van Eyk Research buried, again, in a Caymans court room

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by Greg Bright*

The saga surrounding the demise of van Eyk Research and its one-time controlling shareholder, Pyne Gould Corporation, and their associated suppliers and investors, such as Macquarie Bank, two big New Zealand fiduciaries, and fund manager Aurora has played out in a three-year court case in the Cayman Islands. The 366-page judgement was handed down last week.

The petitioners (plaintiffs) and associates took Pyne Gould Corporation’s Torchlight fund as manager (general partner) of the Cayman Islands-registered investment trust to court, starting legal proceedings in mid-2015, in an attempt to wind up Torchlight after van Eyk went into administration and then liquidation in September 2014 following an illustrious history of more than 20 years. The van Eyk demise was messy, with many fingers being pointed in many directions as to the root causes.

The petitioners in the court case were: Aurora Funds Management as the trustee for the Bear Opportunities Fund, a $55 million vehicle which was part of the van Eyk ‘Blueprint’ series, of which the sole beneficiary was Macquarie Investment Management as responsible entity; Crown Asset Management Ltd of New Zealand, which runs the country’s lands office handling distressed assets for the Government; and the NZ$40 billion Accident Compensation Commission. Macquarie indemnified Aurora for its costs in the action.

Pyne Gould, as the controlling shareholder in Torchlight, and its two executive directors, George Kerr and Russell Naylor, were the respondents (defendants). The judge, the Hon. Justice Robin McMillan, exercised his discretion to publish his judgement even though a settlement had been reached and the petitioners withdrew their action. He did so, he said, because Kerr and Naylor had been heavily criticised and their professional standings impugned during the hearings.

“Not only are Mr Kerr and Mr Naylor entitled to know that they have been exonerated but the public is entitled to know as well,” the judge said. It was a matter of human rights as much as commercial law. The case also raised a number of matters of commercial law of which the public should be aware, he said.

The full judgement is published on the New Zealand Stock Exchange website by Pyne Gould:

If it was wasn’t written by a judge it could easily be a potboiler, with accusations of “blackmail” against the main instigator of the action, Tom Wallace of Millinium Asset Services (MAS) in Sydney, and worse against the other main agitator, Greg Marshall, a New Zealand hedge fund manager who had had a falling out with Kerr over other matters. While neither of them was a limited partner (investor), evidence was presented, and the judge seemed to accept, that the actual petitioners followed their advice despite obvious conflicts of interest.

Kerr and Russell Naylor, a fellow director of Torchlight and consultant to PGC, had their own obvious conflicts but managed to convince the court that there were no related-party problems with the running of Torchlight and, in any case, they would be irrelevant for the case because the fund had clearly performed well. There was no evidence of a diminution in value for the portfolio, even though Tom Wallace had upset the apple cart with one of its investee companies, the Lantern hotel group, when he organised a block of a proposed share buyback and the ousting of Torchlight as manager.

It was alleged, and accepted, that Wallace and Marshall were mainly motivated to oust the current Torchlight management so that they could become the investment manager of the fund – valued at A$216 million in mid-2015 – under a strategy which would provide liquidity to the main investors through a two-year program of selling down all the assets.

It was alleged that Aurora was effectively controlled by Wallace at the time, who “instructed” the manager to become a petitioner in the action. In its cross action, which the judge also addressed, the respondents claimed Aurora, the ACC and Crown Asset Management breached their limited partner agreements by providing confidential information on Torchlight to others, including Wallace and a NZ Fairfax journalist, Tim Hunter. Wallace allegedly used the information to help him in his battle over Lantern while Hunter wrote a critical article of Torchlight’s activities, including transaction and remuneration information and the identity of the investors.

In this part of the action – the default claims – Aurora’s counsel argued that the information was actually sent to Aurora by van Eyk’s product manager, Jacqui Lemon, a long-time employee of the firm, but she was not acting on behalf of van Eyk but was on a “frolic” of her own and there was no evidence Aurora knew what she was doing. The judge didn’t buy the “frolic” line.

Although it received only passing mentions in the proceedings, Pyne Gould became the controlling shareholder in van Eyk in 2012 and sold out about a year later to Andrew Barnes. The move allowed Pyne Gould to exit retail financial services by bundling its NZ Perpetual trustee business in with van Eyk and organising a purchaser who, like George Kerr, subsequently had a falling out with Mark Thomas, the previous controlling shareholder, prior to the firm going into liquidation.

Nicholas Bagnall, the ACC CIO, admitted to speaking with Tim Hunter, who published his damaging article shortly after the conversation. It was also alleged ACC shared the confidential information with MAS late in 2014. Hunter had written several articles which were critical of George Kerr over the years.

The judge said: “In the course of his cross-examination, Mr Bagnall was at various times both emotional and even irrational. He made a number of statements in his affidavits, particularly in relation to Mr Kerr’s character, which were both unfounded and unfair, and which only with reluctance did he ultimately abandon or withdraw.”

Wallace was not a witness during the case but Marshall was, although the defence pointed out that the petitioners probably wished he wasn’t. The judge said: “Not only was Mr Marshall’s evidence replete with personal animosity towards Mr Kerr, but it was also calamitous. He made personal attacks on Mr Kerr’s integrity even though that approach had been expressly abandoned on behalf of the petitioners.”

In his review, the judge said that:

  • all allegations and expressed concerns of the possible worthlessness of the partnership assets and been abandoned and/or discredited
  • all allegations and expressed concerns as to dishonesty or bad faith on the part of Mr Kerr and Mr Naylor had been abandoned and/or discredited, and
  • it is essentially undisputed that the petitioners associated themselves with a campaign on the part of Mr Wallace and Mr Marshall to undermine and ultimately replace the General Partner (Torchlight), thereby enriching Mr Wallace and Mr Marshall and it would also seem expediting the early exit of the petitioners from the partnership.

“In the light of that association and the anticipated benefits to be derived from it the Court has great difficulty in accepting the credibility of the petitioners’ principal witnesses,” the judge said. “In contrast, the Court has found both Mr Kerr and Mr Naylor to be honest and reliable. In circumstance where the petitioners’ witnesses on the one hand and Mr Kerr and Mr Naylor on the other hand differ as to fact the Court unreservedly prefers and accepts the evidence of Mr Kerr and Mr Naylor. It is as simple as that.”

In conclusion the judgement said that the orders the Court would have made, if a settlement had not been reached beforehand, were:

  • the amended petition would have been refused
  • the default notices by the general partner against Aurora, the ACC and Crown Asset management would have been deemed to be valid, and
  • the Court would have heard the parties as to costs.

Note: the author is a former non-executive director of Pyne Gould, between 2012-2014.

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