Lift liquidator failed to protect investors, says options trader

OPTIONS trader Tony Famularo says he could have turned a profit had he been allowed to trade out his option positions in the wake of the collapse of margin lender Lift Capital.

By InvestSMART · 6 Feb 2010

By InvestSMART ·
6 Feb 2010

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OPTIONS trader Tony Famularo says he could have turned a profit had he been allowed to trade out his option positions in the wake of the collapse of margin lender Lift Capital.

The 64-year-old used the final day of a three-day Federal Court hearing to argue the liquidator of Lift Capital could have protected his $345 million share and options portfolio from huge losses had it taken several relatively simple steps.

Mr Famularo outlined a hypothetical trading strategy, which he argued would have avoided the $48 million loss incurred when Merrill Lynch sold down his call options on BHP and Telstra shares between April 10 and April 17, 2008.

Merrill Lynch controversially took possession of more than $700 million of investors' stock and options contracts and sold them to recoup its loans to the margin lender.

Merrill Lynch had closed out his trades without any consideration of how it would affect him, Mr Famularo said.

The NSW Supreme Court found last year that the transfer of the stock from Lift to Merrill Lynch was a "breach of trust".

Mr Famularo said he would have counteracted the liability on the sold call options he held in April 2008 by buying new call options, and would have traded to a profit.

The trading strategy was just a process of buying options contracts and would not have required the outlay of further funds or security, he said.

Merrill Lynch's counsel, Tom Bathurst, QC, said that Mr Famularo did not suggest the trading strategy to the administrators at the time and "can't complain now" about the way the shares were sold down.

"It's all a bit late 18 months down the track," Mr Bathurst said.

Ian Jackman, SC, counsel for the Lift liquidator, echoed Mr Bathurst's comments, saying there was "no explanation why [Mr Famularo] didn't put this strategy [to the liquidators] between April 10 and 17".

Mr Bathurst also said that Mr Famularo's hypothetical trading plan may also have hit a hurdle when the Australian Clearing House and his broker demanded a higher level of security for the purchase of new call options.

According to Mr Bathurst, Mr Famularo's trading strategy was not workable because he could not have executed it all on April 10, the day Lift Capital was placed into administration.

The liquidator argues that Mr Famularo owes it $32 million, but Mr Famularo says this calculation is wrong.

He has launched the Federal Court case in an attempt to have his claim for $103 million recognised by McGrathNicol, the liquidator of Lift Capital.

Mr Famularo has been joined in his legal fight by 26 companies.

Through these companies, more than 100 investors placed their life savings with him. If Mr Famularo's case fails, theses investors are likely to lose their investments.

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Frequently Asked Questions about this Article…

What happened when margin lender Lift Capital collapsed and how did it affect investors?

When Lift Capital collapsed in April 2008, Merrill Lynch took possession of more than $700 million of investors' stock and options to recoup loans and sold them down between April 10 and 17. That sell-down is linked to large losses for investors, including a claimed $48 million loss for options trader Tony Famularo.

Who is Tony Famularo and what claim is he making in the Federal Court?

Tony Famularo is an options trader who says he managed a $345 million share and options portfolio and could have made a profit if allowed to trade out his positions after Lift Capital's collapse. He has launched a Federal Court case seeking recognition of a $103 million claim against McGrathNicol, the liquidator of Lift Capital, and has been joined by 26 companies representing more than 100 investors.

Why does Famularo say the liquidator failed to protect investors after the Lift Capital collapse?

Famularo argues the liquidator could have protected his portfolio by taking simple steps such as buying replacement call options to neutralise liabilities after Merrill Lynch sold his call options on BHP and Telstra. He says that strategy would have avoided the $48 million loss and would not have required additional funds or security.

What did the NSW Supreme Court decide about the transfer of stock from Lift Capital to Merrill Lynch?

The NSW Supreme Court found that the transfer of stock from Lift Capital to Merrill Lynch was a 'breach of trust,' a finding cited in Famularo's legal argument about the propriety of the sell-down by Merrill Lynch.

Why is Merrill Lynch's sale of the stock and options controversial?

Merrill Lynch controversially took control of investors' stock and options and sold them to recoup loans to Lift Capital without consideration of how those sales would affect certain clients, according to Famularo. The sell-down timing and consequences are central to claims that investors suffered unnecessary losses.

What is the liquidator's position and how much do they say Famularo owes?

The Lift liquidator, McGrathNicol, argues Famularo owes about $32 million. Famularo disputes that calculation and is seeking Federal Court recognition of his $103 million claim.

Could Famularo's proposed options trading strategy realistically have been executed in April 2008?

Merrill Lynch's counsel and the liquidator's counsel say Famularo never proposed the strategy to administrators at the time and that it may not have been workable on April 10 due to practical hurdles — including likely additional security demands from the Australian Clearing House and his broker — which could have prevented buying replacement call options.

What are the potential consequences for everyday investors if Famularo's case fails?

If Famularo's Federal Court case fails, the article says more than 100 investors who placed life savings through the 26 companies that joined him are likely to lose their investments, making the legal outcome highly significant for those retail investors.