Category Archives: USA

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.


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

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.


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

God’s law and the law of the State

What happens when you have a particular group in society who are not minded to follow the law of the State, but prefer to follow God’s law as they interpret it?

Recently this question has come up in relation to Sharia law, particularly after the Archbishop of Canterbury said that some aspects of sharia law would inevitably be adopted in Britain. But the question doesn’t just arise in relation to Islam. Many religions have a group within who prefers the laws of God to the laws of the State. For example, orthodox Jews in Australia may take some disputes between one another to the Beth Din, a religious court where rabbis hand out judgment. And some indigenous Australians may prefer that a dispute be dealt with under traditional law rather than “whitefella law”.

My personal opinion is that as long as the law of God does not transgress fundamental human rights, then parties can consent to that particular law binding their actions. It is rather like an agreement to arbitrate in a contract where any disputes are referred to a mutually agreed arbitrator. The problem occurs when a particular practice or punishment which is said to be required by the law of God or tradition is illegal under the laws of the State: eg, stoning, spearing through the leg, promise of child brides etc. My personal opinion is that such things should not be allowed. The issue is slightly more vexed with indigenous tradition than it is with other religious laws because indigenous people didn’t “choose” to move here and to be subject to our laws, they were imposed upon them from colonisers. Nonetheless, as I have explained in one of my very early posts, as a feminist, I just cannot countenance the assault and rape of a teenage “promised bride” by her tribal husband, for example. Cultural relativism be damned.

It is a difficult question however, because it is a balance between religious tolerance and universal human rights (which should apply to all, regardless of race or religion or anything else).

Consequently, I was really interested to read this article in Slate about the American legal system and the Amish and the Mormons. I hadn’t really thought deeply about the conflict that would arise between State law and the traditions and laws of these two groups.

Amish are Anabaptists of Swiss-German origin who live in separate communities. They dress in conservative dress, do not use much modern technology and do not educate their children beyond 8th grade because of the “worldly values” they might learn. Study is focussed on the Bible, and children are expected to work in the fields with their parents once they leave school. They do not believe in Social Security, and do not either make payments or accept payments from the government. The educational practices and expectation that children will work in the fields has brought them in to conflict with US education and child labor rules. In Wisconsin v. Yoder 406 U.S. 205 (1972) three Amish parents were fined by the Wisconsin authorities for taking their children from school before the age of 16, but the US Supreme Court ultimately upheld the right of the parents to do this. Amish refuse to participate in wars, and their conscientious objection has also gotten them into trouble. As the article in Slate observes, the Amish have been given a fair degree of latitude, in part because they are peaceful and because they have managed to broker compromises with the State.

Mormons are members of the Church of Jesus Christ of the Latter Day Saints. They believe in the Book of Mormon. The Church of the Latter Day Saints officially abandoned polygamy after pressure from law enforcement in 1890, but some other fundamentalist groups continue to practice polygamy. The practice of taking multiple wives and taking child brides has brought the Fundamentalist Mormon Church into conflict with the law. In the last few weeks, Texan authorities raided a Fundamentalist Mormon compound after a 16 year old girl called authorities to say that she had recently borne a child to her 50 year old husband. Other US States are concerned that this raid may ruin their efforts to make Fundamentalist Mormons trust them and cooperate with them. As the Slate article outlined, a large raid on a Short Creek Fundamentalist Mormon community in 1953 was ultimately counterproductive. The Slate article concludes that the Mormon groups are in a different situation to the Amish:

But the fundamentalist Mormons groups are in a state of evasion. The ban on bigamy functions as a zoning ordinance: Plural marriage is fine in isolated communities, but not in Salt Lake City, and certainly not on TV talk shows, as Tom Green found. So long as the fundamentalists remain in hiding, the extreme ugliness of conducting raids creates a form of tolerance. They are thus in a “don’t ask, don’t tell” state of legal limbo that could break open at any time. They are outside the law in a different way.

It will be interesting to see whether the Texan raid is counterproductive or forces the Fundamentalist Mormon church into submission.

These situations remind us that the conflict between God’s law and the law of the State has many facets, and there are different ways of resolving the issue. Have a read of the Slate article and see what you think.

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Filed under children, christianity, feminism, human rights, indigenous issues, islam, judaism, law, marriage, politics, religion, society, tolerance, USA

Student evaluations

I think I’ve mentioned the phenomenon of student evaluations before on this blog. Sometimes, as I’ve explained in the earlier post, I’ve received some very amusing ones. Most have been pretty positive although I have received some critical evaluations. Never anything really soul destroying…yet. Other times, the positive ones balance the negative ones exactly (eg, I get 5 saying “Where were the Powerpoint slides?” and 5 saying “Thank God there were no Powerpoint slides!”) I tend to mentally file those responses under “well, you can’t please ’em all”.

Lately I’ve come across a couple of interesting legal issues regarding student evaluations. Of course, both cases come from the US, the fount of much interesting litigation.

First, there’s the case of a student who, when asked to complete a student evaluation form, wrote offensive comments about a professor’s sexuality and expressed the desire that the professor die of AIDs. Read more about it here at Concurring Opinons and here at Volokh Conspiracy.

The evaluation was said to be confidential. However, the professor in question was very upset by the comments, and went through exam papers to identify the handwriting of the person who had made the comments. The particular student was identified, and officially reprimanded. The student has been asked to write a 1,200-word essay on how his remarks affect the lesbian, gay, bisexual and transgender community, to write a letter of apology to the professor (including constructive criticisms of his teaching style), and to discuss with the university training or other programs deemed appropriate.

Hmm. I have to say that I found the student’s comments offensive, and for this reason I decided not to reproduce them on my page. I’m sure that if someone directed racist, sexist or other abuse at me, I would be very, very upset. Particularly if it was something about which I was already sensitive or about which I had already had to face abuse from others previously. I also think the punishment was appropriate, although I do wonder whether it will really change the student’s underlying prejudices.

On the other hand, if it were me, I don’t know that I’d go through all the exam papers and work out who said it. To my mind, the surveys are confidential, and even when people say stupid and offensive things, that is a promise that needs to be kept, except in extreme cases where, for example, a death threat is made. The confidentiality allows students freedom of speech to say whatever they want, even if it is ridiculous or highly critical.

The student did say that he hoped the professor in question would die, but to my mind, it was not a death threat – it was more of a unpleasant and juvenile sneer of the kind that 13 year olds make. The statement made by the student indicates (a) that he is extremely immature and (b) that his opinion is not worth much anyway. I’d probably decide to brush it off as an opinion not even worth worrying about, and hope that as he progressed through university he came to a more open-minded point of view. I might also suspect that he had sexuality issues of his own (as is often the case with young homophobic males)…

However, I’d welcome comments from anyone who feels differently. I suspect some readers who are members of the gay and lesbian community might feel very strongly about this one.

The second case concerns a professor who altered student evaluations to make them more favourable towards him. The professor happened to teach law, and the Supreme Court of Iowa has suspended him from legal practice, with the possibility of reinstatement on conditions. (Hat tip to Stephen Warne for alerting me to this one).

The misconduct occurred as follows. The professor remained in the room when the student surveys were taken, and he and his research assistant also completed surveys which were handed in (favourable, I’m sure). It seems that they amended some of the results.

The professor also gave a speech to the students stressing the importance of good reviews, and said that his problems with the law school had arisen because others were jealous of him. I must say that I have never had the hide to give a speech to students about how important student evaluations are to academic careers. I’d rather people judge me honestly, without having to beg them to be kind.

The professor was suffering from bipolar disorder, and at the time of the offences, he had not taken his medication, which makes his conduct rather more explicable. Ironically, his speciality was mental health law. Still, despite the bipolar disorder, he must have known that what he was doing was wrong.

The consequences have been quite devastating for his career, I am sure – what a silly fellow! – he would have been better to leave the questionnaires untouched and leave his career in one piece.


Filed under academia, cheating, education, freedom of speech, law, legal education, powerpoint, sexuality, society, tolerance, universities, USA

“You have to die, so that I can live.”

Last night, I watched a rather depressing documentary on SBS called The Anatomy of Evil. It was about people who perpetrate genocide. I’ve been morbidly fascinated with this question for a while now, as I’ve explained in an earlier post. I’ve never quite been able to fathom how people could shoot/gas/blow up an innocent civilian.

This documentary consisted mainly of interviews with former members of the Einsatzgruppen and Serb paramilitaries, each of whom conducted ethnic cleansing of villages by lining up people and shooting them at point blank range. Some interviewees were unrepentant, and said they’d “do it again if it was necessary”. Some still regarded the people whom they had shot as sub-human. A few regretted their actions and felt less than human.

The director, Ove Nyholm, concludes that the trigger which compels ordinary people to behave like this is anxiety and fear of a threat. In such circumstances, people put aside normal feelings and become ruthless. This is a survival mechanism, and can actually be a positive thing. People can survive in terrible circumstances through sheer willpower. But in the scenario where a group of people who live alongside you are identified as the threat, there is a risk that you will become ruthless towards those people and cease to see them as human. Add to that a wartime context where violence and killing is condoned and people are forced to follow orders, and the results can be deadly. And there’s the notion of retaliating for past wrongs. One of the most unpleasant interviewees featured in the documentary cited the fact that his family had been driven from Kosovo by Albanians in the past, and that he felt satisfied and a sense of righteous revenge when killing villagers and burning down their houses. Another interviewee said that he became a member of the paramilitary group after his own parents had been brutally killed.

It occurred to me too that this analysis can also help explain other wars and ethnic and religious conflicts which do not involve genocide as such, but where innocent civilians are killed.

Take, for example, terrorist attacks. The way in which terrorists become galvanised to kill innocent people is by considering wrongs done to their own people, and desiring to take revenge. I recall that during the Israeli incursion into Lebanon, someone forwarded a Powerpoint slide of dead Lebanese civilians, including a young boy. The purpose was obviously to provoke outrage against Israel. If I was a radical Hezbollah supporter, I am sure that such pictures would be used to whip me into a state of righteous indignation and revenge. And I am sure that an Israeli defending the incursion into Lebanon would ask me to consider Israeli civilians injured or killed by Hezbollah rockets, or Hezbollah terrorist bombs. They might also point to the suffering of Jewish people in the past in Europe as a reason as to why Israeli territory should be staunchly defended. Personally, I consider the loss of life on both sides to be tragic. Neither side can be said to be blameless, but by the same token, the natural human propensity for revenge makes the outraged response of each side understandable. This is why I am so reluctant to “take sides” in discussions on the Middle East, although I am a firm believer that the State of Israel has a right to exist in its original boundaries.

Conflict is fuelled by the notion that the other group represents a threat to the way of life or security of the group. Sometimes, as in Israel, Northern Ireland or Cyprus there are settlers and occupying forces. Sometimes there are competing claims to the same piece of land, or the same holy site (as with some mosques which are targeted by Hindu militants in India). Sometimes the particular ethnic group wants to be separate from the rest of the country, as with Basques in Spain, Kurds in Turkey, Iraq and elsewhere and Tamils in Sri Lanka, because they feel that their way of life and culture is not adequately represented by the government of the particular country of which they are a part. Sometimes, the victimised group is a minority who have been made a scapegoat for a nation’s ills (as with Jews and Gypsies in Nazi Germany, who were targeted because they were different).

When terrorist attacks are mounted, there are retaliatory attacks, often by armed forces. So the US felt justified in attacking Afghanistan because its innocent citizens had been killed by a terrorist plot which had been planned from Afghan territory. One can understand this. The perpetrators had been sheltered by the Taliban regime. But the problem with attacking terrorist or guerilla groups with military force is that they tend to blend back into the normal population, so when you attack them, there is a risk of killing and wounding innocent civilians, which further fuels the fires of righteous outrage.

I don’t know what the answer to all this is, I just know that we should be wary of those trying to whip up moral outrage, whatever side they are on. Take the Cronulla riots in Sydney. Those organising the rally whipped up moral outrage against young men of Middle Eastern background who had been harrassing beachgoers. Yes, it’s true, harrassing innocent people at the beach is a bad thing. As a result of the rally/riot, several people “of Middle Eastern appearance” were beaten and attacked. Bashing people who happen to look like they come from the Middle East is also a bad thing. Then young men in Lakemba whipped up moral outrage to fuel a retaliatory attack. Attacking the houses and cars of people in Maroubra is another bad thing. The thing is that it’s all bad, and it’s mostly innocent people on both sides who suffer.

Perhaps it’s just instinctive that the “ruthless” switch is tripped when we feel that our safety, territory or way of life is under threat. Perhaps we need to recognise that it’s all just part of the way we’re hardwired. Of course one is outraged by injustice suffered by one’s family, friends or compatriots. How much worse would it be if someone in your family or friendship group is killed by a particular group? I’m not sure how I would cope in those circumstances. As Nyholm said in the documentary, he had to acknowledge that he had doubt as to how he would behave. I don’t know either. I’ve never known how I would behave if I were in the Milgram experiment, although I hope that I’m ornery enough to disobey orders. I do hope that if my “ruthlessness” switch was tripped, I would be able to recover my reason and morality. As one of the interviewees said, the scary thing is not that man becomes a beast, but how long he remains a beast.

Perhaps we need to consider that old piece of Klingon wisdom: “Revenge is a dish best served cold”. (Seriously, its first recorded use in that form is in Star Trek II: The Wrath of Khan…the things you learn from Wikipedia!) When our moral outrage switch is tripped, perhaps we need to be aware that our “ruthlessness” switch may also be switched on at the same time, and guard against taking out our anger against anyone who is or may be associated with the group who is said to be morally outrageous. It is difficult to look into the heart of human darkness, but I am glad that I had the courage to watch this documentary.


Filed under Cronulla riots, good and evil, human rights, Iraq, middle east, morality, Political, politics, psychology, religion, terrorism, tolerance, torture, Uncategorized, USA, war

The sad consequences of losing a pair of pants

You may recall that Roy Pearson, a US administrative law judge, filed a multi-million dollar claim against the Chungs for losing a pair of his pants (earlier explanations here and here). He lost resoundingly, and then appealed. Pearson’s contract as a judge was unlikely to be renewed as a result of his conduct and the adverse publicity surrounding this litigation.
Now the Chungs have now been forced to sell up their shop.

Pretty sad outcome for everyone. And all over one pair of pants! I really hope Pearson sees sense and abandons his appeal, but I have a horrible feeling that he’ll pursue this claim right up to the US Supreme Court.

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Filed under crazy stuff, law, society, tort law, USA

Rat finks, be careful when you send flowers to your mistress

Thanks to my lovely Mum for pointing me to the crazy case of Leroy Greer, who is suing for giving his wife information about the long-stemmed roses which he had sent to his mistress months earlier.

Greer alleges that he ordered the roses for his mistress via the online florist, and that they agreed to keep the records of the transaction private, with no record of the transaction to be mailed to his home or office. Some months later, the florist sent a “Thank You” card to Greer’s home, thanking him for using their services. His suspicious wife called the florists, asking for information about when he had bought flowers from them. They faxed her through the order (including details of the mistress) and she subsequently filed for divorce. has a copy of the order which the florists faxed to the wife, including an interesting handwritten annotation, presumably written by said ex-wife.

What a rat fink. It’s his own fault if he had an affair: he should wear the consequences.



Filed under consumer affairs, crazy stuff, law, USA