Lawyers for the former Anglo Irish Bank CEO David Drumm have said that he was trying to resolve a problem entirely created by Cavan businessman Sean Quinn when Drumm engaged in an illegal scheme to lend money to high net-worth individuals to buy shares in the bank in July 2008, writes Declan Brennan.
Drumm (51) of Skerries, Co Dublin, is to be sentenced at 2pm today (Tuesday) at Dublin Circuit Criminal Court for his role in the illegal scheme, of which gardaí say he was at the helm.
He pleaded guilty last month to 10 counts of authorising or permitting Anglo Irish Bank to give unlawful financial assistance for the purchase of bank shares to the so-called ‘Maple Ten’ group of developers and businessmen between July 10 and 17, 2008.
The loans were part of a scheme designed to unwind a secret 28% stake Sean Quinn had built up in the bank using financial instruments called contracts for difference (CFDs).
Yesterday morning (Monday), Drumm was transferred to court from Mountjoy Prison, where he is serving a six-year prison term imposed last month after he was convicted of conspiring to carry out a €7.2bn fraudulent loan scheme.
The former banking executive appeared in court wearing an off-white polo t-shirt and dark blue jeans. After hearing evidence of the offending and a plea of mitigation, Judge Karen O'Connor adjourned the case to today (Tuesday) for sentencing.
In his plea Brendan Grehan SC, defending, asked the court to consider that the offences arose as a result of the growing financial speculation by Ireland's richest man, Mr Quinn, on Anglo shares using CFDs.
The court heard that CFDs were effectively a financial instrument that allowed the buyer to gamble or speculate on whether share prices will rise or fall. The buyer stands to make major potential gains if the share price increases, but loses if the share price declines, with the payments due each month.
The bank's share price peaked in May 2007 and, after this, the share price gradually began to decline, resulting in Mr Quinn having to pay out each month on his losses.
Outlining how, instead of pulling out, Mr Quinn bought more CFD positions, Mr Grehan said: “He kept hoping if he bought more, he’d recover on losses he made.”
This culminated in Mr Quinn having a position, by mid 2008, of 28% of the bank's shareholdings and a need to deal with this. Mr Quinn's position was destabilising on the bank's shares as there were hedge funds, which were “betting that he could be knocked over”, which could cause the bank to collapse, Mr Grehan said.
Some of these hedges funds were the same institutions that had sold the CFDs to Mr Quinn and stood to gain in monthly “margin calls” every time the bank shares dropped in price, the SC explained.
Drumm and the bank's former chairman, Sean FitzPatrick, met with Mr Quinn in September 2007 and tried to persuade him to reduce his CFD position. The court heard, instead of doing this, Mr Quinn tried to “double down” on his losses by buying more CFD positions.
Counsel said that the Financial Regulator was also very worried about the Quinn position in Anglo and how it might destabilise the bank, as well as the fear of a knock-on effect on other Irish banks.
Mr Grehan said that there was no question but that “the Financial Regulator had a very serious and, dare I say it, noble interest in ensuring Mr Quinn’s position be unwound”.
“This was a problem entirely of the creation of Sean Quinn,” he said. Mr Grehan said the building up of the large CFD position was done in secret using different brokers. He said the bank was being placed in an incredibly vulnerable position at the worst time in the context of a growing global financial crisis.
The position could be “unwound” by the CFD buyer, in this case Mr Quinn, “going long” on the shares, which meant buying the shares. The court heard Mr Quinn was asked to do this in early 2008 but was reluctant to because, doing so, would crystalise the losses he had incurred building up the CFD position.
'Moved heaven and earth' to fix problem
“Mr Quinn was unenthusiastic. He had bought the shares at higher prices,” prosecuting counsel Paul O'Higgins SC said.
Mr Grehan said that, from late 2007, Drumm “moved heaven and earth” to try to resolve the problem “in conventional terms” and it was only when all other options had fallen through, by July 2008, that he proposed getting 10 individuals to buy the share positions.
He said that the situation was coming to a head in July 2008 because, since November 2007, the bank had been lending out millions to the Quinn group to meet its margin calls to the CFD brokers.
This amount grew from €150 million to approximately €2.3bn by July 2008. This amount was “rapidly approaching” 25% of the bank's loan book, the maximum it could lend to a single entity. The bank was then told that it couldn't lend anymore to Quinn.
At this stage the scheme was devised to allow ten “high net worth” individuals to purchase one per cent each of the Quinn shareholding. This purchasing of the shares would be facilitated by short-term loans from the bank.
It was envisaged that €60m in loans would be required but, by the time the scheme was executed, the share price had fallen further and the final cost was around €45m.
Another 15% of the shares linked to the Quinn CFD position was bought by various members of the Quinn family. Charges had been brought against Drumm in relation to these loans but were dropped after Drumm's guilty plea last month.
The court heard that the Quinn group issued a press statement on July 17 announcing the family had “gone long” and bought the shares in the bank but that there was no similar announcement of the Maple Ten share purchases.
Detective Garda Brian Mahon said the original plan was that the Anglo loans to the “Maple Ten” would be bridging loans and that the shares would be bought up by larger financial institutions like Credit Suisse or Lehman Brothers. Two months later Lehmans Brothers collapsed.
Det Mahon said, as the Anglo share price continued to fall, it proved virtually impossible to sell the bulk of the shares. By the time the bank was nationalised, the share price was neglible.
Mr Pat Whelan (56) of Malahide, Dublin and Anglo's former Director of Finance William McAteer (67) of Greenrath, Tipperary town, Co. Tipperary were convicted in 2014, after a three-month trial, of the same 10 charges. They were each ordered to carry out 240 hours of community service.
Drumm was jailed last month after a jury returned unanimous verdicts of guilty on a charge of conspiracy to defraud and false accounting, following an 87-day trial.