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Monday 28 July 2014

Anglo sues former auditors in €50m Sean FitzPatrick case

Tim Healy

Published 17/12/2012|17:42

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IRISH Bank Resolution Corporation (IRBC) is suing its former auditors for €50m over "highly unusual and improper" loan transactions carried out by the bank's ex-chairman Sean FitzPatrick.

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Ernst & Young (E&Y), former auditors for Anglo Irish Bank, now IBRC, is being sued for losses allegedly resulting from the firm's "repeated failure" to uncover the transactions of Mr FitzPatrick.



It is claimed the auditors were in breach of contract in failing to uncover an alleged practice where, for brief periods around the end of Anglo's financial year, Mr FitzPatrick repaid his large Anglo loans with monies borrowed from Irish Nationwide Building Society (INBS) but reversed those transactions days later.



They were called "B&B" (bed and breakfast) transactions because INBS provided temporary accommodation for the loans until they returned to their "true" home in Anglo, the bank claimed.



The net result was large loans otherwise due from Mr FitzPatrick were moved from Anglo's balance sheet, creating the impression he owed less than he actually did, it is alleged.



It is claimed E&Y had access to documents evidencing the FitzPatrick loans, including a certificate of income and salary and a letter relating to his loans.



Had E&Y made particular inquiries about a letter provided to them by Mr FitzPatrick on November 29, 2006, and a schedule attracted to that, the B&B arrangements would have been disclosed, the bank claims.



The audit work by E&Y on directors loan transactions fell below the relevant auditing standards, it is alleged.



The practice came to lignt in 2008 when, due to market turmoil, Mr FitzPatrick could not refinance his loans with INBS "as had become usual", the bank claims. He resigned as Anglo chairman in December 2008.



It is alleged the failure to uncover the B&B practice significantly increased Anglo's exposure to Mr FizPatrick after the end of the 2006 financial year.



Before the 2006 B&B transactions, Anglo had loaned some €69m to Mr FitzPatrick and, after the 2006 annual financial statements were signed on December 5, 2006, it loaned him another €58m.



All of Mr FitzPatrick's loans have been classified impaired, he has been adjudicated bankrupt and the bank expects to suffer losses of "well over €50m" on the loans, it said.



Solicitors for E&Y wrote to the bank's solicitors in January 2011 saying the firm was not aware certain Anglo directors had adopted "the unprecedented refinancing practice with a view to avoiding disclosure requirements", that was never disclosed to E&Y and it had "no reason to suspect such activity" based on their previous audit experience.



E&Y had considered the issue of disclosure of directors loans and had obtained information from the bank and individual directors on which it relied, the letter also stated.



The action by IBRC was transferred to the Commercial Court yesterday on consent of both sides by Mr Justice Peter Kelly who made directions for exchange of legal documents. The case comes back before the court in May.



In an affidavit, Jim Bradley, Chief Financial Officer of IBRC, said, despite been refused access to the audit files, the bank and its lawyers had carried out a careful investigation of the firm's audit work.



Anglo was required in its 2006 financial statements to disclose "related party" transactions, including of directors, that were material to the financial statements, he said.



A note to the 2006 financial statements disclosed related party transaction and said the aggregate amount outstanding at end September 2006 of loans to and deposits by directors were €25m and €5m respectively. For the year ended September 2005, the corresponding figures were €21m and €4m.



* Separately yesterday, the High Court heard Sean FitzPatrick is prepared to be cross-examined about dealings relating to a London office block as part of his the management of his bankruptcy.



The court official in charge of his bankruptcy, Chris Lehane, wants to cross examine him over ownership of the Woolgate Exchange in London.



He had wanted the cross-examination to be adjourned because of fears it could prejudice an ongoing criminal case against him but today the objection was withdrawn.

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