Part one of a Crikey special report. Tomorrow: How a Hallam housewife convinced a multinational share registry to transfer more than $15 million in blue chip Australian stocks.
A committal hearing which started in Melbourne yesterday has raised this extraordinary question: how was it possible for an unknown suburban housewife to walk into the offices of Australia’s share registry giant Computershare and convince them to transfer more than $15 million worth of blue-chip shares into her name?
The prosecution in the case will allege that 34 -year-old mother of six Rachel Cowen used forged documents to secure the shares and Computershare staff acted on the belief that those documents were genuine.
But given that a few simple checks could have prevented this alleged fraud taking place, the case raises major issues about the actions of Computershare staff and whether regulations governing off-market share transfers are effective.
Computershare holds at least 100 million shareholder accounts for more than 14,000 corporations around the world, and manages the share registries of 65% of the companies listed on the ASX.
According to the accounts of the witnesses so far, Computershare staff handed over to Melbourne housewife Rachel Cowen a list of the share holdings owned by a Bahamas-registered investment company, GH Kluge & Sons. Then they gave her a list of the supposedly confidential Security Holder Reference Numbers (SRNs). Staff processed the Share Transfer Forms without checking that the person who signed the form was authorised to sign on behalf of the Kluge family company and they did not contact the Kluge family to verify the transfer before processing it, despite its large value.
And a former Computershare employee — who was asked to resign after the Cowen transactions — told the court that she regularly gave SRNs to shareholders and in eight years at Computershare had never been told that she shouldn’t.
Mark Davis, group regional director of Computershare, has refused to comment on the specifics of this case because it is before the courts, except to make the point that no Computershare employees are implicated in the alleged fraud.
But he did tell Crikey that Computershare believes that regulation of off-market share transfers is inadequate. “We’ve been pushing for more robust regulation of off market transfers, in particular in relation to international transfers,” he says. He argues the limited steps share registries can take in processing transfers is leading to fraud.
“It would be improved if we were able to do identity checks of the transferor. We can’t do it now because… we have to transfer the shares within three days of receiving the properly completed share transfer form. You can’t ask for more information…you have an obligation to process the transfer within three days otherwise you are in breach of the ASX listing rules.”
But whether a change to the regulations allowing Computershare to do identity checks before processing transfers would have protected the Kluge family investment company from allegedly losing its shares to Rachel Cowen is an open question. It depends on the facts of this case, which are in dispute.
And why is Computershare waiting for the Corporations Rules to change before it improves its security checks? Why couldn’t identity checks be done anyway?
Computershare employee Sharon Woodley told the court she gave SRNs to Cowen based on an allegedly forged letter of authority from Cowen. Woodley did not check that the signature on the letter was from a director of Kluge. Had she, she would have realised the signature was by a fictitious person.
When Woodley gave the Share transfer forms to another colleague to process them she was asked whether she needed to send a “25 k letter”, otherwise known as a security letter, to Kluge. According to Woodley’s evidence it is a letter sent to the shareholder on any transaction valued over $25,000.
Woodley said no, it wasn’t required because the transfer was happening in accordance with the letter of authority Cowen had produced. Had Kluge received such a letter he would have been alerted to the unauthorised transfer before it took place.
In her witness statement Woodley said that it was “fairly normal because we often wouldn’t send this letter out if we knew the shareholder had already authorised the process, as all it would achieve would be to slow the whole transaction down.”
Woodley told the court that Computershare has since asked her to resign, saying she had breached company policy by giving the SRNs to Cowen. But under cross-examination Woodley said she regularly gave SRNs to shareholders and in all her training over eight years of employment at Computershare she had never been told that she shouldn’t.
Woodley said, in her role, she never verified signatures or positions held by signatories on transfer forms and to her knowledge no-one at Computershare did. She acknowledged that anyone could have signed a name purporting to be a director of a shareholder and she would not have checked it, she would have accepted it at face value.
Evidence from Computershare’s head of internal audit, Richard de Sousa, sheds further light on Computershare’s processes. When asked in cross-examination whether any checks as to whether people were who they said they were were made, De Sousa told the court that as long as the contact details, name and other information required on a transfer form matched the information held on the share register, the transfer would be processed.
Cowen’s assets are frozen but how is Kluge going to get its money back? It can never get the shares back; they have been sold. Ironically Cowen may have done Kluge a favour because she sold the shares before the market dived. If Kluge still held the shares today they would be worth significantly less than $15.7 million.
Crikey attempted to contact Robert Kluge in the Bahamas but he didn’t respond.
Can Australian and international shareholders feel confident that Computershare is looking after their interests? Some lawyers Crikey spoke to suggested that Kluge may well have a cause of action against Computershare for negligence. An even stronger case against Computershare could be argued by the companies in which Kluge held shares.
These companies, which include, Amcor, ANZ, CSR, Caltex, David Jones, Downer EDI, Rio Tinto, Transurban, Wesfarmers and Woodside Petroleum, could also have negligence case against Computershare or a claim for breach of contract. It is possible Kluge could be considering suing these companies to get its money back.
Computershare’s Davis told Crikey that neither Kluge nor the listed companies for which it runs the share registries have taken legal action against it.
Davis says Computershare is in discussions with ASX about changing the regulations and maintains there is a general industry consensus that the rules should be tightened. “We put a submission into Treasury and I am optimistic there will be changes,” he said.
He said something similar late last year when The Age newspaper demonstrated how shares could be transferred off-market into false names to hide shareholdings from the Tax Office, market regulators and police by transferring a Downer EDI share to Mr Bud Gerigar. Computershare reversed the transfer after they realised it was fictitious.
Problems with off market share transfers were also highlighted earlier this year in relation to BrisConnections. In that case, investors bought securities not realising they were partly paid and the debts owed exceeded the value of the stock many times over. There were reports of investors transferring shares into fictitious names to avoid the calls.
As a result, in May, Senator Nick Sherry, federal minister for superannuation and corporate law, released an options paper on unsolicited off-market share offers primarily designed to protect consumers from undervalued offers through changes to disclosure requirements and access to registers.
But these changes would not touch upon any checks that the share registries would have to carry out before processing a share transfer.
After the allegedly fraudulent transfers to Rachel Cowen were processed, written notification was sent by mail to Kluge in the Bahamas confirming its holdings had changed on July 1, as is required under the Corporations Rules. It was the trigger for the fraud investigation because the transfers were all news to Kluge.
Computershare’s De Sousa admitted to the court yesterday that it took Computershare a week to take action after receiving notification from Kluge on 15 July that it believed a fraud had been committed. “We receive a lot of correspondence from shareholders,” he said. This was a week after the two weeks it had taken for the holding statement to reach Kluge by snail mail in the Bahamas.
If an email or other electronic message had been sent to Kluge before the transaction had been processed, the alleged fraud could not have taken place. If the signatories to the letter of authority or forms had been checked against authorised signatories for Kluge, the alleged fraud could not have taken place. It’s not that hard.