In a hearing in the High Court at Wellington earlier this year, Neil Armitage sued for losses arising from investments in failed finance companies.

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.

Tags: Armitage v Church, Bridgecorp, Carey Church, ING, ING Credit Opportunity Fund (COF), Lloyds insurance, MFS Pacific Finance, Moneyworks NZ Ltd, Neil Armitage, North South Finance, Rapid Ratings, Strategic Finance, Vestar

This entry was posted on Thursday 24th November 2011 and is filed under Vestar Legal Action. Both comments and pings are currently closed.