, including the defendants could have a deterrent effect upon this type of intra and
inter agency communication. This type of communication is inevitable and desirable as investigators think through the issues as they arise in a complex investigation.
[38] In terms of the balancing exercise, I have assessed the strength of the claims to confidentiality, and the extent of the harm that would flow from disclosure. As to the public interest in disclosure I have weighed the strength of the defendants’ interest in disclosure. Some documents are more relevant than others. The more peripheral the relevance, the less the case for disclosure where there are legitimate confidentiality concerns.
[39] I have also considered the ability for redaction and non-publication orders to ameliorate the extent of any harm caused. Some confidentiality or information protection concerns can be met through non-publication, some through non- publication and redaction, but some require orders pursuant to s 69 and s 70 that they not be disclosed in the proceeding.
[40] Finally, the FMA claims that disclosure of some documents will prejudice future investigations in ways other than impeding the free flow of information. However, inspection of the documents has not revealed any particular investigative technique which should be kept confidential.
Counsel-only documents: ss 69 and 70 assessment
[41] Having applied these principles I make determinations in respect of the ss 69 and 70 applications for each document. Where I have declined the confidentiality application in respect of Judge alone documents, the FMA asked that I reserve leave to it to apply for particular redactions. All confidentiality applications are declined on terms:
(a) That the documents are subject to non-publication orders. They should not be distributed beyond counsel and parties without leave of the Court.
(b) Leave is reserved to the FMA to apply for particular redactions.
150.0006Application declined. Highly relevant. Formal internal communication. No prejudice to FMA from disclosure.
150.009Application declined. Although it is from the Commerce Commission (and subject to confidentiality undertakings) it is highly relevant, and narrates facts with little commentary. No prejudice to Commerce Commission or FMA from disclosure.
150.0010 Application declined for the reasons above.
150.0011 Application declined for the reasons above.
150.0016Application declined. Highly relevant. Formal communication. No prejudice to FMA from disclosure.
150.0023 Application declined for email.
Application granted for attachments. The attachments were provided by the Commerce Commission on the basis of confidentiality undertakings, and are privileged in the hands of the Commerce Commission. The applicable privilege is legal advice privilege (a privilege which has not been waived) with an associated right of confidentiality. The Commission has an interest in maintaining this privilege. The attachments are not highly relevant as they appear to address issues other than those pursued in this litigation. The email which encloses the attachments provides the necessary chronological peg for the defendants.
150.0026Application declined. Although the information was received under obligations of confidence, it is highly relevant to the issue of information available to FMA and steps taken in the investigation. The material is also of a factual nature. No prejudice to Commerce Commission or FMA from disclosure.
150.0041 The FMA waives confidentiality claims for this document.
150.0044Application declined, subject to redaction of content of Ms Blenkarne’s email of 5.12 pm (application granted in respect of that portion). Redaction of content of first email in email string upheld on grounds of legal advice privilege. The email otherwise contains relevant information, of a routine nature and does not include expressions of opinion. No prejudice to FMA from disclosure of the balance.
150.0045Application declined. Relevant information, of a routine nature. No prejudice to FMA from disclosure.
150.0049Application declined. Although only peripherally relevant, it is a formal communication. No prejudice to FMA from disclosure.
150.0051 Application declined in respect of email of 22 March 2010, 19 March
2010 memorandum (subject to redactions) and accompanying resolution. Highly relevant as documents provide part of the chronology of the investigation and show what the FMA knew at that point in time. There are also formal communications, and no prejudice to FMA from disclosure. However redactions of paragraphs
12-27 (and associated headings) allowed on the grounds that the material contains legal advice from an in-house lawyer. Request for redactions declined for paragraphs 2-10, as there is no legal advice content in that portion.
Application declined in respect of Mr Crichton’s curriculum vitae. Although the curriculum vitae is not very relevant it is a document designed for providing to others so there is very little if any confidentiality interest.
Application granted in respect of two Commerce Commission sourced documents also attached (dated 20 February 2009 and 23
April 2009). The Commerce Commission documents were provided by the Commission on the basis of confidentiality undertakings, and
are privileged (legal advice privilege) in the hands of the Commerce Commission. Disclosure would prejudice the Commerce Commission’s legitimate interest in maintaining privilege.
150.0054 Application declined. Relevant. Formal document. No prejudice to
FMA from disclosure.
150.0056 Application disclosure. declined. Relevant. No prejudice to FMA from 150.0061
Application disclosure.
declined.
Relevant.
No prejudice
to FMA from
150.0065Application declined subject to a redaction. Redaction allowed of third paragraph (informal expression of opinions including as to non- party liability) and also of the penultimate paragraph (raises informant confidentiality issues). These portions are peripherally relevant, and there is a public interest in maintaining confidentiality in material of this nature. Application declined in respect of balance. Balance of material relevant as it narrates progress of investigation. No prejudice to FMA from disclosure.
150.0069 Application declined. Formal, and relevant. No prejudice to FMA
from disclosure.
150.0070Application declined subject to redaction of names in second paragraph of email and in handwriting on second page. The email is relevant as part of narrative of progress of investigation. However redacted names raise informant confidentiality concerns.
150.0072Application declined. Relevant. No prejudice to FMA from disclosure.
150.0074 Application allowed. Involves the provision of information to SFO
on matters not at issue in this proceeding. Only peripheral relevance.
150.0079 The FMA waives confidentiality claims for this document.
150.0085Application allowed. Little if any probative value on issues beyond what has already been disclosed through other documents. Abbreviated and ambiguous record of a conversation.
150.0094Application declined. Relevant. No prejudice to FMA from disclosure.
150.0097Application allowed. Little if anything of relevance beyond what has already been provided, but contains some frank expressions of preliminary opinion. It is apparent from the remarks recorded that the attendees at meeting would have expected the content of the meeting to remain private. There is a public interest in maintaining the confidentiality of such “full and frank” discussions in the course of an investigation.
150.0105Application declined. Relevant. A formal communication. No prejudice to FMA from disclosure.
150.0106 Application declined. Highly relevant information. No prejudice to
FMA from disclosure.
150.0109Application declined subject to the redaction of the name and identifying particulars of the private individual named throughout the document together with the name of his solicitor, as this raises issues as to informant confidentiality. The balance is highly relevant information in a formal document. No prejudice to FMA from disclosure.
150.0110 Application declined. Relevant information. Factual information.
No prejudice to FMA from disclosure.
150.0120Application declined. Relevant information. Formal record of meeting. No prejudice to FMA from disclosure.
150.0122Application declined. Highly relevant. Although this includes inter- agency communication, the information in the communication is routine. No prejudice to FMA or MBIE from disclosure.
150.0123 Application declined. Relevant information. No prejudice to FMA
from disclosure.
150.0124Application declined. Highly relevant. Shows inter-agency co- operation of a routine nature. No prejudice to FMA or SFO from disclosure.
150.0125Application declined. Relevant. Although discussion concerns a third party the information discussed comes from a public source so informant confidentiality concerns not engaged. No prejudice to FMA from disclosure.
150.0126Application declined. Relevant as evidences gathering of information from external sources. Although it records content of discussions with private individual/entity, it predominantly records what FMA advised external individual/entity. Informant confidentiality concerns therefore not engaged. No prejudice to FMA from disclosure.
150.0130 Application declined subject to redaction of penultimate paragraph.
That paragraph attracts legal advice privilege – narrates content of legal advice. The balance is relevant. Routine information. No prejudice to FMA from disclosure.
150.0135Application declined subject to redaction from part of document that begins “David noted a few comments…” and ending with the end of the parenthetical remark toward the end of document. The redacted material records comments made to FMA investigator by external individual/entity and those are comments about others, not party to the litigation. It also includes private payment arrangements with
Mr Crichton. The balance of the document contains relevant and routine material. No prejudice to FMA from disclosure.
150.0152Application declined in respect of enclosing email and letter subject to redaction of paragraphs 7 & 8. Those two paragraphs contain irrelevant and private contractual detail affecting Mr Crichton’s retainer. The balance of the letter is relevant as it reveals the course and focus of the investigation. No prejudice to FMA from disclosure.
Application granted in respect of the appendix to the letter. The FMA
need not disclose the appendix as legal advice privilege attaches to it.
150.0163Application declined. Relevant. No prejudice to FMA from disclosure.
150.0165Application declined. Relevant. No prejudice to FMA from disclosure.
150.0168Application declined subject to redaction of last paragraph (relates to cost of investigation – irrelevant). The balance is relevant and routine. No prejudice to FMA from disclosure of balance.
150.0170Application declined subject to redaction of sentence beginning “Our estimate …” The redacted material contains irrelevant but private material concerning Mr Crichton’s contractual arrangements with the FMA. The balance is relevant and routine. No prejudice to FMA from disclosure.
150.0172Application declined. Relevant. Although an inter-agency communication it concerns the type of flow of information between agencies the public would expect. No prejudice to SFO or FMA from disclosure.
150.0174Application declined. Relevant. The material currently redacted from the copy disclosed to counsel should also be disclosed. The
material is relatively routine. Legal advice privilege does not attach to communications with a third party, even if it is to assist in preparation of legal advice.12 No prejudice to FMA from disclosure.
150.0175Application declined. Relevant. Again, the redacted material should also be disclosed. No prejudice to FMA from disclosure.
150.0176Application declined subject to redaction of second paragraph. This is irrelevant as it contains material concerning the terms of Mr Crichton’s engagement. The balance is relevant, routine, and there will be no prejudice to the FMA from disclosure.
150.0182Application declined. Relevant, routine, and there will be no prejudice to FMA from disclosure.
150.0183Application declined. Relevant, routine, and there will be no prejudice to FMA from disclosure.
150.0185Application declined. Relevant, routine, and there will be no prejudice to FMA from disclosure.
150.0186Application declined. Relevant, routine, and there will be no prejudice to FMA from disclosure.
150.0187Application declined. Relevant, routine, and there will be no prejudice to FMA from disclosure.
150.0194Application declined. Relevant. Although it concerns the flow of information between agencies, it reveals co-operation of a nature which the public would expect. No prejudice to FMA or Commerce
Commission from disclosure.
12 Richard Mahoney and others The Evidence Act 2006: Act and Analysis (2nd ed, Thomson
Reuters, Wellington, 2014) at [EV54.08].
Judge-only documents: ss 69 and 70 assessment
[42] I assess each of these in turn.
HAN 150.0005 Application declined. A Commerce Commission document assessing statements made in HCL, HFL and UFL prospectuses and “special purpose statements”, dated 21
August 2008. Although it is not apparent when the document came into the possession of the FMA it is prima facie relevant. It shows that the Commerce Commission shared work product as well as documents with the FMA and indicates awareness of some matters at issue in this proceeding. The Commerce Commission has not released FMA from confidentiality undertakings. However, no harm is likely to be caused to either the FMA’s or Commerce Commission’s investigative processes or abilities given the nature of the content. Nor is disclosure likely to impede the future flow of information. The defendants’ interest in access to the documents is significant.
150.0021Application declined. This document is relevant as it concerns the nature of information available to the FMA and practicalities around obtaining it. Although it consists of communication with another agency it is predominantly about the FMA’s investigation. It also outlines the basis on which information sharing can and should occur. As noted earlier, the public would expect information sharing between public agencies investigating the same matter. No prejudice will be caused to the FMA or MBIE from disclosure.
150.0024Application declined for the same reasons as above (although in this case the other agency is Commerce Commission).
HAN 150.0047 Application allowed. This document contains communication with another agency. It has very limited relevance, but
contains frank discussion as to the practicalities of the agencies working together. There is a public interest in agencies being able to have this type of frank exchange without even limited publication of the content.
HAN 150.0066 Application allowed. To the extent this is relevant it contains information which engages public interest in informant confidentiality. Moreover, there is little of probative value in the information in the terms of the limitation defence.
150.0078Application declined. Although a communication from an external agency it is relevant as it concerns available sources of information. It is routine in nature. No prejudice to SFO or FMA from disclosure.
150.0080Application allowed. Most of the content is irrelevant. That which is relevant can be gathered from other documents or through questioning of witnesses (obvious questions arising from other documents). It contains frank exchanges between agencies of the practicalities of them working together. Again there is a public interest in agencies being able to have this type of frank exchange without publication.
150.0083Application declined. Although an inter-agency communication it is relevant. Again shows an expected level of co-operation. No prejudice to FMA or SFO from disclosure.
150.0092Application declined subject to redaction of third to last bullet point. The balance of the document is relevant as it shows progress of investigation. However third to last bullet point contains irrelevant material, which concerns engagement of legal advisors.
150.0095Application granted. Duplicate (apart from irrelevant handwritten material) of another document which is disclosed.
150.0096Application declined subject to redaction of paragraph 2 and of the individual’s name in paragraph 4. Paragraph 2 is irrelevant to limitation defence and concerns the potential liability of a non-party. The individual’s name in paragraph 4 raises informant confidentiality concerns. The balance is relevant as it shows the progress of the investigation. A relatively formal communication. No prejudice to FMA from disclosure.
150.0098Application allowed. To the extent relevant, it is a duplicate of 150.0096.
150.0099Application declined subject to redaction of material from “If Commission decides …” to end of document as it contains irrelevant material (a note of discussions as to practicalities of obtaining legal advice and providing information to another agency). The balance is relevant. Shows progress of investigation. No prejudice to FMA from disclosure of balance.
150.0100Application allowed. To the extent it is relevant, it is a duplicate of 150.0096.
150.0101Application allowed. To the extent it is relevant, it is a duplicate of 150.0096.
150.0117 Application declined subject to redaction of second half of document starting “He noted…”. The balance is relevant. Although it records exchanges with another agency, it is about the provision of information to the FMA. There will be no prejudice to SFO or FMA from disclosure. The second
(redacted) half contains irrelevant material and is concerned with SFO’s concerns and intentions. Prejudice to SFO from disclosure of information it would have provided in expectation it would be kept private.
150.0118 Application declined subject to redaction of portion starting “MED has got a report …” and ending “dividend payments”. The material to be disclosed is relevant to the information that was available to FMA. Although it records exchanges with another agency, these exchanges were about provision of information. No prejudice to FMA or MBIE from disclosure of information. Redaction allowed of material that is relevant only to MBIE investigation and summarises legal advice received by MBIE. Prejudice to MBIE from disclosure of material.
150.0127Application declined. Internal working document but of a relatively formal nature. Sets out plan of action for investigation, so relevant to course of investigation. No prejudice to FMA from disclosure.
HAN 150.0131 Application declined subject to redaction of paragraphs (a), (b), (e) and (f) and associated headings. The redacted portions are irrelevant and narrate the SFO’s advice as to their progress in aspects of their investigation. The balance is relevant to issue of what information was available to the FMA. Although it records an inter-agency communication it shows co-operation of a nature that would be expected. No prejudice to FMA or SFO from disclosure of balance.
HAN 150.0162 Application allowed. To the extent it is relevant it adds little if anything to other disclosed documents, but contains a record of information provided by SFO about its investigation clearly in expectation it would be kept private. The discussion
recorded contains the frank expression of opinions the parties would not expect to be disclosed. There is a significant public interest in maintaining confidentiality in such material, corresponding to the public interest in encouraging that type of co-operation.
HAN 150.0171 Application declined. Relevant as shows the course of the investigation. No prejudice to FMA from disclosure.
HAN 150.0180 Application declined for email but allowed for letter. The email assists with revealing the chronology of the investigation, and there is no prejudice to FMA from disclosure. The letter records information provided by private individual of a nature suggesting that it was conveyed in anticipation that it would be kept confidential. Although it is relevant to the limitation issue, to the extent that it shows the course of the investigation, that information is also available in other documents.
HAN 150.0181 Application declined. Relevant. Although it records a discussion with another agency, it is about the provision of information to the FMA. No prejudice to FMA or SFO from disclosure.
HAN 150.0188 Application allowed. Same reasons as for document HAN
150.0047.
HAN 150.0190 Application allowed. Informal communication referring to practicalities of co-operation with other agency. To the extent it contains relevant information, it is information available from other sources. Balance falls on side of maintaining confidentiality.
HAN 150.0191 Application allowed. For same reason as for document HAN
150.0047.
HAN 150.0192 Application allowed. For same reason as above.
Privilege/waiver of privilege
[43] The defendants challenge the FMA’s claim to litigation privilege in relation to reports prepared for the FMA by an independent forensic accounting expert firm Grant Thornton and associated communications. The defendants say the documents were created before litigation privilege attached, were not created for the dominant purpose of litigation and in any case if litigation privilege did attach, it has been waived by the disclosure of the reports of an earlier expert, Mr Crichton.
[44] The relevant principles are not in dispute. Section 56 of the Evidence Act
2006 codifies privilege known at common law as litigation privilege. The relevant parts of the section provide:
(1) Subsection (2) applies to a communication or information only if the communication or information is made, received, compiled, or prepared for the dominant purpose of preparing for a proceeding or an apprehended proceeding (the “proceeding”).
(2) A person (the “party”) who is, or on reasonable grounds contemplates becoming, a party to the proceeding has a privilege in respect of—
(a) a communication between the party and any other person:
(b) a communication between the party's legal adviser and any other person:
(c) information compiled or prepared by the party or the party's legal adviser:
(d) information compiled or prepared at the request of the party, or the party's legal adviser, by any other person.
[45] Because s 56 codifies the common law test, assistance in the application of this test can be had from reference to pre-existing case law. The privilege attaches to communications by a litigant or his lawyer with a third party, where the communication is for the dominant purpose of preparation for actual or reasonably
apprehended litigation. Preparation does not have to be the only purpose. It does not matter if there is a secondary purpose, so long as preparation is the dominant purpose.13
[46] As to when a proceeding is “apprehended” for the purposes of s 56, it is clear that the mere spectre of eventual litigation is not enough for the privilege to trigger. As noted by Brooke LJ in United States of America v Phillip Morris Inc (No 1):14
It has been recognised on many occasions that there is a conflict between the need to enable clients to communicate freely with their legal advisers in relation to litigation and the need to ensure that all relevant material is before the court: see, for example, Lord Wilberforce in Waugh v British Railways Board at page 531–532 and Lord Simon at pages 535–537. The point at which litigation should be regarded as sufficiently likely for confidential communications between client and his lawyer to attract privilege on this ground therefore involves striking an appropriate balance between these two factors. The requirement that litigation be ‘reasonably in prospect’ is not in my view satisfied unless the party seeking to claim privilege can show that he was aware of circumstances which rendered litigation between himself and a particular person or class of persons a real likelihood rather than a mere possibility.
[47] In Guardian Royal Exchange Assurance of New Zealand Ltd v Stuart, Tompkins J described the privilege as enlivened when the party regards litigation as probable.15
Analysis
[48] Mr Hotchin challenges whether the Grant Thornton reports were prepared for the dominant purpose of preparing for proceedings. The FMA is a regulator, and as such will often act with a duality of purpose – the continued investigation and preparation for proceedings. He argues that if a communication has been prepared for both purposes equally, litigation will not be the dominant purpose. Here, Mr Hotchin says Grant Thornton was engaged to peer review the work of
Mr Crichton, the earlier expert retained. Prior to that peer review being completed
13 Guardian Royal Exchange Assurance of New Zealand Ltd v Stuart [1985] NZLR 596 (CA) at
606.
14 United States v Philip Morris (No 1) [2004] EWCA Civ 330, [2004] 1 CLC 811 at [46]. Brooke
LJ’s observation was applied by Allan J in this Court in Pernod Ricard New Zealand Ltd v Lion
– Beer, Spirits & Wine (NZ) Ltd [2012] NZHC 2801 at [30].
15 Guardian Royal Exchange, above n 13, at 606.
Grant Thornton’s work remained part of the investigative process, and could not be
said to have been prepared for the dominant purpose of litigation.
[49] Having reviewed the documents dealing with the engagement of Grant Thornton, including those in the Judge alone file, I am satisfied that Grant Thornton were engaged not as peer reviewers, but rather as expert witnesses with a view to their providing evidence in Court should the matter proceed to trial. The reports were prepared for the dominant purpose of preparing for that eventuality. There was no duality of purpose.
[50] I am also satisfied that, as the FMA contends, litigation was reasonably apprehended by the beginning of December 2010 so that litigation privilege attached. Mr Hotchin points to various statements made by the FMA after November 2010 which he says shows that by that time litigation was still only possible. The material he relies upon includes:
(a) An FMA letter to a solicitor for Hanover in which Ms Sue Brown, director of primary markets, addresses comments in the media regarding the laying of criminal charges against Hanover directors. She says in that letter:
You can be assured that the Commission has not formed a view prior to completing this investigation and will consider all information available to it before doing it.
Ms Brown also confirms that the directors will have an opportunity to attend a voluntary interview.
(b)An FMA affidavit filed in December 2010 in support of the ex-parte application for interim asset preservation orders against Mr Hotchin, in which Ms Megan Blenkarn of the Commission says:
As a result of its investigations, the [FMA] reasonably apprehends the possibility of initiating litigation against the companies and the directors on the basis of untrue statements contained in offer documents of these companies.
Ms Blenkarn also acknowledges that before reaching a decision as to whether or not to commence proceedings, the FMA wished to interview relevant people.
(c) In May 2011 Ms Sue Brown provided the following update to the
Court on the investigative process:
The investigative planning process, over which I exercise close and regular oversight, is heavily influenced by the need to ensure that a decision on whether to commence proceedings against Mr Hotchin, in particular, is taken by the Board of FMA as soon as reasonably possible.
To that end, I can confirm that FMA is proceeding in the expectation that, if and when my team forms a view that sufficient foundation exists to file civil proceedings, this option will immediately be placed before the CE for consideration before his recommendation to the board. FMA is not ruling out the possibility that the receipt of additional information could result in further causes of action being added and/or criminal charges being laid. However, the immediate focus of the Investigation has been significantly refined, with a view to identifying a smaller number of interrelated issues – adequately representative of FMA’s key regulatory concerns, which can be urgently, and efficiently, progressed.
(d)On 14 December 2011 the FMA resolved to bring these proceedings.
[51] I accept that this chronology establishes that no firm decision had been taken to initiate the present civil proceedings until December 2011, and that the FMA continued to seek information, including undertaking interviews of directors during August 2011. The FMA correctly regarded itself as under an obligation to interview directors (if they so wished) before committing to the issue of these proceedings.
[52] However for litigation privilege to attach, the FMA need not have taken the decision to commence proceedings. It is sufficient that by December 2010 the FMA was aware of circumstances which rendered litigation between the FMA and the defendants probable or a real likelihood. Clearly the FMA was aware of those circumstances by December 2010. At that point the FMA applied to freeze Mr Hotchin’s assets in reliance upon information which it considered likely showed
that offer documents and advertisements had been issued containing untrue statements. That view was based upon Mr Crichton’s report and the extensive documentation FMA investigators had reviewed. The FMA’s continued efforts to seek information including through interviews is not inconsistent with this conclusion. The FMA did not need to know the exact form that the litigation would take, or to believe that the proceedings would definitely be issued. The fact it continued to investigate and refine its views after December 2010 does not therefore assist the defendants.
[53] Mr Hotchin argues in the alternative that the FMA has waived privilege to the Grant Thornton documents through its release of reports prepared for it by Mr Crichton of HFK Ltd. Mr Crichton was the expert originally engaged by the FMA who did extensive investigative work for them.
[54] Section 65 of the Evidence Act 2006 addresses the issue of waiver. It provides in material part:
(1) A person who has a privilege conferred by any of sections 54 to 60 and 64 may waive that privilege either expressly or impliedly.
(2) A person who has a privilege waives the privilege if that person, or anyone with the authority of that person, voluntarily produces or discloses, or consents to the production or disclosure of, any significant part of the privileged communication, information, opinion, or document in circumstances that are inconsistent with a claim of confidentiality.
(3) A person who has a privilege waives the privilege if the person—
(a) acts so as to put the privileged communication, information, opinion, or document in issue in a proceeding; or
(b) institutes a civil proceeding against a person who is in possession of the privileged communication, information, opinion, or document the effect of which is to put the privileged matter in issue in the proceeding.
[55] There has been no waiver express or implied by the FMA of its privilege in respect of the Grant Thornton material. There has been no disclosure of any significant part of it. Privilege has been steadfastly maintained. However Mr Hotchin’s argument is that disclosure of correspondence with HFK Ltd and its work product constitutes disclosure of a significant part of the Grant Thornton
report. This is because Grant Thornton was engaged to peer review Mr Crichton’s
work.
[56] As already noted Grant Thornton were not engaged as peer reviewers, but rather as independent experts with a view to their giving evidence at trial. Even if Grant Thornton has adopted parts of Mr Crichton’s report as its own following review, the fact of review and adoption makes it Grant Thornton’s work product. Mr Crichton’s report is therefore a thing apart from the correspondence between the FMA and Grant Thornton, and from Grant Thornton’s reports.
[57] I also understood Mr Hotchin to argue that privilege can be waived across a class of documents, in this case, a very broad class – all accounting experts’ work product and communications with the FMA. This approach is inconsistent with the wording of s 65 which focuses upon the particular “privileged communication, information, opinion, or document”.
[58] For these reasons the FMA’s claim to litigation privilege in the Grant
Thornton material is upheld.
C Trial phasing/declaration of civil liability
[59] The parties have agreed that the scope of the issues in this proceeding are so broad that there should be a three phase staging of the trial. There is however a difference between them as to what issues should be addressed at each stage.
[60] The FMA seeks an order that the trial be phased as follows:
Stage 1: Liability Trial
[61] Stage 1 would involve:
(a) whether there are any untrue statements in the offer documents;
(b)whether any of the defendants is a person liable for any untruths in accordance with s 56 of the Act;
(c) whether the defendants had reasonable grounds to believe and did believe that the offer documents were true;
(d) whether the defendants should be granted relief under s 63 of the Act; (e) any issues specific to promoter liability;
(f) if the claim against the trustees is permitted by the appellate courts, all issues concerning the liability of the trustees; and
(g) a declaration of civil liability.
Stage 2: Determination of Questions Relating to Compensation
[62] Stage 2 would only be necessary if the plaintiff succeeded in establishing civil liability. Stage 2 would involve determinations of questions relating to reliance, causation, and the means of assessment of compensation.
Stage 3: Compensation and Pecuniary Penalties
[63] A further stage, stage 3, would then address any and all outstanding issues:
(a) whether subscribers met the relevant legal tests for reliance in light of the determinations in the preceding stage;
(b)causation of loss and any other factual determinations concerning causation required in light of the determinations in the previous stage;
(c) the quantum of compensation and all other factual determinations concerning quantum of compensation; and
(d) concerning pecuniary penalties, namely:
(i)whether they are time-barred under s 57E of the Act (an inquiry into what the plaintiff knew or should have known by
30 April 2009 about the established untruths, whatever those untruths are proven to be);
(ii)whether the tests under s 55C of the Act have been satisfied (which relate to the seriousness of the civil liability event); and
(iii) quantum.
[64] The FMA’s position is that the legal test for a declaration of civil liability will be met in full if the Court finds in the FMA’s favour at stage 1 and a declaration at that point is a logical step in compensatory proceedings brought by the FMA. Such an approach is consistent with the civil liability scheme of the Act and it is most consistent with the investor protection scheme of the Act more generally. Mr Hotchin and the other defendants will not be unfairly prejudiced by the Court making a declaration at stage 1.
[65] Mr Hotchin and the other defendants submit that any declaration of civil liability must be made at stage 3, because the limitation defence which is raised in respect of pecuniary penalty orders is also available to the defendants in respect of a declaration of civil liability. As an alternative scenario, the defendants say that its limitation defence should be determined prior to or at the same time as any application for a declaration of civil liability. The defendants say that this approach is mandated by the legislation and is also a fair outcome. There is no need for the FMA to insist on the declaration of civil liability at the first stage.
[66] Determination of the appropriate staging of the trial therefore turns primarily upon the question of whether the limitation period provided in s 57E of the Act applies to declarations for civil liability. This raises an issue of statutory interpretation. In terms of s 5 of the Interpretation Act 1999, the meaning of an
enactment must be ascertained from its text, and in the light of its purpose.16 The
matters which may be considered include indications provided in the Act itself,
16 Interpretation Act 1999, s 5(1).
including headings to the parts and sections and the organisation and format of the enactment.17
[67] Section 55A is a convenient place to start with this question of interpretation. It is a “guide only to the general scheme and effect of ss 55B to 57E”.18 In material part it provides:
(1) The following civil remedies are available from the Court under this
Act if there is a civil liability event:
(a) a pecuniary penalty order and declaration of civil liability
(on application by the FMA only) under section 55C: (b) compensation under section 55G.
(2) Sections 56 to 57A cover who is liable for the civil liability event for both these remedies.
[68] Section 55D describes the “Purpose and effect of declarations of civil liability” as follows:
(1) The purpose of a declaration of civil liability is to enable a person who brings proceedings under section 55G to rely on the declaration in the proceedings for compensation, and not be required to prove the civil liability event.
(2) Accordingly, a declaration of civil liability is conclusive evidence of the matters that must be stated in it under section 55E.
[69] Section 55B provides that for the purposes of Part 2 of the Act, a civil liability event is the distribution of an advertisement or a registered prospectus that includes an untrue statement.19
[70] The title to s 55C is “When Court may make pecuniary penalty orders and declarations of civil liability”. The section provides:
If the FMA applies for a pecuniary penalty order against a person under this
Act, the Court—
17 Securities Act 1978, s 5(3).
18 Section 55A(3).
19 It also includes breach of regulation in connection with contributory mortgages but that is not relevant to these proceedings.
(a) must determine whether there has been a civil liability event and whether the person is liable for a pecuniary penalty order for that civil liability event under sections 56 to 57A; and
(b) must make a declaration of civil liability if satisfied of those matters
(see sections 55D and 55E); and
(c) may order the person to pay to the Crown a pecuniary penalty that the Court considers appropriate (see section 55F) if satisfied of those matters and that the civil liability event—
(i) materially prejudices the interests of subscribers for the securities involved; or
(ii) is likely to materially damage the integrity or reputation of any of New Zealand's securities markets; or
(iii) is otherwise serious.
[71] Section 55G provides a link between the declaration of civil liability and the making of compensation orders. It provides in material part:
(1) The Court may, on the application of the FMA or a subscriber, order a liable person to pay compensation to all or any of the persons who subscribed for any securities on the faith of an advertisement or registered prospectus that includes an untrue statement, for the loss or damage that the persons have sustained by reason of the untrue statement.
…..
(3) A liable person is a person who is liable for compensation for the relevant civil liability event under any of sections 56 to 57A.
(4) The liable person must pay any compensation ordered under the compensation order.
[72] Section 57E contains the relevant time limit which is at issue in this application. Section 57E provides as follows:20
57E Time limit for applying for civil remedies
(1) An application for a pecuniary penalty order may be made at any time within 2 years after the date on which the matter giving rise to the civil liability event was discovered or ought reasonably to have been discovered.
(2) The usual time limits apply to all applications for compensation.
20 The limitation period in this section has now been extended to three years.
(3) However, an application for compensation in respect of the civil liability event may be made at any time within 6 months after the date on which a declaration of civil liability is made, even if the usual time limit has expired.
[73] The defendants’ argument on the point of statutory interpretation is simply this. The Act does not contemplate an application for a declaration of civil liability on a stand alone basis divorced from an application for pecuniary penalty. The limitation period for a pecuniary penalty is the limitation period for a declaration of civil liability. Whether a declaration of civil liability is time barred has been placed at issue. The limitation issue must therefore be addressed at the same time or before the application for a declaration of civil liability. The defendants say that these propositions follow from the text and scheme of the civil remedies provisions and are supported by the Parliamentary material available in respect of them.
[74] The FMA’s response on the issue of statutory interpretation is that a declaration of civil liability does not require that liability for a pecuniary penalty be determined first, merely that the application for a pecuniary penalty has been made. In this case it has. Section 57E does not limit the bringing of the application, merely the awarding of the remedies. The remedy that limitation would prohibit (if established) would be a pecuniary penalty order, not a declaration of civil liability. A declaration of civil liability is not remedial in nature, but rather evidential and has one simple and practical use – to avoid the court being asked to determine matters of fact that have already been decided and determined (in this case if an offer document contains an untrue statement and that a defendant is a person liable for that).
Analysis
[75] Section 57E(1) creates a statutory time bar to the bringing of any application for a pecuniary penalty, not the making of an order that there be a pecuniary penalty. If an application for a declaration of civil liability is necessarily a part of an application for a pecuniary penalty order, or may only be brought with an application for a pecuniary penalty order, s 57E will have the effect of barring an application for a declaration of civil liability if the time limit has expired.
[76] There are strong textual indications that an application for a declaration of civil liability may only be brought together with an application for a pecuniary penalty order. Thus in ss 55A(1)(a) and s 55C(a), applications for pecuniary penalty orders and declarations of civil liability are clearly linked. In s 55A(2) it is stated that sections 56 to 57A cover who is liable for the civil liability event for “both” these remedies. This emphasises the dichotomy between on the one hand a pecuniary penalty order together with a declaration of civil liability and on the other, compensation.
[77] Section 55C further reinforces this interpretation. It provides that a declaration of civil liability is made in response to an application for a pecuniary penalty order, and must be made if the court has determined that there is a civil liability event and “the person is liable for a pecuniary penalty order for that civil liability event”.
[78] Against this reading of these provisions is the fact that one of the purposes of Part 2 is to assist investors by making access to a remedy through pursuing Court proceedings accessible. In order to make out the case for a pecuniary penalty order, the FMA will have to satisfy the Court that there has been distribution of an advertisement or registered prospectus that includes an untrue statement. It will have to prove that there has been a civil liability event. Because it is undesirable that the issue be litigated on multiple occasions by different parties, and because of the public interest in investors being able to pursue recovery of losses in a cost effective manner, the Act provides in s 55D that persons who bring claims under section 55G may rely upon the declaration of civil liability obtained by the FMA as conclusive evidence of the matters which must be stated under section 55E. The FMA says that there is no reason to impose a two year time limit in light of this purpose.
[79] However when regard is had to the scheme of the Act I consider it is clear that this particular investor benefit is a by-product of the principal purpose for which the FMA must act when seeking a declaration of civil liability, rather then the purpose itself. The declaration of civil liability is a necessary stepping stone to the FMA obtaining pecuniary penalty orders and orders for compensation, and these are the principal purposes of the declaration.
[80] The interpretation can be tested in another way. If, as the FMA argues, the time limit imposed by s 57E(1) does not apply to applications for declarations of civil liability, there is no statutory time limit provided in the Act for those applications. This is an unlikely outcome since s 57E also purports to provide a statutory time limit for applications for compensation in respect of the civil liability
event.21 Why would time limits be provided for applications for penalty orders and
compensatory orders but not for declarations of civil liability? [81] Moreover, s 57E(3) provides:
However, an application for compensation in respect of the civil liability event may be made at any time within 6 months after the date on which a declaration of civil liability is made, even if the usual time limit has expired.
[82] The FMA’s interpretation would mean that although the time limit for applications for compensation hinged upon the timing of the declaration of civil liability, the statute provides no time limit for the making of an application for a declaration of civil liability. I agree that this is an unlikely construction.
[83] The interpretation proposed by the defendants is consistent with the comments of the Acting Minister for Commerce in support of the Bill. The Honourable Judith Tizard provided the following explanation of the inclusion of the freezing order provisions in the Bill:22
I also mention the Committee’s work on the declaration of the contravention mechanism. This is a new approach in the New Zealand law that is designed to make it easier for small investors to pursue claims for compensation that might otherwise prove too costly to bring to court. Although submitters were generally supportive of the idea, they noted that a declaration of contravention could be made only subsequent to the Securities Commission or Takeovers Panel taking civil liability proceedings. This would mean that a pecuniary award arising out of those proceedings would diminish the resources available for satisfying subsequent claims for compensation. That is a valid point. So to make a good idea work, the committee recommends that the authorities or any aggrieved party be able to apply for an injunction to freeze the assets of a wrongdoer and potentially prevent that person from leaving the country.
21 Securities Act 1978, s 57E(3).
22 (21 February 2006) 629 NZPD 1334.
[84] For these reasons I consider that the defendants’ interpretation is correct, and that the time limit in s 57E(1) also applies to applications for declarations of civil liability. It follows from this that the limitation issue should be addressed at the same time, or before the issue of whether a declaration of civil liability should be made. Having examined the proposed staging of the trial I consider that the limitation issue should be addressed at the first stage of trial. There seems no reason to delay it until the third stage, as the earlier staging of the issues will benefit investors if the FMA succeeds in its application.
[85] To conclude:
(a) Some of the FMA’s applications that orders pursuant to ss 69 and 70 of the Evidence Act 2006 that documents not be disclosed in the proceeding have been wholly or partially successful. Some have been declined. See paragraphs [14] – [23] and [41] – [42].
(b)The defendants’ application that reports prepared by investigating accountants Grant Thornton be produced, is declined. The FMA is entitled to assert litigation privilege in respect of those documents, a privilege which has not been waived.
(c) The trial phasing proposed by the FMA is amended to allow consideration of the defendants’ limitation defence at the first stage. This variation is based on my finding that the s 57E limitation period applies to applications for declarations of civil liability.
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