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Langbar misery piles up with £2.5m bill

Hundreds of investors in Langbar International, the suspended Aim-listed company under investigation by the Serious Fraud Office, are to be forced to pay an extra £2.5m for derivative investments linked to the shares.

Ahead of a shareholder meeting in London today Nigel Smith, adviser to the Langbar action group, said that a number of people had bought investment instruments know as contracts for difference (CFDs) which were linked to Langbar shares.

Broadly, CFDs give holders an opportunity to purchase the underlying shares of a company for a fixed price at some date in the future.

Now, however, some of the City's brokers and spread betting firms, such as TD Waterhouse and IG Index, have set a St Valentine's Day deadline to press for full and final settlements of these contracts.

Mr Smith explained: "Langbar shares were suspended last October at 50p. We have action group members who not only lost money by holding the actual shares but who must now also pay thousands of pounds more each to fulfil these derivative contracts."

He added: "These City firms are after a 100pc margin call, or full settlement, which supposes that Langbar's shares are worth nothing, yet we simply don't know that to be the case. Some of the company's assets may yet be recovered."

One contract holder owes £12,500 to broker TD Waterhouse, whose CFD arm is run by spread better City Index.

The investor, who asked to remain anonymous, said: "I received a letter from my broker last week telling me the position would be closed on February 14 and that the money must be paid in full by next Monday at the absolute latest.

"I have explained that I already own around £90,000 worth of Langbar shares and I can't afford to find all the money at once."

Clive Cooke, chief executive of TD Waterhouse's CFD division said: "We bought the underlying stock to cover the contracts four months ago. We think it is reasonable that investors should now pay."

At today's meeting David Buchler, chairman of DB Consultants, will update investors on the tracking down of Langbar's assets, which in September were said to be worth £350m. He will also discuss a report by corporate recovery experts Kroll Associates.

Kroll was called in by former Langbar chairman and shareholder Stuart Pearson who resigned last Friday.

Pension Diary

Last July I started the pension challenge - an attempt to turn my self-invested personal pension from £122,000 to £1m within three years using contracts for difference, or CFDs.

CFDs are synthetic stock substitutes that provide me with gearing and the flexibility to go long (bullish) or short (bearish). Gearing or margin trading is the quick way to make or lose a lot of money.

For example, I can control over £1m of equities with only £100,000 of collateral so a 1% increase in the leveraged portfolio will result in a £10,000 or 10% increase in the underlying pension. There are borrowing costs associated with leverage which can mount up, but the big risk is being positioned either completely long or short and the market goes the other way.

After a good start, the pension was over £170,000 going into October. By November the SIPP had dropped to £128,000 - I was "long and wrong" and, more importantly, I was not able to concentrate full-time on my trading to really take advantage of the bounce that followed.

Last month I reported that we were at £148,000, thanks to a general upward move in world stock markets. January and February, at the time of writing, have been good, although there have been a couple of sharp one-day drops in Japan and Wall Street. On both days, however, the market has bounced back immediately - to my mind a very bullish sign.

My task this month was not helped by a large holding in -Mate, a Scottish-run company based in Dubai that makes wireless integrated pocket PCs that I do not really understand but the statements seemed confident. With a good Xmas in the bag, I would hopefully be counting the money.

Wrong ... the integrated pocket PC says "no" - a profits warning on January 20 helped the shares fall 33% intraday - the bottom line saw a very nice profit in my Sipp disappear and return as a rather large loss.

At the time of writing, the pension valuation, including running profit and losses, was £179,856 - a nice improvement over the month, but I am running at about £50,000 behind schedule. It will help me - and all of us - if a bull market returns to these shores.

Some may say that since Saddam's statue toppled, 30 months ago, we have had a bull market - after all, the FTSE has risen significantly since the lows of 3300 in March 2003. Not me. I remember December/January 1999/2000 when the FTSE-100 nearly hit 7000, an all-time high.

It is very unusual to find a five-year period in which the FTSE has not produced a positive return, let alone a six-year period. In fact, my rule of thumb is that, over a 25-year period, one should achieve a ten-fold return on capital.

For example, the FTSE-100 was introduced in 1982 at 1000. So, by the end of 1999, at nearly 7000, things were on target. To get back on track, the FTSE needs to hit 10,000 by December 2006, which is very unlikely. Nevertheless, I am very confident that we are in for an exceptional period of returns from equities.

I am particularly keen on shares that are related to financial services and I like the look of property company Songbird Estates - 202p - which owns a core of property around Canary Wharf. Songbird, whose major shareholder (at 40%) is Prince Alwaleed Bin Talal Al Saud, has benefited from City firms relocating there and has also signed some Olympic leases. But, ultimately, I'm more interested in bulls than songbirds.

Barnett Alexander is a director of Echelon Wealth Management Ltd.

Aussie brokers plan new stock futures in three countries

SYDNEY: A group of Australian brokers is set to launch a new type of stock futures in Hong Kong, Tokyo and Singapore in the hope of exporting local success.

Unlike regular exchange-traded stock futures, the instruments pay dividends and do not expire. Investors can put down as little as 5% of the stock's underlying value to buy or sell one, creating powerful leverage.

The instruments, called contracts for difference (CFDs), have lured Australian day traders due to their ease of use and are also gaining popularity among first-time investors who are looking to magnify returns.

"The simplicity of CFD is the biggest draw and traders with little understanding of the complex derivatives world love them," said Peter Oxlade, who heads CFD sales at Man Financial, a unit of commodities and hedge fund firm Man Group.

"The rollout for offshore investors is expected in mid to late-January and we are in talks with regulators," said Oxlade, a former currency trader and stock broker.

Share CFDs will become available on top companies listed on Tokyo, Hong Kong and Singapore stock exchanges to offshore investors. Once regulatory approvals are in place, residents in Tokyo and Singapore can trade CFDs directly.

"The big thing in Hong Kong is regulation and then infrastructure and people's ability to trade online. CFDs are generally traded on an Internet platform," said Dan Semmler, associate director at the Equity Markets Group of Macquarie Bank. "But the appetite for leverage is extremely strong in Hong Kong and probably outstrips Australia."

The Australian market's daily turnover is about A$350mil, some 14% of the total turnover at the Australian Stock Exchange, and analysts estimate it could boom to about A$1.5bil over the next 12 to 15 months.

First UK-listed CFD

Investment bank SG has entered the burgeoning contracts for difference market with what it claims is 'the first UK-listed CFD'. The new product will trade like existing CFDs but offer guaranteed protection at no extra cost, with the maximum loss capped at the initial margin payment. SG's Christophe de la Celle adds that aside from giving investors the comfort of knowing exactly how much they stand to lose, switching to its CFDs will save investors money in transaction costs.

As the CFDs are listed, private investors will be able to trade them on the London Stock Exchange using a conventional broker and possibly paying substantially lower commission rates. 'This is a milestone for the UK investment market. It gives existing CFD traders and retail investors the possibility to magnify returns in the underlying security, through a product that is transparent, cheaper to trade and with guaranteed protection at no extra cost,' says de la Celle.

Panel declares war on secret derivative dealings in takeover talks

The Takeover Panel will tomorrow force hedge funds to come clean on their dealing activities during takeovers and mergers.

The panel, which polices deals, will introduce new rules that will force hedge funds to declare if they hold more than 1pc of a company through derivatives during takeovers.

The secretive funds - and some private investors - have been able to exert considerable influence over companies during takeovers without having to disclose their interest.

They do this by using derivatives such as contracts for difference (CFDs) to gain exposure to companies' shares.

Just last week it emerged that Polygon, a London hedge fund, had secretly built up a 13.9pc stake in retailer Peacock Group, which is in the throes of a management buy out. The stake only came to light after Polygon converted its CFDs into voting shares.

Investment banks which provide CFDs usually buy the underlying shares on which the CFD's are based and often agree to vote them at the direction of hedge funds which buy the CFD in "sweetheart deals". This enables funds to exert huge influence on takeovers without other investors' knowledge.

The panel's new rules will force funds - and anyone else - to declare their dealings in companies during takeover situations if they hold more than 1pc through both derivatives and/or shares under the Takeover Code's rule 8. Under the rules Poly-gon would have had to declare its CFD interest as soon as it reached more than 1pc of Peacock.

It would have had to declare all further dealings in Peacock after that point. The new information will be supplied over the London Stock Exchange's Regulatory News Service and can be viewed on its website.

Takeover Panel director general Richard Murley said that the rules were designed to "improve transparency" in the City and should cover any derivative that gives an investor exposure to a company's shares now or in the future.

He said: "The rules have been framed so that they are based on principles rather than technicalities and so we hope that they cover any derivative now or that might be developed in the future.

"People may try to come up with products that fall outside the rules but we have tried hard to make sure they will be covered. It is about improving transparency."

City 'genius' Keelan dies aged 50

Brian Keelan, one of the most innovative and at times controversial financiers in the City of London, has died aged 50, cutting short a high-profile career that had promised to take him to the very top at Jardine Matheson, the Hong Kong-based trading group he joined in 2001.

Mr Keelan was a rare iconoclast in the Square Mile who constantly questioned received wisdom during a career that will be remembered principally for two deals while he was at SBC: the ferocious and successful defence he mounted in 1997 on behalf of the Cooperative Wholesale Society against a hostile bid from Andrew Regan, and the attempted £1.2bn takeover bid for Northern Electric by his client Trafalgar House in December 1994.

Friends and former colleagues paid tribute to Mr Keelan, who died on Friday after suffering a brain haemorrhage on holiday.

Jon Wood, one of Mr Keelan's closest ex-colleagues, said: "People use words very loosely these days so they lose their proper meaning but Brian was a genius. He really did think outside the box. He didn't let convention get in the way of anything he was trying to do. He really was a quite incredibly intellectual person."

Mr Keelan, educated at the Benedictine Douai Abbey in Berkshire and University College Oxford - which he captained to University Challenge success - was an early adopter of using cash flows as the main tool for valuing companies. In mounting Trafalgar House's bid for Northern Electric while an adviser at SBC, he became the first banker to use the then obscure financial securities called contracts for differences (cfds) in a large takeover, a move that proved highly controversial with regulators and rival banks.

His aggression and determination to do what he believed was right drove him to defend the Co-op against Andrew Regan, who had been one of Mr Keelan's former clients. Yesterday Mr Regan joined those paying tribute to the financier. "Brian was an amazing man. He was a brilliant and formidable adviser," he said.

Jens Tholstrup, a student at Oxford with Mr Keelan, said: "I have no doubt he would have risen to the very top. He was incredibly focused on success."

Bear Stearns fined by UK market watchdog FSA

Britain's market watchdog said on Monday it had fined U.S. brokerage Bear Stearns Cos. (BSC.N: Quote, Profile, Research) for failing to report derivatives contracts.

The Financial Services Authority fined Bear Stearns 40,000 pounds ($70,210) for failing to report contracts for difference transactions (CFD).

CFDs are geared investments whereby investors take a position on a stock's movement without buying or selling the underlying equity.

The FSA said Bear Stearns had not reported any of its CFD business since they began this business in August 2001.

Bear said it was glad to put the matter behind it.

"This was an error in our systems that was neither deliberate nor reckless, and we are pleased to have this matter resolved," a spokesman for Bear Stearns said.

London Stock Exchange considers CFD exchange

The London Stock Exchange, Europe's largest share market, is considering plans to offer trading in contracts for difference (CFDs), market sources said on Wednesday.

A spokeswoman for the exchange declined to comment on specific plans to launch a market in CFDs, but said it was talking to its members over ways to add value to the process.

She said roughly 35 percent of the LSE's (LSE.L: Quote, Profile, Research) business was related to CFD trading.

CFDs are geared investments whereby investors take a position on a stock's movement without buying or selling the underlying equity. Initially aimed at the growing hedge-fund community, equity CFDs also enable investors to avoid paying the 0.5 percent stamp duty on share purchases.

According to a report on Futures and Options Week's website, CFD-related trading is estimated to account for 20-40 percent of turnover in the London share market.

Irish stakes

The so-called luck of the Irish ran out last week for a group of CFD traders on the Emerald Isle. At least €50 million was lost in minutes during lunchtime last Monday by private clients of Irish stockbroking investors in pharmaceutical company Elan. The traders had staked money on CFDs, which are not regulated by the Irish Financial Services Regulatory Authority (IFSRA), so their losses were amplified when Elan's share price collapsed by 70% last week. Elan was among the most-traded shares using CFDs in Ireland. Last Monday's debacle, when Elan announced it was suspending its multiple sclerosis drug Tysabri, has raised questions as to whether CFDs should have been promoted for use in an underlying share as risky as Elan. Some senior broking sources have confirmed that Irish private investors had staked at least €15 million on CFDs based on the Elan share price rising ahead of Monday's crash. The leverage of CFDs, therefore, means those investors are facing losses of at least €50 million, given the 70% share price collapse. It is actually the second time in just over a year that CFDs have been responsible for amplifying the losses in an Irish share price slide. Investors trading CFDs raised regulatory concerns in January last year when Ryanair shares fell following the airline's profit warning.

IFSRA, unlike its UK counterpart the FSA, is not obliged to compile separate statistics for CFD transactions in Ireland under current legislation.

CFDs are a highly profitable line of business for brokers, who have been promoting them in roadshows and recruiting staff to their CFD desks in recent months. The CFDs sold in Ireland are mostly provided by London-based broker Cantor Fitzgerald, which generated a significant amount of business from the Elan CFDs.

Local brokers and fund managers said the impact on Irish pension funds from the Elan losses will be small but many believe investors will now shy away from more risky stocks. Angus McDonnell, managing partner at Bloxham Stockbrokers, questioned whether Elan - given its high-risk nature - should have been a component of the Irish Stock Exchange index in the first place. 'That is a question for the market,' says McDonnell. 'It certainly made the market look better last year and the funds that track the market. I just wonder if it should have been in the index in the first place.' Elan shares nosedived to €4.66 in Dublin trading last week from €26.90 the previous week.

The crash is a painful but timely reminder of the risky nature of leverage. As spread betting and CFD trading reach new heights of popularity, traders need to be aware of exactly what is at stake.

Bidders may be forced to disclose derivative stakes

Bidders and speculators who build stakes in companies under siege using derivatives may be forced to disclose holdings above 1 per cent under new proposals tabled yesterday by the Takeover Panel.

Citing events during the approaches for Marks & Spencer, the high street retailer, and Alvis, the tank manufacturer, last year to justify its stance, the panel said that stakebuilding using derivatives should be subject to the same disclosure rules as stakebuilding via ordinary shares.

Until now, investors have been allowed to build de facto stakes in companies that are the subject of a bid by buying contracts for difference (CFDs) and other derivatives without making any disclosure.

That is in sharp contrast to the rules applying to ordinary shares, holders of which have to make their positions public once they get above 1 per cent of the total company. There are also extra constraints when stakes go above 15 per cent and 30 per cent.

The panel pointed to the bid for Alvis from BAE Systems last year. BAE received irrevocable acceptances for 16 per cent of Alvis shares from investors in CFDs. The approach by Philip Green, the entrepreneur, for M&S was also cited. Several institutional investors pressed the M&S board to co-operate with Mr Green, having earlier taken CFD positions.

The new rules would also apply to ordinary long stock positions, call options and written put options, the panel suggested.

Although counterparties to CFD positions - usually investment banks and spread betting firms - hedge themselves by taking positions in the relevant company's underlying shares, this is often not disclosed because they are market-makers and therefore exempt from the normal rules.

In theory, because the derivatives carry no votes, the investors can claim that they have no economic control. In practice, however, they do because the counterparty bank will often vote the shares according to the wishes of the customer, or end up selling the underlying shares.

UK Takeover Panel plans to tighten CFD rules

The Takeover Panel is close to announcing plans to change the rules on disclosing derivative contracts, in an attempt to make stakebuilding more transparent.

The panel will consult the investment banking industry on the use and declaration of contracts for difference (CFDs) - derivatives used heavily by hedge funds which have come to dominate takeover situations.

These instruments have played important roles in takeover battles over the past year, such as Philip Green's proposed bid for Marks and Spencer and BAE Systems' bid for Alvis, the tank maker. CFDs, which reflect the difference in share prices between the beginning and end of the contract period, give holders an economic interest over shares without owning them or paying stamp duty.

Trading through CFDs is thought to account for a third of daily share volumes, increasing to three-quarters, during bids. The panel is likely to call for holders of CFDs to be put on the same footing as other shareholders. It is concerned that - unlike shareholders, who have to declare stakes of more than 1 per cent during a takeover battle - CFD holders, who technically cannot vote the shares over which they have contracts, are not required to declare holdings. However, many banks buy the underlying shares to hedge their positions and allow CFD holders to control how these shares are voted.

The panel is also concerned about how investors use CFDs to build stakes above the 30 per cent level that triggers bids. It has asked a number of companies and hedge fund investors to clarify the support from investors using CFDs over the past year.

There is widespread support for improving transparency. Tim Cockroft, chief executive of KBC Peel Hunt, the brokers, said: "It is frustrating to see people hiding behind CFDs."

Financier fined £290,000 over market abuses

ROBERT BONNIER, the financier, was fined £290,000 yesterday for misleading the stock market 12 times during his siege of Regus, the managed offices group, two years ago.

It was the Financial Services Authority's biggest penalty against an individual.

Mr Bonnier, best known as the tycoon behind Scoot.com, the boom-to-bust online directories group, was guilty of market abuse, according to the FSA.

The regulator also fined Indigo Capital, the hedge fund run at the time by Mr Bonnier, a further £65,000 for its role in the phantom stake-building affair.

Mr Bonnier repeatedly claimed to be building a share stake in Regus, when in fact he was merely betting on the share price through derivatives known as contracts for difference (CFDs).

He created a false and misleading impression as to the supply and demand for Regus shares by providing inaccurate information, the FSA said.

Andrew Procter, the FSA's enforcement chief, said: "The repeated actions of Mr Bonnier, an experienced market practitioner, and Indigo's failure adequately to oversee his activities, fall far short of the standards the FSA expects."

The Takeover Panel has already censured Mr Bonnier over a different abuse during the affair. He failed to disclose quickly enough that he was reducing his exposure to Regus just days after announcing he might make a takeover bid.

The 12 mis-statements took place between November 18, 2002, and January 8, 2003, during which time the Regus share price trebled on hopes of a takeover bid. At one point he claimed Indigo owned 15.12 per cent of Regus when in fact its holding was negligible.

The £355,000 of fines compare with a profit of £643,225 which Indigo made when Mr Bonnier closed out its CFD position on seven million Regus shares on January 7, 2003.

The FSA was unable to say whether Mr Bonnier profited personally from his abuse even after subtracting the fine. The penalty was "commensurate with the offence" a spokesman said.

Previously the biggest ever personal fine was the £150,000 penalty meted out last year to Christopher Goekjian, the former Credit Suisse Financial Products chief, for failing to detect or prevent attempts to mislead the Japanese tax authority.

Neither Mr Bonnier nor Indigo, which is registered in New York, is authorised by the FSA. Mr Bonnier left Indigo in September 2003, nine months after the compromising events.

Through his solicitors, Peters & Peters, Mr Bonnier said yesterday that "at no time did he intend to mislead the market and regrets that technically incorrect notifications were made" .

The FSA, while saying nothing about Mr Bonnier's intent, said a person of his experience ought to have known of the likely effect of making inaccurate claims about his holdings.

Although buyers of CFDs can separately negotiate to buy voting and ownership rights to the shares on which the bets are made, Mr Bonnier did not do so.

Schwab goes on defensive

Schwab's appeal has been fading for many customers. The brokerage ended June with 7.5 million customer accounts, down about 3% from 7.7 million at the same time last year. Both Ameritrade and E-Trade have been expanding during the same period, although they remain far smaller than Schwab. Ameritrade had 3.5 million customer accounts in June, while E-Trade's brokerage accounts totaled 2.9 million.

To become more competitive, Schwab has vowed to lower its annual expenses by $150 million to $200 million -- a wrenching process that has already started with 245 layoffs and a plan to close 53 branches, or 16% of Schwab's 339 offices. That comes on top of the retrenchment Schwab began in 2001, when it laid off nearly 10,000 workers and closed dozens of offices.

The most recent quarter helps illustrate why Schwab still needs to shake things up. While Schwab's profit declined 10%, E-Trade and Ameritrade delivered healthy earnings increases despite suffering a downturn in customer trading late in the quarter.

San Francisco -- With its low prices and iconoclastic attitude, discount broker Charles Schwab Corp. represented an annoying stone in Wall Street's wing-tipped shoes for decades.

Now Schwab is scrambling to adjust to competitive threats posed by nimble rivals such as E-Trade Financial Corp. and Ameritrade Holding Corp.

Both of these Internet discount brokers have rebounded from tough times by appealing to Schwab's bread-and-butter audience -- independent-minded, bargain-loving investors searching for an alternative to the financial services establishment.

"It's a market that's ours to win now," E-Trade CEO Mitchell Caplan said. "We believe we have the best value proposition on the Internet."

Since his appointment early last year, Caplan has positioned New York-based E-Trade as an online financial services bazaar that supplements stock trades with a variety of banking products.

The strategy has paid off so far, with E-Trade's market value more than doubling since Caplan took over. During the same 18-month stretch, Schwab's long-slumping stock has declined 8%.

Industry analysts say Schwab became more vulnerable in recent years as it started acting more like a conventional broker with more services aimed at upper-crust investors and fees that disillusioned frugal customers.

"Schwab once defined the discount brokerage industry, but now the company has lost its way and is trying to find its way back," said analyst Matthew Snowling of Friedman, Billings, Ramsey & Co. "There is a painful reinvention process to be done."

Back in the saddle.

Schwab's distress provoked last month's ouster of David Pottruck as CEO, clearing the way for founder and chairman Charles Schwab to try to get the San Francisco-based company back on track.

Since his return two weeks ago, Charles Schwab has declined to talk to the media except for a brief interview with Dow Jones to deny a published report that the company's recent troubles might lead to its sale. He also turned down an interview request from The Associated Press.

"We believe our path of success as a firm is to remain independent and continue to appeal to a broad range of investors," Schwab spokesman Glen Mathison said.

Schwab's appeal has been fading for many customers. The brokerage ended June with 7.5 million customer accounts, down about 3% from 7.7 million at the same time last year. Both Ameritrade and E-Trade have been expanding during the same period, although they remain far smaller than Schwab. Ameritrade had 3.5 million customer accounts in June, while E-Trade's brokerage accounts totaled 2.9 million.

To become more competitive, Schwab has vowed to lower its annual expenses by $150 million to $200 million -- a wrenching process that has already started with 245 layoffs and a plan to close 53 branches, or 16% of Schwab's 339 offices. That comes on top of the retrenchment Schwab began in 2001, when it laid off nearly 10,000 workers and closed dozens of offices.

The most recent quarter helps illustrate why Schwab still needs to shake things up. While Schwab's profit declined 10%, E-Trade and Ameritrade delivered healthy earnings increases despite suffering a downturn in customer trading late in the quarter.

Ameritrade is now the busiest online brokerage, averaging 164,000 daily trades during the second quarter compared with an average of 142,200 at Schwab and average of 127,400 at E-Trade.

Omaha, Neb.-based Ameritrade offers a flat-rate commission of $10.99 per trade regardless of a customer's wealth. E-Trade charges $12.99 per trade for customers with more than $50,000 in their accounts. Schwab, which cut its prices in June, has a more discriminating pricing menu, ranging from $9.95 per trade for customers with at least $1 million to $29.95 for customers with less than $100,000.

Although successful recently, both E-Trade and Ameritrade underwent traumatic reorganizations during the stock market turmoil that dampened customer trading through most of 2001 and 2002. The overhaul produced slimmer, more focused operations that can make money catering to the middle-income customers who have become a lower priority for Schwab.

"We feel we have done a lot of things right in the last few years," Ameritrade CEO Joe Moglia said.

Moglia, a former Merrill Lynch executive hired by Ameritrade in 2001, might not stay on the job much longer. The 55-year-old Moglia says he is contemplating retirement when his contract expires in March.

Looking at the three companies, Snowling said, "it's kind of scary to think that Schwab has to go through another restructuring now that E-Trade and Ameritrade have come out of the last bear market with leaner operating platforms."

The strategy hasn't paid off, because Schwab still can't offer the same array of services as full-service brokers such as Merrill Lynch, and now has too much overhead to keep its prices competitive, said Hoefer & Arnett analyst Richard Bove.

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