Broker Sonray Capital Markets has collapsed, resulting in the seizure and freezing of about 3000 client accounts who have their money tied up in a pooled account.
The Melbourne-based intermediary broker yesterday brought Ferrier Hodgson’s George Georges and John Lindholm as voluntary administrators. The administrators have started an investigation into the circumstances of the collapse. Ferrier Hodgson has circulated a letter to Sonray customers advising them of the voluntary administration. At the time of writing the reasons of the collapse aren’t clear but it is estimated that there are over $65 million frozen in some 3,085 client accounts.
Administrators said yesterday they were holding discussions with the Australian Securities and Investments Commission (ASIC)to determine the cause of the collapse. Mr George was quoted as saying: ‘A creditors’ meeting will be held next week. We understand the concerns of investors at this difficult time and ask for their patience while we carry out the investigation. Our job will be to provide creditors with clarity about what happened to Sonray and we will do all we can to keep creditors informed about any developments.’ While it is not yet clear how much monies are tied up in the frozen accounts, clients are understood to be mostly retail investors, including retirees who manage their own superannuation funds.
While the cause of Sonray’s collapse has yet to be investigated, rumours have it that recent attempts by Sonray to expand into shares and corporate advisory services could have been its undoing. Late in 2009, Sonray partnered with Europe’s SaxoBank to launch a new online trading platform. The platform, dubbed as SonrayTrader consisted of a full-service proprietary trading platform offering investors a full range of capital market products, including forex trading and contracts for differences in stocks listed on more than 20 international exchanges. ‘They grew too quickly, invested too quickly and were short of cashflow,’ one source said. There has also been speculation that Sonray was negotiating with SaxoBank regarding a possible equity injection or buy-out. However, those talks were reported to have collapsed and Saxo Bank decided not to bail it out. However, other sources suggested that the company had been struggling for months and the collapse was tied to a rogue trader who had blown up a discretionary account, using clients’ money, and that SaxoBank had discovered the big hole during its due diligence. Critics noted that Sonray had spent too much on a new financial services trading platform that was supposed to be launched in May 2008 as well as expensive corporate offices.
Other investigations show that Sonray Capital Markets has had a tumultous past since it started trading in 2003. One of the brains behind it was USA-born David Gray, who co-founded Tricom with Lance Rosenberg. Johnson is the sole director, but shareholders include Johnson, Jill Murray, his wife, and sister of Scott Murray, the CEO of the company. Sonray has also been linked to the failed Geelong financial group, Chartwell Enterprises, which conducted business under Sonray’s financial services licence as an authorised representative. A few of Sonray Capitals’s staff also included former advisers of Storm Financial. Apparently, one of Sonray’s products, Back to Basics, is very much similar to the Storm Financial model, in terms of high leverage.
Sonray’s latest accounts did display signs of financial stress. The company suffered a $1.5m loss for the year ended 2009, as expenses of $10.5m outweighed $8.3m in revenue, up from a $442,000 loss for the previous year as costs rose at about twice the rate of revenue. Cashflow was even more dire. The company, with only $567,849 cash on hand at the start of last financial year, burnt through $4.43 million cash on its operating activities. A $5.2 million cash injection through the issue of shares was still not sufficient to prevent a slight fall in its cash position as of June 30.
Sonray also had a 25% stake in Implementation Efficiency Group (IE Group), a cash and forex manager, set up earlier in 2010 by former NAB senior executives Patrick Liddy, John Treloar and Tony O’Grady. Mr Liddy confirmed Sonray had a 25 per cent stake in IE Group and board representation. IE Group is also registered to Sonray’s head office. Mr Liddy stated however that Sonray’s bankruptcy would have no effect on IE Group, clients of which include superannuation funds, master trusts and fund managers.
Founded in 2003 by securities and derivatives specialist Russell Johnson and his brother-in-law, Scott Murray, Sonray makes use of external third-party providers to conduct brokerage services for retail and institutional customers which means that it takes clients and sets them up with brokers for a fee. Sonray managed to survive the fallout that hit a raft of other brokers, including Lift Capital and Opes Prime, during the height of the recession. It employed about 70 people in offices in Melbourne and the Gold Coast. Sonray specialised in online and advisory services in global shares, global futures, global CFDs and margin foreign exchange. Companies affected by the collapse include Sonray Capital Markets Pty Ltd, Sonray Capital Markets (Qld) Pty Ltd, Sonray Capital Markets Nominees Pty Ltd and Sonray Advisory Pty Ltd.
While not engaged in market transactions itself, Sonray held a financial licence and was regulated by ASIC. It is thought that the ASIC has been monitoring Sonray and on three dates asked for extra information on why it could not reconcile its cash.
Aftermath and update, December 2010. Sonray controlled around two per cent of the contracts for difference market prior to its June 2010 collapse, but the group’s 4,000 investors are now expected to receive a return of around $A0.275 in the dollar.
Comments: It is harsh to have no sympathy at all for the Sonray investors. Sonray is different to other cases in that the company substantially embezzled client funds for its own purposes. Apparently, Sonray slowly spent 70% of client funds over several years and the auditors, ASIC and the ATO never even noticed. No investor in their right mind would have knowingly donated their money to a CFD provider. It is akin to having cash in the bank and the bank turning around and saying ‘sorry, you didn’t deposit it, you gave it to us’. I think the investors would have been happy with 95 cents in the dollar as a shortfall resulting from deficits in some client accounts. Finding out they will only get 25 cents because Sonray spent their cash sitting in their accounts while nobody did anything about it is another matter. This bad news is another reason to steer clear of small intermediaries and unlisted financial advisories and why it makes sense to use a market heavyweight like IG which has its shares listed on the London Stock Exchange and transparent business practices.