Landmark adviser lawsuit case closed

A court case that sent shockwaves through the financial adviser industry has come to an end after the two parties settled.

Friday, October 7th 2011, 5:00AM 9 Comments

by Niko Kloeten

The case involved retired vet Neil Armitage, who sued Moneyworks adviser Carey Church after his investments in a handful of finance companies lost money.

He was partly successful, with High Court Justice Robert Dobson awarding him over $60,000 out of an original claim for more than $300,000.

The judge ruled Church had recommended too large an exposure to finance companies.

He also found her to be negligent in recommending the ING credit opportunities fund (COF) as a fixed interest component of the investment, ruling that it was not a fixed interest investment, despite documentation to suggest it was.

However, Justice Dobson also ruled that there was only a low probability Armitage would have followed prudent advice, and reduced the award accordingly.

Both sides were unhappy with the judgment and the case was going to an appeal, where Church was to argue her advice met industry standards at the time.

However, she has "decided that to continue with the appeal is personally and professionally counter-productive," she told Good Returns yesterday.

"There has been a confidential settlement and the matter is now closed."

The settlement means there won't be a court test of Justice Dobson's decision, which has been questioned by IFA president Nigel Tate.

"I think the Judge made a determination based on retrospective knowledge of the risks involved in the COF.

"The Judge has applied his current knowledge to a previous situation and said these funds created some problems and now, when I look at them, they actually look more like an equity type fund than a fixed interest fund."

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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Comments from our readers

On 7 October 2011 at 9:13 am mitchell said:
when a case like this is settled out of court the interested public are deprived of learning all that went on.
Lets hope the case pending involving perpetual trust, pwc and two nelson finance companys reaches the court. There is much to be revealed that will shock and dismay.
On 7 October 2011 at 12:47 pm Concerned said:
It is a pity that some of the Judges more extreme decisions are not going to get tested at appeal. The Judge stating that the COF fund was equity not fixed interest when the documentation clearly stated that the manager of the fund considered it to be fixed interest, is of particular concern. If the Judge is correct on this why are the Regulators not prosecuting the managers for distributing a misleading offer document?
On 7 October 2011 at 2:17 pm Forthright said:
The judiciary have been proved wrong on many occasions, therefore it did not come as a surprise when a Judge alone, decided the US high yield bond market which the Credit Opportunities Fund investment in, was in fact, not a bond market but an equity market. I am sure bond fund managers are in active panic over a decision by a minor NZ court official, after all the managers probably need the activity as there is not many investors willing to invest in the US high yield bond market at the moment. I wonder how the Judge would react to a case involving the listed Credit Agricole SA which has fallen in tradable value by 43%. Based on the Judges COF president, the FMA should be taking the matter under active consideration, meaning they will probably never create a CASHA research file.
On 7 October 2011 at 8:35 pm Realist said:
There was probably nothing substantial that Church could appeal on. Sure the Credit Opportunities Fund call that it was an equity by the judge was debateable(it was really a debt instrument that behaved with geared equity characteristics), and the quantum was low,relative to the costs of taking an appeal.

Quite a lot of the money that went into the COF was via ANZ Advisers. Their clients were sold it as a fixed interest investment.Perhaps the media should follow through and find out how many of the investors were compensated?

Perhaps the real issue for advisers should be was it negligence or was it loss of capital. If the judges verdict was around negligence, then PI cover would be useful. If it was really around diminution of capital, PI cover will only pick up a small portion of the tab.

OBEKThere are lessons to be learned from this case. Most likely there will not be a repeat, as the days of advisers clipping the ticket on a raft of finance company investments have passed, and there are fewer opportunities of investers and advisers being swayed by a myriad of advertisements offering high returns in the Herald, Dominion and the Press.
On 7 October 2011 at 8:51 pm Barry said:
If anyone bothered to read what Dobson actually said, I think they'd see no reason for panic. He did not re-characterise the COF fund as an equity fund. What he said was that, given the investor's risk pattern, this particular product was too risky:

"I also note that in a joint memorandum filed before they gave their evidence, both experts agreed in respect of the ING COF that it was not appropriate for a conservative or balanced investor as an income asset, and should have been treated as a growth asset."
On 7 October 2011 at 9:30 pm Realist said:
There was probably nothing substantial that Church could appeal on. Sure the Credit Opportunities Fund call that it was an equity by the judge was debateable(it was really a debt instrument that behaved with geared equity characteristics), and the quantum was low,relative to the costs of taking an appeal.

Quite a lot of the money that went into the COF was via ANZ Advisers. Their clients were sold it as a fixed interest investment.Perhaps the media should follow through and find out how many of the investors were compensated?

Perhaps the real issue for advisers should be was it negligence or was it loss of capital. If the judges verdict was around negligence, then PI cover would be useful. If it was really around diminution of capital, PI cover will only pick up a small portion of the tab.

OBEKThere are lessons to be learned from this case. Most likely there will not be a repeat, as the days of advisers clipping the ticket on a raft of finance company investments have passed, and there are fewer opportunities of investers and advisers being swayed by a myriad of advertisements offering high returns in the Herald, Dominion and the Press.
On 10 October 2011 at 11:19 am traveller said:
Would not the adviser's PI insurere have some say in the decision not to appeal?
On 10 October 2011 at 2:42 pm Intrigued Professional said:
Interestingly, if you read the judgment carefully, and take yourself back to the time of complaint, along with what was typical for many advisers – be it Church or whomever – then put yourself in those shoes… then it appears that there are a number of substantial matters that could be appealed on.

Whether you had the energy to do so, or not – might of course be a whole different matter.
On 11 October 2011 at 8:38 am Thom Bentley said:
Just to correct a misconception here, the COF did not invest in the US high yield bond market (which has returned close to 10% p.a. in NZD terms over the last three years).

The COF invested in various tranches (including, I believe, equity tranches) of CDOs, which are a very different proposition to bonds with a highly asymetric risk profile. In a CDO if all goes well the investor gets back interest and principal. If the CDO reference portfolio suffers a certain number of defaults the investor loses everything. A CDO is not a bond, and equity tranches of CDOs carry similar or higher risks to equities.
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