Dixon Advisory on warpath over Lift

One of Australia's biggest financial planning groups, Dixon Advisory, has become deeply embroiled in the collapse of stock lending operation Lift Capital. Alan Dixon, the managing director of the Canberra-based group, told Eureka Report his firm is now looking at its legal options. Dixon claims the Lift Capital documentation used by his clients was “misleading” and flags the possibility that Lift's administrators – McGrathNicol – could sue the broking house, Merrill Lynch.

A clearly outraged Dixon says the group – which includes his father, noted superannuation expert Daryl Dixon, and financial commentator Max Walsh at the helm – had “less than 100” clients in Lift Capital. Most of the clients also had conservative loan to valuation ratios of 50%. Dixon says his firm was not the only financial planner caught up in the Lift Capital collapse. “I feel real sympathy for smaller groups who need to extricate themselves from situations like this,” he says.

As criticism mounts over the role of financial planners in directing clients to what turned out to be “high-risk” stock lending operations, Dixon is determined to clear the company name. “I believe the Lift documentation was seriously misleading. The absolute worst-case situation we thought could exist was that they suddenly set the loan-to-value ratios to zero percent, and you would have somewhere between one and three days, depending on the agreement, to choose which securities to sell in order to pay out the loan.” He said the true risk of Lift’s product was hidden from clients and their advisers.

It is understood that most Dixon clients were in a product called SuperLIFT, which was specifically designed for DIY superannuation trustees.

In common with collapsed stocklender Opes Prime, however, even if a client’s shares were only 30% or 50% geared, 100% went to Lift’s creditors when the lender fell over. And, as with Opes, Merrill Lynch liquidated the shares, as per its master securities lending agreement, or AMSLA, it held with Lift. (To read how AMSLA's work click here.)

In common with many senior executives in the financial services industry, Dixon says he is appalled. “That they would sell more than what you owed was not something we ever would have expected to happen. It's absolutely extraordinary that all the securities have been sold because Lift has gone under, or hasn't been able to get any more wholesale funding. There's nothing in the Lift documentation that warns you of that risk,” Dixon says.

Buried deep in the SuperLIFT product disclosure statement, however, is Clause 20.6:

The Lender may hedge any liability obligation or risk the Lender has or might have under the terms of this agreement by entering into physical or derivative transactions over the Relevant Securities in your portfolio (including using your relevant securities as collateral) without giving you notice or requesting your consent. You have no right, interest or entitlement that arises from such arrangements entered into by the Lender.”

However, this disclaimer is not sufficient, according to Dixon. "One simple clause needs a whole lot of further explanation to suggest that they can sell essentially your entire portfolio.

“If we get to the point where one tiny clause completely changes the whole context of the rest of the document and can completely destroy the customer's legal rights then there's no point in having Corporations Law or a Trade Practices Act.”

Commenting on the role of Lift and stockbroker Merrill Lynch in the affair, Dixon says: “I’m extremely disappointed in the behaviour of those directors. If they had got on to this problem a lot earlier by saying, 'We can no longer lend against managed funds', they would have started improving their book.

“The other thing that’s so disgraceful is that Merrill Lynch and Lift couldn’t sit down together and say, 'We’ve got a fundamentally good book of securities here, we’re dealing with 50 financial planning groups and let’s give them a month to refinance and avoid this mess'. It’s just a disgrace. We could have had all our money refinanced or moved to another margin lender.”

It could also be a case of David going against Goliath. “It really makes me think of the position that retail investors must find themselves in," Dixon says. "We’ve got the ability that we’re at least a larger firm, but obviously the administrators and Merrill Lynch have a huge budget to go and assert their rights. It is hard. I feel real sympathy for smaller groups who need to extricate themselves from situations like this.”

A spokesman for Merrill Lynch made no comment on the affair. Representatives of the McGrathNicol group were unavailable for comment. A spokesman for the corporate advisory firm, however, did not rule out the possibility of a lawsuit against Merrill.

Dixon’s argument rests on the fact that SuperLIFT was promoted as a standard instalment product, not a securities lending agreement, and instalment arrangements have been used in self-managed super funds for years. The SuperLIFT product was indeed similar in many ways to a Telstra T3 or Macquarie Airports instalment, whereby the issuer provides economic ownership of a share upon partial payment.

SuperLIFT was a simple, low-geared and innocuous-appearing alternative to margin lending that Dixon and other planners believed would be good for clients investing in a range of blue-chip shares. Loan to valuation ratios were, furthermore, capped at 50%, unlike the extraordinary LVRs that Opes had in its accounts.

What happened, though, was when Lift saw a run on its book, in the wake of the Opes collapse, it was left with little option other than to go into voluntary administration. Although there had been media speculation that Lift had similarities to Opes, it came as a great shock to that SuperLIFT clients would see their shares sold off by Merrill Lynch in the same manner.

It emerged that Lift was effectively a conduit and although clients and planners had signed and cited contracts for instalments, these were in turn backed by an AMSLA between Lift and Merrill. Ultimately, the traders at Merrill took the shares, sold them and clients were left with the charred remains of a bear market fire sale, and – most likely – a capital gains tax liability.

Although Lift’s instalment structure existed before the changes to super gearing rules in September 2007, it adds another dimension to the Lift Capital fallout. Dixon says that, in general, flexibility in gearing is a good thing if approached carefully.

Andrea Slattery, the chief executive of the SMSF Professionals’ Association of Australia (SPAA), says the association plans to make a submission to the Federal Government about gearing in funds, but couldn’t comment at this stage.

The SPAA’s submission will come alongside one from the Association of Superannuation Funds of Australia, which calls for advisers who recommend self-managed super to hold a financial services licence. As Bruce Brammall has pointed out, the Rudd Government has expressed concern about management of the SMSF sector and announced a review in February.

Superannuation Minister Senator Nick Sherry is doubtlessly noticing the effects of Lift’s fallout. Two of his family members were Lift clients and in this bear market of illiquid credit and high uncertainty, the Government will want to be seen to be making a firm stance.

“If Lift and Merrill get away with this, it will be a black day for the Australian retail investment community,” Dixon says. “At what point is the Government going to act?”