McAteer and Whelan spared jail in Anglo case

Two former directors of Anglo Irish Bank convicted of providing unlawful loans to 10 businessmen to buy shares in the bank will not be jailed, a judge at the Dublin Circuit Criminal court has ruled.

Judge Martin Nolan adjourned the sentencing of the bank's former director of finance William McAteer and its former head of Irish lending Pat Whelan until July 21st next for an assessment by the probation service for their suitability for community service.

He said it would be unjust to jail the two men given “a State agency had led them into error and illegality”.

The men have been barred from acting as company directors for five years.

McAteer (63), of Rathgar, Dublin and Whelan (52), of Malahide, Dublin, were found guilty earlier this month of providing unlawful loans to businessmen known as the Maple 10 in July 2008 to buy shares in the bank, contrary to section 60 of the Companies Act.

The two men were found not guilty of six counts of providing unlawful financial assistance to six members of the Quinn family.

Former chairman of the bank Seán FitzPatrick (65), of Greystones, Co Wicklow, was acquitted of the same allegations brought against him.

The court had heard that by July 2008, businessman Sean Quinn’s contracts for difference (CFDs) – investment products based on share price – were equivalent to more than 28 per cent of the bank’s shares. This was a serious concern for the bank as it was feared if the CFDs were unwound in an uncontrolled manner it would have a negative effect on the bank’s share price.

A deal was devised which involved providing loans to the Maple 10 to buy just over 1 per cent each of the shares underlying the CFDs, with six members of the Quinn family buying 15 per cent of the shares. The Maple 10 borrowed €45 million each while the Quinns borrowed €169 million. The deal was executed on July 14th, 2008.

Judge Nolan said in the course of the trial he had to interpret the true purpose of Section 60 and he reached the view that it was to prevent companies from lending money for the purposes of buying shares in their own company.

He said the explicit purpose of the loans to the Maple 10 was to stabilise the share price of Anglo. There was a fear in the bank and probably in the financial regulator’s office that if it was not stabilised it would “go down”, and affect the financial system.

But, he said, the loans were a “blatant affront” to section 60, no matter what the motivation or perceived necessity was.

McAteer and Whelan as directors had an obligation to ensure the bank acted in a lawful manner, and they failed to do so. They both had a duty to stop the loans going ahead and they did not.

The judge said he had to make some findings of fact in the case. He concluded the serious problem that the scheme in question sought to remedy was not caused by the defendants or by Anglo, but by Mr Quinn’s “investment strategy” in Anglo.

He also concluded that former chief executive of the bank David Drumm was the “instigator and author of the scheme”, and both of the defendants knew about the scheme and played their part in it.

Whelan was “intimately involved” and McAteer was aware of it and briefed Fiachre O’Neill, then head of compliance at the bank, and Matt Moran, the bank’s chief financial officer.

Judge Nolan said Con Horan, then prudential director at the Irish Financial Services Regulatory Authority, “did his best”, was candid with the court and his memory of events was “reasonably good”.

He said he believed the situation with Mr Quinn’s holding in Anglo “frightened and disturbed Mr Horan”. The judge said he was satisfied Mr Drumm had kept the then regulator Pat Neary, informed.

He said Mr Neary seemed to have limited recall and difficulty in recalling vital events, but he was satisfied he knew of the general situation.

He said he had “no doubt” he told Mr Drumm that he was anxious to have the matter resolved.

Both Mr Horan and Mr Neary “must have known” the bank intended lending to buy its shares and it seemed “incredible” that the regulator did not take advice as to the legality of the loans.

“It is incredible that red lights didn’t go off somewhere in the regulator’s office,” Judge Nolan said.

“It seems Mr Horan and Mr Neary were more anxious to solve the problem than to comply with the technicality of the law.”

He said their overarching purpose was to save the bank and the financial system, but by not warning Anglo they gave “a green light to lending”.

Anybody at Anglo would have and probably did come to the conclusion there was no legal bar to the bank lending to purchase its shares, he said.

“I am totally surprised the regulator did not give any warning to Anglo Irish Bank,” he said.

The judge said in July 2008, the regulator knew some deal was at hand. He said he was not sure whether the regulator knew there was lending to the Maple 10, but he did know there was lending to the Quinn family, the judge said.

Though McAteer and Whelan had been convicted of lending to the Maple 10 and not to the Quinns, “the principle was the same”. Either the regulator did not know it was a breach of section 60 or he “chose to disregard it”.

On the legal advice provided by Robert Heron of solicitor’s firm Matheson Ormsby Prentice, Judge Nolan said it was not necessary for him to decide what advice Mr Heron actually gave. What was vital was what McAteer and Whelan thought.

He said he accepted evidence from Mr O’Neill and Mr Moran that they believed Mr Heron’s advice meant “they could escape through the portal of ordinary course of business”, and this view was passed on to McAteer and Whelan.

“I can’t be certain they knew what they were doing was a breach of section 60,” the judge said.

He added he did not believe there was any venal motive on behalf of the two men or the bank. The motive was not “avarice, greed or the pursuit of profit”, he said. It was “a genuine if misguided attempt to save the bank”.

He said it would be “incredibly unjust” to impose a custodial sentence in circumstances where “explicit warnings” should have been given by the regulator and by solicitors, and they were not given.

The judge said he felt there had been a serious crime committed. The market in shares depended on transparency, he said, but in July 2008 Anglo had “intruded on the market” and it was not transparent. People who bought shares at the time were misled, and so it was not a victimless crime.

The two men had breached the law but were not deserving of a prison sentence.

He said the attitude and behaviour of the regulator had complicated the case.

“It would be unjust to imprison these two gentlemen when a State agency has led them into error and illegality,” he said.

He adjourned the case to July 31st pending a report from the probation service for their suitability for community service.