Examination of Witnesses (Questions 820-839)|
TUESDAY 29 OCTOBER 2002
820. Were you ever aware of a new issue prospectus
that was misleading as to risk?
(Mr Godfrey) I cannot think of one off
the top of my head. Prospectuses normally do not leave many hostages
to fortune, they are written by lawyers.
821. Were you ever aware of a new issue that
could not reasonably be expected to strengthen the balance sheet?
(Mr Godfrey) Do you mean a rescue issue
or a flotation of a new company?
822. A rescue issue.
(Mr Godfrey) I think we were concerned
about some of the rescue issues, but there were none that could
not possibly strengthen the balance sheet. In our letter we said
that the strengthening could be fairly temporary if markets did
823. In your letter to the Chairman of the Split
Trusts in November 2001 you said, "We are already seeing
examples of trusts which have been to the well . . .", by
which I presume you mean that
(Mr Godfrey) Gone and tried to get more
824. Yes, from investors. That is "the
(Mr Godfrey) Yes.
825. ". . . only a few months ago approaching
a point where they need to do so again. Although this is better
than nothing it is a long way from being as good as raising hard
cash." You go on to say, "These corporate actions .
. .", which of course include going to the well, ".
. . are under way in many cases but they are necessarily conducted
behind closed doors." Do you think that is right?
(Mr Godfrey) Could you read the whole
826. "These corporate actions . . ."
and you have identified three different methods which people can
use to restore the position, ". . . are under way in many
cases but they are necessarily conducted behind closed doors."
(Mr Godfrey) What do I say next? Sorry.
At the moment I cannot remember why I said that. I need a little
827. Then you go on to talk about publishing
the data on holdings as outlined, would enable the AITC to "move
on to the front foot"that is spin doctor's language.
(Mr Godfrey) I think the reason I said
they were conducted behind closed doors is because these corporate
actions are price sensitive, and therefore you are never told
about them whilst they are being put together. We knew in general
that these types of fund raisings were being put together and
this letter was by way of trying to give a steer to boards and
to give them information which we hoped would enable them to make
sure there was not further diminution of value for the zero dividend
preference shareholders by way of rescue issues which just kept
the whole thing spinning for longer whilst their value ebbed away.
That is what that was about.
828. This letter nowhere refers to the fiduciary
duty of these individuals to their investors, who of course were
(Mr Godfrey) We do not need to remind
a board they have a fiduciary responsibility towards their shareholders.
What we were trying to do was to discuss the application of what
was fairly uncharted territory at the time, and we could see developments
in the market which we were concerned might not have over the
longer term the intended effect. We were therefore I think doing
our duty to the shareholders of our member companies by writing
to boards and suggesting a number of things, whether it be a new
look at the accounting policy, or suggesting that having a rescue
rights issue where no real cash came in, but what came in was
a group of stock swaps of other splits in exchange for your new
rescue rights issue, might not prove to be the best thing. Had
markets turned up, we would have been wrong, but as it happened
we have turned out to be entirely correct.
829. Mr Tiner told us when he was here, and
of course you went first so you were not on that occasion able
to come back to this point, that in fact the Guernsey regulator
had approached your organisation and he did mention the name of
the individualHugh Aldous?
(Mr Godfrey) Yes.
830. He said, "It seems that the Guernsey
authority has been in discussions with a Mr Hugh Aldous . . .",
that is not me being unpleasant, that is the way he put it, ".
. . concerning his concerns about cross holdings and the systemic
implications of that." Is that right?
(Mr Godfrey) I think this has become
a bit of a red herring because the Guernsey regulator did not
have any contact with the AITC at any stage. It appears he did
have an exchange of correspondence with a gentleman called Hugh
Aldous. Hugh Aldous is someone who is known to us, he is a director
of an investment trust, he is a member of our representative committee,
he is not an officer of the Association, and that correspondence
was never reported in any way, shape or form to me or any other
member of my staff. Why I say it is a red herring is because the
Guernsey regulator was not the only person who had concerns about
cross holdings, so whilst I do not think that that story hangs
us or anybody else, neither do I think it gets us off the hook.
831. Are you not a bit disappointed that this
guy, Hugh Aldous, did not share these discussions with you?
(Mr Godfrey) No, I am not, because, as
I say, the Guernsey regulator is not the only person who ever
had concerns about the cross holdings. As I said, I myself was
concerned about the fact that managers were investing in new launches
of other splits before that.
832. How are you going to retrieve the reputation
of the sector?
(Mr Godfrey) We are going to improve
transparency and we are going to undertake some very big initiatives
on corporate governance.
833. Mr Godfrey, I meant to put this question
at the beginning. Can I take you back to the questions I asked
Mr Gilbert. This was their enhanced zero trust which was advertised
in The Times two years ago which, by the way, John
Tiner again thinks is misleading where it said that "zeros
are low-risk investments similar to bonds and there is a quasi
guaranteed annual growth". Would you say that was misleading?
(Mr Godfrey) It certainly turned out
to be wrong.
(Mr Godfrey) If you believed it, you
were misled. So please can I stand on that. I am glad you asked
this because there is a very, very important point.
835. It is under ISAs off their web site. It
was a bit of semantics for Mr Currie to say you cannot buy anything
off a web site, I know you cannot, but it is promoted on the web
site and that is the issue because this will affect compensation,
so I would like your view.
(Mr Godfrey) There are a couple of very
important things here. Firstly, we have been told by Aberdeen
that they are going to offer an uplift package on their unit trust
because they advertised it and marketed it direct to the retail
investor. They said that it is not the same for the individual
shares of the zeros because they are not funds, they are equities.
Well, excuse me, but I believe when somebody buys a share in an
investment trust they believe they are buying a collective investment.
If you say what is an investment trust, there are three things:
it pools your money, you get professional management; it is low
cost and it can gear. One of the key features of an investment
trust is it pools your money with other people's so it is viewed
as a collective investment. It may be convenient to say it is
only an equity just like Marconi and you do not get compensation
if shares in Marconi go down, but it is bought by the consumer
as a collective investment and it was made available as that.
Also they said that that advert does not count because it was
not advertiseing the share, it was advertising the savings schemes.
I think that is the point you were trying to make.
(Mr Godfrey) The savings scheme was made
available and marketed to retail investors and ISAs were made
available and marketed to the retail market. I fail to see what
the difference is between a consumer
837. It is very hard for us to get a clear answer
on anything from them. They came with their minds on the defensive,
it was quite obvious, but you are giving us a very clear answer
here. What I said to Mr Gilbert is this: if this is good enough
for those buying direct, why should others not be compensated?
Why is it just down to an accident where they bought the shares?
(Mr Godfrey) The key point is what difference
is there between somebody who goes to Aberdeen direct and buys
a unit in their unit trust and somebody who goes to Aberdeen direct
and buys a share in a zero through their ISA product? None that
I can see.
838. You are sharing your thoughts about this
with the Committee. Is this a point that you have already taken
up with Aberdeen?
(Mr Godfrey) Not formally.
Chairman: We will leave that one with
you. It is a good point.
Mr Cousins: It is a pretty formal way
of communicating with Aberdeen.
839. There are people and an industry that will
not talk to the public. The only way we can get them to talk is
to come before our Committee, so we will maybe keep that practice
up! Okay, you said there are details of your initiative to improve
information on the sector and we are delighted that you suggest
it is vital to provide investors with that information. Do you
think you are going to be faced with similar hold-ups to those
you have been facing with the data project?
(Mr Godfrey) We are looking for support
from this Committee and the FSA to ensure we do not get hold-ups.