business spectator interview with opes

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    KGB INTERROGATION: Chris Campbell and Sal Algeri
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    The Spectators

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    Gottliebsen, Bartholomeusz: KGB INTERROGATION: Chris Campbell and Sal Algeri
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    Stephen Bartholomeusz: Chris Campbell, Sal Algeri welcome to the Interrogation. Can I start by asking how many irregular Opes Prime accounts you’re looking at?

    Chris Campbell: I’m not going to comment on the number, but we’re involved in doing all the frenzied reconciliation which is quite detailed and will take a bit of time to get there and to then start recovery actions on these things.

    SB: I understand the privacy issues you face, but can you say whether any of the account holders are related parties of the principals of Opes?

    CC: I’m not going to comment on that on the basis that it’s subject to ASIC investigation.

    Alan Kohler: Can you tell us what’s the position, as you understand it, of the British Virgin Islands company Riqueza, and who are the directors or shareholders of that company. Do you have any idea?

    CC: Yeah, look we understand that was a company that had one shareholder, one director and that was an employee of the group that [was in] Singapore.

    AK: Which group?

    CC: We are taking steps with the administrator to get control of that company.

    AK: Is it true that $100 million was laundered through that company?

    CC: They’re part of the transactions Alan that are subject to ours and ASIC’s investigations, so we really don’t want to comment on the transactions that were flowing through that company.

    SB: If you don’t mind, can we go back to the starting point. If you’re not sure what the numbers look like today, when you walked in do you know…

    CC: I’m sorry, can I just go back to the assets for a second?

    SB: Yeah sure.

    CC: I mentioned the irregular account assets, which are worth around $200 to $300 million. The other major assets that we think will really make a difference for the unsecured creditors are the
    investments contained in some of the related entities which Sal and I have been appointed over.

    We think in those companies there’s book value of assets showing at between $130 and $140 million. And those assets appear to be all sorts of investments, loans, possibly some property
    interests. We’re not exactly sure whether we have the properties or whether we only have loans over properties.

    We’re just chasing those things down now. That’s where I think there’s been some press reports about motor vehicles. That’s where the motor vehicles are sitting which we have our foot on – in
    Singapore – and so there’s a whole heap of assets in there.

    We’re going through the process now of aggressively trying to find them and realise them. The directors are cooperating with us in
    identifying those assets and assisting us with sorting out how we’re going to recover them.

    AK: Sorry, what was the figure again for that?

    CC: The book value is somewhere between $130 and $140 million. Now that’s book value. That may not be the realisable value.

    AK: Now what do you believe the realisable value of ANZ’s portfolio is?

    CC: That would be hard to tell Alan. We don’t have visibility across that book at the moment. We just get sporadic reports about where the realisations are at, but we don’t have the profile of what’s left
    in that book so we can’t make an estimate really.

    Robert Gottliebsen: Chris how extensive was the stock lending operation of Opes and how did it work?

    CC: The stock lending side?

    RG: Yes.

    CC: Oh look, the main part of the business wasn’t the stock lending –the business where stocks were lent between brokers attempting to do transactions I would imagine. We really didn’t get to the
    bottom of it. Probably best just to talk to a stockbroker where stock lending is part of their business as to why they do it, but it wasn’t the major part of the business.

    RG: Were there any advantages in stapling it together with the margin lending business?

    Sal Algeri: Probably – it wasn’t really a margin lending business. It was an equities leverage lending business so all they did was provide loans against shares that were put up. So it’s not even… it’s a
    little bit different to a typical margin lending business.

    CC: So they did a bit of stock broking and they did a bit of everything but the main part of the business was really a leveraged equity business.

    AK: And so were they acting in a sense as a finance broker?

    CC: Not as a broker, but probably more of a finance house under the guise of a stockbroker I would imagine.

    AK: Yeah. Were they getting a trailing commission on the debt. On the loans that they made?

    CC: No. They obtained funding from the lenders – Merrills etc – and they would then use that money to provide loans back to their client base and charge interest and so forth on those loans, so they
    were effectively a lender.

    AK: So they’re not a broker that collects commissions…but without a balance sheet?

    CC: Without a very strong balance sheet, yeah.

    RG: Basically I could bring my share scrip into Opes and they would lend money on it?

    CC: That’s correct. It’s almost… someone said it was like a Cash Converters.

    SA: If you wanted to borrow $40,000 and you had $100,000 worth of shares, albeit that those shares might have been in the low 300 ASX, they might put a 40 per cent LVR [loan-to-value ratio] on it and
    lend you the $40,000. They’d take the share scrip and then they’d bundle that with bunches of other share scrip and put it out with the three main lenders they had on the other side.

    RG: So they were like pawnbrokers?

    CC: More like a consolidator of stocks and a borrowing house. It’s a wholesale to retail activity.

    RG: Do you think the people who lodged the scrip and borrowed the money had any idea that the whole thing was in one pool?

    CC: Look I think… that answer’s going to be very difficult because there’s so many different sorts of clients here. Some of them probably did know very well what was going on. Some of them may not
    have known.

    Did their advisers know or did their advisers read the documentation? I don’t know and I think that’s really going to come down to… nearly to a case by case scenario.

    RG: And how many people are we talking about in total that are involved in the whole exercise do you think.

    CC: Look the listing’s showing about 1,800 accounts, but we know there’s a huge number of accounts in there that make up one person. They’re trading under different things, so we think there’s around
    1,200, 1,300 accounts.

    SB: Chris, is it true that there’s a significant proportion of those accounts based in Asia. That they actually ran an Asian book as well?

    CC: Look, there is a small offshore brokering book through a broker account but it’s only a small part of the business as far as we can see.

    SA: The majority of it was in Australia.

    AK: And what’s your view about the substantial shareholding notice obligations. When shareholdings were above 5 per cent, that were pledged in this operation, who had the obligation to notify the
    stock exchange of the substantial shareholding?

    CC: Well I think you probably need to ask a lawyer that one (laughs). At the moment, because Opes doesn’t have any of the share scrip, we don’t have to do that. If it’s the case that some of the share
    scrip comes back to us we’re getting prepared to have to lodge notices to be on the safe side.

    SB: Chris, Steve again. There are suggestions that Opes was itself involved in proprietary trading using stock borrowed from its own clients. Have you seen that?

    CC: Look we haven’t delved down into the transaction detail but as for house accounts, look there may be some house accounts in there that, if they are there, would be subject to investigation.

    SB: Could you guys explain the circumstances under which ANZ advanced that last $95 million and gained the charge over Opes’ assets?

    CC: Well some of it’s a little bit from hearsay because we weren’t there at the time so we can only tell you what we’ve been advised. Prior to Easter the directors went to the ANZ Bank and said they had
    an issue they’d found within the books of Opes and they were going to be short by about $95 million.

    The bank had a brief review of that themselves and based on the representation that was given to them they supported the company by advancing an additional $95 million for the company to be
    able to service its transactions that fell due.

    The basis on which that was advanced was fresh new security to secure that $95 million, and on the basis of that they’d allow Deloitte to have a look at the cause of the issue that had arisen and
    to make sure there was nothing else going to come out of the woodwork.

    When we got in there after about 24 hours we found that the hole was substantially larger than what was disclosed by the directors and the directors came to a view on Thursday 27 March that a
    restructure was highly unlikely and then appointed the voluntary administrator.

    AK: So you were in the position of telling the directors something about their company that they didn’t know.

    CC: Correct.

    AK: That’s pretty amazing. What was that like?

    CC: Oh look, it’s not unusual for us to be in that position. That’s what we do.

    RG: Chris, I know there’ll be court cases in the future about this but as an experienced accountant how do you regard the ethics of banks and lending institutions demanding lending agreements from
    brokers that give them security over all the shares owned by a broker’s clients that are borrowing money, irrespective of individual situations. What do you think of the ethics of all that?

    CC: Look, I’m not really going to comment on the ethics of it. I think it’s a fairly straightforward transaction and if you don’t do it by this method then to be able to lend on security they’ll have to formulate
    another method for doing it.

    Let me put it another way to you Bob. If these irregular accounts that are cash and other transactions hadn’t occurred, this wouldn’t be in this problem. It still would have been… it was making
    money outside of this and it should have been able to make money and continue to trade.

    RG: Do you think that the Opes security arrangements are a one off? Or could brokers who are holding clients’ scrip in their nominee companies in non margin or non lending situations, have they got
    the right to use this scrip to secure their own overdraft?

    CC: I think each individual should have a look in detail at the agreements that they have executed to deal in margin loans or borrowing monies where they’re putting any sort of asset up as security. It is
    very important they seek proper advice on these things and fully understand what the lender can do with their assets and securities in a number of different scenarios, including the insolvency of
    that lender

    RG: Does that apply also to brokers who are holding scrip on behalf of clients in a nominee company with no lending at all.

    CC: If there’s no one else has a security over that stockbroker’s account and effectively it’s held in trust, then I’d find it fairly difficult for anybody to be able to get hold of those assets for another purpose
    unless there’s some sort of fraudulent activity of course.

    SA: Bob it’s Sal here – you’ve just got to bear in mind the application forms and the documentation that a customer’s given… Opes customers actually signed, so quite clearly, based on the cases we’ve
    seen, there was a disclosure of what the customer’s entering into.

    SB: Steve again – just to come at that question from a slightly different angle. It’s pretty clear from the reactions of the clients which have been broadcast all over the place, that they’re bewildered and
    bemused that they’ve lost more than they’ve owed without being given the ability to repay their debt or top up their security. How do you explain that to them?

    CC: Well we have a fairly detailed response to them, account by account, and basically we explain to them what happened to their securities when they took the loan out and then how the funding
    situation with Opes actually worked, as we explained to you earlier on, when the securities come in. There’s a change in title at that point and then Opes has a wholesale funding facility out the
    other side with a number of lender and it places those securities with those lenders for funding and at that point there’s a transfer of title again.

    SB: That’s going to create a lot of inequities between clients though isn’t it in terms of the outcomes that they experience?

    CC: Well it’s hard to say that. They will have their accounts closed out and calculations will be done on their accounts and they’ll have a claim for a certain amount of dollars. When the assets are
    realised and distributed, they’ll all get the same pro rata apportionment. And sure, some will lose more than others, but that will be dependent on the structure of their account that they had in place
    at the time, but they’ll lose or gain the same percentage.

    AK: How long do you think it will take for ANZ and Goldman Sachs to realise the remainder of the ANZ security.

    CC: Look I think on ANZ and Goldman Sachs it’s pretty hard for us to tell. As I said, we don’t have the portfolios to actually work out what sort of stocks they’ve got left in there and how hard they are
    going to be to shift.

    AK: And obviously the security that you’ve got in the other companies, Leveraged Capital and Hawkswood – that is pledged to the amount of $95 million to ANZ isn’t it?

    CC: Yep.

    AK: So is there likely to be a surplus in there do you think? I mean you said that the book value is $140 million but it’s quite possible that the market value is no more than $95 million.

    CC: Correct. We don’t know what the market value is going to be with those assets. Look if you assume that the ANZ recovered enough out of the book that it’s got to recover its indebtedness then all
    of that, whatever we realise out of those assets will be available for the creditors.

    If the ANZ Bank’s got a shortfall, then a portion of whatever the shortfall is would then go to the ANZ Bank. So it’s too early to call what that’s going to mean, but as I said the other day I think it’s my
    gut feeling that there will be funds available for the unsecured creditors in this.

    AK: We published this morning an estimate that the ANZ portfolio would result in a surplus of $100 to $150 million. I’ve since been told that that’s more likely to be something between $0 and $80 million.

    CC: It’s hard to say Alan. It’s really dependent on the ability to sell down that portfolio. We don’t know what the make up of it is unfortunately, but that’s really a difficult one to speculate on till we’ve
    actually done the job.

    SB: It’s Steve – those sell downs are obviously critical in terms of the value they realise for the unsecured creditors. To what extent can you or Ferrier Hodgson influence the nature of the sellers? Have
    you been given the chance to have some input into it?

    CC: The general instruction is that ANZ sought advice and an independent party to actually do the realisation for them through Goldman Sachs, so they’ve gone out to get outside expert advice and
    action on how to do the realisation and ANZ have consistently said to us, it is their aim to maximise value in that book. If it takes some time to do that then that’s fine, it will take some time to do it.
    It’s not a matter of fire-selling things.

    SB: What’s Merrill Lynch said to you about their approach?

    CC: Similar. There aim is to maximise value although I believe the profile of their book may have been more disposed towards being able to be realisable a lot more easily.

    RG: There are an incredible number of small companies in that portfolio. It’s as though they specialised in that sort of transaction.

    CC: I have read some affidavit material to that effect. I haven’t questioned the staff at Opes to confirm that’s the case, but it would appear that they were one of the few that would provide margin loans
    against low cap and low volume traded stock.

    RG: It was a very high risk exercise given the liquidity of those companies.

    CC: Yeah, correct.

    AK: I think we better wrap it up. Chris, Sal, thanks for your time.

    CC: Thanks for that… talk to you again soon.
 
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