Missed red flags: Why warnings on Shield and First Guardian went unheeded

Late on Friday, ASIC escalated its enforcement action against former Venture Egg boss Ferras Merhi, alleging he ran an “unconscionable” advice model that channelled investors into high-risk funds while raking in millions.

It’s the kind of action regulators like to trumpet. But for anyone watching the saga of Shield and First Guardian, the more pressing question is: why did it take so long?

Emails and reports obtained and publicised by 7’s Spotlight on Sunday show that warnings went to ASIC years before the regulator took meaningful action.

Paul Chiodo, a director of Shield’s responsible entity, flagged suspicious activity inside First Guardian as early as March 2022, while Financial Advice Association says it facilitated reports to ASIC in 2023 after advisers saw cookie-cutter advice steering clients toward these funds.

And yet, nothing significant happened for months.

Senator Andrew Bragg, long a critic of ASIC, didn’t mince words on Spotlight, saying: “They were warned back in October 2023 from a very reputable financial services company that there was massive malfeasance here. They took almost a year to announce a proper full investigation.”

Meanwhile, clients were allegedly funnelling hundreds of millions into First Guardian and Shield – $296 million and $230 million respectively – based on advice that ASIC now says was conflicted, defective, and unconscionable.

ASIC’s defence: It’s complicated

Deputy chair Sarah Court told Spotlight that the matters are among the most complex ASIC has ever investigated.

She explained that as far as she is aware, when concerns were first raised, they were framed around cold-calling practices.

“It was very much coming to us in that context that these were cold callers, potentially unlicensed, and that there might be financial advising issues here,” she said. “The issues were about advisers giving perfunctory or cookie cutter advice … First Guardian may have been one of those funds.”

Court also cast doubt on Paul Chiodo’s credibility, saying: “I would be a little wary about allegations by Mr Chiodo, who was at the very heart, in our view, of a big portion of this misconduct.”

But Chiodo was not the only one to raise red flags.

Despite this, it was only after First Guardian announced a ‘restructure’ last year that ASIC launched a formal investigation, at which point the scale of the misconduct began to emerge.

“These matters… you pull a piece of string, and there is more and more misconduct, more and more entities, more and more individuals involved,” she said.

Asked if ASIC’s response was “too little, too late”, a spokesperson insisted the regulator had to thoroughly investigate before taking action.

“ASIC has undertaken extensive work on these matters and has acted on the available information,” the spokesperson said.

“This is work is complex, and we need to carefully investigate the operation of managed investment schemes before we decide what action to take in a way that does not precipitate investor losses.”

That explanation will ring hollow for anyone who sees early warnings ignored. Complexity might slow investigations, but it doesn’t absolve the regulator of delay – especially when hundreds of millions of dollars are at stake.

ASIC may be moving now, but the delay leaves a stain. Investors want answers not just about Merhi, but about the regulator itself: why did warnings potentially sit on a desk for years while clients’ superannuation was at risk?

Court acknowledges the tension. “These are fair questions for investors to ask,” she said on Spotlight. But until ASIC explains how it filters warnings, acts on tips, and prioritises cases, the question won’t go away.

As the courts prepare to hear expanded proceedings against Merhi, one thing is clear: this isn’t just a story about bad advice. It’s a story about a regulator under pressure, and about millions of Australians wondering whether the corporate cop was asleep at the wheel.