Banking Bad
Page 8
Sadly, the regulator had been too slow to act. At least two months before Storm collapsed, ASIC had been told the company was in serious trouble and that investors faced heavy losses. ASIC obtained a letter written by Cassimatis instructing investors to dump Storm index funds and switch to cash. The peak lobby group, the Financial Planning Association (FPA), also obtained the letter and quickly launched an inquiry that resulted in Storm’s expulsion as a member. But ASIC didn’t start an investigation until December 2008. By then the markets had plummeted further, CBA had called in its margin loans, and it was too late to help Storm investors.
*
I was working at The Australian’s Melbourne bureau as the Storm scandal unfolded, and was appalled by the behaviour of both Storm and CBA, and by the heartbreaking stories of Storm clients. But another scandal was waiting to be uncovered closer to home.
Tricom and Opes Prime were two relatively large and well-known stockbroker firms that touted a variation on margin lending, known as securities lending. Their operations were largely facilitated through ANZ’s equity finance business. Unlike a margin loan, where the investor at least owns the shares they’ve borrowed to buy, a securities loan strips away the investor’s beneficial ownership of the shares, leaving the client as an unsecured creditor, behind the banks, if the stockbroker hits financial trouble. The attraction is that the securities loans allow investors to leverage small-cap, high-risk stocks that would be excluded from margin loans. But most of Tricom’s and Opes Prime’s clients didn’t realise they had signed up for securities lending rather than a margin loan.
Tricom hit the skids in late January 2008 – the beginning of the GFC – after the sharemarket plunged 5 per cent, triggering margin calls among its 29,000 clients. Tricom’s main creditors, largely ANZ, panicked and froze $1.5 billion in assets held by the broker. Tricom was forced to dump shares on the sharemarket so that ANZ, as the secured creditor, could retrieve its money. An insider was feeding me information about the pandemonium going on, which I then reported on.2 Selling such a large number of shares in an already volatile market wreaked havoc, and thousands of investors were hit with margin calls as the share price of smaller stocks went into free fall.
Tricom’s problems undermined confidence in Opes Prime, as they both offered a similar product, had a similar legal structure, shared the same financiers and did business together. In March 2008 Opes Prime collapsed as ANZ moved to rapidly sell the stockbroker’s share portfolio, exposing more than 1200 clients to huge losses. Twenty-three companies were placed in trading halts while they rushed to find buyers to prevent their share prices collapsing.
Adding to the intrigue was the fact that Opes Prime was the broker of choice for the criminal underworld. When it collapsed, some shady figures began to emerge, including figures linked to money laundering, sharemarket manipulation and other illegal practices. Back in 2006, ANZ had made the fateful decision to extend its share lending facilities beyond the blue chips and members of the ASX200 to all ASX-listed shares. Previously, margin lending had only been used with blue-chip stocks such as BHP Billiton and the banks, but there was no law to enforce this and, as with the US sub-prime mess, financial engineers started targeting small-cap stocks, which were easier to manipulate. This opened up opportunities to invest in the bottom end of the market.
Colourful Melbourne identity Mick Gatto flew to Singapore in a bid to find more than $1 billion worth of assets some of his clients believed were hidden by Opes Prime. ‘I have a good track record of tracking things down,’ Gatto told me. ‘You can run but you can’t hide, and you can quote me on that.’3 Nobody ever got to the bottom of what Gatto was up to, but his involvement turned the spotlight on Opes Prime and what it had been doing, all under the auspices of one of the biggest banks in the country, ANZ.
Two of Opes Prime’s founders, Laurie Emini and Anthony Blumberg, were jailed in 2011 for breaches of directors’ duties over their role in the collapse. ASIC entered an enforceable undertaking with ANZ and Merrill Lynch, to enable 1200 Opes Prime creditors to receive thirty-seven cents in the dollar. In return, ASIC wiped the slate clean on all pending and future litigation against ANZ and Merrill Lynch. ASIC did the deal before it had even completed its investigations into Opes Prime.
*
Covering the GFC was like riding a rollercoaster every day, as more revelations came out about the failings of the global banking system, largely driven by the greed of banks and other financial institutions and enabled by lax regulators. The entire financial system was over-leveraged – meaning loans were secured by undervalued stock – but nobody seemed to have seen the crash coming.
At the time, I was regularly ringing close contacts, including banking analyst Brett Le Mesurier, for his company’s take on the collapse of the major financial services company Lehman Brothers and what it meant in the Australian context. The message I was getting was that Macquarie Bank was bearing the brunt of the market’s concern. Its shares had fallen 7 per cent – a substantial decline, but not catastrophic.
The real activity was happening in the credit markets. Subordinated debt – debt that ranks below other loans or securities in the event of a company collapse – ended the day of the Lehman crash at 500 basis points, or 5 per cent. (In financial markets, interest rates are described in terms of basis points, where 100 basis points is equivalent to 1 per cent.) Macquarie’s senior debt – debt which is senior within a company’s capital structure and is therefore first to be repaid ahead of bond and equity investors – soared to a spread of 320 basis points. That meant Macquarie would have to pay increasingly higher prices to persuade investors to buy its debt – the lifeblood of any financial institution – if the crisis continued. In comparison, Citigroup’s senior debt was trading at an interest rate spread of 300 basis points, while J.P. Morgan’s senior debt was trading at a spread of 200 basis points. The high interest spread on Macquarie’s debt was a clear sign that investors were worried that Macquarie was carrying too much risk on its balance sheet.
The response of the credit markets to Macquarie’s debt, coupled with a report Le Mesurier had written two months earlier on Macquarie’s funding profile, prompted me to write a column in The Australian warning: ‘The reality is that by March next year Macquarie needs to refinance $45 billion of debt. While most of it will be relatively easy, more than $5 billion could prove difficult to get away at a decent price and decent length of time.’4
On the same day, Macquarie issued a statement to the ASX trying to calm investor concerns by suggesting the article was false. ASIC also issued a statement to say that it was looking into alleged false rumours about a number of companies, including Macquarie Group. ‘Pushing false rumours designed to harm a company, such as by forcing a share price down, is illegal,’ it said.5 The practice was known as ‘rumourtrage’.
At 1.30 pm that day, Le Mesurier told me he’d received a call from the compliance department of his employer to say that ASIC investigators wanted to talk to him as soon as possible. They organised a time of 3 pm that day.
Le Mesurier was taken aback by the speed of ASIC’s approach, particularly given his research had used Macquarie’s own disclosures on their funding profile. During the meeting, he was asked what his analysis was based on; he explained that he’d thought Macquarie’s disclosures did not put sufficient focus on their reliance on short-term funding. He was also asked about my article, specifically how I had come by his report and the reason I had written the column. He was further surprised when a journalist from the Financial Review rang him later that day and asked him about the ASIC interview, even mentioning the time of 3 pm. The meeting was supposed to have been confidential, but someone was clearly keen for it to be leaked.
The whole point of my story was that if Macquarie was to continue its operations in the same manner, then refinancing would be an issue. The fact that the Australian Government subsequently guaranteed the debt of Australian financial institutions shows those fears were well founded.
It was also my first real taste of the role of the media in protecting the banks. Eric Beecher, the co-publisher of online newspaper Crikey wrote an op-ed piece lambasting my article as ‘highly speculative, highly questionable, highly irresponsible and highly damaging’. He went on to say, ‘The Australian and its owner could be singly responsible for undermining confidence in Australia’s largest investment bank and, as a result, in the Australian financial marketplace.’6 It was a surprising attack.
What Beecher left out was that Macquarie – whose shares had, by then, plunged 38 per cent to their lowest level in five years – was a major sponsor of his other online website, Business Spectator. Greg Baxter, the media adviser to News Ltd, which owns The Australian, wrote in a letter to Crikey that was published on their website, ‘Crikey was incredibly agitated yesterday about coverage in The Australian of one of Eric Beecher’s advertisers, Macquarie Bank.’ He said ‘coming to the defence of an advertiser is admirable in management, but not such a good look editorially’.7
Former Crikey editor Stephen Mayne then weighed in, writing a separate Crikey piece in which he called my article ‘reckless’, saying, ‘In the current environment you just can’t say a bank has $45 billion repayable in nine months if it’s not true.’8 He went on to write in his Mayne Report, ‘The Australian has been running a vicious campaign against Macquarie . . . and for the past three days the paper has been recklessly fear mongering about its financial strength.’9
J.P. Morgan then published a report saying Macquarie had $46 billion of borrowings that it needed to refinance within a year. Beecher was silent on that one.
Over the following days, the rumour mill went into overdrive. Stories emerged that I was being investigated by ASIC for ‘rumourtrage’. A major market integrity investigation known as Project Mint was established, focusing on false rumours and their effect on market prices. It was spearheaded by a senior ASIC commissioner, Belinda Gibson.
The rumours settled down and everyone got on with their business until a story appeared in the Fairfax papers on 14 January 2009 suggesting ASIC had stepped up its investigation into ‘false rumours spread last year about the financial position of Macquarie Group’.10
In an attempt to get some answers and an insight into ASIC and why it had so quickly launched an investigation into me, I lodged a Freedom of Information request to ASIC in December 2018. The FOI request confirmed that ASIC had launched its investigation on the same day my story was published. Most of the documents were redacted, including who had made the allegation that I had committed a criminal offence. They revealed that on 24 September 2008 Belinda Gibson and five ASIC investigators had held a meeting to discuss me and the article and the findings of one of its staff, Dennis Ho, who had analysed the numbers underpinning my article. He had determined that it was based on credible evidence. A decision was made at that meeting to drop the case.
I also discovered through the FOI process that a high-profile journalist had been actively forwarding my Macquarie articles to Gibson. It made two things clear to me: ASIC could act decisively when it suited its agenda and the media had a lot to answer for when it came to protecting the banks.
The collapse of Tricom, Opes Prime, Storm Financial and other financial organisations showed that the world of banking hadn’t changed since the foreign currency loan scandal that embroiled all the banks. In all these cases there were attempts to play down the scandals, even cover them up.
*
When parliament returned from the summer break on 11 February 2009, Wacka Williams fulfilled the promise he’d made to the gathering at the Golden Ox in Margate and sought a notice of motion in the Senate to establish a parliamentary inquiry, which was successful. Labor was in government and decided to take it out of Wacka’s hands, appoint Bernie Ripoll as the chair, and run it in the Parliamentary Joint Committee on Corporations and Financial Services. The inquiry had a mandate to investigate recent financial collapses including Storm and Opes Prime, and the roles of CBA, ANZ and ASIC in those events.
As the inquiry wrapped up on 23 November 2009, Wacka gave a speech in parliament that summed up his feelings: ‘My time on this committee inquiry has left me with indelible memories of the wholesale human suffering experienced by the victims of these corporate collapses . . . The victims of the Storm collapse can never be adequately compensated for the anguish, heartache, anxiety and psychological suffering they have been forced to endure. Sadly, suicides and threats of suicide have been part of the fallout from the collapse of Storm Financial.’11
By that time, law firms dealing with class actions had waded in and launched actions against CBA, Bank of Queensland, Macquarie and others. CBA paid out compensation of$270 million, Macquarie Bank agreed to pay $82.5 million to victims and the Bank of Queensland signed off on a $17 million compensation deal for victims of Storm.
*
It took the justice system another eight years to finalise proceedings against the owners of Storm Financial. In March 2018, Emmanuel and Julie Cassimatis were each fined $70,000 for breaching their directors’ duties and disqualified from managing corporations until 2025. An ASIC press release reported, ‘It draws to a close ASIC’s Storm-related litigation, which has included investors receiving compensation in relation to losses suffered on investments made through Storm.’12
It might have been over for ASIC, but it wasn’t for anyone else. A month later, Cassimatis filed an appeal, which was heard in February 2019 before the Federal Court, which reserved its judgement. Emmanuel and Julie Cassimatis told Tony Raggatt at the Townsville Bulletin their fight was ‘just beginning’. ‘I promised my clients that I would battle for them and ourselves till my last breath and I have been doing that,’ Emmanuel Cassimatis said, adding that the appeal would be fought on the basis that Storm had been solvent and as directors he and Julie had acted honestly and in accordance with the wishes of shareholders.13
Chapter 6
Profit before people
Unmasking CBA’s rogue planners
JEFF MORRIS WAS DESPERATE. His wife was ill and he needed a stress-free job close to home to help look after his young children. A job as a financial planner at the local Mosman branch of Commonwealth Financial Planning seemed ideal.
He was overqualified for the role, having worked in a number of high-powered jobs in his twenty-five-year career, including as vice president of investment bank Bankers Trust, but this was not the time to focus on his career. In any case, it was March 2008, financial markets were still performing well, CBA was hugely profitable and its reputation was unblemished. What could go wrong?
A lot, as it turned out. A month earlier, on 29 February 2008, ASIC had written a damning letter to Tim Gunning, the general manager of wealth management at Commonwealth Financial Planning and Financial Wisdom, after conducting surveillance over a six-month period in 2007. The letter said ASIC had interviewed senior staff and reviewed 496 examples of advice selected at random from fifty-one financial planning representatives. Of those fifty-one representatives, it had rated thirty-eight as ‘critical’.1
For an adviser to attract a ‘critical’ rating, there had to be evidence of ‘fraud and dishonest conduct’, ‘deliberate or reckless failure to disclose fees, costs, charges, relationship and warnings’ and ‘no evidence of appropriate advice’. In response, CBA had dismissed twelve of the thirty-eight representatives and reported seven to ASIC, ASIC’s letter to Gunning noted. That meant it had kept twenty-six dishonest advisers on its payroll. Given it was a sample of fifty-one advisers, it should have raised alarm bells that the division had systemic issues.
ASIC said there seemed to be a ‘correlation’ between the amount of business that repre
sentatives wrote and CBA not terminating their employment. In other words, if a star adviser did the wrong thing, the bank turned a blind eye.
What was even more worrying than the nondisclosure of fees and commissions and the poor record-keeping was the fact that, according to ASIC, CBA’s compliance framework ‘wasn’t adequately detecting serious misconduct’. ASIC was ‘particularly concerned about the findings from this surveillance, given many of them had already been put to CBA in 2006, after a smaller surveillance was undertaken of its Bankstown branch and Financial Wisdom’s Cairns branches’.
In other words, ASIC had gone inside CBA in 2006, and conducted surveillance and found serious problems with the bank’s systems, files and some of its financial planners. But instead of taking action, ASIC had left it to CBA to sort out these issues. By 2008 the problems had become worse. Yet ASIC’s only response was to write a stern letter to Gunning.
*
Against this backdrop of festering misconduct, Morris was inducted as a CBA financial adviser. What he encountered was the sales- and profit-focussed culture that had flourished under David Murray and Ralph Norris. Monday mornings would begin with a sales meeting and watching CBA television appearances featuring chief executive Ralph Norris or some other senior executive extolling planners to ramp up sales figures. As Morris recalled, ‘The poor branch manager would have to go through this terrible American sales process as to how we were going to shoot the lights out on some sales target or other.’
Practice managers, whose job was to manage the financial planners, would ask the planners for details of their past week’s sales and their next week’s pipeline of business. At the weekly meetings certain products were identified for the planners to flog. Sometimes it was life insurance, sometimes managed funds or some other CBA financial product.