The Corporate Watchdog Is Fast Asleep


Is something seriously wrong with Australia's top corporate regulator, the Australian Securities and Investments Commission? Bit by bit, the evidence is starting to mount. Australia's corporate watchdog is under sustained fire after a series of revelations in recent months, revelations that have added to a checkered history.

ASIC may not have presided over a Lehman Brothers or a HIH recently, but there's been plenty of mid-level corporate malfeasance, much of which ASIC appears to been slow to investigate or respond to. In case after case, the watchdog has been shown to be asleep on the front mat while robbers made off with the family jewellery.

Remember Trio Capital? One of Australia's largest frauds, Trio Capital was a vehicle for siphoning superannuation investments to offshore bank accounts in the British Virgin Islands, where the money disappeared forever. All told, according to the Parliamentary inquiry into the affair, investors were fleeced of at least $176 million.

While local foot soldier Shawn Richard went to jail, the heist's alleged mastermind, a fellow called Jack Flader, got away scot free. This is despite the fact that when Richard was jailed, the judge in his trial accepted that he was acting on instructions from Flader, whom ASIC called the “ultimate controller” of the fraud. A couple of weeks ago, ASIC decided it didn't have enough evidence to proceed.

ASIC's conduct in the Trio scandal was less than zealous. The regulator only found out about Trio when prominent fund manager and finance blogger John Hempton wrote to ASIC, pointing out the Ponzi-like characteristics of the group's investment strategy, and the easily Googlable links between Trio managers and previous scams. When it did begin to investigate, it failed to liaise properly with the Federal Police and the Australian Prudential Regulation Authority, APRA, which meant precious months were lost. The Senate inquiry found that “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”.

ASIC may know more than it is letting on. Troublingly, the Commission has signed a confidentiality agreement with Trio's liquidator, PBB, which means it has access to approximately 6000 found documents from one of Jack Flader's companies, Global Consultants and Services Ltd, which was the custodian of Trio's funds and of which Flader was the CEO. Trio's victims, which have formed a fighting group called the Victims of Financial Fraud, are pursuing the release of those documents against ASIC.

If the Trio revelations are disturbing, they are just one in a series of recent cases that cast serious doubt on the probity and effectiveness of the corporate regulator. ASIC has presided over a number of legal debacles in which it lost critical court cases against high profile corporate villains like One.Tel's Jodee Rich, AWB boss Andrew Lindberg and Fortescue Metals iron ore baron Andrew Forrest.

ASIC has also been asleep during a number of serious financial collapses where it arguably should have been able to step in before hundreds of millions of dollars of investors' money was vaporised, such as Storm Financial, Opes Prime and Banksia.

But it is  a recent case involving financial planners at the Commonwealth Bank that has really got the dogs barking. The Commonwealth Bank appears to have covered up serious malfeasance, including fraud, forged signatures, overcharged fees and the creation of unauthorised investment accounts, amongst rogue sections of its financial planning staff.

ASIC knew. After an investigation by gun Fairfax business reporter Adele Ferguson, we now know that ASIC sat on detailed allegations of the improprieties for 16 months, after first being informed – via a detailed fax – in October 2008. The regulator only acted in March 2010, after whistle-blowers concerned about the regulators conduct turned up at ASIC headquarters in Sydney.

The Commonwealth Bank has since compensated more than a thousand clients of one rogue planner, Don Nguyen, paying out close to $50 million. The Commonwealth Bank was aware of Nguyen's dubious sales practices, but he brought in so much money, the bank turned a blind eye, even promoting him. Nguyen has since been banned from financial planning for seven years.

Now the Senate, led by the Nationals John Williams, has launched an inquiry into the affair, and ASIC's role in it. There will be plenty to investigate. Apart from getting to the bottom of why the regulator waited for more than a year to investigate detailed allegations of wrong-doing, the Senate inquiry could also look into the Trio case, as well as ASIC's troublingly close relationship to the insolvency industry.

The insolvency sector is a perennial bane to investors in shattered companies in Australia. Insolvency law allows liquidators to pay all their own fees first out of the frozen assets of a collapsed business. All too often, after the administrators take their cut, there's nothing left for the investors. ASIC is also the regulator of liquidators, but it appears just as tardy in responding to complaints. For instance, according to the Commission's own figures, there were 437 official complaints about rogue liquidators made to ASIC last year. The Commission commenced only 19 investigations.

It's tough to win a case against a liquidator when the body you complain to is ASIC. A 2010 Senate inquiry into the sector recommended that ASIC be stripped of its regulatory powers of the insolvency sector. But when a liquidator requires a quick answer from ASIC, the response can be quite different. Fairfax's Michael West wrote an article recently drawing attention to the administration of failed mining company Kagara, which collapsed last year leaving 500 people out of work and investors out of pocket for close to a billion dollars.

Angry investors are raising serious questions about the conduct of Kagara's administration. Kagara's administrators, FTI Consulting, have received a “relief order” from ASIC which allows FTI to withhold Kagara's accounts. FTI received the special exemption in only three days, which, as West points out, is a rather different timeframe to the sixteen months waited by the Commonwealth Bank whistleblowers.

How has ASIC responded to the criticism? Truculently. ASIC's Peter Kell has been strident in his defence of the corporate regulator, engaging in a fiery exchange with Labor Senator Doug Cameron on the issue recently, and also penning an op-ed in the Fairfax papers.

I can understand why any investigation, whether it takes 12 months or 12 days, is never going to seem fast enough for those suffering the stress of lost money. But CFP was a complex matter and cases like this involve much background work before a public result is achieved. That is how law enforcement works.

The coming Senate inquiry may test that resolve. ASIC's record as a regulator is manifestly poor. Perhaps it's time our lawmakers looked into some serious reform.

Ben Eltham is New Matilda's National Affairs Correspondent.