How MFS tried to keep the dream alive

O n the Saturday night that John Howard's dynasty was swept into history, Michael King stayed up to campaign by email for the one vote he needed to keep his $1.5 billion investment group, MFS, from a similar fate.

As Kevin "07" Rudd made his victory speech at Brisbane's Suncorp Stadium, just after 11pm, down the Pacific Highway near the Gold Coast, King was continuing the negotiations he had begun by computer at 7am  well before the polling booths opened. Coincidentally, MFS's chairman, the former Liberal leader Andrew Peacock, had swept Howard aside 20 years earlier.

For King, the political battle of the day was persuading David Kelleher, a Sydney chief of the Australian arm of Fortress Investment Group, the US hedge fund, to give MFS another stay of execution on the $250 million it needed to repay within a week.

The bargain King eventually struck with Kelleher, and other actions to meet Fortress's November 30 deadline, are now subjects of an Australian Securities and Investments Commission civil suit in the Queensland Supreme Court.

ASIC is trying to claw back up to $147.5 million from King, three other former executives and three MFS subsidiaries  money the corporate regulator claims was debt drawn against the assets of the then MFS-managed Premium Income Fund, but wrongly used to repay liabilities of MFS companies rather than benefit the fund's investors.

ASIC wants to prove not only that MFS's management team wrongly used other people's money to bail out their companies, but that King's deputy and brief successor, Craig White, the then chief financial officer, David Anderson, the head of its investment management arm, Guy Hutchings, and the former fund manager Marilyn Watts also tried to legitimise the late 2007 financing arrangements by organising the fabrication and backdating of documents early last year.

King and Anderson have told Businessday they are looking forward to having the matters aired and resolved in court. Businessday was unable to get responses from White, Hutchings or Watts.

Among documents filed by ASIC in the case is a draft statement of claim based on its ferreting through the hard-drives of those involved. ASIC also revealed that King and others from MFS were subjected to an interview under Section 19 of the Corporations Act  which compels people to attend, and forbids them from telling anyone it even happened, let alone the content.

ASIC's claim states that King appeared before it in August last year.

MFS, which King and fellow solicitor Phil Adams had created out of their property lending within the Gold Coast law firm McLaughlins, collapsed a few months later under the weight of $2.7 billion of debt.

King, who in recent months signed a three-year personal insolvency deal with his creditors, says he is living in a "shed" on his ambitiously named Elysian Fields polo estate in the Gold Coast hinterland. The estate is now being managed for those to whom he reportedly owes up to $130 million  much of it due to margin calls on his and Adams's now worthless, jointly owned stake in the deceased MFS.

Technically, the MFS subsidiary MFS Castle had borrowed the money from Fortress, but was backed by guarantees from the parent company and MFS Financial Services. The $250 million had been due on August 31, but MFS had won one extension to November 30.

According to ASIC's claim, King showed, in an email sent at 6.03am on November 22 to the then head of MFS's lucrative Stella tourism arm, Rolf Krecklenberg, he was aware that MFS group did not have the money to pay Fortress  and he "admitted" it in his Section 19 examination.

In his first email to Fortress's Kelleher on election morning, ASIC claims, King offered to repay $25 million of principal to Kelleher immediately, so long as it won an extension on the balance. Emails over the next three days, many copied to White and Anderson, resulted on the Monday with MFS agreeing to pay $100 million by Friday  including a $3 million "extension fee" to Fortress  and the rest by February 29.

The crux of ASIC's case is that King and his team then signed off on a loan amendment for which MFS would struggle to find the cash. That hovers on the brink of trying to argue that MFS was trading while insolvent (that a debt had been incurred which company officers knew could not be paid when it was due).

That Monday evening, King received an email from his CFO, Anderson, informing him there was $40 million in MFS Investments  the arm run by Hutchings which was responsible for the funds of Premium Income Fund (PIF) and others.

ASIC claims White told King he knew of a way to "obtain $150 million", use part of that to satisfy Fortress and "undertake. . . transactions which would legitimise the use".

In spite of ASIC supporting other allegations against the men by referring to admissions made in their Section 19 interviews, the claim document does not reveal how the commission knows that White made that proposal, or that King agreed to it  or even if anyone else was party to the conversation and told ASIC.

It goes on to say White knew MFS Investments had a $200 million credit line with Royal Bank of Scotland for PIF, and that on November 27 (the day after the Fortress deal), he jointly signed a request to draw down $150 million of that.

On Friday, November 30, in ASIC's view, the millions were zapped from one account to another. RBS sent its $150 million into PIF's operating account (held under the name of PIF's custodian, Perpetual Nominees) at the Commonwealth Bank's Southport branch. MFS Investments then crossed $130 million to another account at the same branch, owned by MFS Administration, which in turn had by mid-afternoon sent $103 million to Fortress's National Australia Bank account.

ASIC says that last transfer was cash belonging to PIF investors, and that under the fund's constitution should have been put into recognised investments.

It argues that three days later, on December 30, MFS Investments put PIF's finance from RBS in jeopardy by allowing the fund's ratio of assets and liabilities to breach the limit allowed under the loan.

It was three weeks, January 23, before RBS sent a formal "Event of Default" notice  and by then King had been forced out after $1 billion of MFS's market worth was destroyed when its shares crumbled from $4 to 99c (triggering the margin calls on his and Adams's shareholding, and that of another director, Michael Hiscock), trading in the shares was suspended (as it turned out, forever), MFS had revealed its debts were larger than thought and that pretty much all of its assets were for sale.

ASIC says that the very next day White and Anderson ordered staff to begin drawing up documents to show the $147.5 million had been invested on PIF's behalf.

A week later, RBS's Bailey demanded details of where its money had been spent. ASIC says that of the list of 12 loans produced by Anderson, and amended by White, only three, totalling almost

$53 million, related to the bank's cash.

It contends that from early February a series of documents were created, revolving around another MSF Investments-managed fund, Maximum Yield, issuing special units to other MFS group companies which paid for them using loans from PIF  thus justifying the $150 million drawdown of money from RBS.

The documents were signed and backdated, says ASIC, and created a trail which even convinced its auditor, PricewaterhouseCoopers, and external lawyers, Mallesons Stephen Jaques, that there had been no breaches.