21 August 2024
FMA confirmed that the Governor-General, on the advice of the Minister of Commerce and Consumer Affairs given in accordance with a recommendation from the FMA, declared a number of entities within the Du Val group be placed in statutory management under the terms of the Corporations (Investigation and Management) Act 1989 (the Corporations Act).
Statutory management for these entities was announced by the Minister today, effective immediately. John Fisk, Stephen White and Lara Bennett of PwC New Zealand, who were appointed as interim receivers on 2 August 2024, have been appointed as the Statutory Managers.
The Corporations Act provides remedies to deal with complex corporate failures and is most appropriate where a company has, or may have been operating fraudulently or recklessly or, alternatively, where the ordinary law is inadequate to deal with an orderly wind up of the companies. In this case, the FMA considers both provisions apply.
The FMA’s recommendation was based both on its own investigations and a report from the Court- appointed interim receivers, PwC New Zealand (Report). The Report is currently subject to Court orders restricting its publication.
The FMA considers that the conditions under the Corporations Act have been met, and is satisfied that statutory management is the most appropriate available option for each of the Du Val group corporations to which it has been applied, for the purpose of:
- limiting or preventing the risk of further deterioration of the financial affairs of those corporations;
- limiting or preventing the carrying out, or the effects of, any fraudulent act or activity;
- preserving the interests of their creditors or beneficiaries or the public interest; and
- enabling the affairs of the Du Val group corporations to be managed in a more orderly way.
The FMA has ongoing investigations into the Du Val group.
2 August 2024
The High Court has placed Du Val Group, entities associated with the Group, into interim receivership, at the request of the FMA.
Interim Receivers are generally appointed to seek clarity around the financial position of a company or group of companies. John Howard Ross Fisk, Stephen Robert White and Lara Maree Bennett, licensed insolvency practitioners of PwC New Zealand have been appointed interim receivers of the Group. PwC New Zealand is to provide an interim report to the Court within ten working days or such other period as the Court allows.
The Court also approved the FMA's request for asset preservation orders. The orders were requested to support the FMA's active investigation into Du Val Group. The FMA will not provide further comment at this time.
The FMA understands currently there are approximately 120 investors in the Du Val entities, which were marketed as wholesale investments.
March 2023
The FMA has warned Du Val Capital Partners Limited (DVCP), the general partner of the Du Val Mortgage Fund Limited Partnership (Du Val Mortgage Fund, MFLP, the Fund) and Du Val Group.
October 2022
The FMA commenced a review of wholesale investments into property related offers after noting an increase in complaints made and concerns raised about how such wholesale offers were being promoted, and whether the appropriate investors were being targeted and accepted.
July 2022
High Court rules upholding an FMA direction order against property development and investment company Du Val, dismissing all Du Val’s grounds of appeal.
In his decision, Justice Ian Gault agreed with the FMA’s argument that the FMC Act was intended to protect all investors and there are varying degrees of sophistication and experience among wholesale investors, which means not all are inherently sophisticated.
“…I do not consider the FMA erred in law by declining to accept that wholesale investors are inherently more sophisticated than non-wholesale investors and are considered to be capable of evaluating the merits of an offer or accessing necessary information,” Justice Gault said.
The Judge also considered the FMA did not fail to identify the relevant class of investors. He noted the FMA’s arguments that mass media has the capacity to reach a wide audience, and promoters should consider the characteristics of the actual audience that is likely to see the advertisement.
“Where the features or complexity of a product is such that it will only be appropriate for a limited group of people, promoters should do their best to ensure that the advertisement only targets that group and not a wider audience,” the Judge said.
Finally, regarding the ‘fee’, the Judge found that it is a question of fact of what “fee” means to potential investors and that it was available to the FMA to make the determination that the fees representations were misleading.
October 2021
FMA directed property development and investment company Du Val to remove advertising materials likely to mislead or deceive investors.
The FMA considered statements by Du Val in relation to its Mortgage Fund Limited Partnership (“fund”) contravened ‘fair dealing’¹ provisions in the Financial Markets Conduct Act because they created the impression investing in financial products connected to property development was low risk. In fact, property development, including associated finance, is inherently risky.
Du Val’s statements, detailed in the accompanying copy of the direction order, included:
- representing the fund had “the best of both worlds”, with high security and high return and comparing it favourably to bank term deposits but without a balanced view of the risks; and
- claiming there were “no fees” associated with the Mortgage Fund, despite the company retaining any profit on projects above the return to investors. The FMA concluded Du Val receiving 100% of all profits above the 10% fixed return to investors was effectively a performance-based fee and Du Val was not transparent about this.
The statements appeared at various times on Du Val’s website and social media channels. The FMA initially raised concerns with Du Val and the firm took some steps to amend or remove its advertising materials. However, the regulator considered its concerns were only partially addressed and continued to see Du Val marketing materials as likely to be misleading.
Requirements of Du Val’s direction order
The direction order requires Du Val to cease publishing the specific materials in question from all its channels and ensure future materials are not likely to mislead or deceive about the inherent risks of financing property development projects. When advertising the fund, the firm must also exclude any references to term/bank deposits and other low-risk financial products relating to property development and ensure its revenue generating and sharing methods are transparent alongside any claims about no or low fees.
Paul Gregory, FMA Director of Investment Management, said the FMA assessed the seriousness of Du Val’s contraventions and decided a direction order was the appropriate and proportionate regulatory response. “The direction order requires Du Val to demonstrate how it is rectifying its advertising practices. Importantly, we expect Du Val to make changes across all its financial product offers, not just the Mortgage Fund,” he said. Mr Gregory confirmed the FMA has not ruled out further action but the direction order is focused on addressing an existing and ongoing risk of harm to investors from advertising materials.
Du Val must report its compliance with the direction order to the FMA within 10 working days. Within 20 working days Du Val must confirm how it has reviewed its advertising process to ensure future compliance.
The direction order was issued under section 468 of the FMC Act, which allows the FMA to make a direction order if it is satisfied an entity has contravened, or is likely to contravene, a range of provisions in the FMC Act, including the fair dealing provisions.
The FMA has been advised that Du Val intends to appeal certain aspects of the FMA decision.
Wholesale investor exclusion – broader issues
Du Val’s offers used the wholesale investor exclusion in the FMC Act. The wholesale exclusion is designed for investors considered highly experienced and/or well-resourced (such as investment institutions). Individuals typically must reach a monetary or investment experience threshold to qualify as a wholesale investor.
The FMA advises less-experienced investors to stay clear of wholesale offers or, if they believe they may be able to meet the requirements, to seek independent financial advice before investing.
In addition to considering advertising in this space, the FMA has confirmed previous public signals that it will also be looking at industry-wide use of the wholesale exclusion and, in particular, if the “self-certification” exclusion is being used appropriately.
The FMA consulted on its draft guidance on advertising of financial products earlier this year. The final guidance will be published this month and will include guidance that if an offer is only available to wholesale investors the advertisement should make it immediately and prominently clear that it is not suitable for retail investors.
Download Direction Order: Du Val Group NZ Limited and Du Val Capital Partners Limited
