The report by High Court appointed receivers PWC regarding Ross Asset Management makes for sober reading. In the wake of several ponzi schemes being uncovered as the global financial crisis led to more withdrawals than contributions, we have to think carefully about the enormous red flags that presented themselves when it came to Ross Asset Management.
Brian Gaynor wrote in the Herald:
Investors deposited funds with RAM, assets were purchased and sold on their behalf and held by RAM. The investment performance of these funds was reported by RAM without any independent verification or audit. RAM clients had their own individual portfolio and, as a consequence, could have widely differing investment returns.
As he notes, this was exactly the same structure employed by Bernie Madoff. The cash flowed into a single account and back out again when withdrawals were requested. The PWC receivers have identified just $10.2 million out of a supposed $449.6 million in assets under management. The cash flow analysis in the PWC report makes for sobering reading.
When you think about due diligence on potential investments, the Ross Asset Management proposition sets off multiple sirens. The lack of independent verification of returns, the use of an accountant who shared the same address as the firm, the absence of an independent custodian and maintenance of client records in a single Access database are just the tip of the iceberg.
There was quite a disturbing interview on Radio New Zealand where the poor lady involved had all of her savings with David Ross. It is clear that Ross Asset Management was operating on the down low, relying on referrals and word of mouth.
With the high average account balance of around $500,000 many investors would have been wholesale investors / accredited investors. That means lower disclosure is required and filing prospectuses with the FMA isn’t necessary.
It’s clear that having $500,000 to invest is not sufficient evidence of an ability to manage your own wealth. An enormous amount of reading and careful thinking needs to be done before writing a cheque to anyone – let alone to an asset management firm that operated completely outside standard practice.
Since the collapse of MF Global it has been clear that you are an unsecured creditor to any investment firm you have an account with. Every single dollar of your wealth is at risk – your term deposit, your bonds, your shares, your derivatives trades – they all require ongoing monitoring and tough questions being asked of the people you’re dealing with.
When the most clued up fund managers in the world regularly clear different types of trades through different prime brokers to reduce the counter-party risk involved, that’s a clear signal to ordinary investors that breaking up where you put your money is the bare minimum of risk reduction you can do.
I am surprised that accountants performing the foreign investment fund tax calculations for investors in Ross Asset Management didn’t double check shareholdings via the registry. How could you file accurate tax returns reporting foreign capital gains and dividends without double checking the relevant share registries?
I will follow the development of this case with interest. Because Mr Ross was an “Authorised Financial Advisor”, it will be interesting to see whether more background investigation will be conducted to see if other AFAs are running investment funds of this magnitude on the side and outside the regulatory framework the FMA oversees.