After slightly more than a year of legal wrangling, the case against the sole director of ill-fated OTC derivatives company Sonray Capital Markets has come to a close, resulting in a guilty plea to seven offences which contributed to the company’s $46 million demise.
Today, the Australian Securities and Investments Commission (ASIC) has announced that Sonray Capital Markets’ sole director, Russell Johnson, has been committed to a jail term of a maximum of ten years for each one of the state offences, false accounting, theft and deception, and faces a five-year stretch at Her Majesty’s pleasure for submitting a false document to the ASIC.
A Long Stint Behind Bars
Sonray Capital Markets had built up a substantial business, which prior to its demise in June 2010 was one of Australia’s largest introducing brokers (IBs). Occupying prestigious offices in Melbourne and the Gold Coast, the company’s fortunes took a downturn when its expenses outweighed its revenue during the fiscal year of 2009, leaving the company more than $2 million in deficit.
Subsequent to the company’s demise, Sonray Capital Markets was put into administration, and its assets liquidated by insolvency practitioners Ferrier Hodgson. The administrators examined the financial situation of the company, and stated at the time that it had gross client positions of $76.86 million, and gross client holdings in either cash/equities held by counterparties of $30.15 million.
The company, which at the time employed 54 staff and had 3,500 clients, arrived at the end of its active life with a shortfall of $46.70 million.
Additionally, Mr Johnson, in a solvency report required by ASIC, made a false statement about equity injections of $5.2 million into Sonray Capital Markets.
ASIC Commissioner Greg Tanzer made a statement today regarding the prosecution, “ASIC expects directors to act honestly and with integrity, and always in the interests of the company. We take very seriously conduct to the contrary, and the charges that Mr. Johnson has pleaded guilty to today reflect that.”
“The integrity of the market is one of ASIC’s key priorities, and investors have a fundamental right to expect that their money will be handled honestly and appropriately. Where this does not occur, ASIC will not hesitate to take action to protect the interests of the clients,” stated Mr. Tanzer.
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As a stark contrast to the lavish lifestyle once afforded to Mr. Johnson, he now faces a potentially long correctional sentence.
The Deposits Which Never Existed
In October 2011, one year after the firm’s liquidation, the company’s former CEO Scott Murray was incarcerated for five years as a result of charges brought by the ASIC, including six charges of false accounting involving fictitious deposits amounting to $36,439,588, (USD) $9,779,395.25 , and false withdrawals totalling $7,800,923.
As well as the high value misappropriations made by Mr. Murray, in today’s announcement by the ASIC it was revealed that the Supreme Court of Victoria found that Mr. Johnson had also misappropriated company and client funds, a serious criminal matter, and an aspect which the ASIC has been clamping down on since the introduction of its automated surveillance systems.
Mr. Johnson’s misappropriation involved the use of various Sonray Capital Markets client trading accounts to create numerous unfunded deposits for which no physical cash was involved. This was done to either obtain funds for personal use or for Sonray Capital Markets, or to hedge the trading book against margin calls.
The effect of withdrawing funds from client accounts from unfunded deposit entries caused an actual deficiency in the segregated client account funds. As a result of this, the Supreme Court of Victoria found Mr. Johnson guilty of committing seven criminal acts, including three charges of false accounting, one charge of submitting a false document to the ASIC, two charges of theft to the value of $742,641, and one charge of obtaining a financial advantage by deception.
Two years ago, in November 2011, a major Australian news source detailed that Sonray Capital Markets’ clients may have been able to recover a proportion of their lost funds, which at the time amounted to 69 cents in the dollar according to Ferrier Hodgson, which was higher than the 25 to 30 cents per dollar estimated a year previous.
This higher estimate had arisen from a settlement between the liquidator and Saxo Bank, which owned shares worth $20 million in the failed IB, plus a contribution of $18.5 million to the compensation pool by Saxo Bank and Ferrier Hodgson, including a $500,000 initial payment to fund the mediation.
Mr Johnson was granted bail and will appear at the Supreme Court on 11 November, 2013 for a sentence hearing, on condition that he informs the court of any change to his residential address, surrenders his passport and not attend any international port of departure and not contact any prosecution witness.