Prime Trust Action Group Unitholder Update No. 25 – 24 July 2014
Breaking News – Litigation Funding
As investors will recall, we had been concerned for some time that many of the legal actions which had been originally identified by the Prime Trust Action Group would be unable to proceed due to a lack of funding.
We are now delighted to report that a litigation funder has been secured to prosecute the Management Rights Claim. A Funding Agreement has been executed between the Liquidators and a litigation funder (LCM Litigation Fund Pty Ltd, “LCM”). We also note that, subject to further due diligence, various other claims (including potential claims against Pitcher Partners and various Lend Lease subsidiaries) may also be pursued by LCM under the Funding Agreement.
LCM was one of the first professional litigation funding companies in Australia, having commenced operations more than 15 years ago. During that time, LCM has completed 175 cases, with only 8 cases (5%) resulting in a loss.
We expect that the introduction of a successful litigation funder such as LCM will serve to enhance and expedite many of the proceedings that had previously been identified.
On 23 July 2014, the Liquidators issued a Media Release in relation to the Management Rights Claim which can be accessed from the link below:
We also attach an excellent article from the Australian Financial Review dated 23 July 2014 entitled “Prime Trust Liquidators Hunt Big Fish” which provides further insights into the Management Rights Claim.
Given the number of legal proceedings currently on foot, we thought it would be useful to summarise the main actions:
(1) ASIC Proceedings
These proceedings were initiated by ASIC in the Federal Court in August 2012 in the context of sustained representations by the Prime Trust Action Group. In December 2013, Justice Murphy ruled that APCH (the Responsible Entity for Prime Trust) and several APCH Directors breached various provisions of the Corporations Act in amending the Trust’s Constitution to provide a listing fee of $33m.
On 28 - 31 July 2014 the Federal Court is due to consider whether financial penalties and disqualification orders should be imposed on the APCH Directors.
(2) Listing Fee Compensation Proceedings
These proceedings are being conducted by the Receivers on behalf of secured creditors in the Supreme Court of Victoria seeking compensation for the damage caused to the Trust by the payment of the $33m listing fee. The APCH Directors, various entities associated with Mr Lewski, Madgwicks (APCH’s legal advisers) and Kidder Williams (ACPH’s corporate advisers) have been included as defendants in these proceedings. We anticipate that the Plaintiffs will seek compensation of approximately $50m, comprising the listing fee plus interest at commercial rates.
(3) Management Rights Claim
These proceedings are now being conducted by the Liquidators, having previously been conducted by the Receivers. These proceedings, in the Supreme Court of Victoria, seek compensation for the damage caused to the Trust by various dealings in the village management rights, which resulted in the management rights for various retirement villages being transferred to a company associated with Mr Lewski for no consideration, and the subsequent sale of those rights for $60m. The defendants to this claim include several members of the Lewski family, various entities associated with the Lewski family as well as Madgwicks and Kidder Williams.
(4) Legal Action Against Lend Lease Subsidiaries
The Liquidators have acted to reserve the right to pursue a claim against certain Lend Lease subsidiaries, which claim to own the rights to manage the various villages that were originally purchased by the Trust. As investors will recall, we have long disputed Lend Lease’s claim to the management rights and are delighted that the Liquidators have initiated this action. We understand that the Liquidators have until December 2014 to issue formal legal proceedings against the companies in question. Given the revenue obtained by the various Lend Lease companies since purporting to acquire the management rights in 2007, the diminution in the value of the Trust’s assets arising from the restructure and sale of the management rights, and the crystallisation of investor losses as a result of the recent acquisition of nine villages by Lend Lease, we expect this claim to be substantial.
(5) Legal Action Against Pitcher Partners
The Liquidators have acted to reserve the right to pursue damages against Pitcher Partners, who were the auditors of the Trust. It is alleged that Pitcher Partners breached their fiduciary duties to APCH and in relation to a number of issues which have been identified in the audited accounts for 2007 and 2008, including alleged breaches of the Trust’s stated accounting policy. Given the losses sustained by investors as a result of the above issues, we currently expect the claim against Pitcher Partners to be substantial.
For each of the above proceedings, we are continuing to make detailed submissions on various issues as and when they arise.
Representations to Members of Parliament
We would particularly like to thank all those investors who took the time to raise various issues surrounding Prime Trust with their local Member of Parliament. We are delighted to report that approximately 500 investors contacted their local member to raise concerns about the sale by the Receivers of the villages to Lend Lease, the potential for the APCH Directors to claim their defence costs from APCH’s insurance policy and other issues. Following on from these representations, we also recently travelled to Canberra to meet with several Members of Parliament to bring certain matters to their attention. We are also pleased to report that the various issues have been brought to the attention of very senior Government Ministers, including the Prime Minister and the Treasurer.
Sale of Village by Receivers
We remain very concerned about the Receivers’ actions in selling nine Trust villages to Lend Lease without first resolving the dispute over the village management rights, a dispute which we believe prevented many parties from expressing interest in acquiring the villages. In light of the failure to resolve the management rights dispute, we are concerned that the price achieved was not competitive resulting in a poor outcome for the Trust and for investors. We remain optimistic that any losses sustained by investors as a result of the disposal of Trust property at potentially less than market value will be reflected in a claim against various parties in due course.
Professional Indemnity Insurance
We remain concerned that the APCH Directors may potentially access the APCH Professional Indemnity Insurance Policy to meet their legal defence costs. Our understanding of these types of insurance policies is that typically an exclusion applies to directors in cases where they have been found by a Court to have contravened the Corporations Act. The Federal Court judgment in December 2013 repeatedly refers to each of the directors breaching their duties under various provisions of the Corporations Act. If the relevant policy contains such an exclusion clause, we believe that the Federal Court findings should be taken into account by the insurer in assessing the directors’ claims.
We are also aware that policies of this type typically contain a further exclusion in cases where directors engage in a deliberate conflict of interest or a wilful breach of duty. With two directors already on the record as having admitted receiving bonus payments of up to $1.6m from entities associated with Mr Lewski following the introduction of the listing fee, and with the Federal Court finding that APCH did not properly or adequately manage conflicts of interest, then if such a clause is in the relevant policy, we believe that there are strong additional grounds to exclude directors’ claims.
We note that Section 199A of the Corporations Act stipulates that directors are not entitled to be indemnified against legal costs “in defending or resisting proceedings brought by ASIC or a liquidator for a court order if the grounds for making the order are found by the court to have been established”.
We also note Section 912B of the Corporations Act requires APCH, as a financial service licensee, to make suitable arrangements to compensate retail investors against losses arising from breaches of relevant obligations.
The requirement for each Responsible Entity to hold adequate PI cover is an integral part of the investor protection regime administered by ASIC. Given the Federal Court judgment against the directors and the other potential grounds for excluding their claims as noted above, we maintain that payment of the directors’ defence costs in priority to Liquidators’ claims and investors’ claims would make a mockery of ASIC’s compensation regime for investors, and represent a breakdown of the Australian financial services system of the highest order.
We have continued to make strong representations to the Liquidators and ASIC in relation to this matter.
We are also concerned that the outcome of this particular insurance issue as it relates to Prime Trust may set a precedent for other similar cases in the future. Should it be decided that the APCH Directors are entitled to have first call upon the insurance proceeds, even in cases where the Federal Court has concluded that the directors breached the Corporations Act, then we would expect this to lead to the situation where, for the vast majority of Responsible Entities who only hold modest amounts of insurance cover, the entire insurance proceeds are likely to be exhausted by directors’ claims thereby leaving nothing for investors, a situation which would render ASIC’s compensation regime for investors effectively worthless.
Since our previous Update, there have been two interesting articles in the press concerning Prime Trust written by renowned industry commentator, Mr Trevor Sykes.
The first article, “Struck by the Oatmeal Curse”, considers the track records of politicians entering business following their parliamentary careers, with Prime Trust being one of the highlighted cases.
The second article, “Go with the (Cash) Flow” draws parallels between Prime Trust and a Ponzi scheme and is attached for investors’ information.
With the forthcoming proceedings in the Federal Court, we expect there to be a significant amount of media coverage over the next few months and will include the links to these articles on our website as and when they are published.
Thank you once again for your continued support of the Prime Trust Action Group.
Prime Trust Action Group