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Westpac Broking - Serious Flaw Exposed

Brief Overview - Westpac Broking Error

On December 17th, 2007, a serious technical flaw in Westpac Broking's web application software miscalculated available funds and allowed over $400k of share trades to be wrongly executed. The trades were not only accepted by Westpac Broking but the funds to cover the trades were made available at settlement by BT Margin Lending (part of Westpac) who placed the amount against my loan. Due to the miscalculations by Westpac Broking's system, the loan placed my account automatically into 'Margin Call' which required immediate payment.

Despite the obvious error, I had been willing to accept both the loan and the investment. Westpac however, have refused to allow me the loan that their system put through and yet denied that the loan the system put through was made in error. To me this doesn't make sense and contradicts itself.

Depending on market prices, if BT were to foreclose my loan and sell down my portfolio, I could stand to lose a substantial amount of money. Despite being fully co-operative, and so far reducing the loan amount by over $200k, BT have continued with threats of foreclosure and have been unwilling to negotiate a mutually acceptable remedy.

Understandably, my health suffered dramatically as a direct result of the incident and the constant harrassment from BT Financial Group. My quality of life, well being and even my will to live had been substantially reduced. Of lesser concern is other financial losses incurred in legal fees, banking fees (non-Westpac) and medical expenses.

I have helped Westpac Broking, BT Margin Lending and their clients by exposing a serious flaw in their system that has potentially saved them millions of dollars.

The Incident in Detail

On Monday morning, the 17th of December, I logged into Westpac Broking. After reading the news release from Centro Properties Group (CNP), I realised there would likely be a lot of panic selling in the company and I decided I would buy as many shares as I could with available funds. Centro were on my recently compiled list of 35 top companies that I wished to buy into. I presumed, I had about $40k - $50k to invest in Centro, given that the LVR (Loan to value ratio) was 75%. To free up more funds, I placed a series of sell orders for many of my other shares.

Similar situations have happened to myself before and I have decided to put in as much money as I have available. This is normally only a limited amount as my available funds are often minimal. The web application software at Westpac Broking is integrated with my BT Margin Lending account. This system automatically calculates how much equity I have available and limits my investing to this amount. Often, I would place orders until this system says there is no more available funds.

As the market opened and in the heat of the moment, I placed a series of buy orders for CNP, keen to buy as much as I could with available funds. Later that day, after being away from the computer, I returned to Westpac Broking's website and found that CNP's share price had fallen further. Because the system had not refused any of the previous orders, I presumed I still had further funds available and I decided to buy more and more shares.

Being a busy day, I had not been keeping close track of exactly how many shares I was purchasing, nor the dollar amounts. I had also not been keeping track of whether my sell orders had been executed, although I presumed many of them had gone through since I had plenty of funds available to purchase more shares.

Westpac Broking have a system in place to limit clients to only investing funds they have available. This is to protect both themselves and the client. As with most normal bank accounts or credit cards, you simply can not go over your limit. As always, I had trusted Westpac's system to limit my investments to the appropriate level. In this instance, the system failed dramatically.

I had not, and could not have, possibly foreseen that there was a serious flaw in Westpac's system. The website is part of Westpac Banking Group, one of Australia's largest companies, one does not expect it to have any errors, let alone a flaw of such serious nature. As it turned out, the web application software had falsely been leading me to believe that I had available funds to invest with. After the market had closed, I checked the 'Review Orders' page at Westpac Broking's website and found that every buy order for CNP had gone through. I also found that not one of my sell orders had been executed. I then checked my account under the 'Trading Funds' page and was sickened to find the following figures:

Available Funds Market Value    $1,603,524.27
Loan Limit $1,183,757.44
Loan Balance $585,405.78
Funds Available for Trading $598,351.66

(see Annexure 1A - Margin Loan Displayed by Westpac, as at 17/12/07, Market Close. The spreadsheet was compiled using historical data & believed to be the exact figures displayed. The holdings and loan balance can be confirmed using the BT statements (attached). I have also included historical share price data from Westpac's own website for each of the held shares).

At first glance, it was obvious that a serious problem had occurred. The correct figures, which I manually calculated using market prices were:

Available Funds Market Value    $556,954.30
Loan Limit $382,472.12
Loan Balance $585,405.74
Funds Available for Trading -$193,946.99

(see Annexure 1B - Loan Using Current Market Prices, as at 17/12/07 (Market Close))

As evident in these figures, 'Available Funds Market Value' was out by over $1,000,000.

By the time I had reviewed the situation and gathered myself, it was too late (after business hours) to contact BT Margin Lending to discuss immediately.

I have since been back over the figures and have been able to calculate how much available funds I actually had before the market opened on the 17th December 2007. The figures are as follows:

Available Funds Market Value    $263,665.17
Loan Limit $171,100.61
Loan Balance $180,767.31
Funds Available for Trading -$9,666.70

(see Annexure 1C - Margin Loan Status with BT, as at 17/12/07 before Market Open. Calculations can be confirmed using the attached BT statements where it states the loan amount was $173,767.31 on the 19th December. After accounting for the settlement period and the deposited funds, the loan balance was $180,767.31 on the morning of 17th December 2007. The settlement period is factored in at Westpac Broking to avoid having the borrowed amount exceed the loan limit).

As the figures clearly display, I should not have been able to purchase any shares at all without having some of my currently held shares sold. I quite simply did not have a cent to invest with. Even though I had no available funds, the figures in Annexure 1A suggests I could have purchased at least $2,393,000 worth of additional shares. And yet, Westpac denies this is a flaw in the system. Theoretically, the error in their system will allow someone to borrow an unlimited amount as there is believed to be no procedure in place to have these types of transactions flagged. Imagine getting $1billion worth of financing approved at just the click of a button! Most can not argue that this is an extremely irresponsible method of lending money.

I did wish to have the above figures audited by an independent auditor, with their conclusion included with this complaint. This has not been actioned as yet due to time constraints but I believe any audit will confirm the above figures.

How Did the Error Occur?

Using simple maths & logic, I have since been able to calculate how the error occurred. The problem was that all CNP shares were still being calculated at the market share price from 5 days prior. Even the CNP shares just purchased for $1.36 were still being calculated & valued at $5.70. For example, a purchase of 10,000 CNP shares at $1.36 would have credited the 'Available Funds Market Value' with an amount of $57,000 regardless of the purchase price being only $13,600. The system would then miscalculate the 'Funds Available For Trading' and the problem compounded.

This does not quite explain how the first order was accepted as there was clearly no funds available to let any orders go through. I believe Westpac's system recalculated the Funds Available as or after the order was placed, rather than before. The first order executed on the 17th of December was Contract Note #8974707 (see section 11, page 42). This order was for 8,000 CNP shares at $2.39 which was $19,120. If the system was still calculating CNP at $5.70 ($45,600), the available funds would have increased by $26,480 ($45,600 - $19,120) making the new figure $16,813 ($26,480 + -$9,666).

Possible Solutions to Prevent Error

I may not be fully qualified to comment, however, with a technical background in programming web applications software, I know how feasible it should have been to factor in a remedy to the flaw. A number of possible solutions would have prevented the error to occur, including:

  • By having 'Available Funds Market Value' value calculated using most recent purchase price by the client.
  • By having 'Available Funds Market Value' calculated using actual market value rather than by using historical data.
  • By having a dramatic drop in share price flag an error for automatic trading suspension, manual order reviews or manual review of share price market value.
  • By having shares currently coming out of a trading halt to be put on manual review.
  • Have a secondary system which calculates 'Available Funds Market Value' at the actual market value which flags any major discrepancies.

The majority of the trades in question were manually reviewed by a Westpac Broker as is normally done when similar trades are placed in succession. Even when manually reviewed, Westpac failed to reconise any problem and allowed the trades to go through.

I can not know for certain whether Westpac were aware of the flaw, however I believe if they were not, they should be thankful that I have highlighted the issue. I believe Westpac Broking by now, would have taken the appropriate steps to correct the error to prevent the problem occuring again.

Westpac Broking has no warnings on their website to be aware of this flaw.

Centro LVR Cancellation

On December 18th, aware that a large purchase of Centro shares had been made and were pending settlement, BT Margin Lending immediately cancelled the lending ratio (LVR) on the Centro shares entirely. The LVR was previously 75%, and was made non existent. This increased the amount I was required to immediately pay by >$200k. As unethical as this may seem, I concede that BT are within their rights to use this method, if they so choose. I did however, wish to raise this issue as part of my formal complaint as it greatly contributed to the situation.

Persistent Harrassment, Threats of Foreclosure & Constant Denial of any Error

The phone calls began on the 18th December, the day after the share purchases were made. During the first moments of my initial phone conversation with a BT staff member, they stated that the system does not normally allow orders to be placed without the funds being available. This person was simply stating the obvious.

I have included all email correspondence received from or sent to BT Margin Lending. They have repeatedly denied any error and repeatedly threatened to foreclose my account.

I do not understand how Westpac & BT can claim on one hand that the loan was not allowed in error and on the other hand request it be paid back immediately which inadvertently suggests that it was an error.

During a phone conference with Mr Simon Babbage & Mr Sandy Basten (representing Westpac) on the 18th January, a possibly ill-informed Mr Simon Babbage very rudely denied that there was any flaw in the system and continued to make pressing demands and threats of loan foreclosure.

During the above phone conversation, Mr Simon Babbage & Mr Sandy Basten threatened to sell down my entire portfolio if I did not provide further substantial funds and evidence that I can quickly clear the margin call in entirety. The time frame allowed for me to jump through these hoops was three hours, allowing me no time to seek further legal advice or confer with the Industry Ombudsman, APRA or ASIC (FIDO) etc.

Also during the above phone conversation, Mr Simon Babbage & Mr Sandy Basten scheduled to phone me at 10am on the 21st of January. They did not ring, however later that day (21st) Mr Sandy Basten alone called me to briefly mention they were sending out a legal document. During this conversation, I heard audible beeps and believe I was subjected to a monitored or recorded phone call without my knowledge or consent. I have no evidence of this misconduct and concede that it is the least of my worries.

On the morning of 21st January, prior to being phoned by Mr Sandy Basten, I faxed the formal complaint to the Westpac Complaint Review Service. In order to capture their immediate attention, I titled the complaint 'RE: Technical Flaw at Westpac Broking Causes Error of Over $1,000,000'. I also posted a copy of this complaint to the Westpac Complaint Review Service.

On the 22nd January, I expected to receive the legal deed mentioned by Mr Basten however it did not arrive in the mail. I then left Perth for some desperately needed rest & relaxation.

On the 24th of January I had a message on my mobile phone from a staff member at Westpac Broking requesting I call him back regarding the complaint. I did not return this call until I returned to Perth a week later, only to be told that it was just a courtesy call and that he had received the complaint and was handling it from the Westpac Broking side.

I returned to Perth on the 26th January and received the legal document from BT. The document (dated 24th January) had errors and I could not sign it. The document they wished me to sign said 'You have advised that the Company is arranging finance to repay all amounts owing under the Facility from various sources'. I was unable to do so and do not recall saying this. I considered the letter a form of blackmail.

The legal document stated that BT had finally accepted a request for a reprieve and would not exercise it's rights until 12 noon on the 22nd February 2008.

On the 4th February, I received a letter from BT (dated 1st February) stating they were reviewing my complaint and expected to have a response sent within 5 business days.

After putting the facts and figures on paper as part of the formal complaint, I naively expected Westpac to admit to the obvious error and open negotiations for a mutually suitable outcome. I did not expect them to continue to deny any error after I had proven the error occurred & the flaw existed.

On the 14th February, I received a letter from BT (dated 8th February) titled 'Margin Lending Complaint'. In this letter, BT flatly denies any 'system problems'.

My Westpac Induced Rash
This is what I got for trusting
Westpac Bank with my finances.
As of the 22nd February, I have not received any response from Westpac Broking.

Pain & Suffering

The following stress related symptoms I suffered since 17th of December were directly inflicted by the above mentioned incident and harrassment from BT Financial Services and Westpac Banking Corporation.

  • Vomiting
  • Weight Loss
  • Diarrhea
  • Insomnia
  • Hives
  • Headaches
  • Nausea

To add clarity to the situation, I wish to list a few more details rather than list the physical symptoms alone.

  • In Canberra, during a visit to the Telstra tower, my partner refused to let me out of her sight or visit the upstairs observation deck for genuine fear that I may jump.
  • On the 21st December, after further threats from BT, I resorted to begging my parents for financial assistance. Being a very independent person normally, this is what hurt the most and I feel since then that I have been a broken man.
  • I had to attend the wedding of my partners father while visibly ill and with an itchy rash all up my arms and on my hands. In wedding photos, I am forcing a smile while holding back tears.
  • Christmas Day at an annual family gathering, I spent more time in the bathroom being sick than enjoying the company of loved ones.
  • On the 4th & 16th of January, I was bedridden, unable to sleep but unable to move or face the problems BT was weighing me down with.

Perspective

The following may be irrelevant or inadmissible but I wish to have the following noted as it adds to my confusion.

  • In late 2007, I filled out a lengthy application for a Bendigo Bank Visa Card with a limit of just $5,000. My application was rejected.
  • In 1998, The Bank of Melbourne granted me a loan of approximately $42,000, allowing me 30 years to pay this back.
  • As described in this complaint, by pressing a few buttons at Westpac Broking's website, I unintentionally loaned an amount in excess of $400,000 and was allowed (initially) only 3 days to pay this back.

Further Explanation & Simple Analogy of Westpac Broking Error

Understandably, the complexity of margin lending may make it difficult to understand how Westpac made an error of such grand proportion. A Margin Loan is the same as a mortgage on your property but instead, it is your shares that are mortgaged. Lets examine what Westpac did, using property instead of shares.

Say for example, I discovered a suburb that I wanted to buy into and suddenly, apartments there were selling really cheap. Even though I only have a small amount to invest, I apply to purchase 5 apartments at $80,000 each. By doing so, I know my loan application will not go through for at least 4 of them, possibly 5 because I didn't have the required 30% deposit. At the same time, I also put existing properties of mine up for sale meaning if they get sold, I will have more funds available and possibly my application for 2 or 3 apartments will be accepted.

None of my properties sell and an error in the system somehow automatically accepts all 5 loan applications by mistake. The lender (Westpac/BT) then rings me the next day, advises that there was a mistake and says I will need to pay them the entire $400,000 within 3 days or they will sell all 5 properties on my behalf at any price they can get for them.

Rude, irresponsible, inconsiderate, arrogant, incompetent, unethical, disgusting...


The Information above is True and a Matter of Public Interest.