Wednesday 11 August 2004
Charges Laid Against Contributory Mortgage Broker
The National Enforcement Unit of the Companies Office has laid charges in the Auckland District Court against Mortgage
Financier Limited (MFL), a registered contributory mortgage broker based in Whangarei, and its director, Beau Davidson.
The charges are to be first called in the Auckland District Court on 2 September 2004.
The charges relate to the offering and management of interests in a contributory mortgage by MFL. The interests were
secured by a first mortgage over a property at 1 Parliament Street in central Auckland.
MFL faces 4 charges under the Securities Act (Contributory Mortgage) Regulations 1988 relating to paying contributions
out of its nominee company’s trust account to the borrower/mortgagor when:
contributors had not been sent or given a valuation report that complied with the Regulations; contributors had not been
sent or given documents containing a statement signed by the mortgagor detailing the expected costs of the development
and the source of funds to be used to service all money borrowed; it knew or ought to have known that the valuation
reports provided to contributors were misleading in a material particular; and there were not contributions in the trust
account equal to the amount of the principal sum of the mortgage.
Beau Davidson is charged as a party to these breaches under s 66 of the Crimes Act 1961. If convicted, both MFL and Mr
Davidson are liable for a maximum fine of $5,000 on each charge.
The National Enforcement Unit also determined that charges against some other parties for the same breaches could not be
pursued for legal reasons relating to the interrelationship of section 59 of the Act and the relevant provisions of the
Contributory Mortgage Regulations. The other parties were Money Managers Limited (MML) and Securities Registry Limited
(SRL).
Manager of the National Enforcement Unit, Shane Keohane, said the Unit did not ultimately have to form a view as to
whether MML was an issuer or promoter or whether SRL was a promoter.
“Our decision not to prosecute should not be taken as an indication that we formed a view that these entities were not
so acting in relation to these securities.
Mr Keohane said his decision was based upon the legal point outlined above.
The Ministry of Economic Development confirmed that it would consider these issues as part of its review of the
Securities Act and Other Securities Law Issues, the fourth and final piece of the Government's four-part review of
securities law. Mr Keohane said the Securities Commission has already begun a detailed review of the contributory
mortgage regulations and any findings will feed into the Ministry’s work.
Ends
BACKGROUND
MFL was the broker for the 1 Parliament Street Car-Park Limited Contributory Mortgage offered to the public from late
August 2001. The borrower/mortgagor was a company called 1 Parliament Street Car-Park Limited, owned by an Auckland
property developer Brent Clode. This company used the money raised under the contributory mortgage to build a
multi-storey apartment and car park building on the bare site it owned at 1 Parliament Street.
The contributory mortgage was marketed by Money Managers Limited (MML), which operates a nationwide network of financial
advisors. Also involved in formulating the scheme, and then as a principal investor in it, was Securities Registry
Limited (SRL).
The 1 Parliament Street Car-Park Limited Contributory Mortgage was the subject of an inquiry by the Securities
Commission in February and March 2002. The result of the inquiry was that the Commission on 21 March 2002 made an order
under section 44B(2)(c) of the Securities Act 1978 removing MFL as contributory mortgage broker for the mortgage. The
Commission appointed Crichton Horne & Associates Mortgage Brokers Limited to act as contributory mortgage broker in its place.
In May 2002, the Commission issued a report into the circumstances of the offering and management of the Parliament
Street mortgage and on the securities law and practice issues raised by it. The Commission formed the view that
securities law provisions had been breached and identified the parties who might be responsible at law for those
breaches as MFL (as broker under the Regulations and issuer under the Act), MML (as issuer and/or promoter under the
Act) and SRL (as promoter under the Act). The potential civil and criminal liability of MML and SRL’s directors was also
considered. This report is available from the Commission’s website:
http://www.sec-com.govt.nz/publications/documents/mfl/index.shtml.
The Commission referred its report to the National Enforcement Unit (NEU) of the Companies Office for it to consider
whether to lay any criminal charges for the alleged/potential securities law breaches identified in the report. The NEU
has further investigated the matter and has determined that charges against MFL and Mr Davidson in terms of the four
above-mentioned breaches are warranted but that charges in relation to other parties for the same breaches could not be
pursued for legal reasons relating to the interrelationship of s59 of the Act and the relevant provisions of the
Contributory Mortgage Regulations.
Any liability of MML (as issuer or promoter of the security) or SRL (as promoter of the security) for breaches of the
Regulations only arises, if at all, under section 59(1) of the Act. However, a close consideration of section 59 and of
the legislative history of the Act and Regulations has led the NEU to the conclusion that the offences under the
Regulations which may found a prosecution under section 59(1) must relate either to an offer of a security or the
allotment of a security, and the alleged offences under regulations 19, 20 and 21 do not so relate. The NEU did not
ultimately have to form a view as to whether MML was an issuer or promoter or whether SRL was a promoter. The Unit’s
decision not to prosecute should not be taken as an indication that it formed a view that these entities were not so
acting in relation to these securities. The decision was based upon the legal point outlined above.
NON-COMPLIANT VALUATION REPORTS
Contributors to the Parliament Street mortgage were sent or given a copy of a valuation report (or an executive summary
of the same) prepared by Barratt-Boyes Jefferies, registered valuers, dated either 27 August 2001 or 24 or 27 September
2001. It is alleged that these reports were deficient in five respects, namely they did not contain:
the opinion of the registered valuer as to the land value of the land free of encumbrances; the opinion of the
registered valuer as to the capital value of the land free of encumbrances; the opinion of the registered valuer as to
the modified land value of the land; a statement by the registered valuer as to the amount of income that the land could
be reasonably expected to produce on an annual basis under conditions prevailing at the time that report was made; and
the registered valuer’s recommendation as to the amount for which the land provided adequate security for a loan on
first mortgage free of encumbrances.
VALUATION REPORTS WERE MISLEADING IN A MATERIAL PARTICULAR
It is alleged that the reports were misleading in that:
(a) they did not contain the information required in terms of the 3rd Schedule to the Regulations; (b) the
$49.215 million and $52.036 million valuation figures made no allowance for holding and selling costs (as ought to have
been done); (c) the $49.215 million and $52.036 million valuation figures included GST; (d) the valuations were
predicated on the basis that the apartments and carparks would be sold and sold separately (when in fact it was the
borrower’s intention to retain them, rent them out and refinance the mortgage with a mainstream bank)
ENDS