Following on from last year's high profile raid on Anglo Irish Bank's headquarters, Sean Fitzpatrick's brazen assertion that he had broken no laws and done nothing wrong could hardly be more laughable. Unfortunately he seems to have inveigled much of the senior management and Board of both Anglo Irish Bank, Irish Life and Permanent (ILP), and possibly Irish Nationwide in a web of activity that could be deemed criminal in at least three different jurisdictions.
Let us look at some of the material facts
Concealing loans for eight years
Sean FitzPatrick, the former Chairman of Anglo Irish, spent eight years concealing from shareholders €122 million in personal loans from the bank. This was facilitated by way of a series of short term loans from Irish Nationwide.
FitzPatrick had simply transferred his loans at the end of each financial year for the last eight years to the books of Irish Nationwide so that they wouldn't appear on Anglo Irish's annual accounts but none of the Irish regulatory bodies, the Financial Regulator, the Central Bank, nor the Department of Finance took any action. The head of the Financial Regulator Patrick Neary retired last month with a 600k package after disclosing that officials in his department had been told a full year previously about FitzPatrick's hidden loans.
Maple 10 investment scheme
In July 2008 FitzPatrick and Current CEO David Drum arranged for 10 unnamed longstanding customers known as the “Maple 10”to buy 451million euro of shares that in effect Anglo Irish loaned them the money for.
This was to prevent the unwinding of Sean Quinn's CFD positions from dumping 25 percent of the shares on to the market and causing a collapse. 83million euro has been repaid to date.
As the collateral was the shares themselves and the Bank has been nationalised, the shares are now virtually worthless. The Bank estimates at least €300m will be lost and the Government has now refused to reveal the identity of the ten investors in July 2008 under a rather spurious 1949 Central Bank Act.
Circular transactions totalling some €7 billion
In September 2008 a circular transaction took place involving loans from Anglo Irish to Irish Life and Permanent ( ILP) of some €7 billion plus in return for a deposit of same made to Anglo's account from a subsidiary of ILP Irish Life Investment Managers .
Unlike most “bed and Breakfast” transactions at these type of short term injections of liquidity are known, this was classed as a corporate and commercial deposit rather than an inter-bank loan. This loan was then transferred back ten days later, however it was in the customer accounts when the auditors, Ernest and Young took a “snap shot” of the finances for the annual report in December 2008. The customer deposit base looked healthy and expanding, all talk of a run on the bank was dismissed by Anglo Irish's management and the government
This was contra the fact that the bank had lost €4 billion in deposits during the international credit crisis during the month of September. Excluding the €7 billion from ILP, Anglo Irish’s loss of deposits could actually have been €11 billion during September 2008. Anglo Irish effectively presented it's own deposit base as larger and more stable than it was and used these enhanced figures during a "road show" to the U.S. Seeking new institutional investors.
There was also apparently a reciprocal arrangement in place whereby ILP planned to carry out a similar transaction with Anglo Irish prior to the end of its own financial year. Could it have been ILP's intention to use this money from Anglo Irish to hide its reliance on European Central Bank (ECB) funding prior to it's own year end in 2008?
The management of Anglo have now insisted that the financial regulator had encouraged a “green jersey” agenda of encouraging the Banks to make loans to each other to shore up deposits. The Financial Regulator says it did not encourage such transactions in the manner Anglo Irish chose, rather it encouraged the operation of a general scheme of support among the Irish banks.
This circular transfer of money to Anglo Irish from the ILP forced the resignation of ILP CEO Denis Casey, while the Financial Regulator simultaneously launched a probe into these activities.
Anglo Irish was subsequently nationalised due to the further decline of it's financial position, despite continual assertions of it's good financial health
This entire series of dealings has caused an investigation by the Office the Director of Corporate Enforcement (ODCE) to be launched. The ODCE has utilised the services of the Garda Bureau of fraud investigation to visit the head office of Anglo Irish bank to gather and secure any evidence pertinent to the investigation.
Let us look at the law
Can we even discuss these issues without prejudicing any parties who may latter be charged with various offences?
The better view is that as no actual case is before the Courts, so no discussion of the issues involved is precluded, and the Courts are increasingly taking the view that Juries in criminal cases are deemed to be rather robust and not influenced unduly by media coverage.
what areas of the law might be involved?
Fraud
Primarily fraud, which involves the notion of detrimentally affecting or risking the property of others, their rights or interests in that property, or an opportunity or advantage to which the law accords them with respect to said property.
The euphemism 'white-collar crime' is often used as an alternative to the word fraud as fraud is perceived by many people as 'criminal and unethical behaviour' . Coarse and inelegant as it sounds this is essentially a question of fraud, fraud on the market, fraud on the auditors, and fraud on the shareholders.
The Criminal Justice (Theft and Fraud Offences) Act, 2001 defines the act of fraud itself and the inducement of another into similar activity as a ancillary or alternative offence :
Sections10.—(1) A person is guilty of an offence if he or she dishonestly, with the intention of making a gain for himself or herself or another, or of causing loss to another—a) destroys, defaces, conceals or falsifies any account or any document made or required for any accounting purpose,(c) in furnishing information for any purpose produces or makes use of any account, or any such document, which to his or her knowledge is or may be misleading, false or deceptive in a material particular
and 6.—(1) A person who dishonestly, with the intention of making a gain for himself or herself or another, or of causing loss to another, by any deception induces another to do or refrain from doing an act is guilty of an offence.
What other illegal activities might have been taken place?
Company Law and regulatory offences
Apart from Fraud potentially a myriad of company law offences, insider trading, market manipulation, false accounting, conspiracy, concealment of an offence, competition law offences, criminal offences under UK law, under EU law, and possibility offences by officials of the State as well.
And of course any Criminal and or company law offences prosecuted by the State does not preclude the taking of any subsequent civil actions for compensation for by shareholders and other institutions who have suffered a loss due to this course of dealings by Anglo Irish.
false accounting
Under the 1990 Companies Act Section 197.—(1) An officer of a company who knowingly or recklessly makes a statement to which this section applies that is misleading, false or deceptive in a material particular shall be guilty of an offence.
here is also a duty on any Directors under section 202 of the 1990 Companies Act to ‘‘cause to be kept proper books of account’’, which ‘‘correctly explain the transactions of the company’’, which ‘‘will at any time enable the financial position of the company to be determined with reasonable accuracy’’ and which ‘‘will enable the accounts of the company to be readily and properly audited’’.
Any Director who ‘‘fails to take all reasonable steps to secure compliance by the company with the requirements of this section, or has by his own wilful act been the cause of any default by the company thereunder, shall be guilty of an offence’’.
Other than these specific Companies Act offences, Ireland has signed up to several major international and European conventions and directives which have become law in Ireland.
For example the Market abuse directive now in law under the Investment Funds, Companies and Miscellaneous Provisions Act 2005 and subsequent Regulations define two main offences of insider trading and market manipulation.
insider trading
Insider trading occurs when a trade has been influenced by the privileged possession of corporate information that has not yet been made public. Because the information is not available to other investors, a person using such knowledge is seen to gain an unfair advantage over the rest of the market.
Using such nonpublic information for making a trade violates transparency, which is the basis of a capital market. Information in a transparent market is disseminated in a manner by which all the market participants receive it at more or less the same time. Under these conditions, one investor can gain an advantage over another only through acquiring skill in analyzing and interpreting available information. This skill is based on individual merit and awareness. If one person trades with nonpublic information, he or she gains an advantage that is impossible for the rest of the public.
This is not only unfair but disruptive to a properly functioning market: if insider trading were allowed, investors would lose confidence in their disadvantaged position (in comparison to insiders) and would no longer invest.
This is the fundamental rationale behind disallowing such trades.
In Ireland the U S and many other jurisdictions, however, "insiders" are not just limited to corporate officials and major shareholders where illegal insider trading is concerned, but can include any individual who trades shares based on material non-public information in violation of some duty of trust.
This duty may be imputed; for example, in cases of where a corporate insider "tips" a friend about non-public information likely to have an effect on the company's share price, the duty the corporate insider owes the company is now imputed to the friend and the friend violates a duty to the company if he or she trades on the basis of this information.
market manipulation
Market manipulation is any action that causes actual manipulation of the market, for example, where someone (not necessarily an insider) acts to distort the price of a share or other financial instrument by misleading the market or by engaging in artificial transactions or disseminating false and misleading information.
This affects not only directors of listed entities but also senior executives with regular access to inside information, and who have the power to make managerial decisions affecting the company. The Market abuse prohibitions in Irish law are particularly wide and attract severe penalties for the breech thereof.
The 2005 Act and Regulations contain a range of sanctions for breach from criminal penalties of a fine of up to €10 million and or ten years imprisonment to imposition of a civil liability to pay compensation to to all or any parties dealing in shares affected by a breach of the market abuse rules.
Additionally the Financial Regulator may impose a number of what are termed administrative sanctions including monetary penalty up to €2.5 Million, and the disqualification of a person from being concerned in the management of a financial service provider.
General Directors duties and disclosure of loans
There is a number of general common law and statutory duties on the Directors of a company to act in good faith, and to disclose all relevant dealings with the company. For example Sections 41 to 43 of the Companies Act of 1990 require disclosure of all loans made to directors. Section 43 specifically refers to loans made to directors of licensed banks and the requirements concerning this disclosure.
Competition Law offences
Enforcement and administration of the Competition Acts, 2002 and 2006 is the responsibility of the Competition Authority. However Irish Courts can award damages or impose fines for anti-competitive practices. Prohibitions and Penalties for Anti-Competitive Behaviour.
The basic prohibitions on anti-competitive behaviour are contained in sections 4 and 5 of the 2002 Act. Section 4(1) prohibits and renders void ‘all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State, or in any part of the State’.
Civil actions
It has been reported in the media that shareholders in Anglo Irish Bank are contemplating litigation. It would obviously open to them to pursue ILP and Irish nationwide as well under various economic torts such as deceit and conspiracy, as well as for colluding in false accounting and financial misstatement. The interesting question would be whether they could also sue the state for negligence or conspiracy for their part in the whole debacle.
UK Jurisdiction
How might FitzPatrick and other commit an offence in the jurisdiction of England and wales? Well the shares of Anglo Irish and ILP are both listed in the London Stock Exchange and the catch all provisions in Section 3 and 4 of the Criminal Justice Act 1993 which lays down the rules for determining the location of events (Archbold 2007, para. 2-40). states that a person may be guilty of an offence whether or not he was in England and Wales at any material time and whether or not he was a British citizen at any such time.
Their Fraud Act of 2006 draws in all such types of fraudulent activity involving false statements and accounting with one particularly broad provision, namely section 3 defining fraud as failure to disclose information when there is a legal duty to do so.
US and EU Jurisdictions
Under the various rules of the US Stock exchange committee (SEC) and the Sarbanes Oxley Act of 2002, the US federal authorities can claim what is known as “universal jurisdiction” in cases of financial fraud. If any US institutional investors bought shares on a basis of such misrepresentations the individuals culpable could well face US charges and possible extradition.
There is a bi-lateral extradition treaty in place between Ireland and the US. The well known case of the “ Nat West Three” exemplifies the long reach of the US courts in these matters.
For any financial fraud affecting the EU, the body responsible OLAF retains the right to independently investigate any acts in any member state. They should be informed for the purpose of being seen to be attempting a bona fide investigation of the actions of Anglo Irish
The “Raid” on the Anglo Irish Offices
This so called “raid”in itself raises more questions than it answers, Why did the State wait some six months or more to investigate? what value is their in gathering any evidence that may still exist, as such evidence is probably tainted due to so many people having access to any material gathered?
The most reliable evidence is probably any information stored on the server of the main frame of their IT system, but again it's provenance may be open to question by any good lawyer.
Of more relevance is whether the investigation should have been widened to cover Irish Nationwide and ILP and controversially the offices of the financial regulator itself as the law must seen to be applied equally to all parties..The Gardai have access to all the details of an investigation carried out by the regulator under the Central Bank and Irish Financial regulatory Authority Act 2003 and it will be interesting to see what action they take. It may also be fitting for the ODCE or the Gardai to inform the English Serious Fraud Office (SFO) under the Mutual legal assistance law they may wish to launch their own independent investigation.
Potential consequences of the failure to be seen to enforce the law in relation to financial fraud.
The twin questions of whether the Financial Regulator actively conspired with the three named financial institutions in illegal activity, and whether the state in Ireland has the will to investigate it's own bodies hangs over the whole scenario and will dictate how much more capital and funds will flow out of the country.
If we fail to take this seriously and prosecute all apparent wrongdoers it is unlikely Ireland will be seen as anything other that “the wild west of international finance” and suffer massive loss of investment in the future.
We desperately have to regain international confidence again or the economic consequences could be catastrophic.
Do we need the gardai to make a complaint to the serious fraud squad in the UK? Can we report these people another way?
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