Serious Fraud Office has filed criminal charges over failed $750 million insurer CBL

Tuesday, 17 December 2019

The Independent Review by John Trowbridge and Mary Scholtens QC of the Reserve Bank’s Supervision of CBL Insurance Ltd was released in July 2019.

The Serious Fraud Office has filed criminal charges following its investigation into the collapse of insurer CBL, but it wouldn't confirm who it had laid the charges against.

The SFO said its policy was not to name those charged ahead of a first hearing in case they sought name suppression.

CBLC was put into liquidation in May, after going into voluntary administration in February 2018, dragged down by mounting losses on its French insurance business, which insured owners of new homes against the costs of fixing faulty workmanship.

Earlier on Tuesday, the Financial Markets Authority filed two separate civil lawsuits against CBL Corporation (CBLC), its directors, including managing director Peter Harris, and its chief financial officer Carden Mulholland.

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CBL Insurance used to light up the Auckland skyline by night.

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When its shares were suspended on the NZX in early 2018, the company was valued at just under $750 million. Its shares, which were trading at $3.17 each, are now worthless.

The Financial Markets Authority's (FMA) two civil actions come in the wake of two separate investor civil lawsuits filed against CBLC and its directors.

Harris vowed to defend the proceedings vigorously.

'These civil proceedings will be vigorously defended, as will any that might arise from the Serious Fraud Office in their 18-month rush to do so,' said Harris.

'The court is the proper forum for the claims to be litigated – rather than the public jockeying for position by the two litigation funders who are focussed on getting their place at the compensation trough ahead of anyone else and trying to settle without going to court.'

The FMA alleged multiple breaches of the Financial Markets Conduct Act 2013 (FMC Act), and was seeking declarations of contravention and civil pecuniary penalties in both its civil actions.

CBL Corporation's shares were worth a combined $747 million when trading was suspended in February. Some fund managers have marked them down to zero.

The regulator the case was intended to send a strong message to company directors that it would take action where alleged misconduct was detected.

The action could also help clarify the law and provide important legal precedent for future actions.

The first civil action was related to the initial listing of CBLC shares to the public in September 2015, and alleged CBLC and its directors failed to disclose related party transactions to investors thinking of buying into its share offer, and that they had made 'false and/or misleading statements in respect of solvency ratios and the use of the IPO proceeds'.

The defendants to this action were CBLC, directors Harris and Alistair Hutchison, and Mulholland.

The second civil action related to alleged breaches of the FMC Act, namely failing to tell the market of the need to strengthen its reserves, or of directions issued to its European subsidiary by the Central Bank of Ireland.

The FMA also alleged 'misleading and deceptive conduct and/or unsubstantiated representations in trade in respect of CBLC's market announcement on 24 August 2017.

The defendants to this proceeding were CBLC, Harris, Hutchison, and their directors Sir John Wells, Anthony Hannon, Norman Donaldson, Ian Marsh, and chief financial officer Mulholland.

'Our key statutory objective is to promote and facilitate the development of fair, efficient and transparent financial markets,' said Nick Kynoch, FMA general counsel.

'There will be corporate failures in a well-functioning market, however the size and circumstances of CBL's collapse threaten our overarching objective. Because of this we conducted a significant and complex investigation into CBL's failure.'

'We have identified a number of areas of potential misconduct by CBL and its directors and considered a range of potential enforcement actions against the backdrop of our regulatory objectives.'

'We also acknowledge the two litigation-funded class actions filed by investors against CBL, which are primarily aimed at securing compensation for investors. The FMA will engage with investors and the courts to manage the various proceedings now in progress.'

The FMA will ask the courts to allow its two proceedings to be heard together.

The FMA's actions could help shareholders seeking compensation, Kynoch said.

'Proceedings where declarations of contravention and penalties are sought will, if granted, provide the ability for individual claimants to seek compensation in reliance on the declarations of contraventions, which will have been established by the FMA proceedings.'