JAFL Litigation Funding Partners

This is an offer by JAFL Litigation Funding Partners Limited (the Company) of the opportunity to invest in joint or “class action” litigation funding business in New Zealand alongside existing industry participant JAFL.

Ended!

Offer Summary

JAFL Litigation Funding Partners Limited (the Company)

OFFER UPDATE – 15 SEPTEMBER 2020

Closing date extended

Following:

  • the Covid-19 Public Health Response Act 2020 (the Act) Level 3, 2.5 & 2 resurgence responses since August 12, 2020 and
  • the filing of a related second Appeal CA502/20 in the $200m FeltexClaim seeking sufficient time to complete Stage Two pre-requisites

the Closing Date for the Offer has been further extended until 20 November 2020. The extension aligns the Offer period with the expected timing of the appeal hearing.

Applicants who subscribed prior to the date of this update may withdraw their subscriptions if they wish to do so.

This update should be read together with the original Offer document dated 1 May 2020 and the offer updates dated 24 June 2020 & 4 July 2020. That information is set out below and in the PDF Offer document at the Offer Documents tab at www.ccfl.co.nz (the PDF Offer Document).

Background 

As had been anticipated by the appeal filed 19 June 2020 (CA322/30), since the 4 July 2020 Offer update Eric Houghton’s proceeding CIV 2008 409 348 (the FeltexClaim) was struck out effective 14 July 2020. This is now subject to Houghton’s appeals CA322/20 & CA502/20 of the decisions of Justice Dobson dated May 22, 2020 and August 11, 2020 (the Appeals).

In the August 11th decision Justice Dobson declined a stay of the effect of the strike out until the first appeal has been heard.Both High Court decisions are now appealed. CA322/20 and CA502/20 are likely to be consolidated into one appeal by the Court of Appeal and heard over one day in late November or December 2020.

The Appeals say the Judge was wrong not to grant a stay and extend time for compliance with the order for security for costs.

They argue that the injustice to the claimants which would result from refusing an extension of time outweighs any other consideration.

The issue in the Appeals is one of access to justice. As had been noted by Justice Dobson in the decision appealed from….

[22] …………..more than 3,600 claimants have the benefit of a finding that the prospectus on which their subscriptions for shares was based contained an untrue statement. The materiality of that untrue statement in terms of the quantified liability for the defendants, which at its highest might extend to approximately $200 million, can claim material importance in considering whether further concessions in favour of the claimants are appropriate. 

The August 11, 2020 decision had also acknowledged that:

[23] All other things being equal, the continuation of this proceeding is arguably in the public interest. As has been argued for the claimants in various contexts, the claimants seek access to justice using a funded representative action, which the Court should facilitate through to final determination unless there are compelling reasons against doing so. 

Despite that, and while it was somewhat unusual to do so, Justice Dobson also stated that:

[24] Assessing the apparent strength of grounds for an appeal can be somewhat invidious for the judge whose judgment is to be challenged. Mr Carruthers did not advance any submissions as to the grounds on which he would challenge the May judgment. Nothing in the matters traversed since that judgment has caused me to reconsider its merits, which I remain satisfied were virtually inevitable, and in any event well-justified. I accordingly do not rate any appeal that is pursued as having strong prospects of success, but acknowledge that the balancing of competing interests between the claimants and the defendants is a matter of judgement and that other views would be open. 

Investment by the Company in FeltexClaim Stage Two dependent on successful appeals CA322/20 and CA 502/20

The Company’s intended cash investment in the FeltexClaim, and in the proposed Stage Two security for costs solution, is now dependent on a successful outcome of the Appeals (in addition to the other conditions noted previously, which are a successful Offer and confirmation of an effective & binding agreement between the NZ Co-funders). Success of the Offer and continued support for it by claimants and other supporters are in turn necessary to assist a successful outcome of the Appeals.

Appeals expected to be heard by the Appeal Court later this year

On 19 June 2020 Houghton appealed the proposed striking out unless Court timeframes were met (refer 24 June 2020 Offer Update, “the Update” p5 of the PDF Offer Document). On 7 September 2020 Houghton appealed the related 11 August 2020 decision. The Appeals now take into account matters covered in the August 11th decision. The Appeals will dispute the finding by Justice Dobson on 11 August (at [69]) that a Stage Two trial could realistically have taken place from 27 October 2002 or at any other time in 2020. Refer media coverage of these developments at:-

https://www.stuff.co.nz/business/122581536/feltex-investors-continues-with-appeal-against-strikeout-of-their-class-action

Appeals and Appeal Security for Costs to be funded outside the Offer

Joint Action Funding Limited (JAFL) has arranged for the $21,180 Security for costs and the $2,700 scheduling fee for the CA322/20 Appeal to be paid outside the Offer by Stage Two shareholder/underwriters Ian & Neville Hamilton. The expected costs of the Appeal(s), which were to be funded by the Company (refer Update p7 of the PDF Offer Document) will be reduced by this amount ($23,880). All other costs of the Appeals will now also be funded outside the Company’s Offer by the Directors and certain shareholder/underwriters of Stage Two Guarantee Limited. If the Appeals are unsuccessful, the costs to JAFL Partners and its subscribers will be limited to the costs of the issue (approximately $50,000 at the minimum $500,000 raise), refer Update p6 & p7 of the PDF Offer Document.

Other FeltexClaim Stage Two costs to be paid outside the Offer

Negotiations are also continuing for certain Stage Two costs to be funded outside the Offer. These include hearing fees of approximately $96,000 and expert witness fees of approximately $200,000. JAFL is also negotiating to cover some of the Stage Two costs on a success basis. JAFL has secured from Auckland based business people $243,000 of direct cash funding for Stage Two.

Recommendation

We recommend the Company’s Offer to you and welcome your support.

There are a number of risks to be overcome in order to achieve a successful outcome. We described those risks in the original Offer document and the 24 June 2020 update – see below and the PDF Offer Document.

Success of the Company’s Offer remains an important part of the Feltex case litigation funding solution.

Success will assist more than 3,600 Feltex claimants who:

  • have the benefit of a [Supreme Court] finding that the prospectus on which their subscriptions for shares was based contained an untrue statement. The materiality of that untrue statement in terms of the quantified liability for the defendants, which at its highest might extend to approximately $200 million…
  • seek access to justice using a funded representative action, which the Court should facilitate through to final determination

The Company’s Crowdfunding Offer is 60% of the way to the minimum for allotment; your support will help enable the Feltex compensation claim to be heard at Stage Two and entitle you to share in the potential rewards.

Welcome aboard

Tony Gavigan (021 326272)

Logan Granger (027 283 8331)

Directors

JAFL Litigation Funding Partners Limited

 

OFFER UPDATE-  3 JULY 2020

The update on 24 June 2020 below has been amended to clarify the closing date for the offer.  The closing date is 30 September 2020, subject to the offer meeting conditions including that the minimum funding target of $500,000 is reached (see the 24 June update for more information).  The offer may be closed earlier – the Company is targeting 10 July to raise sufficient funds and to meet other conditions.

The original 24 June 2020 update below referred to an earlier potential partial close and further funding being sought under the offer. The Company confirms in the amended update below that there will only be one closing date, 30 September 2020 or earlier.

 

OFFER UPDATE – 24 June 2020

Closing date of Crowdfunding Offer extended to 30 September, 2020

The letter to FeltexClaimants dated 8 January 2020 and relevant minutes issued by the Court in March and April 2020 were made available on the Offer Documents tab at https://www.ccfl.co.nz . These documents form the background detailed in Appendix 1, which led to the Offer and then a Court hearing on May 22, 2020.

The Company updates these developments since its Offer was made on 1 May 2020. The Offer dated 1 May 2020 should now be read in conjunction with this update.

The target date for raising the $500,000 minimum under the Offer is 10 July 2020. The Offer closing date has been extended to 30 September 2020 to enable further capital to be raised as further progress is achieved.

The Company wishes to raise the $500,000 minimum under the Offer by 10 July 2020 but the Offer closing date has been extended to 30 September 2020 to enable that target (or a higher raise) to be achieved.  The offer may be closed earlier.

This Offer Update concerns the Company’s existing and proposed investments in the FeltexClaim, Houghton v Saunders CIV2008-409-348.

The steps required to enable Stage Two of the FeltexClaim to proceed were settled by the decision of Justice Dobson dated 22 May 2020 (the decision). A pdf copy of the decision can be found on the Updates tab on the Offer page.

It is discussed in Appendix 2.

You are strongly advised to read the 22 May 2020 decision and each of the specific risk warnings set out in this Offer Update.

The decision set out two requirements that must be fulfilled by 13 July 2020 or the FeltexClaim by 3,639 claimants seeking $100 million, plus the same again in interest, plus costs will be struck out the following day (the “Orders”).  The requirements are that, by 13 July 2020:

  • The claimants provide the required $1,650,000 Security for Costs (paragraph 92(a) of the decision)
  • Senior counsel for the claimants confirms that, in his opinion, the claimants are adequately resourced to prepare for and present all aspects of their stage two claims (paragraph 92(b) of the decision).

The decision has been appealed because that timeframe may be unfairly short given delays caused this year by COVID-19 restrictions. The nature of the appeal is discussed below in the Security for Costs Proposed section

This Offer Update clarifies what is now required and explains some new and updated risks in investment under the Offer.

Risk Warning: You are reminded that:

  • Equity crowdfunding is risky.
  • Issuers (companies issuing shares) using Collinson Crowdfunding’s facility include new or rapidly growing ventures. Investment in these types of businesses is very speculative and carries high risks.
  • You may lose your entire investment, and must be in a position to bear this risk without undue hardship.
  • New Zealand law normally requires people who offer financial products to give information to investors before they invest.
  • This requires those offering financial products to have disclosed information that is important for investors to make an informed decision. The usual rules do not apply to offers by issuers using Collinson Crowdfunding to raise funds. As a result, you may not be given all the information usually required. You will also have fewer other legal protections for this investment.
  • Ask questions, read all information given carefully, and seek independent financial advice before committing yourself to any investment.

Reason for Offer

The reason for the Company’s Offer is to provide funding so the Stage Two compensation hearing in the FeltexClaim can proceed late 2020 or early 2021. In order to do this $330,000 of the cash to be raised under this Offer will be paid by the Company to Stage Two Guarantee Limited as a guarantee fee. Stage Two Guarantee Limited will give a guarantee to the Court for $1,650,000.

The Company’s investment will be rewarded with a fee of $990,000 (a gross profit before tax to the Company of $660,000) as long as there is a compensation award of at least 13 cents per share (cps) paid to the Feltex Claimants plus interest and costs from the Stage Two proceedings. This process may take several years to complete. This minimum 13cps plus interest and costs outcome is defined as Stage Two “Success” for the purposes of this Offer Update.  The scenarios that may unfold are uncertain and not risk free so you may not receive any return for your investment. The scenarios are detailed below and in the table which is repeated in Appendix 4.

Offer conditions 

The offer is now conditional on the following conditions:

  • A minimum of $500,000 being raised under the Offer;
  • The Company having a legal opinion from the Company’s lawyer that there is an effective and binding agreement amongst Eric Houghton, his solicitor, the Houghton led claimant committee, the NZ Co-funders, the Company, Stage Two Guarantee Limited and JAFL (including any necessary confirmation of JAFL’s accrued rights in which the Company now participates) that the funding solution set out in this Offer is approved.

Security for Costs Proposal 

In response to the Orders’ threat of strike out on 14 July 2020 of the FeltexClaims and any prospect of claimants’ receiving compensation, leading claimants, business people and professionals have now committed in principle to provide the $1,650,000 Security for Costs required for Stage Two to proceed.

In summary, Stage Two Guarantee Limited (the Guarantor) will guarantee the Security for Costs of $1.65m in return for a fee of $330,000 which will be paid by the Company from the proceeds of the Offer.

On Success, the Company will be paid in priority from Resolution Sums a reward of $660,000 (200%) on top of the Company’s proposed cash investment of $330,000.

The proposed shareholders of the Guarantor include Eric Houghton, IL and NA Hamilton, Sir Paul Collins’ Active Equity Holdings Limited, Anthony Walshe, FGL, Craig Anderson, Logan Granger, and the Business Integrity Trust. They will subscribe for their share of the guarantee liability. Further details are at Appendix 3.

The proposed security for costs solution follows recent suggestions by the defendants and the Court, in its minute dated 2 March 2020, that it was in the hands of claimants to share the security for costs risk amongst themselves.

That costs solution is not yet approved as the means to meet the security for costs required by the Court.  This proposed solution requires the reasonable agreement of the Feltex defendants and acceptance by the Court by 13 July 2020. If this does not occur, or the precautionary appeal filed is unsuccessful, the FeltexClaim proceeding will be struck out on 14 July 2020.  The effect of this for investors is set out in the first Table below.

The level of security for costs to be provided by Stage Two Guarantee Limited will be capped at $1,650,000. In the Offer at Appendix A 10 (c) it contemplates a higher level of $2,580,000 as security for costs. The market cost of providing that additional guarantee (above the $1.65m level) cannot currently be justified. This means that some $930,000 of stage one costs recoveries will remain unpaid by the defendants for now.

Important Note:

The Company will use proceeds from the Offer to fund appeals to endeavour to have the proposed guarantee approved by the Court as security for costs. This was not contemplated when the offer was made on 1 May 2020.  If the appeals are not successful it will be unlikely that the Company will be able to recover your full investment – any eventual return you receive will be reduced by the offer costs (which were disclosed on 1 May 2020) and as well as other costs including the costs of the appeal.

Given the history of the proceeding, a precautionary appeal has been filed on 19 June 2020 by Eric Houghton appealing the strike out order on grounds including that the Orders:

  • do not fairly balance the competing interests of justice and the balance of convenience should instead favour the Feltex Claimants who have been out of pocket since they were misled in 2004 as described by the Supreme Court refer Appendix 1.
  • require unnecessarily tight timeframes within the context of past and continuing restrictions posed by the Covid-19 Public Health Response Act 2020.
  • suggest a Stage Two trial with overseas witnesses which cannot realistically proceed this year – while outbreaks of Covid-19 continue to flare up in Australia and Covid-19 remains out of control elsewhere overseas.

Risk Warning:

The proposed security for costs solution is not guaranteed to be successful. Key risks include that:

  • The formalisation of commitments from the proposed shareholders of Stage Two Guarantee Limited is still in progress and is subject to obtaining those commitments in writing in agreed form.
  • The Court in its 22 May 2020 judgment expressed concerns about JAFL meeting costs orders noting that “Since the security for costs order was made, there have been a number of assurances as to compliance with it, none of which have been fulfilled. …The pattern is sufficient to justify a healthy level of scepticism that [JAFL] can perform its obligations as funder to arrange security for costs and to fund pursuit of the stage two claims.”
  • It is noted however the security for costs solution arranged by JAFL and the Company is to be provided by leading individuals named above.
  • The approval of the Court and agreement of the defendants is required for the proposed security for costs solution to be effective.  The Company has not obtained a legal opinion on the whether the proposed solution would be approved by the Court but there is a risk that it will not be approved by the Court.
  • However, the $330,000 will not be invested until the proposed solution is approved.
  • As an investor your funds will be used to fund any required appeals to have the costs solution approved. If the solution is not approved you will lose part of your investment including funds used to pay for this offer and for any required appeals.
  • The appeals may further delay hearings in the FeltexClaim.

Conditional Investment by the Company in the proposed solution 

JAFL Litigation Funding Partners will contribute to the $1.65m Stage Two Guarantee Limited solution by paying a $330,000 underwriting fee out of its Collinson Crowdfunding platform cash raise.

This investment is conditional on:

  • the terms of the proposed guarantee being accepted by the Court
  • a minimum amount of $500,000 being raised by the Company for allotment to proceed
  • the first ranking priority of the repayment of the Company’s investment and the return on it being agreed by the respective NZ Co-funding parties

If the above conditions are not able to be met, funds raised under the Offer will be returned to investors (likely by way of capital repayment) less any costs incurred to that point. Refer to the table below and the notes.

The Company wishes to raise the $500,000 minimum capital under the offer by 10 July 2020. However, the Offer closing date has been extended to 30 September 2020 to enable that target (or a higher raise) to be  achieved.The offer may be closed earlier.

THIS TABLE UPDATES THE TABLES AT PAGES 8 & 16 OF THE OFFER and those tables should be read in conjunction with the table set out below

Use of funds – Updated for mid-case scenario

Tentative start date for use of funds – Post Crowd Funding – aiming for approximately 10 July 2020 but may be as long as 30 September 2020

Notes:

(1)   Proposed payment to Stage Two Guarantee Limited for provision by it of court ordered $1.65m security for costs for Stage 2 of the FeltexClaim on agreed terms.

(2)   The amount available for investment in litigation costs* ($70,000) and some of the working capital** ($50,000) may be applied if required to appeals. An unsuccessful appeal to the Court of Appeal is likely to cost about $100,000. This may reduce the amounts available for other investment and working capital.

If the agreement described in note 1 is not reached the Company will not invest in the proposed solution.

If the proposed solution is not accepted by the Court (including after any appeal) funds raised by the Offer and allotted will be returned to investors in the Offer less the Capital raising costs and the costs of any appeal (see note 2).

Risks and possible returns from providing the proposed solution 

Because of the additional risks described above, the return payable to the Company on success, out of FeltexClaim Resolution Sums, for providing this proposed solution has been increased from $330,000 to $660,000.

That $660,000 potential return on the proposed investment is payable to the Company out of first priority payments received to the extent the FeltexClaim is ultimately successful and achieves recovery for the Feltex IPO investors of at least 13cps of claim (71 million shares claimed for) plus interest and costs.

There is currently no agreement between all the funders now participating as to priorities to those claims.   Agreement in writing to establish that priority is required amongst Eric Houghton, his solicitor, the claimant committee, NZ Co-funders, the Company, Stage Two Guarantee Limited and JAFL, including any necessary confirmation of the priority of JAFL’s rights in which the Company now participates in return for the issue of three million of its shares. If such agreement is not reached the Company will not invest in the proposed solution. However the Company considers there is a high level of commonality amongst the entities involved and a common purpose.

JAFL advises the Company that under the JAFL Agreement it can bind JAFL’s overseas co-funders (HLIF LP) in order to deliver the proposed solution to satisfy the Orders for the benefit of both the FeltexClaimants and JAFL. This is because no rights flow to HLIF LP except through JAFL under the 2011 Investment Agreement between them. That Investment Agreement is subject to the JAFL Agreement. However there is a risk that HLIF LP will dispute these respective rights and the order of priorities settled as anticipated above, which may delay any return to investors.

If the proposed solution is not accepted by the Court (including after any appeal) funds raised by the Offer and allotted will be returned to investors in the Offer, less the Capital raising costs and any appeal costs.

The timeframe for any such returns remains uncertain. In the Offer, the expectation of timing for resolving the FeltexClaims at Stage Two has been described as at least by 31 March 2023.

Risk Warning:

There is a risk that you will lose some or all of your investment.  Any potential returns over and above your investment depend on a number of contingencies including that the FeltexClaim is ultimately successful and a significant number of claimants are awarded at least the Measurement of Loss damages* plus interest and costs. (*refer Appendix 1 for an explanation of Measurement of Loss damages)

Risk Warning:

The following financial information is based on a successful claim that results in significant damages awards to a significant number of Feltex investors, which is subject to a number of significant risks including:

  • The defendants are well-funded and are likely to appeal any adverse judgments.
  • Whether the claimants are entitled to any recovery is still to be determined and there is no guarantee that a Court will find in their favour.  The returns noted below are tentative and there is a risk they will not arise.
  • The claimants may not have sufficient funds to complete all aspects of the proceedings particularly if there are on-going appeals.
  • Key man risk, reflecting that Tony Gavigan is the key to the on-going appeal process.
  • As noted above, there are no fixed agreements among existing funders as to priority so there may be disputes and delays, and actual returns may be subject to the resolution of any disputes.

THIS TABLE UPDATES THE TABLE AT PAGE 22 OF THE OFFER and that table should be read in conjunction with the table set out below

Updated – Financial Information – Year 3 (Financial year ending 31 March 2023) 

By this stage, JAFL and the Company believe that the compensation from the FeltexClaim (if any) should be settled, having been through all possible appeals.  Assuming compensation is awarded to the Claimants, the Company currently believes enforcement against AIG should be straightforward as long as it remains solvent in New Zealand. Payment of its share of Resolution Sums to the Company and/or JAFL could result in the following gross cash flows within the next 3 years in the minimum and mid-case capital raising scenarios:

(Table continued on next page)

THIS TABLE UPDATES THE TABLE AT PAGE 22 OF THE OFFER and that table should be read in conjunction with the table set out below

Updated – Financial Information – Year 3 (Financial year ending 31 March 2023) 

Note: The pre-tax projections in the table above have been calculated based on the assumptions made as set out in the Offer as updated and based on the minimum and mid-case amounts of $500,000 and $1,000,000 respectively being raised by the initial Offer, and the issue of 3,000,000 shares to JAFL.  These projections do not take account of the impact on earnings per share of any shares being issued up to a total of 5,000,000  in the initial Offer, or in any subsequent Offer in the case of an oversubscription. The Offer closing date has been extended to allow further subscriptions.

The above table reflects the maximum amount that investors in the Offer may receive out of the Company’s investment in the Feltex Claim. This is achieved on Success, i.e. if the Court awards a minimum compensation of 13cps times 71 million shares of Feltex Claim plus estimated interest and costs (say, $23.4m, see Table below and in Appendix 4). The Company does not participate in any higher awards to the Feltex Claimants. There is a risk that no claims will be successful or the minimum compensation award will be less than 13cps plus interest in which case Investors will receive less than the full amount of the return in the table above.

FeltexClaims may not succeed in which case returns may be zero.

Remaining Variables in the Feltex Claim

The Supreme Court confirmed in 2018 that the forecast operating revenue for Feltex for the financial year ended 30 June 2004 (FY04) was an untrue statement and that the untrue statement was capable of causing loss. This established part of the claim but the investors also had to show that they had both (1) invested on the faith of the prospectus and (2) had suffered loss by reason of the untrue statement.  Those two elements are the subject of the Stage Two hearings for which the security for costs is required.

To succeed at the higher level of a full refund the claimants will have to prove that they would have reversed their investment decision had they known the true facts (see Appendix 1).

In both cases the claimants will seek to rely on expert evidence of Mr Greg Houston, an economist.  They will argue they would have inquired if they had known the truth and would not have bought or converted bonds into Feltex IPO shares worth less than $1.57. In a recent affidavit Greg Houston stated that, on the basis of a revenue shortfall of $9 million as at 2 June 2004 for the fourth quarter of FY04:

(a.)  The Measurement of Loss as defined by the Supreme Court decision [2018] NZSC 74 likely falls in the range of 13cps to 34cps, excluding interest since 2004.

(b.)  The upper bound Measurement of Loss is 53cps, excluding interest since 2004.

The lower bound 13cps would likely lead to investors in the Offer making a return.  However, both Mr. Houston’s evidence and his revised estimate of loss will have to be accepted by the Court and that is uncertain.

Risk Warning:

For investors in the Offer to receive any return they are relying on the Courts concluding (after all appeals) that the Feltex investors invested on the faith of the prospectus and suffered a loss by reason of the untrue statement.  There are still significant hurdles to that outcome including that the Court will have to accept and approve the expert evidence of the actual loss.  The defendants will likely vigorously dispute these matters.

Priority to any returns 

Any return is contingent on a successful outcome of the FeltexClaim.

Returns on its cash investment by the Company and returns on the guarantee provided by Stage Two Guarantee Limited will be paid with first priority out of Resolution Sums available to Houghton, the Houghton led claimants and JAFL.

It is a condition of the proposed cash investment by the Company in the FeltexClaim Stage Two that the ranking for the Company’s returns sits alongside the previously agreed first priority ranking agreed in 2019 amongst JAFL, FGL and the SCF funders.

This must be agreed with the Company in writing by them and other NZ Co-funders (refer above, and page 6 of the Offer), Eric Houghton, his solicitor, the Feltex claimant committee, Stage Two Guarantee Limited and JAFL. For the sake of completeness it is noted that HLIF LP will not be a party to the priority agreement upon which the offer is conditional; but it is intended that the effect of the priority agreement amongst the parties who have funded the Feltex Claim since 2016 will be that any dispute between JAFL and HLIF LP will not affect the returns to the Company on its existing and proposed investments in the Feltex Claim.

This is possible because HLIF LP has no rights except through JAFL and because the JAFL Agreement prevails over JAFL’s 2011 Investment Agreement with HLIP LP. However there is a risk that HLIF LP will dispute these respective rights and the order of priorities settled as anticipated above, which may delay any return to investors. If no suitable agreement as outlined above can be reached amongst the parties (excluding HLIF LP) the proposed investment will not proceed.

Obligation to confirm that claimants are funded for their stage two claims (Paragraph 92(b))

A condition that must be met by 13 July 2020 to avoid the FeltexClaim being struck out is that senior counsel for the claimants must confirm that, in his opinion, the claimants are adequately resourced to prepare for and present all aspects of their Stage Two claims.

The Company is relying in part on the proceeds of this capital raise. For this reason, Houghton has appealed the time constraints applied by the Orders and the Company has extended the closing date of the Offer to 30 September 2020, as a $500,000 minimum raise may not be sufficient. In addition, JAFL’s recently broadened FGL facility, net of reallocations to the Stage Two Guarantee solution, stands at $243,000 available for Stage Two court costs.  Other contributions to Stage Two costs may be needed by JAFL and other solutions may be devised. The Company has not yet confirmed with senior counsel whether those amounts and timelines will be sufficient to enable senior counsel to provide that confirmation.

Risk Warning:

  • The FeltexClaim will be struck out if senior counsel for the claimants cannot confirm that, in his opinion, the claimants are adequately resourced to prepare for and present all aspects of their stage two claims.
  • The Claimants have not verified that they have sufficient funds at this stage for senior counsel to provide that confirmation.
  • The Company does not yet have confirmation from senior counsel that he is able to provide that confirmation.
  • The success of the 92b solution required will be largely dependent on the level of support the updated Offer receives from Feltex Claimants and the public.
  • This position will be updated prior to any allotment.

Other matters

The amounts of potential returns to the Feltex Claimants in various Resolution scenarios are explained in more detail at Appendix 4 and are summarized in the table below.

The waterfall of priorities set out at pages 5 and 6 of the Offer, are discussed in further detail at Appendix 4, as are other matters.

Risk Warning:

This following financial information is based on the Court agreeing that investors suffered a recoverable loss and awarding them damages, which is subject to a number of significant risks including:

  • The defendants are well-funded and are likely to appeal any adverse judgments.
  • Whether the claimants are entitled to any recovery is still to be determined and there is no guarantee that a Court will find in their favour.  Accordingly, the returns noted below are tentative and there is a risk they will not arise.
  • The claimants may not have sufficient funds to complete all aspects of the proceedings particularly if there are on-going appeals.

For simplicity, in the table below gst is excluded, actual Project Costs are assumed to be $20m, success and management fees are rounded to 40%. The table sets out various scenarios based on the revised Measurement of Loss valuation range advised by Greg Houston. The right-hand column sets out the net end result for the FeltexClaimants per IPO share claimed. The column to the left of that sets out the total overall funders’ entitlements under the JAFL Agreement under each scenario.

The amounts in the Table above are not intended to be precise or legally binding on any party, they are indicative of the wide range of possible Resolution outcomes at Stage Two and under the JAFL Agreement. Refer to Appendix 1 & 4 below for a detailed discussion of possible outcomes. It is possible that the outcome of Stage Two will be that no compensation is awarded to any Feltex Claimants.

The amount estimated for interest in the table ( i.e. the same again) has been calculated as simple annual interest using rates prescribed by the Judicature Act from time to time since 2004. There is a risk the amount of interest payable will be disputed and that has been signaled by Credit Suisse’s lawyers.

To achieve a Stage Two compensation outcome of more than 53cps, for every Feltex IPO share they subscribed, claimants will have to prove at Stage Two, or as otherwise determined by the Court, that they would have reversed their investment decision had they known, for example, the findings of facts set out by the Supreme Court at its paragraph [263] copied below in Appendix 1.

The returns from investment in the Feltex Claim outlined in this updated offer will be achieved if the court awards compensation of the Greg Houston expert valuation minimum of 13cps times 71 million shares of Feltex Claim plus estimated interest and costs. The Company does not participate in any higher awards to the Feltex Claimants. There is a risk that no claims will be successful or the amount awarded is less than 13cps in which case Investors will not receive the full amount of the expected return.

Further updates will be provided as developments unfold and prior to any allotment.

For further information contact

JAFL Litigation Funding Partners Limited
Directors:
Tony Gavigan: 021 326 272
Logan Granger 027 283 8331

Appendix 1

Revised Valuation of Feltex loss caused by untrue statement about revenue – update

By way of background, the FeltexClaim was not commercially viable after the 2019 evidence admissibility rulings which excluded important evidence. Those rulings removed any expert valuation adjustment for a fully informed market reaction to revised future revenue expectations (about Feltex) as at 2 June 2004.

However, while stating that it was prevented from considering the arguments for admissibility of the original evidence at the current stage two interlocutory phase, [it can consider the appeal in due course] the Supreme Court clarification at [8] of its decision [2019] NZSC 148 dated 13 December 2019 repeated their [2018] NZSC 74,  15 August 2018 findings of fact including that:

[263] We accept that the FY05 sales revenue projection was not arrived at by adding a percentage increase to the FY04 forecast figure. In our view, however, this does not answer Mr Houghton’s point, which is that it was unrealistic, in light of the history of the company and in particular the bad results in January, February, April and May, to consider that Feltex could achieve the level of sales projected for FY05. 

This clarified a dispute with the Feltex Defendants throughout 2019 over whether or not those words were findings of fact. This in turn enabled the expert valuation evidence of Mr Houston to be revised. A summary of that valuation is at paragraph 30 of the decision. It concludes at:

30 (c) These conclusions indicate that the Feltex Carpets Limited shares allotted at $1.70 per share as at 2 June 2004 were worth between $1.17 and $1.57.

Risk Warning:

For investors in the Offer to receive any return they are relying on the Courts concluding (after all appeals) that the Feltex investors invested on the faith of the prospectus and suffered a loss by reason of the untrue statement.  There are still significant hurdles to that outcome including that the Court will have to accept and approve the expert evidence of the actual loss.  The defendants will vigorously dispute these matters.

Revised Measurement of Loss evidence – fair value of the Feltex Claim

The Supreme Court had already decided in 2018 that the Measurement of Loss basis applies if a claimant is unable to establish that he or she would have reversed their investment decision had they known the true Feltex revenue position as at 2 June 2004. As noted above, the May 22, 2020 decision records at [30] that Mr Houston deposed his revised upper bound Measurement of Loss at 53 cents per Feltex IPO share.

If none of the Feltex Claimants establish their entitlement to a full refund, based on their own evidence that they would have reversed their investment decision as at 2 June 2004, that basis will apply if Mr. Houston’s evidence prevails at say 53cps. In that case, the total Feltex Claims (in respect of 71m Feltex IPO shares) would total around $37.6m, plus interest since 2004, so around $75.2m in total, plus costs.

If the Court determines the Measurement of Loss falls in the middle of Mr Houston’s range (13cps to 53cps loss) i.e. 33cps the total amount of claim in that scenario would be reduced to $23.4m plus interest plus costs. At $46.8m plus costs the claim is still worth pursuing. Houghton’s actual legal costs since 2008 are around $20m.

Reversal of Investment Decision – full refund of subscription

Sir Paul Collins’ affidavit evidence recorded at [26] of the decision is that had he known of [Feltex’s] revenue performance he would not have invested in the Feltex IPO. His associated entities claim their total loss of $666,000 plus interest. The Company believes the situation of the non-trading entity is closely representative of several large claimants’ claims. They all lost around $1.22 per share net of mitigation.

Even if only half the claimants (by value) persuade the Court that they are entitled to the Supreme Court’s full refund remedy, claims will total around $61.5m plus interest plus costs (say $140m)  which will exceed the AIG/Chubb first defendant directors’ IPO and D&O insurance policies estimated at $90m. Judgment for liability is also sought against the Credit Suisse defendants.

Mr Houghton’s case is that no one pays $1.70 in a quarter of a billion dollar float for a share that would trade at $1.57 at best once the truth came out, let alone one that in the same Greg Houston expert valuation range might be worth only $1.17.

Nevertheless it is for the Court to determine whether it accepts the FeltexClaimants’ evidence. If their evidence is not accepted there may be low or no compensation paid under the Supreme Court ordered criteria.

Appendix 2

The decision of Justice Dobson 22 May 2020 – summary

[91] I accept that a case has been made out for striking out this proceeding. Given the length of its history and the number of interests affected by its determination, that is a regrettable outcome. However, in balancing the competing interests of justice as reflected for claimants and defendants, it is an outcome I am satisfied is warranted, subject to affording the claimants and their funder one last opportunity to perform.

[92] There will accordingly be a striking out of the proceeding on 14 July 2020,unless, by 13 July 2020: (a) security for costs for stage two in the sum of $1.65 million has been either lodged with the Registry of the Court or provided on other terms reasonably agreed to by the defendants and accepted by the Court by that date; and (b) senior counsel for the claimants has confirmed that, in his opinion, the claimants are adequately resourced to prepare for and present all aspects of their stage two claims. 

A full copy of the decision is available on the Offer website page at the Updates tab. The following notes and comments are made by reference to the paragraph references in the decision.

Discussion of the decision [by reference to its paragraphs] 

[56] & [93] Order for distribution of the decision

As ordered by paragraphs [56] and [93] of the decision the Company hereby makes available (including by email) a copy of this judgment to all those to whom the Crowdfunding Offer has been made.

[25] to [54] Complaints by defendants

Investors are directed to paragraphs [25] to [54] of the decision where the Feltex Claimants’ arguments and the Defendants complaints are both set out.

[55] & [56] Not the forum

The director defendants’ complaints are dealt with by Justice Dobson at [55] and [56] where he notes that the [May 11, 2020] hearing was not the forum in which to make any determinations on the standard of accuracy required of such crowd funding documents, given the informality and lack of more stringent requirements that the law contemplates should be permitted them. The complaints may have been overstated or misconceived. The Crowdfunding regime prescribes brevity over excessive information. Nevertheless, out of an abundance of caution, the following disclosure and comments in reply are noted.

[30] Revised Valuation evidence

The significance of the revised Greg Houston valuation of measure of loss following [2018] NZSC 74 and [2019] NZSC 148 is set out at para [30] and discussed in Appendix 1. If this evidence is accepted by the Court it will have turned the un-bankable admissible expert loss evidence, where only 7cps or 8cps of loss was left intact after the 2019 interlocutory evidence hearings, into bankable expert loss evidence (at 13cps to 53cps).

[45] & [46] Distribution of background material

As ordered earlier by the Court, a full recent history of the previously unsuccessful efforts by Eric Houghton and JAFL on behalf of the FeltexClaimants to meet the Court ordered security for costs [since the Feltex director defendants were found in 2018 to be in breach of the Securities Act 1978 and the Fair Trading Act 1986] had been emailed to Feltex Claimants and remains available on the Offer Documents tab on the Offer website page. The minutes are dated March 2, 2020. March 25, 2020 and April 8, 2020.

[48] Waterfall of entitlements

JAFL’s entitlements and the order of priority in which amounts are payable out of any Resolution Sums are set out on pages 5 and 6 of the Offer. It is disclosed that to the extent they are not resolved through the proposed security for costs solution and its agreed priorities, some entitlements as between JAFL and HLIF LP may be disputed. The waterfall is updated below at Appendix 4.

[49] Additional claimants to be heard at Stage Two

The decision at [86] makes extra hearing time available to hear additional claimants claims. The estimated time frame for resolving the Feltex claim is disclosed at pages 21 & 22 of the Offer as being up to 3 years.

[53] and [54] Proposed solutions

The concerns discussed are addressed by the proposed solutions to [92] (a) and (b) described above, and the updated tables above.

[86] Timing

The decision suggests at [86] a Stage 2 trial date of 27 October 2020 for a hearing of up to 6 weeks. The Company thinks that is unrealistic. The risks relating to that possible trial date include whether or not the Covid-19 Public Health Response Act 2020 will allow realistic attendance in person by the claimants overseas witnesses including www.HoustonKemp.com valuation expert Greg Houston, refer [30] of the decision. The directors of the Company and of JAFL have been advised this evidence cannot be given satisfactorily by VMR or similar video link. The defendants have had the advantage of the viva voce evidence of Professor Cornell’s “stage two” valuation evidence (heard at stage one). The Company believes the time of Covid-19 closed and constricted borders would be better used to provide an opportunity for pre-stage-two-trial loss expert and inter-party mediation.

Appendix 3

The Orders will result in a strike out on 14 July 2020 of the Feltex claims and any prospect of claimants receiving the [2018] NZSC 74 Supreme Court ordered compensation, unless the Orders are complied with.

Leading claimants, business people and professionals have committed in principle to underwrite the $1,650,000 Security for Costs required for Stage Two to proceed.Documentation of that underwrite through Stage Two Guarantee Limited (the Guarantor) is underway.

The level of security for costs to be provided by Stage Two Guarantee Limited will be capped at $1,650,000. In the Offer at Appendix A 10 (c) it contemplates a higher level of $2,580,000 as security for costs. The market cost of providing that additional guarantee (above the $1.65m level) cannot currently be justified.

The Guarantor was formed on 2 June, 2020 and it has not traded. Its directors are Craig Anderson, Tony Gavigan and Logan Granger.

Each of the proposed underwriter shareholders of the Guarantor will subscribe for their agreed share of the Guarantor’s guarantee.

The underwriter shareholders include:

  • Eric Houghton
  • IL and NA Hamilton
  • Sir Paul Collins’ Active Equity Holdings Limited
  • Anthony Walshe
  • Fore Golfers Limited (FGL)
  • Craig Anderson
  • Logan Granger
  • The Business Integrity Trust

JAFL Litigation Funding Partners Limited (the Company) will contribute $330,000 to the guarantee solution by paying a fee of that amount to the Guarantor.

In return for that proposed conditional investment in the costs of Stage Two of the Feltex Claim, as described on pages 8, 16 and 22 of the Offer, the Company will be entitled to earn a gross pre tax fee of $990,000 payable on Success from the first priority payments out of the Resolution Sums of the Feltex Claim.

In addition, on Success with the same priority from the same source an additional fee of $330,000 will be paid to Stage Two Guarantee Limited.

The structure described above delivers a cost saving to JAFL of $330,000 compared with the alternative Security for Costs solution of providing the entire $1,650,000 security for costs in cash.

Risk Warning:

The proposed security for costs solution is not guaranteed to be successful. Key risks include that:

  • There are currently no formalised commitments from the proposed shareholders of Stage Two Guarantee Limited.
  • The Court in the 22 May 2020 judgment expressed concerns about JAFL meeting costs orders noting “Since the security for costs order was made, there have been a number of assurances as to compliance with it, none of which have been fulfilled. …The pattern is sufficient to justify a healthy level of scepticism that [JAFL] can perform its obligations as funder to arrange security for costs and to fund pursuit of the stage two claims.
  • The approval of the Court and agreement of the defendants is required for the proposed solution to be effective.  The Company has not obtained a legal opinion on the whether the proposed solution would be approved by the Court but there is a risk that it will not be approved by the Court.
  • As an investor your funds will be used to fund any required appeals to have the costs solution approved. If the solution is not approved you will lose part of your investment including funds used to pay for this offer and for any required appeals.
  • If appeals are required this may further delay hearings on the main claim.

Appendix 4 

Other matters – Clarification of potential outcomes for Feltex Claimants

The minimum amount of total FeltexClaim required to be obtained in order for the Company to achieve the potential returns outlined above is about $60m including interest and costs. This would deliver realistion of both the existing investment in JAFL’s rights and the proposed new cash investment. At that level Feltex Claimants would receive about 30cps net compensation.

Risk Warning:

This following financial information is based on the Court agreeing that investors suffered a recoverable loss and awarding them damages, which is subject to a number of significant risks including:

  • The defendants are well-funded and are likely to appeal any adverse judgments.
  • Whether the claimants are entitled to any recovery is still to be determined and there is no guarantee that a Court will find in their favour.  Accordingly, the returns noted below are tentative and there is a real risk they will not arise.
  • The claimants may not have sufficient funds to complete all aspects of the proceedings particularly if there are on-going appeals.

If the estimated $90m insurance proceeds are recovered the net compensation to Feltex Claimants increases to about 56cps. If about another $90m of compensation is contributed by Credit Suisse, on top of the AIG/Chubb insurance proceeds, the Feltex claimants can recover their average loss of $1.43 per share. Credit Suisse made a USD100m (NZ$160m) profit on the Feltex IPO.

Past costs and the proposed new investment in the claim by the Company and Stage Two Guarantee Limited have to be repaid first out of any Resolution Sums – because most of that money has not been provided by the claimant group itself. It is recognized that all of the funding at the outset in 2007, and much since 2016, has been provided by some claimants who will be separately rewarded for taking that risk.

For simplicity, in the table below gst is excluded, actual Project Costs are assumed to be $20m, success and management fees are rounded to 40%.

The amounts in the Table above are not intended to be precise or legally binding on any party, they are indicative of the wide range of possible Resolution outcomes at Stage Two and under the JAFL Agreement. Refer to Appendix 1 above for a detailed discussion of possible outcomes. It is possible that the outcome of Stage Two will be that no compensation is awarded to any Feltex Claimants.

The amount estimated for interest in the table ( i.e. the same again) has been calculated as simple annual interest using rates prescribed by the Judicature Act from time to time since 2004. There is a risk the amount of interest payable will be less and or disputed and that has already been signaled by Credit Suisse’s lawyers.

To achieve a Stage Two compensation outcome of more than 53cps, for every Feltex IPO share they subscribed, claimants will have to prove at Stage Two, or as otherwise determined by the Court, that they would have reversed their investment decision had they known, for example, the findings of facts set out by the Supreme Court at its paragraph [263] copied above.

 

Warning Statement for crowd funding participants

Equity crowd funding is risky.  Issuers using this facility include new or rapidly growing ventures. Investment in these types of businesses is very speculative and carries high risks.

You may lose your entire investment, and must be in a position to bear this risk without undue hardship.

New Zealand law normally requires people who offer financial products to give information to investors before they invest. This requires those offering financial products to have disclosed information that is important for investors to make an informed decision.

The usual rules do not apply to offers by issuers using this facility. As a result, you may not be given all the information usually required. You will also have fewer other legal protections for this investment.

Ask questions, read all information given carefully, and seek independent financial advice before committing yourself.

Warning Statement for certain wholesale investors 

New Zealand law normally requires people who offer financial products to give information to investors before they invest. This requires those offering financial products to have disclosed information that is important for investors to make an informed decision.

The usual rules do not apply to this offer because there is an exclusion for offers where the amount invested upfront by the investor (plus any other investments the investor has already made in the financial products) is $750,000 or more. As a result of this exclusion, you may not receive a complete and balanced set of information. You will also have fewer other legal protections for this investment. Investments of this kind are not suitable for retail investors. 

Ask questions, read all documents carefully, and seek independent financial advice before committing yourself.

 

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