Storm Financial: Boulevard of broken dreams
TONY RAGGATT
December 26th, 2009
THE collapse of Townsville-based wealth adviser Storm Financial unleashed a wave of human mis
ery
when the Australian sharemarket tanked late last year and financier the
Commonwealth Bank unceremoniously dumped its one-time favoured partner.
More than 3000 investors, many of them long-term Townsville clients,
effectively lost their homes and life savings in the ruins of highly
debt-leveraged investments.
Twelve months on, that massive
implosion of wealth, estimated at $3 billion in losses, is still
rebounding in legal storms raging on several fronts.
Investigations
by regulators and corporate vultures are ongoing, a unique resolution
scheme - a kind of closed-door mediation between the Commonwealth Bank
and its clients - is playing out and company chiefs including founders
Emmanuel and Julie Cassimatis and clients are seeking legal redress
from a range of financiers.
Many of the clients are still seeking answers and even some understanding from a sometimes unsympathetic public.
''Must the greedy or the stupid always be indemnified by the taxpayer or the shareholder,'' one letter writer to the Townsville Bulletin asked last month in an often-repeated sentiment.
This, of course, is a massive over-simplication.
There
are laws in place to protect consumers from the unscrupulous and it
would appear the banks have breached their banking code and contractual
obligations and that financial advisers have not abided by laws
dictating that advice is appropriate to the circumstances of their
clients.
Storm client and Sunshine Coast forensic policeman Sean
McArdle, who has lost millions of dollars, said Storm investors were
not greedy.
He said they were conned and that one of the biggest banks in Australia was deeply involved.
Mr
McArdle has joined about 60 investors who have put their lot in with
Sydney-based lawyer Levitt and Robinson to take on the Commonwealth
Bank and possibly other parties.
While nothing had been lodged in the courts yet, Mr McArdle said a case was brewing.
''Our goal is to resolve this matter so that all clients can walk away with an honest outcome,'' he said.
''It's
amazing that the Commonwealth Bank would have allowed itself to become
involved and be an active member and participant in what's gone on.
''Storm is not an innocent party.''
Mr
McArdle had 'reservations' about the resolution scheme to which about
2300 of the Commonwealth Bank's 2500 clients had signed and in which
clients are being led by another law firm, Slater and Gordon.
''It
may be more about buying a way out of a problem as cheaply as they can
without the scrutiny of the judicial process,'' Mr McArdle said.
''The
Commonwealth Bank has made it quite clear they want everyone to think
they are truly sorry for something they haven't actually nominated what
they are sorry for and yet they won't communicate with any Levitt and
Robinson clients in any meaningful way.''
Storm clients and
Townsville retired couple Margaret and John Scorse, also with losses
running into millions of dollars, have plumbed with Slater and Gordon
and the resolution scheme.
Mr Scorse said they were on to their
fourth or fifth offer from the Commonwealth which involved different
scenarios of saving the family home of 30 years but they are yet to
sign anything.
The bank had agreed to allow the mortgage to stand
on the home and they could stay there until they die and then the bank
would sell it, Mr Scorse said.
As for their margin loans with the
Commonwealth margin lender Colonial Geared Investments, they are
awaiting a determination by a panel headed by retired high court
Justice Ian Callinan, which heard a series of test cases in Sydney last
month.
Mrs Scorse said she believed Colonial Geared Investments was the real villain.
While
they had signed documents provided by Storm Financial on October 8,
2008, to sell down up to 100 per cent of their investment from shares
into cash, Mrs Scorse said it took the bank three months to sell their
portfolio.
''In that time we lost most of our money,'' she said.
With
a determination expected any day, Mr Scorse believed Slater and Gordon
was achieving amazing results by having outcomes just a year after the
crash.
He said it took investors in a comparable financial
nightmare, the foreign loans scandal in the 1980s, 10 years just to get
into court and some of those settlements were still only now being
achieved.
Other Storm investors with other banks are not quite so fortunate.
Townsville
client Jeff Dunn, 64, who had been retired for six years has since
managed to return to 50 hours of work a week to maintain payments on a
Bank of Queensland investment loan secured against his and wife's house.
He said the bank had frozen payments for six months but 'whacked' another $10,000 in accruing interest.
''All they are doing is whacking more on to what we owe,'' he said.
Townsville veteran and pensioner Steve Reynolds, another Bank of Queensland
client, said the bank had offered him a cash rate interest rate of 3
per cent, but without the returns from investments, he could not afford
even those interest repayments .
''This is the unfortunate position of being with Bank of Queensland,'' he said.
''We were sent to Bank of Queensland because the Commonwealth wouldn't touch us.
''It
appears the Commonwealth has recognised its shortcomings and is trying
to deal with them but Bank of Queensland has decided they are going to
fight us.''
Many bank clients, while not foreclosed, are understood to have succumbed to pressure and sold their homes to repay debts.
Storm
Investors Consumer Action Group chairman Mark Weir said the number of
people who had sold out was probably in the hundreds.
Most were still on medication for depression, he said.
Two
cases alleging negligent and unconscionable conduct against the Bank of
Queensland, one by Townsville client Helen Rubens, the other by Sydney
client Mark Schabas, are before the court.
There are also claims against one of the other major margin lenders involved, Macquarie Bank.
Macquarie argues they have not uncovered any recurring or systematic problems or errors with their procedures.
The
bank gave evidence to this year's joint parliamentary inquiry that it
discovered Storm was not passing on to clients margin calls they were
providing.
It is standard industry practice that lenders provide
the margin call by email to the financial adviser who then resolves
them in consultation with the client.
They sent staff to Storm's
Townsville office on October 23, 2008, to find out what was going on
and began contacting clients directly, from October 29.
However,
one Townsville Macquarie Bank margin loan client, who declined to be
named, said they had never received a margin call and were sold down by
the bank at 93 per cent loan to valuation ratio and then charged a
$39,000 break fee.
The client said the bank gave conflicting
advice on their financial position and that they and their accountant
were still unsure of their correct position.
''I don't think
Macquarie had any idea how much we were really sold down for, how much
we were supposed to get and how much we were to pay them,'' the client
said.
''To this day, I and our accountant still don't know
whether our paperwork is right and we haven't been able to do our tax
return.''
While Macquarie claims to have acted within two weeks
of finding Storm had stopped acting on margin calls, the actions of
Storm and the Commonwealth are more curious. The parliamentary inquiry
was told the Commonwealth Bank waited 11 weeks from the time it began
issuing margin calls in September until the time it contacted clients
directly in early December about responding to margin calls.
The
Commonwealth told the inquiry it issued 2600 margin calls to Storm
Financial in respect to Storm clients between October 1 and December 31.
The
bank's group general counsel David Cohen was asked how many of those
calls were addressed within the stipulated five-day limit response time
and he answered: ''I do not have the answer to that and I am not too
sure if any of my colleagues do.''
Mr Cohen said the bank
received $700 million worth of redemption requests from Storm during
October - effectively dealing with margin calls by selling down shares
on which the indexed funds were based and banking the cash.
''Later
on when we raised the issue that there did not seem to be enough action
occurring in response to margin calls, Storm, in emails to us . . .
told us not to contact customers directly because customers were their
property,'' Mr Cohen said.
''That was an email in early December from Mrs Cassimatis.''
Mr
Cohen said the redemptions meant the four Storm-branded funds with the
Commonwealth fell in worth from about $700 million down to $46 million
in six weeks.
He said the funds' trustee took the view that
because of the small number of investors remaining in the funds, who
were carrying the funds' large running costs in derivatives and hedges,
and the risk that the funds because of their much reduced holdings may
no longer comply with the mandate to track the ASX index, it was felt
it was in the best interests of remaining members to close the funds
down.
As for the 11-week delay, Commonwealth executive Ian Narev
admitted they were ''mistakenly hoping'' the customer would make
prudent decisions on margin calls with their adviser.
The
Commonwealth's chief executive officer Ralph Norris added that ''if
there is an issue here . . . the resolution scheme is going to resolve
that''.
There is speculation Storm, realising it had a problem,
and possibly the Commonwealth, gambled on an upturn in the market which
never came. Perhaps Storm had no other choice.
Mr McArdle said
his resolve in getting to the bottom of the mess seemed to grow with
every day and with every untruth and deception told.
''We have to keep pushing on,'' he said.
''I look forward to having the truth not only exposed but revealed for everyone to see.
''These
Storm investors were not the greedy investors they have been made out
to be. They have been conned and the biggest bank in Australia is well
and truly involved.''
