Shield and First Guardian – not just fraud

ANALYSIS

The Assistant Treasurer and Minister for Financial Services, Daniel Mulino would do well to hasten slowly in reacting to calls from, first, InterPrac chief executive, Garry Crole, and now Netwealth for activation of the so-called ‘Trio Formula’ to compensate victims of the Shield and First Guardian collapses.

The crux of the issue for Mulino is whether the collapses are attributable to clear-cut fraud or whether other factors weighed on investor losses – something which remains under investigation by the Australian Securities and Investments Commission (ASIC).

What is already known is that in the case of Macquarie Investment Management an internal system (watch list) failure occurred which allowed the Shield products on the company’s platform. In the case of Netwealth there is, too, the question of the significance  or otherwise of  e-mails sent to Venture Egg principal, Ferras Merhi in January, 2023, advising of the “soft close” of the First Guardian funds “as they do not hold a sufficient rating from an approved research house”.

“The fund requires a minimum rating from SQM of at least 4 stars however First Guardian were only rated as 3.75 stars. There was (sic) also some issues with redemptions that bought them to our attention,” the Netwealth e-mail to Venture Egg’s Merhi said..

Thus, for Mulino, activating a Part 23 “Trio” approach is not an open and shut decision, notwithstanding any desire to make good the losses of innocent investors. He must also consider the sequence of actions and events on the part of the platforms themselves.

Crole first canvassed use of the 2011 Trio Capital precedent in early September when he urged Netwealth and the other platforms to activate access to Operational Risk Financial Requirement processes.

Netwealth wrote to Mulino on Friday and then notified the Australian Securities Commission (ASX) on Monday that it had formally sought financial assistance under Part 23 of the Superannuation Industry (Supervision) Act.

Netwealth’s ASX announcement referenced 1,088 members impacted with a total exposure of approximately $101 million and stated that any financial assistance granted would be applied to restore the fund and to compensate impacted members.

The announcement said “the $101 million exposure reflects total member investments less redemptions made before Falcon Capital Limited, the Responsible Enty of First Guardian, suspended redemptions on 28 May, 2028”

It went on to say “Netwealth considers that Falcon Capital engaged in fraudulent conduct resulting in losses to the Netwealth Superannuation Master Fund. Netwealth believes fraudulent conduct by other entities and individuals has also contributed to these losses”.

At the same time as ASX was dealing with Netwealth’s announcement on Monday, ASIC announced it had secured Federal Court interim orders restraining Merhi from operating within the financial services industry “following ASIC’s allegations that Mr Merhi engaged in unconscionable conduct, failed to act in the best interests of clients, gave conflicted advice, and provided defective statements of advice while receiving millions of dollars”.

And, barely a fortnight after ASIC chair, Joe Longo told a Parliamentary Committee the degree to which individuals targeted by its investigation had been able to afford to “lawyer up” the ASIC announcement stated:

“Between 2020 and 2024, Mr Merhi and advisers working for him allegedly advised clients to invest around $296 million of their superannuation into First Guardian and around $230 million into Shield. In return, ASIC alleges Mr Merhi’s businesses received:

• nearly $18 million in upfront advice fees; and
• more than $19 million from entities associated with First Guardian for marketing First Guardian to clients.”

And in the meantime, early signs from the Australian Financial Complaints Authority (AFCA) are that claims relating to Shield and First Guardian will weigh on the cost of the Compensation Scheme of Last Resort for years to come.