Opes: the full story: Kohler

The clients of Opes Prime Stockbroking look like getting no more than 50 cents in the dollar for what they thought were their own assets. It is better than nothing, which has been the worst fear of many, but the anger will still be long and palpable.

The total value of their shareholdings is believed to be roughly $800 million and they owe Opes slightly more than $300 million, so their net debt is about $500 million.

In what has already become one of the most infamous episodes in Australian stockmarket history, the entire holdings of these 1200 or so clients were discovered, when Opes went bust last week, to be owned by the firms’ lenders – ANZ Bank, Merrill Lynch and Dresdner Bank.

Those banks promptly started selling the shares to recover their debt, causing mayhem on the sharemarket. Merrill Lynch has now sold almost all of its collection of mainly blue chip shares and it’s believed it will pay back a surplus to Opes’s clients of $80 million. The surplus from the Dresdner sale is expected to be $10 million.

ANZ and its broker Goldman Sachs are about a third of the way through their selling programme, having been interrupted by an unsuccessful injunction application before the Federal Court this week.

ANZ’s collateral consisted mostly of less liquid, smaller cap stocks, so it will take longer and the proceeds are less certain. However a surplus of somewhere between $100 million and $150 million is expected.

If it’s the lower of those figures, the return to the clients will be about 38 cents in the dollar; if it’s the higher number, they’ll get 50 cents in the dollar.

But it will be no more than that. The effect of this on those who have been shattered by the news that they did not own the shares that they had paid for will be incalculable. And the damage to the reputation and integrity of the market itself may take years to recover.

It all seems to have happened as a result of a series of misguided decisions by the CEO of Opes, Laurie Emini, to protect six of his favourite clients from margin calls, the largest of which was Sydney lawyer Chris Murphy.

This was discovered almost by accident on the Monday before Easter, when a company not directly related to Opes was hit by demand for shares.

Two companies had been set up at arms length from Opes Prime Stockbroking, called Leveraged Capital Pty Ltd and Hawkswood Pty Ltd. They dealt with Opes via a British Virgin Islands registered company called Riqueza.

The directors of Leveraged Capital are Laurie Emini and Julian Smith, two of the founders of Opes. And the directors of Hawkswood are Emini, Smith and the other founder of Opes, Anthony Blumberg.

Leveraged Capital and Hawkswood had securities loan agreements with Riqueza (these are called AMSLAs, for Australian Master Securities Lending Agreements) and Riqueza had matching AMSLAs with Opes. Leveraged and Hawkswood then both dealt with some Opes clients, some of whom may have been related to Opes in some way.

Two weeks before Easter, one of Leveraged Capital’s clients repaid his or her loan and demanded the return of $95 million worth of shares that had been used to secure that loan.

But those shares had been transferred to ANZ as collateral and when Opes attempted to meet the demand on Leveraged Capital (via the British Virgin Islands company, Riqueza) it breached its loan to value ratio with ANZ. The bank put a stop on the funds.

For Laurie Emini this meant the jig was finally up. His partners, Julian Smith and Anthony Blumberg, wanted to know why Opes had breached its LVR with ANZ, and Emini had to confess that he could not meet the $95 million demand, and why.

And the “why” must have made Smith and Blumberg reel in disbelief: Emini had simply not made margin calls against six clients, totalling more than $200 million. The firm’s capital buffer was gone.

About half of these missed margin calls should have been made against Chris Murphy, who, it’s understood from sources close to Opes, had bought $250 million worth of Challenger Financial shares with $190 million of borrowed money – a loan to value ratio of 76 per cent.

Challenger’s shares collapsed, ironically as a result of hedge funds short selling using borrowed stock – probably even some of it borrowed from Opes.

Eventually Murphy’s holding was worth just $80 million, but he still owed $190 million. He was in the hole for $110 million but not had a single margin call from Opes.

In fact, since he was up against his LVR at the beginning, Chris Murphy should have been getting margin calls the moment Challenger shares started falling.

Five other so far unnamed clients had similar experiences – watching their shareholdings crash to a total of more than $100 million below the value of their debts, but without receiving any margin calls top up their collateral or sell shares.

Did Murphy and the other five realise what was happening, quietly waiting for margin calls that never came? Or did they plead with Emini not to hit them with margin calls, because the shares would go up again soon? This will presumably emerge from ASIC’s investigation.

In any case when Julian Smith and Anthony Blumberg asked why they had breached their LVR with ANZ that Monday, and in response listened, aghast, to Emini’s tale of foregone margin calls, they turned to the lawyer who was handling the proposed public float of Opes – Hall & Willcox.

(Yes, incredibly, Opes was in the final stages of an IPO, for $48 million. An independent expert’s report had been done, and found nothing amiss).

Hall & Willcox called in Ferrier Hodgson to report on whether Opes was solvent or not and they reported that unless the $95 million demand was met, then the firm was insolvent and would have go into administration that day.

So Smith and Blumberg went to ANZ to ask for a loan of $95 million, and had to explain why. The matter went straight up to the managing director Mike Smith. He agreed to advance the funds to prevent an immediate implosion, but only in return for registered mortgage debentures against all of the companies in the Opes group, including Leveraged Capital and Hawkswood, and a personal guarantee from Laurie Emini.

The documents were prepared and executed before the close of business on the Thursday before Good Friday, and the shares needed to meet the demand against Leveraged Capital were released from ANZ’s collateral pool. Crisis averted.

After Easter, ANZ’s Mike Smith decided that more information was needed and appointed Deloitte as investigating accountants.

On Thursday morning Deloite’s Chris Campbell and Sal Algeri reported back to ANZ executives about the $200 million hole from the missed margin calls, including the position of Chris Murphy.

In the end the card that brought the house down was ASX operating rules: Smith and Blumberg received legal advice that despite the complicated structure using the British Virgin Island company, Opes had breached ASX rules on related party transactions, which would have to be reported within 48 hours.

As a result of that advice and firm’s parlous financial condition, they had no choice but to appoint John Lindholm of Ferrier Hodgson as voluntary administrator on Thursday afternoon, which immediately triggered a default in its AMSLAs with ANZ, Merrill Lynch and Dresdner.

ANZ appointed Chris Campbell and Sale Algeri as receivers and all three lenders started selling their security.

The Opes collapse appears to be a Shakespearean tale of human frailty leading to tragedy – how one man’s misguided loyalty to the wrong people has bankrupted both his business and his family, and destroyed many other lives in the process.

It has also sent a shock wave through the investment world. Margin lending everyone knew about; securities lending everyone knew about. But no one, it seems, knew that the two things were being combined in this way.

The AMSLA securities lending contract confers temporary title upon on the borrower for tax purposes. Its use by Opes to secure margin loans instead of the usual mortgage and trust account arrangements – apparently with no one actually knowing it – has produced pandemonium in the sharemarket, with dozens of companies in trading halts and misleading substantial shareholding notices rife.

The mop up will be long and untidy and the price to be paid by those responsible may be heavy. By all accounts this is one case ASIC does not want to be seen to be soft on.