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Dancing on the ashes of Westpoint

By Scott Hickie - posted Tuesday, 14 November 2006


It wasn’t until 2003, three years later, that ASIC decided to start asking questions of Westpoint and its grand wizard, Norman Phillip Carey. Mark Steward, deputy executive director, ASIC Enforcement Directorate described the discussions to a Senate Economics Committee hearing in May 2006 as follows:

It would be fair to say there was a lot of toing-and-froing between ASIC and Westpoint and in particular their lawyers, Freehills - they might say “toing-and-froing”; we might say “cat and mousing” - over this issue. We eventually realised by the end of 2003 that we were being stalled, we were being given the run around.

Senator Watson, in extracting a detailed recollection from Mr Steward and Mr Jeff Lucy, chairman of ASIC, described the ASIC engagement with Westpoint as one that adopted a “softly-softly approach”. Mr Steward and Mr Lucy denied this, but the reality is that there was a massive deficit in effective regulatory responsiveness.

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In the three to four years that ASIC stood on the sidelines nervously feeding rosary beads through their sweaty palms, praying for Westpoint to rise again like a phoenix through pragmatic commercial solutions, Carey managed to build a mezzanine finance mecca that quickly crumbled into a labyrinth of smoke and mirrors.

ASIC defended its regulatory behaviour over this period by stating, “the decision to deliberately carve out promissory notes greater than $50,000 was a deliberate decision taken by parliament. That position existed. At that stage, as we have said in earlier forums, the complaints which we received were to do with the jurisdictional issues; they were not to do with business plan issue or business model issues. People were not suffering financial hardship at that time through their investments.”

ASIC’s contention that complaints only related to jurisdictional concern seems strained. A complaint that raised the fact that the promissory notes issued by Westpoint fell outside the scope of the Corporations Act isn’t really a complaint but more an observation. The complaints directly related to lack of disclosure and the calculated manner in which Westpoint executed its fund-raising campaigns without proper disclosure.

In 1981, the Federal Government enacted an exemption for promissory notes with a face value exceeding $50,000 from the full disclosure requirements that other financial products and services adhere to. Westpoint exploited this loophole with the dual intention to exponentially expand its cash box and have direct access to investors without ASIC vetting the business model, liquidity levels and compliance strategies.

The rules of engagement, of Product Disclosure Statements and Prospectuses were methodically circumvented with pinpoint precision. Trendy buzzwords like mezzanine finance, secondary mortgages, high investment yields and promissory notes camouflaged the real risk and the sobering reality that mezzanine finance can be an unforgiving game.

Carey’s network didn’t have to explain the complexities or risks inherent in mezzanine products as his shark’s patrolled suburban shopping malls and planners pedalled pithy marketing brochures from ivory towers.

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They were not required to inform retail investors that the legal status of a promissory note equated to no more than an IOU from a property development cabal geared to the eyeballs by secured financial institutions; that when the bottom fell out they would be last in line. Nor did many financial advisors even bother to investigate or obtain legal advice on the status of the unsecured promissory notes their clients were advised to invest in.

ASIC: the silent shepherd holding the balance between the market and gutter

I can’t help but let my indulgent cynicism build a white abyss. A room. A netherworld of radiant, ethereal walls sprayed with bright red blood. Mum and dad investors, self-funded retirees and various ethnic community’s trust and livelihoods lay slain at the hands of Carey’s machiavellian cavalcade of director plunder and misfeasance.

Forget about proactive, preventative regulatory action. A smoking gun has told me that blood on the walls is only impetus for action. Jeff Lucy confirms this by stating that “people were not suffering financial hardship at that time through their investments” as a justification for non-intervention.

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About the Author

Scott Hickie is a legal editor and advocates on behalf of various investor action groups.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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