Nearly two years after Halifax Investment Services went into administration, thousands of investors are still waiting to see how much of their money they will get back.
It was on November 23, 2018 that partners at insolvency specialist Ferrier Hodgson were appointed administrators of Australia's Halifax Investment Services in Sydney. Four days later on November 27, the appointment was extended to Halifax NZ, 70 per cent owned by Halifax Australia.
About 12,000 investors have been caught up in the collapse of the online brokerage, with some A$211 million invested. Just over 2000 of those investors are based in New Zealand.
The company's services included margin foreign exchange trading, CFDs (contracts for difference, a form of speculating on market moves), and shares and options trading through the online platforms Interactive Brokers, MetaTrader4 and MetaTrader5.
All of the New Zealand arm's administration and treasury support services were provided by the Australian head office. So, when the Australian business went into administration, Halifax NZ could not operate separately.
The initial administrators' report found that while investors' money was held in trust, there was a shortfall of A$19.7m - about 9 per cent of clients' equity positions.
By August this year that shortfall had blown out to A$33.15m - about 13 per cent of client equity - due to investor account balances rising in value and the cost of the liquidation.
Investigations found that money from both New Zealand and Australian investors was co-mingled and used to fund operational losses. They found that the only way forward was to recommend the appointment of liquidators.
On March 22, 2019, the same administrators were appointed as liquidators, after creditors resolved to take that move at a watershed meeting.
Liquidators Morgan Kelly and Philip Quinlan of KPMG (which Ferrier Hodgson had merged into) said the mixing of funds meant they could not figure out how much of the money held in trust should go to which investors.
Instead, they created four classes of investor to help work out how to dish out the funds, and applied to the Federal Court of Australia and the High Court of New Zealand to get a decision on how to divvy up the money.
Five representative defendants have been appointed to represent various issues and two related parties have also joined the proceedings to represent their own interests.
Since then the case has been winding its way through the courts, with dual hearings held on both sides of the Tasman.
A final hearing is now set down for two weeks, starting on November 30.
Even then, the liquidators have told investors not to expect any money until after June next year.
"Due to the time required to verify investor claims and apply the directions and orders made by the courts to these claims and distribute available assets, we estimate that following receipt of final court directions and orders after the hearing of all issues, it will take at least six months to make a distribution," the liquidators say.
"The liquidators do not anticipate that a distribution to all investors will be made prior to June 2021 and the distribution may not be complete until after that time."
One New Zealand investor who had $45,000 invested via both the New Zealand and Australian platforms says the wait is frustrating, but there is little he can do. "That is the law, it's our legal system."
He won't be attending the court case and for now he has just put the situation out of his head. "It's just waiting and more waiting," he says.
The liquidators are also looking at ways to recover the rest of the money, but have noted that they must also consider the cost of chasing the cash.
Funding any recovery action could involve the investors and creditors having to put up more money, or the involvement of a litigation funder, which would typically take a chunk of any money that might be recovered.
"We are in discussion with multiple litigation funders," says the liquidators' August report.
In the meantime, the Australian Securities and Investments Commission (ASIC) has suspended Halifax's financial services licence until January 8, 2021.
In April 2019 it banned Halifax director Jeffrey Worboys and former director Matthew Barnett from providing financial services for six years, based on conduct in relation to a separate matter.
Until February 2018, Worboys and Barnett were joint chief executive officers of Australian Mutual Holdings, an Australian fund manager that operated managed investment schemes, including the Courtenay House Capital Investment Fund.
The ASIC found that when establishing the Courtenay House Capital Investment Fund, the pair did not exercise the degree of care and diligence required and failed to act in the best interests of the fund's members.
This included a failure to ensure that the people responsible for trading funds had the required qualifications and experience to manage a foreign exchange and derivatives fund.
An ASIC spokeswoman this week said it continued to receive regular updates from the Halifax liquidators and referred the Herald to the Halifax Investment Services key matters page on its website.
There it notes: "ASIC will consider further the circumstances surrounding the voluntary administration and liquidation of Halifax, as well as the allegations of misconduct raised by the Administrators, particularly those concerning compliance with laws on conduct and client money.
"Under the law, including the Corporations Act, licensees must keep client money separate from their own. This is an important safeguard to protect the interests of retail investors.
"ASIC takes matters concerning the protection of client money particularly seriously. ASIC notes that breaches of the client money provisions attract criminal penalties."
The ASIC spokeswoman said as the matter was ongoing, it could not provide any further comment at this stage.
This is not the first time Halifax has been in the regulator's sights.
In 2013 Halifax was the subject of an enforceable undertaking with ASIC following regulatory action over a raft of concerns about the operation of the business.
These included failing to adequately monitor its authorised representatives, failing to ensure staff were properly trained and adhered to professional standards, and failing to have an adequate complaints assessment and handling process.
An independent expert was appointed to monitor a plan to rectify the deficiencies.
The previous year, in 2012, Halifax New Zealand had started trading.
New Zealand action
The liquidators' report says in New Zealand they are investigating the conduct of the company's director and former directors.
The sole remaining director is Andrew Gibbs, who was also New Zealand managing director, and through his trust the owner of 30 per cent of the New Zealand business.
Former directors include Christopher Weir, Worboys and Veronica Aris, who all resigned on November 25, 2018 - two days before the administrator was appointed in this country.
The liquidators said they were also "reviewing the company's information and documents to determine whether there are any other claims available that will give rise to recoveries for the benefit of creditors."
Their potential recovery options include looking at shareholder loans to determine whether any funds are recoverable, potential breaches of directors' duties and auditor or accountant negligence, and possible reckless or wrongful trading.
The liquidators have lodged a notification with the insurer for claims against the directors and former directors of Halifax NZ.
They have also warned that whether or not they pursue any action depends on the evidence, the availability of funding, the merits of any legal proceedings and the likely return if successful.
Meanwhile, the Financial Markets Authority (FMA) has suspended Halifax's derivatives licence.
An FMA spokesman said it opened an investigation into Halifax NZ in February this year. "We cannot comment on the specifics or progress of the investigation, as it is confidential, and it is imperative our investigation is thorough."
The spokesman said the situation was complex due to the liquidation proceedings in both Australia and New Zealand.
"We continue to liaise with the liquidator and with ASIC, the Australian regulator. Our investigation is progressing alongside the liquidation."
Fees mount up
Administration, liquidation and legal fees have already cost close to A$15m and that is before the two week court hearing due to start at the end of this month.
An August report shows the liquidation and voluntary administration of Halifax Australia had incurred total remuneration of A$4.87m and total internal disbursements of A$177,813 by May 31.
On top of that was the remuneration incurred by the administrators and liquidators for Halifax NZ - a further A$1.84m - plus internal disbursements of A$172,168.
And legal costs incurred for the Australian and New Zealand businesses were A$7.7m, paid up to July 31.
The October liquidators' report for Halifax NZ says that as of October this year, liquidators for the New Zealand business had only been paid fees of A$838,354 out of the total liquidation fee of A$1.48m.
The liquidators said early in 2020 that it became clear the process for approving its remuneration by creditor representative groups in Australia and New Zealand was "becoming inefficient", resulting in an "unnecessarily long and costly" process.
In July the liquidators sought guidance from the court on the issue and orders were made by the Australian and New Zealand courts, saying remuneration would be reviewed by an independent expert before being put to the courts for final approval.
Tony Tesoriero, a former deputy district registrar of the Federal Court of Australia, has been appointed to do this.
In the meantime, investors continue to wait and wonder when they will see their money, and how much they will get.
Could it happen again?
A financial services professional with more than 20 years' experience in the industry says New Zealand has failed to address many of the issues which allowed Halifax NZ to fall over - and Kiwi investors are still at risk.
The professional, who declined to be named, said this country's regulations did not ringfence the risk within the country.
A spokesman for the Financial Markets Authority said holding client money offshore was not in breach of either the Financial Markets Conduct Act or FMA licence conditions and licensed issuers had obligations to hold investor money in trust, no matter what country the funds are in.
"The FMA considers retail derivatives to be a high risk financial product and we've been clear that they may not be suitable for many retail consumers.
"Investors need to be aware of the risks and determine whether exposure to derivatives fits their risk profile, especially where the use of leverage exposes them to the risk of greater financial losses than the money they have 'invested'."
About 23,000 retail investors are reported to have accounts with licensed derivative operators in New Zealand.
An FMA risk assessment report on the sector, released in July following analysis of the reporting by 24 derivative issuers, found some issuers did not comply with the regulations for handling client money.
"Although DI [derivative issuers] view their controls for handling client money as very strong, we found instances of potential risks.
"Eight DIs also told us some or all client money and/or property is held offshore. These DIs may rely on the processes and controls of overseas entities to manage client money."
The FMA notes in the report that it expects the issuers to have adequate and effective arrangements to receive, hold, use and disburse client money in compliance with regulations.
"Each year, licensed DIs must obtain assurance reports. Both of these reports must be completed by a qualified auditor and provided to the FMA.
"The assurance reports must also consider whether there are adequate safeguards against the loss, misappropriation and unauthorised use of client money."
Halifax New Zealand had $1 million in capital put aside through a loan from its Australian parent.
The finance professional says that when the decision makers and core risk functions of these companies operating in New Zealand are offshore, it leaves clients exposed.
"When something goes wrong with the company outside New Zealand, there is very little that the FMA can do. This renders their regulations virtually pointless. It could easily have been a lot more costly if Halifax had a more global footprint."
Risky for retail investors
The FMA report found there was a risk that issuers were not taking reasonable steps to determine whether derivatives were suitable for their retail investors.
"Some survey responses indicate that DIs do not take into consideration a customer's prior trading experience, understanding of leverage, or understanding of risk when assessing suitability.
It also found retail customers may be getting poor results from margin trading and were getting themselves into debt.
"Some DIs also had a substantial proportion of retail investors with negative account balances, where the investors' losses exceed their investment and they now owe money to the DI."
The FMA said its future monitoring would address how issuers operated leverage - or borrowing - limits, including product suitability processes and controls in place to ensure clients understand the risks.
The FMA also found there was a risk that conflicts of interest were being poorly managed for proprietary trading.
"Our survey revealed the majority of DIs operate a straight through processing (STP) model where all client transactions are fully hedged with a market counterparty.
"However, we were told about isolated instances of speculating against clients, such as DIs hedging less than 50 per cent of client trades or carrying a substantial level of unhedged positions. This presents a conflict of interest between the DI and their investors, as DIs can directly benefit from an investor's losses."
The FMA report said it believed the sector's risk profile was high and it would continue to focus on monitoring DIs, using the risks summarised in the report to target monitoring activities
"Our future monitoring of DIs will involve both desk-based and onsite inspections. Initially we will be following up with individual DIs to determine how they are addressing the risks identified ...
"Where DIs are not meeting key compliance obligations, we may take action on the DI's licence, or other enforcement action."
But the professional investor said more needed to be done to protect the investor victims who were often people looking for ways to earn extra income as wages are stretched and low interest rates squeeze retirees.
Remove the conflict of interest
"Effective regulations demand that regulators remove the conflict of interest between broker and client. Brokers must not in any way profit from client losses. Aligning the interests of client and broker is essential."
And he says the risk should be ringfenced within the country, reducing leverage and removing the moral hazard that exists between CFD providers and the client.
"An FMA licensed broker would then be the gold standard for retail clients. Until then, the public need to be aware that the FMA licence means very little."
He says other countries such as the United States, Belgium and India have simply banned CFD derivatives being sold to retail investors.
"Like in Belgium, it may be necessary for our Minister of Commerce and Consumer Affairs, to step in."
The FMA spokesman said it did not have product intervention powers and therefore could not ban particular products.
"Some jurisdictions do have those powers and in certain circumstances have applied them to some types of retail derivative products, such as binary options.
"We have regulatory tools that we could use if we felt the need to intervene, such as the ability to alter licence conditions (i.e. in relation to leverage and margin), which we have done in the past."