The Morrogh Action Group plans to challenge a ruling that may exacerbate its losses, writes Dominic Coyle.

W&R Morrogh may have been Ireland's smallest stockbroker but its demise in May 2001 has proved a major headache for its customers - still looking for their money - and for the Irish Stock Exchange, the stockbroking industry and the Investor Compensation Company.

Investors who lost out to the tune of more than €7 million now face further losses after the High Court ruled that the receiver, Mr Tom Grace of PricewaterhouseCoopers, could use funds from shares held electronically in nominee accounts for customers by the brokerage to meet the costs of his investigation.

Members of the Morrogh Action Group held a public meeting in Cork last weekend and have decided to challenge the ruling of Mr Justice Murphy in the Supreme Court. They are stunned that a receivership process to limit the losses of creditors like themselves may now exacerbate their original losses.

"We have initiated the paperwork for an appeal to the Supreme Court," said Mr David Beechinor, spokesman for the Morrogh Action Group. "We have also written to the receiver asking him for the latest valuation of the shares frozen following the collapse." At the time of the High Court hearing, Mr Grace indicated that the shares were worth about €5 million. The cost of the receivership to date is between €3.5 and €4 million and, given those figures, out-of-pocket investors feel they have nothing to lose by pursuing an appeal.

There is speculation, however, that with share values rebounding this year, the frozen stock may be worth considerably more - with some touting figures above €10 million. If so, investors may be reluctant to risk mounting legal costs eating into what remains of their investment.

Their plight is compounded by uncertainty at the Investor Compensation Committee Ltd (ICCL), the body set up to compensate customers of failed investment firms, over its liability to meet losses arising from the costs of the receivership.

About 2,500 claims from Morrogh clients have been lodged with the ICCL but, to date, only claims relating to cash losses have been paid out - a total of €2.6 million. The ICCL administrator is waiting for the conclusion of the receivership processes before adjudicating on the claims for losses relating to shares held by Morrogh in electronic form. These currently amount to around €2.4 million before the receivership costs are taken into account.

"This situation [the receiver being paid out of client funds] was not foreseen in the drafting of the legislation and we are unsure whether such amounts qualify to be compensatable," said ICCL chief operating officer Ms Patricia Farrell. "We are unsure and are taking legal advice." She said it would be a number of weeks before such advice was available.

The Irish Stock Exchange, which has been among the notice parties to the High Court proceedings, has welcomed several aspects of the ruling. "We were keen to uphold the principles of equivalence and traceability and the ruling does both," said a spokesman. The exchange, however, remains concerned about the impact of the case in the areas of investor protection and the integrity of the market, especially in relation to nominee accounts. "We are still reviewing the ramifications of this judgment," the spokesman said.

One unwelcome element of equivalence (where all shares are treated equally) is that it opens the prospect of Mr Grace pursuing the holders of share certificates held by Morrogh and since returned to investors.

Stockbrokers are alarmed at the possibility of the compensation bill mounting, as they will have to meet half the cost of any money paid out.

Industry sources are angry at several aspects of the debacle and the efforts to untangle it. In particular, there is concern that the receiver is turning to remaining client funds at a time when it has yet to be determined fully what assets are available from the company.

Morrogh was an unlimited partnership and, as such, its two partners, Mr Alex Morrogh and Mr Stephen Pearson, are liable for any losses. It is unclear, however, whether the receiver has currently secured funds from either over and above the proceeds of the sale of the company's premises and associated office furniture.

There is also disquiet over the cost benefit of the way in which certain aspects of the receivership have been pursued. The cost of the receivership is nearing the point where it outstrips the compensation paid as a result of the collapse.

The Cork brokerage - the only one based outside of Dublin - imploded when it emerged that partner Mr Stephen Pearson had defrauded shareholder accounts to the tune of more than €5 million. Mr Pearson, who had plundered client portfolios to meet losses built up by him in trading futures on his own account.

The 9,000 customers of Morrogh, which had been operating since 1895 and was considered one of the State's most respected independent brokerages, were shocked to learn subsequently that Mr Pearson had embezzled money at the firm as far back as 1993.

On that occasion, the losses had been made up in-house and the issue covered up.

This time the figure was too big.