One
third of 37 disappointed purchasers buying units in Nelson’s Monaco Village
tourist development have a chance of getting their purchase price back after
the High Court ruled developer Scott Sanders is personally liable to refund
their money.
Mr Sanders was sued for $7.4 million
following allegations units in Monaco Village sold up to twelve years ago amounted
to participatory securities sold without a prospectus in breach of the
Securities Act. While the Monaco Hotel
and Resort is up and running, investors complain they are not getting promised
returns.
Investors in Monaco were asked to provide
working capital; buying individual accomodation units within the development. A management company was set up to manage
holiday lets and to account for revenue received. Local entrepreneur Mike Gepp was the initial
promoter. He bowed out in 2006, short of
cash to finish the project. Mr Sanders
picked up the reins.
The High Court was told Mr Sanders was
aware Mr Gepp had earlier run foul of the Securities Act by having unit
purchasers sign a pooling agreement, having Village revenue pooled for division
across all unit holders. This amounted
to a participatory security. Mr Sanders
took a different approach: subsequent
purchasers took title to each unit subject to a lease. The lease gave management rights to a company
controlled by Mr Sanders. Sales of land
do not fall within the Securities Act.
Each unit holder was to receive revenue earned by their unit alone;
there would be no pooling. The High
Court subsequently ruled this arrangement was also a participatory security
which required a prospectus before sale.
Justice Dunningham said lease terms meant investors took a considerable business
risk without having a degree of control over their property in the way an owner
of conventional commercial property would.
They had no control over who would be tenants or the terms of holiday
lets. They had no right to terminate the
management company’s thirty year lease.
Resource consent for the Village meant the property could be used for
tourist accommodation only. This was not
an ordinary purchase of real estate, Justice Dunningham said. It was a participatory security in a hotel
business. A prospectus was required to
inform potential investors of inherent risks prior to purchase.
Since no prospectus was issued, investors
were entitled to their money back, with interest. The Securities Act holds Mr Sanders
personally liable for refunds since he was a director of the company selling
securities without a prospectus.
Of the 37 investors who sued, eleven are
entitled to repayment. One was denied
repayment as a close business associate of Mr Gepp. He advanced money for the development and
built part of the Village. The remaining
investors denied repayment were those who sued out of time, or were subsequent
purchasers having bought from a prior purchaser.
Bannock
v. Monaco Management – High Court (28.11.16)
17.002