Below is an abridged and edited version of the ACI’s response
to the judgment, and the events preceding it…
From our perspective, as the Advisers Committee for Investors – representing investors based outside of Australia – the collapse of LM Investment Management is a body blow to Australia’s image, and to its reputation as a well-regulated financial services jurisdiction.
Looking back over the last few months, we can count multiple failings that occurred within the Australian regulatory system, the way it was overseen, and the service it provided to investors.
The purpose of this group statement is to communicate the angst our investors feel in the way LMIM was mis-managed initially, and how it is managed now.
To start out with…
The investments we made on behalf of ourselves and our clients were made from hard-earned monies. We and our clients trusted that Australia would look after them for us. We, and they, have been let down.
The first area in which we feel we were let down in has to do with the fund manager, and its directors.
The fund managers made investments and commitments that were well outside the reach of the companies making these investments.
Moreover, in broad daylight, they allowed personal loans to be made to company directors, who also took advances on management fees.
They presented up-to-the-last-minute valuations that were pie in the sky by magnitude, and used Australian accounting professionals to support some of these claims.
They submitted audited accounts and exercised trustee functions in plain view of everyone, with the effect of destroying or absconding with several hundreds of millions of Australian dollars – causing us to ask, in retrospect, where the proverbial accountability of directors of Australian companies was in this instance.
Indeed, as we see it, the entire corporate regulatory environment was violated, and no one in a position of regulatory authority even blinked an eye.
As a last resort, when insolvency was looming – a scant few weeks after the audited accounts had been submitted to the government – the fund managers applied for voluntary administration, with a balance sheet and a portfolio that all but shouted “foul play!”
The court-appointed administrators, responsible entities…
Our next gripe concerns the court-appointed voluntary administrators and responsible entities. Upon being appointed, these entities immediately proceeded to engage in lengthy court battles about turf, as they simultaneously sought to grab a share of the fees that would be forthcoming – all of which were to come out of the pockets of the investors, who were witnessing this, mystified, from the sidelines.
For it was not immediately obvious to us what benefit there was to be had in having these administrators charging around at a rate that, if annualised, would total A$10m a year – money that would come from our already-reduced investment monies – in return for carrying out some pretty routine tasks.
The regulator (ASIC)…
Special mention must be made here of the Australian regulator, the Australian Securities & Investments Commission. That is because given that the underlying assets of this company, those of its component the fund management companies, and the intermediary holding companies were all Australian – and were therefore obliged to comply with Australian laws – we are puzzled that ASIC seemed able ignore the conduct of these companies’ directors and managers, and the way they managed these companies.
For example, Peter Drake, the founder of LMIM; the directors of the fund manager; the trustees; the responsible entities; the auditors; and the other parties – all remain untouched.
We don’t understand why.
Drake managed to secure huge cash advances (around A$40m worth) that he cannot now repay. Despite this, he and his fellow directors remain untouched, and no government entity or other body has even begun to home-in on recovering personal assets of his that were accumulated through the use of wrongly-received funds.
The bankers: Suncorp Metway, Sunland…
Suncorp Metway Bank holds a mortgage over the most valuable asset within the Managed Performance Fund (Maddison). The Managed Performance Fund (MPF) holds a second charge. Suncorp is, meantime, revising its strategy with the aim of becoming a “community bank”.
Investors proposed a “stand-still” to Suncorp, amounting to a "no-loss-to-the-bank" deal, to seek refinance, but they were not even granted a meeting or telephone discussion. Yet it seems approaches from other parties received normal and expected paperwork directly from Suncorp.
It might hope to become a "community bank", but for now, it is a bank with no manners.
Rescue attempts representing investors standing to lose all monies on the Maddison Project – one of the largest of its kind in Queensland and supported by all public authorities – were treated with contempt and rebuffed. What does this say about this bank’s commitment to those local property markets and foreign investors which support the development of the greater Brisbane area?
We understand that a recent purchaser of the Suncorp loan, Sunland, has been awarded the favour of a deal on this mortgage by Suncorp, and we are told that they held no discussions with the trustee of the MPF as second mortgagee.
All we can hope is that Sunland will be conscientious in the role, with due consideration of the second rank MPF investors, who together have invested six times as much.
In the end, one piece of good news…
At least the judge in charge of the case had the good sense to see things as they were – and called them that way.
"The administrators of [LM] have, in my view, demonstrated a preparedness to act in a way inconsistent with those owing duties as responsible entity and trustee under the Corporations Act,” Justice Jean Dalton said in her judgment.
“My view is that they have preferred their own commercial interests to the interests of the fund.
“This is demonstrated in the conduct … in relation to the 13 June 2013 meeting; their dealings with ASIC, and their conduct with this litigation.
“It extends to the point where both administrators have sworn to matters which they either conceded were wrong on cross-examination…or, in my view, are not consonant with reality…
“In a winding-up where conflicts may well arise, and may involve questions of some complexity, I feel no assurance that the current administration would act properly in the interests of members of the fund in identifying those issues or dealing with them.
“In my view, that makes it necessary that someone independent have charge of winding-up FMIF…"
The Advisers Committee for Investors was formed in the wake of the collapse earlier this year of LM Investment Management, an Australia-based fund management group that had expanded rapidly into the international market before it began to run into problems.
The ACI is comprised of more than 20 financial advisers in the international market, who have clients located in Europe, the Middle East, Southeast Asia and the Far East. Most of the clients were invested in LMIM’s Managed Performance Fund.
To read International Adviser’s report last week of how the Supreme Court of Queensland ordered the LM Investment Management First Mortgage Income Fund to be wound up, click here.
