This chapter provides background information on the Sterling Group and the Sterling Income Trust (SIT), as well as the complex housing product offered to consumers. It also looks at the collapse of the Sterling Group and the SIT, including the experience of investors and tenants.
The Sterling Group and the SIT
The Sterling Group was established in 2010 and eventually comprised around 50 companies and trusts centred around property related assets, with a complex organisational and operational structure. Figure 2.1 illustrates the Sterling Group's corporate structure, including how the SIT and other relevant entities were linked to the larger group of companies.
Initially, the Sterling Group's primary business operations were sourcing and aggregating rent rolls and providing property management services through the Rental Management Australia Pty Ltd (RMA) entity. The income generated from RMA was transferred to the trustee for the SIT in March 2013 and later to the trustee for the Silverlink Income Rights Trust (SIRT) in May 2018. At the time of voluntary administration in May 2019, RMA's rent roll included 3,600 properties under management with operations in Western Australia, Victoria and Queensland and it employed around 75 staff.
The Sterling Group was also involved in property development through Acquest Property Pty Ltd (Acquest Property), which was trustee for various Residential Property Investment Trust (RPIT) Development Trusts. Funds from the 'development units' in the SIT were used to provide second-ranking and lower-ranking loans to Acquest Property and/or its related entities.
In 2012, the SIT was registered as a retail managed investment scheme to act as a principal funding mechanism for the RMA business. New subscriptions in the SIT, and later the SIRT, provided the capital to acquire further rent rolls and the development of residential property. The SIT appears 'to have raised funds for the Sterling Group through investments in four types of asset classes corresponding to "sub-trusts" of the SIT', as explained in Figure 2.2.
Theta Asset Management Pty Ltd (Theta) was the Responsible Entity of the SIT and was the operator of the managed investment scheme. As a result, Theta:
established and maintained a due diligence committee for the Product Disclosure Statements (PDSs) issued by the SIT;
prepared, lodged with the Australian Securities and Investments Commission (ASIC), and amended from time to time, a compliance plan for the SIT; and
established and maintained a compliance committee to help ensure that the SIT complied with its legal obligations.
The day-to-day management of the SIT was delegated by Theta to Sterling Corporate Services Pty Ltd (SCS), an entity within the Sterling Group, that also acted as the investment manager of the SIT.
In late 2017, Silverlink was established as a dedicated investment company offering an investment option for Sterling New Life Lease (SNLL) tenant‑investors. Similar in concept to the SIT, it offered investment by way of preference shares in the Silver Link Investment Company (SLIC) or Silver Link Securities Pty Ltd (SLS). However, the Silverlink investment vehicle was not a managed investment scheme and, as a result, operated in a different regulatory setting to the SIT.
ASIC indicated that it 'has not identified any investors in Silverlink who did not also enter into an SNLL, and at least one Silverlink Information Memorandum stated that investments in Silverlink redeemable preference shares were "exclusively reserved" for SNLL tenants'.
In addition, ASIC noted 'that between 9 October 2018 and 12 May 2019, the [SIRT] was known as the Australian Rental Trust, and from 12 March 2019 the name was changed back to the [SIRT]' and that 'the trustee for the [SIRT]/Australian Rental Trust was at all times Silverlink Securities Pty Ltd'.
Figure 2.1: Sterling Group corporate structure
Source: Ferrier Hodgson, Sterling First (Aust) Limited (Administrators Appointed) – Voluntary Administrators' Report – 30 May 2019, p. 14.
In early 2016, Sterling First Projects Pty Ltd (an entity within the Sterling Group) launched a managed housing investment scheme known as the SNLL, which involved long-term residential lease arrangements coupled with the aggregation of rent rolls.
Under the scheme, retirees would invest capital—usually hundreds of thousands of dollars—in the SIT and, at a later stage, the SIRT. Income from the SIT and the SIRT was intended to cover the rent payable for a long-term property lease of up to 40 years. Tenant-investors were given two options across the life of the scheme, depending on when they invested. These were:
investment in the SIT, with distributions used to pay the rent and any surplus reinvested. Under this option investors generally had a lease directly with the landlord; or
investment in preference shares in the SLIC or SLS, which held units in the SIRT. Rent was paid directly by the Sterling Group under a head lease with the landlord and a sub-lease provided to the tenant.
Figure 2.2: Investment options in the SIT
Source: Australian Securities and Investments Commission, Submission 1, p. 12.
The scheme was marketed to retirees as an alternative to downsizing which would result in freeing-up cash to give them a more comfortable lifestyle and a long-term secure residential base. Indeed, some tenant-investors were led to believe that if there was a shortfall between the amount of the distribution from the investments, then they would not be required to pay any shortfall.
One submitter who entered an SNLL explained:
The essence of the scheme was an alternative to either a retirement village or an over 55s' complex. Essentially, this involved an up-front amount of money that was supposed to be deposited into the [SIT] and the interest from this would pay a landlord rent and in turn the landlord would agree to a 5-year rental lease with 7 options for 5 years. As the scheme targeted aged people, this guaranteed rent for life.
On 16 November 2021, ASIC's Chair, Mr Joseph Longo, described the concept:
As part of the arrangement, the person or couple would enter into a long-term residential lease, becoming the tenant. They were also required to pay a lump sum into an investment product, becoming an investor into either the [SIT] or into another Sterling Group company, Silverlink. The return on investment was intended to be used to pay rent under the [SNLL], with any surplus reinvested in the financial product. These tenant-investors were told that the returns from their invested capital would be sufficient to enable each tenant to pay all of the rent due on their particular [SNLL]. At least some tenant-investors were also told that they would not be asked to make any other payments towards rent during the life of the [SNLL] arrangement.
ASIC pointed out that the 'product and accompanying investment involved a complex set of contracts and disclosure documents' and indicated that it had 'reviewed these documents as they related to some of the tenant-investors, and they involved lengthy, complex and technical disclosures, contracts and deeds'. ASIC also noted:
The lease offered by the Sterling Group could, on the face of at least some of the contractual and marketing documents, be entered into without investing in the [SIT] or Silverlink. The two arrangements were legally independent. However, the commercial reality was that the most likely (and most common) means by which a tenant-investor would participate would be by entering into both the [SNLL] and a Sterling investment.
Who invested in the SIT and the SNLL product?
According to ASIC, a total of 527 people invested approximately $30 million in SIT units. Around 481 of these people invested $25 million in the SIT before the issuing of ASIC's stop orders in August 2017, with an additional $4.9 million invested by 46 people after a new PDS for the SIT was issued in October 2017 and before the PDS was declared to be no longer in use in April 2018.
The SNLL product was purchased by 101 people—62 tenant-investors entered through the SIT while 39 tenant-investors contributed a further $7.56 million through Silverlink.
A further 465 people invested in the SIT but did not hold a SNLL.
Novelty of the products offered
In isolation, none of the activities undertaken by the Sterling Group were particularly novel. However, ASIC summarised its view on the nature of the products offered by the Sterling Group:
…ASIC considers that the business activity underlying the [SIT]—the aggregation of rent rolls and residential property development—was unremarkable. However, for SNLL tenant-investors (101 investors out of 566 total investors in the [SIT] and Silverlink), their access to housing was dependent on the financial performance of the investments. This combination was unusual and has resulted in devastating impacts on these tenant-investors.
Indeed, ASIC submitted that it was 'not aware of any other arrangement which made the supply of residential housing dependent on the investment performance of an investment product purchased at the same time'. ASIC observed:
…that this combination of housing, business investment, and elderly tenant-investors created a significantly risky arrangement because the downturn or failure of the underlying business investment may leave tenant-investors unable to pay rent on their homes. Retirees and seniors who may be interested in the SNLL product over more traditional retirement products were less likely to have alternative income sources to pay rent if the returns from the accompanying investment were reduced or failed. If significant loss was suffered, retirees and seniors were likely to have limited prospects for rebuilding their financial position into the future.
Misunderstanding of the term 'trust'
There appears to have been a misunderstanding of the use of the term 'trust' in the minds of tenant-investors. Indeed, several submitters argued that they were misled in relation to the type of trust where their funds would be held:
My wife and I found out about this product through the newspaper with a big article about the Sterling Rent for Life Scheme. After looking into it for a few months and talking to people in the Scheme we arranged a meeting with Mr Jones to sign up. He assured us that the money was going into a TRUST FUND and couldn't be touched. As far as we are concerned this WAS NOT an investment product.
Similarly, Mr Alan Fardoe from the Sterling First Action Group, told the committee that he believed his money was in a 'proper trust'. He explained:
Even when ASIC started raising questions, I thought, 'At least the money's safe; the lease might not be safe, but the money's in a trust fund, so that should be safe'.
In its supplementary submission, ASIC pointed out that the SIT 'was a legal trust but did not operate a "trust account" in the same sense as a solicitor's or real estate agent's trust account'. ASIC submitted that:
In the Sterling matter, the funds placed in the [SIT] were used to purchase units in the trust. The value of those units were necessarily tied to the value of the [SIT] assets, and those funds were then used for the Sterling Group's operational costs (including paying out SNLL rent). The [SIT] 'trust deed' gave Theta, as the trustee, very broad powers and authority to buy and sell, trade and otherwise deal with the trust assets with 'absolute and uncontrolled discretion'.
The relationship between the concepts of 'trust' and 'investment' were explored further by Mr Longo at the public hearing on 16 November 2021:
It's perfectly understandable, because of the use of the word 'trust' in the documents, they might have thought they were putting money into a dedicated stand-alone trust account that was in their name and that their money was preserved in that trust account. That's not how this was structured. When they put their money in, they made some options or choices about what investment they wanted to make and then their money went into those investments. It wasn't dedicated. It's not like a bank account, where you can see your money that is under your name and you can see it there. Once you made your investment at the time you signed your lease, that money went into the building group.
Collapse of the Sterling Group
On 30 April 2018, Theta withdrew the offer of investments in the SIT from the market, following surveillance activity by ASIC's Investment Managers and Superannuation team (IMS). On 27 August 2018, Theta commenced a voluntary winding up of the SIT, after enquiries by ASIC as to its ongoing financial viability.
In March 2019, Ferrier Hodgson (now KPMG) was approached by the Sterling Group's directors to conduct a review of the group's solvency and working capital arrangements. ASIC indicated that on 5 April 2019 it 'engaged council to commence preparation for a potential application for orders to wind-up and freeze assets of the Sterling Group and related entities' and between March and April 2019 'prepared a case for a possible court-appointed provisional liquidator and associated orders'.
On 30 April 2019, ASIC advised that it:
…met with the board of directors for the Sterling Group and informed the board that ASIC was progressing with an imminent application for the appointment of a provisional liquidator to the whole group on the just and equitable ground and on the ground of insolvency, with an application to be filed within days.
Following a decision of the board of directors on 3 May 2019, KPMG were appointed as voluntary administrators of the Sterling Group and its related entities pursuant to Section 436A of the Corporations Act 2001. On 10 June 2019, KPMG advised ASIC that 'the creditors of the Sterling Group had voted in favour of placing the Sterling Group (other than Rental Management Australia Pty Ltd) into liquidation'.
On 13 December 2019, Worrells Solvency & Forensic Accounting (Worrells) were appointed as administrators of the SIT's Responsible Entity, Theta. Theta was subsequently placed into liquidation in March 2020.
In its submission, KPMG indicated that it expects 'to have a further report to creditors outlining an update on the liquidation once the work of ASIC has been completed'.
Reasons for the collapse
On 30 May 2019, KPMG issued a report of its initial investigations into the Sterling Group companies placed under administration. According to this report, the underlying causes for the Sterling Group's and the SIT's failure appeared to be:
the complexity of the organisation and operational structure which ultimately resulted in higher operating costs and a level of organisational dysfunction;
the uncommercial pricing structure under the master deed assignments which, because of reduction in rental income, failed to reflect the cost of running a business and placed it into a loss-making position; and
reliance on capital raising to fund operations.
KPMG reported that the operating performance of the Sterling Group had been in decline 'despite an aggressive drive to acquire new property management agreements for RMA'. KPMG further noted:
The capital invested via the SIT and Silverlink was used to invest in property related assets (with the return on the investment intended to cover the SNL rental commitments), however the value of these underlying assets deteriorated impacting the return on investment. As a result, there were significant cash flow pressures on the Group due to the requirement for entities within the Group to either pay or top up rental payments and mortgage interest repayments.
What happened to the rest of the money?
At the hearing on 16 November 2021, Mr Longo outlined what he understood to be the outcome of the investments made by victims of the collapse:
The costs of running that business model are very high and so that's where the money went. The money went into these investments, and the costs of making and maintaining those investments meant that over time they lost value. I will leave it to the liquidator to give the economics of it, but in the end the returns from those investments were simply insufficient to do two things: (1) to meet the rental obligations and (2) to run the business.
In relation to the SIT, ASIC also noted:
While no liquidators' reports have been provided on the collapse of the [SIT] specifically (as distinguished from the Sterling Group), it is apparent that the collapse of the Sterling Group means that the value of the assets of the [SIT] was substantially diminished, as its main valuable assets were its interests in the Sterling Group businesses and assets.
Indeed, the fate of the money invested in the SIT was summarised by KPMG in its Frequently Asked Questions: SNL Lease Tenants document:
The capital invested was used to buy property related assets (including loans on residential developments and rights associated with property management agreements) and arguably, at least recently, to fund ongoing losses of the Group.
Given current market conditions the value of these underlying assets has deteriorated.
The companies do not currently hold any cash and it is not possible to facilitate any redemption requests relating to your capital.
According to ASIC, the 'funds received from investors in the [SIT] were generally applied in the manner set out in the relevant disclosure documents'. Mr Longo further elaborated on this point on 16 November 2021:
As far as we know, the money did go to where it was supposed to go in the sense of investments in property, buying rent rolls and looking for property related returns. As things stand, we are not aware that any of the tenant investor money ended up, if I can put it as bluntly as this, in the pockets of third parties. As far as we know, the money went where it was supposed to go. What went wrong here was that the business model was far too ambitious. They were looking for returns that we now know were not achievable, and the costs of running this business were high.
In addition, ASIC indicated in its submission that:
Although investigations are continuing, ASIC understands that the liquidators of Theta and the Sterling Group have not identified recoverable uncommercial or unreasonable director-related transactions which could be pursued for the benefit of creditors. The liquidators also do not appear to have identified any significant misappropriation of funds.
In response to concerns that the SIT could be characterised as a Ponzi scheme, Mr Longo told the committee that ASIC didn't think that the structure was originally designed as a Ponzi scheme:
When this managed investment scheme started life in 2012, well before these events, they were real assets. They bought real property, there were real companies and there were real returns. All I would say about the use of the word Ponzi, and this is true of many corporate collapses and this is maybe closer to how people feel about it, towards the end of any corporate collapse when a company is under financial distress, it still has revenue coming in but that revenue might be used to pay for employees or to meet ongoing expenses and, to that extent, the moneys coming in is not going to 'investors'. That's very common in a distressed company situation.
Experience of tenants and investors
The committee heard from many tenants and investors in the Sterling Group about the devastating financial and emotional impact of the collapse. Stakeholders also provided the committee with insights into the practices of Sterling Group directors and employees in marketing Sterling products, as well as their experiences of and attitudes towards ASIC's involvement.
Impact on tenants and investors
While the failure of the SIT and Sterling Group more broadly impacted all investors, it was most devasting for those tenants who sought housing security through the various 'rent-for-life' schemes. This was particularly acute for tenants who were subsequently evicted or had sold their own homes to access the capital required to purchase a SNLL product.
Most affected tenant-investors submitted that they did not have sufficient capital following the collapse of the SIT to purchase another home—which for many was the reason they were attracted by the 'rent-for-life' scheme to begin with. To support their current housing needs, many tenant-investors indicated they were either paying market rent in private dwellings, relying on social housing, living with relatives, or, in at least one case, forced to 'couch surf' at the age of 80.
Indeed, many tenants outlined their despair at the dire financial situation they have found themselves in since the collapse of the SIT:
For the last two and a half years every waking moment is a nightmare, what have we done wrong? We thought we had entered a rent agreement, paying upfront for a 40-year lease, now each and every day is spent in the knowledge we could be homeless, cast out into the street.
Other investors also outlined the impact that the collapse has had on their financial situation, particularly those in retirement:
I am Allan Barrett a 71-year-old victim of the Sterling First collapse. My wife and I have lost all up $325,000 and now having to pay rent of $1320 a month on the property we paid up front our $325,000 for a 40-year lease. This is difficult when you are on the pension.
Another submitter explained that financial investments in the Sterling Group were also undertaken by their extended family:
At least a total of $500,000 was invested by our family, I cannot give an accurate figure because our eldest son is too embarrassed to divulge how much he invested but I do know on top of the bank loan he put all of his superannuation into the scheme.
The profound impact that the failure of the Sterling Group has had on many tenant-investors has extended well beyond their finances. Indeed, the ongoing mental and emotional stress associated with the failure was highlighted by many submitters. For example, Ms Filomena Weston explained the anguish and shame she felt:
After the collapse, I had lost $229,000, everything I had. I blamed myself, I was very low. I seriously considered taking my own life. For six months, I couldn't bear to tell my family what had happened to me. I then attended a landmark court ruling, in which the judge ruled against other Sterling tenants, who would now be evicted from their home. I couldn't believe the ruling, and was distraught outside of the court room. News cameras were there and they filmed my distress, which then went on national television. That's how everyone I knew found out what had happened to me. I was inundated with phone calls asking me what had happened. My kids and my family saw me crying on tv, and when they found out about what I had lost through Sterling this caused arguments, shame and further distress.
Relatives of tenant-investors also provided personal accounts of the shame felt by tenants who have since passed away:
My Dad never complained to his children about what he has been through and losing him has been tough on all his family, but to see him living his last few months in a shabby rental and to hear him one day tell me how ashamed he is of what has happened sickened me to the core. My Dad had nothing to be ashamed of. He put his faith in a system that let him down, but beyond that he has been let down by ASIC and our politicians.
Marketing of the Sterling Group products
Many tenant-investors were highly critical of the sales tactics used by various representatives of the Sterling Group, including:
misrepresenting the type of products that were being offered (for example, insisting that the SIT/Silverlink was not a financial investment and that any money towards 'rent-for-life' would go into a trust for security);
not fully explaining how funds were split and commissions paid for various 'rent-for-life' schemes and investments; and
not providing relevant documents in a timely manner (such as the PDS and the Residential Tenancy Agreement).
Critically, the marketing material for the SNLL scheme emphasised that one of the key benefits was that once the initial investment was made, no further payments would be required in the form of rent or ongoing fees. However, the Australian Financial Complaints Authority (AFCA) subsequently issued a determination that found that the promoters of the scheme:
…failed to disclose the risk that distributions would be insufficient to cover rent, that the capital investment could be depleted and did not disclose the risk to their security of tenure if the SIT could not fund the rental payments. It is reasonable to expect that the complainants would not have entered into the Lease-Investment Arrangement, had they known about the risks associated with the underlying investment.
Indeed, several submitters claimed that they were not provided with the relevant disclosure documents, including the PDS, until after they had signed the contract. For example, Mr Allan Barrett submitted:
At no time during the signing of the documents where we give a PDS. That was posted out to us a week later with the Lease, Deed of Payment and all of the other relevant documents.
Similarly, concerns were raised about whether the marketing of the Silverlink product was appropriate:
Another aspect of its novelty is its highly convoluted design. It was marketed as a lease-for-life rental scheme. The purchaser believes they are signing a long-term rental agreement marked with a deed of sale into a trust fund from which rent will be paid from consolidated revenue. To our horror we discovered that the trust fund was a 'sophisticated investor' scheme for which we did not qualify.
The committee was also told of circumstances where the Sterling Group's representatives encouraged tenants to put excess funds into other Sterling Group investments in addition to that required for the 40-year lease:
In 2016 my wife and I were approached by Sterling First and its agent, to invest more money with a first offer of purchasing Preference Shares which we were told would bolster our monthly ROI. After much thought and convincing, we decided to invest another $200,000 into the scheme and were allocated 1,000,000 shares which had a face value of 0.20 cents a share.
Concerns about the marketing methods employed by the Sterling Group were also raised by non-investor stakeholders such as the Financial Planning Association of Australia (FPAA). For example, Mr Benjamin Marshan, Head of Policy, Strategy and Innovation at the FPAA stated that:
I think the problem is that these types of schemes are targeted through seminars and through radio advertising. They're very complicated to understand and they've got complicated business structures behind them, but the seminars and the information that consumers are provided make them sound like all their dreams are coming true. There's not enough requirement for products to disclose the complexity and the risks of their products when they're in those kinds of seminars.
These concerns are discussed in more detail in Chapter 4.
Interactions with government agencies
Many tenant-investors indicated that they were not made aware of the potential adverse consequences on their eligibility for social security and other support payments due to the complexity of the 'rent-for-life' scheme. For example, the committee was made aware of at least one tenant whose investment in a SNLL caused them to be assessed as a homeowner with the value of the rent-for-life scheme also being deemed as an investment. Accordingly, their pension payments were reduced by about half and the tenant was considered ineligible for rent assistance.
Tenant-investors were also critical of ASIC's role in allowing the Sterling Group to continue to offer the 'rent-for-life' schemes and other investment products when there were concerns in relation to the PDSs and the previous histories of the Sterling Group's directors and other key personnel:
I wish to strongly complain of the disgusting and negligent performance of ASIC in their duty to protect the people of Australia with regards this fraud. ASIC were aware of the problems with this scheme in 2015 and did nothing to protect senior Australians from having their life savings stolen. Apart from issuing a stop order in 2017 on the [SIT] they still permitted Sterling to raise another $11 million with the same product by using a new trust called SILVERLINK. They did nothing to stop this. This negligence by ASIC is deplorable and the worse form of negligence by a Government Body.
Tenants were particularly critical of ASIC's preliminary investigation process where they were approached for comment about the Sterling Group's activities without being informed about any potential concerns. For example, one submitter noted:
My parents moved into their Sterling New Life (SNL) rental property in March 2017. …everything seemed fine, until I found out that in about August 2017, ASIC investigators from WA office had attended my parents Gosnells unit, asking about their SNL lease. My parents said everything seemed fine - why were they asking? They said nothing to worry about, but can we take and copy all the documents? Which they did and sent back.
Similarly, another submitter explained:
We had an ASIC staffer contact us by phone in April 2019 asking us what we understood we had 'bought' and were happy. Our reply was a 40-year rent for life, money paid into a trust account. We were then asked if we had thought we were investors. Our answer was no, we were tenants, paid for a 40-year lease up front. We were then told that there is nothing to worry about when we questioned him as to why he was asking these questions. Conversation ended and we have heard nothing more since.
Other victims of the collapse were also concerned about what they saw as ASIC's limited ability to prevent the Sterling Group from offering a similar 'rent-for-life' product through the Silverlink vehicle:
When we entered into the 'Rent for Life Lease' agreement on 18th April 2018 the product offered to us as an option was called 'Silverlink' as opposed to the 'Sterling Income Trust' (SIT), we elected for the 'Silverlink' product which in essence was basically the same product as the SIT product only restructured and called a different name.
The relevance of this, as we now know (but not at the time we signed up in April 2018) is that ASIC placed a stop order on Sterling selling the SIT product in September 2017, yet Sterling continued to offer SIT as a product after the stop order well into 2018. This fact was never disclosed to us by Sterling, yet Sterling directors, to get around the ASIC stop order, restructured the SIT changed the name and continued to sell it under the new name 'Silverlink'.