Regulator probes secret Groves deals

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This was published 13 years ago

Regulator probes secret Groves deals

By Colin Kruger

The corporate regulator is investigating Eddy Groves's personal financial dealings with the leading creditors of the multibillion-dollar company he founded and ran aground, ABC Learning.

Sources close to the investigation confirm that Mr Groves's attempts to shore up his personal finances in the lead-up to ABC's collapse - involving the Commonwealth Bank, and his former brother-in-law Frank Zullo - are receiving close scrutiny from the Australian Securities and Investments Commission.

A public examination into the debacle heard that Mr Zullo's maintenance firm, QMS, and the syndicate of banks lending more than $1 billion to ABC, including Commbank, allegedly received favourable treatment at the expense of other creditors.

A legal battle in the Supreme Court of South Australia has provided a wealth of detail on the deals in question, which now see Mr Zullo and Commbank battling for control of Mr Groves's last remaining basketball asset, the Adelaide Dome.

He granted both parties mortgages of the property within a month of each other in 2008 - allegedly without either party's knowledge - in return for loans totalling $15 million. About this time he was helping provide the banking syndicate Commbank led with security over all of ABC's assets. According to evidence from the public examination, Mr Zullo's QMS also received tens of millions of dollars in lagging creditor payments.

For Mr Groves the latest troubles began on April 14 this year.

It was the first morning of his testimony before the public examination into ABC Learning's collapse, and Mr Groves was given an impromptu quiz on his relationship with various associates of the failed childcare provider.

His relationship with the former company chairman Sallyanne Atkinson? ''Good.''

Former director Larry Anthony? ''Good.''

The former board member and Austock executive Bill Bessemer? ''Excellent.''

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Ms Atkinson resigned from the ABC Learning board in May 2008, Mr Bessemer resigned a month earlier and Mr Anthony resigned in April last year.

How about Mr Zullo - the sole provider of maintenance services worth tens of millions of dollars a year to ABC's local centres? ''Good.''

''Not so good'' would probably have been the reply if he knew Mr Zullo's lawyers were that very day filing a lawsuit against him seeking to recover $7.3 million.

According to the statement of claim from Mr Zullo, it is money owed on a short-term loan Mr Groves had taken with him in March 2008 when his personal wealth - once estimated at $400 million - hit rock bottom and ABC was fighting for its life.

According to testimony from former ABC executives at the examinations, it was not a good time to be a creditor of the company.

But it was made clear that an inside run with Mr Groves was beneficial. He was the only one who knew how the increasingly unwieldy empire worked and he kept a close grip on all aspects of the operation. This included closely monitoring, and approving, the increasingly late payments to ABC creditors like Mr Zullo.

Mr Groves's sister, Lorie, who was married to Mr Zullo at the time, was in charge of ABC's accounts payable but said during her appearance at the examination that she had little to do with her husband's business, QMS, due to related party concerns.

But she did recall her brother asking about amounts owed to QMS during ABC's tumultuous final year.

Counsel for ABC's administrators at the examinations revealed that QMS was paid $22 million in June 2008 and a further $7 million in September.

During the examination it was also alleged that Mr Groves instigated a bizarre billing system with QMS that would lead to the maintenance provider charging $100,000 for a sink, leading to an overstatement of ABC's earnings and assets.

''How they [ABC] accounted for it was their business,'' Mr Zullo told the examination during his testimony in March this year.

''I don't care if I lose over here and made over there, as long as my bottom line has a margin in it.''

The receivers who took control of ABC on behalf of its bankers in November 2008 continued to use QMS's services.

At the examination in April, Mr Groves was asked if his relationship with Mr Zullo was purely business: ''It was pretty much business,'' he said.

He went on to say he didn't have any contact with Mr Zullo for about two years, from when he took on the global role at ABC ''until April 2008 when I started to thrust myself back into the Australian business''.

But there is clearly more to the relationship, and not just the fact that the Gold Coast hinterland property that Mr Groves calls home is owned by Mr Zullo.

Evidence provided by Mr Groves in relation to a Supreme Court lawsuit from his ex-wife, Le Neve Groves, the co-founder of ABC, lists payments totalling about $6 million to Mr Zullo between January 2006 and June 2007.

Mr Groves also played a central role in granting security over ABC's assets to its banks in June 2008.

Documents lodged in relation to Mr Zullo's case indicate that one of the Commbank executives involved in negotiating the bank's debt with ABC doubled up to play a central role in restructuring Mr Groves's personal debt to the bank. This included giving the bank a mortgage over the Dome.

In its statement of defence, the bank says Mr Groves did not inform it that he had already granted a mortgage over the asset to Mr Zullo.

The lawsuit in effect pits the two creditors against each other to see which mortgage has first ranking over the Dome.

The loser will be able to add further millions to the losses suffered as an unsecured creditor of ABC.

According to the statement of claim lodged by Mr Zullo, he loaned $8 million to Mr Groves on March 14 - about two weeks after the ABC chief had his shareholding wiped out in a margin call.

Mr Groves still owed millions on the loan secured against his ABC shares but his personal losses were not the only thing on his mind.

At that time he had already flown to the US in a desperate bid to sell company assets and stave off a potential liquidity crisis. Liquidators appointed to ABC last month say the company may already have been insolvent.

The Zullo loan was to be repaid within 60 days and Mr Groves offered his 5 million shares in Austock, then worth as much as much as $5.75 million, as security.

Mr Groves was to sell the shares to pay back the loan but apparently this never happened.

According to Mr Groves's defence statement, the Austock shares were transferred to Mr Zullo in August last year when the market value had slumped to just $1.5 million. If Mr Zullo had not sold the shares they would now be worth half that.

In an interesting aside, a court order last month extending ASIC's international travel ban on Mr Groves until the end of this year revealed that he was considering ''a potential claim against Austock Group in relation to its failure to sell his shares when directed to do so by him in early 2008''.

The first loan from Mr Zullo evidently wasn't enough and a further $1.75 million was loaned to Mr Groves in April that year, repayable by October. This time Mr Zullo was given a mortgage over Adelaide Dome and ''would have priority over any subsequent security'', says his statement of claim.

None of this is disputed by Mr Groves, aside from the $7.3 million debt itself.

Problems arose the following month when Mr Groves wanted to extend a facility he had with Commbank on which he owed $5 million.

In its statement of defence Commbank says Mr Groves ''offered to provide'' the bank a mortgage over the Dome in return for an extension of the facility and it was granted on May 29, 2008.

This was roughly the same time when the banking syndicate requested that Mr Groves and the rest of ABC's board give it security over all of ABC's assets.

ABC's liquidator is expected to take legal action to overturn the security obtained by the banks.

According to evidence given at the public examinations, the Commbank financier Rodney Flude was one of the executives involved in overseeing its loans to ABC.

Statements from all three parties involved in Mr Zullo's legal action confirm that Mr Flude negotiated the extension to Mr Groves's loan with the bank.

In the bank's statement of defence, it says it was not made aware of Mr Zullo's ''alleged'' mortgage.

It also says that ''at all material times'' Mr Groves ''has refused to produce the duplicate certificate of title'' to the Dome so that the bank could register its mortgage over the property.

Commbank claims to have superior title over the property as Mr Zullo failed to lodge a caveat on the property, as it had, and ''the documents purporting to comprise the alleged Zullo mortgage are not in registrable form''.

Commbank declined to comment as did lawyers acting for Mr Groves and Mr Zullo.

The case continues.

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