Advisers' shortcomings found in Securities Commission probe

By Mike Ross

Friday 31st May 2002

In biblical history, Gideon led the Israelites to victory over the Midianites. But in this century, the Securities Commission found all Gideon Investments did was liberate investors from their cash.

Based in Australia, Gideon Investments sucked over $6 million out of New Zealand investors, money then wasted by one Michael James Bastion on high living and an expensive cocaine habit before his suicide in Hong Kong.

In a scathing report, the Securities Commission criticised Masterton financial advisers Morison Guildford & Associates for the incompetent and irresponsible way it placed client money with Gideon.

Gideon proved to be a Ponzi fraud: money was stolen from investors promised above-market returns. The commission found while Morison Guildford was unaware of Bastion's fraudulent activities, it solicited investors for Bastion's investment company, failed to properly question the lack of offer documents and appeared to make no effort to evaluate or monitor the investment opportunity supposedly being offered.

The report criticises Morison Guildford for extracting private benefits from the use of client funds with no express authority to do so and questions the firm's practice of generating income by having clients cash in life policies, turn the proceeds over to Gideon and then take out further life policies.

The commission's interest in Morison Guildford was
triggered when Gideon Investments Pty Ltd went into liquidation in Australia with $A5.3 million owed to about 180 New Zealand investors. The liquidator discovered $A30-35 million had been paid into the company by investors from all around the world.

He found that Bastion - whose background included a geology degree from the University of Canterbury and a brief career as a teacher - set up the company supposedly as the trustee of an investment trust called GHF Trading Trust. Inquiries showed that Gideon and GHF were part of a giant Ponzi fraud.

Investors were told their money was going into a unit trust for investment in specific sectors: equities, bonds, currency and futures.

In fact, the money went into one big bucket, used by Bastion as he saw fit. Much of it was spent on property, thoroughbred horses and high living.

Investors were kept happy with false reports of spectacular returns supposedly being made on their investments and were encouraged to roll over their investments on maturity.

In New Zealand, the commission found Morison Guildford was the conduit through which most New Zealand investors' money got into Bastion's bucket.

It says the deal offered investors in New Zealand amounted to an offer of securities to the public, either interests in a unit trust or participatory securities, which required offer documents complying with the Securities Act 1978.

There was no prospectus or investment statement as required by the act; there was no deed of participation and no statutory supervisor; and no reports were filed with the registrar of companies as required by the Unit Trusts Act 1960.

Morison Guildford told the commission it had checked with industry sources as to whether Securities Act documentation was needed.

The commission interviewed the source named and concluded this was not the advice given.

Investor money destined for Gideon passed through two bank accounts: one with the Wairarapa Building Society and another with the Masterton branch of BNZ.

The accounts were in the name of Gideon Investments but Morison Guildford operated both accounts.

Interest accruing on client money in these accounts was withdrawn by Morison Guildford for its own use. There was also evidence of some $87,000 in client money being borrowed by Morison Guildford, interest free and without security.

The Securities Commission also investigated a purported sale in 1999 of a 24% stake in Morison Guildford to a company called Spaincroff Holdings - a company supposedly controlled by Bastion personally or Gideon Investments.

The Australian liquidator of Gideon Investments has been unable to find the existence of any company called Spaincroff Holdings.

The purchase price of $368,000 was funded in part out of client money held in the Masterton BNZ account. Morison Guildford was unable to provide any written evidence of authority from Gideon Investments to take client funds out of the account in payment of the 24% stake in its business.

The commission was critical of Morison Guildford generating fee income by advising some clients to surrender existing life policies, placing the proceeds with Gideon Investments and then taking out further life cover. Morison Guildford received commission income on both client money put into Gideon and the sale of life cover.

From 1996, Morison
Guildford was entitled to commissions from Gideon Investments calculated at 3% in the first year client money was attracted and increasing to 5% for subsequent years of investment.

Morison Guildford later agreed to take its commission in the form of units in Gideon Investments.

Evidence before the commission indicated Morison Guildford was entitled to some $300,000 in Gideon units at the time of Bastion's death.

Mike Ross teaches commercial law at Unitec Business School

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http://www.sec-com.govt.nz/

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