Drumm on back foot as Anglo ratchets up pressure

ANY PROSPECT of former Anglo Irish Bank chief executive David Drumm walking away from bankruptcy and debts of €10 million – including €8.6 million of loans due to his former bank – were dealt a double blow late on Wednesday.

In separate complaints filed with the courts in Massachusetts, Anglo, which is pursuing Drumm over his loans, and the independent trustee appointed by the court to oversee his bankruptcy, both objected to him being given a fresh financial start.

Anglo and the trustee, Boston lawyer Kathleen Dwyer, outlined a litany of allegations, arguing that Drumm should be denied a discharge from bankruptcy that would clear his finances and allow him to walk away debt-free.

The complaints are a game-changer for Drumm and will more than likely prolong what has been a gruelling process that began in October 2010 when he filed for bankruptcy in response to Anglo’s pursuit of his loans.

A judge in the bankruptcy proceedings will now consider the allegations and determine whether Drumm should be discharged at a trial where he would have to respond to each of the allegations.

Bankruptcy in the US, while more lenient than in Ireland, is severe when it comes to the disclosure of an individual’s financial dealings.

“It’s like getting naked in public,” said one source close to the process.

Drumm was grilled by Dwyer at six creditors’ meetings between November 2010 and August 2011, while Anglo directly examined him during two lengthy depositions in February and March.

The allegations made by Anglo and Dwyer centre around the testimony given by Drumm during those many hours of questioning.

Drumm faces allegations, which, if proven, pose serious consequences for him.

Attempts to contact Drumm for his response to the various allegations have proven unsuccessful.

Anglo claimed that he lied repeatedly under oath during the proceedings, denying any involvement or knowledge in various aspects of three matters under investigation at Anglo:

- the concealment of Seán FitzPatrick’s loans,

- loans to Anglo directors,

- loans to Maple 10 investors gathered by Anglo to take a 10 per cent stake held by Seán Quinn to prop up Anglo’s share price as the stock was plummeting in the growing financial crisis of 2008.

More damaging for Drumm in the context of the bankruptcy case are the allegations made by the bank and Dwyer in relation to his testimony concerning his financial affairs in the bankruptcy process.

Drumm “testified falsely” and engaged in a pattern of conduct to conceal from and defraud Anglo, Dwyer and other interested parties, the bank claimed.

In her complaint, Dwyer claimed that Drumm failed to disclose transfers of property, materially understated the value of assets and concealed property.

Drumm “knowingly and fraudulently made numerous false oaths and accounts”, Dwyer said.

A judge will now have to decide whether the claims of the bank and the bankruptcy trustee merit a high-profile bankruptcy trial at which Drumm would have to account for his alleged actions.

If the court fails to discharge him, he could be left in bankruptcy for many years, leaving him vulnerable to further investigations by Anglo and other creditors, and limiting any income he earns for many years, possibly for the rest of his life, until his debts are repaid.

Bankruptcy in the US is set up to give a fresh financial start to the “honest but unfortunate debtor”.

Anglo said Drumm’s “well-established pattern of concealment, deception, manipulation, falsehood and intentionally fraudulent behaviour” – during his time as its chief executive and in the bankruptcy case – “contravene the intent and spirit of bankruptcy”.

The allegations by the bank and by Dwyer shed further light on matters under investigation at Anglo and Drumm’s personal financial dealings as the bank was crumbling in 2008 and after he resigned, leaving Ireland for his new home in Boston.

Drumm’s concealment and fraudulent acts were “a desperate attempt to avoid serious financial risk” to himself, other executive directors at Anglo and favoured investors in the Maple 10 transaction arising from Anglo’s collapsing share price.

These acts were “substantial contributing factors” to a loss of confidence in the bank and its nationalisation in January 2009, the bank said.

FITZPATRICK’S HIDDEN LOANS

Anglo claimed that Drumm knew about the “ever-escalating loan warehousing transactions” where FitzPatrick moved them off the books of the bank by taking short-term loans – lasting just a few days – with Irish Nationwide.

The bank said that Drumm became aware of the loans when he became chief executive in 2005, succeeding FitzPatrick.

“He never disclosed the practice to the board of directors or took any action to stop or curtail the chairman’s loan manipulation, although he concedes that it was inappropriate for FitzPatrick to remain as chairman in light of these practices,” said the bank.

In its complaint, Anglo said that Drumm’s “complicity” in the loan warehousing scheme “made possible a dramatic increase” in FitzPatrick’s loans from about €22 million in 2004 to €122 million in December 2007.

Drumm approved an application to Anglo’s credit committee for new loans to FitzPatrick on May 30th, 2007, which increased his credit limit from €75 million to €88.5 million.

On the same day, Drumm approved a credit limit of €11.5 million for one of FitzPatrick’s children as well as the renewal of a joint loan of about €30 million held by FitzPatrick and fellow non-executive board member at Anglo, Lar Bradshaw.

Two months later, Drumm approved another credit committee application, increasing FitzPatrick’s credit limit to €120 million, at which point his borrowings had reached €103 million.

Anglo alleges that Drumm concealed and failed to act to end the annual warehousing practice and that his failure to disclose the full extent of these loans “constituted serious misconduct”.

“As a direct result of Drumm’s concealment and failure to act to end the annual warehousing practice, Drumm authorised or permitted AIBC [Anglo] to extend approximately €98 million in new loans to FitzPatrick from 2005 to 2008 that would not have been made if, in 2005, Drumm had disclosed the loan warehousing and taken appropriate steps to stop the practice, such as requesting FitzPatrick’s resignation,” Anglo said.

The bank said that if Drumm had fulfilled his duties, FitzPatrick would have resigned earlier and no further loans would have been made to FitzPatrick after 2005.

LOANS TO DIRECTORS

In November 2007, at a time of negative press comment about the bank and volatility in the share price, four directors bought shares with loans from the bank as a show of confidence in the institution.

Anglo claims the share loans to Drumm, the head of Anglo’s Irish business Pat Whelan, head of the UK business Declan Quilligan and head of US business Tony Campbell were provided without contemporaneous credit committee approval or loan documentation.

All the loans were extended on full recourse basis, meaning that the directors were on the hook personally to repay the borrowings.

The bank says Drumm prevented the share loans from being documented when they were made by telling Anglo staff that he wanted to “regularise” the documentation of the new loans and pre-existing loans of the directors.

The bank claims that Drumm did this so he could wait to see how the bank’s share price performed. If Anglo’s share price fell, Drumm “hatched a plan” to document all new directors’ loans as non-recourse “so that he and the other directors would not sustain personal losses”, Anglo alleged.

Anglo says that Drumm repeatedly evaded requests to complete the loan documentation, telling a bank employee reporting to him to put “on ice” or “park” the loan documentation process.

The bank says that on or shortly before September 22nd, 2008 – as the share price was falling in the deteriorating financial crisis – the bank employee received on his desk “an unaddressed envelope”.

The envelope contained a handwritten “mark-up” of a standard loan letter providing that the directors’ loans be documented as non-recourse, meaning the directors were not personally liable.

Anglo said the bank was in severe difficulty at the time following the collapse of Wall Street bank Lehman Brothers, which intensified the financial crisis. The mounting pressure on Anglo at this time led Drumm to appeal to Irish regulators “to issue a statement reassuring the markets that no Irish regulated financial institution would be allowed to fail”, Anglo said in its complaint to the US court.

After the envelope was left on the Anglo employee’s desk, the loan documentation for the four directors was subsequently produced, reclassifying the loans to the directors totalling €18.5 million as non-recourse.

Drumm signed the letters for his own loan of €7.65 million and for the other three directors.

He claimed in testimony that he did not read the loan letters for himself and the other directors and “therefore did not recall the fraudulent non-recourse term”.

The idea that “a sophisticated and experienced lender and chartered accountant and CEO of the very bank making his loan” had never read or had no idea of fraudulent documents was “absurd”, the bank claimed in its complaint.

Anglo said Drumm misused his position of trust as chief executive to control the approval process and the signing of the letters.

The bank also outlined Drumm’s role in another loan under investigation at Anglo – a loan of €8 million to the bank’s finance director Willie McAteer.

As a result of Anglo’s falling share price on September 29th, 2008 – the day the Government agreed the bank guarantee to prevent the collapse of Anglo in the first instance – Drumm approved the non-recourse loan to McAteer.

The loan was provided to repay a similar-sized loan taken out by McAteer from Bank of Ireland, which, as a result of the share price falling, could sell McAteer’s Anglo shares supporting its loan. Drumm argued that the loan had to be made, the bank said.

“Drumm’s approval of the McAteer loan, even if it had been on a fully recourse basis, constituted highly unusual, reckless and imprudent lending, especially in light of AIBC’s liquidity crisis, which made funding for new loans scarce and difficult to obtain in the markets,” the bank claimed.

LOANS TO MAPLE 10 INVESTORS

In July 2008, Anglo gave loans of €45 million each to 10 investors it had approached to take a stake of close to 10 per cent of the bank held by Seán Quinn in a deal known as the Maple transaction.

On each loan, the bank had recourse to the borrower for just 25 per cent of the loans.

By mid-October 2008, two weeks after the bank guarantee, the investors were concerned that the bank’s share price had fallen significantly. Anglo claimed in its complaint to the Boston court that to protect the investors from enforcement on the 25 per cent recourse, on or about October 13th, Drumm and Pat Whelan, who had assembled the investors, agreed to modify the recourse element of the loans.

The bank said that a letter was put in each of the investor’s files amending the original 25 per cent recourse “for the sole purpose of creating ambiguity as to the recourse provision and impairing AIBC’s enforcement of the loans”.

The letters were backdated to July 17th, 2008, and were intended to supersede the original loan letters to the investors of July 10th.

The new letters never went to credit committee for approval. Six of the investors signed and returned the modified letters.

“The sole purpose of the modified recourse letters was to look after the high net-worth customers rather than the best interests of the bank,” Anglo claimed.

DRUMM’S PERSONAL FINANCES

Anglo alleges that in September 2008 “in the event his non-recourse scheme failed” leaving him liable for his loans, Drumm began transferring significant cash from his accounts at Anglo to accounts either held jointly with his wife or exclusively in his wife’s name.

The transfers reached “fever pitch” when Anglo’s fate – and his demise as chief executive – became exceedingly obvious and continued thereafter, Anglo claims. About $1 million was transferred in total and Drumm intentionally failed to disclose these transfers in the statement of financial affairs that he filed in his bankruptcy proceedings in the Boston court on October 29th, 2010.

Anglo said that Drumm only belatedly amended the statements on May 17th, 2011, after counsel for Anglo and the trustee, Kathleen Dwyer, had exposed them during creditors’ meeting on April 1st.

The bank alleged that Drumm “deliberately concealed” the purchase of – and his interest in – the family’s $2.4 million home in the Boston suburb of Wellesley.

Dwyer supported the bank’s claim, saying that, by purchasing the house through a trust, Drumm had concealed the property.

The bank also alleged that Drumm continued to maintain that he was given a loan of $216,800 by his wife, when the bank claims this was money that originated from his earnings and other property interests. (Drumm earned about €13 million during his time at Anglo from 2004 to 2009, the bank said.)

The trustee supports the bank’s claim. Dwyer describes the loan as “fictitious” in her complaint, saying that it was also an attempt by Drumm to conceal property.

Anglo alleges that Drumm devised the “loan” from his wife “as a ruse” to qualify for an “E-2 Treaty Investor Visa” to live in the US and to use the cash in his business accounts as his “personal piggyback to spend on personal expenses”.

Such a visa requires the individual to make a substantial capital investment in the US and “contemplates that the investor provide jobs to United States residents and generate a profit through material commercial activities”, Anglo has claimed.

The bank said Drumm’s business, Harbor Light/Delta “never matured beyond a small, one-person consulting business, with only one client at any given time, and never turned a profit”.

Anglo said “Drumm never developed the business, instead using it for personal spending outside the purview of his creditors”.

Dwyer says that Drumm transferred €682,000 to bank accounts belonging his wife in four transactions between November 3rd, 2008, and December 15th, 2008 – just days before he resigned as chief executive of Anglo over FitzPatrick’s hidden loans.

A further seven transfers totalling $669,000 were made to his wife’s bank account or joint accounts belonging to the couple between June 15th, 2009, and September 28th, 2009 – just weeks before he filed for bankruptcy.

Dwyer said that Drumm failed to disclose the transfer of his interest in a property in Chatham in the resort of Cape Cod and the sale of a Range Rover and BMW.

WHERE NEXT FOR DRUMM?

The former Anglo chief executive faces a daunting task responding to each of the allegations forensically outlined by the bank and the trustee in three court filings totalling 83 pages.

Given the detailed nature of the complaints, a lengthy public trial in the Boston courts is in prospect and Drumm faces further scrutiny of his role in the demise of Anglo and of his personal financial affairs.

It would appear that the events leading to the collapse of Anglo in January 2009 will be subject to a more public investigation in the US ahead of any disclosures in the criminal investigations in Ireland.