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Investment Advisers: A Case Study
Gideon Investments Pty Limited - Morison Guildford & Associates Limited
1 Introduction
1.1 On 25 January 2001, the Securities Commission decided to undertake a formal review into an issue of securities by Gideon Investments Pty Limited ("Gideon") or associated companies. The review covered the promotion of the securities and advice given about them, and in particular looked at the role of Morison Guildford and Associates Limited ("Morison Guildford"). On 15 March 2001 terms of reference were settled. A copy of the terms of reference is attached at appendix "A".
1.2 The review followed a request by the Commission on 18 August 2000 to the Registrar of Companies for him, or any person authorised by him, to exercise his powers under section 67(1) of the Securities Act 1978 in respect of:
- Any promoter, investment adviser, or investment broker in New Zealand in
respect of securities of which Gideon is the issuer.
- Any director, officer, or employee in New Zealand of Gideon.
- Any director, officer, or employee in New Zealand of any promoter,
investment adviser or investment broker in respect of securities issued by
Gideon.
- Any person in New Zealand who holds documents relating to any money or
other property that is managed, supervised, controlled, or held in trust by
Gideon, or any such promoter, investment adviser or investment broker.
- Morison Guildford.
- Any director, officer, or employee of Morison Guildford.
- Any person who holds documents relating to any money or other property that is managed, supervised, controlled, or held in trust by Morison Guildford.
1.3 Section 67 of the Act empowers the Registrar of Companies to require documents to be provided for inspection. On 21 December 2000 the Commission received a report from the Registrar on his inspection.
1.4 The Commission sought information from a number of parties including:
- The liquidator of Gideon.
- His representatives in New Zealand and Hong Kong.
- The Australian Securities and Investments Commission.
- The Hong Kong Securities and Futures Commission.
- The Registrar of Companies.
- New Zealand investors in Gideon.
- New Zealand banks with which Morison Guildford held accounts.
- Morison Guildford.
1.5 The information we received included the liquidator's reports, letters from investors, bank account details, bank staff file notes and information from Morison Guildford. This included information obtained at recorded interviews with the directors of Morison Guildford, Andrew Morison and Michael Phillip Guildford, conducted by staff at the Commission offices. Morison and Guildford were represented by their lawyer Scott Barker of Buddle Findlay throughout the interview. We also interviewed a number of Gideon investors.
1.6 The Quorum of Commission Members responsible for dealing with the review was:
- Ms J Diplock
- Mr C A N Beyer
- Ms E M Hickey
- Ms J M G Perry
- Ms C A Quinn
2. The offer of Securities by Gideon Investments Pty Limited and related companies
2.1 Gideon is a company that was incorporated in Sydney, New South Wales, Australia. It has not been registered on the overseas companies' register in New Zealand. Throughout the period under review Michael James Bastion and Maureen Catherine Bastion were both the shareholders and the directors of Gideon.1
2.2 On periodic trips to New Zealand, in particular to the Hawke's Bay and Masterton areas, Bastion met with prospective investors to promote investment funds managed by Gideon. Bastion often made contact with prospective investors through introductions from Morison Guildford, a firm with which he established close links, and also possibly from existing investors.2
2.2 On 29 March 2000, following the death of Bastion on 16 March 2000, Gideon was placed in liquidation in Australia by the Supreme Court of New South Wales. G T Hancock, previously of Grant Thornton and now at Stockford Limited, was appointed as liquidator.
2.3 On the basis of the information we have, there have been numerous breaches of securities law relating to Gideon.
Michael Bastion
2.4 Bastion was the managing director of Gideon.3 The only other director was his wife Maureen. We have no evidence to suggest Mrs Bastion's involvement in the affairs of Gideon extended beyond a limited administrative role.
2.5 Bastion was born in Takapuna, New Zealand on 26 May 1961. His qualifications included a Batchelor of Science degree, majoring in Geology, from Canterbury University New Zealand, obtained in May 1983. The Christchurch Teachers College also awarded him a diploma in teaching in November 1983.4
2.6 Bastion started his working career as a school teacher. Later he held positions with Barclays Bank, O'Connor Grieve and Co, Barclays DeZoete Wedd and Lehman Brothers.5
2.7 Bastion's first contacts with Morison Guildford were in the mid-eighties, through Andrew Morison, a shareholder and director of the company. At that time, Bastion was a currency dealer and an equities trader. Bastion had been involved in professional work for friends of Morison.
2.8 The liquidator's report said he was informed that Bastion had become a heavy user of drugs, particularly cocaine, in the twelve months prior to his death.6
2.9 On the basis of the information we have, it appears that Bastion engaged in fraudulent behaviour in his position as the managing director of Gideon.
The Scheme
2.10 Gideon appears to have presented itself as a trustee and management company for an investment vehicle described as the GHF Trading Trust. The trust deed is dated 1 August 1993 (for a description see paragraphs 2.22 to 2.25). However, the liquidator was unable to find a signed copy of the deed. On legal advice the liquidator sought directions and orders from the Court as to whether a trust existed. The Supreme Court of New South Wales ruled that the liquidator was "justified in recognising the existence of an express trust created on or around 1 July 1994".7
2.11 According to a letter from the liquidator to New Zealand investors dated 12 May 2000, approximately 180 New Zealand investors placed a total of more than A$5,300,000 with Gideon. A large proportion of these investors were based in the Wairarapa. In addition, at least another 120 investors in Australia and Hong Kong placed about A$20,000,000 with Gideon.8 The liquidator revised these estimates in a report to investors dated 9 November 2000, in which he said that although the final amount deposited by investors was not known, it was estimated to be between $30 million and $35 million. This same report referred to a "Report as to Affairs" which said that $40,000,000 was owing to "unsecured creditors".9 This figure was not broken down into investors and other types of creditors. In any case a substantial sum of money was invested in the scheme.
2.12 The "Report as to Affairs" was provided to the liquidator by the surviving director (as required under Australian law). It lists all the assets and liabilities of the company on the date the official liquidator was appointed. It noted an estimated shortfall between assets and liabilities of A$35,617,739. This was a preliminary indication of the amount that would remain outstanding to investors and other creditors after all remaining assets were liquidated and distributed.
2.13 Michael Phillip Guildford, a shareholder and director of Morison Guildford, described the development of Gideon in the following way.
"He - Michael - was working for other companies, and he had a few friends who wanted to invest money, and I understand that these friends said: 'you're good at investing, why don't you do it for us', and that's how I understand it started. And, he thought that he could do it quite well for them, and so he formed the Gideon Trust as the vehicle for his friends and others to place money into - friends really - to place money into as the investment vehicle, and then he would trade on the sharemarket and other markets similar".10
2.14 Morison described Gideon as a "speculative investment"11. He commented on the structure of Gideon as follows:
"We're familiar enough with the conventional unit trust industry to know the various custodian requirements; so, what have you. And, this was at the other end of the scale completely because, although it was a unit trust, as we understood, we knew very well that it was dependent on the integrity of a person regardless of, if you've got a unit trust or otherwise, an investor was reliant on the integrity of the human being, or an individual to make or break this thing."12
2.15 Morison considered the honesty or dishonesty of the manager to be the important factor in Gideon's performance.
"The vehicle of the unit trust was really a mechanism in order to legitimise the - and to legalise the entity, but at the end of the day it was up to Bastion's integrity as to what he did with the funds in the unit trust. He was the manager of the trust."13
2.16 As noted below it is doubtful that there was a unit trust, at least under New Zealand law.
2.17 A quarterly trading results investment report was sent to investors. This attributed a monthly return on investors' funds, expressed as a percentage return on invested capital. On the basis of these reports, if true, investors would have earned 51.5% for the year ending June 1998 and 41.8% for the year ending 1999.14
2.18 For the most part investors appeared to let their investments roll over and did not seek periodic payments whether of capital or income. Those people in New Zealand who required periodic income advised Bastion, who would forward the required funds into a Morison Guildford bank account, from which Morison Guildford disbursed the income. Similar procedures applied for those investors requiring a refund of their investment.
2.19 The types of investments open to Gideon under the document called the GHF Trading Trust Management Deed (see paragraphs 2.26 to 2.33) were equities, bonds, currency and futures.15
2.20 According to the liquidator, Bastion treated investors' funds, once banked into the Gideon bank account, as his own. The liquidator said there was some evidence of share trading, but in the main funds were used to acquire interests in property, thoroughbred racehorses in various countries and to pay for Bastion's lifestyle.16
2.21 According to the liquidator, between December 1994 and March 2000 Bastion's personal expenditure taken from the various bank accounts relating to Gideon was about A$7,169,199.61, or an average of A$1,370,200 a year.17
The GHF Trading Trust Deed
2.22 The liquidator's Report to Investors dated 9 November 2000 described a document bearing the date 1 August 1993 and entitled the "GHF Trading Trust".18 The liquidator noted that he had been unable to locate a signed copy of that document. However, as noted above, the Court has ruled that the liquidator was justified in recognising the existence of an express trust on the terms in that document.
2.23 The settlor under the document was Christopher Charlton, with a settlement sum of A$100. The trustee was Gideon. The initial unit holders were:
- Richard Hodgkinson
- Harold E Hodgkinson
- Amanda Stewart Pty Limited
- Peter Bartholemew
- Man Pag Pty Limited
- Michael Bastion.
2.24 Christopher Charlton also acted as the company's accountant.
2.25 The ultimate distribution date was noted as 29 June 2050. The GHF Trust was created under New South Wales law. The Trust deed annexed an application form. It was noted that the minimum application was for 50,000 by A$1.00 units.
The GHF Trading Trust Management Deed (the Management Agreement)
2.26 A deed was signed between Gideon (called "the trustee" in the deed) and the investors (called "the unit holders" in the deed). The deed set out Gideon's powers to exercise management and control of the "trust fund", described as the GHF Trading Trust, and the remuneration payable to Gideon for the provision of its management services. The dates noted below are from a sample deed. They were added in pen to the deed and were adjusted for each investor in accord with the date of investment. We note some key clauses from the deed.
2.27 Clause 4 of the deed said:
"The Trustee shall have no power to invest the Trust fund other than in equities, bonds, currency markets and futures without the consent in writing first and had obtained from at least three quarters of the Unit Holders holding at least three quarters of the total issued units other than the Appointor, or entity under the control of the Appointor."
2.28 Clause 5 of the deed said:
"Subject to the provisions of Clauses 7 and 9 hereof, the Trustee shall have no discretion to make any loan to any person, or to distribute either capital or income or to allow any benefit or advantage to any person or corporation other than to Unit Holders in accordance with the proportion that the number of units held by each Unit Holder bears to the total issued units."
2.29 Clause 6 said Gideon must provide the Unit Holders with "a management report and financial statement as to the results of investments made by the Trustee at quarterly intervals."
2.30 Clauses 7 and 9 said the trustee (Gideon) should be paid 15% of the gross profits, as certified by the trust's accountants in 1999, and 25% of the gross profits, as certified by the trust's accountants in 2000.
2.31 Clause 8 said that if Gideon incurred losses as a result of its investment activities in the year ended 31 March 1999, Gideon "shall from its own funds and resources deposit into the Trust Fund by way of non-interest bearing advance an amount equivalent to such losses". No repayment of such loan advance was allowed to be made other than from profits derived from the investment activities of Gideon.
2.32 Clause 10 said if Gideon incurred losses as a result of its investment activities in the year ended 31 March 2000, Gideon should from its own funds deposit into the trust fund, by way of non-interest bearing loan advance, an amount equal to 25% of such losses. No repayment of such loan advance might be made other than from profits derived from the investment activities of Gideon.
2.33 Clause 11 said Gideon should use its best endeavours to ensure that financial statements relating to its investment activities were provided to Unit Holders within one month of the June 30 year end.
Confidential Information Memorandum
2.34 The liquidator's report notes a "Confidential Information Memorandum" describing Gideon and its activities for a potential investor who was considering whether to take a 40% stake in the company's issued capital for A$2,000,000. Half of this sum was to be paid on 30 June 1994, with the balance to be paid in four equal monthly instalments over the following four months. The liquidator did not have information as to whether this transaction was completed. The memorandum said:
"Broadly speaking, the company has categorised its investments into the investment groups:
- Horses
- Funds Management
- Dealing
- Investments
- Gaming and Entertainment
The company has access to sufficient cash scenarios to operate and had further developed its base plan to outline the actual positions taken to date.
These business ventures are largely:
- Bloodstock and Thoroughbred Industry (Horses)
- Financial Management (Funds Management)
-Hedge funds and management of financial portfolios for clients- Broking and Consulting (Dealing)
- Investments
-Property Trust and Direct Real Estate
-Equity in Corporate Entities
-Joint Ventures - Primary Industry
-Strategic Investment Planning- Licensed gaming and betting activities and other entertainment areas, including joint arrangements involving VIC TAB, ACT TAB, and VITAB.
The company's business plan is to continue to concentrate on the opportunities afforded by these entities and to expand where necessary in complementary activities."19
2.35 There was no Gideon horse fund. There was no Gideon gaming and entertainment fund. However, it is clear that the activities of Gideon as managed by Bastion went outside the investment mandate in the management agreement. In regard to the content of the management deed the liquidator said: "my investigations to date reveal that all of these clauses were breached regularly".20
Was the offer of securities made in New Zealand in accordance with New Zealand law?
2.36 We consider that Gideon made an offer of securities to the public for subscription. We consider that this offer was not made in accordance with New Zealand law.
Type of securities
2.37 Interests in the Gideon fund might have been either interests in a unit trust or participatory securities. If not a unit trust, they would by definition have been participatory securities. The definition of unit trust in New Zealand is contained in the Unit Trusts Act 1960. Gideon did not comply with that Act. Although the Supreme Court of New South Wales found that the liquidator was justified in recognising the existence of an express trust, the fund was for the most part not administered as a trust. The matter is therefore in some doubt.
Offer to the public
2.38 The offer of securities issued by Gideon was clearly made to the public, as that term is used in the Securities Act 1978. In a letter to New Zealand investors dated 12 May 2000, the liquidator said there were about 180 New Zealand investors. We have corresponded with some of the investors. We found no reason to conclude that they were not members of the public in relation to Gideon.
Offer documents
2.39 Whether the offer was of interests in a unit trust or of participatory securities, it is clear that the necessary legal steps were not followed. There was no registered prospectus or investment statement as required by the Securities Act. There was no deed of participation and no statutory supervisor. There was a document called a trust deed. This might not have been signed and was not lodged with the Registrar of Companies, as is required for unit trusts under section 9 of the Unit Trusts Act. Gideon was not an eligible trustee under that Act.
Accounting records, financial statements etc
2.40 Gideon does not appear to have kept proper accounting records, as required under section 53 of the Securities Act.
2.41 Financial statements were not prepared or audited as prescribed by the Securities Act 1978 and the Financial Reporting Act 1993.
2.42 Section 20 of the Unit Trusts Act provides that in every year the manager of each unit trust must file a report with the Registrar of Companies. This must include:
2.43 No report was filed under the Unit Trusts Act.
2.44 Section 20(2A) of the Unit Trusts Act says financial statements sent to the Registrar of Companies in accordance with the Financial Reporting Act 1993 must have attached the following information for the period covered by the financial statements:
- A summary of purchases and sales of property under the unit trust.
- A list of all the investments of the unit trust.
- Particulars of costs.
- The estimated market value, as at that date, of the investments and other property.
2.45 This information was not provided to the Registrar.
Australian Law
2.46 We note that the liquidator's Report to Investors dated 9 November 2000 said the activities carried on by Gideon comprised a managed investment scheme. The report also said the following sections of the Corporations Law appeared to have been breached21:
- Section 232 relating to the duties and liabilities of directors.
- Sections 601ED(5), 601FC, 601FD, 726, 780 and 806 relating to managed
investment schemes, fund raising and trading in securities.
- Section 591 relating to failure to keep proper accounting records.
- Sections 596 and 1264 relating to fraud.
- Section 866 relating to failure to keep a trust account.
Footnotes:
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