Reputations are going down with a very leaky ship, writes Colin Kruger.
JUST as the stench of Melbourne underworld connections was beginning to fade from the Opes Prime collapse come new allegations that seem to ensure no one involved will walk away from the mess with their reputation unsullied.
Claims and counter-claims between the Opes financier, ANZ Bank, the receivers it appointed to the failed margin lender, Deloitte, and the Opes executive Anthony Blumberg - himself under investigation for his role in the debacle - have shed new light on the days leading up to the collapse, and the news is damning all round.
Mr Blumberg alleges that ANZ ignored his warnings of fraud at Opes and his insistence that its $95 million lifeline would not be enough to keep the group afloat. The warnings came over Easter, just as ANZ was preparing a refinancing package to plug the first hole that had appeared in the Opes accounts.
The bank has denied any wrongdoing, but it confirmed that Mr Blumberg was made to retract the fraud allegation so the ill-fated rescue could go ahead. Barely days after the lifeline was provided, confirmation of a $200 million hole in its balance sheet and "account irregularities" finally sent Opes under.
The delay proved to be expensive for its clients because of some nasty surprises in the ANZ rescue package. ANZ received a charge over the assets of Opes that would allow it to claw back up to $800 million even though the bank had injected only $95 million into the failing margin lender.
Moreover, the bank changed its securities lending agreement with Opes in a way that ensured it retained hundreds of millions of dollars worth of shares when Opes finally collapsed.
Under the new contract ANZ had the luxury of selling down $920 million worth of shares to pay off its loan to Opes, worth about $720 million. Even so, the bank expects to fall short because of plummeting share prices. It will have to rely on the charge it gained over the assets of Opes to make up the deficit.
Opes insiders say the original contract used a "mark to market" system, by which ANZ would have been forced to "net off" $720 million worth of stock and return the rest to the administrator - whether sale of the stock was enough to satisfy its loan or not.
Essentially, the bank would have been forced to wear any subsequent loss from the sale and stand in line as an unsecured creditor for the balance.
Mr Blumberg appears to have paid for his damaging outburst days later when a memo from Deloitte to the Australian Securities and Investments Commission, detailing allegations against him, was leaked to the media.
The memo alleged Mr Blumberg was involved in a $40 million spending and investment binge, financed by two Opes-related entities, Leveraged Capital and Hawkswood Investments.
Aside from spending on luxury items, fast cars and real estate, about $20 million was loaned to Mr Blumberg's father through a Channel Islands company his father controlled. The loan balance was written down to just $700,000, according to reports.
Mr Blumberg told BusinessDay his father paid back most of the loan and is owed millions in the collapse. Deloitte's Chris Campbell, who heads the team of Opes receivers, denied it was responsible for the timely leak.
"That document was a memo between the receivers and our lawyers and there was no benefit in giving it to anyone other than our lawyers," he told the Herald.
Reports over the weekend suggest it would not be the first run-in between Mr Blumberg and Deloitte, where he was employed until 2000. Later that year, a court order was given against Mr Blumberg, ordering him to refrain from infringing the copyright of Deloitte Consulting after he left the firm.
Mr Blumberg's behaviour in the lead-up to the Opes collapse is not without fault either.
According to The Australian Financial Review, Mr Blumberg himself confirmed that $16 million worth of loans he had with Leveraged Capital were to be written off in return for his initial support of ANZ's $95 million refinancing package.
He later warned ANZ of fraud and threatened to derail the package.
In return for refuting his allegations of fraud, ANZ agreed to relieve him of a personal guarantee he gave against Opes as part of the rescue package.
The various allegations would provide damaging courtroom fodder - especially for ANZ - if mediation talks being set up by the administrators, led by Ferrier Hodgson's John Lindholm, fail.
In that case, Mr Lindholm is expected to recommend the Opes companies be put into liquidation and begin action against the Opes directors, ANZ and Merrill Lynch.
The information leaked to the press over the last week suggests he will have plenty to work with. As an example, the Deloitte memo also reported the firm's suspicions that Opes was trading while insolvent before the administrators were called in. This imperils ANZ's rescue deal, and increases the chances of the transaction being overturned if Opes is put into liquidation.
The good news for unsecured creditors is that the latest allegations make it even more likely that ANZ, and its new boss, Mike Smith, will reach a settlement that puts an end to the festering mess.
Mr Smith probably summed up the troubles for ANZ best at a company briefing in April when he said: "In terms of the actual size of the problem, it's very small of course. But in terms of reputation it is huge."
Argo Investments' Chris Hall told Bloomberg: "It's a distraction for Smith and the last thing he would want to be dealing with. It seems to be getting more and more muddy every day."
In what appears to be the first major ANZ casualty, Chris Cooper resigned last week as head of the bank's division that oversaw securities lending to clients like Opes.
The three parties - ANZ, fellow Opes financier Merrill Lynch, and Mr Lindholm - have not come to the table yet, at least not officially, but ANZ is not the only party with incentive to strike a deal.
Merrill Lynch may look like the surprise case. Why would it bother to get involved in a mediation when it has recovered its loans and walked away with funds to spare?
Even Opes insiders describe its title to the stock as clean, in stark contrast to ANZ's problematic securities loan agreements.
The Slater & Gordon-led class action gives a hint of what trouble Merrill Lynch may face despite its contractually watertight position.
In its documents lodged with the Federal Court last month, the law firm said the fact that neither Merrill nor ANZ filed any relevant interest in the shares was "consistent with the belief" that the Opes clients retained beneficial ownership.
If successful, it means that the case could unpick Merrill's carefully stitched agreements and leave it as an unsecured creditor with debts of about $500 million.
The big question is what price the two would have to pay to get angry Opes clients, now unsecured creditors owed more than $500 million - over the line.
While ANZ and Mr Lindholm have distanced themselves from the 62 cents-in-the-dollar offer reported in the press, legal experts say there are a number of reasons why this figure has credibility.
Technically, ANZ will need to convince all of the 1000-plus Opes clients to accept its deal. But in practice the bankers only need to worry about the clients whose claims are of a sufficient size for them to contemplate court action.
A 62 cents-in-the-dollar offer would be attractive to this group of Opes clients, who would lead the class actions being prepared against Opes and the banks. Even if their legal actions are successful, they stand to lose at least 30 cents in the dollar to the litigation funders like IMF, and then there are the legal fees.
A guarantee of about 60 cents in the hand for every dollar owed will probably be as good as it gets.
A successful mediation would be the ideal outcome for Mr Lindholm, who faces a wrestle with Deloitte to get any sort of return from ANZ's selldown, draining legal costs as more court action is taken by Opes clients, and increasing pressure from lawyers representing those clients.
Slater & Gordon have voiced disapproval of the administrator's recent plea for creditors to pull back from "unhelpful" legal action against the banks.
"Our view is that the only reason ANZ bank is talking is because of the litigation pressure we have brought to bear," said Slater & Gordon's Van Moulis. "In the time that the administrator has been there, frankly speaking, the creditors have received very little information as to where their shares are, what view he takes of the legality of their arguments, whether he considers their claims real or not."
Asked if the firm would consider recommending its clients remove the administrator, Mr Moulis said: "There's a range of options open and I don't want to pre-empt any of those options … it's a possibility, I presume."
Not all of the legal teams gearing up for battle are unhappy with the administrator's attempt at mediation. The Sydney barrister Charles Sweeney, QC, who is representing another group of Opes clients contemplating a class action, is taking a wait-and-see approach.
"The group of clients that I represent supports the efforts of the administrator to explore the possibility of a consensual outcome and we are doing what we can to facilitate his efforts," Mr Sweeney said.
The group is understood to comprise about 100 clients owed $200 million in the Opes collapse.
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