Storm Financial founders fail to back up claims of bank conspiracy

Storm Financial founders Emmanuel and Julie Cassimatis have tried to paint themselves as victims of a Commonwealth Bank conspiracy to bring them down.

But as time goes by and a clearer picture emerges of how Storm was run and why it collapsed, the couple are looking less like victims and more like architects of their own demise.

That is not to say that the CBA will escape being the subject of class actions and other legal moves for damages by former Storm clients and possibly the Storm liquidator. The bank is in the sights of specialist litigator Slater & Gordon, which has signed up about 1000 people to a class action.

But a report to creditors released yesterday by Ivor Worrell and Raj Khatri of Worrells Solvency and Forensic Accountants says the couple who founded Storm in Townsville in 1994 have yet to supply documents to back up two key allegations made against CBA.

The Cassimatises claimed CBA and its wealth management arm Colonial First State contributed to the collapse of Storm by failing to comply in a timely manner with written instructions to redeem securities held in relation to a margin loan granted to Storm.

But despite a request made by the administrators, no documentation has been provided to support the claim or to quantify the alleged loss.

The couple claimed CBA and Colonial failed to comply with an obligation to give 30 days’ notice of its intention to terminate Storm’s index funds, which were “white label” managed funds set up by Colonial for Storm. But no documents were supplied to support this claim.

A third allegation that CBA and Colonial misled customers of Storm about Storm’s responsibility to those customers is the subject of a Federal Court action which is being defended by CBA.

The report to creditors by Storm’s administrators reveals the couple built a financial planning empire that was leveraged to the continuing rise in the sharemarket.

They charged up-front commissions of 7% and trailing commissions based on assets under management. While the market was rising the strategy worked well.

And it worked well long after the market started falling. In the year to June 2008, Storm earned $53.8 million in up-front fees and $14 million in trailing commissions. Over the same period the S&P/ASX200 index fell 16.8%.

Up-front fees collapsed from $4.5 million a month in the year to June to $330,000 a month by December 2008.

Storm had invested an aggregate amount of $4.86 billion by end of August 2008. About $1.78 billion of that, or 37%, was funded by way of margin lending.

By the end of October 2008 the value of investments had fallen 30% to $3.46 billion but the margin loan funded component had only dropped 14% to $1.53 billion.

This means the loan-to-value ratio of Storm’s margin loans rose significantly as the market fall accelerated.

An investigation into Storm’s activities by the Australian Securities and Investments Commission has found that Storm encouraged its clients to step up their borrowing through margin loans as their portfolios grew. It also found that Storm encouraged its clients to leverage other assets for investment in shares.

ASIC is investigating whether the advice provided by Storm met the minimum standards of advice and was relevant to each individual’s personal circumstances, and whether it was within rules designed to manage conflicts of interest.

The efforts by the Cassimatises to present themselves as victims does not stack up against the evidence in the creditors’ report of their 11th hour efforts to pull money out of the business.

Worrells found that by 19 November last year, the company’s joint chief financial officer knew a $11.2 million tax bill was due on 1 December, but there were no funds to pay the bill.

On 15 December, Emmanuel and Julie Cassimatis paid a dividend to themselves of $2 million. On that day the company did not have the statutory minimum number of directors.

On 23 December, the $2 million payment was reaffirmed after Julie Cassimatis’s sister Dawn Collette joined the board as a director.

The $2 million dividend is currently frozen and is likely to be returned to Storm for the use of creditors. However, Worrells believes it will be claimed by CBA under its charge.

A total of 54 Storm clients have claimed $18.7 million in damages for alleged negligent advice or for fees for service that was not provided.

Slater & Gordon says that is the tip of the iceberg. Its 1000 class-action clients will be lodging much larger damages claims.

However, the creditors’ report makes clear there are unlikely to be sufficient assets to cover the CBA’s debt.

That means that any claims for damages will have to focus on three targets: Julie and Emmanuel Cassimatis, Storm’s professional indemnity insurers American International Group, and CBA.

Related articles:

•          Storm creditors told to put the company into liquidation
  

•          ASIC freezes $2m payment to Storm Financial founders
•          Five lessons from the collapse of Storm Financial
•          “We’ve lost money too” – Storm founders break silence
•          Queensland’s Storm Financial Group under pressure