The Australian Securities and Investments Commission (ASIC) has commenced a raft of legal action against Australian financial services licensees Interprac and MWL, as well as research house SQM Research, over their connections to the failed Shield and First Guardian master funds.
ASIC announced the three separate actions today as part of its ongoing investigation into the collapse of Shield and First Guardian and in commencing civil penalty proceedings in the Federal Court against Interprac, the corporate watchdog alleged it failed to ensure its former authorised representatives, Venture Egg and Rhys Reilly Pty Ltd, complied with the best interests obligations and failed to have adequate risk management systems when advising 6843 clients to invest around $677 million of their super into the two funds.
The regulator specifically alleged Interprac failed to have in place an adequate process to approve financial products that went on its approved product list and relied solely on external research, and did not respond appropriately to the use of lead generators.
Additionally, it alleged the firm did not enforce or maintain a hold on new investments into Shield and First Guardian after managing director and responsible manager Garry Crole acknowledged serious issues with both funds, nor did it prevent the use of a ‘negative consent’, resulting in some clients’ superannuation being invested without express consent.
ASIC is seeking declarations, civil penalties and orders to restrain Interprac from carrying on a financial services business.
In a separate action, the regulator has sought leave to commence proceedings that will allege MWL, former director Nicholas Maikousis and lead generator Imperial Capital Group Australia were involved in a project in which Imperial referred prospective clients to MWL for tailored financial advice, but instead MWL placed their superannuation into Shield as a pre-selected investment.
ASIC will seek to allege that, among a number of issues, MWL failed to take reasonable steps to ensure its representatives acted in the best interests of its clients and provided appropriate advice about recommendations to roll over superannuation into Shield as the pre-selected investment option, and that Maikousis was involved in this activity.
Additionally, it will also claim MWL failed to ensure its financial services were provided efficiently, honestly and fairly and failed to have in place adequate arrangements to manage conflicts of interest, and Imperial made misleading representations about the standard, quality and benefits of MWL’s financial services and was involved in MWL’s alleged contravention of its obligation to provide financial services efficiently, honestly and fairly.
ASIC will seek declarations and civil penalties against all defendants and orders disqualifying Maikousis from managing corporations.
In the third action announced by the regulator, it is suing SQM Research in the Federal Court claiming it prepared reports that contained misleading representations and its processes fell short of expected standards when it published ‘favourable’ ratings for the Shield Master Fund.
The research firm published reports in October 2021, March 2022 and October 2022 that rated the different classes of Shield as ‘3¾ stars, Favourable’ and charged fees to Keystone Asset Management, the responsible entity of Shield, for preparing the research reports.
In taking this action, ASIC alleged SQM Research failed to obtain the information needed to properly assess Shield, failed to properly consider inconsistencies in information received when preparing reports about the fund and misrepresented that it had a reasonable basis for giving the ratings it did for Shield and had exercised reasonable care and skill in doing so.
ASIC deputy chair Sarah Court said the civil penalty proceedings against SQM Research marked the first time the regulator had taken action against a research house and it would seek declarations and civil penalties from the court.
The regulator has already commenced a number of other actions against entities linked to Shield and First Guardian, and Court said at the ASIC Annual Forum today that 45 individual court appearances had already taken place and 10 separate Federal Court proceedings were currently underway against 18 defendants, with more expected to be announced.
