'First Step trusts were mis-sold'

An allegation from a former Money Managers' franchisee that the giant financial advisory firm mis-sold mezzanine loan investments to conservative investors has been sent to the Commerce Commission.

An investor will send a similar complaint this week.

The complaints allege the First Step trusts, which, at their peak contained more than $500 million, were targeted at low risk investors but were unsuitable.

The First Step trusts were frozen in late 2006 owing $457m to Money Managers' clients, of which $223m has since been repaid. Of the balance, it appears that $112m may never be recovered.

Former Money Managers franchisee Martin Visser claims Money Managers' advisers were not kept properly informed about the loans that backed the First Step trusts or how risky they were, and were not sent prospectuses for the product, even when changes were made, of which they should have been aware.

Money Managers denies it failed to adequately disclose the nature of the trusts. Spokesman David Peach said: "It is understandable that people are angry because something has been lost and that anger is always going to be directed somewhere, and if somebody deliberately or otherwise did something wrong then there would be some foundation for that anger. But in this instance there is no question of mismanagement or anything of that nature. It is simply that the markets have crashed and the value that was there prior to 2006 isn't there now.

"People are entitled to complain if they think something is wrong. What I will say is that it is demonstrable that there has always been fair and full disclosure for everything that has happened with First Step from inception to the current day and I am confident, if there is an inquiry made by anybody, that we can answer it to their fair and full satisfaction."

First Step financial reports reveal problems with four large loans:

One loan to Structured Finance (owned by business associates of Money Managers founder Doug Somers-Edgar) was $137m when First Step was frozen. $30m of that loan is still owing and Structured Finance has suspended payments to investors after the collapse of large projects it had financed.

A loan to related party vehicle financier Club Finance, of which Somers-Edgar is a director, has had $51.2m of losses written off.

A loan to a geothermal project, now in receivership, the sale of which has fallen over. In January, First Step trustee Calibre told investors $75m was owing to the trusts.

A $36m loan to Retail on Main, a property development company in receivership and liquidation.

Visser, who was given a loan from one of the trusts to buy a Money Managers' franchise and has been bankrupted as a result, says he has nothing now to lose from speaking out. In his complaint, he told the Commerce Commission: "Advisers were told that a key advantage of First Step was that, because of the nature of the First Step structure, a problem loan could not flow on from one deposit trust to another. This is how First Step was communicated by advisers to clients. Advisers pay a minimum of 35c per dollar earned to Money Managers for the latter to perform the appropriate due diligence and to market an investment in a clear and truthful manner.

"We were given the impression that there were four distinct mortgage trusts. It turns out that 40% of the book of investments was in two large and risky investments: Geotherm and Club Finance."

Visser wrote that, by 2003, the model portfolio for those rated 1, the most conservative on Money Managers' 1 to 7 risk scale, were recommended a weighting of 36% in the trusts. Those rated 2 were recommended a weighting of 39%, with 12% in Secured Deposit Trust (1st mortgages), 10% in Traditional Finance Trust (1st and 2nd mortgages), 9% in Escalator Trust (debentures) and 8% in Premium Performance Trust (mezzanine finance), Visser said. The least risk-averse clients, rated 7, were recommended just 6% in the First Step trusts.

In a separate complaint to be sent to the commission this week, an investor alleges: "The First Step Investment was sold to us under the understanding it was a safe investment and would return an interest rate slightly higher than bank interest rates. "

"Write downs are becoming the norm with First Step, and the indications are there are more to come," he wrote, noting the loans were often made to related parties.

Another investor Warren Nuttal, a vet from Hamilton, said: "They did say there were risk levels particularly in the higher funds, but they didn't indicate in much detail where it [the money] was going. I got the impression [it was invested] in property development and mortgages, but I didn't know it was going to go into car loans, geothermal projects or franchisee loans."

Had he known, he said he would never have invested.

Both said they had invested early in First Step's existence, but were not kept abreast of changes to the funds or sent new investment statements and so had no opportunity to withdraw their money.

Another investor, Ron Jensen, said Money Managers had invested 100 percent of his retirement nest egg into First Step. "I asked for a secure investment," he recalls.

Investors were invited by Money Managers to invest the money coming out of First Step into other Money Managers' products. Jensen says he was offered Orange Insurance and the Totara Mortgage Fund. He chose Totara. Both are now frozen and Orange Finance is seeking a moratorium from investors in a vote on Friday next week.

The Commerce Commission said it had received complaints about First Step.

"The complaints have been assessed by the Fair Trading branch and will not be investigated further. This is because there is a three-year limitation period on a complaint under the Fair Trading Act and these complaints related to matters in excess of three years ago," it said.

Visser called the decision "cobblers" and "not justice", adding his complaint covered the period right up until the closure of the fund, which was less than three years ago. The unnamed investor said: "That's unbelievable. If I had known at the start of August 2006 where my money was invested, I would have pulled it out immediately."