What the media got wrong about the Opes Prime Collapse and Beconwood ruling

After reading the article Opes client loses court Bid, by Chris Zappone in the SMH and the Age, I had a desire to not only consider a career in popular legal journalism but to write a blog about the ANZ Bank, Beconwood Securities and the rest of the companies and individuals that have been affected by collapse of the stockbroker Opes Prime.

Specifically, I will outline why the article above is void of legal comprehension of the decision of Justice Finkelstein in Beconwood Securities Pty Ltd v Australia and New Zealand Banking Group Limited. I will do this by responding to quotations of what was written in the article with my own and Justice Finkelstein’s thoughts as a result of decision.

Luckily for those who are interested in actually knowing what is going on, I have been staying well up to speed with the collapse of Opes Prime. From the controversial sale of millions of shares of Australian public companies by the ANZ to the underworld revenge paths of Mick Gatto, I have been glued to my various news feeds. Throw in lawyer Chris Murphy, many people who have lost millions of dollars (including a good percentage of 7 million dollars of Beconwood’s ‘securites’) and a collapse that is tougher than usual for the average reader to understand and you arrive at what most would consider a media frenzy.

To say that the media err on the side of caution when reporting legal decisions and reasoning to the public would probably not be in line with the approach taken in the above article. Minutes after the “26-page ruling” (direct quote from Chris) was handed down, apparently a sound analysis of the ruling had been made and an article was quickly packaged for the hungry RSS readers such as myself and sent to the front [on]lines.

Other than being aware that the ruling was 26 pages pages long and that Justice Finkelstein answered ‘no’ to a question that I’m not certain the author understood, the article illustrates a shocking understanding of what was actually decided in the case. Further to this, despite the fact that the result is clearly not ideal for those affected by the collapse of Opes Prime which the article outlines, it blatantly mistakes the legal position of the clients of Opes Prime in its first sentence:

Clients of collapsed stockbroker Opes Prime do not have a legal claim allowing them to recover their shares, according to a Federal Court ruling this morning.

It goes on to discuss an agreement at issue that Beconwood didn’t even enter into (Beconwood entered into a varied Securities Lending Agreement (SLA), not the standard AMSLA) and proclaims the validity of this agreement when the construction of the agreement, not its validity, was what was being considered.

“Justice Finkelstein has upheld the legal status of the Australian Master Securities Lending Agreement used by Opes Prime,” the bank said. “That agreement does what it says. Full ownership of the shares is transferred…In a 26-page ruling released in the Federal Court in Melbourne, Justice Finkelstein found that the agreement signed by Beconwood Securities was valid and the plaintiff didn’t have “equity of redemption or other equitable estate or equitable interest” once the shares were lent to the stockbroker.

To outline the significant error in these statements, an introduction to the case is required but put simply, Opes clients still have several causes of action if their alleged misrepresentation did in fact occur. For those of you who are unfamiliar with this whole matter, this introduction will hopefully make it clearer.


The ‘Opes Prime Primer’

Beconwood Securities is one of the many angry clients of collapsed stock broker Opes Prime who is trying to recover the securities (approximately $7 million worth) that were transferred through a securities lending and borrowing agreement (SLA) to Opes Prime in exchange for about 1.1 million dollars of cash that was used to invest in the stock market. As a result of Opes Prime not actually having the money, they had a separate agreement with the ANZ to receive the money in exchange for transferring ownership of the shares transferred by Beconwood to ANZ.

Note here that Opes Prime is effectively acting as a middle man that charges a fee for broking services and advice whilst the ANZ is ultimately the company funding the investments of Opes Prime clients in return for the security offered by each client which in this case were shares in Destra and a few other Australian companies.

As a result of the decline in the stock market in recent times and stockbroking advice you can only assume that you wouldn’t want to pay a fee for, a number of margin calls came in requiring more security from Opes’ clients and ultimately Opes Prime’s liquidity dropped below acceptable levels as a result of a number of factors I will not go into here.

Shortly after, Opes prime was put into administration. Like many other Opes clients, Beconwood had transferred significantly more securities (value-wise) than the amount of cash that they had received and are making any attempts possible to legally compel the return of their shares (they will receive a certain amount as a result of the liquidation but this is not at issue). Separately, I will discuss the reports of certain high profile Opes clients having received significantly more cash than the security they had transferred but suffice it to say that there may be some very interesting outcomes if this is properly looked into.

Beconwood’s ‘legal claims’

After actually reading the 26 page ruling by Justice Finkelstein, I am able to summarise and reference Beconwood’s actual legal claims. I will say at this point that i know that popular news is not required to get the majority of what it got wrong in this case correct but that perhaps articles like this will make it slightly more likely.

I only do this so that we may have some idea about what was decided and what other legal avenues remain open to Beconwood rather than assuming judges make popular-culture-friendly decisions with unjustified sweeping claims void of reasoning. I might also add at this point that the judgment was very funny in places and well worth a read:

Beconwood proposed to the court that it had a security interest in the shares held by ANZ on a number of bases, of which only two were considered. Thus, Beconwood and the other Opes Prime clients may still have a legal claim as outlined by Justice Finkelstein below:

I emphasise that for present purposes it is neither necessary nor proper to consider (and I expressly have not considered) precisely what representations were or were not made in the meetings and correspondence between Beconwood and OPS, or what Beconwood may or may not have understood regarding the meaning of the terms of the proposed securities facility. At present, it necessary only to note that Beconwood entered into the SLA, the construction of whose written terms is now at issue. It must be remembered, however, that Beconwood contends that if it has not made out its case on the SLA alone, it will still be able to do so when account is taken of representations allegedly made by OPS and which form part of the arrangement, or inform that arrangement.

Justice Finkelstein outlines the two claims considered as follows:

First, Beconwood says that, on its true construction, the legal effect of the SLA is to create a mortgage of its shares in favour of Opes Prime with the consequence that the shares can be redeemed on repayment of the money received from Opes Prime…Beconwood believed that the true character of the SLA is that of a mortgage pursuant to which it borrowed money from OPS and put up its shares by way of security. It follows, so the argument goes, that Beconwood has an equity of redemption in respect of those shares.

The second basis is that Beconwood has an equitable charge over the shares [as a result of the nature of the agreement]…[Therefore], by reason of the SLA Beconwood has a charge over the shares which is enforceable in equity.

The corollary of each argument is that under the arrangement Opes Prime did not become the absolute owner of the shares.

If successfull on either of these claims, Beconwood would have an interest as either a mortgagor or chargee respectively over the securities that are now the legal property of ANZ (this would lead to an equitable interest and an ‘equity of redemption’ respectively). For those who have not studied equity, this would lead to Beconwood being more likely to have its shares returned.

An Finkelstein outlines, it would then separately have to prove that either of these equitable interests have priority over ANZ’s current and very real legal interest (another question not considered in the judgment).

Opes Prime clients and steps forward from here

Another of Zappone’s comments leads well into the result of the case and likely steps forward from here:

Beconwood Managing Director Paul Choiselat said he was disappointed and was yet to decide whether to appeal.

When deciding whether to appeal the decision, Mr Choiselat will likely consider the clarity of Justice Finkelstein’s reasoning in denying the two claims. He does have an appeal channel open but he is more likely to await thefull decision that will be completed by Justice Finkelystein on the other points of law raised in his claims.

If he were to appeal, he would have to appeal the construction of the agreement made by Justice Finkelstein. Without intending to turn this piece into a discussion of equity and property assignment, the ratio for the decisions appears very sound to me and provides little hope for success on these two claims. I will post a separate blog with a summary of the reasoning behind the decision if people are interested but for those who are keen read from paragraph 35 in the judgment.

Thus, if Beconwood Securities is to have a chance at getting its shares returned, it would in my opinion be much better off waiting for the final decision which may be considering claims such as innocent or fraudulent misrepresentation (assuming their claims are true) than appealing the two claims put forward in this case. However, even in this case, as it is an institutional investor, it would be quite difficult to prove that the actual agreement was anything other than that which is clearly stated in the agreement as outlined below:

Clause 3.1 provides: “The Parties must execute and deliver all necessary documents and give all necessary instructions to procure that all right, title and interest in [any Securities, Equivalent Securities, Collateral or Equivalent Collateral] will pass absolutely from one Party to the other, free from all liens, charges, equities and encumbrances, on delivery or redelivery of the same in accordance with this Agreement.”

I personallly wish Beconwood the best of luck in their hopes of recovering the money in the event that there was misleading conduct and hope that any suspicious behaviour allowing this to happen is properly investigated (including any Opes client accounts that were significantly undersecured and Australia’s severe incongruence with the more secure American SEC regulations in this area).

If you liked or disliked this blog, please comment below and let me know.

16 thoughts on “What the media got wrong about the Opes Prime Collapse and Beconwood ruling”

  1. Very nice post James.

    I haven’t been following the whole thing as closely as you have, but thank you for bringing me up to speed.

    You also seem to have a better recollection of equity than I do. Impressive, if for no other reason, because of your less than spotless attendance record.

  2. Thanks Tom,

    Any chance to bring up my less than spotless attendance hey! I’m considering posting the bio you wrote for me :)

  3. Nice post James.

    I have been following closely and the issue that keeps raising its head is that of abandonment.

    It seems that legally the ANZ by their actions abandoned the AMSLA. I think most actions coming at ANZ from this point forward will be focused on misleading and deceptive conduct and abandonment of contract.

    Good luck to all clients.

  4. James,

    Good read. I feel some of the stuff published in the papers is straight from press releases prepared by ANZ.

    Seems to me ANZ must be getting worried about the possibility of at least one of the court cases being prepared getting up.

    Thank you.

  5. I think that it’s good time to buy IGC(International Goldfield Ltd),because IGC may be a tarket to be taken over by NKP.
    Please,refer to the announcements on 25 March 2008 and 5 May 2008 by IGC!
    Let’s make a good fortune!

  6. hmm lets see.

    Firstly what makes you think Opes Prime gave any advice? Having stockbroking license doesnt mean they are full service.

    Secondly, could it be that Beconwood were very desperate for some funds in order to acquire another crappy company?

    Thirdly, as a former client of OP, I read the SLA and had it explained to me that legal ownership past. But hey I had crappy stocks how was was I going to feed my greed for more of the same.

    Fourth – The directors or Beconwood are no doubt sophisicated investors, and I can guarantee you they would have known of the risks involved. For gods sake people, if the market had not gone into meltdown they would have made a bucketload of cash and be throwing praise at Opes. So mate… let it go, I have, people took a risk.. its as simple as that. Find something else to do.

  7. Hi Graham,

    On your third point, I was also a client and I also read the SLA (pre-Feb 2008). I was also aware that legal ownership passed, but legal ownership is very different from beneficial ownership and I was under the impression that beneficial ownership remained with me.

    Opes did nothing to explain the real situation either directly or in the FSG. I think the most telling is that the pre Feb 2008 FSG didn’t contain anything about the result of Opes becoming insolvent in its risks section. The post Feb 2008 added a paragraph explaining that risk and what would happen, but Opes never informed me of the new FSG or the changes that were in it.

    We will wait and see what happens. Whatever the eventual outcome, it will be interesting.

  8. Matthew,

    Have you ever read the risk section of a Margin Lenders T and C’s, I’m fairly certain it doesn’t go into what would happen if the margin lender becomes insolvent. The truth is no one at Opes would be aware of what would happen in an SLA as well, it depends on the circumstances. The fact that Lirim (The twat I like to call him) caused a massive hole in the shortfalls at Opes meant that no one would know what the outcome would be if it went pear shaped. If the company had become insolvent through a much smaller stuffup, chances are the reciever may even have allowed us to pay out our loans and grab our shares, or perhaps 90% of them.. we will never know.. but mate,, legal ownership seems pretty obvious to me. Beneficial ownership is the big grey area. Will be interesting.. but Im not about to crucify the people who worked at Opes about it, apart from the useless directors.

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