Australian superannuation has been dubbed the “biggest pool of disengaged investment in the world”, by activist investor John Hempton of Bronte Capital, speaking at the IMCA annual conference.
Hempton, who was taking part in a discussion on fraud at the conference held in Sydney and Melbourne on December 3 and 4, warned this disengagement made the system ripe for fraud. He estimated that there were around five to six fraudulent financial services organisations in Australia that were seeking to exploit people’s low engagement levels with their superannuation.
He predicted that many frauds would not be fully exposed until the next decade when the system is predicted to have much larger outflows of capital as greater numbers retire with significant balances.
Hempton makes money out of an investment strategy that shorts international companies, which he suspects of providing misleading or fraudulent information to investors. It was such investigations that led him to warn of wrongdoing at Trio and its Astarra hedge fund.
In highlighting the inevitability of fraud in superannuation, he said: “[Australia] has the biggest pool of disengaged money in the world and there are at least 5-7 fraudulent organisations out there looking to exploit this.”
Hempton has suspicions on a range of organisations, but did not have enough evidence yet to expose fraud. He warned the delegates, many of them investment consultants and asset owners, that they should not rely on the regulator stopping these organisations soon either – Hempton was speaking before the release of the Financial System Inquiry report which recommends greater scope for the Australian Securities and Investment Commission in investigating financial services firms it suspects of fraudulent activity.
“The regulator has to be 100 percent certain something is a fraud before prosecuting, so you cannot rely on them. If you guys are recommending a product and you feel that it is 5 percent likely to be a fraud then you should not be recommending it.”
Hempton was speaking in a discussion with Joel Cohen, the US prosecuting lawyer of Jordan Belfort, who ran a boiler room fraud aimed at getting personal investors to purchase overvalued stocks, whose crimes were portrayed in the film the Wolf of Wall Street.
Cohen, who was speaking on a phone link from New York, confirmed Hempton’s view by saying that prosecutors had to build up large amounts of evidence over several years to be able to successfully prove that fraud was taking place at Belfort’s firm Stratton Oakmont.
Stephen Dunne, chief executive of AMP Capital Investors, approached the issue of fraud from a different perspective. He cited research which showed that 24 percent of financial services professional would like to be involved in insider professional if they think they could get away with it.
He urged individuals to take responsibility for the system they are a part of and suggested this could start by signing the Banking and Finance Oath, which contains a set of commitments that individuals working in the banking and finance industry agree to adopt and apply as personal principles in their work.