Investors in LM's frozen mortgage funds left high and dry
Financial advisers who put their clients into LM Investment Management's since-frozen funds stand to collect millions in commissions before their clients see any return.
A report from the administrators to the ill-fated mortgage empire shows $10 million in claims for financial advisers. It is a cruel irony for the investors who have lost money in the collapse yet have not been deemed to be creditors.
As revealed in BusinessDay on Tuesday, the founder of LM, Peter Drake, had taken at least $46 million in loans before the group collapsed earlier this year. The loans have not been repaid.
Thanks to the hole left by the Drake loans, escalating management fees before the collapse, and now the feeding frenzy by the administrators and litigation, the prospective returns for investors are diminishing with every week.
Since the collapse in March, administrators FTI Consulting have charged $2.4 million in fees, or $130,000 a week. The administrators are seeking to recover funds from Drake. They are also considering action against LM's other directors - Francene Mulder, Katherine Phillips and Eghard van der Hoven.
"From our investigations to date, there is evidence to indicate the company may have traded whilst insolvent for a period and entered into certain transactions that may be voidable against a liquidator," the report says.
Another four directors - Simon Tickner, Lisa Maree Darcy, John O'Sullivan and Grant Fischer - resigned last year as LM's financial position was deteriorating.
Despite the ravages of the global financial crisis, Peter Drake was able to keep marketing worldwide and raising more money for the LM funds until 2012.
Unfortunately for his investors - as opposed to their financial planners who were on commission of at least 3 per cent of their clients' savings - the fund's fees were too high. And a good deal of the fees were "pre-paid"; paid up front, that is.
LM Administration, the vehicle from which Drake took the greatest personal benefit, and of which he was sole director and shareholder, received $14 million in "pre-paid income" from six LM funds, including the flagship LM First Mortgage Income Fund.
In 2010 and 2011, even as his funds were frozen, the gross income of LMA - also the company that made $30 million in loans to Drake - increased by 118 per cent, from $9.5 million to $20.8 million, "mainly due to a 200.49 per cent increase in management fees".
Through the circuitous corporate structure of LM, fees were paid from the funds into LM Investment Management, the responsible entity. Much of this was then passed through to Drake's LMA via service agreements. LMA, in turn, lent Drake $30 million. He also drew a $16 million loan straight from one of the funds, the Managed Performance Fund, into his Hong Kong company Century Star Investments. CSI, in turn, is a major shareholder in LM.
The loans to Peter Drake may face scrutiny from the Tax Office if they are deemed as tax-free income. Loans were also made from the funds to companies controlled by Drake for property developments. More than half of investors' monies in the MPF - $234 million - was funnelled into the Maddison Estate project on the Gold Coast. Another Drake entity controlled the project.
The administrators' report says MPF's advisers have claims for $2.7 million in commissions and First Mortgage Investment Fund's advisers have claims for $7.4 million even though the fund was frozen long before the LM collapse. Fees were paid to advisers despite investors being locked in without the prospect of redemption.
FTI is locked in a skirmish with the Trilogy Group for the management rights to the flagship LM First Mortgage Income Fund. Trilogy, the largest unit-holder in the fund with 23 per cent, says investors would be better off with just a responsible entity rather than paying large fees to a liquidator as well. FTI is now recommending liquidation.
Trilogy is seeking orders in the Queensland Supreme Court to replace LM Investment Management, and therefore FTI, as responsible entity. Judgment is pending.
Peter Drake has also brought proceedings against Fairfax Media and this reporter for defamation. Fairfax is defending the case.
Once again the only winners in this insolvency saga are the liquidators and the lawyers. Big winners.