Shadow brokering: Grey area the regulator struggles to control

FANCY a private dinner for 20 with Virgin founder Richard Branson? What about learning to make a fortune on stocks in 30 minutes? Or how to hide your assets?

You can also learn "why most financial commentators are totally wrong with their predictions of the real estate market and how to strike gold when others think it's impossible!''

If the answer is yes, and you don't mind forking out $4997, then the ''financial education summit'' in Melbourne in October is for you.

If you don't have time to go to the seminar, then you can go to 21st Century's websites and take out a bronze, silver or gold membership for between $4000 and $8000 and learn how to beat the odds - or not.

It's a thriving business. According to Konrad Bobilak - a former associate of controversial property spruiker Henry Kaye - who now runs 21st Century Property Direct: "We have a database of 250,000 members who are part of the 21st Century Academy."

All this wouldn't be possible without Box Hill husband-and-wife team Rory and Margaret Deutsch, whose company Romad Financial Services rents its Australian Financial Services Licence (AFSL) to 82 individuals and entities, including Jamie McIntyre's 21st Century Group.

Romad, which has a staff of seven, and expects to have 300 representatives in the next three years, rents its licence to some colourful characters, some former associates of Kaye and several others who have been involved with failed companies, including Russell Johnson from Sonray, which collapsed last year owing investors $48 million.

Lax corporate and financial regulations allow holders of nearly 5000 AFSLs to ''sublet'' them to an unknown number of ''authorised representatives'' who are entitled to run financial planning and share trading, or ''shadow broking'' businesses.

The so-called shadow brokers resemble stockbrokers but have far less regulatory and capital oversight by authorities than traditional brokers.

Denise Brailey, a consumer advocate who blew the whistle on Kaye, said ASIC assumes licensees will have robust compliance and risk management arrangements.

"ASIC has been systematically handing out AFS licences like Smarties for over a decade. ASIC are permitting AFS licensees to hire those persons known to have been associated with monstrous financial losses," she said.

In a tipoff sent to ASIC last October, one 21st Century insider claimed: ''I work for 21st Century Academy, therefore I have to send this information anonymously. As you well know, it is owned by Jamie Macintyre [sic], however what you probably do not know is that Henry Kaye has been running it for the last year out [of] the head office in King Street, Melbourne.

''I am doing this to protect innocent people being ripped off by another Henry Kaye scheme.''

It is unclear whether Kaye has any part in 21st Century, as McIntyre did not return calls or reply to an email. But when the question was put to Bobilak, he answered: "You're talking about the property spruiker from 10 years ago running Property Direct? You're kidding, you're not serious? No, he's not involved with our company, I can assure you.''

Romad rents its licence to Bobilak and David Loughnan, who was an associate of Kaye and is now working for 21st Century, which is run by flamboyant Gold Coast resident Jamie McIntyre. He and 21st Century are also authorised representatives of Romad.

ASIC slapped an injunction on McIntyre in 2005, restraining him from ''arranging, promoting and holding live seminars in Australia'' that gave financial advice on securities and derivatives.

On his 21st Century Education website McIntyre now spruiks finance and property seminars costing up to $30,000, where paid-up ''members'' buy wholesale land and other property or pay for wealth creation, investment and trading advice.

Two other former Kaye associates, Eddie Vitkin and Steven Molnar, also work out of 21st Century's offices.

The BusinessDay investigation shows two 21st Century businesses used for trading shares and securities are registered to an empty office, with ''for lease'' signs, in Lorimer Street, Southbank. The same office is the business address of Bobilak, the principal promoter of wholesale land deals under 21st Century Property Direct.

Bobilak and Sydney-based Molnar run seminars through Property Direct, selling 10-year ''options'' - ranging in price from $16,500 to $22,000 - to ''reserve'' land outside Shepparton. Other 21st Century seminars target city real estate and American property. Investors are scattered across Australia and New Zealand, the result of seminars being held in most capital cities.

The paddocks in Raftery Road, Kialla, being ''optioned'' as individual lots are zoned rural living or urban floodway and are unlikely to be developed for at least another 15 years.

''We have made it clear to anyone who has contacted council about this proposal that we are not involved in, nor do we endorse, the proposal,'' Shepparton's manager of sustainable development, Dean Rochfort, said.

One insider said at least 350 people had paid for ''options'' by the end of last year, which suggests small investors have sunk an estimated $10 million or more into the venture.

Most investors said they purchased at least three ''options'', as well as paying up to $8000 in 21st Century membership.

Sydney investor Ziggy Okuszko, who also bought other property in Melbourne and Perth through 21st Century, bought three ''options'' for about $20,000 each.

''Anything you do in your life carries risk,'' Okuszko said. The ''option'' gave investors the ''right, but not the obligation to buy'' the land at the end of 10 years.

Mildura couple Sonia and Martin Floyd bought three options for $16,500 each for their super fund and business. ''Oh, geez, are we going to go under?'' Floyd said when told about the council's response.

Another investor, who did not want to be identified, spent $22,000 on three options plus $5000 on membership.

''Every time I've talked to them, they're saying within two or three months there will be similar land next door that will get council approval,'' the investor said.

Another McIntyre business, 21st Century Eminis, employs former plumber David Loughnan, an authorised representative of Romad, as a share-trading "coach". "From ex-plumber to full-time professional trader, David was making millions in trading within just a few years,'' the website says.

Under the Day Trading Results section on the website, it shows a video in which a group of 21st Century Eminis Platinum Members claim they made $76,512.50 of combined profit in 25 minutes. But in 2009, Victoria's Supreme Court made a scathing judgment against Loughnan when $700,000 of secretary Olyvia Tsocanos's money went missing after Loughnan advised her to deposit the money in a company account he and two other directors, including Bobilak, controlled. The court heard Tsocanos was told she would make "substantial profits, about 50 per cent interest a year, from investments in bonds in the US and the money would remain in a NAB account with no risk to her".

The same day it was withdrawn and the principal never repaid. Loughnan was ordered to pay the $700,000 back, but appealed the decision and it was settled out of court.

Deutsch told BusinessDay late last month that he has seven full-time staff working for him and that he was the compliance officer and acting responsible officer for Romad and 21st Century Investment Services.

Under the Corporations Act, an AFSL holder is liable for its authorised representatives. If one falls over, it could have a domino effect on the rest.

Deutsch is no stranger to ASIC. In September 2007 four companies, including Business Strategies No 5, of which he was a director, were wound up by ASIC.

Deutsch said his standards of compliance for the 82 authorised representatives under Romad were high, including conducting ''secret-shopper'' surveys twice a year and twice-yearly spot reviews of representatives and websites.

His reps have to comply with minimum liquidity standards and supply regular cash-flow projections for the following three months.

Licensing and subletting licences is a high-risk area. The test for AFS licensing is ''good fame and character''. This means ASIC cannot refuse to issue a licence unless it can form the belief that the applicant will not comply with the obligations set out in the Corporations Act. Mere suspicion or a questionable background is not enough for ASIC to refuse.

There are no special licensing tests for shadow brokers. While some shadow brokers have strong compliance, governance and liquidity, there is nothing in the legislation to stop people entering into shadow broking arrangements.

This means anyone who wants to set up shop either applies to ASIC for an AFSL or applies to be a representative of an AFSL holder. This is how Russell Johnson's RJ Capital was able to become an authorised rep, even after he had his passport seized and told the Supreme Court of Victoria in a hearing that he used between $100,000 and $525,000 of funds belonging to Sonray clients to pay personal expenses.

As Dean Surkitt, head of retail at Bell Potter stockbrokers said: "If all businesses that purchase and sell shares had the same regulatory requirements that ASX market participants have to comply with, everyone would be better off and the regulator would then have a set of data that it could look at and interrogate. It could use that data to sort out the top 10 and bottom 10 and focus their resources in the most appropriate areas,'' he said.