Millions in 'gratuities' for First Step trio

Investors in the defunct First Step Trusts promoted by advisory firm Money Managers, now known as MMG Advisory Partners, have learned three wealthy individuals received $1.25 million from the funds in the last months of their operation.

The three – Doug Somers-Edgar, Gerald Siddall and Russell Tills – were involved in marketing and managing the funds but also gained from an unusual feature of the investment structure that made them personal beneficiaries of four intermediate trusts.

First Step investors, many of them elderly, are out of pocket by about $236m since the freeze in 2006.

Among them is retired Wellington investor Peter Fletcher, who gathered the information about the trust payments in a meeting last month with MMG chief executive Derek Young and First Step trustee Edward Russell of sister company Calibre Asset Services.

He was told the beneficiary payments were $1.25m in the 2006/07 financial year – the period in which the funds were frozen – following payments in previous years of $5.5m, $8.9m and $9.5m. The money was on top of management and brokerage fees earned by companies owned by the three of typically $6m-$7m a year. "It seems excessive under any circumstances really," said Fletcher. "They are entitled to a profit I'm sure, but considering [First Step fund manager] Matrix was apparently doing the work, it's more or less a gratuity to them. They didn't invest or risk any of their own money."

Under the First Step structure, the public invested in four separate funds which in turn lent all their money to four Financial Trusts, which on-lent the money at a margin to various borrowers, often related parties.

Like finance companies, the Financial Trusts were designed to make a profit from their lending, but unlike finance companies they were designed to operate with zero capital – all profits and capital were paid to the trusts' beneficiaries, who were interests associated with Somers-Edgar, Siddall and Tills.

"[They] extracted any surplus money in the year it was generated," said Fletcher. "There were no bonus payments to investors in a good year, we were stuck with the fixed interest they negotiated with the trustee, Calibre Asset Services, but even worse is the fact that when the losses started to be realised, all the money generated by the Financial Trusts had been put beyond reach and the investors faced the losses alone."

Although details of the Financial Trust structure were fully disclosed in prospectus documents, Fletcher said investors should not have to trawl through small print to judge investments for themselves.

"Irrespective of what the investment statement disclosed, I stressed that we went to Money Managers seeking professional financial advice because they claim to offer this service.

"It was my contention that [First Step] was so heavily loaded in favour of the beneficiaries of the Financial Trusts that it should not have passed any sort of test that was client-centred."

The information obtained by Fletcher about the beneficiary payments is virtually the only detail to emerge about the four Financial Trusts at the heart of First Step since the year to March 2005. No accounts for subsequent years have been published and requests from this newspaper for them have been refused.

Fletcher said Russell asked him at the start of the meeting to sign a confidentiality agreement which might have allowed him to see more documents, "which I declined to do because thousands of investors have lost millions of dollars and it seemed to me that our discussions should be on the record".

Fletcher said he and other investors would find their position more bearable if the beneficiaries agreed to share some of the pain by underwriting a portion of the losses. "So far this has not resulted in a positive response," he said.

Investors have been told it may be 2011 before the final position of First Step is known.

Somers-Edgar, Siddall and Tills could not be reached for comment.

- © Fairfax NZ News