What they are about to receive - from the judge



verb (used without object)

1: to bicker or quibble over trifles or unimportant matters.

2: to carry on a petty, shifty, or unethical law business.

Finally, a judge has thrown the book at some insolvency types for pettifogging.

Justice Jean Dalton may not have deployed the P-word itself but she surely captured the quintessence of pettifogging in her decision on Thursday in the Supreme Court of Queensland.

"Solicitors acting for [the administrators] filed an affidavit of over 800 pages ... that was of such marginal relevance that it was not referred to in either written or oral submissions by any party." We adored that.

The Dalton decision will delight anyone who has looked on forlornly as the thing they once called an investment dissolved before their very eyes in a welter of administrators' and lawyers' fees.

"Extravagant waste of members' funds", "sniping and argumentative" affidavits, sending "misleading" statements to creditors, said the judge, and on it went. "My view is that they have preferred their own commercial interests to the interests of the fund."

Is this not the industry standard? Is not shame the only regulator?

Justice Dalton was presiding over the battle for the flagship fund in Peter Drake's disintegrating empire, LM Investment Management. At stake are management rights, and fees - though not as much as there might have been had Mr Drake, LM's founder, not awarded himself $46 million in loans before the demise.

In the end, the court stripped the administrators, FTI Consulting, of control and ordered the First Mortgage Income Fund be wound up.

"In my view, the conduct of [FTI] in this litigation was combative and partisan in a way which I see as reflective of the administrators acting in their own interests to keep control of the winding up of the FMIF, rather than acting in the interests of the members."

Might there be a trend? In April, Justice Antony Siopis of the Federal Court in Western Australia ordered an inquiry into the receivership of Burrup Fertilisers. ANZ's receivers, PPB, and their lawyers, Freehills, cleaned out $56 million in just 14 months.

PPB, the "new black" in insolvency, is also spearheading the Lehman Brothers Australia assault, a five-year epic in which councils, charities and churches are yet to see one red cent while PPB has divvied up the $80 million-odd in spoils already with the likes of Ashurst and Clayton Utz.

A couple of months ago, the Fairfax news desk got a call from a solicitor at Russells saying we had better send a reporter down to the courts because property fund manager Trilogy was in serious strife.

The reporter called yours truly. It didn't sound right. As it turns out, it was pettifogging. Somebody in the FTI camp had brought an action against FTI's arch rival Trilogy - in another court, at LM unit-holders' expense, claiming Trilogy was in dire straits. Trilogy owns 20 per cent of the LM fund and was vying with FTI for control.

So FTI calls its expert witness, a forensic accountant called Mr Hellen, to give evidence before Justice Dalton that Trilogy was not of a sound financial state. Sadly for FTI, the judge found that Mr Hellen's heart was not in it. His report, she said, was "highly qualified and inconclusive". Even Mr Hellen was sceptical about his own findings as he had had "very limited time" to conduct the assessment.

In any event, she said, the judge in the other case awarded a decision in Trilogy's favour while the case before her was still proceeding and, although an appeal was lodged, "It seems an extravagant waste of members' funds," she said

As to the affidavit of FTI administrator Ginette Muller and her claims about Trilogy: "It is hard to see this statement as anything other than unprofessionally robust and partisan ..." Ouch.

The judge lambasted the administrators for their "enormous amount of affidavit material exchanged and the late hours and weekend work by solicitors, reveals a worrying scenario as to litigation costs in circumstances where [FTI] ought firmly to be keeping in mind the interests of members of an illiquid, and perhaps insolvent, fund." Ouch.

Russells was subject to a thorough and deserving working over by the judge, but FTI's other solicitors, Norton Rose, also came in for a touch-up. Among other things, she found they called a creditors' meeting as a "tactic ... which had the aim of seeing off [their] rival for control of the [fund]". That would constitute, in this author's humble submission ... pettifogging again.

Tactics, tactics. All is tactics in liquidator land, especially as the more time and money one wastes, the more one is paid.

Justice Dalton said she could not trust FTI to do the right thing by members, and ordered the wind-up.

That leaves investors with a discredited administrator (FTI) in charge of an insolvent responsible entity (LMIM), charging up to 5.5 per cent management fees on top of a receiver (BDO).

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