Eye-opening insights into regulator’s role – and lack of curiosity

The trial provided intriguing, eye-opening insights into the role of the financial regulator, who emerged as a key behind-the-scenes player in the frantic scramble to unwind businessman Seán Quinn's stake in Anglo Irish Bank in 2007-2008.

When Seán FitzPatrick and David Drumm, Anglo's chairman and chief executive, discovered on September 11th, 2007, that Quinn had a potentially dangerous 24 per cent stake in Anglo through contracts for difference (CFDs), they promptly reported the bombshell to the Anglo board.

According to a number of board members, the directors reacted with shock at a revelation they believed could undermine not only the bank but the entire Irish financial sector, and Drumm was instructed to inform the regulator.

Records show that shortly after Anglo learned of the size of Quinn's holding, Drumm met Patrick Neary, chief executive of the Irish Financial Services Regulatory Authority.

Over two days in the witness box at the trial, however, Neary maintained that Drumm did not tell him that autumn he had learned the size of Quinn’s CFD positions. The two men had a “low-key” and “private” meeting in September, Neary said, but Drumm merely told him he was concerned about rumours Quinn might have a CFD holding.

Anglo board members understood Neary was told of the Quinn holding that autumn, but Neary said in court that he was not told the level. “You didn’t ask outright?” Brendan Grehan SC, defending, asked during the trial. “I don’t recall asking and he didn’t tell me,” Neary responded. After the meeting, an official at the regulator’s office presented Neary with a document on what CFDs were.

The overall impression left by Neary’s evidence was of a regulator who appeared deferential to the powerful men who led the institutions he was supposed to be supervising. He also showed a striking lack of curiosity.

Neary recalled meeting Quinn in early 2008, at a time when rumours were rife that Quinn had built up potentially damaging CFD positions in Anglo. But Neary said he didn’t ask Quinn about the size of his stake because he didn’t think it would be “fair or appropriate” to tackle the tycoon on his investments.

Yet Quinn was no ordinary visitor, popping into Neary’s office for a cup of tea. He was Ireland’s richest man. His insurance company was regulated by Neary’s outfit, as was the bank in which he was rumoured to have built up a stake. And this wasn’t any old investment: if it was true that Quinn had a huge CFD holding in Anglo, that could potentially destabilise the entire Irish financial system. Yet Neary didn’t even ask the question.

In evidence, Neary said he didn't know the size of Quinn's investment until March 21st, 2008, six months after Anglo had learned of it. This was despite Neary having attended a meeting on February 22nd of the domestic standing group, a high-level body where officials from the Department of Finance, the Central Bank and the Financial Regulator's office were tasked with planning for financial emergencies.

A note of the meeting mentioned the ramifications “if current positions become publicly known”.

Then there was the March deal – the first attempt by Anglo to unwind Quinn’s CFD stake. Email records showed that when Anglo and the Quinn side struck a deal in March 2008 to unwind the CFD stake, by finding an institutional investor for a portion of the underlying shares, a copy of the agreement was sent to the regulator’s office.

Matt Moran, Anglo's chief financial officer, said Con Horan, prudential director at the regulator, requested the removal from the document of a reference to the regulator's approval.

This March deal – although it was never executed – explicitly included lending to the Quinns. According to Neary, he never even knew about this deal. Remarkably, Neary wasn’t aware of a deal Horan, who had an office on the same floor, was clearly very much aware of.

On the July 2008 transaction at the centre of the case, a number of witnesses, including Anglo employees and Morgan Stanley bankers, said they were assured the regulator was on board and comfortable with the deal. Neary and Horan disputed this, arguing they did not have full information on it.

In the witness box, Neary was implicitly criticised by defence counsel for not taking notes of several key meetings. His recollections were also tested in cross-examination.

By this reporter’s count, in two days in the box Neary said “I don’t recall” 30 times, “I don’t know” 23 times, “I can’t recall” 12 times, “I can’t/don’t/cannot remember” 12 times, “That’s a complete blank to me” once, and “I’ve absolutely no recollection” four times.

Throughout the trial, the impression emerged of Anglo having been put under significant pressure by the regulator's office to resolve the Quinn CFD crisis. However, in his closing speech to the jury, Judge Martin Nolan told the jury the attitude or actions of the regulator were "totally irrelevant" in law.

This followed extensive legal argument, during which Paul O’Higgins SC, prosecuting, said approval by the regulator – if there was approval – was legally irrelevant as the regulator had no prosecutorial role and could not authorise the commission of crimes.

He went on: “It could be that the regulator, in certain circumstances and depending on the evidence available, would be capable perhaps of aiding and abetting or counselling or procuring maybe . . . the commission of an offence by someone else. But certainly the regulator, by being thought to or encouraging a transaction which was in fact illegal, cannot in any circumstances cause that transaction to become legal.”