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Court of Appeal of New Zealand |
Last Updated: 30 July 2017
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IN THE COURT OF APPEAL OF NEW ZEALAND
CA252/05
BETWEEN SECURITIES COMMISSION Appellant
AND MIDAVIA RAIL INVESTMENTS BVBA First Respondent
AND BERKSHIRE FUND III, A LIMITED PARTNERSHIP
Second Respondent
AND CARL FERENBACH Third Respondent
AND DAVID MCKELLAR RICHWHITE Fourth Respondent
CA19/06
AND BETWEEN MIDAVIA RAIL INVESTMENTS BVBA First Applicant
AND DAVID MCKELLAR RICHWHITE Second Applicant
AND SECURITIES COMMISSION First Respondent
AND CARL FERENBACH Second Respondent
AND BERKSHIRE FUND III, A LIMITED PARTNERSHIP
Third Respondent
Hearing: 5 and 6 April 2006
Court: Glazebrook, Chambers and Randerson JJ
SECURITIES COMMISSION V MIDAVIA RAIL INVESTMENTS BVBA AND ORS CA CA252/05 29
November 2006
Counsel: D J White QC and J S McHerron for Securities Commission
A R Galbraith QC, R J C Partridge, and J Cooper for Midavia Rail
Investments BVBA and David McK Richwhite
D A R Williams QC and M R Dean QC for Berkshire Fund III and
Carl Ferenbach
Judgment: 29 November 2006 at 11 am
JUDGMENT OF THE COURT
CA252/05
CA19/06
D The application for leave to appeal is dismissed. E No order as to
costs.
REASONS OF THE COURT
(Given by Chambers J)
Table of Contents
Para No
Alleged insider trading in Tranz Rail [1] Issues on the appeal [7] What are the elements of the causes of action
under ss 7 and 9 of the Securities Markets Act? [18]
Why gain made/loss avoided is not an element
in the causes of action [22]
Why the third and fourth possibilities are wrong [35]
Leave to appeal with respect to request for particulars
[59]
Alleged insider trading in Tranz Rail
[1] The Securities Commission alleges that Midavia Rail Investments
BVBA, Berkshire III, Carl Ferenbach, and David Richwhite,
among others,
indulged in insider trading in February 2002 with respect to shares held in
Tranz Rail Holdings Limited, now Toll
NZ Limited. Midavia, the first
respondent on the appeal (CA252/05), was a substantial security holder in Tranz
Rail; Mr Richwhite,
the fourth respondent, was at the time a
director of Midavia and Midavia’s representative on the Tranz
Rail
board. Berkshire, a limited partnership, the second respondent, also owned
shares in Tranz Rail; Mr Ferenbach, the third respondent,
was at material times
the managing director of Berkshire and Berkshire’s representative on Tranz
Rail’s board.
[2] The essence of the Commission’s case is that Messrs
Richwhite and Ferenbach became aware of inside information
as a result of their
positions on the Tranz Rail board, which information they then passed on to
Midavia and Berkshire respectively.
Midavia and Berkshire then sold millions
of shares in Tranz Rail. (Mr Ferenbach also sold shares he owned personally.)
The Securities
Commission alleges that the price they received for their shares
($3.60 a share) was substantially more than they would have
received had
the alleged inside information been disclosed to the market prior to their
share trading.
[3] The Securities Commission commenced its proceeding against the respondents on 13 October 2004. The Commission seeks from Midavia, Berkshire, and Mr Ferenbach compensation pursuant to s 7(2)(c)(i) of the Securities Markets Act 1988 and pecuniary penalties under s 7(2)(c)(ii) with respect to their trading with inside information. The Commission also seeks from Messrs Richwhite and Ferenbach compensation pursuant to s 9(2)(g)(ii) and pecuniary penalties under s 9(2)(g)(iii) in respect of their alleged “tipping”.
[4] Midavia and Mr Richwhite sought to have part of the statement of
claim against them struck out. That application led to
the Commission applying
to have certain questions of law determined prior to trial. In brief, those
questions related to whether
the Commission’s claims for pecuniary
penalties were time-barred. Williams J heard argument on those questions in
July
last year and delivered a judgment on 28 September last year: Securities
Commission v Midavia Rail Investments BVBA HC AK CIV 2004-485-2174. His
Honour’s answers were essentially (though not completely) in
Midavia’s favour; they would
have meant that the Commission’s claim
for pecuniary penalties was out of time. The Commission appealed from that
decision.
Midavia and Mr Richwhite have cross-appealed with respect to one part
of His Honour’s judgment.
[5] Midavia and Mr Richwhite then brought on for hearing their strike-out
application, which appears to have been parked while
the Securities
Commission’s application for pre-trial determinations was dealt with. On
13 January this year, Williams J
delivered a further judgment in which he held
that Midavia and Mr Richwhite had “made out a case to strike out the
pecuniary
penalty claims against them on the basis that the claims are
statute-barred”: at [61]. From that decision too the Commission
has
appealed. This appeal and the Commission’s earlier appeal have been
dealt with together.
[6] Although Berkshire and Mr Ferenbach took no active role on the
appeals, they, through their counsel, advised that
they supported and
adopted Midavia’s submissions in opposition to the Commission’s
appeals and in support of Midavia’s
cross-appeal.
Issues on the appeal
[7] Everyone agrees that the Commission’s action to recover statutory compensation is in time: Limitation Act 1950, s 4(1)(d). But Parliament prescribed in s 4(5) a shorter limitation period with respect to the recovery of statutory penalties:
An action to recover any penalty or forfeiture, or sum by way of penalty or
forfeiture, recoverable by virtue of any enactment shall
not be brought after
the expiration of two years from the date on which the cause of action
accrued:
[8] Before the penalties claims could be struck out, therefore, it had
to be clear that the Commission’s causes of action
under ss 7 and 9 of the
Securities Markets Act accrued prior to 13 October 2002. Williams J
found that they had.
But His Honour’s reasoning did not exactly
accord with either side’s submissions, and each has challenged the
reasoning
on this appeal (in Midavia’s case, by way of cross-appeal).
His Honour held that the causes of action, if established, accrued
when the
alleged insiders sold their shares and thereby “avoided
losses”. The alleged fact that losses were
avoided was an element of
the statutory causes of action, His Honour found.
[9] So the crucial issue on the appeal is: when did “the causes
of action” under ss 7 and 9 of the Securities Markets
Act accrue? This
involves a consideration of what the elements of the causes of action under ss 7
and 9 are.
[10] Four possible answers have been suggested. The answer suggested on
Midavia’s part is that the causes of action were
complete when the trades
took place, which in Midavia’s case was 8 February 2002 and, in the case
of Berkshire and Mr Ferenbach,
was 12 February 2002. Mr Galbraith QC,
for Midavia and Mr Richwhite, submitted that the judge had been wrong to find
that the gain made or the loss avoided as a result of the insider trading was an
element in the cause of action. Mr Galbraith accepted
that his argument would
in most cases (and indeed in this case) lead to time starting to run for
limitation purposes at the same
time as time started to run on Williams
J’s formulation.
[11] The second possibility is the approach favoured by Williams J. That is, the causes of action were complete when the gain was made or the loss avoided. On the pleaded facts of this case, His Honour found that the pleaded losses were avoided on the date of the trades, even though at that date no one, as a matter of fact, would have then been able to calculate the extent of the loss avoided: 13 January 2006 judgment (“the January judgment”) at [26].
[12] If either of these first two possibilities is correct, then
it is clear that Williams J was correct to declare
that part of the statement
of claim in which the Commission sought to recover penalties to be time-barred.
We should record that
the Commission advised that it did not propose to rely on
s 28 of the Limitation Act as a means of postponing the start of the limitation
period.
[13] The third possibility was advanced by the Commission. The
Commission agreed with Williams J that the loss/gain was an element
of the cause
of action, but Mr White QC, for the Commission, submitted that no loss or gain
in fact occurred unless and until the
inside information became publicly
available. The Commission’s argument is that in this case it is
“an unresolved
issue of fact” as to when the losses pleaded by the
Commission were avoided. As a consequence, the Commission argues, the
claim for
pecuniary penalties should have been allowed to run to trial for the trial judge
to make a factual assessment.
[14] The fourth possibility was advanced by the Commission as an
alternative argument. The Commission’s alternative submission
was that
the doctrine of reasonable discoverability should apply to these statutory
causes of action. That is to say, time does
not start running for the purposes
of s 4(5) until all the elements of the cause of action are first
“reasonably discoverable”
by a potential plaintiff. The Commission
asserts that date could well have been after 13 October 2002, with the
consequence that
the claims for pecuniary penalties should have been allowed to
proceed to trial for factual evaluation. Williams J held
that the
doctrine of reasonable discoverability did not apply.
[15] There is one other matter we deal with in these reasons for judgment. In CA19/06, Midavia and Mr Richwhite applied to this court for leave to appeal under s 24G(2) of the Judicature Act 1908 from another interlocutory decision of Williams J, dated 7 October 2005 (“the October judgment”). In brief, Midavia and Mr Richwhite, and other defendants in the proceeding, had applied for further particulars. Williams J dismissed that application. Midavia and Mr Richwhite sought leave from the High Court to appeal to this court, but Williams J refused to grant leave. That refusal is one part of Williams J’s omnibus judgment of 13 January this year: see the discussion at [37]-[41].
[16] The issue for us was whether Williams J had been right to decline
leave to appeal. Because of the way the oral argument
developed, we shall be
able to deal with that application very briefly.
[17] We shall deal with the two issues in turn.
What are the elements of the causes of action under ss 7 and 9 of the Securities
Markets Act?
[18] Section 7 reads as follows:
Liability of insider who deals in securities of a public
issuer-
(1) An insider of a public issuer who has inside information about the public
issuer and who-
(a) Buys securities of the public issuer from any person; or
(b) Sells securities of the public issuer to any person-
is liable to the persons referred to in subsection (2) of this section. (2) The persons to whom the insider is liable are-
(a) In a case where the insider buys securities of the public issuer, any
person from whom the securities are bought for any loss
incurred by that person
in selling them to the insider:
(b) In a case where the insider sells securities of the public issuer,
any person to whom the securities are sold for any loss
incurred by that person
in buying them from the insider:
(c) The public issuer for-
(i) The amount of any gain made or a loss avoided by the insider in buying or
selling the securities; and
(ii) Any amount which the Court considers to be an appropriate
pecuniary penalty.
(3) The maximum amount for which an insider is liable under paragraphs
(a), (b) and (c)(i) of subsection (2) of this section,
combined, shall not
exceed the greater of those separate amounts for which the insider is
liable.
(4) The amount of any pecuniary penalty shall not exceed- (a) The consideration for the securities; or
(b) Three times the amount of the gain made or the loss avoided by the
insider in buying or selling the securities-
whichever is the greater.
[19] Section 9 reads as follows:
Liability of insider for tipping about securities of a public
issuer-
(1) An insider of a public issuer who has inside information about the public
issuer and who-
(a) Advises or encourages any person to-
(i) Buy or sell securities of the public issuer; or
(ii) Advise or encourage any other person to buy or sell securities
of the public issuer; or
(b) Communicates the information, or causes the information to be
disclosed, to a person knowing or believing that person or another
person will,
or is like to,-
(i) Buy or sell securities of the public issuer; or
(ii) Advise or encourage another person to buy or sell securities of
the public issuer-
is liable to the persons referred to in subsection (2) of this section. (2) The persons to whom the insider is liable are-
(a) Any person who sells securities of the public issuer to a person who
is advised or encouraged by the insider to buy securities
of the public issuer
for any loss incurred by that person:
(b) Any person who buys securities of the public issuer from a person who
is advised or encouraged by the insider to sell
securities of the public
issuer for any loss incurred by that person:
(c) Any person who sells securities of the public issuer to a person
referred to in subsection (1)(a)(ii) of this section who
is advised or
encouraged to buy the securities for any loss incurred by that person:
(d) Any person who buys securities of the public issuer from a person
referred to in subsection (1)(a)(ii) of this section who
is advised or
encouraged to sell the securities for any loss incurred by that person:
(e) Any person who sells securities of the public issuer to a person referred to in subsection (1)(b)(i) or (ii) of this section for any loss incurred by that person:
(f) Any person who buys securities of the public issuer from a person
referred to in subsection (1)(b)(i) or (ii) of this section
for any loss
incurred by that person:
(g) The public issuer for-
(i) Any consideration or benefit received by the insider; and
(ii) Any gains made, or losses avoided, by the persons referred
to in subsection (2) of this section in buying the securities
from or selling
them to the persons to whom the insider is liable; and
(iii) Any amount which the Court considers to be an
appropriate pecuniary penalty.
(3) The maximum amount for which an insider is liable under paragraphs
(a) to (f) and (g)(i) and (ii) of subsection (2) of this
section, combined,
shall not exceed the greater of the separate amounts for which the insider is
liable.
(4) The amount of any pecuniary penalty shall not exceed-
(a) The combined total consideration for the securities paid or
received by the persons referred to in subsection (2)
of this section in buying
them from or selling them to the persons to whom the insider is liable;
or
(b) Three times the combined amounts of the gains made, or the losses
avoided, by those persons-
whichever is the greater.
[20] In his judgment of 28 September last year (“the September judgment”), Williams J held that the causes of action were complete once a gain was made or a loss avoided “following the impugned trades”: at [106]. He rejected the Commission’s submission that the start date of the limitation period could be deferred on the basis of “the concept of reasonable discoverability”: at [129]. His Honour confirmed this approach in the January judgment. He confirmed his view that “the making of a gain or the avoiding of a loss is a necessary element of causes of action for insider trading or tipping” (at [26]), contrary to Mr Galbraith’s submission. But the end result led to the causes of action accruing exactly when Mr Galbraith said they accrued, namely at the time of the sales. He found therefore that the cause of action against Midavia and Mr Richwhite “must have crystallised at that date [8 February 2002, the date of sale] at the latest”: at [30].
[21] For reasons we shall now explain, we find that Mr Galbraith’s
submission is correct. The making of a gain or the
avoiding of a loss is not
an element in the causes of action. The causes of action are complete when the
sale or purchase is made.
In this particular case, that leads to a date of
accrual of the causes of action identical to the date Williams J chose, namely
8
February 2002. In the reasons that follow, we shall first explain why we
prefer Mr Galbraith’s argument to His
Honour’s. We shall then
explain why we reject the alternative arguments (the third and fourth
possibilities) advanced by the
Commission.
Why gain made/loss avoided is not an element in the causes of
action
[22] Mr Galbraith submitted that the conduct ss 7 and 9 were designed to
deter was abuse by insiders of their relationship with
the public issuer by
trading or tipping while in possession of inside information. It is consistent
with this intention for Parliament
to make this conduct unlawful whether or not,
in any particular case, it resulted in a gain made or loss avoided. We agree
with
that submission. In our view, it is supported by the following
considerations.
[23] First, it is necessary to consider the structure of ss 7 and 9.
There are clear distinctions drawn between liability,
remedies, and the persons
who may claim them. Under s 7, liability is established by an insider who has
inside information buying
or selling securities of the public issuer: s
7(1). And, under s 9(1), liability is established where the insider who
has inside information advises or encourages any person to buy or sell
securities of the public issuer. (There are other bases
for liability under s
9(1) not presently material.)
[24] Where liability is established, the persons to whom the liability is owed and the nature of the remedies available to them are set out separately under s 7(2) and s 9(2) respectively. Those remedies include both compensation and pecuniary penalties. Under s 7(2)(a) and (b), the insider is liable for any losses incurred by a person who buys shares from or sells shares to the insider. And, under s 7(2)(c), the insider is liable to the public issuer for any gain made or any loss avoided by the insider and is also exposed to pecuniary penalties. A similar regime applies under
s 9(2), which again distinguishes between losses on the share transactions,
pecuniary penalties, and the persons who may claim them.
[25] Importantly, an insider or tipper may be liable for
pecuniary penalties regardless of whether a gain is made
or loss
avoided: see s 7(2)(c)(ii) and s 9(2)(g)(iii).
[26] Secondly, there will be cases (admittedly rare) where insider
trading and tipping do not, in fact, lead to a gain/loss.
For example, a
transaction between two insiders with access to the same information or a
situation where, for some other reason,
the securities are traded at a market
price, even taking account of the inside information. It is safe to
conclude that
Parliament intended to proscribe such conduct, even though
the insiders’ or tippers’ liability would be limited to
penalties.
[27] Thirdly, the view that a loss or gain is not an element of the cause
of action is consistent with the position under like
regulatory legislation:
see, for example, s 80 of the Commerce Act 1986 and s 40 of the Fair Trading Act
1986, where, at least as
far as penalties are concerned, it is not necessary to
establish loss.
[28] Given all these considerations, and in particular the clear
distinctions drawn between classes of liability, the remedies
available and the
persons who may seek them, we are satisfied that the causes of action under ss 7
and 9 are established when the
elements of ss 7(1) and 9(1) respectively are
made out.
[29] Williams J, in the September judgment, specified that a gain/loss
was an element in the cause of action - see [106](c)
- but he did
not say why. The explanation for that may be that he was concentrating on
two other issues which were being
argued before him, namely whose cause of
action the Securities Commission was bringing and the applicability of the
reasonable discoverability
doctrine. Williams J’s January judgment was
not the occasion, of course, for substantial reargument of his September
findings.
Both sides had by then signalled their intention to reargue these
questions in this court.
[30] On the cross-appeal, Mr White relied on Williams J’s finding. But, as we have already observed, His Honour did not really explain in the September judgment why a gain/loss was an element of the cause of action.
[31] Mr White then went on to consider s 9(2)(g)(i), the provision which
captures a tipper who receives consideration for a tip.
Mr White accepted that
liability could accrue in those circumstances, even though no trading had
taken place, but he observed
that Heron J, in Colonial Mutual Life
Assurance Society Limited v Wilson Neill Limited (No 2) [1993] 2 NZLR 657,
had considered that provision as one “standing alone”: at 677. We
accept that s 9(2)(g)(i) does deal with a different
situation; we accept that
it, and it alone, does not require a trade to have taken place. But we have
not relied on s 9(2)(g)(i)
as part of our reasoning in preferring Mr
Galbraith’s submission. No one is disputing that, for the purposes of
claims
for penalties, trades must have taken place.
[32] Secondly, Mr White referred to the fact that Midavia and Mr
Richwhite have, by a notice seeking further and better particulars,
sought
particulars of loss. This, he submitted, was “difficult to reconcile with
their argument that loss avoided is not an
element of the cause of
action”. With respect, there is no inconsistency at all. Loss, after
all, is not an element of a
cause of action for breach of contract, but of
course a defendant is entitled to particulars of the loss a plaintiff claims
resulted
from that breach.
[33] Finally, Mr White submitted that it would be very rare for a court
to award a pecuniary penalty where no gain is made or
loss avoided. That may be
so, but the fact that it is possible indicates that a gain/loss is not an
element of the cause of action.
[34] We are satisfied that Mr Galbraith’s argument on this aspect
of the case is correct and that accordingly the cross-appeal
from the September
judgment must be allowed on the question of whether Williams J was right to find
that a gain/loss was an element
in the causes of action.
Why the third and fourth possibilities are wrong
[35] As earlier indicated, Mr White advanced on the appeal two possibilities as to when the causes of action under ss 7 and 9 should be considered as accruing. His first suggestion (the third possibility, discussed at [13] above) was summarised in this way in Mr White’s written submissions:
In the context of ss 7 and 9 there will be no gain made or loss avoided
unless and until the inside information becomes known to the
market (ie is
publicly available) and the price of the securities changes as a consequence.
By definition this will occur after
the transaction (the buy or the sell) the
subject of the insider trading.
[36] His second suggestion (the fourth possibility, discussed at [14]
above) was expressed thus: “the cause of action [does]
not accrue until
all the elements of the cause of action could reasonably have been discovered by
the plaintiff”. Under the
Securities Markets Act, Mr White submitted that
the “reasonable discoverability” argument had two
aspects:
(a) The insider trading cause of action does not accrue until it is
possible to calculate the loss or gain; and
(b) The insider trading cause of action does not accrue until
all the elements of the cause of action ie the existence
of inside information,
an insider or tippee trading and a loss or gain, could reasonably have been
discovered by a potential plaintiff.
[37] Although the two suggestions are expressed in different words, they
seem to us to lead to the same conclusion. Under each
suggestion, it is
essential that the inside information become public. In each case, the
publication of the information must have
led to a change in the price
of the securities, with a consequential gain/loss. Once those two things
have happened,
it would inevitably mean that the existence of the cause of
action was reasonably discoverable.
[38] Williams J concentrated on the reasonable discoverability argument, perhaps because that was the only suggestion put to him. We shall deal with both suggestions together because we see no significant difference between them. His Honour held that there was no general reasonable discoverability doctrine and he could not discern from the Securities Markets Act any Parliamentary intention to introduce that doctrine into ss 7 and 9. He was particularly attracted to Fisher J’s analysis in Commerce Commission v Roche Products (New Zealand) Limited [2003]
2 NZLR 519 at [33]-[39], on analogous legislation. Fisher J in that case had held
that the Commerce Commission’s claim for pecuniary penalties against
Roche was time-barred.
[39] Williams J gave a number of reasons as to why reasonable
discoverability was not appropriate: the September judgment at [113].
These
included the difficulty of working out when a cause of action would accrue, the
lack of judicial power to create a longstop
termination point for limitation
periods, and the fact that certainty as to the commencement and termination of
the relevant limitation
period was particularly desirable in claims for
pecuniary penalties, given that they were “a quasi-criminal
remedy”.
[40] In the January judgment, Williams J added a further reason why
reasonable discoverability was not appropriate: at [26].
He noted s 15 of the
Securities Markets Act, which sets out how losses and gains were to be
calculated and the meaning of “value”.
Everything in that section
is geared to the value “at the time of the sale or purchase”. That
does suggest, as Williams
J held, that the cause of action was complete at that
date. Although in theory Parliament could fix a date of valuing gain/loss
earlier than the date on which the cause of action accrued, that would surely be
somewhat unusual, to say the least.
[41] In essence, we consider that, on this aspect of the case, Williams J
was correct, for the reasons he gave. Even if Mr White’s
first
suggestion is different from his second, which we doubt, we are of the view that
the first suggestion too is wrong for the
reasons Williams J
advanced.
[42] It will be immediately apparent that both suggestions are dependent
upon a gain/loss being an element in the causes of action.
Mr White accepted
that. For the reasons we have already given, we do not consider that a
gain/loss is an element of the causes
of action. That in itself disposes of the
Commission’s argument.
[43] Even had we considered a gain/loss was an element in the causes of action, we would have nonetheless rejected Mr White’s submission and endorsed the reasoning of Williams J.
[44] Mr White submitted that Williams J’s conclusion was wrong for
five reasons. We shall deal with those reasons in the
order Mr White presented
them.
[45] First, since Williams J’s September judgment, this
court delivered its decision in Murray v Morel and Co Limited [2005] NZCA 432; [2006] 2
NZLR 366. In that decision, this court confirmed earlier decisions that there
is no general doctrine of “reasonable discoverability”.
This court
held that, if a “reasonable discoverability” gloss were to be placed
generally by judicial fiat on the Limitation
Act, it would have to be the
Supreme Court which did it: at [45]. Alternatively, it was a matter for
Parliament. Viewed at a general
level, therefore, Murray clearly can be
seen as supportive of Williams J’s conclusion. It reinforces his
preference for Commerce Commission v Roche Products, say, over cases like
Bomac Laboratories Ltd v F Hoffman – La Roche Ltd (2002) 7
NZBLC 103,627 (which is arguably supportive of a more pervasive
application of reasonable discoverability).
[46] Mr White submitted that Murray was distinguishable because it
was dealing with an argument that reasonable discoverability was now
the general test. Mr White submitted that his proposition went no
further than asserting that “reasonable discoverability” was
the
test under Part 1 of the Securities Markets Act. On that question, the decision
was silent.
[47] While we accept that Murray is not definitive one way or the
other and note further that it is subject to an appeal to the Supreme Court
([2006] NZSC 23), we
agree with Mr Galbraith that the decision provides no
support for an expansion of “reasonable discoverability” categories.
It reiterates what this court has said on numerous occasions (see, eg,
Gilbert v Shanahan [1998] 3 NZLR 528 at 545), namely that, if reasonable
discoverability is thought desirable as the test, it is for Parliament to
introduce it, so that
an appropriate longstop provision might be provided. A
reasonable discoverability doctrine without such a longstop could
potentially be very unfair to defendants.
[48] We deal with Mr White’s second and third reasons together. His second reason was that Parliament intended potential plaintiffs to be able to calculate loss or gain before the statutory cause of action for insider trading or tipping accrued. His
third reason was that calculation of loss or gain is a notional exercise
requiring expert evidence. Mr White, expanding on these
reasons, submitted that
Parliament must have expected the Commission and other potential plaintiffs to
have the opportunity “to
acquire the relevant information and obtain
expert advice on whether a cause of action exists” and indeed to be able
to calculate
the loss before time should start running.
[49] We cannot accept that such a Parliamentary intention can be
distilled from the Act. For a start, it could take
many months, if
not years, for experts to investigate thoroughly the alleged inside
information and then to calculate the
gain made or the loss avoided by the
insider. The date of the accrual of the cause of action would be extremely
difficult to assess.
The present case shows graphically how difficult. There
are in the present case many pieces of alleged “inside information”,
which have become public at different times. Would the cause of action accrue
when the first piece became public and its effect
on the securities’ value
was calculable? Or does all the alleged inside information have to become
public? Or is there
a new cause of action as each piece of information becomes
public and its impact becomes calculable? In our view, there is nothing
in the
legislation to support that construction.
[50] Mr White’s fourth reason was that the absence
of a “reasonable discoverability” provision
in Part 1 of the
Securities Markets Act was not determinative. This argument was advanced in
response to a point strongly made by
Mr Galbraith. Mr Galbraith had pointed to
Part 2, Subpart 1 of the Securities Markets Act, the purpose of which was to
provide
for appropriate continuous disclosure by public issuers of material
information not generally available to the market: see s 19A(1).
Mr Galbraith
noted that Parliament had provided under that subpart for a “reasonable
discoverability” regime. Subsection
(5) of s 19L, which was inserted by s
16 of the Securities Markets Amendment Act 2002, provides, with respect to
pecuniary penalties
under that part of the Act, as follows:
An application under subsection (1) [for pecuniary penalties] may be made at any time within three years after the date on which the matter giving rise to the contravention was discovered or ought reasonably to have been discovered.
[51] A similar provision was introduced at the same time with respect to compensatory orders under that subpart: see s 19M(4). Mr Galbraith made the point that Parliament’s failure to legislate in similar terms with respect to Part 1 applications, either when the Act was first passed or at the time of the substantial
2002 amendment, was decisive.
[52] Mr White disputed that. He cited this court’s decision in
Goodman Fielder Limited v Commerce Commission [1987] 2 NZLR 10 at 18, and
said that we “should not place too much weight on contrasting provisions
in others parts of the same legislation”.
[53] We accept that the contrast is not decisive, but it is still
entitled to weight. The 2002 amendment did make significant
alterations to Part
1 as well as to Part 2. Parliament, in the case of applications under Part 2,
Subpart 1, went for a short limitation
period (three years), coupled with a
“reasonable discoverability” gloss. It should not be forgotten that
the general
limitation period under Part 1 is six years; it is only pecuniary
penalties which attract the shorter period. Parliament may well
have
considered that, given the six year limitation period, the “reasonable
discoverability” gloss was unnecessary, and
indeed potentially unfair.
Parliament may have considered that inside information is always likely to get
into the public domain
fairly quickly. Insider trading, after all, is in the
nature of things likely to occur only shortly before the inside
information is disclosed. Further, because of the public issuer’s
statutory disclosure obligations, the insider
trader or tipper generally has
limited time in which to trade or tip before disclosure occurs.
[54] We see ss 19L(5) and 19M(4) as reinforcing our view and this
court’s view in Murray that the introduction of a “reasonable
discoverability” test should be a matter for the legislature, not the
courts, as
it needs to be accompanied by either a longstop provision (as in s
393 of the Building Act 2004) or a shortened limitation period.
[55] Mr White’s final reason was that “there is no good reason why “reasonable discoverability” should not apply in relation to insider trading”. With respect, that reverses the presumption. There can be no doubt that reasonable discoverability remains the exception to the general rule as to when causes of action accrue.
[56] We accept that a case can be made for reasonable discoverability in
this area. For instance, cl 27 of the Securities Legislation
Bill proposes a new
s 42ZK, which would, if enacted, create a two year limitation period from
“the date on which the matter
giving rise to the contravention was
discovered or ought reasonably to have been discovered”. Even under
the proposed
amendment, however, that new limitation period will not apply
to all applications under the Securities Markets Act. The point
is, however, the
same as we were discussing when dealing with ss 19L(5) and 19M(4): if reasonable
discoverability is to be introduced,
it should be done by Parliament, which has
the ability (which the courts do not have) of tempering this
“advantage” to
plaintiffs with either a longstop provision or a
shortened limitation period.
[57] We are not persuaded, therefore, by Mr White’s submissions in
favour of a reasonable discoverability test. We
consider that the
alleged causes of action accrued when the sales took place, even if those
affected by the insider trading
were not then aware that they had been victims
of such trading. They had from that time six years in which to commence a
proceeding
to recover compensation. The public issuer, and in its place the
Securities Commission, had two years in which to apply for
penalties.
[58] In our view, the claims for pecuniary penalties against
Midavia and
Mr Richwhite were correctly declared to be time-barred.
Leave to appeal with respect to request for
particulars
[59] In the October judgment, Williams J dismissed Midavia’s
application for further particulars. Subsequently he declined
to grant leave to
appeal to this court on that issue. That led to Midavia and Mr Richwhite
applying to this court for leave to appeal.
[60] In the course of discussing why he was declining leave to appeal,
Williams J
said (the January judgment at [39]):
There is also force in Mr White’s point that much of the material that
Midavia/Richwhite seek by way of particulars, if not already available, is
likely to become available or discernible following completion of discovery
and inspection.
[61] Mr Galbraith accepted before us that was probably true. We accept
that the defendants are entitled to understand fully the
nature of the case the
Commission brings against them. We think, however, that it is probably
premature to require further particularisation
at this stage. Let discovery
and inspection take place. If then the defendants are still genuinely
disadvantaged in knowing the
case against them, they can at that point seek
further information, either by way of particulars or, as Williams J suggested,
by
way of interrogatories.
[62] Mr White submitted to us that Williams J had indicated that he was
willing to look at this issue again once discovery and
inspection were complete.
We think that is the appropriate time for this question to be taken further, if
need be.
[63] Accordingly, we dismiss Midavia’s application for leave
to appeal in
CA19/06.
Solicitors:
Crown Law Office, Wellington, for Securities Commission
Bell Gully, Auckland, for Midavia Rail Investments BVBA and David McK Richwhite
Lowndes Jordan, Auckland, for Berkshire Fund III, a Limited Partnership and Carl Ferenbach
NZLII:
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URL: http://www.nzlii.org/nz/cases/NZCA/2006/505.html