The Guilty and The Greedy in Financial Markets

Guilt and Greed have seen some spectacular frauds play out in the global financial markets.

Guilt: Nick Leeson, AKA Rogue Trader; Unchecked risk taking by Mr Leeson saw one of the biggest financial scandals of the 20th Century, bankrupting Barings Bank in 1995.

Greed: Moving across the North Atlantic Ocean to New York, Jordan Belfort, AKA The Wolf of Wall Street, somewhat more uncouth than our English aforementioned criminal, infamously made millions in a boiler room style trading firm.

Here in Australia we have seen our own Nick Leeson-esque story unfold this month, with directors of Sonray Capital setting up bogus accounts and stealing money.

These are all stories that started out with people with good intentions – above board transactions, burrowing into criminal and dishonest acts when guilt and greed took hold.

What is most frightening of all however is PURE, DELIBERATE, PLANNED THEFT from the start.
This week, in a hearing in Sydney, this very story has (finally) begun to be told.

The front man – the clean cut fresh faced 35 year old Canadian, Shawn Richard.

(One Dealer incredulously sucked in by his looks and charm proclaimed “but he was the nicest guy”…A prerequisite for a fraudster, no?)

Shawn Richard ran, along with some other characters well known in other countries as fraudsters and criminals, Astarra Funds Management, later renamed Trio Capital.

Over 10,000 Australians invested $400million of their money in this little known fund that seemingly could beat the global financial crisis.

Astarra’s flagship hedge fund, Astarra Strategic (or Absolute Alpha), reported positive returns whilst every other hedge fund, worldwide, was negative. It had the backing of a 5 Star Rating from Morning Star (who has since claimed they performed no indepth analysis). It had the backing of the South Australian based Association of Independently owned Financial Planners, (AIOFP). Lastly, it had the backing of a very small handful of Dealer Groups (all members of the AIOFP) who risked their client’s money. In some instances, these Dealers recommended no other product except Astarra.

It took the owner of a Hedge Fund, Bronte Capital, to question the fantastical returns in a letter sent to Dr Ken Henry in September 2009. In under 4 weeks ASIC had frozen the fund. Then, liquidator PPB was swiftly appointed.

To date between $123 million and $190 million of Australian Investor’s money has not been found.
Speculation has been rife since the fund was frozen that this was a case of fraud and theft, but those most closely linked to Trio Capital saw otherwise.

Peter Johnston of the AIOFP referred to the whistle blower from Bronte Capital in an article printed in Money Management as suffering” professional jealousy” and was prepared to “back his 30 years in business” on Shawn Richard.

This week, the truth has finally come out in the public cross examination of Shawn Richard by the liquidator PPB:
o Shawn Richard has no qualifications
o Shawn Richard was merely an ‘office boy’ sent to run the Australian Operations by some heavyweight goons AKA his good mates
o Shawn Richard was paid millions of dollars in secret undisclosed commissions
o Shawn Richard admits to Australian Investor’s money doing a round robin – sent to an offshore account and ending up as cash in the pocket of his boss, Hong Kong resident Jack Flader.

This is a frightening turn of events for those who invested their money.

How did this happen?

There is clearly a need for greater tightening of our regulatory system if a Canadian with bogus qualifications and no experience is given a licence to manage over $400 million.

But this isn’t just the issue. There is a stream of parties that need to take responsibility:-

1. The Custodian who was supposed to ensure the money was physically where it was supposed to be
2. The Auditors who signed off on the audit for the last few years

3. And Lastly (and importantly) the interface between the product and the client: The Dealers who recommended this product to their financial planners. Why didn’t those dealers complete a DUE DILIGENCE on this fund manager? Is it not their job to understand, research and review a product before adding it to their recommended list? Is it not their job to be sure of the credentials of the people they are entrusting to look after their client's money? Is this not part and parcel of holding a financial licence?

Greed - we have seen recently in the case of Westpoint this to be a motivating factor, where dealers involved received inflated commissions to sign up clients.

Who knows what undisclosed deals the Dealers had with Shawn RIchard (if any). What we do know is that Shawn Richard was quite accepting of illegal payments as a part of normal business transactions.

…time will tell if this indeed was a factor in the Dealer's decision to use Astarra, and if there was, may there be proper justice for the investor.