Morgans feels blowtorch at Smiles Inclusive collapse inquiry

Broking house Morgans has been accused of using shareholders’ proxy votes without their knowledge in a boardroom coup at troubled dental firm Smiles Inclusive.

Smiles Inclusive listed on the ASX in April 2018 after a $35m IPO.

Stockbroking firm Morgans allegedly used shareholders’ proxy votes without their knowledge in a boardroom coup at troubled dental chain Smiles Inclusive that kept one of its long-standing clients as chairman.

A public examination in the Federal Court into the $91m collapse of the company in 2020 heard claims that Morgans orchestrated a campaign at an extraordinary general meeting to remove former chief executive Mike Timoney and David Herlihy from the board and keep chair David Usasz and his supporters in their positions.

Mr Usasz, a long-term client of Morgans and former tax advisor to Morgans chairman Tim Crommelin, was subsequently kept on as chairman at the EGM in May 2019.

Later Morgans provided a $200,000 interest free loan to Smiles Inclusive as it spiralled towards collapse, at one stage having less than $100 in its account.

The court heard that Morgans wrote to its own clients asking them to support Mr Usasz and his allied directors as well as campaigning to other shareholders against Mr Timoney.

Morgans executive director corporate advisory Philip Lee was asked by examining barrister Vicki Bell to verify whether several days before the EGM, batches of proxy votes from shareholders, who were also Morgans clients, were voted in the online poll in favour of Mr Usasz through the Morgans Wealth Plus platform.

“The timing of these votes is quite unusual as it appears that shares were voted every 60 seconds,” said Ms Bell. “All these votes were in favour of the Usasz side. Do you accept it’s quite unusual?”

Former Smiles Inclusive chair David Usasz. Picture: Richard Waugh

Mr Lee, who was involved in Morgans’ underwriting of Smile’s $35m IPO in April 2018 that was mainly taken up by its clients, said the proxy votes would have been voted following written or verbal instructions from clients.

“It’s quite possible these votes were entered in batches given the backlog,” said Mr Lee. “There would have been emailed instructions to do so.”

However, Ms Bell then pointed to correspondence to Smiles Inclusive from three separate shareholders who complained that they did not vote in the poll despite their proxies being lodged in favour of Mr Usasz.

“It is quite extraordinary that these are Morgans clients and they did not vote,” said Ms Bell. “It is quite troubling is it not?”

When asked about the voting discrepancy, Mr Crommelin said it was not troubling to him and he would have to look into the circumstances.

“This is all after the event,” said Mr Crommelin. “If they are trying to be cheeky. I mean you could not find anyone who said they voted for Kevin Rudd and yet he became prime minister of Australia.” Mr Crommelin said he first met Mr Usasz more than 35 years ago in his capacity as junior partner at PwC.

“He ultimately became my tax go to person at PwC,” said Mr Crommelin.

“I also knew him in a sporting capacity at the University of Queensland rugby and saw him from time to time at social occasions.

He said Morgans supported the approach of Mr Usasz and his team, calling the strategy of Mr Timoney and David Herlihy “a joke”.

“We had outrageous spending from certain members of the board and we supported the section of the board that could take the company forward and which had the support of the bank,” Mr Crommelin said.

Morgans chairman Tim Crommelin.

Referring to the $200,000 interest free loan to Smiles, Mr Crommelin said the loan was done to avoid the company failing to meet a bank covenant.

“It is common that many companies from time to time are in breach of their covenants with the banks. We made the decision in this instance that we would lend some interim money given the bank was applying pressure on Smiles to obtain more capital. We had a lot of clients invested in Smiles and were interested in keeping the company alive.”

Mr Crommelin said similar loans had been made “many times” by the firm.

In earlier testimony, Mr Lee said the loan was the first he could recall being made.