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Stakes high in investment case
By GARY SHEERAN - Sunday Star Times | Sunday, 27 July 2008
A top law firm and a controversial property developer copped flak from the bench on Tuesday in a landmark prosecution over protection for small investors.
The case at the Auckland District Court followed complaints from Dunedin real estate agent Peter Gale and his wife Susan, a nurse, who had invested in a luxury apartment development in the Queensland resort town of Agnes Waters.
The investment had been promoted, without a prospectus and investment statement, by Dan McEwan, a developer involved in some significant projects nationwide. McEwan took $116,400 off the Gales for Agnes Waters and a Sovi Bay (Fiji) property development, both of which failed.
Without a prospectus, which would have contained detailed information about the risks and rewards of the scheme, McEwan could legally promote it only to professional investors.
The prosecution alleges the Gales were not in that category and if the court agrees, the consequences for McEwan's companies and McEwan himself could be severe. The law says the entire offer must be unwound and all funds returned to investors, with a 10% annual interest payment. Both the company and directors are deemed liable, and there are heavy fines.
In his defence, McEwan told the court he had been advised by law firm Chapman Tripp that a person who made seven investment transactions over a decade could be considered an "habitual" or professional investor.
But Judge Philippa Cunningham poured scorn on Chapman Tripp's advice, saying such a test was a "gross over-simplification" of who was, and was not, a professional investor. She said she was not sure whether lawyers were in the best position to decide on the issue anyway.
The judge also had words for McEwan, who had kept "very unsatisfactory" records to show why some investors were deemed professionals, and therefore able to invest in his high-risk projects. "It is not clear what that process was, not even clear to Mr McEwan," she said.
In previous cases involving securities law, courts have demanded clear records showing why people had been offered securities under exemptions in the law.
The Ministry of Economic Development has brought the current case against McEwan and two of his companies after the Gales complained to the Securities Commission about their Agnes Waters investment.
The case is significant because the law does not define habitual investor, and no court case has so far sought to do so. And with finance companies falling over in the aftermath of the credit crunch, the current case will not be the last.
This month the Companies Office filed criminal charges against directors of failed Five Star Finance relating to offering securities to the public without a registered prospectus.
Interest in the case is also heightened because it involves McEwan, who has emerged as a significant property player in recent years and whose activities have sparked complaints from disillusioned investors.
McEwan's counsel, Todd Simmonds, told the court the Securities Commission was "going after" his client, as shown by the fact that charges had been laid against McEwan as well as two of his companies.
But Simmonds said McEwan was "a reputable businessman who has never intended to take anyone for a ride. His philosophy is one of high rewards for high risk".
If the court found the law was contravened, then McEwan did not know that and did not consent to it, said Simmonds. McEwan had relied on his own lawyers at Atmore Law (now Carter Atmore Law), who sought specialist securities advice from Chapman Tripp who "are not a corner dairy ... but respected legal advisers".
To sheet home personal criminal liability to McEwan because lawyers had "a bad day" was an incredibly tough call, he said.
But Sam Wimsett, counsel for the ministry, said it was not good enough for McEwan to seek to justify his action by saying he relied on lawyers' advice. "McEwan is the front man, the sole director [of the companies involved] and shared the same office with his lawyers." He said reliance on legal advisers was a matter of mitigation, and not liability.
Wimsett also told the judge the other alternative was that McEwan actually did know that what was going on contravened the law.
The judge spent more than an hour questioning McEwan, who said the original advice from Chapman Tripp was that five investment transactions in 10 years would constitute an habitual, or professional investor. That was later increased to seven transactions. It was written advice, which had since been lost in a "server crash".
The judge said the 7/10 test was irrelevant to the case. She said there was a big difference between investing in a local investment property, securing a mortgage over it and taking the rent, and investing in a Queensland development where there were many more and greater unknowns.
Gale told the court he bought four investment properties in Queenstown between 1999 and 2004, and had sold two of them. Wimsett said the Gales were doing what "massive numbers" of middle New Zealanders had done in recent years. He had done so as a private individual, not as a professional investor. His business was not the investment of money per se, and he was a marketer and sales person.
Gale was also employed by McEwan between 2002 and 2005, and his application in August 2004 to buy shares in the McEwan company promoting the Agnes Waters project was originally rejected.
Gale applied again, listing further investments, emphasising his own commercial and accounting expertise, and the fact that as a regional development officer for a McEwan company he was involved in investment as part of his occupation. Gale left McEwan's employment in August 2005. He complained to the Securities Commission after the investment turned sour.
Simmonds said the fact Gale expressed "surprise" that he had initially been rejected as an habitual investor was "very instructive". He said Atmore Law was correct to ultimately assess him as one.
Although the law did not define habitual investing, such investing would be regular and continuing over a period of time. "On that basis [Gale] does meet the test."
The judge reserved her decision. But whichever way it goes, it is expected to be appealed. Given the significance of the case, lawyers are keen to see a higher court ruling on the judgement to give it added weight.
See also http://www.propertytalk.com/forum/sh...ghlight=McEwan
By GARY SHEERAN - Sunday Star Times | Sunday, 27 July 2008
A top law firm and a controversial property developer copped flak from the bench on Tuesday in a landmark prosecution over protection for small investors.
The case at the Auckland District Court followed complaints from Dunedin real estate agent Peter Gale and his wife Susan, a nurse, who had invested in a luxury apartment development in the Queensland resort town of Agnes Waters.
The investment had been promoted, without a prospectus and investment statement, by Dan McEwan, a developer involved in some significant projects nationwide. McEwan took $116,400 off the Gales for Agnes Waters and a Sovi Bay (Fiji) property development, both of which failed.
Without a prospectus, which would have contained detailed information about the risks and rewards of the scheme, McEwan could legally promote it only to professional investors.
The prosecution alleges the Gales were not in that category and if the court agrees, the consequences for McEwan's companies and McEwan himself could be severe. The law says the entire offer must be unwound and all funds returned to investors, with a 10% annual interest payment. Both the company and directors are deemed liable, and there are heavy fines.
In his defence, McEwan told the court he had been advised by law firm Chapman Tripp that a person who made seven investment transactions over a decade could be considered an "habitual" or professional investor.
But Judge Philippa Cunningham poured scorn on Chapman Tripp's advice, saying such a test was a "gross over-simplification" of who was, and was not, a professional investor. She said she was not sure whether lawyers were in the best position to decide on the issue anyway.
The judge also had words for McEwan, who had kept "very unsatisfactory" records to show why some investors were deemed professionals, and therefore able to invest in his high-risk projects. "It is not clear what that process was, not even clear to Mr McEwan," she said.
In previous cases involving securities law, courts have demanded clear records showing why people had been offered securities under exemptions in the law.
The Ministry of Economic Development has brought the current case against McEwan and two of his companies after the Gales complained to the Securities Commission about their Agnes Waters investment.
The case is significant because the law does not define habitual investor, and no court case has so far sought to do so. And with finance companies falling over in the aftermath of the credit crunch, the current case will not be the last.
This month the Companies Office filed criminal charges against directors of failed Five Star Finance relating to offering securities to the public without a registered prospectus.
Interest in the case is also heightened because it involves McEwan, who has emerged as a significant property player in recent years and whose activities have sparked complaints from disillusioned investors.
McEwan's counsel, Todd Simmonds, told the court the Securities Commission was "going after" his client, as shown by the fact that charges had been laid against McEwan as well as two of his companies.
But Simmonds said McEwan was "a reputable businessman who has never intended to take anyone for a ride. His philosophy is one of high rewards for high risk".
If the court found the law was contravened, then McEwan did not know that and did not consent to it, said Simmonds. McEwan had relied on his own lawyers at Atmore Law (now Carter Atmore Law), who sought specialist securities advice from Chapman Tripp who "are not a corner dairy ... but respected legal advisers".
To sheet home personal criminal liability to McEwan because lawyers had "a bad day" was an incredibly tough call, he said.
But Sam Wimsett, counsel for the ministry, said it was not good enough for McEwan to seek to justify his action by saying he relied on lawyers' advice. "McEwan is the front man, the sole director [of the companies involved] and shared the same office with his lawyers." He said reliance on legal advisers was a matter of mitigation, and not liability.
Wimsett also told the judge the other alternative was that McEwan actually did know that what was going on contravened the law.
The judge spent more than an hour questioning McEwan, who said the original advice from Chapman Tripp was that five investment transactions in 10 years would constitute an habitual, or professional investor. That was later increased to seven transactions. It was written advice, which had since been lost in a "server crash".
The judge said the 7/10 test was irrelevant to the case. She said there was a big difference between investing in a local investment property, securing a mortgage over it and taking the rent, and investing in a Queensland development where there were many more and greater unknowns.
Gale told the court he bought four investment properties in Queenstown between 1999 and 2004, and had sold two of them. Wimsett said the Gales were doing what "massive numbers" of middle New Zealanders had done in recent years. He had done so as a private individual, not as a professional investor. His business was not the investment of money per se, and he was a marketer and sales person.
Gale was also employed by McEwan between 2002 and 2005, and his application in August 2004 to buy shares in the McEwan company promoting the Agnes Waters project was originally rejected.
Gale applied again, listing further investments, emphasising his own commercial and accounting expertise, and the fact that as a regional development officer for a McEwan company he was involved in investment as part of his occupation. Gale left McEwan's employment in August 2005. He complained to the Securities Commission after the investment turned sour.
Simmonds said the fact Gale expressed "surprise" that he had initially been rejected as an habitual investor was "very instructive". He said Atmore Law was correct to ultimately assess him as one.
Although the law did not define habitual investing, such investing would be regular and continuing over a period of time. "On that basis [Gale] does meet the test."
The judge reserved her decision. But whichever way it goes, it is expected to be appealed. Given the significance of the case, lawyers are keen to see a higher court ruling on the judgement to give it added weight.
See also http://www.propertytalk.com/forum/sh...ghlight=McEwan