Serendipitously discovered this during my cyber surfing this morning; a presentation “outlining massive fraud in the Australian listed investment company (LIC) sector”:
The Great Australian Investment Ponzi
The A$16 billion Australian listed investment company (LIC) sector has become one of the largest Ponzi schemes in history, surpassed only by Bernie Madoff and MMM.
For years, the dividends from the LICs have been financed by the LICs issuing shares, with the LICs thus paying their returns by seeking new investor funds.
The LIC’s manipulate their share prices by buying each other and themselves, in the process creating inflated reported net tangible assets (NTA).
The companies named include:
Washington H Soul Pattinson & Company Limited (SOL)
Brickworks Limited (BKW)
Argo Investments Limited (ARG)
Australian Foundation Investment Company Limited (AFI)
Milton Corporation Limited (MLT)
Australian United Investment Company Limited (AUI)
Diversified United Investment Limited (DUI)
BKI Investment Company Limited (BKI)
Djerriwarrh Investments Limited (DJW)
Mirrabooka Investments Limited (MIR)
Your humble blogger is not a shares guy, and so cannot comment on the veracity of this impressively comprehensive (85 page) presentation.
Perhaps readers with more knowledge of the subject would care to analyse and comment?
UPDATE:
Some excerpted highlights, for those unwilling to wade through such comprehensive details –
“LIC share manipulation is not performed for vanity alone, it allows the managers to perpetuate premium fraud. Premium fraud is committed by inflating the LIC share price beyond NTA and then issuing shares… Over the years premium fraud has netted the LICs hundreds of millions of dollars, at the expense of small investors, and ASIC has done nothing. Of the $1.6 billion in LIC shares issued between 2006 and 2012 a significant proportion has been lost due to this form of securities fraud. All the major LICs currently engage in flagrant securities fraud of this kind.”
“SOL (Washington H Soul Pattinson & Co Limited) is one of the most manipulated shares on the ASX, and has been for years. SOL and its accomplice bankers have set up a fake share price, with the most common trade size being one single share. The manipulators can then ramp the price as they see fit…
This is a multibillion dollar company. On the 29/6 at 15:58, SOL was ramped 3% by HFT algos trading 5 shares.
Regulators, bankers, research analysts and financial journalists do not ask any questions, even after years of blatant fraud. In most cases they are incompetent, in many cases they are corrupt, and in some cases they have been silenced. The LICs can either buy off editors or sool lawyers on them.”
“The LIC managers have a cartel of crossbuying, with three beneficial effects for the criminals:
* The crossbuying ramps LIC share prices from true market values
* The crossbuying distorts reported NTAs from real asset values
* The crossbuying increases manager fee income and distorts reported fee incomeThe crossholdings allow the managers to charge multiple fees and hide it.”
“A cartel owns most BKW (Brickworks Limited) shares and controls the share price. The cartel openly ramps the share price after employee share plan issues, so insiders can cash out at a higher price. This is of course the very definition of insider trading. On the 3rd October, BKW issued a quarter of a million shares to employees at a consideration of $10.07. The cartel then ramped the share price 12%, to close at $11.25 on 5th October. It is clear they have given up any pretense and are now not even bothering to cover their tracks.
The bankers and analysts associated with these criminals are fully aware of what is going on, with the BKW scheme alluded to in internal communications, thus leaving proof of collusion in share manipulation and insider trading. These criminals are 100% confident in ASIC’s complete incompetence and impotence.
Granny investors buying BKW shares at the inflated price, perhaps under the misapprehension that ASIC does its job, can consider themselves screwed. If you think ASIC is doing nothing, you are wrong. Much worse, ASIC is endorsing BKW as non-manipulated to granny investors and is abetting criminals.”
“Some of the richest and most well-connected people in Australia are directly involved in the scam. The LIC managers openly refer to their industry as ‘The Gentlemen’s Club’, where goodfellas back each other up rather than honouring their fiduciary duty to investors. This cooperation is crucial for coordinating ramps, as defectors taking profits would crash a ramp before it even started. But the protozoan parasites have evolved an entire ecosystem:
1) Managers form cartels to buy each other and chosen manipulable shares
2) Lawyers cover up any mention of fraud using legal threats
3) Auditors sign off that inflated asset valuations are fair
4) bankers provide leverage for share price ramps
5) Brokers churn shares to create the illusion of liquidity
6) Stock exchange personnel advertise the scam and provide misleading statistics
7) Analysts are directly and explicitly bribed to shill the LICs
8) Journalists tout individual ramped stocks and the entire fraudulent industry
9) Regulators legitimize the scam and rubberstamp its abusesIn every single link of the chain, the LIC managers have close friends and accomplices, and these receive their rewards in the form of cash, insider tips and future appointments. The entire knot could be unwound with an Alexandrian solution: Ban LICs from ever again issuing a single share to granny investors. The goodfellas would of course apoplectically protest, as this would starve the ponzi of new cash inflows, and thus sound its death knell. But if they are such great managers and all outperform the market, why do they need to constantly beg for more cash?”
“The Australian government Future Fund recently revealed it had underreported fees, with investment fees actually totalling $1bn instead of $500m last year. The reason for this slight miscalculation of 100% was ‘non-consolidated investment vehicles’. If two investment vehicles own part of each other, and the Future Fund invests in them, part of the holdings will be charged fees twice. Sound familiar?
The geniuses at the Future Fund have discovered fee distortion from crossholdings… Of course this.. applies to the entire Australian superannuation and managed funds industry. Of $1.9 trillion unconsolidated assets in managed funds, crossholdings constitute $382bn or 20%.”
“Most of the LICs are now manipulating their share price with algo share trading. The reason for this is simple; the cost is low, the risk of apprehension zero, and the rewards considerable. The top chart shows DJW share trades on the 29/6/12, when the price was ramped from $3.60 to $3.75. The bottom chart shows the volume distribution of trades, illustrating how two thirds of the trades were for ten shares or less.
The share prices of the LICs are fraudulent, mere empty quotes put up by the managers themselves. In reality the LIC sector is insolvent and has nowhere near enough money to cash out investors.
The LIC sector has devolved into fraud along the lines of Stratton Oakmont. The only difference is that Jordan Belfort required hundreds of boiler room traders, whereas today with HFT trading the costs are much lower.”
“EQT (Equity Trustees Limited) has ramped LIC shares with its superannuation and managed funds, including EquitySuper products and the EQT Flagship Fund. The LIC crossholdings allow the same assets to be counted on several balance sheets, in a form of rehypothecation, and fraudulently inflates NTAs…
ASIC is well aware the the EquitySuper and EQT Flagship products are fraudulent with overstated NTAs and unit prices, yet helps cover up the fact the millions in super money has been stolen by a criminal crossramping cartel.”
“Managers of several Australian fund management companies have started using pension funds entrusted to them by granny investors to ramp their own share prices. This can either be done directly, by using funds under management to buy shares in the fund management company, or indirectly by using FUM to crossbuy with one or more other fund management companies. The managers then reap the direct benefit from own shareholdings and performance metrics related to their fund management company share price.”
“Executive share plans can be used for ramping, as ESPs are allowed to buy the shares to be awarded to executives on-market. For thinly-traded shares or for shares with concentrated ownership, this allows the executives to ramp their own shares before they are awarded. The net effect is that insiders can off-load their shares to granny investors at a temporarily inflated price.
Between 28/08 and 20/09, the Mortgage Choice executive plan issued 2,500,000 shares to executives using options with a $0.76 exercise price. MOC was then ramped 30%.”
And much, much more.
Barnaby Is Right 
The finance industry abounds with fraud and insider trading most of which never comes into the public eye as this is a mates club. You only see into the industry when retribution is sought on one of the players who have fallen out of favour (Renne Rivkin) or when the fraud can no longer be ignored.
We are currently seeing a fraud of a worldwide nature where government and their Central banks are selling down gold so that populations do not shy away from their to be worthless printed money, as many of the larger economies are printing money like it is going out of style. As always happens the big boys cash in and the smaller players and the rest of society pays via inflation (yet to come) and the devaluing of their saving. So I guess a transfer of wealth to governments and the big end of town.
What you have reported is yet another example of ‘business’ defrauding small investors. I bet there is no jail time or the seizure of assets from these crooks. The courts in this country do not work that way. They should.
Reminds me of Victorian fishing industry circa 1960s/70s. Allied Fisheries, offering 20% return on investment, paid for out of new investment ( That was not in their prospectus ) Most investors , lawyers and over financial doctors. Main benefactors were other fishermen as they built a nice lot of new boats before the inevitable end when those boats were sold rather cheaply to genuine fishers
The governments pursuance of the Essendon Football Clubs players and coach over the alleged use of protein supplements is a more important issue at the moment.
LOL of course! Silly me.
Seems to me that the originator of this analysis has a bee in his bonnet that is totally unjustified by the facts. LICs are trading at a premium to NTA at the moment, but this is by no means always the case. Probably the reason they are trading at a premium at the moment is that they offer healthy fully franked dividends with the advantage of some spreading of risk through the breadth of their portfolios. This makes them an attractive proposition for SMSFs, particularly since their management expenses are so low.
Most LICs have dividend reinvestment plans, which is usually the main means by which the number of shares increases. Sometimes they also have rights issues or share purchase plan issues. For an example, see http://www.argoinvestments.com.au/media/files/19389.pdf.
The increase in the number of shares has very little to do with staff share plans. LICs are run on a very lean basis with minimal management costs.
why not analyse penny dreadful explorers //////high salaries//////share issues//////high salaries///////money runs out//////another share issue to the gullible////////heaps and heaps of these over the years
This guy is not half as smart as he thinks he is, ALOT of misinformation and WRONG analysis of his financial reports in his LIC crusade, be careful republishing.
Respectfully, your blanket condemnation would earn some credibility if you were to offer some (any) specifics as to exactly how and why he/she is wrong.
In regards to LICs simply put the Balance sheet or NTA per share (the value of what the company holds) is its true value. Most investors value pre tax by the way.
The P&L and cashflow dont tell the whole picture but mainly dividends and the effect of portolio changes.
His assertion that Oil Search a with a market cap of 10 billion is artificially inflated by shareholders who combined own less than 1.5% of the stock made me chuckle very much.
If anyone seriously thinks any listed company is involved in anything improper they should consult the regulators ASIC, unless they suspect that ASIC is also involved in which case they should consult the police, unless ofcourse they suspect the police are involved…
All the best now where is that tin foil hat of mine?
Oh please Chris. Really? You truly think ASIC is (a) competent, and/or (b) clean? Try reviewing Michael West’s columns (SMH), for starters.
As stated in the blog (ie, “Your humble blogger is not a shares guy, and so cannot comment on the veracity of this impressively comprehensive (85 page) presentation…”) I’ve no comment on whether this person’s claims are accurate. But if the substance of your conviction that all is pure and clean with listed companies is — as it would appear — that if there were a problem/fraud as argued then the regulators would know about it, and/or actually do something about it, with competence and integrity, then with all due respect, I’d suggest that you are very, very naïve.
Again with respect, you’ve not offered a single point of real substance in rebuttal of this person’s claims. I could go through your response line by line and pick it apart, but see little point. If you are honest with yourself, you might review your own arguments and note (for a start) the prevalence of “weasel words” – “most”, “might”, “mainly”. Hardly convincing. Your subsequent resorting to mockery and insult (“made me chuckle”, “where is that tin foil hat of mine”) does not evidence an argument of substance, but quite the contrary — an absence of argument.
As far as I’m concerned, the veracity or otherwise of this person’s claims remains an open question.
OK on his first page, cashflow analysis wrong completely wrong he is only looking at operating activities cashflow ignoring all other cashflow ie Investing activities,finance activities etc. He fails to understand shares issued under DRP by the LIC have no effect on cashflow likewise when the LIC owns shares in for example CBA and participes in DRP instead of receiving cash it does not show up in the cashflow, it does however show up in the P&L hence the difference in dividends received on the Cashflow and dividends received on the P&L.
You are aware some of the most respected businessmen in the country like Don Argus sit on the boards of some of these LICs?
Now since I am so niaive please explain to me how a shareholder who owns 1.5% of Oil Search a 10 billion dollar company can manipulate its share price?
All the best.
You’ve addressed only one page (the first); you’ve assumed he has not included “other cashflow activities” in his summations but not actually demonstrated proof of that; you’ve asserted argumentum ad verecundiam in defence of the integrity of the boards of “some” of these LIC’s; I need not go on.
Thanks for your contribution. But I remain unconvinced, and so of the view that this person’s claims remain an open question.
Another funny, how can TRU be subject to ramping as he sugests now that it has received a takeover offer?
Mate there is more holes in his analysis than a block of Jarlsberg.
@Blissfull, I havent assumed I looked at the cashlow statement. I also looked at the income statement which would include all dividends recieved including DRP shares received in leu of cash, something he hasnt.