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Investment Advisers: A Case Study
Gideon Investments Pty Limited - Morison Guildford & Associates Limited
5. Banking Arrangements
5.1 Morison Guildford would receive funds from investors in Gideon. These funds were placed in accounts that were in Gideon's name but that could only be operated by either Morison or Guildford. Later the funds were transferred into an account in the name of Gideon at the National Bank of New Zealand controlled by Bastion. From there Bastion would periodically transfer funds to the Gideon bank account held at Citibank in Sydney. The Morison Guildford bank accounts were not audited.47 The following banking arrangements were in place.
Wairarapa Building Society, Masterton (client no: 263672)
5.2 An account with this building society was used from 6 April 1998 to 11 August 1999.
5.3 Investors' funds were paid into the account. The account name was Gideon Investments. However, Morison Guildford was the organiser of the account and authorised all payments from it. Alex Tulloch, general manager of the Wairarapa Building Society treated ownership of the funds deposited in such "trust accounts" as resting with the firm concerned, in this instance Morison Guildford.48 Morison and Guildford dispute that this correctly reflects the legal position. Irrespective of that, this does appear to have applied to the operation of this account. Neither Gideon nor Bastion had authority to operate the account. The building society did not need authority from Bastion for Morison Guildford to operate the account. Morison Guildford would transfer investors' funds from this account to account number: 06 0287 0346817 000. This was an account held by Gideon with the National Bank in Auckland
5.4 We note there are transactions from the account that appear to be withdrawals of interest. Morison said that interest earned on funds in the account was withdrawn for Morison Guildford's own use.49 We comment on this later in this report in chapter 7.
Bank of New Zealand, Masterton (account: 688-0184919-000)
5.5 This account was actively used from 11 August 1999 to 28 April 2000. According to Morison it was a trading account set up in July 1999 to receive a deposit from Bastion. The deposit was to fund several withdrawals requested by investors at the time.50
5.6 From August 1999, investors' funds were paid into the BNZ account. The account name was Gideon Investments Client Account - Business Advantage Chq A/c. The address was The Partners, Gideon Investments, Client Account, PO Box 350, Masterton. This is Morison Guildford's PO Box. Both Morison and Guildford were cheque signatories to this account. As with the Wairarapa Building Society account neither Gideon nor Bastion had authority to operate it. No authority from Bastion was needed by the bank for Morison Guildford to operate the account. However, in practice it appears that transfers and deductions from the account were made upon Bastion's instruction. Funds would be transferred to Gideon by cheque into the Gideon National Bank account in Auckland.
5.7 The following transactions are noted for this account:
| Date | Cheque no. | Payee/Markings | Amount |
| 16/09/99 | 000020 | Telfer Properties | 24,000.00 |
| 19/10/99 | 000022 | Morison Guildford | 1,500.00 |
| 19/10/99 | Wairarapa BS | 83,965.90 | |
| 21/10/99 | 000023 | Morison Guildford | 4,000.00 |
| 21/10/99 | 000025 | MG s/pc | 85,000.00 |
| 21/10/99 | 000026 | AM s/pc | 51,000.00 |
| 10/11/99 | 000027 | AM s/pc | 9,000.00 |
| 16/11/99 | 000028 | AM s/pc | 25,000.00 |
| 29/11/99 | 000029 | AM | 6,000.00 |
| 20/12/99 | 000033 | MG share p/c | 26,000.00 |
| 20/12/99 | 000034 | AM share p/c | 26,000.00 |
| 20/12/99 | 000035 | Telfer Properties | 48,000.00 |
| 10/01/00 | Morison Guildford | 144.00 | |
| 28/01/00 | 000041 | Morison Guildford | 5,000.00 |
| 28/01/00 | 000042 | Morison Guildford | 5,000.00 |
| 31/01/00 | 000044 | AM | 25,000.00 |
| 31/01/00 | 000045 | MG | 25,000.00 |
| 23/02/00 | 000046 | Cash | 2,000.00 |
| 29/02/00 | 000047 | AM | 10,000.00 |
| 01/03/00 | 000048 | MG | 10,000.00 |
| 23/03/00 | 000049 | Cash | 1,000.00 |
| $471,609.90 |
5.8 Here MG refers to Guildford and AM refers to Morison. References to s/pc and share p/c are markings made in pencil by Morison Guildford on a copy of the account records. These appear to denote deductions relating to the sale of shares in Morison Guildford by Morison, Guildford and their wives. The actual purchaser is unknown. The nominal purchaser, Spaincroff Holdings Limited, does not appear to exist. Morison and Guildford have stated that they considered this to be a purchase of shares by Bastion.51 However, it is clear that investors' monies paid into Gideon's BNZ account for investment in the Gideon funds were used to provide money for part of the purchase. There is no written record of the reasons why Gideon money was used for this purpose. Morison and Guildford said Bastion had instructed them by telephone to make the withdrawals. They said Bastion told them he would place his own funds in Gideon, in a like sum to the amount that he had instructed Morison and Guildford to withdraw, to make good investors' funds in Gideon.52 There is no corroboration of this. We understand from the liquidator that there had been no reimbursement of this money by Bastion or Morison Guildford as at the date he took office. Morison and Guildford said they and their wives had offered to buy their respective shares back from Spaincroff at the price paid for them53.
5.9 Part payment for the sale of those shares was made by cheque, payable to AM and MPG (which appears to refer to Andrew Morison and Michael Guildford). The liquidator said the balance of the share purchase price had been paid by cheque from an unrelated account sometime earlier, and did not appear to have been paid from this account.54 We do not have further details of the cheque. We discuss this transaction and other payments from the account further in chapter 8 of this report.
5.10 On 31 August 2000, NZ$65,148.46 was still held in the account. We are informed that the balance remaining in the account was transferred to the liquidator on 16 May 2001 and amounted to A$51,494.29.55
National Bank Gideon account (account number: 06 0287 0346817 000)
5.11 Money from the Wairarapa Building Society account, and later from the BNZ account, was transferred to a National Bank Gideon account. This account appears to have been operated solely by Bastion. 56
5.12 Guildford commented on why there were two separate accounts - a Gideon account at the National Bank and a Morison Guildford / Gideon account at the BNZ.
"The Gideon account at the National Bank was Mike Bastion's account for Gideon investment funds which he had - well, I presume he had - well, he operated it. The reason we had the Gideon account at the BNZ was that, money that was - that people wanted to invest with Gideon would sometimes come in over a month at different stages, and what we would do is put it into that account and then write one cheque to put into the Gideon National Bank account."57
5.13 According to Guildford the money was transferred monthly into the National Bank Gideon account on Bastion's instructions to streamline the administration of the incoming funds.58
Interest
5.14 Interest was payable on the BNZ andWairarapa Building Society accounts. The interest was withdrawn by Morison Guildford for their own use.59 Morison said:
"we probably from time to time took a few hundred dollars out, of interest, for our own use. But the interest that was being accumulated was minimal, it wasn't there long enough."
6. Due Diligence and Monitoring of Gideon
6.1 Morison Guildford had a clear interest in the ongoing affairs and management of the Gideon schemes. They gave advice in respect of the schemes. They provided administrative and support services.
6.2 We consider the due diligence process Morison Guildford undertook in regard to Gideon.
Offer documents
6.3 The Gideon offer of securities was made without the requisite offer documents. No investment statement was prepared for the Gideon offer. No prospectus was registered. There was no trustee or statutory supervisor in the manner required under New Zealand law for a contributory scheme or unit trust. Neither Morison nor Guildford saw or asked to see an investment statement, a prospectus or a deed of participation. There was a trust deed but it was not in the form required by New Zealand law and was not registered with the Registrar of Companies.
6.4 We raised the matter of offer documents with Guildford.
"A: I knew there wasn't a prospectus because it was - I believed it was a private fund, so I knew there was no prospectus.Q: Could you tell us what you mean by a "private fund"?
A: Well, it was a fund which was run by Michael Bastion, and he basically chose who the members were.
Q: Is that right?
A: I presumed that's how he felt about it. Like, he - I understand the unit trusts that a company would have, and anyone can go in and say, I would like to have 1,000 units. Correct?
Q: Probably, yes.
A: In this case Michael - if someone wanted to invest, and he didn't want them to invest, he wouldn't take them on.
Q: Were any of the people who invested, who wanted to invest, after getting in touch with Morison Guildford, ever told that they were not acceptable as investors?
A: Not - none of the people I dealt with.
Q: And they would be accepted as investors on your say so, would they?
A: Yes."60
6.5 The Securities Act 1978 provides that if an offer of securities is made to the public a prospectus complying with the Act and Regulations must be registered with the Registrar of Companies and an investment statement must be provided to investors before they subscribe. The prospectus includes all material information and the investment statement provides an investor with key information about an offer.
6.6 Morison said he checked his understanding of the legal position in respect of Gideon with a senior representative of a large entity involved in the investment sector and got confirmation of his understanding that documentation under the Act was not necessary.61 We have spoken with the person. We do not consider it likely that Morison received advice of the nature described or that if he had it would have been a basis for concluding that securities law did not apply.
Financial statements and audit
6.7 The ongoing health of a company can to some degree be monitored by examining its periodic financial statements and other accounting information, and its annual report. Some people are reassured by the knowledge that the financial statements have been audited.
6.8 We asked Morison whether he had ever discussed with Bastion who were his accountants, who were his auditors and who were his professional advisers. Morison said he was told that Bastion's accountants, first in Sydney and later in Hong Kong, cross-checked his figures at the end of every year. Morison said Bastion gave an impression that the accountants were keeping an eye on what was going on.
"Q: Did you ever see annual financial statements of the Gideon company or separate accounts of the Gideon funds?A: In the very early stages he had a summary of position of the fund. That was, I think, for the first couple of years, and then - but every year after that a statement was issued to each investor showing them their individual position. But no, not a summary of the fund position after those first couple of years. But he assured us all, we always understood that the month after the so-called close of the trading year was spent with the accountants getting the reconciliation of the fund carried out before statements were issued to individuals."62
6.9 That impression was never questioned by Morison.
6.10 Morison said during the interview he never asked for copies of annual financial statements.63
6.11 Similarly, Guildford did not ask who Gideon's auditors were or who were the accountants Gideon relied on for advice in making investment decisions. Guildford did not see financial statements for the fund annually. Guildford said he did ask to see a statement of the composition of the fund and the answer from Bastion was "we must do it".
6.12 Provision was made in the management agreement for annual financial statements to be provided to investors. We asked Guildford about this.
"Q: Did any of your clients or people who invested with your help ever ask for copies of the annual or half-yearly statements of the fund?A: No"64
Ongoing monitoring
6.13 Morison said he had ongoing telephone discussions with Bastion, talking on the phone once or twice a week:
"He would ring us regularly, we would ring him regularly. We would be discussing a whole host of topics, but he was keeping us well informed about how his investment performance was going. He would be curious to know what incoming funds were being lined up. There was just administrative matters occasionally, but most of all how he was heading."65
6.14 We asked whether there was any further monitoring of Gideon by Morison Guildford beyond the telephone discussions they had with him. Morison said:
"No, there was nothing, apart from talking to him on the phone or when he visited here, and he would visit New Zealand a couple of times a year and would want to see the clients, want to see the investors and talk to them, and talk to them about how everything was going. There was no ducking away."66
Comments
6.15 We raise questions later in this paper (see chapter 9) about the status of Morison Guildford and its directors in relation to the Gideon offer. For the moment we limit ourselves to observing that the provisions about investment statements and prospectuses are central to securities law. They are based on the principle of disclosure - that investors should have access to all material information about an offer of securities to enable them to make a considered decision on whether to invest. Whatever their status, Morison Guildford and its directors should have been well aware of this.
6.16 Promoters have responsibilities for offer documents under the Securities Act 1978. Investment advisers should be aware of the requirement for offer documents. We were surprised that the lack of offer documents was not questioned.
6.17 We also consider that an investment adviser takes on a number of responsibilities when he or she decides to give advice about a particular offer of securities. The content of those responsibilities will vary according to the role the investment adviser undertakes in regard to the offer. The common law and equity impose responsibilities.
6.18 While ultimately it is for the Courts to decide what responsibilities an investment adviser holds in law, we consider that depending on the particular circumstances an investment adviser recommending investment in a particular investment fund:
- Should undertake some analysis of the investment. This would include analysis of
the offer documents, and annual and other periodic reports and financial
statements.
- Should, if conventional offer documents are not available, ask why not.
- Should, if there is an ongoing role in obtaining investors for a particular investment fund, establish some form of ongoing monitoring and analysis of the investment's performance.
6.19 Further responsibilities might arise if the adviser acts as a fiduciary.
6.20 If the investment adviser was so involved in the offer of securities that he was instrumental in formulating the plan or programme pursuant to which the offer is made, then he might also be a promoter for the purposes of the law. If so further responsibilities arise. However on the evidence available to us we do not consider that Morison Guildford were promoters.
6.21 We conclude in chapter 9 that Morison Guildford acted as investment advisers and consider that they should have taken the steps outlined above. It is possible that the nature of the Gideon fund, and Bastion's involvement with it, would have been revealed had they done so. This might have led to Morison Guildford ceasing to raise money for the Gideon fund and perhaps would have enabled an attempt to be made to regain investors' money while Bastion was still alive.
6.22 As to the suggestion made by Morison Guildford that: "Bastion's conduct over the
five year period leading up to his death would tend to indicate that if documentation
had been requested by a third party, such as MGAL or an investor, it might simply
have been fraudulently generated to satisfy any enquiry"67, given the requirement for registration and the content required by the Securities Act, we reject this suggestion as
untenable.
Footnotes:
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