The "cavalier" ethos and attitude displayed by Anglo Irish Bank in promoting and managing an investment fund for two hotels in New York "readily explains how Anglo single-handedly brought this country to the position it finds itself in", the Commercial Court was told today.
A "Black Brochure" given to 50 high net worth Irish individuals in September 2006 aimed at encouraging them to invest in the hotels fund failed to disclose key risks involved and amounted to "conscious and deliberate dishonesty", one of those investors, Gerard McCaughey has claimed.
The brochure estimated the hotels renovation costs at some $25 million but these turned out to be $103 million which was well beyond the fund and led to works being halted, it is claimed.
Martin Hayden SC, for Mr McCaughey, handed in a copy of that brochure to Mr Justice George Birmingham yesterday. There might be others "in a box" in Anglo, "along with the golf balls", counsel remarked.
He was opening Mr McCaughey's action against Anglo Irish Bank and the Anglo-owned Delaware-based Mainland Ventures Corporation (MVC) over the Anglo Irish New York Hotel Fund, a private equity investment in which 50 people invested an average $ 1 million each in 2006.
The action by Mr McCaughey, with addresses at Sandymount, Dublin and Manhattan Beach, California, is regarded as a test or "pathfinder" action for cases by 23 other investors and is expected to last six weeks.
Both defendants are being sued for $23 million dollars over alleged fraudulent and/or reckless concealment and/or misrepresentation concerning the fund, set up to purchase and renovate the Beekman Tower Hotel and Eastgate Tower Hotel in Manhattan. The claims are denied.
Today, Mr Hayden said the issue in the case was the manner and fashion with which Anglo brought this project to the investors and how the project was arranged by Anglo Irish Private Banking with its New York office. MVC was formed by Anglo to hold its interest in the fund in a "very sophisticated manner" to avoid any regulatory supervision of the brochure, counsel said. Anglo accepted Irish law applies to the case, he added.
In 2006, Anglo was perceived as a "quality" institution with unparalleled expertise in a position to especially help individuals with wealth management, counsel said. It had a division for private banking, which was "all the vogue" in the Celtic Tiger years, involving a highly specialised process whereby the "chosen" would be given an opportunity to invest in very select projects.
None of these investors had ever seen the hotels and did not know the persons in the US who brought the project to Anglo in New York, he said.
The court heard the project involved the purchase of the two hotels with the intention of renovating them. Mr Hayden said Anglo made a non-binding bid for the hotels in March 2006, paid a non-refundable deposit of $11.5 million in May 2006 and by July 2006 had committed to a contract to acquire the hotels.
In late July 2006, it had no investors but was commited to a process whereby it had to get $50 million equity for the fund by September 2006. The investors were procured via the black brochure and told there would be a return of between 17-20 per cent, counsel said.
Mr Hayden said Jason Drennan, the central person promoting the fund in Ireland for Anglo, would tell the court he was under "huge pressure" to raise the $50 million.
The court was told difficulties arose because original renovation cost projections increased very quickly and by 2009 were $103 million. There was a failure to factor in the fact one of the hotels was built in 1928 and the other in 1972 and would involve different renovation requirements, counsel said.
The final renovation costs were not viable so Anglo was "caught in a bind" and could not raise that money from the investors, counsel said.
Mr Hayden said the bank failed to tell the investors anything throughout 2006, 2007 and most of 2008 about problems being encountered and was giving them quarterly reviews suggesting all was well when something was "clearly rotten".
That situation continued until December 2008 when Mr McCaughey decided to visit the hotels during a family holiday in New York. It was then he learned from one of the US individuals who had brought the project to Anglo that Anglo had directed in June 2008 no further works should be carried out on the hotels, counsel said. That was the first notification to the investors there was a problem.
Mr McCaughey made further inquiries and discovered the two hotels did not have the necessary certificates of occupancy under the New York planning code, counsel said. That was not set out in the investment brochure which also did not state there were some long term sitting tenants in the hotels.
Mr Hayden said the desired certificates of occupancy cannot be obtained until the renovation works are carried out but remain halted.
The brochure also provided for an interest rate capping strategy but Anglo had instead carried out an interest swap which had the effect of costing the investors $7 million, counsel said.
Persistent attempts by Mr McCaughey from December 2008 on to get information from Anglo proved unsuccessful for some time, counsel added. Mr McCaughey believed he was being told "barefaced" lies by officials and that Anglo had portrayed him as a difficult person "stirring up angst".
