Opes Prime


Opes Prime Group Limited was an Australian securities lending and stockbroking firm which suffered a dramatic collapse in 2008.

Overview

The company was founded in 2003 by Laurie Emini and Julian Smith. Emini, an Albanian emigrant to Australia, had worked for the Australia & New Zealand Banking Group until he was retrenched in 1997, and began share trading from his home. Smith, a British national, had emigrated to Australia in 1993, and ran the securities and investments division of the stock brokerage firm Ord Minnett. By 2008, the company had offices in Melbourne, Sydney and Singapore and employed about 80 people.
The company's downfall was revealed on 28 March 2008 when the Australian Securities & Investments Commission announced it was launching an investigation into Opes Prime Stockbroking, and that the company had gone into receivership the previous day, with Deloitte Touche Tohmatsu appointed as receivers by the ANZ Bank immediately after the company had appointed Ferrier Hodgson as administrators. Opes Prime's secured debt was believed to be over A$1 billion, with its major secured creditors including the ANZ Bank, and Merrill Lynch.
Melbourne underworld figure Mick Gatto made headlines when he travelled to Singapore on behalf of an anonymous group of investors in an attempt to retrieve their money. Gatto however returned to Melbourne saying that the Singapore Directors and staff were hardly to blame but were rather "victims".
On 15 October 2008, the Opes Prime creditors voted to place the companies of the group into liquidation with the administrator Ferrier Hodgson being appointed as liquidator. Ferrier Hodgson then tenaciously pursued ANZ Bank and Merrill Lynch for restitution in relation to their dealings with the companies immediately prior to and in receivership. This effort was supported by ASIC. The actions of ASIC and Ferrier Hodgson resulted in a settlement which included the payment of compensation and enforceable undertakings by ANZ Bank.
These settlements allowed the liquidators to propose a scheme of arrangement which was approved by the court on 4 August 2009. The scheme of arrangement has allowed the liquidators to repay creditors some 37c in the dollar of the sums they were owed, but prevents the creditors from taking any further actions against ANZ Bank.

Criminal charges

Laurie Emini, Julian Smith and a third director, Anthony Blumberg were each charged with four offences in late 2009 in relation to the collapse of the group. In bringing these charges ASIC alleged that shortly before Opes Prime collapsed, the directors signed financial documentation with ANZ Bank to obtain a term loan for Opes Prime Stockbroking Limited and Opes Prime Group Limited and pledged the companies' assets as security to meet the obligations of a third company, Leveraged Capital Pty Ltd. ASIC alleged that in doing so, the directors were intentionally dishonest and failed to exercise their powers and discharge their duties in good faith in the best interests of OPGL and OPSL. It was further alleged that Messrs Emini, Smith and Blumberg dishonestly used their position as directors of OPGL and OPSL with the intention of directly or indirectly gaining an advantage for themselves or for someone else.
Leveraged Capital Pty Ltd was a company owned by Emini and Smith. It was placed into administration and receivership at the same time as the Opes Prime companies.
A third company at the centre of the saga, Hawkswood Pty Ltd, was owned equally by Emini, Smith and Blumberg. It was ostensibly involved in venture capital financing. It was also placed into administration and receivership at the same time as the Opes Prime companies.
On 28 May 2010 ASIC announced that a further 22 charges had been laid against Laurie Emini for breaching his duties as a director of Opes Prime Stockbroking Ltd and Leveraged Capital Pty Ltd. ASIC alleged that on a number of occasions between July 2006 and February 2008, Emini caused the false recording of securities in the records of OPSL and Leveraged Capital so that securities were recorded as being held by more than one client at the same time. The result of this false recording was that the records of OPSL and Leveraged Capital were not a true reflection of the state of those companies' securities holdings and consequently, their respective financial positions. The value of these securities was in excess of $50 million. ASIC further alleged that in causing the false recordings to be made, Emini was intentionally dishonest and failed to exercise and discharge his duties in good faith in the best interests of OPSL and Leveraged Capital. Ten of the charges brought by ASIC allege that Emini used his position with Opes "dishonestly with the intention of directly gaining an advantage for yourself or someone else".
There was a significant delay in bringing the three accused to trial because of the length of time prosecutors believed that a committal hearing would require - some three to four weeks. The committal hearing was set for 28 February 2011, but some further developments in the case occurred on 2 February 2011. On that day, Emini was declared bankrupt owing some $6.8 million to Opes Prime as well as sizeable sums to others including his lawyers. At the same time, Smith was granted legal aid with his defence to be funded by taxpayers.

Committal proceedings

As it turned out, the long committal hearing did not eventuate. On the first day of the hearing, Emini indicated that he would not contest the committal and was therefore committed to stand trial on 21 March 2011. His counsel, Peter Fitzgerald also told the court, "My client's pleading not guilty, but as indicated... there will be a plea to an appropriately worded indictment". Blumberg also did not proceed to committal. He sought an adjournment which was granted. Outside court Blumberg's solicitor, Graeme Efron, said his client was "in discussions with the Crown" but "no inference can be drawn that my client will plead guilty".
The committal hearing for Smith proceeded after a delay of a week. In presenting its case, the prosecution made the following allegations:
  • The largest single client of failed stock lender Opes Prime was given special treatment and allowed to continue trading despite a $116 million shortfall in his accounts.
  • Emini tried to hide the $116 million shortfall in the accounts of Sydney lawyer-turned-investor Chris Murphy. He allegedly tried to cover up the shortfalls by manipulating stock to avoid margin calls being made on Murphy and other key clients. To this end, the amount of stock available to Opes Prime and Leveraged Capital, was allegedly double-counted at least 13 times.
  • Smith had hidden the true nature of the "Murphy problem" from the ANZ bank. "He was aware Murphy could not repay and it's alleged he gave the ANZ bank the impression that Murphy could repay," Mark Gibson, the prosecuting counsel, said. "The opposite was the state of affairs and it's alleged he knew very well about that."
  • Smith also allegedly hid from the bank the true financial position of Opes Prime and Leveraged Capital. He applied for and was given a $95 million loan from ANZ but it was allegedly insufficient to solve the $300 million problem caused by shortfalls in its key accounts.
Mr Gibson indicated that Smith had informed the ANZ Bank that Opes Prime accounts had been "manipulated", but alleged that he did not disclose the true nature of the "Murphy" problem. Gibson said that in addition to failing to tell ANZ that Murphy owed Opes Prime as much as $116 million, Smith also concealed problems, including a $102 million shortfall in accounts held by Riqueza Holdings, a company controlled by Emini, Smith and Blumberg.
On the same day, the court also heard from the Chief Operating Officer of Opes Prime who indicated that Smith gave an "aggressive" response when confronted with the Murphy issue at Opes Prime's Melbourne office in February 2008. Smith is further alleged to have said, "I am telling you the position is covered and there are no problems with it. Put a stop to this shit now and get on with your job."
The following day, 8 March 2011, Opes Prime's erstwhile Chief Financial Officer made further revelations. He indicated that, "It is now my belief that the arrangement entered into with the ANZ provided absolutely no benefit at all to Opes Prime and was to the total detriment of its clients, creditors and employees." He also recounted that he had been present when Smith had received the phone call from ANZ Bank. "Smith was so relieved at the news he broke down sobbing," he said.
On 9 March 2011, evidence presented indicated that $95 million worth of shares belonging to Norm Seckold were being used to "plug a hole" in Chris Murphy's accounts and Seckold had requested the return of his shares. A lawyer who had advised Opes Prime indicated that the shortfall in the Murphy accounts was some $196 million rather than the $116 million that had previously been mentioned. He also indicated that at that stage he believed removing Mr. Seckold's shares from Opes Prime could leave the company insolvent. After ANZ Bank was informed of the problem it presented a plan to the Opes Prime directors which gave Opes Prime $95 million in order to release the shares of Seckold, in return for a charge over Opes Prime assets. The interesting background to this proposal was that Seckold was not in fact a client of Opes Prime. He was actually a client of Leveraged Capital and it was from that company that he had sought a return of his securities and not from Opes Prime.
On 10 March, the court heard from senior ANZ Bank executive Ben Steinberg. He indicated that he had been informed about a $100 million "hole", but despite regarding the matter as extremely serious, he felt it could be rectified because Murphy was "able to obtain assistance from the Packers in receiving guarantees" as had been revealed in earlier evidence. He also indicated that on the day following the execution of the agreement, Blumberg had called him in some distress to indicate that the shortfall was actually closer to $200 million than $100 million. The court was also told that the agreement included a change to the securities lending agreement between ANZ Bank and Opes Prime. This change applied to the "close out" provisions of the securities lending agreement that would apply in the event of a default. The standard provisions would have seen all shareholdings valued at market prices with the party with the higher value paying the other party the difference. This would have resulted in ANZ Bank owing Opes Prime the margins between their holdings of shares and the value of loans drawn by Opes Prime and its clients. Steinberg indicated that this payment would have been some $240 million. ANZ Bank would have then been left to dispose of the mostly small capitalisation securities on the market for what would likely have been a lower value. The provisions were instead changed to value the shares at the price which could be obtained for them on the market. The risk of loss on disposal was thereby transferred to Opes Prime and its clients.
This evidence reflects comments by Blumberg reported in The Australian of 5 June 2008. In this article, Blumberg stated, "I understood that the bank wanted to replace the existing close-out arrangements, under which the securities pool held by the bank would be valued according to more judgmental fair value. I was well aware that this variation might cause significant detriment to the companies, in light of the make-up of the securities pool held by ANZ, and therefore we resisted that change during late February and early March.'
Blumberg also commented on the discussions with ANZ Bank on Easter Friday to which Steinberg referred. Blumberg said he believed money was to be lent to Leveraged Capital and that when he woke up on Good Friday he "had a moment of clarity". "I realised there was no way that $95 million from ANZ would fix the problems Opes was facing." Blumberg said he phoned Steinberg around 10 am. He couldn't remember the exact words used, but believed that they had conversation to the following effect, "In no way are you going to drop $95 million into Opes on Tuesday morning. The problem is much bigger than $95 million. There are double stock counting issues and in addition to the $95 million call there is a $116 million hole. There is no way I am signing a guarantee when the $95 million won't fix a problem. The problem would be $200 million or more and the company may be insolvent.' To which Steinberg apparently said, "You can't back out, it's all signed. We have agreed to advance the money so we cannot stop the process." From the information emerging at the trial, it would appear that this assessment of the problem was accurate. Including the $95m "call" by Seckold for the return of his securities by Leveraged Capital, there would appear to have been a total deficiency of $196m.
The Australian article also revealed that Blumberg eventually withdrew his objections and allegations of potential fraud in exchange for ANZ Bank releasing him from a personal guarantee which they had required him to provide as part of the agreement.
On 11 March the court heard testimony from Opes Prime's erstwhile head of operations. She had carried out a number of transactions at Emini's behest to bolster the margin positions of a number of accounts including Riqueza, those of Chris Murphy and also others. She indicated that the first such transaction occurred on 27 June 2006 when Emini had used $17.4 million worth of Norm Seckold's shares to support the margin position of Riqueza. By early March 2008 this approach saw $95 million of Norm Seckold's holding of Coeur d'Alene Mines being held as collateral by Opes Prime for borrowings by Riqueza and accounts associated with Riqueza. This would suggest that Emini had transferred shares owned by Leveraged Capital to Riqueza to be lodged with Opes Prime as collateral for Riqueza's borrowings. Opes Prime had in turn lodged these shares with ANZ Bank to support its borrowing position. The problem with this transaction was that although the shares were owned by Leveraged Capital, they were in reality collateral for Norm Seckold's borrowings rather than free assets of Leveraged Capital.
At the conclusion of proceedings Smith was committed to stand trial in the supreme court on 21 March 2011.
Blumberg had also returned to court on 11 March. He pleaded not guilty and indicated that he was willing to proceed directly to trial. He was duly also committed to stand trial in the supreme court on 21 March 2011.
Summary
The questioning of the various witnesses regarding their statements indicates the following:
  • Whilst directors of Opes Prime, Smith and Emini owned and operated Leveraged Capital and Smith, Emini and Blumberg owned and operated Hawkswood.
  • Smith, Emini and Blumberg controlled the Singapore domiciled and British Virgin Island registered company Riqueza despite the company not being owned by them.
  • Riqueza had an account with Opes Prime for the purposes of securities lending and equity financing.
  • Riqueza provided a conduit for moving shares and money between Opes Prime and the two companies Leveraged Capital and Hawkswood.
  • Leveraged Capital assets were used to provide collateral to the Riqueza account. The first time this occurred was in June 2006.
  • The use of assets in this way occurred on a number of other occasions between June 2006 and March 2008. Leveraged Capital and Hawkswood assets were also used, via Riqueza, to provide collateral to the accounts of Chris Murphy an Opes Prime client with whom Emini and Smith had a business relationship.
  • When Norm Seckold sought the return of his shares from Leveraged Capital, they had been passed to Riqueza for it to use as collateral for itself and other Opes Prime accounts in a cross margin group.
  • The shares were in turn being used by Opes Prime to provide collateral for its financing position with ANZ Bank. Riqueza was unable to provide replacement collateral to Opes Prime so Opes Prime was unable to redeem the shares from ANZ Bank. As a result, Riqueza could not return the shares to Leveraged Capital and it could not return them to Norm Seckold.
  • ASIC alleges that Smith, Emini and Blumberg sought to resolve this impasse by means of an agreement with ANZ Bank.
  • At this time the ANZ Bank was in the position that if there had been a default by Opes Prime, it would have had to settle its account with Opes Prime at then current market prices and this would have resulted in a surplus in favour of Opes Prime of some $240 million.
  • The agreement reached required Opes Prime to grant ANZ Bank a charge over its assets and an amendment to their mutual securities lending agreement which would remove ANZ Bank's obligation to repay the $240 million in surplus value to Opes Prime and its clients.
  • In return for these benefits, ANZ Bank released Norm Seckold's shares so that they could be returned to Leveraged Capital and then to him.
  • The value of the agreement was $95 million whereas the potential shortfall in Opes Prime's accounts was as high as $200 million.