Chapter 4
Legitimacy by association
4.1
Convincing potential investors of the legitimacy of a land banking project
was central to the promotion of the scheme. The committee has noted the use of
celebrities and testimonials from people who have increased their wealth
through such ventures as an important part of marketing land banking schemes. In
this chapter, the committee looks at the way in which promoters also linked
reputable, well-known companies and government agencies to their schemes as another
means of reassuring investors of their credibility and the commercial viability
of the proposed development.
Involvement of reputable third parties
4.2
The committee has serious concerns about the practices of some property
development companies, marketing agents, architects and other third-parties
involved in providing advice on, or supporting the development of, some land
banking schemes. The committee considers that the extravagant promises made by
Market First and 21st Century Group about their respective
developments would have seemed far less plausible were it not for the associations,
often overstated, with brand name companies. In particular, the committee has
concerns about the involvement of well‑known or supposedly 'independent'
companies in two respects:
-
some well-known companies were repeatedly mentioned at investment
seminars and in marketing material as being engaged with the planning or
construction of the developments, but these companies later denied that they
were substantively involved with the schemes; and
-
investors were referred to lawyers and accountants who had pre‑existing
business relationships with Market First and 21st Century
Group, a practice known as offering a 'one stop shop'.
Project partners
4.3
In their promotion of land banking schemes, both 21st Century
Group and Market First referred to connections with respected third parties. For
example, as part of his marketing strategy, Mr McIntyre linked his company's
land banking schemes with those of the large, well-established companies in the
property industry and certain government bodies.[1]
One investor, Ms Baxter, told Fairfax Media:
I think the game plan is to construct a money-making scheme
using the integrity that comes from reputable names within the building and legal
industries, to gain the consumer's trust and confidence so they part with their
money. Meanwhile, the developer has no intention to follow through with the project.[2]
4.4
The claimed involvement of reputable, brand name companies and
government bodies is illustrated through the following case studies involving
the Greater Shepparton City Council, SMEC Urban, Peddle Thorp architects,
Slater and Gordon Lawyers, and the Victorian government's former Office of
Living Victoria.
Moira Park Green
City development: former Councillor Mr Milvan Muto
4.5
The 21st Century Property Direct investment seminar, which
promoted the Moira Park Green City development outside of Shepparton, featured
an influential presentation from Mr Milvan Muto, who at that time was an
elected councillor for the Greater Shepparton City Council.[3]
4.6
In a pre-recorded presentation, Mr Muto outlined the factors that would
contribute to Shepparton's future economic growth, including the need for
housing construction to meet demand, the potential development of a fast train
from Shepparton to Melbourne running at the speed of the Japanese Shinkansen
bullet trains, and state and federal government funding.[4]
One of Mr Muto's final comments was:
In Shepparton, we only really have one growth corridor for
residential and that's the southern growth corridor, which heads towards
Melbourne and follows the river and the creek.
[5]
4.7
While Mr Muto did not comment directly on or endorse the Moira Park
Green City development, 21st Century Property Direct's spruiker, Mr
Molnar, made a number of comments immediately after Mr Muto's presentation
linking Mr Muto's remarks to the likelihood of the land being rezoned:
Ok, so you have managed to hear from council. What did you
get from council? And he [Mr Muto] is obviously one of the councillors. There
is only one area where Shepparton can grow and that's where? South corridor. So
the area we are doing the development in is guess where? South! Alright, it is
in the preferred growth corridor.
So the government, local government, has designated [that]
this is the only area we are going to grow and this [Moira Park Green City] is
where they want it to grow. So what do you think the chances are of getting
development approval in that area? Like, that's where they want it, that is
where they have said they want it.
Many people had the question, 'well, you know is it swamp
land?' or 'will it be approved?' so that is why we want the council to tell
people 'this is the corridor'. We have given them [the council] a master plan,
they understand it, they are actually very happy with it, so it just has to go
through a process, and that process will actually take years to do.[6]
4.8
In March 2015, however, the Shepparton News reported that Greater
Shepparton City Council had received 49 inquiries from investors who were
concerned about their investment in the Moira Park Green City development.[7]
The article mentioned that Mr Muto had been listed as a speaker at the 21st
Century Property Direct seminars but that the Greater Shepparton City Council
was refuting allegations that it had endorsed the development. The newspaper
quoted Mr Johann Rajaratnam, the council's sustainable development
director, who said:
Council has made it clear to anyone who contacts us about
this proposal that council is not involved in this development in any way, nor
is the council promoting or endorsing the proposal as part of its longterm development strategy.[8]
4.9
A letter, dated 10 March 2015, from the Greater Shepparton City Council
to the Shepparton Newspaper outlined the council's current position in relation
to the land which was the subject of the proposed 'Moira Park Green City' development.
In its letter, the Council noted that it had not received an application for a
planning permit to subdivide any of the land and 'it did not necessarily follow
that the Council will approve such an application at any time in the future'.
It stated further:
The land is currently not zoned to allow small lot
residential subdivisions and is in fact subject to significant flooding which
will prohibit development in some areas.[9]
4.10
Ms Monka told the committee that she had paid $60,000 for
two options in the Moira Park Green City development because of what she perceived
to be an endorsement from the Greater Shepparton City Council:
What really sold me to the Shepparton scheme was an
endorsement from Greater Shepparton City Council and the respected names of the
businesses involved in the project. The attendees were frequently reminded of
them. It was like an insurance policy—very much as the other project in 2009—so
I paid for a club membership and set up a self-managed super fund—
...
...the most important [consideration] for me—it was like an
insurance policy—was that the city council was there and was saying: 'It's
real. It will happen.'[10]
4.11
As noted previously, the value of options in land banking schemes is
inherently tied to the likelihood that the land will be rezoned and receive
development approval. As such, any suggestion that the local council (or
another government body with planning responsibilities) endorses a development
can influence a potential investor's decision to sign up to the scheme. This is
especially the case when an individual associated with a local council is used,
however subtly, to endorse the development.
Moira Park Green
City development: SMEC Urban
4.12
The involvement of SMEC Urban, which has since been renamed as SMEC, in
the development of Moira Park Green City was repeatedly mentioned in
promotional materials and during 21st Century Group's investment
seminars. SMEC provides integrated urban development consultancy services
throughout Australia, with the origins of the company dating back to the
construction of the Snowy Mountains Scheme.
4.13
Mr Ofer Fridberg, described as a senior urban planner from SMEC Urban,
gave a presentation to 21st Century Property Direct's seminar on the
strategic background and the planning process for Moira Park Green City,
including how the development would fit in with the Greater Shepparton Housing
Strategy.[11]
A slide taken from the 21st Century Property Direct seminar
referred to SMEC Urban as industry specialists in master-planned developments
that:
...are engaged to construct your property and are selected for
their high level of public credibility and industry respect.[12]
4.14
21st Century Property Direct's spruiker introduced SMEC Urban
as the 'project manager' for the development.[13]
However, a brochure for the Moira Park Green City development and SMEC Urban's
own presentation at the 21st Century Property Direct seminar (see Figure
3) described SMEC Urban's role as 'project consultants'.[14]
Figure 3: Slide
from 21st Century Group's presentation on the Moira Park Green City
development[15]
4.15
According to SMEC, it had been contracted to provide some services, such
as conceptual urban design information, to the Moira Park Green City
development but that the relationship had been terminated because of a number
of concerns with the process:
Our review of our files relating to the project in question
indicate that SMEC terminated the relationship with the client due to
unauthorised use of SMEC's brand and marketing materials as well as use of
information and materials supplied by SMEC beyond their intended use.[16]
4.16
SMEC also provided a letter, dated 5 October 2011, that was sent to
Mr Nejat Mackali, the Shepparton property developer who was involved
with the Moira Park Green City development, terminating the business
relationship:
In withdrawing our services from the project, we reinforce
the purpose of our work undertaken to date, together with concerns raised
previously;
-
Drawings we prepared were concepts only and not intended for any
other purpose and should not be used to support any business case for Zsa Zsa properties
and certainly not for use as marketing material to attract investment. They
were also prepared on your instruction to test densities;
-
On a number of occasions we have advised that Council were
unlikely to accept density proposed in our concepts and those of Chris Smith
& Associates and that the concepts were an exercise in assessing
yield/density;
-
On a number of occasions we have advised that much of the land is
subject to flooding and that the relevant studies should be undertaken before
proceeding with the development.[17]
4.17
The promoters of the schemes used the good name and reputation of this
organisation beyond the services it was contracted to provide to enhance its
own standing.
Market First's
Foscari and Veneziane projects: Slater and Gordon Lawyers
4.18
Some investors in Market First's land banking schemes, the Foscari and
Veneziane projects on the outskirts of Melbourne, were influenced by the
reputed involvement of well-known law firm Slater and Gordon. The committee
heard evidence that Market First's representatives, including Mr Rowan Burn,
CEO of Market First, heavily promoted Slater and Gordon's involvement during
their seminars.[18]
Statements made to potential investors suggested that Slater and Gordon were
involved in the projects to represent and protect the interests of individual
investors, including by lodging a 'master caveat' over the lots to ensure that
the rights of the investors were maintained. While there appears to be no such
thing as a 'master caveat', it is apparent, as explained further below, that
some investors believed the instrument existed and provided an effective
guarantee that their investment in a project would be secure if the project did
not proceed.
4.19
While some investors were clients of Slater and Gordon, others, however,
were under the misapprehension that they were clients when clearly they were
not. This misunderstanding became apparent when Slater and Gordon received file
transfer forms for investors who were not their clients.[19]
Mr Guy, for example, thought he was represented by Slater and Gordon and
provided the committee with a Slater and Gordon disclosure statement and costs
agreement signed by his wife and himself.[20]
This document, however, was not signed by Slater and Gordon and Slater and
Gordon later confirmed that Mr Guy was not a client of the firm.[21]
Another investor, whose name is withheld, also provided the committee with a
similar document from Slater and Gordon not signed by anyone from the firm.[22]
This investor also received documents from Summit Law and the file transfer
form from Slater and Gordon to SK Lawyers.[23]
4.20
Mr Adam Zuchowski, who was then employed as a Senior Associate
in the Footscray office of Slater and Gordon, was the lawyer representing some
investors in the Foscari and Veneziane projects.[24]
He took on his first clients for Market First's projects in May 2013.[25]
According to Slater and Gordon, Mr Zuchowski advised 197 clients on the
Veneziane or Foscari projects, 41 of which were options clients and the
remaining 156 had invested through off-the-plan contracts of sale.[26]
Ms Sharon Taylor, General Manager of Professional Standards and Risk
at Slater and Gordon, started reviewing her firm's involvement when the matter
was referred to her group on 23 September 2013. Mr Zuchowski stopped
working for Slater and Gordon on 2 December 2013.[27]
4.21
Ms Taylor's group investigated both Mr Zuchowski's advice as well as
Market First's developments and, as noted earlier, raised concerns about the
projects. They included: uncertainty around who was behind the developers;
representations made to investors, in particular, that they were purchasing at
wholesale prices; payments for exclusive membership; and 'a disconnect between
the lifestyle amenity promised to investors and the likelihood of delivery'.[28]
4.22
As discussed in the next chapter, Slater and Gordon also became
concerned that Mr Zuchowski may have had a potential conflict of interest in
providing advice on matters relating to Market First schemes. This potential conflict
of interest appears to have derived in part from the fact that Mr Zuchowski is
the brother-in-law of Mr Darren Eliau, the Principal Lawyer at Evans Ellis
Lawyers, which has been at the centre of a number of land banking schemes.[29]
4.23
Mr Guy, who invested in Market First's Foscari project, told the
committee that his investment decision was influenced by Slater and Gordon's apparent
association with the project. Mr Guy told the committee that Mr Burn spoke
about this involvement at the seminar:
...Rowan Burn made a comment in his statement during our
program that Slater and Gordon would hold the master caveat over the entire
site, protecting investors in the event the project development failed, or a
sale of the whole site was imminent. That was what was influencing them. It was
a guarantee that our money would not be lost because the money would be held in
the lawyer's trust funds. It would only be released on completion of our
property.[30]
4.24
In addition, according to Mr Guy, he spoke to a lawyer named 'Adam' from
Slater and Gordon who discussed the master caveat Slater and Gordon would lodge
over the block of land.
4.25
Mr Hayne and Ms Baxter, who also invested in Market First's projects, had
similar recollections about references to the master caveat. Mr Hayne indicated
that Mr Burn, in his investment seminar presentation, told the audience
that Slater and Gordon was providing the master caveat 'so I could not lose my
money'.[31]
Ms Baxter informed the committee that 'They were the two things that made me
buy into the scheme—the existence of the master caveat and representation by a
reputable law firm'.[32]
4.26
Ms Taylor explained that Slater and Gordon was not involved in lodging a
master caveat. She referred to this 'curious notion' of a master caveat that
'had apparently been suggested by representatives of Market First':
The first I heard of the 'master caveat' was after our 10
February 2014 letter had been sent out to clients. One client contacted me and
discussed the issue of the master caveat. That was the first time that I had
heard of the master caveat. It was a little perplexing, really, because Slater
and Gordon clearly did not provide a master caveat. What I was able to glean
was it appeared that it was something said in the promotional seminars by Rowan
Burn, as a way of assuring people about their investment. But it is not
something that Slater and Gordon can or would provide. In fact, I am a little
perplexed by what a master caveat would even be for a land development of that
kind.[33]
4.27
To summarise Ms Taylor's evidence, Slater and Gordon did not provide
master caveats over the Market First projects and the provision of a master
caveat would have, according to Ms Taylor, been 'implausible' as no such instrument
exists.[34]
Ms Taylor also provided the committee with a file note from a phone
conversation with Ms Baxter on 13 February 2014; the file note records Ms Baxter
asking about the master caveat which Mr Burn had mentioned at every seminar Ms Baxter
attended.[35]
It appears that Ms Baxter was the client who had contacted Ms Taylor and
discussed with her the issue of the master caveat.
4.28
Mr Zuchowski, the Slater and Gordon lawyer who provided advice on the
Market First schemes, submitted that he did not provide any advice or
representations about lodging a master caveat, an instrument he also thought
did not exist:
My advice did not include any representations, comments or
discussion whatsoever in respect of a 'master caveat', the existence of a
'master caveat' or indeed that a 'master caveat' would be lodged and is
directly contrary to the evidence given by Ms Baxter to the Committee.
...
I further advise:
- I am
unaware of and do not believe that such an instrument known as a 'master
caveat' in fact exists as a matter of property law;
- Accordingly
I did not and would not provide any advice in respect of a 'master caveat' and
again, as such an instrument does not exist I could not provide any advice in
respect of it...[36]
4.29
Further, Mr Zuchowski maintained that Slater and Gordon's clients were
provided with documents (for an off-the-plan contract of sale) which expressly
stated that the purchaser was not permitted to lodge a caveat to protect their
interest.[37]
4.30
In summary, all three investors in Market First projects who gave
evidence to the committee had a strong recollection of Mr Burn making
representations about Slater and Gordon providing a master caveat over the
Foscari and Veneziane projects during his presentations at investment seminars.
These recollections seem consistent with Market First's practice to encourage
attendees at its seminars to view its land banking schemes as a legitimate,
rewarding property investment opportunity. The committee considers that it is
unlikely that three investors, who do not have legal backgrounds, would concoct
consistent and detailed stories about a non-existent type of caveat. It is more
likely that Market First did make representations about Slater and Gordon
lodging a master caveat to protect the interests of investors. It is clear that
the representations about the master caveat, and Slater and Gordon's purported role
in lodging the master caveat, played a substantial role in giving a sense of
legitimacy to Market First's projects and convincing investors that their
interests in the developments would be protected.
4.31
On the evidence, Mr Zuchowski's role in facilitating and encouraging
clients to think that a master caveat would be lodged to protect their
interests is unclear. Mr Zuchowski did not mention or provide any evidence
about the documents provided in relation to options agreements; he asserted
that the vast majority of matters on which he provided advice related to
off-the-plan contracts of sale.[38]
According to the documents Mr Zuchowski provided to the committee, investors in
off-the-plan contracts of sale could not lodge any type of caveat to protect
their interests.[39]
4.32
The committee believes that Market First repeatedly promoted the
involvement of Slater and Gordon and referred investors to Mr Zuchowski because
the law firm's reputation provided the developments with an aura of legitimacy.
Investors felt their interests would be protected because of the involvement of
Slater and Gordon. Following this matter, Slater and Gordon has instituted an
absolute prohibition on accepting work from wealth creation seminars, as the
firm considers 'that wealth creation seminars represent an undesirable segment
of the real estate promotion market'.[40]
4.33
The committee considers that firms need to be cautious about providing
advice on schemes that are promoted by spruikers, which includes ensuring that
internal risk management processes are robust enough to identify promptly employees
who may be engaged with developers or promoters of schemes that the firm would
not endorse.
Market First's
Foscari and Veneziane projects: Peddle Thorp architects
4.34
In their marketing brochures and during presentations at investment
seminars, Market First promised that the Foscari and Veneziane luxury housing
estates to be constructed outside of Melbourne were designed by Peddle Thorp
architects. Market First's marketing brochure stated:
You can invest in a project designed by World Class
Architects Elevli Plus Peddle Thorp
Peddle Thorp have designed many world famous projects
including The Grand Hyatt in Collins Street Melbourne, Doha Aquarium in Dubai,
The Rod Laver Arena, ANZ Headquarters in Melbourne and the recent global
rebranding of Tiffany & Co.[41]
4.35
The brochure also described Peddle Thorp as a 'project partner' for
Market First's developments.[42]
Mr Burn spent several minutes showing the attendees at one investment seminar
photographs of Peddle Thorp's projects, emphasising that Market First's housing
developments would be similarly luxurious and well-designed.[43]
Peddle Thorp's involvement appears to have added significant attractiveness to
Market First's developments, providing evidence to justify the promises of high
returns for a 'branded' development built on farmland outside Melbourne.
4.36
Peddle Thorp Architects (PTA) informed the committee of its involvement
with Market First's projects. It noted that, around August to November 2011, Michael
Grochowski, Project Management (Aust) Pty Ltd engaged both PTA and its interior
design company PTID for masterplanning and graphic design services for the
Acacia Banks, Truganina and Reeds Edge near Melton. According to PTA, they had
no knowledge of Market First's involvement in the project or of the project
timeline—it did not know that these projects were Market First developments or
that any sales or options were offered for sale. PTA noted that they were
engaged 'to prepare a concept masterplan for Mr Grochowski (Project Management
(Aust) Pty Ltd) for which PTA and PTID have not been fully paid'.[44]
PTA explained:
...our Contract was with Michael Grochowski, Project Management
(Aust) Pty Ltd, who was introduced to us by Hakan Elevli of Elevli Plus. The
relationship ended as our invoices remained unpaid.[45]
4.37
As noted in chapter 2, ASIC has serious concerns that Foscari is not
close to completion and appears unable to be completed due to the financial
position of the development company which operated the scheme and is the owner
of the land.[46]
It was also prompted to take legal proceedings against Foscari because it
formed the view that investors may have invested in the scheme on the basis of
misleading representations by the promoters of the project.
Office of Living
Victoria—government grant to Foscari
4.38
The Foscari development promoted by Market First in Melbourne's outer
west received a $651,679 stormwater grant from the Victorian Government's
former water agency, the Office of Living Victoria. An investor update on
Market First's website cited this grant as evidence of the project's
development.[47]
The grant was also mentioned in Market First's marketing brochure:
Quality of content, outcomes and presentation
One of the major outcomes from the design [of Foscari] has
been awarding of an Office of Living Victoria fund commitment for the projects
ability to showcase how sustainability is a catalyst for connecting community,
water and the environment.[48]
4.39
A recent independent review of the grants program by former Victorian
and Western Australian Auditor‑General, Mr Des Pearson AO, found that 80 per
cent of the grant had been released to the holding company behind Foscari,
Foscari Holdings Pty Ltd. It also had concerns about the viability of the
scheme, stating that the purpose of the grant was:
...to implement storm water management infrastructure in a
green field development yet no infrastructure has been delivered. Milestone
payments were triggered on signing of the Funding Agreement (25%), completion
of detailed design work (45%) and awarding of contracts to builders (10%). No
further milestones have been met and it is not clear whether the project will
be completed.[49]
4.40
Following the release of the independent review of the grants program,
it was reported that the Victorian government would attempt to recover the
grant money from Foscari Holdings.[50]
Victorian Water Minister, the Hon Lisa Neville MLA, said the government would
seek to recover the money as there were 'no tangible outcomes at all' with the
Foscari project.[51]
Conclusion
4.41
The ability of the operators and promoters of land banking schemes to
convince some well-known members of the property development sector and
government agencies that the land would be developed as promised highlights the
importance of all relevant authorities carrying out proper probity checks.
4.42
It appears that many of the companies that were promoted as having a
significant involvement in bringing the developments to life were only involved
at the early stages of the projects, and later withdrew their services. The
involvement of these third parties provided a sense of legitimacy to the
projects and encouraged investors to believe that the schemes were well
supported by others in the property sector. However, potential investors were
not aware of the exact nature of the companies' engagement or that they were no
longer involved with the schemes.
4.43
In other cases, as with the Greater Shepparton City Council and Slater
and Gordon (excluding the endeavours of Mr Muto and Mr Zuchowski,
respectively), it appears that the brand name of the third party was used
during investment seminars often without the explicit knowledge or consent of
these organisations.
4.44
More broadly, these case studies raise questions about how consumers—who
are often unaware of standard practices in the property development
industry—can tell the difference between reputable developments and high-risk
developments when some of those inside the industry (and in government) seem to
have some difficulty in discerning the difference. They also highlight the
reputational damage legitimate businesses can suffer by being associated with
less reputable schemes, regardless of whether or not they have been directly
involved in operating or providing advice on land banking schemes. Finally, the
case studies demonstrate the capacity of the promoters of such schemes to
overstate the involvement of respectable companies for blatant promotional
purposes. They are likely to seize any opportunity to associate their venture
with recognised, reputable entities in the expectation that it will lend
credibility to their project.
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