Anglo’s loans were ‘anything but ordinary’, trial told

The 16 loans which Anglo Irish Bank gave borrowers to buy shares in the bank in July 2008 were "anything but ordinary", prosecution counsel said yesterday.

Barrister for the State, Paul O’Higgins SC, told the jury of 15 the argument that lending concerned in the trial happened in “very extraordinary circumstances” was an “important part of the case to consider”. The prosecution would argue there is “no doubt” that the loans were “not part of the ordinary business of banks”.

He was outlining the prosecution arguments in the case of Seán FitzPatrick (65) of Greystones, Co Wicklow, William McAteer (63) of Rathgar and Pat Whelan (51) of Malahide, Dublin.

All three have pleaded not guilty to 16 counts of providing unlawful financial assistance to 16 individuals, including members of Seán Quinn’s family and the “Maple 10” borrowers in July 2008 to buy shares in the bank, contrary to section 60 of the Companies Act.

The prosecution said the loans involved €175 million to the Quinn family and €450 million to the “supposedly high net worth” borrowers , the Maple 10. This was used to purchase shares – 10 per cent of shares in Anglo Irish Bank in the case of the Maple 10 – and created the “impression”of stability.

The prosecution will argue that the bank’s then managing director of lending, Pat Whelan, was “very much involved in carrying out the transaction”, Mr O’Higgins said.

It will argue that the bank’s then chief risk officer and finance director, Willie McAteer, was “not as involved in carrying out the transactions” but “knew all about them”.

The prosecution will argue that the bank’s then non-executive chairman, Sean FitzPatrick, was “told about the lending” but “what exactly he knew” was a matter for the jury.

Duty as chairman
However, the prosecution will say he "did nothing to stop" the transaction "despite his duty as chairman of the company to do so", Mr O'Higgins said. Because Anglo Irish Bank was lending for the purchase of its own shares, executives "authorised it", "carried it out", and "took no reasonable steps to prevent it", the prosecution will argue.

Mr O’Higgins said the prosecution would say the loans were “not lawful”. The “whole purpose” was to buy Anglo shares to “unwind” the position of Seán Quinn’s contracts for difference (CFD), worth 25 per cent of the bank’s shares.

Contracts for difference were an “extraordinary form of gambling”, he said. These allowed a person to “gamble on the future of shares” which they did not own.

He said CFDs allow investors to receive much more profit if the share price goes up but also exposes them to much bigger losses if the share price drops.

While it was “perfectly legitimate” for the bank to try to resolve the Quinn situation “they were not entitled to do it illegally”, he said.

He outlined arguments why the loans were not ordinary, including that generally the lending process involves borrowers going to the bank, not bank to the borrowers. He said then chief executive David Drumm and Mr Whelan travelled abroad to talk to some of the Maple 10 about taking loans during holidays in France and Portugal. Some borrowers were told “we will fill in all the paperwork, don’t worry about the details”, he said.

The loan arrangement gave personal recourse for the borrower at 25 per cent, he said.

In a submission to the court, barristers for Mr FitzPatrick and Mr Whelan said their clients admitted the money was loaned to buy shares as a result of a plan by the bank to allow it to unwind Seán Quinn’s contracts for difference position.

Counsel for Mr Whelan, Brendan Grehan SC, said his client had implemented the plan on the basis and belief that it was “in the ordinary course of business”. Mr Whelan says it was also done on the basis that both the Irish and UK financial regulators had agreed to it, the bank received expert legal advice and a major international financial services provider was executing the transaction. His understanding was that the financial services provider would only do so if “satisfied” the loan was “in compliance with all relevant legal requirements”. The court heard that the Companies Act allows for a defence of such activity if lending is in the “ordinary course of business”.

Lead-up to loans
Mr O'Higgins outlined the lead-up to the loans. In a 2007 meeting involving Mr FitzPatrick, Mr Drumm and Mr Quinn, the bank discovered that Mr Quinn had contracts for difference for 25 per cent of the bank's shares. The bank was "enthusiastic" to bring an end to the situation, he said.

Anglo was concerned because it was heavily exposed to his fortunes, Mr O’Higgins said. The Financial Regulator also became concerned.

By March 2008 the Anglo share price had dropped from €17 to €6.50. The bank later got full power of attorney of Mr Quinn’s CFD position. By July 2008 Anglo decided to do something “absolutely illegal”, Mr O’Higgins said.

The bank decided to put together a scheme where the Quinns bought shares in the bank directly and others would take a shareholding. There would be a “choreographed” market announcement to say the Quinn CFD position was resolved, he said.

The jury was told that the share price was a measure of the company’s worth.

Mr O’Higgins said the law is there to ensure the true value of the company can be seen by the public. How directors dealt with shares was important.