By Gareth Vaughan
This year has been a strange one. In fact COVID-19 and all it entails make that an understatement. But one of the strangest things that has happened to me in 2020 had nothing to do with the infamous virus.
On a classic showery and sunny Auckland day in early August, I found myself in an Albany courtroom being cross examined by a defendant representing himself in a court case brought by the Financial Markets Authority (FMA). For a journalist used to asking rather than being asked the questions, this was a curious experience.
My involvement stemmed from a story I wrote in April 2017; Pegasus Markets and Solid Global Investment, two NZ financial service providers and their misleading statements. The top of that story is pasted in below.
Criminal charges laid
In late February 2018, nearly a year after my story was published, the FMA announced it had filed criminal charges against Pegasus Markets Ltd and Michael Reps, the company's New Zealand-based director, for allegedly breaching the Financial Service Providers (Registration and Dispute Resolution) Act (FSP Act). However, neither Reps nor Pegasus were named until after the issue of name suppression was resolved by the Court.
In April 2018 I was approached by FMA staff about my correspondence with Reps, and about being a witness in their case. Having railed against misuse of NZ companies and our preposterous, in my view at least, Financial Service Providers Register ( FSPR), I could hardly say no.
The following 27 months became a lesson in the old cliché that the wheels of justice grind slowly within a busy court system.
Due to those wheels grinding slowly, I was formally served by FMA representatives twice, and had to provide a formal written statement twice. Records of my correspondence with Reps were also used in the FMA's case.
The trial eventually took place on August 3 and 4 this year, with me appearing as a witness during the afternoon of the 3rd. This involved me reading from my statement and being questioned by the FMA's lawyers. In earlier skirmishes Reps had legal representation, but by the time of the trial he was representing himself. Thus he cross examined me himself.
The court experience felt largely uneventful and passed very quickly given it had been such a long time coming.
On September 9, some weeks and an Auckland lockdown later, Judge June Jelas issued a two page ruling finding both Pegasus Markets and Reps guilty of two charges of breaching the FSP Act. A full judgment with detailed reasons behind her decisions followed in November.
Pegasus Markets faced two charges under Section 12 of the FSP Act, and Reps one under Section 12 and another under Section 40. Section 12 of the FSP Act provides that no person, including a corporation, can claim to be in the business of providing a financial service unless it is registered on the FSPR and a member of an approved dispute resolution scheme. Section 40 of the FSP Act covers a director’s liability if (s)he knowingly authorises or knowingly fails to prevent a corporation committing an offence under the Act.
Each charge for breaching Section 12 of the FSP Act carries a maximum fine of $300,000 for a company and a maximum penalty of either a $100,000 fine and/or one year imprisonment for an individual. The charges against Pegasus Markets and Reps were the first of their kind under Section 12 of the FSP Act. Reps only faces penalties for breaching Section 12 because Section 40 is effectively the mechanism to establish director liability for Section 12, with Section 12 providing the penalty.
Thus Pegasus Markets faces a maximum fine of $600,000, and Reps faces up to 12 months imprisonment and/or up to a $100,000 fine. Sentencing is scheduled for December 16. Reps, who has fought the FMA all the way, has the right to appeal.
The second case of this type brought by the FMA moved much faster than the Pegasus-Reps case. In it Morgan DeVere Corporate Finance Ltd was fined $40,000 in 2019 following conviction at the Wellington District Court on two charges of breaching the FSP Act. Morgan DeVere had continued to claim it was registered on the FSPR after being deregistered and despite FMA warnings. Morgan DeVere's NZ based director, Rene Moorby, pleaded guilty and was sentenced to 75 hours of community service for his role in the offending.
Incidently the FMA issued this warning about Solid Global Investment, the other company featuring in my story highlighted above, in December 2018 noting it "could be involved in a scam." Reps was also the NZ director of Solid Global Investment.
What is the FSPR and why does it matter?
Before getting into further detail of the Pegasus Markets and Reps case, let's look at what the FSPR actually is and why it matters.
Anyone in NZ providing a financial service such as insurers, banks, fund managers and financial advisers, must be registered on the FSPR, which is supervised by the Companies Office, located within the Ministry of Business, Innovation & Employment (MBIE). The FSPR records the name, address and financial dispute resolution service membership of the provider, along with the services it's registered to provide and any licences it may have. Thus it's a bit like a phone directory for the financial services sector.
The FSPR came out of a 2006 government review of financial products and providers that recommended the introduction of a comprehensive register of financial service providers. Among other things, this was designed to help satisfy NZ’s international obligations through the recommendations of global anti-money laundering overseer the Financial Action Task Force, before NZ's Anti-Money Laundering and Countering Financing of Terrorism Act came into force in 2013. These obligations required the licencing or registration of all financial institutions to ensure effective monitoring of anti-money laundering and countering terrorist financing obligations.
Since December 2010 anyone providing a financial service has been required to be registered on the FSPR. According to MBIE, there are 14,567 registered financial service providers. Of these 10,272 are individuals, 4,126 are companies, with 169 classified as “other.” A total of 12,179 only provide services that don’t require a licence. There's a range of financial services that don’t require a licence. The full list of these is here.
Despite the good intentions behind it, the FSPR has been open to exploitation by overseas based people with nefarious intentions. That’s because companies have been able to register on the FSPR if they have a place of business in NZ, regardless of where in the world their financial services are targeted or provided. That means entities can, and have, set up superficial operations in NZ. These firms typically registered to provide financial services that don't require licensing in NZ, such as foreign exchange, or forex, services. There has been no pre-vetting by a NZ regulator, and they usually don't tend to offer financial services within NZ. These entities have, however, been able to use their NZ registration overseas to give a false impression that they are actually regulated in NZ and trade off NZ's good international reputation.
These issues are highlighted in Judge Jelas' judgment.
"Registration of FSPs [financial service providers] is often mistaken by consumers as indicating that a business or individual is licensed and subject to regulation by NZ authorities. Some FSPs deliberately promoted their NZ registration for the purpose of giving an impression that their activities were regulated by the NZ authorities. As counsel for the FMA have emphasised, registration provides a directory of FSPs, it does not mean they are subject to the oversight of a government regulator," the judgment says.
The Government last year made a change, through the Financial Services Legislation Amendment Act, meaning financial service providers with a place of business in NZ that provide financial services only to overseas persons can no longer register on the FSPR.
“I know that some offshore firms have been registering in New Zealand as financial service providers to give the misleading impression they are subject to regulatory oversight in this country. The changes in the [Financial Services Legislation Amendment] Bill will prevent that from happening," Commerce and Consumer Affairs Minister Kris Faafoi said in April 2019.
The FMA, meanwhile, is the NZ government agency tasked with enforcing securities, financial reporting, and company law as it applies to financial services. In 2014 the FMA received powers to direct the Registrar of the Financial Service Providers Registry at the Companies Office, currently Ross van der Schyff, to de-register FSPs.
An ongoing headache
However, despite the Government and FMA's efforts, problems related to the FSPR remain ongoing. In September an Australian Broadcasting Corporation (ABC) TV producer contacted me about the NZ registered company Advanced Global Markets Ltd. The FMA last year issued a warning about Advanced Global Markets, or AG Markets, after I drew it to the regulator's attention. Formerly registered on the FSPR, AG Markets was still claiming to be.
In addition, Queensland-based Taya Burnett is an AG Markets director. Burnett is the wife of Ian Taylor, a member of the infamous company incorporating Taylor family. In 2018 interest.co.nz reported NZ Police had received more than 350 criminal investigation enquiries from overseas relating to NZ companies established for clients by the Taylors.
The ABC producer drew my attention to an ABC story about AG Markets alleging it was running a foreign-exchange scam, taking millions of dollars from investors around the world. The story was part of ABC's coverage of the FinCEN Files, which include more than 2,100 suspicious activity reports filed by banks and other financial firms with the US Department of Treasury’s Financial Crimes Enforcement Network. BuzzFeed News obtained the records and shared them with the International Consortium of Investigative Journalists, which partnered with other news organisations including the ABC.
I've been highlighting misuse and potential misuse of the FSPR for several years, arguing in 2016 and again in 2018 that the Government should simply abolish the FSPR because NZ no longer needs it. In 2017 I also highlighted the global scale of FSPR problems, and here I looked at companies that, despite being kicked off the FSPR effectively because they're deemed a risk to NZ's international reputation, are allowed to remain as registered NZ companies. All interest.co.nz's FSPR related stories can be found here.
No engagement from Pegasus
Now back to the Pegasus Markets and Reps case.
The two Pegasus Markets charges related to the company holding out it was registered under the FSP Act, knowing that it wasn't, between August 13, 2015 and July 2017, and from September 8, 2017 until February 13, 2018. The Reps charges were that he, as a director of Pegasus Markets, a financial service provider, knowingly failed to prevent the commission of an offence by Pegasus Markets during those same two time frames. The charges reflected two websites controlled by and connected to Pegasus Markets.
Pegasus Markets was incorporated as a NZ registered company on March 11, 2014. At this time its sole director and shareholder was Rafeal Ruiz Lemonche, a Barcelona resident. The registered office and address for service provided was that of Business Results (HB) Ltd, an accounting firm in Napier. To this day Pegasus Markets remains a registered NZ company, albeit van der Schyff has initiated action to remove it from the Companies Register.
Pegasus Markets registered on the FSPR on June 29, 2014, and became a member of dispute resolution service Financial Service Complaints Ltd. It was on the FSPR between June 2014 and August 2015, registered to provide services trading financial products or foreign exchange on behalf of other persons. This didn't require any licences. Its deregistration was directed by the FMA.
Interestingly, no Pegasus Markets representative engaged with the court throughout the proceedings.
"...There is no information before the court as to the reasons for Pegasus' absence...Only Mr Reps has engaged with the court and, as noted by Judge Manuel [following an early hearing in the case], Mr Reps has no standing to bring applications of behalf of Pegasus," Judge Jelas said.
The FMA gave notice to Lemonche of its intention to deregister Pegasus Markets from the FSPR on June 23, 2015. The regulator said its registration was likely to have the effect of creating a false or misleading appearance of the extent to which Pegasus Markets provides financial services from a place of business in NZ, and the extent to which it's regulated by NZ law in relation to those services.
"Our understanding is that the financial services provided by Pegasus Markets Limited are substantively provided outside of New Zealand to clients outside New Zealand. We also note that Pegasus Markets Limited is not regulated by New Zealand law in relation to those financial services," the FMA said.
"We also believe that when clients discover that a New Zealand registered financial service provider is not regulated by New Zealand law in relation to the financial services it provides, that is also likely to result in damage to the integrity and reputation of New Zealand's financial markets and the law and regulatory arrangements in relation to those markets."
"More generally, we believe that registration as a financial service provider in New Zealand in circumstances where the registration appears to be primarily for the purpose of, or is in fact likely to create the appearance that financial services are provided from New Zealand and are regulated in New Zealand, is likely to be damaging to the integrity and reputation of New Zealand's financial markets and New Zealand's law and regulatory arrangements for regulating those markets," the FMA added.
Lemonche sent a written response to the FMA on June 24, 2015. This included details of the services provided to Pegasus Markets by Business Results HB, saying these were substantive and critical to Pegasus Markets' operations from NZ. These included auditing client information provided for anti-money laundering due diligence purposes and risk analysis, and the reconciliation of customer deposits, withdrawals, and equity balances. Nonetheless the FMA went ahead and deregistered Pegasus Markets from the FSPR saying the financial services provided by Pegasus Markets are "substantially provided via a website controlled outside of New Zealand to clients outside of New Zealand," adding no financial services relating to the substantive operations of Pegasus Markets were provided from NZ.
From May 2015 a Companies Act amendment meant all NZ companies had to have at least one director living in either NZ or Australia. This change was made to ensure there's a director accountable for a company's actions within NZ.
Reps was appointed Pegasus Markets' director on October 8, 2015, almost two months after the company was deregistered from the FSPR on August 13, 2015. At the time Reps' Yield Quest Ltd was offering NZ resident director services for people overseas, noting; "This is not a passive nominee service as seen with some providers."
Reps 'knowingly failed' to prevent Pegasus' offending
Judge Jelas noted it was a prerequisite to the charges against Reps that the charges against Pegasus Markets were proven. She concluded that Pegasus Markets "continued to hold out that it was a registered FSP, on both of its websites, after it had been deregistered as a FSP."
"I am satisfied there is overwhelming direct evidence that Pegasus was informed and knew it had been deregistered as a FSP at the time deregistration occurred," Judge Jelas said.
"I am satisfied that all four elements of both charges against Pegasus have been proved to the requisite standard of beyond reasonable doubt. For these reasons, I had no difficulty finding Pegasus guilty of both offences."
She said FMA prosecutors presented screenshots of Pegasus Markets' websites at different times containing statements of the services Pegasus was offering to potential clients. Pegasus described itself as a broker in a trading capacity.
"The website also contains a personal letter from Mr Lemonche, the company founder, stating the purpose of Pegasus is to make the trading experience easier and wishes users 'happy trading with us.' Those statements expressly represent Pegasus as being in the business of providing financial services."
Among the "overwhelming direct evidence" that Pegasus Markets was informed and knew it had been deregistered as a FSP at the time deregistration occurred, Judge Jelas highlighted an email I sent to Reps in March 2017 outlining statements on the Pegasus website that Pegasus was registered in NZ as an FSP. Her judgment also features Reps' reply, as below.
Thank you for your email bringing to my attention the two issues regarding Pegasus Markets Limited...
I will be contacting the management of both companies today to advise them both to amend the information on their websites.
"If you like, I can follow up with an email to inform you when these amendments have been made.
I responded saying; "...yes, please let me know when/if these issues are addressed." I've never received any such confirmation.
With the charges against Pegasus Markets proved, Judge Jelas said to prove offending by Reps it must be established that he was a director of Pegasus during the offence periods, and that he knowingly failed to prevent Pegasus committing an offence.
"I have no difficulty reaching the conclusion that, from the time of Mr Reps' appointment as a director of Pegasus, Mr Reps knew Pegasus was a deregistered FSP and that its websites had not been amended to remove all references to it still being a registered FSP."
"I have found that there is no evidence that Mr Reps took any steps to prevent Pegasus committing its offending."
Among this lack of evidence she sites Reps' statement to me that he would be contacting the management of Pegasus Markets to advise them to amend the information on their websites.
"Again no evidence has been provided as to the nature of the contacts made by Mr Reps to management of Pegasus."
Ultimately Judge Jelas concluded Reps "knowingly failed" to prevent Pegasus' offending.
"...I am satisfied that all the elements of both charges against Michael Reps have been proved to the requisite standard of beyond reasonable doubt and I have found Mr Reps guilty of both offences," the Judge said.
"I find that both charges against Pegasus Markets Limited are proved. I consider that Pegasus Markets Limited held out it was a registered Financial Services Provider under the Financial Service Providers (Registration and Dispute Resolution) Act 2008, when it was not registered under the Act, by either stating in writing that it was a registered Financial Service Provider and/or by displaying a logo which stated it was a registered financial service provider."
"I find that both charges against Mr Reps are proved. I am satisfied that Mr Reps was aware that Pegasus Markets Limited was a deregistered financial service provider when he took office as a director of Pegasus Markets Limited. I am satisfied that Mr Reps was made aware that Pegasus Markets Limited continued to represent themselves as [a] registered financial service provider during the offence periods and did not take any steps to precent Pegasus Markets Limited from representing themselves as such," Judge Jelas said.
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