ASIC Commences Action Against KPMG
ASIC Commences Action Against KPMG Over Westpoint Collapse
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The Australian Securities and Investments Commission (ASIC) has commenced action in the Supreme Court of Victoria against accountancy firm KPMG over its auditing of companies in the Westpoint Group which collapsed in early 2006 with losses in excess of $300 million. The action, taken on behalf of eight Westpoint companies, is the next phase of ASIC’s program to seek to obtain compensation for the benefit of investors.
The claims are for negligent conduct by KPMG of audits of the financial accounts of various Westpoint companies for the years ended 30 June 2002, 2003 and 2004 and are in the order of $200 million. The action, if successful, could potentially benefit up to 80 per cent of investors in the Westpoint Group.
The civil proceedings
have been launched under section 50 of the ASIC Act, which
enables ASIC to commence proceedings for damages in the
ASIC Chairman, Mr Tony D’Aloisio said, ‘ASIC sees a clear public interest in using its powers in these circumstances to pursue compensation for the benefit of Westpoint investors’.
The ASIC Chairman said the proceedings against KPMG follow other steps taken by ASIC to commence actions against directors and officers of the Westpoint Group as well as a trustee and several financial services licensees.
‘The proceedings brought by ASIC allege that KPMG negligently carried out audits of the plaintiff companies by failing to identify issues related to the continuing solvency of the companies and failing to qualify audits of the companies. The claim also alleges that KPMG should have notified ASIC that it had grounds to suspect that breaches of the Corporations Act were taking place within the plaintiff companies, including breaches of directors’ duties and rules against insolvent trading’, Mr D’Aloisio said.
ASIC contends that a true understanding of the solvency of companies in the Westpoint Group could only be understood by an analysis of the Westpoint Group as a whole. This is because the Westpoint Group used a group ‘treasury model’ which utilised inter-company loans between mezzanine companies and development companies which were guaranteed by Westpoint Corporation Pty Ltd. The claim against KPMG has been formulated on the basis that KPMG owed each mezzanine company a duty of care in its capacity as auditor of Westpoint Corporation Pty Ltd, as well as in its capacity as auditor of each mezzanine company.
The Westpoint companies in whose names ASIC has commenced proceedings are Ann Street Mezzanine Pty Ltd; Bayshore Mezzanine Pty Ltd; Bayview Heritage Mezzanine Pty Ltd; Market Street Mezzanine Ltd (previously Market Street Mezzanine Pty Ltd); Market Street Mezzanine No. 2 Pty Ltd; Mount Street Mezzanine Pty Ltd; North Sydney Finance Ltd; and York Street Mezzanine Pty Ltd. The matter will be heard on a date to be fixed.
Background to the Westpoint collapse
The investors in Westpoint-related financial products had an outstanding total capital invested of $393 million as at January 2006 when the Group collapsed. Liquidators and administrators of the various entities have estimated total amounts available for distribution to investors in respect of a limited number of the entities of $64 million. A small number of investors have commenced their own recovery proceedings and/or settled their claims. The estimated losses in respect of the Westpoint products totalling $329 million are summarised in Graph 1 below. The estimated liquidators’ recovery for distribution to investors for a number of entities is subject to final determination of claims.
Actions to obtain compensation for the benefit of investors
ASIC is pursuing all available avenues by which it can properly use its powers to recover funds for the benefit of Westpoint investors. Since November 2007, ASIC has commenced 16 civil actions (now including the action against KPMG) seeking to recover funds for investors in the majority of the Westpoint companies. These claims are summarised in the following table.
ASIC actions for compensation
Five individuals who were appointed as, or are alleged to have been, directors: Norman Carey, Graham Rundle, Richard Beck, John Dixon and Lynette Schiftan
Approximate amount being claimed $263 million
financial services licensees:
• Bongiorno Financial Advisers Pty Ltd and Bongiorno Financial Advisers (Aust) Ltd;
• Dukes Financial Services Pty Ltd (now known as Barzen Pty Ltd) and Joseph Dukes;
• Glenhurst Corporation Pty Ltd (in Liquidation);
• Masu Financial Management Pty Ltd;
• Professional Investment Services Pty Ltd; and
• Strategic Joint Partners Pty Ltd (the Financial Planners).
Approximate amount being claimed $69
State Trustees Limited, the trustee of
an unsecured Mezzanine Note issue by Market Street Mezzanine
Approximate amount being claimed $17.9 million
Accountancy firm KPMG
Approximate amount being claimed $200 million
Total amount being claimed $549.9 million
Limitations of this information and
risks of litigation
It should be noted that the total of all amounts claimed against all of the defendants exceeds the total losses suffered by all Westpoint investors. This is because in part the same losses are claimed against different defendants and so it should not be assumed that the amounts being sought in each proceeding are cumulative. Accordingly, investors should not conclude that there is any possibility that they will recover more than their individual losses.
While ASIC regards the claims which have been made as having a sound foundation, all litigation has inherent risks and uncertainties. Proofs of debt have not been called for in relation to a number of Westpoint companies on behalf of which ASIC is making a legal claim and this may affect investor recovery.
ASIC has taken the following actions in relation
to the Westpoint Group:
• Former promoter of Westpoint products, Mr Neil Burnard, has been convicted by a jury in the District Court of New South Wales on nine criminal charges in relation to the raising of
investor funds. Mr Burnard was found guilty of obtaining financial advantage for various Westpoint mezzanine companies and was sentenced on 20 June 2008. He was fined $50,000 and sentenced to twelve months imprisonment, fully suspended on condition that he be of good behaviour. The Commonwealth Director of Public Prosecutions (CDPP) has filed an appeal in respect of the leniency of the sentence. Mr Burnard has filed a notice of intention to appeal against conviction. It is anticipated that both appeals will be heard on 10 December 2008;
• One adviser, Annamieke De Boer, has pleaded guilty to a criminal charge in relation to stealing, and was sentenced to 12 months imprisonment with the sentence suspended for two years;
• ASIC has also banned 18 licensed financial advisers and four unlicensed advisers who provided advice in relation to Westpoint products. These advisers were banned for periods between three years and permanently. One financial adviser has also been disqualified as a company director following action taken by ASIC arising from his conduct in relation to Westpoint products;
• ASIC has wound up 18 insolvent companies in the Westpoint Group and has taken action to secure assets through the liquidation process;
• ASIC took asset preservation proceedings
against former directors and officers to secure their assets
and those of related companies and trusts. Asset
preservation orders now form part of the compensation action
against the directors.
ASIC’s investigations are continuing.
New website for Westpoint investors
ASIC will keep investors informed of the progress made in each of the civil actions via postings on the Westpoint section on the ASIC website at www.asic.gov.au/wstpoint/wstpoint.nsf
This website aims to provide Westpoint investors with improved information about the various actions being taken by ASIC to gain compensation for their investments lost in the Westpoint collapse. The information is complicated by the number of different funds and companies within the Westpoint group and the many different actions that have been initiated by ASIC and liquidators.
In making the information available, it is most important that Westpoint investors understand that the website provides only indicative information to better enable investors to understand the potential of the compensation and recovery actions.
Investors with questions should call the ASIC Infoline on 1300 300 630.