Brian Gaynor: Access agony laid bare on the web

Sharetrader, the website for sharemarket traders, was the best place to follow the Access Brokerage drama this week. The site (www.sharetrader.co.nz) became a frenzy of activity soon after the New Zealand Exchange suspended Access from trading on Monday morning. There have been nearly 400 posts on the subject this week, a clear record for a five-day period.

The early posters were optimistic; they believed their money was safe. One wrote: "Hope no sharetraders are seriously caught up in the mess. But the fidelity fund should bail you out." Another noted: "I do most of my trading online via Access and have a bit of cash on their on call BNZ and UDC accounts . I assume this is still safe since the cash is held by the bank???"

But the mood turned sombre by mid-day. One poster wrote: "Telephoned BNZ re status of BNZ-Access Brokerage at call accounts and was told that these accounts have been frozen." Another asked the question: "Does anyone know what provisions the Fidelity Fund actually has for this situation? Only experience I have with a broker going bust was in Australia, took a year to finally settle my claim, fortunately in full after ASX court action."

By late afternoon, the topic had become more personal ... "I could lose my life savings in this one" while another wrote: "I have about $24k in the BNZ account and $12k in the UDC one so I want a quick resolution."

One individual phoned Access, BNZ and UDC. "UDC assured me all accounts were frozen and checked my account, they were informative and reassuring. BNZ told me they couldn't talk to me as they only dealt with Access, basically they weren't going to tell me a thing. Very un-nerving and bad customer relations."

An early bird on Tuesday morning commented: "The BNZ gave me a balance on the total pool a while ago - the figure was $33 million."

But, later that morning, the critics began to surface. One wrote: "If you look at Access Brokerage's market share - about 2 per cent - and the discount charges, it would have been very difficult for them to make any money as a broker. It is possible that client money has been used to prop up the business for some time."

Another took a swipe at Access' internet clients: "People using Access were there on the cheap. Access has always been a risk due to its ownership structure."

During the past few days, Michael Stiassny, Bank of New Zealand, Access' directors, the NZX and fellow posters have all been in the gun. The only parties that have avoided the bullets are the Government and the media, a most unusual development.

But the sharetrader site demonstrates that investors are not scrutinising legal contracts as many of Access' clients had deposited money into accounts without fully understanding the conditions and security pertaining to these accounts.

The collapse also shows that Access and the Bank of New Zealand have fallen well short of best practice standards. Fraud may also have contributed to the brokers' collapse.

In simple terms, retail brokers run two bank accounts: a company account and a client trust account. The latter is used to receive payments from clients for the purchase of shares, to make payments to clients for the sale of their shares and to settle with the counterparty brokers.

This trust account, which in the Access case is called the Access Brokerage Client Trust Account, cannot be used for any other purpose, including the running of the broking company. There is a strong argument that the BNZ is a constructive trustee of Access Brokerage Client Trust Account and it allowed funds from this account to be used by Access Brokerage. Some of these illegally siphoned funds may then have been stolen.

The other important bank account as far as this saga is concerned is the Access Brokerage BNZ NZD$ Call Deposit Account.

When individuals signed up as online trading clients of Access they had to open a NZ dollar call account and deposit money in it.

In some places, this was called the Access Brokerage BNZ NZD$ Call Deposit Account while in others the BNZ NZD$ Call Deposit Account. The different terms were confusing but it seems that many Access clients were given the impression that their money was held in totally separate cash accounts whereas it was held in an account which had a pooled characteristic and was controlled by Access.

(Readers with a long memory will remember the famous Goldcorp case, which also involved the Bank of New Zealand. Investors were encouraged to purchase gold bullion and were unequivocally told that Goldcorp would store the gold in their name and on their behalf. When the BNZ placed Goldcorp in receivership, it claimed that the gold was owned by the company and not by the clients. After a long and expensive case, the courts found in favour of the BNZ and against Goldcorp's clients. The lesson from this case was that legal contracts take precedence over a company's unequivocal promises or advertising material that indicate a different situation.)

The Access Brokerage BNZ Call Deposit Account situation is further complicated because the BNZ used Access as an agent for its own online trading clients and encouraged its online clients to deposit money in this account. How could this money be frozen when these BNZ clients were never direct clients of Access?

Ultimately, Access fell over because the broker was funding its day-to-day operation from the Access Brokerage Client Trust Account and this account was, in turn, funded by Access Brokerage BNZ Call Deposit Account.

This is a complicated situation but the responsibility for Access' collapse seems to lie, in descending order, with the directors of Access Brokerage, Bank of New Zealand, Access' call deposit account clients and the NZX.

The prime responsibility rests with Bill Garlick and Peter Marshall, Access Brokerage's two directors. They should have ensured that the company's Client Trust Account was only used to settle client purchases and sales.

The BNZ should also have made sure that Access Brokerage Client Trust Account was only used for its intended purpose. The BNZ should not have allowed Access to give the impression that the Access Brokerage BNZ Call Deposit Account was an individually based account when it had pooled characteristics. In addition the bank should not have encouraged its own clients to put money into this account.

It is difficult to criticise Access clients because they are the big losers at this stage. But the Goldcorp case demonstrated that investors should carefully scrutinise legal contracts and make sure they know where they are putting their money. Finally, the NZX has indicated that it will use the Fidelity Guarantee Fund or its own funds to meet the obligations Access had to its clients. This is praiseworthy but the main contributors to the deficit should be Garlick, Marshall and the BNZ.

Complex financial collapses are not always clear-cut. Big organisations, such as the BNZ, can dig their heels in even when they have a clear ethical, if not a legal, responsibility to contribute to a financial deficit.

Court proceedings following the Goldcorp collapse lasted five years. Let's hope the Access clean-up doesn't take that long.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.


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