Glancing up at the sparkling silver doughnut logo as he walked into the millionaires’ factory for a meeting with his Macquarie Private Wealth adviser in July 2009, Don Waller was hopeful that this meeting would be kinder than the last.
After more than half his life savings had been torched by the global financial crisis in the previous year, he expected the recent 40 per cent rebound in the equity markets to pep up his finances.
It was not to be. Waller’s adviser, who still works at the bank, told him his already devastated financial portfolio had gone up just 4 per cent and he had not been able to take advantage of the $96 billion equity issues corporate Australia was raising at rock-bottom prices.
‘‘'It was gut-wrenching,’’ Waller says. ‘‘'It wasn’t until I got home and read the annual review document that I realised the managed funds I had been put into had a heavy exposure to foreign currency movements.’’
As he flicked the pages, he was horrified to discover that his family trust had a 76 per cent exposure to foreign currency and his superannuation fund had a 48 per cent exposure, despite explicit instructions that he did not want currency exposure.
Waller and his partner signed up with Macquarie in 2005 after receiving a substantial financial windfall from the sale of a company he had worked at for a number of years. The couple turned to Macquarie because they believed their money would be safe – and do well.
Assessed as balanced/growth investors – not high-growth or speculative – they were advised to pour their $3.2 million into an investment portfolio and gear up with another $2.5 million, which was placed in Macquarie’s costly Geared Equities Investment product.
The net effect of the high-fee MPW investment recommendations was to reduce their nest egg from $3.2 million to an estimated $1.4 million when they finally pulled up stumps and walked away.
Included in the loss was an estimated $160,000 paid in financial planning and advisory fees, $37,000 paid in a margin loan, more than $42,000 on brokerage and $776,449 in interest and put option costs on the $2.5 million Geared Equities Investment portfolio. All up, Waller estimates total payments were in excess of $1 million.
‘‘'We suffered every possible worse scenario imaginable,’’ he says. ‘‘We had a margin loan account and so got caught out with margin calls, and we were transferred into managed funds that were invested in a number of non-equity, derivatives-based, currency-exposed managed funds – the risk of which was not properly explained – and didn’t help us when the markets rebounded.’’
The low point of the disastrous investment advice was tipping $238,303 of the Wallers' money into a series of funds run by Australian group Basis Capital – funds that were, via a company in tax haven the Cayman Islands, pumped into one of the worst investments in the world: complex collateralised debt obligations issued by the financial wizards at Wall Street’s ‘‘vampire squid’’, Goldman Sachs.
Those CDOs included the notorious ‘‘Timberwolf’’, described by Goldman Sachs’ then-head of sales, Tom Montag, as ‘‘one shitty deal’’ in a June 22, 2007, email.
Weeks after the Wallers were put into the risky Basis Australia Rim Diversified fund, on July 16, 2007, the fund was suspended after being unable to meet margin calls from its financiers.
Seven years later, the funds have been wound up and Basis is still pursuing Goldman Sachs through the courts in New York for selling it the toxic securities. No trial date is yet set.
A Fairfax Media investigation can reveal that the Wallers are one of hundreds – possibly thousands – of customers of Macquarie who may have been deliberately misclassified as sophisticated or wholesale investors rather than retail investors to avoid paperwork and the extra regulatory requirements attached to retail clients. It also enables advisers to push investors into more complex exotic products, many of them Macquarie-related products, which pay the advisers higher fees and commissions.
There is ‘‘no consumer protection, only downside for investors who allow themselves to be categorised as 'sophisticated,’ ’’ an industry expert says.
The misconduct inside Macquarie’s private wealth division occurred about the same time that Jeff Morris, a whistleblower inside the Commonwealth Bank’s financial planning division, approached ASIC warning it of a ‘‘high-level conspiracy’’ to conceal the ‘‘corruption and gross incompetence’’ of some of the bank’s star financial planners, including Don Nguyen.
About the time Morris was hatching a plan to blow the whistle on the Commonwealth Bank's financial planning scandal, an internal review at Macquarie in 2008 revealed ‘‘compliance deficiencies’’ within Macquarie Private Wealth that were so bad that 80 per cent of its advisers were not up to scratch.
Morris' actions, as revealed last year by Fairfax Media, triggered a high-profile Senate inquiry into the performance of ASIC, including why it took the regulator 16 months to act on Morris' tip-off.
He says the problems at Macquarie, taken together with those at the Commonwealth Bank, point to systemic problems across the financial planning industry. ‘‘This indicts ASIC as the utterly ineffective regulator and makes an overwhelming case for a wide-ranging royal commission into the sector,’’ he says.
‘‘Again, as at CBA, so at Macquarie, a lot of the problems seem to be due to vertical integration, whereby product manufacturers own financial planning groups and use them as sales channels to shift product. Thus so-called 'advice businesses' revolve around shifting product rather than giving advice.’’
Macquarie refuses to disclose the number of clients who have been misclassified as sophisticated rather than retail. It admitted that ‘‘a review of client files and client classification is ongoing where concerns have been raised by clients or identified by MPW [Macquarie Private Wealth]’’.
It also refuses to estimate the amount of compensation it has paid out. It says clients ‘‘will be’’ remediated in a process to be overseen by Deloitte and ASIC. Some estimate the losses by victims could be many tens of millions of dollars.
BusinessDay can reveal ASIC has known about the state of the MPW division since 2010. It took until December 2011 to launch surveillance.
During that surveillance it uncovered serious misconduct, including concerns about the classification of investors as sophisticated investors, a lack of record-keeping, and cheating by some advisers in their annual continuous professional development exams.
It is understood a document was circulated amongst advisers with the answers to the exam. This document, known in some circles as the ‘‘Penske File’’, named after the folder of documents on which the hapless Seinfeld character George Costanza pretends to work.
Macquarie refused to comment on the Penske File and said it had brought in ‘‘supervised compliance knowledge assessment for advisers and the implementation of external compliance training’’.
ASIC slapped Macquarie with an enforceable undertaking in January last year – more than two years after it first became aware of the extent of the misconduct, the misclassification of many clients which resulted in inappropriate advice but big fees for the advisers – and poor record-keeping.
Enforceable undertakings, a negotiated outcome with ASIC in which an offending company promises to clean up its act, are just one of the regulator’s armoury of tools. Others include fines, and suspending, banning or amending financial services licences.
ASIC believes enforceable undertakings provide it with the flexibility to change the culture of organisations and cost less than taking often powerful institutions to court.
However, BusinessDay can reveal that widespread problems persist within MPW. Despite the progress Macquarie claims to have made, the experts continue to find files that do not meet minimum standards.
Many have missing statements of advice, do not show any research was undertaken as to the client’s needs or that any investment alternatives were considered.
They have found problems with the treatment of self-managed super funds, recent file notes that refer to months-old transactions and forms that were not properly filled out.
While it is believed ASIC investigators have seen improvement, with five months left to go under the undertaking there is still a long way to go.
Macquarie still seems to lack information on its own customers. It discreetly sent out letters on July 4 of this year to customers as well as people that had simply transacted business, such as share trading, with Macquarie where the advice was provided by a non-Macquarie financial planner.
The move prompted an industry expert to question why Macquarie would send this letter to people that did not have any potential claim against them. ‘‘Is it their lack of understanding of what they should do or is this a process to say they have contacted thousands of persons to say no one had come forward?’’ he said. ‘‘What is happening now is that these persons are ringing their advisers, who are telling them that there is no problem.’’
The letter, obtained by BusinessDay, says Macquarie Equities is ‘‘about to commence a review of your account’’. It says the review will assess whether the customer was a retail or wholesale client. It says ‘‘while we have certain information on your file, we would like to provide you with an opportunity to share with us any information you believe is relevant and would like us to consider’’.
For Macquarie, it may have seemed that the undertaking put an end to controversy over its financial advisory arm – the group says it ‘‘has been working closely with ASIC to make the necessary improvements to the business’’.
‘‘MPW takes its obligations to clients and regulators seriously,’’ Macquarie says. ‘‘MPW has carried out extensive work on the EU over the past 18 months.’’
Macquarie chief executive Nicholas Moore recently told the market it was contacting all 87,000 clients to give them the opportunity to raise concerns, it had culled its advisers to 300, who had spent 11,500 hours in training and education ,and it had spent $49 million improving its processes and systems upgrades.
But not everyone is convinced. A recent Senate inquiry said it was ‘‘concerned with the efficacy of the enforceable undertaking entered into as a result of serious compliance deficiencies within Macquarie Private Wealth’’. It recommended ASIC put Macquarie Private Wealth under ‘‘intensive surveillance’’.
Nationals Senator John Williams, who was a driving force behind the Senate inquiry, told BusinessDay he still had serious concerns over Macquarie, the progress of the enforceable undertaking and ASIC’s oversight. ‘‘When we tabled the report I said Macquarie should have a good look in the mirror at themselves,’’ he said. ‘‘I’m concerned about the standards and quality of their financial advisers, and on September 5 at the parliamentary joint committee I will be asking ASIC for an update on the progress of the enforceable undertaking and whether things are improving.’’
It is believed that despite the shortcomings it has identified, ASIC is broadly satisfied with the progress of the enforceable undertaking.
While ASIC concentrates on the legalese of the enforceable undertaking, Macquarie’s victims tell a grimmer, simpler story of a culture that encouraged planners, motivated by the prospect of lucrative commissions, to flip clients into high-risk investments.
A spate of lawsuits across the country – and the experience of the Wallers – paints a picture of an organisation that fights tooth and nail to avoid admitting wrongdoing and plays legal hardball to try to minimise its liability.
In two lawsuits, clients allege margin loans, taken out with Macquarie Bank, turned sour in 2007 and 2008 as the global financial crisis continued to wreak havoc on global markets.
Queensland couple Brian and Simone Dougherty, a tradesman and an IT worker, allege a series of margin calls in late 2008 and early 2009 devastated their $1.5 million share portfolio, forcing the sale of $214,000 worth of securities, mental anguish and personal distress.
In ongoing Queensland Supreme Court proceedings, they allege they paid $71,000 in fees for advice that was misleading, did not take into account their personal circumstances and did not include any risk management strategies to reduce the impact of the falling market.
Another former client, Phillip Buda, claimed he lost $555,000 – more than half his $916,000 nest egg – due to Macquarie selling him a million dollar margin loan.
Buda’s case, which was settled last year, also illustrates how hard Macquarie fights client claims.
In a submission to the court, his lawyers accused Macquarie of ‘‘attempting to frustrate the progress of the proceedings’’, ‘‘pleading the law in a very involved fashion’’ and ‘‘microscopically examining’’ Buda’s claim.
An earlier Federal Court case provides an even starker example of Macquarie’s aggressive approach to litigation, and appear to show that the roots of its cultural problems stretch back to before the global financial crisis.
Nine clients who signed up with Macquarie in 2006 had complained to the group over millions of dollars of losses allegedly caused by two Adelaide advisers, Paul Kennedy and Brad Dohrmann, both of whom have since left the industry.
They said the advisers exploited a flaw in MPW’s systems to pledge their assets against two different products at the same time, leaving them completely exposed when the market plunged during the global financial crisis.
As the dispute reached its climax in October 2008, Macquarie raced off to the courthouse, filing state court writs for repayment of margin loans against their clients before they could lodge their own claim in the Federal Court.
And when Macquarie came to defend the Federal Court action, it claimed that the ‘‘double counting’’, which it knew was against company policy, gave the clients ‘‘an advantage resulting in an increased risk to MEL [Macquarie Equities Limited] and the bank’’.
While it eventually settled, Macquarie continued to defend the case even after Kennedy and Dohrmann were sacked.
Slater & Gordon’s Walter says little has changed and Macquarie’s approach to litigation remains ‘‘pretty tough’’.
‘‘Their approach is, well, just go and sue us. They like to play hardball, that’s our experience.
‘‘All the things you see in those cases are the things they’d be doing now – complexity and legal barriers.’’
As Walter and his competitor at Maurice Blackburn, John Berrill, circle, within the walls of Macquarie’s high-tech Sydney waterside headquarters, a team of independent experts from KPMG continues to comb through the files.
Maurice Blackburn’s Berrill says Macquarie’s approach is not good enough and the plight of victims ‘‘cries out for a slimlined compensation arrangement’’.
‘‘It needs something other than each individual has to run off to court or the Financial Ombudsman Service and wait a couple of years for an outcome.’’
Waller chose not taken legal action because he believes it is too expensive. He has spent the past 14 months bashing his head against the wall trying to get his file with Macquarie reviewed with a view to getting financial compensation for the $1.4 million losses he says arose from “negligence’’ and ‘‘breach of contract’’.
He first wrote to Macquarie on May 31, 2013, saying he understood that this mandate period covered the global financial crisis. ‘‘However, the investment recommendations from MPW precluded us from participating in the recovery in equity markets in 2009 – our losses became permanent, which has had a material ongoing adverse impact on our financial position – just at the time I was entering retirement. Our disillusionment extends not only to our significant investment loss but also to issues of client service (and lack thereof).’’
He was referring to some ‘‘tense’’ discussions with his adviser in 2009 which resulted in a ‘‘hostile reception’’ and no invite to an annual investment review in 2010. The fees continued to be charged monthly.
The initial response from his 2013 letter to Macquarie was that his ‘‘complaint appears to be very complex’’ and might take some time to work out.
Waller received an email last week – 14 months after his initial approach – from a senior manager of compliance in Macquarie’s risk management group, saying: ‘‘Please accept my apologies for the delay in response. I anticipate being in a position to send our response to you some time next week, most probably towards the end of the week.’’
While others who had little to do with Macquarie have received the July 4 letter, Waller, who has been in constant contact with the company, has not.
On Friday, he was still waiting for his long-promised response from MPW.
He says the experience has been life-changing. ‘‘Why would you put any faith or confidence in the financial planning industry?” he says. ‘‘I took everything back and decided to manage what we had left.
‘‘I’m now responsible for my own profit and losses and so far I’ve done quite well: outperforming the market each year.’’
