Another lesson from life

It's all turned a bit sticky for one of the country's best-known financial advisers. SIMON HENDERY reports on
the money troubles of Doug Somers-Edgar.

A nervous clip has crept into the normally avuncular, smooth-talking voice of Money Managers chief Doug Somers-Edgar.

The 56-year-old multi-millionaire is more eager than usual this Sunday morning to remind Radio Pacific listeners about his 45 years as a successful investor.

"What makes Money Managers different from other advisers is that I made enough money to retire by the time I was 36," he tells the audience on his hour-long advertorial Money Show, estimated to cost the company at least $2000 a week.

"Most investment advising companies in New Zealand are run by people who learned it from the textbook. I did that but I also learned it in real life."

Doug Somers-Edgar is one of the highest profile, most successful financial advisers in New Zealand.

His personal wealth is at least $50 million, according to last year's National Business Review rich list, and his magnificent house in Browns Bay is on a section worth $770,000.

His relentless self-promotion through talkback radio and financial planning seminars has made Money Managers - the company he owns with his wife, Anne - one of the country's best-known investment advisers.

But this year, Money Managers has been in the news for all the wrong reasons.

Last week, the Securities Commission banned it from offering contributory mortgages to clients for a year.

That was a week after it released a hard-hitting report criticising the company's involvement in the financing of the Parliament St property development in central Auckland.

The commission said the $27 million Parliament Street contributory mortgage - to part-finance a carpark and apartment block developed by former Olympic kayaker Brent Clode - breached the Securities Act and related regulations.

The commission's report said Whangarei company The Mortgage Financier, which issued the mortgage, Money Managers and an associated company, Securities Registry, and directors of the three companies, may be criminally or civilly liable.

Strict rules govern the way a contributory mortgage should be raised. The commission said the regulations were broken when Money Managers paid $8 million of the money to the developer before it had raised the full amount of the mortgage.

As well, it said, investors were given misleading information about the value of the development, and Money Managers had been acting as a contributory mortgage broker when it was not registered as such.

The commission has passed the matter to the Companies Office's national enforcement unit, which is considering whether to lay charges.

Somers-Edgar's reaction to the bad press has been to go on the offensive. He has refused requests for a face-to-face interview with the Herald since the story broke.

But last Sunday he used part of his radio show, which he has hosted for 10 years, to criticise media coverage of his company.

He also laid the blame for the problems with the Parliament St fund-raising on The Mortgage Financier, the company that put together the contributory mortgage which Money Managers then marketed to clients.

"We have been dragged through the mud, and my name has been dragged through the mud," he said.

"We feel extremely let down by the people who managed the contributory mortgages, and they have apologised to us."

Somers-Edgar has also said that the commission's ban will have no effect on Money Managers clients' investments because the company had not planned to market any other contributory mortgages.

It says it has 37 other types of investments available to clients.

Most importantly, he claims, the move has major implications for the financial advisory industry, as anyone who recommends a contributory mortgage to a client would be deemed to be acting as a broker under the Security Commission's definition.

The Commission disagrees. It says Money Managers effectively behaved as a broker because it had exclusive rights on the offer.

It also says the company acted as promoter and issuer of the offer - two roles at odds with each other.

Securities Commission chairwoman Jane Diplock says financial advisers who "are working professionally and appropriately" have nothing to fear from the commission.

Despite its recent clamp on errant contributory mortgage operators, the commission is not on a witchhunt, she says.

"Money Managers, like any other participant in the financial market, is fine as long as it plays by the rules.

"This report is about their behaviour and approach in a particular contributory mortgage scheme and we found they had breached the regulations."

New Zealanders have invested about $500 million in contributory mortgages. But that is a drop in the bucket compared with the scale of mainstream options.

Investors have $42.5 billion in housing and $19 billion in managed funds.

The relative unpopularity of contributory mortgages reflects the high risk involved. Developers seek such finance only if bank lending is not available, and the high interest rates reflect that increased risk.

Parliament St investors were offered 9.5 per cent annual interest over two years an attractive rate for those such as the retired who rely on interest payments for income at a time when bank deposit rates are low.

The president of the Financial Planners and Insurance Advisers Association, Bernard Gresham, says it is rare for advisers to recommend contributory mortgages because of the potential high risk and the non-liquid nature of the investment.

"On that basis, I can't see what has happened to Money Managers as impacting on the day-to-day work of financial advisers," Gresham says.

The FPIA is a 1400-member voluntary association with a code of conduct and complaints procedure.

Only three of about 90 Money Managers advisers are members.

In the end, no small investors were burned by the Parliament Street fiasco. The money has been repaid, with interest, and Somers-Edgar has promised to pay about $55,000 in fees incurred when the Commission removed The Mortgage Financier as broker, appointing a Christchurch broker in its place.

Covering the new broker's fees, which would otherwise have fallen to investors, has enabled Money Managers to save some face.

The company is no stranger to controversy. In 1997, it was criticised by the Advertising Standards Complaints Board for using the word "independent" in its advertising.

The board said it received fees for selling products to clients, so it could not claim to be independent.

This year, Money Managers' First Step investment scheme, which holds about $400 million of clients' money, was criticised in the National Business Review over the repeated taking of fees (known in the industry as "clipping the ticket") by companies associated with Somers-Edgar and business partners.

The company replied that the fees were no secret - investors had been told in advance how the commissions worked.

Three of 26 high-return property bond - or "junk bond" - issues Money Managers has been involved in marketing have had unhappy outcomes for investors.

The largest junk bond default is Pacific Properties (Metropolis) Ltd, which raised $21 million to help finance the 38-level Metropolis apartment/hotel building in Auckland.

The 1755 mainly retired people who invested were due to get their money back - plus 14 per cent a year - on May 20 last year. The total involved was about $24 million.

Metropolis developer Andrew Krukziener has for the past year promised the investors a new deal, but still has not fulfilled his promise.

Pacific Properties (Park Terrace) raised $7 million to help finance 115 apartments on the banks of the Avon in Park Tce, Christchurch.

But problems arose when pre-purchase deals were not settled, and a cash shortfall resulted in investors not getting their money back when it was due in 2000.

The Ballantyne bond issue raised $8 million for a Katikati residential/golf course development. It was due to be repaid in September 1999. But the developer defaulted on interest payments and the development went into receivership.

Money Managers' response to the problems with the three property bonds is to say that anybody who invested in all 26 of its bonds would have received a return of more than 14 per cent.

Despite Money Managers' problems, the charismatic Somers-Edgar has a strong band of loyal supporters.

Last Sunday morning a caller named Harold phoned the radio show to congratulate Somers-Edgar on the way he had handled the "moaning and snivelling" over Parliament St. But even the faithful are being tested.

Paul, who described himself as "a long-term investor through Money Managers", called the show to say he was concerned about the lack of financial information disclosed in offer documents for the Parliament St investment, which he did not take up.

"I have put a good deal of reliance on the good name of Money Managers and your word also, and this hasn't been too bad.

"But I must tell you that I had a lot of these contributory mortgages until the Parliament St offering came up, and I was most concerned about the level of disclosure in the information which was sent to me."

Somers-Edgar told him: "I completely agree with you on that."

He then outlined in detail the failings of The Mortgage Financier, the broker behind the deal.

Money Managers projects under scrutiny

Parliament St

Money Managers marketed a $27 million contributory mortgage for a planned car park and apartment block in Parliament St, Auckland.

The Securities Commission says the company could be prosecuted because it breached regulations by acting as an unregistered broker and endangered investors' savings by paying the developer when it had raised less than half the money.

Developers tend to use contributory mortgages, which pool money collected from small investors, if they cannot borrow enough money from banks. Investors receive a higher rate of interest because of the increased risk.

Metropolis

Property developer Andrew Krukziener's 38-level Auckland high-rise was partly financed by a public bond issue, marketed by Money Managers.

A year after they were due to get their money back, Metropolis bond holders are still waiting to be repaid more than $24 million.

The Metropolis fund raising is one of three out of 26 "junk bond" issues marketed by Money Managers that have run into problems. The others are:

* Pacific Properties (Park Terrace) raised $7 million to help finance 115 apartments in Christchurch, but the money was not repaid when it was due in 2000. Bondholders are expected to get back between 67c and 70c in the dollar of their original investment.

* The Ballantyne bond issue raised $8 million for a Katikati residential/golf course development. It was due to be repaid in September 1999. But the developer defaulted on interest payments and the development went into receivership.