Columbus and Pioneer case wraps up

The three-day Federal Court hearing of claims and cross-claims between mortgage originator and manager Pioneer Mortgage Services and Columbus Capital, a non-bank financial services player, concluded on Friday.

At the heart of the dispute were several interrelated actions, some of which had their genesis well before September 2012, when Columbus acquired Origin Mortgage Management, ANZ's wholesale origination business, which had funding and service fee agreements dating back to the 1990s with Pioneer and up to 20 other independent mortgage firms.

Key to the dispute is whether a fraud committed by a former Pioneer employee was evidence of a breach of one important clause in the management fee contract, which required Pioneer to operate in a businesslike manner.

Pioneer asserted before Justice Jayne Jagot that Columbus was merely aiming to improve its return on a mortgage pool of more than 8000 loans, totalling around A$2 billion, and had tried to do this in several ways with varying levels of success since taking over the Origin portfolio.

Pioneer itself came to an agreement, after litigation in 2013, to accept a fee of 110 basis points over Columbus's cost of capital. The previous fee was not disclosed in court, but it was agreed it was higher.

Mortgages were managed through an IT system developed and provided by ANZ. However, from 2009 Pioneer lost direct access to the system, so reports were requested and sent by ANZ to the mortgage managers as password-protected zipped text files.

Much time on the final day was devoted to establishing that these were large and unwieldy reports (quarterly reports would run for hundreds of pages), in a text-only format. Further, once opened, the text-only files could be altered without any indication as to what had been done.

There were procedures in place that required the paperwork for mortgage redraw requests of over $10,000 to have all paperwork and identities verified at the time, and redraws rechecked each quarter.

However, as it emerged during the three days of testimony, an employee of Pioneer who had worked her way up through the various parts of the business was able to exploit a flaw in the system and carry out a series of fraudulent redraws, starting from as early as 2006 and finishing in 2013, when a new IT management system with stronger checks and balances was put in place by Columbus.

When Pioneer admitted the fraud in mid-2014, Columbus sought to take over management of all Pioneer's Origin mortgages (about 500 mortgages, according to evidence provided in cross-examination). Pioneer successfully argued for an injunction and Columbus sought to impose a $399 administration fee on all the Pioneer mortgages established through the Origin program.  

In court, lawyers for Pioneer argued that the wrongful conduct by the firm's former customer services manager was not authorised, not part of her normal duties, and was done "on a frolic of her own." There was no act of negligence by her employers, it was argued. They described Columbus as embarking on "a program of self-help" by stopping payment of management fees to Pioneer after being told of the systemic fraud.

Pioneer's lawyers also continued to run the argument that the new $399 annual loan facility administration fee was not necessary, citing the testimony from Karl Sick, treasurer for Columbus Capital, that due diligence was undertaken prior to the acquisition of the Origin portfolio from ANZ in 2012 and losses were not projected at any point.

The point was also made that Columbus made a profit in each of the 2013 and 2014 years, and its income was "enhanced" due to successful outcomes in court cases against other mortgage managers and the transfer of some back office work to the Philippines.

Also, procedures were in place to waive the fee if any customers complained, and the fee was not imposed on the customers of many other mortgage managers.

For its part, Columbus was unrelenting in its view that Pioneer was drawn into the fraud as a matter of "vicarious liability" - firstly by allowing an employee access to all passwords, then by leaving her in charge of both parts of the business that were responsible for processing redraws, and finally by representing her to ANZ as someone allowed access to information and reports.

Columbus also continued with the line, developed on the first day of the hearing, that Pioneer did not follow its own procedures - for instance, it was supposed to ensure that two employees were involved in each redraw transaction: one from client services to assist in preparing the paperwork and another from client support, who was expected to verify the request was genuine.

"The person responsible for guarding against such a fraud didn't do her job properly", it was asserted by Columbus - seizing on a small admission by one witness that she could now see the process was flawed, but was following procedures to the letter at the time.

(In fact, although not mentioned in the summing up, it was raised on the first day of this three-day hearing that Pioneer told Columbus that ANZ's process was to blame, but this point was not fully explored by either side.)

Columbus's silk also reminded the Court that two letters had been sent to Pioneer - the first one demanding that mortgages subject to fraudulent redraws should be bought back as redraws paid out by Columbus could not be recovered; and the second advising that non-payment put Pioneer in default of its agreement with Columbus.

There was also a further battle over the semantics around whether or not the letters telling customers of Pioneer of the need to pay an annual $399 fee were a misrepresentation of the financial situation facing Columbus.

The Columbus legal team asserted the customers were being asked to "contribute" to their administration costs, and the fact that Columbus received other income streams from other parts of its business was "neither here nor there."  

The hair splitting continued, particularly over whether or not customers had paid out their loans with Pioneer due to the letter instigated by Columbus. For instance, where a customer had asked to close their account "before 16 December," the date that the fee was to take effect, but did not cite the fee as the reason, Columbus argued the connection had not been established.

Justice Jayne Jagot has reserved judgment, giving both sides a couple more weeks to make further submissions on several last-minute pieces of evidence provided on the final afternoon.