The death of financier David Coe at the age of 58 sparked a torrent of eulogies in the business press, led by The Australian Financial Review, which devoted four glowing articles to the former lawyer turned financial engineer.
While the death of anyone at a relatively young age is to be mourned, one’s passing should not act to abrogate the sins of a lifetime. And for all his charity work and apparent financial genius, Coe will be remembered for being one of the four greatest villains of Australia’s decade of financial greed — along with ABC Learning’s Eddy Groves, Babcock & Brown’s Phil Green and MFS’s Michael King.
Until the global financial crisis struck in 2007, the former Mallesons lawyer enjoyed a charmed business career. Coe secured seed capital in 1979 from long-time friend John Kinghorn (who would later float RAMS for $650 million and more recently, find notoriety as a key witness in the NSW corruption inquiry). Specialising in complex aircraft leasing and cross-border transactions, Coe was worth $85 million by 2001, before anyone had really heard of him.
It was the creation of Record Investments (as a funding vehicle for Allco, which would remain manager) that catapulted Coe into the big time — alongside Allan Moss at Macquarie Bank and Phil Green at a growing Babcock & Brown. Record was chaired by the impressive former Macquarie chief Tony Berg and maintained growing profits and strong governance. Record’s success would lead to Coe’s inclusion in the BRW Rich List in 2004, with an estimated wealth of $141 million.
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However, that wouldn’t be enough for Coe, who together with other Allco principals, increased their ownership in Record and removed Berg from the board. Soon after, Allco and Record would merge, with Coe becoming executive chairman of the ASX-listed Allco Finance Group (and retaining a leveraged, indirect 7.1% ownership interest).
While building Allco, Coe still maintained close links to Kinghorn, agreeing to sit on the board of RAMS, then Australia’s leading non-bank mortgage lender. In 2007, Kinghorn floated RAMS, with Coe a non-executive director. The float raised $650 million, much of which found its way into the pockets of Kinghorn (and his business associates like Greg Jones, another key witness in the ICAC hearings into Eddie Obeid).
Quite fortunately for Kinghorn, the RAMS float was conveniently timed only weeks before the secondary funding market completely dried up. Three weeks after listing for $2.50 per share, RAMS shares dropped to only 57 cents (and would be sold to Westpac months later). The New York Times soon after declared the RAMS float to be “the worst initial public offering of the decade”.
RAMS aside, things appeared to be going swimmingly for Coe at Allco, with the company announcing a 41% rise in profit to $211 million in 2007. At the time though, Coe and long-time associate Gordon Fell were plotting a more sinister transaction — the acquisition of associated property group Rubicon. Rubicon was 21% owned by Allco itself, with the remainder being held by Coe, Gordon Fell and Mathew Cooper. Under the plan, Allco would purchase Rubicon for around $60 million in cash, and the rest in Allco shares. Coe himself would net $12 million from the purchase, while Fell, a former Rhodes scholar, would collect almost $30 million.
Allco shareholders voted in favour of the acquisition, after being told by Allco that the Rubicon purchase was “a natural progression of Allco’s business plan in response to the rapid growth and new opportunities emerging in the real estate sector around the world”. Shareholders were promised that the purchase would bring “significant revenue synergy potential through integrated approach to origination, funding, comprehensive product set and scale benefits” and that it would increase “the proportion of recurring funds management income for Allco”.
Of course, what Allco shareholders weren’t told was that Rubicon, for all intents and purposes, was already dead. Rubicon’s auditor PwC would claim in its December 2007 review of key operating trusts (only weeks after the acquisition), that there was “significant uncertainty regarding the continuation of [the Rubicon America Trust] as a going concern [and that] the consolidated entity” current liabilities exceeded its current assets of $144,309,000.” The situation for Rubicon’s other two trusts was just as bleak. Bearing in mind, virtually all of Rubicon’s income came from fees paid by the apparently insolvent trusts. Without those fees, Rubicon would be worth nothing. (The company would have lost $17 million that year without trust fees).
In effect, Allco shareholders paid Coe, Fell and Matthew Cooper more than $60 million for an asset that was worthless. At the time, Coe and Fell were directors of Rubicon, so they either knew, or certainly ought to have known, that the business was on the verge of collapse.
But while Rubicon was perhaps the most brazen, it certainly wasn’t the only time that Coe benefited at the expense of Allco shareholders. Weeks after the Rubicon purchase was completed, on December 18, 2007, as Allco shares were falling, the company extended a letter of credit (effectively a loan) to the Allco Principals Trust. The trust was the vehicle in which Coe and his associates owned their Allco shares. The loan was made to stave off a margin call (which would have caused Allco shares to drop even further), but in effect, amounted to Allco shareholders giving money to Coe and other Allco executives.
The loan was of little use — within a month the trust would face a margin call and was forced to liquidate its holdings anyway. The $52 million which Allco paid to the trust would never be repaid, and remains one of the great corporate scandals of the past decade.
From all reports, David Coe was a friendly and generous man, loved by friends and family, who died too young. But that doesn’t change the fact that he presided (and personally benefited) amid one of the greatest corporate collapses this country has ever seen. Of course, to fail in business is not a crime, nor is it necessarily even to be scorned, as a capitalist economy is built on risk.
But while Allco shareholders lost everything, Coe personally collected more than $12 million from the Rubicon transaction, and benefited directly from other related party transactions such at the $52 million Allco Principals loan.
*Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed (Wiley, 2009), which features one of the only detailed published accounts of the fall of the house of Allco