Leverage Crushed Austraillian Brokerage

Freewheeling borrowing to buy stocks has led to brokerage collapses in Australia, fueled by broad-ranging margin calls in a rocky market. Two brokerage firms -- Opes Prime Stockbroking Ltd. in Melbourne and Lift Capital Ltd. in Sydney -- have been forced into receivership, the Australian equivalent of bankruptcy, after nervous creditors withdrew their support. A third brokerage, Tricom Equities Ltd., is staggering under similar debt burdens. Traders expect more firms will go under. Victims include the brokerages' customers. The expansion-minded brokers borrowed heavily, using customers' shares as collateral. When the market went south, the lenders liquidated the customers' holdings in an attempt to minimize their own losses. The brokerages' creditors, Australia & New Zealand Banking Group Ltd., the country's fourth-biggest lender by market capitalization, and Merrill Lynch & Co. together dumped more than two billion Australian dollars (US$1.9 billion) in shares they held as collateral. The mess has provoked a series of investigations and threats of lawsuits, and has shaken confidence in Australia's stock market. The root of the problem is a loophole in Australian regulations that allows brokers to put up customers' shares as loan collateral, without notifying the customers. The investors apparently didn't know their shares had been pledged against the loans until it was too late. In the U.S., brokers are forbidden from dipping into a customer's account for their own purposes. Opes, which began operations in 2003, disclosed in documents to investors that it could do this. But many customers now say they had no idea their stock had been so pledged. The brokers used the loans to expand their own margin-lending activities to customers. Margin lending can be quite profitable for brokers, who earn interest from the borrowings. That setup worked fine as long as the Australian market rose. During its five-year run, the A&P/ASX 200, Australia's benchmark index, climbed 130%. But since hitting a high Nov. 1, the index has dropped 18%, joining a global market rout. Suddenly, the brokers were hit by margin calls of their own from ANZ and Merrill. Some Opes and Lift customers have lost millions of dollars in equity as ANZ and Merrill sold off these shares. Two directors of mineral-resources company Paladin Energy Ltd. had their stakes sold without their consent, the company said in a filing with the stock exchange. Those directors are planning to sue, the filing said. Paladin directors didn't respond to calls seeking comment. The tumult isn't confined to Australia. In Singapore, the management-led buyout of an engineering concern called Jade Technologies Holdings Ltd. fell apart after the chief executive, Anthony Soh, had his stake sold out from under him. Mr. Soh's shares had resided in an Opes account. The investigations are mounting. The Australian Securities and Investments Commission and the Australian Securities Exchange have launched probes into possible fraud. Singapore's white-collar-crime unit has started its own inquiry. ANZ faces a public-relations nightmare for its involvement. The bank is conducting an internal inquiry to uncover whether any of the bank's employees breached risk controls or ethical standards. During a briefing Wednesday of the bank's financial results, Chief Executive Mike Smith expressed frustration with the bank's involvement in the collapse of Opes. "This is very irritating. I'm absolutely determined to see whether there have been any breaches in our processes or standards," Mr. Smith said. He said the internal probe includes all the bank's securities-lending activities, not just the loans to Opes, but he added that he wasn't prepared yet to provide any details. Merrill and the regulators declined to comment.