A number of transactions involving former Irish Permanent chief executive Mr Edmund Farrell were devices used by him to extract large sums of money from the former building society, the High Court was told yesterday.
Mr Justice Geoghegan was hearing the opening of a number of actions taken by the Irish Permanent plc which are expected to last at least 12 weeks.
The defendants are Dr Farrell and his wife Zora, of Grasmere, Westminster Road, Foxrock, Co Dublin; Mr Kelvin Smythe, a financial consultant, of Sydney Avenue, Blackrock, Dublin; and Quasar Corporation, which is incorporated in Delaware and described as financial consultant to Irish Permanent.
When the case opened on Tuesday, a claim against Dublin solicitor Mr Stephen MacKenzie, who had acted as a legal consultant to the society, was settled. The Irish Permanent was withdrawing all allegations against him.
In court yesterday, Mr Paul Gallagher SC, for Irish Permanent, said there were five transactions which came under scrutiny in relation to Dr Farrell. The Irish Permanent's case was that each of the transactions was a device used by Dr Farrell to extract large sums from what was then a building society, he said.
The first of the transactions, Drummond, related to events in 1986 and was modified by the Veraldi transaction of 1987, Mr Gallagher said. In the same year the Grasmere transaction took place, Grasmere being the name of the home belonging to Dr and Mrs Farrell at the time. In 1990 there was the Utrecht transaction which related to a holiday home on Lough Corrib.
In that transaction and the Restrictive Covenant transaction, Mr Smythe and his companies were involved, counsel said. Mr Gallagher said the Utrecht transaction was clearly fraudulent. It was an attempt to disguise a payment to Mr Smythe's company, Trivo, when the true purpose was to purchase a holiday home at Lough Corrib, Co Galway, for Dr Farrell.
The Restrictive Covenant transaction was a device probably thought of by Mr Smythe as a means of obtaining a substantial sum of money from the society in 1991 to enable Dr Farrell repurchase Grasmere from the society.
The Utrecht and Restrictive Covenant transactions took place against a background where Mr Smythe had contacted a director of the society, Mr Enda Hogan, in 1990. Mr Smythe had asked that the society make a payment of £2 million to Dr Farrell. That was not done but £100,000 was extracted through Trivo and, through foreign bank accounts, it came back into Ireland to purchase the Lough Corrib property.
The court was told that Dr Farrell qualified as a medical doctor in 1971 and joined the Irish Permanent the following year. He became a director in 1974 and managing director a year later. Mr Gallagher said Dr Farrell was in a unique position from 1979 when the then board of directors approved a service agreement under which, "quite extraordinarily", it was agreed to engage him as managing director until December 31st, 2012.
He was to continue unless the agreement was terminated by either side who must give six months notice. His salary was £45,000 per annum and was index-linked with a discretion allowing the board to give greater in creases. The evidence would be that from the 1980s until his dismissal in 1993, Dr Farrell spent a large part of the time away from the society, Mr Gallagher said.
During this period the society expanded greatly and ultimately became the foremost building society in the State.
Mr Gallagher said the extraordinary nature of Dr Farrell's agreement with the society formed the backdrop to what occurred in 1986 and the Drummond transaction. He opened documents relating to Irish Permanent's allegations against Dr Farrell in the Drummond transaction and referred to an actuarial exercise reducing his then salary of £160,000 to £60,000. It showed the compensation which would be paid to Dr Farrell under the scheme would be £1.33 million.
Mr Gallagher referred to documents from Dr Farrell to a company in the Isle of Man confirming he wished to resign his present position with the society and was at the time considering changing his residency from Ireland and becoming a consultant.
Mr Gallagher said Dr Farrell decided to resign from the society in 1986, give up all his rights without any compensation and trust the society would enter into a new contract with him. Notwithstanding his resignation, in April 1987, Dr Farrell's annual salary was stated to be £140,000. Having resigned, Dr Farrell wrote to the society's secretary, Mr George Treacy, informing him he was contracting his services to a management company, which the Irish Permanent could only assume was Drummond.
Another actuary's report was prepared, seeking advice on the capital value of pension rights on a salary reduced from £160,000 to £60,000 from June 1986. This involved a capital sum that could be paid to Dr Farrell.
Mr Gallagher said the court would find that throughout this period Dr Farrell was "obsessed with secrecy". At the time (1986), the emoluments of directors were returned as a lump sum and it was impossible to know "who got what". Legislation was intended to be introduced in 1986 requiring the disclosure by building societies of fees paid to each director. It was introduced in 1989.
Mr Gallagher said it was feared the public would learn of this "extraordinary deal" which Dr Farrell had with the society. The legislation imposed restrictions on a society entering into transactions with directors without the approval of members. A legal opinion was received, although not followed. The problems in relation to taxation were identified. Dr Farrell resigned in 1986 but the disclosure required under the Building Societies Act was never made, apparently on the basis that at the time, he was not a director, although he was subsequently co-opted as a director after the arrangements were put in place.
Mr Gallagher said as a result of being co-opted as director, Dr Farrell should have come up for re-election at the annual general meeting but never did so. He claimed Dr Farrell effectively ceased to be a director. There were two or three occasions on which sums of £150,000 were paid out for the purpose of being given to Dr Farrell. Some of the monies taken out in that way would ultimately be used to buy a condominium in the US.
A tax device was half implemented. Gilts were purchased. If one bought gilts in Ireland, one could take them to a London broker and have them sold, thereby getting the monies out of this jurisdiction, he said.
Further correspondence showed that in July 1986, the board requested Dr Farrell to defer his resignation for some months. Having apparently entered into a contract in May 1986, Dr Farrell could not be managing director of the society without breaching that contract. He was not in constant attendance, yet at the end of the year he was paid his full salary as if he had never gone and as if there had been a reduction in his salary.
Discussions took place in the Isle of Man on July 30th, 1986, in relation to the Drummond scheme, Mr Gallagher said. Present at the meeting were Dr Farrell and three others. The meeting was "farcical" and there was a "pretence of negotiations". A private aircraft was hired to go to the Isle of Man for the purpose and was paid for by the society. It was purported to give Dr Farrell 26 years earnings in one capital sum but they were getting a contract of service from him for 10 years. Apart from the incongruity and absurdity of paying in advance for 26 years service, all the society was getting in the best view was a commitment for 10 years, Mr Gallagher said.