Investors could burn again in new round of syndicates

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Property schemes taking deposits from investors are springing up while collapsed firms still wind their way through courts and liquidations.

Heed this warning from Paul Dale, the Auckland barrister fighting for 400 of the 4000 Blue Chip investors who stand likely to lose $80 million in all.

“People are already being lured back into syndicates,” he tells BizScene. “There are still insufficient safeguards and it [a crash] will happen again – absolutely, for sure.”

With Queenstown’s property market hard hit, locals may welcome new pooled investment money to pump into development. However, a second quick collapse might delay full market recovery for years.

Dale, whose Blue Chip clients are spread as far south as Queenstown and beyond, understands why older savers fall for risky investments. They need extra cash flow because they find they can’t live on superannuation.

“They’ll take their savings and they’ll invest them. They are absolutely vulnerable.”

Widespread naivety that survived the finance-companies crash surprises him. Sales people toss about “grand expressions” like secured debenture stock and mortgages backed by Lloyd’s of London.

“People are getting taken in by expressions like that.”

Some financial advisers fall for the patter too, he adds.

Property schemes continue to attract savers because of a belief that property prices always rise and because we have no capital-gains tax. This encourages the sales pitch: Put your money into property and you can’t lose.

Dale asked former Labour Commerce Minister Lianne Dalziel to put troubled Blue Chip under statutory management.

He believes this would have worked and saved investors millions. However, Dalziel, on what he believes was lame advice, declined.

“She was told it was under control by liquidators when it wasn’t.”

Dale was in court this week testing enforceability of mortgages on investors’ homes. Other litigation will follow against Blue Chip directors and a slew of lawyers.

Client fees don’t cover all costs, but Dale hopes his firm can be paid “when we win”.

He expects wide suffering if his case on Blue Chip mortgages fails.

People in similar positions in America are better off. Lenders cannot pursue them beyond foreclosure and taking their homes.

In New Zealand, lenders can pursue people for debt after foreclosure. They can bankrupt you as well as take your home.

Dale understands the reasons for the Government guaranteeing bank and finance company deposits that qualify, but believes it might also consider saving some homes.

Commentator and analyst Bernard Hickey, who runs the web site interest.co.nz, wants the Government to give the Reserve Bank even more power over finance companies.

“It should take the extra step of making the Reserve Bank the front-line regulator instead of trustees, who I think have failed,” Hickey says.

Anyone taking deposits from the public should be regulated like a bank, he argues.

They should file quarterly accounts promptly with the Reserve Bank, which would also monitor their capital structure.

Finance companies reported up to nine months late before the crash, Hickey adds.

Rather than leave investors to find finance-company reports and prospectuses on the Companies Office internet site, he favours “pro-active” releases similar to those on the Stock Exchange.

Neill Birss will chase up your biz tips: neillb@maxnet.co.nz