Friday, April 30, 2021

The tough task facing the Australian securities regulator

Australia has several jurisdictional issues that make it a haven for corporate criminals. These features are sometimes for better, sometimes for worse, but they leave the securities regulator with a task considerably harder than any similar sized country.

Feature one: compulsory privatised pensions (called superannuation)

Australians are forced to save almost ten percent of their salary into lock-box savings accounts that they cannot touch until retirement. 

Twenty year olds are locking up tens of thousands of dollars that they cannot see, cannot touch and cannot benefit from for decades. They naturally enough become disengaged from this money.

This is real money though - and collectively it adds up to over a trillion dollars.

Bluntly - this is the biggest pool of disengaged money on the planet - with large amounts of financial assets held by people of middling to no financial sophistication.

Financial institutions in Australia have been fattened on fees from these collected savings. I personally have been a beneficiary.

That said these savings have attracted fraudsters, sometimes on a grand scale. I was quite publicly the person who reported one of the biggest frauds - when organised crime looted hundreds of millions of dollars raised by a fund manager called Astarra/Trio. Privately I have reported other frauds some of which ASIC (our securities regulator) has acted on.

Feature two: very plaintiff friendly defamation laws

Australia has some of the most plaintiff friendly defamation laws on the planet. There is a reason why I will not tell you which other frauds I reported to ASIC. The perpetrators would sue me (and may succeed even though the client money is mostly gone).

So far the most prominent people who have successfully blown the whistle on Australian frauds publicly are American short-sellers who write a reports and then hide in America - safe behind the American First Amendment and their freedom of speech. 

Major frauds in Australia have been well known for years by market participants who simply could not say anything because of the enormous power of Australian defamation laws. For example Dominic McCormick knew about Astarra Trio for years before he tipped me off. And he said nothing in part because he was scared of being sued.

Feature three: a historically weak securities regulator (ASIC) and low sentences

You would be blind if you did not notice that ASIC has a poor record of prosecuting securities fraud. So few people have been to prison for what is straight theft it is laughable. When they do get a prosecution sentences are sometimes ludicrously low. Shawn Richard from Astarra/Trio for instance ran an entirely fake funds management company for many years which simply took client money and wired it overseas. He got some of it diverted to a Lichtenstein bank account. He got two and a half years. In the US he would have got over twenty.

The Newly appointed Securities Regulator chair

The Australian Government has just appointed a new chair of ASIC and I am scared.

The appointment is Joe Longo who actually worked when (much) younger at the regulator he now leads. 

Much more controversially he was a senior corporate lawyer at Deutsche Bank for seventeen years when Deutsche Bank was the most scandal ridden and blatantly criminal investment bank on the planet.

I am not saying anything particularly controversial about Deutsche Bank. They have paid over USD15 billion in fines

Joe Longo was a lawyer there through most of that.

I know nothing about him. For all I know he may have been trying to reform the bank from within. 

Or he may not have. I genuinely do not know and the case has not been made.

But Deutsche was so bad that a senior corporate lawyer would have spent years gasping for breath has he was immersed in one pool of pus after another. It was not pretty.

Appointing a Deutsche Bank in-house lawyer to run your securities regulator is - politely - a brave political appointment. Heroically brave. Far braver than I expected from Josh Frydenberg - the relevant Australian Minister.

Poacher turned gamekeeper

I am not totally without hope though. Many a poacher has become an effective gamekeeper.

The US has more of a tradition of noblesse oblige than Australia and sometimes US government appointments come from skimming the top of the barrel. The average Goldman partner for instance would have the skills to be a very good securities regulator and some former Goldman staff have become very fine public servants.

I genuinely hope Joe Longo, with his long history of swimming through Deutsche Bank's pools of pus, lives up to his promise. Because the costs of failure are high. 


PS. To illustrate the costs of failure - about 300 million dollars were stolen in the Astarra/Trio debacle. $200 million of that was compensated by government - the money effectively taken from other pensions/superannuation accounts. There is no reason why this cannot be ten times or a hundred times larger, and if the regulator fails it will be a hundred times larger. Refunding money stolen by organised crime is not where I want my taxes to go.

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