How regulatory failure left LM Fund investors stranded for over a decade

As the country approaches the height of the Christmas season, it is worth recalling that hundreds of citizens who lost their life savings remain abandoned by the very financial system meant to protect them.

They are the victims of the mis-selling of the LM Managed Performance Fund of Australia, a product that was widely marketed in Malta, principally between 2008 and 2013. It was often sold, or more accurately mis-sold, under the guise of an “execution-only” mandate and done so in full view of the regulator.

Many of those targeted were financially unsophisticated investors. Among them were workers who had taken early retirement schemes at Maltacom, Drydocks and other state entities, as well as public employees who had just received their retirement gratuities.

They were drawn in by the promise of high coupon payments from an Australian property fund whose inherent fragility ought to have been evident to the sales staff distributing it, given the various indicators already in full view that the fund was bound to fail.

For most of these retail investors, this was their first experience of financial investment. Individually, they committed tens of thousands of euros; collectively, their investments ran into millions. The outcome was uniform: a total loss of both capital and income.

Responsibility lay primarily with three MFSA-licensed investment services firms: All Invest Co Ltd, MFSP Financial Management Ltd and Hollingsworth Financial Services Ltd.

These entities were allowed to continue operating unchecked until the damage had been done. Only then did the Malta Financial Services Authority move to suspend or withdraw its licences.

In 2013, the LM Managed Performance Fund entered compulsory liquidation in Australia. No interest payments were made thereafter, nor was capital repaid on maturity.

Many investors sought redress, either through complaints filed with the newly established Arbiter for Financial Services or through the ordinary courts. While they were invariably successful on the merits, their compensation was severely constrained.

The Investor Compensation Scheme caps payouts at €20,000 per investor, meaning that even successful claimants recovered only a small fraction of their losses.

The liquidation process of LM Managed Performance Fund in Australia itself dragged on for almost 11 years. It was only towards the end of 2024 that investors finally saw some progress, when the Australian liquidators concluded their work and remitted the proceeds to Zenith Finance Ltd, the name adopted some years earlier by MFSP Financial Management Ltd.

The investments of all Maltese investors in the fund are held in nominee form by Zenith Finance Ltd, a company placed under the administration and supervision of the Criminal Court.

Yet more than a year after Zenith received the liquidation proceeds in its bank accounts in Malta, the funds remain undistributed. The court-appointed administrator, Maria Evelina Spiteri, who succeeded her late father Hector Spiteri, himself appointed by the Court of Criminal Judicature in place of Steve Paris, the MFSA’s original appointee, has yet to release the monies to their lawful beneficiaries.

Many investors have not even been informed that the liquidation process has concluded, let alone that they may now be entitled to a partial, albeit modest, recovery.

Worse still, Zenith Finance Ltd requires investors to sign releases absolving the company and all its officials, past and present, of liability for professional negligence or other wrongdoing. Such demands go beyond what is permissible.

At most, Zenith is entitled only to a straightforward discharge in its role as paying agent for the liquidator. The broader waivers being sought are emblematic of unfair contractual terms and unlawful exoneration clauses, prohibited under EU directives transposed into Maltese law through the Consumer Affairs Act.

So while many readers may be enjoying the excesses of the festive season, it bears remembering that hundreds of fellow citizens, many of them retirees, lost everything to investment mis-selling years ago and are still being denied even their small share of the liquidation proceeds.

The Arbiter for Financial Services has attempted to intervene, though thus far without tangible results. By contrast, the Malta Financial Services Authority has effectively washed its hands of the affair even though this debacle can be traced back to its own deficient, if not altogether absent, supervision during the notorious decade of widespread investment mis-selling between 2007 and 2014.