By using crossholdings criminal companies inflate reported assets, in order to issue shares to the public based on deliberate misrepresentations of NTA. The figure below illustrates how crossholdings conjure assets out of thin air. Let's say a criminal fund manager has $10m in real assets to engineer and sell to granny investors. The fund manager can put the $10m in fund A, giving it an NTA of $10m and a $10m market cap at par. However, if the criminal instead creates two funds, B1 and B2, each with $5m in real assets and a 50% mutual crossholding valued at $5m, total NTA and market cap would be $20m, if share prices are maintained at par to NTA. (Note that funds can perfectly legally offer buybacks/redemptions at par to NTA, even if this NTA is fraudulently inflated by crossholdings, thus creating an artificial floor far above fair value.) This arrangement thus magically doubles assets and market cap, artificially boosting fund manager fees. When issuing shares at this ramped price, half of investors money would be stolen by the scheme operators.
But why stop there? The $10m could instead be split into ten different funds, funds C1 to C10, each with $1m in real assets and $9m in conjured crossholdings with each other. Each of these funds would have a reported NTA of $10m, and at par would have a market cap of $10m, despite having only $1m in real assets. In aggregate these funds would report assets of $100m, and be assigned a market value of $100m, magically conjured from $10m in real assets. ASIC incredibly would consider none of this fraudulent, but instead fully endorses and protects such fraud.
When fraud is tolerated, it spreads. Crossholdings now form a massive dead weight in the Australian financial system, inflating reported assets by billions of dollars. Entire industries have emerged to take advantage of such securities fraud. The crossholdings generate no net cash flows, have zero net value for investors, and by creating crossholdings the criminal directors of such schemes have committed fraud. The simple analysis above does not even take into consideration the running costs of the funds, nor how share prices are being ramped beyond par to NTA. Both these factors serve to exacerbate crossholding fraud overvaluations exponentially.