Storm Financial directors breached duties
Storm Financial directors, Emmanuel and Julie Cassimatis have been found to have breached their duties as directors and provided inappropriate advice to certain investors.
The Federal Court ruled on 26 August that Storm Financial provided inappropriate advice to certain investors based on their personal circumstances and failed to consider each person's circumstances and investigate the subject matter of the advice.
The Australian Securities and Investments Commission (ASIC) began civil penalty proceedings against the Cassimatises in late 2010. ASIC considered that Storm operated a one-size-fits-all system since 1994 when providing investment advice to clients.
The advice recommended that Storm clients invest large amounts in index funds, using "double gearing". This approach involved taking out both a home loan and a margin loan in order to buy units in index funds, create a "cash dam" and pay Storm fees.
Once initial investment occurred, "Stormified clients were encouraged to take "step" investments over time.
According to ASIC, by the time Storm collapsed in early 2009, around 3,000 of its 14,000 clients had been "Stormified", with many clients in negative equity positions and experiencing significant losses.
ASIC launched a case based on a sample of investors who were advised to invest according to the Storm model. ASIC considered the advice to be inappropriate as each of the investors were alleged to be over 50 years old, were retired or were approaching and planning for retirement, had limited income and assets, and had little or no chance of recovering their losses.
ASIC also alleged Storm failed to ensure the financial services covered by its licence were provided efficiently, honestly, and fairly. It also alleged the Cassimatises had breached its obligations under the Corporations Act and did not exercise their powers as directors of Storm with the diligence expected of directors in that situation.
In his ruling, the judge found that:
"A reasonable director with the responsibilities of Mr and Mrs Cassimatis would have known that the Storm model was being applied to clients such as those who fell within this class and that its application was likely to lead to inappropriate advice. The consequences of that inappropriate advice would be catastrophic for Storm (the entity to whom the directors owed their duties). It would have been simple to take precautionary measures to attempt to avoid the application of the Storm model to this class of persons."
The case is due for a later hearing to determine civil penalties and the nature of disqualification orders to be imposed on the directors for breaching their duties.
AUTHOR
Malavika Santhebennur
Recommended for you
Sequoia Financial Group has declined by five financial advisers in the past week, four of whom have opened up a new AFSL, according to Wealth Data.
Insignia Financial chief executive Scott Hartley has detailed whether the firm will be selecting an exclusive bidder for the second phase of due diligence as it awaits revised bids from three private equity players.
Insignia Financial has reported a statutory net loss after tax of $17 million in its first half results, although the firm has noted cost optimisation means this is an improvement from a $50 million loss last year.
With alternative funds being described as “impossible” for fund managers to target towards advisers without the support of BDMs for education, Money Management explores the evolving nature of the distribution role.
