04 July 2022

High Court dismisses Du Val appeal against FMA direction order

The Financial Markets Authority (FMA) - Te Mana Tātai Hokohoko has welcomed a High Court ruling upholding an FMA direction order against property development and investment company Du Val, dismissing all Du Val’s grounds of appeal.

In October 2021 the FMA directed Du Val to remove advertising materials likely to mislead or deceive investors, considering they contravened ‘fair dealing’¹ provisions in the Financial Markets Conduct (FMC) Act. The FMA said the statements created the impression investing in financial products connected to property development was low risk when, in fact, property development, including associated finance, is inherently risky. The statements also claimed there were “no fees”, despite Du Val retaining any profit on projects above the return to investors. Du Val’s offers used the wholesale investor exclusion in the FMC Act.

In its appeal of the direction order, Du Val argued: the FMA failed to correctly identify the relevant class of ‘consumers’ (i.e. wholesale investors); wholesale investors are inherently more sophisticated than non-wholesale investors and are capable of evaluating the merits of an offer; and the FMA incorrectly determined Du Val’s right to retain any profits was a “performance-based fee”.

In his decision, Justice Ian Gault agreed with the FMA’s argument that the FMC Act was intended to protect all investors and there are varying degrees of sophistication and experience among wholesale investors, which means not all are inherently sophisticated.

“…I do not consider the FMA erred in law by declining to accept that wholesale investors are inherently more sophisticated than non-wholesale investors and are considered to be capable of evaluating the merits of an offer or accessing necessary information,” Justice Gault said.

The Judge also considered the FMA did not fail to identify the relevant class of investors. He noted the FMA’s arguments that mass media has the capacity to reach a wide audience and promoters should consider the characteristics of the actual audience that is likely to see the advertisement.

“Where the features or complexity of a product is such that it will only be appropriate for a limited group of people, promoters should do their best to ensure that the advertisement only targets that group and not a wider audience,” the Judge said.

Finally, regarding the ‘fee’, the Judge found that it is a question of fact of what “fee” means to potential investors and that it was available to the FMA to make the determination that the fees representations were misleading.

Paul Gregory, FMA Director of Investment Management, said: “We welcome this judgment, which recognises that the fair dealing provisions of the law are intended to protect all investors from misleading advertising. Wholesale offerors should pay close attention to this case and take care how they market and advertise to prospective investors.”

Du Val’s statements in question, detailed in the direction order, included:

  • representing the fund had “the best of both worlds”, with high security and high return and comparing it favourably to bank term deposits but without a balanced view of the risks; and
  • claiming there were “no fees” associated with the Mortgage Fund, despite the company retaining any profit on projects above the return to investors. The FMA concluded Du Val receiving 100% of all profits above the 10% fixed return to investors was effectively a performance-based fee and Du Val was not transparent about this.

The statements appeared at various times on Du Val’s website and social media channels.


Download High Court Judgment: Du Val v Financial Markets Authority

¹ The ‘fair dealing’ provisions in the FMC Act prohibit:

  • misleading or deceptive conduct, including conduct which is likely to mislead or deceive; and
  • false, misleading or unsubstantiated representations.

Media contacts:

Andrew Park
FMA Media Relations Manager
[email protected]
021 220 6770

Campbell Gibson
FMA Senior Adviser, Media Relations
[email protected]
021 945 323