Extract taken from 'The Securities Ligation Review – edition 5'
i Forms of action
The FMA has a broad range of criminal, civil and administrative enforcement tools.
The FMA can collect and disseminate information or research about financial markets, has the power to issue warnings, reports and guidelines and make comment about any matter relating to financial markets, and it can set frameworks and methodologies for market participants.
The FMA can also issue (on an urgent basis, if necessary) orders or notices as follows:
stop orders: these may prohibit offers, issues, sales or other acquisitions or disposals of financial products; prohibit an offeror from accepting applications for financial products; or prevent the distribution of disclosure documentation. The FMA can also issue, without notice, an interim stop order pending an exercise of its powers;direction orders: these may direct a person to comply with the law; take steps to comply with the law or to avoid any potential or actual adverse effects of a contravention; or require a person to report to the FMA regarding implementation. A direction order can also specify that a person may not rely on an exemption in the FMCA, prohibit the use of simplified disclosure and prohibit an offer under a recognition regime; andinfringement notices: these may be issued in a limited range of circumstances and provide the FMA with a flexible means for dealing with minor offences (such as a failure to send certain notices to security holders).
The next level of intervention is the FMCA's civil liability regime, under which the FMA can apply to the High Court for a declaration of contravention, a pecuniary penalty order, a compensatory order or other civil liability order (as described above).
The FMA can prosecute any proceeding under the FMCA and can:
exercise and control a right of action on behalf of private litigants; andwith leave of the High Court, represent a class of persons if the persons have the same or substantially the same interest in relation to the proceedings.
The FMA can accept enforceable undertakings (a form of negotiated settlement, which can include the payment of compensation), state a case for the opinion of the High Court and settle a case or investigation. The FMA (or any other entitled person) may also seek banning orders in the High Court. On application of the FMA (or any other person), the court may grant injunctive relief. In certain cases, the FMA may refer conduct to the Serious Fraud Office, the Commerce Commission, the Police or the Reserve Bank of New Zealand (RBNZ).
At the highest level of intervention, a contravention of the FMCA coupled with knowledge or recklessness can lead to criminal prosecution by the FMA.
The FMA has a policy of publicising enforcement action unless there are policy, legal or other compelling reasons not to do so. This is to maximise the 'visible deterrence' and to educate market participants.
ii ProcedureSEARCH POWERS
One of the key differences between public enforcement and private enforcement is the information gathering powers of the FMA. If the FMA considers it necessary or desirable it may (by written notice) require a person to supply the FMA with information, produce documents, reproduce information, appear before the FMA and give evidence.
The FMA may authorise a specified person to enter and search a place, vehicle, or other thing. The search may only occur if the occupier or person in charge consents or a warrant is obtained.
The standard of proof for civil proceedings is the balance of probabilities, and the usual rules of evidence and procedure apply. In FMA v. Warminger, a market manipulation case brought under the old regime (the SA), the High Court required 'strong evidence' to be satisfied that the elements of the statutory provisions were made out on the balance of probabilities. It seems likely this approach will be carried over to civil proceedings under the FMCA.
The FMA has committed to act as a model litigant in civil proceedings. This leads to a number of (self-imposed) obligations, including acting honestly and fairly, but does not prevent the FMA from acting promptly, decisively and properly to protect its interests.
The FMA will only take criminal action where there is evidence of intentional, reckless or other serious unlawful conduct. Rules governing the FMA's conduct of criminal litigation are also set out in the Solicitor-General's Prosecution Guidelines.
The standard of proof for criminal proceedings is beyond reasonable doubt and procedure is governed by the Criminal Procedure Act 2011.
DECLARATIONS OF CONTRAVENTION
Any person, including the FMA, can apply to the court for a declaration of contravention. The purpose of a declaration of contravention is to lay the groundwork for a later applicant seeking a civil remedy, who can rely on the declaration of contravention as establishing the defendant's contravention of the FMCA.
COLLABORATION WITH OTHER REGULATORS
The FMA has entered into memoranda of understanding with other regulators and agencies. One relevant example is the memorandum of understanding between the FMA and the Commerce Commission. For matters relating to misleading and deceptive conduct, the FMA has primary regulatory responsibility in relation to financial products and financial services, with the Commerce Commission taking primary regulatory responsibility for other misleading and deceptive conduct.
The FMA can settle matters either prior to, or following the commencement of, proceedings. The FMA will, pursuant to its model litigant policy, consider proposals to avoid or resolve litigation, including by cooperation or other agreed resolution.
When the FMA exercises a person's right of action and brings proceedings, those proceedings cannot be settled, compromised or discontinued without the court's approval. The High Court recently issued the first such approval. The Court assessed the settlement in light of the FMA's objective and functions, and approved the settlement on the basis of the following reasons:
the defendant's admissions;the settlement sum was accepted as being in a 'range commensurate' to the losses caused; andthe settlement agreement was to be made public, including by way of public announcement.
In criminal prosecutions, the parties can find a mutually beneficial compromise, which results in the defendant facing fewer charges or pleading guilty to certain charges, or both.
iv Sentencing and liabilityCRIMINAL PROCEEDINGS
The maximum sanctions for criminal offending under the FMCA are: for individuals, up to 10 years' imprisonment or a fine not exceeding NZ$1 million, or both; and for corporations a fine not exceeding NZ$5 million.
PECUNIARY PENALTIES IN CIVIL PROCEEDINGS
Significant pecuniary penalties can be imposed under the FMCA. The maximum penalty applicable (e.g., for defective disclosure in regulated offers) is the greatest of:
the consideration for the relevant transaction;three times the amount of the gain made or loss avoided by the contravention; andNZ$1 million for an individual or NZ$5 million in any other case.
A person cannot be liable for more than one pecuniary penalty for the same conduct and cannot be ordered to pay a pecuniary penalty and a fine for the same conduct.
In determining the appropriate pecuniary penalty, the court must have reference to a variety of relevant matters, including those listed in Section 492 of the FMCA. In Warminger, the High Court adopted an approach to determining the appropriate pecuniary penalty that required the court to fix a starting point having regard to the relevant statutory criteria and then make deductions for personal circumstances. A similar approach is likely to be adopted under the FMCA.
The maximum amount payable under an infringement notice108 ranges from NZ$5,000 to NZ$20,000. However, if an infringement offence is proceeded with summarily, the maximum fine is NZ$50,000.