BNZ in the gun over Access

By Nick Stride

Friday 10th September 2004

New Zealand Exchange is set to take on Bank of New Zealand over losses suffered by clients of collapsed Access Brokerage.

BNZ has instructed Bell Gully on its involvement in the Access fiasco, discarding day-to-day legal advisers Minter Ellison Rudd Watts and Buddle Findlay.

It is understood the bank's top tier of executives are directing the defence.

BNZ provided the client funds trust account operated by Access to hold money to be paid to clients who had sold securities, or by clients who had bought.

The account was frozen on Monday after it was reported it held about $5 million less than needed to meet due payments.

BNZ also provided personal call accounts for individual customers of the Bill Garlick-owned firm. On Monday it said these were not affected by the broker's collapse.

But on Tuesday the accounts, which contain about $47 million of Access clients' money, were frozen on the orders of the liquidator, Ferrier Hodgson.

A source close to the exchange said the terms and conditions attached to the various products BNZ provided to Access and its customers were many and complex and investigations were at an early stage.

Access' disclosures contain the statement: "By letter dated April 1 annually, Bank of New Zealand acknowledges that the Client Funds Trust Account is used by Access to hold money on behalf of its clients and that the money held in that account may not be applied to meet any liabilities of Access."

However, the liquidator has said that appears to be exactly what happened money was taken from the account to fund Access' operating expenditure.

The liquidator also said the practices that resulted in Access' default had gone on "for some time."

Early suggestions were that "for some time" meant some months but sources close to the issue say it appears the practices have been going on for some years.

The practices appear to be of the "robbing Peter to pay Paul" variety: when money taken illegitimately from the account became payable to a selling client, incoming money from a buying client would be used to settle.

But the siphoned-off amount grew larger and larger.

Under this scenario, the 710 clients who traded on the last three days of last week, who are owed the $5 million, are the equivalent of those left without a seat when the music stops in a game of musical chairs.

Meanwhile, NZX chief executive Mark Weldon has raised eyebrows among his shareholders by raising the possibility the exchange might use its own funds to make good Access clients' losses.

Weldon listed the possibility as one of three potential avenues of recourse the exchange would pursue on the clients' behalf. The others were pursuing legal action against those responsible for the losses and/or using the $500,000 in the exchange's fidelity fund.

Eion Edgar, one of the exchange's largest individual holders, said he was surprised Weldon had raised the possibility the exchange might itself make good Access clients' losses. "It [the exchange] is a public company now and it has responsibilities to all its shareholders.

"The only thing is if it was good for the stability of the industry. But my own view is that there are other courses that need to be vigorously pursued before the exchange could consider that."

NZX chairman Simon Allen declined to say whether Weldon had consulted him before contingently committing the company's funds but said "our [the board's] position has been accurately expressed."

He did not agree that if the exchange's shareholders ended up compensating Access' clients for their losses that would create a precedent.

"There is no possibility that we would enter that type of arrangement."

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