Director pleads guilty to $5 million fraud

Director pleads guilty to $5 million fraud

Mr Evan Paul Cherry (53) today pleaded guilty in the North Shore District Court to four charges laid under the Crimes Act by the Serious Fraud Office (SFO).

The charges relate to the misapplication of investor funds and false statements in investor reports by Mr Cherry while he was the director of Albany based investment and financial advisors - Investment Solutions Limited, ISL Nominees Limited, Trading Strategies Limited, ISL Strategic Investments Limited, and ISL Strategic Investments 100 Limited.

The ISL companies received approximately $9 million from an estimated 175 investors.
Between January 2001 and February 2007 when the majority of offending occurred, approximately $5 million of funds was invested contrary to investment instructions. The majority of the investors involved had transferred to investments offered by Mr Cherry's personal advisory business from those of a large institutional investment company when he terminated his association with that institution.

SFO Chief Executive, Adam Feeley, said the case illustrated the importance of looking beyond personal connections and carefully assessing the risk of investments.

"The high level of trust associated with personal relationships reduces any questioning by the investor when presented with a change in the underlying nature of the investment. It can be a dangerous arrangement that clouds judgement", he said.

The SFO acknowledge the assistance of the Financial Markets Authority (FMA). The Securities Commission (the predecessor to the FMA) referred this matter to the SFO in May 2011 having completed the initial analysis, resulting in an SFO investigation being commenced in June 2011.

Mr Cherry will be remanded in custody until sentencing on 11 December.

ENDS

For further information

Andrea Linton
Serious Fraud Office
027 705 4550

Note to editors

Background to investigation

Evan Paul Cherry commenced his financial advisory career around 1997. From around January 2001 to 28 February 2007, Mr Cherry operated his own investment and financial advisory business through the following companies:

• Investment Solutions Limited;
• ISL Nominees Limited;
• Trading Strategies Limited;
• ISL Strategic Investments Limited; and
• ISL Strategic Investments 100 Limited.

The ISL companies received approximately $9 million in funds from an estimated 175 public investors.

The above companies received funds from the public either pursuant to a custodial agreement and authorisation form or pursuant to written and/or oral communications given by Mr Cherry to investors.

ISL was to invest funds only in shares, stock, notes, debentures and debenture stock of any New Zealand or foreign company (and hold such securities in their name). This was to be done in good faith.

Some common characteristics of investors were that they tended to be people who were not necessarily experienced or sophisticated investors, varying in age, and looking to invest surplus capital in order to extract profit. The majority of the investors involved had transferred to investments offered by Mr Cherry's from those of a large institutional investment company when he terminated his association with that institution. On some occasions, they were advised by Mr Cherry to extract equity from their homes, or otherwise borrow funds for use in his investment scheme.

Between 2001 and February 2007, Mr Cherry misapplied investor funds in breach of the custodial agreements by using funds to repay other investors' investments for personal use, to purchase shares in ISL, to pay off personal loans and to purchase a boat.

Crimes Act offences

Section 220: Theft by person in special relationship
(1) This section applies to any person who has received or is in possession of, or has control over, any property on terms or in circumstances that the person knows require the person-
(a) to account to any other person for the property, or for any proceeds arising from the property; or
(b) to deal with the property, or any proceeds arising from the property, in accordance with the requirements of any other person.

(2) Every one to whom subsection (1) applies commits theft who intentionally fails to account to the other person as so required or intentionally deals with the property, or any proceeds of the property, otherwise than in accordance with those requirements.

(3) This section applies whether or not the person was required to deliver over the identical property received or in the person's possession or control.

(4) For the purposes of subsection (1), it is a question of law whether the circumstances required any person to account or to act in accordance with any requirements.

Section 224: Theft by misappropriating proceeds held under direction
For offences occurring pre October 2003
Every one commits theft who, having received, either solely or jointly with any other person, any money or valuable security, or any power of attorney for the sale of any real or personal property, with a direction that the money or any part thereof, or the proceeds or any part of the proceeds of the security or property, shall be applied to any purpose or paid to any person specified in the direction, in violation of good faith and contrary to the direction, fraudulently applies to any other purpose or pays to any other person the money or proceeds, or any part thereof:

Provided that where the person receiving the money, security, or power of attorney, and the person from whom he receives it, deal with each other on such terms that all money paid to the former would, in the absence of any such direction, be properly treated as an item in a debtor and creditor account between them, this section shall not apply unless the direction is in writing.

Section 242: False statement by promoter, etc.
(1) Every one is liable to imprisonment for a term not exceeding 10 years who, in respect of any body, whether incorporated or unincorporated and whether formed or intended to be formed, makes or concurs in making or publishes any false statement, whether in any prospectus, account, or otherwise, with intent-
(a) to induce any person, whether ascertained or not, to subscribe to any security within the meaning of the Securities Act 1978; or
(b) to deceive or cause loss to any person, whether ascertained or not; or
(c) to induce any person, whether ascertained or not, to entrust or advance any property to any other person.

(2) In this section, false statement means any statement in respect of which the person making or publishing the statement-
(a) knows the statement is false in a material particular; or
(b) is reckless as to the whether the statement is false in a material particular.

Section 250: False statement by promoter, etc.
For offences occurring pre October 2003
Every one is liable to imprisonment for a term not exceeding 10 years who, being a promoter, director, manager, or officer of any company or body corporate, either existing or intended to be formed, makes, circulates, or publishes, or concurs in making, circulating, or publishing, any prospectus, statement, or account which he knows to be false in any material particular,-

(a) With intent to induce persons, whether ascertained or not, to become shareholders or members; or
(b) With intent to deceive or defraud the members, shareholders, or creditors of the company or body corporate, or any of them, whether ascertained or not; or
(c) With intent to induce any person or persons, whether ascertained or not, to entrust or advance any property to the company or body corporate, or to enter into any security for its benefit.

Role of the SFO

The Serious Fraud Office (SFO) was established in 1990 under the Serious Fraud Office Act in response to the collapse of financial markets in New Zealand at that time.

The SFO operates three investigative teams:

• Fraud Detection & Intelligence;
• Financial Markets & Corporate Fraud; and
• Fraud & Corruption.

The SFO operates under two sets of investigative powers.

Part I of the SFO Act provides that it may act where the Director "has reason to suspect that an investigation into the affairs of any person may disclose serious or complex fraud."

Part II of the SFO Act provides the SFO with more extensive powers where: "...the Director has reasonable grounds to believe that an offence involving serious or complex fraud may have been committed..."

The SFO's Statement of Intent 2012-2015 sets out the SFO's three year strategic goals and performance standards. It is available online at: www.sfo.govt.nz