Tuesday, 21 January 2014

Australia's biggest pension scam

An article in The Global Mail by Mike Bowers:

"Inside the Offshore Fraud: The Villains and Victims of Australia’s Biggest Pension Scam"

The timeline gives a clear picture what happened:

Investors are protected by 5 parties:
  • The trustee, who keeps all assets in trust
  • The fund manager, who manages the assets in the best interest of the investors by giving instructions to the trustee, without being allowed to "touch" the assets
  • The financial advisor, who is responsible to give good investment advice to his clients
  • Auditors, both internal and external, checking the books
  • The securities regulator who is responsible for licensing etc.

Yet in this case, involving the Astarra Strategic Fund managed by Trio Capital, all were sleeping on the job:
  • The fund manager and the trustee were connected;
  • The financial advisors received huge incentives to recommend this fund: "Retail investors could invest in the Strategic Fund with as little as $1000, and were often advised to do so by financial planners, who received an up-front commission of up to 4 per cent.";
  • Auditors KPMG (internal) and WHK (extrernal) are reputed companies, yet didn't see the danger; unfortunately, having one of the "Big Four" accounting firms is not exactly a guarantee against fraud or scams, as many cases have shown in the past;
  • Trio Capital, who ran the Astarra Strategic Fund was licensed by Australian financial-regulation authorities

One of my favourite bloggers, John Hempton from Bronte Capital was the whistle-blower in this case, acting on a tip off, the story "A dark privatised social security story: Astarra, the missing money and how examining a fund manager owned by Joe Biden’s family led to substantial regulatory action in Australia" (which is a beautiful read) can be found here.

Remarkably how fast Hempton found out that the persons behind the hedge fund had a rather patchy background, a clear red flag. And yes, Joe Biden is the US Vice President.

Another informative article written by Dominic McCormick, Hempton's tipper, can be found here.

Luckily the authorities acted fast, as can be seen from the above timeline, in a few months all related funds were suspended and only two years later one manager was jailed and many other were punished to a lesser degree. Lots of stories have been written about the case, informing the public. Unfortunately, the alleged mastermind behind it all probably goes scot-free.

What can be learned from this case?
  • Investors should be aware that fund managers don't handle money themselves, they should be separated from the trustees;
  • Investors should be informed about fees, high fees are a red flag since the advisors have a clear incentive to recommend the investment;
  • Don't put all your eggs in one basket, please read the story about John Telford;
  • Even having several reputable companies or authorities overseeing an investment vehicle is not a guarantee that nothing fishy is going on;
  • Whistle-blowers form an important part in the eco-system, if the authorities had not acted so quickly, much more damage would have been done.

In Malaysia several similar cases have occurred, Genevva gold trading scheme was one, SJ Asset Management another. Both cases have dragged on for years, not much information is forthcoming. I hope one day we will get as much clarity about these (and other) cases as in the above Australian scam. Their investors and the public at large deserve it, as do the alleged perpetrators.

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