Late last year, a strange thing happened at Money Managers, the financial advisory company owned by Doug Somers-Edgar. One of the company’s franchisees – someone whose entire business consisted of selling Money Manager’s investment products – suddenly went on a campaign against them.
This franchisee was particularly critical about what he called “Money Manager’s latest failure,”
the First Step trusts, which have been closed and winding down since December 2006.
He began his campaign by texting at least one reporter at a major newspaper, anonymously. Then he sent letters to media and finance outlets, again anonymously. Then he sent out copies of First Step’s financial statements for 2007 – and that’s when he got a reaction.
A number of news outlets,
including NBR , ran stories about how First Step expected to lose about $38 million of investors’ money because of bad debts. About a third of its investors’ original capital, $108 million, was in loans and advances that couldn’t be evaluated because of a “fundamental uncertainty.” About $63 million of investors’ money was in a used-car loan company that was being investigated for possible illegal activities.
The articles all ran in the same week in mid-December, just after investors received
a letter from First Step’s trustee confirming the expected loss of the $38 million and the questions about the car loan company.
According to First Step, the franchisee who sent the information to the media has since sold his Money Managers business and moved on. But the revelations about the trusts’ accounts continue to infuriate investors.
“I told them to get stuffed,” said 79-year-old Lindsay Taylor, who together with his wife invested about $270,000 in First Step. Mr Taylor said he’d always thought their money was being invested in property mortgages.
“And they put our money into a finance company lending to unemployed people to buy second-hand cars?” he said. “How many other companies associated with this scheme are screwball?”
Write your own rules
Go to
Money Manager’s website and you’ll find a dreamy-looking picture featuring what appears to be the company’s motto: “write your own rules.”
And that’s just about what Mr Somers-Edgar did when he started the First Step trusts.
Unlike most financial investments which advertise their independence and objectivity, First Step was built on a series of inter-related companies and related-party deals which the trusts’ promoters not only disclosed, but used as a selling point to investors.
According to First Step, related-party deals are a means by which the trusts can control projects they’ve lent money to.
The man who would appear to have the most control over First Step’s projects is Mr Somers-Edgar. He’s the sole director and shareholder of Money Managers, the exclusive promoter of the First Step trusts. He’s the sole director and shareholder of Financial Trust Ltd, which administers the trusts and makes decisions about what loans to make with investors’ money. He’s the sole director and shareholder of Matrix Funding Group, which manages the First Step loans.
And, through a series of related-party transactions, he’s a director and shareholder at several businesses that have gotten some of First Step’s biggest loans.
It was a surprise, then, when NBR asked for an interview with Mr Somers-Edgar and was told that “he’s simply not involved in the winding down of the First Step trusts.”
With all of those directorships, shouldn’t Mr Somers-Edgar be involved in the winding down of the First Step trusts? Shouldn’t he be involved in his own companies that owe money to the First Step trusts?
Yes he should be, according to Rob Rendle, senior solicitor at the Companies Office.
Under
section 128 of the companies act , Mr Rendle said, “you can’t just walk away and say you don’t know anything about [your company.]” A director “can’t delegate the overarching management function” to someone else.
But it’s easy to see how Mr Somers-Edgar might be tempted to delegate some of his many directors’ roles to someone else. Because at this point, some of the related-party deals he made during First Step’s early days have become sore points for investors during its wind-down.
Take CTT Finance Holdings, the parent company of CTT Financial Services, CTT One, Paragon Factors and Dental Finance. Mr Somers-Edgar is a shareholder
in all five of these companies and until 2002 he was also a director of all of them.
In 2004 they
all failed, owing about $21 million to the First Step trusts.
By last December, CTT had only paid back about $9.5 million of those loans and appeared to be nearly out of assets.“There will be insufficient funds realized from the receivership to repay the secured debt in full,” wrote
CTT’s receiver Murray Allot .
In a written comment, Phil Epps, CEO of the Edgar Family Trust and a key player at First Step, said that First Step investors didn’t lose any money when CTT failed to pay the remaining $11.5 million of its debt to the trusts. Instead, he said, that loss was mostly covered by “retained earnings” that First Step directors might otherwise have taken as dividends.
But that’s not the case with Club Finance, a company which First Step admits will probably cost investors millions.
It wouldn’t be the first scandal for Club Finance, a used-car loan company located in Mt Wellington, Auckland.
In September 2006, the company was the subject of a newspaper article entitled “Solo mum owes $35,260 on $9,000 car .” The article told the story of a young woman with a sick child who’d allegedly been tricked into signing an unfair contract with Club Finance.
In May 2007, the company got more unwanted attention when the Commerce Commission made it repay $788,000 worth of redundancy insurance which it had sold to unemployed car buyers.
One article about the repayments noted that more than half of Club Finance’s customers were unemployed.
Mr Somers-Edgar has been a director and 50 per cent shareholder of Club Finance since it started business in 2003. But when the story about the Commerce Commission broke, representatives of Money Managers told TV reporters he “had nothing to do with the running of the business .”
And today, when it looks like Club Finance won’t be able to repay the $63 million it owes First Step, Mr Somers-Edgar has all the more reason to distance himself from his car finance company.
In a written statement, Mr Somers-Edgar’s spokesman Phil Epps told NBR the accounting firm KordaMentha is now overseeing Club Finance.
He added that “we are in the process of providing further information to the appropriate [regulatory] bodies.”
He also pointed out, somewhat cryptically, that “following the appointment of KordaMentha, [Club Finance’s] managing director and CEO, Philip Markwick, relinquished stewardship” of the company.
Meanwhile, Mr Markwick says he can see which way the wind is blowing.
“They’re looking for someone to blame,” he told NBR, “but there was full disclosure at board meetings, governance meetings and regular meetings with Doug Somers-Edgar.
“I also met informally with Doug on a regular basis, and with Phil Epps.”
Mr Markwick blamed Club Finance’s problems on Mr Somers-Edgar’s decision to cut off its sole source of funding, the First Step trusts.
He also said he made Mr Somers-Edgar “fully aware of the ramifications” of that decision – namely, that it could potentially ruin Club Finance.
Sour deals
Mr Markwick isn’t the only one who’s accused Mr Somers-Edgar’s team of mismanagement.
“I’ve got to get these guys out of our business!” Alistair McLachlan shouted into the phone, when NBR called him about his company Geotherm.
In December 2006, Mr Somers-Edgar’s managing company, Matrix, put Geotherm into
receivership after it defaulted on a First Step loan repayment. Two years later, the company still owes First Step investors about $76 million.
When it went into receivership, the company was working on a geothermal energy project near Taupo.
Last June, the receivers reported that while “the only asset realized to date is a motor vehicle sold,” they were “actively pursuing a recapitalization or sale of the company.”
But Mr McLachlan, who was the founder and driving force behind Geotherm, insisted the project had only been “held back” by Matrix.
“Once I can get them out of here, then it’ll go ahead,” he said.
Levels of Risk
According to Mr Epps, the problems with Geotherm and Club Finance are what forced First Step to set aside $38 million for expected losses.
But the question many investors say they want answered is how their money ever got into those deals in the first place.
The First Step trusts were designed and marketed on a graduated-risk model. According to First Step’s investment statement, the highest level of the four trusts would invest in mezzanine finance and subordinated debt projects, “suitable for investors who accept a high degree of credit risk to enhance returns.”
But the statement describes the lowest level trust – the
Secured Mortgage Trust – simply as an investment that “include[s] property development loans supported by a first or second mortgage over the development site.”
So why did all four levels of trusts invest in Club Finance’s car loans, Geotherm’s energy project and CTT’s financial services?
According to a public relations representative for First Step, the trusts’ managers invested in those projects to diversify the trusts. He pointed out that, until First Step closed, no investor ever lost money in the trusts.
As for Club Finance, he said, back in 2003 car loans were considered an excellent investment.
Which raises another, more difficult, issue for investors.
As First Step winds down the market is turning sour – and that makes it harder to recover their money.
Just take a look at the property development at 19 Birdwood Crescent in Parnell, which currently owes the First Step trusts about $19 million. The building is complete, the units in it are sold, and the project is simply awaiting paperwork from the council.
Nevertheless, First Step’s administrator has
taken the developer to court . Why?
According to the trustee for the project, “the court case is hot wind…They’re taking action to be seen to be doing the right thing for investors.”
When it’s time to repay the loan, it will have to be renegotiated.
“Everyone’s going to get hurt a bit,” he said. “The whole market’s in the same position. It’s a mess.”
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Links c Share Investor 2007-2009
Even though Money Managers-the former pyramid scheme seller or what the yanks call a Ponzi Scheme-headed by Doug Somers-Edgar (pictured inset), is trying to turn over a new leaf and reinvent itself the First Step trustee Edward Russell is still talking bullshit:
