Trading Retirees investing way out of their depth

AsxBroker · 5th Nov, 2009

Retirees investing way out of their depth
November 5, 2009
It started conservatively but turned into a disaster, writes Cosima Marriner.

The stockbroker Ord Minnett had a well rehearsed sales patter for prospective clients who visited its office behind the Gold Coast racetrack.

''Just 9 per cent of brokers in Australia are licensed to trade options," the prospective clients were told, "and most of that 9 per cent work here at Ord Minnett. We're the experts."

Retirees in their 60s wanting to earn an income from their life savings say they were promised returns of 20 to 25 per cent on every $100,000 they invested with the firm for conservative options trading.

And so people like Mike Rowston, Ann Tyson, John and Yvonne Schweicker, and Ken and Noelene Winton opened accounts.

The relationship started well, they say. The broker traded options on a few blue-chip stocks conservatively, made some good money for them and everyone was happy. ''The market was going well,'' John Schweicker recalls. ''If you wanted to keep your profits small and conservative, it was working.''

But in the winter of 2004 it all turned sour. Within a year many Ord Minett clients had lost all their money - millions of dollars wiped out in increasingly risky options trading. They now say that some of these trades were unauthorised.

Ten former clients have banded together to sue the firm for $2.3 million in compensation. In individual claims lodged with the Queensland Supreme Court, they allege the broker was negligent and breached its duty of care to them. They say they were not properly informed of the risks associated with the options trading, and allege the broker did not tailor its investment strategies to their individual needs.

The case comes as the Australian Securities and Investments Commission considers banning certain financial products as ''too risky'' for retail investors. It is a tacit acknowledgement that the regulator's current reliance on education and disclosure to protect investors may be insufficient.

The ASIC chairman, Tony D'Aloisio, said last month: ''At a retail level we again saw that disclosure didn't necessarily mean investors understand the risks, notwithstanding they had long PDSs [product disclosure statements], long prospectuses, documents.''

The regulator is now examining ''complex'' financial products sold to retail investors.

Ord Minnett declined to be interviewed by BusinessDay. In a statement the firm said it "is of the view that it has no liability in respect of these claims and will be responding accordingly".

It is the second court action Ord Minnett is facing relating to options trading by one of its advisers. Fifteen former clients of a Canberra adviser, Eric Hawley, are suing it for compensation for losses on trading conducted by Hawley. Ord Minnett has already reached settlements with many of Hawley's former clients.

Both cases concern brokers' legal obligations to know their clients. The Queensland claims name an Ord Minnett employee, Ben Leeden, as the private client adviser in charge of the accounts. Leeden could not be contacted by BusinessDay. It is alleged Ord Minnett did not properly supervise his trading.

"Know your client rules are an ongoing, non-negotiable responsibility of a broker with every trade," says Bernie Knapp, the Brisbane solicitor representing the disaffected clients. "They have to get informed consent from you and your trade has to be in accordance with the risk management factors that the broker is by law required to [identify] when you become a client. They are forbidden by law to invest your money outside those bounds."

Mike Rowston first heard about Leeden in 2002 from a mate at Southport Golf Club. Told this guy was making ''a fortune'' out of options trading, Rowston opened two accounts with him.

And Rowston's friend Ken Winton, a builder from Nambucca Heads in NSW, was fed up with his broker, so Rowston introduced him to Leeden.

Winton would later tell his friends Yvonne and John Schweicker, who owned the newsagency in Nambucca Heads, how well he was doing. So when the Schweickers retired to the Gold Coast they opened their own account with Ord Minnett.

Ann Tyson signed with Leeden of her own accord. Newly divorced, with no income and a home as her only asset, Tyson was looking for ways to make money. Suffering multiple sclerosis, her work opportunities were limited, and the disability pension was not enough to live on. So Tyson started researching the sharemarket, and attended an options trading course. Learning that Ord Minnett was a specialist in options, she signed with the firm.

And for a while the broker kept its clients pretty happy. But then the stakes started rising.

According to the Supreme Court claims, instead of trading five contracts at a time, Leeden suggested to clients they trade 10. And instead of sticking to safe stocks like those of the big banks, he started taking out contracts on more volatile shares.

The clients say they did not understand the implications of the more aggressive strategy. Ord Minnett denies these allegations. It says it has yet to receive "a full and proper account of the particulars of the breaches that have been alleged".

"We have undertaken a comprehensive review of the trading undertaken by the plaintiffs and we have confirmed that they at all times personally directed the trading and appeared to be fully cognisant of the implications of the trading strategy they employed," it says.

But Ann Tyson says: ''I had something like 15 or 16 positions opened at a time, and that was nuts. It was nuts because there's no way you could keep track of the ramifications of the liability that was on us.''

Mike Rowston agrees. "It started getting way, way out of hand and we didn't realise it. He was going way beyond our ability to satisfy [our liabilities] - way, way beyond."

Rowston alleges in Supreme Court filings that he was unaware of the liabilities attached to his portfolio at the time because Leeden would only represent the positive position of his trades.

The plaintiffs commissioned a forensic audit of the options trading of their accounts. It found that on a number of occasions Ord Minnett opened trades on the same stocks on the same day for superannuation funds, companies and individuals.

''This list of investors clearly has diverse risk profiles and very different expectations from their investments,'' a chartered accountant, UHY Haines Norton, reported.

''If the investment strategies of each of these diverse investors happened to align to direct Ord Minnett to make the same investment in the same option trade on the same day, then that coincidence would be extraordinarily remarkable.''

Meanwhile, the market was moving against the Ord Minnett clients. This was calamitous because they were trading what are known as naked options: the high-risk practice of selling options contracts without owning the underlying share as protection from an adverse price movement. In theory some naked options positions can lead to unlimited loss.

Whereas other brokers like Commsec require clients to have 150 per cent security (i.e. $150,000 in their account for every $100,000 they trade), the Ord Minnett clients say such limits did not exist for them. Instead, they would receive urgent requests for extra money to cover their looming liabilities.

"You could trade with no security, and when it went bad they wanted the money there and then," Schweicker says. "You put it in, they lost it and then they asked you for more."

The clients say they grew increasingly uneasy about the trading, only to be assured that they would be able to recover their losses if they stayed active in the market, increasing their exposure.

Schweicker says he had to sell his wife's 100,000 AMP shares to cover losses, Rowston contributed another $40,000 in cash, and Tyson says she was convinced to tip in $30,000 worth of Telstra shares she owned.

Tyson says she had already lost her $80,000 super nest egg and was now trading with a $300,000 loan taken out against her house, so she started asking to get out.

It all came to a head in late 2005. The new boss of the Gold Coast office, Murray Britton, informed both Mike Rowston and John Schweicker there was nothing left in their accounts. They say that was the first they knew of the extent of their trading losses.

"He said: 'Your account is no good; you can't trade anymore.'" Schweicker remembers the phone call clearly. "I said: 'I knew it wasn't travelling too well, but I had the opinion if the market stayed steady it would just slowly get out of trouble.' He said: 'Well I'm afraid that's not the case'."

ASIC has investigated the claims against Ord Minnett and said in July last year that it would ''not take any further action … at this time''.

Ben Leeden continues to work as a private client adviser in Ord Minnett's Gold Coast office. His former clients say they are still "very hopeful" of recouping some of their losses from Ord Minnett.

"I visualise it every day," Tyson says. "I do a lot of visualisation."
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Retirees investing way out of their depth

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