The harder they fall, the more litigious they get. Lawyers for former ABC Learning Centres founder and Eddy Groves sent a letter of demand to ABC’s former house broker and financial adviser Austock seeking compensation of $10 million for an alleged failure to process a share sale order.
Austock told the ASX yesterday that it had received a letter of demand from Groves claiming that “on February 27, 2008, Mr Groves gave an order to sell approximately 5 million shares in ACK [Austock] at market price, that the order was not executed by Austock and that Mr Groves suffered loss as a result. The losses claimed by Mr Groves (including consequential losses of $5.5 million on the subsequent sale of his private helicopter and luxury yacht in September 2009) amount to $10 million.”
The background of Groves claim provides an interesting insight into the collapse of Groves’ relationship with Austock, which was routinely paid tens of millions of dollars by ABC for providing financial advice.
Bill Bessemer, the former Chairman of Austock, sat on the ABC Learning Centres board prior to its 1998 float. As ABC grew, so did the fees it paid to Austock. In 2002, ABC paid Austock $944,000 for financial advice for capital raisings, that increased to $1.3 million the following year and $3 million in 2004.
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But Austock really started cashing in on ABC in 2005 when it served as ABC’s sole financial adviser on the company-transforming takeovers of Peppercorn Childcare Centres and Child Care Centres of Australia. Austock also underwrote ABC’s equity raising to fund the acquisitions. In total, ABC paid Austock more than $16 million in 2005 – that amounted to almost a third of ABC’s total profit for the year. In 2006 Austock was paid even more, with ABC shareholders handing over $26 million to the small broker for ‘payment and commissions’ for the company’s capital raisings.
Austock wasn’t only paid for financial advice and under-writing fees – it also managed several funds which owned the properties upon which ABC ran childcare centres. Austock would earn millions of dollars in fees for managing entities like the Austock Childcare Fund.
In 2005, shortly before ABC started paying Austock tens of millions of dollars in fees, it was revealed that Eddy Groves had amassed a 4.1 percent ownership stake in the broker (it is those 5 million shares which are the subject of Groves’ legal claim).
It was perhaps a coincidence that shortly after Groves obtained an ownership stake in Austock that ABC’s fees to Austock increased substantially.
Groves is claiming that on 27 February 2008, around the time ABC was imploding (that day ABC was suspended from trading prior to announcing the sale of US-based centres to Morgan Stanley Private Equity), he attempted to sell his entire stake in Austock. But for some reason, the shares were not sold and Groves suffered a substantial loss.
The strange part of the claim is that on 27 February Austock shares were trading at $1.40 – so Groves’ stake in the company was worth $7 million. But two weeks later Austock shares had only dropped slightly to $1.25 – valuing Groves’ interest at $6.25 million (a loss of $750,000). Even two months later, on 30 April, Austock shares were 90 cents – meaning that Groves’ stake was worth $4.5 million. It would appear on its face that Groves’ loss as a result of his allegations against Austock (even if Austock were completely culpable, which itself would be difficult to prove) the loss does not appear to be anywhere near $10 million.
Austock chief executive, Paul Masi, told the Financial Review that the broker had received Groves’ demand and but that “we find it very hard to accept [and] have begun a process to investigate the situation.
The Austock claim is one of several legal action in which Groves is currently embroiled. ASIC is believed to still be investigating Groves’ conduct in relation to ABC’s collapse (and last year obtained an order freezing Groves’ assets). ASIC is also looking closely at Groves actions prior to ABC’s failure and his relationship with former brother-in-law Frank Zullo. Meanwhile, Zullo is also taking legal action against Groves seeking to recover $7.3 million and the Commonwealth Bank is also chasing Groves for $6 million in relation to security provided on the home of the Adelaide 36s basket team, the Distinctive Homes Dome.
To further complicate matters for Groves, his ex-wife Le Neve is suing him (and margin lenders) for $64.2 million over the loss of shares which were used to cover margin loans over ABC shares.
Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed.