Monday, 25 June 2012
Corporations and Financial Services Committee; Report
I am pleased to resume my remarks about the recent report of the Corporations and Financial Services Committee into the collapse of Trio Capital. When I was interrupted I was speaking on the topic of Mr Jack Flader and the other international masterminds who appear to have been involved in perpetrating this fraud on Australian investors. The committee in its report has called on the regulators—ASIC and APR—and the Australian Federal Police to urgently reopen an investigation into likely criminal activity in this matter. The committee has also urged ASIC to fund the liquidator of Trio to continue its factual investigation into where the money went, particularly the assets of the ARP growth fund. It seems beyond dispute that the money went offshore to the British Virgin Islands, but the final outcome is still, to the committee's great surprise, not known with certainty.
In my remarks I will focus in particular on the ARP growth fund, which was one of the funds operated by Trio Capital and one of the funds in which a significant number of my constituents lost large amounts of money. In fact, the tragedy of this affair is that a large number of Australians invested the entire balance of their self-managed superannuation fund into the ARP growth fund. The average balance was in the hundreds of thousands of dollars, and there are people who have lost more than that as a result of the fraudulent conduct of those responsible for the operation of Trio.
The history of this affair was canvassed in some detail in the committee's report. As late as 2008 an audit of the ARP growth fund as well as other managed investment schemes which were part of Trio's range of products continued to certify the accounts as giving a true and correct report of the financial position of the fund. The principal asset of the ARP growth fund was a derivative contract held by a company in the British Virgin Islands. It turns out that the auditor did not independently verify the existence of the company or the value of the contract. Indeed, a key factual question is whether the principal underlying asset of the ARP growth fund ever existed and had value. The Australian Prudential Regulatory Authority gave evidence to the committee that it believes that the contract did exist but that its value fell to zero as a result of the collapse of the US investment bank Bear Stearns in the global financial crisis in 2008. I am sceptical as to the validity of that explanation. The committee heard other evidence—which I personally found persuasive—that if the contract did exist then it would have retained value as a consequence of the fact that the liabilities of Bear Stearns were assumed by JP Morgan, another US investment bank. In its report, the committee indicates that it is not satisfied as a factual matter that the value of the contract did fall to zero or, at the very least, the committee is not satisfied that the conclusion drawn on this matter by the Australian Prudential Regulatory Authority is founded on reasonable investigation.
Madam Deputy Speaker O'Neill, as you would know, given your other capacity as chair of the corporations and financial services committee, just last Friday when the other relevant regulator, the Australian Securities and Investment Commission, appeared before the committee, we further canvassed the question of whether the underlying derivative contract purportedly held by the ARP Growth Fund or a company some steps down the chain of companies ever in fact existed. The Australian Securities and Investment Commission expressed its view that the contract did exist but that the value of the contract fell to zero.
Again, I want to place on record that I am not satisfied that that has been demonstrated and I am not satisfied that the liquidator has been able to reach a conclusion on that matter, and nor am I satisfied that the matter has been demonstrated to a degree which is persuasive to those of my constituents and others who lost money in the ARP Growth Fund. I note that this is one of the matters that the liquidator of Trio, PPB, intends to further investigate and reach a conclusion on, should it be the case that ASIC follows the recommendation of the committee and provides further funding to PPB to allow it to continue its factual investigation.
One of the grave difficulties that this case and this episode presents is the fact that Australians have been treated differently in relation to the loss of substantial amounts of money. Last year the Minister for Financial Services and Superannuation, Bill Shorten, announced $55 million of compensation to some of those who were defrauded in the Trio matter. The basis for that compensation is under a longstanding provision of the Superannuation Industry (Supervision) Act. Under part 23 of that act, it is open to the minister to determine that compensation is payable in the event of fraud or theft suffered by an APRA regulated superannuation fund. It is not contested that the law confines the availability of that remedy to APRA regulated superannuation funds. It is not contested that self-managed superannuation funds are not APRA regulated superannuation funds. That is clear on the face of the legislation. However, one of issues which the committee gave consideration to and made a recommendation about is the factual circumstances in which most of those who lost money in the ARP Growth Fund came to put their money into that fund. In the main, they came to put their money into that fund through moving their money out of a previous investment vehicle, the Professional Pensions Pooled Superannuation Trust.
The Professional Pensions Pooled Superannuation Trust was a vehicle controlled by a financial adviser named Mr Paul Gresham, who operated extensively on the north shore of Sydney, as well as in other areas. It is through his activities that many of my constituents lost money. Mr Gresham had his clients put their money into the Professional Pensions Pooled Superannuation Trust. For many years it operated perfectly satisfactorily, putting money into a range of legitimate and reputable investment vehicles. What happened some time between 2003 and 2005 is that Mr Gresham advised his clients to move their money out of the PPPST—the Professional Pensions Pooled Superannuation Trust—and into another vehicle, the ARP Growth Fund. We now know, including from the terms of an enforceable undertaking obtained from Mr Gresham by the Australian Securities Investment Commission, that Mr Gresham was a co-conspirator in the circumstances in which a collection of fraudsters took control of a pre-existing reputable funds management business and renamed it Trio. We now know that Mr Gresham was in on this from the start.
The relevance of this is that the Professional Pensions Pooled Superannuation Trust is a vehicle which is regulated by APRA. It is an APRA regulated superannuation fund, and persons investing in a pooled superannuation trust, as a matter of law, can have the benefit of the same remedy under part 23 of the act as has already been made available by the minister to others who lost money in the case of Trio. Therefore, one of the recommendations in the report is that the minister, his department and the relevant agencies give careful consideration to the factual circumstances in which investors who were originally in the Professional Pensions Pooled Superannuation Trust then moved their money into the ARP Growth Fund. The government should give careful consideration to whether that factual circumstance is itself an act of fraud or theft which caused those investors to lose their money. On the basis of the material the committee was able to consider and on the basis of the facts which have been agreed by Mr Gresham in the enforceable undertaking which he has given to ASIC, it appears that there may be a good basis for reaching the view that the very act on the part of Mr Gresham of inducing his clients to move their money from the Professional Pensions Pooled Superannuation Trust into the ARP Growth Fund was itself an act of fraud or theft and an act the victims of which were persons who had their money in an APRA regulated fund. That matter was canvassed in a recommendation of the committee's report, and I would urge the minister, his department and the relevant agencies—including APRA—to have careful regard to.
In addition to recommendations which are directed to the extent possible at trying to deal with the extraordinary loss suffered by many Australians in the Trio Capital affair, the committee has also made a broader set of recommendations directed towards policy changes to reduce the prospect of a similar fraud being perpetrated in the future. In particular, we have recommended that consideration to be given to rules requiring managed investment schemes to disclose the details of their underlying investments. In the case of Trio, what happened was that people who were saving money for retirement through the vehicle of a superannuation fund—either an APRA regulated fund or a self-managed super fund—had their money placed into highly risky offshore investment vehicles. It is very hard to understand the basis on which any financial adviser could recommend that the entirety of an individual's retirement savings be invested in an offshore vehicle in a notorious jurisdiction such as the British Virgin Islands when the underlying asset of that vehicle is a highly complex derivative contract. That appears to be a highly risky strategy, and if the underlying details of the investment of a managed investment scheme were required to be disclosed—for example, in the product disclosure statement—it would make it somewhat more difficult for such an ill-advised investment to occur. It would be no panacea, but it may be of some assistance.
Thee Trio collapse has been a sorry episode, and many Australians have suffered as a result. There is more work to do to clean it up. I commend the committee's report to the parliament.