Friday 31 October 2014

Lise Hand: Jury took copious notes as jargon of CFDs explained

Published 07/02/2014 | 02:30

ACRONYMS are peculiar yokes altogether. Some groupings of letters when expanded into words make perfect sense. After the last few turbulent years, even illiterate dogs on the streets of Ireland now know that IMF stands for International Monetary Fund – an organisation once headed by an acronymed boss DSK (Dominique Strauss-Khan) until his tenure in the top job came to an unfortunate end.

But another financial acronym, which has been lurking in the background since the economic crash, is about to take centre stage, courtesy of the trial of three former executives of Anglo Irish Bank.

The latest offering of alphabet soup is CFD – but unlike some acronyms, this one gives little clue to its meaning, even when spelled out. A Contract For Difference is a complex financial product, and it was the subject of much discussion during day two of the trial of Sean FitzPatrick, Pat Whelan and William McAteer in the Circuit Criminal Court yesterday.

Once again, Court 19 was packed and among the early business of the morning was to furnish an explication to the jury and the court as to what exactly are CFDs, as they're set to be a major feature in this unfolding tale.

However, the legal teams chose to leave the lesson to an expert. The third witness on to the stand was Seamus Coffey, a lecturer in economics and a specialist in macro-economics and banking. A little earlier, one of the senior counsels for the defence had quoted billionaire business magnate Warren Buffet's description of CFDs as "weapons of mass destruction". However, Seamus had prepared an analogy which was far more familiar to his Irish audience – which was that of placing a bet on a horse.

The economist explained that buying CFDs is like placing a bet on a horse, as opposed to buying shares in a company, which is more akin to having a stake in the horse. Therefore, the worth of the bet is dependent on the performance of the animal.

"The key word in CFD is the final word – difference. Using the horse bet analogy, if the horse won by a certain distance you would gain more," he said.

Seamus went on to elaborate that if the share price rises there are substantial gains to be made but equally losses, known as margin calls, can be heavy.

Members of the 15-person jury were taking copious notes, and Seamus Coffey's lesson in CFDs drew praise from the counsel for Sean FitzPatrick, Michael O'Higgins SC, who pronounced it to be "excellent".

In the afternoon session, CFDs were once more placed back into the spotlight as the court heard about the dealings of businessman Sean Quinn with these particular derivatives.

The three former Anglo bankers listened intently to the evidence of former CEO of the Quinn Group Liam McCaffrey as he told the court about various encounters between members of the bank and the Quinn Group.

He described a meeting in the Ardboyne Hotel in Navan in September 2007, which he had attended, along with Sean Quinn and Anglo executives David Drumm and Sean FitzPatrick.

At this meeting, the Anglo pair learned for the first time the extent of the businessman's holding in the bank through CFDs, which now stood at 24pc.

"They were concerned at the level and somewhat surprised," Liam said.

A while later, senior counsel Brendan Grehan, acting for Pat Whelan, asked Liam McCaffrey about Sean Quinn's belief in his derivatives. "Mr Quinn became quite enamoured of the concept of CFDs".

Liam agreed. "It turned out that way, yes."

The hearing drew to a close a short time later but everyone was left with the distinct impression that these three letters aren't going away anytime soon.

Irish Independent

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