Financial Storm Brewing in the Horizon

The Commonwealth Bank of Australia has a financial storm brewing in its horizon as a group of former investors of the collapsed Storm Financial filed a class action suit against the bank.

Storm Financial was a Townsville, Queensland financial services group that negotiated loans and other forms of indebtedness for individual customers with major Australian and global banks, foremost among them is Commonwealth Bank. Other banks included in the suit are Macquarie Bank and the National Australia Bank.

At the height of the global financial crisis, the group collapsed leaving its investors high and dry with millions of dollars in debt. In August of 2008, the client base of the Storm Financial had over Aus$4.8 billion in the company’s sponsored shared funds. The class action complainants claim that Storm Financial and Commonwealth Bank of Australia ran a managed investment scheme over these accumulated funds. The suit also claims that the investment scheme was operated without the necessary exemption obtained from the Federal Corporations Act.

As the world crisis enveloped Australia, the capitalization dropped to Aus$3.5 billion with almost 40% of the investments funded by margin lending. The suit claims that the finance group failed to provide investors a prospectus detailing the risks involved in the investment scheme. In January 2009, the company collapsed and was placed under receivership with an accumulated debt amounting to Aus$88 million.

This is the first of its kind in the country and lead counsel is Stewart Levitt of the firm Levitt Robinson. He said that the class action suit consists of 300 investors; mainly hard-working Australians who even had to borrow money in order to commit themselves to the scheme. The problem was, according to Mr. Levitt, “it could never have happened if the banks did not keep throwing money at them.”

Mr. Levitt further said that, “the resolution schemes that have developed are shelters for financial institutions.” Most of his clients had mortgaged their homes to the very same banks to fund their participation in the investment scheme.

In response, a statement from the Commonwealth Bank of Australia read that the bank is disappointed with the class action suit filed by former Storm Financial clients in Federal Court. The statement further added that a resolution scheme had been reached with some of the former clients to recoup their investments to some extent. All in all it said, more than 1,000 former clients have already received fair outcomes of the settlement. The program started in February 2010 and had detailed cash payouts and mortgage reductions for those severely affected by the bad lending practices of the group and its inability to call on the margin loans given.

The complainants calling themselves as Storm Investors Consumer Action Group deplored the resolution scheme saying that not all clients were eligible for it and not all were satisfied. They also pointed out that these financial institutions hold a mortgage over their homes and have used it as a pressure point to force former clients to settle their claims.

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Tagged as: class action suit, Commonwealth Bank of Australia, Storm Financial