Macquarie Bank's recorded phone calls used as evidence against them

What would you do if faced with a call on a margin loan of $160,000 from Macquarie Bank and given three working days to pay it? Over the past 12 months this has became a common situation in Australia, and around the world.

Last year one investor’s offer to meet the Bank’s call didn’t go exactly as planned and the Bank sold his shares at a substantial loss. However the Federal Court agreed that the investor’s efforts were sufficient to meet the Bank’s call. They ordered the Bank to compensate the investor. The Bank’s own recorded phone calls actually helped the case against them.

This court decision could impact every investor who uses margin lending arrangements.

Background to the case of Goodridge v Macquarie Bank Ltd and Leveraged Equities Ltd

Next time you hear the words “this call may be recorded for training purposes” it may just help you. Lawfully obtained ‘surveillance’, in this case recording of phone calls, were used in this court decision.  This type of surveillance evidence is often most useful in the detection and proof of frauds but this case was different.

In the Federal Court decision on 12 February 2010 of Goodridge v Macquarie Bank Ltd and Leveraged Equities Ltd recorded telephone conversations were used to prove an aspect of the case. The Plaintiff is a Barrister (as a litigant in person) and he decided to take on the might of Macquarie Bank and Adelaide Bank.

The main issue was whether or not the Borrower had satisfied a Bank’s “call” under a Margin Loan.

The Situation

On Thursday 5 February 2009 the Bank made a margin call upon the Borrower. This required a payment of nearly $160,000 be paid by the following Tuesday 10 February – or three business days.

The Borrower sought to negotiate an extension. The Borrower knew that 10 days after the deadline he would receive approximately $175,000 of dividends from these units. His offer was for the dividends to be paid directly to the Bank in satisfaction of the Call. The Bank verbally agreed to this offer in a phone conversation.

Recorded Phone Calls Used as Evidence

The Bank had a procedure for recording telephone calls of its customers and brokers.  Two of these recordings were used in evidence as between the Borrower and the account manager. 

As agreed the Borrower signed an authority and instruction directing the dividend from his investments be credited to the Bank. As part of a subsequent conversation the account manager told the Borrower that he had done his part and that it was “perfect”. 

For an unexplained reason this authority was not acted upon and the dividend payment was still made directly to the Borrower’s bank account. It was then transferred to the Bank by the Borrower.

His Honour Justice Rares found that this action by the investor completely satisfied the margin call based on the evidence. The Plaintiff had successfully proven this aspect of his case using the Defendant’s own phone records.

Comment by Mark Streeter Sydney Lawyer

This case is illustrative of the high value Courts give to records held in objective media. These may include film, tape of voice recording or other electronic media such as emails, Skype or SMS records.

In a Court of Law it is not enough to be right. You must be able to prove, on the balance of probabilities, that you are right.  In this situation the recorded phone calls were the proof that was needed.

However any surveillance evidence must be in admissible form. It must not be obtained illegally. Otherwise it cannot be used in a Court of Law.  In Australia there are very strict rules regulating the collection of information and data.

This case actually involved two more margin loan calls with very interesting results. See the next blogpost.

Bank told to compensate for selling shares in low market

Macquarie Bank's sale of loan book creates problems for clients

The facts behind the case

Mr Goodridge (the Borrower) entered into a margin lending loan arrangement with Macquarie Bank in May 2003.  On 8 January 2009 Macquarie Bank sold their “loan book” (which included Mr Goodridge’s margin lending account) to a subsidiary of Bendigo and Adelaide Banks – Leveraged Equities Ltd (the Second Defendant in these proceedings).  Notices were issued on 19 January 2009 purporting to notify all customers of the Bank of the transfer and the new “ownership” of the Banking arrangements.

The Bank (either Macquarie Bank or Leveraged Equities) made a “calls and demands” under the loan on 5 February 2009 and 23 February 2009.
The evidence was accepted (form the Bank’s recording of a telephone conversation) that there was a negotiated arrangement between the Bank and the Borrower and the 5 February 2009 margin call was fully satisfied by the Borrower.

The enquiry then focused on whether or not a “call” under the margin loan by the Bank on 23 February 2009 expired unsatisfied which justifying the Bank selling the securities to pay down the margin loan.

The Borrower had purchased units in a listed units in Macquarie Country Wide Trust (MCW Trust).  The market price of these units on 11 November 2008 was 31 cents.  The discounted cashflow valuation that Macquarie Equities Ltd had placed on these Units was $1.15.  The price of these Units came under a degree of stress and by 23 February 2009 the price had fallen to 14.5 cents per Unit and during the day had dropped to 13 cents.  On the afternoon of 23 February 2009 an email was despatched from Leveraged Equities to the Borrower requiring payment of the margin call of $190,000.  The Borrower was given 24 hours to pay this amount to maintain the Loan Valuation Ratio (LVR) at 70%.  The “margin call” was not met within this timeframe and the Bank sold the Units for prices that went down to 10.5 cents per Unit.  All 5.6 million units were sold and because of the depressed price (in part caused by the fact that the market could not absorb the sale of 5.6 million units in a 24 hour period!)  There was still an amount outstanding to the Bank.  It remained in debit of over $58,000.00.

What's the Story?

The relationship between a Lender and the Borrower under a margin loan facility is one of substantial interdependence.  Unlike real estate which could take somewhere between three and six months for the Bank to take possession and sell, listed securities can be sold quite quickly.
The relevant clause of the margin lending loan required the Bank to give three business days notice for compliance with a margin call.  Other clauses in the agreement provided for the ability, at the discretion of the Bank, to modify the terms of the agreement.  However, His Honour Justice Rares found that this three days notice as an expressed term offered the Borrower a substantial contractual right and any alternative construction would lead to a very unreasonable and uncommercial result!

His Honour Justice Rares noted that the liability to meet a margin call remained contingent up until the time of the compliance and only matures into an actual liability if at the time of the application of the formula (to ascertain the LVR) the loan balance and the valuation of the securities is in breach of the required ratio.  His Honour Justice Rares delivered a lengthy 57 page judgement which dealt with many legal and factual complexities in a rational and well reasoned judgment.  The judgment will provide essential reading in construing any contracts relating to margin lending accounts.

His Honour found that the margin call was in breach of the terms of the margin loan agreement and accordingly invalid. There was no right on the part of the Bank (either of the two defendants) entitling them to sell.  Accordingly the sale of the units was unlawful and damages were payable.

If that was not enough, the judge also found that in the event that it was validly assigned that the “shortening” of the time for meeting the margin call from 3 to 1 days was a breach of section 12CB of the ASIC Act.  His Honour found that in all the factual circumstances, there had been a misuse of the power of sale and that the second defendant had required the Borrower to comply with conditions that were not reasonably necessary to protect his legitimate interest in breach of section 12CB(2)(b) ASIC Act in that it required him to pay money in accordance with a timetable and a series of demands that were not valid and secondly threatened, and then proceeded to, sell his property without a legitimate interest that it was entitled to protect. 

Accordingly this misuse of the power of sale was unconscionable.

The Borrower sought relief and an order that 5,603,562 in the MCW Trust be restored to him.

Since 23 February 2009 these units have increased in price substantially.  Additionally the units paid dividend (which also part of his damages claim) together with interest on the dividends.  As at 26 February 2010 they are 56.5 cents / Unit.  (That is his units would be worth over $3,000,000 plus dividend, plus interest on the lost dividend).

Another important issue - Invalid Assignment

Another significant legal issue to be determined was the question of whether or not a Bank can assign and “sell” a loan portfolio.  In the second paragraph of the judgement His Honour notes that:
“It was common ground that contractual obligations are generally incapable of assignment and that these can only be transferred by novation of the original contract.” 

His Honour found against the Banks on multiple counts. He found that they had not been a valid assignment of the entitlement under the loan to the second defendant which entitled them to make the call on the margin loan.

Comment from Mark Streeter - Sydney Lawyer

Inevitably this court decision will be appealed. Macquarie Bank sold a $1.5 billion loan portfolio to Leveraged Equities Ltd. They certainly would not want to see some sort of class action by other Borrowers seeking compensation for margin calls that were unlawfully made!

The saga will continue in the meantime - Happy investing!

The first margin loan in this particular case also involved the use of a phone recording as evidence. Read the full story on the blogsite

David beats Goliath using a recorded phone call