Ring of intrigue
ON June 3, 2008, key directors of the Irish National Stud gathered at their headquarters in Tully, Co Kildare, to reflect on the most successful year in its history.
They pored over the origins of a profit which was enormous for a company of its size. The text of Lady Chryss O’Reilly’s report, explaining how the extraordinary year came to pass, was accepted. Her board also signed off on the technical language used to fulfil its obligations and inform the public about the multi-million euro profit three people at the table had reaped as part of the Invincible Spirit stallion syndicate.
This was the 2007 investment deal which valued the company’s stand-out sire at €45 million but secured his future at the Stud. The three board members shared part of the buy-in bonanza as private shareholders in the syndicate. None of the directors were to know, but the same month would see the final fling in an affair between the two people responsible for Invincible Spirit’s profit making prospects — their chief executive, John Clarke, and their stallion nominations manager, Julie Lynch. On the basis of Chairman Lady O’Reilly’s report, they were equally unaware of the scale of the financial firestorm that was now just weeks away.
“The underlying commercial trend in 2007 reflected the years which preceded it,” Lady O’Reilly stated. “Demand at the yearling sales was best described as patchy. Buyers were extremely selective and only those animals who met exacting standards provided a worthwhile commercial return.
“In many ways this is as it should be, as there is undoubtedly still a level of overproduction which, given the current overall economic situation, may lead to further difficulties for breeders in a potentially softening market later this year.”
Her assessment could have been lifted and easily transplanted into the arguments of many leading economists on the likelihood of a gentle landing in the Irish property market. Those analysts were all wrong. So were Lady O’Reilly and her board. The market did not just soften. It went into seizure.
When Agriculture Minister Brendan Smith arrived for the annual general meeting three weeks later, he told the company not to be too self-satisfied. He warned it against using large, once-off profits to project big shadows on the wall, when the accounts actually held little to justify long-term optimism.
“I am pleased that the company returned a significant profit before taxation on its 2007 activities,” said Mr Smith. “I note, however, that when the profits from once-off activities are stripped out, an operating loss for the year of over €300,000 was incurred.
“I am well aware that trading in shares in mares and stallions is a normal part of the business of any public Stud. In this context the fortunes of studs can fluctuate wildly from year to year.”
The company knew the heat was coming, but felt it had the wherewithal to endure it. In an email to the Department of Agriculture earlier that month, Mr Clarke had expressed a form of upbeat anxiety.
“I would emphasise that in the bloodstock field it is virtually impossible to predict future earnings and profitability as there are so many imponderables,” said Mr Clarke. “The trend is that earnings from fees will increase as the success of Invincible Spirit brings us additional opportunities.”
The Stud benefited from the experiences and insight of many of its directors who had a personal interest in ensuring they read the market right. Company secretary John McStay was among these and had been the stud’s chief financial advisor for 15 years. His company, McStay Luby, had also handled the firm’s accounts. But the industry had become more financially intricate. Mr McStay felt the Stud would benefit from more full-time, in-house expertise.
Just before the AGM, the board started the quest to recruit a financial controller. This had a direct effect on Mr McStay. His firm had earned €464,000 from its work for the Stud in the eight years leading up to the beginning of the search for a financial controller. It billed for another €24,250 in the six months before the position was filled. This was mostly accounted for by regular annual bills that rose from €23,045 a year in 2000 to €48,450 in 2008.
The total sum also included €48,400 for the work Mr McStay had done in the case of a former farm and tourism manager who claimed he was bullied so badly he had to leave work, and €59,895 which he charged to the Invincible Spirit syndicate. This was the group of investors who asked Mr McStay to help complete the unique multi-million dollar investment by Dubai’s Sheikh Mohammed in the wonder stallion Invincible Spirit. He and the company had enjoyed a huge profit on this particular deal. But Mr McStay and the board knew there would be no such windfalls in 2008.
Lady O’Reilly’s report said there was nervousness in international markets. She argued that the company’s foundation was still strong. It had the capacity to cover more than 1,000 mares a year. She hoped that the Government would provide more of taxpayers’ money to pay for continued investment in stallions. There was still €17m in unused equity that the finance minister could buy up at any stage.
For a time, investing in stallions was attractive on so many levels. It was tax free. The money spent on these horses could be written off and so could earnings from syndicates. A developer could walk in with a €10m lump sum. He could buy into a proven stallion and sell the nominations his shareholding entitled him to for thousands each — tax free. If it suited, he could sell the shareholding again — tax free. Then, should this man have a mare, he could add greatly to this with the price his yearling could make in the sales’ ring — tax free.
The industry became a stomping ground for money men. By 2006 the Goffs’ Million Sale, pioneered by Charlie Haughey two decades earlier, was generating gross revenues of almost €60m, a jump of 15% in 12 months. The same year, the total value of thoroughbreds sold in Ireland hit €191m. Like property and banking, Ireland was responsible for a far greater share of an over-stocked market than its size would suggest.
The country was producing 42% of all thoroughbred foals in Europe and had seven out of 10 of the world’s top stallions. In early 2004, a complaint was made to the European Commission that the lucrative tax exemption for stud fees and profits, introduced by Mr Haughey in 1969, was anti-competitive. There was a lot of posturing between Dublin and Brussels. A year later, the Commission made the decisive move and ruled that the exemption constituted illegal state-aid. It put the pressure on. Ireland had to back down.
There was no definitive data on the value of the measure. Figures from the Revenue Commissioners in 2006 suggested that at least €90m worth of profits fell into this category, which translated into an effective subsidy from the public to those trading in thoroughbreds. It was worth in excess of €20m in foregone taxes.
On December 7, 2005, Finance Minister Brian Cowen said the bloodstock-boosting exemption would be abolished. But he allowed a sunset period, permitting it to stay in place for three more breeding seasons. The lights eventually went out on August 1, 2008.
But if the horse racing industry thought that the loss of its competitive edge was the worst thing that would happen to it that autumn, it was very, very wrong.
Traditionally, there had been a slight lag between property crashes and downfalls in the stallion markets. The summer of 2008 saw the bloodstock business match its speculative sister stride for stride. Throughout August, bankers and consultants were passing each other in the Department of Finance to try to figure out a way to solve the impending banking crisis. Money was leaving Anglo Irish Bank so fast it had only a matter of weeks before it ran out. At any point, Irish Nationwide Building Society was just days from demise.
Then, attempts to keep the ship steady were sunk by a tsunami originating on the other side of the Atlantic Ocean.
It was September 15 when the American banking giant, Lehman Brothers, went bankrupt. Money markets around the world went into convulsions. The American presidential election campaign was put on hold to allow all sides to deal with the crisis. Less than two weeks later, already exposed buyers were asked to dip into their pockets at the most important event on the Irish National Stud’s calendar — the Goffs’ Orby Sale.
This was the premier trading event in Ireland for top-class yearlings and it had traditionally been Tully’s preferred market. The Stud had already got into a spot of bother. Legally, it could borrow up to €30m, but could only increase its lines of credit if it had the express approval of the minister for agriculture.
In August and September, it had gone it alone and borrowed more; the Department was not happy. In a letter to Mr Clarke, which outlined seven areas where officials felt the Stud did not comply with its corporate governance rules, the Department criticised the failure to get permission before it extended its short-term loans.
“From the returns submitted by McStay Luby last week, the Irish National Stud exceeded its authorised level of bank overdraft in August and September 2008, albeit in a time of extraordinary turbulence,” said the Department.
“The Irish National Stud must put in place measures to ensure it has the requisite borrowing approval in place before proceeding to borrow; the Company must adhere to the provisions set down in legislation.”
Mayday not Payday
During those months of August and September, the company would, ordinarily, have been certain that its biggest pay day of the year, the yearlings’ sale, would cancel out any short-term overdrafts.
On September 28, trading at Goffs began. The board felt it had prepared its best package yet. Unfortunately, the second day of the event just happened to be one of the most important in Irish economic history. After weeks teasing out possibilities, the sands were running out at the Department of Finance. During the day, the share price at Anglo fell 50%.
That evening, the Government made the dramatic and irreversible decision to guarantee the entire Irish banking system with a promise to cover €440 billion worth of liabilities. With Fine Gael support, Fianna Fáil and the Green Party went into the Dáil the next day and worked through a measure that allowed the most emphatic possible intervention into the country’s financial sector.
Back at Goffs, the Stud was stuck trying to get the best prices for its selection of young well-bred yearlings from undoubtedly proven mares. The company felt it was an “outstanding crop” falling victim to forces outside of its control. A year earlier, the till receipts would have been rolling. This time, the Stud only got half the money it had budgeted for. At the Sportsman’s Sale that finished off the week at Goffs, there were fewer horses offered and lower prices paid and turnover for the day was down more than 50% on 2007. Goffs’ chief executive, Henry Beeby, had a frank reflection for the Racing Post.
“Overall it has been a tough week that coincided with the world financial crisis,” he said. “The current recession in the Irish property market undoubtedly had a negative influence, with many Irish property developers, who’ve been such active purchasers in recent years, notably missing from the list of buyers this week.
“This is a problem unique to Ireland. While we’ve enjoyed their patronage in recent years, we’ve certainly felt their absence very keenly this week.”
There was some activity. This was led by Dermot Weld who bought the last of Indian Ridge’s yearlings to come to Goffs. He took this off the Irish National Stud for €75,000. That trade was six times the day’s average. It was not nearly enough to stop the shuddering sales week from scaring many people. Publicly, John Clarke was not among them.
“The Stud fees are dictated by supply and demand and those stallions who are doing well will stay the same or go up, and those who aren’t will have to come down,” said Clarke. “I believe the current situation is just a hiccup and I foresee no major changes. If a breeder has a reasonable mare, they have got to breed from her and by the time they come to offer the progeny in a couple of years hopefully things will be different.
“It was very hard for a sale (Goffs) to buck financial catastrophes outside the industry. Most of the right people were here, but they had less to spend,” Clarke added in a contribution to a media analysis of the dismal figures.
He was not the only person to hold this opinion. Prominent businessmen, the country’s leaders, senior bankers and the money-men who built the boom all appeared to believe it was just a scare.
Anglo Irish Bank was so confident of recovery it arranged with Irish Life and Permanent for an overnight transfer of €7.5 billion to massage its accounts to appear healthy enough to ride out the storm. The controversial transaction did nothing to prevent the bank going to the wall three months later. Neither did the proud posturing after the Goffs’ sale manage to restore confidence among buyers.
Just seven weeks after the Orby Sale, the bloodstock figures got much worse. At Goffs’ November foals’ event, turnover was a third of what it had been a year earlier and the average sale price was halved. A colt from Invincible Spirit, sent to the ring by Tully, salvaged some smiles with a nice price in one of the final trades of the event.
There was an underlying worry grating at the bloodstock business. It relied on a small number of key players. These people knew there was a greater chance of the sector falling foul of a collapse in building and banking. Construction income had underpinned the industry for more than a decade. Large investments were secured on the basis of hefty rolling debts. Even people who were not immersed in those exposed areas were still tangled up in other vulnerable pursuits.
Lady O’Reilly, her husband and her family had been behind a €100m rescue attempt for Waterford Wedgewood. But its position was getting precarious.
Worst of all, the squeeze was starting to come on the most powerful force in the industry.
In Dubai the lenders behind its architectural playground of imaginative skyscrapers and concept cities were starting to call in their debts. Construction on the world’s tallest building, the imitation archipelago of islands fashioned in the shape of the planet, and a host of other standout sites around Dubai came to a stand-still.
The principality had a €59 billion debt to rearrange quickly and economic commentators were pessimistic about the prospects for the rest of its liabilities. The saving grace for Dubai was that the oil wealth of Abu Dhabi provided a subtle guarantee to its property price-dependent neighbour.
But as soon as Dubai got into trouble, a sobering realisation struck — Abu Dhabi’s support would have to come at a price. Speculation was that this could lead to a curtailment of Dubai’s exuberance in horseracing. Sheikh Mohammed was the ruler of Dubai, the heir behind its innovation and the owner of the Godolphin and Darley breeding enterprises. The wealth he and his brothers in the Maktoum family brought to breeding was the support pole on which the market was pegged.
Since the early 1980s, the Maktoums’ outlandish spending had provided a constant injection into the industry at almost every big sales event. Sheikh Mohammed was the single biggest buyer in the thoroughbred market and the most prolific actor in the history of the business. Even the family’s protracted dispute with Coolmore served to drive prices up.
When questions started surfacing, Sheikh Mohammed’s racing team stressed to whoever asked that horses were a personal indulgence. They were not directly connected to the fortunes of Dubai, in either good times or bad. Even if this was the case, the reassurances could not stop the second-guessing on whether the Maktoums’ cheque book would be closed. It was a period when any optimistic financial outlook could not be taken at face value. An acceptance soon set in that a harsh depression was looming. Within 12 months of the seminal Goffs’ sale, the final Million Yearlings’ event it could afford, even the Stud had begun to sober up.
“A huge amount of our clients would have been people who got in on the Celtic Tiger boom. People in IT and property developers were among the buyers,” stallion nominations manager Julie Lynch told Bloomberg. Indeed, the realisation by the wider industry of the trouble it was in happened well before that.
Scramble to survive
Towards the end of 2008 there was panic among all breeders and studs. There was a dash to cut prices and still try to secure bookings for 2009. A month after it published its 2009 price list, the Irish National Stud released a more attractive redraft. Invincible Spirit’s fee was lowered to €50,000, down €10,000 from what the Stud originally thought it would get for him in 2009. It was two-thirds of what he had been valued at the previous year. This cut more than €1m worth of earning potential off him.
His neighbours in the sunlit stallion boxes were also devalued. Celtic Swing had his price cut by 33% to just €4,000 for his final season before he was shipped to Italy. Verglas came down by €2,500. More recent arrivals, Amadeus Wolf and Jeremy, dropped to €8,000.
Once the syndicates and the board set the prices, it had always been back to Mr Clarke and Ms Lynch to sell the nominations. Invincible Spirit worked out fine at a reduced fee. The new boy, Amadeus Wolf, was not so popular.
It was always desirable to have the books for each stallion finalised by Christmas. So it was typically a frantic few months leading up to the December break. Still, the Stud’s efforts to shore up its stallion roster for 2009 just about worked. Between all the stallions, the team managed to ensure there were more than 900 mares booked in to be covered at Tully for 2009. Most of the interest centred around the cheaper sires and Elusive City. This stallion was living at Tully since the demise of the Huma Park Stud. But the semi-state did not own any part of him.
Lady O’Reilly, her husband Sir Anthony and her brother, Peter Goulandris, were not as successful at keeping the furnaces at Waterford Wedgewood firing through the winter months. In December, it accounted for pre-tax losses of €63m. On January 5, it blamed the volatile international markets and suspended trading of its shares on the stock exchange. More than 800 workers in Ireland were to be let go.
Similarly, the Government’s strategy to keep the banking sector intact through the tempest had become submerged by an onslaught from overseas. Sean Quinn’s stake in Anglo and the bank’s chronic accounts had failed to convince investors that even a guarantee from the Irish people was enough. The Government admitted its efforts to paper over the cracks had failed.
On January 15, Anglo Irish was sensationally nationalised. The run on the sector had already meant that it brought large portions of Bank of Ireland and AIB with it.
On the Thursday the toxic Anglo Irish Bank was nationalised, the poisonous atmosphere in the office at the National Stud also got too much for Julie Lynch. Anxiety forced her to go home from work.
After a weekend’s reflection she came back to work and decided she could no longer remain quiet. She made her first formal complaint about the chief executive’s behaviour to the human resources manager. Two days later, she approached one of the directors, Trevor Stewart. She opened up about the affair and asked for something to be done to stop Mr Clarke’s alleged bullying behaviour from repeating itself.
Mr Stewart had been the most recent addition to the board of Tully. He was an investor in bloodstock and was involved in the Invincible Spirit syndicate. Mr Stewart duly took a note of the conversation and passed it on to the board. Ms Lynch said that, after this, Lady O’Reilly agreed to meet her. She also claimed the chairman changed her mind and had her chauffeur hand-deliver a letter on January 28. This explained how the board wanted to deal with the situation.
The matter was recognised as serious. Concerned by Ms Lynch’s admission of an affair with Mr Clarke, the directors had decided to appoint the former chairman of the Labour Court, Finbarr Flood, to mediate between the two senior staff members.
The clean-cut Mr Flood began work as a messenger boy in the Guinness brewery at the age of 14. He climbed the ladder to become the managing director of the St James’s Gate facility. The lanky, inner-city Dubliner was a professional footballer in the days before the game got glamorous.
In 1998 he was made chairman of the Labour Court and held the post until the end of 2003, during which time he was responsible for restructuring and reforming how it operated. Afterwards, he was made chairman of Shelbourne Football Club at a time when it rose to become league champion and, subsequently, crashed into collapse within a few months.
So, Mr Flood knew all about difficulties and disasters. The board looked for the benefit of his insight. The former Labour Court chairman sat down with both parties. He had spelled out a full list of the allegations and gave the chief executive a chance to respond. These accusations had suggested Mr Clarke was very difficult to work with, had left Ms Lynch out of essential meetings and did not treat her with respect. They also said his behaviour towards her was not acceptable during 2008 when they travelled to the Milan sales, the Keenland sales, the major Tattersalls’ event in Newmarket, the outing in Deauville, France, and when they recommenced their affair at Royal Ascot. At some of these events the travelling party had included Mr Clarke’s wife, Monica. It was deemed to be all too much.
“[Ms Lynch] stated she could not take any more of this pressure and that something had to give,” Mr Flood said. “She mentioned that she considered resignation and would have to if the situation continued.” In fact Ms Lynch had already attempted to resign.
“At one point, on or about the 19th of March 2009, I became so stressed that I handed Mr Clarke a letter of resignation,” Ms Lynch later told the High Court in an affidavit. “I subsequently withdrew this. Mr Clarke exploited this situation by utilising it to accuse me of being mentally unstable.
“He reiterated this accusation on numerous occasions, both to employees, members of the board, customers and clients of the Irish National Stud.”
John McStay wrote to the stallion nominations manager as soon as the board heard of her resignation letter. He told her Mr Flood was investigating the debacle and it was being addressed urgently.
On March 26, Ms Lynch texted company secretary Mr McStay and said she was suffering from panic attacks. He asked her to attend the company doctor. Mr McStay said he was concerned because counselling had been offered by the Stud but was not taken up. The offer of paid leave was put on the table.
On April 1, Ms Lynch withdrew her resignation and the next day she went back to Dr McGoldrick who certified her fit to return to work. She was also advised to submit a written account of her relationship with Mr Clarke to Mr Flood. This covered her entire time at the company. Separately, Mr Clarke recounted his version of events in writing, but this only spanned the era after the affair ended.
After getting her timeline of trauma to Mr Flood, Ms Lynch began to feel the investigation was going on too long. She said that Mr Clarke had continued to harass her even though their relationship was under scrutiny.
“Despite the board being aware of this conduct, members such as John McStay and Orla Hennelly of human resources failed to take any action to prevent recurrences,” Ms Lynch testified in court. “I raised the issue with Mr Clarke. I asked for a meeting with the chairman. Mr Clarke refused my request.
“I further raised the issue with Orla Hennelly to no avail. There was still no indication of when the investigation would conclude, nor was any action proposed to prevent the ongoing bullying or harassment.”
Mr McStay said Ms Hennelly was only trying to help. He also denied that the board had done little to protect its stallion nominations manager. He said he and other senior personnel were in constant contact with both parties during that time. They had asked Mr Clarke to make sure his behaviour was appropriate, cordial and respectful. But, whatever had been done throughout March and April, in Ms Lynch’s mind it was not enough.
The country was in despondent form. That week Finance Minister Brian Lenihan had got to his feet for the second time in six months to announce an emergency budget to stop Ireland’s own debt crisis becoming terminal. The next day was Ash Wednesday and the public was left to stew over the sad situation it found itself in. Ms Lynch spent the day doing the same. On Holy Thursday, 30 months after the first signs of romance between Ms Lynch and her boss, she took it upon herself to set the affair on its darkest turn.
“I decided I could take no more,” she said, “I had to end the pain.
“I wrote my will and left it in an envelope addressed to my mother under the door of Mr Clarke’s office that evening. I had to leave it in his office as it was Easter weekend and so that my body would be found and not left undiscovered in my house for a few days.”
CONNECT WITH US TODAY
Be the first to know the latest news and updates
