Regulator ASIC sues firms over billion-dollar Shield and First Guardian fund collapses

The corporate cop is launching legal action against SQM Research and InterPrac over Shield and First Guardian, as its peer, APRA, defends its own regulatory efforts.

Garry Crole is the managing director of InterPrac Financial Planning.

The corporate cop will attempt its first legal scalp over a research firm as part of the Shield and First Guardian reckoning that left thousands of Australians without their retirement savings.

The Australian Securities and Investments Commission on Thursday said it was suing advice licensee InterPrac Financial Planning and ratings house SQM Research and was seeking leave to sue advice firm MWL Financial for their roles in the chain that led to 12,000 Australians putting $1bn of super money into Shield and First Guardian.

Investors pummelled InterPrac’s parent company, ASX-listed Sequoia Financial, with its shares plunging 10.5 per cent despite the company telling the market it would vigorously defend the proceedings.

ASIC’s twin regulator, the Australian Prudential Regulation Authority, has largely sat on the sidelines as ASIC has leaned into enforcement action.

So far, ASIC has launched 10 proceedings in the Federal Court against 18 defendants in the First Guardian and Shield cases. There have been 52 appearances and 64 affidavits filed.

When questioned on what actions APRA had taken to address the Shield and First Guardian scandal, chair John Lonsdale defended the regulator.

Mr Lonsdale, speaking on the sidelines of ASIC’s annual forum in Melbourne, said APRA had “done a lot of work”.

“We’ve done a lot of work on investment governance, and this has been ongoing, and we’ve written to funds, and we’re saying more work needs to happen on governance,” he said.

Mr Lonsdale said APRA was demanding to know how investment products like Shield and First Guardian came to be given space on platforms as well as what monitoring took place, “and very importantly, how they get off”.

“We’re doing a lot of work together with ASIC and trying to do that in the most regulatory efficient way,” he said. “You’ve got to look at it in totality.”

ASIC targets InterPrac and SQM

InterPrac was the main advice licensee involved in the Shield and First Guardian scandals, with its advice firms Venture Egg Financial Services and Reilly Financial tipping thousands of clients into the two schemes. Both funds were put into liquidation in the past year after Australians invested about $1bn on the recommendations of their financial advisers, most of it over a three-year period.

SQM was the only research house to rate First Guardian and Shield, handing them favourable ratings despite the funds having no track records and providing scant details on what they would invest in. These ratings allowed the funds to be placed onto platforms hosted by trustees including Macquarie, Equity Trustees, Netwealth and Diversa.

“We have now commenced proceedings against SQM Research for preparing reports and publishing favourable ratings for Shield. This is the first time ASIC has taken action against a research house,” ASIC deputy commissioner Sarah Court said on Thursday.

She said the regulator was “absolutely worried” about the research houses operating in the market but stopped short of calling out a systemic issue around how research houses rate funds.

“If you are going to put out a document that you know others are going to rely on, then in our view there is a significant obligation and onus on you to make sure you do your homework, to put in the due diligence to what you’re saying … I don’t know that we’re alleging there’s a systemic problem,” she said.

“The research house we’ve taken action against today rated both of these funds as investment grade. We’re saying that was misleading.”

ASIC deputy chair Sarah Court.

SQM prepared reports containing misleading representations and its processes fell short when it published “favourable” ratings for the Shield fund, ASIC alleged in its proceedings launched in the Federal Court.

SQM founder Louis Christopher told The Australian his firm was assessing the claim and would make its position known “in due time”.

In its action against InterPrac, ASIC alleges the licensee failed to ensure its authorised representatives Venture Egg and Rhys Reilly of Reilly Financial complied with best interests obligations and failed to have adequate risk management systems.

Together, Venture Egg and Reilly Financial tipped the savings of 6,800 clients into the two funds.

Both Shield and First Guardian are in liquidation and currently under investigation for allegedly misusing investor money. Liquidators have previously estimated Shield investors may get 60c to 70c in the dollar back but the outlook for First Guardian investors is much worse, with much of the money feared gone after allegedly being invested in the directors’ pet projects and moved overseas.

InterPrac failed to act against ‘negative consent’: ASIC

ASIC alleges InterPrac failed to have an adequate process for approving financial products and relied entirely on external research to add Shield and First Guardian to its approved product list.

An investigation by The Australian revealed earlier this year that InterPrac put First Guardian on its approved product list following a request from Venture Egg founder Ferras Merhi.

Mr Merhi was the main adviser involved in Shield and First Guardian, and ASIC alleges he was paid millions of dollars directly from First Guardian to market the fund while also recommending clients invest their super in it.

ASIC alleged InterPrac failed to act once it knew lead generators were being used to funnel clients into Shield and First Guardian and failed to prevent the use of a ‘negative consent’ model.

The Australian revealed in July how Venture Egg clients were tipped into the funds without their knowledge using the negative consent model whereby advisers would send an email to clients with a recommendation they switch, and if they didn’t receive consent within seven days, the advisers made the switch anyway.

Falcon Capital co-founder Simon Selimaj, developer Paul Chiodo and former First Guardian CEO David Anderson.

The action against SQM and InterPrac comes after ASIC sued Equity Trustees in Federal Court for its role in the Shield scandal and secured $321m from Macquarie to repay investors. Equity Trustees is defending the claim.

The regulator has so far taken no action against trustees that allowed First Guardian onto their platforms.

Ms Court said ASIC had grappled with the number of gatekeepers involved who should have protected investors.

“We’ve talked about what ASIC knew and yes, there were some complaints coming in at some stage about selling practices but nothing about the funds themselves and the potential risk of those funds. These were funds that were sitting on the platforms of regulated super trustees. There were advisers, research houses and auditors involved; there was a string of players involved in this and that’s why these investigations are so complex,” she said.

She said ASIC was continuing to investigate.

The regulator is also seeking leave to commence proceedings against MWL Financial Services, a former director of the firm and Imperial Capital Group, a lead generator, for their roles in putting investors into Shield.

ASIC is seeking declarations and civil penalties against SQM and InterPrac, as well as orders to restrain InterPrac from carrying on a financial services business.

Originally published as Regulator ASIC sues firms over billion-dollar Shield and First Guardian fund collapses