Financial regulator raised ‘no red flags’ about Anglo share deal

In a phone call between the Irish financial regulator and investment bank Morgan Stanley about the Anglo Irish Bank share deal, the regulator raised "no red flags", the Dublin Circuit Criminal Court heard this morning.

David Churton, a director at Morgan Stanley’s legal and compliance department when the Anglo deal took place in July 2008, also said there was no discussion about the bank lending to investors to purchase its own shares.

The investment bank handled the unwinding of the Quinn holding in Anglo Irish Bank.

Mr Churton told the court Morgan Stanley was not seeking formal approval from the Irish or UK financial regulators but wanted to offer them an opportunity to “raise a red flag”.

If the regulators had done so, Morgan Stanley would not have gone ahead with the transaction unless it could have “mitigated” the concerns.

Mr Churton was the sixth witness to be questioned about the phone call to the financial regulator on July 12th 2008, two days before the transaction took place.

Sean Fitzpatrick (65) of Greystones, Co Wicklow, Willie Mc Ateer (63) of Rathgar, Dublin and Pat Whelan (51) of Malahide, Dublin have been charged with 16 counts of providing unlawful financial assistance to 16 individuals in July 2008 to buy shares in the bank, contrary to Section 60 of the Companies Act.

Mr Whelan has also been charged with being privy to the fraudulent alteration of loan facility letters to seven individuals.

All three men have pleaded not guilty to the charges.

Mr Churton told Una Ní Raifeartaigh, for the prosecution, that there were non-standard elements to the Quinn transaction.

It involved the unwinding of businessman Sean Quinn’s 28 per cent interest in Anglo held in contracts for difference (CFDs)- investment products based on share price. The Quinn children were to purchase 15 per cent of the shares and businessmen known as the Maple 10 were to purchase 1 per cent each using money loaned by the bank, the court had heard.

Mr Churton said the “non-standard elements” included the involvement of the financial regulator and of Anglo. Morgan Stanley also “became aware that financing was going to be provided to purchasers of Anglo shares” and “that gave rise to some concerns”, he said.

He told the court there were also concerns regarding the timeline on which the transaction would be carried out. Morgan Stanley became aware of it on Thursday 10th of July and it was to be completed by the evening of Monday 14th.

Mr Churton said when they raised concerns on the Friday with the bank that it “might be sensible to have the dealings time line extended”, there was “real disappointment”.

“One of the calls came to a very abrupt end on Friday night,” he said.

The Morgan Stanley team subsequently reconsidered its position and went ahead with the proposed timeline.

Shortly before lunch, Con Horan, prudential director at the Irish financial regulator’s office in 2008, began giving evidence. He is the first witness to appear from the financial regulator’s office. He told the court he was answerable to then financial regulator Patrick Neary.

Mr Horan outlined the role of the Domestic Standing Group, a group that included members of the financial regulator’s office, the Central Bank and the Department of Finance. It was set up in 2006 following EU regulations to look at financial stability and preparedness in the event of a financial crisis, he said.

He also outlined the concerns the regulator’s office had about Quinn Insurance in February 2008 when its auditors highlighted issues including the purchase of properties by the company and money being “placed with entities related to the Quinn family”.

The court had heard that cash was released from the insurance company to fund “margin calls” by CFD providers when the value of Anglo Irish Bank shares went down.

Mr Horan said this was a “serious issue” from the regulator’s perspective and it was investigated.

He told the court on Good Friday 2008, he became aware of the size of the Quinn CFD holding in Anglo and this was “a significant problem”.

The global financial difficulties had already begun, he said, and over St Patrick’s weekend there had been “a mini-run” on Anglo with depositors withdrawing money. There was “ongoing engagement” with the bank, he said.

A deal to unwind the Quinn CFDs was suggested at the end of March which would involve the Quinns buying some shares and institutional investors buying the balance. The Quinns would have to borrow €360 million from Anglo for the deal, Mr Horan said.

Ms Ní Raifeartaigh asked him what his initial reaction was to Anglo lending to Quinn for the deal.

Mr Horan said his initial reaction was he was “uncomfortable with that” and he expressed that. The regulator’s office was aware of the extensive Quinn borrowings with Anglo and did not necessarily want to see the bank exposing itself further, he said.

The case continues.