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What about the liability?...He contained the liability to his investment vehicle, Australian Style Investments. The A$4.5M was paid to an another entity of Bolt

What about the liability?...He contained the liability to his investment vehicle, Australian Style Investments. The A$4.5M was paid to an another entity of Bolton’s, Australian Style Holdings, to quarantine it from the $120M liability in Australian Style Investments. I thought it was a great story until here. This just seems totally unethical. Am I missing something? Certainly I can't just evade the liability of a risky short sale (for example) by making the trade through a shell corporation?

jakarta 17y ago
Technically you could. Most hedge funds are LLCs, if the trades spectacularly fail they're not on the hook for the potential unlimited losses of the short trade. Just the amount that is in the investment vehicle.
pmorici 17y ago
In this case it says the bank offered to take all the shares off the investors hands for free to free them from the liability.
- hristov 17y ago
  This however does not absolve Mr. Bolton from his conduct.
  - ericwaller 17y ago
    Also it seems like this was just luck. I don't think he expected to have the liabilities waived (by being bought back by the bank).
netsp 17y ago
You're right. Something is off here. That seems like moving all the cash from one company to another and letting the first go bankrupt without the latter assuming liability. What stops this happening more often?
- hristov 17y ago
  Corporate law.
  - netsp 17y ago
    Care to be more specific? What happens normally that failed to happen here & why.
    - hristov 17y ago
      The law is different from country to country, and I am not sure about the law or the facts of the case here. But the person that controls a corporation usually has a fiduciary duty to the corporation and usually cannot merely give away the assets of the corporation. Here the corporation had an asset (voting rights) that got sold, but the proceeds of the sale did not come back to the original corporation selling the asset but went to a completely different corporation. Depending on how this was done this may be improper. What usually happens in this case is that someone that is a creditor of the corporation sues to get the money back. However, here the creditor did not sue because it seems like they were able to get their money from another source as explained in the other posts in this discussion. BTW none of this is legal advice :).
nl 17y ago
Don't forget that many (most?) of the people that he bought those shared off originally were probably unaware of the liability associated with it when they bought it. There were other suits associated with that liability (many claimed they were never made aware of it when they invested), so the ethical situation is murky at best.
hristov 17y ago
You are right. What he did was sell assets owned by corp A and put the proceeds of the sale in corp B. That seems definitely unethical. I do not know much about Aussie corp law but it may also be very illegal. Also, he may have breached another rule by proposing an action that he obviously did not believe to be desirable when he had a large chunk of the corporation. Again I am not sure what the particular rules in this case are but usually large shareholders have fiduciary duties towards the corporation and small shareholders so they cannot do things that injure the corporation. So I am not sure this guy should be admired. It seems that he just broke a bunch of rules betting that he would not get sued. And he is not getting sued, but that may have been due to luck rather than being right. I think what happened is that his ass was saved when a bank decided to buy out any shares that anybody wants to get rid of and make the necessary subscription payments. Thus the bank would buy Mr. Bolton's shares and make the payments, so the corporation would not have to sue Mr. Bolton for the payments.
netsp 17y ago
I don't understand why he had any need for this anyway. If he sold the shares along with the associated liabilities, why would he have any liabilities at all in Australian Style Investments?
- ericwaller 17y ago
  If you're referring to the bank buying back shares as a "favor" to the investors who didn't know better, I don't think that was part of his plan, just luck.
  - netsp 17y ago
    No what I mean is that he sold the shares, these shares came with a liability. When he sold his shares to Thiess John Holland, why didn't the liabilities go with them?
    - ericwaller 17y ago
      He only sold the voting rights associated with the shares in that transaction.
      - netsp 17y ago
        In that case, I don't understand. Why couldn't every shareholder with unwanted stock do this, less receiving money in exchange fore his/her voting rights? Put differently, if this is possible and legal, what keeps everyone else liable?
        crc32 17y ago
        I think in most circumstances, nobody would want to buy the voting rights. This was an unusual situation in which Theiss paid for the voting rights to vote against the interests of the share holders.
amalcon 17y ago
That's exactly what corporations are actually for: allowing investment without exposure to liability in excess of the investment. What I suspect was done here was that Investments sold the voting rights to Holdings for A$1, which in turn sold them on for the A$4.5M. It's a clever little trick that can almost certainly be dressed up to be legal by more knowledgeable people than myself.
- ericwaller 17y ago
  Right, I guess what I'm really questioning is who let him take on that much liability without having him personally guarantee it. I can't get a small business loan for my brand new corporation, pay it all to myself as compensation, and walk away saying "oh well, the business failed."
  - whatusername 17y ago
    The shares had an outstanding capital raising thingy going (don't know the terms) Each individual share held the requirement to pay $2 at some later point.. So what he did was purchase a bunch of shares worth about -$1.99 for 1 cent each. It's on the market - so noone had to approve he could actually pay the later $2 installment. He then managed to separate the value (voting rights) from the liability (oustanding $2/share) and profited from the value.
    - ericwaller 17y ago
      Ok, so basically the system wasn't really set up to deal with this strange asset. Because if I sell a put option (which means I may be required to buy shares later on), my brokerage is definitely going to enforce margin requirements to make sure I can afford those shares if things don't go my way.
cabalamat 17y ago
A limited company is a firewall through which debt can't pass. How is what he did any more unethical than any other limited company? (Or are you implying that limited companies are in principle unethical?)
- ericwaller 17y ago
  It's just that it generally doesn't work this way, the moral hazard would be insane. Lenders are smart enough to have debt personally guaranteed by someone at the corporation when the company has no assets of its own to use as collateral.
  - cabalamat 17y ago
    Maybe debt firewalls (i.e. limited companies) should be two-way, i.e. if a limited compan doesn't have to pay its debts, nor do its debtors. I don't see how anyone could disagree with this on fairness grounds. I'm not sure whether it would have good or bad economic effects.

jakarta 17y ago

Technically you could. Most hedge funds are LLCs, if the trades spectacularly fail they're not on the hook for the potential unlimited losses of the short trade. Just the amount that is in the investment vehicle.

pmorici 17y ago

In this case it says the bank offered to take all the shares off the investors hands for free to free them from the liability.

hristov 17y ago
This however does not absolve Mr. Bolton from his conduct.
- ericwaller 17y ago
  Also it seems like this was just luck. I don't think he expected to have the liabilities waived (by being bought back by the bank).

netsp 17y ago

You're right. Something is off here. That seems like moving all the cash from one company to another and letting the first go bankrupt without the latter assuming liability. What stops this happening more often?

hristov 17y ago
Corporate law.
- netsp 17y ago
  Care to be more specific? What happens normally that failed to happen here & why.
  - hristov 17y ago
    The law is different from country to country, and I am not sure about the law or the facts of the case here. But the person that controls a corporation usually has a fiduciary duty to the corporation and usually cannot merely give away the assets of the corporation. Here the corporation had an asset (voting rights) that got sold, but the proceeds of the sale did not come back to the original corporation selling the asset but went to a completely different corporation. Depending on how this was done this may be improper. What usually happens in this case is that someone that is a creditor of the corporation sues to get the money back. However, here the creditor did not sue because it seems like they were able to get their money from another source as explained in the other posts in this discussion. BTW none of this is legal advice :).

nl 17y ago

Don't forget that many (most?) of the people that he bought those shared off originally were probably unaware of the liability associated with it when they bought it. There were other suits associated with that liability (many claimed they were never made aware of it when they invested), so the ethical situation is murky at best.

hristov 17y ago

You are right. What he did was sell assets owned by corp A and put the proceeds of the sale in corp B. That seems definitely unethical. I do not know much about Aussie corp law but it may also be very illegal. Also, he may have breached another rule by proposing an action that he obviously did not believe to be desirable when he had a large chunk of the corporation. Again I am not sure what the particular rules in this case are but usually large shareholders have fiduciary duties towards the corporation and small shareholders so they cannot do things that injure the corporation. So I am not sure this guy should be admired. It seems that he just broke a bunch of rules betting that he would not get sued. And he is not getting sued, but that may have been due to luck rather than being right. I think what happened is that his ass was saved when a bank decided to buy out any shares that anybody wants to get rid of and make the necessary subscription payments. Thus the bank would buy Mr. Bolton's shares and make the payments, so the corporation would not have to sue Mr. Bolton for the payments.

netsp 17y ago

I don't understand why he had any need for this anyway. If he sold the shares along with the associated liabilities, why would he have any liabilities at all in Australian Style Investments?

ericwaller 17y ago
If you're referring to the bank buying back shares as a "favor" to the investors who didn't know better, I don't think that was part of his plan, just luck.
- netsp 17y ago
  No what I mean is that he sold the shares, these shares came with a liability. When he sold his shares to Thiess John Holland, why didn't the liabilities go with them?
  - ericwaller 17y ago
    He only sold the voting rights associated with the shares in that transaction.
    - netsp 17y ago
      In that case, I don't understand. Why couldn't every shareholder with unwanted stock do this, less receiving money in exchange fore his/her voting rights? Put differently, if this is possible and legal, what keeps everyone else liable?
      - crc32 17y ago
        I think in most circumstances, nobody would want to buy the voting rights. This was an unusual situation in which Theiss paid for the voting rights to vote against the interests of the share holders.

amalcon 17y ago

That's exactly what corporations are actually for: allowing investment without exposure to liability in excess of the investment. What I suspect was done here was that Investments sold the voting rights to Holdings for A$1, which in turn sold them on for the A$4.5M. It's a clever little trick that can almost certainly be dressed up to be legal by more knowledgeable people than myself.

ericwaller 17y ago
Right, I guess what I'm really questioning is who let him take on that much liability without having him personally guarantee it. I can't get a small business loan for my brand new corporation, pay it all to myself as compensation, and walk away saying "oh well, the business failed."
- whatusername 17y ago
  The shares had an outstanding capital raising thingy going (don't know the terms) Each individual share held the requirement to pay $2 at some later point.. So what he did was purchase a bunch of shares worth about -$1.99 for 1 cent each. It's on the market - so noone had to approve he could actually pay the later $2 installment. He then managed to separate the value (voting rights) from the liability (oustanding $2/share) and profited from the value.
  - ericwaller 17y ago
    Ok, so basically the system wasn't really set up to deal with this strange asset. Because if I sell a put option (which means I may be required to buy shares later on), my brokerage is definitely going to enforce margin requirements to make sure I can afford those shares if things don't go my way.

cabalamat 17y ago

A limited company is a firewall through which debt can't pass. How is what he did any more unethical than any other limited company? (Or are you implying that limited companies are in principle unethical?)

ericwaller 17y ago
It's just that it generally doesn't work this way, the moral hazard would be insane. Lenders are smart enough to have debt personally guaranteed by someone at the corporation when the company has no assets of its own to use as collateral.
- cabalamat 17y ago
  Maybe debt firewalls (i.e. limited companies) should be two-way, i.e. if a limited compan doesn't have to pay its debts, nor do its debtors. I don't see how anyone could disagree with this on fairness grounds. I'm not sure whether it would have good or bad economic effects.