‘Red flags’: Watchdog too slow to act

Sterling First marketed itself as pairing up “smart property investors that are looking to get a better rental return with retirees that are looking to sign a long-term lease”.

Dozens of retirees involved in the scheme sold their homes to free locked-up capital, then moved into rental properties with the expectation they would stay there for the rest of their life.

But Sterling First went into liquidation in 2019 – allegedly after trading while insolvent for months – and many of the lessees were forced out while others fought to keep a roof over their heads.

Coburn Corporate Intelligence managing director Niall Coburn, who set up his practice after working as a senior specialist adviser to the Australian Securities and Investments Commission, told the inquiry on Tuesday there were multiple “red flags” that should have prompted the regulator to seek an injunction.

“The most important stuff you have to do as an investigator … is be fast off the blocks as soon as there is a smell in the air,” Mr Coburn said.

“Because these fraudsters are really good, they’re sharp, you’re dealing with pretty intellectual minds in terms of finance.

“As soon as there’s a red flag … there’d be six or seven here, you’ve got enough to have an injunction, just to stop it.

“If you’re waiting six months to a year, you’re going to have a lot of bodies on the street.”

In its submission, ASIC said it received three reports of suspected misconduct in 2015-16 relating to the Sterling Group, but at the time it considered no further action was warranted.

In August 2017, it served an interim stop order on Theta, the responsible entity for the Sterling Income Trust, prohibiting offers, issues, sales or transfers, and causing sale-pitch seminars to be cancelled and concerning statements on a website to be amended.

By March 2018, ASIC had completed a review of Theta’s new product disclosure statement and decided not to take action to stop its use.

But around the same time, ASIC was concerned about the solvency of the Sterling Group, and about a month or so later, Sterling Income Trust was closed to new investors.

It wasn’t until late May 2018 that ASIC began a formal investigation into whether individuals associated with the Sterling Group had been breaching the Corporations Act from June 2012. Its probe included interviewing 44 investors and/or tenant-investors.

By August 2018, ASIC had told Theta that Sterling Income Trust should be wound up – a process that is ongoing.

“It’s about market intelligence … the better you can make a judgment,” Mr Coburn told the inquiry.

“If you sit back, even though you’ve got those complaints in 2015-16 … and hope that things are going to fly in the window, well, that’s never going to happen.

“As an investigator, actually get out there and go to houses.

“How many houses did they go to? How many did they speak to immediately?

“Often the answers are found very earlier on if you start interviewing witnesses and gather evidence.

“It seems to me that the evidence was there within ASIC but hadn’t been put together to make a decisive decision.”

The financial collapse expert and barrister said the problem with ASIC was not resources.

“Someone didn’t make a decision and it would be a senior within ASIC to make a call to do an injunction,” he said.

“We used to be able to go to court ourselves – ASIC lawyers could conduct injunctions themselves.

“Now everything is outsourced. You’re relying on some counsel outside ASIC to hopefully have the same view as you.”

Originally published as Plenty of ‘red flags’ before Sterling First collapse, former ASIC team leader and barrister tells inquiry