$1bn scandal: How an entire financial planning industry looked the other way while Shield and First Guardian thrived

The corporate regulator has started to ban advisers linked to the Shield Master Fund.

Australia’s superannuation system is regularly held up as an example to the world. However, look a little deeper and there’s still plenty of yawning regulatory gaps which can become a nightmare for the people who put their faith in it.

Too often it comes back to poor advice or hard sell that can lead to shocking outcomes for investors, such as those who were encouraged to pull money out of their own super funds and put into high risk ventures.

It has been another low point for financial planning with the developments in recent days of two separate, but loosely connected cases, whereby collectively $1bn in savings belonging to thousands of Australians, has been frozen or has disappeared.

The scale of the scandal shouldn’t go unnoticed by politicians, but it has.

Regulators and courts are now attempting to clean up after the fact, but this will be a long, slow process that is likely to take years.

The first place to start is by looking at managing conflicts between investment funds and their responsible entities and greater structures.

Both scandals – the frozen $480m Shield Master Fund and the collapsed $500m First Guardian Master Fund – have exposed allegations of greed and shocking shortcomings in distribution, namely through financial planners.

Investments into the two master funds went missing or went into highly questionable investments. Picture: Gaye Gerard

And this is the same part of the retirement industry that is consistently campaigning for lighter regulation, but regularly refuses to confront the recurring problems in its own ranks.

This is the bind the industry has allowed itself to get itself into. Good advice with hefty upfront fees is now being priced out of reach for Australians, leaving many vulnerable to shoddy operators,

One of these, the Shield Master Fund, a highly risky fund frozen by corporate regulator ASIC in June last year, was ultimately a feeder fund for high-risk property investments. ASIC is pursuing the fund for allegedly misleading about a myriad of related party interests with its now collapsed manager, Keystone Asset Management.

ASIC alleges investors were misled about the underlying investments held in Shield which were mostly to unlisted investment schemes, linked to Melbourne property developer Paul Chiodo – himself a former director of Keystone.

It claims many investors were pushed into Shield through a hard sell by telemarketers and then directed to financial planners.

The cases of Keystone and Shield have been slowly running through courts and administration process for more than a year. However, the focus has started to turn to the licensed planners who sold the products for lucrative commissions over the two years that Shield was in operation. About 5800 people had funds tied up with Shield.

This week, ASIC banned two financial planners from Melbourne-based MWL Financial Services, which was the first banning action of advisers due to the Shield scandal.

The planning industry is at the forefront of arguing for lighter regulation.

This won’t be the end of it. Bans are expected to be placed on at least another five financial planners across multiple firms in relation to selling Shield Master Fund products.

MWL’s Matthew Bradley was banned for eight years, while adviser colleague Isaac McQueen copped a four-year ban.

In both cases, ASIC said the planners gave inappropriate advice which was not in their clients’ best interests because they recommended they invest “most of their superannuation” in Shield’s high-growth products.

Bradley copped the bigger ban after ASIC found the statement of advice he was required to prepare for clients included “false and misleading statements” that implied better returns if their super were placed into Shield. He did this by using returns projection tables in documents and suggested Shield had a better long-term track record.

A generous view would be Bradley had little understanding or experience in what he was telling his clients to do; a more cynical version would be that he put his own interests above his clients and allowed them to get burnt in the process. His firm MWL deserves closer scrutiny.

MWL did not respond to requests for comment.

Next week, the Federal Court will also hear a travel ban order on two others more closely connected to Shield. Companies operated by Osama Saad and Ferras Merhi, which were at the centre of marketing, have had freezing orders placed on their assets.

As well as planners, thousands of self-managed super fund investors accessed Shield over super platforms run by Macquarie Wrap, run by Macquarie, as well as NQ Super and Super Simplifier, which were both run by Equity Trustees.

The trustees of both were asleep at the wheel by providing shelf space to sell an inherently flawed product to investors over their trusted distribution networks.

The Australian’s Cliona O’Dowd this week outlined the sorry tale of the First Guardian Master Fund, that was even more brazen in its actions leading up to its collapse.

Liquidators Ross Blakeley and Paul Harlond of FTI have likened the fund and its responsible entity, Falcon Capital, to an elaborate Ponzi scheme. ASIC sought to wind up Falcon and First Guardian last April.

Like Shield, Falcon also ran marketing campaigns to drive people into its funds, paying $40m to entities linked to the two behind Shield’s marketing gurus Osama Saad and Ferras Merhi. Several other entities were paid to drive investors to First Guardian. The fees were ultimately sourced from the fund, which in itself is not permitted.

A liquidators’ report released into First Guardian this week reads like an investment horror story. Account keeping was shoddy, and there were few signs investments were being made as promised.

Cash was co-mingled, and money was moved daily between trust accounts to meet redemptions, and management fees and other charges.

The funds withdrawn “may not have truly reflected income generated from fund activities and returns from investments made. Rather, the sources of those funds may have been from funds raised from new investors,” the liquidators’ report said.

Investors were thought to believe First Guardian was sitting on as much as $500m, but much of this had simply disappeared or was pumped into insolvent ventures, often linked to Falcon directors.

The liquidators warned the recovery of funds would be considerably less than that. Of the tangible assets, there were just a little over $2m in Australia, including cash and a $440,000 Lamborghini bought by the firm and found in Falcon director Simon Selimaj’s possession.

Again, First Guardian was sitting in plain sight on several high-profile platforms: YourChoice Super/Praemium Super. Equity Trustees NQ Super and Netwealth Super’s platform.

What is worrying is First Guardian was set up as a registered managed investment scheme, which attracts heavier regulation than an ordinary investment trust. This would have given many the confidence to direct funds into First Guardian.

Like Shield, First Guardian relied on a lot of people to help generate its hundreds of millions of dollars.

For those who invested in both funds it is a sad tale of multiple failures right through the investment chain.

It is bordering on inconceivable that an entire investment industry – from platform operators to advisers – was in the dark about these funds, yet an industry that claims to have clients’ best interests front of mind, simply did nothing.