Investors, Take Note

Sydney Morning Herald

Wednesday April 30, 2008

Anne Lampe

RETIREES and investors plunged $339 million into unsecured notes issued by Australian Capital Reserve and stand to lose a lot of it following its collapse a year ago. How much they will lose is still being determined by the liquidator, PricewaterhouseCoopers.

As part of that process the liquidator has been picking through the entrails of the company in the NSW Supreme Court, examining the co-founders of the group - Sam Pogson and Murray Lapham, non-executive directors of ACR, associates, as well as the valuer of most of the properties, Peter Phippen.

It was the first time these parties have been questioned in detail, in public, about their recall of multimillion-dollar deals between the network of more than 26 property development and finance companies run by Lapham and Pogson under the Estate Property Group banner.

Because many of the transactions took place almost two to three years ago, the two former directors said they could not recall in detail either the transactions or what led to them at the time.

Some large, multimillion-dollar transactions - one for $17 million - were backdated several months and had the effect of enhancing greatly both the 2005 and 2006 financial year-end profits and balance sheets. Vacant and partly built sites were valued and revalued on a formula which worked backwards from the estimated sale price of a completed development. This optimistic - and, as it turned out, totally unrealistic - valuation formula and backdated sale contracts had the effect of boosting the asset values and enabled ACR to raise more money from the public. Asked about these transactions, Lapham and Pogson said they sought to make profits every year and relied on their accountant's advice on the timing of transactions that could be included in year-end accounts.

What ACR turned out to be was a low-interest fundraising vehicle aimed to provide development funds for Lapham and Pogson projects.

There were many moments of unreality during the course of the examination but a few stood out.

It was previously unknown that the two directors each walked away with 13 apartments in a Gosford development. It emerged that apartments from the development were being sold for about $550,000 each, so the 13 units could have been worth more than $7 million.

Those purchases were financed with funds from the group. Pogson and Lapham both said they had wanted to retire with the rental income from the apartments so they could have a comfortable retirement and go fishing.

Whether or not they will now be able to realise their dream of fishing on the rent of those apartments is something that will be determined by the liquidator. Thirteen is not known as a lucky number.

Investors received 9.55 per cent return a year for their 10-year unsecured notes. It was all second- and third-mortgage money.

ACR loaned that money for up to 15 per cent but with first-mortgage security from the companies in the group they were lending to. This interest rate more accurately reflected the risk being taken by investors.One has to ask: if the lender demanded first-mortgage security in return for 15 per cent a year, why would anyone be prepared to settle for no security in return for 9.55 per cent?

It soon became clear ACR was merely a funding arm for two aspirational private developers who were running 26 development and construction companies to realise their dreams.

Other deals which came to light include Phippen's purchase of Lapham's used Mercedes-Benz at the trade-in price. He had also sought to buy a unit in the Gosford block, which ultimately did not proceed. Phippen had no recollection of that failed purchase. He put this down to a heart operation which adversely affected his memory. His mother bought a unit in the same block for $349,000, a discount of up to $200,000 off the market value.

The liquidator will now complete a report on his findings and present it to creditors and to the corporate regulator. The evidence wound on, listing a raft of related party deals, regular revaluations of properties - sometimes monthly - by the same valuer, and massaged accounts.

The washup is that Lapham says he has no assets, other than two leased cars. He lives in a multimillion-dollar home owned by his wife. Pogson similarly has no assets, other than a bicycle. The family home is owned by his wife.

The liquidator will complete a report on his findings and present it to creditors and to the corporate regulator.

© 2008 Sydney Morning Herald

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