Courts

Thursday 24 July 2014

Anglo Trial: The Quinn/Maple Ten Deal

Conor Gallagher

Published 17/04/2014|15:55

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From left, William McAteer; Sean Fitzpatrick and Pat Whelan
From left, William McAteer; Sean Fitzpatrick and Pat Whelan

The sequence of events leading up to the offences can be traced back to a meeting in a Navan hotel in September 2007 involving Ireland’s then richest man and two Anglo Irish Bank directors.

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Rumours had been circulating for months that Cavan billionaire Sean Quinn had built up a large control of Anglo through contracts for difference (CFDs) which are investment tools that bet on a stock’s performance.

The concern was that if Mr Quinn could not continue to fund the CFDs, they would be unwound and a glut of Anglo stock would come on the market, destabilising the share price. Anglo’s board of directors decided that CEO David Drumm should meet with Mr Quinn to find out the extent of his control.

It was decided that Anglo Chairman Sean FitzPatrick would also attend the meeting as it was known that Mr Quinn was an admirer of how Mr FitzPatrick did business.

When the two directors met Mr Quinn in the Ardboyne Hotel on September 11 they were shocked to learn that the businessman controlled 24 per cent of Anglo stock, worth about €2 billion. They had expected a figure in the low teens or less.

Mr Drumm reported back to the board who ordered him to immediately tell the Financial Regulator. He did meet with the regulator Pat Neary, although Mr Neary later claimed he was never told the extent of Mr Quinn’s stake.

Over the following months Anglo’s share price declined dramatically. This meant Mr Quinn and his Quinn Group had to pay huge sums in margin calls to fund the CFD positions.

This money was coming from Anglo who could not afford to allow a quarter of their shares to come on the market at once. In November 2007, Anglo lent the Quinn Group €150 million. The next month they lent €500 million.

Mr Quinn’s situation worsened considerably on March 17, 2008 after what became known as the St Patricks Day Massacre. The collapse of US bank Bear Stearns caused 30 per cent to be wiped off Anglo’s share price.

The Quinn Group needed an immediate €220 million from Anglo to meet margin calls caused by the plummeting share price. Meanwhile the Anglo board became concerned about customers withdrawing their money on a large scale as had happened with UK bank Northern Rock.

Measures were put in place in the event of a run on the bank and pressure was increased on Mr Quinn to unwind his CFDs which Anglo believed were one of the causes of the share price decline.

The situation was made more urgent with the discovery that Mr Quinn had continued to buy CFDs on Anglo and now controlled 29.4 per cent of its stock. He insisted that the Anglo stock was undervalued and would recover.

Despite Mr Quinn’s reluctance to dispose of his CFDs, an agreement was reached on March 31, 2008 that he would “go long” on 15 per cent of the CFDs. This meant his family would buy the shares outright.

Mr Quinn was unhappy because it would crystallise the losses he had already incurred but he had no choice if he wanted to keep borrowing from Anglo.

The March plan also involved an institutional investor being found to buy another 10 per cent of the stock. Anglo executives set about finding someone willing to take on the stock and Mr Drumm and Anglo’s head of Irish lending Pat Whelan set off on a tour of the Middle East in search of willing sovereign wealth funds.

Other strategies were also considered. Operation Sleeve involved issuing a new batch of Anglo shares to the market to dilute Mr Quinn’s holding while Project Dribble, which was devised by investment bank Morgan Stanley, involved releasing small amounts of the shares into the market on a daily basis.

These plans came to nothing, partly because of Mr Quinn’s continued reluctance to unwind the shares and partly because sovereign funds and finance institutions were not interested in Anglo shares.

Meanwhile the share price continued to fall and Anglo was forced to continue funding the Quinn margin calls. At this stage Mr Quinn’s Anglo borrowings were approaching €2 billion.

It is not clear who first proposed the Maple plan. The defence suggested the idea could have even come from the Regulator’s office. The trial was told that on July 8, 2008, Mr Drumm and Con Horan from the Financial Regulator’s office discussed approaching wealthy Anglo customers to buy the remaining 10 per cent.

Events moved quickly after that. Ten long term Anglo customers were selected and approached by Mr Drumm and Mr Whelan. The meetings happened over the following few days with the executives flying to France and Portugal to meet some of the customers.

The customers, referred to as “ten heroes” by Mr Whelan, were told Anglo would loan them the money to buy the shares and that they would be able to sell the shares after a short amount of time. Most were told they would be helping the bank in its hour of need and that they could potentially profit from the deal.

They were to borrow from Anglo to buy 1 per cent each of the shares. The loans were subject to 25 per cent recourse meaning borrowers would only be personally liable for around €12 million if the shares became worthless. All ten signed up immediately.

On July 14, 2008 the deal went through. Mr Quinn’s wife and five children borrowed a total of €169 million to help buy 15 per cent and the Maple Ten borrowed €45 million each to buy 9.4 per cent.

The Quinn Group issued a press release on the deal, although it did not mention the role of the Maple Ten or that funding for the share purchase was coming from Anglo. At first the plan seemed to have worked with the share price rebounding over the following days.

However the increase was only temporary. In September 2008, Lehman Brothers went under, sending shockwaves through the financial markets and bringing Anglo to its knees. By the following January the bank was owned by the Irish taxpayer.

Few of the facts in the case were in dispute but the prosecution alleged different levels of involvement by the three accused.

Least involved was former Chairman Sean FitzPatrick. He was aware of the Quinn issue from meeting Mr Quinn in September 2007 and from a second meeting in March 2008. As chairman of the bank he was present for all board discussions of the Quinn problem.

He was told over the phone by Mr Drumm about the Maple plan and informed that Anglo would be lending to ten wealthy customers to buy shares. Mr FitzPatrick told gardaí that Mr Drumm never told him the ten’s identities as he “was keeping it very tight.”

Mr McAteer was more involved. On July 8, 2008 he told Chief Financial Officer Matt Moran about the Maple Plan and the next morning went through the details of the deal with Mr Moran and head of compliance Fiachre O’Neill. He later told gardaí he wasn’t sure if he signed off on the loans and that he might have been on holidays at the time.

Mr Whelan was most active in arranging the Maple deal. He approached the ten and drafted the associated documentation. According to prosecuting counsel he was “up to his neck in it”, although Mr Whelan’s counsel insisted he was merely following the instructions of his CEO.

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