Albury-based Trio Capital went under in 2009, leaving a trail of financial destruction in its wake. A Parliamentary inquiry into its collapse found that more than 6000 Australians invested in Trio and its web of related companies. All lost their money (though some have been compensated). Some lost their life savings. More than $176 million disappeared — most likely stolen in a clever trans-national fraud that saw super funds transferred to a British Virgin Islands account and then spirited away into the underworld of organised crime.
The inquiry says that unlike the collapse of investment firms Storm Financial and Westpoint, Trio was not merely caused by incompetence and financial mismanagement. Trio was a carefully calculated and highly lucrative fraud.
The implications for Australia’s superannuation industry and the agencies that regulate it are uncomfortable, to say the least. The inquiry has found that the two key regulators, the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA), were asleep at the wheel.
Trio’s auditors also signed off on a set of accounts that should have raised huge red flags. Financial planners recommended a product which, if they had bothered to look closely, was obviously too good to be true. This lack of due diligence from planners and advisors ended up costing their clients millions. And Trio’s appearance of being a reputable superannuation fund — it had the necessary paperwork from APRA and appeared in ratings from Morningstar — helped deceive investors too.
The details of the Trio fraud are fascinating. There were all the usual features of high-level financial fraud including tortuous paper trials, tricky name changes, off-shore special purpose vehicles, overseas hedge funds, failed Wall Street merchant banks and $2 shelf companies headquartered in known tax shelters.
The report states that "significant monies from these schemes were invested in the British Virgin Islands in hedge funds controlled by a Hong Kong-based American lawyer, Mr Flader. When these hedge funds collapsed, Australian investors’ funds disappeared. The committee understands that Mr Flader is well-known to the United States Securities and Exchange Commission (SEC)". Oops.
Many of the victims of Trio invested after Trio was recommended to them by their financial planners and advisors. In a masterpiece of understatement, the committee notes that "the evidence suggests that their recommendations were influenced by the high commissions paid by Trio." Well, who would have thought?
Trio was largely the master plan of three men: Jack Flader, Paul Gresham and Shawn Richard. Richard, who had his name on many of the legal documents as the Australian director of Astarra Strategic (one of the many inter-related companies involved in the fraud), is the only one to have faced criminal charges. He went to jail for two and half years — a term many would consider rather light on, considering he was intimately involved in one of the largest financial frauds in Australian history. But Flader, allegedly the mastermind, is not being pursued.
Perhaps the biggest scandal of all was the way that Trio’s fraud came to light. Was it due to watchful regulators pouncing on incriminating evidence? A brave whistle-blower within the organisation? Disgruntled investors?
No, Trio first came to the attention of the authorities because John Hempton at Bronte Capital received a tip-off from a reader of his blog. That tipper, Dominic McCormick, noticed that the people involved in Astarra had links to companies involved in previous scams in the UK. Hempton also noticed the obvious Ponzi-like characteristics of the Trio group, which had been hiding in plain sight. He wrote a blog post about it, and also a letter to ASIC Chairman Tony D’Aloisio. Hempton took "about 40 minutes" to discover the following:
"What attracted me to Absolute Alpha [Absolute Alpha changed its name to Astarra later] in the first case", Hempton writes, "was the CVs of the principal players."
Those CVs, listed on Astarra’s publicly available material, included Eugene Liu, named as "chief investment strategist". Liu listed his involvement with the firm Pacific Continental Investments, which went bust during the global financial crisis. This Guardian article from 2008 calls Pacific Continental "possibly the UK’s most notorious firm of stockbrokers." Shawn Richard, the since-jailed CEO, turns out to have been a manager with Pacific Continental in Taiwan, although he didn’t list that on his bio at the time.
Once alerted, ASIC did swing into action, sending Trio and Astarra a series of notices and enforcements. But the inquiry says that it failed to coordinate its activities with the ATO and ASIC. As a result, precious months elapsed, time which the overseas conspirators used to spirit away the money supposedly held in a shalf company in the British Virgin Islands.
Eventually, Trio was investigated and fraud detected. Trio was wound up and Richards charged. But the investigation was hardly copybook. The inquiry says that ASIC and APRA was regularly uaware of each other’s activities: for instance, "when ASIC commenced its active surveillance of [Trio] in June 2009, it did not seem aware that Trio was not providing the prudential regulator [APRA] with basic facts about the existence of assets and their value".
The record of the regulators before John Hempton wrote to D’Aloisio is discouraging. APRA supposedly conducted five prudential reviews of Trio between 2004 and 2009. Nothing was uncovered. Their record since is just as concerning. The inquiry notes that "there are no ongoing criminal investigations into the conduct of Mr Flader or others involved in developing and implementing this scheme." The committee describes Shawn Richard as "only … the
local foot soldier of the scheme."
There is plenty more blame to go round. Auditors WHK — the same guys who signed off on the Coalition’s 2010 election costings, which were later found to be billions of dollars in error — failed to ask any meaningful questions, when serious red flags should have been raised.
But the real worry is what the Trio case suggests about the structure of Australia’s retirement savings. As Hempton notes in his original blog post, Australia’s superannuation system is effectively privatised social security. For those investing their own savings in self-managed superannuation funds (SMSFs), the opportunities for a total wipe-out of their life savings are all too evident.
Unlike industry or retail funds, self-managed super is not regulated by APRA, but instead the ATO. As the inquiry notes, "The ATO’s focus is on the SMSF’s compliance with superannuation and taxation laws, not on prudential safeguards." Because they are not APRA-regulated, SMSFs are not insured against fraud or theft.
SMSFs represent a large and growing pool of money that seems particularly vulnerable to shonky financial planners and dodgy investment vehicles. According to APRA, self-managed super funds accounted for around one-third of all Australia’s superannuation assets last year: a total of $407 billion in 2011. SMSF’s are also the fastest growing type of super fund, probably because of the tax advantages they confer.
The opportunities for frauds and shonks are only too obvious — as are the weaknesses in the current regulatory regimes. Self-managed super can be a wonderful vehicle for saving for retirement. It can also be an opportunity to throw away your life savings. For mum and dad investors, it may be that the complexities and pitfalls of managing their own super are far more dangerous than many realise: certainy more dangerous than the associated returns justfiy.
The performance of the regulators also provides a direct counter-example to the view that Australia survived the GFC because of our superior financial regulation. That may be the case in the banking industry, but what about super?
Without far tighter regulation of the SMSF sector, Australia may be at risk from a domestic financial crisis brought on by a big failure in the superannuation industry. That’s a sobering thought.
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