Incidentally the 2nd story from the Sunday Star Times is about Dougie selling up the company.
A smooth transition of clients money to his back pocket then out the door huh Doug?
You should be in the slammer mate.
c Share Investor 2008
Out of step?
The Dominion Post | Saturday, 23 February 2008
Investors in First Step are getting worried about their money, says Jon Hoyle.
After a year with their savings locked up, investors in Money Managers' former flagship - the Australian unit trusts scheme First Step - are becoming increasingly worried they won't get all their money back.
Some argue Money Managers owner and founder Doug Somers-Edgar should cover any investor losses in the scheme.
The company admits the global credit crunch has affected the cashing-up of First Step's assets.
First Step's trusts were closed in November 2006 with $457 million of 7000 investors' money on the books. Of this amount, $330 million was investor capital and $127 million was in effect accrued interest. By December 2007, $186.5 million had been returned to investors in dribs and drabs, based on how much money, how long and in which trusts they had invested.
Another payment was made last week, but The Dominion Post understands it was $8 million less than the expected $25 million. A Money Managers spokesman said he did not know the latest payout's amount but "could" find out. Follow-up calls were unanswered by press-time.
First Step was launched in 2000, taking advantage of a loophole in Australian and New Zealand tax law. Investors began withdrawing in increasing numbers after Finance Minister Michael Cullen changed tax legislation in 2004.
The Dominion Post has spoken to nine mainly elderly First Step investors either considering or planning to take court action against those involved in the scheme to recover claimed losses. One says he had $15,000 written off in December and predicts he is at risk of losing a further $65,000, the way the funds' liquidation is going.
He said he had tried to get his money out before the funds closed, but after three months of delays, the money was locked in till liquidation could be completed.
David Peach, owner of a public relations company representing Mr Somers-Edgar, said when originally asked about investor losses: "What's been lost? No one knows if there will be losses or not." Long-time First Step critic Chris Lee, a Kapiti Coast financial adviser, was unconvinced. "Read the last accounts. You can't argue that nobody has lost money - that's just horse manure," he said.
In December, the funds' trustee Calibre Asset Services warned that $38 million was unlikely to be returned to investors and a further $109 million was classified as being under "fundamental uncertainty".
In the fundamental uncertainty basket was $79 million owed by Geotherm Group (now in receivership) for the development of a geothermal power plant near Taupo.
Mr Peach said stress on credit markets had had a negative impact on cashing up the trusts' assets as it was more difficult for potential buyers to get capital.
The lawyer for one group of investors, James MacFarlane, said the global credit squeeze or any other "adjusted macroeconomic events are not an effective defence". The money invested in First Step passed through several entities owned or controlled by Mr Somers-Edgar and Aucklanders Russell Tills and Gerald Sidall. Mr Tills and Mr Sidall resigned from companies related to the funds in the months after their closure.
Both Mr Lee and Mr MacFarlane said the profit made on these transactions should be used to cover any investor losses.
One investor noted the NBR Rich List had estimated Mr Somers-Edgar's personal wealth had doubled to $120 million between 2006 and 2007.
All investors spoken to asked that their names not be published, citing fears over possible litigation.
Money Managers has been quick to hit back at critics. In 2005, it and Mr Somers-Edgar sought $500,000 in damages from Mr Lee for articles on his website. The claim was discontinued.
The same year, the Consumers Institute published a report critical of Money Managers and First Step. The institute's then chief executive, David Russell, said Mr Somers-Edgar called for his resignation and then wrote to the institute's board demanding he be sacked.
Lawyers for Money Managers and First Step's (Mauritius-registered) trustee Calibre Asset Services have said they are considering a complaint to the Press Council over a Dominion Post report published this month.
Money Managers has described Mr MacFarlane's talking to the paper about his plans to sue the Money Managers and other parties on behalf of investors in First Step as having a "sinister implication".
Mr Somers-Edgar would not comment when contacted earlier this month. But a statement from Mr Peach attacked Mr MacFarlane for not revealing the identities of those he is acting for, what the claims of action are and when papers will be filed with the court.
Mr Peach said: "If his implication here is some impropriety over management of the funds, then he should employ a lawyer capable of sifting fact from fiction and speculation." He compared Mr MacFarlane's approach to an "American-style touting strategy".
Mr MacFarlane said he would not provide details on causes of action as it would help Money Managers' lawyers prepare their defence, but his clients' cases had been fully analysed and the causes of action clearly identified.
He alleges that Money Managers had run "an elaborate funding, marketing and fiduciary and sales structure to raise funds from non-low-risk investments", which included lending money to companies associated with Mr Somers-Edgar and other principals in First Step. "This operated outside the continuous disclosure and insider trading regimes imposed by the Securities Markets Act," he claims.
He has also suggested Australian regulators have an interest in First Step, though Money Managers has dismissed this.
Mr Peach said all practices relating to First Step had been in accordance with the law and that the majority of investors had made "very good" returns.
A key concern of First Step investors was the degree of related-party lending.
First Step accounts for the 2007 financial year showed significant losses attributed to related-party lending, whereby loans are made between groups and companies that are closely linked. During 2007, the trusts wrote off advances and loans worth $400,000 to Quadrent Finance and $394,000 to CTT Finance Holdings (in receivership).
In 2006, $1.375 million of Quadrent loans were written off.
More than $60 million of loans were made to Club Finance, a used-car loan company. It is half owned by Mr Somers-Edgar.
Last year, Club Finance settled out of court with the Commerce Commission, agreeing to refund $788,000 of redundancy insurance premiums it charged 1500 unemployed borrowers.
Jonathan Glass, an adviser for Gareth Morgan Investments, said related-party lending was considered a high-risk game. It should generally be a red flag for investors looking at investing with any company.
Change afoot at Money Managers
By ROB STOCK - Sunday Star Times | Sunday, 24 February 2008Money Managers founder Doug Somers-Edgar is selling up, releasing the iron grip he has held over the firm since it was launched in 1986.
The Star-Times understands Somers-Edgar is selling stakes in the financial planning business to Money Managers' chief executive Alasdair Scott, franchisees, and NZ Funds Management owned by long-time Somers-Edgar business associates Gerald Siddall and Russell Tills.
Money Managers' franchisees are telling clients the Money Managers model, involving the marketing of products from related parties, will be watered down, with the firm recommending more products from unrelated companies.
Related parties currently providing products and services to Money Managers include Orange Insurance, Orange Finance, Heritage Trustee Company, Dominion Funds and Matrix Funding Group, all ultimately 100% owned by Somers-Edgar.
Some of these products involved multiple layers of related party connections, such as the First Step products which are now being wound up with some Money Managers' clients facing losses. Money in the trusts was lent to various businesses, including Club Finance (now in receivership), a used-car dealer in South Auckland which Somers-Edgar half-owns.
Because Money Managers is such an effective sales channel, the unrated Orange Finance can offer investors a two-year rate of 8.55%, just 0.1 percentage point higher than a similar investment at the safest New Zealand bank, and 1.45 points less than South Canterbury Finance.
Scott would not confirm details of the deal, which is due to be signed in early March, or whether Somers- Edgar would retain a stake in the business. He said an announcement would be made when it was concluded.
Scott told the Star-Times in August 2006 that he was championing change in the business, although sources within the company say franchisees frustrated by stalled growth at Money Managers have been agitating for change.
On its website, Money Managers claims to have 35,000 clients and $2 billion under advice. They are the same figures Money Managers was giving in mid-2004.
Currently four of the 100 shares in Money Managers are owned by Somers-Edgar in his own name. The other 96 are owned by Edgar Holdings, a company with 30,000 shares, all owned by Somers-Edgar and his wife Anne.
In recent years Somers-Edgar has taken a low-profile role at Money Managers.
He is a polarising figure who grew to fame through tirelessly fronting seminars around the country and self-promotion on radio.
Discussions around the future of the firm include operating a flat-fee model where all commissions on products are rebated entirely to clients.
National Business Review
First Step: Where did the money go?
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| Doug Somers-Edgar |
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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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Buy new: $10.17
Links c Share Investor 2007-2009
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