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Chapter 2
The structure, operation and collapse of Trio Capital
Introduction
2.1
One of the key tasks before the committee in conducting this inquiry is
to detail, publicly and systematically, the operation of Trio Capital and the
events that led to its collapse. This chapter addresses that task. It is
divided into five parts:
-
the first looks at the structure and operation of Trio Capital,
particularly the two fraudulent investments schemes for which Trio was the
responsible entity;
- the second part focuses on the role of Mr Shawn Richard and Mr
Jack Flader in orchestrating the Trio Capital fraud;
- part three notes the role of financial advisers in recommending
the fraudulent Trio funds to investors, and raises the question of whether
these investments were suitable for the type of investors;
- part four looks at how the Trio Capital fraud was uncovered and
the response of the regulators, the Australian Securities and Investments Commission
(ASIC) and the Australian Prudential Regulatory Authority (APRA); and
- the final part of the chapter presents a chronology of the events
in the Trio Capital story from 2003 to 2012. This timeline serves as a useful
point of reference to recap the evidence of the chapter and to guide the reader
through subsequent chapters.
The structure and operation of Trio Capital
2.2
The structure and operation of Trio Capital form a complex story. Over
time, the names of holding and subsidiary companies changed, the operation of
these companies traversed international jurisdictions, and there was
considerable cross investment between superannuation funds which included
complex investments in property development companies and overseas hedge funds.[1]
All these factors complicate a clear explanation of what happened with Trio
Capital.
2.3
Figures 2.1, 2.2, 2.3 and 2.4 (below) aim to show how the different
parts of Trio Capital operated. Figure 2.1 represents the basic structure of
Trio Capital, based on information contained in submitters' and witnesses'
evidence to this inquiry. Figures 2.2, 2.3 and 2.4 are drawn from PPB
Advisory's submission, and reproduced with permission. PPB is Trio Capital's
administrator.
2.4
Trio Capital was both a licensed superannuation fund trustee and the
'responsible entity' for several managed investment schemes. Figure 2.1 (left
box) shows that Trio Capital was the trustee of a series of superannuation
funds: Astarra Personal Pension Plan; Astarra Pooled Superannuation Trust;
Astarra Superannuation Plan; Employees Federations of NSW Superannuation Plan;
and My Retirement Plan. These funds were regulated by APRA.[2] Investors in these funds
were eligible for, and have received compensation (see chapter 3).
2.5
Figure 2.1 (right box) also shows that Trio Capital was the responsible
entity for a number of managed investment schemes. Substantial amounts of money
were invested in these schemes by the superannuation funds for which Trio
Capital was the common trustee.[3]
The managed investment schemes of central interest in this inquiry are the
Astarra Strategic Fund (ASF) and the ARP Growth Fund. The former was used
fraudulently, while there are serious questions about the legitimacy of the
latter.
2.6
Several hundred people invested their superannuation savings directly into
these managed investment schemes through the use of a self-managed
superannuation fund (SMSF), rather than through the APRA-regulated
superannuation funds for which Trio was the trustee. As chapter 3 of this
report explains, those who lost money in Trio's managed investment schemes
through an SMSF are not eligible for compensation.
2.7
Trio generated income from charging fees to each of the managed
investment schemes and superannuation funds in respect of which it acted as a
responsible entity or trustee. Trio's principal expenses comprised management
fees payable to Astarra Funds Management (its parent company) and to third
parties—custodians, investment managers and financial planning groups.[4]
2.8
The majority of the managed investment schemes listed in Figure 2.1 were
legitimate, providing appropriate returns to investors. However, the
administrators' investigations concluded that five schemes had 'significant
asset impairment'. These schemes were the ASF, ARP Growth Fund, Astarra
Wholesale Portfolio Service, Astarra Portfolio Service and Astarra Overseas
Equity Pool. There was some investment by Astarra Wholesale Portfolio Service,
Astarra Portfolio Service and Astarra Overseas Equity Pool in the ASF which
partly explains their asset impairment.
Figure 2.1: Astarra Group Structure
2.9
The ASF was established as an Australian based hedge 'fund of funds'. Astarra
Asset Management (AAM) was the investment manager of the ASF. A former director
of AAM, who has now been jailed, described for the committee how the ASF
operated:
...all discussions with the RE [responsible entity]/trustee
relating to making investments were held at the very beginning, prior to the
first investment being made. Following the establishment of the ASF, an
investment management agreement between AAM and the RE was executed giving AAM
the authority to invest monies according to the stated strategy and investment
process, which was to invest in overseas hedge funds. Once the management was
executed, the first investment as well as every other investment was executed
without requiring any further discussions with the RE or Trustee.
In other words, the RE/Trustee was completely reliant on this
management agreement for all aspects of the fund's activities and played no
role in relation to any investment decisions other than passing on AAM's
instructions to the custodian. The process for sending monies to overseas funds
was for AAM to e-mail the RE an instruction to invest in a particular fund
which they then forwarded to the custodian for execution on the same day.[5]
2.10
While the ASF and the ARP Growth Fund had a common responsible
entity in Trio, and had similar investment strategies, the funds operated
separately. Significant monies from these schemes were invested in the British
Virgin Islands in hedge funds controlled by a Hong Kong based American lawyer,
Mr Flader. When these hedge funds collapsed, Australian investors' funds
disappeared. The committee understands that Mr Flader is well-known to the
United States Securities and Exchange Commission (SEC).
2.11
PPB Advisory found that overseas hedge funds represented the
largest losses to Trio investors:
The most significant losses to Trio investors relate to
Category 3 investments (overseas hedge funds) which included:
- approximately $123 million
invested by the Astarra Strategic Fund (ASF) via Deferred Purchase Agreements
in various overseas hedge funds; and
- approximately $52 million invested
by the ARP Growth Fund in Professional Pensions ARP Ltd.[6]
2.12
The ASF, with a value of approximately $123 million, had more than 6000
members.[7]
The ARP Growth Fund, with a value of approximately $53 million, was
represented by 74 unit holders.[8]
The Astarra Personal Pension Plan, Astarra Superannuation Plan, Employees
Federations of NSW Superannuation Plan and My Retirement Plan had approximately
10 000 members. Of this number, over 5000 superannuation members were
invested in the ASF.[9]
2.13
The principal focus of this inquiry has been on the operation of these
two funds—the ASF and the ARP Growth Fund. The following sections examine how
they were structured and operated by Trio and its directors.
Changing names
2.14
At the outset, the changing names of companies (and even people)
involved in the Trio case needs to be clarified. The start of this story was in
November 2003, when a reputable, mid-sized funds management business named
Tolhurst Funds Management was purchased by Wright Global Asset Management Group
(WGAM). The directors of WGAM, Mr Richard, Mr Matthew Littauer and Mr
Cameron Anderson thereby became the directors of Tolhurst Funds Management. Tolhurst
Funds Management was later renamed Astarra Funds Management. Tolhurst Funds
Management had a subsidiary called Tolhurst Capital. In May 2004, Tolhurst Capital
was renamed 'Astarra Capital'; in September 2009, Astarra Capital was renamed
Trio Capital.
2.15
There were also name changes to the investment funds into which Trio, as
the responsible entity, directed funds. In particular, AAM—the ASF's investment
manager—was initially established as Absolute Alpha. The name changed in August
2009.
2.16
One of Trio's founding directors, Mr Cameron Anderson, owned a property
development company called Silverhall. Silverhall was later renamed Ualan
Property.
2.17
Even one of the key people involved in the Trio case changed his name.
Mr Paul Gresham owned and controlled PST Management Pty Limited (PSTM),
the company that acted as the investment manager of the ARP Growth Fund. ARP Growth
Fund was a managed investment scheme run by Trio Capital. Mr Gresham
recommended investments for ARP Growth Fund and its predecessor Professional
Pensions Pooled Superannuation Trust (PPPST). Mr Gresham changed his name
to Mr Tony Maher.
The Trio Directors' investments
2.18
Figure 2.2 adds to the information in Figure 2.1, focussing on the
interaction of investments between the ARP Growth Fund and the ASF. It shows
how the monies in these funds were invested by three of the founding directors
of Trio Capital: Mr Richard, Mr Anderson and Mr David Millhouse.
2.19
Figure 2.2 shows that the linkages between these funds and the
involvement of Mr Richard and Mr Millhouse are relatively straightforward.
Essentially, Mr Richard's influence came through investments in the
underlying hedge funds of the ASF. Mr Richard was a director of AAM, the
investment manager of the ASF. As explained more fully below, Mr Richard was
jailed in August 2011 for engaging in dishonest conduct with respect to
financial services.
2.20
Mr Millhouse's involvement was through the investment of Asttar
Wholesale Portfolio Service and Asttar Overseas Equity Pool in Millhouse
Private Equity Trusts. Mr Millhouse was a board member of the overseas
entities that constituted the investment of this trust.
2.21
Figure 2.2 shows that Mr Anderson's involvement is considerably more
complex, with monies from ARP Growth Fund and Asttar Wholesale Portfolio
Service being invested through Mr Cameron's property trusts and holdings, and
through the ASF and the underlying hedge funds of the ASF. At the time of
writing, this company was in liquidation and Mr Anderson was answering
allegations that his company had charged the ARP Growth Fund and ASF exorbitant
asset management fees.[10]
Figure 2.2 Interaction of Investments and Founding Directors
of Trio [11]
Figure 2.3: Investment Structure of PPARP an Investment of ARP Growth Fund
ARP Growth Fund and Mr Paul Gresham
2.22
As noted earlier, Mr Gresham (later Tony Maher) was the owner and
controller of PST Management Pty Ltd. PST Management acted as the investment
manager for PPPST. Mr Gresham induced PPPST investors to move their funds into ARP
Growth Fund, a managed investment scheme. This Fund replaced PPPST in July
2007. This effectively shifted investors from an APRA-regulated fund in PPPST
to a SMSF investing directly in the ARP Growth Fund.[12]
As chapter 3 discusses, this has excluded ARP Growth Fund investors from the government's
compensation package.
2.23
Mr Gresham identified and recommended investments for PPPST and later
ARP. He arranged for unit holders in PPPST to invest through a special purpose
British Virgin Islands investment fund called Professional Pensions ARP Limited
(PPARP). This fund purchased shares in the Archimedes and Pythagoras Segregated
Portfolios of Empyreal SPC Limited (Empyreal), which was licensed as a professional
fund in the British Virgin Islands. Empyreal was managed by Mr Philip York, who
negotiated a 'swap agreement' on behalf of these two portfolios with Bear Stearns.[13]
2.24
The February 2012 enforceable undertaking accepted by ASIC from Mr Maher
(formerly Gresham) stated that he had received undisclosed payments of more
than $2 million arising from investments that he recommended for ARP and PPPST.
The undertaking noted that in accepting these undisclosed payments, Mr Maher
created a conflict of interest. In addition, the undertaking stated that
Mr Maher was calculating on the value of ARP's investment in PPARP on his
own and using a methodology that 'had no reasonable basis'. It was misleading
for Mr Gresham not to disclose either of these matters to Trio because he
knew that Trio would use these valuations to calculate the unit price of ARP.[14]
ASIC stated that he had failed to undertake due diligence in recommending some
investments in ARP/PPPST in circumstances where he knew that he had a conflict
of interest.[15]
2.25
The operation of the ARP Growth Fund is illustrated in Figure 2.3. In
its submission to this inquiry, PPB Advisory described these arrangements as
follows:
The major direct and indirect investments of the ARP Growth
Fund were units in Professional Pensions ARP Limited (PPARP), a company
registered in the British Virgin Islands.
On 1 August 2006, Pythagoras Segregated Portfolio (PSP) and
Archimedes Segregated Portfolio (ASP) entered into a Structured Fund Derivative
contract with Bear Stearns International Limited ("Bears"). These
contracts are referred to as "Total Return Swaps" whereby Bears
agrees to pay the Portfolio an amount equal to the total market value of a
basket of "Shares or other forms of interests in hedge funds and managed
futures accounts" ("Basket Value") and the Portfolio agrees to
pay Bears an amount by which the initial Basket Value exceeds the cash
collateral deposited by the Portfolio ("Floating Rate Notional
amount"). The initial cash deposited by the Portfolio as collateral must
represent at least 40% of the "Equity Notional Amount" i.e. the
initial Basket Value. If the Basket Value declines, more collateral must be
deposited, or alternatively, Bears may redeem any investment it may have made
to hedge its synthetic exposure. Bears, however, are under no obligation to
make investments in any fund forming part of the Basket. The Portfolio has no
investment in any fund; its investment is the value of the derivative contract
to which it is counterparty to Bears. Both contracts were terminated effective
30 September 2008.
Empyreal, in its capacity as Funds Manager, negotiated with
JP Morgan to take over Bears obligations in March 2008.[16]
2.26
Notably, APRA argued that the funds in the ARP Growth Fund were lost due
to the collapse of the investment bank and the global financial crisis rather
than fraudulent activity:
In the period June 2004 to July 2007, Trio was also the
trustee of the Professional Pensions Pooled Superannuation Trust (PPPST). The
PPPST was wound up in July 2007. Upon wind-up of the PPPST the members were
provided with a new PDS and given the option to invest the redemption proceeds
into the ARP Growth Fund, a managed investment scheme operated by Trio. This
fund held substantial monies from self-managed superannuation funds (SMSFs),
which were ultimately invested via a British Virgin Islands Segregated Mutual
Funds Company in a number of derivative contracts with a US-based investment
bank, Bear Sterns. These funds were lost due to the failure of Bear Stearns and
the severe market movements during the Global Financial Crisis and not due to fraud.[17]
2.27
Chapter 8 of this report presents the evidence, and the committee's
view, on the following questions: did the derivative contract between PPARP and
Bear Stearns actually exist; were the ARP Growth Fund monies lost due to fraud
or the collapse of Bear Stearns; and can the funds be recovered?
Figure 2.4: Fund Flow Arrangement of the DPA Structure of the ASF
The flow of funds through the Astarra Strategic Fund
2.28
Figure 2.4 shows the flow of funds through the ASF. Investors paid money
to Trio as the responsible entity, which then deposited the funds into a Trio
Custodian Account. Trio initially appointed ANZ Custodian Services and then
National Australia Trustees Limited (NATL). Their views of the collapse of Trio
are presented in chapter 5.
2.29
The custodian's role was to pay the funds into the Hong Kong Bank
Account of EMA International (EMA). The sole purpose of EMA was to allow the
ASF, through its agent and investment manager AAM, to invest directly and
indirectly in overseas hedge funds through a deferred purchase agreement (DPA).[18]
The DPA provided that investments were to be held offshore until AAM requested
the delivery of those investments or their equivalent money's worth. AAM would
then transfer the assets or the monies to Trio.[19]
2.30
In its submission, PPB Advisory explained that the ASF:
[C]omprised of a series of contractual rights obtained by a
British Virgin Islands registered entity, EMA International Limited (EMA), to
receive certain delivery assets in the future. The value of those delivery
assets would be determined by the performance of five underlying off-shore
hedge funds (the Underlying Funds) being:
- Exploration Fund Limited (EFL)
- Tailwind Investment Fund
(Tailwind)
- SBS Dynamic Opportunities Fund Ltd
(SBS)
- Pacific Capital Markets Cayman LDC
(Pacific)
- Atlantis Capital Markets Cayman
LDC (Atlantis)
The monies paid to EMA to acquire the contractual rights
were, according to the documentation, then to be invested by EMA in the
Underlying Funds...[20]
2.31
The link between the Exploration Fund Limited (EFL) and Trio Capital was
explained as follows:
The EFL was a company incorporated in Saint Lucia, West
Indies and operated as a hedge fund, although at the time of the initial
investment, EFL was newly formed and had no operating history. The EFL
appointed a Saint Lucia company, Global Financial Managers Limited (GFML) as
investment manager and GFML delegated its duties in relation to Australian
investors to Wright Global Investments Pty Limited (WGI). Mr Shawn Richard was
a director, secretary and general manager of WGI. Mr Richard was also a
director of Trio from 5 November 2003 to 15 November 2005 and a member of
Trio's Investment Committee from February 2004 to December 2005 and December
2008 to August 2009. Mr Richard, through various corporate entities, was the
ultimate owner of Trio.[21]
Mr Shawn Richard, Mr Jack Flader and the Trio fraud
2.32
Having explained these structures and the flow of investment money, the
obvious question arises: how were these arrangements used to perpetrate fraud?
In his judgment on Mr Richard, Justice Peter Garling of the New South Wales
Supreme Court, provided the following statement of facts:[22]
-
Mr Shawn Richard was, at various times, a director and the
responsible officer and agent of Trio. Mr Richard was a director of Trio's
immediate holding company, Astarra Funds Management Pty Ltd (AFM).
- The investment manager of the ASF, via agreements with Trio, was AAM.
Mr Richard was a director of AAM. In addition, AAM was an authorised
representative of Trio and Wright Global Investments Pty Ltd (WGI). Mr Richard
was a director and the responsible officer of WGI.
- EMA was a 'special purpose vehicle' established to facilitate
investments by the ASF in funds offshore. Mr Richard was in control of EMA.
- Mr Richard represented himself to investors as being the
controller of Trio, WGI and AFM, when he was aware that these representations
were false. The representation was false because at all times after July 2004,
Mr Richard knew that Mr Jack Flader, a US citizen based in Hong Kong, was the ultimate
controller of these entities and the business of the Trio Capital Group.
- Mr Richard used his positions with respect to Trio, WGI and AFM
to arrange the transfer of Australian investors' monies from Trio Managed Funds
in Australia, to overseas funds controlled by Flader ('Flader Controlled Funds').
The money was subsequently used to purchase shares in US companies at inflated
prices, from foreign companies controlled by Flader ('Flader Vendor Companies').
The inflated share prices realised significant profits for the Flader Vendor
Companies.
- The shares which were purchased were themselves only quoted on
the Over-the-Counter Bulletin Board as unregulated US equity securities. This
meant that they were vulnerable to share price manipulation, and often there was
only restricted stock available for trading.
- From November 2006, when the directors of Trio became concerned
and decided to cease its exposure to a particular Flader Controlled Fund (the EFL),
Mr Richard participated in the creation of new offshore funds for Trio to invest
in, all of which were controlled by Flader. He falsely represented to Trio and
ASF investors that he was diversifying the portfolio to different investment
managers from the original Flader Controlled Funds.
- The GSCL Group, of which Mr Flader was the Chief Executive
Officer and Chairman, was the custodian of the assets of the Flader Controlled
Funds at all material times. In addition, the GCSL Group, provided
administration services to EMA.
- The only monies invested into the Flader Controlled Funds were
those from the Trio Managed Funds, with two exceptions. The Australasian
Conference Association Superannuation Trust and the Australian Baseball
Federation Inc. directly invested in one of the Flader Controlled Funds.
- A large proportion of profits received by the Flader Vendor
Companies, from the sale of shares purchased from Australian investors' monies
deposited into the Flader Controlled Funds, were subsequently used to provide
funds to Trio, WGI, AFM and AAM, by way of loans from other companies
controlled by Flader ('Flader Funding Companies'). Mr Richard falsely
represented to auditors of Trio, WGI, AFM and AAM that he controlled these
funding companies.[23]
2.33
Later in the judgment, it was noted that Mr Richard's counsel accepted
that an adequate description of the scheme was that it was:
...a scheme designed to divert Australian investors' money
from superannuation and managed investment funds into overseas hedge funds
contrary to the interest of the investors in return for significant undisclosed
payments.[24]
2.34
PPB Advisory corroborated this description. The committee asked the
company whether it had concluded there were no assets in the ASF because the
underlying investments were a series of fraudulent hedge funds. It responded:
They are fraudulent. We have received certain information, as
part of secrecy provisions, from other regulators that point in the direction
of where some of those funds may have ended up. As to whether there is a legal
constructive trust argument to say those are the funds of the ASF, it is a very
complex process. We certainly have not given up trying to recover the money.
But it is not the money that was thought to have been invested through the
structure as it was explained to the unit holders.[25]
2.35
The committee queried whether the structure of the ASF and the ARP
Growth Fund was broadly similar given the investment was through a couple of
intermediaries with, in each case, at least one company located in the British
Virgin Islands, and the underlying investment merely a contractual right to
receive payment if certain things happened. The Director of PPB Advisory, Mr
Brett Manwaring, responded:
Certainly, in the case of the ASF that is correct. In the
case of the ARP Growth Fund, they do not even own the contractual rights. They
are owned by a third interposing entity, whereby PPARP own shares in Empyreal.
Empyreal is the party that owns those contractual rights. There are a whole
series of parties that would need to be gone through, even to attach to those
contractual arrangements. We have contacted all parties and sought to have the
contractual rights assigned to us, as we understand we are the only investor.
But, when you do not have voting rights, they can stand in the way of
disclosing information.[26]
The role of financial advisers
2.36
Investors in the ASF and the ARP Growth Fund generally fell into two
groups. The first group invested via the APRA regulated superannuation funds,
shown in Figure 2.1. Trio was the common trustee of these funds. There were
approximately 10 000 members in the four Trio superannuation funds
(excluding the Astarra Pooled Superannuation Trust). Over 5000 of these
superannuation members invested in the ASF and will receive (or have received)
compensation (see chapter 3).
2.37
The second group invested via SMSFs. ASIC states that there are around
690 direct investors in the ASF not eligible for compensation (i.e.: not within
an APRA regulated superannuation fund). Of this number, there were around 285
SMSFs. The others were individuals, corporations or trusts.[27]
There were 74 unit holders in the ARP Growth Fund, all of which were SMSFs.
2.38
SMSF investors in the ASF and the ARP Growth Fund were typically
recommended these investments by financial advisers. A Wollongong-based
adviser, Mr Ross Tarrant, recommended the ASF to 220 of his clients. In his
words, 'they have lost approximately $25 million as a direct result of my
financial advice by including ASF into our client portfolios'.[28]
In November 2011, ASIC banned Ross Tarrant for seven years for breaching
financial services law.[29]
Mr Tarrant is appealing this decision.
2.39
Mr Gresham, operating on Sydney's north shore, recommended the ARP
Growth Fund to his clients. As noted earlier, the enforceable undertaking
accepted by Mr Gresham stated that he had received undisclosed payments of more
than $2 million arising from investments that he recommended for ARP and
PPPST. For example, the undertaking noted that Mr Gresham did not disclose to
Trio or unitholders in PPPST that he had an informal agreement with Mr Richard
and Mr Littauer. This agreement provided for payments to be made to him in
relation to PPPST investment in Huntleigh Investment Fund (later the EFL).[30]
2.40
Unlike other financial advisers who recommended Trio investments,
Mr Gresham had had involvement with the key players in the Trio fraud. The
undertaking accepted by Mr Gresham made clear that he had known Mr Richard, Mr Littauer
and Mr Anderson since 2003, when he assisted them raise funds, loaned on
commercial terms from his clients, to enable WGAM to purchase Tolhurst Funds
Management. The undertaking also states that Mr Gresham met Mr Flader and
Mr York in early 2004 through his relationship with Mr Richard and Mr
Littauer.[31]
2.41
The committee believes that Mr Gresham's recommendation to invest in the
ARP Growth Fund was based either on a deliberate attempt to defraud his clients,
or at the very least to concentrate on enriching himself while wilfully
disregarding the evidence that the investment scheme into which he was putting
his clients' money was fraudulent.
2.42
The committee does not know with certainty why these advisers
recommended their clients use Trio products, but the evidence suggests that
their recommendations were influenced by the high commissions paid by Trio.
Chapter 5 of this report examines the views of financial planners who
recommended Trio Capital to their clients; chapter 6 canvasses various
criticisms of their role.
The suitability of the Trio funds
as an investment
2.43
For the committee, the overwhelming impression from the preceding
discussion is of the complexity of the Trio Capital investment structure. It
raises the following questions:
- was Trio an appropriate investment for 'mum and dad' investors
with little knowledge or understanding of the investment structure, operation
and risk?
- are complex managed investment schemes with multi-layered
structures suitable for retail investors given the higher levels of risk and
the difficulty for retail investors to understand and monitor the investment?
These are legitimate
and important questions, notwithstanding the deliberate fraudulent activity of
Mr Richard and Mr Flader, among others.
2.44
This issue of the suitability of the Trio schemes in turn raises
important questions about the role of financial advisers in recommending Trio
to their clients. First, and most obviously, did financial advisers understand
the Trio investment structure and the risks involved? Second, did financial
advisers understand that the various Trio schemes were linked through Trio as
the responsible entity, or were they deceived on this as part of the Trio
fraud?
2.45
The committee considers that multi-layered managed investment scheme
structures are difficult for all but the most sophisticated and attentive
retail investor to understand. Moreover, investors themselves will not be aware
of their ultimate exposure and the risks of their investment. As ASIC
explained:
It is not an uncommon practice in the industry that a
registered managed investment scheme invests in another managed investment
scheme to gain particular exposure to underlying assets in a cost effective way
(e.g. a retail feeder fund investing in wholesale funds that has greater
economies of scale). It is therefore not necessarily unsuitable for retail
investors to be indirectly invested in intermediary investment vehicles.
However, the multiple layer structure may create difficulties
in identifying an investor's ultimate exposure through an investment and the
extent of exposure to a particular financial product or type of financial
product that may arise indirectly through multiple investment vehicles. The
risks associated with multiple layer investment can be exacerbated where
multiple layer investment occurs in foreign jurisdictions where regulatory
oversight is not as thorough.[32]
2.46
ASIC contrasted the position of an investor making a direct investment,
with one investing in a managed investment scheme managed by a responsible
entity:
The suitability of an investment to an investor depends on
the personal circumstances of the investor, including, for example, the risk
appetite of the investor, the risk profile of the investor's investment
portfolio, the investor's investment horizon, the investor's ability to
understand the risk characteristics of the product taking into account any
advice the investor receives, and the investor's capacity to track the
performance of the financial product, personally or through an adviser.
In a direct investment situation, it is important that an
investor makes an assessment of the product in light of these risk factors
before investing, and then throughout the life of the investment.
However, when an investor invests in a registered managed
investment scheme managed by a responsible entity, or a professional investment
manager acting on the responsible entity's behalf, the investor relies on the
responsible entity to assess the risks of the particular financial products
that the managed investment scheme invests in (the underlying assets) and
implement strategies to manage such risks, consistent with any disclosures to
the investor (e.g. by diversification). The investor still needs to assess the
suitability of an investment in the registered managed investment scheme and,
for this purpose, will generally be given a PDS.[33]
2.47
As ASIC pointed out, in many circumstances it will be perfectly
appropriate for a retail investor to invest in a managed investment scheme. It
noted that an investment in some assets through a registered managed investment
scheme may be suitable for a retail investor, even in cases where direct
investment by the retail investor is unsuitable. ASIC also noted that the
complexity of the financial product, and the difficulty for the retail investor
to monitor the investment, may be of lesser importance than the investor's
confidence in the performance of the responsible entity.[34]
2.48
PPB Advisory queried the suitability of Trio for the type of investors
it attracted. It observed that:
- The...hedge fund investments are
extremely complex involving numerous interposing parties and several overseas
jurisdictions...
-
The structure of the hedge fund
investments and the type of investors involved are in our view, incongruent.
- Trio (the other directors) did not
appear to fully understand the nature of the investments or the risk profile.[35]
2.49
A combination of lack of understanding and deliberate misconduct led to
poor governance arrangements. The Trust Company, which was the replacement
responsible entity for some of the Trio funds, observed that:
...the former operators of the
Trio funds did not appropriately deal with conflicts of interests that emerged
in their capacity as:
Trustee of
superannuation funds;
Responsible entity of
registered schemes; and
Associates of
the investment manager appointed to the Trio funds.
...We observed little evidence to suggest that these
conflicts were adequately managed with the degree of appropriate caution a
reasonable fiduciary would exercise discharging their obligations.
The proven dishonest conduct by those responsible for the
investment management of the Astarra Strategic Fund coupled with the
enforceable undertakings offered by the directors of Trio Capital would prima
facie demonstrate a lack of robust compliance and governance arrangements
within Trio Capital.[36]
Committee view
2.50
It does seem likely that the complexity of the Trio structure was to
some extent intentional, so as to camouflage the fraudulent activity. A key
element of the scheme was to move the funds of Australian investors overseas,
making it much harder for Australian auditors to verify the existence of the
funds; for Australian liquidators to recover any remaining funds; and for
Australian authorities to investigate and to pursue those who have carried out
criminal conduct.
2.51
From a retail investor's point of view, this complexity of the Trio
investment structure required investors to place their trust in the competence
and judgment of the responsible entity. In this context, the role of financial
advisers and planners in recommending Trio to investors is a matter that
warrants close scrutiny. The committee finds it very difficult to see how the
various Trio investment options were appropriate investments or an appropriate
mix and spread of investments of different risk classes to provide for everyday
Australians' retirement needs. Later chapters of this report argue that, to
some extent, these financial advisers and planners should bear some blame for
their role in recommending Trio as a suitable investment for 'mum and dad'
investors.
The collapse of Trio Capital and the regulatory response
2.52
This section looks at how the Trio Capital fraud was uncovered and the
response of ASIC and APRA. Chapter 4 examines the mindset and the rationale of
the regulators in investigating the Trio fraud.
Alerting the authorities
2.53
In September 2009, Mr John Hempton, Chief Executive Officer at Bronte Capital
Management and a former Treasury official, wrote a letter to ASIC Chairman, Mr
Tony D'Aloisio. The letter alerted ASIC to the suspiciously smooth returns
achieved by the ASF in the context of a turbulent financial environment. He
argued in the letter that while it was possible that the ASF was a fraud, there
was no proof of that. Mr Hempton's letter resulted in ASIC launching an
investigation into the activities of certain Trio funds (see Table 2.2 above
and chapter 4).
2.54
Mr Hempton wrote on his blog: 'there was no genius in my letter –
everything could be found (fairly easily) on the internet – and the original
tip-off came from a reader of my blog – who noticed links with a story I wrote
up in March 2009'.[37]
Nonetheless, the blog clearly shows Mr Hempton's persistence and insight in
bringing his concerns to the attention of the media and ASIC. In early January
2010, he wrote the following:
Six months ago a reader pointed me to a fund of hedge funds
(called Absolute Alpha) based in Australia. I looked – and within forty minutes
I became very concerned – but could not prove harm to the fund's investors. I
tipped off the Sydney Morning Herald. The journalists at the Herald worked hard
at the story but alas they too could not prove harm. Indeed a major bank misled
them as to whether the assets were in (their) safe custody. The bank confirmed
the assets were in custody – a statement they have now withdrawn. Obviously
with a reputable third party vouching for the assets any hypothesis of harm was
going to be hard to sustain. The Herald published nothing.[38]
2.55
He continued:
I however remained suspicious – but could not easily do
anything. For there to be something desperately wrong either the bank had to
be a party or grossly negligent as to their custody of the assets. Absolute
Alpha was a boutique fund manager loosely associated with – and partly owned –
by a superannuation wrap provider called Astarra. Astarra is now called Trio.
The wrap provider did all the superannuation compliance and in turn (claimed
to) invest funds with other fund managers – mostly reputable managers. The
relationship between Trio and some of the funds in which they were supposed to
invest is complex.
The amount of money in Absolute Alpha was probably under 100
million. There were plenty of things that did not look right – but I did not
think there was much I could do about it.
So I let it go – though I did not forget about it.
Later I tried to log into Absolute Alpha's website and it was
dead. This (falsely) indicated my worst fear.
Again I alerted the Herald.
Alas it was not so simple. Absolute Alpha it seems had taken
over the funds management of all the money in the Astarra wrap. They had
renamed themselves Astarra. Astarra later renamed itself Trio. Astarra's
website boasted of a billion dollars in funds under management...
Anyway I wrote a letter to...ASIC laying out all my concerns
and (implicitly) the method for testing my concerns were false. [I sincerely
hoped I was wrong – and hoped the regulator would prove me incorrect by
identifying and valuing the assets. I still sincerely hope all the money turns
up in the British Virgin Islands.][39]
2.56
Mr Hempton did note that ASIC's actions in responding to his tip-off
were 'exemplary'. He argued in his blog that ASIC did what the SEC in the US
could not and 'act on a "Markopolos letter" within weeks'.[40]
Mr Hempton explained that unlike the SEC in the Madoff case, ASIC did
attempt to confirm the existence and value of the assets. Indeed, ASIC
Chairman, Mr Greg Medcraft, made a point of highlighting these efforts in
his evidence to the committee (see chapter 4). Mr Hempton noted that in putting
a stop on all Astarra funds, ASIC acted to protect investors.
Regulatory action and enforceable
undertakings
2.57
Chapter 4 of this report details the regulatory response to the tip-off
from Mr Hempton. It also explains the mindset of the regulators in
investigating Trio and the coordination of their activities.
2.58
It is useful here to sketch the regulators' actions. Table 2.1 (below)
notes that ASIC commenced its investigation into the conduct of Trio officers on
2 October 2009. A fortnight later, it issued an interim stop order on Trio
preventing offers, issues, transfers or sales of interests in the ASF and other
managed investment schemes for which Trio was the responsible entity. In
November 2009, ASIC froze pension payments and withdrawals from ARP Growth Fund.
Table 2.1: Enforceable undertakings
Date
|
Person
/ Company
|
Condition
of EU
|
Agency accepting EU
|
March 2012
|
Mr John Godfrey
|
No expiry date
|
APRA
|
Feb 2012
|
Mr Paul Gresham / Tony Maher
|
Permanent ban
|
ASIC
|
Feb 2012
|
Mr Timothy Frazer, WHK auditor
|
3 years
|
ASIC
|
Sept 2011
|
Mr Keith Finkelde
|
6 years
|
APRA
|
Aug 2011
|
Mr Keith Finkelde
|
Prevented from any role in financial services for 4 years
|
ASIC
|
Aug 2011
|
Mr David O'Bryen
|
Prevented from any role in financial services for 4 years
|
ASIC
|
Aug 2011
|
Mr David Andrews
|
Prevented from any role in financial services for 9 years
|
ASIC
|
July 2011
|
Mr Rex Phillpott
|
15 years
|
ASIC
|
July 2011
|
Ms Natasha Beck
|
2 years
|
ASIC
|
Sept 2011
|
Mr David Andrews
|
10 years
|
APRA
|
Oct 2011
|
Mr David O'Bryen
|
Five and a half years
|
APRA
|
July 2011
|
Seagrims Pty Ltd, Peter and Anne-Marie Seagrim
|
suspension of the AFSL for 3 years
|
ASIC
|
June 2011
|
Kilara Financial Solutions
|
Commitment to modify aspects of compliance
|
ASIC
|
Sources: ASIC, Enforceable
undertakings register, http://www.asic.gov.au/asic/asic.nsf/byheadline/Enforceable+undertaking+register%3A+list?openDocument and APRA Enforceable undertakings register, http://www.apra.gov.au/CrossIndustry/Pages/EnforceableUndertakings.aspx (accessed 1 May 2012)
2.59
APRA had conducted several prudential reviews of Trio between 2004 and
2009. In mid-2009, when information requested from Trio was not forthcoming, it
conducted a further prudential review to ascertain the existence of overseas
assets. When this information was not provided, APRA commenced an investigation
in October 2009.
2.60
On 2 December 2009, APRA issued a 'show cause' letter on Trio as to why
it should not be suspended or removed as trustee. On 17 December, APRA
suspended Trio's licence as the trustee of its four superannuation funds and
one pooled superannuation trust. APRA suspended Trio's licence as a result of
numerous breaches of Trio's licence conditions, including:
[F]ailure to provide the auditors reports for 2009; failure
to submit quarterly returns due 5 November 2009; failure to adhere to custodial
requirements; failure to exercise care, skill and diligence and failure to act
in the best interests of beneficiaries; and failure to demonstrate due
diligence on the investment in the Exploration Fund Limited (EFL); and not
being unable to satisfy APRA's concerns regarding the valuation of
superannuation assets.[41]
A chronology of key events
2.61
Table 2.2 is a basic chronology of events relating to the operation and
collapse of Trio. The timeline commences in early 2003, when ASIC issued an Australian
Financial Services Licence to the ultimate Australian holding company, Wright
Global Asset Management. It ends in March 2012, when APRA entered into an
enforceable undertaking from another Trio Director, Mr John Godfrey.[42]
The key events in Table 2.2 are:
-
the purchase of Tolhurst Funds Management by Wright Global Asset
Management in November 2003;
-
the replacement of the Trust Company for Trio as the trustee of
PPPST in June 2004;
- the registration of the ASF on 28 August 2005 and the ARP Growth
Fund on 1 July 2007;
-
Mr John Hempton's letter to ASIC Chairman, Mr Tony D'Aloisio, on
16 September 2009, alerting ASIC to potentially fraudulent activity in the
ASF (see below);
- ASIC's investigation of the conduct of Trio from October to
December 2009 (see chapter 4);
- APRA's suspension of Trio's licence as the trustee of four
superannuation funds and one pooled superannuation trust on 17 December 2009
(see chapter 4);
- the winding up of the ARP Growth Fund in April 2010;
-
the resolution of creditors to place Trio Capital into
liquidation in June 2010;
- the government's decision in April 2011 to provide nearly $55
million in compensation for investors in APRA-regulated superannuation funds
that were under the trusteeship of Trio Capital (see chapter 3); and
- the jailing of former Trio director Mr Richard in August 2011.
Table 2.2: Trio timeline[43]
Date
|
Event
|
Early 2003
|
ASIC issues Financial
Services Licence to Wright Global Asset Management (WGAM)
|
2003
|
Mr Shawn Richard and Mr
Anthony Littauer advises Mr Paul Gresham of their interest in acquiring a
funds management business in Albury named Tolhurst Funds Management (later
Astarra Funds Management) and Tolhurst Capital Limited (later Astarra Capital
then Trio Capital)
|
November 2003
|
WGAM purchases Tolhurst
Funds Management. Mr Shawn Richard, Mr Matthew Littauer and Mr Cameron
Anderson (directors of WGAM) become directors of Tolhurst Funds Management
|
24 February 2004
|
PST Management Ltd becomes
an authorised representative of Wright Global Investments Pty Ltd [controlled
by Mr Jack Flader].
|
Early 2004
|
ASIC issues an Australian
Financial Services Licence to Tolhurst Capital
|
May 2004
|
Tolhurst is renamed Astarra
Funds Management. From May 2004 until September 2009, Trio operates as
'Astarra Capital Limited'
|
11 June 2004
|
Following a request by Paul
Gresham, Trio becomes trustee of Professional Pensions Pooled Superannuation
Trust (PPPST), replacing the Trust Company
|
2005
|
Morningstar
commences publishing quantitative star ratings for some of the funds managed
by Trio Capital Ltd (then known as Astarra Capital Ltd)
|
28 August 2005
|
Astarra Strategic Fund
(ASF) is registered by Trio as a MI scheme through ASIC. Mr Shawn
Richard is a director of Absolute Alpha, the investment manager of the ASF.
|
September 2006
|
KPMG conducts an audit of
Astarra's Internal Compliance Plan
|
2006–2007
|
Research house Van Mac
provides a report on Absolute Alpha giving it a 5 star rating
|
17 May 2007
|
Astarra Capital issues a
product disclosure statement for ARP Growth Fund: Astarra is the Responsible
Entity and PST Management Ltd is the Investment Manager. Both were linked to
Jack Flader.
|
29 June 2007
|
Professional Pensions
Pooled Superannuation Trust (PPPST) is wound up.
|
1 July 2007
|
The ARP Growth Fund is
created to replace PPPST. Astarra Capital was also the Trustee of PPPST. Mr
Gresham induced PPPST investors to reinvest in ARP.
|
September 2007
|
KPMG conducts an audit of
Astarra's Internal Compliance Plan
|
30 May 2008
|
Mr Gresham resigns as a
Director of PPARP and a new administrator is appointed
|
June 2008
|
Morningstar
enters into a
licensing agreement with Astarra Capital in June 2008, by which Morningstar is
granted to Astarra Capital a non-transferrable, non-exclusive license to
publish Morningstar Ratings on three of Astarra Capital's funds
|
Date
|
Event
|
September 2008
|
KPMG
conducts audit of Astarra's Internal Compliance Plan
|
October 2008
|
APRA unsuccessfully seeks
information about the valuation of Trio funds
|
6 February 2009
|
National Australia Trustees
Limited is appointed by Trio as custodian, replacing ANZ Custodian Services
|
August 2009
|
Absolute Alpha is renamed
as 'Astarra Asset Management' (AAM)
|
September 2009
|
KPMG conducts an audit of
Astarra's Internal Compliance Plan
|
September 2009
|
Astarra Capital is renamed
Trio Capital
|
16 September 2009
|
Mr John Hempton writes to the Chairman of ASIC expressing his
concerns about the Astarra Strategic Fund
|
2 October 2009
|
ASIC commences an investigation into the conduct of Trio
officers in relation to suspected contraventions of section 601FD of the
Corporations Act
|
16 October 2009
|
ASIC issues an interim stop order on Trio preventing offers,
issues, transfers or sales of interests in the ASF and certain other MI schemes
for which Trio was the RE
|
|
November 2009
|
Pension payments and withdrawals from ARP Growth Fund are frozen
by ASIC
|
|
2 December 2009
|
APRA
issues a 'show cause' letter on Trio as to why it should not be suspended or
removed as trustee
|
|
16 December 2009
|
Directors
of PPB Advisory resolve to place Trio Capital and other associated companies
(Astarra Funds Management Pty Ltd and ASI Pty Ltd) into voluntary
administration.
|
|
17 December 2009
|
APRA suspends Trio's
licence as the trustee of its four superannuation funds and one pooled
superannuation trust
|
|
19 March 2010
|
Administrators
approach the Supreme Court of NSW to have the following managed investment
schemes wound up due to exposure to impaired assets: Astarr Wholesale
Portfolio Service, Astarr Portfolio Service, Astarr Overseas Equities Pool,
ASF and the ARP Growth Fund
|
|
April 2010
|
Report from liquidators PPB
Advisory
|
|
April 2010
|
ARP Growth Fund is wound up
by a court order issued by Justice Palmer
|
|
22 June 2010
|
Trio
Capital is placed into liquidation by resolution of creditors
|
|
July 2010
|
PST
Management is placed into liquidation
|
|
July 2010
|
Public
examinations are undertaken in respect of Shawn Richard and Eugene Liu
regarding the ASF.
|
|
29 July 2010
|
Initial report by PPB
Advisory is lodged with ASIC regarding investigations into breaches by
directors and officers of Trio Capital in relation to the ARP Growth Fund
|
|
3 August 2010
|
Ten
schemes with minimal or no exposure to impaired assets are transitioned to
Trust Company as the replacement Responsible Entity
|
|
Date
|
Event
|
|
7 December 2010
|
Mr
Richard pleads guilty to two charges of dishonest conduct in the course of
carrying on a financial services business and admits to a third charge of
making false statements in relation to financial products.
|
|
13 April 2011
|
The
Hon. Bill Shorten MP, Minister for Superannuation and Financial Services,
issues a determination under Part 23 of the SIS Act, for a grant of
$54,994,079 to be paid to the acting trustee ACT Super for payment to the
members.
|
|
18 May 2011
|
PPB
issues a report noting its investigations into the role of KPMG and WHK in
auditing Trio Capital
|
|
24 June 2011
|
ASIC
accepts an enforceable undertaking from Kilara Financial Solutions Pty Ltd
(Kilara) to modify aspects of its compliance culture and to remedy past
compliance concerns in the provision of financial advice to retail clients.
Kilara recommends that retail clients switch their superannuation holding
into another fund, My Retirement Plan, which invested in either My Income
Pool or My Growth Pool. Trio was the responsible entity for My Retirement
Plan.
|
|
July 2011
|
Mr
Richard is formally convicted of dishonest conduct in relation to the Trio
fraud.
|
|
4 July 2011
|
ASIC
issues a media release stating that ASIC will hold the gatekeepers to
account. ASIC enters into enforceable undertakings with former directors of
Trio, Mr Rex Phillpott and Ms Natasha Beck, preventing them from working in
the financial services industry for 15 years and two years respectively. APRA
also accepts enforceable undertaking from Ms Beck.
|
|
5 July 2011
|
ASIC
announces that it has suspended the AFS licence held by Seagrims Pty Ltd
(Seagrims) until 27 November 2011. Mr Peter Seagrim and Ms Anne-Marie
Seagrim, both of Port Augusta, who are the directors and responsible managers
of Seagrims, are banned by ASIC from providing financial services for three
years.
|
|
11 August 2011
|
ASIC
enters into an enforceable undertaking with former chairman and director of
Trio, Mr David Andrews, preventing him from acting in any role within the financial
services industry for nine years. With the exception of a small private
company in which Mr Andrews is sole director, Mr Andrews also agrees not
to act as a director of any corporation for nine years.
|
|
12
August 2011
|
Justice Garling sentences
Mr Richard to a total of three years and nine months imprisonment with a
minimum term of two years and six months
|
|
24 August 2011
|
ASIC
enters into enforceable undertakings with former Trio directors, Mr Keith
Finkelde and Mr David O'Bryen, preventing them from taking part in the
management of companies and providing financial services for four years each.
|
|
6 September 2011
|
APRA
accepts enforceable undertakings from Mr Rex Phillpott for a period of 15
years and Mr David Andrews for a period of 10 years.
|
|
12 September 2011
|
APRA
accepts enforceable undertakings from Mr Keith Finkelde for a period of
six years.
|
|
27 October 2011
|
APRA
accepts enforceable undertakings from Mr David O'Brien for a period of five
and a half years.
|
|
1 February 2012
|
ASIC accepts an enforceable
undertaking from Mr Gresham, permanently preventing him from working in the
Aust'n financial services industry or managing a corporation.
|
|
Date
|
Event
|
|
10 February 2012
|
ASIC accepts an enforceable
undertaking from ASF auditor, Mr Timothy Frazer of WHK. Mr Frazer will not
act as a registered company auditor for three years.
|
|
5 March 2012
|
APRA
accepts an enforceable undertaking with no expiry date from Mr John Godfrey,
a former director of Trio. Mr Godfrey was a
non-executive director of Trio from February 2005 until June 2007. He
was also Chairman of the Board from June 2005 to February 2007.
|
|
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