By Cameron Houston and Chris Vedelago
Macquarie Group faces a major class action over allegations some of its investment advisers artificially inflated the price of a small mining company before a sudden collapse wiped out many of its investors.
The investment bank's brokers are accused of deliberately "ramping" stock in Cleveland Mining Group by playing a key role in the acquisition of a Brazilian iron-ore mine project with a potential value of $34 billion that turned out to be a worthless patch of jungle.
Many investors were long-term friends of the Macquarie advisers, but they now claim they were duped by assurances the speculative stock would deliver massive financial returns.
The bank, known as the "millionaires' factory", is facing legal action on several fronts, with a series of explosive claims referred to the corporate regulator last month.
Former Macquarie Bank investment advisers Stefan Whiting, left, and Michael Rosenbaum.
The country's largest investment bank is bracing for another scandal at a time when its stockbroking arm has only recently emerged from an enforceable undertaking order from the Australian Securities and Investments Commission (ASIC) over its "systemic deficiencies" in compliance with financial services laws.
Cleveland Mining Group managing director David Mendelawitz has taken the extraordinary step of complaining about the advisers' conduct to ASIC.
In a letter to ASIC obtained by Fairfax Media, he raises specific concerns about the three Macquarie employees based on information collected during a two-year private investigation funded by a major shareholder.
Macquarie has been aware of many of the claims for more than a year, after civil action was begun by a Ballarat businessman who lost about $4 million investing in Cleveland.
According to preliminary core samples, the mine known as Ferradura was expected to deliver more than 10 billion tons of iron ore at a time when Australia was struggling to keep pace with demand in China.
Brighton connections
The allegations have also rippled around the bayside suburb of Brighton, where dozens of locals were burnt after buying into Cleveland on the advice of two former Macquarie directors who lived in the area.
Clients were recruited at primary school functions, dinner parties or while cycling down Beach Road.
Former Macquarie adviser Stefan Whiting.Credit: Facebook
Another divisional director at Macquarie, who has since left the bank, also pushed the stock aggressively among his network of wealthy investors.
For most of 2011, Cleveland stock hovered around 35¢, but the Macquarie advisers assured potential investors it was destined to reach $1.20.
It's Macquarie everywhere you look!Credit: Bloomberg
When I realised it was all bullshit, I transferred to an online trading account and sold the lot.
A former Cleveland investor
Many jumped aboard, and encouraged friends to do the same.
They appeared oblivious to the fact Cleveland was a highly speculative stock that began with a market capitalisation of just $20 million – less than some of the real estate along Brighton's golden mile.
Cleveland Mining Group managing director David Mendelawitz.
Propelled by a string of positive announcements, Cleveland's share price almost tripled between March and April 2012, as investors contemplated a massive windfall.
Their dreams were fleeting; the share price collapsed in late 2012.
Illustration: Ron Tandberg
The stock, which was voluntarily suspended from the ASX in October 2016, last traded at just 7¢.
Risks 'understood'
Macquarie is expected to argue its clients were "professional" or "sophisticated" investors, who should have understood the implicit risks of buying shares in a mining company that had never produced an ounce of anything valuable.
But several victims of the rout told Fairfax Media the stock was artificially inflated.
In stockbroking parlance, they claim it was a classic "pump and dump", where stock is purchased at a low price before the release of positive and often misleading company announcements, which are often promulgated on social media, on online forums, or by word-of-mouth.
Based in Perth, Cleveland was founded in 2009 by several former executives from Fortescue Metals Group, with ambitions of becoming a mid-tier gold producer.
Mr Mendelawitz, who spent five years as Fortescue Metals' business improvement manager before joining Cleveland, told the media in 2010 that he would assess "a pipeline of prospective projects based on stringent economic criteria rather than hype".
In December that year, Mr Mendelawitz engaged Macquarie Equities Ltd to raise $4.64 million in funding for several offshore projects, including the Premier Gold Mine in Brazil.
Mr Mendelawitz told Fairfax Media he felt like he had joined an exclusive club when he signed the agreement with Macquarie.
In September 2011, Stefan Whiting, then a Macquarie investment adviser, became involved in a contentious deal that super-charged Cleveland's share price but ultimately contributed to its collapse.
Lost in the Amazon
Emails obtained by Fairfax Media show Mr Whiting acted as an intermediary in the sale of a separate Brazilian iron ore mine to Cleveland.
His role in the transaction appears to have been a serious breach of his conflict-of-interest obligations, and would have given him access to potentially price-sensitive information.
Mr Whiting even asked Cleveland for an "introduction fee", outside his remuneration package with Macquarie.
"All we need is confirmation of a [sic] introduction fee of 1.5 per cent on purchase price plus the NDA [non-disclosure agreement]. This will give access to geo [geological] reports and data room info," Mr Whiting said in an email on September 7, 2011.
When Mr Mendelawitz refused, Mr Whiting claimed it was a joke.
It was not the only time Mr Whiting would request a commission. On December 20, 2012, Mr Whiting sent an invoice to Cleveland asking for a $12,500 commission for "corporate services".
According to preliminary core samples, the mine known as Ferradura was expected to deliver more than 10 billion tons of iron ore at a time when Australia was struggling to keep pace with demand in China.
One initial report provided by an independent source valued the tenement, in the northern Brazilian state of Amapa, at $34 billion.
Hot property?
As the Ferradura deal was being negotiated, a series of mysterious posts began appearing on Hot Copper – an online forum where traders swap tips, information and, sometimes, baseless rumours.
Numerous comments posted by "Troutfish007" revealed extraordinary insight for someone claiming to be "new to this game".
Several of Troutfish007's posts preceded announcements by Cleveland to the Australian Stock Exchange.
Fairfax Media does not suggest Macquarie or its advisers had any involvement with the posts by Troutfish007, but the comments appeared to be part of a broader campaign to spruik Cleveland stock.
In the six months after Mr Whiting introduced the Ferradura project to Cleveland in September 2011, Macquarie's then divisional director, Michael Rosenbaum, and another Macquarie adviser made more than 20 trades in Cleveland in the names of companies registered to them or family members.
Most of the trading was done by Mr Rosenbaum in two companies owned by a relative.
On February 23, 2012, Cleveland announced to the ASX it had signed a memorandum of understanding to purchase the Brazilian mine.
Stock climbs
The stock began to climb in the following weeks, leading to a trading frenzy that briefly piqued the interest of the ASX, which queried why the price had soared from 54¢ on March 19 to 76¢ just four days later.
"The company does not have any other explanation for the price change and the increase in volume in securities traded in the company," Cleveland's finance director Aaron Finlay told the ASX.
As the share price surged, "Troutfish007" posted on Hot Copper on March 27: "I expect some consolidation around 67-70 this week, and then more progress next week. Any additional positive news and the magical $1 mark you speak of will be seriously tested. These Fortescue Metals boys don't mess about. Happy holding."
On April 2, 2012, another investment adviser at Macquarie purchased 50,000 Cleveland shares through a privately owned company.
On April 3, 2012, Troutfish007 again demonstrated extraordinary prescience in another post on Hot Copper.
"I beleive [sic] something big is about to happen, due to the big run we've had, but I'm really not certain about pinpointing where the catalyst is lying with Cleveland. Perhaps there's good news on all fronts ... but, I have a feeling it's down to one project ... just not sure which."
A day later, on April 4, Cleveland announced that drilling would begin at another of its Brazilian mines, Porto Grande.
The stock price peaked at 95¢ on April 10 and the Macquarie insider began to sell down his holding of about 400,000 shares on April 13.
Cleveland had become a self-fulfilling prophecy, propelled by hype and misinformation rather than any apparent improvement to the underlying business.
Tight control
Behind the scenes, Mr Whiting and Mr Rosenbaum maintained tight control of anyone with a significant stake in the company.
Mr Rosenbaum regularly contacted a Cleveland insider, asking for information from the company's share register about the identity of sellers.
"Can we see who sold yesterday," Mr Rosenbaum said in an email on September 28, 2011. "Yep" was the immediate response.
The Macquarie advisers are said to have exerted tight control.Credit: Jim Rice
In another email on November 15, 2011, Mr Rosenbaum tells his source at Cleveland: "40 cents, only three dollars to go."
Almost a year later, on September 7, 2012, Mr Rosenbaum appeared to be still attempting to prop up the share price.
"Cleaned out all selling, onward and up," he said in an email.
When clients wanted to sell Cleveland stock or "take profit", Mr Whiting often intervened and urged them to hold, or buy more.
One client set up an online trading account after Mr Whiting repeatedly refused to sell his stock.
"We used to ride together, we were mates I guess. He refused my requests to sell on two occasions. He said he couldn't do it, as a mate. When I realised it was all bullshit, I transferred to an online trading account and sold the lot," said the former friend of Mr Whiting, who lost about $31,000 on Cleveland trades.
Two investors told Fairfax Media that Mr Whiting purchased Cleveland stock in their accounts, without their knowledge or consent.
Selling staunched
Even as doubts emerged over the Ferradura project, Mr Whiting continued to hawk Cleveland and staunch any selling that would potentially put downward pressure on the stock price.
The advisers went to South America with the company.Credit: act\aurora.daniels
In an email to a former friend, Mr Whiting offered to personally buy the man's shares if he wanted to sell.
"We have spent the last two weeks in South America with the company and are completely comfortable with the CDG story ... If you want to sell or know anyone who does, ask them to call me and we will arrange to buy their stock," Mr Whiting said in a message on October 25, 2012.
Eventually, and perhaps belatedly, Mr Mendelawitz became worried about the direction of his company and the steep trajectory of its share price.
"They were trying to keep it as tight as possible. They controlled the registry, so if anyone was selling they could get in and buy straight away. We weren't complaining because the price was going up, but I was very concerned about whether we could support the valuations," he said.
Tensions boil over
On a second trip to the Ferradura project in Brazil in October 2012, tensions finally boiled over amid growing concerns about the credibility of the initial core samples following a site visit.
A flurry of large sell orders suddenly destabilised the stock and the price dipped to mid-40¢. Mr Rosenbaum and Mr Whiting denied any knowledge about who was responsible for dumping the stock, according to Mr Mendelawitz.
While staying at the St Moritz Hotel in Brasilia, Mr Mendelawitz received information from Australia about the identity of the seller.
It was a prominent Melbourne businessman who also happened to be a client of Mr Rosenbaum.
Mr Mendelawitz claims that a tearful Mr Rosenbaum admitted during a confrontation on the hotel's rooftop terrace that he was behind the sell orders.
"He basically broke down. He said his client had to sell because he needed the money. He promised to get his life in order and promised he could still get the stock to $1.20," Mr Mendelawitz said.
Project worthless
But the company was about to receive disastrous news - the Ferradura project that had generated so much buzz was confirmed as a worthless dud.
The project in Brazil would not produce any iron ore.Credit: Vincent Mundy
Concerns had first been raised by Cleveland director Jim Williams, who warned other directors in a July 2012 email: "There may not be any economic ore at Ferradura."
A report almost a year later confirmed his fears.
Cleveland had been misled, and the initial core samples that indicated a motherlode of iron ore were wrong, amid claims they had been fabricated.
In an internal email, questions were also asked about the adequacy of the due diligence undertaken by Cleveland, and why problems had not been identified before the acquisition.
If the research reports had been falsified, it had nothing to do with Macquarie.
The investment bank and its executives had no knowledge or involvement in the preparation of the allegedly fraudulent mining reports.
Shares plummet
By December 2012, the share price had plummeted back to around 30¢. The fall continued over the following years, finally closing at 7¢ when the company requested a suspension from the ASX.
Mr Whiting appears to have made a significant loss on his private holding of Cleveland bought by his company Fishin Chips Pty Ltd after selling his holding of 300,000 shares between February and July 2013.
At least one major Cleveland shareholder claims he was urged to hold or buy more stock by Mr Whiting, who was offloading his shares at the same time.
The Ferradura project was officially declared dead by late 2013.
"The historical information [about the quality of the mine] was found to be largely unreliable and shaft digging showed only minor potential for the project," the annual report said.
Mr Whiting left the stockbroking industry in 2013, while Mr Rosenbaum moved to a rival firm that same year. The other investment adviser continues to work at Macquarie.
None of the three bankers responded to questions about their conduct from Fairfax Media. All three have issued legal warnings to Fairfax Media via their lawyers.
Macquarie is expected to again be in ASIC's crosshairs over the misconduct allegations levelled against some of its most senior staff.
ASIC has received complaints.Credit: Sasha Woolley
'Utmost seriousness'
A Macquarie spokeswoman said the bank would not comment on individual client matters or matters subject to litigation, but added that the allegations aired by Fairfax Media only "represent one side of a matter".
Macquarie refused to answer a series of questions about the activities of its traders and their involvement with Cleveland.
"Macquarie treats any allegations regarding inappropriate or potentially illegal behaviour with the utmost seriousness, regardless of their source. Where matters are raised, Macquarie conducts a thorough investigation and where appropriate, notifies relevant authorities," the spokeswoman said.
In 2013, ASIC issued Macquarie with an enforceable undertaking after it was unable to demonstrate a reasonable basis for the advice it provided to hundreds of clients.
The bank was forced to pay almost $25 million in compensation to about 260 clients.
The latest misconduct allegations and prospect of another ASIC investigation into Macquarie's activities comes at an inconvenient time for the banking industry.
After a string of damaging scandals over the past five years, the four big banks and Macquarie launched a campaign against the government's contentious plan to impose a levy.
They have also attempted to persuade the government and ASIC that increased compliance or a royal commission would be overkill.
Court looms
But several Cleveland investors will not be waiting for the government or regulators to intervene.
Lawyers for the Ballarat businessman, who lost $4 million following Macquarie's advice, began negotiating with the bank in April last year in a bid for compensation.
A writ was lodged in the Supreme Court in January 2017, while a separate complaint is before the Financial Ombudsman Service.
Last week, Macpherson Kelley Lawyers made contact with hundreds of Cleveland investors in preparation for a class action.
Michael Hazell, from Macpherson Kelley Lawyers, confirmed the firm was acting on behalf of several clients "who have concerns about the financial advice provided by Macquarie in relations to Cleveland Mining".
After losing about $30 million on the value of his personal stock, Mr Mendelawitz is still scrambling to save his company. He concedes he made mistakes.
But he accuses Macquarie of turning a blind eye to the conduct of its investment advisers.
"We thought we were covered, we had Macquarie Bank in our corner. But we didn't, we had a few blokes pumping up a stock and when their network ran out, it all fell over."