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Deferred Management Fees – Retrospectivity of New Fee Arrangements

1. We believe that the new fee arrangements (whereby the Trust would only receive 40% of deferred management fees instead of 100%) were made retrospective and yet this was not brought to investors’ attention. In a typical case, the deferred management fee is 3% of the incoming contribution per annum. If a unit has been occupied for say 10 years prior to the new fee arrangements coming into force, the Trust has already accrued a deferred management fee of 30% of the incoming contribution. However, the new fee arrangements appear to have been applied retrospectively, so that there was a windfall gain to Retirement Guide Pty Ltd (a company associated with Mr Lewski) and correspondingly, a windfall loss to the Trust. Using the above example, once the new fee arrangements were effected, the Trust’s accrued deferred management fee reduced overnight from 30% to 12% of the incoming contribution. Mr Horne was asked to concur that the fee restructure unfairly benefitted Mr Lewski to the very great detriment of unitholders.

2. We believe that the retrospectivity of the new fee arrangements resulted in huge losses for unitholders. Buried on page 63 of the 2007 PDS, in the Appendix to the Investigating Accountants’ Report on Historical and Forecast Financial Information, is the comment that the new fee arrangements will result in accrued deferred management fees of $57 million being written off. Such a statement is not included in that part of the PDS prepared by the RE and there is of course no prominence given to such an important piece of information. Effectively, we believe that the $57 million was transferred from the pockets of unitholders to the pockets of Mr Lewski’s Retirement Guide Pty Ltd. The Trust’s 2007 Balance Sheet show as an asset accrued management fees of $61 million whereas, in the 2008 Balance Sheet, this asset has disappeared. Mr Horne was asked to concur that the fee restructure was hugely detrimental to the interests of unitholders and that Mr Lewski and the RE should be responsible for indemnifying the Trust for the associated losses.

Distributions from Unrealised Capital Gains

1. Each year the Trust’s Financial Reports confirmed the accounting policy to be that unrealized capital gains would be treated as unitholders’ equity and realised capital gains would be treated as income available for distribution to unitholders:

“Undistributed income is transferred directly to the Unitholders’ funds and may consist of unrealized changes in the net market value of the investments … Net capital gains on the realisation of any investments … will be included in the determination of distributable income …” (note 1(h) to Financial Reports)

The reality, however, is that the RE consistently breached its written accounting policy by paying distributions from unrealised capital gains. Looking at 2007 as just one example, cash income was $36 million and expenses were $34 million, meaning that only $2 million was available for distributions. Bearing in mind that this was just prior to the IPO and capital raising of $100 million, the Trust paid distributions of $30 million even though there was only $2 million available, borrowing the difference. In a similar manner, deficits of more than $120 million were recorded over the period 2006-09.

Effectively, therefore, the Trust was being managed in such a way that it was living beyond its means, racking up huge deficits and the terminal decline of the Trust was simply inevitable. By deviating from its stated distribution policy, and thereby continuing to pay distributions to unitholders until October 2008, Mr Horne was asked to concur that the RE deliberately and deceivingly camouflaged the Trust’s true financial position. Mr Horne was also asked to concur that the Trust’s auditor must share responsibility for camouflaging the Trust’s true financial position.

2. The 2007 PDS stated that the Trust had a good history of paying distributions, however, the vitally important piece of information that these distributions were being financed by additional borrowings was not disclosed. Mr Horne was asked to concur that the RE acted in a grossly irresponsible manner.

3. Mr Horne was asked to concur that the Trust’s current parlous financial position has been exacerbated by the RE continuing to pay distributions when there were insufficient funds, which lead to increased borrowings to cover the shortfall. Mr Horne was also asked to concur that the RE used the proceeds from the capital raising and increased borrowings to artificially prop us distributions, meaning that the Trust had taken on the characteristics of a Ponzi scheme.

4. Section 601FC of the Corporations Act requires the RE to exercise the due care and diligence expected of a reasonable person. By continuing to pay distributions when there were insufficient funds, and continuing to give the impression that the Trust was performing well, Mr Horne was asked to concur that the RE was able, in 2007, to raise additional funds of $100 million, generating a listing fee of $33 million as well as a swathe of other fees. Mr Horne was also asked to concur that, by camouflaging the Trust’s financial position, the RE was able to undertake a dramatic expansion of the Trust, resulting in huge commissions (up to 5% of each property’s value) being paid to companies under the control of Mr Lewski, and in Mr Lewski being able to sell the management rights to Babcock & Brown Communities for $60 million and sell his own shareholding in the RE for an additional $60-80 million.

Misleading and Deceptive Disclosure

1. Section 1013C of the Corporations Act 2001 states that: “… a Product Disclosure Statement must also contain any other information that might be reasonably expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product.” As Managing Director, Mr Lewski was responsible for the daily operations of the Trust and was clearly the key person for the Trust. Mr Lewski’s background information, as per the PDS, read exceptionally well and unitholders were comforted that their investment would be in the hands of someone who appeared to be not only well-qualified and very experienced but also someone who had apparently been sanctioned by ASIC and various professional and industry groups.

We are now aware that Mr Lewski’s profile contained a number of critical omissions which we strongly believe were designed to mislead and deceive potential investors. Had such critical information been included in Mr Lewski’s profile, unitholders would have been expected to avoid investing in the Trust. To give just one example, we are now aware that, in the early 2000s, Mr Lewski was involved in a retirement village managed investment scheme, which was unregistered in direct contravention of ASIC requirements that all such schemes must be registered.

We also believe that the disclosure made in respect of Mr Richard Beck, the one time Chairman of the RE, was misleading and deceptive. The Action Group notes that Mr Beck is reported to have regularly represented himself as a bank director, even though his company did not have a banking licence. The Action Group notes that Mr Beck was also the architect of the Westpoint disaster which resulted in unitholder losses of more than $300 million. Mr Horne was asked to concur that unitholders were mislead and deceived by the biographical information provided in respect of Mr Lewski and Mr Beck. Mr Horne was also asked whether he considered that investors would have been unlikely to invest if they had been provided with all material and relevant information about Mr Lewski and Mr Beck.

2. It is extraordinary to note that the PDSs contained no reference to the gearing level of the trust, either the actual gearing level or management’s plan for managing the gearing levels. The PDS also gives the clear impression that the Trust will be conservatively and lowly geared by including prominent and definitive statements such as “This investment is suited to prudent investors seeking a long-term property investment…”.

In practice the Trust’s gearing levels were allowed to increase from 29% (in 2005) to 79% (in 2009). Bearing in mind that risk increases exponentially once gearing levels exceed 50%, bearing in mind that the average gearing of Australian property trusts is 30%, and bearing in mind that the RE stated that the Trust was suitable to prudent investors, Mr Horne was asked to concur that investors were misled and deceived as to the risks associated with their investment.

Investment of Funds Outside Investment Mandate

1. The Trust’s Constitution provides that all investments “must… fit the description of an investment in real property used for the purposes of retirement or aged care facilities”. However, the RE committed funds to development projects on a second mortgage basis, and we believe that this was contrary to the investment mandate in the Constitution. We are also aware of Product Disclosure Statements which make no reference to the Trust being able to invest in development projects, let alone mention the extraordinary amounts of risk involved in investing on a second mortgage basis. We also note that the PDSs stated that the Trust was suited to “prudent investors”, strongly indicating that the Trust was to be managed conservatively . We understand that the Trust’s losses on such development projects have exceeded $50 million.

Mr Horne was asked to concur that the developments were contrary to the Trust’s investment mandate. Mr Horne was also asked to concur that potential investors were not informed that the Trust could undertake such risky activities, and that the RE and the directors of the RE should indemnify the Trust for the losses associated with these breaches of the investment mandate.


1. The PDSs disclosed that the administration and RE costs to be paid by the Trust were to be quite small, being approximately $1.5 million per annum throughout the period 2005-09. However, the total amount of fees taken from the Trust by the RE and its related entities over the 2005-09 period reached an incredible $91 million (on average $18 million per year). Mr Horne was asked whether he considered that the growth in fees to a more than 12 times the level disclosed in the PDS strongly indicates that investors were grossly misled.

2. Mr Horne was asked whether the expenses associated with the infamous August 2006 amendment of the Constitution that inserted the listing and removal fees were charged to the Trust Fund.

3. Mr Horne was asked whether he would order that all expenses incurred by the Trust in relation to proven instances of the RE’s misconduct be reimbursed to the Trust.

4. Mr Horne was asked whether he agreed that the 2005 PDS contained a provision that the Management Expense Ratio (MER) was to be capped at 0.65%. Mr Horne was asked what action he would take against the RE for any breach of the MER cap.
5. Mr Horne was asked what expenses were incurred in respect of the aborted proposal to staple the management shares and the Trust units, as announced in March 2010 and whether these expenses were charged to the Trust.



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