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Flaws apparent, QC tells court

PRIMEBROKER Securities' business structure had several flaws that made it deeply vulnerable to the "volatile and dangerous" trading conditions that plagued the Australian sharemarket in 2008, a court has heard.

PRIMEBROKER Securities' business structure had several flaws that made it deeply vulnerable to the "volatile and dangerous" trading conditions that plagued the Australian sharemarket in 2008, a court has heard.

Not only was the share-lending firm overexposed to certain stocks, but about half its portfolio comprised relatively illiquid stocks outside the ASX 300, the Victorian Supreme Court heard yesterday.

As well, Primebroker's retail clients who had lent shares to the firm were under financial stress, fielding repeated margin calls from Primebroker as the sharemarket plunged, the court heard.

"Primebroker was finding it difficult, if not impossible in some cases, to secure from clients the resolution of those margin [calls], and that exacerbated Primebroker's own position," counsel for ANZ Bank, Alan Archibald, QC, said. ANZ is defending lawsuits brought by Primebroker's principals, Sal Catalano and Ian Pattison, and by the firm's liquidator.

Primebroker's principals claim the bank misled them into believing it was committed to supporting the company and staying involved in the securities lending industry when it was planning to exit.

The liquidator wants to claw back payments Primebroker made to ANZ in the six months before ANZ appointed receivers.

ANZ denies wrongful conduct and says it was conducting a "classic work-out" of Primebroker and the Chimaera financial group by trying to assist it through what Mr Catalano and Mr Pattison considered a temporary liquidity problem.

Yet Mr Archibald suggested that, considering the structural flaws, Chimaera's name was "aptly chosen". In Greek mythology it referred to a particular monster in English, "chimaera" had come to mean "a wild, incongruous scheme", and that "does truly reflect the elements of its business".

Mr Archibald said Primebroker's share portfolio in January 2008 was overly focused on stocks such as MFS Ltd. Primebroker had $200 million of MFS shares deposited with ANZ and another counterparty, Fortis, but when MFS shares plunged from above $4 to 99?, Primebroker was hit with huge margin calls.

Mr Archibald said ANZ's conduct as it embarked on a workout, put in place co-operation deeds and offered limited financing terms, was "wholly inconsistent" with Primebroker's characterisation of it.


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