 |
|
 |
|
Investment Advisers: A Case Study
Gideon Investments Pty Limited - Morison Guildford & Associates Limited
7. Remuneration of Morison Guildford and other benefits
Commission on Gideon investments
7.1 We received from the liquidator of Gideon, a copy of a letter dated 12 September 1996 from Morison Guildford to Bastion signed by Guildford. The letter said:
"Further to our chat during your visit last month regarding our fee for placing clients' funds with Gideon. The formula we agreed on is acceptable and the most equitable for all parties.I.e. First year of any investment - Three percent of gross increase in clients unit numbers as at 31/6 each year.
Year Two and each successive year of any investment - Five percent of gross increase in clients unit numbers as at 31/6.
The manner in which we are paid may vary from year to year, but initially we would prefer that you purchase units in our company name in the Gideon Fund..."68
7.2 A letter from Morison Guildford to Gideon investors dated 16 August 2000 said:
"There have been questions raised by some investors regarding commission payments that we received from Bastion. Prior to 1997 we did not receive any reward from Bastion. In 1997 Bastion suggested that we receive some form of reward. We then reached an agreement with Bastion under which we would receive units in the trust as commission payments. However, no units were issued to us."69
7.3 A Bank of New Zealand Masterton branch memorandum dated 23 October 2000 said:
"As regards the income side of their operation they agreed that they have taken their eye off the ball. They were finding that attracting funds into Gideon Investments and the commissions paid more profitable than the commission they could achieve from life and health insurance. As a result their commissions received for life and health insurance decreased from $411,942 to $303,907 in 2000. However their fire and health division showed a pleasing increase to $113,496, up from $78,508 in 1999.Following the collapse of Gideon Investments not only did Morison Guildford lose the commissions due to them for this past financial year, the amount not known, but both Mr Morison and Mr Guildford indicated that between them they personally had about $300,000 invested with Gideon which is now likely to be lost to them."70
7.4 A formal statement from an investor said: "Mike also confirmed that he would earn a commission from selling the unit trusts to me, being 4% of the 20% success fee that the unit trust would charge me"71
7.5 In response Guildford said he was supposed to receive this "by way of units in GHF, as opposed to any cash payment. Michael Bastion had offered this 4%, represented in units to me. On enquiry following his death ...I discovered that no units had in fact been provided to me despite the offer."72 Morison Guildford accordingly question the accuracy of the BNZ memorandum quoted at paragraph 7.3.
7.6 This does, however, show that Morison and Guildford already believed they had earned $300,000 in Gideon units.
7.7 We are informed Morison and Guildford told the liquidator that Bastion had arranged for a company to be registered in the British Virgin Islands for them and had opened a bank account in Hong Kong to be used by this company. The British Virgin Islands company, Hanny Enterprises Limited, was incorporated for the purpose of receiving either fees or commissions. Morison Guildford claimed that no fees or commissions were paid by this company to Morison Guildford.
7.8 We contacted Tom Corkhill, the Hong Kong agent of the Gideon liquidator. According to Corkhill, Hanny Enterprises had two shares on issue, which were registered to their nominee company Jobrenco Limited. Each share was held on trust for Morison and Guildford respectively. The sole director of Hanny was Grant Thornton's nominee company Chaparral Limited.
7.9 Corkhill said that according to their records, Hanny Enterprises never undertook any transactions and was annulled by the British Virgin Islands company registry in November 2000 for non-payment of government fees.
Sale of interest in Morison Guildford
7.10 In addition Morison and Guildford and their wives sold a 24% interest in Morison Guildford to Bastion or Gideon, which was funded by Gideon investors.
7.11 In the opinion of the writer of a Bank of New Zealand Masterton branch memorandum (see paragraph 8.4 below), a reasonable valuation of the Morison Guildford business - assuming the purchase was securing a genuine interest - was about NZ$450,000 to $500,000. 24% of this is $112,500 to $125,000, substantially less than the price paid of $368,000.
7.12 Morison Guildford told us the value of NZ$450,000 to $500,000 was arrived at by Morison and Guildford themselves as follows:
This formula is based on the premium commission income generated by that
business.
7.13 By way of further explanation Morison and Guildford said they received advice that "the consideration need not be tied to a strict valuation of the business. A willing buyer and willing seller could agree to whatever value they wished"74. However, the question remains as to the motivation for paying a price not connected to the value of the business. We comment further on this at chapter 8.
7.14 In any event this payment represents a significant benefit to Morison and Guildford and their respective families for their association with Bastion.
Personal use of Gideon money
7.15 According to Morison, interest was taken out of the Wairarapa Building Society and BNZ bank accounts for Morison Guildford's own use. Morison Guildford implied that the interest payments were used to offset expenses, such as copying and mailouts to investors, and in maintaining regular contact with Bastion.
7.16 Further, Morison Guildford borrowed money from the fund. This loan appears to have been made interest free with no security. We comment further on this at chapter 8.
Commission on new insurance policies
7.17 As noted above, it appears that Morison Guildford advised many investors to take out new insurance policies when they were advised to invest with Gideon. Morison Guildford would have received commissions from the insurance companies for this.
Comments
7.18 It is clear that whether or not Morison Guildford actually received remuneration or other rewards for securing investors in Gideon, they had agreed to an arrangement under which they would receive remuneration by way of allocated units. They believed they already had units allocated to them for this and had an ongoing expectation (until Bastion's death) that they would receive further units for soliciting additional investment money.
7.19 An investment statement that accords with Schedule 3D of the Securities Regulations 1983 has to disclose information about the types of charges that might be payable from the scheme that might affect returns to subscribers.
7.20 Under the Investment Advisers (Disclosure) Act 1996, if a request is made to an investment adviser for any of the information detailed in section 4, disclosure must be made in writing of that matter and all other matters outlined in section 4. These matters include whether the adviser or an associated person has a direct or indirect pecuniary or other interest in giving investment advice to the investors and if so, the nature of that interest.
7.22 While we have no evidence that a request for such information was made to Morison or Guildford, if they were investment advisers and such a request was made, they would have been obliged to disclose any remuneration or other interest they received directly or indirectly from giving investment advice on Gideon that was reasonably likely to influence them in giving advice. We note that the investment adviser disclosure leaflets provided to us by Morison and Guildford did not refer to Gideon or any remuneration derived from their role with Gideon.
8. Payments from the Morison Guildford Gideon Investments Client Account
8.1 Several payments made by Morison Guildford from the BNZ Gideon Investments Client Account were not to the Gideon National Bank account. These payments relate to Spaincroff Holdings Limited, Telfer Properties Martinborough Limited and Morison Guildford. We have questioned Morison and Guildford about these payments.
Spaincroff Holdings Limited
8.2 Towards the end of 1999 Spaincroff Holdings acquired 24 shares in Morison Guildford, representing 24% of the company's issued capital, for consideration of NZ$368,000. The four shareholders each sold an equal number of shares. Guildford said he considered Bastion had bought the shares.75 Morison said he considered either Gideon or Bastion personally had bought them.76
8.3 A facsimile dated 1 September 1999 attaches four share transfer forms for signature by Bastion. Each transfer form records consideration of NZ$92,000. This adds up to a total payment of NZ$368,000, or about A$300,000 for 24% of Morison Guildford's shares.
8.4 We note that according to the BNZ Masterton branch memorandum dated 23 October 2000, Morison Guildford's insurance business was valued on the basis of the premiums generated, and indications were that the business would have a value of around NZ$450,000 to $500,000. This placed a value of up to $120,000 on the 24% interest.77 We note, however, Morison Guildford's comment at paragraph 7.12 on how the sale price was arrived at.
8.5 A letter to the New Zealand agents for the liquidator dated 30 June 2000, on Morison Guildford letterhead and signed by Morison, said:
"The 1999 withdrawals were notified to Katy Byrnes and MJB via email of the spreadsheet from which you took a copy."78
8.6 The letter also enclosed a copy of a bank statement from what appears to be Morison's personal account. This showed receipt of $150,000 "being part payment from Spaincroff Holdings Ltd for shares in Morison Guildford" (presumably part payment for both his and his wife's sale of shares) and "statements showing deductions from 'incoming funds', as instructed by MJ Bastion as part payment for shares."79
8.7 It appears that no due diligence was undertaken by Bastion on Morison Guildford before the share purchase was made.
8.8 There is no record of Spaincroff Holdings Limited being registered in New Zealand. The liquidator said he has undertaken extensive research to find a jurisdiction in which this company has been registered, without success. The liquidator suspects the company was not registered in any jurisdiction. Morison Guildford has not been able to clarify whether the company has been registered in any jurisdiction.
8.9 The liquidator said the address for Spaincroff that appears on the share transfer form is a previous address for Bastion's sister.
8.10 Morison Guildford's letter to Gideon investors dated 16 August 2000 said:
"For what we thought were sound commercial reasons, we wanted to secure a long term association with Michael Bastion. We agreed to sell 24% of Morison Guildford and Associates Ltd to a company called Spaincroff Holdings Limited.Spaincroff Holdings Limited was to be a shareholder. It was never intended that Bastion be involved in the business. At the time we felt there were at least 10 years of good business association to be enjoyed and 'locking' Bastion into our business made good sense."80
8.11 We asked Morison and Guildford about Spaincroff Holdings. Morison told us that Bastion authorised Morison Guildford to make a payment to themselves from the BNZ Gideon Investments Client Account, but the communication from Bastion was not in writing. Morison said the purpose of the payment was to give Bastion a personal shareholding in Morison Guildford.81 Guildford said a first payment was paid by bank draft into Morison's personal account and a second was made from the BNZ Gideon Investments Client Account.82
Telfer Properties Martinborough Limited
8.12 Money from the BNZ Gideon Investments Client Account appears to have been invested with a company named Telfer Properties Martinborough Limited. Telfer Properties is a company that developed and now operates a function/accommodation venue in Martinborough. It owns the complex. Morison was a promoter of it with his wife and Anthony Ractliffe, who was also an investor with Gideon. Morison's wife is a director of the company. The company sought capital from investors, some of whom were Gideon investors.
8.13 We asked Morison about payments to Telfer Properties. He told us that a payment was made from the BNZ Gideon Investments Client Account to Telfer Properties to pay for part of a share purchase by Bastion.
"A: That was taken from incoming funds as authorised by Bastion. He took a holding in Telfer Properties to the value of $96,000, which he had paid half of some probably six months or more earlier. He direct credited it through to the Telfer account, and he authorised us to take the balance of his investment, which was $48,000, from incoming funds in late 99 which he undertook to settle at the other end.Q: So, you were settling a Bastion transaction with Gideon money?
A: Yes."
...
"A: The payment that we deducted from the incoming funds to pay for the second - Bastion's second payment to Telfer Properties, I may not have made it clear; it was on the same basis that we took the balance of the payments out for the purchases of Morison Guildford, it was to be contra'd at his end.
Q: Yes, you've said you've got no evidence to demonstrate that.
A: No, there isn't."83
Loan to Morison Guildford
8.14 A file note from Noel Fussell at the BNZ dated 14 August 2000 said:
"Last year Morison Guildford borrowed from Gideon some $87,000 and they are now required to repay this. However, they will not be repaying it to Australia but rather the funds will be held in trust with their solicitor Phillips Fox.This was the first time Morison Guildford borrowed money from Gideon and they were expecting to do a divvy up at the end of June with their commissions due which would have taken care of this loan. However, as we now know, this has all turned to custard."84
8.15 We asked Morison about the loan.
"A: That was - with the aid of hindsight it makes you squeal a bit, but we asked Bastion if we could deduct casual payments to help us through a small patch of liquidity, which we would account for at June, at the end of the trading year, and that amounted to $87,000 which has since been repaid as well.Q: When was that repaid?
A: We paid it.
Q: When was that?
A: When?
Q: Yes, yes?
A: Oh, some months ago to Phillips Fox trust account until the ownership of the funds was established. There was a question mark over who was the rightful owner of the funds, whether it was Gideon, New Zealand investors or some other entity which - but they - on legal advice we - Phillips Fox suggested they hold it until the ownership was identified.
Q: When was that loan taken out?
A: When?
Q: Yes?
A: Probably in a few payments over a period of four or five months. I can't be specific about when, but over - probably from October through till January/February, for 99/2000.
Q: That was out of the BNZ account?
A: Yes. And that's been fully accounted for and reconciled."85
8.16 There is no documentation for the loan. It appears that the loan was interest free and there appears to have been no security for the loan.
8.17 We are informed that an amount of A$71,721.16 which appears to be the equivalent of NZ$87,000 was transferred to the liquidator of Gideon from the Phillips Fox Trust Account on 7 May 2001.86 There was no provision for interest in this payment in respect of the period of the loan.
Authority for Payments
8.18 We asked Morison and Guildford to provide us with any correspondence from Bastion instructing Morison Guildford or its directors to withdraw funds from either the Bank of New Zealand "Gideon Investments Client Account" or the Wairarapa Building Society "Gideon Investments" account.
8.19 Their solicitors, Buddle Findlay, replied on their behalf saying:
"Our clients have informed us that they are unable to provide the following documents for the reasons outlined below:
- any correspondence from Bastion instructing Morison Guildford or its directors to withdraw funds from either of the Bank of New Zealand "Gideon Investments Client Account" or the Wairarapa Building Society "Gideon Investments" account for:
- Payment for shares in Morison Guildford and Associates
Limited that were transferred to Spaincroff Holdings Limited;
- Payment for shares in Telfer Properties Martinborough
Limited
With regard to (i) and (ii) deductions from the BNZ account for the payment of shares were made under verbal instructions from Michael Bastion;
- Loans to Morison Guildford or its directors
Loans were made with Michael Bastion's verbal authority.
These loans have since been repaid; - Any other withdrawals of monies not being transfers to the
Gideon National Bank account or repayments to investors
Other payments made on behalf of clients were all done with their knowledge and verbal consents;
- Payment for shares in Morison Guildford and Associates
Limited that were transferred to Spaincroff Holdings Limited;
- Any correspondence with investors notifying them of any one or more
of those withdrawal
No such correspondence exists."87
Footnotes:
About
|
Publications
|
Notices
|
What's new?
|
International
|
Speeches
|
Site map
Search
|
Information for investors
|
Contact us
|
Accessibility
Disclaimer
Copyright
|
Privacy
|
newzealand.govt.nz
|
Home
© Copyright New Zealand Securities Commission