Blue Chip finger puppetry?

August 8, 2008

Team A: This is a picture of Jeff Meltzer of Meltzer Mason Heath, New Zealand.

A Mr. Aaron Heath says that after six months investigation, it is still too early to know what to write in their promised reports. Hmmm.

This is not a trivial little financial bubble involving a tiny franchise system tanking.

Blue Chip and its founder and Oz resident Mark Bryers have caused 2,000 Mom and Pop Kiwis to lose over $80 million as 20 related companies went buns up kneeling.

It appears the liquidator’s actions and sense of urgency have the full support of Commerce Minister Lianne Dalziel and the Clark government.

Team B: Anne Gibson from The New Zealand Herald reports this week in Blue Chip process frustrates lawyers that:

Two lawyers acting for more than 300 Blue Chip investors say they are aghast at the scale of the task and are angry about what they say is a distinct lack of Government aid for investors.

Specifically, how helpful have the liquidators been in assisting the the two lawyers (Paul Dale and Daniel Grove) in trying to defend the 2,000 citizens?

Grove says his firm has been greeted only with hostility from the liquidators so far. “We requested a document and were told we needed a court order.”

Illustratively, it is these two barristers that are:

Issuing proceedings against two Auckland lawyers – whom the barristers refused to identify – for professional negligence over advice to clients who became Blue Chip investors.

The two lawyers are doing this: not the liquidators or the Government.

  • You Decide: Is it Team A or Team B that appears to be putting on a cheesy puppet play?

Franchising is much riskier than independent business

July 24, 2008

The franchise industry is well-known for its hyperbole bordering on propaganda.

For the latest example of these half-truths and silent misrepresentations see a recent modestly named article: Franchising to the Rescue.

In my opinion, this is an unnecessarily biased and dangerous article for small business investors.

It’s assumption is that franchising is a safer investment than independent business. That claim has been exploded for at least 10 years and totally ignores the recent New Zealand experience with Blue Chip and Green Acres.

  • No mention, either, of the two Australian state franchise inquiries and the upcoming national Oz industry probe. [see an excellent Oz resource, BakersDelightLies.com]

All the credible academic research comes to the opposite conclusion: Franchising is much riskier than independent business.

Research: There is an big quality difference between true academic work [published in refereed journals, funded by public money] versus private research [biased, paid for by interest groups]. It is not enough to say that there are no reliable statistics and then go ahead and spout off unsubstantiated figures.

  • Everyone knows the public remembers the numbers while forgetting the qualifications.

Publishing these self-serving guesses [with zero opposing opinions] is bordering on reckless media behaviour. Mom-and-Pop investors are risking their life savings and homes, after all.

Timothy Bates: In 1996, this university professor published an academic study that rocked the franchise industry. Bates was contracted by the Office of Advocacy of the U.S. Small Business Adminstration to look at survival patterns of franchised and non-franchised businesses.

Survival Patterns Among Franchise and Nonfranchise Firms Started in 1986 and 1987 concluded the following [see S.B.A. Research Summary, Related Bates paper]:

  • young independent small firms had a better chance of surviving than small, non-corporate franchises,
  • while franchise firms were better capitalized than non-franchise firms, about 62 percent of the franchise firms survived, versus 68 percent of the non-franchise or independent firms,
  • average profit was much higher for the independent businesses; profits were negative, on average, for the franchise firms,
  • franchises purchased from a previous owner were riskier than franchise firms started from scratch, and
  • only 49 percent of the franchises started by women in 1987 were in existence in 1991, compared with 67 percent of the independent firms started by women.

Within the report itself, Bates said:

…the franchisee route to self-employment is associated with higher business closure rates and lower profits for the young, largely noncorporate firms, relative to independent business ownership. p. 8.

U.S. Government: On June 24, 1999 Dr. Bates appeared before the U.S. House of Representatives’s Subcommittee on Commercial and Administrative Law. The Oversight Hearings on the Franchising Relationship were called to review the state-of-the-union in American franchising. Click here for a .pdf copy of his testimony.

Bates:

Findings of my research indicate that new and small franchisees are more likely to discontinue operations than independent startups, and this holds true when firm and owner traits are controlled for statistically. One clear-cut finding was that franchisees starting by purchasing the firm from a previous owner were riskier than franchisees starting from scratch. A person entering self-employment by purchasing an ongoing franchise risks acquiring a firm that is more likely than a de novo startup to go out of business within the next few years. [my emphasis]

These Kiwi industry gentlemen know all about


Blue Chip in government hot water since 2005

July 23, 2008

Another in a series of terrific articles by The New Zealand Herald on the Blue Chip mess.

This time, it seems the government was fiddling while Blue Chip investors’ money was burning.

Maria Slade reports today that two brief cases of original documents were handed over to property consultant Olly Newland [left] who has been helping the victims and the Serious Fraud Office.

It appears the Inland Revenue Department was pressuring the Blue Chip group of companies for income tax payable in 2005.

The documents – 40 or 50 files in their original folders – reveal that the Blue Chip property investment group was being pressured by Inland Revenue over hundreds of thousands of dollars in unpaid tax as far back as 2005.

The group did not fall over until early this year, when 22 of its companies were placed in liquidation owing around $84 million.

So a government agency was having a tough time with Blue Chip company 2 to 3 years before the whistle was blown? I wonder how many people got burned after the government knew or should have known there was a public risk?

Every public servant [civil servants, Oath of Allegiance, Parliamentary Oath & Executive Councillor] swears an Oath of Office to serve Her Majesty Queen Elizabeth the Second.

  • Presumably, QEII would frown on enabling a theft of $84 million from 2,000 of her loyal subjects [many of whom were old enough to remember her coronation].

Somebody knew something. They reported their suspicions properly. Somebody else did nothing because it would have been embarrassing politically to pull the plug, even though that was their duty to do so.

Some of the two thousand Kiwi were sold down the river to avoid a political scandal. The Blue Chip fiasco was not an accident: This was perfectly predictable and made worse by government inaction. The scammers had some very good friends in high places, I think.

For example, Simnel Ltd – a company associated with Blue Chip founder Mark Bryers – was under pressure to pay a tax bill of $226,806.

As Newland said:

“It was all happening long before the whistle was blown.”

Note: It is my experience that federal public servants are meticulous in documenting that they had informed their political masters about a likely tax loss. They know their duty and they knew there was a vulnerability [public hazard] in failing to regulate non-bank lenders.

There exists a paper trail from the Blue Chip tax problem into the political elite. Unless I miss my guess, all roads lead to the office of the Prime Minister of New Zealand.


Legal Aid used to fund franchise lawsuits

July 23, 2008

Now here are a couple of novel ideas from New Zealand.

Maria Slade at the ever-vigilant New Zealand Herald reports today that the 2,000 investors who have lost over $84-million in the Blue Chip franchise collapse are being encouraged to apply for legal aid to finance their attempts at getting thier money back.

Commerce Minister Lianne Dalziel says she is:

interested in helping Blue Chip investors find ways and means to access legal advice, particularly in this case where lack of funding is a barrier to legal recourse.

This is a first: I have never seen a publicly funded legal aid program used to fund a franchise legal action.

Not that surprising that the New Zealand government doesn’t want to touch the Blue Chip mess with a 10 foot pole. It’d raise too many questions about lax commercial regulation, I’d imagine.

  • Something about creating a very friendly feeding ground for massive consumer fraud, targeting Kiwi senior citizens.
  • International financial market laughingstock? Or some other alarmist conclusions.

The second is that the the lawyers and valuation firms are being scrutinized for their professional competence.

Law firm Ellis Law, together with barristers Paul Dale and Daniel Grove, are acting on behalf of several hundred of them. Activity includes taking legal action against solicitors over allegedly negligent advice they gave on the investments.

Valuers who provided allegedly inflated valuations on properties sold through the Blue Chip scheme are also in the lawyers’ sights.

But we’re missing a key ingredient to the Blue Chip fraud sausage: The lenders. Where are they in this fiasco? The last time I checked, there should be some type of regulation or lapdog self-regulation to cover these lenders.

  • Could it be the government is handing over the heads of the small fries [no-name lawyers and valuators] to avoid looking responsible for not regulating lenders sufficiently?
  • The Kiwi government knew or would have been reasonably been expected to know that lax or no lending regulations causes loss.
  • When the chickens come home to roost, the government blames everyone except themselves.

This fraud would have been impossible without a source of funds. I suspect the government was asleep at the switch as $ millions fed this humongous scam.

  1. Remember: Sue the SOBs with insurance, when you don’t have the cojones to sue the government and Her Majesty’s ministers.

Will Kiwi Courts view mortgage debt Unenforceable?

May 26, 2008

There is a very important article with the sleeper title of Blue Chip loans disputed by Jane Phare of the New Zealand Herald.

Auckland barrister Paul Dale plans to apply for injunctions against finance companies involved in Blue Chip properties in cases where the loan application documents appear to be false or fraudulent.

He argues the mortgages should be set aside and is preparing to launch a precedent-setting battle against finance companies, including GE Finance, other lenders and their agents. The action could prevent the mortgagee sales of homes owned by desperate Blue Chip investors, many retired, who face losing everything.

To date, Dale has looked closely at four case studies, collectively worth about $2 million in disputed mortgages. “My own view is some of these mortgages are not enforceable,” he said…

I agree with Mr. Dale.

From what I can see, Dale is the only person that is willing to take practical action and wish him (and those smart enough to support him) all the best. Otherwise, everyone else seems to be defending the franchise and banking interests.

Attentive readers of the FranchiseFool might remember my Mar 19th posting called: Loan Contracts: Unenforceable or Voidable?

I asked if these mortgage debts were valid or:

“…unenforceable (valid but the Court will not enforce) or voidable (certain conditions present or absent: fraud, material misrepresentation, etc.)…”

It is certainly too early to tell but this is the most promising development to date, in my non-legal opinion.

Too bad the Clark government couldn’t help out ($) with some of the legal heavy-lifting but they are notable for their consistency.


Oz Alert: Shrewd businessmen immigrating

May 22, 2008

If you happen to bump into Bob Bangerter (left) or his fellow Blue Chip founder Mark Bryers (below) say hello for me.

I take Bob at his word: He is not, as some media outlets portray him, a rich old fiddler.

As far as the former lawyer Bob Bryers is concerned, a conviction for drunk driving (see Blue Chip’ Bryers blows the bag) and a divorce (see Blue Chip investors’ hopes fade) don’t seem to be slowing him down a bit.

It appears that Bryers is back in the real estate/franchising saddle but this time working full-time in Sydney, AU after becoming less popular in New Zealand (2,000 unhappy investors, $80-million losses).

Sydney property investment company Barkley Walsh says it is a subsidiary of ASX-listed Northern Crest Investments. Northern Crest was previously called Blue Chip Financial Solutions and is the parent company of many of the Blue Chip-related companies in liquidation in this country. Trading in its shares has been suspended since February.

To understand how franchising can be used to market over-priced assets AND dodge tiresome old real estate regulations, I recommend a very instructive article on http://www.stuff.co.nz called The Blue Chip Scandal: the valuations process.

Perfectly legal, I assure you.

Meanwhile back at the scene of the non-crime, the NZ Commerce Minister (a lawyer) continues to demean her office by publicly begging bottom-feeding finance companies to not collect on their perfectly legal Blue Chip mortgages.

This time on national radio.

BTW:

  1. Businesspeople will do what they can get away with to make a buck. That’s their job. If they don’t, they deserve to be fired.
  2. Everything is legal unless there is a specific statute to say it is illegal.
  3. The politicians’ job is to make sure legislation and enforcement are there so thousands are not impoverished by “aggressive capitalists”.

Don’t blame a leopard for having spots (see #1), fall for any excuse du jour why laws were castrated (see #2) or be confused as to the duty of this cabinet to its electorate (see #3).

This isn’t complicated, folks: A franchisor corporation is created. They recruit unsuspecting franchisees who are the only ones legally responsible for selling into a real estate bubble. The franchise system takes in the money and rapidly moves it to a related company. The franchise system (mask) is then killed off to sever legal liability to the principals and the cash.

SOP (standard operating procedure) in franchising, all around the world.


90 yr old faces losing her home over Blue Chip

May 22, 2008

Mrs. Gwendoline Harrison, a New Zealand pensioner was served with legal papers at her bedside this week. It involves the collection of a $300,000 mortgage that the franchise company, Blue Chip, sold her.

It appears she is $8,000 in arrears and attributes her illness to worry about being dragged from the home she has lived in for 60 years.

How a 90 year old found herself in such a sophisticated investment arrangement involving so many no-name finance and marketing shells says a lot about the consumer legal protections in New Zealand.

The lender in this case was TEA Custodians.

The Serious Fraud Office announced last week that they are investigating both Blue Chip and Bridgecorp.

As usual, the New Zealand Herald has been doing a stellar job of covering the story with the able assistance of EUFA, a spunky grassroots investor protection lobby group.

Professionals

The lawyers mentioned are from Sanderson Weir. They are listed on sandersonweir.com as Jonathan Flaws, Nicola Robertson and Julian Macmillian. Their address is listed on this site and they appear to serve both the New Zealand and Australia markets.

Mr. Flaws’ picture appears on their website.

The SOLUTION?

  1. Pass a law that requires a buyer to get a certificate of legal advice for all purchases of investments of and through a franchise.
  2. Make professionals personally liable for their advice (no BS liability shields).
  3. Fund test lawsuit to sue the 1st one that breaches their fiduciary duty to their consumer clients.
  4. No professional underwriter will deal with that or similar lawyers.

Simple, eh, Minister Dalziel?

Lawyer, heal thyself.


Predatory franchise lending in New Zealand?

April 30, 2008

The New Zealand-based Exposing Unacceptable Financial Activities, EUFA, group sent out an email press release on April 25th specifically citing the U.S. experience in the sub-prime mortgage debacle and the allegations regarding predatory lending practices.

EUFA spokesman Gray Eatwell said from Southland:

“Documents provided to Blue Chip investors by some lenders show serious inaccuracies that indicate unconscionable lending practices” ” As a consequence of the deception and falsifications involved it is unlikely that such documentation would withstand the scrutiny of the Crimes Act and other such law”

Mr. Eatwell further added:

“when we look at the Crimes Act S240 Obtaining by deception or causing loss by deception and S242 False statement by promoter, etc for example, some very serious questions about the Blue Chip loans emerge. Such questions must be adjudicated”.

It would appear that a group of Blue Chip borrowers has formed and are starting to organize for lawsuit:

…any other investors who is unhappy with the way the documentation of their loan was presented to them should make contact with EUFA immediately.


Financial speculation

April 30, 2008

In his 1990 book named A Short History of Financial Euphoria, economist John Kenneth Galbraith outlines what he sees as the patterns in speculation since the Tulipomania of 1636-1637. A nice little review is here.

Specifically:

  1. Individuals and institutions are captured by the wondrous satisfaction from gaining wealth.
  2. People believe (wrongly) that those associated with large amounts of money are intelligent.
  3. This upward lift creates a speculative bidding up (bubble) in land, securities, or art which reinforces itself until…
  4. …the inevitable mass disillusion and the crash.

This cycle is very evident in franchise systems and those investment schemes that rely on franchising as a means of marketing.

The current Blue Chip situation in New Zealand is instructive. A recent article from the New Zealand Herald indicates:

Blue Chip Financial Solutions advanced “substantial” deposits from investors to a company owned by the property scheme’s co-founder Mark Bryers, a 2005 independent report says.

The PricewaterhouseCoopers appraisal report, written for Blue Chip as it considered buying several companies from Bryers, said as at June 2005 the “vast majority” of these deposits were advanced on an unsecured basis to Bryers’ property development company Ingot Holdings. Blue Chip raised eyebrows in 2005

Total losses? A newly revised minimum of $84-million for 3,000 Mom-and-Pop real estate investors.

BTW: All perfectly legal, I assure you. Only the finest NZ and AU legal and accounting minds were used in baking this cake. Everything is legal unless a specific law exists to make it illegal. And then you’ve got to investigate, charge and prosecute the law breakers.

Oh well, so it goes.

Dr. Galbraith taught at Harvard University for many years, won the U.S. Presidential Medal of Freedom (twice) and was born on a farm in southwestern Ontario, Canada.


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