Archive for October 17th, 2010

Take a look at the picture in the attached article on Sean Fitzpatrick’s bankruptcy (not that anyone needs reminding but Sean was the boss of Anglo Irish Bank whose collapse is set to cost Ireland’s citizenry €29-34bn). The picture is from the front page of the Independent on 29th September, 2010 and shows Sean’s wife, Catriona, alone at the wheel of a car. She is wearing sunglasses so it is difficult to make out her expression but she seems surprised to be having her photograph taken when she is in the privacy of her own car. Her relevance to the article is that information about her personal finances was disclosed in the court which was considering the bankruptcy of her husband. The article sets out in considerable detail Catriona’s finances despite the fact that it is not she that is bankrupt but her husband. I don’t know Mrs Fitzpatrick personally but her coverage seems intrusive when you remember that the story is really about Sean. Of course we want to know if Sean has channelled wealth to his wife that can be questioned in the context of unlawful transfers to avoid creditors but that’s about the only newsworthy aspect of this story. The woman is the wife of someone that has cost us dearly but that doesn’t make her the embodiment of Marie Antoinette, Lady McBeth and Elizabeth Bathory.

Contrast that photograph with the photographs of Paddy McKillen, the developer and property investor presently fighting NAMA in the courts. Paddy owes Anglo €899m and given that we all own Anglo that means Paddy owes every man, woman and child in the State €200. And on top of that Paddy apparently owes AIB (which is going to be 90%+ owned by us) a further €900m. And if we believe some reporting, if Paddy is successful in court that may place the government’s entire strategy for dealing with the banking crisis in jeopardy. The case is so serious that for only for the second time since becoming Attorney General in 2007 has Paul Gallagher come out of his shell to personally lead the State’s case in court. Paddy, we are told, is a very private man and that is why the only photograph in circulation is a 20-year old photograph from a Construction Industry Federation black-tie event. So who is more newsworthy, of more significance to the public interest – Catriona Fitzpatrick or Paddy McKillen? See anything wrong in that?

Sean of course is not mainly known as a developer though he does have a portfolio of property. But wives of developers are becoming more newsworthy it seems as reports multiply of their husbands transferring assets to them (examples here and here).

There is a concern that developers, whose debts we are all now shouldering with the bailout of the banks, have transferred assets to their wives in an effort to squirrel away their wealth and not pay down their debts which they owe to the rest of us. Of course that is a legitimate source of concern and it is enraging to think that a developer has calculatedly deprived his creditors (which is mostly us) of millions by handing it over to his wife or has put property in her name or sold property to her below the true value. It is concerning though that the media seems to be whipping up a campaign against developers’ wives – not because this isn’t a legitimate subject but because of inaccuracy and false innuendo. There are suggestions that NAMA can’t seek to undo transactions effected before 21st December 2009 (the date NAMA came into being). There are also claims that the banks themselves are limited to challenging transactions upto two years old (ie upto October 2008). All of this is rubbish – this is from law firm Lavelle Coleman “transfers made with the intention of defeating delaying or hindering creditors or preventing the proportionate distribution of assets made be set aside, if the transfer is proved to be a “fraudulent conveyance” (i.e. deliberately done for this reason). There is no time limit in which such a transaction may be set aside.” and “there are bankruptcy rules which invalidate gifts and transfers at undervalue made within a certain time of bankruptcy. A transfer made within two or five years before bankruptcy other than in good faith and for valuable considerations can be avoided if the transferor was insolvent at that time.” The Bankruptcy Act 1988 provides more detail. NAMA takes over the rights of the loan agreement and that includes pursuing borrowers and allows NAMA to seek to set aside transactions up to five years old (that brings you back to October 2005).  The five year rule applies where a developer was insolvent at the time of the transfer.

NAMA, it seems, is not ignoring the issue of transfers to spouses and I hear on the grapevine that NAMA may have written a letter to developers in recent days in the following terms (or similar)

“Re: Unencumbered assets / asset transfers

Dear -,

I refer to the statement of affairs in respect of XXX and the listing of property transfers which you submitted to us as part of the recent business plan submission.

To finalise this information, NAMA requires that xxx principals submit a final, signed, comprehensive and itemised listing of all asset transfers to connected parties (including spouses and other family connections if applicable) over the past five years. This list should detail the date of transfer and where relevant, the consideration paid.

In addition, NAMA requires a final. signed and comprehensive listing of all assets currently held for each of the principals, and separately for each of their spouses. The listing of assets should be itemised , subject to a financial threshold of €10k for personal assets and house contents, and should include a full breakdown of all properties, cash, personal assets, house contents and all other assets, detailed by the partnership, corporate entity and trust in which they have a beneficial interest or in their own name. A description, estimated valuation and details of any related debt should be provided in respect of each asset.

The principals and spouses are reminded that NAMA may at any time seek sworn affidavits in respect of the statements of affairs or asset transfers.

Yours sincerely,
Portfolio Asset Manager
National Asset Management Agency”

I hope that future reporting on transfers of assets to developers’ wives sets out the correct legal context for dealing with fraudulent transfers or transfers below value or transfers when the developer was insolvent. There is very real anger in this country at the consequences of the property crash and financial crisis and it must surely be incumbent on the media when it does report on developers’ wives that it doesn’t withhold relevant information, the suppression of which just stokes up latent anger.

UPDATE: 1st October, 2011. As this is probably the flagship blogpost on developer wives, an update to report that NAMA has claimed the majority of the Top 30 developers had made spousal transfers, and that a message from Minister for Finance, Michael Noonan’s office claims that a minority of NAMA’s debtors had made spousal transfers. Remembering that NAMA overall has 850 debtors, that implies that outside the Top 30, transfers were not so common.


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It was in April 2010 when the new-ish INBS CEO Gerry McGinn announced that he was bringing in forensic accountants to, according to the Irish Times, “unearth and pursue any malpractice discovered”.  What was surprising was that he was engaging Ernst & Young (E&Y) who were of course Anglo’s auditors during the boom years and certainly during 2006, 2007 and 2008. They were also the auditors for EBS. Their contracts at both financial institutions were terminated in 2009. The table below shows the auditors of the six Irish banks which are protected by the State guarantee (only IL&P avoided NAMA because it has no land and development loans whatsoever).

As you can see, in 2009 E&Y was replaced at both Anglo and EBS by Deloitte and Touche and KPMG respectively. Merely replaced, and as shown above continue to earn fees from State-owned INBS in “unearthing” and “pursuing any malpractice discovered”. E&Y did quite well when they were auditing Anglo and EBS – the accounts show that they were paid €4.3m in audit fees between 2006-2008 (plus an additional €2.0m for other services).

When Enron collapsed in the US, the ensuing scandal also put paid to the 89-year old Big-5 accountancy giant Arthur Andersen – although the US Supreme Court overturned criminal indictments in destroying potential evidence, the company’s reputation had suffered to the extent that it was broken with a rump consulting firm Accenture emerging from the ashes (there are still apparently 200 people employed in Arthur Andersen running a training and conference facility in Chicago). And of course the company faced a large number of court cases from investors. Now so far in Ireland, and I am being careful in what I say here, although there does appear to have been a share support scheme at Anglo, that there was a deliberate and successful attempt at hiding Sean Fitzpatrick’s loans at Anglo and that Anglo’s year-end loans and deposits carousel with Irish Life and Permanent seems to have gone unnoticed, no criminal charges have been laid and there are three (very) slow moving investigations ongoing with the Gardai, the Office of the Director of Corporate Enforcement and the Financial Regulator. Further the City of London police and the UK’s Serious Fraud Office are reported to be investigating Anglo. And although auditors have a role in ensuring the accounts show a “true and fair” view of a company’s financial standing, auditors cannot be blamed for the property bubble and the worldwide credit crisis. Whether they should have uncovered the above three matters and examined their consequences is another matter but is not the point of this entry.

Consider the €1.7bn of loans that NAMA has reportedly acquired so far for nil value. The nil value is not the result of a collapsing property market. No, according to the Independent it is the result of “imperfect security”. The Independent reminds us of Mr Justice Peter Kelly’s remarks in the High Court earlier this year when examining loans to companies formerly controlled by developer Liam Carroll when he said that it was “astonishing” and “extraordinary” given the vast sums involved that AIB’s only security for the borrowings was letters of undertakings from a solicitors’ firm and the deposit of title deeds. The Independent article also claims that staff in some institutions have exited banks after facing possible disciplinary proceedings. Anglo, it is claimed, accounts for €600m of the €1.7bn zero value loans. When appearing before the Oireachtas Joint Committee on Finance and the Public Service in April 2010, NAMA CEO Brendan McDonagh said “our own [NAMA’s] detailed due diligence on a loan by loan examination has revealed a troubling picture of poor loan documentation, of assets not properly legally secured and of inadequate stress-testing of borrowers and loans – all born of a mindless scramble to funnel lending into one sector at considerable pace and of a reckless abandonment of basic principles of credit risk and prudent lending”. The Governor of the Central Bank, Patrick Honohan, alluded to the role of auditors (and accountants) in his report into The Irish Banking Crisis Regulatory and Financial Stability Policy 2003-2008 in May 2010  “It may also be the case that auditors and accountants should have been more alert to weaknesses in the banks‘ lending and financial position. While these aspects have not been independently researched for this Report, they merit further investigation” and “a related risk was that in a lending environment characterised by unprecedented growth, competition among lenders especially from newer/smaller players  would lead to an overall relaxation of lending standards. Although there were no warning signals coming from the institutions‘ accountants/auditors, anecdotal evidence suggests that some of these elements were starting to occur [2006-2008].” Regling and Watson also touch on the role of auditors but don’t at all probe beneath the surface in their Preliminary Report on the Sources of Ireland’s Banking Crisis in May 2010 “In some of these areas, again, there may be questions how far external auditors probed relevant draft accounts before certifying them”. Following the publication of the Central Bank Governor’s and the Regling and Watson reports, the Minister for Finance announced a further enquiry being overseen by former civil servant at Finland’s Department of Finance, Peter Nyberg which is due to be published by the end of this month. The terms of reference for this new enquiry do cover risk management and corporate governance but it is unclear to what extent the role of auditors will be examined.

An auditor’s role is, in an overall sense, to ensure the accounts give a “true and fair” view of the company’s standing. In arriving at their conclusion auditors will have examined the figures eventually shown in the financial statements and then using a range of techniques will set out to verify the source of the figures. In checking the value of an individual loan, they would have been expected to check the paperwork evidencing the loan. A significant proportion of these loans have nil value because that paperwork is inadequate. Now €1.7bn in respect of the €27bn overall in Tranches 1 and 2 is just 6% and auditors will not examine every single loan but I would have expected even sampling to have uncovered problems worthy of further investigation.

Professional firms have professional indemnity insurance for a reason. It is there for situations where their professional negligence causes damage. And loans that are now worthless because of inadequate documentation are damaging because although NAMA will pay nothing for them, we the citizenry need pay for the recapitalizations in the banks where the losses have been crystallized. Sure, E&Y lost their auditing contracts with Anglo and EBS but they have picked up State contracts elsewhere (for example at INBS above). And indeed KPMG has kept its auditing contracts at INBS and nationalized AIB. KPMG earned €1.1m between 2006-2009 in auditing INBS’s books alone.

It is a matter of concern that auditing in the EU is dominated by a small number of giant firms, and that concern is being investigated at EU level. But giant or not, there should not be a barrier or hesitancy in investigating the auditors’ role in the financial crisis and given that the State now owns Anglo, AIB, EBS and INBS (and effectively BoI though the shareholding is being artificially maintained at 36.5% with attempts to avoid the crystallization of the true level of loan losses) there should be no issue in establishing if there has been professional negligence. It is hoped the Nyberg report expected in the next two weeks will shine a light on this subject but failing that, the State that owns four of the NAMA banks should pursue this matter with alacrity – after all a nice €5-10bn professional negligence payout might go some way to offsetting the €50bn cost of the bailout (€34bn Anglo, €3.5bn BoI, €6.5bn++ AIB, €5.4bn INBS and <€1bn EBS). It might also improve the reputation of auditing in the State and do something to lessen the Wild West regulatory image of the country. Plainly the companies named above have not been judged guilty of professional negligence at this stage. However the quantity of worthless loans now being uncovered by NAMA should at least give rise to suspicions that audits were not undertaken to an adequate standard.

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