Leverage Crushed Austraillian Brokerage

1.9 billion) in stocks they kept as collateral. The mess has provoked a series of risks and investigations of lawsuits and has shaken self-confidence in Australia’s stock market. The root of the problem is a loophole in Australian rules that allows brokers to put on customers’ shares as loan security, without notifying the customers. The investors apparently didn’t know their stocks had been pledged against the loan until it was too past due.

In the U.S., brokers are forbidden from dipping into a customer’s take into account their own purposes. Opes, which began functions in 2003, disclosed in documents to investors that it might do this. But many customers now say they had no idea their stock had been so pledged. The brokers used the loans to expand their own margin-lending activities to customers. Margin lending can be quite profitable for brokers, who earn interest from the borrowings.

That setup proved helpful fine as long as the Australian market rose. During its five-year run, the A&P/ASX 200, Australia’s standard index, climbed 130%. But since striking a higher Nov. 1, the index has fallen 18%, joining a global market rout. Suddenly, the agents were stricken by margin calls of their own from Merrill and ANZ. Some Opes and Lift customers have lost millions of dollars in equity as ANZ and Merrill sold off these shares. Two directors of mineral-resources company Paladin Energy Ltd.

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Those directors are planning to sue, the filing said. Paladin directors didn’t react to phone calls seeking comment. The tumult isn’t confined to Australia. In Singapore, the management-led buyout of an executive concern called Jade Technologies Holdings Ltd. Anthony So had his stake sold out from under him. Mr. Soh’s shares had resided within an Opes account.

The investigations are mounting. The Australian Securities and Investments Commission and the Australian Securities Exchange have launched probes into possible scams. Singapore’s white-collar-crime unit has started its inquiry. ANZ faces a public-relations headache for its involvement. The bank is conducting an internal inquiry to discover whether any of the bank’s employees breached risk handles or ethical requirements.

During a briefing Wednesday of the bank’s financial results, LEADER Mike Smith expressed irritation with the bank’s participation in the collapse of Opes. Mr. Smith said. He said the inner probe includes all the bank’s securities-lending activities, not the loans to Opes just, but he added that he wasn’t prepared yet to provide any details. Merrill and the regulators declined to comment.