Flickr: Hans S

When it takes an investment fund more than three months to find proof that they have invested the 118 million dollars they say they have, it might strike you as a little suspect. In fact, there are a number of reasons to suspect dirty dealings by the Australian strategic investment fund, Astarra. But the official supervisory body didn’t pick them up.

Three months ago blogger John Hempton blew the whistle on Astarra, in what may be a fraud operation that is, for an economy the size of Australia’s, comparable to the Madoff scandal in the US. Although the discovery was accidental, it is worrying that it should be a blogger who spots dodgy results on a financial statement.

What it shows us is that despite their best efforts, government regulators and financial watchdogs are sometimes unable to spot a rotten investment fund and this, even in a climate of heightened scepticism of financial firms and banks.

“You pull on the piece of string and mostly you find a piece of string. But sometimes you find something attached,” said Hempton. “[There was] nothing that led to the uncovering of Astarra you could not find on the internet. This was not hard, I just did the work.”

This is the story of how Astarra’s dishonest operation was unearthed.

Blogger John Hempton wrote a story on an Australian hedge fund that led a reader to comment. The comment suggested he have a look into Absolute Alpha (now Astarra). Hempton did, and immediately realised the reported returns were suspect. They were consistent in the same way as Madoff’s had been: a little too ideal. In a market that is generally volatile, a smooth upward curve of returns is unlikely at best, made-up at worst.

What Hempton suspected, and wrote to the Australian Securities and Investments Commission (ASIC), was that the Astarra Strategic Fund wasn’t investing money at all. They were a ponzi, paying returns from their own money or that of subsequent investors’, not genuine profit. The way you prove or disprove those suspicions is to say, “If you have the money, go on, prove it to me.” ASIC did.

Trio, the overseer of the whole business, couldn’t find it. Anywhere. For three months. They said it was in being managed by EMA International, which is based in the British Virgin Islands. But EMA International couldn’t tell ASIC what funds the $118m had been invested in.

What an engaged member of the public noticed and reported has resulted in the shutting down of the whole Trio operation by the financial authorities. It is now in administration.

But even as the investigation continues, the story has attracted little attention. “I cannot work out why the otherwise sensationalist Murdoch press has not written a single story on this yet,” Hempton noted. “All they need to do is find a cluster of pensioners who will not receive their pension this month and who will have no idea as to why.”

Maybe the traditional press just haven’t grasped the implications of this story. This seems strange considering the amount of money involved. The mothership, Trio, of which the especially dubious Astarra Strategic Hedge Fund was one of six, had a hold on $1billion. The watchdog’s oversight should spark concern, especially at a time when they are supposed to be on their toes.