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Article Contents (Estimated Reading Time - 10 mins 55 secs)

Summary

Stay informed with the latest update on Brite Advisors Receivership. Learn about the legal proceedings and financial investigations affecting clients.

 

The receivers, Linda Smith and Rob Kirman, provided an update on February 1st about their efforts with Brite Advisors Pty Ltd since being appointed in December. They are working through some tricky issues as they try to follow the Federal Court’s orders to secure Brite’s assets.

This receivership has illuminated some complex arrangements in place, but Linda and Rob are focused on protecting the company’s remaining value as best they can while complying with the court mandates.

Their latest report highlights the progress made so far. We’ll have to stay tuned for additional updates from the receivers down the road as this process moves forward. You can refer to this article for the overview of the process regarding Brite Advisors.

 

Asset Management and Variance Findings

In their initial report to the Court as Investigative Accountants on December 8th, 2023, the Receivers highlighted some important discoveries about Brite Advisors:

  • There was a significant $69.1 million discrepancy between the Client Assets Under Management (Client AuM) reported on the Brite Salesforce platform and the verified Client AuM as of November 9th. This c.10% variance underscores weaknesses in Brite’s asset management practices.
  • The investigation revealed that due to the commingled structure of the four Interactive Brokers Australia (IBA) accounts, this variance cannot be tied to any specific group of Beneficiaries or jurisdiction.
  • All IBA accounts were maintained in an omnibus format under Brite Advisors, indicating a lack of segregation within each account.

The commingled nature of the accounts and the omnibus structure without segmentation represent challenges in tracing assets back to underlying beneficiaries. The $69.1 million dollar gap highlights flaws in Brite’s asset management and reporting processes that the Receivers are still working to unravel.

There was some speculation that some of this amount might have been recovered, given the lack of reference in the last update from the Receivers, but that hope seems to have been misplaced. Of course, as they complete their reconciliation process, it might end up being the case that this figure is incorrect, and that the discrepancy is actually materially different, but all we have is this information, so a c.10% loss is a baseline we are expecting, attributable to account discrepancies.

 

Return of Funds from Interactive Brokers Hong Kong

During the timeframe from June to November 2023, Brite Advisors executed a significant operation involving the divestment and transfer of approximately AU$129 million in Client Assets Under Management (AuM).

This sum was moved from the company’s Interactive Brokers Australia (IBA) accounts into a cash position. It was subsequently transferred to an HSBC account in Hong Kong, which was held under the name of Brite Hong Kong Limited (Brite HK).

Following the issuance of court orders on 24 November 2023, a directive was given for these funds to be repatriated to Brite Advisors’ IBA accounts. By December 2023, a substantial portion of these funds, amounting to AU$115.8 million, was successfully returned. This sum is currently maintained in accounts under the Receivers’ control.

However, the Receivers have noted an ongoing investigation into the complete accounting of the Client AuM during its tenure with Brite HK. This is because the Directors have yet to provide a comprehensive account of these funds.

Again, this highlights the perplexing nature of the Brite arrangements, and such a large transfer of client assets, especially in the middle of an investigation/whispers of client asset issues, is particularly troubling. Hopefully the whereabouts of the unreturned funds is resolved, and the missing amounts recovered, but if we presume that it is yet more money that won’t be recovered, that brings the total client assets “under threat” to c.$77.5m USD, which is c.11% of client assets.

 

Investigations into Related Party Transactions

The Receivers’ ongoing investigations have uncovered that approximately $91.4 million in net funds have been channelled to various related parties of Brite Advisors since the fiscal year (FY) 2016. This scrutiny is part of a broader examination into the financial dealings of Brite Advisors.

It focuses particularly on the flow of funds from the company’s Interactive Brokers Australia (IBA) accounts into its Westpac operating accounts. From there, the funds were subsequently disbursed to these related entities.

The critical aspect under review by the Receivers is the nature of these payments to related entities. Specifically, they are questioning the legal and ethical basis of such disbursements.

This includes an in-depth analysis to ascertain whether these related entities were rightfully entitled to receive the payments. Additionally, they are examining if any of these funds were utilised to finance the acquisition of subsidiaries within the broader Brite group.

We don’t know where these transactions fit in with regard to the client fund discrepancies, but it isn’t a huge jump to assume they are connected, and that a lot of the missing client assets are attributable to these related party transactions. Again, this also highlights the risks involved with vertically integrated financial services providers, as there aren’t independent 3rd parties involved, so the level of transparency just isn’t there.

 

Interactive Brokers Credit Facility Review

The Receivers have conducted a detailed examination of the Interactive Brokers (IB) Credit Facility, notably highlighting that Brite Advisors, serving as a guarantor, facilitated a significant financial transaction on 14 December 2020. This transaction involved a partial repayment amounting to US$5 million towards the US$10 million IB Credit Facility, with Brite Advisory Group Limited (BAG) being the principal borrower.

Furthermore, the investigation revealed that Brite Advisors’ accounts were utilised to settle interest payments totalling US$1.4 million related to this credit facility.

This focused review of the IB Credit Facility is instrumental in evaluating the strategic financial decisions impacting Brite Advisors’ liquidity and overarching financial health. The Receivers’ efforts to dissect the terms, utilisation, and consequent financial implications of this credit facility are pivotal in understanding its influence on the financial stability of Brite Advisors.

This update did little to confirm the amount outstanding on the margin facility, and as we know this was backed against client funds, this is particularly disappointing. It does appear that the credit facility has shrunk significantly since some of the disclosures made in the SEC charging document, but it can’t be certain how this interacts with the missing client cash mentioned above, and we can only wait to see what the Receivers have to say in their next announcement for, hopefully, a more thoroughly explained status update

 

Acquisitions and Strategic Investments Analysis

The Receivers have conducted a thorough review of various acquisitions undertaken by entities within the Brite Group since 2018. Through their detailed investigations, it has come to light that for at least 10 significant acquisitions, there is a suspicion that the payments were either fully or partially financed using Client Assets Under Management (AuM) or by leveraging these assets as security for borrowed funds.

The Receivers are now meticulously assessing whether there are any grounds for Brite Advisors and/or the underlying Beneficiaries to lodge claims concerning these acquisitions. This indicates a deep dive into the legality and appropriateness of using client assets in such a manner.

In addition to these acquisition-related inquiries, the Receivers have expanded their investigation scope to include property assets. Specifically, they have identified 59 over-the-counter (OTC) assets listed in AutoRek, that were not held in Interactive Brokers Australia (IBA) accounts.

The process of engaging with various third parties to ascertain the relevance and ownership of these assets is underway. This step is crucial in determining whether any of these assets fall within the scope of the Receivers’ appointment and responsibilities.

Further complicating matters is the intricate web of financial and asset management practices within the Brite Group. Mapping out this complex landscape remains an ongoing effort as the Receivers continue their extensive investigations.

This development only further complicates matters and indicates just how big a task the Receivers have ahead of them to unwind this murky web, and repatriate clients with as much of their hard earnings savings and pensions as possible. It may very well be the case that further lawsuits/class actions need to be taken in the future to recover as much of the missing funds as possible, as the Australian courts may lack the capability/authority to obtain the assets themselves, but this all remains to be seen.

 

Proceedings Update

The Receivers are committed to maintaining open lines of communication with Corporate Trustees and beneficiaries throughout the duration of the Receivership. They pledge to provide timely updates on the conduct of the Receivership and to disseminate further correspondence as new material developments arise.

For ease of access and to ensure stakeholders are well-informed, all correspondence issued to stakeholders will be made available for download from the McGrath Nicol website, specifically at the dedicated Brite Advisors section.

At Cameron James, we will also continue to review the status updates, and attempt to distil them into more decipherable (read: shorter and less jargon filled) articles.

 

ASIC’s Application for Company Wind-Up

In line with the directives set out in the Court Orders, the Receivers submitted their detailed report to the Court on 24 January 2024. This action was closely followed by a significant move from the Australian Securities and Investments Commission (ASIC), which, on 22 January 2024, formally applied to the Court for the wind-up of Brite Advisors.

This application by ASIC highlights the regulatory body’s growing concerns over the financial management and compliance practices within Brite Advisors, signalling a critical phase in the legal proceedings surrounding the company.

 

Legal Proceedings and Client Impact

The Receivers’ Report to the Court on 24 January 2024, alongside ASIC’s application to wind up Brite Advisors on 22 January 2024, marks a pivotal moment in the ongoing legal proceedings.

The scheduled court hearing on 6 February 2024, at 9am (AWST), is set to be a decisive event that could shape the future of Brite Advisors, potentially leading to its liquidation and the appointment of a liquidator.

This hearing, which will be conducted virtually and is open to the public, underscores the importance of transparency in these proceedings.

On 6 February 2024, Mcgrath Nicol transitioned into a dual role where they were appointed both as Liquidators of Brite Advisors and as Receivers and Managers of the trust assets. This significant development, driven by ASIC’s application, is pivotal in ensuring the integrity and equitable treatment of all stakeholders within the liquidation process.

 

Appointment of Liquidators: McGrathNicol’s Role

The appointment of Linda Smith and Rob Kirman as joint and several Liquidators and Receivers on 6 February 2024, following the Federal Court’s decision, marks a critical step in managing Brite Advisors’ affairs.

Their responsibilities include winding up Brite Advisors’ operations and managing client assets under management (AuM), under the continued asset preservation orders obtained by ASIC. This ensures that the liquidation process and the management of trust assets are handled with the utmost diligence and transparency.

They must also ensure that all legal and financial obligations are met. Their appointment follows their previous roles as investigative accountants, providing them with in-depth knowledge of Brite Advisors’ financial situation.

 

Regulatory Actions and Responses

In response to the unfolding situation at Brite Advisors, regulatory bodies, spearheaded by ASIC, have taken decisive steps, including the filing of a wind-up application. These actions reflect deep concerns over the company’s financial management and compliance practices.

The regulatory responses aim to safeguard client interests and preserve the integrity of the financial advisory sector. For Brite Advisors’ clients and stakeholders, these developments are a reminder of the critical role regulatory bodies play in maintaining stability and trust within the industry.

 

Our Thoughts

We have provided individual commentary/opinion under many of the headings above, but our overall message has not changed much, even given the rather significant updates above.

What we are saying to Brite clients who get in touch with us is rather universal, which is mainly to set expectations. This process is unlikely to be resolved any time soon, and there is likely to be a rather significant “haircut” to the amount you will have available to transfer out, with a best case scenario looking like c.10%, and the worst case closer to 20%, but these figures are very much subject to change, as more updates from the Receivers are received.

Our guidance is the same as it has been since the Brite situation first came to light, which is to actively engage in the regulated financial advice process with a locally regulated financial adviser. An adviser you have thoroughly performed due diligence on (and perhaps several advisers), who you trust (tough we know given you are likely very distrusting of advisers given your experience with them), and hopefully get yourself into a position where once the funds are released by the Receivers, you are all guns blazing ready to go, to get yourself into a more suitable pension wrapper/investment platform and start obtaining “proper” financial planning and advice.

 

 

The last thing you want is to be trying to obtain advice at the last minute, having not done thorough due diligence, as the chances of you making a mistake and utilising the services of an inferior/unscrupulous adviser are likely to drastically increase. You want to get ahead of it, and be thoroughly well planned and ready to go, as soon as you are able to do so.

You will also likely find that if you choose a good financial adviser, there are many other parts of your financial situation that can be looked at and improved whilst you wait, as has been the case with many of the clients we have engaged with, where we are already helping them with their non-UK assets and doing financial planning and cashflow modelling with them.

Author

Jonathan Laws

My journey at Cameron James has been exceptional. I am something of a sponge for knowledge, which has made me extremely well suited to the complexities and constantly evolving UK Pension Transfer system. This in-depth knowledge and experience of Final Salary Pension Transfers allows me to be at the very top of my game and protect my client’s best interests.

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