Analysis: Quinn family papers show role played by regulator

Documents filed with the High Court relating to an action being pursued by members of bankrupt businessman Seán Quinn's family against Irish Bank Resolution Corporation cast a light on the actions of the financial regulator in the events that led to the collapse of Anglo Irish Bank in 2008/2009.

IBRC comprises the former Anglo and Irish Nationwide Building Society and was placed into liquidation in February this year by the Government.

The Quinns allege that it advanced them unlawful loans of up to €2.34 billion.

The family plans to issue separate proceedings against the Department of Finance and the Central Bank of Ireland.

In an affidavit relating to the IBRC case, Aoife Quinn, Quinn's daughter, claims the regulator and the department "participated in, facilitated and compounded the wrongful acts perpetrated by Anglo" against the family.

O'Connor report
A key document in their case, and one seen by The Irish Times, is the so-called "O'Connor report". This was prepared by former Anglo senior executive Pat Whelan for the bank's then chairman Donal O'Connor.

It is dated January 6th, 2009. It details how Anglo’s relationship with Quinn began in December 1998, following its acquisition of the Smurfit Paribas loan book. The loan to Quinn was initially €8.26 million.

Up to November 21st, 2007, “all accounts in the Quinn connection operated in an exemplary manner”. Things began to unravel in late 2007 as Quinn built up what would ultimately become a 28 per cent stake in Anglo through contracts for difference (CFDs), a structure that meant he could hide his stake from the bank, regulators and other investors.

The report details the level of engagement with the regulator and the extent of its knowledge of the dealings between Anglo, Quinn and the 10 investors who were persuaded by the bank to buy some of Quinn’s shares to help reduce his holding without destabilising the institution.

"A meeting took place around September 2007 and SQ [Seán Quinn] confirmed that he had a substantial position in Anglo through CFDs. After this meeting the board was informed of SQ's CFD positions and it was decided that the regulator should be informed immediately. David met and advised Pat Neary [chief executive of the Financial Regulator] of this situation," the report states.

To hide his stakebuilding, Quinn used nine separate institutions to acquire 215.8 million at an average price of €14.

Between December 2007 and March 2008 a number of discussions took place with Quinn regarding his CFDs.

'No powers available'
"We (and the regulator) wanted him to close out these positions, but he was unwilling to do so because he was 'under water' on the price and he still believed there was good upside or profit. There were no powers available to the bank or the regulator to force him to exit, as technically he was not a shareholder in the bank," the report states.

Anglo's share price collapsed by more than 30 per cent on March 17th, 2008. After this, Anglo chief executive David Drumm and chairman Seán Fitzpatrick sought an agreement with Quinn to "place" 9.4 per cent of his stake with other investors.

Eventually, Quinn agreed to do this subject to approval of the Anglo board and the regulator. “Approval from the Anglo board and the regulator was obtained,” the report notes.

It details Anglo’s efforts to place the shares, with the assistance of Morgan Stanley.

Morgan Stanley believed that if Anglo was willing to take over ACC Bank, its parent group Rabobank might take a stake in Anglo.

On May 8th, Con Horan, described in the report as Pat Neary’s number two and who now holds a position with the European Banking Authority in London, advised that Quinn Group’s auditors would not be in a position to sign off on the company’s accounts because of a guarantee held by Anglo.

“Our view at the time was that the regulator had a conflict of interest because releasing the guarantee could be viewed as increasing our exposure and considering he was looking for us to reduce risk, this didn’t make sense,” the report states.

In May, the regulator was “ringing every couple of days looking for a progress report” on the placement of Quinn shares and was “very anxious” that it should succeed.

On June 3rd, 2008, Quinn told Drumm that his company would breach financial covenants with its syndicate of banks and requested a cash facility of €200 million.

A breach would have allowed the syndicate to investigate transactions within the group and could have exposed Quinn’s position in Anglo.

On June 23rd, Horan was appraised of Quinn’s potential covenant breach. A week later, they met again with Horan to inform him of the Anglo board’s decision to provide the €200 million to Quinn.

Horan was described as begin “concerned” that its exposure to Quinn was increasing with “no real progress” being made on the share placement.

Regulator sought 'plan B'
In July, the regulator was on to the bank "every other day wanting to know if the share placement was going to happen and, if not, what 'plan B' was".

Around this time, Anglo began discussing the possibility of placing the shares with a small group of its clients – the Maple 10.

On July 14th, the clients had been lined up and the regulator was informed of their names and “given full details on the deal”.

The shares were sold at €4.63, crystallising a loss for Quinn of €955 million.

An interest debit on December 31st, 2008, increased its exposure to Quinn to €2.75 billion.

A summary at the back of the report concluded that Quinn had the “financial strength” to come through this. It turned out to be wishful thinking.