'You remain the beneficial owner of the securities,' failed broker Opes Prime told its clients
May 17, 2008 The Weekend Australian
ANZ Bank's claim over a portfolio of $650 million shares seized from the collapsed Opes Prime Stockbroking could be threatened by revelations from archived websites that clients were the beneficial owner of shares in Opes Prime and that ANZ was merely the custodian.
The Weekend Australian has obtained information from archived Opes Prime websites, financial accounts and presentations to advisers and brokers that reveal clients of Opes Prime were not presented with the true position of their relationship with ANZ and Opes Prime.
The only public statement made to change this position came on February 28, 2008, when Opes Prime amended its website by changing its securities lending and borrowing agreement and removed statements that clients kept beneficial ownership in the shares.
The archived websites, sourced by listed litigation funder IMF which is launching a group action against ANZ Bank, reveal that as far back as March 2005 Opes Prime was peddling material that stated: "Whilst your securities are lodged with Opes Prime and held by our custodian, ANZ Nominees, you remain the beneficial owner of the securities and therefore are able to participate in corporate actions, with the exception of share purchase plans. All entitlements for your holding will be passed on to you with a notice outlining the transaction."
This sounds more like a share mortgage agreement rather than a securities lending contract between the client and the stockbroker. This statement, which was used consistently throughout Opes Prime's marketing literature, infers that the client's collateral is held by ANZ as custodian for the protection of the client, rather than because ANZ had purchased it from Opes.
It was not until February 28, 2008, which was more than two weeks after the broker had started to spin out of control, that the Opes Prime website started to issue warnings that if the company got into financial trouble, clients using securities lending agreements would become unsecured creditors of Opes. Opes Prime collapsed on March 27, leaving 1200 unsecured creditors facing more than $500 million in losses. They will be lucky to get 30c in the dollar.
Many of the 1200 unsecured creditors are in the process of launching group actions against ANZ in a bid to get their shares or the money back. These archives, documents and accounts potentially give investors some fresh ammunition as they investigate how much ANZ knew about this material.
However, ANZ is steadfast in its belief that it has title over the shares and therefore is within its rights to sell those shares to protect its financial position.
IMF executive director Hugh McLernon said: "If ANZ had notice through its executives of these statements being made by Opes on their website, in their brochures, orally, in presentation documents to stockbrokers and financial planners, in their accounts and in their correspondence, then ANZ will have to disgorge the funds received for the shares and may have to pay extra damages in relation to particular cases where particular damage has been caused by the sale."
Mr McLernon said his clients' claim was directly against ANZ, and so it did not matter what arrangements ANZ might make with the administrator.
"Any such agreement does not prevent the clients from proceeding against the bank for whatever amount they do not recover from Opes," he said.
Put simply, ANZ could very well have to reverse the sale of shares it has been liquidating since March 27, and return them to Opes Prime's 1200 hapless clients, who are currently classified as unsecured creditors, facing years of struggle before they get to see 30 cents in the dollar.
ANZ has not sold all the Opes Prime stock, but if it does have to return stock to shareholders, it will hope that the share prices do not go up too far as they start buying them back, otherwise it will compound its losses.
This has prompted talk that ANZ might pursue a scheme of arrangement to bring the saga - and damage to its reputation - to an early end.
Any such arrangement would result in ANZ abandoning the benefits it has achieved from the sell down of the Opes Prime share portfolio as ANZ would rank equally with all other creditors.
Such a result would do little to enhance the bank's reputation and in the light of the debacle that occurred at NAB in the infamous foreign exchange losses, it could well prompt some of the directors to reconsider their positions.
In other marketing material, including a presentation released to The Weekend Australian by an Opes Prime client who is suing ANZ on the grounds that the bank unlawfully sold his stock, nowhere does it state the true nature of the securities lending business, or the risks or transfer of ownership from the transactions or the relegation to an unsecured creditor in the event of a collapse.
The presentation by Opes Prime's business development manager in NSW, Matthew Corbett, on April 17, 2007, states in slide nine that opening a securities lending account involves: "Investor reads, completes and signs an Opes Prime Financial Services Guide (available online or hard copy), also ensuring relevant details pertaining to the authorised representative/s on the account are listed; investor lodges cash and/or approved equities in exchange for an "Available Margin" position to establish facilities; lodged margin collateral is assigned a "Loan Value Ratio" (LvR); and all accounts require an account designation referring to "Opes" to ensure contract notes are forwarded to us. For example: Mr John Adam Doe, Opes Prime a/c."
But the most compelling argument that clients did not know what was going on are in Opes Prime's latest financial accounts to June 30, 2007, which were audited by Ernst & Young, and which fail to disclose the true relationship between the broker and the bank.
A comparison of the accounts of Opes Prime and Tricom, both which operated similar models and used the same financing arrangements with ANZ Bank, note a stark difference in how the accounts were treated.
Tricom Equities' latest accounts clearly show that the shares were pledged to ANZ as security against the securities lending agreements and arguably were searchable by investors.
In sharp contrast, Opes Prime's accounts fail to detail with any clarity the nature of the security arrangement between itself and ANZ.
McLernon argues that the accounts disclose that the clients are debtors of Opes. "This can only be the case if the relationship between the clients and Opes was that of margin lending, not securities lending," he said.
The trouble with Opes Prime dates back to January 22, so-called Black Tuesday, when the share market dived 7.5 per cent, creating havoc with margin lenders. The first one to be publicly exposed was Tricom Equities, with its banks ANZ and Merrill Lynch swooping in.
Confidential documents obtained by The Weekend Australian indicate that days after Black Tuesday, ANZ encouraged Tricom and Opes Prime to strike a deal that reduced Tricom's loan to ANZ and lifted Opes Prime's collateral.
Daily financial statements of Tricom's cash position, produced for Tricom by insolvency practitioner Korda Mentha, reveal that $8.9 million was drawn out of the struggling Opes Prime and handed over to Tricom in exchange for shares on February 11, the same day Opes Prime had alerted the ASX and ASIC that it was in trouble.
This transaction improved ANZ's position but had a detrimental impact on both brokers. In Opes Prime's case the documents show that it was putting out daily margin calls to Tricom, while, in Tricom's case, it almost resulted in its collapse as the stock it had given as collateral to Opes Prime back in February was seized by the banks on March 27, leaving Tricom an unsecured creditor of Opes Prime.
IMF's McLernon said the case was basically that clients signed an application form not a contract, that the application form incorporated the terms of the Opes financial Services guide which was on the website, that the FSG did not include the Australian Masters Securities Lending Association's standard terms, ergo those terms were not included in the contract between the client and Opes.
McLernon reckons if the terms were somehow included then this occurred by the allegedly false and misleading statements made by executives of Opes to the clients, who were led to believe they were entering margin lending contracts where the shares were provided as security for the loan and would be held on the clients behalf by ANZ acting as custodian. If this is the case, the contract should be set aside. Opes executives have been gagged from commenting on this issue.
On a separate front, more than 100 listed companies are still grappling with the consequences of being named as having large numbers of their shares on loan through ANZ's stock lending business.
ANZ has revealed its stock lending agreements include large holdings in companies including Waterwheel of which it has 43.8 per cent, Austin Group 45 per cent, Adacel Technologies 33 per cent, Transpacific Industries, with 17.8 per cent of its shares and 14 per cent in Hedley Leisure and Gaming Property Fund.
The risk with this is that many companies have now been outed as having major lines of stock out on loan, which gives hedge funds a potential list of targets to short sell.
ANZ has argued it received a waiver eight years ago from ASIC, meaning it did not have to disclose its ownership positions in relation to stock lending. But ASIC appears to disagree, requesting ANZ disclose all its stock lending positions after the Opes Prime collapse.
This would appear to be the residue of stock lending by ANZ in its own right together with positions in Opes Prime, Tricom and another smaller group, Chimaera Capital. The key point of difference between Chimaera and ANZ is that no sell down appears to have occurred at this point in time.
Opes Prime's collapse is one of the most controversial collapses in Australian history. It has involved underworld figures, allegations of stock irregularities, fraud, high profile businessmen trading hundreds of millions of dollars of shares on loans that were never margin called, at least suicides of clients who lost everything, group litigation and a headache for the regulators who have been three steps behind on every count.
There is a long way to play out and the unsecured creditors will next have their say at a meeting in June. But between now and then, there is no doubt a lot more will come out and whatever it is, ANZ's reputation has been dealt an immeasurable blow.
ANZ Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
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