The collapse of Ross Asset Management snared 900 investors in what could turn out to be NZ's biggest Ponzi scheme. Investors now face a massive struggle to claw back some losses.
'Christopher', a man in his early 60s, sits at a cafe in downtown Wellington, rattling off a detailed list of events that span 15 years, pausing often to wryly chuckle and shake his head.
It's hard to marry his easygoing demeanour with the knowledge he's recently seen his investment portfolio go instantly from about $2 million to zero. He says - with a shrug - that it's a bit like grief, and he's now at the acceptance phase.
"You recognise all the stages: you go through stunned disbelief, anger, depression and then gradually, gradually, acceptance. For me it took six weeks."
Christopher is one of the 900-plus investors caught up in the collapse of Ross Asset Management, the Wellington wealth manager run by David Ross. The firm was raided by the Financial Markets Authority in early November after investors complained they were unable to access their funds or even reach Ross.
What has since emerged after an investigation by receiver PricewaterhouseCoopers is an investment portfolio purported to be worth $449.6m backed by just $10.5m in assets.
In addition, an analysis of the RAM bank accounts shows that since the year 2000 just over $303m was invested in the firm, while $29.8m was taken out in fees and investors withdrew $289.2m.
The records show withdrawals outpaced contributions for the first time in 2008, when the global financial crisis hit, but recovered the following year, with $30.5m going into RAM, while $28.7m was taken out in fees and withdrawals.
Critically, the recovery soon reversed and withdrawals outpaced contributions in 2010, 2011 and 2012, but those contributions still amounted to more than $80m during the same period.
In total, the funds withdrawn by investors in the 12-year period exceeded investor contributions by more than $60m.
For some that is a classic sign of a Ponzi scheme, where incoming funds are used to pay for withdrawals while maintaining the illusion the portfolio is still delivering market-eating returns.
IF David Ross is found to have been operating a Ponzi - and the receiver has yet to officially rule that he was - it creates a situation where some investors who withdrew their funds before the collapse of RAM profited from those who were entering it. It pits the haves against the have-nots.
Bruce Tichbon, head of the Ross Supporters Group, believes the numbers clearly spell out that Ross was operating a Ponzi.
He favours a clawback process, where the receiver reverses fictitious profits, in effect mutualising the losses but ensuring no one is left penniless.
A similar approach has been used in the Bernie Madoff case in the United States, where US$9.3 billion (NZ$11b) of the estimated US$17.5b invested in the pyramid scheme has so far been recovered.
Tichbon, who appears to have lost all the money he invested with RAM in 2009, says it would be the fairest approach, but that those who profited from it are likely to fight bitterly.
"There are so many people who are winners and are fighting any form of clawback, and so many people who are desperate to get something back," he said.
"When I hold meetings they are very, very contentious. I've held meetings where I was afraid someone was going to attack me."
Complicating matters is that many investors are caught in the middle.
Christopher, for instance, invested the proceeds of a land sale with RAM in the late 1990s, and saw that original investment grow tenfold over the next 15 years. The original capital was gradually drawn down to pay for household expenses, but the bulk of the portfolio was lost when RAM collapsed.
That is hardly a windfall, but next to the people who have been left penniless by the fraud, Christopher is wary of being labelled a "have", and that is why he requested his identity be kept secret.
PwC's John Fisk said there were provisions in the Companies Act that allowed liquidators to recover some funds under voidable transaction provisions, but it needed to be established whether investors were creditors of the company, and it could get complicated.
For instance, the Companies Act also prevents liquidators from recovering funds paid out by a liquidated company provided they were received in good faith.
The receivers also have to determine when RAM tipped from being a legitimate investment firm to an illegitimate one, to determine how far the clawback should reach.
That process is complicated by Ross's poor record-keeping and outdated systems.
"It doesn't mean we can't make the claim, but there's likely to be legal action defending the claim," Fisk said, noting receivers may choose to go the route of a test case to reduce costs.
Cost is a potential hurdle.
As it stands, the $10.5m in assets that have been found are subject to proprietary claims from some investors, who say David Ross merely traded their shares in their name, and as such they should be returned to them.
If they are successful, Fisk estimates that the general pool of funds available for redistribution and to fund legal action could be reduced by as much as 40 per cent.
Christopher, resigned to never seeing a cent of his nest egg again, has moved on with his life. Plans for an early retirement have evaporated but he said he enjoyed his work and life went on. But that doesn't mean he is without regret.
"One day you're rich and you haven't got a financial worry in the world, and the next day you are sort of going to be OK but you haven't got any special fund to leave the children."
What he regrets most is having recommended Ross to friends and family.
"You do feel you're doing the right thing at the time - why shouldn't they share in some of the benefits that you've enjoyed over the past 10 years or more?"
He also regrets not heeding the red flags.
"People might have thought his bookkeeping was careless, that he was doing very well but that he was a bit casual with his reporting," Christopher said.
"But overall I, along with a lot of other people, checked the buying prices and the selling prices and they all seemed to tally on the day."
He also wants to dismiss the perception that RAM investors were so greedy they could not see the returns were too good to be true.
Yes, some were highly wealthy and sophisticated investors who could have known better, but the bulk of them are everyday people who were hoping to see their savings outperform inflation and tax.
DECLINE AND FALL
Ross Asset Management timeline
1990s: David Ross sets up Ross Asset Management
2008: Investor withdrawals exceed contributions for the first time
2010-2012: Investors take out $119m, with just $81m of new funds invested
2012: November 2: RAM offices raided and assets frozen
November 6: PwC appointed as receiver, with brokerage First NZ Capital. Ross in hospital for undisclosed reason
November 15: First receivers' report shows just $10.5m in assets
November 21:Ross discharged from hospital, agrees to assist investigation
December 3: Application to liquidate RAM
December 17: RAM and various entities liquidated
RED FLAGS DIFFICULT TO SPOT
The Ross Asset Management scandal has seen a rash of finger pointing among investors, advisers and regulators over who was responsible for preventing what could be New Zealand's biggest Ponzi scheme.
But while the argument is a long way from being resolved, it has left many people wondering how you spot what could be a highly sophisticated fraud, designed to keep investors in the dark while appearing beyond reproach to regulators.
Alan Borthwick, principal adviser at Dux Financial Services, said it was often very hard for investors to get a view on what was happening behind the investment statement, but there were a few red flags to watch out for.
In no particular order, the first is a lack of separation between the fund manager and the adviser.
Many legitimate financial services firms operate on both sides of the line but have clearly defined rules and practices to keep the two apart, preventing them from talking up their own book.
The second is whether the business is audited or monitored by an external party such as a trustee or ratings agency, though this is not always foolproof as false claims can be made. That also extends to who is investing the funds.
Borthwick said investment firms that employed external managers were far less likely to be able to hide fraudulent transactions, whereas a single manager could easily manip ulate investor statements.
"If they're doing active portfolio tweaking that would be a major red flag," he said.
Consistently high returns are also a major warning, according to Borthwick, who notes that while many Kiwi firms have produced earnings of 20 per cent or more in a given year, they are unlikely to sustain that over the longer term.
He also advises investors to follow their instincts - if they sense that something does not smell right, they should investigate it further or raise it with the relevant regulator instead of ignoring it.
Lastly, he suggests people get external advice from financial advisers, other players in the industry or regulators if they are unsure about a matter.
"Even if they don't come up with a different view to you, at least someone else has looked at it," he said.