Massive litigation is almost certain as the collapse of Ross Asset Management is unravelled, writes Bruce Tichbon

Hundreds of kiwi “mom and pop investors” have been shattered by the collapse of Ross Asset Management (Ram), wiping out nearly half a billion dollars of their savings. Widows have been stripped of their life savings, children have lost their money for university and many will be forced to sell their family homes.

But on the flip side, some lucky ones have made money out of Ram; they took out more than they put in.

It is too early to say if RAM was a legitimate share trading business, or a Ponzi scheme, and it will take forensic examination by the receiver and soon-to-be-appointed liquidator to prove what it really was.

A group has been formed to represent investors and over half have joined. Feedback suggests that besides a sense of grief and shock, certain sentiments are emerging. Many are angry the government did not provide regulatory protection. But that’s not the only issue. Unwinding the mess will almost certainly be expensive and take many more years than it should.

Recall the recent case of Alan Hubbard’s Aorangi Securities, where it has taken 2 years and $12 million in administrative and legal fees to argue over $60 million and there is still no resolution despite appeals to the government. The Madoff Ponzi in the USA has taken over 3 years so far and according to the investor group has absorbed nearly US$1 billion (NZ$1.18bn) in administrative and legal fees. Why does the so-called professional horsepower needed to unravel the mess left by one man seem to cost so much?

Liquidation experts advise us that massive litigation is almost certain in the case of the David Ross companies, as a voidable transaction regime or similar is highly likely (but not yet proven). Under such regimes, those who have made money from Ram (they have taken out more than they put in) may have to return some. This is based on the philosophy that some or all of the money taken by them actually belonged to other investors. The returned money would go into a pool from which the investors would be able to recover some of their original investment. Some $67 million was taken out of RAM in the last 2 years.

This divides the RAM investor community into two camps, those who might have to pay back and those who might benefit from this. It brings an element of fairness for those who have lost their whole life savings, but is not favoured by others.

This sets the stage for massive litigation. Already some parties are ‘lawyering up’. Those who in the past made money will tend to argue RAM was not a Ponzi, and that their past gains were legitimate share trading. Those who stand to gain from the claw back will argue the opposite.

But it does not stop there. Those who in the past made money now have money to pay for a long and expensive legal fight. Those who were made destitute will not be able to afford a long fight.

The legal system breaks citizens into three classes. The rich can afford lawyers, the poor get legal aid and can have lawyers, and the middle class has neither wealth nor legal aid. The bulk of RAM investors are middle class and fall into this latter category. It appears they have been pillaged by Ram, now many will be pillaged again by our own legal and administrative institutions in the wash-up. The rich, corporates and government can afford lawyers and administrators who charge hundreds of dollars per hour for years on end; ordinary mom and pop investors cannot.

The government has in some areas implemented low cost regimes to fix such problems. The Accident Compensation scheme (ACC) removed the grounds for litigation, in exchange for efficient, binding administrative solutions. The Disputes Tribunal and the Tenancy Tribunal provide much cheaper alternatives to the courts. The government is about to introduce a tribunal-like system for the Family Court, which was becoming unaffordable for the government after its costs blew out to $137 million per year. This should also reduce costs for Family Court litigants.

Could the government introduce a tribunal system to solve the potential problems for Ram investors, of massive administrative and legal costs, and years of delay? A mediator who could make binding decisions could have the whole thing wrapped up in six months. But instead investors will probably still be fighting in three years’ time and beyond, looking at bills of many millions of dollars that the investors will have to pay, seeing what little is left of their precious family investments devoured.

Bruce Tichbon is a spokesperson for the Ross Asset Management Investors Group

Comment – Notice Madoff’s wife and daughter must forfeit nearly all their assets.  Further, nearly half of the funds have been recovered for redistribution.  The US Ponzi law seems to be clear and decisive, unlike NZ law.

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Comment – We are working hard to find out why the liquidator is of the view that claw back  “was in an area of the law which was uncertain”.

The man charged with untangling Ross Asset Management is dampening expectations about the prospects of clawing back funds from clients who withdrew their investments before the suspected Ponzi scheme collapsed.

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It may prove difficult for the liquidators of Ross Asset Management to claw back payments already made to some investors ahead of others, following two High Court cases.  The decisions have shaken up the generally accepted understanding around insolvent transactions – payments made by a troubled firm in the run-up to it going under.

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Comment – this news is deeply distressing.

The Securities Commission appears to have been warned about suspected Ponzi scheme operator David Ross three years ago, but took no action. An email obtained through the Official Information Act shows Securities Commissioner Annabel Cotton was told of concerns about Ross in September 2009.

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