The 640 investors with $125 million caught in a Ponzi scheme engineered by Wellington’s David Ross look to receive a total of fourteen cents in the dollar following High Court approval of liquidators’ pragmatic proposals for unwinding the long-running fraud.
It has been a six year job for insolvency specialists at PriceWaterhouseCoopers untangling legal and accounting confusion left by fraudster David Ross. He fooled clients into believing he was a financial wizard capable of earning above-market returns. Money flooded in, much of it stolen by Ross. He is currently serving a ten year jail term for fraud.
Ross Asset Management Ltd and Dagger Nominees Ltd were the corporate vehicles used for his Ponzi fraud. On liquidation, investors were holding statements declaring investments held on their behalf amounting in total to some $450 million. These were a complete fiction. The liquidators tracked down trust assets totalling about fourteen million dollars. A dizzying array of accounting and legal complications followed. About 860 investors are affected. One investor successfully prised a substantial number of securities out of liquidators’ hands by arguing his was a special case; the shares were held by Ross in trust specifically for him. This left a reduced pool of assets claimed by differing categories of investor: ‘overpaid investors’ still owed money according to their fictitious statements but having been paid out more by Ross than they had paid in, and; ‘shortfall investors’ paid either nothing or less than they put in. Early court rulings decided investors paid out during the course of the multi-year fraud were liable only to refund payments received in excess of what they had placed for investment. The liquidators are pursuing ‘overpaid’ investors. A total of $19.5 million has been recovered to date, according to the liquidators’ most recent report.
Recoveries from overpaid investors, successful claims against Ross and members of his immediate family plus interest on money held means liquidators are now ready to make a distribution. Ignoring the fantasy figures used by Ross when reporting profits to investors, money placed with Ross for investment but not repaid totals some $125 million. The individual most affected left three million dollars with Ross.
In the High Court, Associate judge Johnston ruled the assets and liabilities of Ross Asset Management and Dagger Nominees be pooled together in the liquidation. Accounting records did not clearly differentiate between the two companies. Investors who have already received back the dollar amount of their investment get no liquidation payout. They cannot claim for fictitious profits reported to them but unpaid. Trade creditors, owed $68,100, get the same payout as investors. Claims by ‘shortfall investors’ are to be adjusted for inflation given differing sums were paid in and out at different times. This recognises the time-value of money.
Investors planning to sue for fraud can do so said Judge Johnstone, but any award of damages will rank behind returns of capital for investors. With investors not being repaid in full, any damages award for fraud will be worthless.
Judge Johnstone commented a liquidation code designed to order priorities between creditors does not fit comfortably with frauds where trust assets are involved. A pro-rata distribution across trade and trust creditors was the only pragmatic solution. Government is currently investigating rule changes to deal with Ponzi frauds.
re Ross Asset Management Ltd – High Court (8.08.18)
18.161