Fellow director Rob Roest was similarly found guilty of all the charges he was facing.

Both are now remanded in custody awaiting sentencing.

Justice Venning said a prison sentence was inevitable for Petricevic. He will be sentenced on 26 April. Only 21 sleeps until we find out how long he will be sleeping in a cell and eating prison food.

After seeing our Vestar-recommended investment in Bridgecorp plunge in value by 90 percent, a loss of some $36,000, I hope the sentence might be long enough for rot to set in.

I personally find it unsettling that the likes of Petricevic are pursued aggressively, as they should, while Vestar’s investment advisors get off scott free. Like Petricevic, their defence was finger pointing too… “We had no power to influence the portfolios. We were just doing what we were told.”

But if a client instructed that they did not want to be in a particular investment, or wanted a particular investment redeemed when it came up for rollover, they were bound to act upon that instruction. And I understand at least one ethical advisor quietly suggested clients give him such instructions, thereby saving their bacon.

Shame our advisor was not of that same ethical ilk.

And a salutary lesson to all advisors to put your clients’ interests first, not your own, if you want to survive and prosper long term. Petricevic proves you can get away with it for a while but not forever.

If you are a participant and have not yet received your email, please check your spam folder.

If you have recently changed email addresses and forgotten to update us, please email your updated details to both vern@vov.co.nz and bkeon@slingshot.co.nz.

Case law now exists that suggests Vestar is in the clear for recommending Bridgecorp. Going by case law, the Courts will deem it was an appropriate investment for Vestar to recommend because of its Lloyds insurance and the existence of an adequate ratings report.

There will undoubtedly be other investments that the Courts will deem to have been appropriate.

If the Cornwells win, the best-case scenario is damages of $105,000 plus costs. The likely scenario is $60,000 plus costs.

Any costs awarded are likely to be no more than half the Cornwell’s actual costs.

If the case proceeds to a full hearing in the High Court, the Cornwell’s total costs will be in the order of $250,000. The defendants’ costs will be in the order of $350,000.

A possible likely scenario is therefore that the net cost of the Cornwell case will be $125,000 ($250,000 actual cost less 50% that the defendants are ordered to pay) and the damages awarded $60,000.

That’s a net cost of $125,000 less $60,000 damages the defendants must pay for their actions that led to the Cornwell’s losses, which equals a net loss  of $65,000.

In other words, the financial outcome will likely be $65,000 worse than if the case had not been taken at all.

But there is no guarantee of winning. This is what is know as “litigation risk”.

If the case goes the other way and the Cornwells do not win, they will receive no compensation and face a cost of $250,000 for their case and maybe half of the defendants’ costs of $350,000 – an all-up cost of $425,000. Ouch.

Armed with knowledge of the two recent relevant cases, both sides have therefore agreed not to proceed to trial. This is a rational, pragmatic approach by both sides.

BACKGROUND

The case was brought against Dillon O’Sullivan, Kelvin Syms, Simon Purvis, Andre Gaylard, Bret Jackson, Kenneth Swain, Donal Curtin and John Perris.

Dillon O’Sullivan was general manager of Westplan, 40% owned by Northplan, and an investment advisor at Westplan’s Hawera branch.

Kelvin Syms, Simon Purvis, Andre Gaylard, Bret Jackson and Kenneth Swain were directors of Northplan.

Donal Curtin and John Perris were members of Northplan’s investment committee.

Charles Luscombe, Dorothy Turner and Kathleen Whyte engaged Dillon O’Sullivan to manage the investment of their mother’s estate. Their mother, Winifred Luscombe, was elderly, frail and unable to conduct her affairs independently.

At the start of 2007 their mother’s portfolio, of which 82% had been placed in finance companies, was worth about $500,000. By the end of that year it had lost two-thirds of its value and was worth about $167,000.

Bret Jackson and Kenneth Swain applied for summary judgement/strike out of the claims against them, claiming that none of the claims against them could succeed.

Considerations

As a director, Bret Jackson attended monthly board meetings of Northplan in Albany. The board meetings usually included an update from Westplan, prepared by Westplan’s general manager, Dillon O’Sullivan.

Northplan’s board kept an overview of the general allocation of all investment funds, in keeping with its governance role. Reviewing specific investment advice is a management activity and therefore outside the scope of the board in its governance role. The board’s concern was simply to ensure there was a ‘process’ followed by the investment committee and that the investment committee was staffed appropriately.

Jackson said it was not the board’s role to interfere with decisions about the recommended investment portfolios or specific client advice. He was not a financial planner and had no involvement with clients or the investment portfolios of clients.

Jackson never met Mrs Luscombe or her children. In fact, he had never heard of them until served with their claim against him, and had no knowledge of their particular investment needs or requirements.

Kenneth Swain’s background is life insurance. He established Swain Investment Services Ltd in 1997 and first became involved with Northplan in 2002 when they were appointed to provide expert advice “as to the asset allocation of product selection”. From that time Swain Investments had the benefit of the model portfolios recommended by Northplan’s investment committee.

In 2004 Swain sold a 20% shareholding in Swain Investments to Northplan, which appointed a director to Swain’s board. MFS purchased Northplan in December 2006 and the remaining shares in Swain Investments in March 2007. Swain was appointed to Northplan’s board in July 2007.

In relation to Jackson and Swain, the case was brought on the basis that as directors of Northplan they knew, or ought to have known, or were in a position to control matters in order to prevent any of Mrs Luscombe’s losses from occurring.

They were sued simply because they, along with the other named defendants, were board directors at the time when Mrs Luscombe’s losses of $330,000 were incurred.

DECISION

The judge described the case as being about whether or not there was an assumption by Jackson and Swain of personal responsibility to Mrs Luscombe and her children.

He said the case does not identify any decision [in relation to Mrs Luscombe] for which Jackson and Swain are responsible.

He described the statement of claim as being replete with allegations of negligence that Jackson and Swain, as directors, had caused $333,000 of losses when there was nothing connecting them to Mrs Luscombe or her children specifically.

The judge also said there was no evidence the board enforced the investment committee’s recommendations.

Although directors can be liable for failing to discharge their duties to manage the company, those duties are owed to the company and not to third persons ordinarily. The judge stated that “directors do not in the ordinary course owe duties to anyone other than their company.”

The judge agreed with Jackson & Swain’s lawyer “that to impose personal liability upon directors on the basis that they should have known about the quality of investment advice being given by one of its advisors, is a charter for indeterminate liability.”

If a director is simply discharging his or her responsibilities as a director, making decisions in board meetings and supervising the management of the company, he/she cannot be liable to the outside world.

The judge could find no evidence “to found a case for personal responsibility to the plaintiffs.”

Result

There was no arguable case to sustain the claims against Jackson and Swain and their applications for summary judgment were therefore granted.

Costs

The court ordered the plaintiffs (Mrs Luscombe’s children, as executors of Mrs Luscombe’s will), to pay Jackson’s and Swain’s costs.

VOV SUMMARY

Jackson and Swain were found innocent but the case against the other defendants continues. It may even succeed, but at what cost?

The judge in this case found that directors are not liable to investors if they are simply carrying out their responsibilities as a director. Being a board member per se is not enough. The director has to be involved in management or operating decisions that directly affect the investor in order for such liability to arise.

There was evidence that the investment committee developed model portfolios for different kinds of investors, that it was then up to the investment advisors to present those options to clients, and that they had a discretion about recommendations given to clients.

Advisors had a discretion to vary the recommended model portfolios within limits; greater variation being allowed with higher management level approvals.

It is clear that directors who stick to their governance role are in the clear. It also appears to VoV that members of the investment committee will most likely attempt to argue that it is the investment advisors who are liable to individual investors, not the investment committee.

Any case would have to provide evidence of the investment committee’s model portfolios being enforced, or advisors having insufficient discretion to vary the model portfolios enough, for anyone other than individual advisors to be held liable.

It is a curious but entirely predictable situation in that senior management are pointing the finger at the advisors saying they had discretion to vary the portfolios to suit individual investors, and the advisors are pointing the finger at senior management saying they had no choice but to enforce the model portfolios.

In this case, though, the discovery phase has been completed and the judge is satisfied that all the evidence is before the Court. There appears to be no evidence that investment advisors were compelled to enforce the model portfolios.

VoV therefore has grave reservations about the probability of this case succeeding.

If it fails, Mrs Luscombe will not only have lost $333,000 but she will face direct costs of perhaps $150,000 or more plus face having to pay some or all of the defendants’ costs, which could be in the vicinity of $350,000.

Given that her portfolio is now only worth $167,000 one wonders if there will not only be nothing left, but Mrs Luscombe and the children will have to mortgage their homes to pay the bill.

It is a sobering thought.

And if they win, the Armitage v Church precedent I wrote about in my last article suggests compensation would be for less than 50%, in which case they, like Mr Armitage, are likely to be worse off than if they had not taken the case at all.

Stay tuned for instalment number three next week.

He argued that his financial advisor, Mrs Carey Church of Moneyworks NZ Ltd, was amongst other things negligent in recommending he invest in finance companies that were riskier than appropriate.

BACKGROUND

Mr Armitage retired from the New Zealand government owning a number of rental properties. He attended a seminar in March 2003 at which Mrs Church presented on the topic of how to manage investments in retirement.

This led to a meeting in April 2003 where Mrs Church reviewed the financial details of the investment properties then owned by Mr and Mrs Armitage and their trust.

In her investment report for them, Mrs Church recommended they sell one of their investment properties, take out substantial life insurance (through her), and work towards long-term fixed interest investments.

[How familiar, says VoV. We too were persuaded to ditch our previously successful investments and invest the money through Vestar. We are still angry about the misleading claims that convinced us to go with them.]

In December 2005 Mr Armitage sought advice from Mrs Church regarding the investment of some $350,000 to $370,000 expected from the sale of one of their rental properties.

Mr Armitage completed a risk profile questionnaire which ranked him as a “conservative” investor.

Mrs Church recommended a narrow range of fixed interest investments: two ING products and four finance companies – Bridgecorp, MFS Pacific Finance, Strategic Finance and North South Finance.

All four finance companies later failed.

In late 2006 Mr Armitage again sought advice from Mrs Church about investing $640,000 from selling his remaining investment properties, as well as $430,000 of his own funds, which would bring their total investment portfolio up to around $1.4 million.

Mrs Church advised Mr Armitage to invest in more ING products and the four finance companies.

Bridgecorp went into receivership in July 2007 and around the same time Mr Armitage terminated his relationship with Mrs Church and Moneyworks.

Mr Armitage sued in 2009 for $292,000 of the losses he claimed were caused by Mrs Church and Moneyworks breaching their duty of care in the spread and risk level of his investments.

[Sound familiar? Right up to this point you could easily substitute 'Vestar' for 'Moneyworks' and it would describe many Vestar clients' situations perfectly. - VoV]

DECISION

Guilty

The court found Mrs Church guilty of breaching her duty to provide competent advice.

Her recommendation that Mr Armitage concentrate his investments in finance companies was found to be inappropriately narrow and exacerbated risk. Mr Armitage had 67% of his investment funds in three companies, and his family trust had 24% in four finance companies and 74% in ING funds.

She was also found negligent in her advice to invest in ING’s Credit Opportunity Fund (COF) as part of the fixed interest portfolio, as this was really a growth asset.

Given Mr Armitage’s risk profile, the court ruled these investments were not appropriate.

The court also cited Mrs Church’s failure to recommend alternative, less risky fixed interest investments, such as listed corporate bonds or bonds issued by government and local bodies.

She was also found to have failed to disclose that her advice was limited to certain categories of investment, and that she restricted her investment research to finance companies and ING products. Her disclaimer was not enough to avoid liability.

Personally Liable

The court also ruled that Mrs Church was personally liable. Due to her high level of contact and close relationship with Mr Armitage, the judge found she should have reasonably foreseen the damage that would result from her failure to provide competent advice and therefore the corporate veil of her company Moneyworks Ltd could not protect her from personal liability.

Not Guilty

Mrs Church was not found to be negligent in recommending Bridgecorp. Her advice was justified in view of the existence of Lloyds insurance as well as a positive rating from Rapid Ratings.

She was also not negligent in recommending ING’s fixed interest investments. Despite there being only a single fund manager, the product spread was sufficient, unlike a single finance company debenture.

The court found Mrs Church was entitled to rely on ING at the time “as being sound and of good reputation, with very substantial backing.” The drop in value of the funds was due to the global financial crisis, which Mrs Church could not have reasonably foreseen.

Partial negligence by Armitage

It was important to Mr Armitage that his investments would generate the level of income he required from them. As a result he expected higher interest rates than appropriate for low-risk fixed interest investments.

The court found this contributed to Mrs Church’s negligent investment recommendations, and reduced damages by 25% to account for Mr Armitage’s ‘partial negligence’.

This revised figure for damages payable was reduced by a further 60% because of evidence that Mr Armitage may not have followed more prudent advice even if given. The judge considered there was at least a 60% chance that Mr Armitage would not have followed competent advice to invest in less risky fixed interest investments. These would not have failed but would have paid up to 2% less interest.

Mrs Church was therefore found liable for only 30% of the damages sought.

Damages

Mrs Church was ordered to pay nearly $60,000 compensation for loss on the finance company investments, and around $8,500 plus interest on losses from the ING COF product. She is appealing the decision.

Costs

The court ordered Mrs Church to pay Mr Armitage’s costs.

However, the court noted that rather than focusing on the material issues, both sides pursued arguments that the court regarded as diversions. This added unnecessary time to the trial and judgment. Mr Armitage also made a belated amendment to the Statement of Claim.

For these reasons, the court ordered costs in favour of Mr Armitage at the lowest end of the scale.

VOV SUMMARY

Mr Armitage won the battle but lost the war.

He calculated his losses at $292,000 and ‘won’ the case but was awarded only $68,500 (including interest) in compensation.

Furthermore, the ‘costs’ awarded to him would most likely have covered no more than one third of his actual costs.

By my calculations this would have left him with a legal bill that was not even covered by the $68,500 damages awarded to him.

Mr Armitage’s actual costs were not disclosed. However, VoV estimates perhaps $150,000 for the High Court trial, plus another $30,000 for expert witnesses and ancillary costs, giving a total cost of $180,000.

The costs awarded to him might reach $50,000 at most, being one third of his trial costs. That leaves Mr Armitage with net costs of $130,000.

However, he did win $68,500 in compensation plus interest, which reduces his net cost to $61,500.

In other words, despite winning the case, Mr Armitage is another $61,500 out of pocket than if he had not taken the case at all.

That means it’s cost him $61,500 for a moral victory over Mrs Church. And it may not yet be over because she intends to appeal.

Food for thought, says VoV.

Stay tuned for instalment number two tomorrow.

Over the course of the next week I will report on two important precedents and the implications for our case, then report on the status of our case.

Stay tuned for instalment number one tomorrow.

“If successful, the bid to oust the current manager of the listed Vital Healthcare Property Trust will be the third investor “rescue” by little-known Ascot fund management group.”

> Full article here

He describes it as a more public situation than he has been used to over the last five years, but the fundamentals of “the retail investors getting a raw deal” is still the same.

If you know anyone who is a unit holder of Vital Healthcare Property Trust (“Vital”), could you please pass on that David would be grateful for their support.

The Vital share register is “open” (not dominated by the institutions) so the battle will be won or lost by the engagement he gets with retail investors.

Unfortunately there is a history of apathy that he will need to break through. Word of mouth and good PR (which hopefully starts in tomorrow’s Sunday Star Times) will be critical.

Effectively, things are still chugging along at glacial pace and there is no change since their last update. They will next report to investors in December 2011.

PAC has two A$418m claims against Octavier and OCVA (both in liquidation) in respect of the Put Option and the mismanagement of PAC’s loans. There is still no confirmation from the liquidators in respect of these claims.

Octavier and OCVA don’t have enough money to pay all their debts in full, including those to PAC.

There is also “a dispute regarding priority ranking in respect of certain debts and proceedings are in place regarding this matter.” What that means is that some people owed money are arguing they should be paid out before other people, and it’s now being argued before the Courts.

Until that’s resolved, the liquidators can’t say how much is available to pay out.

On 22 December 2010 there was a payout of 1.67 cents in the dollar to secured debenture holders. That brought the total return since the start of the moratorium to 23.86 cents in the dollar.

If your Vestar advisor is not listed below, would you be kind enough to leave a comment below with the name of your advisor, and which office they were working out of.

Here is the list we have so far…

Thanks in advance for your help.

Keon is the client liaison officer charged with acting as the interface between the large group of Vestar investors funding the legal case and barrister Lawrence Herzog’s instructing solicitor.

The Cornwells…
The test case is being brought by Bruce & Janine Cornwell who were Vestar clients and are claiming damages for their losses in various finance companies – which the investment committee recommended – that have subsequently failed.

Some of the related-party investments that investors were put into by Vestar are now under investigation by the Serious Fraud Office.

The case…
The case is being taken against Vestar directors Kelvin Syms and Simon Purvis, as well as the former investment committee members, who include Syms, Purvis, Commerce Commission board member Donal Curtin, and John Perris.

Cornwells win round one…
The defendants applied for summary judgement to strike out the Cornwells’ case. A preliminary hearing to consider this application was scheduled to be heard in the High Court in Auckland on 1 November 2010.

Vestar investors Bruce & Janine Cornwell filed evidence opposing the application, and the defendants subsequently withdrew their claims against the Cornwells and with it their application for summary judgement.

Essentially, they accepted they had a case to answer, says Keon.

Hearing date…
The Court has set down a hearing for the Cornwells’ claim in February 2012 but the Cornwells will seek a priority to bring the date forward.

A quick recap on the case…
The Cornwells’ case is being brought as a test case, the result of which a group of aggrieved Vestar investors hope to be able to use as a precedent in further claims that may be brought in the future.

About 150 ex-clients of Vestar have joined forces to fund the litigation against the former directors and members of the Vestar investment committee.

They were invariably low-risk investors, as acknowledged by Vestar in their risk profile categorisation. But we allege that many investments were high risk and inappropriate for these investors’ risk profile, and they have suffered significant losses as a result.

Some of the related-party investments that investors were put into by Vestar are now under investigation by the Serious Fraud Office.

It is our case that the directors and investment committee had a fiduciary duty of care to investors, and damages are therefore sought for failure to advise on the riskiness of the investments.

Our claim is based on alleged negligence, breach of fiduciary duty and breach of the Fair Trading Act.

The former directors and members of the Vestar investment committee were served with proceedings early in 2009. As expected, they all filed statements of defence denying any liability.

An initial Court conference to set procedural guidelines and timetable orders took place on 29 July 2009, and there have been various conferences and applications since then.

More info…
Investors participating in the case and requiring more information can contact Barry Keon as per the contact details contained in the participant briefing he emailed today. Non-participants are welcome to monitor this blog for updates.

He was sentenced in the High Court at Auckland this morning to 11 months of home detention, 200 hours of community service and ordered to pay $200,000 in reparation.

He managed to avoid a jail term with a starting point of three to four years in recognition of his guilty plea, his “genuine remorse” and his offer of $200,000 reparation, which will lead to his bankruptcy. He is also cooperating with the Securities Commission in its prosecution against Nathans.

Looks like he’s one of the few with a conscience. Good on him for doing what he’s done; it must be difficult going down that track when others will fight tooth and nail to avoid consequences.

Other Nathans Finance directors Mervyn Doolan, Kenneth Moses and Donald Young have pleaded not guilty and will fight similar charges. Looks like jail for them if they’re found guilty.

This is very significant. It looks as though the Securities Commission found the weak point in the wall of silence. As all finance companies seem to be interrelated I suspect more prosecutions will follow.

Click this link to read the NZ Herald article.

You can view the full table with lots of extra data at www.interest.co.nz/saving/deep-freeze-list.

Special thanks to James Usmar from Saturn Portfolio for referring me to this splendid table.

If you were retired and dependent on the income from your investment portfolio, or were low-risk, short-term investors, Vestar would probably have put 100% of your money into the same mixture of rat bag finance companies they put many into.  Let’s take an example of a $100,000 “low-risk” Vestar portfolio and see what can be expected back:

• Bridgecorp: $17,500 invested… $1,750 expected back.
• Capital+Merchant: $17,500 invested… $175 expected back.
• MFS Pacific Finance: $17,500 invested… $3,938 expected back.
• St Laurence: $17,500 invested… $5,950 expected back.
• Boston Finance: $15,000 invested… $5,550 expected back.
• PropertyFinance Securities: $15,000 invested… $13,650

The total expected return from this $100,000 portfolio is $31,013 – a loss of 69 cents in the dollar. In the meantime, the 31 cents in the dollar continues to trickle back in dribs & drabs.

In a nutshell, it all got a bit overwhelming and I got a bit demoralised.

Like many of you, I’d just like to put it all behind me and move on. This financially devastating experience has been one of the worst things Vestar clients have ever experienced. Me included.

It’s knackered people’s retirement plans, pushed people to despair, and in some cases close to suicide.

If it was just the “global financial crisis” it would be easier to rationalise it as an act of God. But it’s more than that. The human trickery and deceit makes this whole sorry saga so much harder to accept. It sure is nice seeing the convictions beginning to come through. Some jail terms would be nice.

So what changed? Why am I now back?

A few things…

1. The Christchurch earthquake. What the heck do I have to complain about compared to the people of Christchurch? Time for Vern to pull himself together and show some moral fibre.
2. A phone call. There is a Vestar victim out there who thought they were all alone. They’ve never spoken with another Vestar victim and didn’t know they existed, let alone the scale of the problem. I received an email, then we talked. Their story is heart wrenching. They were close to retirement with about a quarter of a million invested through Vestar. Their portfolio contained all the usual dodgy finance companies. After the collapses they were left with no income and some health issues to deal with. They had to go to WINZ who put them on a sickness benefit until they turned 65, at which time they transitioned to the pension. They had to sell their house and downsize to free up a small amount of capital, which is now on term deposit in the bank. They stumbled across this blog last week, which has helped them come to terms with what’s happened.
3. You. I get lots of email. You have a thirst for information and want to know what’s happening. There is an excess of information everywhere you look, but precious few sources of good, distilled information tailored to our needs. You also need support, to know that you are not alone, and this blog provides that.
4. James Usmar. James has been wonderful in providing me with relevant information and encouragement. He is one of life’s true gentlemen, and a damned good financial planner working for one of the best investment advisory firms in the country. If you have any savings left and want to do something better than just leave it in the bank, I highly recommend James. Give him a call on (09) 379-5501 or look up the website at www.SaturnPortfolio.co.nz.
5. The legal case. I had a meeting just before Christmas and am overdue to provide you with an update. Expect it in the coming week.

What’s next? As well as the legal case update, I’m working on an article that will contain a list of all the failed finance companies and how much you can expect to get back from each one, as well as before and after values for a typical Vestar low-risk, income portfolio.

Allan Hubbard has his supporters, and a vocal number of them have been protesting against the statutory management imposed by the Government on Mr & Mrs Hubbard and nine trusts and companies they run. The Hubbards are also under investigation by the Serious Fraud Office, another matter that his supporters are unhappy with.

They say the Government’s approach is divisive and unfair and that it has provided no evidence to justify its actions. They have asked the Government to extend the same compassion toward Mr Hubbard that he has to investors over the years.

And that, I believe, is the crux of the matter.

Mr Hubbard appears to be a nice man. A gentleman. He lives in Timaru and is/was the South Island’s wealthiest man. He is a major philanthropist. Despite his wealth and 82 years of age, he drives a VW and arrives at work at 6:30am every day. And he is on kidney dialysis.

It pulls all the heart strings… On top of liking him we can admire his success, his generosity, his work ethic and his non-ostentatious lifestyle, and feel sorry for him with his medical condition and the predicament he finds himself in at his age.

Does that mean we should join the chorus of those protesting his innocence and the unfairness of the Government’s actions?

VoV believes it would be hypocritical to do so.

We have campaigned for the Government to take action against finance companies and protect investors, and we have protested about the Government’s lack of such action. It would be hypocritical of us to now protest about the Government doing the very thing we have campaigned for.

Yes, it should have taken action to protect investors in other finance companies and hasn’t, but that is another issue.

Bridgecorp and Capital+Merchant failed before the Government stepped in to guarantee finance company investments. South Canterbury Finance is by far the largest finance company the Government has had to guarantee, with $1.9 billion of assets and 30,000 investors owed about $1.3 billion. This perhaps explains why it was so quick to take action on this occasion.

VoV only wishes that self-interest wasn’t the only thing spurring the Government into action.

Investors have collectively lost much more than the Government stands to lose with South Canterbury Finance, but because we are a once-removed group of disparate individuals, we have less visibility and are way down the priority list.

South Canterbury Finance, on the other hand, could potentially cost the Government a quarter of a billion dollars or more. One entity. One lump sum. So the Government understandably moved to protect its investment.

Allan Hubbard stands accused of:

• Lending $134 from Aorangi Securities Ltd without adequate documentation.
• Not having the required investment statement and prospectus.
• Aorangi invested $83 million of investors’ money in farms, of which $59m is to farming businesses associated with Mr Hubbard.
• Many of the farms are struggling and of the 51 loans on them, only 17 will be able to meet their obligations in September.
• $24m of investors’ money was lent to Hubbard’s Te Tua Charitable Trust. The statutory manager says many of the loans are interest free and some will not be recoverable.
• Of the $23m in mortgages Aorangi lent to businesses, $10m is to Southbury Group, a company associated with Mr Hubbard.
• Overstating the value of Hubbard Management Funds (HMF) by at least 25 per cent by reporting non-existent investments and cash balances.
• The statutory manager says the investment profile of HMF is not consistent with what would be appropriate for a typical investor in HMF. “There is a lack of blue chip investments and the composition of the fund’s portfolio generally means that the fund is high risk in nature.”
• The Serious Fraud Office is investigating possible Crimes Act breaches.

VoV is not qualified to judge or even opine upon the validity of these accusations. It is impossible for us to know the full facts until afterwards.

All VoV will say is that the Government is doing what it feels it must to protect its investment. It would be wrong for us to let emotion cloud our judgement and join the chorus of those protesting against this.

Our feelings of affection for Allan and Jean Hubbard should be compartmentalised. We must let the statutory management run its course and see what is turned up.

I wish the Government had acted in a similarly decisive way in the past. We now know it can act decisively when its own money is at risk. Perhaps the bureaucracy has finally awoken and will act decisively in future cases where investors’ money is at risk. Let’s live in hope.

Legal Case Against Vestar

Question: Can anyone give us any information regarding the class action against Vestar by Lawrence Herzog?

Vern says: Lawrence Herzog emailed an update to participants today. However, there are 27 participants for whom Lawrence has no email address. If you are one of those, please contact vern@vov.co.nz or write to: Victims of Vestar sub-group, c/o EUFA, PO Box 8021, Cherrywood, Tauranga 3145.

The former directors and members of the Vestar investment committee were served with proceedings early last year. As expected, they all filed statements of defence denying any liability.

An initial Court conference to set procedural guidelines and timetable orders took place on 29 July 2009, and there have been various conferences and applications since then.

Mr Herzog says a preliminary hearing on the Vestar test case is now set down to be heard by the High Court on 1 November 2010. The purpose of this preliminary hearing is for the Court to make a binding decision on the validity of the case against Vestar directors and members of the investment committee.

Success in the preliminary hearing is a necessary step in the process towards a final Court hearing, which will ultimately determine the final outcome.

Radius

Question: Has there been any further development on the progress that was projected at the September 2009 meeting? Have the new directors been able to get to the heart of the problems in the businesses? Have they been allowed to exercise any real changes in order for us “victims” to get our investment released?

James says: Sandy Maier, the chairman of Radius Properties Ltd, released a letter on 14 July 2010 updating shareholders on progress to date. Click here for a PDF of the letter (or right click and select “Save Target As…” to download).

The letter deals with the historic nature of what was found after Ascot Capital Management (David Glenn) became the manager and gives details of the various settlements he has negotiated.

According to the letter, the Board believes the net asset backing of each RPL share at the time they assumed control was approximately $0.36 per share. This is the Board’s unaudited assessment of value at 10 November 2009.

The current value per share will be announced after the 2010 audited accounts are completed in August. However, I am told the new manager’s negotiations and activities have removed large liabilities that will see the value per share increase materially above 36 cents.

Where Are We At With All The Failed Companies?

Question: Thanks once again for all the hard work – it is appreciated. Like most Vestar clients, we have a bunch of “investments” in finance companies which are either in moratorium or receivership, and others in companies like Radius and Clendon that have no market or are in perilous situations. I find it very difficult to keep track of their status. Some, like OPI for instance, have been silent for many months. Would it be possible to produce a summary of these companies with a description of their current standing (in moratorium, in receivership, etc)?

It is also difficult to reconcile capital repayments, so I wonder if James could also devise a summary of repayments already made, and where available (like St Laurence) the projected final return range? We are probably getting close to the time when most of us will have a picture of how much we have lost forever! I’m not sure I want to know, but still… Thank you again.

James says: A good question – it’s hard enough for me to keep on top of so must be very difficult for you. I suggest all readers leave a comment below with the companies you would like commentary on (a straw poll if you like) and I will collate the information starting with the most requested companies.

Finance Company News

James says: Here are some items of relevance that have come across my desk recently…

Criminal Charges – North South / Dominion Finance
The Securities commission has laid criminal and civil charges against the directors of Dominion Finance and its sister company North South Finance. They are accused of misleading investors by misrepresenting their financial position and risks. Dominion Finance was put into receivership in 2008, owing $176.9 million to 5,900 investors. The receiver told investors in its March update they can expect repayments of between 10 cents to 25 cents in the dollar. North South avoided receivership after its trustee agreed to an orderly supervised wind down of their book.

Significantly one of the directors, Vance Arkinstall, is chief executive of the Investment Savings and Insurance Association (representing the main funds management companies) and past chairman of the nominating committee for New Zealand Superannuation Fund Guardians. Other directors charged are Richard Bettle a director of listed company’s Goodman Property Trust, Terence Butler, Ann Butler, Paul Forsyth and Robert Barry Whale.

Irongate bonds to pay out – Formerly St Laurence Property and Finance
Relief for all when Irongate announced that it has agreed binding terms with a consortium led by Bluestone Group. The consortium is to provide $45 million in new funding, which will allow Irongate to repay in full its Series 1 and 2 Bonds, scheduled to mature on 15 July 2010.

Lombard may increase interim distribution
The receiver now has sufficient funds to pay a further interim distribution of 2.5 cents in the dollar to secured debenture investors. They are currently working through a recovery process which could increase the interim distribution to up to 5 cents in the dollar. They are delaying the issue of the next report until on or around 12 July 2010 this report will confirm the next interim distribution.

ING Diversified Yield Fund (DYF) and ING Regular Income Fund (RIF) – who gets paid?
The commerce commission is determining the payment method by the 19th of July, payments to be made within 90 days of the 22nd of June.

ING says: “The Commerce Commission has raised a number of issues as a result of its investigation, but has acknowledged that these issues remain untested from a legal perspective. While we do not agree with all of the Commission’s views, we agree that it is in the best interests of investors to avoid a lengthy court process, with an uncertain outcome for all.”

The Deed of Settlement regarding Commerce Commission Investigation into ING Diversified Yield Fund and Regular Income Fund says: “By this Deed, ING (NZ) and ANZN acknowledge that some of their conduct may have breached the Act and agree to make further payments to eligible investors (further payments).” … and… “ING (NZ) and ANZN acknowledge that some, though not all, of their conduct in relation to the funds may have contravened sections 10, 13(a), 13(b) or 13(e) of the Fair Trading Act 1986.”

Eligible investors are under the deed means: “Eligible investor” means all persons and entities who invested in the DYF and/or RIF and suffered loss arising from that investment and have not already received 100% of the amount invested by them back from ANZN and/or ING (NZ). For the avoidance of doubt this includes only those investors who held units at the date of suspension of the funds on 13 March 2008 (the suspension date).

About James Usmar

James Usmar joined Saturn Portfolio as an investment adviser after immigrating to New Zealand in 2006. He was a qualified financial planner in the UK working for a tax consultancy firm, where he specialised in investments through financial centres such as Jersey and the Isle of Man.

About Saturn Portfolio

Saturn Portfolio is an investment advisory firm built on a history of trusted advice since 1988. They invest $160 million on behalf of clients. Four experienced client advisers work in the business. Saturn Portfolio is not aligned to any investment manager or product provider. This means they can freely select and recommend the most appropriate investments for you.

Their process is to discover and discuss your current situation, goals and investment knowledge. Once they assess your needs they give you a written plan, which they discuss with you and clarify any queries. They do not implement the recommendations until you give approval to proceed.

Importantly, Saturn Portfolio’s sole source of income is the fee you pay to them. They do not take any commission or brokerage from product providers. www.SaturnPortfolio.co.nz

Today we have some news updates that have come across James Usmar’s desk this week…

St Laurence Receivership

The latest St Laurence receivership reports (PDF 2.8 MB) are out. St Laurence’s receivers told investors the best they can expect to recover is 32 cents in the dollar, including the 10 cents already paid under the finance company’s failed moratorium. The report estimats debenture holders will get between 15 cents and 22 cents more from the company’s remaining assets, while note holders and unsecured creditors will get nothing. The receivers will also pursue guarantees provided by former managing director Kevin Podmore and associated companies pledging to meet any shortfall in funds to a maximum $20 million if St Laurence was put into receivership.

Relief for Hanover and United investors?

Some relief for Hanover and United investors came this week as Allied Farmers has accused Hanover Finance of breaching their agreement and will take legal action against Mark Hotchin and Eric Watson. Allied have not paid them the $5 million dollars they were due to pay as part of the original deal, which is good news. What is also interesting is that they may also try to pursue the Hanover Directors for potentially ducking out of guarantees that were due under the moratorium, potentially $20 million. Small beans to the investors I know but better than nothing.

Ascot Private Equity Limited

There have been some positive changes at Ascot recently. Click here for an interim update (PDF 25 KB).

ING Diversified Yield Fund and Regular Income Fund

Please click here for the latest from ING (PDF 13 KB) regarding their $45 million settlement with the Commerce Commission who investigated the marketing, promotion and sale of the DYF and RIF Funds. There is sadly no clarification available at present as to who is likely to receive a share of this. Is it ANZ customers or all investors? ING aren’t saying but I will let you know as soon as possible.

About James Usmar

James was a qualified financial planner in the UK working for a tax consultancy firm. He specialised in investments through financial centres such as Jersey and the Isle of Man. James joined Saturn Portfolio as an investment adviser after immigrating to New Zealand in 2006.

About Saturn Portfolio

Saturn Portfolio is an investment advisory firm built on a history of trusted advice since 1988. They invest $160 million on behalf of clients. Four experienced client advisers work in the business. Saturn Portfolio is not aligned to any investment manager or product provider. This means they can freely select and recommend the most appropriate investments for you.

Their process is to discover and discuss your current situation, goals and investment knowledge. Once they assess your needs they give you a written plan, which they discuss with you and clarify any queries. They do not implement the recommendations until you give approval to proceed.

Importantly, Saturn Portfolio’s sole source of income is the fee you pay to them. They do not take any commission or brokerage from product providers. www.SaturnPortfolio.co.nz

How Did It Happen?

Question: Hey Vern, Firstly I’d like to say that without people like you, these white collared thieves would just simply get away with this. Good on you for carrying the torch for us. I dread getting mail about all this mess because it just brings back the pain. Our money is all gone, the guys that took it are holidaying in Hawaii or wherever, the guys that advised us to give the other guys our money have mostly changed jobs or towns and are untouchable. Am I alone in this feeling?

What I’d really like to know is how did all this happen and how did they get away with it? I’ve been told that Northplan, who had signed papers saying they could invest our money as they saw fit, sold that right or portfolio to MFS, who in turn used our money without our knowledge to replace their money in their failing investment houses, and then wound everything up! So they extracted their money, replaced it with ours without our knowledge and then those businesses slowly but surely went belly up, and there’s nothing we can do about it? Have I been ill advised?

Vern says: Wow, that’s a big question, and a damn good one too! I suspect James Usmar would like to answer this question but as a professional investment advisor might be constrained in what he is professionally able to say. Sometimes it’s easier for someone outside the industry to be more open about these things, so rather than put James in a difficult position I will attempt to answer your question as best I can.

Let’s talk about a hypothetical finance company. Its borrowers are property developers who take out a first mortgage on their high-risk, speculative property development with a bank. But the developer doesn’t want to tip any money in himself so he gets a second mortgage, and sometimes a third mortgage, from a finance company.

The finance company borrows money from mum & dad investors who are lured in by the advertising which promotes the finance company as rock solid with a history dating back to the Renaissance, well-known “names” as directors (often senior Government officials or ex-politicians), conservatively run and generally as safe as houses. (Yeah, right we say with hindsight.)

The finance company pays you 8% interest, pays 2% commission to the financial planning company (over twice the going rate compared to a “safe” finance company), and another 2% as a “marketing subsidy” to the financial planning company as a [legal] bribe to encourage it to tip all its mum & dad investors’ money into the shaky finance company. That’s 12% in total they have to pay to get your money, and all this happens behind closed doors without you knowing anything about it.

Developers are charged say 15% to 20% interest, but because they don’t have any money the finance company says, “That’s okay, we’ll just add the interest to the loan balance and you can pay it when you sell your property development.”

Here’s the interesting bit. Each year the finance company calculates the interest that has been added onto the loan (money it has not received yet) and lists it as profit.

It then announces its huge [paper] profit to the world and projects an air of success, which causes more money to flow in from investors.

And because it’s made so much profit it is able to declare a generous dividend and pay its owners $85 million.

But it’s just a paper profit remember, so where does the $85 million come from? There’s only one place it can come from… the money flowing in from mum & dad investors via financial planning companies. It’s like a legal Ponzi scheme. Legal in this country anyway.

When the economy hits recessionary times, as it always does, and things turn to custard, as they inevitably do, we enter what property expert Kieran Trass calls the banks’ cycle of losses.

If it’s a cycle of losses for banks, what is it for finance companies? This time around it was total devastation. Finance companies went under, property developers went broke, and us investors lost our money. But the finance company directors who saw it coming managed to legally extract their money by declaring huge dividends on the paper profits.

This is nothing more than legalised theft. Robin Hood seems to have switched sides folks… he’s robbing from the poor to pay the rich.

This is the battle that Suzanne Edmonds fights today. She’s doing a great job agitating at high levels to “fix the system”.

Returning to the above scenario, if the company that owns the financial planning company also owns a couple of finance companies that are finding it difficult to get enough money, it’s doesn’t take much imagination to recognise the temptation for them to divert investors’ money into those finance companies. And they don’t need your permission because they conned you into signing a power of attorney allowing them to do so.

They can then use your money to repay the money they lent to the finance company, declare profits, pay themselves a fat dividend, and be sitting pretty when it goes belly up. If they still had a bit of money invested, they can even say, “Poor me, I’ve lost money too!”

What about disclosure rules, I hear some ask? Easy… just get the spin doctors to write the necessary disclosure in such a way that investors are not alarmed, and get your silver-tongued sales reps (dressed up as financial planners) to either gloss over it or “massage” you into believing it is fantastically beneficial for you.

That’s why disclosure rules won’t fix anything. We need harsh penalties like Australia and most other countries in the Western world, not more disclosure.

Most investors used financial planning companies because they didn’t have the skills to analyse all the offerings and disclosures, and trusted the so-called experts.

It is wrong for Government to rely on caveat emptor – let the buyer beware. There absolutely should be rules and penalties in place to protect investors from legalised theft and unscrupulous dealers.

Let’s hope we join the rest of the civilised world in putting such protections in place.

James Usmar of Saturn Portfolio Management reported that there would be a newsletter from the manager (Praesidium Asset Management) and simultaneous commentary from the trustee (Perpetual Trust) on the week of 8th June.

As it turns out, the manager was late with its report, which was eventually released on 16 June. Thank you to James who kindly forwarded me a copy of both reports.

In short, the manager is hoping to achieve an eventual principal repayment in the region of 88c in the dollar on the Class B Notes. However, this is dependent on legal proceedings against Lloyds Insurance to enforce DMT’s right to claim under its insurance policy. The 88c estimate assumes a nil recovery of costs from Lloyds. Any recovery of costs would therefore boost the principal repayment to investors.

Perpetual Trust has approved an extension of the repayment date to 31 December 2010 and acknowledges that additional time might be required beyond 2010 because of uncertainty over how long these legal proceedings will take.

In other words, don’t hold your breath because this is going to take some time.

You can download a copy of the reports here:

DMT May 2010 Manager’s report 
(PDF 66 KB – right click and select “Save Target As…” to download)

DMT May 2010 Trustee’s report 
(PDF 55 KB – right click and select “Save Target As…” to download)