Cydonee Mardon continues our expose of the $176 million Trio Capital fraud by revealing that $121 million, including most of the hard-earned super savings from Illawarra investors, was siphoned off after the independent gatekeeper, ANZ, removed itself as custodian of doomed Astarra Capital and was not replaced.
For the next seven months, Astarra Capital operated illegally without a custodian, opening the way for convicted fraudster and liar Shawn Richard to do his dirty business unfettered.
More than $121 million worth of financial transactions took place after ANZ was removed as custodian of the fraudulent Astarra Strategic Fund, documents reveal.
ANZ removed itself as one of the gatekeepers of Trio Capital's fund in February 2009 and was replaced by National Australia Trustees Ltd (NAT), but the changeover was not completed until September 2009.
During that seven-month changeover period, $121.7 million in Astarra funds was sent out of Australia, never to be seen again.
''What we had here was [a] chain of gatekeepers. Many of those gatekeepers clearly came up short.''
Those transactions were dressed up as legitimate investments using a complex financial instrument called deferred purchase agreements (DPAs).
The transactions should have been countersigned by Astarra's custodian but were not, as ANZ had withdrawn and the transfer to NAT had not been completed.
On each of the DPAs in question, there was no custodian named and where the custodian would have signed previously, the responsible entity, Astarra Capital, is named in its place, effectively removing the custodian and the need for an external party to sign off on the financial transactions.
Of the 21 deferred purchase agreements made from February to September 2009, 15 were for more than $1 million.
A $51.8 million transaction to purchase units in one of Trio's other funds, the Exploration Fund, occurred on June 30, 2009, the same month ASIC began reviewing hedge funds and shortlisted Astarra for further review.
Trio director Shawn Richard authorised and implemented this transaction despite knowing the Trio Investment Committee had placed a ban in August 2006 upon any further investments being made in the Exploration Fund.
After the ban, Richard, jailed for dishonesty over the Trio fraud, played a part in creating three new funds in the Cayman Islands and Anguilla.
These transactions were authorised and signed off by Richard contrary to the instructions of the Trio Investment Committee.
The volume and amount of the fraudulent transactions between February and September 2009 stand in stark contrast to the pattern of transactions recorded under ANZ's watch.
Astarra began operations in Australia in September 2005, and according to ASIC statements, the fraud began only weeks later.
However, while ANZ was custodian from January 2008 to February 2009, deferred purchase agreements worth $7.55 million were signed, with none of the transactions exceeding $1 million.
In February 2009 ANZ removed itself as custodian of Astarra - then known as Alpha Strategic Fund - based on a commercial decision to exit arrangements with a number of smaller customers, including Trio.
In an amended deed dated February 17, 2009, obtained by the Mercury, ANZ "ceased as custodian" for the Alpha Strategic Fund.
The document displays the signatures of Absolute Alpha directors Shawn Richard and Eugene Liu and director of Astarra Capital Ltd Rex Phillpott.
There was no audited financial report provided for the Exploration Fund as at June 30, 2008.
WHK auditor Tim Frazer relied on an Australian-based audit firm to verify the existence and value of the underlying offshore-based hedge funds.
ASIC suspended Mr Frazer from auditing for three years.
According to ASIC, custodians have reporting obligations to lodge suspicious matter reports with AUSTRAC, Australia's anti-money laundering and counter-terrorism financing regulator.
"Suspicious matter reporting extends to information that may be relevant to the investigation or prosecution of any offence of a law of the Commonwealth or state or territory," ASIC said.
In addition it said it was "good practice for custodians ... to foster a whistleblowing culture and framework".
NAT, a member of the NAB Group, was appointed by Trio as custodian in February 2009.
NAB, in a submission to the parliamentary inquiry into the Trio collapse, said the custodian's role was to take custody of the assets, act on Trio's instructions and provide reports to Trio on assets under custody.
Duties of a custodian included its obligation to report any suspicious activity.
"For our staff this means where they identify any activity that is unusual and it cannot be explained either logically or rationally, then details of the activity must be submitted internally to a NAB central investigations unit for further investigation."
Should the investigation confirm the activity is suspicious, it should then be lodged with AUSTRAC.
Both NAB and ANZ in their submissions to the inquiry agreed with ASIC that custodians acted as bare trustees, holding the legal title of their clients' assets without discretion as to how the assets were managed or invested.
According to the statement of facts, which formed the case against Richard when he was sentenced on dishonesty charges, the Trio director "paid reckless disregard" as to whether the investments into the Exploration Fund were in the best interests of Astarra.
Richard was also aware from April 2007 that assets held by the Exploration Fund were "illiquid" and "of questionable value" and not convertible to cash without new money from Astarra.
ASIC chairman Greg Medcraft told the Trio inquiry that "directors and the executors of the responsible entities, the investment manager, the compliance committee, the compliance plan audit, the research houses, the custodians, the advisers" all had roles to play in preventing fraud.
"What we had here was [a] chain of gatekeepers. Many of those gatekeepers clearly came up short," he said.
"One of the most challenging tasks for a regulator is to identify so-called bad apples in industry, particularly when they are engaged in outright dishonest conduct.
"Gatekeepers are often the first in line in terms of defending against bad behaviour by perpetrators of issues in the system. Therefore, improving the regulation of gatekeepers is the key to ensuring the integrity of our system, and I think you will see that reflected in our forward work program ... for example, our work around research houses and custodians."
Mr Medcraft added that focusing on the role of gatekeepers did not abrogate ASIC of its responsibilities as an oversight body.