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>December 2008 Edition ----

Well another year nears its end. This one is rather momentous in that worldwide the chickens or fruits of commercial corruption have rather came home to roost. In New Zealand the government has swung to the right of the political spectrum at the least appropriate time. But Sir Roger isn't entirely back so things could be worse. Well there is plenty happening with respect to the Feltex Carpets saga so we will concentrate on that. There is no point in getting on to new material all the time. Best to stick with one thing and follow it through.

In its adjudication No 2056 The NZ Press Council has failed to uphold a complaint against the Fairfax web site Stuff for failing to disclose the names of the major recipients of payments made by Auckland International Airport which it was claiming against a Canadian pension fund as expenses incurred in relation to a takeover bid which the fund made for the airport company. The bid eventually failed. The pension fund had disputed its liability for much of these costs and was taking the matter to court and the airport was obliged to disclose this dispute to the Stock Exchange.

We are not impressed by the standard of this adjudication and wish to bring several aspects of it to attention.

The essence of the compliant was that the name of at least one of these firms spelt controversy or trouble and hence was newsworthy. It was especially newsworthy in connection with Auckland International Airport since Ms Joan Withers is a director of that company and she was also a director of Feltex Carpets Ltd at the time that company issued its IPO. The names of the two payees, Credit Suisse and First NZ Capital, also featured in that IPO prospectus, in being part of the name of the vendor and the promoter of the issue and as one of the lead brokers of the issue. Ms Wither resigned as a Feltex director after only about a year in office and about the time that the company announced a significantly downgraded profit forecast. The impression given was that Ms Withers had suddenly woken up to the fact that she had gotten herself into bad company and she had wished to indicate that by washing her hands of that bad company by resigning the directorship. Subscribers who saw her name and photo in the prospectus as a new director were entitled to think that she would remain there for quite a few years and she would do her best to help steer the company through any trouble which might come its way during such time. Arguably she broke her moral contract with subscribers. Being named as a new director should indicate not only that she is there but, baring unforeseen health issues, she will continue be there for some time and will be on hand should any trouble arise. There was a critical need for sound director judgement after she left to maximise the return to shareholders which in the event was performed most dismally. Indeed a reasonable conclusion is that the remaining directors saw to it that the shareholders were left with nothing so that there would be no "fighting fund" on hand from which shareholders could take action against them. And the Securities Commission has found significant fault with the financial reporting which has occurred as soon as Ms Withers left. Ms Withers still has a heavy responsible workload which would indicate that there were no health issues. However if the rest of the pot turned out to be black it was possibly best to flee and so raise some sort of alarm. But the names of those two payees of Auckland Airport will have indicated to many of those who were informed of them that Ms Withers was still prepared to associate with core Feltex IPO players and she hence was probably not at odds with them over the content of the Feltex prospectus. However a requirement for her probable public liability insurance to remain effective is probably that she do or say nothing that indicates guilt which of course complicates matters no end.

We say that by failing to say who these payees of Auckland Airport were the Press Council, has failed to give readers of its adjudication the opportunity to decide for themselves whether it was reasonable for Stuff not to publish this information when it came to hand. The Council refers to the payees as "two stockbroking companies". Well as far as we are aware Credit Suisse or a similar name is not registered as a stockbroker in New Zealand.. The stockbroking firm that did bear Credit Suisse in its name changed its name to First NZ Capital, the other of these two payees, early this decade. We do not think "stockbroking company" is an accurate description for Credit Suisse. Who told the Council that Credit Suisse was a stockbroking company we do not know but it was not the complainant. We think it is just fantacy on its part. The involvement of those words in names in the Feltex affair was not as a broker but as the vendor and the promoter.

We are unaware of any other news outlet which told of the dispute between the pension fund and airport company but did not advise who the major payees were when that information became available as the Press Council infers was the case. Stuff's claimed source of the information was an NZ Press Association article which came out before the Canadians had had time to respond to news of the dispute and advise who the major payees who received the disputed "expenses" were. The adjudication states that Stuff "also pointed to other websites that had run similar stories with out including the detail about the two brokerage companies who had been paid incentive fees". Yes it did with respect to the NZ Herald's website but we are unaware of any others being mentioned. But the Herald's site published an update article with the names soon after the name became available. The Council chose not to tell of this.

We do not know whether the Press Association released a followup article when the Canadians responded. If it did then Stuff chose not to use it. If it did not then there might be small publications who were relying on the Press Association who will also not have told the names of the payees but we doubt if the Press Council knows of any. We think it was implying that Stuff was not alone without justification.

The major newspapers all had the response of the Canadians available to them when they first told of the dispute on the Tuesday and gave all the information in one hit.. We think it not right to say that they later gave the information about the payees. The implication iis that they did it after the news value of the information had passed and they had no obligation to supply the information.

But the following paragraph in the Council's "Discussion and Decision" is disgustingly illogical and discredits any objectivity which the Council might clam to have. "Here the Online Editor's point is telling. Apparently, according to the complainant, journalists working for the Fairfax owned stuff website were pressured not to publish information, yet The Press and the The Dominion Post, two of fairfax's leading papers [later] published this information i.e. the names of the two stockbroking companies that received incentive payments."

What is in the slightest bit "telling"in favour of Fairfax or Stuff about that? When people or companies crib or cheat they invariably do so in places where it is beneficial to them and they unlikely to get caught. They avoid doing so in places where they will get caught. The major newspapers had no option but to publish those names. There are many bloggers and commentators who would pull them up promptly if they did not do so. Prominent business people still rely on newspapers radio and TV for their information. These all disclosed those names. But because websites are not yet established as a mainstay of business news Stuff or Fairfax thought they could get away with it. Many struggling Mums and Dads who got stung by the Feltex IPO forgo a newspaper and rely upon websites. Many have sympathy for Ms Withers probably getting trapped into Feltex by Credit Suisse and thought she had broken away from them as soon as she could. This news would have told them, if they had got it, that she is still in thick with Credit Suisse and so there is no reason for then not to join in action to recover their funds. The more such people (and there are many thousands of them) who can be prevented from knowing that Credit Suisse have been getting money out of Auckland Airport the better it is for Ms Withers. The more people who join in recovery action the more likely it is to succeed.

Looking at it another way just because the editors of the Dominion Post and The Press have not succumbed to pressure not to publish or have not felt any such pressure does not in anyway mean the Stuff editors did not feel that publishing these names could adversely affect their career. Ms Withers had about that time personally handled a large number of Fairfax redundancies. Many journalists and editors would no doubt not want to be on that list or any further list that may be coming. The official position is as Ms Wither solicitor mentions (see our Nov 2008 edition) "And Ms Withers, through strict Fairfax policy, has no control whatever over content carried in the Stuff site or in any other Fairfax publication." So while by this internally controlled policy she cannot tell a journalist what to say she does seem to control the redundancy notices and possibly who's name goes on them, at the margin anyway. Journalists cannot be told by her what they are saying which is not liked. They have to judge for themselves and get it right or one of those letters might well be coming their way. This solicitor's letter suggests that she thinks that everything she does is impeccably so any report which is critical of her would at that rate be bad journalism.

The Press Council has chosen to ignore completely the question of the owners or senior executives of publications having other strings to their bow. Members of Parliament, particularly if they are in Cabinet invariably are not directors of public companies nor hold similar positions. The same should apply to newspaper executives. They might not make laws but they can mold public opinion.

If the Press Council is so sure the omitted information "merely expanded on a matter of detail" why did they not risk boring their readers with another six words in their 1000 word adjudication to give the readers the opportunity to decide for themselves. Actually all their readers will know the names immediately because they are newspaper readers who follow scandals. Many poor Stuff readers who would be able to make good use of the information remain ignorant.

The other news concerning Fairfax is that its Australasian CEO, arguably Ms Wither's boss, has resigned. He would seem to be rather instrumental in the appointment of Ms Withers. We wonder whether he received any submissions from the Securities Commission prior to that. It would have boosted Ms Withers image so she could better weather the storm. And it provided some sort of reason for Ms Withers quitting Feltex. But that is no excuse to the Feltex shareholders. They go down the plughole so she can go on to bigger and brighter things. On the New Zealand scene Mr Kirk perhaps could not say 'no" to a request to appoint a bright female but that would not necessarily go down in Australia. The share price is all important over there.

We wish to also do an update on what is going on with the Shareholders action against those who devised the 2004 Feltex Carpets IPO. We have read the judgement of French J, which is very informative. One of his decisions was not to allow the "opt out" procedure whereby upon giving newspaper notice all shareholders meeting certain criteria were deemed to be part of the action unless they expressly gave notice that they were not to be part of it. Such inactive shareholders would not incur any liability for the action unless it was successful in which case expenses and commissions would be deducted from the amount payable to them. His reasons for not allowing "opt-out" were not particularly convincing and we think it could be appealed. Opt-out actions are now being allowed in many countries but not yet in England. Opt out seems fair. Everybody who gets a payout pays a fair proportion of the costs. Ideally we think everyone who advances money up front to allow the action to proceed would be rewarded for the risk taken if the action proceeded but we were surprised to learn that that was not going to be the case. However it seems that it is not going to be appealed so that opt-out can be forgotten about as far as the Feltex case is concerned. But unfortunately shareholders cannot opt in without paying some share of costs up front. We think this also is fair and commend doing so to shareholders who can afford it. It has got to the stage where this is the probably the only feasibly action but we believe it nevertheless has a just cause and a very good chance of success. The main risk is in the entrepreneur being a double agent and not presenting a compelling case.

We rather suspect that it will be possible if the action is successful and those liable pay up, for those shareholders who are part of the action to take an injunction against those who are not, from receiving their share of proceeds without paying to those who took the action a fair share of the costs and some compensation for risks taken. That would mean all was fair, and makes in more worthwhile to opt in and so maximise the chance of success.

The judgement of French J makes it very clear that for most causes of action those who purchased shares after the allotment cannot rely upon any statements in the prospectus. Hence it is not practical to include the many shareholders who so purchased shares and did not subscribe for them in the same case. There is plenty of case law saying a prospectus is only for those who subscribe or consider doing so and not for those who buy later. We think that this is not logical and will be reversed in time. To the extent that a prospectus quotes from information in annual reports we think that buyers could claim to have read from annual reports. We think that these people have a good case be it different from that of subscribers and less certain. We think that such a case should proceed at the same time as that of the subscribers although the case is quite separate. There was a surprising lot of trading after the allotment.