http://www.theaustralian.com.au/bus...stment-group-mfs/story-e6frg8zx-1225914001515
AS Michael King cursed, joked and threw about slang before court this week, he looked every bit the small-time Gold Coast solicitor.
His hair long, and donning an open-necked shirt and necklace, in contrast to the corporate image he cultivated while pulling a $3 million salary as head of MFS, Mr King was questioned in a bid to find just when the group became insolvent.
But for many, when the investment giant he created collapsed owing $2.5 billion after a share price crash in January 2008 (after which executives renamed the group Octaviar in a futile attempt at brand-cleansing), the question wasn't why the juggernaut had failed, or precisely when, but how it had survived for so long.
MFS was created out of a Gold Coast law firm embroiled in the nationwide solicitors' mortgage broking crisis of the late 1990s.
Mr King and MFS chief executive Phil Adams were partners of Southport-based McLaughlins Solicitors until 2000, when they formed MFS from the finance arm of that firm after an industry-wide crackdown by the corporate regulator.
Law firms had traditionally invested relatively small sums of money for clients as part of a trustee role, but that practice rocketed in the 90s.
Firms were attracting investments in a bid to turn a dollar by on-lending those funds at a higher rate, most often to property developers seeking cheap debt.
The practice ultimately cost thousands of elderly Australian's much of their life savings as many of those loans soured.
Reacting to the failures and subsequent media scrutiny, the Australian Securities and Investments Commission ruled in 1999 that solicitors must form "managed investment schemes" if they were investing money on behalf of clients.
McLaughlins Financial Services became the managed investment scheme run from suburban premises at Southport that Mr King and Mr Adams steered to a $5bn-plus empire.
Much of that growth was on the back of unsophisticated investors directly targeted by the company, first in Queensland and then nationwide.
That growth was based on the aggressive pursuit of funds under management, or "FUM", as Mr Adams affectionately called the capital raised.
Speaking to The Australian in those Southport offices in early 2004, a tanned Mr Adams said the group's FUM had grown "from zero to $1.2bn" in less than 3 1/2 years.
"The products we offer appeal to the mum and dad investors. They understand the opportunities they get from our investment products and they understand what the risks are," Mr Adams said at the time.
"They're not overcomplicated investors and the fact that we have interaction daily with them gives us more opportunity to deliver investment that suits their needs."
But by 2008 it was painfully clear most investors had no idea of the risks they were exposed to.
For MFS, more funds under management meant more fees to the group, in which Mr Adams and Mr King had massive stakes, and higher executive salaries, control and power.
By September 2007, four months before the share price collapse that would ultimately seal the company's fate, MFS declared it had "at least $5.4bn" of assets under management. Further: "MFS confirms previous guidance of a target of at least $10bn of fee-paying assets under management by June 30, 2008."
The NSW Supreme Court heard on Wednesday that MFS was facing serious cashflow problems by November 2007, when Mr King met private equity firm CVC Asia Pacific in a bid to sell for $2bn MFS's recently acquired and disparate hospitality arm Stella.
According to details read out to the court, when the Stella deal fell through, Mr King proposed a $300m capital raising.
Although in the early days MFS's pursuit of funds under management was a grab for fee revenues, towards the end of its life it appears the scramble for size became a short-sighted band-aid strategy to cover growing operating shortfalls.
In its pursuit of FUM, MFS was snapping up everything from the Mount Hotham and Falls Creeks snowfields in Victoria to a travel agency franchise and a string of aquariums in Melbourne, Thailand and Korea, often paying well over the odds.
Underbidders on many of those assets were confounded as to how MFS could make the prices it was paying "stack up".
Many expressed concerns the group was far more concerned with growing the scale of the business than buying assets delivering suitable returns.
That, they warned, would lead the group to failure because it would be unable to continue making dividend payments required by investors.
Leading into the share price collapse, MFS had spent about $2.3bn buying the string of assets in the Stella group, including the Harvey World Travel franchise, the Outrigger resorts brand and the management rights to thousands of coastal holiday apartments through mergers with Gold Coast companies Breakfree and S8.
Three weeks after MFS shares collapsed from $3.19 to 99c in January 2008, down from $5 a month earlier, the group announced it had sold 65 per cent of Stella to private equity firm CVC Asia Pacific in a deal that delivered MFS $409m in cash and valued the company at just $1.53bn.
Under the deal, CVC Asia Pacific would assume $905m of debt, which was to be repaid to investment bank UBS.
But even at that heavily discounted price, CVC and UBS had apparently hugely overestimated the true value of Stella and were badly burned.
In 2008-09 the group delivered its owners a $667.1m loss.
UBS wrote off, or converted to shares, about $575m in loans to the company.
But overwhelmingly it was retail investors who were hardest hit by the collapse of MFS, and its arms and subsidiaries.
At the time of the share price collapse, the MFS Premium Income Fund froze the funds of 10,000 investors, worth a combined $770m.
Almost all of that money has been lost.