Company director fraud

Company Director FraudDirector 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 fraud?

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 fraud

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 expenses.
  • 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 related parties.
  • The company's accounts have significant unexplained or unusual expenses.
  • 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

mature man looking disappointed

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 companies.

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 invest in.

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 deal with.
  • Read the company's financial statements and remuneration report.
  • 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 company's progress:

  • Read the company's annual report.
  • Check for any continuous disclosure announcements to identify red flags.
  • Attend the company's annual general meeting to ask the directors questions.

Find out the other things you can do to keep track of your investments.

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 information.

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 website.

ASIC takes action on company director fraud

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.

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Last updated: 24 Oct 2018