They had made a fortune riding the price of Tullow Oil during 1996 and 1997, when the share rose from a low of 69p to a high of £1.67 as the stockbroking firm dealt in tens of millions of shares. They took high risks, betting the price would never fall and got away with it. Now the same people were hoping to make even more money riding the back of Dana Petroleum.
They enjoyed the risk they were taking. MMI Stockbrokers Ltd (MMI), as well as trading heavily in exploration stocks, also offered its customers the option of rollovers. A system existed whereby customers did not have to pay for shares they bought until, for example, 20 days later. However, they could also roll over their stock - i.e. enter into another 20-day agreement by selling and then repurchasing the stock. As long as the price kept rising, everyone was making money. But towards the end of 1997, the first signs of impending disaster appeared. K&H Options, a London stockbroking firm which was underwriting most of the rollover in Dana Petroleum, got worried. A large amount of the rollovers had been going on for almost two years.
The two sides discussed the matter and Mr Oisin Fanning, an executive director of MMI, came to an agreement with the London firm that MMI would reduce its roll-overs in Dana from 54 million shares to 16 million. The reduction took place but what K&H did not know was that, at the same time, a commensurate exposure in Dana roll-overs was being taken out with another London firm, SG Warburg.
In April 1998, Warburg told MMI it could no longer do business with it in relation to rolling over MMI clients' stock. Panic set in. MMI had 70 million shares in Dana through Warburg and the sale of anything like that amount of stock would send the share price tumbling. During May, MMI managed to sell off a block of Dana shares, some 50 million in all. However, the sale of such a large amount of the stock damaged the price and the market knew that MMI, the official stockbroker to Dana, held more of the shares. MMI only got 16p a share for the 50 million shares, even though they had been priced at 24p up to that time.
The drop in price was catastrophic. The net assets of MMI in March 1998 were only £965,047. When the Dana price was at 20p and the company had a 70 million shareholding, a drop to 15p would have exposed MMI's clients to losses of £3.5 million.
What happened was that the shares fell to 9p. It was a disaster for MMI clients and the company. It was also a disaster for MMI directors, employees and connected persons. They were all substantial investors and were facing huge personal financial losses.
What happened next was outlined in court yesterday in an affidavit from the MMI liquidator, Mr Tom Kavanagh, and may yet be contested by the parties involved.
Mr Kavanagh is of the opinion that what occurred was that the ordinary customers of MMI were defrauded by the directors of MMI. The total amount involved, he said, was approximately £1.9 million.
The alleged misappropriation involved a Jersey company called Cater Allen. Cater Allen had given MMI full discretion to manage its client funds, and to make share purchases and sales.
On April 7th, 1998, three cheques were drawn on the Irish client account which held money belonging to MMI's clients. The total involved was £386,455 (€490,697) and the cheques were signed by two of the MMI directors. On the same day the three cheques were relodged back into the client account. In the meantime, however, the clients to whom the funds were accredited had altered.
The amount was debited from the client fund in respect of Cater Allen, i.e. the amount was treated as having been paid to Cater Allen. However, the money was credited to seven accounts, a number of which the liquidator believes are accounts belonging to Mr Fanning, or persons linked to him. One is in the name of Mr John Curran, another MMI director. Further similar transactions occurred in Britain on the same day. A total of £551,462 sterling (€855,378) was withdrawn from two client accounts in cheques signed by two MMI directors. The money was again relodged to the client accounts from which it was drawn, debited to Cater Allen and again credited to parties linked to the directors.
On March 3rd, 1998, there was a transaction involving £200,000 sterling being debited from the ledger account of Cater Allen and then sent to Hambros Private Bank.
Cater Allen has said it did not receive the money. In fact the Jersey company has said it did not receive any of the money mentioned above. Cater Allen, which the books show to be a debtor of MMI (in liquidation), has informed Mr Kavanagh that it should be a creditor. It has also said it is considering taking legal action to have its money returned.
Mr Kavanagh also mentioned a 1996 transaction involving approximately £500,000 sterling, the net effect of which was that the money appeared to have been paid into MMI by Mr Fanning, a Mr Francis O'Brien and IBI Nominees, but in fact came from the client account - i.e. the account which held clients' funds. The lodgement came by way of Mr Paul Boucher, a director of MMI.
The lodgements into accounts in the names of directors and persons associated with them, reduced the size of those persons' debts to MMI (in liquidation). This was at the expense of Cater Allen but what is not clear is who was the beneficial owner of the Cater Allen funds.
Intriguingly, a link exists between it and a number of the MMI directors.
Cater Allen was investigated by the Central Bank before the liquidation of MMI. The bank was told the beneficial owner was a Mr Adrian Lynch, from Kilkee, Co Clare.
Mr Kavanagh is of the view that statements from an MMI director, Mr Colm O'Reilly, that Mr Lynch authorised payments from the Cater Allen account, is not credible. He believes this because the beneficial owner of Cater Allen had no authority to transact business with MMI. Rather it was Mr O'Reilly and Mr Fanning who handled the Cater Allen account as per the agreement they had with that company.
The Cater Allen accounts were opened in June 1997, with debit balances totalling £835,064, by the direct transfer of balances from accounts in the name of IBI Nominee Accounts. The Central Bank investigation found that the IBI account was jointly owned by Mr Fanning, Mr Curran and Mr Boucher.
In a letter to the Central Bank in July 1997, Mr Fanning admits this was previously the case, but says the account is now owned by his father, Mr Enda Fanning. The point is important as it means that MMI had as a client a company, the beneficial owners of which were three of MMI's directors.
A Mr Adrian Lynch, of Kilkee, Co Clare, when contacted last night, said he had never heard of Cater Allen, MMI Stockbrokers, or any of its directors.
Whoever owns the funds lodged with MMI on behalf of Cater Allen may or may not take a case to have their funds returned. The general view before the liquidator discovering evidence of possible misappropriation, was that he would be unlikely to ever get the debts due to MMI from Cater Allen.
On the books Cater Allen owes £426,004. However, if £1.9 million of its money was misappropriated, it could claim it is owed £1.5 million plus. The MMI story is set to run and run.
