AIB investment group created fake trades to favour specific clients

AIB’S investment management subsidiary created artificial trades to boost the performance of certain clients’ investment portfolios, according to yesterday’s IFSRA report.

But there was no evidence that five former top executives at AIB, who benefited from the practice, including one-time chief executive Gerry Scanlan, knew what was going on.

Mr Scanlan was named earlier this year as a beneficiary of Faldor, an investment company registered in the British Virgin Islands that was managed by AIB Investment Managers between 1989 and 1996.

He said at the time he knew nothing of Faldor’s existence before AIB informed him of his link to it in October 2003.

IFSRA’s report found Faldor was one of several clients to benefit from “inappropriate” transactions carried out by AIBIM, but that no disciplinary action had been taken against the AIBIM staff involved.

The report did not disclose how Faldor came to be set up, who within AIBIM was responsible for its management and who within the greater AIB group was aware of its activities.

IFSRA said AIBIM had carried out, between 1989 and 1991, “unacceptable” artificial share trades that boosted the value of investment portfolios belonging to certain clients, including Faldor. IFSRA also said some favoured clients made profits at the expense of others.

But there was no law before 1995 to stop banks favouring selected customers ahead of others when it came to managing investments.

IFSRA prudential director Patrick Neary said the funds management industry was completely unregulated until 1995, when the Investment Intermediaries Act was signed into law.

IFSRA identified eight transactions that took place between 1991 and 1993 and disadvantaged two clients by a total of €174,000.

The clients suffered by being allocated share deals on less favourable terms than were given to other clients for who AIBIM had performed similar transactions.

AIB has since paid out €470,000 to these clients to compensate them for losses.

IFSRA said there was no legislation to outlaw these practices at the time.

“In the early 1990s, you invested with no statutory protection,” said Mr Neary, who said that investment firms had no legal benchmark to meet when it came to managing client relationships at the time.

But changes since 1995 tightened up the regime for allocating share trades to specific customers, leaving less room to manipulate the accounting entries governing such transactions. This improved the environment for investors.