Financial
advisers using client lists to push new investments be warned: an Auckland
financial adviser fell foul of the Securities Act when offering shares in a new
property development without first issuing a prospectus. A client of two year’s standing was a “member
of the public” and should have received a prospectus. She is entitled to her money back, with
interest.
The High Court was told Auckland financial
adviser Stephen Duff floated a company called Frimley Estate Ltd in 2004 with
plans to subdivide a 7.8 hectare block of land near Hastings. He raised capital from 21 shareholders,
including $149,400 from Marianne Fog.
She was a client of his financial advisory company, Financial Vision
Ltd. Ms Fog had previously invested a
$900,000 inheritance through Mr Duff and his company, including an investment
in a commercial property.
Frimley Estate proved to be a commercial
disaster. Sales were not as good as
projected. Resource consent delays and
unexpected site remediation work increased costs. Financing and holding costs eroded
capital. Meanwhile, Mr Duff extracted
management fees and guarantee fees totalling $1.7 million over five years of
the project. Evidence was given that the
subdivision has a current government valuation of $1.88 million. Mortgages secured over the land total $2.02
million.
Ms Fog sued to recover her investment. The Securities Act requires a registered prospectus
whenever securities are offered to the public.
This enables investors to learn details of a proposed investment before
committing. Ms Fog did not receive a
prospectus. Mr Duff provided a valuation
of the land to be subdivided and some promotional material.
Frimley Estate argued Ms Fog did not need a
prospectus; she came within the Securities Act exemption for offers made to
“close business associates”.
Justice Asher ruled that Ms Fog was not a close
business associate. There was a business
relationship, but it was not particularly close. Mr Duff was in contact infrequently, at best
once a year for an update on her investment portfolio. The Frimley Estate project invited investment
in an undeveloped green fields property, far different from the passive
investments she then held. For
securities law, she was “a member of the public” and should have received a
registered prospectus. Ms Fog said she
would not have invested had she known of potential costs and delays and also
known that Mr Duff, while a shareholder, was not committed to providing cash
from the outset. Provision of financial
information would have disclosed that investors’ contributions would be
dissappearing quickly in payment of interest and fees.
Securities law imposes strict penalties for
promoting investments to the public without a registered prospectus. The company is required to repay the investor,
with interest. If the company cannot
pay, directors are personally liable to pay.
Mr Duff argued that all shareholders, bar Ms
Fog and one other, had voted in favour of leaving in their money and completing the
project. Justice Asher said Ms Fog
cannot be forced to remain an investor by majority vote. She has a statutory right to repayment
following a failure to provide a registered prospectus.
Frimley
Estate v. Fog – High Court (13.05.15)
15.045