Former Anglo executives knew of ‘illegal scheme’ to buy bank’s shares

FitzPatrick, McAteer and Whelan deny unlawfully providing financial assistance

Senior Business Correspondent Tom Lyons reports on day one of the trial of former Anglo Irish Bank directors Seán FitzPatrick, William McAteer and Pat Whelan at the Criminal Courts of Justice. Video: Bryan O'Brien

The trial of three former Anglo Irish Bank directors has begun with the jury hearing that the accused are alleged to have known about an illegal scheme to fund the buying of shares in the bank.

Former chairman Seán FitzPatrick and former directors William McAteer and Pat Whelan are accused of providing unlawful financial assistance to members of businessman Seán Quinn's family and the so called "Maple Ten", a trusted group of Anglo borrowers, for the purchase of shares in Anglo.

The prosecution say the lending was to allow these 16 investors to buy Anglo shares thereby creating the public perception of stability in the bank’s share price. They say a total of €160 million was illegally loaned to Seán Quinn’s wife and five children while €450 million was illegally loaned to the Maple Ten.

It is the state’s case that Mr Whelan was “very much involved” in the scheme while Mr McAteer was less involved but fully aware of what was happening. The prosecution allege that Mr FitzPatrick, as chairman of the board, was told about the lending, that he permitted it to happen and did nothing to stop it.

READ SOME MORE

Mr FitzPatrick and Mr Whelan admit that the money was loaned for the purpose of buying shares in the bank. Counsel for Mr Whelan, Brendan Grehan SC said the lending was “in the ordinary course of business” and that both the Irish and UK financial regulators had agreed to it.

Dublin Circuit Criminal Court heard that Section 60 of the 1963 Companies Act allows for a defence of such activity if lending is "in the ordinary course" of the company's business. The prosecution say the scale and nature of the loans show they were not given "in the ordinary course of business."

The three men have been charged with 16 counts of providing unlawful financial assistance to 16 individuals to buy shares in the bank. Each charge relates to a specific person, who allegedly received loans between July 10th and July 30th, 2008.

Mr Whelan also faces seven charges of being privy to the fraudulent alteration of loan facility letters to seven individuals.

Mr FitzPatrick (65) of Greystones, Co Wicklow, Mr McAteer (63) of Rathgar, Dublin and Pat Whelan (51) of Malahide, Dublin have pleaded not guilty to all charges.

During his opening address to the jury, prosecuting counsel Paul O'Higgins SC gave a history of Anglo Irish Bank describing how Mr FitzPatrick became chief executive in 1986. He also mentioned its swift growth during the 1990s and 2000s and the appointment of David Drumm as chief executive in 2004, when Mr FitzPatrick moved to the chairman role.

He said that in 2007 senior staff at the bank became aware that businessman Seán Quinn controlled around 25 per cent of the bank through “contracts for difference”. Mr O’Higgins described contracts for difference as “an extraordinary form of gambling” offered to members of the investing public by “financial geniuses”.

“For a commission you go to a CFD provider. Instead of buying shares, you gambled on the future of shares. You didn’t have to buy them. You might only have to pay 10 or 20 per cent of the cost of the shares.”

He said contracts for difference allowed investors to receive much more profit if the share price goes up but also exposes them to much bigger losses if the share price drops.

“At the end of a fixed period there is a closing off and the bookie pays you or you pay the bookie. You may own €1,000 euro or you may lose €1,000. If you lose the €1,000 you have to top up the amount you have with the CFD provider.

“Or you can close off the position which means the shares are sold and you have to pay what you owe”.

Mr Quinn controlled around €2 billion of Anglo stock through contracts for difference. Counsel said this made Anglo very nervous because if his fortunes changed it could seriously affect the bank. The Financial Regulator also became concerned.

Anglo tried to unwind Mr Quinn's position by inviting Middle Eastern governments and other investors to buy the stocks but nobody was interested. On March 17th, 2008 the situation worsened when the collapse of Bear Stearns Bank caused Anglo's share price to drop from €17 to €6.50. It would fall a lot more later, counsel said.

Mr O’Higgins said Anglo then “decided to do something absolutely illegal.” They wanted to swap Mr Quinn’s contracts for difference for ordinary shares and to bring in other investors in to dilute his control of the bank.

The prosecution said a plan was formed to allow Mr Quinn’s wife and five children to “go long” on the stock, meaning they would buy it outright once the contracts for difference position was unwound. A public statement was then released saying the Quinns had bought the shares outright and the contracts for difference situation was resolved.

However, according to the prosecution, the public were not told that the situation was a lot more complex. The bank had approached ten other “trusted borrowers” with “supposedly high net worth” and asked them to buy ten per cent of the bank’s shares. Anglo would loan them the money, €45 million each, to allow them to do this. As part of the deal the investors would only be personally liable for a maximum of 25 per cent of this loan.

Counsel said that Anglo staff approached these ten people with the deal. One was approached while on holidays in France while another was approached in Portugal.

Mr O’Higgins said “if a lot of people, when on their holiday, saw their banker approaching in the distance, they would head for the nearest sand dune”. However the deals were concluded and the shares were bought. He said Anglo told them “not to worry about the details” and that they’d “take care of the paperwork”.

Counsel told the jury that the actions of the bank were “absolutely illegal”. Mr O’Higgins’ final points referred to the separate charges against Mr Whelan. He told the jurors that in October 2008 Mr Whelan allegedly decided to send a new loan facility letter backdated to July which would drop the personal recourse on seven of the loans from 25 per cent to nothing. This would mean that the bank would lose out on around €112 million and others would be saved that amount.

The case continues before Judge Martin Nolan tomorrow when the jury of seven men and eight women will heard the first witness for the prosecution.