Come To New Zealand – We’re A Soft Touch

We’re being bombarded with tales of financiers duping investors. Today we learn that the Securities Commission is pursuing the directors of Capital + Merchant Finance. Yesterday it was announced Capital + Merchant and other finance companies were to be investigated by the Serious Fraud Office.

Also, yesterday investment adviser Stephen Versalko was sentenced to six years for defrauding investors of almost $18 million. He’ll probably be out in four.

Just over a week ago we learned that the directors of failed finance company Hanover Finance were up to their old tricks again.

Meanwhile people like Rod Petricevic and Mark Bryers continue to enjoy lives of comfort while many of the people their companies cleaned out wonder how they will pay for their retirements.

This has become a crisis, and the next couple of years are likely to see a flood of similar cases.

This crisis affects the entire country, not just the small investors who lost everything. Trust in the capital markets is at an all-time low, and that means people will be wary about trusting anyone who is looking for capital funding. That’s a problem, because if we are to grow the economy we need new businesses, and those businesses will need capital. People need to have confidence that when they invest in an enterprise they won’t be robbed blind. At the moment they don't.

Because we're a soft touch for crooks, shysters and snake-oil salesmen. We lack serious regulation, or if regulation exists it isn't being adequately enforced.

But what can be done? The Capital Markets Taskforce recommended a range of sensible measures about disclosure obligations to investors. They would certainly help. But if we are to get a handle on this issue we need to think about implementing a range of additional measures. Two of them ought to be no-brainers:

• Tougher penalties for people who commit financial offences in the future. If there is any area of the law where tougher sentences might have a deterrent value, it is in the financial crimes area. Offenders are usually smart and well-educated, and their crimes usually take a large amount of planning and time. They are more likely to be circumspect if one of their own gets hammered.
• Commit vastly more resources into the SFO, Securities Commission and other enforcement agencies. If we are to see an improvement in public confidence in the capital markets we need these agencies to move quickly and forcefully. At present they have a huge backlog of investigation and enforcement work, and it may be years before some of the people they are investigating ever face the consequences of their actions. The Capital Markets Taskforce recommended that some of the regulatory functions currently spread across a range of agencies be centralised within only a couple of agencies, and that idea has merit.

And then there’s the “wishlist” – that’s the stuff we probably all agree ought to happen, but which isn't so easy to implement.

• Make it harder for people convicted of financial offences to shelter their assets in trusts and other entities. Great idea, hard to implement. There are many perfectly good reasons for people to have trusts.
• Make it easier to claw back assets or property obtained from the proceeds of crime. But this is an area of law already fraught with difficulty.
• Require promoters to have to disclose their past business failings in any investment disclosure documents. That's easy to say, but what counts as a failure? What if it isn't the person's fault?
• Change the law so that complex fraud cases can be tried by a judge only. The SFO has a hard time trying financial crime cases, because they usually involve complex fact situations. For those cases it is probably more appropriate for a judge, or a panel of judges, to be deciding on guilt or innocence. There has been some movement in this area, but it may be necessary to extend the power to dispense with a jury.
• Create a new range of financial offences, to capture the shysters and bad guys. Great. So how, and which ones?

Have I missed anything? Do you agree with my list?