The significance of the State's sprawling investigation into Independent News and Media (INM) is suggested in some of the the numbers.
So far the Office of the Director of Corporate Enforcement (ODCE) has been on the case for 22 months. We’re now approaching the end of 16 weeks of court wrangling, across two different sets of proceedings, with a third in the pipeline.
Three different State agencies are either investigating or preparing to investigate allegations of misconduct at INM. More than 40 different affidavits have been filed so far to two different judges by at least 22 different witnesses.
Seven directors have resigned, and the company is on its second chairman and its second chief executive since a steady stream of scandals first broke, including that a list of at least 19 prominent people had private data illegally leaked.
But even as it took Mr Justice Peter Kelly 1½ hours on Tuesday to present his full 76-page judgment on the ODCE's application for High Court inspectors at INM, it became obvious almost as soon as he started reviewing the evidence that there was only going to be one conclusion: send in the investigators fast.
“I am satisfied on the basis of the evidence which has been put before me that a number of incidents [at INM] are suggestive of the conduct of the affairs of the company for an unlawful purpose,” said the judge.
It was an understated conclusion, but potentially damning.
The entry of court inspectors into INM is a pivotal moment in the near two-year drama that has engulfed the company ever since The Irish Times revealed in 2016 that Robert Pitt, its former chief executive, had fallen out with Leslie Buckley, its former chairman and an ally of shareholder Denis O'Brien.
High Court inspectors are not like examiners or receivers: they are not sent in to take control of the business, they are simply investigators.
But Sean Gillane and Richard Fleck, the two lawyers who have been selected to inspect INM, will arrive tooled up with a battery of statutory powers that are the envy of most State regulators, including the ODCE.
They can, with the court’s help, force witnesses to give evidence on oath, which will help cast their investigative net well beyond the officers and management of INM who have hitherto been the focus of the ODCE’s inquiries. O’Brien is almost certain to be interviewed by the inspectors.
Terms of reference
Inspectors can also demand documents from almost wherever they choose, and they have broad authority to pursue anybody they feel might have information relevant to their terms of reference.
With their appointment it feels as if one phase of the the meandering INM saga has ended and another is about to begin. It is likely to take two years. For a stock market-listed business the consequences of having inspectors on board throughout this period are potentially huge.
What will the inspectors be looking for?
In his judgment Kelly has set down the parameters for the inspectors’ investigations, which essentially fall under nine broad headings.
Firstly, Kelly has ruled that they should examine allegations that Buckley oversaw a secret operation to mine the newspaper publisher’s email servers for data on a list of people, including several who had crossed swords with O’Brien.
Secondly, they have been asked to investigate allegations by Pitt and Ryan Preston, INM's chief financial officer, that Buckley pressured them to vastly overpay for Newstalk radio station, which O'Brien was looking to sell in 2016.
Their third remit is to examine disputed deal "success fees" that a former O'Brien board nominee at INM, Paul Connolly and Island Capital – owned by O'Brien – unsuccessfully sought from the business. Pitt refused to pay on the basis that he felt the fees weren't owed.
Next, Fleck and Gillane will examine the INM board’s initial response to Pitt and Preston’s whistleblower complaints about Newstalk, which the ODCE has alleged were inadequate and biased in favour of Buckley.
The inspectors will then examine suspicions that Buckley and O’Brien may have discussed “inside information” about INM. If proven this would be a breach of market abuse rules. Related to this they will also review if Buckley improperly revealed other “confidential information”, including legal advice.
Data breach inquiry
Their seventh term of reference covers whether the ODCE has been deliberately deprived of passwords for protected files relating to the data breach inquiry. They will then assess if any specific laws or regulations were broken.
Finally, the court inspectors will turn their attention to the alleged conduct of some of the “dramatis personae” listed by Kelly on Tuesday.
Specifically the inspectors will examine whether INM has been run to the detriment of some shareholders over others – the ODCE has suggested it may have been run for the primary benefit of 30 per cent shareholder O’Brien – and whether anybody involved engaged in “misfeasance or misconduct”.
Kelly has already stated that he sees the evidence as suggesting that Buckley may have engaged in such “misconduct and misfeasance” in his time at INM. The former chairman, who protests his innocence, is already being sued by the company for his alleged conduct, while it is also likely facing a tsunami of lawsuits from people whose data may have been improperly accessed.
Buckley and INM will, therefore, be acutely aware that an official report of a court inspector is acceptable as prima facie evidence in civil litigation. Fleck and Gillane's findings could provide the ammunition for other guns to fire. The potential stakes for the listed business are huge.
The only real victory this week for INM, which opposed the application for inspectors, was to keep the terms of reference down to single figures. A tenth remit sought for the inspectors by the ODCE – a “roving review” of INM’s corporate governance standards – was rejected by the judge as being too broad.
While the inspectors will likely take until 2020 to complete their work, what will their appointment mean for INM in the short term?
Firstly, it must count the costs. The company has previously cited legal fees associated with the ODCE investigation and a separate independent review as part of an exceptional €2.5 million charge in its 2017 accounts.
So far in 2018 its battle with the ODCE has already cost it at least €1.9 million in legal fees. Now that it has lost its action against the ODCE the legal bill for INM may tick much higher, closer to €3 million.
The last investigation by a High Court inspector of a listed Irish business – energy conglomerate DCC almost a decade ago – cost about €1.2 million directly to conduct. The inspection of INM, which will be more complex and sprawling than the DCC case, will likely cost a lot more. Who bears that cost will depend in part upon the findings of the inspectors, and how they apportion blame for the incidents covered by their terms of reference. The final decision on costs will be taken by the court.
Potential costs
Meanwhile, the potential costs to INM of the expected flood of civil cases over the data breach are at this stage impossible to predict. So too are the costs of a separate investigation by the Data Protection Commissioner, and another likely examination by the Central Bank of the "inside information" allegations.
As part of its unsuccessful attempt to stymie the appointment of inspectors, INM hired a former UK partner at PricewaterhouseCoopers, Kim Green, to compile a report on the damage the company feared the appointment of inspectors could inflict.
Green highlighted that INM’s newspaper circulations, revenues and earnings were all under pressure, and suggested this trend would be exacerbated by the appointment of inspectors. He then cited legal fees as a major cost.
Green then argued that INM would have to hire “specialist personnel” to either replace managers seconded to furnish information to the inspectors or to directly handle the investigators’ requests.
He said INM’s finance team would also have to be beefed up, and that the IT team would be drained of resources due to the constant production of reports and figures for the investigators.
Green also suggested that INM’s borrowing costs might increase due to a perceived rise in lending, although the business is currently debt-free. He also warned management would be hugely distracted and staff morale decimated.
“The additional direct costs imposed on the business arising from the appointment of inspectors would be a substantial further burden, and would cause very significant additional declines in future performance,” said Green.
Murdoch MacLennan, who replaced Buckley as chairman in March, went further. He told the High Court that INM’s “very survival would be jeopardised” by the erosion in market confidence that would follow the arrival of inspectors.
Kelly accepted that appointing inspectors would damage INM, but he rejected MacLennan’s assertion that it could cause INM to go bust. Anyway, the judge suggested, the company has a cash pile of €90 million as a safety net.
The difficulty for INM is that over the last year it has started burning its cash pile. Already it has shrunk by more than €6 million since last summer. With the mounting costs of an inspection, a cash burn could become a cash inferno.
Document-gathering
What are the next steps? A source familiar with how a court inspection process is conducted said Gillane and Fleck would first enter a “document-gathering phase”.
“They will start off by reading everything that was put in front of the court,” said the source. “That will take them weeks.”
Then they will identify “key witnesses”. If they suspect a witness will not co-operate the inspectors can go into the High Court to seek to compel testimony.
“When it comes to witnesses the inspectors will likely go after the low-hanging fruit first. People against whom there are allegations tend to come last.”
The source suggested that the inspectors were likely, at least initially, to liaise most frequently with McCann Fitzgerald, INM's law firm, rather than the publisher itself.
The company will probably try to keep its most senior operational management as insulated as possible from the inspection process, but the source suggested that somebody like INM’s company secretary will most likely be appointed to parse requests.
Kelly has suggested that, given the breadth of issues to be investigated, the inspectors might conduct their investigation and report in modules, much like a tribunal of inquiry. Fleck and Gillane have been asked to provide their first interim report to the High Court by next April.
The inspectors will also have to compile their own team of lawyers and investigative assistants. It is thought by sources to be unlikely that the INM inspectors will seek desks inside the company’s premises.
Because Fleck, at least, is based outside the jurisdiction it is thought more likely that the State may provide the investigation with a temporary premises, with the cost to be apportioned later.
The DCC inspector, Bill Shipsey, produced his final report in 2010 within 18 months of his appointment. The INM process is expected to take far longer, although it will ultimately operate to a timetable set by Kelly.
However long it takes, the process will linger over INM like a cloud until it ends. Depending upon the inspectors’ findings, and of whom they find wrongdoing, if anyone, the repercussions of Kelly’s decision this week could yet go further.
