opes prime anatomy of a collapse

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    Anatomy of a collapse

    April 5, 2008

    The fall of Opes Prime has shaken the sharemarket and trapped over 1000 wealthy investors in its financial wreckage. Stuart Washington reports.

    Two relatively minor players in the world of stockbroking, Tricom and Opes Prime, have rattled the Australian stockmarket to its foundations.

    Along the way, they have made the regulators look like dopes, exposed gaping holes in the lending practices of ANZ, which lent Opes $650 million, and played havoc with the fortunes of some 1200 investors.

    These investors now wait nervously to see if they will get any of the $1.5 billion they had invested in shares through Opes.

    The goings-on in the Melbourne firm Opes Prime are full of racy intrigue. The Australian Securities and Investments Commission is painting the previously unremarkable chief executive, Laurie Emini, as a flight risk while it probes what the Federal Court was told seems to have been an unsuccessful last-ditch bid to stave off liquidation by switching about $200 million in its clients' accounts.

    Damaging snippets about Emini have emerged, including the fact that he is a director of companies with the Melbourne accountant Michael Hymer, who has also acted for convicted drug trafficker Tony Mokbel and other Mokbel family members for more than a decade.

    Then there are some titillating details: Emini and fellow Opes directors Julian Smith and Anthony Blumberg are also shareholders in a business that licenses Playboy merchandise throughout Australia, through their company Hawkswood Investments. Adding to the car-crash fascination, Opes' clients include the prominent Sydney criminal lawyer Christopher Murphy, who said this week about a portfolio once worth about $140 million that he had little idea what was going on "apart from the fact that I'm losing money".

    Murphy's and fellow investors' concerns are now focused on the fate of their shares, spread across more than 677 companies.

    Or, more accurately, the shares they thought were theirs.

    In most margin loans, investors borrow against the value of their existing shares to buy more shares, but they retain ownership of the whole stake. In the fundamentally flawed business model pioneered by Tricom and picked up by Opes, the loan was made on condition that investors signed over ownership of all their shares as security.

    Many Opes investors claim to be unaware of this fundamental difference, or of the great risk to which it exposed them when Opes fell apart.

    Their ignorance ended when Opes Prime went into administration on Thursday last week and its lenders, ANZ, Merrill Lynch and Dresdner Kleinwort, became owners of all the shares.

    The people who thought they owned the shares are now unsecured creditors to Opes, waiting to see if there is any money left after the banks sell the shares.

    "I wake up every morning feeling sick and wonder why, and then I remember why," an Australian investment banker in Jakarta wrote to Crikey this week, saying he had lost his life savings.

    "My broker never advised me that the structure was different to Leveraged Equities when I shifted in December 2007."

    In his case, the value of shares he owned outstripped the loan from Opes by $2.7 million. But, in a demonstration of just how fundamentally risky the model was, all of his shares have gone into one big bucket held by the bankers. The Jakarta banker stands in line with the 1200 other unsecured creditors.

    How much pity can be spared for the investors, many of them wealthy and supposedly sophisticated, is perhaps debatable. The agreements with Opes made it clear that stock was being transferred to the company and its model was no secret.

    Dividend cheques addressed to Opes Prime were a big clue that the broker was offering something different..

    In fact, Opes's success relied on it taking ownership of the shares; the ownership arrangement was the thing that allowed Opes to extend the range of securities it loaned against well beyond that of its more conservative margin-lending competitors, including many smaller, relatively illiquid stocks.

    "We can leverage [lend against] every stock on the exchange," Emini spruiked in BRW in 2006.

    The veteran company director Graham Bradley, the chairman of Stockland, says: "Some people have been unwary about the fine print of margin-lending arrangements. The term has been used loosely to cover two vastly different arrangements: one that has no change in beneficial ownership and one that purports to change the beneficial ownership."

    He adds drily, referring to an old saw: "You get education when you read the fine print and experience when you don't."

    The huge number of companies that Opes Prime was prepared to lend against shows the "subprime" nature of its lending. And it serves as an indictment of ANZ's approach to its lending to Opes, an indictment given some support by the "gardening leave" given to two ANZ executives during the week and unresolved questions about the ANZ-Opes relationship.

    More than 50 companies made startling disclosures to the Australian Securities Exchange that large chunks of their stock had been seized from Opes by the banks, with the fate of Opes' shareholders, and the other shareholders, hanging on just how orderly the sell-off by the bankers will be.

    Sharemarket turmoil has ensued among the smaller stocks, including speculation over the attempts by Tricom to seize back its stock.

    Kim Jacobs, the managing director of the small-cap investment advisory service Inteq, says he knows of one company facing the sale of 6 million shares when it usually trades a few hundred thousand shares a day - a share overhang that is a common factor across many of the badly affected companies.

    "If they are sold at massive discounts they are going to trigger further margin calls and another wave of selling," he says.

    "Don't forget, as soon as some of these companies go below a certain point, some fund managers automatically have to sell."

    While ANZ would not touch many of the companies with its own thriving margin-lending business, it was comfortable enough to advance $650 million to Opes - effectively subcontracting out the risky lending.

    ANZ is also the major lender to Tricom and has been actively cutting Tricom's loan book since it failed to settle trades on January 29.

    David Manchee, an asset manager with Leyland Private Asset Management, expresses no great surprise in Opes' fate and says: "If you go up the risk profile and lend on lower-quality securities, then you run a higher risk, particularly when things turn down rapidly."

    But Manchee, who worked with Emini in the late 1990s for ANZ Securities, does not subscribe to Emini being cast as public enemy No.1.

    "He was part of a very successful team. He did nothing wrong and he was very highly regarded," Manchee says of Emini's time at ANZ Securities. "I actually feel for Laurie at this time."

    Emini was retrenched from ANZ Securities in 1997. He subsequently worked with the back-office sharemarket business Australian Clearing Services, where he met Smith. Emini and Smith founded Leveraged Capital in 2001. It became Opes Prime Securities in 2003, merging with Blumberg's ACS Stockbroking in 2005.

    Emini and his partners hit on a business model that cashed in on the dying days of the bull market. The pitch was that Opes was able to provide a service to investors that had previously only been available to large institutions or the super-rich. It was a pitch that was bought by many, particularly directors in small companies that were unable to access margin loans over shares in their companies.

    In one example, John Terpu, the managing director of junior explorer Conquest Mining, held a 5.6 per cent stake in his company worth $5.8 million. His total loan from Opes was less than $470,000.

    "The potential loss of my shares is obviously devastating to me personally," Terpu told the ASX.

    His distress doesn't matter. All of his shares have gone into the banks' big bucket. Terpu is in line with the rest of the unsecured creditors.

    Where were the regulators when this late bull market, liquidity bubble in largely unregulated margin lending occurred?

    In early 2006 Opes had about $230 million in loans. A year later it had about $1 billion. When the ship went down, it had about $1.5 billion.

    Indeed, where were the regulators when rampant undisclosed short selling gripped the market earlier this year, or when shareholders belatedly found that the directors of ABC Learning Centres and Allco had huge margin loans against their stakes, with disastrous consequences for all shareholders?

    As a stockbroker, Opes is one of the ASX's 92 "market participants" and, as such, is supposed to be monitored for its capital adequacy - shorthand for "does it have enough money to meet its commitments?".

    The ASX checked the capital adequacy of brokers in January after the market fell heavily; it checked the capital adequacy again when Tricom faltered.

    A spokesman for the ASX, Matthew Gibbs, says the ASX was checking Opes's capital adequacy requirements daily since mid February. But it is hard to connect this monitoring with the $200 million "switcheroo" between Opes clients allegedly cooked up by Emini. Then there is the stark reality of the company being pushed into administration.

    The over-extension of Tricom, which led to the market grinding to a halt in January when it was unable to settle some trades is also hardly a feather in the cap of the ASX or ASIC.

    "The exchange has an absolute line of sight into the activities into [these] two market participants," says Dean Paatsch, a principal with the shareholder advisory service RiskMetrics.

    "As the exchange, you can slice open a broker from head to toe. The dogs had been barking for a long time before this happened."

    There are plenty of questions to be asked about what the regulators failed to pick up.

    Terpu's shareholding in Conquest had been previously disclosed to the market as that of a director and a substantial shareholder with more than 5 per cent of the company. But Opes, which owned the shares, never issued any substantial shareholder notices. Nor was the (admittedly minor) level of debt over Terpu's shares disclosed to the market.

    One investor, who has seen his shares in Bannerman Resources tumble from $2.22 before the Opes problems were revealed to about $1.77 amid heavy selling, blames a "complete failure by regulators to protect retail investors and there is a complete lack of transparency in the markets".

    "If Opes clients weren't the beneficial owners of their companies, why were substantial shareholders notices across a number of companies not lodged by Opes themselves?" he asks.

    Bradley, who is not in favour of increased regulation, agrees that in a bull market there have been omissions in disclosures. And he says the issues of substantial shareholder notices and directors' levels of debt over their shares need to be addressed.

    "If there was a change in legal or beneficial ownership there should have been substantial shareholder notices given to the company," he says.

    This would also apply to directors entering arrangements with Opes, because they had effectively "traded" their shares. And also to directors who had entered into margin loans over their shares.

    "It's been normal not to inquire into the financial arrangements of directors or senior executives of companies," Bradley says. "That has now changed because what we have come to realise is that these arrangements might come to override the control a director or executive is assumed to have over the shares they have disclosed [as theirs]."

    Boards Bradley chairs are now considering measures to address these issues: the need to disclose directors' loans over their shares, and if there was a margin call or the likelihood of a call, if the executive can't meet the call, and if the director had a large number of shares.

    Almost all market players are eager for regulatory action on the issue of short selling. Both Tricom's and Opes' models make available the pooled stock for use in stock lending, which can be used to "short" the same stock.

    "Disclosure needs to be improved around the true nature of short positions, that's a fact," Paatsch says. "It's market manipulation that people are really complaining about."

    The saga of Opes is now before the courts, and the business model of Tricom and Opes is being tested by aggrieved shareholders who still think the shares are theirs. They may well be. But by the time the court decisions are handed down, it looks like most of the shares will be long gone.

    Lessons have been learned. The Jakarta banker, who got into Opes only because it was offering loans on companies he couldn't get anywhere else, says: "If something's too good to be true, it probably isn't true. Leveraged Equity wouldn't lend anything against them."

    The deeper problems exposed by Opes and Tricom remain.


    http://business.smh.com.au
 
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