Timber fight another blow to IOOF

The timber scheme was pitched to retail investors in the 1980s and 1990s as a safe, “set and forget” tax effective investment product with a long-term income stream. Brochures described the pine forest investment scheme as low risk, “little affected by industrial disputes or temporary economic downturns. The trees just keep on growing.”

A key feature of the product was a safety net for covenant holders where the trustee, AET, held security instruments called encumbrances over the land which thereby secured Sapfor’s obligation to pay proceeds of timber sales to covenant holders.

Or so they thought.

On its website AET touts itself as one of the country’s biggest non-government providers of trustee services, with more than $6 billion in funds under management and administration. It collected fees for Sapfor in return for overseeing the scheme’s forestry management and ensuring covenant holders received proceeds from the sale of timber.

“For more than 130 years, we have been helping Australians build, manage, protect and transfer their wealth to give them peace of mind about their financial future,” AET says.

Problems began in 2008 when SEAS Sapfor and its parent Auspine was bought by Tasmanian timber group Gunns, which ingloriously collapsed in 2012.

In 2010. Gunns tapped its main creditor ANZ for $340 million and agreed to grant a fixed and floating charge over the Sapfor scheme assets as collateral. AET was kept in the dark about the charges.

Then in 2012, in an attempt to stay afloat, Gunns sold a string of assets including the Sapfor trees and land.

Documents lodged in court allege that as part of the sale, AET agreed to release encumbrances on the Sapfor assets. It alleges it did it “prior to recovering the proceeds of the Tree Sale Agreement and without obtaining any other equivalent security to ensure that the proceeds would be paid to AET for distribution to covenant holders.”

As security trustee of the Sapfor scheme, it is alleged it should have kept the security in place until the covenant holders had been paid their entitlements.

It didn’t do that, and the proceeds of the Sapfor asset sale went into the coffers of Gunns, which collapsed, with the funds seized by the receivers.

According to an administrators report in 2013, filed by PPB Advisory, the Sapfor assets sold in March 2012 were subject to covenants. “Accordingly, $27.6 million of the … assets’ sale proceeds were attributable to covenant holders and were to be payable in five instalments in 2013,” the report says. “Additionally, $6.1 million of harvest proceeds were due and payable to the covenant holders during August and September 2012. Investigations indicate these harvest proceeds were not paid to covenant holders.”

The 4500 covenant holders, most of them elderly, lost their entire investment, which they had sat on for decades.

One covenant holder, Peter Hickson, invested in the Sapfor timber and land scheme in 1984. He paid it off over the next few years. “The plan was deliberate to have a long-term investment in what I thought was a reputable company,” he told The Australian Financial Review in a statement.

“Following the sale of 30 years of timber plus land valuation naturally I expected a return,” he said.

The legal battle has gone on since Gunns collapsed. In 2012, AET pursued the receivers of Gunns to retrieve the money, but failed.

Then in 2015, a covenant holder contacted law firm Piper Alderman requesting help. In mid- 2016, a new trustee was appointed after Piper Alderman applied to the NSW Supreme Court. The new trustee, David Kerr of RSM Australia, was granted access to the books and records of the trust and conducted investigations.

In June 2017, Kerr filed a case in the NSW Supreme Court against AET alleging breach of trust and negligence. AET filed its defence, denying liability and cross claimed against Sparke Helmore, the law firm it appointed for advice on the sale of the Sapfor assets. “If AET is found liable to the covenant holders for any loss or damage … then [the law firm] are liable to AET for the same loss or damage by reason of breach of duties,” the claim states. Like AET, Sparke Helmore denies liability.

The covenant holders have been waiting seven years to have their day in court. As Hickson says “I had a young family at the time and I struggled to pay it off. I was delighted when I did. My wife got sick during the middle of it all and then, in 1990, she died. I didn’t have the money at the time and had two young children (two boys) and had to bring them up.

“I didn’t do anything wrong but lost the lot because they pinched it.”

The legal action will give a glimpse into the opaque world of trustees and whether anyone is ultimately on the hook for the tens of millions of dollars lost by thousands of retirees.

Last October IOOF announced the sale of its sale of AET Corporate Trust to Sargon Capital for $51 million. It said it would retain its private trust business which focuses on private client trustee services, estate planning and compensation trusts.

“The provision of corporate trust services to the financial services industry is a specialist area that sits outside IOOF’s advice-led wealth management focus and is a stronger strategic fit with Sargon,” IOOF said.

IOOF has a lot of soul searching to do. Since Kelaher’s disastrous appearance at the royal commission in August 2018 and the subsequent move by APRA in December to take legal action against him and four other senior executives and board members, its share price has fallen so far that it was kicked out of the S&P/ASX100.

The royal commission opened up a can of worms for the company, putting its acquisition of ANZ Wealth under a cloud.

For years IOOF thumbed its nose at ASIC and APRA and both copped it. Now it seems, investors and the regulators are fighting back.

The Sapfor covenant holders are waiting for July for the court to bring them closure one way or another. But there is a lot of bitterness.

“I’m a registered nurse and if I ever stuff up I would have to go before the registration authority. These people should face the appropriate regulating body. They should be held accountable for their actions,” covenant holder Peter Hickson says.

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