Rodney Hide has put enormous energy into implementing Labour's plan to centralise government of Auckland.

Will he feel it was worth it if the result of all that effort and political capital expended could be the imposition on the whole region of the 'precautionary principle' kind of rule exhibited in the ARC's bob-each-way decision to preserve an ugly old shed on their waterfront. 

Once it was decided to proceed with the left's cunning plan, National did very well to label Rodney with the responsibility.  If the demographics mean the structure is persistently dominated by the left's non-acheiver people and culture, making it monolithic leaves no localities free of their rule. They'll have the "rich prick" areas to tax to pay for their re-election bribes to the gullible voters who'll keep them in power.

One of my reasons for being glad that Kerry Prendergast is standing again in Wellington, is her conversion from enthusiasm for a monolithic Wellington region local government, back to sticking with the devil we know. At least some areas can be comparatively well governed while others suffer. And the comparisons can be instructive.

Auckland will soon lose that prospect of comparison. 

This was in draft as a brief law book review. I got distracted when criminal prosecutions were announced today of Vance Arkinstall and Rick Bettle among others, alleging misleading statements in the prospectuses and advertisements of Dominion Finance Ltd.

Vance was a longserving Chief Executive of ISI, the insurance and savings industry peak body.

Rick Bettle was a revered chief executive of Wrightson (before my time on the board of that company) and has since been one of the country's most highly regarded company directors. He has been a trusted government entity chair (TAB, Civil Aviation and Capital and Coast Health) and presided over the Institute of Directors In New Zealand.

What happens to the law, to the confidence of New Zealanders in the probity of our commercial leaders, and to the enforcement bodies when such people spend years in criminal proceedings?

They may be guilty as charged. They may be able to refute the prosecution claims conclusively, as all based on hindsight. They may escape on technicalities. Some may show that even due diligence did not reveal that the statements were incorrect. Others may fail  though they were equally unaware of the mistatements, because they have not kept a backcovering paper trail of diligence, even if they were in fact sensibly diligent. The cases may reveal a pattern of wishful thinking. They may instead show calculated risk-taking with the highest of motives, accepting personal exposure in the not foolish hope that continued confidence  would let the company trade through and avoid crystallizing the losses that are now certain.

I know nothing either way in this case. But  I do know one thing – these prosecutions and others like them could be seen in years to come as a watershed for our company  and securities law, and for respect for the law.  Which way that goes could in turn have more influence than all Bill English's tax changes, or Rodney Hide's red tape scissors, on whether we regain an enterprise culture, investing our own money productively in risky businesses,  or instead continuing to rely  on banks borrowing foreigners' money to fund our idleness..

The deterrent of the prosecutions could see the birth of  impeccable candour among company directors, ushering in a new age in which fear of prosecution makes it  possible to take at face value nearly all public commercial discourse, assuming statements have been checked to exhaustion for possibly misleading inferences. The resulting public confidence will see a flood or renewed saving and direct  investment by the newly trusting "mums and dads".

Or we could be watching a dramatic acceleration of the great decline in  opportunities for direct public investment, as promoters directors and major shareholders decide that the compliance costs (and risks) of public offering far outweigh any lowered costs of capital. On that scenario there will be little that the NZX can do to reverse its decline in significance. The power and revenue of private equity and other "wholesale" market intermediaries will surge, and whatever their 'financial literacy' or newly refreshed trust, for "kiwi mums and dads" there will be declining choice for direct investment.

This is not an attack on the Commission for these prosecutions. They may have been left with no choice but to pursue many of these cases, by rank culpability, or by the way the law is framed. I've long urged more enforcement and less fiddling with the rules. But the rules that need enforcement are the rules against fraudsters, against dishonesty. I hope the Commission is not deciding that the need to look tough justifies chasing people they do not suspect of genuine fraud, just because the regulations have redefined 'fraud' with strict liability for mistakes that had no dishonest intention.

I should have posted on this earlier when David Jackson, an eminent accountant, had to resign from the Securities Commission when the Commission launched  'civil proceedings' (essentially criminal prosecution-lite) against him and other directors of Nuplex. Or even earlier when John Hagen, with whom I sat on the Securities Commission began his ordeal under criminal law as a director of Feltex.

I do not know Jackson. But from what I know of the others they could never have imagined the liabilities they now face. Nor could many others who've worked with them and believe them to be honest and honourable. John Hagen put thousands of essentially volunteer hours into upholding standards of probity in the securities industry as an auditor, as a leader in his firm, and as a Securities Commissioner.

My fear is that as these cases wind on we will create a self fuelled spiral of decline in trust and the expectation of being law abiding, that are among our cultural treasures and competitive advantages.

What can protect ordinary investors from confusion and cynicism as they see commercial leaders in the dock (who can you trust?).

At the same time, even if the prosecutions are justified in law I foresee a tacit consensus emerging among business people that the law is deeply unfair if it targets people they believe to be decent and honest while politicians (and their own employees) are sheltered by other laws, for deceit, and theft and gross derelictions of duty. They will decide that securities law is written by cynical hypocrites who care only about appearances, not substance, and that it is enforced by morons. If that view takes root there will be a consensus like that already abroad about tax avoidance (and the tradesman cash economy). When enough people find justifications for  ignoring or evading the law you eventually get Italian style corruption. The "consensus of merchants" lies at the heart of our commercial morality. We generally trust that people will do their duty and what they say they will do. How long can that  expectation last when people see the law colliding with morality in yet another sphere (it is already mocked in employment law, and in welfare entitlements).

For two decades we have been writing aspirational slogans into securities law (and employment law ) instead of trying to confine it to what honest people do in practice. We are now reaping the consequences – regulators bound to enforce these aspirational statements against people who are not crooks. If they do not enforce, however unreasonable the law, the authorities will feed mistrust themselves for failing in their duties.

Even if those charged are convicted most of the market insiders will continue to regard the convicts as decent people, and some of them will remain leaders. People will not bother with niceties of reasoning. They'll simply decide "if even he/she is now a target, I could be too – best stay out of the territory, or do whatever it takes to make sure the authorities get no traction with me".

I have worried for years about the  potential costs of  law made by people who think it is enough to recite noble objectives, It is no consolation that at least one of the current targets regarded me as over-anxious.

And so, eventually I get back to the book review. Directors Duties and Powers is by Professor Peter Watts. He is one of the very few commercial law academics (here and overseas) with enough appreciation of the elements of the rule of law, and its fragility, to publish his  concerns about the trend to feelgood law (including self indulgent judgemade law). He has warned that eventually it could be an own goal.

For a flavour of his iconoclasm, here's his explanation for ignoring the fashionable topic of "governance".

"This is NOT a book on what has come to be called "corporate governance". ….If most companies, or most companies of a certain type, come to adopt a governance practice, it is usually not long before someone argues that directors are legally negligent if they have not conformed to the practice. Courts and legislatures need however to be vigilant on this score. It is not always necessary to integrate the ideal into the floor of duties, which is what the law should concern itself with. Many corporate governance ideas are the brainwaves of strong advocates, who like nothing better than to see their latest strictures turned into binding laws. All such notions and practices should be viewed with considerable scepticism by judges and legislators before being made compulsory…."

I'm not sure whether non-lawyers will appreciate the strength in that  delicate warning.

Peter was one of the best junior lawyers I've had the privilege to work with. He richly deserves the Legal Research Foundation's JF Northey Memorial Book Award for this book. I invited myself to the launch when I was unexpectedly free in Auckland at the right time last year. I should have thanked Peter before now by promoting his excellent work.

But for practical purposes, much of this scholarship will count as nothing if the dominant driver for  directors becomes fear of strict, crude and politically defined criminal liability, not the carefully balanced duties evolved over thousands of cases by the judges who oversaw the heyday of Anglo-Saxon capitalism.

If the US closes down our 1080 source I suppose we'll start getting it from China, because they'll make it if there is demand. It would be too rational for New Zealand to think of making the stuff for the world even though we reportedly use 90% of what is made. 

A season after I finally gave up on 10 years' opposition and allowed aerial application of 1080 with EPRO's deer repellent, my land had more birds and rich bush growth than I'd ever known.

I found no dead deer or cattle (though there were wild cows and calves in the area) but it did kill feral sheep (I found 14 carcasses).

Two years later there are still more birds than we had before. I've just had another TB testing round with no reactors on my place.  All my neighbours have suffered the restrictions of TB movement controls. I want to stay clear.

.

I hope some enterprising journalist tracks down our Professor Flynn in Dunedin to get his views on the report just noted in the Economist, that links average country IQs with their ranking for the  prevalence of infectious diseases.

"A rise in intelligence over the decades has already been noticed in rich countries. It is called the Flynn effect after James Flynn, who discovered it. Its cause, however, has been mysterious—until now".

The report summarises the findings:

"At the bottom of the average-intelligence list is Equatorial Guinea, followed by St Lucia. Cameroon, Mozambique and Gabon tie at third from bottom. These countries also have among the highest burden of infectious diseases. At the top of the list of countries with the highest average intelligence is Singapore, followed by South Korea. China and Japan tie in third place. These countries all have relatively low levels of disease. America, Britain and a number of European countries, follow behind the leaders. A list of the countries included in the study can be found at: www.economist.com/science-technology"

I'm puzzled by the indication that China has low disease prevalence. If it is indeed comparable with the wealthy west that is a phenomenal acheivement, given their relative poverty, population density, and the use of human dung as fertiliser.

The Senate confirmation hearings for Supreme Court nominee Elena Kagan are underway. The appointment of the former Dean of Harvard Law School may not be quite the foregone conclusion assumed a couple of months ago. Some Republican Senators seem to be winding themselves up for a filibuster.

Without fireworks the hearings are not attracting much attention, but they are prompting a vigorous revival of argument about "judicial activism". Ann Coulter puts the view from the right pithily:

"Congress, as the people's elected representatives, is supposed to "get things done." If they don't, that usually means the people don't want those things done. It's not the court's job to say: "Hey, Congress, you forgot to enact this! Don't worry, we'll take care of it." But liberals see the Supreme Court as their backup legislature, giving them all the laws Democrats can't pass themselves because they'd be voted out of office if they did."

Kagan's 5 years in Clinton's team, and hostility to military recruitment at Harvard are under the spotlight, along with concerns about her lack of law practice and judicial experience. The unseemly debate over whether she is lesbian is unlikely to revive in the Senate Committee but conscientious senators are worried about her position on judicial activism. Her support is substantially based on success as Dean of Harvard Law School. She has never been a judge and apparently has not written much of rigor.

She's struggling to point to anything showing much respect for the duty to maintain certainty and predictability in law. Former Attorney General Edwin Meese summed it up for conservatives long before the hearings as follows:

"Though Ms. Kagan has not written extensively on the role of a judge, the little she has written is troubling. In a law review article, she expressed agreement with the idea that the Court primarily exists to look out for the "despised and disadvantaged." The problem with this view—which sounds remarkably similar to President Obama's frequent appeals to judges ruling on grounds other than law–is that it allows judges to favor whichever particular client they view as "despised and disadvantaged."

Our recent experience of a Law School Dean in high constutional legal office is not encouraging. In my view former Waikato Dean Margaret Wilson could hardly have a worse legacy as Attorney General and Associate Minister of Justice.

We got a relationships property law that penalises separated mothers with children and lonely old people and compulsorily attaches the property consequences of marriage to many others who have precisely the opposite intention by not marrying.

We lost access to the Privy Council, one of the world's most highly regarded judiciaries. I guess it would have cost New Zealand no more than $5m per year (all  costs including lawyer travel) for the dozen or so cases a year that went to the Privy Council.

The standard view is that three hearing levels are needed to achieve reasonable appeal reliability. A well functioning judiciary is reversed in about one third of appeals at each level. 12 cases per year was a high normal frequency of appeal to the third level from our size population (comparing ourselves with Austraila, the UK, Canada).

We now have around three times that number going to the third level. The court was "designed" to hear up to 50 full cases per year.

The cost could be readily calculated accurately, but guesstimates will be close enough to highlight the point  – we are now paying between five and ten times the previous cost with no noticeable increase in the certainty or predictability of our law, or any public increase in confidence in the judiciary.

The interest, maintenance and depreciation costs for our Supreme Court's ugly home alone may be more than $10m. There will be salary and operating costs of say another $4m.  And assuming conservatively that it costs each side an average of $150k to take a case to the Supreme Court the increase in the number of cases going past the Court of Appeal takes the private cost to say $12m. The total of $26m can be compared with the guesstimate of $5m as the total cost of Privy Council access used during the debate over abolition of our right to go there.

But the worst result of our new arrangements is the inability reassure people that decisions are not overly influenced by chumminess between judges and counsel and litigants. That problem was at the heart of my efforts to force a rethink while Wilson's Bill was going through.

My worst fears have been justified. Just this week I was sent by an intelligent businessman his argument to the court for a rehearing in circumstances that to him reeked of the influence of personal friendships or undue respect between Supreme Court judges and counsel. Though I doubt that he is right, I can not be sure, and there is nothing I can say that will reassure him that his case has been considered dispassionately.

And we have yet to experience our first controversial appointment, after which there will be permanent suspicion of political agendas on the Court.

Interesting to learn that GPG directors can enforce boardroom solidarity by sacking a fellow director, or so Sir Ron Brierley says in the 28 June statement announcing Tony Gibbs' sacking:

"Following careful consideration of these matters, the Board has today resolved, in accordance with Article 97(e), to terminate the appointment of Mr Gibbs as an Executive Director and has further resolved, that his office as a Director of Guinness Peat Group plc be vacated. Consequently, Mr Gibbs has ceased to be a Director of the company."

However merited Gibbs' revolt, the way in which he delivered the news of his disagreement with the Board decisions breached strong conventions. In New Zealand his fellow directors would have at least asked him to resign. But I'm not aware of public companies here which would allow directors to do the sacking. It is for shareholders to sack a steward they have appointed  to govern their company.

Still, GPG has always presented as if it was the directors' company and we the other shareholders were invited along for the ride. For a long while that worked well. Once they've fallen to fighting, we shall see.

Solidarity conventions are based on sound intuitions. Searching argument internally, then external solidarity around the majority decision pays off more reliably than the alternatives, despite the risks of group-think and the passionate rightness of dissent on some occasions.

At first glance the MED discussion document (released yesterday evening) is well pitched to produce some practical reform. It poses sensible questions and does not make the mistake of assuming too much (other than the irritatingly frequent shorthand use of the term 'regulation' as if it is a self-evident good, without distinction according to purpose).

But it would have had more credibility as a first principles analysis if it had suggested, or at least asked about, suspension of the implementation of the morass of occupational regulation coming in this year for the benefit of those who will be left in the financial advisory industry (to the disadvantage of most investors) with damage to 'financial literacy' generally. I've been working my way for a client through the Financial Service Providers Act 2008 and the raft of patch-up and supplementary law (including the woeful 'pre-implementation adjustments" Bill on whichthe Select Committee reported on 11 June).  An ill considered mess is well down the tracks without any cost/benefit calculation I can find.

Why has there been so little attention to the potential costs of the new compulsory dispute resolution processes? They are not permitted to include any contraints or disincentives to baseless complaining. Costs will fall across providers and their customers generally.

And though the Securities Law discussion paper has useful description of issues to be considered in bulking up the FMA's enforcement role, it does not ask the  fundamental question – whether the benefits from a fat and now grotesquely costly superstructure of specialist securities regulation outweigh those costs, in comparison to spending the same or a lesser amount ensuring speedy, economical and effective enforcement of laws against dishonesty  of general application (i.e. not confined to 'securities' ).

To restore practical strength to laws against dishonesty could do more for New Zealand than fiddling with the lawyer wealth scheme that is what securities law has become. It would need court reform and changes to rules that protect fraudsters from exposure, and structures that shelter their ill-gotten gains. Requiring orders for  full recovery of legal costs (risk adjusted) from losers might help. Such a genuine reform would have lower risks of unintended consequence.

I'll be studying carefully  for unintended consequences those sections of the paper proposing new supervision of 'collective investment schemes'. Companies are proposed for inclusion as such. The limited liability company form has been refined for over 150 years. Such cultural taonga are always at risk from faddish remedies touted with the best of intentions.  Enthusiasts for change sometimes have little understanding of why their taonga works, and why it looks like it does. The paper sensibly appears agnostic in this area.

Businesses, and business organisations in particular, should mark 20 August as the closing date for submissions on this paper. Thoughtful input will be important.

I hope the Securities Commission knew what they were doing when they asked the Minister to inflict statutory management on Alan Hubbard and his wife.

Watching TV One coverage yesterday evening was very sad – especially the Timaru Herald headline :Hubbard in Fraud Probe".

If the Hubbards are indeed solvent and the problem is just a paperwork muddle, those who have brought down headlines like that on Mr Hubbard should feel ashamed of themselves. There is law that can sort out that kind of thing without calling in the SFO.

If  the government has seen fire in the smoke we shall know in due course, but it was not reassuring to have the Minister solemnly citing an investor's complaint that he had not had an investment statement as the trigger for all this. Diddums.

We've got a major securities law refview underway partly prompted by dawning recogntion of the uselessness of investment statements and much else of the paraphenalia of offering law. I wonder how long that investor had been investing with Hubbard without investment statements?

Nor did it seem necessarily germane to me that there are related party loans from Aorangi to the Hubbards and their businesses.

I thought that related party investment was exactly what most of those investors wanted. They wanted their money alongside Alan Hubbard's, in his businesses, because he was so successful.

Normally I would be with Bryan Gaynor in deploring related party lending. Usually it is a breach of the expectations of investors. In this case it was the whole point, from what I've heard from South Island friends.

Once again the Hon Judith Collins, Minister of Police has the courage to say what few in authority have been willing to say for some years. This time her simple determination – that the Police should not back off for fear of causing offenders to crash if they flee at high speed –  highlights the contrast with her predecessors. She did not say "good riddance" but she was clear:

 . "Police are not going to stand by and let dangerous drivers take over the roads and put innocent people's lives at risk."
Ms Collins says reviews have suggested the pursuits policy be fine tuned but she believes that in general, the policy is very sound. "

The DomPost this morning quoted Police Association President Greg O'Connor saying "There's a generation growing up that know that if they drive fast enough, police will be forced to pull out. You're actually, perversely, making the roads more dangerous."

Sadly, politically correct Commissioners and the IPCA and coroners have created that generation. There is nothing wrong with having internal rules to limit pointless speed chases when there are other ways to apprehend people. Innocent people are killed in chases. But the best way to prevent them is likely to be minimising the number of chases by near certainty that they will not pay for the offender, not by micromanaging Police conduct to the point where there is a good chance they will be ineffective.

It will take some years now of obvious determination by the Police to ensure that bolting at high speed does not pay, to rebuild the folk lore knowledge that it is simply not worth trying to outrun the Police.

There may be safer ways to pursue fleeing wrongdoers. David Farrar mentions helicopters. They are too expensive for much routine work, but the time must be coming when unmanned flying camera technology will be cost effective.

Whatever is used there must be a determination throughout the criminal justice system to ensure that rules mean what they say. The current situation is another illustration of the common experience – that soggy minds with the best intentions can be the greatest cause of tragic unintended consequences. The worst policy in this area is to leave open a reasonable prospect of a successful gamble by offenders. We know they have a higher propensity to gamble than non-offenders.

The kindest law is not the one that "treats each situation on its merits". It is probably the one that seems the toughest with the least incentive to gamble.

The Corporations (Investigation and Management) Act 1989 was controversial when it was passed. 

The powers conferred were so sweeping (including suspension of the rights of secured creditors) that there were concerns it could increase the risk premium for lending in and to New Zealand. The sparing use of it since has largely reassured markets, so much so that few would have remembered the early fears. It was passed when New Zealand was feeling particularly humble in the gloomy after party debris of our de-regulation boom, and before the lordly Australians realised that they had corporate cowboys and looters whose falls from grace were even more spectacular.

But I doubt that any of us who analysed it back then would have expected to see [wealthy?] individuals going unwlllingly into statutory management. 

'Corporation' is defined for the purposes of that Act to mean "a body of persons, whether incorporated or not, and whether incorporated or established in New Zealand or elsewhere" .

 The Act gave the power from the start to bring associated persons within the controlled net.  I suppose if one thinks it OK to have a precautionary power to supersede ordinary insolvency and receivership law by decree, there is no particular reason to stop it at genuine "bodies of persons". Individuals too can be so wealthy or have such tentacles that their financial downfall can affect people just as a corporate collapse can. But this law is now being applied in circumstances far from those cited in the speeches of Sir Geoffrey Palmer and others who pushed it through. It was considered necessary  to bring order to collapses large enough to shake the economy – what we'd now all recognise as systemic risks.  The collapse of Hubbard, now that South Canterbury Finance seems to have been insulated from it, is spectacular but hardly a matter of systemic risk.

To apply statutory management in the interests of some charitable trusts and $88m worth of lending seems a long step from what the promoters of this law said they were doing. This is power creep on a grand scale, however useful it may be in the particular circumstances.  I take it to have been used for proper motives. But the powers are so wide and open to political misuse, that this is not a favourable sign.

Alan Hubbard may be grateful for at least one feature of the law.  The hasty drafting in 1989 leaves the statutory managers with an unresolved conflict of interests. Company law and insolvency law usually establish and respect a hierarchy of claimants. At the top are secured and preferential creditors (including IRD and employees). After them come unsecured creditors. Equity holders (members) rank last, as they should. They have the highest risk investment, and their interests should be sacrificed if necessary to help ensure that the higher ranking "stakeholders" get their contractual entitilements. 

Confusingly sections 4 and 5 of the Act state the purposes in terms that treat creditors, members and beneficiaries as if they are all equally deserving of protection. Section 41 confirms the clanger in the statement of what the statutory managers must consider in the exercise of their powers.  This flaw has caused managers deep concern in the past.  It should have been fixed with a simple amendment to confirm that they can discriminate in accordance with the normal hierarchy without liability to anyone.

For Mr and Mrs Hubbard however, it could be a comfort. The managers will have to be aware that if they take a course that might put priority say on prompt realisation, against the risk of further deterioration in property prices (bearing in mind for example Bernard Hickey's bearish expectations for property price (latest –  more falls))  they may be sacrificing the equity stakeholders' prospects of recovery. 

Decisions will be subject to judicial review. A manager is protected by Crown indemnity (section 63) for a good faith exercise of power , but such a draconian law should have been tidied up long ago.

This law is also now a sitting temptation for regulators and a snare for politicians. Even if the ordinary law could handle a situation like this (which might be problematic in the particular circumstances of a mix of trusts and companies and individual affairs) this case could foster cries for "decisive action" from the State in any high profile collapse.  It might be hard for a MInister to answer the question – "why not us?" from the creditors of the next high profile collapser.

Sooner or later sound insolvency law will be damaged.