The Court of Appeal has confirmed that the Securities Commission will not be able to seek penalties in the case against former Tranz Rail Director, David Richwhite, and Midavia Rail Investments as the penalties claims are time-barred under the current wording of the legislation.
The Securities Commission commenced proceedings in October 2004 seeking compensation and statutory penalties against six parties who were alleged to have been involved in insider trading in February 2002 in shares held in Tranz Rail Holdings Limited (now Toll NZ Limited). Four of the original six defendants have since settled with the Commission.
In a preliminary application, the court was asked to determine whether the Commission was entitled to seek statutory penalties as well as compensation against the defendants. The High Court1 determined that it was not entitled to do so as the Commission's causes of action under section 7 (for insider trading) and section 9 (for tipping) of the Securities Markets Act (the Act) accrued when the alleged insiders sold their shares and thereby "avoided losses". Given that the trades in question occurred in February 2002 this meant that the Commission was time-barred from recovering penalties by the two year limitation period "from the date on which the cause of action accrued" prescribed under the Limitation Act.
The Commission appealed this decision on the basis that:
The Court of Appeal2 rejected both of the Commission's arguments. In reaching its decision, the court agreed with the respondents' argument that a loss or gain was not an element of the causes of action for the insider trading and tipping. In its view, the causes of action under sections 7 and 9 of the Act were complete when the trades took place. Accordingly, the court held that the Commission was time-barred from pursuing penalties against the respondents.
It should be noted that when the new insider trading regime (passed in October last year) comes into force this will no longer be the position. Under the new regime, the Securities Commission will be able to bring an application for a pecuniary penalty at any time within three years after the date on which the matter giving rise to a contravention of the insider trading provisions "was discovered or ought reasonably to have been discovered."
The Securities Commission has indicated3 since that it does not intend to appeal this decision but will continue to pursue its claim for compensation against the two remaining defendants.
Bell Gully is acting for the two remaining defendants, David Richwhite and Midavia Rail Investments.
1 Securities Commission v Midavia Rail Investments BVBA (Unreported, High Court AK CIV 2004-485-2174, 28 September 2005 and 13 January 2006);
2 Securities Commission v Midavia Rail Investments BVBA and Ors (Unreported, Court of Appeal, CA252/05, 29 November 2006)
3 The Bulletin, (The Quarterly Newsletter of the New Zealand Securities Commission) No. 38, January 2007, p.1
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