Investors in lucky escape

By ANNE GIBSON

Rapid Securities Commission intervention may have saved small investors in this Parliament St apartment project from major losses.

To most passersby, the hole in the ground at 1 Parliament St near Auckland's High Court probably looks like any other property development.

The dream of former Olympic kayaker Brent Clode, the hole is intended eventually to blossom with more than 200 high-rise apartments.

But safety troubles have dogged the site, including the death of a worker when a wall collapsed.

Now the venture is in more difficulty. Although 11th-hour negotiations appear to have saved more than 1200 small investors who put up about half the $27 million sought for the project, a Securities Commission investigation into the project's financing could lead to one of Auckland's best-known investment advisers facing criminal or civil proceedings for breaching mortgage rules.

Yesterday, the commission finished an inquiry by referring three companies - The Mortgage Financier, of Whangarei, Money Managers, of Albany, and Securities Registry - to the Companies Office national enforcement unit.

The commission believes that if the case goes to court, The Mortgage Financier, as issuer of the mortgage, and Money Managers, which offered interests in the mortgage although it was not registered as a contributory mortgage broker, could face civil and criminal liability.

Money Managers and Securities Registry may also be liable as promoters of the offer, as could the directors of all three companies.

The inquiry is part of a wider investigation of such schemes, into which small investors are believed to have poured at least $195 million.

Last November, the commission revealed that it was looking into nine of the 21 schemes believed to exist, not including contributory mortgages through solicitors' nominee companies.

Commission chairwoman Jane Diplock says Money Managers' clients were given "misleading information" about the value of the Parliament St property and their money "was placed at risk" by being paid to the borrower before fundraising was complete.

Money Managers is owned by avuncular Auckland businessman Doug Somers-Edgar and his wife, Anne. Securities Registry is another Money Managers company. Its directors are Somers-Edgar, Gerald Siddall and Russell Tills, and it is associated with the First Steps investment products promoted by Money Managers.

Securities Registry put $3 million of First Steps' money into the Parliament St contributory mortgage.

Originally from Southland, Somers-Edgar now lives on Auckland's North Shore and runs his chain of investment advisory stores from his Albany headquarters.

He founded Money Managers in 1986, and it now has more than 45 offices, including one in Queen St, Auckland.

Money Managers has promoted itself as "impartial, experienced and informed".

A company profile says: "Doug decided New Zealand needed investment advisers capable of independently evaluating investment products on behalf of investors and providing unbiased recommendations."

A regular radio talkback host not renowned for suffering on-air criticism of his financial planning and investment dynasty, Somers-Edgar first appeared in the National Business Review Rich List last year as controlling a $1.7 billion empire and having a minimum personal wealth of $50 million.

Somers-Edgar was involved in the Metropolis junk bond investment with developer Andrew Krukziener. Clients who bought the $21 million of junk bonds are still waiting to get their money back, let alone anyinterest.

Somers-Edgar told the Business Herald yesterday that he had done nothing wrong on the Parliament St offer.

"The investors' money was never at risk. We didn't do anything wrong. It was very disappointing for us - the whole process - because we have not been able to talk to our clients about this matter."

Beau Davidson, a director of The Mortgage Financier, said it was his firm that brought the matter to the commission's attention.

While acknowledging that the commission had a job to do, he said he was also disappointed with the outcome: "We don't agree with the report in its entirety, but I'm not willing to say what parts I don't agree with. I won't attempt a trial by media."

The $27 million for the Parliament St project was sought from Money Managers' mainly elderly and retired clients last year.

The deal was that they financed a 16-level apartment block being developed by Clode Consulting on vacant land fronting Anzac Ave and Eden Crescent.

For their two-year investment, Money Managers' clients were promised 9.5 per cent interest, with the principal and interest due next year.

The Mortgage Financier acted as broker, although the money was raised through Money Managers.

Last month, the Securities Commission ordered The Mortgage Financier to stop acting as broker. It banned its advertisements and passed management of the scheme to Christchurch firm Crichton Horne & Associates.

The commission said Money Managers was already marketing the Parliament St offer in August, before the borrower had satisfied all the conditions of the loan agreement.

It had not provided a registered valuers' report on the property, as required by the loan offer and by the contributory mortgage regulations.

To compound the problems, Clode originally sought to build just 195 apartments on the site. Partway through the deal, he got permission to increase this to 212 units and add more levels. Investors were not told.

The commission has warned that it is important for investors to know exactly what a property is worth at the time they invest in it, as well as what it might be worth after the development is complete.

In September - a few days before the offer was due to close - less than half the money had been raised, yet Somers-Edgar, on behalf of Money Managers, signed a document promising to pay the full amount by March this year. The closing date of the offer was extended.

It is the risks Money Managers took with investors' money which most concern the Securities Commission.

In particular, it noted:

* Money Managers had exclusive rights on the offer. That means it was behaving as if it was a contributory mortgage broker, although it is not registered as such.

* Money Managers should have withdrawn the offer to investors and repaid them once it failed to raise the full amount. The fact that it managed to raise less than half the money but still decided to extend the offer - and pay some of the cash to Clode - endangered people's savings.

* Money Managers acted as both a promoter and issuer of the offer - two roles at odds with each other.

* Money Managers and Securities Registry paid themselves a full commission, even though they had not completed the deal. Money Managers took $540,000 and Securities Registry $67,000. The Mortgage Financier took fees of $189,000.

* Investors were given incomplete valuation reports, so they were unclear about the risk. A valuation by Phillip Amesbury, a valuer with Barratt-Boyes Jefferies, did not comply with the rules for such schemes. It did not contain the land value, the capital value, the modified land value or a mortgage recommendation.

David Crichton, of Crichton Horn, said yesterday that he had authorised an automatic payment which would return all the investors' money.

Clode had refinanced the loan facility, and settlement had been received, he said.

No one is saying who has put up the money, but Crichton calls it "an excellent outcome" for investors "as it avoids any possible loss of principal for them".

In this case, investors appear to have been saved from a fate of which they were totally unaware. None knew until yesterday about the problems with the valuations and how the deal was being handled.

Had it not been for the Securities Commission's prompt intervention - and the refinancing of the deal - they could have lost their money.

Higher-risk alternative to the bank

How do contributory mortgage schemes work?

Property owners, developers and others needing finance often use such schemes when they cannot get money from a bank. Instead, they borrow money pooled from small investors. Because it is considered higher risk, brokers charge higher rates of interest. If all goes well, investors receive a share of the payments made by the borrower.

Questions investors should ask:
What risks are you likely to face?

Who has first claim on the property if the borrower defaults?

How will the mortgage be refinanced as it falls due?

What happens if the project fails?

What fees and costs are you liable for?

What is the reputation and track record of the developer?

Does the broker or promoter have a financial interest in the project?

The Securities Commission's full 40-page report.