The Australian Prudential Regulation Authority (APRA) has released the report on its investigation into the failure of Trio Capital Limited. It provides a useful case study on APRA’s approach to investigations and how it interacts with ASIC.

APRA’s investigation focused on six related-party investments totalling $150 million, all of which were lost or unable to be recovered. The key concerns identified by APRA were that Trio and former Trio directors failed to act in members’ best interests as:

• the related-party investments had been made on the basis of insufficient due diligence;
• the investments were on terms more favourable to related parties than would reasonably be expected had they been at arm’s length; and
• there was inadequate monitoring of the performance of the related-party investments.

In summary APRA’s regulatory outcomes were as follows:
a) Trio was removed as trustee of the Trio Superannuation Entities, and ACT Super was appointed as acting trustee;
b) Trio’s assets were frozen to protect members’ interests;
c) the Minister granted financial assistance to members of the Trio Superannuation Entities under Part 23 of the SIS Act in relation to losses associated with the ASF; and
d) 13 former Trio directors entered into enforceable undertakings with APRA agreeing not to hold specific roles in the industry for periods ranging between 3 years 6 months and 15 years (with one having no expiry date).

As a result of ASIC’s investigation, a number of people have either been jailed, banned from providing financial services, disqualified from managing companies or have agreed to remove themselves from the financial services industry for various periods.

Investment governance
Trio made the related party investments through a series of unlisted assets such as hedge funds, private equity trusts and residential property funds. These investments had a number of common features which heightened the associated investment risk. This included the use of small proprietary corporate vehicles, opaque or complex investment structures, investment vehicles that had no prior operating history, investments in offshore locations not subject to enhanced regulatory oversight, inadequate security and uncommercial terms. The investigation report identified APRA’s concerns that insufficient due diligence had been undertaken by Trio given these heightened risks.

Conflicts of interest
The investigation report refers to the complex series of related party relationships in these investments that gave rise to material conflicts of interest.

Fraud-related investment risk management
A significant proportion of Trio’s investments losses were due to fraudulent conduct in relation to the Astarra Strategic Fund. The most significant fraud related investment risks include the misappropriation of investment assets, material overstatement of investment asset value or material misrepresentations on the nature of the investment asset’s risk and return profile.