Equity Trustees has conceded the Shield and First Guardian master funds passed its due diligence process but insists it is the victim of fraudulent conduct.
In a speech at the AGM of ASX-listed EQT Holdings, the parent company of Equity Trustees Superannuation Limited, managing director Mick O’Brien told shareholders the trustee was neither owner or operator of the platform nor the responsible entity for the collapsed funds.
He added the trustee had no relationship with the advisers, licensees, lead generators, responsible entities, fund managers or property developers involved in the scheme.
“At the request of the platform promoters, ETSL instigated its process for listing of new managed investment schemes,” O’Brien said.
“It undertook due diligence to determine whether the schemes should be allowed on the platforms and available to members, which the schemes passed in both instances.”
However, the argument from the trustee was that they were also defrauded.
“The liquidator’s report indicated the responsible entity, Keystone, misled ETSL and members by misdirecting scheme assets to pay lead generators and second by investing the remaining scheme assets in a manner contrary to the Product Disclosure Statement,” O’Brien said.
Furthermore, O’Brien argued the trustee never recommended or directed member money into the schemes.
“The only monies that flowed to these schemes came from members who directed the trustee to invest in that manner, based on advice the member received from their chosen financial adviser,” O’Brien said.
“In particular, we believe that the biggest single source of failure were the responsible entities of the two managed investment schemes. The responsible entities were closely followed by the fund managers of the schemes, the lead generators, the financial advisers and the licensed dealer groups that authorised the financial advisers. I reiterate: ETSL did not have any relationship with these parties.
“Most of these parties were the holders of Australian Financial Service Licences or their authorised representatives, with the licences provided by ASIC.”
Equity Trustees confirmed it is preparing to apply to the government for financial assistance to remediate clients, under Part 23 of the Superannuation Industry (Supervision) Act.
Part 23 applications may be approved by the minister if the fund suffered a loss from fraudulent conduct or theft, the loss substantially reduced the fund which caused difficulties paying benefits, and if the approval is in the public interest.
Netwealth announced in the past week it had made a similar application and Diversa Trustees confirmed to Professional Planner that it is in the process of doing so as well.
“Diversa considers the First Guardian Master Fund’s losses to have resulted from fraudulent conduct,” a statement from a Diversa Trustees spokesperson said.
In a doorstop interview on Thursday, Minister for Financial Services Daniel Mulino was asked if he had considered the requests, but the minister said he was waiting to be briefed by his department, noting he had received the letter from Netwealth.
“Once I’ve received that briefing I will then write to APRA, as I’m required to do under the act, for APRA’s views as the independent macro prudential regulator, and I will table that letter that I write to APRA in the parliament,” Mulino said.
“I don’t want to prejudge where I will go in my consideration of that request, but I’m stepping through methodically, getting briefing from the department and then, in turn, as required by the act, I will write to APRA.”
Equity Trustees questions why ASIC isn’t seeking advice compensation
ASIC is suing Equity Trustees, which has stood by its initial position that it hasn’t breached any of its legal obligations and will defend itself in court.
O’Brien said he couldn’t comment on the trustee’s legal prospects, although he pointed to comments made by ASIC deputy chair Sarah Court to Parliament in September.
“Specifically, ASIC said ‘We may win that, then those obligations will be clear. If we lose that case that’s been contested, that’s another potential area of law reform that may be required to make clear what the obligation of platform providers are’.”
O’Brien also noted Court’s testimony to Parliament where she detailed the regulator had raised concerns with Macquarie in Shield on April 2023 while Equity Trustees wasn’t warned.
He added the first inflows Equity Trustees received wasn’t until June 2023, but stopped accepting any further applications by October 2023, advising ASIC of their concerns.
ASIC issued interim stop orders on Shield in February 2024.
Equity Trustees was the trustee for NQ Super, which held Shield and First Guardian and DASH’s Super Simplifier which held Shield.
As the trustee prepares its own application for government assistance, O’Brien’s comments suggested a double standard with ASIC’s approach whereby the trustees were being pursued for remediation but other parties involved weren’t.
“We welcome ASIC’s work in taking action against the responsible entities, fund managers and advisers,” O’Brien said.
“We note however that ASIC has not sought compensation or remediation for members from any of these parties.”
ASIC has been in court this month against Ferras Merhi who is considered to be a central part of what the regulator described as an “industrial scale” pipeline of lead generation services being used by advisers to put clients in the failed funds. The regulator further alleged Merhi received money from the funds to market them.
Furthermore, 140 advisers are being investigated in total and several smaller licensees have been cancelled.
The collapse of the funds left $1.2 billion worth of retirement savings of 11,000 people up in the air.
While Equity Trustees, Netwealth and Macquarie will ask for government assistance, Macquarie had chosen to remediate investors directly.
Destruction of shareholder value
The impact of the Shield and First Guardian collapse has taken its toll on the share price of the group, which is down 22.43 per cent over the past six months.
The share prices of Netwealth (up 10.64 per cent over the same time frame) and Macquarie (up 14.43 per cent) have remained steady over the same period with only comparatively smaller fluctuations during negative announcements.
O’Brien said “it won’t be lost” on shareholders that the market capitalisation of the parent company has reduced $300 million since ASIC commenced its action (now $667 million).
“We have previously indicated to the market that, based on expected recoveries as set out in the liquidator’s report, the quantum of loss for Shield investors under ETSL’s trusteeship is estimated to be approximately $73 million,” O’Brien said.
“I can also advise shareholders that members’ exposure to First Guardian through super funds of which ETSL is trustee is some $70 million. ETSL is a wholly-owned subsidiary of EQT Holdings Limited and there is no cross guarantee provided to that entity.”
The company does hold insurance coverage as required by law, but O’Brien said further details were confidential.
“[The group] has taken appropriate action, including notifying its insurers, to preserve its insurance cover,” O’Brien said.
