Skepticlawyer.com.au

Another reason why I have been a bit distracted lately… after two years of my own little blog, I am moving my blogging services elsewhere.

I have decided to accept an offer to team up with Skepticlawyer (Helen Dale) from Catallaxy, and we are setting up a joint blog, Skepticlawyer. It goes live today! We are both lawyers (obviously) but we have quite different political slants – it just makes for more fun, really - the main thing is that we enjoy each other’s posts.

Henceforth, all my posting will be at Skepticlawyer, so please update your links and feeds.

Check out my new post on legal ethics and clients who confess to crimes. Helen also has an interesting post on whether libertarians and progressives can hammer out a political compromise.

13 Comments

Filed under blogging, blogs, law

Opes investors fail at first hurdle

I know that some people have lost a lot of money through the collapse of Opes Prime, so it seems a bit ghoulish to be fascinated by it – but there you have it, I can’t help myself – I’m fascinated. There are so many interesting equitable and property law questions raised by it (tracing, equitable mortgages, mere equities, trusts in undifferentiated property), not to mention corporate governance issues. Some of my favourite topics!

Anyway, I saw yesterday that Finkelstein J of the Federal Court had handed down an important judgment from the point of view of investors seeking to reclaim their shares (Beconwood Securities Pty Ltd v Australia and New Zealand Banking Group Limited [2008] FCA 594).

I should explain briefly how the Opes Prime arrangement worked before getting into the judgment. Investors “loaned” their shares to Opes Prime in return for a cash advance. As a term of the Securities Lending Agreement (SLA), Opes promised that when the money advanced to the investor was repaid to it, Opes would redeliver shares to the investor which were equivalent in number and type to those originally provided. The value of the cash advance supplied was less than the value of the shares provided to Opes. The difference between the value of the cash advance and the value of the shares is referred to as the “margin”. Problems occur if the value of the shares fall below the value of the cash originally advanced to the investor, because then the value of the security is less than the value of the loan, and will not be sufficient to recompense Opes if the investor does not pay it back. In those circumstances, a “margin call” should be made to the investor, whereby the investor is required to “top up” the amount of shares provided so that the value of the shares is again greater than the value of the cash. One of the issues seems to have been that margin calls were not made when they should have been made to certain significant and substantial investors. And of course, the general stock market slump contributed to the drop in value of the shares beyond the margin.

As Finkelstein J notes at [9]:

In this case credit risk is all important. Boiled down to its essence, a party’s exposure to loss in the event of default is equal to the margin. That is to say, if the non-defaulting party is on the short side of the margin (ie the value of the assets delivered to him is less than the value of the assets provided) he will suffer a loss and, in the case of insolvency, be required to prove for the difference in the insolvency of the defaulting party.

In other words, the investors will have to pay the difference if their shares are not adequate security for the cash advances they received.

The investors are alleging that they were told by Opes that they would retain some form of ownership in their original shares. In fact, this was not true from a legal perspective (as will be discussed in greater detail below). Opes loaned the shares received from investors to its bankers, ANZ Bank (the defendant in this case) and Merrill Lynch. In return for this, Opes received cash advances, which were presumably used in part to fund the provision of cash collateral to investors. However, ANZ became aware that Opes was in financial difficulties, and appointed receivers to the firm. ANZ and Merrill Lynch commenced selling the shares that had been provided by Opes as security for its loans. Presumably this drove the value of shares even further below the margin. It was at this point that shocked investors started challenging the sales, as they had thought they retained some kind of ownership in the shares, and that it was not in ANZ’s power to sell them off.

In Beconwood, the plaintiffs claimed that they had retained a proprietary interest in the shares which they had loaned to Opes in two ways:

  1. Through an equity of redemption pursuant to a mortgage of the legal title to the shares
  2. Through an equitable charge over the shares

Both of these interests are proprietary security interests. Let me explain the equity of redemption first. In general law land, the actual title to the property is transferred to the lender, but the borrower retains the beneficial interest in the property (so he or she can live there and enjoy the property). What happens when the borrower has paid back all of her loan? It is then that the equity of redemption comes into play – it means that the lender has to transfer the legal title back to the borrower – the borrower is entitled to “redeem” her property.

An equitable charge is a little different. Legal ownership in the security property is never transferred to the lender at all – the lender merely has a right to sell off the borrower’s property if the borrower defaults.

The investor failed to make out either kind of security interest. In essence, this came down to Clause 3.4 of the SLA between Opes and the Investor, which stated as follows:

Notwithstanding the use of expressions such as “borrow”, “lend”, “Collateral”, “Margin”, “redeliver”, etc., which are used to reflect terminology used in the market for transactions of the kind provided for in this Agreement, all right title and interest in and to Securities “borrowed” or “lent” and “Collateral” which one Party transfers to the other in accordance with this Agreement will pass absolutely from one Party to the other free and clear of any liens, claims, charges or encumbrances or any other interest of the Transferring Party or of any third party (other than a lien routinely imposed on all securities in a relevant clearance system) without the transferor retaining any interest or right to the transferred property, the Party obtaining such title being obliged only to redeliver Equivalent Securities or Equivalent Collateral, as the case may be. Each Transfer under this Agreement must be made so as to constitute or result in a valid and legally effective transfer of the Transferring Party’s legal and beneficial title to the recipient.

In other words, it was clearly stated in the SLA that full ownership of the shares was transferred to Opes. All that the investor was entitled to upon repayment of the cash advance was equivalent shares – not necessarily the same shares as those which were originally provided to Opes. The point to be made about shares is that they are fungible – one share is very much like another, and it doesn’t particularly matter which one you get as long as you get an equivalent back. Finkelstein J makes the point that economically speaking, the arrangement was very much like a mortgage, but legally speaking, the analysis just could not be sustained.

The plaintiff then tried to argue that there was a necessary implied term in the SLA that the investor had a charge over any shares of the equivalent type held by Opes until it received its shares back, but it also failed in this respect too.

Finkelstein J’s judgment seems correct to me. Regardless of the representations Opes may or may not have made to its clients, it is the terms of the SLA which are fundamental, and the terms are explicit that the investors do not retain an interest in the shares. Clearly the investors did not read the terms of the SLA closely enough.

Finkelstein J makes an interesting analysis of US law. It is clear that the US has been using these kind of “securities lending arrangements” for longer than Australia, and that the market in the US is highly regulated in respect of these arrangements (unlike the Australian market). Perhaps the Australian regulators need to consider instituting US-style regulation if these kind of securities lending arrangements continue in popularity.

9 Comments

Filed under courts, equity, Federal Court, insolvency law, law, property, shareholders, stock exchange, USA

Seinfeld makes it to court

I’ve written previously on how Alice in Wonderland has made it into many Court judgments. Well, now Jerry and Elaine have made it into a judgment too!

In Parish Oil Co Inc v Dillon Companies Inc, the US Court of Appeals in Colorado mentioned Seinfeld in an anti-trust case:

Indeed, the plaintiffs’ reading would apparently render unlawful in the State of Colorado a promotional gimmick so common that it features in an episode from Seinfeld:

JERRY: “Atomic Sub”? Why are you eating there?

ELAINE: I got a card, and they stamp it every time I buy a sub. Twenty four stamps, and I become a Submarine Captain!

JERRY: What does that mean?

ELAINE (embarrassed): Free sub.

Seinfeld: The Strike (NBC television broadcast Dec. 18, 1997).

If the first twenty-four sandwiches are sold for $4 apiece at a cost to the maker of $3, the customer who follows through and redeems the offer will have spent $96 to buy $75 worth of sandwiches. But the last one is sold below cost (in fact, it is “free”), making it illegal under the plaintiffs’ version of the UPA. We do not believe the Colorado legislature would have acted so cavalierly as to ban such customer-rewards programs—indeed, to make them criminal—without more clearly expressing an intent to do so.

The plaintiff had sought to challenge a scheme whereby consumers at a particular supermarket got reduced cost petrol from a particular supplier if they had purchased groceries of a specified value. I’m sure this is familiar to all and sundry (our house abounds in vouchers for cut-price petrol from various outlets).

I think it’s awesome that the Court used Seinfeld to illustrate its point.

Now my only wish is that a court use the episode from Treehouse of Horror IV  to illustrate the concept of nemo dat quod non habet (you cannot give what you do not have). In a portion of this episode, Ned Flanders appears as the devil and tempts Homer with a donut in exchange for his soul. Homer, of course, accepts the offer and signs the contract. He cannot resist eating all of the donut, and the devil appears to claim his soul. However, Marge and Lisa are able to show that Homer could not give his soul to the devil because he had already given his soul to Marge on their wedding day (Marge produces a signed photo as evidence of this). Accordingly, the devil cannot take Homer’s soul, but turns his head into a huge donut… There you have it: nemo dat quod non habet in a nutshell.

Well, I’m a property lawyer, of course my wishes are nerdy.

(Via Core Economics)

Leave a comment

Filed under consumer affairs, crazy stuff, humour, judges, law, property, television

Confirmed

No, I haven’t suddenly become a Christian or anything – but I found out today that my PhD was confirmed. It’s been a bit of a nerve-wracking week. I had to give a 25 minute presentation to the department on my topic. Somehow giving a talk to friends and colleagues is a very scary prospect, probably because I really do care what they think – if it was a bunch of strangers, I don’t think I’d care so much. But amazingly enough, it all went fine. Then today, I had to face a committee to talk about my progress to date (I’m about half way through). It was actually tremendously useful to get some different points of view about approaches I could take. Whew! Now I can actually sit back and relax for five seconds – the last three weeks have been crazy.

5 Comments

Filed under academia, Personal, universities

Expectant

Yes, it’s official now – I am expecting Baby No. 2. Well, most of you probably guessed from my post “Pregnancy is not an illness“.

This now explains why I had to quit Missing Link a few months back. I have been finding it very hard to operate normally with “morning” sickness and the debilitating tiredness that pregnancy brings. Worst of all, I have had to run out of class mid-lecture on one occasion. Oh well, they are a nice class, very polite, they didn’t say anything about it.

Fortunately, I am now feeling a lot better – still not 100% yet, but I reckon I’ll be pretty good in another week or too (touchwood).

I find that I get more anxious about the state of the world when I’m pregnant, and particularly just after I’ve given birth. Last time, I would cry at news stories of abandoned children or children caught up in war. I had to stop watching the news for a month – there was just too much sad and bad stuff. It must be the hormones – they make you want to mother everyone in the world. So I’ll try not to let my blog become too anxious and neurotic!

Our daughter is very excited about the prospect of being a big sister. Some days she thinks it will be a boy, some days she thinks it will be a girl. She hopes Baby will come out and play blocks with her – I’ve had to explain that Baby won’t really be able to play or even do very much when he/she comes out, but when Baby gets bigger, I’m sure he/she will want to play.

I’m really fascinated to see whether this baby will be like our daughter or totally different. My sister and I are very, very different in many ways (although, naturally, we’re also very similar in many others). I can’t wait to meet him or her! So it’s all exciting.

14 Comments

Filed under childbirth, children, motherhood, pregnancy

Cause and effect

I haven’t been too impressed with ethanol fuels for a while. My concern back then was “that if governments make emotional knee-jerk reactions, the cure may be as bad as the disease it is designed to alleviate.”

In that context, the current food crisis is a salutory reminder of the nature of cause and effect.  Food riots have occurred in Egypt and Haiti and other countries, and the World Bank has warned the increased cost of food will push 100 million impoverished people deeper into poverty.

As this Washington Post article makes clear, the causes of the crisis are many, including the Australian drought, high oil prices and world economic trade barriers which obscured the rising food prices, preventing the market from making gradual adjustments.

However, another cause is the move in the US to plant crops for biofuels. Apparently one-fifth to one-quarter of the US corn crop will go to the production of ethanol for biofuel, which has contributed to the rise in global corn prices. And one must question how efficient biofuel is, according to these statistics stated in a New York Sun article

“It takes around 400 pounds of corn to make 25 gallons of ethanol,” Mr. Senauer, also an applied economics professor at Minnesota, said. “It’s not going to be a very good diet but that’s roughly enough to keep an adult person alive for a year.”

Some environmental and charity groups have now turned against biofuels as a result of the current crisis. It just proves that there’s no easy solution, and that proper and considered thought needs to be put into alternative fuel sources. This is why I hate scaremongering; it leads to irrational responses where the outcomes can be disasterous. Hopefully this will cause some thought about other options instead of biofuel.

But more than that, I hope that people will not starve as a result of the heightened food prices.

2 Comments

Filed under climate change, Economics, environment, ethanol fuel, food, politics, society, USA

Teaching by example

A science teacher friend told me that “teaching by real life example” is all the rage these days. People have to run around the room pretending to be electrons, rather than learning about electrical current in the abstract. It’s supposed to make learning more “approachable” and easier. A creditable aim, but I am afraid that I have always despised that kind of teaching. It treats people like idiots, incapable of understanding abstract thought. And personally, I learn far more by learning the abstract concept. (Well, I’m an academic lawyer, of course I love abstract concepts.)

It seems that perhaps I am not alone in learning more readily by being taught an abstract concept.

A recent study suggests concrete examples may actually impede students from learning an abstract mathematical concept. The New York Times article explains:

In the experiment, the college students learned a simple but unfamiliar mathematical system, essentially a set of rules. Some learned the system through purely abstract symbols, and others learned it through concrete examples like combining liquids in measuring cups and tennis balls in a container.

Then the students were tested on a different situation — what they were told was a children’s game — that used the same math. “We told students you can use the knowledge you just acquired to figure out these rules of the game,” Dr. Kaminski said.

The students who learned the math abstractly did well with figuring out the rules of the game. Those who had learned through examples using measuring cups or tennis balls performed little better than might be expected if they were simply guessing. Students who were presented the abstract symbols after the concrete examples did better than those who learned only through cups or balls, but not as well as those who learned only the abstract symbols.

The problem with the real-world examples, Dr. Kaminski said, was that they obscured the underlying math, and students were not able to transfer their knowledge to new problems.

“They tend to remember the superficial, the two trains passing in the night,” Dr. Kaminski said. “It’s really a problem of our attention getting pulled to superficial information.”

The researchers said they had experimental evidence showing a similar effect with 11-year-old children. The findings run counter to what Dr. Kaminski said was a “pervasive assumption” among math educators that concrete examples help more children better understand math.

But if the Ohio State findings also apply to more basic math lessons, then teaching fractions with slices of pizza or statistics by pulling marbles out of a bag might prove counterproductive. “There are reasons to think it could affect everyone, including young learners,” Dr. Kaminski said.

As a teacher, I’ve always been a big fan of keeping it simple, and getting across the basic concepts. Seems like maybe I am on the right track. So I won’t be getting my class to pretend to be Torrens land titles or mere equities any time in the future.

4 Comments

Filed under academia, children, education, psychology