Who pays for investor losses?

The long tail of the finance company monster is finally appearing in the court system. From what I understand a number of legal cases against financial advisers for putting clients into now-defunct, frozen or worthless finance company investments have been settled out of court - which is perfectly legitimate and probably the best outcome for most parties.

But the out-of-court action prevents the justice system from creating useful legal precedents for how to handle such claims - what does constitute negligent financial advice? Investments do fail, should advisers cop the blame for all of them? And who's going to pay for it all?

That last question is the one that obsesses litigators. There's no point suing a person or entity with no assets. And as Tamsyn Parker's story in the New Zealand Herald this week revealed, that's just what Donna Barraclough and Tony Hall's legal team were trying to establish in the case of collapsed financial advisory firm Vestar and its professional indemnity (PI) insurer QBE.

The result was not a good one for Hall and Barraclough - the High Court in New Plymouth ruled that due to exclusion clauses in Vestar's PI policy, QBE was not obliged to stump up if negligent advice was proven in their case.

And Vestar itself - or the company it morphed into, FP North - is broke. According to FP North's second liquidator's report published in March this year, the group is about $20 million short of being able to pay its unsecured creditors (that's excluding the $7.5 million it owes to ASB, which is first in the queue anyway).

As the liquidators dourly note: "The Company has received a considerable number of notices from investors of their intention to claim losses against the Company and it's [sic] insurers. A number of these have progressed to legal proceedings.

"The Liquidators are responding to each case individually. We are advising potential litigants that the Company has insufficient funds to defend any action."

Hence Barraclough and Hall's move to chase QBE. The ruling against them calls into question the value of PI cover; an issue the advisory industry itself is currently facing.

"It seems that with financial advisers they can get away with not having to pay," Barraclough told the Herald, but many of them just can't without PI backing them up.

The New Plymouth Vestar case also highlights how confusing and expensive it is for consumers to seek redress through the court system for poor advice. A proper, consumer-friendly financial complaints system is on the drawing board  but until then a number of genuine investor claims will die in the arms of lawyers.

Barraclough and Hall haven't given up, though, and will now target the former Vestar investment committee and directors (of whom only one is listed, Jason Robert Duncan Maywald - or as I know him 'the guy who never returns phonecalls',). The couple are certainly persistent and I hope they get some satisfaction beyond creating another legal precedent.

 

David Chaplin


Pictured: Tony Hall and wife Donna Barraclough. Photo/Sarah Ivey.