Liquidators of the Ross Asset Management group of companies, found to be a Ponzi scheme, are looking to claw back $954,000 one investor withdrew before the scheme collapsed, in the first of three test cases.
PwC's John Fisk, represented by lawyer Mike Colson, says liquidators have a claim on any funds withdrawn from the investment scheme since December 2010 under the Companies Act, on the basis investors would receive more than their entitlement under a liquidation. The liquidators also believe they can make a claim on anyone who withdrew funds within the past six years under the Property Law Act, on the basis they were part of David Ross's fraud.
Wellington-based Ross built up a private investment service by word of mouth, producing regular reports for shareholders indicating healthy but fictitious returns. Between June 2000 and September 2012, Ross reported false profits of $351 million from fictitious securities trading as part of a fraud that was the largest single such crime committed by an individual in New Zealand.
In June last year, the Court of Appeal turned down a bid by Ross to reduce his 10-year, 10-month jail term, which carries a minimum non-parole period of five years and five months.
In the first of the test cases to claw back up to $3.8 million that was withdrawn from the scheme, Justice Alan Mackenzie in the Wellington High Court heard the respondent, who has interim name suppression and represented by Justin Smith QC, withdrew $954,000 from the RAM group in 2011.
The respondent had originally invested $500,000 in November 2007, via a bank loan, and the total returned includes 'profit' on the investment. Colson argues because a Ponzi scheme relies on new investors putting money in to repay older investors and prolong the fraud, any repayment made belongs to the collective group of defrauded investors.
Smith said even if the respondent was liable to repay the $954,000 he couldn't, as he'd used the funds for a property development which had turned out to be a "loss making venture", and had to sell his holiday house to keep afloat. Colson replied there was little evidence to show the financial restrictions the respondent had, and he still had the value of his residential home "with harbour views" and the property development, which he'd bought to protect the views.
Smith argued under the Property Law Act and The Companies Act, the respondent was afforded protection from a claw-back if it could be shown he received the RAM payment in good faith and with no knowledge of the fraud. Smith also argued that the respondent's investment provided value to RAM when he made the deposit in 2007, despite the funds not being used as Ross had said they would be.
A technical legal argument around defining the value of the respondent's investment was at the core of the case, which Justice Mackenzie would need to determine to fit under both sets of legislation.
Currently, defrauded Ross Asset Management investors expect to receive 3 cents in every dollar invested and the claw-back of $954,000 would lift this to 4 cents in the dollar, Colson said.
Fisk is seeking to claw back some of the $100 million to $115 million that was lost in the fraudulent scheme for some 1,200 investors. As at June 16, they estimated the realisable value of shares held by Ross Asset Management entities to be about $5.4 million, with estimated total realisations available for investors and creditors of $3.98 million.
Ross Asset Management's assets were frozen and receivers appointed in 2012 by the Financial Markets Authority after the watchdog received complaints about delayed or non-payment of investor funds. Ross wasn't available in the early days of the investigation due to his hospitalisation under the Mental Health Act.
PwC's John Fisk and David Bridgman were appointed to preserve the assets of the Ross family and related trusts as part of the wider investigation into Ross Asset Management.
Justice Mackenzie reserved his decision saying it was "an important matter" and he needed to take time to consider.