'Raised concern' on hedge funds

A TEAM of regulators raised concerns about fraudulent hedge funds more than a year before the whistle was blown on the biggest superannuation theft in Australia's history.

By InvestSMART · 5 Jul 2011

By InvestSMART ·
5 Jul 2011

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A TEAM of regulators raised concerns about fraudulent hedge funds more than a year before the whistle was blown on the biggest superannuation theft in Australia's history.

Yesterday it was revealed that the Australian Prudential Regulation Authority raised concerns about the fund manager Trio Capital's valuation of its two hedge funds in August 2008.

As a result of its "prudential review" of the Albury-based fund manager, the superannuation regulator unsuccessfully sought further information about the valuation of the funds.

In October 2008, APRA was told there were no "available valuations" of two offshore hedge funds registered in the obscure Caribbean tax havens, St Lucia and the British Virgin Islands.

APRA took no action against Trio Capital until after the scam was exposed in a letter by Bronte Capital blogger John Hempton in September 2009.

In April this year, the federal government awarded superannuation investors $55 million in compensation for their part in a theft totalling $125 million. A further $60 million in investors' money is missing, presumed stolen.

The revelation of APRA's 2008 review of Trio Capital was contained in enforceable undertakings made by former directors of Trio with both APRA and the Australian Securities and Investments Commission.

The former chief executive of Trio Capital, Rex Phillpott, has been barred from a role in financial services for 15 years.

A former non-executive director of Trio, Natasha Beck, has been barred from a role in superannuation for four years and financial services for two years.

The actions against the directors of Trio Capital follow the charging of Trio's former investment manager, Shawn Richard, on two counts of dishonest conduct in relation to misappropriating $6.4 million. The undertakings signed by the directors reveal ASIC's concerns that each director breached several sections of the Corporations Act.

The documents show Trio's board held concerns about its hedge fund investments as early as 2006, including failures to honour requests for the return of investors' money and difficulties in obtaining accurate valuations.

Mr Phillpott was revealed as being intimately involved in the investments into offshore hedge funds, without being aware of the valuation methods used to value the funds. Mr Phillpott was also instrumental in the 2009 transfer of $50 million in one of Trio's hedge funds, the Exploration Fund, into its successor hedge fund, Astarra Strategic. He did this "notwithstanding that he was aware of liquidity problems with the Exploration Fund and concerns about the lack of information being provided by the Exploration Fund".

BusinessDay has previously revealed that the Exploration Fund was run by a Philippines stockbroker with a long history of stock fraud, Frank Richard Bell.

As the Trio saga unfolded, it became clear regulators had regular brushes with the fund. For example, in 2005 APRA forced Richard off the board of Trio Capital in 2005 because of conflict-of-interest concerns arising from his roles as both owner and investment manager for the fund. In 2006, APRA had direct involvement with another Trio fund, ARP Growth, forcing it outside the superannuation entities it regulates.

In 2008 ASIC interviewed Richard under its compulsory examination powers about a $500,000 secret payment from Trio and Trio-related companies to a financial planner.

APRA would make no comment yesterday.

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Frequently Asked Questions about this Article…

What was the Trio Capital scandal and how did hedge fund fraud affect superannuation investors?

The Trio Capital scandal involved fraudulent and poorly valued offshore hedge funds managed via Trio Capital and has been described as the biggest superannuation theft in Australia’s history. About $125 million was implicated in the scam, the federal government later awarded $55 million in compensation to affected superannuation investors, and a further $60 million of investors’ money is missing and presumed stolen.

When did regulators first raise concerns about Trio Capital hedge fund valuations?

APRA’s prudential review raised concerns about Trio Capital’s valuation of two hedge funds in August 2008. By October 2008 APRA was told there were no "available valuations" for two offshore funds registered in St Lucia and the British Virgin Islands. Despite these concerns, APRA did not take action against Trio until after a September 2009 letter from Bronte Capital blogger John Hempton exposed the scam.

What actions did APRA and ASIC take in relation to Trio Capital and its directors?

Regulators had multiple interactions with Trio: APRA forced an investment manager, Frank Richard, off Trio’s board in 2005 for conflict-of-interest concerns and pushed the ARP Growth fund outside superannuation regulation in 2006. ASIC used compulsory examination powers in 2008 to interview Richard about a $500,000 secret payment. Later, former Trio directors signed enforceable undertakings with APRA and ASIC; former CEO Rex Phillpott was barred from financial services roles for 15 years, and former non-executive director Natasha Beck was banned from superannuation for four years and financial services for two years. Trio’s former investment manager Shawn Richard was charged with two counts of dishonest conduct in relation to misappropriating $6.4 million.

How much money was confirmed missing or misappropriated in the Trio Capital case?

The article states a total theft of $125 million related to the Trio saga. The federal government awarded $55 million in compensation to superannuation investors, and about $60 million remains missing and is presumed stolen. Separately, charges relate to the misappropriation of $6.4 million by a former investment manager.

What red flags from the Trio Capital case should everyday investors watch for in hedge fund investments?

Key red flags highlighted by the Trio case include: a lack of available or verifiable valuations for fund holdings, funds registered in opaque offshore jurisdictions (for example, St Lucia and the British Virgin Islands), repeated failures to honour investor redemption requests, persistent liquidity problems, limited or unreliable information from fund managers, and links to individuals with prior fraud histories. These are practical warning signs for ordinary investors considering hedge funds.

What role did offshore jurisdictions and valuation issues play in the fraud allegations?

The problematic hedge funds were registered in obscure Caribbean tax havens — St Lucia and the British Virgin Islands — and APRA was told there were no "available valuations" for those funds in October 2008. Difficulty obtaining accurate valuations and reliance on opaque offshore structures were central issues in the allegations and regulator concerns.

Who were the main people named in the article and what penalties or charges did they face?

People named include former Trio chief executive Rex Phillpott, who has been barred from roles in financial services for 15 years; former non-executive director Natasha Beck, barred from superannuation for four years and from financial services for two years; former investment manager Shawn Richard, charged with two counts of dishonest conduct over $6.4 million; and Frank Richard Bell, a Philippines stockbroker who ran the Exploration Fund and has a long history of stock fraud according to the article. The directors also signed enforceable undertakings with APRA and ASIC that revealed concerns about breaches of the Corporations Act.

What lessons about regulator effectiveness and investor vigilance does the Trio Capital saga offer?

The Trio case shows that regulators (APRA and ASIC) had repeated brushes with the fund, raising concerns as early as 2005–2008, but broader action on Trio did not occur until the scam was publicly exposed in 2009. For everyday investors, the takeaway is to practise due diligence: ask for independent valuations, be cautious with opaque offshore structures, watch for redemption or liquidity issues, diversify holdings, and stay informed — while also recognising that regulator involvement does not always prevent fraud.