Lessons from Lift Capital

Local directors of US investment bank Merrill Lynch are facing the possibility of court examination by the liquidator of margin lending business Lift Capital as a precursor to potential legal action against Merrill for breaches of the Corporations Law.

Merrill is also being pursued in a civil action brought in the Federal Court by two former clients of Lift, Gillian Swaby and Rick Crabb, who are claiming Merrill did not have the right to sell shares transferred to them by Lift and held as collateral for margin loans.

The Lift collapse has been a disaster for Lift's 1600 clients who have lost up to half the amount they invested. But the legal actions surrounding what happened could help to clarify the rights of those who take out margin loans.

Financial planners gave clients of Lift a product disclosure statement that said they were entering into a "first mortgage secured” margin loan over the top 200 ASX stocks. They were not aware that their shares were pooled and offered as collateral to Merrill Lynch for a $700 million loan.

Tony McGrath and Joseph Hayes of insolvency specialists McGrathNicol are pursuing Merrill Lynch to recover $32 million lost by Tony Famularo, an options trader who borrowed about $300 million from Lift as part of an elaborate options trading scheme.

Famularo will soon be issued with a summons to appear in court and answer questions under oath about his financial position and his capacity to repay $32 million owed to Lift.

Merrill liquidated Famularo's share and options portfolio after McGrath and Hayes were appointed administrators on April 10 this year.

The liquidation of assets after the appointment of administrators raises the prospect of potential claims against Merrill under various sections of the Corporations Act including provisions that say only an administrator can deal with company property and that during an administration a person cannot enforce a charge without the administrator's consent.

McGrath and Hayes are also examining a potential claim that Lift's contract arrangements with Merrill were "voidable on unconscionable conduct grounds”. They will also examine whether any floating charges imposed in the six months before the collapse can be declared void.

Merrill is ready to "vigorously defend itself” in any litigation arising from its role in Lift Capital's collapse, according to its latest quarterly filing with the US Securities and Exchange Commission.

McGrath and Hayes were given the powers to pursue Merrill last week when they were appointed joint liquidators of Lift. Up until that time Merrill had been negotiating to achieve a deed of company arrangement.

They said they had requested Merrill to clarify their relationship with Famularo and an examination summons would be issued if necessary. However, settlement remained the favoured outcome.

The Lift collapse has earned McGrathNicol about $3.68 million. Creditors have been told that it will cost another $2.5 million to complete the work.

The final tasks could include debt collection and possible litigation against all Lift clients with outstanding margin loan accounts. Lift clients with loans totalling $27 million are still paying interest at 7.35 per cent. The loans are now repayable.