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New York shows ASIC the way to pounce on GFC villains

The announcement yesterday that New York Attorney-General Andrew Cuomo  is seeking $US150 million in damages from mega accounting firm Ernst & Young over the collapse of Lehman Brothers is indicative of just how irrelevant Australian corporate regulators have become. While US authorities have taken legal action against the likes of Ernst & Young,  Goldman Sachs, Ponzi-scheme operators Bernie Madoff, Alan Stamford and Marc Dreier and Countrywide’s Angelo Mozilo — ASIC, Australia’s so-called corporate watchdog, has laid no criminal charges and only a smattering of civil actions against the villains of the GFC.

In the claim against Ernst & Young, Cuomo claimed that:

E&Y substantially assisted Lehman Brothers Holdings Inc, now bankrupt, to engage in a massive accounting fraud, involving the surreptitious removal of tens of billions of dollars of securities from Lehman’s balance sheet in order to create a false impression of Lehman’s liquidity, thereby defrauding the investing public.

Interestingly, no charges have yet been laid against any Lehman executive (including former CEO Richard Fuld).

The decision by Cuomo (who will shortly be appointed as the governor of New York) is a sharp contrast to the Australian corporate enforcement landscape, in which virtually none of the villains of the global financial crisis have been bothered by legal claims.

Despite having more than two years to prepare some sort of case, ASIC has not brought any civil or criminal charges against the likes of:

  • Centro — Which is accused of vastly mis-stating the level of liabilities on its balance sheet. Centro and its auditor, PricewaterhouseCoopers, are facing a civil claim from shareholders for mis-classifying more than $1 billion in liabilities. ASIC has not laid any charges against any executive or director of Centro (some of whom remain on the board of Centro and other large ASX-listed companies).
  • Allco — Accused (and effectively admitted to) mis-stating liabilities on its balance sheet by a couple of billion dollars not long before its collapse. Allco also spent more than $60 million in cash purchasing Rubicon, a company owned by Allco directors David Coe and Gordon Fell. At the time, auditors of Rubicon’s satellite firms felt that there was doubt they the firm could continue as a going concern. This was not disclosed to Allco shareholders. ASIC has not yet felt it apt to bring charges against any Allco director despite what appears to be reasonably clear evidence.
  • ABC Learning Centres — ABC appeared to vastly mislead shareholders and lenders as to its true financial position for several years before its collapse. Former ABC CEO and founder Eddie Groves was at the same time paying hundreds of millions of dollars of ABC funds to related parties (and since the company’s collapse, Groves has transferred millions of dollars of assets to friends and family. While ASIC sought to freeze Groves’ assets almost 18 months ago, it has yet to lay a single charge, civil or criminal, in relation to ABC’s collapse against Groves or any other ABC director or executive
  • Babcock & Brown — The former high-flying investment bank collapsed in 2008, but not before it spent tens of millions of dollars propping up its house broker, Tricom. The decision to use Babcock shareholders funds in such a way was curious, especially since it appeared to benefit CEO Phil Green, who had millions of dollars of Babcock shares trapped in Tricom’s accounts. Meanwhile, Green was making all sorts of wildly optimistic statements to the market as to Babcock’s prospects, while internal Babcock memos provided a very different view. ASIC has not laid any charges, civil or criminal, against any director or executive of Babcock, and has not sought to claw back the hundreds of millions of dollars paid to Babcock executives in the years before the bank’s untimely collapse.

Of course, ASIC, which is led by Mallesons partner and ASX CEO Tony D’Aloisio is focused on far more important prosecutions — such as jailing clinically depressed 25-year-old insider trader John Hartman, whose crimes, while clear, were far less damaging to the community than the collapses of Allco, ABC Learning Centres, Babcock & Brown and Centro or bungling critical legal cases such as James Hardie and One.Tel.

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