The unequal allocation of deals amongst customers by investment managers was a fact of life in the period covered by the Faldor scandal, according to a former employee of AIB Investment Managers (AIBIM). Colm Keena reports

"If we bought say 50,000 shares in the morning at a certain price, it would be later in the evening when we would allocate the shares and, in the meantime, the value of the shares could have gone up. It was as crude as that."

Investment companies such as AIBIM would look after a large number of accounts, some of them belonging to individuals, some belonging to groups of individuals and some belonging to pension funds or other such financial entities.

Investment experts would buy a lot of shares in a particular company because they considered them a good buy and later decide which of their customers to allocate them to.

In the 1980s and early 1990s, when there were no laws governing the issue and computers did not do such work automatically, the individuals handling these transactions had the power to confer favours. This applied in AIBIM and in other such companies.

"Say if I buy the shares in the morning and then the price goes up, I might give you the ones that were bought earlier in the morning, and give ones bought later in the morning, when the price had already gone up a bit, to someone else.

"Or I could give you the ones that were bought early in the morning before the price started to come down. The shares, remember, were not paid for until a few days later.

"It was as crude as that and, because it could be abused in the way we are discussing, because some funds were disadvantaged in the way we are discussing, the situation was changed," according to the source.

If the shares were bought and sold within a day or two, then the allocation would involve actual profit.

A directive from the EU in the mid-1990s made all member-states introduce new laws to cover the issue. In the Republic, the Investment Intermediaries Act was passed in 1995 and, a year later, a regulation under the Act laid down rules for deal allocations. The new act also introduced regulation of investment intermediaries, such as AIBIM, for the first time. And 1996 was the year the Faldor account at AIBIM was closed.

"There are very rigid rules now and the deals are allocated directly and you can't wait to see how the stock will go," said the source.

"Back in the 1980s and early 1990s, people were aware of the power they had, and they would have used it, but what is being alleged now about AIBIM is very troubling and it would have been seen as very troubling back then.

"Everyone would have recognised that you could not favour investors from inside the bank over clients from outside."

Rather, the power available to the investment executives was used to keep customers happy, according to the source.

"The more demanding and more capable client would get the advantage. You have to remember it is a competitive business. People who were keeping a closer eye on their account would get the bulk of the favours.

"Or if someone had had a bad year you might try to make it up the following year. But favouring an internal group of executives over outside clients would have been seen as a very bad thing."

AIB, in its statement to the media last week, said no client of AIBIM had been disadvantaged as a result of deal allocation practices which benefited the account involving the British Virgin Islands company Faldor.

While it is clear that AIBIM operated an account involving an offshore company, the beneficiaries of which were senior executives of the bank, there are a number of aspects of the overall affair that still need explaining.

One of the most intriguing is the announcement by the bank that it has identified "taxation consequences arising from some of the practices identified [in its inquiries\]. These amount to approximately €800,000, including tax, interest and penalties, which AIB will underwrite."

The bank has said this liability has nothing to do with the Faldor account. As well as the Faldor account, the investigations also revealed there were AIBIM accounts belonging to a further five executives, three of whom are still with the bank, and concerning which there were tax issues.

The €800,000 liability includes a small element of a possible liability linked to one or more of the former executives. What the rest of it pertains to is not at all clear and is the one item of the whole affair about which the bank is refusing to talk. It has said there are legal reasons for it not wanting to discuss the matter.

Revenue sources say the matter is too sensitive for it to even give guidance on the general issues involved.

Somehow the bank, when examining the allocation practices that existed in the period prior to 1996, came to the conclusion that the tax liability existed. The fact that it has underwritten this liability rather than paid it off, could be seen as suggesting there may be some question as to who exactly is responsible for the tax.

However, sources have indicated that the liability does not arise from practices by the bank that led to tax liabilities for clients and of which the clients were unaware.

As already noted, Mr Scanlon has said he did not know his money had been lodged to a British Virgin Islands investment company.

In his statement to the media he referred to the issue of tax. "Though we [Mr Scanlon and his wife\] may have had a cause of action against AIBIM in respect of the tax liability arising from its management of this investment, in light of my long-standing and valued relationship with AIB, we decided not to pursue such a claim and made full payment to the Revenue Commissioners in respect of tax, interest and penalty liabilities."

If the €800,000 liability is not connected to former clients of AIBIM, then another possibility is that it is a result of something AIB did with its in-house accounts - in other words, how it invested its own money.

However, if that was the case it is not clear why the bank would not simply pay the liability instead of saying it had underwritten it.

Clarity on the issue will no doubt emerge in time.