Associate Professor Evan Jones continues his exposé on the Commonwealth Bank and its shady subsidiaries and partners, including an analysis of the Storm Financial debacle.
The dark side of the Commonwealth Bank – Part Two
[Read Part One here.]
Garden Variety Corruption re Individual Borrowers
Meanwhile, the garden variety corrupt defaults continued, facilitated by a complicit judiciary if litigation ensues. South Australian farmer Steve Heinrich was a victim of fraud by his local branch manager in the mid-1980s. As with the NAB, head office steps in to destroy the customer victim rather than to clean out its stables. After all, the manager was pursuing business aggressively, merely following the rules and the culture dictated from head office. After interminable litigation, the bank sought ‘vexatious litigant’ status against Heinrich and the judiciary complied.
Then there were Anastasia and Brian Timms, lent on a dud furniture business in 1991 which the bank was looking to offload, given that the existing owners were facing inevitable foreclosure by the bank and with no residual assets for the bank to commandeer. Add the case of Bernie Madigan whose attempt to close out a paid-up mortgage involved demands for further unwarranted and substantial payments, with Madigan’s costs escalating dramatically with punitive charges and expensive battles through the court system. Incidentally, the Timms and the Madigan cases were the last to be reported on in detail by the Fairfax press, via veteran banking reporter Anne Lampe (Timms, Sydney Morning Herald 25 February 2004; Madigan, SMH, 10 November 2004). Henceforth bank malpractice has been deemed a subject not fit for consumption by a public known to possess a delicate constitution.
There is a mid-1990s Queensland case of a Dr Robert Cooke, proprietor of three medical emergency centres whose modernisation was being funded by the CBA under agreement, with the bank subsequently reneging on that agreement and foreclosing on the centres. An independent valuer put the value of Cooke’s three medical centres in 1996 at over $10 million. The Bank sold the three centres for a total sum of $705,000. And the bulk of that reduced figure was never credited to Cooke’s account.
Add Ian and Ellen Clapham, from the mid-2000s onwards. The Claphams pursued the rural dream but, thanks to the CBA, woke to a nightmare. Their macadamia farms were hit with a market downturn, par for the course on the land. They had the assets to weather the downturn. They needed forbearance and short-term cooperation from the bank, but instead faced predation. The bank smells blood, goes in for the kill and initiates a sting operation. The simple vehicle for the operation is draconian penalty interest rates, which CBA continued to charge despite the fact that after only 3 months the Claphams made good on interest and penalties in arrears and repaid approximately $1.5 million of principal. Such penalty rates should be illegal, but nobody in officialdom gives a damn. So the CBA cleaned the Claphams out.
All so unnecessary; and all quintessentially corrupt. Garden variety corruption, but corruption nevertheless. And because it is under the radar, the practice continues unrequited.
And so on, and so on. Bruce Ford’s dogged attempts to get to the bottom of the CBA’s convoluted default accounting system led to a small-scale Parliamentary Inquiry and October 2000 Report on ‘Shadow Ledgers’ and the Provision of Bank Statements to Customers. The CBA’s Chief Financial Officer Michael Ullmer dissembled before the Committee, claiming that the reason that the bank did not provide the customers with statements was because there was only a handful of them and, besides, they were effectively lost causes. Ullmer also claimed that
“… the Commonwealth Bank may cease to issue further statements as in the past there has been little purpose in providing information that the customer may perceive as incorrect and may further inflame the dispute that may well be in place between the customer and the bank.”
Ullmer dissembled again on a follow-up ABC program on 27 July 2001. (Ullmer’s courage in the face of enemy fire led him to be subsequently hired by the NAB, an appropriate marriage.) The Committee Report gave the CBA an imperceptible rap over the knuckles and the bank promised to start sending out statements to defaulted customers.
Rather, the bank carried on with business as usual. The aforementioned Timms family provided confirmation that nothing had changed with respect to the bank’s secrecy. Ditto the case of Lana and Alexander McLean whose dispute reached the courts (CBA v Aspenview, 2001) just after the Shadow Ledgers inquiry. Under pressure from the same Parliamentary Committee’s revisiting in 2007 of the issue of non-provision of bank statements, and the McLean case being raised by their local MP, Treasurer Peter Costello, CEO Ralph Norris noted that “Ms McLean had complained to ASIC, APRA and the Victorian Attorney-General, but her issue had not been taken up.” (Richard Gluyas, ‘Lawful and appropriate, says CBA’, The Australian, 30 June 2007). Well, that’s all right then. Regulatory inaction legitimises the bank’s disinclination to abide by demands from a Parliamentary Committee. ASIC has never investigated complaints brought before it in this domain, and Norris clearly discerned the implications of ASIC’s invisibility for his bank’s freedom of action. This $16 million man was worth every cent. Business as usual.
The Arm’s Length Rip-off Scenario, Perfected Through Repetition
The Gold Coast two-tier marketing scam
Another scam happened in the early 2000s, of significant import. The phenomenon, colloquially known as a ‘two-tier property scam’, involved spivs marketing Gold Coast properties at vastly inflated prices to ill-informed out-of-town would-be investors. Banks would provide the loan funds, aware of the real valuations and the scam involved. In this instance, the ANZ was apparently the main bank culprit, but the CBA was also involved. The great advantage of such a scam is that the banks could ply a corrupt trade behind other players in the front line. In 2001, the Australian Competition & Consumer Commission (under chairman Allan Fels) took the CBA and various front line spivs to court, charging them with ‘unconscionable, misleading and deceptive conduct’. From Courier Mail journalist Hedley Thomas (29 November 2001):
‘The case turns on a Cairns couple, Marie and Stephen Gleeson, who were tele-marketed, flown to the Gold Coast, shown a $164,900 investment property and subjected to intense pressure. They were referred to solicitor Greg Pointon and arrangements were made by a finance broker for funds to be made available by the Commonwealth Bank. The ACCC said the bank got a valuation for the property of $100,000, but did not reveal this to the Gleesons. The bank knew the marketeering techniques were misleading and known for achieving selling prices well in excess of local value.’
Kiefel J found against the spivs but ignored the integral role of the banks. (Is it pertinent that Kiefel, like many of her peers, had acted as counsel for banks on her way to the bench?) Tim O’Dwyer, solicitor for many victims, noted (Thomas, CM, 19 December 2003):
‘An awful lot of banks are no doubt now breathing a collective sigh of relief. … If a properly researched and prepared course-of-conduct case were brought against any one of them, it should not be too difficult to prove that the bank lent money over and over again to similar investors in similar circumstances for similar overpriced properties where similar real estate scamsters and their mates were involved.’
Storm Financial Unlimited
Breathing a collective sigh of relief indeed. Fast forward to the splendid if ephemeral phenomenon of Storm Financial Limited. The utterly unsophisticated – ‘Mum and Dad’ investors, the precariously employed, those on disability pensions, etc – were seduced by Storm principals, Emmanuel and Julie Cassimatis, and staff to sign up for a package comprising a home mortgage loan taken on the client’s residence (occasionally investment properties), complemented by a margin loan, the total to be placed into an indexed fund, with the loan quantum to be further enhanced if customer asset re-valuations looked rosy. The court labelled the Storm Model as a ‘standardised leveraged investment programme’ and summarised it thus (ASIC v Storm, FCA, 2 August 2011):
(a) to make leveraged investments in index share funds by investing:
(i) money available to the Investors from their existing resources, including in many cases money borrowed by way of a loan secured on the Investor’s home; and
(ii) money borrowed pursuant to a margin loan secured against units acquired in index share funds;
(b) to retain some investment funds in a cash account known as a ‘cash dam’ for servicing the cost of the loans and, if required, living expenses; and
(c) to receive from Storm ongoing monitoring and management of their investments and loans.
This was intrinsically a ‘dodgy brothers’ scenario, guaranteed to fail.
The Storm Financial model represents variations on a theme of the two-tier property marketing scam. The model would have been impossible without bank funding, especially from the CBA. Without the CBA, other lenders (especially Bank of Queensland, Macquarie Bank) could not have joined in as marginal vultures. I have a colleague who is of the opinion that the CBA was the driving force in the transformation of Storm Financial from a two-bit provincial outfit to the large-scale ‘get rich quick’ enterprise; this is a not unreasonable proposition.
As I have written elsewhere:
‘The bank had been involved with Storm since 1994, but the transformed Storm was evidently viewed within the bank as a profit bonanza. The CBA fuelled Storm’s fantasy – home loans, margin loans through subsidiary Colonial Geared Investments, and ‘wealth management’ of the loans into index funds through Colonial First State. … The CBA’s desktop ‘VAS’ remote valuation system, introduced in March 2008, gave increasingly generous valuations of client property [albeit vigorously denied by the bank], readily leveraged into a higher margin loan and more fees for Storm. The CBA extended Storm clients’ loan to valuation ratio to an unprecedented 80% plus 10% ‘buffer’, and a unique office outlet was established in Townsville to service Storm business. The Colonial arms even paid for a ‘gala ball’ in Italy in 2008 for the smooching of clients. Such was the success that the CBA yearly raised sales targets of the Storm-servicing cell, including for 2008-09.’
The CBA effectively defaulted the whole Storm apparatus in late 2008 (Storm went into administration on 9 January 2009). It sold many Storm clients’ portfolios without them receiving a margin call (the haggle over who was responsible for the margin calls is an irrelevant diversion). It unilaterally dropped the loan to valuation ratio on Storm loans from 80% to 70% in early December, triggering margin calls to clean out any remaining Storm clients. On 10 December the bank unilaterally shut down all Storm-badged products. Yet, as late as 29 October, the bank lent Storm a further $10.165 million to pay out a debt to Macquarie Bank and ‘provide funding for further acquisitions’ (Ripoll Storm Report, p.200). As the dominant lender, the CBA was ultimately in control of the whole Storm apparatus, indifferent to (benefiting from?) the loose cannon that was the Storm’s modus operandi.
The CBA has (atypically) acknowledged some culpability regarding its involvement, which has performed valuable service in quelling any potential political hostility. In June 2009 this:
‘The Bank acknowledges that the position in which some Storm Financial clients find themselves, while not caused directly by the Bank, involves the Bank to some degree. … Said CEO Ralph Norris: "In some cases we have identified shortcomings in how we lent money to our customers involved with Storm Financial … We are not proud of our involvement in some of these issues and we are working toward a fair and equitable outcome for our affected customers.”’
Well might the bank acknowledge culpability. But the CBA has claimed responsibility for some ‘irregularities’, nature unspecified, with promises to make amends, details unspecified. Townsville-based economic consultant Carey Ramm told ABC Radio:
“Certainly I haven't seen all 2,500 clients of Storm [the number was closer to 2,800] that are held by the Commonwealth Bank, but in the vast majority of the loan documents I have seen out of the Commonwealth Bank, I have been amazed at just how bad the loan documentation has been and a vast majority of those will have to be written off.”
Simultaneously, CEO Ralph Norris claimed:
"The bank is not responsible for the financial advice provided independently by Storm Financial to the bank's customers. That was clearly the responsibility of Storm Financial, a licensed financial advisory company."
The CBA’s David Cohen (appearing before the Ripoll Storm Inquiry in September 2009) maintained the mantra:
“… it needs to be recognised that there are other parties significantly involved in the hardship suffered by Storm clients. CBA is not responsible for either those parties or their contribution to the hardship being experienced.”
The CBA’s Matthew Comyn at the same hearings:
“It was not a relationship that ran to the highest levels of CBA. It was an association whereby Storm did refer customers to the CBA … The relationship was no more than a referral of business to us, and we in turn serviced the business.”
Journalist Ben Butler noted comparable disavowals in ASIC’s pursuit of the CBA in the courts (‘CBA links to finance group under scrutiny’, The Age, 6 September 2011):
‘… ASIC alleges CBA, together with Macquarie Bank and Bank of Queensland, were involved in running managed investment schemes, which are required to be registered with the regulator, in partnership with Storm. In a bid to show a managed investment scheme existed, ASIC alleges in its statement of claim the banks ''had a close commercial relationship with Storm'', and then goes on to list three pages of dealings and contact between the banks and Storm.
‘“The meaning of the term 'close' is unclear,'' CBA says in its defence.’
Your Honour, we might have had several thousand children together but, really, there was nothing to it. On the contrary; the meaning of ‘close’ is utterly transparent. All power and no responsibility – the two-tier property marketing scam revisited.
Seasoned journalist Alan Kohler claimed, at the height of the dénouement in February 2009:
“Storm Financial in Townsville was not so much a Ponzi scheme … as a scandalous partnership between spivs and a bank, that should have known better, to place ordinary people in harm’s way.”
A bank, that should have known better, placing ordinary people in harm’s way? Unthinkable? Rather, Storm Financial was a scandalous ‘close’ partnership between low level spivs and high level spivs, with the latter institutionalising the spivvery on an industrial scale.
The CBA’s formal apology is just words. The Ripoll Committee swooned in gratitude:
‘The committee certainly welcomes the CBA's readiness to admit its mistakes in the way it transacted business with Storm and Storm's clients who are also clients of the bank. The committee appreciates the bank making the effort to establish an innovative and fast-tracked resolution scheme for affected clients.’ [par.3.118]
Craven. A few shekels aside, the bank has declined to give substance to the words by stymieing Storm clients’ claims. Witness the bank’s fight against two Sydney doctors, Mark Irving and Anthony Oliver, in the courts during 2011, with the bank arguing that margin lending falls outside the consumer credit code and so anything goes.
The regulators and the political class oblige. The Australian Securities and Investments Commission had earlier audited Storm Financial and given it the OK. ASIC’s submission to the Storm Inquiry was a shocker. It generalised ‘that the current standards in the advice industry are adequate’ (p.37). More, the submission tacitly acknowledges the retail investments sector as corrupted, yet it refers merely to ‘potential systemic issues that have arisen in relation to the role played by lending institutions in recent retail investor losses’ (p.87). Potential? Disgraceful. ASIC has since lifted its game, but many Storm victims remain disgruntled by the impasse.
As for the politicians, the November 2009 Ripoll Storm Report gave the CBA yet another imperceptible slap on the wrist: “The committee is concerned that close relationships and integrated systems, at least at the branch level, and perhaps in combination with bank sales and lending targets discussed at paragraph 3.54, may have caused some bank staff to lose sight of who their true customer was and to fail in their obligations under the Code of Banking Practice to exercise prudence and diligence in their lending decisions [par.3.52].” And that’s it. Margin lending per se is fine, buyer beware, but advisors and lenders should display professionalism in their relationships with clients. It will be business as usual. Fairfax journalist Michael West noted accurately that “This report carries all the weight and ferocity of a wet lettuce.
Colonial First State
If the CBA had really meant business, it would have acted to clean up the culture of its Storm agent, ‘wealth manager’ Colonial First State. No such house-cleaning has taken place. Journalist Colin Kruger elaborates on the essential character of CFS (Sydney Morning Herald, 21 February 2011), a piece that demands to be quoted at length, and the story is not pretty.
‘The Commonwealth Bank-owned Colonial [First State] has collected more than $17 million in fees from the Mortgage Income Fund since it was frozen more than two years ago, locking up $852 million of investor's money. A year ago, rising loan losses led Colonial to wind up the fund as it could no longer pay distributions to investors. … In a statement the company said: … “The steps taken by us in managing the fund are in the best interests of investors as a whole.” ….
‘The financial statement shows the fund's income of $14.8 million for the year was wiped out by a $17.2 million write-down in the value of its loans. Adding in $7.9 million worth of management fees paid to Colonial last year, the fund made a loss of $10.3 million. The losses decrease the chance of investors getting back their initial investment.
‘The accounts show the fund's investments are worth $509.7 million, less than the $518.2 million needed to pay out investors in full. … Colonial has said it may take four years to wind up the fund and return money to investors. Until then, Colonial will collect a management fee of 1.15 per cent of funds under management.’
Veteran journalist Robert Gottliebsen (Business Spectator, 28 October 2008) expressed shock that the “Commonwealth Bank [had] stepped back from the undertakings of one of its wholly owned subsidiaries.” Quite.
“Among the likely consequences of the CBA decision is that all bank owned operations that are not directly part of a bank, including their finance companies, will be questioned.”
Not quite. The discretion available to Head Office with these ‘arm’s length’ relationships appears to be well understood upstairs. Nobody who matters, especially prospective customers looking for integrity in the financial services sector, has yet to join the dots.
The only thing that CFS has done since the Storm fiasco is to up its advertising budget, falsely and ludicrously claiming expertise in funds management.
Commonwealth Financial Planning Limited
Then there is another related subsidiary, Commonwealth Financial Planning Limited. More incompetence; more corruption. Potential clients were going to CFPL with considerable sums, hoping for comfortable returns but seeking safe investments, notably for retirement purposes. Instead, the sums were ploughed into high risk outlets. Said a Maurice Blackburn partner, pursuing a class action:
"Their money was placed in geared share funds and overseas shares without sufficient diversification, and they've lost millions from their retirement nest-eggs.''
How could this be? You’ve guessed it — a ‘rogue adviser’, in this case Chatswood NSW-located Don Nguyen. The rotten apple defence. In this case, the somnolent ASIC came to the party, and drummed Nguyen out of the trade. But Maurice Blackburn was only on the case because ASIC was slow to the job and because it was tolerating a joke ‘compensation arrangement’. Also confidential, of course, which is how banks prefer the resolution of any conflict. Choice, consumer advocate, expressed dissatisfaction with the practice, as nobody knows whether justice has been done and no precedents are established; but confidentiality in these cases remained.
But then, along came another CFPL adviser to be belatedly let go, Simon Langton of Western Australia. Another rogue adviser. But how do these transcontinental rotten apples get rotten? Is there possibly something rotten in the barrel itself?
I am aware of another very unhappy former CPFL client couple, Jenny and Greg Cadwallader. The Cadwalladers invested their savings, previously in cash, with CFPL in 2007, electing for what CFPL’s Product Disclosure Statement claimed was a ‘100% medium risk option’. Belatedly, and accidentally, they discovered that 60% of their funds were placed in a ‘high risk option’. Greg Cadwallader sought satisfaction from ASIC, the Financial Planning Association, the ASX, the Commonwealth Ombudsman and the Financial Ombudsman Service. He notes: “Everyone has treated me like a pariah.” It happens that the Cadwalladers were advised by a Sydney-based Mr H (as the FOS referred to him), CFPL ‘representative’, of whom there has been no media exposure. It also happens that the FOS devoted considerable resources to a 28-page document claiming to prove that the Cadwalladers, who had no idea, were consummately knowledgeable and intimately involved in the direction of their funds into a high risk option. The innately compromised bank-funded FOS refers to the CBA as ‘the member’ — the member, that is, of the FOS. The FOS Cadwallader deliberation is dated July 2010, right in the middle of media exposure of the rogue adviser Don Nguyen. Mr H’s practices paralleled that of Mr N, yet the Cadwalladers are found guilty of self-consciously throwing their hard earned nest egg into high risk options and down the drain.
Mr H no longer ‘represents’ CFPL. But the CBA is still hawking its financial planners, possessing ‘extensive knowledge’, forming ‘trusting relationships’, ‘insights into clients’ personal circumstances’, etc. (Where do I sign?) The relevant website does carry ‘Important information’, namely: “Commonwealth Financial Planners are Representatives or Authorised Representatives [are they employees? are they perhaps independent contractors? and what are their terms of remuneration?] of Commonwealth Financial Planning Limited, a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia [emphasis mine].” Consumer Credit Code or not, it’s still a regime of caveat emptor. And if you can’t understand Latin, don’t go near CFPL for advice on quarantining your nest egg from predation. The fact that CFPL has not been closed down by the authorities highlights the success of the ‘rotten apple’ gambit.
(Professor Evan Jones finishes his Commonwealth Bank exposé tomorrow with part 3: “Shakedown at the BankWest saloon”.)
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