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 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.


The Philosophy of taking a Loss

March 28, 2008

The Sting, 1973 movie, 7 Academy awardsThis is a very interesting article picked up by an excellent law weblog. In Cooling the Mark Out, sociologist Erving Goffman says:

The confidence of the mark is won, and he is given an opportunity to invest his money in a gambling venture which he understands to have been fixed in his favor The venture, of course, is fixed, but not in his favor.

The mark is permitted to win some money and then persuaded to invest more. There is an “accident” or “mistake,” and the mark loses his total investment.

The operators then depart in a ceremony that is called the blowoff or sting. They leave the mark but take his money.

The mark is expected to go on his way, a little wiser and a lot poorer.

Of course, sometimes something wises the victim:

In order to avoid this adverse publicity, an additional phase is sometimes added at the end of the play.

It is called cooling the mark out.

After the blowoff has occurred, one of the operators stays with the mark and makes an effort to keep the anger of the mark within manageable and sensible proportions. The operator stays behind his teammates in the capacity of what might be called a cooler and exercises upon the mark the art of consolation.

An attempt is made to define the situation for the mark in a way that makes it easy for him to accept the inevitable and quietly go home. The mark is given instruction in the philosophy of taking a loss. [my emphasis]

Brilliant. Check out the rest of Michael Webster’s excellent weblog, The Bizop News. It is a must read if you want to understand the psychology and law of fraud.

The original article, On Cooling the Mark Out: Some Aspects of Adaptation to Failure, University of Chicago.

Fascinating and very applicable whenever the fraud sausage explodes, to use one of Michael’s vivid expressions.


John Kenneth Galbraith, 1908-2006

March 28, 2008

The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not.

galbraith

If all else fails, immortality can always be assured by spectacular error.

People need to think of themselves as unmanaged, independent and free, if they are to be controlled with maximum success.

The greater the wealth, the thicker will be the dirt.


Intentional corporate insolvency

March 25, 2008

Corporate grim reaperStuff in this life happens for a reason.

And the only reason anything in business happens is to make a return for those that are in control.

All corporations are born, mature and die: They have a lifespan. Some natural; Others not so much.

What many people fail to appreciate is that many businesses are assisted in their own suicide to avoid paying out their creditors and investors (once the cash is safely off-shore, mind you).

Weak or non-existent insolvency laws make it very profitable for fraudsters to take in money in Corporation1, transfer it to Corporation2 (and elsewhere) and then have accountants, corporate lawyers and consultants kill Corporation1.

This parts investors from their money. Usually 100% legally.

  1. Any liquidator that doesn’t admit that corporate euthanasia happens frequently is either a liar or a scoundrel or both.
  2. If a government fails to provide a law, then this Intentional insolvency trick is perfectly legal (ie. no lawsuit will remedy the loss).

Ever wonder why the fiddlers don’t even bother to flee the scene of the crime? The joke is on you as an investor: There haven’t been any laws broken.


More Kiwi Franchise Fraud

February 27, 2008

20080225-green-power-nz.jpgMigrants cry foul over new franchise deal, Lincoln Tan

Green Power’s locked and unstaffed Birkenhead headquarters. Photo / Paul Estcourt


Police are investigating an alleged scam in which people, mainly Chinese immigrants, claim to have been sold non-existent franchise businesses.

It is believed as many as 30 people may have been conned in the latest case, involving commercial cleaning franchise company Green Power.

The Herald has spoken to six Chinese immigrants who each paid $20,000 or more to Green Power for their franchises, which guaranteed a weekly income of $1000.

Only a franchisor association could believe that registering systems and franchisees, mandatory mediation and voluntary disclosure is going to redeem their reputation.

It’s not that I mind corporations asking for what they want: That’s their job. Don’t get me wrong. I would do the same.

What makes even a fool despair is the regularity that governments “drop their drawers”, no matter how short-sighted and reckless the consequences.


Franchisee Narrative

February 25, 2008

It is very useful for a franchisee to write down in their own words a history of what happened from their point of view.

This is an outstanding example of a franchise investor’s narrative. In July 2005, it was written in preparation of what would become a 10 month-long Royal Canadian Mounted Police, Commercial Crime Section investigation.

We would like to help reduce the risk of franchise relationships being used as a vehicle for increased white-collar crime in Ontario. The high cost of litigation and franchisor intimidation make Ontario franchisees defenseless.

Several stakeholders, with this lender only being an example, exploit this systemic problem. Current Ontario franchise policy actually increases the risk to small business investors.

Thank you again and I look forward to working with you.

The RCMP officers were kind enough to suggest that a lawsuit was always possible when they informed the Oudovikines that they would be stopping their criminal investigation.


Investigating the bank (2)

February 25, 2008

Ottawa Citizen logo

Franchises are often financed with government guaranteed loan programs. The bankers, sales agents (aka “franchisor associates”) & franchisors have a very organized way of dealing with unsuspecting franchise investors.

In March 2006, the Ottawa Citizen newspaper published an article called: Mounties investigate ‘predatory lending’. This is the first public mention of a specific example of what I had defined to Industry Canada as Predatory Franchise Lending.

Mr. Oudovikine says his case shows how big banks, franchisors and franchise brokers team up to take advantage of franchisees, many of whom are recent immigrants like him.

“It’s predatory lending. (CIBC) didn’t do any of the due diligence they should have done,” says Mr. Oudovikine, who sent the Citizen e-mails confirming the RCMP investigation. An RCMP official said the police force doesn’t confirm or deny investigation.

The Ottawa Citizen has also published Bank springs another privacy leak on May 14, 2005.

Mr. McLeod said CIBC is also investigating the loan granted to Mr. Oudovikine to start the franchise. But he said it is standard practice to make such loans payable to the franchisor, and noted that bank loan documents make that clear.

But Country Style chief executive Patrick Gibbons said he’s never heard of such a practice. He was unaware of any dispute over Mr. Oudovikine’s loan.

“A loan agreement is business between the franchisee and the lending party, period,” he said.

Two bank drafts made payable to the franchisor of +$230,000 in loans plus +$80,000 owner’s equity but with no current account signing officer’s signature?

So it goes in franchising.


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