‘Very lucrative business’: ASIC details broadening scope of fund investigations

The Shield Master Fund and First Guardian Master Fund scandals have, based on the latest numbers from the corporate regulator, impacted around 11,000 consumers with approximately $1.1 billion of funds invested.

However, this number could be set to soar, with Australian Securities and Investments Commission (ASIC) chair Joe Longo telling a parliamentary joint committee hearing into ASIC oversight that more funds are under investigation.

“I regret to inform the committee that it’s even more than that, because there’s a range of funds that we’re looking at, a range of investigations we’re looking at, and the number of investors that have been affected by this conduct, I would have thought, is closer to 25 or 30 thousand,” Longo said on Thursday.

In his opening address, the chair signalled that more enforcement action is on the way, stating it is “not just possible, it is increasingly likely”.

“We have cancelled the AFS licence of MWL Financial Services, and taken Ferras Merhi to court over his conduct, we have been in court more than 40 times already, executed search warrants, frozen assets and cancelled the licenses of advisers,” Longo said.

He added: “Our investigations into these high-risk super investment matters are complex and ongoing,” he said.

“They include numerous lines of inquiry and a large number of entities and individuals, including lead generators, financial advisers, advice licensees, superannuation trustees, the research house, auditors and the managed investment schemes.

“While our first priority has been preserving assets for the benefit of investors, the next phase will be about holding key players to account.”

‘Lawyered up’ roadblocks

Chief among the issues holding back ASIC’s investigations, according to Longo, is that the scale of misconduct has been a “very lucrative business”.

“A lot of the individuals – well all of the individuals and businesses – they’ve all made a lot of money. They’re well-resourced,” he told the committee.

“They’re all lawyered up, there’s not a lot of co-operation here.”

Deputy chair Sarah Court, also speaking at the committee hearing, said there are real concerns about the transitioning of a lead generation call to include a financial adviser

“This is where there is an issue in terms of, this is illegal for there to be cookie-cutter, perfunctory financial advice, but these are licensed financial advisers that are advising the superannuation member to move their super from one of the funds,” Court said.

“One of the myriad things we have been doing is banning and investigating. In fact, I think we had a paper at one of our commission meetings yesterday where there are 140 individuals that we are in the process of looking at.

“Twenty of those have already had court action, 50 of them are current investigations, and 70 more we have on the list.”

She added: “These are licensed financial advisers.”

Trustees under fire

Given the broadening scope of the already massive investor impact, it is unsurprising that that the corporate regulator aims to establish clear boundaries for super fund trustee due diligence requirements when adding funds to their platforms.

Court said that, in ASIC’s view, trustees owe members a “range of duties”.

“We are of the view that the trustees may have failed in those duties,” Court said.

“We’ve taken court proceedings in the last few weeks against one of those trustees, Equity Trustees, and we are alleging that it has breached the duties that it owed as a superannuation trustee to those people that were able to invest through its platform or the platform it made accessible.

“That matter is before the court and being defended, but we are of the view that the trustees have an obligation to protect the members’ funds and act in the members’ best interests.”

The proceedings against Equity Trustees, which ASIC launched late last month, relate specifically to its inclusion of Shield on super platforms it hosted.

Longo explained that while the obligations on trustees are all established in legislation, “they’ve never been tested”.

“In the proceedings that we’ve already commenced, and there may well be more proceedings coming, we’re testing the standards of diligence that the superannuation trustee has to discharge before putting anything on their platform,” the chair explained.

“The trustee can’t be putting products there that aren’t suitable.”

ASIC executive director of enforcement, Chris Savundra, told the committee that the regulator’s concerns, as far as they relate to super trustees, are not related to the misappropriation or misuse of investor funds alleged against Shield and First Guardian’s responsible entities, but the lack of adequate risk assessment.

“What we say is these funds had no track record, the individuals had no track records, so they were high risk,” Savundra said.

“The assets were illiquid, high-risk. So looking at it through that risk lens, the assessment should have been done.

“I don’t believe trustees were not putting Shield or First Guardian on their platform because they were aware that investor funds were being misused or misappropriated, and to my knowledge, no trustee raised those concerns with us. Those were ascertained through our investigative work.”

Court also noted that the different segments of the chain involved in the collapse are all blaming each other.

“We are certainly investigating at least one of the ratings houses that we are concerned had the Shield Master Fund rated as of investment grade or words to that effect, and indeed, one of the challenges with these matters is that in a sense, everyone is pointing fingers at everyone else,” she said.

“For example, the financial advisers are saying to us, ‘well look, you can’t hold us accountable for this ASIC, because the ratings house had rated these funds, or at least the Shield Master Fund, as of investment grade. Super fund trustees are telling us the same thing, saying ‘well we relied on the ratings houses’ or ‘we relied on the fact that these members had financial advice’.

“So one of the challenges here is trying to pull all of this apart and work out where does liability lie. Our own view is that significant failures and likely contraventions of the law, certainly ones that we are proposing to take forward, in every link of this long chain.”