The Financial Markets Authority was warned of potential issues at CBL Corp before the insurance services group went public in 2015 but dismissed the complaints, which came from a businessman whose company was caught in a US probe over “fraudulent” insurance sales.

The FMA didn’t pursue Geoff Waterhouse’s 2015 claim that CBL’s prospectus contained “a blatant lie”, one of many complaints about CBL he levelled to regulators, including the FMA and the Reserve Bank. Emails between the Waterhouse and the FMA show the regulator felt the overall impression didn’t mislead investors and due diligence was “sufficiently robust”. The Reserve Bank last month convinced the High Court to put the company’s CBL Insurance unit into interim liquidation after the company breached the bank’s orders by paying $55 million to overseas companies.

Contractors Bonding Ltd, now CBL, signed a deferred prosecution agreement with the US state of Georgia in 2007 after being accused of selling fraudulent insurance. The deal, signed by chief executive Peter Harris and former executive Anthony Thomas, saw the Kiwi insurer pay US$750,000 in restitution and agree that CBL wouldn’t do business in the US for 10 years in exchange for the state not bringing charges. That restriction terminated early in 2014.

Harris had signed a statement of facts accepting CBL never bought Mark Solofa Insurance Company, which was licensed in American Samoa. However, CBL’s 2015 product disclosure statement states CBL did acquire the American Samoan business and didn’t accept it had breached insurance regulations, “but cooperated with the Georgia Insurance Department and ceased writing new business”.

Waterhouse, also known as Godfrey Waterhouse, was involved in the Georgia dispute through his company Phoenix Brokers and has been pursuing Harris and CBL through the courts and the media for more than a decade. Waterhouse used pseudonyms in some of his correspondence with regulators, including a series of emails under the nom de plume, Alun Fosta.

Our review has also shown that the due diligence processes of CBL appear sufficiently robust to give us confidence in these processes.

(From an email from the Financial Markets Authority lawyer in 2015.)

The FMA considered Waterhouse’s 2015 complaint, and a senior solicitor at the FMA responded that “at this present time the information provided to use by the issuer suggest that all proceedings are appropriately accounted for”.

“Our review has also shown that the due diligence processes of CBL appear sufficiently robust to give us confidence in these processes,” the FMA solicitor said in 2015. “The overall impression conveyed by the PDS

is that there were potential irregularities in the conduct of CBL in the US so any investor is on notice of these historical issues.

“On that basis our current position is that we do not believe that there is sufficient evidence to determine that the disputed statements in the PDS are misleading and materially adverse from the point of view of an investor,” the FMA solicitor said in an email.

The FMA told BusinessDesk in an emailed statement that it does not sign off or approve a product disclosure statement and “directors are responsible for the content of a PDS”.

“The FMA is currently investigating the conduct of CBL, including its directors and executive, to determine potential breaches of the Financial Markets Conduct Act 2013, including breaches of continuous disclosure obligations, financial reporting requirements, and fair-dealing,” it said. “We have the cooperation of the RBNZ, NZX Regulation and overseas regulators to assist in these matters.”

That investigation differs from the one raised by Waterhouse, with the NZX-listed insurer suspended from trading over its disclosure relating to the reserving adequacy for a French construction business. That attracted orders by the Reserve Bank and Central Bank of Ireland, and CBL appointed voluntary administrators last month in an effort to preserve value in the business.

Yesterday, the deputy governor of the Reserve Bank Geoff Bascand said in an interview with Radio New Zealand that the bank had been taking steps to prevent something serious happening for “quite some time”, but “unfortunately it escalated to this crescendo moment” when CBL breached the central bank’s directions and it had no other option than to put the company into interim liquidation.

The state of Georgia began its CBL investigation with Phoenix Brokers, owned by Geoff Waterhouse and his son Robert. CBL had entered into an agreement to underwrite taxi and limousine insurance sold by Phoenix in Georgia in 2000, but got in trouble in 2002 when local regulations changed because it wasn’t licensed or domiciled in a US state or territory. CBL told Phoenix Brokers and National Program Management, another Georgia-based insurance broker, that it had a contract to buy Mark Solofa Insurance Company.

However, CBL never received the shares and never paid the US$3 million price of the business to its owners, according to the statement of facts signed by Harris and Thomas. It continued underwriting insurance for Phoenix and National Program Management but didn’t tell them that its agreement to purchase MSIC hadn’t been settled. The state issued arrest warrants for both the Waterhouses for civil racketeering, on the basis that they were knowingly selling fraudulent policies, though those charges were later dropped and CBL was pursued.

Waterhouse sued CBL in New Zealand, backed by litigation funder LPF Group, with CBL disputing their funding source all the way to the Supreme Court in 2013. The Supreme Court’s judgment has become important case law on the court’s role in regulating litigation funding in New Zealand, while the substantive case was settled out of court.


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