Opes clients stand to receive at best 30 cents in the dollar for shares most thought they owned. That is where ANZ and Merrill Lynch come into the equation.

Based on the contracts entered into there seems little conjecture that ANZ/Merrills are in a technical sense, entitled to sell the stock they claim to beneficially own. However, that is assuming the contract between the parties is enforceable. The clients are claiming, with the help of a battalion of lawyers, that representations were made by Opes and/or ANZ, that the clients would retain beneficial ownership of the shares – this could arguably deem the Securities Lending and Borrowing Agreement unenforceable by reason of misrepresentation.

The situation occurring now wasn’t entirely unforseen. The Opes Prime Financial Services Guide (dated February 2008) notes that one of the risks faced by Opes clients was ‘credit risk’. Specifically:

In the event of insolvency by Opes Prime then you will rank as an unsecured creditor in respect of any excess value of collateral that you have lodged with Opes Prime over and above the value of securities you have borrowed from Opes Prime or the excess of the value of the securities you have loaned to Opes Prime and the cash that has been delivered as collateral.

Interestingly, that confusing paragraph was only included in the Opes FSG this February. Before then, the FSG didn’t clearly outline the risks faced by clients should Opes become insolvent. It appears therefore that pre and post-February Opes clients may be two separate classes of plaintiff. (The fact that Opes inserted the clause recently leads one to suspect that it was worried about clients falling to understand the full implications of the Agreement).

ANZ would be well aware of the 1983 decision of the High Court in Amadio. Amadio involved two Italian parents who spoke very little English providing a guarantee to their son who was a builder. After the son’s business failed, the Commonwealth Bank sought to enforce the guarantee. The High Court eventually held that the guarantee was unenforceable on the grounds of unconscionability. Factors considered by the court included the poor literacy of the Amadios, the fact that no independent advice was received and the crucial fact that the bank knew of the son’s precarious financial position but allowed the Amadios to believe that the business was progressing well.

While Amadio was an extreme example of unconscionability some of the principles may apply with Opes. It has been alleged that various ANZ representatives actively told some Opes Prime clients that they would retain beneficial interests in their shares (it is alleged that Opes employees did the same). Very few people would seek legal advice when opening a margin lending account.

Further, as Matthew Dunckley noted in the AFR today, between 19 March (when ANZ provided a $95 million “lifeline” to Opes) and 27 March 2008 (when the administrators were called in) ANZ and Opes continued to allow clients to transfer shares into their Opes account. ANZ were aware (like the CBA were in Amadio) that Opes were in a degree of bother but continued to allow unknowing clients to contribute security. A week later, ANZ seized that very security.

Throw in the fact that Opes never lodged a Substantial Shareholder Notice (despite allegedly being the beneficial owner of more than 5 percent of shares in more than 90 companies), nor made the required takeover bids when its relevant interest hit 20 percent and you have a bank with very dirty hands.