Perhaps stung by public criticism that it hasn’t done enough to prevent and prosecute corporate fraud, ASIC has launched a second action in as many weeks, announcing a civil claim against various directors of collapsed fund manager MFS. The $147.5 million claim alleges that various MFS executives, including former managing directors Michael King and Phil Adams, created false documents and provided fabricated information to its auditors and creditors.
The action appears more serious than the claims launched against various Centro directors in late October (the Centro claim alleged that directors failed to accurately report current liabilities to shareholders).
Of the corporate collapses of the past few years, MFS appeared to be the one laced with the most stupidity. The white-shoe Queensland fund manager adopted the worst elements of the Macquarie Model and combined it with a business plan that appeared to consist of buying assets for more than what they were worth and raising money from gullible punters. MFS utilised a network of financial planners to raise money for its satellite funds (including the Premium Income Fund) — some of those financial planners (from Avenue Capital Management) also happened to be non-executive directors of MFS.
Some of MFS greatest fiascoes included buying the Mount Hotham and Falls Creek ski resorts and quickly selling them to satellite funds MFS Living and Leisure for a $15 million “profit”. Within three years, Living and Leisure wrote off $40 million from the value of the ski resorts while paying millions on “management fees” to MFS for the privilege. MFS also paid more than $2.2 billion to acquire a string of tourism assets including BreakFree, S8 and the Sheraton Mirage to form the Stella Group. After slipping into administration, MFS sold 65% of Stella to private equity firm CVC for $430 million. It would give the rest of Stella to CVC for nothing a year later after CVC sued MFS for misleading behaviour after MFS allegedly overstated Stella’s profitability. It takes a truly incompetent business to turn $2.2 billion into less than $500 million in a couple of years.
ASIC’s statement of claim gives the impression that in its dying days, desperate MFS executives adopted a similar tactic to that used by one of Australia’s most colourful corporate characters, Alan Bond. That is, pilfering money from one part of the empire to prop up another. While Bond diverted $1 billion from Robert Holmes a Court’s Bell Resources, the MFS crew allegedly used $147.5 million from its PIF satellite to repay a $103 million loan to hedge fund Fortress Capital. MFS’ desperation may have stemmed from the fact that Fortress is known as being a brutal creditor, unafraid to tip borrowers into administration if not repaid.
At the time, MFS allegedly had only $40 million in its account and would have been unable to repay the US lender.
The problem with what the MFS executives appear to have done is that PIF was a completely separate fund, which was meant to be a safe, reliable investment for mainly older investors seeking a stable yield. Few investors in PIF would have expected their savings to be used as a cashbox to prop up MFS’ ailing empire.
ASIC alleges that Craig White (who was King’s deputy and took over running MFS after King’s resignation in January 2008) authorised the $103 million transfer and the creation of false documents to “disguise” the payment. Former KPMG employee David Anderson, who is remarkably still being paid almost $1 million per year to work at MFS (now called Octaviar), was also charged with “aiding and abetting” the payments. KPMG was MFS’ auditor.
Colourful former MFS boss Michael King, who is believed to spend most of his time at his multimillion dollar polo complex in Queensland, told the Financial Review that he looked forward to having the matter resolved in open court. (Admittedly, such confidence is not out of character for King, who claimed days before the company’s collapse that MFS didn’t “actually need the equity … We could stay as we are and keep going. Our earnings guidance is unchanged and there is no change to our debt position.”)
King’s partner, Phil Adams, has not commented, with the former BRW Rich List member remaining in Dubai running an investment advisory firm called Agilis. Agilis’ website claims that its “business is conducted with ethics and integrity, with a corporate governance structure that underpins a sustainable business and enhances our reputation”. There is no mention of the civil charges that have been laid against Adams nor the fact that Adams’ former margin-lender, Lift Capital, moved to bankrupt him last year after the he failed to repay debts of more than $13 million.
While the civil claim will be welcomed by PIF unitholders (and MFS shareholders), some may be questioning whether the conduct of various MFS executives, especially that of creating false documents, may have been more fitting of criminal action, rather than civil charges.