The week started on a spectacular note with a “don’t sell” announcement from Auckland International Airport and a stunning $20 million final settlement in the Tranz Rail insider-trading case.

The $20 million payment had its origins in the sale of 17.6 million Tranz Rail shares at $3.60 by parties associated with David Richwhite and Sir Michael Fay on February 8, 2002.

The shares were sold the day after Tranz Rail announced net earnings of $43.3 million for the six months to December 2001 compared with a loss of $6.7 million in the previous corresponding period.

The Richwhite/Fay shares were sold mainly to institutions, and many of these purchasers reduced their holdings shortly afterwards when Tranz Rail shares traded up to $4.30.

Wayne Collins replaced Mark Bloomer as chief financial officer on April 29 and began to release information revealing the true position of the company, including a loss of $122.7 million for the June 2002 year.

The Securities Commission believed most of this negative information was available to insiders when they sold shares in the first half of 2002.

By mid-April 2003 Tranz Rail’s share price had slumped to 30c.

In October 2004, the commission filed insider-trading proceedings against Richwhite, Midavia Rail Investments (owned by Richwhite and Fay), Berkshire Fund, former managing director Michael Beard, former director and Berkshire representative Carl Ferenbach and CFO Bloomer.

The latter four sold shares around the same time as the Richwhite and Fay interests.
Berkshire and Ferenbach agreed to pay $7,380,509, Beard $155,692 and Bloomer $156,000, without admitting liability.

But Richwhite and Fay were always going to be the more difficult catch because of their deep pockets and determination to fight legal challenges to the bitter end, as evident in the Winebox inquiry.

The two are no strangers to insider trading charges. Levin businessman Donald Kincaid successfully applied to the High Court to bring proceedings against Fay and the investment bank Fay, Richwhite in the mid-1990s. Kincaid claimed the defendants knew of serious problems at the Bank of New Zealand when Fay, Richwhite sold BNZ shares in July 1990.

Kincaid didn’t have the financial resources to undertake a long and costly legal battle but won a moral victory when BNZ agreed to pay his legal costs, estimated at $600,000, and Fay, Richwhite sponsored seminars on securities regulation in Auckland and Wellington.

It is not known whether Richwhite or Fay attended these seminars, which had a strong emphasis on insider-trading regulations.

Securities Commission chairwoman Jane Diplock was in an ebullient mood on Monday when she announced the $20 million settlement with Richwhite and Fay.

This is a major victory for the commission, and it must have had a water-tight legal case to convince the former investment bankers that their best option was an out-of-court settlement.

Insider trading is a civil offence, and the main objective in imposing penalties for it is to extract payment from offenders and use this money to compensate victims.
The $20 million payment meets these objectives, and will be available to those who bought shares from Richwhite and Fay.

The problem with this is that many of these investors sold out a month later at a higher price and the commission will need to get a ruling on how any surplus money is used.

Second in line may be those who bought Tranz Rail on market between February and July 2002.

Richwhite and Fay are paying up without admitting any liability, but this week’s outburst of hostility towards them, particularly in Parliament, indicates there is a wide-spread belief that the $20 million payment is fully justified.

This is mainly because of the perception that they ruthlessly pursued their own self-interests ahead of everyone else through their involvement in high-profile privatised and other listed companies.

They failed to realise that the October 1987 sharemarket crash signalled the end of the “me-first era” and shareholders, regulators, the media and public would no longer tolerate directors and major shareholders who rode roughshod over minority interests.

As the table shows, they made a combined profit of $438 million from the sale of interests in Bank of New Zealand, European Pacific Investments (the Winebox company), Tranz Rail and Telecom.

By comparison IPO investors in the first three companies made a total loss of $271 million, based on the assumption that Tranz Rail shareholders sold their shares to the $1.10 Toll Holdings offer.

The $20 million insider-trading payment is petty cash to Richwhite and Fay, but they would probably trade a large percentage of their wealth for a more sympathetic hearing from the court of public opinion.

Sadly for them, they never seemed to realise that personal reputation is ultimately more important than a multimillion-dollar bank account.

The other highlight of the week was Auckland International Airport’s announcement that the Canadian Pension Plan Investment Board had approached some airport shareholders and offered to buy their shares at $3.10 each. Auckland Airport also revealed that it was in discussion with several parties, including the Canadians, on value-enhancing opportunities.

The most important point is that airports are extremely attractive assets for long-term-oriented pension/superannuation funds because of their stable earnings, long-term growth prospects, aggressive capital management possibilities (capital repayments) and high dividend payouts.

There has been a huge increase in these large super funds in recent years, mainly because governments are concerned about ageing populations and their ability to finance existing pension plans.

We have the New Zealand Superannuation Fund, Australia has its Future Fund and there are many other country funds including those of Norway, Chile, Canada and Ireland.

As well, large super funds have evolved from compulsory superannuation schemes and schemes like KiwiSaver.

These have an appetite for low-risk growth companies and Auckland Airport is a keenly sought asset in this area.

These fast-growing super funds need bigger and bigger investments and the Canadian Pension Plan Investment Board, which has C$116.6 billion ($142 billion) under management, has a one-third interest in the consortium that acquired AWG Plc, the parent of Anglian Water in Britain.

It also has a 27 per cent stake in the consortium that owns HQI Transelec Chile SA, Chile’s main electricity lines company.

CPPIB is trying to put together a consortium to buy a controlling stake in Auckland Airport.

The Canadian fund’s spin doctors are putting out the message that this will be a New Zealand consortium, but we don’t have large pools of money that could participate in a bid for Auckland Airport.

The Government’s New Zealand Superannuation Fund, which has $12.8 billion under management, is by far the largest but it is not allowed to have control of any entity. This restricts it from having any meaningful interest in a Canadian-led Auckland Airport bid consortium.

It is ridiculous that Canada’s large super fund, which also operates under an act of Parliament, can make a bid for 100 per cent of Auckland Airport, but the New Zealand Superannuation Fund is restricted to a minority, non-controlling stake.

It also appears that Macquarie Airports is considering an Auckland Airport offer. With the prospect of a contestable bid, airport shareholders should adhere to the directors’ “don’t sell” advice.

Fay,Richwhite v The Public – One clear winner in terms of profits

   (Profit & losses on final closure)

  Fay,Richwhite The Public
Bank of New Zealand $41m ($91m) loss
European Pacific Investments* $36m ($30m) loss
Tranz Rail  $87m ($150m) loss
Telecom $274m N/a
Total $438m ($271m) loss

*The “wine-box” company.