Opes Prime – Investors’ Interests Are Chum Compared to These Sharks

This shark, swallow you whole. No shakin’, no tenderizin’, down you go.

ANZ chief executive Mike Smith was forced yesterday to take control of an internal investigation of the group’s role in the Opes Prime affair.

The move follows an emergency meeting of the ANZ board last Thursday at which directors discussed the damage to the bank’s reputation from the Opes Prime collapse.

“It has obviously bruised the reputation of a very fine institution,” Mr Smith told BusinessDaily.

“You always have issues in a bank . . . this is a particularly serious one.”

The Australian Securities Exchange refused to comment yesterday on claims that liquidity problems at Opes Prime had been reported to the ASX a month before the broker collapsed.

Mr Smith revealed that ANZ had reviewed its exposures to stockbrokers and margin lenders, including Opes Prime, after another client, Tricom Securities, experienced liquidity issues in late January.

“I think these exposures were reviewed but the businesses were seen to be still running OK,” he said.

Overview  

As with all scandals, there are the victims and villains, heroes and vultures. Then throw in a underworld figure and things get really interesting.

Before the scandal broke, Opes Prime was a relatively unknown brokerage firm, with about 80 people, offices in Australia and Singapore, and interests in the British Virgin Islands. It was founded in 2003 by Laurie Emini, a Macedonian emigrant to Australia who had previously worked for the Australia and New Zealand Banking Group (ANZ) and Julian Smith, a British national who emigrated to Australia in 1993 and ran the securities and investments division of stockbroker Ord Minett.

The external auditor for Australia and New Zealand Banking Group is KPMG.

The external auditor for Opes Prime is Ernst & Young, however there has been no mention of their involvement in the media. I am still searching for a copy of their latest annual report. The only place on the Opes website to find this information is in their account agreement, still posted for use by investors as evidence of what they did or did not agree to…

Financial irregularities  

A story from the Australian News on April 5th tells what happened:

One week after Opes’ shock collapse rocked the market, destroyed the fortunes of its clients, and triggered a $1 billion share-sale program by Opes’ secured lenders, ANZ, Merrill Lynch and Dresdner Kleinwort, an affidavit released by the Federal Court has provided the first detailed insights into the desperate weeks and days before receivers took charge.

It alleges a “systematic manipulation” of share-trading accounts at Opes, and indicates that a share portfolio owned by Mr Murphy (high profile criminal defense lawyer) had plunged so far into the red that it owed more than $146 million by March.

Laurie Emini, the broker’s founding chief executive, has been accused of ordering staff to manipulate six trading accounts worth around $200 million so that his favorite clients would not be hit by margin calls in the market downturn. He, along with fellow directors Julian Smith and Anthony Blumberg, have been forced by the Federal Court to surrender their passports.

Investors face massive losses  

As a result of the collapse of Opes Prime, approximately 1200 investors, many of them mom and dad investors have lost more than AUS $1 billion dollars. Losses by investors are exaggerated due to a very unusual business practice, by US standards :

Opes Prime took ownership of the entire portfolio of shares of their clients whenever a margin loan was taken out to purchase other shares, regardless of the size of the loan.

So, even though investors are now willing to repay the margin loans, they are still unable to get their shares back as the covered creditors to Opes, (ANZ bank and Merrill Lynch) have taken ownership of those shares and are selling them off to cover their positions.

First it was equity swaps, now it’s margin loans. As the Opes Prime collapse has once again demonstrated, Australia’s disclosure regime in relation to substantial shareholdings is having trouble coping with evolving business practices.

There has long been unease that there’s no disclosure requirement for equity swaps in relation to the holders, and some other derivatives, particularly in takeover situations. The Takeovers Panel has now acted, and has a guidance note requiring disclosure once a party’s holding of physical stock and equity swaps reaches 5 per cent of a company’s capital and every 1 per cent thereafter.

The collapse of Opes Prime has raised new concerns about the disclosure rules. When administrators and receivers were appointed many clients were startled to learn that the sharebroker’s major lenders, ANZ Bank and Merrill Lynch, were selling off securities the clients had provided as collateral for margin loans.

Those clients had assumed that they were parties to the standard margin loans, where the clients obtained equitable mortgages and they retained legal title and beneficial ownership to the securities they provided as collateral.

Instead, Opes Prime carried out margin lending through stock lending arrangements under which the clients sold to the broker the securities they put up as collateral. The legal title and beneficial ownership transferred to the broker, with the client retaining the right to be re-delivered with “equivalent securities”. In effect it was a sale and repurchase agreement.

Here is an interview with one of those mom and dad investors who has seen his net worth fall from approximately $400,000 to $5,000 overnight.  

DAVID REGANSPURGER: I had a margin loan at the time of the collapse of about $100,000. We had a $400,000, $420,000 share portfolio, but I was making sure that I was only ever borrowing about … a 25 or 30 per cent LVR ratio to the entire portfolio to make sure that we were very well clear of even the market collapsing. We were still very clear that we were never going to get a margin call or [be] in any danger of losing our stock in that regard.

Brigid Glanville: And what were you told, what’s happened to your shares when Opes Prime collapsed late last week?  

DR: Well I initially rang and spoke to someone at Deloitte [blogger note: the receiver selected by ANZ Bank for OPES and its subsidiaries] , who I think they’re the receivers, and I asked the question, ‘Look, can we just pay off our margin loan and therefore then get our share portfolio back?’ We could source the money from friends and family if need be and just unlock our account.

And I received a call later that day, from, I think a Merrill Lynch broker up in Sydney. Basically it was very polite but also very short in that ‘well look David, you don’t own the shares any more, ANZ does, and we’ve been advised to sell the shares so you don’t have an opportunity to buy these shares back, or pay off your margin loan, because they’re not your shares any more, they’re ANZ’s’.”

Lack of oversight by regulators 

ASIC and the ASX have come under scrutiny as to whether they provided enough oversight to prevent this sort of scandal from occurring. The Opes Prime saga also raises questions about the sufficiency and effectiveness of current regulations governing stock broking firms.

 The Australian Financial Review reported today that two regulators – the Australian Securities Exchange (ASX) and the Australian Securities and Investments Commission (ASIC) – took no action when Opes Prime breached its capital liquidity threshold – a requirement that total assets remain above 120 per cent of total liabilities.

The Don gets involved  

Adding to the growing saga, a group of unidentified investors has hired Mick Gatto, a known member of Melbourne’s underworld to help them recover their money. In 2004, Mick was acquitted for killing one of Melbourne’s most notorious hit man. He claimed it was in self defence but the police said otherwise. 

Mr Gatto’s private company, Arbitrations & Mediations — which he says makes “problems disappear” — has in the past been engaged to deal with feuds on Melbourne construction sites.
Yesterday, Mr Gatto told The Age: “These Opes Prime clients can take their chances and lose all their money to lawyers and to the receivers, or they can take their chances with me to extract a return on their behalf.

“The proof is in the pudding with me. I solve problems … It’s my way or the highway.”  

Following Mr Gatto’s trip to Singapore, it seems that he was able to get some answers but he has not revealed whether he knows where the money is, or if there is any money at all. For the record, Ferrier Hodgson the administrators of Opes Prime have stated that they have not hired Mick Gatto.

Opes was created five years ago by Julian Smith, a former head of securities lending at Ord Minnett and chairman of the Australian Securities Lending Association, and Emini, a former head of the securities lending business at ANZ McCaughan.

They later merged their business with that of Anthony Blumberg, a former banking specialist with Deloitte Consulting.

So why is Deloitte the one looking for Anthony Blumberg’s luxury cars?

Conclusion  

Always, always, always read the fine print when dealing with your stockbrokers.
And when you swim with the sharks, you had better swim faster…

Many thanks to D in Melbourne for preparing much of this content.