Thursday 27 October 2016

Former ILP director found not guilty of conspiracy to defraud the public

Published 03/06/2016 | 14:57

Peter Fitzpatrick: Photo: Collins
Peter Fitzpatrick: Photo: Collins

ILP's former finance director Peter Fitzpatrick (63) of Convent Lane, Portmarnock, Dublin has been found not guilty of conspiracy to defraud the public in 2008.

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Mr Fitzpatrick was one of four former executives from Anglo Irish Bank and Irish Life & Permanent (ILP) alleged to have conspired to mislead investors about the true health of Anglo.

All four men have been on trial at Dublin Circuit Criminal Court since last January. It was the longest running criminal trial in the State's history.

They all pleaded not guilty to conspiring together and with others to mislead investors by setting up a €7.2 billion circular transaction scheme between March 1st and September 30th, 2008 to bolster Anglo's balance sheet.

Read More: In Profile: Peter Fitzpatrick

On Wednesday the jury convicted Anglo's former head of capital markets, John Bowe (52) and the bank's then finance director, Willie McAteer (65) who were accused of conspiring to mislead investors, depositors and lenders about the true health of Anglo. They have been remanded on bail pending sentence until July 25th next.

The jury are still deliberating over the case of Denis Casey (56), from Raheny, Dublin.

The jury in the trial of two former executives from Irish Life & Permanent (ILP) accused of conspiracy to defraud were told this morning it can return a majority verdict.

The eleven jurors had been deliberating for 44 hours and 26 minutes over the course of eleven days when Judge Martin Nolan told them this morning they can return a verdict on which ten of them agree. Up to now they could only return unanimous verdicts.

John Bowe (52) from Glasnevin, Dublin and Willie McAteer (65) of Greenrath, Tipperary Town, Co. Tipperary, Denis Casey (56), from Raheny, Dublin and Peter Fitzpatrick (63) of Convent Lane, Portmarnock, Dublin all pleaded not guilty to conspiring together and with others to mislead investors by setting up a €7.2 billion circular transaction scheme between March 1 and September 30, 2008 to bolster Anglo's balance sheet.

Today is day 86 of the trial which is the longest criminal trial in the State's history.

The prosecution case was that the four men were involved in a setting up a circular scheme of billion euro transactions where Anglo lent money to ILP and ILP sent the money back, via their assurance firm Irish Life Assurance, to Anglo.

The scheme was designed so that the deposits came from the assurance company and would be treated as customer deposits, which are considered a better measure of a bank's strength than inter-bank loans.

The €7.2 billion deposit was later accounted for in Anglo's preliminary results on December 3rd 2008 as part of Anglo's customer deposits figure. The prosecution say that the entire objective of the scheme was to mislead anybody reading Anglo's accounts by artificially inflating the customer deposits number from €44bn to €51bn, a difference of 16%.

Lawyers for the Anglo defendants have argued that the deposits were real deposits and were accounted for correctly on Anglo's balance sheet and so no fraud was carried out. Lawyers defending the former ILP executives say their clients had no control over how Anglo would account for the deposits and that their clients had no intention to mislead the public.

The State opened the case by telling the jury that there was no commercial substance to the September 2008 transactions and their only purpose was to deceive.

“They take a vast amount of time and trouble and they amount to one large candy floss whose only conceivable purpose is to bolster up and artificially inflate the Anglo customer deposit. That is manifestly dishonest and was done with dishonest intent,” Paul O’Higgins SC alleged.

As a result of the credit crunch that had seen the fall of financial institutions across the world, including Northern Rock in 2007 and Bear Sterns and Lehman Brothers in March and September 2008, it had become more difficult for banks to get funding. Competition for corporate or customer deposits was fierce and were increasingly viewed by the market as a measure of public confidence in a bank.

On March 17 the share price in Anglo had fallen by a substantial amount and this day became dubbed the “St Patrick's Day massacre”. The half year end for the bank was coming up on March 30, counsel said and the bank would have to report to the markets.

Matt Cullen, senior manager of Anglo's Treasury Department in 2008, had the dubious honour of being the first witness in the trial. He said that in March 2008 a decision was taken by the executive directors that the bank should show a “strong corporate number” to the market, meaning to increase their corporate funding.

He was told to approach ILP and ultimately a “back to back” transaction was set up where Anglo placed €750m with ILP and the ILP Group would “give us back a corporate deposit” from Irish Life Assurance Corporate, the non-banking entity owned and managed by ILP.

He said it had to come from this entity so that it would show up as a corporate deposit as opposed to a inter-banking loan. The court heard that non-banking deposits, from the likes of life assurance and pension funds, had a greater value than inter-bank loans from the point of view of the markets and investors looking at a bank's state of health.

The transfer was short term to cover the month end, he said and testified that the bank's then Chief Financial Officer Matt Moran and CEO David Drumm knew about the transaction. He said that when the transaction was explained to Mr Drumm he said: “That's not an issue, no problem”.

In June a reciprocal deal took place where Anglo transferred €3bn to ILP and ILP transferred a portfolio of home mortgages to Anglo.

The trial heard that over the summer a list of about 50 “funding initiatives” was drawn up with the objective of getting corporate funding into the bank. By the end of September most of these had fallen away and the ILP/Anglo deal was one of three left.

Matt Cullen testified: “As funding initiatives fell away David Drumm turned to me and asked me would I ask Irish Life would they do six or seven billion in September.” He said he rang his opposite number in ILP, David Gantly, and put the request to him.

He said Mr Gantly came back to him and said that his finance director Peter Fitzpatrick said ILP would do it if Anglo did the same for Irish Life in December at their year end.

Mr Cullen said: “I spoke to Willie McAteer and David Drumm. I relayed that message back to them. They said 'absolutely no problem, go back and tell David Gantly we will do that'”.

Mr Cullen told Mr Bowe that he spoke to David Gantly and told him the figure for the September interbank loans could now be higher than the previously agreed three billion euro. He relayed a conversation with Mr Gantly to Mr Bowe in which the ILP dealer said that increasing the interbank deposit from three to five would not be a problem

"Because, as they see it, you might be well be hung for a sheep as a lamb,” Mr Cullen told Mr Bowe.

The jury heard evidence from that the two ILP accused insisted that they wanted any deposits to Anglo from ILP to be secured against cash collateral from Anglo.

An accounting expert witness, Mark Hunt, testified for the prosecution that this has implications for the accounting treatment of the deal in that because there is no risk to the depositor the deposits to Anglo must be netted off against the inter-bank loans from Anglo and therefore shown as zero on the balance sheet.

Mr Gantly testified during the trial that he was uncomfortable with the transaction because "it was non-standard".

He added: “However this was being reported, obviously that was being reported to the Regulator, I was also very conscious of the Green Jersey Agenda and banks being asked what they needed to do and to help each other in what was extreme circumstances”.

The €7.2bn deal was €6.7bn in excess of Anglo’s own credit limit with ILP of €500m and this meant the transactions needed to be signed off. Tony O'Hanlon, a senior manager, refused to sign off on the deal because he couldn't rationalise approving that excess which he said was totally out of proportion.

Mr McAteer, in his role as chief risk officer, and Mike Nurse, who at the time was head of treasury risk and Mr O'Hanlon's boss, did sign off on the excess which allowed the deal to proceed.

In a call on September 29 Mr Bowe told Drumm and Mr McAteer about the “€6bn fix” with “Permo” , explaining that “what happens is the money goes round in a circle”.

He said: “What’s happening is we give the money to them and the dance here is we actually get it back in time and that’s becoming very very tough to do”. During this conference call Mr McAteer said “well keep going for the moment anyway”.

Matt Moran also testified that he was in David Drumm's office on September 30th when Mr Bowe arrived in and informed the Chief Executive that the ILP transactions were over and suggested that Mr Drumm ring Denis Casey to thank him.

After the deal was executed Claire Taylor, who was the bank's regulator at the Financial Regulator's office, contacted Anglo on October 1 to discuss the deposits, which would appear on each bank’s account in the Central Bank,

Ciaran McArdle, a dealer with Anglo's Group Trading department, told her: “It's trying to manipulate our balance sheet for our financial year end. We have boosted our customer funding number. It's not a real number.”

On the same day Ciaran Cunningham, a senior accountant with Anglo, advised traders in the bank's Treasury section about how they could treat the deals. The jury heard that Mr Cunningham told them: "I think it'd be our preference to show them grossed, to be honest".

Settling the transactions gross would mean the €7.2bn in short term deposits from ILP could be included in the bank's balance sheet figure for customer deposits, which is what ultimately happened. Mr Cunningham told the traders: "The risk is if we do settle them net, we could be forced to net them in the accounts. That'd be a bit of a disaster."

He told Úna Ní Raifeartaigh SC, prosecuting, that by "disaster" he was referring to the fact that the intention of the transactions was balance sheet management and that netting them would have failed to achieve this.

Later that month Mr Bowe told Mary Elizabeth Donoghue in the Financial Regulator’s office: “Call it balance sheet dressing or window dressing or anything...our motive was not about liquidity.”  Ms Donoghue suggested: “So it’d look like an asset manager had placed money with yourselves” and Mr Bowe replied, “Exactly”.

At a meeting of the bank’s audit committee on November 18th, 2008 Colin Golden, Anglo’s head of group finance in 2008, read a briefing note detailing the ILP deal to the committee and said that “the transactions bolstered customer deposits”.

Donal O’Connor, a non-executive director and member of the audit committee who had dialed in from Australia, asked “was this window dressing?” and Mr McAteer answered using the words “balance sheet management”.

The audit committee ultimately approved the treatment of the deals in Anglo’s balance sheet as customer deposits and Anglo’s auditors Ernst&Young signed off on these accounts. The balance sheet was published on December 3 as part of Anglo’s preliminary results and with no explanatory note to show that €7.2bn of the deposits were linked to the same value in loans to ILP.

The back to back deals began to emerge in media reports the following February and as a result ILP released a press statement disputing the way that Anglo’s had treated the deposits in their accounts. Anglo’s accounts were later re-issued with a note linking the deal together.

Mr Casey stepped down as Group CEO in February 2009. He told gardai that after his resignation three phone-calls were made to change the accounting treatment of the transactions in ILP records to show it as a non-collateralised transaction.

The first of these, he said, were from Matt Moran. Another call was made from Donal O'Connor, who had succeeded Sean FitzPatrick as chairman.

He said these requests were rejected and following that, the Secretary General of the Department of Finance Kevin Cardiff contacted ILP “enquiring about the accounting treatment for the transaction” and concluding that it was a 'spat' which should be sorted out between ILP and Anglo”.

Early on in the trial the jury heard evidence of Anglo management discussing disguising short terms loans of €750m from Irish Life and Permanent and keeping them “tight as a duck's arse”, the trial of former banking executives has heard.

Mr Bowe told a conference call with Anglo executives in March 2008, when a similar type of transaction was being discussed in relation to the bank's half-year figures, that the only issue they had to think about was from a regulatory point of view.

He said: “And the regulator is more or less saying,“look, I'm not looking”.

In another call on March 27 Matt Cullen, a former director of treasury at Anglo and his counterpart in ILP, David Gantly, discussed the details of the March transactions. Mr Bowe was also on this call.

Mr Gantly told Mr Cullen: “You put the stuff into us and we put it straight back through our other boys. You just need an overnight transaction through month-end, correct”. The court heard “the other boys” referred to Irish Life Assurance.

Mr Gantly said he was purposely not using names because, he said, “the walls have ears in this climate”. He later suggested it would be better to break the €750m figure into smaller transactions because “it might look better to disguise it, somewhat, you know?”.

Mr Gantly added later on the same call: “I can vouch for my own have to be tight as a duck's arse here”. 

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