‘Maple 10’ case again reflects badly on Irish financial regulation

Analysis: Judge says regulator ‘enthusiastic’ on effort to unwind Quinn’s secret Anglo stake

Another sentencing of a former Anglo Irish Bank executive, another negative judgment for the Financial Regulator and what it knew - or should have been known - during the 2008 banking crisis.

Judge Karen O'Connor, handing down a suspended 15-month sentence to the bank's already-jailed former chief executive David Drumm, referred repeatedly to the role of the regulator in the illegal scheme behind the loans to 10 property developers - known as 'the Maple 10' - aimed at buttressing the bank's declining share price in the summer of 2008.

She mentioned several times that the regulator was fully aware of Anglo’s attempts to unwind the massive stake taken by businessman Seán Quinn, which had been built up for years in secret.

The regulator knew, she said, that the the bank was “vulnerable and exposed” to Quinn’s investment in the bank, amassed through contracts for difference, a form of deposit-based “gamble or speculation” - as the judge described it - around the direction in which the share price will go. If it went up, he won; when it went down, he lost.

In her sentencing remarks, the judge gave an abridged history of Quinn’s reckless punt on what was once Ireland’s third largest bank and how the Fermanagh businessman expanded his interest in Anglo as the share price reached a peak above €17 a share in May 2007 and continued increasing it even after it started to fall.

Margin calls

The margin calls on Quinn to meet losses from Anglo's declining share price sparked demands for loans from Anglo that pushed the bank's exposure to the Quinn Group to in excess of €2 billion in 2008.

The judge noted that at the end of March 2008, steps were taken to make Mr Quinn “go long” - converting his secret investment into actual shares in an attempt to stabilise both Anglo’s share price and the bank.

The regulator was "aware" of the efforts to unwind the Quinn stake and "very enthusiastic" about these efforts, said the judge. There were failed attempts to line up investment banks Credit Suisse and Lehmann Brothers, whose own collapse in September 2008 would knock the financial world off its axis.

When an agreement was reached in March 2008 allowing Quinn to go long with short-term lending from Anglo, “it was decided by the financial regulatory authorities not to veto this transaction,” the judge said.

Drumm’s efforts to find investors overseas, in the US and Middle East, to take 10 per cent of the bank’s shares behind the Quinn CFDs failed. Then a scheme was “contemplated” where Anglo would manage the purchase of this 10 per cent stake by 10 high net-worth individuals, lending them money for the purchases.

The judge said there was a “degree of ambiguity” around what was known about the illegal lending to 10 property developers to buy shares in the Anglo to unwind Quinn’s investment.

It “should have raised concerns” within the regulator when it was made aware of a scheme to lend even short-term funding to the Quinn family to buy shares.

‘Alarm bells’

“One would have expected that alarm bells would have sounded when the scheme was being considered in March,” said the judge.

But the bells clearly did not sound, and the unlawful scheme proceeded.

Judge O'Connor's sentencing ruling on the illegal scheme comes four years after another judge said he could not sentence two former Anglo bankers, Willie McAteer and Pat Whelan, to jail terms because the regulator had given them the "green light" and because he found that "a State agency led them into error and illegality".

Those two bankers received 240 hours community service each. This option was not available to Judge O’Connor given that Drumm is serving a six-year jail term for his conspiracy-to-defraud and false-accounting convictions over Anglo’s €7.2 billion fraudulent window-dressing deposits with Irish Life & Permanent.

Instead she handed down a suspended 15-month sentence and some criticism of the regulator’s role.