Ross Asset Management may have breached the Securities Act by misrepresenting to its clients the kind of services it was offering, allowing it to escape audits.
The Shareholders' Association has called for a swift law change to ensure all companies taking money from the public are subject to strong oversight.
Fears are building that Ross Asset Management may have been a Ponzi scheme, after the first receivers' report showed that of the $449 million its 900 clients believed were being managed for them, only $10m had been confirmed as existing.
Despite the Government making a series of law changes designed to improve investor confidence after a series of finance company collapses, Ross Asset was never audited. It did not need to be because it claimed to simply be offering investment advice, rather than its own investment products.
Sue Brown, head of primary regulation at the Financial Markets Authority, said Ross Asset's founder and sole director, David Ross, appeared to have presented to clients that he offered a service, promising to invest money in specific assets, held on their behalf.
Accordingly each investor would be presented with an investment statement showing a portfolio of assets.
"What seems to have been happening behind the scenes is that the money was simply being aggregated into one pool, and so it became a scheme," Ms Brown said."It may be an illegal Securities Act issue, [what was] going on behind the scenes."
The receivers' report on Ross Asset, made public on Thursday, said it appeared that investment statements sent to clients were inflated and may have been fictitious.
Mr Ross is in hospital and has been unable to instruct his lawyers or assist with the FMA's investigation.
He ran the company from its offices on The Terrace with little more than administrative support.
NZSA chairman John Hawkins said the apparent loophole of oversight Ross had exposed required swift change. "That is absolutely staggering, outrageous and needs to be addressed, and rapidly. If you're taking investment funds . . . then it's absolutely essential that there is independent oversight of what's happening, whether it is via a trustee, auditors, or ideally, a combination of the two."
John Fisk, a partner at PwC who is charged with clarifying the situation at Ross, said it had been "noted" that the company never appeared to be audited, but it did not appear to have been, of itself, illegal.
"There was no legal requirement for him to be audited, but when I look at it, you've got supposedly $450 million under his control.
"If I was an investor, I'd want it audited," Mr Fisk said.
The finance industry is concerned that Ross's collapse may prompt a collapse in investor confidence in financial advisers.
Lyn McMorran, executive director of the Financial Services Federation, said she hoped the Financial Markets Conduct Act, currently progressing through Parliament, would improve oversight of the sector.
"This is yet another situation where everyone in the investment markets is tarred with the same brush, where legitimate operators who are regularly audited are seen as being the same as this guy, who was just a cowboy."
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