Auckland, July 17, 2019
How ANZ Bank fought for more than three years to keep its role in New Zealand’s biggest Ponzi scheme quiet, and stop a regulator telling out-of-pocket investors the details.
On June 16 2019, ANZ Bank Chairman Sir John Key fronted up to Auckland journalists about the departure of the Bank’s then long-standing Chief Executive David Hisco.
An investigation had raised questions about Hisco’s reporting of his expenses, Key explained. Personal expenses like chauffeur-driven cars and wine storage had been marked in the accounts as business ones.
The amounts were small, but the principle was important.
“We as an organisation and the New Zealand board and me as Chairman expect transparency from not only our CEO but every person who works for this company,” Key told the press conference.
The financial community was astonished. No one saw Hisco’s departure coming.
But all round the country, there were other people who were also astonished – for a totally different reason. These were the New Zealand investors who had lost a combined $110 million in the 2012 collapse of country’s biggest Ponzi scheme – Ross Asset Management.
What would have surprised these out-of-pocket investors was ANZ’s seeming focus on transparency.
RAM Ponzi Scheme
Why? Because they had recently discovered that for more than three years, ANZ had battled in court to stop anyone knowing about a Financial Markets Authority investigation into the bank’s role in the RAM Ponzi Scheme.
ANZ is thought to have spent well over a million dollars in legal costs on what looks very much, from the outside at least, like an effort to prevent transparency.
In fact, so secret had the whole affair been that John Strahl, Head of the RAM Investors Group, says investors didn’t even know there had been a court case – let alone that ANZ had fought the FMA’s attempts at disclosure over a three-year period all the way to the Supreme Court.
The case was eventually thrown out in April.
To be fair to John Key, the decision to take legal action to stop the FMA releasing information didn’t come from him as Chair. He only joined ANZ’s New Zealand Board in October 2017 and took the top job in early 2018. But the ultimately unsuccessful decision to pursue the case to the Supreme Court was his. And he could have initiated talks with out-of-pocket RAM investors any time he wanted.
But no one said anything.
RAM investors knew that in a separate case Ross Asset Management’s founder David Ross had gone to jail for 10 years for fraud. He’s still there.
But Ross being behind bars doesn’t get investors the millions they are still owed.
What could do that is important information gathered by the Financial Markets Authority in 2015 and 2016 from Ross Asset Management’s bank – ANZ.
ANZ blocks FMA disclosure
The Court of Appeal judgment from Justices Forrest Miller, Mark Cooper and Raynor Asher in December 2018 is clear. The FMA wanted to give this information to investors, because the regulator believed investors could use it to take a case against ANZ and recover at least some of the money.
“On February 17, 2016 the FMA wrote to ANZ stating that it had formed the view that ANZ ‘may still be liable to a beneficiary for a breach of trust in equitable cases of action for knowing receipt and dishonest assistance’.”
That sounds like legal jargon, but the key words ‘knowing receipt’ and ‘dishonest assistance’ are important. They mean that the FMA thinks ANZ, as RAM’s bankers, should at some stage have realised what was going on – and acted to stop it.
The FMA doesn’t use the word incompetent, but Strahl does. He says ANZ banking staff working on the RAM account should have pulled the plug on David Ross years before they did – and saved investors a whole load of money and stress.
“ANZ was looking at the operations of the bank accounts on a day-to-day basis,” Strahl said.
“They know how fund managers work. Anyone with half a brain could have detected these bank accounts were not being operated how they should have been.”
“One meeting and I smelt a rat”
Strahl didn’t have money in the RAM Ponzi scheme. But he got involved in 2012 when he was asked to be an independent trustee for a family that had money with RAM.
He decided to check out David Ross and was horrified by what he found. After just one meeting with Ross, Strahl advised the family trust to get its funds out of RAM.
When Ross didn’t come up with the money, Strahl approached the Financial Markets Authority, which acted on a number of complaints and shut the scheme down.
“I met with Ross and interviewed him and was unhappy with the responses. I had a bad feeling; it looked dodgy, so I went to the FMA.”
If it was obvious to an outsider all wasn’t well with RAM’s financial position, Strahl said, why didn’t ANZ notice anything?
“I come along and have one meeting with Ross, and smell a rat. The bankers could see it on a daily basis.”
ANZ Bank investigated
By 2014, the FMA had secured the conviction of David Ross and turned its energies to the RAM investors. It met the liquidators, who had looked into the possibility of a claim against ANZ, but decided it wasn’t the role of the liquidators to take that claim.
So, in 2015, the FMA began its own inquiry into ANZ, which it upgraded to an investigation in early 2016. That’s when it wrote to ANZ Bank talking about ‘knowing receipt’ and ‘dishonest assistance’, the Court of Appeal judgment showed.
“The letter indicated that the FMA considered it ‘appropriate to share its findings with RAM investors as any decision about whether a claim is brought will necessarily need to have their input’.”
ANZ disagreed. It argued the FMA’s proposed disclosure was outside its powers under the Financial Markets Authority Act 2011 and that it was for an unauthorised purpose.
As ANZ spokesman Stefan Herrick puts it: “ANZ provided a significant number of documents to the FMA to assist in its investigations into Ross Asset Management. ANZ released confidential information (including customer information) to the FMA, as required by law. The FMA wished to pass on selected documents to a third party.
“We believed this issue raised significant questions about the use of confidential information by a regulator. We believe customers and companies alike need to have confidence that confidential information is treated as such, and when provided to a regulator, is only used by that regulator in accordance with their statutory mandate.”
ANZ went to the High Court to stop the FMA releasing the information and won. ANZ even argued successfully that details of the court case should also be suppressed. Investors didn’t even know it was happening.
Appeals and after
But then the FMA appealed – and won.
So ANZ appealed that appeal.
And in April this year the Supreme Court brought the issue to a close by refusing to hear anything further of the matter from ANZ. After three years, the FMA could talk to the RAM investors.
And so it was that John Strahl and other key representatives of RAM investors got a call from the FMA telling key investors about the court case and the existence of the FMA evidence.
Strahl says it was a bolt from the blue.
“We were gobsmacked. Five years ago, we asked the FMA if they were going to do anything to check the affairs of the ANZ Bank. They said yes but then went stony-cold quiet. In the end, we gave up on it.
“We thought the FMA was being useless, when in fact they were being vigilant.”
RAM investors launch court action
Suddenly investors were under huge pressure to put a case together before time limits kicked in, Strahl says.
“When we were advised in April, initially we were told we had two to three weeks to decide if we wanted to do something, but the FMA was able to extend the limitation period.”
Still, it expires in September.
“We were obliged to do our investigation, get lawyers, find funding, and file court proceedings in just three months,” Strahl said.
Money to take the case is coming from Auckland-based litigation funders LPF, which has been involved in two significant actions over the last few months -the case against the directors of failed construction company Mainzeal, and the case brought by kiwifruit growers against MPI over the devastating kiwifruit disease PSA.
The litigation funding model works by LPF taking a (fairly hefty) percentage of any award if the case is successful, but not taking a fee if they lose.
Strahl said that was the only way many of the investors were going to come on board.
“There was an enormous desire to take action against ANZ, but a major reluctance to commit more money, given that the money [for a court case] could be quite large.
Strahl said that around 220 investors have joined the action so far. Until they know how many are taking part it isn’t possible to put a figure on how big the claim against ANZ will be.
Insiders estimate it could be “north of $70 million”, although that’s small change for a bank that last year made just shy of $2 billion in New Zealand.
Strahl hopes more of the 660 who are eligible will sign up before the September cut-off.
“I am confident that we will get 300-400. Why wouldn’t they join? All the costs are paid for.”
Classic Ponzi scheme
The investors’ arguments focus on Ross Asset Management’s ANZ bank accounts. Taken down to basics, there were two sorts of account involved. First a client account, which received money from investors and (in theory at least) invested it for those clients. Second, an operating account, which received management fees from the client funds and paid the company’s bills.
Like a lawyer’s trust account, the money in RAM’s client account should have been sacrosanct.
It wasn’t. When RAM’s operating account went into overdraft, which it regularly did, sometimes by hundreds of thousands of dollars, David Ross used funds from the client account to pay off the overdraft.
That meant he wasn’t investing all his clients’ money in outside funds; he was using some of it for business expenses. So when old clients wanted their money back, Ross increasingly had to use new client money to pay them.
At the same time, RAM provided fictitious quarterly reports to investors claiming their funds were making strong returns.
It’s the classic Ponzi scheme money-go-round scenario, and it’s what landed David Ross in jail.
But the FMA and RAM investors argue the ANZ played a supporting role in the unravelling of RAM that lost $110 million of people’s life savings.
Amongst other things, they say ANZ should have asked more questions about where David Ross was getting the money from to pay off the big overdrafts.
“These were ordinary folks, largely individuals, largely elderly people, who worked and saved hard. They looked to invest their money with someone reputable, someone able to provide a better return than bank deposit.”
“A very good claim against ANZ”
Strahl reckons if someone at ANZ had thought less about keeping David Ross, a good ANZ client, happy and had instead taken a hard look at what was really going on at Ross Asset Management, RAM’s Ponzi scheme could have been stopped years before it was.
“We aren’t suggesting ANZ deliberately or dishonestly assisted [David Ross]. But they failed to meet the reasonable standard for a banker in those circumstances. If at any time they had blown the whistle, they could have stopped this.”
Warning to firms
In a significant case reported by US news site Quartz last week, accounting giant Deloitte and others have agreed to pay $234.6 million over their role allegedly enabling a giant Ponzi scheme run by now-defunct Aequitas Capital Management between 2010 and 2016.
The class action lawsuit alleged the securities scheme couldn’t have happened without firms like Deloitte and EisnerAmper—also a defendant in the lawsuit—signing off on their books, and lawyers including elite white-shoe firm Sidley Austin doing the paperwork, the article says.
“The settlement is a warning to service firms that failing to sniff out potential wrongdoing by clients can cause years of expensive court proceedings, followed by a hefty payout,” Quartz journalist Max de Haldevang writes.
Strahl said that RAM investors have taken independent legal advice since getting the FMA report and “this confirms we have a very good claim against ANZ.”
ANZ spokesman Stefan Herrick argues that ANZ, like the investors, was misled by Mr Ross.
“ANZ strongly denies the allegations and will be defending the claim from the investors and the litigation funder. The FMA said last week the matter raised important questions around bankers’ duties and this provides the opportunity for them to be tested in court.”
That’s for the future. No date has been set for the hearing, which is likely to be some months away. In the meantime, the issue of historical lack of transparency in ANZ’s banking practices remains.
The Court of Appeal judgment against ANZ Bank in the Ross Asset Management Ponzi scheme case mentions the “t” word often.
“The FMA’s main objective is to promote and facilitate the development of fair, efficient, and transparent financial markets,” the judgment said, going on to talk about the 2007 financial sector scandals, the passing of the 2011 Financial Markets Authority Act, and the creation of the FMA as the Government’s way of providing much-needed additional protection for investors.
The need for transparency was key, the appeal court judges say.
“The reference to ‘transparency’ indicated that Parliament was concerned that investors were not receiving sufficient information, and that transparency is a means of achieving protection for investors.”
And the FMA needed to be able to share information it had gathered about ANZ with investors to give them a chance to take action against ANZ or not, the judges said.
“It is plain that the FMA regarded investor input as an important part of its investigation… It genuinely wanted information from the RAM investors to help it decide whether it should issue its own proceedings, and to help investors decide whether to issue their own claim.
“Clearly, the FMA could not make a decision as to whether to issue proceedings itself unless it had a full understanding of whether investors would bring their own proceedings. Investors could not make decisions unless they knew the facts, and the FMA could not make decisions about exercising its powers… without getting the investors’ feedback on the facts.”
However, ANZ’s Herrick said that the RAM court proceedings were not about transparency, or a lack of it.
“They were about protecting confidential information, including personal and customer information. Even Newsroom has a policy that protects personal and customer information.”
ANZ wasn’t satisfied that the confidentiality provisions put in place by the FMA around the release of sensitive information were stringent enough – although the Court of Appeal judges decided they were.
Still, Sir John Key’s ardent promotion of transparency over the former CEO David Hisco’s expenses does lay the bank open to scrutiny over other murky episodes in its history.
It’s not just the FMA was being forced to spend hundreds of thousands of taxpayer dollars fighting to release documents investors needed to take action against ANZ in the RAM case.
In 2013, ANZ was investigated by the Commerce Commission and the FMA and forced to pay out $19 million to farmers it misled over the benefits and downsides of complicated interest rate swaps it sold them between 2005 and 2008.
Rural advocates estimate farmers could have lost up to a billion dollars altogether over the interest rate swaps, with ANZ the largest culprit.
The bank lost a long-running court case over the same issue last month. See The Taranaki farmers who took on a $81bn bank – and won.
Earlier this year, ANZ was stripped of the right to set its own risk capital buffers, after the Reserve Bank asked it to investigate its practices.
ANZ discovered it had been using a non-approved model for more than five years and the RBNZ was not happy.
ANZ was pinged for more than $400 million over tax avoidance claims in 2009. And there are two ongoing Reserve Bank investigations into ANZ.
Oh and there’s that issue of the ANZ Bank selling a house to then CEO David Hisco’s wife for more than $3 million less than it was worth back in 2017 – a Hisco-related perks issue that Sir John failed to mention in last month’s press conference into his former CEO’s expenses.
His pro-transparency press conference.
Nikki Mandow is Business Editor at Newsroom based in Auckland. The above article, which appeared on the Newsroom website today (July 17, 2019) has been published her under a Special Agreement.