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Investment Advisers: A Case Study
Gideon Investments Pty Limited - Morison Guildford & Associates Limited
3. Morison Guildford & Associates Limited
3.1 Morison Guildford is a company that was incorporated on 10 October 1989 with its registered office in Masterton. The directors are Andrew Morison and Michael Phillip Guildford, both of Masterton.
3.2 As at 2 October 2000, 100 shares were on issue and there were five shareholders. The shareholders in Morison Guildford and the number of shares held by them were as follows:22
- Margaret Robin Guildford (19)
- Michael Phillip Guildford (19)
- Andrew Morison (19)
- Catherine Morison (19)
- Spaincroff Holdings Limited (24)
3.3 Guildford has described the background to the company in the following terms:
"Andrew and I joined forces 11 years ago, formed Morison Guildford & Associates. Previous to that we were separate National Mutual agents. We run a fire and general broking business, which is - the majority of our business is the farming area. We also sell risk insurance for a number of companies. That is our main - that is the main business we are in.So, basically, we are insurance salesmen I suppose, hence the term "insurance brokers". Now, our business is mainly insurance, or mostly insurance in fact."23
3.4 Morison informed the Commission that the firm also offered superannuation services to some clients. We asked Morison if Morison Guildford did any work in relation to life policies with an investment element. Morison stated:
"Yes, that's all there; was when we started out in this business. The industry's changed so much that, from having an option of three types of policies, you now have a book full. So, yes, we're in by default in having an involvement in cash accumulation policies."24
3.5 A compilation of the financial statements prepared for Morison Guildford for the year ended 31 March 2000 and dated 21 December 2000 said Morison Guildford's principal business is the sale of insurance / investment products.
3.6 We requested copies of Morison and Guildford's investment adviser disclosure documents. We received copies of leaflets prepared for each of Morison and Guildford "to satisfy the requirements of the Investment Adviser (Disclosure) Act 1996" and recording that they provide services in the following areas:
"SUPERANNUATIONI provide opinions on a variety of products as well as a range of retirement savings plans to enable you to plan the income you receive when you retire.
FINANCIAL PROTECTION
I am able to advise you on a variety of insurance products to help ease financial stress during times of injury, illness or death. These can include term insurance, which provides a lump sum of money should a person die, income protection which recognises that the ability to earn an income is a person's most important asset, and trauma insurance which is designed to help with financial recovery by providing a lump sum payment in the event of a number of specified serious illnesses or injuries.
HEALTH INSURANCE
I can advise you about a range of health insurance plans which can be adapted to meet client's changing lifestyles. I provide this service using the products and resources of Sovereign, Aetna Health, and Tower Health.
GENERAL
Where required I can provide or arrange for suitable professional advice and service in associated areas of concern. This may include:
- Fire and general insurance
- Other financial services e.g mortgages"
3.7 The leaflets also said that the intention of the Investment Advisers (Disclosure) Act was to "provide increased protection for the New Zealand investor and implies an even higher level of professionalism for the industry I represent".
3.8 The leaflets said Morison and Guildford did not charge a fee for providing advice. They said they might receive remuneration in the form of commissions and benefits from each of AXA, Royal and Sun Alliance, Sovereign, Tower Life and Health, and Cigna Life. No reference was made in the leaflets to Gideon.
3.9 It appears that these leaflets were never distributed.26 They were not provided to any investor in Gideon.
Directors of Morison Guildford
Michael Guildford
3.10 Michael Phillip Guildford was born on 13 November 1951 in Masterton. He has a secondary school education. In response to a question about what qualifications he has that are relevant to his work as an investment adviser he said: "Well none, except 25 years experience with an insurance company".
3.11 Guildford joined National Mutual Life, now AXA New Zealand Limited, in January 1977 as a life underwriter and has had a relationship with the company ever since.
3.12 Guildford's investment adviser disclosure leaflet said he received legislation training from National Mutual in 1994 and that he had "business insurance accreditation".
3.13 Guildford said he first met Bastion through Morison in 1995 or 1996.27 Guildford understood Bastion had been a sharebroker and had held various positions in companies related to banking. Guildford said he did not have detailed knowledge about Bastion's business experience. He knew Bastion had been a teacher and had obtained "a degree in teaching".
Andrew Morison
3.14 Andrew Morison was born on 19 May 1949 in Wellington. He gives his occupation as an insurance broker. According to his investment adviser disclosure leaflet, Morison has acted as an insurance broker for 27 years. Morison said National Mutual has run a number of specialist courses in which individuals from Morison Guildford took part.
3.15 Morison's investment adviser disclosure leaflet said he had also received legislation training from National Mutual in 1994 and that he had "business insurance accreditation".
3.16 Morison first met Bastion through mutual friends in the 1980s.28
4. Morison Guildford's Relationship with Gideon and Gideon Investors: Obtaining Investors and Administration
4.1 A large number of Morison Guildford clients invested in the Gideon scheme. Morison said about 120 of the firm's clients would have invested in Gideon. Morison Guildford would have between 1000 and 1500 clients, he said.29 According to Guildford, Morison Guildford collected about A$5 million for Gideon.30
4.2 Morison Guildford's initial involvement with Gideon arose after Morison visited Bastion in Sydney in 1995. He spent a few hours with Bastion discussing Morison Guildford's insurance business. Bastion told Morison about the Gideon scheme. At that stage Gideon had been running for more than a year. According to Morison, Bastion was boasting about Gideon's success. Bastion said he wanted to cash up his life insurance policy and place the resulting money in Gideon because it outperformed anything that could be achieved by a life policy.
"That was when our curiosity was aroused, and we were with friends at the time who were with us in Sydney and who were party to our discussions about this over dinner, and that's when the germ was created."31
4.3 At a certain point in time Morison Guildford became more involved in aspects of Gideon's activities. Morison commented that interest grew from Bastion's friends, and Morison and Guildford's friends who knew Bastion. After about 12 months Bastion suggested there should be a more formal relationship "because it was going to be a long-term one and there was a reasonable flow of funds coming through, and we could formalise something".32
4.4 Morison commented on how the relationship was formalised:
"It was never formalised by any agreements or agencies, it was formalised by discussions saying, we will handle any incoming funds for you at this end, and he said, that's fine, it makes it a lot easier for him if [there is] just one contact point, and we acted as a point of contact for anyone who chose to become involved, and also for incoming stuff, and also as a mail box for correspondence which he was sending out to individual investors. We used to receive it and distribute it for him."33
4.5 When signing up investors, Morison Guildford provided investors with a copy of the management agreement. Investors would sign that and Morison or Guildford would witness their signatures.
4.6 Morison Guildford would receive money from investors for Gideon and make payments to investors from Gideon, generally by cheque. They would deposit the money into the Gideon account controlled by them. The funds would then be transferred into the bank account controlled by Bastion. The management agreement would then be sent to Bastion, who would sign it and issue a certificate based on the amount of money invested.
4.7 Guildford commented on Morison Guildford's record keeping in regard to Gideon:
"Q: What records do you keep with regards to the investment?A: We kept a spreadsheet.
Q: Detailing each individual investor?
A: Yes.
Q: Would you match up any refunds against that spreadsheet?
A: Yes." 34
4.8 We are informed that Morison Guildford would put the certificate number for each investor on the spreadsheet.
4.9 Morison said Morison Guildford was a point of receipt for investors' funds and a point where the fund could be discussed. Bastion sent quarterly reports on the Gideon fund to Morison Guildford. Initially the reports referred to companies in which Gideon was alleged to have invested. Later the reports became general discussions about the world economy without reference to the actual investments made by the fund. Either way, the Commission considers they were inadequate as reports of the activities of the fund. They did not contain financial information except for a percentage figure for the fund's alleged returns. They were clearly not intended to meet any statutory reporting requirements and were not financial statements as required under clause 6 of the Management Deed (see paragraph 2.29 above). A sample copy of the reports is attached at appendix "B". Morison Guildford showed these quarterly reports to potential investors and forwarded them to existing investors.
"if they wanted to invest money they were given the quarterly reports, the trust deed, that was available to look at. They were given the agreement, they were given returns of the fund over the last four years approximately. They were given various newsletters that Mike used to send out."35
4.10 Guildford commented on Morison Guildford's role on behalf of Bastion and Gideon.
"Well, we were really a - the go-between. We were a facility for his - people who wanted to invest with him to - he needed - he - we would receive - be able to give them the information, like in the reports, or the deed, or the returns, and then we were a collection area for him. Then we would then put any funds that were invested into his account, bank account. So, really we were a collection, a collection facility for him, and that was just through a friendship thing. Andy was his mate, I suppose, and I'm Andy's partner. That's where we stand."36
4.11 From time to time people who had not been clients of Morison Guildford approached them about investing with Gideon. Morison Guildford would provide them with copies of the reports Bastion had sent out, information about the returns that could be obtained, and copies of the agreement and deed.37
4.12 Guildford personally invested in Gideon. He told clients and prospective investors that he had done so. If prospective Gideon investors asked him why he invested he replied that this was because of the fund's growth. He showed prospective investors material he had received from Bastion. He considered that the material he passed on showed a positive picture.
4.13 Morison said he did not invest in Gideon.
4.14 A BNZ diary note prepared by Noel Fussell, business manager, Wairarapa, dated 5 April 2000 said:
"Both Andy and Mike invested in a firm in Hong Kong over recent years called Gideon Investments. This investment was producing substantially better returns than anything else that could be earned in New Zealand. However, the principal of this investment firm Michael Bastion took his own life two weeks ago in Hong Kong and it now looks as if there may well be some fraudulent activity within the fund. Andy and Mike estimate that they would have had an estimated $300,000 invested in this fund and there is now a real risk that these funds will be lost. Andy will keep me informed."38
4.15 Morison Guildford said this diary note misunderstood the position. They said the $300,000 referred to was their estimate of the value of units in the Gideon Hedge Fund Trading Trust that they believed had been allocated to them by Bastion.39 We comment on this at chapter 7.
4.16 Both Morison and Guildford often spoke to Bastion on the telephone, Morison more so than Guildford. They would report to Bastion on a monthly basis about the amount of new investments.
4.17 We asked Guildford whether it would be fair to say that some of the investors regarded Morison Guildford as an agent of Gideon in their district.
A: "Right, I'm happy to answer that. Some of the investors would be - see us as helpful.Q: In organising both the investment and the recovery of the investment?
A: Correct."40
4.18 Morison commented on the typical process that occurred when talking to somebody who was considering investing in Gideon.
A: "Well, at any time the people who made enquiry were people we knew. There were no strangers. Without exception, I think they were always people we knew, because it seemed to come - the enquiry would come from dinner table conversations. Investors were talking about it amongst their own circle of friends, and the enquiries would regularly come from that source. And, obviously it's hard to - there wasn't a general pattern, because no two people are the same, have the same way of doing things, but I suppose on average you could - their enquiry was, because they had heard the performance, about the performance of the Gideon thing, they obviously were keen to find out from us a little bit more detail about how the - what sort of things he invests in, what sort of structure he operates under, what is involved in getting in, what is involved in getting out, what are the rules, how much does he charge, and that was probably about as much as anyone wanted to know.Q: So, what was the next step, assuming a person was interested in investing, or taking it further?
A: The entry dates were for some quite a long time, at the beginning of every month there would be a deemed entry point for anyone who wanted to jump on. From 1999 it was by Bastion's request, limited to once every six months. So, given that the bulk of the investors probably came in under the once a month entry rule, there was a management agreement which we had copies of, which they would sign, and we would complete and put their full name on it and their date of entry. We'd set out the charging structure and the reporting obligations of Bastion, and they would write a cheque out to Gideon. We would send the agreement off to be stamped and witnessed, or signed by Bastion, and keep a copy for the client, and that was about it. In due course a certificate would be issued to verify their investment, and that was it."41
4.19 In a letter to Gideon investors dated 14 July 1999, Morison Guildford said Bastion had set up an Asian fund that was separate from the GHF Trading Trust. The letter said:
"Under the GHF Trust Deed, Mike can only invest in the Australiasian (sic) markets. He is confident that the time is right to 'come back' to Asia and has a fund for this purpose. He has a number of substantial investors already in the Asian fund, and if you wish to discuss transferring any of your GHF holding into the Gideon "Asia", please give us a call, as a decision needs to be made this month. This could be a unique way of enjoying some diversification within Gideon."42
4.20 This letter and other letters dated 14 July 1998 and 14 June 1999 from Morison Guildford to Gideon investors, attaching reports from Gideon, invited further investment with Gideon. For example, the letter to investors dated 14 June 1999 said:
"This letter is to advise that those wishing to make a further investment into Gideon will be welcome but there will be only two intakes during the year, being July and January.Please call either Mike or Andy if you would like to discuss otherwise we will be in touch around mid July with information on the past year's performance."43
4.21 Most of the correspondence between Morison Guildford and investors was in a standard form. The content of each letter on a particular date to a particular investor was identical to the letters sent out to other investors on that date. The letters from Morison Guildford were all on Morison Guildford letterhead. They attached a copy of material supplied by Bastion.
New Zealand Investors
4.22 We wished to find out from investors in Gideon how they had come to invest in the funds. We wrote to the majority of Gideon investors in New Zealand, who were identified in Morison Guildford's records, in order to better understand the circumstances of their investment and the nature of the service provided by Morison Guildford. We excluded investors with shared addresses and in some cases shared surnames. We sent out 104 letters and received 21 responses. We decided to meet some of the investors who responded, in particular nine whose experiences appeared to raise questions about securities market practice or possible non-compliance with the law. We interviewed each investor separately and in private. A prior draft of this report included summaries of what these investors said to the Commission in writing. In commenting on that draft, solicitors for Morison Guildford contested the accuracy of what was said by many of them. Those comments were put to the investors during the interviews. We summarise the statements made to us in the following paragraphs. We do not name the people involved although, with the consent of the investors, most were identified to the lawyer representing Morison Guildford. There is a clear pattern in the separate explanations of the investors' dealings with Morison Guildford. There are a number of inconsistencies between the statements made to us by Morison Guildford and the statements made by investors. We have not sought to definitively resolve the conflicting versions.
4.23 In conducting the interviews we had a particular interest in the following questions:
- The identity of the investors.
- Their relative experience in investment.
- Their previous association with Morison Guildford.
- The extent to which they relied on Morison Guildford in deciding to invest.
- The source of money for investment in Gideon.
- The effect on life insurance policies held.
4.24 Of the 9 investors we interviewed:
- None were professional investors.
- Most had previous associations with Morison or Guildford, and trusted and
relied on their judgement. One was a close relative.
- On virtually all occasions, Morison Guildford commenced the discussions
about Gideon.
- In eight cases, Morison Guildford identified the surrender of existing life
policies that were on Morison Guildford's insurance books as a source of
money for reinvestment.
- In those eight cases we were told Morison Guildford drew attention to Gideon
and suggested that the Gideon funds would provide investors with a better
return than their existing life policies.
- In seven cases, the investors were encouraged to take out further life insurance
as well.
- Five of the people we spoke to understood that the investment in Gideon was
guaranteed, or that some form of insurance cover had been taken out over
Bastion's life for their benefit.
- Six said they were told there was a minimum amount for investment in Gideon.
Comments
4.25 We consider that Morison Guildford and its directors advised a number of potential investors in New Zealand to put money into Gideon. Most of those investors were already known to the directors of Morison Guildford. Some individuals were encouraged to surrender existing policies and to invest the proceeds into Gideon.
4.26 It appears that in many cases Morison Guildford took a three-step approach when soliciting clients for Gideon:
- Advice was given to the client to surrender an existing insurance policy.
- Advice was given to invest with Gideon.
- Advice was given to buy more insurance.
4.27 Morison Guildford would have obtained a commission for selling the new insurance policies and expected to be paid for promoting the Gideon funds. We discuss the issue of payment for Morison Guildford's role with Gideon in chapter 7.
4.28 In regard to paragraph 4.24(g) above, Morison Guildford say that there were 2 insurance policies taken out with AXA and Cigna over Bastion's life which yielded NZ$3.5 million for the benefit of creditors of Gideon.44
4.29 We consider that Morison Guildford was actively involved in soliciting new investors for Gideon in New Zealand and undertook an intermediary administrative role for Gideon and Gideon investors in New Zealand. This included a role in administering the flow of funds for New Zealand investors, the maintenance of bank accounts, and the depositing and withdrawing of funds. Morison Guildford also acted as a central distribution point for information from Gideon to New Zealand investors. Morison Guildford said 120 investors affected by the Bastion fraud had invested money in some way via Morison Guildford (out of approximately 180 New Zealanders who invested with Gideon).45 Aside from Bastion, who introduced a smaller number of New Zealand investors to Gideon directly, we are not aware of any other firm or persons involved in soliciting investors for Gideon. As noted at paragraph 2.11, the liquidator has estimated that the total amount invested with Gideon by New Zealanders was $A5,300,00046 and Guildford has estimated that Morison Guildford raised about A$5,000,000.
4.30 We have received letters from some investors other than those interviewed that suggest in their cases Morison Guildford took a lesser role. It appears that the degree of involvement of Morison Guildford in obtaining monies for Gideon varied with different investors.
4.31 Morison Guildford had an extensive relationship with Bastion through the life of the Gideon funds. In addition, as noted below, Bastion (or Gideon or a Gideon fund) was for a time a significant shareholder in Morison Guildford.
4.32 Important questions for the Commission were:
- Whether interests in any Gideon fund were offered for subscription to the
public in New Zealand and whether these interests were securities for the
purpose of the Securities Act 1978.
- Whether Morison Guildford or its directors acted as investment advisers or
investment brokers, as these terms are defined in the Investment Advisers
(Disclosure) Act 1996, in respect of any Gideon fund.
- Whether Morison Guildford or its directors were "promoters" of any Gideon
fund for the purpose of the Securities Act 1978.
- If yes to (b) or (c), whether Morison Guildford and its directors complied with the law.
We consider these questions in chapter 9 below.
Footnotes:
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