BUSINESS OPINION: Despite being alerted to one scheme, the regulator did not smell a rat and investigate further

IF ANYONE in Ireland has cause to be grateful to Seán Fitzpatrick it is probably Harry Cassidy.

Fitzpatrick and his colleagues set the bar for what constitutes a financial scandal in Ireland so high that the collapse of Cassidy’s Customs House Capital seems almost pedestrian.

The problems at CHC may involve a mere €56 million of clients’ money compared to the €36 billion of taxpayers’ cash flushed down the plug hole at Anglo Irish Bank but what went on there is equally horrifying.

According to Noel Thompson and George Tracey, the two Central Bank officials appointed to investigate CHC, the wheels started to come off the business some time in 2007.

The company had started making commercial property investments on behalf of clients in 2004 and had committed to bigger and bigger deals, putting down deposits before it had even lined up clients to buy them.

When the market crashed in 2007 the flow of new funds dried up and CHC started to look for creative ways to plug the funding gap before eventually just plundering client funds.

By the time a halt was called earlier this year some €56.15 million of client funds had been diverted into a range of property investments without their knowledge and approval.

How much of it is ever recovered will depend on the value of the underlying properties.

The nature of what went on is vividly described in testimony given to the investigators by junior staff but also by Cassidy and other senior management.

What comes across is an ever increasingly level of delusion and denial. In one incident Cassidy seems to argue the toss with the inspectors as to whether the mandate on some equity funds managed by CHC – and diverted into the property investments without the client’s knowledge – theoretically allowed indirect investment in property.

It is tempting to characterise CHC as just another example of regulatory failure and the regulator did, without a doubt, drop the ball.

In 2009 a member of staff at CHC alerted them to one of the schemes being used to prop up the property plays – a mezzanine bond fund.

The company was told to stop using the €10.5 million fund to bridge property deals and return the money to clients once the deals were unwound. It was also told to increase its capital. But it would appear the regulator did not smell a rat and probe any deeper. The report furnished to the High Court last week is silent on the matter as it was not part of its terms of reference.

The regulator, however, has some explaining to do and given its track record over the period we must fear the worse. One thing is certain and it is that the issue will not go away. A group of 100 investors have already identified the regulator as a possible mark if their money is gone, judging by a statement issued on their behalf by a PR firm last Friday.

You would be slow to rush to the defence of the regulator but on reading the High Court report you really do have to wonder if anyone would have rational grounds to have suspected the scale of what was going on at CHC.

In a similar vein: Is it reasonable to expect the regulator to detect these things in a company where the culture of deception runs so deep that the true identity of its backers is kept secret? One of the more amazing revelations in the report is that John Caldwell was a silent partner in the company controlling up to 25 per cent of the business before being bought out in 2007 for €2 million with clients’ funds.

Caldwell, a Dublin solicitor, was identified by the Mahon tribunal in 2004 as the beneficial owner of the “Jackson Way” lands in Carrickmines in Dublin which were the subject of a controversial rezoning in the 1990s. Later this year the tribunal is to report on allegations that bribery was involved.

Cassidy told the investigators he did not like Caldwell or trust him but seems to have had little problem with him as a shareholder or concealing his involvement from the 1,500 clients whose €1.15 billion he managed.

Any regulatory system other than one that presumed everybody was guilty until proven otherwise will struggle to deal with individuals and organisations that are fundamentally dishonest. And perhaps the really interesting question here is whether or not CHC was an aberration or symptomatic of some wider issue.

It is a question that you keep coming back to in the wake of Anglo Irish Bank and all the other scandals of recent years. Is there a systemic problem with ethics and the business culture that has evolved here over the past few decades?

It is a hard question to answer. But the very direct connection between the collapse of CHC and wallets and pensions of 1,500 of the country’s most eminent professionals and business people might mean that its one that gets taken a bit more seriously.