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01 December 2001
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BUSINESS
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Millions lost in black holes
By Janet Fife-Yeomans
December 01, 2001
LES Emerson knows Gunnedah Road on the way to Tamworth Airport well. He has to drive it when he visits his sister-in-law.
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If he had gone just a bit further, he would have passed a prime block of grazing land sandwiched between the airport and the lamb abattoir. The land was meant to be a mushroom farm, and golf superstar Tiger Woods had agreed to be involved in a deal to sell spent chicken poo.
Sound a little on the nose? Emerson reckons it stinks.
He is one of hundreds of people who lost their superannuation when it was unknowingly ploughed into investments like the Peel Valley mushroom farm, where the only crop so far has been weeds.
Investors like Emerson, John Crosby, Richard and Jennifer Kaan and Ken Moffatt thought their money was being held as cash at bank by the government-approved trustees, Commercial Nominees of Australia (CNA) – the trustee of about 500 small, do-it-yourself superannuation funds, most of them family funds with less than five members.
Instead, their future was poured into financial black holes.
And it's now been revealed that the money kept flowing for at least 11 months – and allegedly up to 19 months – after two govern-ment regulators, the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investment Commission (ASIC), knew there were problems.
One of the reasons APRA and ASIC failed to act, reportedly, was that they didn't want to cause a run on the fund.
When Crosby contacted ASIC after his $1 million of superannuation disappeared, he was even told not to tell anyone that the commission was investigating CNA.
Just ask Les Emerson what he thinks of that.
"I think I have been treated a bit like a mush-room myself," said Emerson, referring to the saying about being kept in the dark and fed bullshit.
The Senate Select Committee into Superannuation and Financial Services, which looked into the fiasco, reported on August 30: "Some investors were left feeling confused, helpless, angry (and) frustrated, and have lost complete faith in the Australian system – and for this they blame APRA and ASIC."
It was not until February this year that ASIC finally pulled the plug on CNA, and two weeks ago revoked the securities dealers' licences of one of the Sydney financial advisers who had been recommending CNA products, Saxby Bridge Financial Planning Pty Ltd, over a number of "serious concerns" including that the individual investment needs of clients were not appropriately served.
On May 10, CNA was put into liquidation.
The handling of the CNA debacle, concurrent with that of HIH insurance, has not only severely dented the public's confidence in the regulation of Australia's financial sector but particularly the regulation of the growing pool of superannuation money.
When Les Emerson, 57, was made redundant in May 1999 after 29 years as a factory worker for the Nestle company he went to a financial adviser, who told him he would need an allocated pension.
He was unlikely to work again but glad to be able to take over from his wife Heather in looking after their handicapped son Andrew, 25.
In October 1999, his $149,000 went into CNA's Enhanced Cash Management Trust (ECMT), where it was supposed to be held as cash at bank until Emerson decided where to invest it.
According to evidence given to the senate committee, ASIC had been aware for four months, since June 1999, of problems with CNA and had alerted APRA soon after.
Emerson has since lost all his money.
In April 2000, APRA appointed Peter Hedge of PricewaterhouseCoopers to investigate CNA.
But in July 2000, three months after the investigation began, when Richard and Jennifer Kaan decided to switch their family superannuation from a DIY scheme to a government-approved trustee and on the advice of Saxby Bridge put the money into CNA, there was still no warning to stop them.
As with Emerson, their instructions were to leave some of the money in the cash management trust. Saxby Bridge's general manager Phil Dally told the senate committee: "We were told (by CNA) that with the tacit agreement of APRA, had they actually notified clients and/or advisers, that would have precipitated a run on the fund and the liquidity crisis that they were concerned about."
The Kaans lost $300,000.
"Now we are energised to do something about it but at the time we were devastated," says Richard Kaan, 61.
"You understand that investments may not be safe and nobody would be sympathetic if I had put the money into a mushroom farm.
"But this was money held in cash management, it was cash at bank. You do not expect a government-regulated and approved trustee structure to be anything but safe."
Like the Kaans, in July 2000 Crosby, 59, began to invest his superannuation money with CNA. "By that time ASIC and APRA knew everything," he says. "It's unbelievable. You think it can't happen, but it has."
Crosby lost all his $1 million.
By the time ASIC pulled the plug, more than $15 million had been invested in the ECMT and $10 million in one of CNA's other dodgy funds, the Equity Enhanced Fund. It had all gone, some in loans to former directors of CNA and related party trusts and into assets which were promoted within CNA at significantly over value, according to the senate report.
Take Peel Valley Mushrooms, for example. It bought the land near the airport from Tamworth City Council for $150,000 to build 32 growing sheds.
It emerged during a Queensland Supreme Court case – in which Peel Valley Mushrooms was sued over a loan it had guaranteed – that the company had by November 1996 run into difficulties.
Costs had blown out on the construction, an estimated further $8.5 million was needed, and by April 1997 the directors were on the lookout for alternative sources of funding, Justice Fryberg said.
The judge was also told that the spent compost from Peel Valley's mushroom growing was going to be reused to manufacture a combined fertiliser and insect repellent for use on golf courses, and Tiger Woods had expressed interest in branding the product "Tigergreen".
An "unlikely sounding scheme", said the judge.
ASIC and APRA told the committee that CNA's cash management fund seemed to have fallen into the gap between them.
CNA had set it up as an excluded offer trust, which ASIC said was not subject to Managed Investments Act or the Corporations Law disclosure provisions, so it did not come under the supervisory control of ASIC.
APRA said it did not regulate excluded offer trusts and said it had not been made aware of the problems with the ECMT until told by CNA itself in March 2000.
Importantly, neither regulator was able to say how many other such investments fall into the gap.
ASIC chairman David Knott said ASIC knew of CNA's problems only eight months before it intervened.
Now law firm Slater and Gordon is considering legal action on behalf of some investors.
The new trustees of CNA, Oak Breeze, have lodged an application under the Superannuation Industry Supervision Act for recompense for the losses.
The senate committee recommended that the application be expedited and also that the minister consider an act of grace payment.
"Given that superannuation is a compulsory aspect of Australia's three pillar retirement incomes system, it is incumbent upon the Government to provide redress when its approved prudential regulatory framework has let down investors," the committee said.
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Not-so-safe savings
Millions lost in black holes
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