Custom house of cards

Michael Clifford on the demise of Custom House Capital and the missing €56 million

Harry Cassidy: Custom House Capital was a staid outfit when he arrived at its door in 1999, trailing big ideas about how to make serious money.

THE PENSIONERS

PETER O’Connor put in a working life of 40 years in the retail business. He held senior positions with some of the major players and then bought his own place in north Dublin and made a success of that. Ten years ago, he sold the business, with the intention of using the proceeds to fund his pension.

In 2005, following some bad investments, he wanted to move his cash. He received strong professional advice to put the money with an outfit called Custom House Capital (CHC). It was a wealth management firm which invested in property for consortiums, but also managed pensions.

“There were the haves and the have-nots in there,” O’Connor says. He was among the latter, a large cohort of the firm’s 1,400 clients who weren’t taking a punt, but wanted a safe home for their money, to keep them in their advanced years.

“I wanted the money kept in cash or as near to cash as possible,” he says. In July last year, his monthly cheques stopped coming. On October 23 all his suspicions were confirmed. Most if not all his money was taken from his accounts and used to prop up property investments in the company. The initial estimate is that €56 million is missing.

O’Connor, like most of the investors in CHC, is reluctant to be fully identified. “Some people just don’t believe it,” he says. “One big problem, apart from having your life turned upside down, is convincing people what has happened. They just don’t believe such a thing could happen — that money could disappear like that.”

He echoes the words of High Court judge Gerard Hogan who said: “it was a Ponzi scheme.” O’Connor adds: “and they (the company directors) are walking around scot free.”

O’Connor’s experience has been replicated by many others. Some have reached the point of frustration that they got over their reluctance to be identified and picked up the phone to ring Joe Duffy.

Patrick’s broker advised him to invest his pension with Custom House. He had been contributing to a pension for 40 years and by 2009 he was in a position to have the fund managed by an approved agent like Custom House. Now he believes he might lose his home as a result of what has happened.

“I was due to retire at the end of December,” he told RTÉ’s Liveline. “I had a company which ceased trading two years ago and I had been drawing cash, but that’s coming to an end. After that I have nothing.

“The newspaper said the investors were high net worth individuals. I wasn’t one of them. I had a pension and a huge mortgage and this is why I could lose my home.”

Catherine’s mother was in her 80s when she sold her home in 2006 and moved into a retirement village. She wanted to put the proceeds from the sale of the house into something secure, from which she could draw what she required in her new home.

“I had heard about it (CHC) through my parents’ accountant,” Catherine told Liveline. “He (the accountant) is not responsible; it was regulated by the financial regulator. I went in to meet John Whyte (CHC director) and a few others. We stressed we were risk adverse, we wanted somewhere to put money and if she would need access to it she could have it. We weren’t looking for a high investment yield.”

Last July, Catherine’s mother spotted something in the newspaper about CHC. She rang her daughter.

“I phoned up and spoke to John Whyte. He said it was not what it seems but he couldn’t comment. Said there was nothing to worry about. Nobody has any access to funds… my mother has huge concerns. Nobody knows what our situation is, how much is gone; is it all gone or part gone? (There is a) web of deceit around the whole thing.”

Other callers to Liveline related a similar experience, and more again rang the programme, to vent frustration but declined to go on air.

The full extent of the losses won’t be crystallised until an audit is completed on December 21.

At any other time in history, Custom House Capital would represent a major scandal. Today, in the shadow of the bank formerly known as Anglo Irish, and all the other recklessness that thrust the economy into a black hole, it gets little space.

Hundreds of pensioners have had their futures thrust onto fate’s choppy seas. The prima facie evidence suggests a major crime has been committed. And all who had invested their futures with the company want to know how it could have happened. How could their money disappear under the gaze of the Central Bank, the Pensions Board and the company’s auditor?

THE OUTFIT

Custom House Capital was a staid outfit when Harry Cassidy arrived at its door in 1999, trailing big ideas about how to make serious money. Cassidy began his career in financial services in 1974 with Bank of Ireland. According to himself he worked in the “trust and tax department at the bank”. He qualified as a tax consultant and he is a fellow of the Chartered Institute of Taxation and Securities.

In 1995, he moved to Guinness Mahon, the merchant bank, notorious for its association with Charlie Haughey’s bagman, Des Traynor.

Four years after joining the bank, Cassidy moved onto Custom House Capital. He took it over within a year, refashioning it as a vehicle for high net worth individuals.

The company was regulated under section 10 of the Investment Intermediaries Act 1995, which allows for the setting up of investment vehicles to be policed by the Central Bank. The main focus of the business was property, with a particular emphasis on Europe.

Cassidy was joined at CHC by a former colleague from Guinness Mahon, John Whyte. A third director of the company was John Mulholland, a barrister who had decades of experience in the pensions industry. CHC was going to position itself as a provider of investment opportunities aimed at providing for retirement.

Cassidy paid himself a salary of €430,000. His fellow director Whyte was on a comparatively modest €130,000. The company was based in a Georgian building in Dublin’s Merrion Square.

Mulholland is a serious golf nut, and is a fixture at the exclusive Mount Juliet club. In the early years, investors were treated to golf outings in the K Club, where they were often be accompanied by a professional of note on their rounds. CHC sponsored professional golfer Damien McGrane.

Mulholland was also responsible for introducing a silent partner to the business, solicitor John Caldwell, who was up to his ears in the Planning Tribunal. In 2004, the tribunal found that Caldwell was the beneficial owner of lands in Carrigmines which were the subject of investigations in bribery, and the proceeds from which were confiscated by the Criminal Assets Bureau.

Caldwell owned 20% of CHC, increasing his stake to 25%. He and Harry Cassidy didn’t see eye to eye.

“He is not a friend of mine,” Cassidy told Central Bank inspectors earlier this year. “He is a contact of John’s. I never knew him before I set up with CHC — knew of him, didn’t trust him.”

In 2007, Caldwell was bought out of his stake for e2 million. The money used to pay him off was taken from a client account in CHC, the details of which were kept on the hard drive of the financial controller, and not shared on the company’s computer system. Caldwell did extremely well for himself, considering what was to befall CHC within a few years.

Peter O’Connor, like all the other investors had no idea that Caldwell was involved. “If that had got out there would have been a queue of people around Merrion Square waiting to get their money back”. Caldwell was not implicated in the subsequent investigation into Custom House Capital.

But back in the early years, business was flying. Timing was on their side. With the Celtic Tiger roaring there was a surfeit of businesspeople, doctors, solicitors, accountants, and others who needed somewhere to invest their money. CHC quickly gain a reputation as being a good operator.

In retrospect, it was a time when making money from money didn’t require any great acumen. The property market was going through the roof, as was the stock market, and the world economy was on a roll. Over time, CHC would acquire around 1,400 customers who invested arounde1.5 billion. For those investing in property, a minimum typical investment in a consortium was €250,000.

Further horizons opened up with the advent of PRSA pension plans, which allowed individuals to set up their own pensions to be administered by approved agents.

CHC was quick out of the blocks. In May 2003, the company became the ninth approved provider of PRSA accounts. All of the other providers at that stage were major retail banks or former building societies. The PRSA accounts were policed by the Pensions Board. So by then, two regulatory authorities were supposed to be keeping a close eye on the pension business of CHC.

The light touch regulation environment and property mania of the time prompted the loosening of the rules in other areas.Finance Minister Charlie McCreevy brought in a new law to allow for pensions to be invested in property.

CHC director John Mulholland was effusive in praising the measure when he wrote about it in a newspaper at the time.

“As a result of this change, which was introduced by the Minister for Finance, Mr McCreevy, the way is now clear for holders of self-administered pension schemes to borrow in order to invest in property,” he wrote.

“It allows investors to gain more exposure to residential, commercial and office property markets, both at home and abroad, where previously they would not have had the means within the retirement fund to achieve this.

Gearing also adds massively to the ability to grow assets in the fund.”

The near sanctity that applied to pension investment was no longer suited for the glorious times of money for old rope. People could now borrow on foot of their pension funds to buy property. Crucially, any such investments could only be undertaken with the full consent of the account holder. It was to eventually emerge that hundreds of clients who wanted their money kept in cash had their accounts plundered to prop up ailing property investments.

BEHIND CLOSED DOORS

In January 2008, CHC launched a marketing video which had Harry Cassidy in ebullient form.

“We identified the potential of the German property market over two years ago,” he told viewers. “Germany with its recovering economy offers exciting investment opportunities for clients. Advantages include attractive rental income compared to Ireland and the UK… delivering on our commitment to protect and grow your wealth we source only prime retail properties in Germany’s largest cities.”

By that stage, CHC had invested in 16 major deals with German estate agents Berendes, and was in negotiations for another 10 to 15.

The latter commitments were about to become a major problem. With the domestic economy heading south, and a credit crunch tightening up the flow of cash, CHC began having major difficulty funding its property commitments.

On January 21, a few weeks after that marketing whiz, pension investors received a letter from CHC. They were invited to use their money “to provide short term equity funding of our European property projects. This may be for three to six months.”

There was no risk. Their money was “100% capital protected” and an insurance policy was in place in the unlikely event of any hiccups.

Peter O’Connor saw no problem. He had been monitoring his investment with six monthly visits to CHC’s office, and his monthly stipend was consistent. He had no reason to suspect his trust was misplaced.

“I went in for a meeting after I got that,” he says. “I did everything face to face with them. And it looked like there couldn’t be any risk, so I said go ahead.”

As it was to turn out, the investment was not 100% protected. The premium on the insurance policy was not paid. And the balances on O’Connor’s accounts forwarded to him thereafter were doctored.

The manner in which this was done was illustrated in two examples in the report of Central Bank inspectors. In Chapter Two of the report, the inspectors examined two funds which were supposed to be kept in cash for the holders of PRSA accounts. The Destiny PRSA Fund stated on July 14 last that it had €10,412,139 in assets held on behalf of 485 clients.

The report states: “However, it appears that €9,930,999 of this, representing over 95% of the fund, was also transferred or in some fashion made available to CHC-promoted client property investments. The relevant transactions regarding this fund appear to date from 2008 through to December 2010.”

Another such fund was the Destiny Select II Cash Fund, which as the name says, was supposed to be kept in cash.

The fund stated in July that it had €3,860,836 held on behalf of 58 clients.

The report states: “However, it appears that from this a balance of €3,674,803 (representing over 95% of the fund) had been transferred or in some fashion made available to CHC-promoted client property investments. The relevant transactions regarding this fund appear to have occurred between October 2010 and February 2011.” A total of e13.6 million was taken from those two accounts alone to prop up other investments.

The inspectors concluded that “both cash funds had ceased to operate in the manner for which they were established and could not meet the legitimate requests from clients for money to be repaid.

“It is beyond question that the transfer of money from these cash funds to become loans in commercial property vehicles was contrary to the proper conduct of such funds and without justification.”

This plundering of accounts became a matter of course. In order to cover tracks, account balances were doctored, and if a pensioner made a call on their cash, it was sourced elsewhere, similar to how a pyramid scheme operates. By the time the inspectors came in, many of the staff were only too eager to get things off their chest.

The financial controller Paul Lavery was asked how the transfers of clients’ money typically came about.

“Harry would send you an email saying he needed to talk to you and you’d go down to him and he’d say ‘Listen, there’s a payment to go out to X property’ and you’d say ‘And? What can we do about it, like? I can’t do anything about that’. He’d say ‘Listen, it needs to go’ and I’d say ‘Where are you going to fund it from?’. He’d say ‘It has to go out today, it has to be done’, you know. And ‘I don’t know where you’re going to fund it from, to be honest with you’ and he says ‘Well, we’ll have to fund it because it has to go out. If it doesn’t go out, you know, any money going across, any money that has gone across to that specific property is going to be lost’. I said ‘Well, you can’t do that’ and he’d say ‘Well, if we don’t do it, we are going to lose everything’. That was always his line. When you raised concerns that you can’t do this, he’d say if we don’t do this, whatever equity that has been invested is going to be lost.”

Meanwhile, in public, the company directors carried on as if everything in the garden was rosy and blooming. At the end of 2009, John Mulholland sent out a Christmas message to investors, in which he pointed out that there was e14 billion more on deposit in Irish banks than there had been at the peak of the SSIA savings boom a few years before.

“As a nation, we are saving our way into recession,” he wrote. His subliminal pitch was to get those savers to invest in Custom House Capital. For the poor unfortunates who hadalready done that, a brutal awakening was just around the corner.

TUMBLING PYRAMID

In 2009, the Central Bank carried out an inspection of Custom House Capital. It found little amiss, which infers it didn’t look in the right places. By April 2010, the company had been instructed to desist from writing new business because of “administrative procedures and controls”. It was later reported that one of the issues of concern was about how CHC segregated its clients’ assets from the firm’s own assets.

We now know that this precise issue was the cause of what was later exposed, yet at the time, no action was taken.

When Peter O’Connor saw a newspaper report in September 2010 about the problems, he went straight in to check on his future.

“Harry Cassidy said it was nothing, everything was in order. It was about not having the right passport photos and that ESB or phone bills for identity purposes weren’t in place.”

O’Connor remained uneasy and had a whole series of meetings in the company’s office over the course of the next six months. At all times he was assured that his money was as safe as houses.

In June 2011, another company, Appian Asset Management, bought into CHC. When Appian’s people went in and examined the books they found an overpowering smell and contacted the Central Bank immediately. Appian then reversed out of the proposed deal.

The Central Bank applied to the High Court to have inspectors appointed, and after a three-month investigation they reported to back to the Court on October 23.

The inspectors found there had been “a systemic and deliberate misuse” of more than €56 million of clients assets and cash.

“There was a systematic and deliberate misuse of assets and cash belonging directly or indirectly to clients of CHC,” the report concluded.

“This misuse was deliberately disguised by CHC through the use of false accounting entries and the issue of false and misleading statements to clients.”

The judge said what had gone on had been “a sort of Irish Ponzi scheme”.

He appointed a liquidator to the company, and forwarded the report to the DPP and the gardaí.

Peter O’Connor isn’t holding out much hope of getting any of his money back.

“I found Harry Cassidy to be a genuine enough guy,” he says. “But I don’t know if he knew anything about properties in Europe. Then the property collapse came and he had trouble getting investors to stump up. So he took the money from our accounts.

“Now, he and the others are swanning about the place and the investors like me have had our futures taken away at this stage of life.”

THE AFTERMATH

The final report on the extent of losses is expected to be published on December 21.

The forensic detail of the inspectors’ report, along with the testimonies published therein, suggests there is strong prima facie evidence that a major crime of fraud has been committed. Nobody has been arrested. The movements of the former directors of the company have not been restricted. Nobody has been questioned under caution.

Around 150 of those who invested their pensions have retained Lavelle Coleman Solicitors in Dublin to represent their interests. In a statement released on behalf of the clients, Lavelle Coleman pointed to a number of areas of concern.

“The investors are outraged and shocked. They feel it is a disgrace that such a misuse of funds could happen under the eye of the Central Bank who had regulatory responsibilities. There is effectively no money left for investors… In 2009 the Central Bank carried out an inspection of Custom House Capital, however nothing was done to address those concerns for an unacceptable period of time. Had the Central Bank acted promptly in 2009 the extent of the misuse of client funds may not have happened.”

Apart from the Central Bank, other bodies should have been in a position to uncover what was afoot within Custom House Capital. The Pensions Board is responsible for policing the PRSA system, which was at the heart of the issues, and the company’s auditor signed off on the company accounts annually. While the auditor can only examine what is placed before him or her, a trend has been uncovered in recent years to suggest “light touch” regime applied to auditing as much as to regulation.

Last week, the financial regulator Matthew Elderfield, announced there would a major review of all asset management companies. It comes after one wild and expensive horse has long since bolted.