The rise of litigation funding in New Zealand puts politicians and business leaders on notice – their actions will now be policed by a powerful new sheriff, writes Chris Lee.
In business, as in life, there may be a range of thought processes that quell the temptation to cheat. One would hope that for the non-psychopathic, conscience, morality or simple humanity may be the only handbrakes required. For those with no such instincts the most effective constraint should be the certainty that what tempts them is illegal, that their transgression will lead to being charged, and that the punishment will put a cost on the act of cheating that is greater than the sugar rush of reward.
The easiest example of how the fear of being detected can constrain behaviour is the drink-driving enforcement. We learnt this month that the percentage of road accidents involving drug or alcohol-affected drivers has risen over the past few years, coinciding with a reduction in the number of checkpoints conducted by Police.
The risk-reward odds changed in favour of those who roll the dice and so more people took their chances when checkpoint numbers fell. Neither conscience, morality nor common sense were the deterrent. Being caught, and enduring stigmatism, financial cost and loss of freedom (to drive, or even to avoid incarceration) had become less likely, so more people took the chance.
Breach of duty, indeed fraud, has rarely been constrained in New Zealand by such logic – but we might be about to observe the power of a new handbrake. The catalyst for change will be the new powers of litigation funders, their intervention now being approved by the law-makers and encouraged by the courts. Litigation funders take on complex cases in exchange for a cut of the settlements, providing money, muscle and intellect to challenge poor performance on government and in business.
They bring to shoddy governors and executives the certainty that they will be answerable to their victims. Litigation funding now has the law’s blessing to intervene in pursuit of justice, funding cases that would otherwise be buried because of the immense cost and skill needed to bring those cases to a conclusion.
This analogy applies to the controls that investors need when they divert their personal money into an investment product. Those investors expect the people who now use the money, (other people’s money – OPM) to act legally and morally, and to be accountable.
Those expectations were treated risibly by many in charge of OPM in the years around the global financial crisis, especially in the financial sector. Investors relied on the application of the law to sort out illegal behaviour. They waited and waited; in vain.
Anyone who has paid attention to the Hayne’s Commission on banking in Australia, or simply read my book The Billion Dollar Bonfire, will know how the various participants in the finance sector have regularly colluded to permit the mis-use and ultimate theft, of OPM.
The politicians, the regulators, the auditors, the trustees, and the insolvency practitioners, one way or another, colluded in the abuse. In my opinion, some still do. The principal and initial offenders were directors and company executives. They acted with impunity because the law was weak and unspecific, the supervision of the behaviour was insipid at best, and there was no effective enforcement.
There were only rare cases of accountability, and when offenders were accountable, their punishment was often resolved in secret with limp settlements, usually subject to confidentiality agreements and usually met by insurance policies whose premiums ironically had been paid for by the investors, not by the offenders.
We now have a new Sheriff in town, and should all be applauding loudly the arrival of litigation funders in New Zealand. Litigation funding is not new to the world. It is a huge and somewhat ugly industry in America, where the lawyers who enrich themselves from litigating other people’s wars are often called ambulance-chasers. They actively pursue accidents or disasters, persuading the victims to engage lawyers and allow the lawyers to retain say, 30% of the award should they succeed in obtaining compensation from the offenders. They operate on a no-win, no-fee basis.
The cases they chase may be from any accident, perhaps as simple as breaking a leg by falling after stepping in a pot-hole that a council should have repaired. In New Zealand the Accident Compensation Corporation covers those mishaps so litigation funding has had no traction in personal injuries, here. We do not have ambulance-chasers as far as I can see.
If we ever were to have worthy politicians and law-makers we would not need litigation funders to frighten weak business people into behaving properly. Instead we have had decades of political leaders without the wit, the experience, or the personal standards to address an issue that should be a foundation of a decent society.
Politicians like John Key, Bill English, Steven Joyce, and now Grant Robertson needed social intelligence as well as knowledge to address the problem. They displayed shortfalls in those areas. Now litigation funding – indeed just one funder, Level Playing Fields (LPF) – is doing the job that others have cast aside, holding business governors and executives accountable to the law.
Some examples of what the field has achieved in just a few short years:
- Forced PWC to compensate victims of the serial Christchurch bankrupt, David Henderson. PWC’s audit of Henderson’s Property Ventures Group was so far short of a fair standard that PWC contributed a ‘’secret’’ amount to avoid compensation. That amount is rumoured to have been as much as $100 million, hardly a token penalty, nectar from heaven for the victims of Henderson’s behaviour.
- Won in the High Court an award against the Ministry of Primary Industries, for its shoddy standards that allowed toxic pollen to be imported. The pollen set free a virus in kiwifruit orchards that cost the orchardists at least a billion dollars. MPI is appealing an award that would restore hundreds of millions to the affected orchardists.
- Won in the High Court an award of $36 million from some appalling directors of Mainzeal, the failed NZX-listed property company chaired by retired politician Jenny Shipley.
- Is now funding cases against the directors of CBL Insurance and Intueri whose investors were royally rorted.
LPF has succeeded in many other lower-profile examples of poor performance, some as humble in scale as a settlement for the investors badly let down by an incompetent financial adviser. It helped with the funding of a case for finance company investors which resulted in a settlement from the company’s trustees and auditors. It’s chaired by a retired Supreme Court Judge (Bill Wilson), was founded by a former lawyer and company director (Phil Newland) and is supported by directors Bruce Sheppard (the founder of the NZ Shareholders Association) and Michael Stiassny (a prominent public company director).
It is changing New Zealand. It might be the factor that ignites increased moral and legal standards in cowardly or self-interested business leaders. LPF is thus addressing a major power imbalance.
That imbalance is itself an example of self-interest and moral turpitude being shielded by poor law, weak regulatory intervention, spineless politicians and law-makers and the globally omnipresent Old Boys Network, the last of these being themselves fed by self-interest.
For example: Trustees appoint insolvency practitioners who direct OPM to lawyers, valuers and bankers. Do I need to spell out the composition of the old boys’ network? Guess who helped the law-makers frame the 2019 version of the Insolvency Practitioners Act? Yet their rich fees are often paid by the very investors the OBN purports to protect.
Government departments, companies and the highest paid directors, executives, auditors, lawyers and trustees buy indemnity insurance that is used to fend off any legal challenges and rarely to settle troublesome cases when the prospect of a win in Court is unlikely.
They hire the best Queen’s Councillors. They connive with the insurers, they obfuscate, they delay and usually their funding out-guns the funding available to victims, resulting in stalemate. They behave like this because they can.
Well, watch out. The likes of LPF have a pool of investors whose resources are sufficient to unpick the tactics of the wrongdoers and their insurers. The litigation funders will not blink.
When cheats and bullies cannot intimidate they come to the table to sort out a resolution. Knowing they shall be held accountable might initiate a change in their behaviour. Investors have a new friend, in the likes of LPF.
Chris Lee heads the Paraparaumu-based stockbroking firm Chris Lee & Partners