In the world of investment banking, it is no more than small change to put $325,000 into a blockchain start-up. Misrepresentations about prospects for start-up Outward Ltd, which never got off the ground as planned, saw investment banker Bill Birnie and colleague Charles Pearce go full guns blazing to recover their losses.
The two exposed a series of blatant mistruths by Warkworth-based Rob Rogers raising start-up funds for Outward.
Prospects and possibilities were presented as done deals.
Mr Rogers’ company Jervois Strategy Ltd assisted Outward in a 2018 fundraising round. Mr Rogers was sued personally after complaints about his marketing spiel. Justice McHerron described Messrs Birnie and Pearce as being apparently beguiled by Mr Rogers ability to spin straw into gold.
The High Court was told of multiple emails sent by Mr Rogers both talking up benefits of blockchain technology to reduce costs of financing international trade and emphasising the foothold Outward was securing in this new world.
A statement that Outward had been ‘accepted into’ Blockhaus was deceptive and misleading, Justice McHerron ruled. It suggested Outward was a serious investment opportunity with access to an extensive trading platform.
Swiss-based Blockhaus is a blockchain-based financial investment platform. The court record shows Outward had gone no further than having preliminary discussions with a privately-owned company based in Auckland trading under the name Blockhaus NZ Ltd. There was never any concluded legal agreement between Outward and Blockhaus NZ, the court was told. Outward had never been ‘accepted’ by Blockhaus.
A statement that Outward’s blockchain-based software was currently being implemented as part of a pilot project with Maersk was incorrect and made recklessly, Justice McHerron said.
The court was told that even after receiving clear advice there was no Maersk project involving Outward, Mr Rogers persisted in talking up the existence of Outward’s supposed involvement in a multi-million dollar project.
His statement that a consortium of offshore investors was about to put up to USD 30 million into Outward, with due diligence currently underway, was also misleading.
The court was told there had been preliminary discussions with this consortium, through an intermediary, but no progress was made and there was never any due diligence undertaken.
Having ruled that these misrepresentations were in breach of the Fair Trading Act, Justice McHerron said Messrs Birnie and Pearce had no legal claim against Mr Rogers personally.
Mr Rogers’ work raising capital for Outward was done for his company Jervois Strategy, as part of its contract with Outward. Commissions were invoiced by Jervois and paid to Jervois.
The two investors should have sued Jervois Strategy instead, Justice McHerron said.
Separately, Justice McHerron ruled any claim against Outward Ltd itself was barred by a clause in the investors’ contract exempting Outward from liability for ‘any loss or damage’ resulting from their investment.
As a general rule, the Fair Trading Act prohibits use of exemption clauses to avoid fair trading liability; to protect consumers who face ‘take it or leave it’ standard-form contracts when dealing with corporates.
But where both sides to a commercial dispute are ‘in trade,’ Fair Trading Act exemption clauses are enforced if fair and reasonable.
Justice McHerron ruled it was fair and reasonable to exempt Outward from liability in this case. Both Mr Birnie and Mr Pearce come from investment banking backgrounds. As wholesale investors they knew the risks of investing in start-up businesses. They could have been more diligent in their research before investing. The risk lay with them.
Despite having struck out on these Fair Trading Act claims, the two were awarded damages against Mr Rogers personally and Playmaker Labs Ltd, a company related to Outward.
In 2022, with litigation looming: Mr Rogers promised to pay $100,000 and Playmaker $200,000; to settle the dispute. Playmaker paid only $10,000 before a court hearing was set down to force the issue.
Justice McHerron ruled the settlement agreement enforceable.
Both Outward and Playmaker are controlled by Peter Dowell, formerly with ANZ Bank, now a Wellington investment banker.
Birnie v. Outward Ltd – High Court (16.09.24)
24.227