ASIC v Storm Financial: The Battle Has Ended
The principals of Storm Financial, Emmanuel and Julie Cassimatis, have both just received civil penalties of $70,000 and a seven year disqualification from managing corporations. This is as a result of breaching their duties as directors and failing to ensure that the financial services which they were providing under their AFSL were provided efficiently, honestly and fairly.
ASIC argued that Storm Financial provided advice to a variety of unsuitable investors who would later become ‘stormified’ and encouraged to invest substantial amounts in index funds using ”double gearing” (‘Storm Model’). At a (fairly) high level, part of this Model involved certain investors being encouraged to take out a home loan and a margin loan in order to purchase units in an index fund to create a ”cash dam” and to pay for Storm’s fees.
The Monthly reported that investors would then be incrementally encouraged to take regular ”step” investments, borrowing more and investing more. If the stock market fell by 10% investors would be advised to buy more shares because they were cheap, if the stock market rose by 10% investors were advised to buy more shares to maximise their gains.
Storm Financial operated fairly aggressively in the industry with highly visible TV adverts, weekly seminars, and enthusiastic endorsements from national celebrities, so its method of increasing investment opportunity was not unexpected. It used computer software to regularly review investors and send automated notices en masse encouraging investors to take the next ”step”.
During 2007, Storm encouraged approximately 3,000 investors to ”step” up. The biggest problem with this method was that investors were unlikely to recover enough money to cover their interest fees on the loans and if the market fell by 30%-40% (which it did in 2008), they would lose everything. One investor said that even if the market rose by 4% each year, the rise would only generate enough money to cover the interest charges on the loans.
But it wasn’t necessarily the method of investment that ASIC were investigating. Storm Financial was accused of failing to provide advice to investors which was appropriate to their personal circumstances, namely that the majority of its investors were either elderly, approaching retirement or were receiving low incomes. The investors did not have the means or prospects of rebuilding their financial position in the event of suffering significant financial loss. Many investors had secured a vast amount of debt against their previously unencumbered homes and personal wealth, so when the GFC hit in 2008/2009, most of those investors fell into negative equity sustaining significant financial loss.
The outcome of the Storm crash has seen the three major lending banks associated with Storm cough up substantial sums as compensation for the investors; the Commonwealth Bank of Australia made available up to $260 million, Macquarie Bank agreed to pay $82.5 million and the Bank of Queensland signed a $17 million compensation deal.
However, investors are still reeling at what they consider a lenient punishment for Emmanuel and Julie Cassimatis. Given the sums invested and the cost of the crash, many investors feel that a combined penalty of $140,000 is mere pocket money for the two former principals. Complaints from Emmanuel Cassimatis regarding the loss of his business and home is unlikely to be of any comfort to the victims of the crash. This was the day for justice and investors who lost everything are unlikely to recover anything further.