Greedy?

There have been a number of assertions by some uninformed people since the ‘Storm Financial’ collapse that clients of Storm Financial were simply greedy and, as a result, they took unnecessary risks that culminated in their losing everything when the global financial crisis occurred in late 2008. In other words, "we were well aware of the risks we were running and went ahead and participated in the Storm scheme anyway!"Nothing, in fact, could be further from the truth! You don't put aside a nest egg for retirement by being stupid! Nor do you gamble in the hope that you might get lucky! On the contrary, we were circumspect and sought investments that were "low risk": employing an investing strategy on a broad front. Or so we thought!

That is what Storm Financial sold us anyway, but they forgot to tell us that they and the banks had their own secret agenda. They had plans to use our money for their own ends Let’s now look at the financial plan Storm and the banks that supported that advisory firm promoted:

Storm’s SOA - Page 60 of 107 - Mr VF Ainslie & Ms HM Gillies 15th May 2007

 “Real & Manageable Risk

There are two types of risk: real risk and manageable risk. Each of the following types of real risk involves the loss of your capital, or the loss of income. This is true whether the capital and income lost is that you have already earned, or is the capital and income you had the potential to earn, but did not earn because of the choices made. Real risk is the possibility of irrecoverably losing some or all of your capital.

We have identified 3 distinct types of real risk:

Default Risk is the potential to lose your capital because the company you have invested in has become insolvent or bankrupt.

Asset Selection Risk is that risk associated with choosing the correct asset classes in which to invest; and:

Share Selection Risk is due to the uncertainty that you will choose correctly ahead of time the companies that will perform well in the future.

Another kind of risk associated with investing is that the returns you earn will be higher in some years than in other years, and in still other years the returns may be negative. This variability of returns, or volatility, is what financial markets refer to as 'risk'. This understanding of the term 'risk' lets us see the truth in the old saying “the higher the risk, the higher the return”. It is true to the extent that assets with high returns have higher volatility than assets with lower average returns. In order to attain the relatively high returns delivered by Share-based assets, we need to accept the inevitable volatility associated with that asset class. We term volatility or variability of returns as 'manageable risk' - the returns will be variable, but over a longer time frame there is certainty that the asset value will rise.

An Indexed Share Investment captures these average market returns, allowing us to eliminate Default risk, Asset Selection Risk and Share Selection risk. We manage the volatility of your Investment by ensuring that you have adequate Cash Reserves to use for your Plan when the income and capital growth from Shares is low. When the returns from your Share Investment rise, we will replenish the Cash Reserves; in this way they act as a 'dam' to ensure that the variability of returns becomes insignificant to the operation of your Plan. It is very important that these Cash Reserves be maintained for the purpose described above - they are not provided to finance private spending, and should not be used for any purpose without prior consultation with us.”

Sounds great in theory but we, the investors, had no way of knowing then that Storm would not follow these parameters. For one, these so-called “Cash Reserves” were drained by Storm in order to shore up their financial model in a falling market.

In retrospect, it has now become evident that Storm’s model was never designed to allow for a rapid market decline or significant drops over any sustained period of time because cash reserves would be depleted to the point where nothing was left. Neither the banks or ASIC realized that this basic flaw existed in Storm’s financial strategy until it was all too late! We, the investors, certainly didn’t because we were led to believe that safeguards were in place that would alert us when agreed ratios had been reached.

Storm’s SOA - Page 61 of 107 - Mr VF Ainslie & Ms HM Gillies 15th May 2007

“Risks Associated with Borrowing to Invest

Borrowing to invest introduces a new element of risk to any Financial Plan. As well as magnifying gains and losses as described above, using shares as security to borrow investment funds can put the investor in the position of margin call. This occurs if the listed price of shares falls below a level that would cover the lender's loan to you, and then the lender will ask you to contribute the difference. This ensures that the lender's exposure for the shares remains the same.

In his book “Scams & Swindlers” (Investment disasters and how to avoid them, True stories from ASIC), Bruce Brown gives us some very useful advice. (Look out for a book in the future from Cassimatis on the same subject! Frank)

For most investors, particularly if you have an average income, it is wise to only borrow a limited percentage of the price of 'the shares or units if you want to gear into the market. Although this means the number of shares or units you can buy will be less, so the value of the potential profits and tax breaks will be less, it also means there is less chance you will suffer a margin call. ASIC (1988J Pages 138·139.

This quote highlights a very important facet of our Recommendations. We have advised that you use borrowings to facilitate the purchase of business assets. In so doing, we have used strict guidelines on the amount of those borrowings, and have related them to the size of your asset base. As has been explained within this document, should you implement these ‘Recommendations’ in full your overall debt ratio would be 48%, which is made up of liabilities of 80% of the value of your home and other Property assets, and 49.17% of the value of your Share­based assets.

These debt levels are well within our guidelines as being prudent. Adequate arrangements have been made to handle market volatility and the associated potential for margin call - these have been fully described and explained in the section of this document entitled Your Post-Plan Position.”

One can see now by the evidence at hand that what Storm preached is not what it practised! The overall debt ratio was never adhered to and Storm had no software in place to capture the total debt anyway (margin loans for instance) so the 48% was a figment of Storm’s imagination, or to be more precise, a blatant lie promulgated by Storm to deceive people. Storm in its SOA’s expounded on the dangers of borrowing and reassured investors that its approach was a cautious one, when all the while, Storm real intent was hidden, and its approach to its clients’ assets was reckless and unmindful of the risks involved.

If Storm’s scheme was, as many claim, a get-rich scheme no one told the investors who had been assured that the risks were minimal and the concentration was on long term growth rather than a quick return.

Storm’s SOA - Page 79 of 107 - Mr VF Ainslie & Ms HM Gillies 15th May 2007

“Your Investment Timeframe

During our discussions, you have indicated that you initially wish to consider wealth creation to cover your immediate living needs and continue the growth of your assets to produce an income for now and over the next ten-year period. We have discussed this time frame and have explained that our recommendations need a minimum of a five-year time horizon due to the nature of the investments required to meet your goals. An Investment may be profitable within shorter or longer time horizons depending on which part of the economic cycle prevails at the start of your Investment. However, it is our advice to you that the longer time horizon will allow you to ride out whatever volatility the market presents and still allows for a profit to be generated.

The building of wealth is a journey - it is not a single event. We anticipate that implementation of these Recommendations is the beginning of a process that will endure for the rest of your lifetime. However, it is reasonable to expect to begin to enjoy the proceeds of the Investment well before your lifetime is over! Before proceeding with implementing this Plan, it is important that you understand that a minimum of 5 to 7 years is required before you can expect to be spending from the profits of the Investment.”

This doesn’t sound like a get-rich-scheme to me or one that would entice risk takers to come on board. In fact it had just the opposite affect on us because it reassured us that Storm Financial had our long term goals in mind and would not be taking any undue risks with our money. As it turned out, Storm used this sort of wording to allay their customers' fears of any risks involved. 

The first question that elderly people ask (75% of Storm’s clientele were past retirement age) before they entrust their money to anyone is, “Are there any risks involved?” Storm used this type of "risk free" psychology to win people over. They knew full well that the last thing elderly people want to do is put their life savings at risk. Only a fool would think otherwise. Bernie Ripoll for instance. He said, “a fool and his money are easily parted” implying  that anyone that invested in Storm Financial was a fool. I can assure him that we were not. If there are any fools involved in this sorry mess, they sit on the Government benches beside him. They were the fools that allowed this to happen in the first place! The Government's raft of financial reforms since only serve to highlight its culpability in this matter. 

What's that old saying, "Employ monkeys and you get peanuts!"  It can also be rightfully applied to government in a somewhat different form. "Employ donkeys and you get carrot heads!"

Last, but not least, is the matter of margin loans. We have been castigated by many for taking out margin loans that only added further to our debt. Quite frankly, most of us had never heard of margin loans until we went to Storm Financial for advice. Indeed, Helen and I didn't need to take out margin loans because we already had 1.6 million dollars unencumbered in assets. Storm, however, saw it differently. They were the professionals!  Don’t forget that Storm professed to be just that and were quick to point out that we were not! Storm told us that it had been operating successfully for years; were backed by some of the major banks in this country; and it handled countless investment portfolios! Storm therefore, it claimed, had the necessary credentials to advise us and manage our money. Who were we to argue? So when we were advised to take out margin loans and do all the other things they told us to do, we thought we were acting on solid financial advice. We had no reason to suspect otherwise.

Storm’s SOA - Page 64 of 107 - Mr VF Ainslie & Ms HM Gillies 15th May 2007

"The main difference between a margin loan and a conventional bank loan that uses property as security is that shares change in value each day. This means you can check the daily market value of your investments, and the lender will also monitor your portfolio value daily. If the value falls below an agreed minimum, the lender will require you to make a margin call.

A margin call will be made if your equity - the value of the assets that you contributed to the investment - falls below the agreed lending ratio. If this happens, the lender will ask you to provide additional funds to restore at least the minimum equity position. To help protect against small market fluctuations, there is usually a 'buffer' (typically 5% of the total portfolio value) within which a margin call will not be made.

A margin call requires prompt action to repair, so it is important to plan what you would do if you were faced with one. There are a number of ways you can satisfy a margin call. You can:

 If you do not initiate one of these actions, the lender will act on your behalf, usually selling shares to reduce the loan. The best way to avoid margin calls is to be conservative in the amount you borrow.

Let’s look at what happened in reality:

The banks didn't notify us, the Storm investors, when margin calls were made but rather Storm Financial under covert agreements they had with that company. Because they were covert, Storm’s investors knew nothing about them.

Margin calls should be made by prudent banks to their customers within ‘5 days’. It took the Macquarie Bank more than 3 weeks to notify their Storm clients directly and 10 to 11 weeks for the CBA bank to do the same. Incidentally, many margin calls were never made directly to their customers although the exact numbers are still unknown. In a volatile market where days and even hours are critical at times, can you imagine the impact these delays had on customers portfolios.

In these covert agreements between Storm and the CBA/Macquarie Banks, ratios and conditions were agreed to that were not part of the original agreements between the banks and Storm’s clients. Storm Financial were not a party to these contracts and therefore the banks and Storm had no right to alter the conditions of these contracts.

In summary:

It doesn't take a genius to work out that greed was certainly involved in the Storm financial debacle. The greed, however, was not on the part of the Storm investors involved who were innocent parties in all this. Rather, it was on the part of Storm Financial and the rogue banks who conspired together to churn money out of their Storm customers for their own ends. Certainly, nothing that they did benefited the investors concerned in any way. The result was that it left the clients of Storm who were also the customers of these banks destitute, and in some cases, deep in debt.  So much for responsible and prudent financial advice and so-called banking codes of conduct.

Before anyone judges us, we ask them to do one thing! "Please ascertain the real facts before throwing that first stone!" What happened to Lindy Chamberlain should be an object lesson to us all

The evidence is compelling, and the 'Right' overwhelming with us!