Thousands of investors who were exposed to heavy losses by investing their retirement savings in the First Guardian and Shield managed investment schemes have been told they may be able to get “remediation” from the superannuation trustees that ran platforms that housed their investments.
Corporate watchdog the Australian Securities and Investments Commission (ASIC) is investigating the failed First Guardian Master Fund and Shield Master Fund, which have left thousands of investors exposed to heavy losses, collectively worth more than $1 billion.
Until now, much of the media spotlight has been on the “lead generators” that called people, lured them in, and pushed them onto licensed financial advisers that then pumped their money into the now-failed managed investment schemes.
But the focus is also turning to the role that superannuation platforms, which are overseen by superannuation trustees, may have played.
Superannuation trustees, including Equity Trustees, Macquarie, Netwealth, and Diversa, gave the go-ahead for First Guardian and Shield to be placed on their platforms.
All super platforms have been contacted for this story. Equity Trustees, Netwealth, and Diversa declined to comment.
Last month, ASIC announced it was suing one of the platforms, Equity Trustees Superannuation, for its alleged role in the loss of $160 million of retirement savings in the Shield Master Fund.
These platforms, which have been around for decades, house the investments. They allow financial advisers to invest on behalf of their clients in options that can earn them money, such as shares, hybrids, bonds, and managed funds.
ABC News can reveal that ASX-listed Sequoia, which has itself been under fire over its role in the collapsed First Guardian and Shield funds via its subsidiary InterPrac, has written to investors caught up in the collapses, telling them they may be able to get “remediation” through a mechanism called the Operational Risk Financial Requirement (ORFR).
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If you have more information about this story please contact Nassim Khadem at khadem.nassim@abc.net.au or nassimkhadem@protonmail.com
Sequoia CEO and managing director Garry Crole told ABC News “Macquarie and ASIC both erred in placing Shield into receivership”.
He said a “viable alternative existed in the case of Shield via a Deed of Company Arrangement (DOCA) which could have facilitated the appointment of a new manager and protected more capital”.
“The failure to pursue that path has likely amplified member losses and I confirm as a licensee who cares for members we applied to the courts to support a manager who put up a case they believed would see up to 100 per cent of Shield funds recovered,” he said.
“Macquarie and ASIC dismissed our request to represent members and the court ruled the clients were not ours but members of the super funds so we were unable to represent such clients.”
He said there was evidence that ASIC was notified as early as 2022 regarding issues with First Guardian.
He said in the case of Shield, InterPrac actively engaged with the trustee and the court, but was deemed not to have standing, as clients were considered members of the fund and therefore only the trustee could act on their behalf.
Corporate watchdog ASIC is investigating the failed First Guardian Master Fund and Shield Master Fund collapses. (Supplied: asic.gov.au)
What is the ORFR reserve and can it be used to pay remediation?
Since 2013, superannuation funds regulated by the Australian Prudential Regulation Authority (APRA) have been legally required to hold an ORFR reserve.
This is a financial safety net designed to protect members from “operational risks”, which Sequoia says include losses that arise due to “issues such as governance failures or investment menu oversights”.
ASIC sues Equity Trustees Superannuation for alleged role in $160m investment scheme
Sequoia says its legal and advice teams have written to relevant super trustees “asking them to consider whether the issues with the Shield and First Guardian warrant the use of the reserve to support affected members”.
It is unclear whether superannuation trustees could direct funds to pay customer remediation using operational risk reserves or via other means.
It is believed that most investors caught up had their retirement savings invested by financial advisers via superannuation platforms.
However, some investors used self-managed superannuation funds and therefore would not be eligible for compensation under the ORFR.
In addition, recouping money via the liquidation process is proving problematic for about 6,000 people who had invested about $500 million with First Guardian. They have already been told by liquidators that there may be insufficient funds to pay them back.
Sequoia told investors in a letter: “While we cannot guarantee a successful outcome, we believe there is a legitimate case and are committed to advocating strongly on your behalf to ensure this outcome is given our entire attention.”
APRA requires superannuation funds to hold an operational risk financial reserve (ORFR) equivalent to the value of 25 basis points of funds under management.
But some hold general reserves over and above these risk financial reserves.
In October 2024, APRA introduced updated guidance to allow for lower minimums for large funds, with targets of 0.20 per cent for funds over $30 billion and 0.175 per cent for those over $165 billion in funds under management.
Financial Services Council CEO Blake Briggs, whose organisation lobbies on behalf of the big superannuation funds, told ABC News that the collapses of First Guardian and Shield were “deeply concerning as they can have a material impact on the retirement outcomes of consumers”.
He did not comment on whether the super trustees which governed the super platforms would pay impacted investors remediation.
Instead, he said, there might have been “breaches of multiple areas of existing laws from misleading and deceptive conduct, potential breaches of director’s duties, the advice best interest duty, conflicted remuneration and conflicts of interest”, which would all be tested in court.
“There also appears to have been problematic lead-generation practices designed to get around existing anti-hawking laws, which sought to entice consumers into these failed schemes,” he said.
“Superannuation platforms have existing high regulatory expectations for the way they oversee the investments they offer to members, and we are reviewing with industry what further measures can be taken to identify and prevent deliberate acts of fraud in the system.”
Sequoia under scrutiny because of InterPrac
Sequoia itself has been under scrutiny for its role in the failures of the Shield Master Fund and the First Guardian Master Fund, both of which saw heavy flows of money coming from advice firms linked to Ferras Merhi, mainly through his firm Venture Egg. Mr Merhi is under ASIC investigation.
Six thousand set to lose super savings
InterPrac, which is a wholly owned subsidiary of Sequoia, had authorised both Mr Merhi and Venture Egg until cutting ties at the end of May.
But Venture Egg is not the only InterPrac-authorised advice business that is on ASIC’s radar, with others including Reilly Financial and Miller Wealth Group advising clients to invest in one or both funds.
Mr Crole told ABC News that the fundamental purpose of ORFR introduced under the Gillard government in 2013 was to ensure that members would not bear the cost of systemic or operational failures.
He said according to APRA guidance, “operational risk events” that reserves can cover include “inadequate or failed internal processes or controls” such as failures to conduct due diligence failures or oversight breakdowns.
The guidance, he said, also covered “external events including fraud” and “failures by service providers whose actions directly affect member outcomes”.
Mr Crole noted that he also served on the board of Diversa Trustees during the development and early implementation of the ORFR framework.
He said when Shield and First Guardian funds were placed on the superannuation platforms, it could have been the result of a “failure to identify red flags or conduct adequate investment due diligence”, as well as “misrepresentations made to research houses, trustees, and licensees; and exposure of member funds to unauthorised or mismanaged schemes that have since collapsed”.
“These events meet the threshold of materiality and operational causality required to activate the ORFR,” he said.
“Remediation is necessary because members have suffered direct financial harm without fault of their own.”
In August, Sequoia disclosed that $22 million in complaints against its subsidiary InterPrac have been lodged with the Australian Financial Complaints Authority (AFCA) relating to its role in the collapses, but sources have told ABC News the figure could run much higher.
In an ASX release in April, Sequoia said InterPrac was assisting the regulator and would review its operations and systems.
It said it would also consider the obligations of trustees, auditors and custodians of the funds and the obligations of platform providers through which the investments into the funds were made.
It was also reviewing the “obligations of the rating authorities with respect of the funds” — relating to news that investment research firm SQM Research gave “favourable” ratings to the now-collapsed First Guardian and Shield funds.
SQM Research’s founder and managing director, Louis Christopher, has previously said “the firm assigned ratings between 3.5 and 3.75 stars out of 5 to the above-mentioned funds over their life cycle”, but “both funds were subsequently downgraded when we became concerned about limited disclosure, irregularities, and a lack of information from the fund managers”.
Louis Christopher said SQM Research assigned ratings between 3.5 and 3.75 stars out of 5 to First Guardian and Shield. (ABC News: John Gunn)
Compensation Scheme of Last Resort
Some investors who lost money in the First Guardian and Shield schemes can also seek to recoup their retirement savings via the Compensation Scheme of Last Resort (CSLR).
First Guardian investors to lose super
The scheme is designed to compensate victims of financial misconduct when the firm behind a claim has gone out of business or cannot pay up after a determination from the Australian Financial Complaints Authority.
But claims to the scheme are capped at a maximum payout of $150,000 per Australian consumer.
And compensation is funded via an industry levy on financial advisers, which has more than doubled over the past financial year.
Financial advisers contributed about $24.1 million to the program in the year to June. In the current financial year, advisers are expected to contribute $75.7 million.
Industry bodies like the Financial Advice Association Australia (FAAA) have been pushing for the financial advice sector’s contribution to be capped at $20 million annually, and for the government to cover the excess cost from a broader range of sectors.
The FAAA’s CEO, Sarah Abood, told ABC News the funding mechanism that has been built to support the CSLR was “both unfair and unsustainable”.
Sarah Abood says funding for the CSLR needs to be broadened. (ABC News: John Gunn)
She noted managed investment schemes were “a notable and problematic exclusion from the scope of the CSLR, as failures of these products are responsible for substantial consumer harm that currently has no recourse if the firm fails”.