The founders of the collapsed contracts for difference provider Sonray Capital Markets withdrew hundreds of thousands of dollars from client accounts and put the money into their own accounts using a complex system to conceal the transactions, a public examination heard yesterday.

The co-founder Scott Murray said he used multiple ”house” and unfunded accounts in various names, including at least one client’s name, in an effort to make successful trades and recover amounts that had been transferred out of the clients’ pooled account.  Mr Murray was being examined as part of Ferrier Hodgson’s investigation into the firm’s collapse, which left a $46.7 million hole in investors’ trading accounts.

Sonray also directly paid the mortgage repayments on a holiday home in Sorrento, Victoria, that was owned by the other founder, Russell Johnson. The home doubled as a disaster recovery residence for Sonray as it had a computer on the premises that had access to the trading platform.

The examination of Mr Murray, the chief executive of Sonray, in the Victorian Supreme Court in Melbourne, heard that clients’ money was withdrawn from a segregated account and lent to his father, John Murray. The two loans, one for $100,000 and another for $300,000 were at no interest.

The examination heard that money was also transferred from client segregated accounts to pay creditors relating to the building of a wholesale trading platform. Funds were then withdrawn and deposited into his bank account to pay his home mortgage.  Mr Johnson used an estimated $550,000 for his own personal purposes, it was alleged.
Mr Murray rejected the allegation that the transfer of money was concealed. He said in the early days of Sonray being set up he was paid little in the way of salary. Sonray, which Mr Johnson and Mr Murray founded in 2003, went into external administration on June 22, after a bailout attempt by Saxo Bank fell through.

Mr Murray has since given an undertaking to the Australian Securities and Investments Commission that he would not leave Australia without consent, and Mr Johnson has surrendered his passport. Mr Murray said there had been deficiencies in client accounts for years and that Saxo Bank was aware that hedging was being done in house accounts in  mid to late 2008.

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THE collapse of securities execution service provider Sonray Capital Markets is bad news for those clients caught in its funding black hole. But it is likely to save many more unsuspecting derivatives gamblers and traders from a similar fate.

Sonray was a relatively small player with about 4000 clients. But it made a number of costly errors, now being paid for by the clients. The first of these was the decision not to report a rogue trader to the regulator. The next was Sonray’s decision to pay those affected by the non-approved trades with other clients’ money. And finally, there was Sonray’s attempt to get square by trying to trade its way back to break-even — again using its clients’ money.

The only positive to come out of this whole mess is the sunlight it has cast on the treatment of client monies, which should ring alarm bells for clients of other derivatives operators. Canny traders should assess the risk of their broker going belly up and get out if they don’t have that appetite.

There is also a strong argument that these co-mingled models are a fiduciary failure, and that the Australian Securities & Investments Commission should only allow them to be made available to sophisticated investors.

CFD Account Security

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The $65 million collapse of Sonray Capital has put the spotlight on the hundreds of businesses that offer financial products, where clients’ money is pooled together into one big account and the client becomes an unsecured creditor if the company collapses. These businesses operate with little protection for consumers in the event of a collapse. The Australian Securities and Investments Commission (ASIC) estimates there are more than 35,000 active participants in the CFD market.

Doug Clark of the Stockbrokers Association of Australia, said investors really needed to understand the product they were investing in, the risks of losing money and the way their investments were held. Clark said risks would be reduced if brokers and these other entities were included under the new market integrity rules that ASIC will introduce when it takes over the ASX’s supervisory powers this year. ”We have urged the government and ASIC to apply the new market integrity rules to non-broker brokers, but they have chosen not to at this stage,” Clark said.

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THE collapse of derivatives group Sonray Capital Markets on Tuesday – with more than $65 million frozen in client accounts – was the result of a derivatives position that blew up, leaving the group’s pooled account in margin call, and Sonray with insufficient funds to close it out. Sonray executives were not answering calls yesterday but administrator Ferrier Hodgson said last night that all accounts would remain frozen to ensure there was no further risk to the group.

The appointment of the administrator followed a period of extraordinary volatility for the broking company on financial markets last month. One former employee said that a negative margin position in the foreign exchange business contributed to Saxo Bank’s withdrawal from a potential buyout.

The collapse further highlights the dangers of derivatives products sold to retail investors, and is expected to speed up the release by the Australian Securities and Investments Commission of tougher rules to strengthen the protections for retail investors trading derivatives products such as contracts for difference (CFDs). The new regulatory guidelines are expected to be released within a week.

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The Sonray Capital Markets group, that made a name for itself in the booming but controversial market for derivative trading instruments, ceased trading yesterday after appointing Ferrier Hodgson as administrator late on Tuesday. While it is not yet clear how much money is tied up in the suspended accounts, clients are understood to be mostly retail investors, including retirees who manage their own superannuation funds.

Ferrier Hodgson is investigating the circumstances of the collapse and will confer with the Australian Securities & Investments Commission as soon as possible. Sonray, founded in 2003 by securities and derivatives specialist Russell Johnson and his brother-in-law, Scott Murray, joins a growing list of financial services outfits that have collapsed since the onset of the global financial crisis, including Opes Prime Group, Chimaera and Lift Capital.
According to Sonray’s website, the firm specialised in online and advisory services in global equities,futures and foreign exchange. It also claims to be one of the first companies in Australia to offer contracts for difference, or CFDs, which have grown in popularity in recent years but have also been the subject of regulatory concerns worldwide due to the risks posed to unsophisticated investors.
While Ferrier Hodgson has yet to ascertain the cause of the firm’s failure, sources close to the group have claimed that recent attempts to expand into equities and corporate advisory might have been its undoing. Late last year, Sonray entered into a partnership with Europe’s Saxo Bank to launch a new online trading platform.

CFD Broker Sonray In Receivership

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