Reprimands from the Financial Markets Authority (FMA) are piling up against Du Val Group, while the embattled property developer scrambles to block disaffected investors from leaking to the media.
The regulator issued Du Val Capital Partners (DVCP), the general partner of the Du Val Mortgage Fund and Du Val Group, a formal warning last week for misleading investors about its suspension of cash distributions from the mortgage fund in January. In the FMA’s view, Du Val breached s 19 of the Financial Markets Conduct Act 2013.
Complaints were made to the FMA after the suspension. Investors had been told the fund would be wound up and the cash distributions converted into units at a 25% premium to be placed in a new company, pending a potential public listing on the NZ Stock Exchange or an alternate.
FMA executive director (response and enforcement) Paul Gregory says this was misleading as the payments were suspended because Du Val’s board could not approve cash distributions as it would leave the company unable to meet its other obligations. And, Gregory says, the proposal to convert cash distributions into units in the fund is not permitted under the terms of the limited partnership agreement governing the investment and investors were not obliged to accept that decision.
Du Val Capital Partners, in a brief statement, says it is disappointed the FMA has issued a public warning against the company for a direct communication made to a small group of investors. “The fund is closed and the communications have no relevance to the New Zealand public. Investors have received further communication to clarify statements that may have been misunderstood,” the statement said.
DVCP sold units under its mortgage fund to wholesale investors over the past two years at a minimum buy-in of $250,000. The units are backed by a portfolio of nine South Auckland apartment developments valued by Du Val at $750 million. The investment offered a fixed return of 10% per year, paid quarterly, equating to cash distributions of $2.5 million per quarter or $10 million per year. Most of the investors relied on the fund’s interest payments.
One elderly investor, who has $800,000 in the mortgage fund and leaked information to BusinessDesk, was this week reminded of his obligations by Du Val’s senior legal counsel Matthew Hawkes, who advised the investor to “keep all information relating to the business” confidential under the terms of the limited partnership agreement. Du Val says all investors are bound by non-disclosure agreements.
Hawkes told the investor the company required him to remedy the ‘breach’ immediately by, amongst other things, destroying confidential information leaked to BusinessDesk. Requests to exit the fund have got investors nowhere. In further leaked information to BusinessDesk, Du Val general manager of investor relations Glen Williams told investors the company continues to priortise funds for the completion of projects and the protection of investor funds. “Redemptions will be considered as part of the upcoming liquidity events on the terms of the limited partnership agreement,” he said. No details of the liquidity events have been given.
Last month, DVCP chairman Owen Culliney said a listing wasn’t certain, given there had been no formal engagement with either the stock exchange or the FMA to date. In an update, Williams told investors the company has now pushed out the likely timeframe for using an information memorandum in relation to the stock exchange listing due to delays onsite following the weather events in Auckland.
Gregory says the FMA is satisfied that Du Val, by making statements about the mortgage fund conversion of cash distributions into units, may have constituted conduct that is likely to mislead or deceive because investors were not informed of the underlying reason for the board’s resolution to suspend and capitalise distributions, or of their rights relating to the suspension.
“We consider the conduct has actively prevented or has not enabled investors to make a properly informed decision about dealing in financial products. “The warning means Du Val investors have more accurate information on the public record about the proposal which, if they wish, means they can better engage with Du Val and/or seek advice about their options,” Gregory says. “Du Val should now reflect on its fair dealing obligations and whether it has provided accurate information to its investors. For the FMA’s part, we reserve the right to take further action in the matter.”
This latest reprimand comes on top of a warning in October last year to it and six other property funds over dodgy wholesale investor certificates.
Du Val Group also lost a High Court appeal in the middle of last year against the FMA’s directions to withdraw a promotional video from an advertising campaign and remove claims about an investment offering that the FMA considering likely to be deceptive and misleading to potential investors. Du Val was at the time running its campaign to raise $100 million for the mortgage fund. ■