Watson and Hotchin Want To Spend More Of Your Money

You would have to be a fool to put money into anything that has the signature of Eric Watson and Mark Hotchin on it.

The disgrace that was Hanover Finance continues to haunt investors. Allied Farmers is now saddled with its loan book, and things are not looking good.

Hanover Finance forgave personal guarantees and loans in the run-up to the transfer of its loan book to Allied Farmers, says Rob Alloway, the man now trying to turn the mess of loans into hard cash.

Alloway, Allied Farmers' chief executive, is on the warpath after last week having to write down a loan book supposedly worth $396.2 million in October, to just $175.5m.

"There were two borrowers involved and several days before the transaction settled they were released from their personal guarantees in the project which is just mental. Why would you do that?"

One personal guarantee was for more than $20m and the other for "several hundred thousand", Alloway said.

And yet the same pair that ran Hanover into the ground are behind FAI Money, another finance company that is advertising for funds.

Brian Gaynor writes:

But the most extraordinary development is that Hotchin and Watson are still raising money from the public through FAI Money, formerly FAI Finance, and its accounting policies and disclosures are just as poor as Hanover's.

FAI traditionally offered secured and unsecured personal loans but its latest prospectus reveals that the board and shareholders have decided that the company may now engage in the provision of property development and property investment finance to the property development/investment sector.

The prospectus also reveals that FAI's accounting policies on interest are exactly the same as Hanover's. In other words, interest capitalised on property developments is accrued over the course of the loan instead of being recognised when it is received.

In addition, KPMG was the auditor of Hanover Finance and is the auditor of FAI Money.

But, more importantly, there is no disclosure of the Hanover debacle and the role Hotchin and Watson played in this.

A great deal of emphasis is placed on FAI's Credit Committee, which comprises the CEO, credit manager and an independent member of the board.

But neither the CEO nor credit manager are listed in the Company Directory section and David Henry, who is FAI Money's only independent director, was the chairman of Hanover and doesn't appear to have much property development expertise.

FAI's investment statement, which is the most widely used document by investors, is also woefully inadequate as it doesn't include a list or description of directors and executives.

It also contains only vague comments about the company's approach towards property lending.

Take a look at the FAI Money site. It's full of promises about how secure your money will be. Heck, you'll even receive a first ranking secured deposit - first ranking, except for all of the things that rank ahead of it, that is:

In the event of insolvency, there is no other charge over all of the assets of the Company that would rank above a secured first ranking deposit other than claims of the Trustee and any receiver, claims of the holders of any prior ranking charges and any claims given preference by law. [emphasis added by me]

So how lucky are you feeling?

The Capital Markets Taskforce denounced the poor state of our investment disclosure regime. The prospectuses and investment statements routinely pedalled out to gullible investors are usually not worth the paper they are printed on. The rules allow people like Watson and Hotchin to take money from unsophisticated, often elderly, investors, on the back of promises of unrealistic returns and assurances that their money is safe. First-ranking merely means that your position is only slightly better than the position of a completely unsecured investor.

Watson and Hotchin may well have broken no laws, but in many respects they are little better than pirates.