Theta hit with $2M penalty for defective product disclosure statements
ASIC 2020-11-19 9:41 pm By Cat Fredenburgh | Melbourne

A court has ordered Theta Asset Management, a collapsed financial services provider that ran a property investment scheme targeting retirees, to pay a $2 million penalty for issuing defective product disclosure statements.

Federal Court Justice Neil McKerracher found that Theta and its managing director Robert Marie had violated the Corporations Act by authorising the issue of five defective product disclosure statements for the Sterling Income Trust managed investment scheme. These statements were used to raise close to $17 million from investors, many of them retirees.

Marie was ordered to pay a $100,000 penalty and was barred from managing corporations for four years.

In handing down his judgment, Justice McKerracher noted that investors in the trust had suffered catastrophic losses. The judge has not yet published his reasons.

Many retirees allegedly lost their life savings after investing in Sterling, which promoted property schemes that would pair “smart property investors that are looking to get a better rental return with retirees that are looking to sign a long term lease”.

In January, the Australian Securities and Investments Commission suspended the Australian Financial Services Licences of Theta and Valuestream Investment Management until July 21, 2020, after they were placed in administration the month before. Worrells’ Christopher Darin and Mervyn Kitay have been appointed administrators of the companies.

The corporate regulator said it will not seek to recover the $2 million penalty from Theta, as this would limit the funds available for distribution to creditors.

ASIC took Theta and its managing director to court in December for issuing the allegedly defective product disclosure statements between May 20, 2016 and April 30, 2018.

The Sterling Investment Trust was Theta’s primary funding mechanism for the acquisition of property management agreements and property management businesses or rent rolls by Sterling Corporate Services. Twelve Sterling Group units went into administration in March of last year.

Justice McKerracher found the product disclosure statements — issued for development units, management company units, and income units and growth units in the SIT — contained misleading and deceptive statements on rental payments, the payment of distributions to unit holders, and the suitability of units, in addition to failing to disclose information required under the Corporations Act.

The product disclosure statements represented that distributions from the SIT would be enough for investors to pay the rent due on their long-term residential leases. But the distributions depended on the performance of the underlying investments of the SIT and the financial position of the Sterling Group, a risk which Theta failed to disclose, Justice McKerracher found.

The product disclosure statements for income and growth units were also found to be defective because they included the misleading and deceptive statement that Sterling Group would provide a secured or enforceable guarantee of the distributions to be made to unit holders, which it failed to do.

A revised product disclosure statement issued for income and growth units which represented that the SIT would suit an investor looking for income and capital preservation and not capital growth was also found to be misleading and deceptive because the financial position of the SIT on the issue date of the product disclosure statement made the trust an unsuitable investment for certain investors.

All of the product disclosure statements at issue omitted information that investors were entitled to, the court found.

The court also found a lack of clear disclosure regarding conflicts of interest; the risks of the trust’s underlying investments; income support by the group to ensure it met its obligations; limitations on investors’ ability to redeem their investments; and auditor concerns regarding the financial viability of the trust, among other omissions.

Shine Lawyers had considered a class action on behalf of investors in products by Sterling Group entities, including the SIT, but decided against pursuing the matter.

ASIC said it continues to investigate other officers and entities within the Sterling Group of companies.

Theta is represented by Colin Biggers & Paisley.

The case is Australian Securities & Investments Commission v Theta Asset Management Limited & Anor.

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