A “sophisticated investor” eager to buy a half share in a property management business has failed in a lawsuit recovery for the loss of his entire $800k investment.
Biloela retiree John Stowe was introduced to real estate agent Margaret Johnson after replying to a Gold Coast investment broker’s newspaper advertisement.
After taking up (presumably successful) positions in several companies represented by the broker – with whom Johnson was said to have had a role as communications manager – Stowe was excited by the opportunity to buy into an established rent roll.
In his mind rent rolls were “very lucrative cash flow businesses” with excellent capital growth and resale potential.
Stowe – who did not use a financial adviser or lawyer but discussed his investments with his accountant – subscribed $500,000 cash from his self-managed super fund in August 2008 for a half share of Cameo Property Services by acquisition of half of the units in a unit trust.
The business plan developed by Johnson – who became its other half owner in exchange for just $2,500 in cash and her “intellectual property contribution” – was for Cameo to acquire a $377k rent roll business on Hope Island.
She had been targeting that particular agency because of its “quality and size” and had hopes to “immediately seek an increase in its properties under management”.
Notwithstanding Stowe’s contribution, Johnson’s plan also envisaged financing Cameo’s rent roll acquisitions as to 50% by external debt.
Within days of Stowe’s cash hitting the tin, Johnson sought him out for $300k “short-term funding” to allow the business to settle the buys of two rent rolls it had under contract. CBA had apparently been taking too long to approve a loan that the business had applied for.
He agreed to a two-year $300k loan to the business at 18% p.a. claiming later that this was in response to Johnson’s representations that it was “necessary to protect the value of [his original] investment”.
The “loan” was in fact in the form of a “convertible note” which Stowe could at his option redeem in cash or by way of additional units after two-years.
On Stowe’s first visit to Cameo’s office in May 2010, “the first thing he saw was a big pink Mercedes convertible” with personalised number plates bearing Johnson’s initials.
After discovering what he believed to be anomalies in the accounts and secured debt of which he was unaware, Stowe accused Johnson of “having her hand and the honeypot”.
The accusations soon escalated to “deception and fraud”.
The business was “struggling by the end of 2010” and a liquidator was appointed in February 2012.
Stowe eventually sued Johnson to recover the $800k he had put in.
At the contest which came before Justice Soraya Ryan in Queensland’s Supreme Court in October 2018, he contended Johnson had represented that his capital investment would be secured over the rent roll asset.
Her honour – who required the plaintiff to prove his case notwithstanding that Johnson didn’t attend court to defend the claim – wasn’t convinced.
In her view the fact that the investment was “backed by a saleable asset” did not equate to having a security over the asset in the sense of a secured creditor who enjoys priority over other creditors.
In any event the court was not persuaded that Stowe was induced by any representation concerning the “secured” nature of his investment given the clear evidence that he had decided himself, the rent roll investment was sound.
For the same reason, Stowe failed on claims that he had relied on allegedly misleading projections as to the profitability of the business.
“I had a lot of experience with rent rolls and must have gone through nearly every rent roll in Rockhampton,” Stowe swore from the witness stand. “This one filled some of the shortfalls I’d [identified] and should have been a good business”.
Stowe also alleged that it had been unconscionable for Johnson to “induce” from him the $300k loan “and then behind his back take out secured funding that eventually crippled the business”.
Whatever view she took of the loan, the judge reasoned that it was not provided by the investor as a result of any “unethical or morally tainted conduct” on Johnson’s part.
In closing her 60 pages of written reasons rejecting the investor’s claim, her honour observed as follows.
“Cameo failed. The evidence suggested that its only income generating asset was overvalued from the start. The defendant made several attempts – ultimately fruitless – to keep the business going. However I do not find anything in her conduct as revealed in the evidence to suggest a lack of honesty or fidelity on her part. The plaintiff has not established an entitlement to judgement on this basis.”
The judgment reveals that the Cameo business – and rent roll – was sold just prior to the appointment of the liquidator to secured creditor Balmanno Pty Ltd for a sum equivalent to the outstanding balance of the Cameo’s debt due to it.
Balmanno was itself put into liquidation by the ATO in February 2014.
A real estate business by the name of Cameo Property Services currently operates on Hope Island.
