Ross Asset Management Cash Flow 2000 to 2012

“It was not the financial elite, [it] was ordinary New Zealanders who are working hard and have saved money,” he said.

I am pleased to read that there are rumblings of net winners having money clawed back from the Ross Asset Management scheme.

In the recovery of assets in the Madoff scheme, Irving Picard has pursued “net winners” who received more from the scheme than they put in. He has achieved several substantial settlements, notably the estate of Jeffry Picower and the NY Met owners who used Madoff like a checking account.

The comment by investor Bruce Tichbon that his group of investors want to limit the fees charged by receivers and liquidators is entertaining.

The cost of recovering funds from fraud is high due to the need for forensic accounting experts and civil suits against “net winners”. Many of the transactions over the past few years could qualify as voidable preference, meaning the liquidator can claw them back.

The process will also take years to wind down. There are no quick resolutions to situations like this. You can’t just get a court order one month and have the “net losers” bank cheques the next.

We are yet to hear back from the Serious Fraud Office on whether charges will be laid against David Ross.

But by representing the cash flows identified by PWC in its report to the High Court graphically, we can see how these schemes work:

The net difference over the 12 year period, which excludes activity before 2000, is -$15,774,673.59. But over $303 million was contributed to the scheme and almost $290 million withdrawn. Management fees accounted for almost $30 million dollars.

The onset of the global financial crisis seems to have set the unwinding of David Ross into motion. A substantial increase in withdrawals along with a major reduction in contributions rapidly altered the mathematics here.

It’s clear that although management fees of $30 million were a factor in the collapse of the scheme, they are dwarfed by the mathematics. It’s simply not possible to keep adding substantial investors to finance the withdrawals of other investors in a global financial crisis where people are cautious about investing outside of lower risk assets.

I am extremely concerned that anti-money laundering rules didn’t pick up on really odd cash flow patterns like this. I hope the FMA will use this occasion to instruct the commercial banks to identify high cash cash flow patterns like we saw above.

The “unusually large” number of brokerage accounts held by RAM and its associated entities are also major red flags. If you have hundreds of millions of dollars under management, maintaining accurate performing reporting over a handful of accounts is difficult enough – dozens of accounts would require a substantial back office operation.

With respect to overseas asset recovery, if a substantial portion of the management fees has been transferred offshore best of luck to PWC in getting any of that back.

This is going to be one of the most interesting cases to come out of the global financial crisis in New Zealand. The fact that nobody has done serious due diligence does not bode well for any notion that investors are capable of managing their own money without enormous investment in education and financial literacy.