Financial adviser: Armitage v. Church

Poor financial advice is not excused simply by having clients complete a risk profile questionnaire. Financial advisers are still obliged to recommend investments suitable for the client’s risk profile. Financial adviser, Carey Robyn Church, was ordered to pay nearly $60,000 damages to a retired public servant and his family trust for losses arising from negligent financial advice.

The High Court was told that Mr Neil Armitage retired from government employment as a veterinarian with a portfolio of investment properties. In December 2005, he approached Mrs Church for advice regarding the investment of some $350,000 to $370,000 expected after selling one of the properties.

Completion of a risk profile questionnaire saw Mr Armitage ranked as a “conservative” investor. He invested the funds in fixed interest securities on the advice of Mrs Church: a mortgage trust, ING and four finance companies (Bridgecorp, MFS Pacific, Strategic Finance, and North South Finance). All four of these finance companies later became insolvent.

In 2006, he again approached Mrs Church for advice in anticipation of realising some $640,000 on the sale of his remaining investment property. Further risk profile questionnaires were completed by both Mr Armitage personally (now ranking as a “balanced/growth” investor) and on behalf of his family trust (“balanced/moderately aggressive”).

Following her advice, further investments were made in ING products.

Justice Dobson ruled that a financial adviser’s duty to a retail customer included a requirement to ensure both that investments were relevant to a client’s appetite for risk and that cash flow requirements met the client’s need for income.

Justice Dobson ruled that where clients are recommended inappropriately risky investments as part of the fixed interest component in their portfolio, they are entitled to recover losses arising at the time the investment was intended to be realised.

Experts criticised Mrs Church advice for its narrow range of investments, having the effect of exacerbating risk. Her advice saw Mr Armitage holding 67% of his investment funds in three companies and his family trust having 24% exposed to four finance companies, 27% on fixed interest with ING and nearly 47% in other ING funds. No investments were recommended in quality corporate bonds or bonds issued by government or local bodies.

Just over $200,000 in capital losses were suffered because of this negligent advice. The damages awarded were reduced by 25% because Mr Armitage was held partly negligent himself, having pressed for higher paying fixed interest investments than his risk profile warranted. This revised figure for damages payable was reduced again, by 40%, because of evidence that Mr Armitage may not have followed more prudent advice even if given. The court was told Mr Armitage continued later to place funds with finance companies despite his initial losses with a Bridgecorp investment.

Justice Dobson ruled that Mrs Church was not negligent in respect of advice about future cash flows. She was not responsible for cash flow deficiencies suffered. There was evidence that Mr Armitage himself drew up cashflow “budgets” but did not fully recognise the periodic manner in which payments would be received or that withholding tax would be deducted before receipt. Mr Armitage had chosen to retain bank borrowings after the sale of investment properties for reinvestment in fixed interest securities. This cost contributed to his cash flow difficulties. Mrs Church had questioned the wisdom of not paying off bank borrowings.

Armitage v. Church – High Court (27.05 11)

05.11.004

Maori: Haronga v. Waitangi Tribunal

Individual hapu can have property rights which differ from iwi-wide claims. The Waitangi Tribunal has been told to exercise its statutory powers to ensure claimants receive justice. The Supreme Court criticised Tribunal orders which forced Poverty Bay Maori to wait and have their claim to forest assets lumped in with wider iwi claims.

The Tribunal was told to expedite its 2004 report which found that a government 1961 purchase of land in Mangatu State Forest breached the Treaty of Waitangi. Previous Maori owners feared their successful land claim would be diluted by a contemporaneous iwi-wide claim. Rather than make a direct order, the Tribunal had suggested a district-wide negotiation with government to progress the settlement of all local claims with the intent of “increasing the pie” of assets available for compensation.

The court was told 100,000 acres of Mangatu land were vested in local Maori back in 1881. The government purchased a block of nearly 10,000 acres in 1961 for erosion control. This block amounts to about one quarter of Mangatu State Forest, inland from Gisborne. Revenue has been accumulating from logging the forest. Previous Maori owners want access to this revenue, especially since the 2004 Tribunal report supports their claim.

Legislation governing forestry Treaty claims requires that the Tribunal “should” consider return of forest land where a breach of the Treaty has been proved. The Supreme Court ruled that the Tribunal had failed to consider this option. An urgent hearing by the Tribunal was ordered.

Haronga v. Waitangi Tribunal – Supreme Court (19.05.11)

05.11.005

Share offers: Financial Markets Authority v. Carrington Securities

Unsolicited mailshots to small shareholders in listed companies are misleading and deceptive where prominence given to the above-market offer price is not matched by equal prominence given to the fact that payment is deferred, with the buyer receiving all dividends in the interim.

Following an application by securities regulator, the Financial Markets Authority, the High Court has frozen registration of unsolicited share bids made by interests associated with Christchurch entrepreneur Bernard Whimp in listed companies Contact Energy, DNZ Property, Fletcher Building, Guinness Peat, Trust Power and Vector.

Nearly 1200 shareholders responded to Mr Whimp’s offers. His scheme mirrored similar share offers made in Australia.

The Markets Authority argued Mr Whimp’s offers were misleading, in breach of the Securities Markets Act 1988. The front page highlighted an above-market price on offer and generated an air of urgency with emphasis on strict time limits within which to respond. In the fine print on the reverse, it was revealed that only ten per cent of the price would be paid on acceptance with the balance due over the next ten years. Over this decade, sellers would rank as unsecured creditors for payment due and would lose out on dividends paid in the interim.

A share offer can be misleading while still factually true. In this case, the discounted present value of the share offers were below current market value. Shareholders were being invited to give up an income-producing security in return for an unsecured promise to pay in the future, a promise made by a person with a less than stellar track record. The court was told Mr Whimp has been convicted of burglary and was prohibited from managing any company for a four year period commencing 2006.

Financial Markets Authority v. Carrington Securities – High Court (09.05.11)

05.11.003

Lease: Ingram v. Patcroft Properties

Acting one day too soon cost a landlord dearly. The tenant was entitled to $100,000 from the landlord for destroying its business and was not liable for ongoing rental costs amounting to nearly one million dollars.

The Supreme Court case concerned a bar operating in the basement of a backpacker operation in Lorne Street, central Auckland. There was a history of late payments by the tenant and previous litigation over operation of the lease. The lease allowed the landlord to take possession of the bar if the rent was in arrears for 14 days or more.

In June 2005, the landlord took possession for non-payment, but did so when unpaid rent was 13 days overdue – one day short of the 14 day time limit. As part of this process, the landlord changed the locks, issued trespass notices against the bar owners and seized property in the bar as security for non-payment.

But acting one day early meant the landlord was in breach of the lease. The court ruled that this action amounted to an unlawful action by the landlord, excluding the tenant from continuing operation of the bar.

The Court ruled that because the landlord was in breach, it could not turn round and claim it was entitled to continuing damages over the term of the lease for ongoing rent.

The landlord had claimed damages of $1.6 million from the evicted tenant: the Court ruled the landlord was entitled to only $84,900 – unpaid rent of $5,100 up to the date of eviction and the balance for deferred repairs and maintenance which had been disputed by the tenant.

This meant the tenant was required to pay the landlord some $84,900. But the Court ruled that the tenant was entitled in turn to receive $136,600 damages from the landlord: $100,000 for the loss of its business and $36,600 agreed as overpaid for the tenant’s share of lift maintenance costs.

Ingram v. Patcroft Properties – Supreme Court (10.05.11)

05.11.001

Charities: Greenpeace

While tax advantages flow from having charitable status, agitating for political change does not fit the legal definition of a charity – as Greenpeace has found to its cost.

The Charities Commission denied Greenpeace registration as a charity saying one of the Society’s aims, to achieve disarmament, together with its explicit approval of direct non-violent protest action amounts to political activity.

Because charities enjoy an indirect taxpayer subsidy by receiving their income tax free, the courts have carefully circumscribed who might be treated at law as a charity.

The High Court ruled that over one hundred years of case law defining what is a “charity” was not altered by the Charities Act 2005. Earlier case law decided that any organisation seeking to achieve a political object is not a charity. An educational programme promoting peace could be charitable, but a programme supporting pacifism would not. Peace can be generally preferred to war, but not peace at any price.

Promotion of disarmament and peace are amongst Greenpeace’s primary objectives. The High Court ruled that while these two objectives are worthy pursuits, they have historically been considered political and “not charitable”.

The Court said there is a distinction between education (encouraging rationale debate) which is charitable, and advocacy (promoting a political result) which is not charitable.

The objectives of Greenpeace coupled with its support of protest action amounts to advocacy, not education.

Re Greenpeace – High Court (06.05.11)

05.11.002