Disconnected: A road to ruin

One road links little old ladies losing their homes, a soapie star from Home And Away, a former bankrupt and mate of Alan Bond, a Gen Y greenmailer, Macquarie (of course), Humphrey B. Bear, a skipping rope jump champion and lawyers galore - everybody, really, except the corporate watchdog - and that's BrisConnections.

Not so unique, however, is the vote buying, impenetrable prospectus, potential conflicts of interest and undemanding auditing, which have all become par for the course.

But BrisConnections has exposed dangerous cracks in the system for protecting investors.

At least in the end Macquarie, one of the underwriters and a big promoter of the stock, was shamed into rescuing small investors in Australia's largest infrastructure project, most recently valued by the market as not so much worthless as downright negative.

If the stock exchange had permitted it, BrisConnections could have been the first share to trade at a negative price.

Until Macquarie came to the rescue by not so much buying as accepting holdings of up to 50,000 units, you couldn't even give them away because each came with a demand for a $1 payment this week. Plus another $1 next year.

Indeed, BrisConnections could be confused with a Ponzi scheme, warnings about which feature prominently on ASIC's website, except for the fact that it's legal.

Ponzi or pyramid schemes promise instant riches by using the money of new investors to pay existing ones. Eventually the pyramid caves in when it runs out of new investors.

With some creative, though apparently above-board, accounting, BrisConnections quickly claimed a profit after listing last year, even though almost half the funds raised from Australia's worst float disappeared in fees. Even a generous dividend was mooted.

Yet the Brisbane airport tunnel link project had barely dug a hole and it will be four years before anybody drives through it.

In reality, investors were just getting back some of the money they put in - or, in a nice Ponzi twist, more units would be issued since unitholders automatically go in the dividend re-investment scheme.

"At the outset we had concerns, even before it listed, at the fees and the way it was marketed," says the chief executive of the Australian Shareholders' Association, Stuart Wilson. "It was touted as a 14 per cent yield but it wasn't a yield because it wasn't income. It was almost like a Ponzi scheme."

BrisConnections last traded at one-tenth of a cent, only because the stock exchange wouldn't allow the price to drop any further.

Talk about toxic. Buying 1 million shares at 0.1 of a cent each would cost just $1000 - boy, that's some leverage - but also carry a liability to pay $2 million. Oopsy.

While few have much sympathy for day traders who bought millions of units online without knowing what they were getting themselves into, shareholders who bought in the float or soon after may have been taken for a ride. They were as good as promised a 5.95 cent dividend, since slashed to 0.05 cent and postponed to June.

How did the responsible entity - half owned by Leighton Holdings, which owns the project's contractor, Thiess John Holland, and shares the same chairman as the project manager - get away with that?

Easy. Blame the global financial crisis, silly.

But hang on. If all the borrowers are on board and everything is underwritten, as BrisConnections keeps insisting, what does a credit crisis matter?

Ah well, there are those who might think a 5.95 cent dividend on a virtually free share is a darn good return.

But if they can't sell once they've pocketed the dividend, then BrisConnections won't get its dough.

So, what was BrisConnections doing spruiking the stock's prospects a week earlier - the "enormous potential and a positive outlook", it said - with the dividend apparently safe and sound?

You have to wonder where the ASX and ASIC were while this was going on.

"It's annoying that ASIC looks after corporate clients," says Sam Wylie, senior fellow of the Melbourne Business School.

"It started investigating aggressive short selling the same day the accusation was made by Macquarie. It doesn't show that level of bulldog determination when it comes to household investors."

BrisConnections is one of the most extreme examples of what can go wrong with stapled securities. Typically the property trust holding the assets is stapled to a management company that almost certainly will also be a property developer.

And so, once-safe listed property trusts morphed into debt-laden disasters.

Although called "trusts", don't expect to find a trustee minding your patch. That requirement was scrapped 10 years ago when the collapse of Mortgage Estate showed trustees were asleep at the wheel.

But instead of booking the driver, the government sold the car.

Trustees were replaced by a so-called responsible entity, which although licensed by ASIC can also be, and usually is, the fund manager or promoter.

The resulting conflict of interest in this situation is akin to asking the landlord to pay the rent for you.

ASIC's website says: "You may ask if your money is safe, even though there is no separate trustee for every managed investment scheme."

OK, I'll bite. Its answer was that "the Corporations Act contains safeguards for your protection".

Deputy chairman of the Australian Shareholders' Association, Stephen Matthews, points out the responsible entity can be based in Bermuda, "which is not subject to the same disclosure laws as an ASX company".

A spot check by ASIC eight years ago found "breaches or compliance failures in 69 of the 83 responsible entities inspected".

BrisConnections has even made a virtue of the fact that it's thinking of bringing the responsible entity "in house" to cut costs.

As it is you can see a potential conflict where unitholders might want to wind the whole thing up but the contractor never would.

Incredibly, some trusts can even change their deeds or constitutions without so much as a by-your-leave from unitholders.

Indeed, some go as far as borrowing or issuing new units willy nilly at the expense of existing unitholders.

The once-venerable GPT Group made a huge rights issue last year at well below its asset backing.

"Under the old trust deed controlled by a trustee, this would not be allowed without an amendment authorised by a meeting of unitholders," says Michael Heffernan, a client adviser at Reynolds & Co, one of the last of the independent family-owned stockbrokers.

"These new stapled entities established by Macquarie, Babcock & Brown and Allco through their product disclosure statement or prospectus allowed the manager to change the deeds of the trusts under their care without referral to unitholders."

Never mind that the old trust deeds also limited borrowings.

"There's more protection for shareholders than there is for members of managed funds," says Ian Ramsay, director of the Centre for Corporate Law and Securities Regulation at the University of Melbourne.

A product disclosure statement must list all the risks of the investment but they don't have to be weighted. Theoretically, an earthquake in outer Mongolia, which might lift the price of oil, ranks as an equal risk to the chairman absconding with all the money.

So long as somewhere up the back the prospectus admits that there could be a problem, it seems ASIC won't care if there really is one.

One risk not mentioned by BrisConnections that turned out to be critical is the impact on the price of issuing by instalments.

When a share price is falling, a partly paid share will do even worse because of the built-in leverage.

It's not as if it should be an unfamiliar problem. T3's prospectus says: "The partial payment characteristics of instalment receipts may make percentage price movements in them greater than percentage price movements if they were fully paid shares in similar circumstances."

Not even T3 dropped to one-tenth of a cent.

Come to that, how can the auditor and responsible entity both ignore the fact that the market is assigning no value to the stock at all?

That's some presumption on their part that the market has it so totally wrong.

TOLLWAY TO HELL

July 31, 2008 BrisConnections debuts at 41 cents for the $1 part-paid units.

Sep 3 Confirms will pay 5.95 cents dividend in March units trade at 12 cents.

Oct 21 Macquarie, having earned $130 million in fees, begins bailing out at a loss.

Oct 23 Price slumps to 0.1 cent.

Oct 24 BrisConnections says group has enormous potential.

Oct 30 The promised dividend is cut from 5.95 cents to 0.05 cent and then postponed.

Nov 24 Australian Style Investments, owned 1 per cent by Nick Bolton and 99 per cent by his sister, soapie star Georgia, starts buying.

Feb 3, 2009 Half-year results show net profit of $10.5 million and responsible entity says "there are reasonable grounds" to believe it can pay its debts as they become due.

Feb 12 Bolton demands special meeting to wind up BrisConnections.

Mar 30 Macquarie buys stock again.

Apr 8 Bolton changes sides by selling his proxies for $4.5 million, which in effect shoots down his own resolutions.

Apr 11 BrisConnections gets Bolton's proxy form showing backflip.

Apr 14 Extraordinary general meeting where resolutions to wind up company are lost.

Apr 15 ASIC says it will investigate.

Apr 16 ASIC warns unitholders not to transfer shares into fictitious names to avoid next $1 payment.

Apr 21 Macquarie says it will take up to 50,000 units from investors for free.

Apr 24 Class action launched.

Apr 29 Second $1 payment due.

CASE STUDY

While all around him wanted to sell, David Barrow was trying to buy BrisConnections stock.

But stockbrokers wouldn't let him.

The scriptwriter, producer, aspiring lawyer, boxer, jump-rope champion (1996), entrepreneur and merchant banker (for three months) is a natural for a role in the BrisConnections farce.

More to the point, he's corporate trustee for the Julie Anne Barrow Charitable Trust, which limits his liability to whatever assets the trust has.

"I only popped up when someone put me on to an article at the last weekend in March," he says.

It was a feature on Nicholas Bolton, who within weeks had pocketed $4.5 million by selling his votes for the very meeting he'd called.

"I couldn't sleep for days as my mind was ticking over," David says. "I wondered what would it take to get tickets to the circus of the BrisConnections meeting?"

Still, word got around that the charity was a buyer. Having got into the meeting, he says he spent his time "at the registry".

With about 1.4 per cent of the group - "I know we got everyone over the line who came to us" - he says the deadline to cough up on Wednesday isn't as important as June 4, when the underwriters will auction defaulted units.

Will he be buying? "Well, we'll see", is all he'll say.

What about the $1 owing on the units he already has?

"Well there's always a number of options," he says. "One would be get a financier in who would meet the liability and take on the stock. A very real possibility is legal action (which) most likely will put an injunction on the call."

Besides David says he "looked at fundamentals and thought this is actually quite a good investment".

He says: ""I just play as it goes along. There are thousands of possibilities.

"Who would have thought six months ago the four Bs - Bolton, Barrow, Byrnes and Humphrey B Bear - that that would have happened?"