Investors' worst fear realised: Ross tells receiver cupboard is bare

David Ross (file photo)

(BusinessDesk) Wellington fund manager David Ross, whose businesses have been frozen after missing investor payments, has told receiver PwC not to expect to find any other assets after being released from hospital after three weeks of care under the Mental Health Act.

John Fisk and David Bridgman from accounting firm PwC, the court-appointed receiver and manager of the Ross Asset Management group of companies, met with Ross yesterday to confirm the financial position of the various entities under their management, according to a statement on their website.

"Based on this meeting, the receivers and managers do not expect to locate any further assets of significant value within the Ross Group (In Receivership)," PwC said. "The receivers and managers acknowledge this will be extremely disappointing news for investors."

Ross was released earlier this week after receiving compulsory treatment under the Mental Health Act, according to a statement released by legal firm Chapman Tripp.

PwC's Fisk and Bridgman said they will focus on collecting information from brokers and reporting to court on Monday as the next step of their management. They have already indicated they see liquidation of the Ross group companies as the appropriate step.

The Serious Fraud Office launched a formal investigation this week, having helped the Financial Markets Authority with its own inquiries since Oct. 25.

Ross, formerly a share broker, managed funds on behalf of 900 privately wealthy individuals, with management fees averaging $4.4 million a year paid in each of the last three years.

The PwC investigation found inadequate record-keeping and has been unable to source much of the documentary evidence for trading and investment holdings that it needs to complete a full picture of what looks to have the characteristics of a Ponzi-style scheme, where investors were paid out at least in part using other investors' funds.

It suspects many or most of the trading history disclosed to clients was "fictitious."

The Ross group's database purports to show investments worth $449.6 million, of which $152.4 million is said to be held in Australian investments, another $136.1 million in Canada, some $156.4 million in the US, $3.8 million in New Zealand, and $943,332 elsewhere. Of this, some $437.6 million was held by a Ross group subsidiary, Bevis Marks.

However, assets worth just $10.2 million, and $200,000 in cash deposits, had been identified in the receivers' initial searches, which they described as a matter of "considerable concern.'

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Ok - not good and looks awful. Sympathies to all the investors.

The investors have to look at themselves in a mirror and probably conclude that dishonesty, a lack of their own financial literacy, an element of greed, poor advice from local accountants and lawyers, and a regulatory framework failure have all contributed - one suspects in that order.

Let's start by looking at the regulatory regime that Ross was operating in. Tthe Securities Commission for most of his time operating and the now departed Jane Diplock (its head). In addition to her being fast asleep at the wheel over the finance companies, her legacy MUST now include significant blame for this fiasco.

A true risk analysis by the Sec Comm would have thrown financial industry reporting, industry understanding and custody arrangements as a problem at some stage in her TEN years in the role. What risk analysis was ever undertaken, one has to ask.

Instead, she appeared to focus on trying to get additional regulatory power from the NZX and the Reserve Bank, and sitting in seat 1A on planes around the world promoting herself into Securities Regulatory Industry executives and chair roles. I am in disbelief that she still is promoting herself around the world as a securities industry regulatory consultant, and as a front in NZ for woman in business. This surely isn't appropriate.

I think this will be a defining moment for Sean Hughes, the head of the FMA for the last year and a half. I think some accountability should be taken by Sean, after all the FMA approved David Ross in his watch as an AFA. I accept that much of the reform framework was already in place, and most of the senior staff he inherited were working for the Sec Comm or Companies Office prior.

I think he is going to need to show solid leadership and make some serious people changes to change the culture. The transitional head of the FMA - Simon Botherway - possibly didn't do Sean any favours in designing the organisational structure, much of which saw Sec Comm Staff retaining their general roles, with different titles and with increased pay packets.

Sean needs to show decisive leadership and restore credibility of the AFA regime to a "no surprises" basis. A lot of effort and cost has gone into creating this regime (by the industry and the investors) and this investment is at serious risk. The securities industry is right to be furious with the FMA over this, and a number of high-level delegations will be on this case for some time, lobbying for substantial change at the FMA. The FMA has fallen at an early hurdle here and those FMA board members who were on the Sec Comm may wish to take the fall. Certainly, the government needs to "encourage" this.

Overriding this, however, is the need for a thorough risk analysis. Clearly, the FMA (and, in fact, the rest of the market) had no idea that Ross Asset had anything like the amount investors believed they had. What does the FMA know about the levels of funds managed and held by AFAs? One suspect not a lot. Is there another Ross Asset out there? Until there is published information and transparency on the market dynamics then surely this risk cant be managed.

One suspects that the FMA will need to implement a returns basis database with transparency for the public on everything from quantum of funds, nature of funds, whether they are discretionary or advisory, custody arrangements in NZ and offshore, money handling arrangements, existence of audit or probably more appropriately external review, governance arrangements for all financial service providers. A law society type inspection needs to occur.

But even with all of these suggestions, the underlying issue will be how financial literacy can be improved. Those investors who thought that 20% plus returns were possible for what appears to be a very long and unbelievable period are a large part of the problem. No regulatory framework will ever avoid fraud. That's a fact. And in a small economy like NZ the easiest way to avoid these type of risks is education and financial literacy - but also accepting that you can't stop or prevent fools and their money. That is their choice.

I advocate the following. Spend 50% of the FMA budget for the next 2 years on education - a series of paid programmes on TV. These should be targeted at the 2% of NZers who lost money in finance companies, and the likes of the 900 investors in Ross Asset. A wider audience will see these and also start asking the hard questions.

Three key themes:
1. Diversify - in all respects - with who they are investing, where they are investing and basics of investing.
2. The concept of risk - and where the least risk is found and the relationship of risk and return.
3. Asking the questions and seeking external advice - talking openly to others about what you are thinking of investing in and considering. There may be enclaves of stupid people in NZ but this might just reduce the risk of stupidity.

Second and equally importantly a cutural change - starting by some personnel changes at the FMA, is also a must. If the FMA argue for more resources, then that will be a sign of no change in culture! They have to be more productive like the rest of the economy has to, and not follow the standard public service line of we need additional resources. Shift the resource to where a proper risk analysis shows it is needed.

As has been quoted a lot in the last week, investors need to understand what they are investing in, what the arrangements are and "if the returns looks too good, they probably are" !

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TLDR

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The comment is actually aimed at people who would state TLDR whenever they see a prospectus...

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The information which I think is missing in the whole coverage of this affair is "How much of the alleged $450 million is imagined capital gains in investments, and how much is real money put in by investors ?"
We may yet discover that a very significantly lesser amount of real money is missing and a significant amount of imaginary money was never anywhere in the first place.

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It is not as simple as this. Some investors will have been paid out on the imagined capital gains. This scheme has been going a long time.

I think in the last five years there have been more withdrawals than investments.

This will present the major challenge to PWC: how to pursue investors who have been paid out to recover funds on behalf of the investors who were still in the scheme at the end.

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Couldn't anyone have asked the question...what have you bought at xyz $$ and what have you sold at xyz $$ to realixe these profits? Just once?

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Ross sent out quarterly reports. These contained start positions, transactions during the period and end positions. An independent audit - just once - would have shown the true position.

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I was told about this guy over 7 years ago (from friends who had invested) and then again within the last few months by an accountant. Both times I was advised he was returning over 25% for his investors. Immediately, instinct told me to run a mile. When will we learn...if it sounds too good to be true, etc.... I'm sorry that some people are having to be reminded the hard way.

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Anyone would have run a mile if they had been getting that sort of ROI!

The most I ever got on a quarterly statement was 13%, mostly it was 6-8% and sometimes it was at a loss of 5-6%. It usually reflected exactly what the markets were doing and gave no indication to be suspicious. This is a terrible tragedy for many families who have been affected.

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Over the last 9 mths many people have ask Ross for key information but he would go to ground - hence the resulting complaints to the FMA
- custodial details, custodial audit reports, broker statements, by trade, trade broker transaction reports.

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A bit of a lad, isn't he?

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... in the list of mistakes you should probably add misplaced trust. Acquaintances who others would describe as financially literate, experienced in business and generally well educated apparently believed in what he told them, due to their long term relationship/friendship going back to the old days ...

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Ponzi scheme, embezzlement or converted into personal assets overseas. Take your pick.

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