The corporate watchdog has ramped up its legal action in the wake of the collapse of the Shield Master Fund and First Guardian Master Fund, with SQM Research, InterPrac Financial Planning and MWL Financial Services slapped with civil proceedings in the Federal Court.
The legal pursuit is the latest in a series of civil cases being brought by the Australian Securities and Investments Commission (ASIC) following the demise of Shield, First Guardian and Australian Fiduciaries which has put at risk $1.2 billion in retirement savings of thousands of Australians.
It is also the first time that ASIC has taken legal action against a research house.
SQM Research has been targeted by ASIC over “favourable” ratings it gave the Shield Master Fund in reports that the regulator says contained misleading representations, arguing that the company’s processes fell short of expected standards.
SQM Research published reports in October 2021, March 2022 and October 2022 that rated the different classes of Shield as “3¾ stars, favourable”.
ASIC alleges that SQM Research failed to obtain the information it needed to properly assess Shield; that it failed to properly consider inconsistencies in information it received when preparing its reports about Shield; and that it misrepresented that it had a reasonable basis for giving Shield a “favourable” rating and had exercised reasonable care and skill in doing so.
The researcher is also alleged to have made misrepresentations that understated the percentage of funds managed by parties related to Shield and the asset allocation of Shield.
ASIC alleges that the SQM Research reports did not accurately depict the standard, quality, value or grade of Shield, and that this reflected deficiencies in the processes SQM followed.
ASIC Deputy Chair Sarah Court says the civil penalty proceedings against SQM Research marks the first time the regulator has taken action against a research house.
“Research houses have a responsibility to ensure they obtain the information needed to prepare their reports, take real care and skill in assessing that information and to present that information accurately,” says Court.
“We believe research houses are important gatekeepers and form part of a critical line of defence against poor quality investments or unsuitable products.
“Given the important role research houses play in rating funds and investments, the community is entitled to expect that their reports will be accurate and based on appropriate information and analysis.”
In its Federal Court filings against InterPrac Financial Planning, a subsidiary of Sequoia Financial Group (ASX: SEQ), ASIC alleges that thousands of Australians were exposed to poor financial advice and significant risks from the Shield and First Guardian through critical oversight and compliance failures by the financial planning company.
InterPrac is alleged to have failed to ensure its former authorised representatives Venture Egg and Rhys Reilly Pty Ltd complied with the “best interests” obligations. They are also alleged to have failed to provide adequate risk management systems.
InterPrac and its representatives advised around 6,843 clients to invest about $677 million of their superannuation into Shield and First Guardian, the collapse of which has left some of these superannuation savings at risk.
The ASIC deputy chair says InterPrac’s alleged oversight and compliance failures exposed thousands of Australians to poor advice and significant financial risk.
“We allege InterPrac failed to ensure certain authorised representatives acted in their clients’ best interests, contributing to hundreds of millions of dollars of superannuation being invested in products that were unsuitable, high risk and costly,” says Court.
“We allege that no competent financial adviser could have recommended Australians invest large amounts of their superannuation in these funds, and that InterPrac – as licensee – should have been alert and responsive to the significant risk this conduct posed to clients, but it failed on many levels.”
In a statement to the ASX, Sequoia says it intends to defend ASIC's allegations "vigorously".
“The InterPrac board and support staff are committed to continue to act in clients’ best interests and take our compliance and governance obligations seriously," says Sequoia CEO Garry Crole.
"We do recognise the impact on clients affected by the external investment product failure confirming InterPrac has cooperated fully with ASIC’s investigation.”
The third Federal Court action against MWL Financial Services, which is now in administration, alleges that the company provided inappropriate financial advice to clients to invest their superannuation into the Shield Master Fund.
ASIC says between May 2022 and February 2024, nine MWL representatives advised at least 556 clients to make initial investments of about $114 million of their superannuation into Shield.
ASIC is also targeting former MWL director Nicholas Maikousis and lead generator Imperial Capital Group Australia in the Federal Court action, with the regulator alleging serious failings in relation to Imperial’s referral of clients to MWL and the financial advice given by MWL advisers.
Imperial, acting as a lead generator, is alleged to have made misleading representations to prospective clients about the standard, quality and benefits of MWL’s financial services and was involved in MWL’s alleged contravention of its obligation to provide financial services efficiently, honestly and fairly.
Maikousis is also alleged to have been involved in MWL’s alleged contraventions of its general licensee obligations and its obligation to take reasonable steps to ensure its authorised representatives complied with their best interests and related duties.
MWL is alleged to have received advice fees charged to clients for preparing statements of advice recommending investment in Shield, with Imperial said to have received about $12.8 million in payments from entities associated with Shield for client referrals.
“ASIC will seek to allege that MWL and Imperial were involved in a project which resulted in the superannuation of hundreds of Australians being invested into a high-risk scheme,” says Court.
The ASIC deputy chair says the project allegedly involved Imperial referring prospective clients to MWL for what Imperial represented would be tailored financial advice, but which instead put clients into a pre-selected investment, namely Shield.
“Instead of the tailored financial advice that was promised, we will seek to allege MWL provided pre-determined advice that was not in clients’ best interests,” she says.
“Despite Shield having no proven track record, we will seek to allege clients were advised to invest most or almost all of their retirement savings into the fund, irrespective of their individual circumstances.”
ASIC launched its first civil action in August relating to the collapse of Shield, First Guardian and Australian Fiduciaries, targeting Equity Trustees Superannuation over alleged oversight failures in relation to Shield.
The legal manoeuvres come on the heels of an investigation by Slater and Gordon Lawyers for a potential class action on behalf of thousands of investors who have lost their superannuation savings to alleged Ponzi schemes involving the three funds.
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