Wednesday 22 May 2019

'Bombshell' Morrogh ruling puts nominee investors at risk if broker goes bust

A High Court ruling on the collapse of The Morrogh brokerage in Cork has raised huge question marks over the security of electronic-based shareholding. Consumer watchdogs now maintain that paper certs alone are 100pc safe in the event of a stockbroker failure.

A "bombshell" ruling in the High Court has put a question mark on the security of billions of euro worth of shares held in electronic accounts.

Judge Roderick Murphy ruled that an estimated ?5m in shares held in trust for clients by failed Cork Stockbroker W&R Morrogh should go to pay the estimated ?3m-plus costs of receiver Tom Grace, including legal costs.

This undermines years of effort by stockbrokers and the Irish Stock Exchange to convince investors to switch their holdings from certs to electronic holdings.

Consumer activists and regulators were united in advising that the only truly secure way to hold shares now appears to be in the form of paper certs

"It's a bombshell. It's a disaster for the (Morrogh) investors and of considerable concern to anyone with nominee accounts," said Eddie Hobbs, spokesman for the Consumers Association of Ireland.

"As it stands, that's the law - in black and white. My immediate reaction is to say - get your shares out of nominee accounts and into certs. There's enough risk to equity investments without this."

Brendan Burgess, chartered accountant and proprietor of www.askaboutmoney.com, unequivicably recommends shares certs.

"I don't see why anyone would take this risk (with nominee accounts)."

The Irish Financial Services Regulatory Authority has also been reported as saying that "if you want absolute security, you should get your share certificates," although it also stressed that this would cause delays and hassle for those who need to trade quickly.

Yesterday, a spokeswoman added: "It's a question for clients to weigh up. For example, with US shares there is no option for dealing with certs."

She said there were a lot of disadvantages to holding certificates as security against "the unlikely event" of a stockbroker's liquidation.

Yet Morrogh shareholders - and those of three other stockbrokers who went to the wall in the past 20 years - might disagree. That level of failure is surprisingly high among a handful of stockbroking firms in this country.

The Irish Stock Exchange, not surprisingly, attempted to play down fears.

"There has been a lot of very sensationalist advice. Maintaining your shares in cert form is an option, but if the market moves, it's going to take a lot longer (to react)," said Brian Healy, director of trading.

He also recommended that investors look at holding their shares in Crest personal accounts, which is a more secure way to hold shares electronically than with nominee accounts, (a point also made below in our guide to share ownership). However, he could not give a categorical assurance that this sort of account would be completely secure in the event of a receivership.

Mr Healy stressed that in a previous stockbroker liquidation, shares held in nominee accounts were distributed to clients.

And as recently as last July, the Judge Murphy ruled that shares held in nominee accounts had the same status as those in paper form.

The latest ruling does not overturn that - however, the receiver does not have ready access to monies held through paper certs that have been returned to clients.

Clients involved in the case still have around two weeks in which to lodge an appeal.

The Irish Stock Exchange is also considering its legal options, but it is in a weaker position as it is not involved directly in the case. "This is a broader issue than stockbroking. We are all looking at it very carefully."

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