OPES PRIME COLLAPSE: Billion dollar bust

On the Thursday before Easter some of the directors of Opes Prime Stockbroking discovered what is euphemistically known as "irregularities” with some of the trades – also known as a hole in the accounts.

They told their main lender, ANZ, and the bank agreed to provide some more funding until the problem was sorted out.

They also sent several employees home, including the managing director and major shareholder, Laurie Emini, and told them not to come back.

By Tuesday, after the Easter break, ANZ was getting worried, so it asked the head of Deloitte's corporate re-organisation group, Chris Campbell, to go in and have a look.

Imagine his surprise to find that hole had either got bigger, or was bigger already; by yesterday afternoon the situation was hopeless and the directors had no choice but to appoint a voluntary administrator – John Lindholm of Ferrier Hodgson – automatically triggering ANZ's appointment of Campbell as receiver.

For the record, ANZ is owed $650 million and Merrill Lynch is owed about $400 million. Both say they are fully covered by security (shares), of which they have already taken possession and are already selling into the market.

That, at least, is the bare bones of what is likely to be the most spectacular and messiest fiasco of this bear market.

That's firstly because ASIC is now investigating breaches of the Corporations Act, while ASX is talking about "irregularities”, having cancelled the firm's licence.

This afternoon Chris Campbell said in answer to a question: "I hesitate to say whether funds have been stolen. That is unclear at this stage.”

And the second reason this collapse will be spectacular and messy is that about 1200 retail clients of Opes are about to be traumatised by the sudden and utterly unexpected loss of their wealth – up to $1 billion.

Opes has at least one thing in common with Tricom – investors who use the firm to buy shares on margin have assigned beneficial ownership of their entire holdings to the broker – including their original collateral (whether they know it or not, and often they don't).

Opes' business model is, or rather was, that it lends as a finance broker on commission on behalf of ANZ and Merrill Lynch and takes full ownership of the scrip provided as collateral. It then lends that stock for a fee to short sellers, along with stock provided by institutional investors – for another fee.

Now that Opes is in receivership, its secured lender, ANZ, now effectively owns all of the shares that had been put up as collateral. Some of it is already being sold, the rest has to be recovered from those who borrowed it.

To be clear: all of the shares that Opes Prime's margin loan clients think they own, and owned before they dealt with Opes, are now owned by ANZ – no matter how small their loan is.

For example, I heard of a real case this morning of an investor who bought $1 million worth shares through Opes, of which $250,000 was borrowed. The entire $1 million has now been lost and the investor becomes an unsecured creditor of Opes Prime.

So that person will lose $750,000 in assets simply through the mistake of using Opes Prime as broker and lender for a third of that amount. That story will be repeated many times over.

What happened? Well, the Australian Securities Investments Commission has formed a "special team” to investigate, and the ASX said that the appointment of receivers was required due to "a number of internal stock and cash movement irregularities”.

No one is explaining what this means, exactly, but ASIC and Deloitte's investigators are now, as I write, poring through Opes filing cabinets and hard drives collecting material.

This, of course, raises the immediate question of what the directors knew and should have announced last Thursday.

It seems likely that the company may have been insolvent at that time, and perhaps before then.

When I asked Chris Campbell this morning whether Opes had been effectively insolvent last week, he said: "That's a job for John Lindholm”, meaning that if it was insolvent before Easter, and continued to trade, Lindholm would have a claim against the directors for trading while insolvent.

I asked Campbell which, if any, of the directors were co-operating with him. He said one was – Anthony Blumberg. He had heard from Julian Smith, but had not heard from any of the others, including the chairman, Peter Gillooly.

Some of the 80 employees, all of whom are very distressed, are helping to man the phones for equally distressed clients. (The phone number, by the way, 03 9618 7577, although there may be a wait.)

Opes Prime was founded in 2003 by Laurie Emini and Julian Smith as a specialist securities lending and margin lending broker.

Emini is a long-time ANZ Bank executive who rose to general manager of ANZ Nominees. He took over the bank's securities lending division in 1990 before moving across to its stockbroker ANZ McCaughan Securities in 1992. During the 1990s he had a number of jobs involving securities lending.

Julian Smith was an investment banker with Morgan Stanley in London who joined The Boston Safe Deposit and Trust Co in 1986 as head of securities lending. In 1993 he moved to Australia to head the securities lending department of Ord Minnett, also serving as chairman of the Australian Securities Lending Association for a few years from 1994.

He and Laurie Emini got together in 2001, and in 2003 they launched Opes Prime as a specialist stock lending firm with Anthony Blumberg, another local stockbroker. Last year the hapless Peter Gillooly, former chief general manager of Tattersall's, joined them as non-executive chairman.

Now it's all gone pear-shaped, with Laurie Emini sent home by his colleagues, the ASX suspending their operating licence, an ASIC team investigating potential breaches of the law, receivers from Deloitte now running the business, such as it is, and the clients losing all their money.

The two lenders – ANZ and Merrill Lynch – look to be entirely covered. Whether there will be anything left for the unsecured creditors, represented now by John Lindholm of Ferrier Hodgson, is another matter entirely.

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