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
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.
"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."
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.
Whether you had the energy to do so, or not – might of course be a whole different matter.
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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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.