A scandal at financial services giant IOOF involving claims of insider trading, front running…

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BMA735 Management Ethics
Assessment task 2: Case study 2
IOOF Holdings (The Australian Financial Review, June 21, 2015 and ABC News, December 7,
A scandal at financial services giant IOOF involving claims of insider trading, front running
and "misrepresentation" of performance numbers raises issues about culture and the
insidiousness of vertical integration. Internal emails and documents obtained by The
Australian Financial Review reveal breaches and errors in unit pricing in some of IOOF's cash
management trusts. A July 2014 Risk and Compliance Committee (RCC) document prepared
for the group's advice division describes an incident in 2009 were clients were paid too
much in their cash management account, which resulted in clients since then "receiving a
diluted distribution". The document said: "Communication to financial planners and clients
– none to date."
An email exchange between two compliance officers tasked with compiling a list of
breaches in a handful of IOOF's cash management trusts, made the bombshell comment:
"There seems to be just as many unit pricing incidents as there were breaches." The emails,
composed on March 31, 2014, are referring to a request by the Australian Prudential
Regulation Authority (APRA) to supply all investment breaches and unit pricing errors in
several IOOF Funds, including Questor and IIML. It lists 15 separate incidents between 2012
and 2013. They include a Platinum Asset Management unit pricing error in late 2012 and a
Questor Cash Management Fund issue in September 2012, which over distributed to a few
internal unitholders to the tune of at least $6 million.
What began in 1846 as the Victorian Grand Lodge of the Independent Order of Odd Fellows
friendly society has grown into a 650,000-customer listed company. IOOF controls $150
billion of investor funds and uses almost 1200 financial planners who struggle with a
hotchpotch of technology courtesy of acquisitions and a low-cost research department.
IOOF demutualised in 2002, but it has grown significantly in the past few years through
acquisition, including buying Bridges Financial Services, Shadforth, Lonsdale and a majority
stake in Ord Minnett. The merger frenzy has made IOOF the second largest non-bank
financial planning network in the country.
The acquisitions have created the challenge of trying to marry a hotchpotch of technologies,
platforms, dealer groups – both aligned and owned by IOOF – and different cultures. At the
same time, costs have been slashed to help boost profit margins – and bonuses. As former
stockbroker and fund manager Mike Mangan said, however: "It seems the whole financial
services industry, with rare exceptions, is unethical at best; corrupt at worst. Occasionally
someone with ethics comes along like an IOOF whistleblower. And they get fired for their
ethical stand."

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