Written by Jonathan laws
Introduction
We wanted to wait before putting out any further commentary on the various court hearings, publications and task announcements that the Receivers of the Brite Advisors collapse have published and completed. This delay was intentional, as there has been so much up in the air, and we wanted to get a firmer understanding of just how accurate any timelines and comments made will be.
On a personal level, there was also a trip to Chicago, Madison, Green Bay and Nashville in the middle to watch my beloved Green Bay Packers, of which I even had the chance to meet a few clients, including former Brite clients, and then another bout of Covid which further delayed getting this out. However, given the timelines involved, giving time for things to start moving with the Receivership has not been the end of the world, and has allowed us to get more clarity around the accuracy of some of the guideline dates provided etc.
We will be publishing a much longer commentary on the fourth Court Report, which brought to light lots of “interesting” (read: aggravating) facts around Brite and their various relationships with international companies, and a blog on the timeline provided for the fund disbursement, both of which will be coming out shortly. We wanted to put together a summary and commentary grounded in our real life experience on the Frequently Asked Questions document that they published on 28th August though first.
Frequently Asked Questions (FAQ)
The FAQ and responses they published are shared below (official MGN response is in italics) along with our commentary on what their answer indicates and our views and thoughts from our own experiences dealing with Brite platform victims.
For further context and clarity, we recommend that everyone review the Fourth Report in conjunction with the FAQ section, for which we will also be publishing a blog on shortly, especially as there are many references to the report within the Receivers responses.
It is my understanding that US beneficiaries’ assets are held separately and are therefore unaffected by the shortfall. Can a distribution occur quickly in relation to those beneficiaries?
The Receivers do not agree that there has been any effective segregation of the Client AuM. However, the Receivers are aware that Brite USA has informed its clients that it believes their assets are segregated from Client AuM held for other Beneficiaries.
The assets held in the Interactive Brokers Australia Pty Ltd (IBA) omnibus account were separated into sub-accounts (within the omnibus account) in June 2021. One was designated as purporting to hold the assets of US-based Beneficiaries. The Receivers have considered the circumstances of this separation, and the information provided by Brite USA.
Whilst the Receivers’ investigations are still ongoing, the Receivers do not consider that the separation of assets into different IBA accounts in this way protected those assets from Brite Advisors conduct which has resulted in the shortfall in Client AuM. This is explained in further detail in the Fourth Report at [2.1.24] – [2.1.26], [4.6.9] – [4.6.12], [6.3.16] – [6.3.22], and [6.4].
The Receivers are progressing their investigations into how and why Brite Advisors separated the IBA omnibus account and will provide a further report upon completion of this investigation.
Our thoughts:
Whilst we have seen the various emails and statements made by Brite Advisors USA management arguing profusely that the assets were segregated, as MGN has stated, no concrete evidence has been produced to support that claim. A few emails between Brite USA and Brite Australia do not necessarily indicate that any action was taken, which appears to be the case here. With Brite Advisors USA delisting, or looking to delist, from SEC Authorisation, it appears they have all but given up the fight on this one as well.
Although it will be disappointing for Brite Advisors USA clients to hear this, we just don’t see how they are going to be able to get any court to agree that the assets were segregated. It is very likely, in our view, that Brite USA clients will be getting mixed into the general pool. This also means that none of the Brite Advisors USA client funds will be distributed until all funds are distributed, which was likely to be the case anyway, even if they were segregated, as often all assets need to be reconciled in receivership or liquidation before anything can be distributed back to claimants.
Why can’t the Receivers determine the assets contributed by each beneficiary and distribute those?
A simple distribution by reference to the records held by Brite Advisors is not possible.
Beneficiaries may have understood that certain investments were held for them by Brite Advisors, received account statements that identified specific asset holdings with Brite Advisors at various times, or otherwise received reassurance from Brite Advisors (or other parties) relating to the assets held for them.
However, this does not necessarily mean that those investments were actually held by Brite Advisors. This applies regardless of (i) whether the investments were in the form of a model portfolio or bespoke investment, or (ii) whether Beneficiaries understood that their assets were purported to be held on a “segregated” basis. See the Receivers’ Fourth Report at [2.1.14], [2.1.17] – [2.1.18], [2.1.23] – [2.1.26], [5.6.1] – [5.6.2], [5.6.27] – [5.6.48], [6.8], and [6.9].
Our thoughts:
Essentially, MGN are stating that Brite Advisors accounts weren’t worth the metaphorical paper they were written on, and they have alleged many times that many statements provided to Brite platform clients were false or manipulated, with their adviser/Brite management sending them manipulated accounts to keep the charade going.
This is why the recent announcement to use account values, as at December 13th, to base the apportionment of the cash redistribution to platform users, is what needs to be the focus. It is this value that will be used to help determine what percentage of the final pot is to be sent back to each beneficiary. One thing to add though, and this is based on our understanding of what sounds rather obvious and logical, but this figure is not what will be actually sent back, but rather this figure will decide the apportionment. Any subsequent growth will be applied still, as that is attributable to you, whether a bespoke portfolio or one of the model portfolios currently being managed by the 3rd party Investment Manager in Australia.
This is an area where we would like the Receivers to come out publicly and confirm the details, as whilst they have repeatedly stated that this valuation statement as of December 13th will be accessible for Brite clients shortly and is how they are going to base the apportionment, we have been contacted by several Brite clients who seem to think this is what they will be getting back.
Now for those that have found themselves unsure, it has led to two divergent thoughts we have seen repeatedly. One, that that is the value they will get and all the fantastic investment growth that has occurred in global capital markets since that date will not benefit them, i.e. the Receivers will pocket the growth on invested funds. So this group is actually leading themselves to potentially underestimate the value they will get back.
Then, the other side is that there are those who haven’t taken on board the repayment of margin loans and other liabilities that will be deduced from the asset, so are taking this value to be the amount they get back with investment growth on top i.e. the liabilities have already been taken into account. We know that the variance is likely north of 10%, and then there are the costs of the receivership itself, so the eventual reduction is going to be substantial. This then leads to these Brite clients over estimating the eventual amount of funds that they will get back.
If the Receivers know there is a 10% variance, why can’t they make an immediate distribution of 80%?
The Receivers are considering whether, how and when an interim distribution could be made. In setting the approach to any interim distribution in terms of quantum and timing, the Receivers must be prudent to ensure that the distribution will not later prejudice any Beneficiaries. Considering the circumstances outlined in the Fourth Report, formulating an approach to any potential interim distribution is complex.
For example, and as described in 3.1 above, a Corporate Trustee or group of Beneficiaries may assert that the separation of assets into IBA sub-accounts was effective in segregating those assets and insulating them from the shortfall. In that case, the Receivers need to withhold adequate funds pending a determination of this issue, which will mean that an interim distribution is unlikely to be feasible.
However, we will issue a further update to Corporate Trustees and Beneficiaries once this analysis is complete.
Our thoughts:
This seems like a rather convoluted response, and in our view the main reason for this is that at this stage they fundamentally don’t know the true value of the variance. So to start sending back money, which may actually be owed to someone else when they finish their investigations, is just too big a risk to take.
Whilst we know it is frustrating, we can’t see how they are going to make such a payment, not until they are very sure what the variance is, and can be sure that any funds they send won’t have to be recalled etc.
There are also lots of questions around the legality of the margin loans, and other creditors they have, so there is just too much up in the air to even consider this at this stage, not until they have a much more concrete view on what belongs to whom, and what recourse they have for the various causes of the variance etc.
The Receivers have already been appointed for 10 months, what has happened over this time?
Since the Receivers appointment on 13 December 2023 (approximately 8 months ago), we have acted to (i) secure and preserve the Client AuM and (ii) work towards a distribution of the Client AuM. The steps taken by the Receivers are set out at Section 3 of the Fourth Report.
The key challenge the Receivers have faced in progressing towards a distribution of the Client AuM is not having unfettered access to Brite Advisors critical systems. Further information regarding how this has impacted the Receivers’ work can be found in the Fourth Report at [3.4.7] – [3.4.12], [4.3.27], and [4.8.3] – [4.8.6].
Our thoughts:
We completely understand the reason why this question was asked. This has been a very frustrating experience for Brite platform victims, and it does feel like it is dragging on. However, as the various Court reports show, the Brite Advisors group is/was just such a large entangled web of suspicious activity, criss-crossing the globe.
The investigations have been extensive, and whilst it might have been the best part of year, and the funds are still frozen and unavailable, from our experience when coming across victims of other collapsed pensions or investments, the process often takes multiple years, with the recent Hartley SIPP Administration being a good example, as that entered administration on 29th July 2022, and is still not fully resolved. So we are still looking at a total time frame that is likely to be average, if not below average, based on the timelines indicated from MGN.
Why do the Receivers indicate that they require another 8-10 months before they can consider a distribution?
In short, for the Court to order a distribution, the Receivers will need to confirm that they have identified who should receive the distribution and how much they should receive.
Unfortunately, the existence of a deficiency in the Client AuM combined with the barriers in the Receivers gaining access to the critical systems leaves a large volume of work to be done before these questions can be answered conclusively and a distribution made.
As we have described, apart from rebuilding the critical systems required to identify and verify beneficiary entitlements, there may be competing claims on the Client AuM and accordingly, it is important that (i) beneficiaries are provided an opportunity to verify their entitlements, (ii) interested parties are given an opportunity to be heard on the proposed method of distribution, and (iii) the Receivers are following a fair and equitable process.
The timing contained in the Framework Orders takes into account these factors.
The process to verify Beneficiaries’ entitlements will occur concurrently with the preparation of the Explanatory Memorandum and is addressed in the Fourth Report at [3.4.27] – [3.4.34].
However, before verifying Beneficiaries’ entitlements, the Receivers need to:
- complete the rebuild of SalesForce (which remains on track to complete by early September 2024);
- verify the data, documentation and SalesForce environment to be made available to all beneficiaries to ensure this is accurate and functional.
The process and timetable to obtain orders from the Court relating to distribution of the Client AuM is detailed in the Fourth Report at [3.5.1] – [3.5.4].
In addition, before proposing an approach to distribution and seeking orders from the Court, the Receivers have the following further work to complete (addressed in the Receivers’ Fourth Report at [2.1.25] and [5.6.21] – [5.6.25]).
- Further engagement with Corporate Trustees to confirm details of, (i) how the distribution will be dealt with once received by the Corporate Trustees, and (ii) the fee structure Corporate Trustees intend to impose on Beneficiaries in relation to that distribution. These are matters which the Receivers anticipate that the Court will want to be informed of prior to making any orders relating to the distribution of the Client AuM.
- Consideration of the regulatory and taxation issues arising in various jurisdictions, many of which have been raised through feedback from the Corporate Trustees and Beneficiaries, which may impact the approach to distribution.
- Investigation into the significant volume of trading activity which occurred in respective IB accounts prior to events of purported segregation. See 3.1 above.
These matters are addressed in the Fourth Report at [3.4.7] – [3.4.26].
Our thoughts:
This expands a little bit on our commentary to the previous question answer; but to reiterate, this situation is far more complex than it appears on the surface, given the sheer volume of entities involved, and the cross border nature of Brite Advisors. There are so many competing areas to consider, that every decision will have many knock on effects, so all decisions need to be very carefully thought out before being made.
However, we do have a timeline now, and at least we can take solace in that we are not being strung along, left to guess when things are actually going to get resolved. Or at least we know not to get our hopes up of a quick resolution, and Q2 2025 looks like a realistic indicative timeline for the funds to be all ready to send back to Trustees, touch wood!
I’m concerned about potential volatility in the market and the impact on my assets over the period up to distribution, what action are the Receivers taking?
The Receivers acknowledge this risk and note that Client AuM performance is sensitive to global market movements and will fluctuate over time.
In relation to model portfolio investments, the rebalanced Client AuM is now invested in accordance with portfolio mandates, which comprises a broadly diversified portfolio and will continue to be managed accordingly.
In relation to bespoke investments, these assets are being monitored and reconciled on a regular basis.
As reported in the Fourth Report, Client AuM invested on the IB Platform (both model portfolio and bespoke assets) have performed favourably following aggregated growth of approximately 11% for the period from 13 December 2023 to 16 August 2024.
Weekly portfolio reports produced by the Interim Fund Manager are available via the Brite Advisors portal on the McGrathNicol website.
Our thoughts:
Whilst it was obviously quite a big risk to take, as markets could have fallen this year, and lord knows how poorly Brite victims would have taken a further loss in their funds, but as it stands, Brite portfolios (although bespoke portfolios will of course have performed independently) have grown substantially, as 2024 has been such a good year for global asset growth.
In fact, given the growth rates, and even accounting for the fact the values to be communicated shortly from the Receivers as of 13th December 2023 on Salesforce will be reduced by the ultimate shortfall, they may not actually end up being too far removed from the actual amounts available once funds are ready to be sent out.
Now, that is of course a bit of luck, but should hopefully lead to a bit of comfort for Brite clients, who know their assets have grown, even if they of course will not end up being as high as they should have been.
Given that staying invested is the best strategy for pension assets (unless expressly earmarked for withdrawals in the next 12 months), this was a prudent and evidence based approach for the Receivers to have taken. Many receivers may have taken a very cautious approach and moved all assets into cash, to guard from any market falls, but the fact that they followed the evidence and did the right thing with the funds, should mean that they will have helped obtain a higher value for the victims than a cautious approach would have taken. Slight caveat though, this is of course based on current performance, and if markers fall drastically between now and the cash redistribution, then it won’t matter for much, but that's investing for you! If you want good returns, you need to accept additional volatility, and the chance that you have bad luck. Again though, if you have a good adviser helping you who helps you keep things in context, and your emotions in check, then you would know and be comfortable and, indeed, expectant of such volatility and risk.
I hold bespoke investments, my assets are not being managed by the Interim Fund Manager and will be subject to market fluctuations in the period up to distribution. Why am I not permitted to exercise trades during this time?
In short, the Receivers have not yet identified any bespoke investments held on the IBA platform which are conclusively traceable to a particular beneficiary and are not infected by the shortfall in assets. For further detail regarding the shortfall relating to bespoke assets, see the Fourth Report at [5.6.39] – [5.6.48], [5.6.83] – [5.6.86], [6.9] and Appendix A6. The Receivers are considering options for Beneficiaries to de-risk bespoke investments in circumstances where they may have an entitlement to particular assets.
Notwithstanding this, whilst bespoke investments (or non-model portfolio investments) held in Brite Advisors’ IB accounts have not been actively managed or traded by the Interim Funds Manager, these assets are being monitored and reconciled on a regular basis. As noted in 3.6 above, Client AuM invested on the IB Platform (both model portfolio and bespoke assets) have performed favourably since 13 December 2023.
The Receivers obtained orders from the Court on 27 March 2024 that they would be acting properly and are justified in refusing to act on specific trading instructions received from any third party, including individual Beneficiaries, the Corporate Trustees, and any financial advisor to those persons.
The Receivers obtained these orders because they were of the view that it is not possible to action such dealing instructions due to (i) the difficulty with forming a view as to any individual Beneficiary’s interest in the specific assets the subject of the instruction and (ii) the risk that actioning any dealing instruction will prejudice another Beneficiaries’ position with respect to the Client AuM. This is addressed in the affidavit of Linda Methven Smith dated 26 March 2024, available here: //www.mcgrathnicol.com/creditors/brite-advisors-pty-ltd/.
We note that there are now some instances where the Receivers can identify certain assets on the IBA platform to which an individual Beneficiary is entitled according to the 13 December 2023 data. However, even in relation to those assets, there remains a risk that actioning a dealing instruction would prejudice another Beneficiaries’ position with respect to the Client AuM. This is on the basis that the conduct which resulted in the shortfall, as described in section 6 of the Fourth Report, may give rise to claims against those assets by other Beneficiaries.
Our thoughts:
We have come across many Brite clients who have historical valuations and transaction summaries that indicate they own assets that were external to the Brite model portfolios.
We are cautiously optimistic that these assets will be able to be specifically assigned to an individual beneficiary, but for the time being it is too difficult to say for certain.
Whilst frustrating, especially when the prospective owners can’t make any trades, we see this as the prudent approach, as you can’t allow buying and selling of assets for which you aren’t actually 100% sure of whom the true owner is.
When will I receive a Valuation Statement?
As part of the entitlement verification process, Beneficiaries will be provided a valuation notice and the supporting information. The entitlement verification process and its timing is explained in further detail in the Fourth Report at [3.4.20] – [3.4.34].
Our thoughts:
Given that the ID verification process started, and seems to have gone rather smoothly based on what our Brite platform clients have told us, we expect these valuations to be accessible imminently. Famous last words, especially for this receivership where it has often felt like one step forwards two steps back, but we think based on language used, that it should not take more than a week or two for this to be available, but don’t be too surprised if it drags on a bit, as they may want all ID verification completed first, and stragglers could cause delays.
Are the Receivers considering the jurisdictional tax implications as part of their distribution strategy?
The Receivers have engaged Linklaters, UK Lawyers, to advise on the impact of pension regulations under the law of England and Wales, including taxation impacts. The Receivers will also consider the regulatory and taxation issues arising in various jurisdictions, many of which have been raised through feedback from the Corporate Trustees and Beneficiaries, which may impact the approach to distribution.
These considerations will ultimately inform distribution methodology.
Our thoughts:
If you read our previous blog, you would know that we commented quite heavily about the Receivers, in our view, misguided approach to considering a direct distribution back to the beneficiaries, and all the disastrous tax and legal issues that would cause. It now looks like they are obtaining legal advice on this, which is understandable given the sums of money involved, and the risks.
However, in our view a standard cash distribution back to the Trustees, or direct to beneficiaries of platform clients, is the only option that should even be thought of, let alone entertained. A cash distribution straight to a beneficiary from a QROPS or SIPP would result in all sorts of taxation and legal issues in multiples countries, both for the beneficiaries, but also the Trustees, and also possibly even leave the Receivers open for legal action, so to us was just bizarre to have ever even been brought up.
I know that there is serious distrust with many of you and your Trustees and, I assure you, we share many of them, but we really can’t see any other way. There is also significant scrutiny on this debacle, that Trustees are not going to be anything other than on their best behaviour to make sure they don’t generate any negative feedback, so this fear is rather misplaced in our view, even if it is incredibly understandable.
Get the money back to the Trustee, and then, with the help of a good adviser, get the funds transferred over to a superior Trustee if you or the adviser have concerns about your existing provider.
What action is being taken against the Directors and Officers of Brite Advisors? Why are they not being held accountable?
The Receivers’ investigations have identified suspected misuse of Client AuM and related suspected breaches of the law over a prolonged period of time.
The Receivers continue to investigate, with legal input, whether any recovery actions are available and able to be pursued against various third parties, having regard to factors including prospects, costs and commerciality considerations.
If recovery actions are pursued, any recoveries from those actions may be available to respond to Beneficiaries’ entitlements (after deduction of costs, and any other relevant deductions, including any deductions required to be paid under a litigation funding agreement, if applicable).
At this stage, it is expected that it will take some time before the Receivers will be able to conclude their investigations. As such, recovery actions are currently unquantified, could be protracted and any return available to satisfy Beneficiaries’ entitlements is uncertain. Accordingly, the Receivers have not factored in any potential recoveries into the estimated shortfall.
Outside recoveries for the benefit of Beneficiaries, the Receivers’ role in relation to holding third parties accountable is limited to reporting on suspected breaches of law in its report to the Court dated 24 January 2024, which was done in compliance with Court orders.
Our thoughts:
A common theme from many of the Brite victims we have spoken to is the desire to get some form of retribution and compensation from the actors involved in getting them into this mess, be it the Trustees, their adviser or their advisors firms ownership and management, and we also share much of the desire to see some of these people pay for their transgressions. However, we do need to be pragmatic and take onboard that such a course of action having any modicum of success is easier said than done.
Whilst we imagine the Receivers will do their best to claw back any of the margin loans, especially given what appears to be a solid legal argument, any other sort of retribution/compensation, such as the advisers who originally advised QROPS for US Residents, despite knowing they were likely subject to lots of tax issues and didn’t disclose their substantial commissions clearly or honestly, or the Trustees for not vetting the platform sufficiently (although the platform got tacit approval from various regulators, so not sure how much blame can be placed on them), is likely to require private action. Which is why we are so supportive of Brite clients getting together, as not only will it help you vet advisers and keep your sanity, but it will also help you collectivise, should you decide to take any legal action etc.
We can not emphasise the value of getting together with other Brite clients enough, even if it is just a Facebook Group. When we come across Brite clients that have decided to not engage with others, and do it alone, whether because they don’t see the value in doing so, or just don’t want to dwell on it too much, they are almost always the ones most likely to have fallen for another pitch from a salesman masquerading as an adviser and/or the ones being advised the most inappropriate or unsuitable route post cash distribution. There well and truly is safety in numbers.
Who is responsible for overseeing the Receivers’ ongoing fees?
The Receivers were appointed by the Court on the application of the Australian Securities and Investments Commission. As such, it is the Court who oversees the Receivers’ ongoing fees. Prior to payment of any of the Receivers’ costs and expenses, approval is obtained from the Court following submission of detailed and itemised remuneration reporting. All Corporate Trustees are notified of the respective amounts and provided with the Receivers’ remuneration reporting immediately after it is submitted to the Court. This is addressed in the Fourth Report at [3.3.3].
Our thoughts:
We know the fees you see being generated by the Receivers can really make you baulk, but there is a lot that they are doing. Speaking from my own experience during my PwC days, when I was in charge of the Stock reconciliation process for the Stanley Gibbons investments liquidation, these reconciliation, investigation and redistribution processes can be so complex, especially when there are so many parties and jurisdictions involved.
The courts in Australia have a sterling reputation for being consumer friendly, so the fact the Courts are overseeing the fees should provide comfort, even if I fully appreciate how hard it is to accept that you have to pay for the privilege of getting access back your own money.
Conclusion
Many of these questions are also questions that have been asked of our Cameron James advisers, and indeed our advisers have thought themselves, on multiple occasions, so we have been very glad to see MGN actually come out and formally answer them. Whilst we may not fully like all of their answers, at least they have provided some clarity and more definitive statements, which we, and most Brite Advisors victims, have felt has been lacking during this whole receivership.
It does appear like there is more structure, and a bit more emphasis on getting funds back to beneficiaries, even if it is still some way away. Our timeline blog will address their current stated timeline, and our thoughts on that, but between that blog and this blog, you should be in a much more informed position, with a lot fewer questions still needing to be answered, even if you may not be happy with those answers, which allows you to focus and clear your mind on the road ahead.
As always, whilst it is many moons away, it does not seem like it will be too long now before you will be able to access their portal to obtain the valuation, and please do not hesitate to get in touch should you wish to discuss things.
Next Steps
Beyond obtaining the valuation, and then confirming or disputing those figures, there is not much more you can do in terms of expediting the cash distribution process itself. However, you can get yourself ready for a life post Brite, and the best way to do that is to engage in an adviser search, and hopefully find an adviser who can help you move on and not have such an awful ordeal occur again.
There is so much beneficial financial planning that can be done, and was often just completely ignored due to how transactional many of the Brite Advisors relationships were that we have seen. So even though there is not much that can be done with these funds for a while, there is potentially a heck of a lot of valuable things you could be doing in the meantime with an honest, transparent and “full fat” financial planning focused financial adviser. There are several Brite clients we are helping now, including around cash flow planning, advice on their local pensions/investments, educating on how the various state benefits systems work etc. All things that are part and parcel of providing modern lifestyle financial planning, but have been sadly neglected here for many.
If you would like to get in touch with one of our advisers to discuss things further, then please book in for your free Discovery Meeting below.