Predatory lending practices

August 20, 2008

This is a very good 9 minute summary of what happens when governments look the other way.

In this example, it the U.S. subprime mortgage market which has reached over $1-trillion. It is rapidly causing a worldwide recession.

  • The mechanisms used in the U.S. mortgage industry (predatory lending practices: loan pushing, sales agents, etc.) are routinely seen within the franchise industry.
  • The exact same process was used in the +$84-million Blue Chip fraud in New Zealand.

If these financial practices have affected your family, I would suggest you take the action as suggested at the end of the video.

Thanks to Loan Sharking – Creditoris Squaliformes for posting this.

Advertisements

Green Acres fraud triggers Kiwi franchise review?

August 19, 2008

This is an interesting article by Nevil Gibson in The National Business Review: Franchisers face prospect of regulation.

Nevil Gibson starts of with:

The Green Acres franchising scam, in which dozens of new migrants from China and India were bilked of millions of dollars, has sparked a government clampdown on the sector.

Commerce Minister Dalziel [picture] is quoted as saying:

“I was actively involved in meeting with franchisees at the beginning of the year who had been caught up in what is an alleged fraud and still subject to investigation by the relevant authorities including the Franchise Association of New Zealand (FANZ).

As a bit of a reminder to viewers:

In May, the NBR reported the Green Acres Group – the country’s largest franchiser – had recovered from the $4 million fraud, which involved an individual selling a home ironing franchise to several hundred investors for more than $20,000 each.

The media reason given is Green Acres but the Discussion Paper cites a total of 3 reasons:

  1. information imbalance [assuming more of the same pre-sale disclosure information will help],
  2. cost of any remedy [keep litigation but make mediation mandatory], and
  3. reputation damage that interferes with the franchise industry’s ability to sell, sell, sell.

Curious how the wrong that seems to get the most attention is the negative publicity drag on the head office as opposed to the $4-million cash lost to the recent immigrants.

Time will tell if this proposed regulation turns out to another McLaw: the illusion of franchise investor protection. A cynical interpretation makes this spin designed to get past the next election.

  • One great suggestion is a requirement for every franchise system to join the FANZ and be held accountable to its Franchising Code of Practice [download pdf].
  • Mandatory legal advice would be a real step forward, too. [A Certificate of Independent Legal Advice from both spouses to make a franchise agreement enforceable.]

These standards would apply to all members of the FANZ community [lawyers, accountants, consultants, salespeople] and not just to the franchisors. Right?

It would be a shame to have salespeople or consultants not being responsible for their advice let alone the professionals [franchise lawyers and accountants] who have an existing statutory duty of care to provide prudent advice.

It would seem a shame to maintain the fraud incubator where a Blue Chip v2.0 can flourish [ie. defrocked professional uses franchising as a mask and liability shield that causes thousands of the most vulnerable to lose their homes].

The standard when evaluating public official actions is, if I recall correctly:

  • knew or
  • could have been reasonably been expected to know.

New Zealand announces a franchise regulation review at a sales expo

August 18, 2008

The national Labour government of Helen Clark announced on August 15th that:

The Ministry of Economic Development is conducting a review of franchising regulation to explore whether there are any widespread problems in the franchising sector which may require franchise specific regulation.

The announcement, via the Ministry of Economic Development, can be seen here or the Discussion Paper can be downloaded here [Review of Franchising Regulation in New Zealand, pdf]

  • There have certainly been enough high profile franchise nightmares and spectacular fraud investigations to justify this action: Blue Chip, Green Acres, Green Power. And, usually, only the most severe ever surface into the national media [tip of the iceberg].

Further coverage was provided by the Franchise New Zealand trade magazine in an article named: Government Wants Feedback on Franchise Regulation.

Interestingly, the Commerce Minister Lianne Dalziel made the government’s annoucement at a franchise sales show. You can see her entire speech here and please find below Minister Dalziel’s concluding remarks to her franchisor marketing and franchise banker audience:

Can I conclude by congratulating all of you for participating in this Expo and can I thank the Franchise Association for its advocacy for a sector that is a vital part of the New Zealand economy. Can I acknowledge the sponsorship of Westpac – these events don’t happen without sponsors – and can I congratulate those of you who have been chosen as the ‘show stoppers’ for going the extra mile.

It is important, at certain times, to remind those in authority that they serve citizens’ interests as well as corporate interests.

  • I would encourage franchise investors and those affected by no franchise industry oversight [such as Blue Chip] to voice their opinions to their elected officials, current government, media outlets and financial institutions.

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.

%d bloggers like this: