Expat investors launch suits against advisers, trustees and insurance firms
Financial advisers, trustees and insurance firms being taken to court in bid to recover losses in Australian investment product
Expatriate investors in a failed Australian mortgage fund have started to sue financial advisers, pension fund trustees and listed life insurance companies in a bid to recoup the nearly A$400 million (HK$2.89 billion) that disappeared in one of the largest scandals to rock the offshore investment industry in recent decades.
The Australian regulators are still investigating what happened to the LM Managed Performance fund, now valued at five Australian cents on the dollar.
LM founder Peter Drake denied the fund was a sham in a recent Post Magazine interview, and instead blamed asset price write-downs and poor currency hedging.
Australian-based investors had already won compensation because financial advisory firms gave inadequate advice and did limited due diligence, said Fraser Whitehead, the head of group litigation at law firm Slater & Gordon.
The challenge was harder for Asian-based expatriates as many financial advisers have no professional indemnity insurance. That made insurers and trust companies a natural target for litigation, Whitehead said.
Several LM investor groups told the South China Morning Post they were consulting lawyers and filing suits.
In Hong Kong, investors are lodging complaints with the regulatory authorities and the police.
Investors argue that insurers and trust companies have duty of care and fiduciary responsibilities.
Pitched as low risk and suitable for retirees, the fund started delaying redemption payouts in 2009 but advisers pocketing undisclosed double-digit commissions never revealed this potential drawback, investors complain.
London-listed insurers Friends Provident, Royal Skandia and Hansard Global, as well as British insurance mutual Royal London, all allowed the fund on to their platforms. So did European listed insurers AXA and Generali.
"Any investment decision is made by the clients - policyholders and/or their advisers - who bear the investment risk, and Generali administers the product in accordance with their instructions," said a spokesman for Italy's largest insurance company.
It was a view echoed by other insurers which replied to the Post.
However, insurance companies do screen funds before allowing them on to their platforms and they can delist them.
"In Britain, there is a lot of reputational risk at stake if the providers get it wrong but this doesn't seem to apply in the expatriate world," said Ian Ashleigh, the head of Compliance Matters UK, a firm now advising LM investors on asset recovery.
Emails passed to the Post by former Tokyo-based broker Martyn Terpilowski reveal that LM staff linked payouts to the rate of new money coming in. Investors wanting their money back were told they were in a "queue", but in 2012, the "queue" disappeared after "a computer error", according to emails.
Terpilowski waged a futile four-year battle against LM to get his clients' money back. He also sent warning emails to several insurers about the fund.
Insurers kept it on their platforms because it was popular with commission-hungry brokers, he said.
There are now question marks over how redemptions were organised. The fund constitution - the document that governs how a fund is run - did "not include any specific provision providing for a queuing of investor redemptions", said Simon Vertullo, a partner at KordaMentha and the fund's administrator.
A dual-track redemption system gave priority to insurers' clients, who in the fund's final years were the biggest net contributors, even though other investors had waited longer for their money, Terpilowski's emails show.
Not all platform operators liked what they saw. "Unresolved liquidity issues and suspect performance were alarming red flags", said Kelvin Yip, the chief operating officer at iFast Financial, a Singaporean company with US$4 billion in client assets under management.
One of iFast's first acts after acquiring ING's Hong Kong fund platform in 2009 was to delist all LM funds despite opposition from local advisers who wanted to keep it, Yip said.