lift capital situation unclear

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    It doesn’t look like Lift Capital has, or rather had, the same business model as Opes Prime, although as the receivers and administrators of Opes have discovered, going into a modern stockbroking firm as administrator is full of surprises.

    The exact basis on which Lift has been lending money to its 1600 clients, and what the legal rights of those clients are, will now be discovered by the administrators who arrived today at its Park Street offices – Tony McGrath and Joe Hayes of McGrath Nicol.

    Not much is known about Lift, and all concerned at the firm have stoutly resisted returning the phone calls and emails of journalists for the better part of a fortnight, since rumours first surfaced that it would follow Opes to the wall.

    However, a reading of the firm’s product disclosure statement (PDS) suggests that its equities finance business is based on mortgages rather than the securities loan agreements that Opes used.

    There is at least one other firm that appears to use securities loan agreements to lend cash against shares, and that is Melbourne based Chimaera Capital. Once again, phone calls and emails have not been returned, but the “securities finance trading” section of the firm’s website clearly refers to securities lending rather than mortgages.

    The hugely important question of whether a securities loan is really a mortgage, thus providing the borrowers with the right to have those particular shares returned on repayment of the loan, will now be settled by a test case in the Federal Court before Justice Ray Finkelstein.

    Judge Finkelstein has decided to use the case of claim of one Opes client, Paul Choiselat, the managing director Jumbuck Entertainment, as an expedited test case on the meaning of the Australian Master Securities Lending Agreement, which was used by Opes to secure cash loans to clients for margin trading.

    Lift Capital’s product disclosure statement says: “…for the purpose of securing repayment of the amount outstanding, the mortgagor, as beneficial owner, agrees to mortgage to the lender … all relevant loan security…”

    However, the agreement also provides that all of the “relevant loan securities” will be held in the name of Lift Capital Nominees No.1 Pty Ltd, and that the client agrees “to transfer the relevant loan securities you own to Nominees”.

    “Relevant loan securities” are defined in the agreement as the mortgaged property in relation to the “protected share loan”.

    Taken at face value, it appears that the shares against which Lift’s clients have borrowed money are held in the name of Lift Capital Nominees, but at least they are mortgaged rather than lent under an AMSLA.

    If that’s right, it means that Lift’s clients will have rights to the surplus proceeds from their own individual portfolios, rather than finding their shares pooled with everyone else’s and having to queue up as unsecured creditors of the company (subject to Finkelstein J’s findings of course).

    Chimaera Capital does not have a similar PDS on its website so its legal agreements cannot be publicly scrutinised, but its clients should urgently inspect their documentation. If, as is suggested by the references to securities lending on its website, these are AMSLAs, it would be a good idea to get legal advice.

    Securities lending for cash has been common practice among investment banks and institutions for years.

    The innovation of Opes Prime, and possibly Chimaera, has been to offer it to a less sophisticated retail market.

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