ASIC: Ponzi Scheme ‘Mastermind’ Handed Record Penalty

The man described as the ‘mastermind’ behind more than a dozen unregistered offshore managed investment funds, including a $30 million Ponzi scheme, was today ordered to pay a record penalty of $500,000, and was permanently banned from managing companies and providing financial services.

The penalty order of $500,000 is the largest awarded in ASIC’s history.

David Hobbs of Nelson, New Zealand, was one of 13 people, including his wife, Jacqueline Hobbs, who operated the unlicensed funds, which targeted Australian investors and self-managed superannuation funds.

More than $55 million was invested in 14 individual investment funds in countries including New Zealand, the United States, Hong Kong, Vanuatu, the Bahamas, Anguilla, and the Turks and Caicos Islands.

In a decision in November 2012, the Supreme Court of NSW found that together the funds were one large scheme and that Mr Hobbs either ‘personally chose’ or ‘implicitly approved’ the other individuals who operated the scheme with him (refer: 12-266MR).

At the Supreme Court of NSW, Justice Julie Ward today imposed the following penalties:

On 11 February 2013 Brian Wood, of Davistown, Jimmy Truong of St John’s Park, and Con Koutsoukos of Wiley Park, were sentenced to jail for the role they played in operating one of the funds called the Integrity Plus Fund (refer: 13-025MR). The Court found the three knew the fund they were operating was a scam with no prospect of legitimate return, and that the ‘salary’ they were drawing for themselves came from investors’ money.

In handing down her decision today, Justice Ward said the Hobbs scheme could be characterised as ‘one presented to unsophisticated investors as a ‘get rich quick’ scheme with no risk of loss of capital and a huge upside on the profits by reason of their investment’.

She found Mr Hobbs’ conduct, in directing the payment of moneys out of investment schemes for his own personal benefit, as well as the giving by him of directions as to the payment of returns at a fixed percentage irrespective of the existence of profits (as in a Ponzi scheme), was serious and reflected a disregard for the interests of investors. Justice Ward said this, along with other factors such as the fact superannuation money was targeted, justified the imposition of significant penalties.

Justice Ward also found Mr Hobbs ‘deliberately sought to put in place and have implemented a structure that was intended to avoid regulatory supervision (and hence would deprive investors of that safeguard)’.

ASIC Commissioner Greg Tanzer condemned Mr Hobbs’ illegal behaviour.

‘The whole scheme was designed to avoid compliance with Australian financial services laws,’ Mr Tanzer said.

‘Mr Hobbs’ conduct involved a gross breach of investors’ trust. His actions were very serious and have left his victims in difficult financial positions.

‘Today’s outcome should send a strong message that ASIC will act to ensure those who deliberately deceive investors or misuse investors’ money for their own personal benefit are brought to account.

‘The experience of the investors in this matter should serve as a timely reminder to investors to beware of returns that sound too good to be true. Before you invest in any scheme, you should do independent checks to see if it has an Australian financial services licence and how the returns are really going to be made. Don’t just trust the word of the person selling you the scheme,’ Mr Tanzer added.

More information about ponzi schemes and investment funds can be found on ASIC’s MoneySmart website.

The Court also ordered the winding up of the scheme and appointed Mr Barry Taylor and Mr Andrew Needham of HLB Mann Judd as liquidators. Mr Taylor and Mr Needham will determine the return of funds to investors and the Court has ordered they hold a meeting of investors on or before 13 June 2013. They can be contacted on (02) 9020 4000.

Background

• the offshore investments were legal when they were illegal in Australia;
• there was no risk of losing the money they invested (capital) because it was ‘capital guaranteed’ or ‘principal protected’ when in reality it was ‘at risk and that because of the leveraging of those investments, it was possible … to lose more than 100%’ of most invested funds; and
• their investment would return likely ‘around 4% per month’, when it ‘might make no return at all for any number of months’ (in the circumstances the use of qualifications such as ‘best efforts’ or ‘there being no guarantee’ did not ‘remove or counteract the misleading effect of what was said’).

Other types of misrepresentations made on different occasions to different investors included:

• that their investment could be redeemed on 60 days’ notice after 12 months when there was no mechanism to allow this;
• that the scheme was generating profits or sufficient profits to pay purported profit to the investor when it was a ponzi payment;
• investor funds would be invested in AA+ or A+ securities or the underwriting of those securities when they were not so invested; and
• they would become shareholders in a company that would generate profits for shareholders through investments in China, do a commercial bond to fund a project in China and Mr Hobbs would give $200 million from the proceeds of a sale of rights to the company.

Investors’ money was transferred through a series of offshore accounts resulting in a complicated international paper trail.

ASIC was assisted by a number of other regulators including the United States Commodity Future Trading Commission, New Zealand Financial Markets Authority and Hong Kong Securities & Futures Commission.