Company director fraud
Director stealing your cash?
Are you the victim of company director fraud? If you've invested
in a start-up company that seems to be really good but your
investments are going nowhere, it could be because the company
directors are living the high life on your money. Here's how to
spot the warning signs of company director fraud.
What is company director
Director fraud is where a director of a company takes investors'
funds and uses them for personal gain, instead of using the funds
to grow or run the business. It may also be called director theft
or misappropriation of funds.
It's a criminal offence for a director of a company to misuse
investors' money for personal gain. When this happens, investors
can lose some or all of their investment.
Warning signs of director
Here are some things to look for that may indicate something is
not right with the company you have invested in:
- The company continually raises funds but it's not clear what
the funds are being used for or there is nothing to show for its
- The company does not release updates on their exploration or
research and development (R&D) activity.
- The company is paying large consulting or service fees to
- The company's accounts have significant unexplained or unusual
- The company has taken on loans, asset sales or purchase
agreements with related parties where there is no clear business
purpose or benefit.
Case study: Tamir loses money through director fraud
Retiree Tamir was told by a friend, over a game of golf, about a
company called Artificial Organ Technologies that was looking for
investors. The company says it's developing a new type of
artificial heart. Tamir visited the company's website and read
about their research and development activities, their goals and
estimated time frames for a return on investment. He called his
broker and asked him to purchase $20,000 of Artificial Organ
Technologies shares on behalf of his SMSF.
Six months later, Tamir's broker called him to tell him that the
company had been placed into administration and that one of the
founding directors was being investigated for company fraud. The
director had been using investors' funds to renovate his mansion
and live an extravagant lifestyle. The broker said investors would
be unlikely to get back any of their money.
If Tamir had done more research including a company director search on the ASIC website,
he would have discovered that the director in question had been
involved in two other failed research and development
The accounts of Artificial OrganTechnologies showed large
deductions for directors' fees and unusual expenses, but nothing
for research and development.
Tamir's SMSF has other assets, so he didn't lose everything, but
it will affect how long his retirement income lasts. Tamir's
learned a valuable lesson and has asked his broker to research and
recommend some reputable medical research companies for him to
How to protect your investments
Before you invest
Before you decide to invest in a company, there are some things
you can do to minimise your risks:
- If the company is issuing new shares on the market, read the prospectus carefully.
- Research the company's business and the directors (including
other directorships they hold or have held). Search ASIC's professional registers and check the
list of companies you should not
- Read the company's financial statements and remuneration
- If the investment was recommended to you, find out if the
person making the recommendation is personally involved in the
company, or will receive any benefit if you invest.
- Seek independent professional advice if you're not sure.
See choosing shares to buy for more
information on researching companies.
After you've invested
When you've invested money in a business, it's important to keep
track of your investment. Here are some ways you can monitor the
- Read the company's annual report.
- Check for any continuous disclosure announcements to identify
- Attend the company's annual general meeting to ask the
Find out the other things you can do to keep track of your
What to do if you are a victim
of director fraud
If you think a company director is defrauding investors by using
company funds for personal gain, you can report it to your local
police or major fraud squad in your state.
You can also report misconduct to ASIC. See ASIC's running of companies webpage for more
What is illegal phoenix activity?
Illegal phoenix activity occurs when a director of a company
that can't pay its debts transfers the company's assets to a new
company for little or no payment. Directors take this illegal
action to avoid paying creditors of the old company when it is
liquidated. Find out more about illegal phoenix activity on the ASIC
ASIC takes action on company
ASIC investigates allegations of fraud against company directors
and prosecutes offenders where there is evidence of
wrongdoing. ASIC media releases outline the latest court
actions against directors.
Director fraud occurs where a director of a
company uses investors' funds for personal gain. You can't prevent
this crime from happening but you can minimise your chance of loss
by researching the company before and after you invest.
Last updated: 27 Oct 2017