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.


Martin said...

It is Ok to have "the money effectively taken from other pensions/superannuation accounts", when those other accounts belong to the people responsible for lack of oversight. Scary if they can simply take your money for nothing in return. There is no incentive to change the system.

I thought the German "Riester" with a guaranteed return of at least 0,0% was the worst designed system of them all. This lead to selling of equities in the corona crash to be able to honour the guarantee, which the regulator, famous "BAFIN" requires to be shown annually in the accounts. At least it is voluntary, but such a waste of tax money to subsidize Riester when unsubsidized passive-ETFs-portfolios have better returns in most cases.

Anonymous said...

I think your assessment of Deutsche is a little harsh but understandable.

In many ways DB was much cleaner than its large US counterparts (I was there and saw us turn down a lot of business that US banks executed). Not that you would know this from the press they get.

The difference between say GS/JPM and DB? DB just paid the fines and moved on even when it was very clear that the regulator was flat out wrong. This wasn't a big problem when the fines were small but post the GFC when the regulators had to be seen to act, and wanted front page news sized fines, DB became the goto bank for a smacking. Not being a US bank just painted a bigger target. John Cryan as CEO (he was well after my time) didn't seem interested in fighting even the most outrageously contrived charges. Having paid one huge fine without pushing back it became a regulators feeding frenzy.

The regulators (as you well know) have very little technical knowledge and come at everything with a level of hindsight that is myopic. "You should have known that roll of gaffer tape was going to be used to wrap a bomb, used by a terrorist, in a country far away from the hardware store the tape was purchased. As the dollar payments processor for the bank that does card payment processing for the hardware store, we the US regulator are going to fine you .....(pick a very large number) and tell everyone you failed to stop terrorists". OK that's a bit OTT but some of the huge fines related to correspondent banking where not that far removed in structure.

DB's fundamental issues were, growing way too fast, lack of a good(any) archiving/records keeping process and really poor systems integration. The purchase of Bankers Trust just created massive cluster fuck and lit the fire. It is no coincidence that many of the fines at DB were related to US business.

All this is not to say there were not bad actors, there clearly were, but that all the big banks had problems, DB just become the whipping boy.

Alwayslearning28 said...

Brilliantly written. Completely agree.

I add that the dark pool of superannuation deprives Australians of a chance to build their financial literacy.

My questions to my superannuation fund of simply knowing where my money was were, at best, answered by vague allocations.

Whereas investing in a company directly, I can follow it's progress. I can see the use or abuse of debt, remuneration structures, risky business strategy like chasing trends, or scary valuations relative to profits.

I also worry about political appointments of getting the main suspects to regulate their old buddies or at least people they share similarities with. Toxic cultures can corrupt even the best of intentions. How could a person receive their livelihood (even if they fought it from their inside) from a system (proven to be unlawful) for 17 years and not be affected or not make the tough personal ethical choice to quit as it didn't align with his values.

Not directed at Mr Longo who I don't know and wish well. Just how I think as an average Australian - dependent on a financial system properly regulated. I hope that Mr Longo can turn around criticisms of ASIC of picking favourites of who to prosecute/not prosecute which ultimately ends up ASIC bullying little people who don't have the resources to fight back whilst the rich get richer (such as the well paid people working at banks fined for unlawful conduct, whilst the average Australians still get steamrolled and the purchasing power of their life savings slowly eroded)

s4v said...

Yes, our German structured savings products are a shame but an easy sell politically (and a nice subsidy for the financial industry)

John Telford said...

Thank you John Hempton for keeping an accurate observation / knowledge about financial crime in Australia.

For the record, The Trio fraud saw $194.5m disappeared, $55m compensated to APRA-supervised funds by collecting from the other nation-wide APRA-supervised funds. An additional $17m went to the law firm that did the clerical work.

History is full of surprises. John Hempton discovered the Trio fraud by looking into the alleged fraudulent conduct in a Hunter and Jame Biden owned and operated fund in New York.

The Australian regulators didn't look into the Biden connection probable because Joe Biden was then the Vice President of the United States. Now history shows Hunter Biden is connected to other alleged fraudulent activities - too many to mention.

The Trio Fraud Manual provides evidence about Trio.

John Smith said...

The reality of the situation

Who cares, it is worthless anyway.

Anonymous said...

An excellent article.

Your point regarding defamation laws in Australia is a very important one (the laws are an absolute joke). Like you, I know of (what are in essence) frauds occurring today, but would dare not name names. Suffice to say, many more millions will be lost, while our politicians and their public servant factotums do nothing.

As for ASIC, you have hit the nail on the head. I could tell you of many very irregular movements in security prices over the years (prior to market sensitive announcements being made by the relevant company). No one has ever been prosecuted in these cases, and what's more, they know they never will be - what a sad state of affairs.

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