Considering the extensive steps taken by regulators internationally to reform and impose further controls on all providers of financial services, it would be reasonable to experience a resultant decrease in the amount of nefarious activity toward retail clients by those with less than appropriate intentions.
In New Zealand, the Financial Markets Authority (FMA) has risen in the course of just a year, from just a register of companies with very little administrative, compliance or regulatory enforcement abilities, rather similar to the British Virgin Islands FSC, to a fully-fledged financial markets’ regulatory authority with stringent procedures which must be adhered to, and the powers to prosecute individuals and firms that bilk their clients.
Largest Ponzi Scheme in New Zealand’s History
On Thursday, August 29, David Robert Gilmour Ross, a financial services professional from Wellington, New Zealand, fell foul of regulatory enforcement, landing him with a criminal prosecution for operating the largest Ponzi scheme to have ever been conducted in the history of the nation.
The FMA, in conjunction with the Serious Fraud Office (SFO), conducted an investigation into the business conduct of Mr. Ross and his company Ross Asset Management (RAM) and related entities, which resulted in the SFO bringing charges against Mr. Ross on June 13 this year.
The charges comprised of four counts of false accounting and one count of theft by person in special relationship.
Bilking The Unsuspecting
On June 28, FMA charged Mr Ross with one count of providing a financial service when he was not registered for that service, one count of knowingly making a false or misleading declaration or representation to FMA for the purposes of obtaining authorisation to become an Authorised Financial Adviser, and one count of supplying information or producing documents to FMA which he knew to be false or misleading.
The investigation into RAM and its related entities commenced in October last year, when FMA received complaints from investors who had been unable to withdraw funds.
At that time, FMA took immediate action to preserve investors’ funds by obtaining asset preservation orders and appointing receivers and managers to RAM and its related entities. A joint investigation with SFO subsequently commenced.
The SFO charges alleged that Mr. Ross conducted a Ponzi scheme which he disguised by falsely reporting clients’ investments. Large portions of client portfolios shown as invested through a broker ‘Bevis Marks’ were fictitious and never existed, resulting in an overstatement of investment positions by more than $380 million.
Mr. Ross carried out the scheme by luring new investors to his Ross Asset Management fund with promises of returns of up to 30 per cent.
Legal Risk Factor Beneath Ripple’s Lawsuit from SECGo to article >>
So significant and damaging was Mr. Ross’ conduct, that more than 1,200 RAM client accounts have been affected by Mr Ross’ scheme, out of which it is anticipated that 700 will never recover their investment.
This, added to the amount of money involved, resulted in the prosecutors issuing a jail sentence for Mr. Ross, who has been remanded in custody until October 24, when a sentencing date will be set.
SFO Acting Chief Executive, Simon McArley made a public statement subsequent to the prosecution: “While a guilty plea does not address the significant losses incurred by a large number of victims, it will bring some relief to those victims. SFO and FMA have worked well together, applying their respective specialist skills in order to progress the investigation quickly and enable this timely outcome.”
FMA Head of Enforcement, Belinda Moffat further added: “The financial adviser regime relies on advisers providing truthful information when they apply for any license and Mr. Ross’ conduct has seriously undermined the integrity of that regime. We are committed to restoring investor confidence and will continue to respond immediately to investor complaints against market participants.”
Most certainly, the FMA is making an effort to highlight the potential existence of such schemes, as demonstrated by a warning posted on its website last week about Phoenix Forex making what the regulator considers to be, unrealistic claims about high returns as a means of selling the Oak FX product, considering it to be along the lines of a High Yield Investment Program and therefore, extreme caution should be exercised.
A well-worn adage is that prevention is better than cure, however, in the case of Mr. Ross, the crimes were perpetrated over a long period of time, whereas, the FMA has been in existence in New Zealand only since May 1, 2011, and in such a short space of time has firmly concentrated on bringing the country’s regulatory procedures in line with other established jurisdictions, under the leadership of Sean Hughes, who is due to stand down from his post as CEO at the end of the year.
Upon Mr. Hughes’ decision to resign, he reflected on his achievements as CEO, and that the launch and build of FMA had been an intense and satisfying period of work. FMA Chairman Simon Allen stated at the time that the FMA is set to expand its operations next year, due to further regulatory rulings coming into effect in New Zealand: “Looking forward, FMA’s regulatory scope is set to further expand from next year with the introduction of the Financial Markets Conduct Act. The timing is well aligned for the next Chief Executive to advance this work” he concluded.
Whilst this regulatory structure paves the way for consumer peace of mind in future, those who found themselves on the receiving end of Mr. Ross’ Ponzi scheme are testimony to the need for high quality consumer protection policies.
Mr. Ross preyed on senior citizens and those less familiar with technology or financial markets.
Jean Thompson, a lady of 70 years of age, from Christchurch, counts herself among the lucky ones, according to a report by The Press, a New Zealand-based news source, despite not seeing a cent of her supposed $1.2 million investment portfolio.
She had invested a total of $270,000 in the scheme since December 1995. She made a small return on investment through quarterly withdrawals, but it’s not one she’s prepared to disclose. She was initially angry that she had been ripped off, but now, according to the aforementioned report, holds no ill feeling toward Mr. Ross. She does, however, feel sorry for the people who lost everything.
“Just by luck, by having been in so long, I happened to be able to withdraw more than I put in. “If it had shut down a year earlier I may not have got all my deposit back.”
Ms. Thompson doesn’t believe Ross was running a Ponzi scheme from the beginning. She believes he cracked during the financial crisis in 2008 and resorted to unscrupulous conduct.