Roskow Blog

An Australian conman has been jailed for 13 years recently over a money management scam that offered clients annual returns of 50 per cent or more by investing in commodities and currencies. Why does this keep happening?

By Jim Parker, Vice President, DFA Australia Limited

Graeme Hoy and his business partner Ian Stewart Rau set up a company called Chartwell Enterprises which preyed on unsophisticated investors in the regional Victorian city of Geelong. Hoy brought in the dollars, while Rau ran the money from a fake trading room, complete with pretend "market analysts" making predictions.

Why no-one picked as odd the fact that someone should set up a commodities and currencies trading desk in an old industrial city better known for its football team than as a financial services hub isn't exactly clear. But it seems plenty of people, dazzled by the promised returns, were prepared to put logic aside.

Just to prove to potential investors that his mysterious trading methods were successful, Hoy leased a Rolls Royce Phantom and cruised around in a $6 million yacht paid for out of the company's retained earnings.

The ruse seemed to work and Hoy and his partner eventually brought tens of millions through the door on the promise of returns that few, if anyone, anywhere else in the world were able to generate with any consistency.

The problem in this case was that only $400,000 of those incoming funds was ever used for trading. Instead, Hoy and Rau survived for 15 months by funding "returns" out of new money from recently signed unit holders—a classic 'Ponzi' scheme.

Chartwell Enterprises finally collapsed three years ago under the weight of $82 million in debt. Hoy pleaded guilty to 44 charges relating to the scam and faces a non-parole period of nine years. Rau was jailed for just under two years.

In sentencing Hoy in the Victorian Supreme Court, Judge Terry Forrest noted that days before the collapse, Hoy was reassuring investors that their money was safe.

"You have diminished the lives of all," Forrest said. "You have stolen from them and humiliated them and for that you must be held to account."

While not in the class of the giant Ponzi scheme run by the infamous Bernie Madoff, the US investment advisor who scammed investors for at least $20 billion, the Chartwell sting revives some age-old truths about investing.

Firstly, there is no such thing as a sure thing. Promises of recurring returns of 50 per cent more a year irrespective of market conditions should set off alarm bells, as should inattention to the individual needs and risk appetites of clients.

Firms that appear out of nowhere in old industrial towns and led by Rolls Royce-driving, fast-talking salesmen might also justifiably attract suspicion. Claims to be able to successfully and consistently pick trends in commodities and currencies—when even the world's most powerful banks can't do it—should also be treated with the greatest scepticism.

Ultimately, though, there is only one test for would-be investors: If it sounds too good to be true, it almost certainly is.