An affidavit filed by the Central Bank shows that Cork stockbroker Mr Stephen Pearson may have lost £3.2 million (€4.06 million) in trading futures on his personal account.
The affidavit also confirms that there may be a total deficit of almost £1 million at Mr Pearson's firm, W&R Morrogh - with a shortfall in client funds of £168,000 and a potential discrepancy of £800,000 in Morrogh's custodial account with Merrill Lynch. Morrogh has 9,000 clients, mostly drawn from Cork city and its environs.
Mr Pearson is the junior partner and 40 per cent shareholder in W&R Morrogh, which was placed in receivership by the High Court last week after serious financial irregularities were discovered. The firm's senior partner, Mr Alec Morrogh, holds the other 60 per cent of the firm.
The first indication that all was not well at W&R Morrogh came on Monday April 23rd when Ms Catherine Scally, a senior official of the Central Bank, rang Morrogh to enquire why the firm's weekly return for the week to April 20th had not been submitted to the bank. Ms Scally spoke with Mr Alec Morrogh who told her that Mr Pearson was out of the office for health reasons and would be gone for some time. Mr Pearson usually made all the firm's reports to the Central Bank, the regulatory authority for stockbrokers.
Later that day, a senior regulator with the Central Bank, Ms Mary Burke, was told by Mr Morrogh that Mr Pearson appeared to have defrauded the firm. The alleged fraud was discovered when one of Morrogh's employees, Mr Pat Sexton, found an entry in one of the firm's books "which appeared to indicate a misappropriation of funds". Mr Morrogh told Ms Burke that he had spoken to Mr Pearson the previous Friday, but that Mr Pearson had left the office and could not be located. He then arranged to meet Ms Burke the following day (Tuesday). Mr Morrogh subsequently cancelled this meeting with Ms Burke as the firm's auditors were trying to quantify the losses at Morrogh before meeting the Central Bank official.
The next day, the Central Bank ordered Morrogh not to engage in any new business, to stop advertising for business and also to lodge proceeds from the firms's shares in the London Stock Exchange. The Central Bank then began its own inspection of Morrogh's books.
Mr Morrogh informed it that Mr Pearson appeared to have lost £3.2 million in trading futures on his own account, and that £1.9 million of these losses remained unpaid. Mr Morrogh also told the Central Bank officials that £1.3 million on an account entitled "spare client a/c" appeared to be unaccounted for.
Mr Morrogh and some of his employees told the Central Bank that if the proceeds of the firm's share in the LSE were sold, there would be a surplus of £800,000 in client funds. However, it later emerged that Morrogh employees were unable to support this estimate of a surplus. At the same time, accountants Deloitte & Touche were preparing a report on Morrogh's compliance with client money requirements.
The following day (Thursday), Mr Sexton told the Central Bank officials that having carried out a reconciliation of bank statements, there was an estimated shortfall of £168,000 on client funds while there appeared to be irregularities totalling £800,000 in Morrogh's stock custodial account with Merrill Lynch.
On Friday, the Central Bank applied to have Mr Tom Grace of PricewaterhouseCoopers appointed receiver to Morrogh as there remained a number of substantial matters to be dealt with or resolved. Mr Alec Morrogh supported the receiver's appointment. The affidavits filed with the High Court do not show that the Central Bank officials have been able to question Mr Pearson about his alleged fraud.
"In his absence, it did not appear to be possible to obtain a clear picture of the financial position of the firm and, in particular, of client fund," the affidavit states.
The Morrogh case will now return to the High Court next Tuesday when the Central Bank will petition for the winding-up of W&R Morrogh.
