Bryan Frith From: The Australian November 03, 2009 12:00AM AS...

Bryan Frith From: The Australian November 03, 2009 12:00AM

AS with Centro, ASIC's civil proceedings against former executives of the failed MFS involves charges of breach of fiduciary duties and failing to present accounts giving a true and fair view of the company's affairs, with the added spice of claims that a paper trail of false transactions was created to deliberately mislead the company's non-executive directors, auditors, bankers and even its own compliance officers.

Moreover, reading between the lines, more charges may be in the offing if ASIC succeeds in these proceedings, because the events outlined by ASIC would indicate MFS was probably already insolvent before the alleged contraventions took place.

Essentially, ASIC claims the executive officers caused MFS Investment Management, now known as Managed Investments Ltd, the responsible entity of the Premium Income Fund, to draw a $150-$200 million facility granted to the fund by Royal Bank of Scotland, and immediately pass the funds to MFS, apparently without even going through the fund's bank account, to enable the parent company to pay down pressing debt obligations.

The funds were the property of PIF, which received no benefit from the transaction, and in fact suffered losses. Moreover, as passing the funds up the tree to MFS entities was a related party transaction it required prior unitholder approval, which was not obtained, in contravention of the Corporations Act.

ASIC is seeking not only civil penalties (of up to $200,000 for each breach) against the former executives, but orders against all but one of the executives, that they be required to pay compensation ranging from $103m to $147.5m.

ASIC is seeking also to have the former officers disqualified from managing a corporation, which includes being unable to act as a director of a company.

PIF's responsible entity, now controlled by Jenny Hutson's Wellington Capital, already has proceedings afoot seeking compensation of $147.5m in relation to the funds that were transferred MFS entities, and litigation funder IMF is funding a class action. Although the responsible entity's action is against MFDS corporate entities, ASIC is after the executive directors and officers involved.


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But unlike Centro, or for that matter James Hardie, ASIC is not pursuing the non-executive directors because it considers they were misled and provided false information and documents, which according to ASIC, created sham transactions that were backdated and purported to transfer assets (largely valueless) as security for the $150m.








The defendants are former MFS chief executive Michael King, former deputy chief executive and MFSIM director Craig White, former MFSIM chief executive and director Guy Hutchings, former MFS chief finance officer David Anderson, and former MFSIM fund manager Marilyn Watts.

ASIC claims that in June 2007 MFS borrowed a $250m short-term facility from Fortress Credit, which was due to be repaid on August 31. MFS negotiated an agreement under which it would repay $100m of the debt, plus a $3m extension fee by November 30, and repayment of the remaining $150m would be extended until March 2008.

MFS did not have sufficient funds to repay the $100m and so MFSIM was used to borrow on behalf of PIF and transfer the funds to MFS entities, in breach of its fiduciary responsibilities to PIF and its unitholders.

Interestingly, King is among those charged by ASIC although he was not a director of MFSIM or the other MFS entities involved, and he was not a signatory to any of the documents. However, ASIC contends that he was fully aware of what was taking place, that White was in contact with him on almost a daily basis and acted in accordance with his instructions, and the regulator cites a bundle of emails to back up its contentions.

In view of the claims about falsifying records, deliberately misleading the auditors, bankers, non-executive directors, and compliance officers who suspected breaches in relation to the transfers, it is perhaps surprising that some of the parties were charged only with civil breaches of their fiduciary responsibilities to a managed investment scheme and not with criminal offences.