INVESTMENT managers appointed to oversee $400 million in Trio Capital funds had previously worked at Pacific Continental Securities, a "boiler room" stockbroker censured in the US and Britain for pressuring investors to buy dodgy stocks.
The allegation was contained in a letter sent to the Australian Securities and Investments Commission chairman, Tony D'Aloisio, that blew the whistle on Trio Capital's Astarra Strategic Fund.
Within a month of receiving the letter, ASIC had frozen Trio's 24 managed investment schemes. Shortly afterwards the Australian Prudential Regulation Authority had frozen Trio's five superannuation funds.
Astarra Strategic Fund is under scrutiny over the whereabouts of $118 million supposedly invested in international hedge funds througha company in the BritishVirgin Islands called EMA International.
This week the Herald revealed that about $47 million had been tipped into the fund on June 30 by managers acting for Trio Capital.
Shortly before Christmas regulators in effect seized control of all Trio's investments, revoking its licence to operate managed investment schemes and placing a trustee over its superannuation funds.
The whistleblower letter was sent by the chief investment officer of the fund manager Bronte Capital, John Hempton, who was alerted to Trio's flagship investment fund, Astarra Strategic Fund, after he had blogged about US hedge funds.
In his letter to ASIC, Mr Hempton focused on the smooth returns achieved by Astarra Strategic Fund over the past five years, similar to how whistleblowers focused on the returns of Bernard Madoff's fund.
"It reported a few negative months (typically about -1 to -2 per cent) during the height of the crisis - but it has never reported anything that looks like a bad result," Mr Hempton wrote. "These are the sort of results that have had a bad reputation since the exposure of Bernie Madoff."
Mr Hempton said this week: "The point is, all ASIC needed to do to dismiss my letter was to check whether the assets were there. That is the one thing that has not yet been able to be done."
Mr Hempton also focused on the career histories of the investment managers of Astarra Strategic Fund - Shawn Richard, 34, and Eugene Liu, 33 - and voiced his alarm that Trio had appointed the men as investment managers to all of its funds. He said both men had worked previously with Pacific Continental Securities.
Pacific Continental Securities has been associated with "boiler room" or pressure tactics since the late 1990s, as it sold microcap companies to investors.
It has been mentioned in academic papers examining the sale of practically worthless US companies to offshore investors. Its British arm, established in 2001, collapsed in June 2007, and last year its chief executive was banned and fined #80,000 ($145,000).
The Times described its tactics last year, saying "the company was notorious for its cold-calling of inexperienced investors and for using high-pressure techniques to sell them shares of companies listed on AIM [the Alternative Investment Market] and high-risk shares listed on America's over-the-counter market".
Mr Liu refers to his time with Pacific Continental Securities in the US, and World Financial Capital Markets in the US and Asia, in his biography on Astarra Asset Management's website.
Earlier online versions of Mr Richard's biography say he held the position of general manager for Pacific Continental Securities' Taiwan branch from 1996 to accepting the vice-presidency in 2000.
Comment Page 5
Frequently Asked Questions about this Article…
What happened to Trio Capital and its managed funds?
According to the article, regulators moved quickly after a whistleblower letter: ASIC froze Trio Capital's 24 managed investment schemes within about a month of receiving the letter, and APRA froze its five superannuation funds. Shortly afterwards regulators effectively seized control of Trio's investments, revoked its licence to operate managed investment schemes and placed a trustee over its superannuation funds.
Why was the Astarra Strategic Fund under scrutiny for missing assets?
The article says Astarra Strategic Fund was being investigated over the whereabouts of about $118 million that was said to be invested in international hedge funds via a British Virgin Islands company called EMA International. The whistleblower flagged concerns that those assets could not be independently verified.
Who blew the whistle on Astarra Strategic Fund and what did they report?
The whistleblower was John Hempton, chief investment officer at Bronte Capital. In a letter to ASIC he highlighted suspicions about Astarra's unusually smooth returns over five years and urged regulators to verify whether the assets actually existed. His comparison referenced the type of returns that raised alarms in the Bernie Madoff case.
What specific return patterns raised alarm about the fund?
Hempton pointed out that Astarra reported very smooth returns, with only a few small negative months (typically around -1 to -2 percent) even through the financial crisis. He argued such consistently steady performance can be a red flag — the same pattern that attracted scrutiny in other well-known fraud cases.
Who were the investment managers named in the article and why did their backgrounds worry investors?
The article names Shawn Richard (34) and Eugene Liu (33) as investment managers appointed to Astarra Strategic Fund and other Trio funds. Hempton expressed alarm because both men had previously worked at Pacific Continental Securities, a firm associated with 'boiler room' sales tactics, raising concerns about suitability to manage all of Trio's funds.
What is Pacific Continental Securities and why is it mentioned in the Trio Capital story?
Pacific Continental Securities is described in the article as a firm long associated with 'boiler room' or high-pressure selling tactics, including cold-calling inexperienced investors and pushing microcap and high-risk shares. The firm's British arm collapsed in 2007, and its chief executive was later banned and fined. The managers' prior work there prompted scrutiny.
Did the article say any large, unusual transactions occurred before the freeze?
Yes. The Herald revealed that about $47 million was tipped into the Astarra fund on June 30 by managers acting for Trio Capital, a large inflow the article highlights as part of the surrounding concerns.
What red flags from the Trio Capital/Astarra case should everyday investors watch for?
Based on the article, investors should be alert to several warning signs: unusually smooth or too-consistent returns over many years, difficulty verifying where assets are held (especially if routed through offshore companies), sudden large unexplained inflows, and fund managers with histories tied to firms accused of aggressive or questionable sales tactics. The whistleblower noted regulators could have checked whether the assets were actually there — verification and transparency are key.
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