opes : disclosure disaster

Business spectator

4:00 PM Apr 2, 2008

James Thomson

Disclosure disaster


As the fallout from the Opes Prime collapse spreads throughout the small cap market, one question is being asked and again and again: why didn’t anyone realise the extent of Opes’ lending?

The simple answer: a lack of disclosure.

Earlier today, boutique stockbroker Aequs Capital announced to the market that Opes Prime’s receivers hold 11.22 per cent of Aequs’ issued capital.

More importantly, Aequs managing director Drew Metcalfe also raised an interesting point by noting that neither Opes Prime nor ANZ have lodged notices of substantial shareholding with the company.

If Opes and Tricom were the legal owners of their clients' stock – as has becoming horribly clear to Opes’ former clients over the past few days – then under the Corporations Act, Opes and Tricom should have informed the market where they held stakes of 5 per cent or greater in any company. Had they done so, this whole mess may have been avoided.

For starters, the misguided clients who believed that they retained ownership of their shares would have realised that this wasn’t the case when they saw Opes and Tricom flooding the market with substantial shareholder notices. The confusion on this point should not be underestimated – it is not just limited to a few misguided punters. Business Spectator spoke to one small cap chief executive this morning who says he was shocked to learn that his large stake was suddenly in the hands of Opes’ receivers. Had he seen Opes lodging a substantial shareholder notice, he would have changed his lending arrangements quick smart.

Secondly, company executives – some of whom are just discovering that big parcels of shares in their companies could be dumped at any time by Opes’ receivers – would have at least known about the presence of Opes on their registries.

Thirdly, had Opes and Tricom lodged substantial shareholder notices as they should have, investors would have been better informed about which companies had shareholders with margin loans. Given that margin loans are one of the things that attract short sellers, this could have helped investors avoid companies about to have their share prices shot down by the shorters.

Finally, the slew of substantial shareholder notices would have alerted corporate regulators to the size and scope of the margin lending problem.

One lawyer with expertise in the Corporations Act suggested that Opes and Tricom may have incorrectly believed they were acting as nominee companies (essentially holding vehicles) for other shareholders and as such did not have to lodge substantial shareholder notices under the Corporations Act. But this argument doesn’t really stack up, given that banks and brokers at the big end of the town regularly lodge substantial shareholder notices. Perhaps Opes and Tricom lacked the sort of compliance culture prevalent in bigger financial institutions.

It is believed that ANZ does not have to lodge substantial shareholder notices due to an exemption under the Corporations Act, although this is also a point of contention with some company executives, including those at Aequs.

ASIC’s investigation into the Opes collapse must examine why Opes, Tricom and any other broker with similar client agreements did not lodge substantial shareholders notices in companies where they owned stakes of 5 per cent or more.

ASIC and the ASX should also ask themselves why, after it became clear in late January that clients of Tricom had lost ownership of shares they lent to the broker, the regulators did not force every broker in Australia to publically tell investors whether they used similar lending agreements.

Had this happened, any confusion amongst Opes clients would have been cleared up and concerned clients could have unwound their positions well before the broker collapsed.

No doubt every Australian investor with a stock lending arrangement is nervously poring over the fine print of their contract, trying to work out whether or not they actually own shares used as collateral. As a matter of urgency, ASIC and the ASX should force brokers to reassure these investors.

link: http://www.businessspectator.com.au/bs.nsf/Article/Disclosure-disaster-DB8P9?OpenDocument

cheers
Marny