Analysis: Key recommendations in the report on the downfall of Morrogh stockbrokers are aimed at reducing a receiver's costs, writes Colm Keena, Public Affairs Correspondent
When the Morrogh investment firm in Cork collapsed in April 2001, it left a type of mess in its wake that had not been confronted here before.
For this reason, solutions had to be devised for problems encountered, without the assistance of guiding rules or precedents.
The chaos left behind by the firm's collapse was considerable. The firm's former junior partner, and financial controller, Stephen Pearson, had been using clients' funds to play the stock market.
As the man in the firm who controlled its finances, he was in a key position to hide what he was up to.
Pearson eventually pleaded guilty to 31 charges of fraudulently converting clients' funds, 11 charges of forgery and five counts of obtaining funds under false pretences between November 1995 and April 2001.
The firm's books were a mess. The documents that, in theory, should have presented a true account of what was owned, and by whom, did no such thing. The courts heard that €5.5 million of the firm's funds had been lost by Pearson as a result of his activities. It had estimated assets of €6.2 million, but liabilities of €12.6 million.
For receiver Tom Grace, the question was how to distribute the inadequate funds available, to the firm's clients who wanted their money back.
Should a person who had, say, given a large amount of cash to Morroghs a short time prior to the collapse, simply be given that money back if the firm had never gotten around to investing it?
Or should some of this money be used to compensate a long-time investor whose shareholding, held by Morrogh, had been reduced in value by way of Pearson's activities?
In the collapse of a company, a liquidator is allowed to use the company's assets to pay both the liquidator's fees and the creditors, and there are easily identifiable secured and unsecured creditors.
However, the stock exchange legislation under which Mr Grace was operating, allowed for the use of client funds to pay his costs while he set about seeking to make sense of the Morrogh finances, and deciding what each claimant should get.
Different sets of claimants had different views as to how Mr Grace should decide who got what.
In order to proceed, Mr Grace allowed the arguments be made in front of the High Court, and then set about implementing whatever decisions the High Court handed down. This provided protection from legal action by disgruntled claimants.
However, it also led to the accumulation of massive legal fees, which had to be paid out of the client assets held by Morrogh.
It also meant that the unfortunate clients had to wait for much longer than they might be expected to, in order to receive their money (or the fraction of it they would eventually receive).
The key recommendations of the Final Report of the Morrogh Working Group seek to address these issues. It has recommended that pre-determined rules should be developed, and set out in law, for the distribution of client assets in circumstances where a shortfall in client assets has occurred following the collapse of an investment firm.
The thinking is that if this can be done, receivers will not have to go to the courts, the costs of future receiverships will, as a consequence, be hugely reduced, clients will get more of their investments back, and the whole process will operate more quickly than it did with the Morrogh collapse.
The group has decided that the current model, whereby client assets can be used to fund the receiver's work, once the firm's assets have been depleted, should continue.
The hope, presumably, is that less money will be used up by the receiver if he or she has clear rules to operate by.
Pearson was initially sentenced to three years' imprisonment, with the final year suspended, but the DPP appealed and the sentence was increased to five years by the Court of Criminal Appeal last May.
The severity of the sentence may act to make a repeat of the Morrogh scenario less likely.
