Storm Financial close to collapsing
Storm Financial clients threaten class action
The clients of the Townsville-based financial planning firm Storm Financial are considering a class action against the company according to media reports in mid-December 2008.
The north Queensland company’s share market funds were terminated in early December and assets were being sold off.
Storm has about 13,000 clients across Australia and about $6 billion in funds and liabilities under advice. The company has 38 financial advisers, two authorised representatives and 164 staff in 14 offices across Queensland (seven are in regional Queensland), NSW and Victoria with a head office in Townsville.
According to lawyer Damian Scattini, a number of clients are considering filing a class action against the company for providing them with inappropriate advice. “They’ve been put into a very high risk venture that’s been presented as anything other than high risk,” he said.
Scattini says some customers are alleging they were not warned they could lose their money through high-risk investments. “These are ordinary mums and dads and sadly grandmums and grandads, who have been put into this vehicle and they’ve been encouraged to use their house as collateral. It’s tragic enough if you are a 40-year-old but if you are a 65-year-old you don’t have time to ride it out, you don’t have time to start again,” he said.
Just six weeks earlier on October 30th, 2008, the Townsville Bulletin reported that, “Townsville’s wealthiest couple has vowed to survive the financial storm. Julie and Emmanuel Cassimatis said their highly-successful business Storm Financial would be around for the next 30 years despite the world-wide credit crunch which has claimed some of the biggest businesses and heavily impacted the Australian financial sector.”
Ms Cassimatis said southern media reports of hundreds of millions of dollars of Storm client stock being dumped into the market and that the company was in turmoil were incorrect. “Storm Financial Limited is a strong company both financially and culturally - we’ve been around for over 30 years and intend to be around the next 30 years. Storm is currently seeking new firms to acquire and continuing with its acquisition path,” she said.
Ms Cassimatis said she was confident Storm Financial had complied with all regulatory obligations in respect to providing advice to shareholders and investors.
According to the October 30th, 2008, Townsville Bulletin report, the Cassimatises boast a fortune of about $450 million and were listed at number 22 on this year’s Sunday Mail’s Queensland Top 100 Rich List.
Mr Cassimatis said they didn’t do anything half-heartedly. Earlier in 2008 the company hosted about 600 of its clients on a group holiday at a Sun City resort in South Africa, while four hundred clients joined the Cassimatises in the Mediterranean for a holiday in 2007.
The very day before this story appeared in the Townsville press, Michael West had written a critical article about storm in the Fairfax press.
“One year ago, financial planning company Storm Financial was trying to pull off a $500 million stock market float. It never quite got that float away, despite the assistance of UBS and Macquarie (and investigating accountant PWC), despite the heady market, and despite two attempts - one mid-year and another in October 2007. Now margin calls have forced Challenger, which acts as Storm’s responsible entity, to dump hundreds of millions of dollars of Storm client stock into the market. Colonial, which also runs indices for storm, is ducking for cover.
“Storm founder Julie Cassimatis and her husband Emmanuel steered Storm from a two-advisor show in Townsville in 1994 to a planning powerhouse with 13,000 clients across the country controlling $4.6 billion in funds under management. There is a fatal flaw in their business model however - failure to come to grips with the fact that bear markets happen.
“The Storm way was to get clients to borrow using their house, and any other asset which could be leveraged, and hop into the stock market every time it dipped. This worked a treat for years: the market kept dipping then surging to fresh new highs. Finance was abundant and cheap.
By 2007, Storm was on a serious acquisition binge. It had bought a planning group in Melbourne, then expanded across Queensland into Brisbane, the Gold Coast and Sydney. It snapped up 10 companies in March 2007 alone.
“The “pathfinder” prospectus - a copy of which has been sitting on the desk here for a year in the knowledge that it would soon come in handy - shows Storm agreed to pay $32.9 million for a swag of planning businesses. But there was a catch: “This consideration is to be paid in the form of shares” from the IPO.
“A glossy presentation to funds managers shows a list of Storm’s multi-millionaires.
Client AO - 8 years, 6 months invested. First investment $350,000, current balance $14.9 million.
“Another started with Storm just before the September 11 market crash. First investment $300,000. Current balance $37.8 million.
Fees on that account were $330,000 for March 2007 for an accumulated total of $1.2 million.
“According to the prospectus, Storm was to have offered 160 million shares to the public, including a 28.5 million selldown of the $1 shares by the Cassimatises. Market cap at the IPO was to have been $424 million to $498 million with the Cassimatises keeping 54%. Some $14 million in proceeds would go to repay shareholder loans and $110 million was earmarked for acquisitions.
The husband and wife team were to have picked up a salary of $513,129.20 apiece and were on quite a nice fee wicket to boot, thanks to licence arrangements for selling their Ignite research service and their Phormula leverage service to Storm.
“Storm itself earned only small income from the “non-Stormified” clients but once they were geared up and Stormified, Storm could expect an up-front fee of 6.5% to 7% of gross investment. The usual trailing fees applied, both to Storm and to the planning companies that had been acquired by Storm.”
Jamie Mcintyre, Chairman of 21st Century Education says if only these clients had taken the trouble to obtain a financial education costing no more then a few thousand dollars they could have avoided loosing this money.
Mcintyre is a long-standing critic of the financial planning industry and the ethics and integrity of many of the companies and people involved in the financial planning industry. Even before the sub-prime crisis emerged in the US thousands of Australian investors, many of them retirees, had lost their life savings in dubious financial schemes promoted by financial planners. He even wrote a best-selling book on the topic, What I didn’t learn from my financial planner but wish I had (21st Century Publishing, 2007)
He said many novice investors try to save a few thousand dollars by not investing in their financial education but were paying 7% in fees to Storm Financial to manage their money in high-risk investments and now stand to lose everything.
The basic education we teach our clients at 21st Century Education, Mcintyre says, is to protect their share portfolio. “We stress to clients if you ever borrow for shares, never leverage more than 50% and use income producing strategies such as share renting and selling insurance in the share market.
Mcintyre says 21st Century clients following it’s strategies are making tens of thousands a month at the time of this article (mid-December 2008) from the share market, despite the financial woes being experienced by many at that time.
The reason for the success of these 21st Century clients McIntyre says, is because they invested in a financial education with 21st Century Education, an education sadly lacking in their schooling. “These people are now reaping the rewards whereas those who blindly followed the expensive, commission based advice of financial planners such as Storm Financial are now paying a huge price - their life savings in many instances.”
Just days after the Storm problems were reported in the press Reuters reported what may be the biggest ever scam by a “financial planner”.
In mid-December 2008 investors were scrambling to assess potential losses from an alleged US$50 billion ($76 billion) fraud by Bernard Madoff, following the arrest of the prominent Wall Street trader in the US.
Prosecutors and regulators accused the 70-year-old, who was chairman of the Nasdaq Stock Market in the early 1990s, of masterminding a fraud of epic proportions through his investment advisory business, which managed at least one hedge fund.
Madoff’s hundreds of investors included captains of industry, corporations - some of which are publicly traded - that used Madoff almost as a high-yielding cash management account, endowments, universities, foundations and, importantly, many high-profile funds of funds. “It appears that at least US$15 billion of wealth, much of which was concentrated in southern Florida and New York City, has gone to ‘money heaven,’” one person said.
Federal agents arrested Madoff at his apartment after prosecutors said he told senior employees that his money management operations were “all just one big lie” and “basically, a giant Ponzi scheme.”
A Ponzi scheme is an illegal investment vehicle that pays off old investors with money from new ones, and is dependent on a constant stream of new investment. Because the invested capital is not earning a sufficient return on its own, such schemes eventually collapse under their own weight.
Madoff is the founder of Bernard L. Madoff Investment Securities LLC, a market-making firm he launched in 1960. His separate investment advisory business had US$17.1 billion of assets under management.
“I expect to get back zero,” said Floridian Susan Leavitt, who invested through Madoff. “When he tells the feds he has US$200 million to US$300 million left out of billions, what can you expect?”
Prior to Madoff’s arrest, investors had wondered how he was able to generate annual returns in the low double digits in a variety of market environments. Many questioned how US regulators were able to ignore numerous red flags with regard to Madoff’s operations.
Investors overseas were reeling from the alleged fraud. Benedict Hentsch, a Swiss private bank, said it had 56 million Swiss francs (AU$71 million) of exposure to Madoff’s investment advisory business.
Madoff said “there is no innocent explanation” for his activities, and that he “paid investors with money that wasn’t there,” according to the federal complaint.
Prosecutors also accused Madoff of wanting to distribute as much as US$300 million to employees, family members and friends before turning himself in.
Charged with one count of securities fraud, he faces up to 20 years in prison and a US$5 million fine. The US Securities and Exchange Commission filed separate civil charges.
New York-based Aksia LLC, an adviser to hedge fund investors, had previously warned clients not to put their money with Bernard Madoff after learning of “red flags” at his company, including that its books were audited by a three-person accounting firm, Friehling & Horowitz, an auditor operating out of a 13-by-18 foot location in an office park in New York City’s northern suburbs.
Aksia urged clients last year not to invest with Madoff’s firm after learning the identity of the New City, New York-based auditor, according to Jake Walthour, head of advisory services at Aksia. Friehling & Horowitz included one partner in his late 70s who lives in Florida, a secretary, and one active accountant, Aksia said.
“Our judgment was swift given the extensive list of red flags,” Aksia wrote yesterday in a letter to clients.
The copy of the four-page report, dated Dec. 18, 2006, attested that the financial statements of Madoff’s securities firm were “in conformity with accounting principles generally accepted in the United States.”
The financial analysis said Madoff Securities had US$1.3 billion in assets, including US$711 million in marketable securities and US$67 million in US debt. Member’s equity, the firm’s net worth, was US$604 million, according to the document.
Aksia’s Jim Vos said, “I’m shocked by how investors turned a blind eye to returns that were too good to be true, constant steady small positive monthly returns. When something is too good to be true, it probably is.”
Madoff told senior employees that the firm was insolvent and “had been for years,” prosecutors said in a criminal complaint.
Among the other “red flags” cited by Aksia was the “high degree of secrecy” surrounding the trading of the feeder fund accounts, which provided capital to Madoff Securities, and its use of a trading strategy that appeared “remarkably simple,” yet “could not be nearly replicated by our quant analyst.”
The Securities and Exchange Commission had not examined Madoff’s books since he registered the unit with the agency in September 2006. Madoff’s investment advisory business was never inspected by US regulators after he subjected it to oversight two years ago, people familiar with the case said.
Madoff had advised the SEC how to regulate markets and donated regularly to politicians and had told his sons he was operating a long-running Ponzi scheme in the New York-based firm’s business advising rich people, hedge funds and institutions. His ability to avoid detection may fuel debate about the SEC’s effectiveness and the adequacy of its resources for policing money managers.
“Given what the SEC claims is the magnitude of the fraud, this is something you would hope an inspection would have uncovered. It’s hard to imagine a fraud of this alleged size not being accompanied by significant and pervasive compliance problems,” said Mercer Bullard, a University of Mississippi law professor and former mutual-fund attorney at the SEC.
Always remember, in both bull markets and bear markets - a financial education can be your best insurance against schemes such as these.
21st Century Education can assist you on the path to wealth creation in the 21st Century. For further information log on to: www.LearnToBeRich.com.au
21st Century Education have a range of books by Jamie McIntyre available, including:
What I didn’t learn at school but wish I had
What I didn’t learn from my real estate agent but wish I had
What I didn’t learn from my financial planner but wish I had
What I didn’t learn from Google but wish I had
What I didn’t learn from my accountant but wish I had
