Is it fair for Opes clients to claim victim status?

Could it be a bit rich for victims of the Opus Prime collapse to now claim that they did not understand that they were transferring title in their shares to the stockbroking firm in return for margin loans?

It’s bad luck for them that Opes fell over, went into receivership and lost its title in the shares to its lenders – ANZ Bank and Merrill Lynch – but not entirely unforeseeable.

In July 2006 I interviewed Lauri Emini and two of his colleagues about the structure and products of the then fast-growing financial services business for BRW.

At the time Emini was quite open with me about how his firm was able to provide margin loans using small illiquid stocks as security.

He told me, from the other side of the board table in his Collins Street, Melbourne office, that Opes Prime took ownership of his clients’ shares, which meant it did not have to comply with securitization requirements by banks lending to them. “We can leverage every stock on the exchange” he said.

The question of what Opus Prime’s clients understood as their legal position in relation to the shares is now the subject of legal action.

Yesterday NSW Supreme Court Justice Bergin granted an injunction blocking the dumping of shares in one of the companies caught up in the scandal.

In his decision Bergin said statements about lending agreements on Opes’ website appeared to contradict the contracts signed by its margin lending clients.

Opes reportedly said investors would retain “beneficial and economic ownership” of the loaned stock and the transaction could be “reversed at any time.”

“The statement on the web page is not replicated in the agreement,” Justice Bergin said. “The agreement is quite to the contrary.”

Yesterday the AFR reported that some Opes clients are only now waking up to the significance of the facts that instead of receiving notices of registration from share registries, they were being kept up-to-date by statements from Opes and dividends were being credited via Opes accounts rather than directly from the companies.

No doubt many will blame their advisers for not helping them fully appreciate the risks they were taking. One Opes client told the AFR that his broker never told him that Opes’ business was different from other margin lenders or that the stock would be transferred to its lenders. He now concedes he should have read the terms and conditions.

Back in 2006, Opes’ co-founder Emini’s pitch for business was that he was adapting a big-scale broking product for smaller investors. Institutional investors were commonly doing these deals he said but he had identified a niche for offering a standard form of securities lending and equity borrowing to rich individuals.

He said the business didn’t take off until he merged with ACS Stockbroking in June 2005, giving him new credibility. Other brokers then had the confidence to refer their clients. Back then he said that he had no minimum sized deal and many were worth $20-40,000. He said he was yet to make a profit.

He told me at the time he wasn’t worried about the stock market turning because his book was naturally hedged. But he did acknowledge that if there was a big downturn and a fall in market activity, it would be difficult to build the volume of deals the company needs.

This would suggest Emini knew the risks. Were his clients just looking the other way because of the lure of higher returns? The lesson in the whole disaster is not only to read the fine print but ask your broker lots of questions about all the risks – both likely and unlikely. Buyer beware.