IOOF’s boiler room throws customers to the wolves

http://www.theage.com.au/business/banking-and-finance/ioofs-boiler-room-throws-customers-to-the-wolves-20150619-ghrdl6

IOOF’s boiler room throws customers to the wolves

June 20, 2015 – 12:15AM

Adele Ferguson and Sarah Danckert

Insider trading, cheating and front-running – the allegations run thick and fast in the IOOF boiler room.

As Christmas parties spilled onto the side streets of Sydney’s CBD, two men from listed financial services group IOOF were not in the mood to party. One of the men, a senior equities analyst, was about to become a company whistleblower, a move that would expose another financial scandal and cost him his job.  It was Friday December 12, 2014 and the other man, the company’s head of investigations Rob Urwin, wanted to discuss a few matters before heading home. The conversation turned to some questionable behaviour inside the company, most notably its research division and some of the antics of its head of advice research Peter Hilton, so Urwin suggested the discussion continue over a beer. As they settled in at the Shirt Bar, discreetly tucked away in an alley close to the company’s Kent Street offices, topics moved from IOOF’s aggressive sales culture to some possible serious breaches in the research division, which is the engine room of IOOF’s $150 billion funds under management.

“I was pissed off yesterday,” the equities analyst told Urwin, explaining how the company’s equities team wanted to start ramping financial advisers into stock ahead of a research report being issued. “[The equities team] was told it is time to call the planners and I go like ‘no it’s not … the report isn’t out yet so what are you freakin’ talking about’?

“You don’t talk about a report before it comes out. You don’t touch a report, you don’t trade a report, you don’t do anything to the report before it comes out. I was fuming. I couldn’t work yesterday, Rob … there’s no rules around this team.”

Front-running is illegal. It can occur when stock is bought knowing a research report is coming that could send the share price up and thus benefit the buyer of the stock.

Urwin appeared horrified. “He’s [Hilton] forcing me to get my file out. My file is that high no shit,” Urwin said, gesturing with his hands to show that the investigation department’s file into Hilton was enormous.

Fresh scandal

He was right to be worried. A Fairfax Media investigation into IOOF has sighted hundreds of documents and emails that embroil the former venerable friendly society in a series of financial planning exposes, including the Commonwealth Bank, which in that case involved fraud, forgery, a cover-up by management, and low-ball offers of compensation to clients. Fairfax Media has also exposed widespread cheating on professional exams at Macquarie Group and a scandal at National Australia Bank, which in that case included forged client signatures, file reconstructions, poor advice and compensation payouts to those clients who complained long and loud enough.

This IOOF case included elements of many of those scandals and underscores the myriad problems plaguing Australia’s financial advice industry. It is why a Senate inquiry last year called for a royal commission into CBA and a wider investigation into the rest of the industry – calls that the Abbott government has so far ignored.

IOOF was formed in 1846 as the Independent Order of Odd Fellows friendly society. By 2004 it had listed on the ASX and had a reputation as a serial acquirer of businesses. Its appetite for hoovering up funds management businesses then slashing costs earned it the nickname “Pac Man” and created one of the largest networks of financial advisers in the country.

As part of that acquisition drive the company now owns a majority stake in Ord Minnett. It is headed up by Tim Gunning who ran CBA’s financial planning division at a time when shoddy financial planners including “dodgy” Don Nguyen were being protected by the bank. It also owns Bridges Financial Services, Shadforth, Plan B and Lonsdale. Another subsidiary, Consultum, recently came into the sights of the corporate regulator in relation to deficient advice on complex structured investment products.

IOOF’s research division provides independent research for the group’s 1120-strong financial planning network, including equities research on hundreds of listed stocks and research reports on thousands of managed funds. These reports are relied on by the planners to spruik products to the group’s 650,000 clients.

It is why the comments by the whistleblower about the goings on inside the research division appeared so shocking to Urwin. “He’s forcing me to get my file out. My file is that high no shit,” Urwin said.

Explosive file

Urwin was referring to an explosive file dating back to 2009 that includes an investigation by the company into possible front-running by its head of advice research Peter Hilton, who has been with IOOF since 1989, possible insider trading by some other staff, taking allocations for placements ahead of clients, and stuffing a capital shortfall in a capital raising of ING Office Fund into one of IOOF’s funds to the detriment of customers of that fund.

The whistleblower, who joined IOOF in May 2014, had no knowledge of the existence of that file. It paints a picture of a company that is not client-focused. “It’s us first and then the clients,” says one former employee. Its research team is relatively small and over the years many of the research reports have been out of step with regulatory requirements.

The file sighted by Fairfax Media includes: a compliance report titled “potential front-running by head of research” on behalf of a relative’s account in August 2008; a history of the trading patterns of Hilton’s relative from 1995; four versions of a memo from group legal services “interview with Peter Hilton – trading behaviours” dated April 9, 2009; internal emails relating to the internal investigation; and a first and final warning letter to Hilton. (Far from leaving he would later be promoted).

The trading account of Hilton’s relative details scores of trades between 1995 and 2014. It was a trade in Toll Holdings in 2009 that was of particular interest to internal investigators, along with a transaction in ING Office Fund the same year, and a hulking allocation of shares in Platinum Asset Management’s $4.9 billion float also garnered attention. Other trades assessed by Fairfax Media show the relative bought and sold shares numerous times coinciding with research released on equities ranging from blue chip stocks to highly speculative, day trader darlings.

The internal investigation into these trades was seen by many as not going far enough. In an email dated March 31, 2009 a former senior executive at IOOF informs the head of legal: “Following my review and discussion with Peter, I do not believe there has been any breach of the ASX rules for front-running … as a general comment Peter has once again reaffirmed to me there has been no intentional breach of any trading rules.”

His email prompted the head of legal to fire off a narky email to IOOF boss Chris Kelaher: “I have been asking for a response for close to three weeks and he sends it to me two minutes before a five-hour product workshop. He then makes conclusions in it which is meant to be the job of ASX compliance, not the business!”

Fairfax Media is not suggesting Kelaher engaged in any wrongdoing.

Hilton was investigated at the height of the global financial crisis and financial markets were in chaos. Companies including investment bank Babcock & Brown collapsed in March 2009, managed investment schemes including Timbercorp and Great Southern were toppling like ten pins.

IOOF was desperate to keep out of the limelight. Its shares had hit record lows and it was trying to contain outflows of funds.

By May 22, 2009, Hilton had been sorted out.

“Ideally, I want it to go the same way as this example,” an email to the legal department says. The email was referring to the matter of an insider trading incident involving two other IOOF staff in highly speculative Malaysian IT security outfit Entertainment Media and Telecoms Company (ETC). Insider trading is a crime that can often result in the perpetrator going to jail.

Insider trading

The internal investigation into insider trading came just days after a senior staffer sent emails setting up a crossing of more than 24 million shares in ETC between IOOF’s poorly performing Manifest Balanced Equity Fund and four funds managed by another IOOF subsidiary, Questor Financial Services.

The emails, seen by Fairfax Media, show the trade took place at a hefty premium to ETC’s prior day closing price.

The crossing in ETC coincided with IOOF subsidiary Bridges initiating coverage on ETC.

Ahead of the crossing the senior staffer placed personal trades in the stock, according to a legal memo into the “trading behaviours” of Hilton. The crossing pushed up the share price of ETC, allowing the staffer to trade his personal shares for a profit.

The outcome of IOOF’s investigation into that insider trading incident was a first and final warning for “inappropriate share trading in ETC” and a request to donate the “proceeds of profit from the sale of the ETC shares to a charity” designated by Australian Wealth Management, a subsidiary of IOOF. The company refused to comment on the incident.

Under Regulatory Guide 238, a market participant must notify ASIC if it suspects insider trading.

The senior staffer, who left IOOF a year after the insider trading incident, told Fairfax Media: “You’re not the regulator or anything like that so I’m not going to actually comment at all but it was all resolved at the time.”

He said it was “resolved in house”.  He is currently working for another financial institution.

Yet another former analyst at IOOF was also named in the 2009 legal memo in relation to insider trading.

A different analyst again in January 2009 was raked over the coals over suspected naked shortselling at a time when it was banned after the government had used taxpayers’ money to prop up the financial services sector. It is believed this matter was never referred to ASIC. IOOF declined to comment.

Hilton – who was the responsible manager of the Questor funds as well as the head of advice research at Bridges – was grilled over his knowledge of the “inappropriate share trading matter” and his motivation behind the shifting of the 24 million shares in the highly speculative ETC stock from one IOOF-managed fund into four others.

Fairfax Media has also seen evidence Hilton was investigated in relation to share allocations, specifically his relative managing to get one of the largest allocations across the entire network of planners in the float of Platinum Asset Management on May 17, 2008 only to flip the 100,000 shares 11 days later for a $69,000-plus profit. Hilton’s relative also ended up with significant allocations for raisings by Challenger Infrastructure and Macquarie Convertible Preference Shares.

Testing time

Fast forward to March 2014 and a “research and corrective plan” indicates problems continued to exist in the research department. The note refers to a separate series of incidents including a breach of password access and “P Hilton to receive a letter advising of breach and final warning”. His responsible manager status was revoked immediately. Two other staff [who Fairfax Media has not named] were instructed to “read and accept IT code of conduct and password management policy” and a third staff member was told not to “complete training on behalf of others”.

Another breach refers to allegations of Hilton “instructing a direct report to complete Kaplan and eLearning training”. It says the board was advised of the March 2014 training breach. It says “Hilton to re-sit all eLearning modules” and “Hilton to complete 12 hours training” and that “training must be supervised”.

This occurred as a scandal was brewing at Macquarie Private Wealth where some advisers were cheating on exams using a document known as the “Penske File”.

Industry-wide cheating, poor education standards and questionable ethics prompted a parliamentary joint committee to release a set of proposal to raise “professional, ethical and education standards in the financial services industry”.

The explosive three-page IOOF document also refers to “misrepresentation of outperformance numbers”. It says a “decision [was] made that outperformance numbers will no longer be produced as representative”.

The company refused to comment on a series of questions about its performance tables, including whether allegations that the numbers were misleading going back at least a decade.

Performance figures are the heart and soul of a funds manager. They are used in presentations, in reports and to benchmark a fund against other funds, and are used by financial advisers to attract clients to the funds.

When the whistleblower unburdened himself to Urwin, he had no idea that some of his concerns about questionable share trading, research reports and performance tables were old news and that Hilton had received at least two previous final warnings. Nor did he know that earlier that year Hilton had been stripped of responsible manager status.

When he told Urwin that he had been asked to sit Hilton’s training modules, Urwin was gobsmacked. “Are you straight up on that?” he said.  “Yes,” said the whistleblower. “Na, na, nah … I am gutted about that. He has been hauled over the coals ‘cos he got other people to do his training.”

The troubles at IOOF could be blamed on an aggressive sales culture and hunger for deals. A source close to the company says the group’s penchant for acquisitions meant there was no choice but to consolidate as the new IOOF was a mess of “licorice allsorts” that was expensive to administer and made it difficult to monitor compliance.

A focus on the bottom line has attracted criticism with the management and maintenance of its platforms, with one fund manager describing IOOF Pursuit and The Portfolio Service as substandard and causing considerable frustrations for planners and clients trying to navigate the practically arcane systems.

One critical IOOF report seen by Fairfax Media states: “We do not invest in new technology that will support/facilitate the development of new or improved products/ services or delivery channels.”

Further, data integrity issues are rated “high” in a Risk and Compliance Committee report from July. It says data transmitted between IRESSNet and XPlan has missing transactions resulting in inaccurate client records. The report also shows client email accounts were “compromised resulting in fraudulent withdrawal requests being sent to platforms”.

The impacts of these issues are laid bare in emails sent by frustrated planners to the research team.

One of the top planners at Bridges wrote an email on December 16, 2013 to the research division of IOOF saying, “I refer your email sent just now and was wondering if someone from Research could explain why you are recommending we place 50 per cent of our clients’ managed fund portfolios into funds that have consistently underperformed their respective Morningstar Benchmarks.” He listed the funds, then said: “From the research reports issued this morning, I believe these recommended funds have exceeded the benchmark on just two out of 36 occasions…. Surely not??? What’s going on here: I can’t help but feel our research department has finally been compromised. The research reports that were released included IOOF Core Menu Model Portfolios along with six other IOOF trusts.”

Another planner at Bridges, who is based in Queensland, wrote: “I have reviewed a client’s portfolio and found that the following exchange-traded funds are still comparing their returns to the wrong index.”

IOOF financial planning subsidiaries have had a number of run-ins with ASIC over the years, with a number of planners banned and at least one sentenced to prison. IOOF refused to detail how many clients had been affected and how much compensation had been paid to victims of poor financial advice.

In a statement IOOF said it is “proud of its compliance record and takes seriously any suggestion the company’s high standards are not being met.  The matters raised occurred up to seven years ago and have been dealt with appropriately.  Furthermore, it is our view that regulatory bodies have been notified where appropriate.

“We have a strong record of reporting breaches in a timely manner and terminating advisers where they fail to meet our compliance and professional standards. We have taken action in both these areas in the past two years,” an IOOF spokeswoman said.

“Where it has been determined by an independent third party that individual clients should be compensated, or IOOF otherwise believes it should make good, this has been done. We are regularly in contact with ASIC when appropriate, in relation to any reportable breach, as and when they occur.”

IOOF declined to answer more than 50 specific questions outlining the allegations against Hilton and the company. It said in each instance raised, “our internal controls identified the incident”. It said where necessary, an independent professional services firm was engaged to investigate.  “Subsequently processes and procedures were refined.  We are satisfied appropriate disciplinary and remedial action was taken with ongoing monitoring implemented.”

It said it “strongly” rejected any claims that IOOF has weak compliance controls.

Hilton was sent a series of questions and declined to comment. Urwin also declined to comment on his meeting with the whistleblower.

Whistleblower sacked

The whistleblower requested that his name not appear in the story for privacy reasons, but says he felt so strongly about what he witnessed inside IOOF – and what happened to him when he spoke out – that he decided to reach out to the media. He has also contacted ASIC.

Things started to unravel after a separate conversation had taken place between the whistleblower and a compliance officer, who discussed her own concerns with the organisation.

He relayed the details of that conversation to human resources and soon after was informed that Hilton and the compliance officer had lodged an “unofficial” complaint about him to HR. (Two months later the compliance officer left the company.)

The stress was too much. The whistleblower packed up his desk and went on stress leave. He was immediately informed by HR that the company had switched off his email.

On Christmas Eve IOOF’s company secretary looked at the complaints and decided “no further action is warranted” and the “matter will be considered closed”.

But the whistleblower was on a mission. He went to Fair Work and lodged a bullying and harassment claim, which outlined some of the allegations he had raised with Urwin, including being asked to cheat on compliance modules, front-running and insider trading.

During the Fair Work process, IOOF sacked him. It came two weeks before he was due to lodge documents to support his allegations.

The sacking was based on “serious misconduct” including “vexatious allegations” against his boss within the meaning of the IOOF No Bullying Policy.

It said PricewaterhouseCoopers had carried out an independent investigation into his allegations of insider trading, front-running and plagiarism and found them unsubstantiated. It said he had “harassed” colleagues to provide a statement to support his Fair Work claim and that he had used IOOF confidential information in breach of his obligations.

The Fair Work conciliation process between the whistleblower and the company failed. The whistleblower is now left to contemplate action in the Federal Court or the Federal Circuit Court.

“I gave the company every opportunity to do the right thing. I didn’t go to ASIC and I didn’t go to the media, I went to the company and it blew up in my face,” he says.

“My uncle has spent his life working in a factory and bakery – he makes about $55,000 a year – that’s similar to the profile of our clients. Having said that, I spoke out because clients running from the likes of Macquarie, CBA, ANZ, and NAB thinking they are leaving behind unethical, corrupt behaviour should be warned. IOOF is just as bad, if not worse. Are we able to sue the lawmakers for pushing us to these wolves?”

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