ASIC responds to Michael Pascoe

I read of your Crikey Daily article on Monday, 31 October 2005 with some surprise.

You apparently say that ASIC’s work on
high-yield debentures has “progressed no further than pulling a prospectus.”
This is simply not true.

It is undoubtedly true that this sector has
been out-of-shape for a while, but this is a more of a by-product of a booming
property market than regulatory failure.

Even before the release of the February
2005 high-yield debenture report, ASIC was hard at work in this area:

• Prior to February 2005, ASIC issued a number of media releases
  summarising regulatory action taken in relation to defective debenture
  prospectuses and consumer alerts for investors in high-yield fixed
  interest products. For example, see [MR
  03-158], [MR
  04-002], [MR
  04-124] and [MR
  04-242].

• In December 2004, ASIC got orders to wind up managed investment
  schemes operated by the Co-Develop group in Queensland.
  ASIC also got an undertaking from the Co-Develop group not to seek any
  further money from investors for the schemes. In the course of financing
  various property developments, the Co-Develop group had sought and
  obtained money from the public through the use of, among other things,
  debentures, without a prospectus. See [MR
  04/41].

• ASIC also took action against Westpoint Corporation, which was
  issuing promissory notes in an attempt to circumvent the debenture and
  prospectus provisions of the Act. The court held that the products offered
  were interests in a managed investment scheme. The decision is currently
  under appeal and cross-appeal. See [MR
  04/157]. We also recently (25 October) stopped another Westpoint issue
  on the basis that Westpoint had not provided updated disclosures on the
  group’s current financial performance.
  

The February 2005 surveillance itself
involved the following stop orders:

Issuer	Action
Fincorp Investments Ltd	Final stop order
Australian Capital Reserve Ltd	Interim stop order, supplementary prospectus lodged
Hargraves Secured Investments Ltd	Interim stop order, supplementary prospectus lodged
Victorian Finance & Leasing Ltd	Interim stop order, supplementary prospectus lodged

Since then, ASIC has taken a number of
enforcement actions against issuers, (in addition to Sovereign Capital) which
it sounds like you are unaware of. The following actions have all been taken since
that report in early 2005:

• ASIC took legal proceedings in the Supreme Court of NSW against
  Fincorp Investments Limited. ASIC alleged that Fincorp’s prospectus was
  misleading. As a result, Fincorp has been required to offer certain
  investors who invested in Fincorp debentures in 2004 all of their money
  back, including accrued interest. Fincorp could now be faced with having
  to refund many millions of dollars to investors who still hold their
  investments. This is landmark outcome, being the first time ASIC has
  sought a refund on behalf of investors, in the absence of a corporate
  failure, and with a company still functioning with a ‘live’ prospectus.
  See [MR
  05/290] for details.

• ASIC also took legal action against Fincorp on its newspaper
  and radio ads bearing slogans such as ‘invest with certainty.’ We got an
  enforceable undertaking from Fincorp under which it agreed to correct the
  ads. The action against Fincorp has had industry-wide impact on the
  content and tone of ads for high-yield debentures. See [MR
  05/272]. There has been a
  noticeable change since then. Those that have not got the message have
  been followed up by ASIC.

• ASIC took action in April 2005 against Mr Hoy who, through his
  companies, had offered investors the opportunity to participate in a
  high-yield bank debenture investments scheme. ASIC alleged that Mr Hoy had
  engaged in conduct that was misleading and deceptive and had withdrawn
  money from company bank accounts and used it for his own purposes. The
  Court ordered that the schemes be wound up and that Mr Hoy be prohibited
  from making statements concerning financial products and from carrying on a
  financial services business without a license. See [MR
  05/103].

• We imposed additional licensing conditions and disclosure requirements
  on City Pacific Ltd, a mortgage trust operator, following concerns about
  City Pacific’s compliance with the Act. See [MR
  05/168] and its ASX
  announcement ‘ASIC license conditions’ on 22 June 2005.

• In June 2005, we required a supplementary prospectus to be
  lodged by Provident Capital Limited, another debenture issuer, primarily
  in relation to loans in arrears and lack of clarity in relation to whether
  they were paying compound interest or simple interest.

• ASIC also got interim orders in July 2005 restraining South
  Australian Mr Mercorella from receiving or disposing of any funds in
  relation to a managed investment scheme. ASIC alleges Mercorella had been
  operating the scheme in breach of the Act, owing at least 78 investors
  about $56 million. ASIC will also seek orders to wind up Seabay
  Investments, which is suspected of issuing debentures in breach of the
  Act, and who had lent over $20 million to Mr Mercorella. See [MR
  05/204].

• Another example occurred last month with the banning orders and
  disqualifications ASIC obtained against five men associated with the
  failed Elm Financial Services Group. ASIC alleged that each of the five
  were involved in illegal fundraising, misleading or deceptive conduct and
  contraventions of directors duties. The proceedings were in relation to
  six risky investment schemes, primarily unsecured debentures, which Elm
  had promoted to its client investors. See [MR
  05/330].

In addition to our work on Sovereign, see MR
05/316, a number of other high-yield debenture issuers are also currently
being investigated by ASIC, although we can’t comment on these matters yet.

Our campaign has also significantly
increased awareness of the risks of high-yield debentures, reverberating widely
in the media.

Lastly, I should add that as recently as
Friday of last week, we issued an interim stop order on a prospectus issued by
Australian Capital Reserve Limited.

Yours
sincerely

Jeremy
Cooper
Deputy Chairman