Buying and selling on the stock market is a form of gambling but the operation run by MMI Stockbrokers, now in liquidation, had an element of added risk.
In a normal deal a client buys stock and settles within five to 10 days. It is only in the most unusual - and unfortunate - cases that the client finds him or herself paying for stock that is worth substantially less than the money being handed over.
However, according to a former executive with MMI Stockbrokers, the company bought and sold stock for its clients using the normal settlement terms, but also offered two extended credit schemes. These were a 20-day rollover scheme, and a 90-day "give-and-take-back" scheme. In relation to both schemes the company did business with K & H Options, London.
The give-and-take-back scheme involved buying shares through K & H Options but not paying for them for 90 days. Payment would be at a price agreed at the time the shares were purchased. For example, a £1 share might be purchased with an agreement that K & H would be paid £1.10 in 90 days. The MMI client would then hope that at the end of the 90-day period, the share would have risen higher than the agreed payment price.
If the stock had risen in price to above £1.10, the client could sell it back to K & H and collect the difference. If the share price was below £1.10, the client could still sell the stock back to K & H, and pay up the difference. Also, at any time during the three months it was open to the client to opt to sell the stock at the then market price, and settle up at the end of the 90-day period.
In order "to be prudent" MMI took a margin from its clients. A margin is similar to a deposit and MMI would look for 20 to 25 per cent of the amount due to be paid to K & H. This provided security as it would be most unlikely the stock would fall by more than 20 per cent in value during a 90-day period. If a client was well known and was involved in a number of transactions, a margin might not be sought for every transaction.
According to the former executive, who did not wish to be named, "MMI was not unique in doing give-and-take-back deals", but it did so more than most stockbroking firms "because K & H were giving the credit".
The source cannot remember who approached who in relation to give-and-take-back but says it was "business K & H promoted" and was a service the London firm had been providing to MMI "for about three or four years".
The second type of scheme operated by MMI and K & H involved a 20-day settlement period with a facility whereby on day 18 the parties could agree to roll over settlement for a further 20 days. The source says the majority of the business MMI conducted with K & H was of the give-and-take-back variety.
MMI dealt heavily in oil stocks, including Dana Petroleum and Tullow Oil. "At any given time Dana would be a fifth to an eighth of the exposure K & H had with us," according to the source. As well as the Dana and Tullow stock, MMI clients bought a range of FTSE 100 shares - shares in the top 100 companies quoted on the London Stock Exchange (LSE).
Financial difficulties hit MMI last year when the price of Dana stock suddenly plummeted and, at the same time, the FTSE index dropped about 25 per cent. The Dana share price fell from 22p in June, to 8p in early September. Mr Oisin Fanning, who stepped down as managing director in September, told The Irish Times at the time that the situation had been "controllable" until the drop in the Dana price was accompanied by the plummet in FTSE stocks in August and September.
With the Dana stock having fallen by more than 60 per cent, clients of MMI who had thought that in a worse-case scenario they might lose their margin, now found they were being asked to pay up significant sums of money. Some said they did not have the funds, or could not produce them by the agreed settlement date. Others objected that they had been badly advised by MMI in relation to the Dana stock.
In the High Court this week an accountant, Mr Tom Kavanagh, was appointed liquidator to MMI Stockbrokers. The court was told that the company had assets comprising "settled" debts of £3.5 million and "unsettled" debts of £13 million. Settled debts are those where MMI has paid the London counter-party to a deal but has not yet received the funds from its clients. Unsettled debts are those where the London counter-parties have not yet been paid by MMI, and where MMI has not yet been paid by its clients.
It is understood that K & H is owed approximately £8 million by MMI and the remaining £5 million in unsettled debts is due to Merrill Lynch, Credit Suisse, and other London firms.
It is also understood that most of the settled and unsettled debt relates to the period around September of last year. The company informed the Central Bank at the time that it was in difficulty and some days later the bank ordered that it cease trading. On September 19th the LSE said it was banning the company from trading.
In late September it emerged that the Central Bank believed a British investor was interested in MMI and for that reason it was allowing the company remain in existence. In October the bank gave the company more time to put the deal together. By November it was announced that a company linked to K & H was taking over MMI and that the deal was being approved by the Central Bank. The founders of MMI were not to receive any payment. The deal was finalised in early December.
MMI Stockbrokers had eight directors including founding directors Mr Fanning, Mr Paul Boucher and Mr John Curran. The three directors were also directors of MMI Ltd, and the group had money broking and foreign exchange operations. The companies operated from 26 Lower Baggot Street, which is owned by Crownhill Property, a company owned by Messrs Boucher, Curran and until recently, Fanning. MMI also had a majority shareholding in Liberty Asset Management Ltd. The money broking and foreign exchange businesses have not been affected by the collapse of MMI Stockbrokers.
K & H Options, London, is associated with Dutch financial group Mees Pierson. The Dutch group announced it would not be putting any funding into the MMI deal. MMI was taken over by Factoralter, a company owned by four of the five K & H directors. A capital injection of £2.3 million was made as part of the December deal, bringing MMI back into the black.
Why the London firm decided to put fresh funding into the troubled Dublin operation has led to much speculation. One London source has said it was primarily to allow the company get a foothold in the Dublin market and, secondly, to give it the opportunity to directly pursue the £8 million it was owed by the MMI clients.
Others say it was primarily to secure direct involvement in securing the debts and that if £2 million was spent recovering £8 million, that would be worthwhile. Extensive due diligence is understood to have taken place prior to the move. Whatever the case, the deal did not work out well for the London operation.
Last month MMI made a successful petition to the High Court for the appointment of a provisional liquidator. Mr Robert Holt, of West Sussex, a director of Factoralter and of K & H, said MMI had traded successfully until August 1998, when it began to encounter difficulties which were "inextricably linked to the manner in which the company conducted its business". A margin of 25 per cent was operated by the company but when the market fell in September by more than that, the company found itself having difficulty collecting debts.
Mr Holt told the court Factoralter took over MMI in a deal which involved the injection of £2.3 million together with a standby facility with some of MMI's then directors. The Central Bank removed its suspension and the company set about collecting its debts. However, when MMI sought to draw on the standby facility it encountered difficulties. Mr Holt also said the level of business conducted since Factoralter took over was less than expected, and that MMI's clients were not as forthcoming in paying their debts as had been expected. Mr Holt said one client had gone into liquidation, leaving an unrecoverable £800,000 owed to MMI.
Two weeks ago K & H told the LSE that it was ceasing to operate as a options dealer. Mees Pierson, through a spokeswoman, said it would cover all option trades which had been entered into by K & H and which K & H might find itself unable to pay for. According to the spokeswoman the decision to cease its options trading was taken by K & H alone.
On Monday an accountant, Mr Tom Kavanagh, was appointed liquidator to MMI. (Mr Kavanagh had been appointed provisional liquidator last month.) The High Court ruled that LSE rules covering stockbroking firms which default could operate in relation to MMI. This was in response to an application from the exchange. The LSE was given the names of MMI clients linked to the unsettled debts arising from London dealings. The London stockbroking firms involved in these deals can now contact the MMI clients directly in pursuit of their debts.
It is understood that most of the MMI debts are associated with dealings on the London exchange though some have to do with Dublin trades. An application is likely to be heard in the High Court today in relation to Dublin stockbrokers being informed as to the identities of MMI clients linked to unsettled dealings concerning the Dublin exchange.
The LSE default rule has introduced complex questions concerning the rights of creditors and debtors, given that stockbroking firms will be directly approaching clients looking for debt payments at the same time as Mr Kavanagh is trying to liquidate MMI and properly share out what assets exist. Detailed negotiations in relation to the matter have been under way all week.
Another complication concerns the Revenue Commissioners. The High Court heard that as well as being owed money from MMI, the Revenue owes some £500,000 in stamp duty to the company. This debt arises from dealings where shares were resold within 25 days and the stamp duty levied is thereby being refunded. However, the £500,000 has been "assigned" to Ulster Bank. According to the MMI source, there was an ongoing assignment of the stamp duty debt to Ulster Bank. The firm would use a facility with Ulster Bank to pay stamp duty refunds to clients, and then settle with the bank when the refunds were paid by the Revenue some months later.
There are about 800 clients on the MMI books, only about 100 of whom were active clients. The size of the debts involved vary hugely. The debtors who are having difficulty paying up are understood to fall into three loose catagories: those who have the necessary assets though not the cash; those who took a gamble and now don't have the money to pay up; and a small group who are alleging they were badly advised in relation to the oil stocks.
The former MMI executive gives the following reply when asked why his company collapsed: "Bad luck and we accepted too much credit from K & H and passed that on to too many people."
On subsequent developments another source says: "The bottom line for K & H was that the money didn't come in." Any shortfall from the MMI clients which K & H cannot cover, is likely to be met by Mees Pierson.
