A well-known fraud scandal in Australia involved the collapse of the Westpoint Corporation. Essentially, investors thought they were funding property development projects for a 12 per cent per annum return. However, Westpoint Corporation was a property development company that relied on mezzanine finance schemes. (As above, the term ‘mezzanine’ in this context is used to describe a group of companies in the middle, between the parent company and the property development projects.) The unsuspecting investors thought they were providing funding to a particular company for a particular property development. However, once the money was received it was farmed off by the parent company for distribution to other companies to pay for previous projects, the directors’ large salaries, financial planner commissions and previous investor returns. In essence, more and more investors were needed to fund the previous investor returns and projects. The group of companies eventually collapsed. The following is typical of the media attention this collapse attracted.
It’s being called the biggest corporate collapse since HIH — and whether or not that’s accurate, it’s probably the most predictable property disaster since Henry Kaye collapsed. Depending on which report you read, as many as six thousand investors may lose as much as $1 billion after investing their savings with Perth-based Westpoint Corporation. Whatever the final numbers, it’s going to be very big and very tragic. But, worst of all, it was all so predictable and avoidable.
Westpoint . . . [was] . . . a property development company. It needs to find two types of investors — financiers to fund its apartment projects and then buyers to buy the apartments. To fund the building of its projects, financial predators (who call themselves financial planners) advised their trusting clients that Westpoint Corporation’s projects were safe and secure. The investors effectively loaned their money to Westpoint in schemes known as Mezzanine Lending. Thanks to these financial planners, Westpoint raised hundreds of millions of dollars.
So why did many financial planners recommend Westpoint to their clients? Because they’re more predators than planners. When Westpoint offered extra big commissions, they knew it would attract the most predatory of the planners. Hundreds of millions of investors’ money went into Westpoint’s Mezzanine Finance schemes because of the financial planners. The second type of investors that Westpoint needed were buyers for its apartments. In order to pay big interest rates and big commissions, Westpoint needed a big price for its apartments, well above the true market price. Enter more predators.
Australian Securities and Investments Commission chief Jeff Lucy said of the financial planners who steered their clients into Westpoint, ‘They should have known better’. Yes, indeed, it was all so predictable. Now, it’s all so tragic (Jenman 2006).
Required
(a) Outline the main issues of this case.
(b) Now that you have read the outcome of the Westpoint Corporation case, and particularly that investors lost millions of dollars, how do you feel about your recommendation in 2.1?
