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Octaviar financiers unworried before fall

On Wednesday 15 December 2010, 19:02 EST

Major financiers of a collapsed Gold Coast property and financial group were not concerned about their client's solvency, even when the share price plunged by two-thirds.

Octaviar, formerly known as MFS, collapsed in 2008 owing about $2 billion to creditors including Fortress Credit.

Liquidators are trying to determine exactly when the company became insolvent.

In a hearing in Brisbane on Wednesday, Fortress Credit's Mark Kwei said he alone did the due diligence on Octaviar.

When he first looked into its financial health in 2006, he determined it to be a "strong company".

In December 2007, Mr Kwei raised with his boss, Fortress chief executive officer David Kelleher, problems with one part of the Octaviar group.

Young Villages Estate, a retirement project, was performing below standard, he said.

"The comfort level we had with the underlying security was not as good as we thought it was," Mr Kwei said.

But it was not until MFS founder Michael King alerted shareholders to problems with a capital-raising proposal in January 2008 that Mr Kwei sought short-term cash flow projections from Octaviar.

"It appeared there was only just sufficient cash for it to meet its obligations over the (two-month) forecast period," he said.

Mr Kwei said he listened to the January 18 phone call and was worried that Mr King had not properly explained the company's financial position.

"I was concerned that statements that he made had been misinterpreted," he told the court, agreeing with liquidator Kylie Downes that Mr King had "glossed over" the money owed to Fortress.

The proposal saw the company's share price fall from $3.18 to 99 cents, but Mr Kwei said he still wasn't worried about Octaviar's ability to repay the loans.

"I believed they could," he said, claiming he hadn't thought about what had caused Octaviar's cash flow problems.

Mr Kwei told the court that on joining Fortress in 2006, he was given no formal guidelines on due diligence.

Feedback from Mr Kelleher was given only on an "ad hoc" basis, he said.

Mr Kelleher later confirmed this, saying his guidance on due diligence was informal, "depending on the transaction".

Mr Kelleher said it was "some months thereafter" in December 2007 that he became worried about Octaviar's capacity to repay its debts.

He will continue giving evidence on Thursday.

Former KPMG auditor Mitch Craig was on Wednesday due before a hearing in Sydney.