Ross Asset prompts ponzi law change
Consumer Affairs Minister Kris Faafoi has unveiled a proposal to make winding up ponzi schemes fairer.
It was prompted by the lengthy court battle following the collapse of the Ross Asset Management (RAM) ponzi scheme, which ended with some investors getting all their money back, while others face the grim prospect of getting back just a few cents in every dollar.
David Ross, who operated RAM, was jailed for more than 10 years having left investors with losses of about $115 million.
Under the proposed laws, the High Court would be able to declare a failed investment scheme a ponzi scheme, which is a fraudulent investment operation characterised by fake investment returns, and in which exiting investors are paid out using other investors’ capital.
Such a declaration would give a liquidator the power to claw back all payments to investors over the previous four years, with the exception of cases where it would push people into financial hardship.
The liquidator would then share the money fairly among all the investors caught in the ponzi scheme, though there is one kind of investor who might be allowed to keep 100 per cent of their money.
This would be a whistleblower who, having got their money out, alerted authorities to the existence of the ponzi scheme.
Details of the proposed laws are contained in a discussion paper released this week by the Ministry of Business, Innovation Employment (MBIE).
It said current laws for winding up ponzi schemes resulted in unfair results, with some investors getting all their money back, and others only a tiny fraction.
It gave the fictional example of an investor who deposited $5000 with a ponzi scheme, who then went on to withdraw $2000, leaving $3000 with the scheme, which then collapsed. If there was only enough money left to pay back the remaining investors 10 cents in every dollar, this investor would end up with $2300 of their capital.
Another investor, who put in $5000, but had the bad luck not to withdraw any before the scheme collapsed, would get back just $500.
Similar cases emerged after the collapse of RAM. The case of McIntosh v Fisk went all the way to and the Supreme Court, with RAM liquidator John Fisk seeking to have investor Hamish McIntosh pay back just over $950,000 he withdrew from RAM before it was discovered the company was fraudulent.
Last year the Supreme Court ruled McIntosh could keep the $500,000 capital he had invested with RAM, but not the $450,000 in ‘‘fictitious’’ profit Ross had paid him.
The implications of McIntosh v Fisk were that ‘‘any investor in a ponzi scheme can retain all invested funds that were withdrawn before a liquidator is appointed’’, MBIE said.
‘‘This means that investors who withdraw funds from a ponzi scheme before it collapses gain an advantage over those who do not.’’
Faafoi welcomed the review. ‘‘We have to do a better job of giving investors protection to ensure when there is a collapse, there is a fair framework for people to be able to recover their money.
‘‘Ponzi schemes don’t happen often in New Zealand but when they do, real harm is caused. Many of the people who become involved in ponzi schemes are small investors unaware of the risks of the schemes, and many are likely to be investing savings or retirement funds they can ill afford to lose.’’
RAM victims’ representative Bruce Tichbon has lobbied for changes to the law.
‘‘David Ross will only serve five years and five months behind bars for his crime,’’ Tichbon said.
‘‘Yet it is now over five years and five months since his fraud was exposed in early November 2012.
‘‘For many investors, especially those who are elderly, the wait has been as tough as anything Ross will suffer.
‘‘The liquidation of Ross Asset Management has been a disaster. Many in the legal community recognise that the limited outcomes achieved so far have cost investors so much, taken so long, and are so unfair that corrective legislation must be put before Parliament.’’
rob.stock@stuff.co.nz