Regulated by central bank

Eight months after a report on Custom House Capital’s Ponzi-type scheme — in which many lost their life savings — those responsible have not been brought to justice, says Michael Clifford

One day recently, Ingrid Baugh heard 17 adverts on the radio for various financial institutions. Each one of the advertising slots ended with the sober phrase “is regulated by the Central Bank of Ireland”.

The line brought a wry smile to Baugh’s face. At this stage, she is forced to observe irony, because to contemplate reality has become too painful. The experience she and her family have endured at the hands of one financial institution has informed her about the things that some people are capable of. What really exercises her today, though, is the incompetence in policing a sector that has been at the heart of the destruction of the economy.

Ingrid Baugh’s mother is one of hundreds of pensioners whose nest eggs have disappeared in the tumbling pyramid that was Custom House Capital. An estimated €66m is understood to have been lost by investors, who thought they were putting their money into a safe, low-risk repository. The investment firm was headed up by Harry Cassidy, a big noise in Dublin’s financial community, who paid himself a salary of €430,000.

Last October, two court-appointed inspectors presented their report on CHC to High Court judge Gerard Hogan. The report detailed where client funds had been misused and lost, money moved out of accounts and transferred to property deals without the clients’ knowledge; and how the Financial Regulator was given completely false information.

The report made it clear there was “systemic and deliberate misuse of assets and cash”. Judge Hogan said the report described a “sort of Ponzi” scheme. He appointed a liquidator and referred the report to a number of statutory agencies, including the DPP. Precious little has happened in the interim.

Custom House Capital had around 1,400 clients, some of whom were described as “high net worth” individuals. However, there was also a large cohort of clients who had invested their life savings with CHC to keep safe for declining years. This category of clients is believed to number at least 400, and many of them are now represented by a solicitor’s firm.

The investigations in CHC have also yielded cases where, for instance, trust funds set up to care for children with disabilities were plundered by Mr Cassidy to prop up his ailing property investments. Mr Cassidy was excoriated in the inspectors’ report. Two other company’s directors (Mr Cassidy was a director as well as CEO) were also severely criticised.

Ms Baugh’s mother sold the family home in 2006. She had lived there all her married life. She invested most of the proceeds with CHC, based on professional advice. Now, at 85, she and her adult offspring have been left with serious worry about the future because of the loss of the money.

Eight months down the line from the publication of a report that laid out the extent of the deceit, no prosecutions have been taken. The criminal justice element of the case is moving at the snail’s pace that has typified the various investigations undertaken since the collapse of the economy.

Despite the inspectors’ report being littered with phrases such as “deliberately disguised”, “false accounting” and “misleading statements to clients”, the long arm of the law appears to have gone limp.

What concerns interested parties like Ms Baugh even more though, is the lack of regulation that attached to CHC. If it happened there, why can’t it happen anywhere else? Nearly four years after the retirement of the “Bob the Builder” regulator Patrick Neary, and the ushering in of a new era of tighter regulation, the indications are that precious little has changed.

In Jul 2009, the Central Bank was informed by a whistleblower that all was not as it seemed in the bowels of CHC’s operation. An investigation was conducted by the regulator which, beyond a few administration kinks, found little to cause alarm.

The benign result of the investigation allowed CHC to continue on its merry way to misappropriate clients’ money. It was only two years later, in Jun 2011, when another company conducted due diligence with a view to investment, that the full story came to light. How could a private company running the rule over CHC find all the foul stuff, yet the Central Bank, whose primary function is to regulate, could not?

Even in recent months, another case has reared its ugly head, that of Bloxham Stockbrokers, which closed its doors when information of financial malpractice came to light. Again, this outfit was apparently “regulated by the Central Bank of Ireland”.

“What is happening with regulation?” Ms Baugh asks. “What does it mean for the ordinary Joe Soaps when they hear that phrase in adverts. There must be more of it going on out there. Goodness knows what other places are up to.”

For those who have been left out of pocket, there is precious little prospect of redress from the Central Bank, which was supposed to be policing CHC. Lavelle Coleman Solicitors, which is representing a large group of CHC clients, obtained a legal opinion from senior counsel Brian Murray on the prospects of redress.

THE results were depressing. The opinion details how there may be a case against directors who were shown to act illegally or to have misled. Of course, any such case would only be worthwhile if the directors had sufficient funds available to pay compensation, not to mind the costs of an action. That is entirely unclear, and in practical terms, highly unlikely.

What of the Financial Regulator, whose function it is to keep financial institutions honest? Surely there is some comeback to an agency of state that has fallen down on the job, and cost some citizens their life savings?

According to the legal opinion, the statutory regulator enjoys effective immunity from prosecution.

“The bank is not liable for anything done or omitted in the performance of its functions or powers, unless it is proved that the act or omission was in bad faith,” the opinion reads.

Proving bad faith would mean showing that the regulator’s failure amounted to intentional action, which would be nearly impossible to prove.

“Although very serious issues arise as to how a financial institution regulated by the Central Bank could operate in the manner that is now known of CHC, proving negligence by the bank in the discharge of its statutory powers is not enough. The investors would have to prove positive bad faith.”

In effect, the regulator has immunity. But what of challenging such a concept in today’s world, where it has been shown that regulators have performed appallingly?

Again, there is little joy for consumers in the senior counsel’s opinion.

“Whether one agrees or not with the proposition that immunity fosters better regulation, a court in a constitutional challenge will be concerned not whether the State is right in the decision that is made to facilitate such immunity, but with whether its decision to enable immunity is effectively irrational. We are of the view that the challenges in this regard for investors will be just too great.”

So, if it is not possible to seek redress from the regulator, what about the State, which enacted the laws that protected the regulator, who in turn fell down on the job?

“The basis for a claim against the State arises from the proposition that the system of regulation in place prior to the appointment of inspectors over CHC was inadequate,” the opinion reads. “This appears to have been accepted by Mr Matthew Elderfield in a letter provided to us by an investor, insofar as it might be said, that he suggests that had a system of administration been in place it might have enabled the Central Bank to avoid the losses that had arisen.”

It goes on: “However, to convert the omission to have a form of administration in place (if it is an omission) into a legally cognisable cause of action, it is necessary to identify some legal basis for the asserted duty on the part of the State to legislate in this way.”

The lawyers conclude that there is precious little basis on which to do so.

As a result, those whose life savings disappeared have no real prospect of redress from the authorities charged with keeping bankers honest.

Earlier this year, the Central Bank set out its action plan for 2012. Included in all the plans are a range of enforcement and inspection regimes that will be put in place.

Ingrid Baugh is not impressed. “That was not done three of four years ago when it should have been. “It’s bolting the stable door after the horse is well and truly gone. We were supposed to have a new regime in place in 2009 when they investigated Custom House. And we know now how that ended up.”