Cameron Rhodes is a straightforward fellow.
The managing director of agribusiness firm Great Southern spoke with a forthright manner when, in March this year, he said the unrest in global markets had little impact on Australia's agribusiness sector.
"It's obviously a very interesting investment climate that we live in at the moment, but I do think that should mean that alternative asset classes have far more relevance and attractiveness in this current climate than ever before," Rhodes said.
"As people look at the volatility of the stock market, depressed property market and exceptionally low interest rates in terms of investment alternatives, I think people may be more prepared to look at other assets and in that space, in agribusiness and forestry, as they do offer some very unique diversification opportunities and far less volatile return profiles than the more mainstream asset classes."
Sol Rabinowicz, the approachable chief executive of Great Southern's main rival, Timbercorp, agreed global markets were of lesser concern for his group than Mother Nature's cruel tricks of floods and droughts, though it was Rabinowicz's belief that management was key to survival.
"There's only so much you can do in planning. As far as drought is concerned we're in our third year of extreme drought and we have simply become very good at managing through dry conditions," he said.
"We're actually quite pleased with the results we've gotten. We've been able to get close to prospectus yields through most of our projects; not for all of them.
"Yes, we're in a major economic crisis that has put the slow down on things, but once that's over we will return to a very high level of interest in the sector."
Less than two months after this March interview took place, both Timbercorp (on 23 April) and Great Southern (on 16 May) had been placed in administration, with Rhodes and Rabinowicz in hiding.
At the time, it was believed market forces were the cause of failure as it was suspected neither firm survived the costs associated with flood and drought.
It would, however, be many months before allegations of mismanagement, and misleading and possible deceptive conduct on behalf of both firms would emerge as the possible reasons behind the listed companies' collapse.
As investors began to realise the extent of their losses and Australian financial service licensees discovered their level of exposure to the fallen groups, the finger of blame was pointed directly at financial advisers and authorised representatives.
Investors and industry players began to cry foul play, with commissions and other tax concession arrangements accepted by advisers and reps placed under scrutiny.
"The GFC (global financial crisis) obviously created fault lines across many different companies, including financial services companies, and some of those fault lines exposed companies that had too high risk, poor management or mismanagement," Association of Financial Advisers (AFA) chief executive Richard Klipin says.
"I think that's some of the lessons out of the GFC, that companies that have big brands, big names and big reputations ultimately had business models when the crunch came were not sustainable.
"There is no doubt that advisers have paid some of the reputational price for some of the failures."
In Klipin's view, there is a need for greater transparency and greater involvement for all those involved in the advice value chain.
"It's easy to join the dots and end up that the advisers were responsible. But what that masks is a greater degree of complexity and we've seen that out of the GFC there weren't single causes," he says.
"There was an easy link to alleged high commissions and advisory groups that had various interests within those groups to say that was part of the failure, rather than looking at the management or the management structure, the deadlines that [the two groups] had."
As the financial services industry began to turn on its own, the Parliamentary Joint Committee (PJC) on Corporations and Financial Services stepped in, announcing on 27 May that an inquiry would be launched into managed investment schemes (MIS).
"The committee wants to get to the bottom of how and why investors were encouraged into these schemes and whether they were built on a sustainable business structure," PJC chair Bernie Ripoll said at the time.
"We need to understand the motivations for people getting involved in these schemes, including the role played by the taxation treatment of MIS, and whether the regulation of MIS is sufficient and appropriate."
Preliminary findings from the three-month inquiry found the collapse of Great Southern and Timbercorp wiped out more than 50 per cent of the market, with early data suggesting almost no investor intends to reinvest in the sector.
More than 60,000 investors either lost their funds or their funds are tied up in the courts or they were yet to lose their funds, Ripoll said.
"The damages the collapse of those two particular organisations have done to that sector is not quite irreversible but it is massive, it's on a large scale," he said.
"I assure you when we get the data back in from that sector there will be almost nobody reinvesting in that sector because of those two particular collapses."
The reaction by many investors continues to fuel Ripoll's prediction, with a number of class action groups forming.
Earlier this month, litigation firm IMF announced it would fund a second class action against companies associated with Great Southern.
The action, to be launched in the Supreme Court of Western Australia, will be taken on behalf of investors in Great Southern Plantations from 1998 to 2003 who exchanged their woodlot interests for shares in Great Southern Limited as part of a failed program called Project Transform.
"More than 100 people have joined and their claim will be for $30 million to $40 million odd," IMF managing director Hugh McLernon says.
Around 1200 investors in Great Southern Plantations who exchanged their woodlot interests in Great Southern Limited during the course of Project Transform are eligible to join the action, McLernon says.
Great Southern announced the restructuring of Project Transform in January this year.
The restructure created a company with three business streams: forestry, agricultural investment services and cattle.
It was facilitated through a series of proposed transactions to acquire the interests of investors in selected Great Southern pulpwood and cattle managed investment projects in exchange for new shares to be issued by the company.
"They attempted to change the constitution of eight schemes, but only the two cattle schemes were actually changed. They needed a 75 per cent vote and that is why all of the cattle scheme interests were transferred to Great Southern," McLernon says.
"The other six, which were the woodlots, didn't get a 75 per cent vote. So they bought the interest of the individual members in exchange for shares."
In June 2009, IMF agreed to fund a class action on behalf of investors in the cattle schemes.
Fellow litigation specialist Slater & Gordon is yet to announce any class action suit against either Great Southern or Timbercorp, though it has commenced an investigation into potential actions on behalf of investors.
Macpherson and Kelly on the other hand has been working on class action cases since the respective companies collapsed, Macpherson and Kelly principal accredited commercial litigation specialist Ron Willemsen says.
"We now have in excess of 1900 Timbercorp investors with files open with us, individual investors. We have in excess of 1600 Great Southern investors with files open with us. The majority of the firm's clients have borrowings that were taken from Timbercorp Finance, from Great Southern Finance or through Great Southern Finance," Willemsen says.
"So those financiers are linked and as far as Bendigo and Adelaide Bank are concerned there was an arrangement in place over several years between the bank and Great Southern, and we've said all along that the bank's big mistake was relying on Great Southern personnel to arrange the loans because anything unlawful that was done by Great Southern impacts on Bendigo Bank."
Macpherson and Kelly will launch a class action on behalf of Timbercorp investors on 28 October, and an action in respect to Great Southern in November.
It is likely the action against Timbercorp will involve the responsible entity and Timbercorp Finance Pty Ltd as well as the company directors Rabinowicz, Robert Hance, Garry Liddell and John Vaughn, Willemsen says.
The action against Great Southern will involve the responsible entity, Great Southern Finance Pty Ltd, the directors Phillip Butlin and Rhodes and a former director John Young, he adds.
It is also likely Bendigo and Adelaide Bank and Javelin Asset Management Pty Ltd, which is a company linked with Young, will be called in to answer questions on their involvement, he says.
In regards to Timbercorp, Macpherson and Kelly intends to claim that the firm knew it was on the verge of collapse and did not inform shareholders; and that the nature of its agribusiness schemes were of a type like a joint venture where high fiduciary obligations were owed to each member of the joint venture - which were the investor on the one hand and the responsible entity and the land holding company on the other.
The firm also intends to claim that under provisions of the Corporations Act a high duty is owed to investors under MIS, requiring the responsible entity to act in the best interest of the investor.
The claims also intend to centre on the situation that if there is a conflict of interest between the interest of the company on the one hand and the interest of the investor on the other, priority must be given to the interest of the investor. "We say that those provisions have been breached, we say there has been misleading or deceptive conduct by silence in the directors and the companies not giving information to the investors that the company was on the verge of collapse," Willemsen says.
"There are inconsistencies in the information that was fed out to shareholders of the Timbercorp public company and information that was fed out to investors in the managed investment schemes."
In terms of action against Great Southern, similar claims of mismanagement will be raised, he says. "We think that pretty much Great Southern was obtaining money under false pretences and they weren't disclosing the information to investors like they ought to have," he says.
As part of its case, Macpherson and Kelly intends to claim an example of this occurred with a failed 1994 timber plantation. The project was going to yield a significant loss for investors when harvest time came, but Macpherson and Kelly alleges Great Southern tipped in $3 million to make it appear the project was profitable.
"Really from that time onwards, we say, on behalf of our clients, that Great Southern engaged in misleading or deception conduct and that's what the class action will be all about," Willemsen says.
"The people we are acting for are those that invested in new projects in 2005, 2006, 2007 and 2008. The reason we've gone back further is we think there was a culture of non-disclosure going back as far as least 2005, which was around the time when the former chairman resigned and a non-executive director.
"Those people resigned because they didn't like the smell of the place. Those people made a very smart decision in removing themselves from the organisation."
As part of Macpherson and Kelly's action, the firm has advised its clients to stop making repayments on their loans with Timbercorp Finance and loans with Bendigo and Adelaide Bank. "We've written a letter on behalf of each and every one of our clients setting out chapter and verse why we think people were justified in ceasing their loan repayments," Willemsen says.
"The whole thing about the case is that our clients were deprived of the opportunity to make an informed decision about their investments and that's what it all comes down to.
"We think they are justified in taking some sort of self-help measure in cancelling their loan repayments and that's what all our clients have done that have borrowings with any of those financiers that were linked with those responsible entities."
The opportunity for financial advisers has also been removed in Willemsen's view.
"Those financial planners did not have access to any better information than what investors had access to," he says.
"The case is about silence. The directors of the responsible entities, the vice is that they remained silent when there was a duty to speak to the investors, they didn't speak to planners either about what was going on.
"The planners didn't know Timbercorp was on the verge of collapse. When Timbercorp issued its October 2008 invoice for all the horticulture projects it was in fact in breach of its bank covenants and the planners didn't know that.
"Timbercorp chose not to tell them. It's easy to point the finger at the planners, but I wouldn't label them as having done the wrong thing across the board."
There is a school of thought that if management of Great Southern and Timbercorp did not provide accurate information to advisers, there is no way they could have known to advise their clients away from the firms, FPA deputy chief executive and head of professionalism Deen Sanders says.
"There is a school of thought that suggests that if the funds management company itself is unable to provide accurate, timely information to its investing community, then there is obviously some sort of liability attached to that," Sanders says.
"It is certainly our view, and has been for some time, that proportionate liability is underdone and advisers do bare the brunt of all the complaints."
However, despite his comments, Sanders is quick to make clear the FPA is not suggesting financial planners are blameless in this mess.
"What we are absolutely suggesting that there is room for proportionate liability and without wanting to draw a parallel to Westpoint - as they are completely unrelated - but nonetheless that example still is informative that we have prosecutions against the chief executive officers, we have prosecutions against the auditors of those firms, we have prosecutions against the salespeople attached to those firms and still the only one who has ever paid a consumer is the financial planner," he says.
"A similar scenario arises in agribusiness that financial planners are seen as the source of the most likely compensation and that's something that we think the system needs to drastically and urgently address."
The difficulty in this situation is that where there is evidence of inappropriate advice then unfortunately the full blame shifts to financial planners.
In an attempt to gauge the exposure of its members to Great Southern, the FPA conducted a survey of its principal members between 21 and 25 April 2009.
More than one-third (36.7 per cent) of the association's principal members responded to the survey.
The survey found less than half of the respondents (44.2 per cent) recommended agribusiness MIS to their clients.
For those who did recommend the investment vehicle to clients, agribusiness generally accounted for no more than 10 per cent of the client's assets (excluding the family home), the survey found.
Great Southern accounted for about one-third (31.1 per cent) of all agribusiness MIS funds under management.
Half of Great Southern investor clients (51.5 per cent) were leveraged, with three-quarters (74.8 per cent) of these clients borrowing through Great Southern Finance, the survey said.
Commissions paid by Great Southern to financial planners were 5-10 per cent, with commission rebates paid to clients rare.
No volume rebate percentage was paid by Great Southern to financial planners that responded to the survey, the survey said.
Conference sponsorship and other forms of payment to financial planning firms by Great Southern were rare.
The FPA has had only one complaint in relation to agribusiness, which surprisingly is unrelated to either Great Southern or Timbercorp, Sanders says.
"Certainly that's when we undertook that research and that's when we established the diversification strategy was the dominant strategy and that there was not a basis for substantial complaints," he says.
"Now what that informed us about realistically was that we didn't come out as a consequence with guidance because evidently people were doing the right thing, at least to the best of their capacity."
The FPA has not received evidence from ASIC that it has received complaints about inappropriate advice, he says.
"They have informed us that they have received many hundreds of complaints about managed investment schemes. None of those at this point has been identified as inappropriate advice complaints," he says.
For the AFA, a number of its corporate members had exposure to Great Southern and Timbercorp.
"That [exposure] has and continues to be managed fairly tightly. But other than a market segment struggling given that two of its major players were removed from the market at a time when lots of other things were under stress, they were instruments that advisers and clients used," Klipin says.
However, according to Klipin, the broader issue is around advice and where product failure is dressed up as inappropriate advice.
"This grey area of product failure being dressed up as inappropriate advice is obviously a concern for us and concern for our members because we're starting to see things turn up through FOS (Financial Ombudsman Service) that clearly were product failure but the FOS judgments are coming out as inappropriate advice," he says.
"The bottom line is that everyone suffers because the reputation of the product that may fall over, the people who advise on the product, the consumers who lost money. It's pretty easy to think that it's pretty black and white, but it isn't. It's a pretty complex area."
The FPA's position is that while financial planners are not entirely blameless, it should be taken into account that clients have been advised by a financial planner into agribusiness scheme, in full knowledge of the nature of the investment, as part of a diversified portfolio, Sanders says.
"Clients should be able to take on risk, they should be able to take on appropriate tax deduction strategies if that's their preference," he says.
"And a financial planner's job is to manage that carefully and make sure the client doesn't expose themselves to inappropriate and substantial risks and we think that's been the case in relation to these agribusiness schemes.
"We think that's something that should be taken into account, in both regulatory concerns but also in terms of compensation concerns. Ultimately the question of inappropriate advice must be based around those sorts of considerations - what was available and able to be known at the time and how is that particularly matched to the risk and exposure of the client."
It is Sanders' view that such considerations will be applied. Though as the industry is yet to see a run of compensation actions come through, uncertainty still remains on how planners will be treated.
"We understand there is a range of complaints in FOS," he says.
"We don't know the quantum of that. We don't know the likely outcome of that. But we would obviously encourage them to be mindful of the market data that was available at the time and also the level of risk for the entire client, not just on the individual investments."
To date, FOS has just over 40 complaints in relation to advice regarding Great Southern and Timbercorp. "I guess what we're slightly concerned about is that a lot of the actions liquidators are taking we don't know what the final payout in the dollar will be or what the final wind up of these schemes will be, so we think there might be people waiting before they decide to make a complaint," FOS investments, life insurance and superannuation ombudsman Alison Maynard says.
"What I'm saying is that we think that there could be more disputes coming because some investors may be waiting to see what the actual return is before they make up their mind whether to pursue a complaint."
Maynard considers the number of claims against Great Southern and Timbercorp to be significant, but not high. "The amounts would be within our limits, but no I haven't got information on what the values are. We'll probably know the value of the initial investment, but because a lot of the winding up or dealings by liquidators are all happening and the return to investors often hasn't been determined, so we won't know the amounts of those claims," she says.
"Though just like any other case, we will look at each case on its merits, so that doesn't mean that there are 40 complaints that are going to be upheld.
"It may well have been an appropriate investment for some people as part of a well-diversified portfolio where you wanted to have investments in a particular investment and take on the risk of those investments."
Maynard says she is also keeping an eye on what returns investors are getting.
"I think if returns are above a certain level, investors might be prepared to wear the losses and not complain, whereas if the results are very poor then they might be more inclined to complain," she says.
In Willemsen's view, investors looking to wait around for any significant return may be waiting awhile.
"Any significant returns are very slim. They may get some money back, but it's not going to be anywhere near enough to cover what they have invested," he says.
"We don't see there's any point in waiting around and seeing what the ultimate payout figure will be for people because the ones getting paid out are the banks that have security over the assets - like the land and water rights.
"They are the ones who are going to be paid out. The investors are going to be left to pick up the scraps. So we don't think there's any point in waiting to see what dividend has been received because it's going be quite insignificant in the overall scheme of things."
The confusion that surrounds the future of Australia's agribusiness sector looks set to remain for unfortunately what could be the long term, as legal action against firms is yet to get fully underway.
It is only hoped greater care is taken in uncovering possible solutions to both investor and adviser losses than was initially taken at the creation of a number of these MIS investments.
