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Financial planners lose Federal Court case

THE three remaining directors of financial planning firm Smith Martis Cork & Rajan have been ordered to pay ousted managing director Joseph Martis $737,000 plus interest for his stake in the business.

Mr Martis took legal action in the Federal Court after being ousted by his fellow directors in May 2002.

Justice Carr ruled firmly in favour of Mr Martis, who claimed his former colleagues acted in a manner that was oppressive, unfairly prejudicial and discriminatory towards him.

The three remaining directors – Graham Smith, Patrick Cork and Suresh Rajan – had countered by claiming Mr Martis caused a raft of problems in the business.

These included inequitable allocation of ‘trailer’ fees, failure to meet the requirements of the Financial Services Reform Act, failure to control the cost of renovations and failure to update the firm’s accounting system.

Justice Carr found none of the complaints was justified.

The West Perth business was jointly established by the four directors in 1991.

The payout to Mr Martis, who held a 22.5 per cent stake, was based on a valuation of $3.27 million.

This was 6.4 times the estimated future maintainable earnings of the business of $512,000 after tax.

Justice Carr’s approach to valuation provided a fascinating insight into the financial affairs of the business.

He relied primarily on the evidence of Pricewaterhouse-Coopers partner Andrew Edwards, who was called as an expert witness by Mr Martis.

In contrast, Justice Carr was particularly critical of consultant David Mazengarb, who was called as an expert witness by the remaining directors.

“I was not impressed by Mr Mazengarb’s evidence,” Justice Carr wrote.

“Mr Mazengarb, in my view, adopted the role of an advocate for the defendants rather than a dispassionate expert.”

The valuation was based on operating revenue of $2.7 million per annum (the average for the three years to June 30 2002) less various costs.

Recurring investment management fees averaged $1.7 million, or more than half the total revenue.

There were two steps in the valuation process that could be considered contentious.

First, Justice Carr assumed that remuneration of authorised representatives would be 40 per cent of gross fees (less “direct” costs).

He concluded this was the generally accepted industry standard, even though the financial planners at Smith Martis Cork & Rajan were paid 80 per cent (less “all” costs).

Second, Justice Carr assumed that financial planners leaving the firm would not be able to take their clients with them.

“The company could obtain ample legal relief to restrain such conduct and full compensation for any loss,” he wrote.

He dismissed as irrelevant the evidence of several accountants who said they referred business to individual advisers rather than the company.

 

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