Is this the biggest corporate fraud in Australian history?
The government has been largely silent through the Shield and First Guardian failures that could see 12,000 investors lose $1bn in super savings.
The collapses of First Guardian and Shield could be the biggest corporate frauds in Australian history, eclipsing a disaster in 2009 when thousands of investors lost their super savings held with Trio Capital.
Plenty of questions were asked back then. Plenty of recommendations were made.
And yet, here we are, more than 15 years later and First Guardian has collapsed just months after another fund, Shield. It’s left 12,000 investors who collectively pumped $1bn into their superannuation savings facing the dire prospect of losing it all. Another $160m has been lost by investors in Australian Fiduciaries.
All up, more than $1.26bn in superannuation funds have been caught up in the collapses. This is money required by law to be set aside to allow for a better retirement.
How can it happen?
In the case of First Guardian and Shield, the failures were everywhere, from the regulators Australian Prudential Regulation Authority and the Australian Securities and Investments Commission, to the super trustees Macquarie, Equity Trustees, Diversa and Netwealth, the research house SQM, the financial advisers and, of course, the funds themselves, which are under investigation for misusing investor funds.
For the victims of the suspected wrongdoing the big questions being asked are how could their super be so easily lost? And will there be any support from the government?
So far, they have been largely ignored and left to navigate the fallout and the steps ahead alone.
Shield and First Guardian come crashing down
Both Shield and First Guardian were marketed as diversified portfolios that were delivering higher returns than those available in industry super funds. The new funds – First Guardian began in 2019 and Shield in 2021 – grew quickly.
Between 2022 and 2023, a handful of advisers tipped close to $500m of client money into each fund.
Then it all came crashing down. First Shield, in 2024, followed by First Guardian months later. The Australian revealed in February the link between Shield founder Paul Chiodo to First Guardian’s former CEO David Anderson.
After the funds collapsed and the liquidators came in, they discovered both funds held a range of illiquid private assets, not the vanilla holdings investors thought their money was in.
For Shield, most of the money appears to have been in failed property developments. Liquidators have previously suggested investors may potentially get back 22c to 50c in the dollar once the wind-up is complete.
The outlook for First Guardian investors could well be worse. About half of the $450m in client money was allegedly channelled overseas and may be difficult to recover, liquidators suggest. Other investments include loans to Australian ventures that have since gone into liquidation.
The liquidators for First Guardian have so far declined to give an estimate of what they think they can recover.
Big questions to answer
There are major questions to be answered by regulators and the government.
It beggars belief that a government-mandated scheme that forces workers to tip a portion of their monthly salary into a super fund, which has grown to a $4 trillion national savings pot, is not more tightly supervised, regulated and controlled.
For anyone familiar with the Trio Capital story, the alleged wrongdoing by Falcon Capital and First Guardian, including allegations hundreds of millions of dollars were channelled overseas, seems like deja vu.
Trio Capital was the trustee for a number of superannuation schemes that collapsed in 2009 after Bronte Capital’s John Hempton reached out to then-Treasury boss Ken Henry to ask that he forward Hempton’s concerns, anonymously, to the head of ASIC.
Two of Trio’s funds were involved in the fraud: the Astarra Strategic Fund (ASF) and the ARP Growth Fund. Both were managed investment schemes, with Trio as the responsible entity.
In his letter to ASIC’s Tony D’Aloisio, Hempton pointed to the suspiciously smooth investment returns recorded by the Astarra fund through the Global Financial Crisis.
“These are the sort of results that have had a bad reputation since the exposure of Bernie Madoff,” Hempton wrote to ASIC.
Within four weeks of sending that letter, Astarra was shut down. ARP followed shortly after but about $176m in super savings was lost from the two schemes: $123m from Astarra and $52m from ARP.
An inquiry into the fund found: “As the Trio case amply demonstrates, there are various points of systemic weakness relating to the role of the regulators, the auditors, custodians, research houses and financial advisers.”
Like at Trio, the responsible entities at Shield and First Guardian were led by the same people who ran the funds.
Falcon Capital was First Guardian’s responsible entity and its directors were David Anderson and Simon Selimaj, also known as Simon Sallka and Simon Sokol. Mr Anderson was also the CEO of First Guardian and Mr Selimaj was the fund’s CIO.
Keystone Asset Management was Shield’s responsible entity. Paul Chiodo was a Keystone director and also ran the Shield funds.
Just as the Trio directors funnelled investor money overseas, First Guardian is also alleged to have moved millions of dollars offshore.
Shortcomings in regulation
In a submission to the Cooper Review of Superannuation in February 2010, Hempton warned there were “several critical shortcomings in Australian regulation which could lead to catastrophic failure of several superannuation funds”.
“These are funds which will be left with essentially no assets in exchange for a lifetime of compulsory contribution – not through investment losses but by the assets somehow disappearing through fraud and misadventure,” Hempton wrote.
The Cooper review brought us the Stronger Super Reforms, which broadened APRA’s mandate and tightened regulation but, clearly, they didn’t go far enough.
Since then we’ve had the banking royal commission, which exposed systemic failures across the industry and the Michelle Levy review, which recommended that the best interests duty – that’s the legal obligation that advisers act in the best interests of their clients – be scrapped.
The government is currently reviewing changes to the best interests duty as part of its broader advice reforms.
The advisers involved in Shield and First Guardian, meanwhile, could well face serious consequences when this is all done.
The main adviser caught up in the scandal, Ferras Merhi, ran two advice shops: Venture Egg Financial Services and Financial Services Group Australia. Between the two, he put more than 6000 of the 12000 affected investors into the funds, The Weekend Australian understands.
During this same period, Mr Merhi was also allegedly paid millions of dollars by the funds in marketing fees through another of his businesses.
It’s time for assistant treasurer Daniel Mulino, who has kept quiet through this whole sorry saga, to act and bring in regulatory reforms to clean up this murky system, not only for the investors involved, but for all of us with money in super.