Investors' $233 million buried in stonewalling that stinks

IF IT looks like a rat and smells like a rat, most of us would probably hazard a guess that yes, it's a rat.

There's room for varying opinion of course, so perhaps you could let me know if you think the following has rat-like qualities.

At the last count, about $233 million is owed to investors in a financial product called First Step, marketed by financial advisory group Money Managers. The investors have been waiting three years and have been told they won't get the final reckoning until 2011. Even then, at least half of the money may never be recovered.

This is unfortunate – but investments don't always pay off so there's no point crying over spilt milk. Get over it, move on, nothing to see here.

But wait a minute, the people who put money into First Step were often relying on it to fund their retirement. They'd kept money aside, taken advice and put it into a scheme they thought was relatively low risk. As elderly people, they have limited time to wait for their money. Every passing year is a lost opportunity to use the fruits of their life savings.

The young have time to recover from losses; the old do not. For them this is an extremely serious matter.

So who is taking it seriously?

Money Managers, the original marketer of First Step, was placed in voluntary liquidation by owner Doug Somers-Edgar in March this year. In August last year it sold its financial advisory business to its management in a new company now called MMG Advisory Group.

Somers-Edgar is understood to retain an ownership interest in MMG.

When the Sunday Star-Times asked MMG some questions about First Step last month, spokesman Shaun Anastasi said: "[I] must admit I'm a bit confused as to why you'd be asking MMG Advisory Partners for comments on matters which relate to FTL and/or the management of First Step. Edward Russell, of Calibre Asset Services, is the person you need to speak to."

It looks like MMG, while happy to buy Money Managers clients, doesn't take responsibility for First Step that goes with them. Another term for this is "passing the buck".

The trustee, Edward Russell, refuses to answer questions from the media about First Step. "It is my practice to discuss issues that pertain to investors' interests direct rather than through the media," he told the Star-Times.

OK, so presumably he gives investors all the information they need about what happened to their money?

Nope. Investors have asked for financial statements of the four trusts at the heart of First Step, particularly those covering the period when their loans to a company called Club Finance soared from $19.8m to $57.1m.

Russell, apparently after taking legal advice, has refused to release them – although clause 3.4(d) of his trust deed states that he must "supply to the unit holders, in any meeting of unit holders, such oral or written information relating to the affairs of any relevant trust which any unit holder of that relevant trust has given it reasonable notice to supply".

Club Finance, half-owned by Somers-Edgar, lent the money it

borrowed from First Step to buyers of used cars, many of them unemployed – and promptly lost it all. First Step expects to recover just $5m out of a total $63m in outstanding loans to Club Finance.

With such a breathtaking, outrageous, mind-boggling level of losses you would expect a vigorous pursuit of all avenues for recovery.

It appears a report was commissioned, by Club Finance, from insolvency practitioner Korda Mentha into the affairs of the firm.

Investors have asked Russell for a copy of this report and he has refused on the grounds it belongs to Club Finance. Why he allowed Club to investigate itself over such huge losses has not been explained.

Russell has taken no action against the directors of Club Finance. Investors have been told this is because the costs were impractical and the directors had their assets well protected so any money awarded would be difficult to collect.

They have also been told the Serious Fraud Office was informed of Club Finance's practices and had found no criminal case to answer.

No receiver has been appointed to Club Finance and no explanation has been given for how it lost $58m.

But perhaps Russell can't appoint a receiver to Club Finance.

The complex structure of First Step means he is a trustee only for four frontline unit trusts and these lent all their money to four intermediate trusts, called Financial Trust No 1, No 2 and so on. It was these trusts that lent the money to Club Finance and they have a separate trustee called Financial Trust Ltd.

So maybe it's FTL that has the power to appoint a receiver?

Maybe, but it probably has little reason to since its sole remaining director is Somers-Edgar. FTL's other directors until 2007 included Russell Tills and Gerald Siddall, who also own First Step's trustee, Calibre. Club Finance, incidentally, is far from the only lending gone bad for First Step. All the while, Calibre was obliged to deliver reports every quarter to a statutory supervisor – Perpetual Trust – setting out in detail any matters that could adversely affect investor interests.

Investors have asked for copies of those reports – and guess what? They've been refused.

Fortunately, Perpetual has power under the trust deed (clause 3.5) to force Calibre to release those reports. Has it done so? No.

The Star-Times also has asked Perpetual for those reports and has received no response at all. On August 26 we wrote to Perpetual CEO Louise Edwards requesting financial statements for the four Financial Trusts. After several follow-up emails and phone calls, the usually helpful Edwards has still declined to respond. It's safe to assume, therefore, the answer is no.

The upshot is that although First Step appeared to have several people looking after the investment – a trustee, a statutory supervisor, a manager, a financial advisory group – their willingness to actually do anything to help seems limited, if not non-existent.

The complex structure of First Step leaves investors powerless. Their anxiety, rage, clamour and entreaty drains into an enervating nothingness lined with headed notepaper. Who is responsible? No one. Who will help them? No one.

This affair has many of the hallmarks of a cover-up and smells like a rat to me. What do you think?

tim.hunter@star-times.co.nz