The verdict in the Bridgecorp trial was delivered on 5 April, with directors Rod Petricevic, Rob Roest and Peter Steigrad all being found guilty in the High Court on charges of making untrue statements in prospectuses, investment statements and directors' certificates.
The offending of Petricevic and Roest is the most serious of the three recent cases that have come before the New Zealand courts involving the collapse of property finance companies. Unlike the Nathan and Lombard cases, these directors have been found culpable of actual dishonesty when making statements about Bridgecorp's affairs. Imprisonment of Petricevic and Roest, according to Justice Venning when delivering his judgment, is "inevitable". They have been remanded in custody to await sentence.
Petricevic and Roest were convicted on all ten counts brought against them under the Securities Act 1978, and also for six charges under the Crimes Act 1961 for knowingly making false statements to induce subscriptions for securities in Bridgecorp, and two charges under the Companies Act 1993 for knowingly making false statements in directors' certificates provided to Bridgecorp's trustee.
Steigrad, a non-executive director resident in Australia, was not charged with the Crimes Act and Companies Act offences. He was convicted on six of the Securities Act charges but found not guilty in relation to four of them. Steigrad has been remanded on bail.
The Crimes Act charges against Petricevic and Roest concerned statements made in offer documents which failed to disclose the fact that on a number of occasions Bridgecorp had missed interest payments and repayments of principal to investors when they had fallen due. Each of the payments were made on the next business day but the Court rejected the contention that this meant that the missed payments were immaterial. In the context of a finance company, the fact that payments were missed even by a day was important - something that matters - particularly when the company had a prospectus before the public. Claims in evidence by Petricevic that he did not know about the missed payments were found to be untrue by the Judge. Claims by Roest that the payments were "delayed" and not missed were rejected as specious.
The Companies Act charges rested on the same failure to disclose the missed payments, this time in directors' certificates provide to the trustee for debenture-holders of the company.
At the heart of the Securities Act convictions were findings that offer documents contained untrue statements about:
- a related party - the notional investor would have been left with the clear impression that the company in question was unrelated to Bridgecorp, and would have taken comfort from the fact that it was prepared to pay $76 million for loans that Bridgecorp had previously advanced to related parties.
- circumstances arising between the issue of Bridgecorp's last financial statements in June 2006 and the issue of the offer documents in December 2006 - the offer documents had said that there were no new adverse circumstances, when in fact there were several, including a downturn in new investments, an increase in impaired loans and a deterioration in cash flow.
- management of liquidity risk - Bridgecorp did not in fact manage liquidity in accordance with a claimed policy of holding a $50 million cash reserve and liquidity had deteriorated significantly since the last financial statements.
In terms of its legal significance, some new propositions arise in the Bridgecorp case and there are some areas of difference from what has gone before:
- One of the "statements" relied on by the Crown was in fact not a statement at all, and was really a complaint about an omission. The Crown did not get home on this particular ground. The Crown claimed that the inclusion of June 2006 accounts in the offer documents was untrue because it omitted to mention the subsequent deterioration in Bridgecorp's position. However, under the relevant provision of the Securities Act, while omissions can be misleading, they still have to be linked to some sort of statement and make the statement untrue. The Judge held that the accounts merely recorded Bridgecorp's financial position as at 30 June 2006 and not later. It was not misleading of itself not to say anything further, because self-evidently the financial position would change in some way after that date. This is a nuance on the earlier Nathans case but not ultimately a difference in approach.
- The "notional investor" test put forward in the Nathans and Lombard cases was adopted but Venning J differed slightly from the decision in Lombard. Unlike Dobson J, he thought the notional investor would get appropriate advice if he or she was unable to understand any material aspect of an offer document.
- In an earlier Court of Appeal decision in the Bridgecorp saga, it was held that the representations in an offer document were continuing and it was not enough for the statements to be true on the day that the document is signed off by directors. In Lombard, the Crown had failed in significant aspects of its case in this regard by failing to establish milestone events subsequent to the date of the offer documents that triggered a need to change them. The Crown did not make this mistake in the Bridgecorp trial - it articulated and proved "milestones" which established the untruth of statements and the accuseds' states of mind at subsequent specific dates.
On the whole, however, Bridgecorp is broadly consistent with the approaches taken by Heath J in the Nathans case and by Dobson J in Lombard. The key messages for directors remain the same:
- Directors have a non-delegable duty to form their own opinions on whether offer documents contain untrue statements. They have an obligation to review material before them, including due diligence and management reports, and satisfy themselves that the information would present to a notional investor an accurate impression of the company at the relevant time.
- Directors have to rely on others for the provision of information and the Securities Act recognises this. However, the Act also envisages the need for further inquiry when the circumstances require it. Steigrad was acquitted on some counts because he could justifiably rely on the material provided to him in board packages up to a certain date. Later on however, when Bridgecorp's position had deteriorated further, there was a tipping point when significant items of information should have led him to question the truthfulness of statements in the offer documents.
- All directors of finance companies are expected to have the ability to read and understand financial statements and use that understanding when making decisions about matters such as solvency and liquidity. A director must understand the fundamentals of the business, monitor performance and review financial statements regularly.
Petricevic and Roest will be sentenced on 26 April and 18 May respectively. The Crown has said it will seek a substantial term of imprisonment. Steigrad will be sentenced on 18 May as well.
The directors have indicated that they will appeal.