Another Anglo mess to be unravelled?

Sunday, May 29, 2011

By Kathleen Barrington

A senior businessman took time out from his hectic schedule last week to explain to me what he considers to be the ‘‘multiple conflicts of interest’’ that Anglo Irish Bank has in its dealings with private investors, through its wealth management division.

The executive, who spoke on condition of anonymity, was one of a number of investors who, in 2006, invested between €500,000 and €1 million in Anglo’s European Geared Property Fund.

The fund ultimately raised about €1.3 billion in equity and borrowings to acquire property in Britain, Ireland, Belgium, Germany, France and Romania, some of it developed by Anglo’s own Irish developer clients.

The businessman has now been told that his investment is worth about 28 per cent of the amount he invested.

So anyone who invested €1 million in the fund has seen €720,000 wiped off the value of the investment. If the €1 million was borrowed from Anglo, the loan remains to be repaid even though the assets in the fund have plunged in value.

Investors lost even larger sums in other investments touted by Anglo’s private banking and life assurance subsidiaries.

Last year, The Sunday Business Post reported that people who bought into Anglo’s Select Geared Property Fund, opened in 2007, had seen 97.5 per cent of their investment wiped out.

The businessman says many of the properties backing the two funds were sourced from property developers who were some of Anglo’s biggest borrowers.

‘‘As a result of the continuous stream of publicity from the courts, it is now apparent that most of the properties were bought from, or with, clients of the bank. Since then, it has become obvious that those clients were in serious trouble at the time. Some have been declared insolvent,” he said.

The businessman says he understood that when he invested in the European Geared Property fund in October/November 2006, he was investing in properties that had already been secured by the bank up to 18 months previously, and that they had increased in value since.

He shows a handwritten note from Anglo Irish Private Banking, in which the executive promoting the fund writes:’ ‘Give me a shout when you have had a chance to review. A considerable number of the properties are substantially in the money having been secured 6-18 months ago.”

He believes this claim was misleading, as subsequent documentation showed that the vast bulk of the properties were acquired after 2006.

The businessman also says that about a year after he invested in Anglo’s European Geared Property Fund, he was offered a loan facility to invest in the Select Geared Property Fund.

He says that he told Anglo that he did not want to participate in the second fund, as he thought the valuations of the properties were too high.

‘‘I was astounded some time later to discover that the European Geared Property Fund had, in fact, bought at least one of those properties which were part of the Select Geared Property Fund that I had refused to invest in,” he said.

The businessman raises a number of serious questions, such as whether the interests of the investors in the fund were being adequately protected by the wealth management division, in circumstances where the equity the investors were putting up may have had the effect of bailing out the bank and/or its clients.

Anglo strongly rejects the idea that a conflict existed.

‘‘The vast majority of the properties in the European Geared Property Fund [EGPF] were bought on the open market from third parties, in conjunction with - not from - the relevant joint venture partner,” the bank said in a statement.

‘‘In a small number of cases, Anglo bought from the developer on pre-agreed contractual terms when the site was being developed.

"Importantly, in those instances, investors were not exposed to development risk as Anglo contracted to buy the finished building only, thereby removing development risk from the EGPF. The intention of the bank was not to have development risk in the fund.”

Anglo also insisted that the European Geared Property Fund was marketed in a fully transparent way.

‘‘All clients were made well aware, during the equity raising period, through the fully disclosed information contained in the fund brochure that Anglo provided senior debt and temporary equity bridging finance for the projects in question.

The full extent of Anglo’s relationship with all parties, including developers and JV Partners, was made very clear to all potential investors,” it said.

Anglo also said the brochure included a clear statement of all fees, expenses and costs associated with the acquisition and management of the fund and underlying properties.

It said that ‘‘all investors have had, and continue to have, the right to come into the bank and review all documentation related to the fund and each of the underlying properties’’.

The brochure, seen by this newspaper, did make absolutely clear that the charges would have wiped out 29 per cent of the investor’s initial investment at the end of the first year.

The figure assumed no rental income and no change in the capital value of the properties in which the fund invested, though in practice investors would have been expecting rental increases and rising property values.

The charges were large because there were so many advisers feeding at the investors’ trough.

The typical costs included fees for agents, surveyors, valuers, lawyers and tax experts, and a slice for the taxman in the form of stamp duty, capital duty and Vat.

The documents reveal that investors paid between 1 per cent and 1.5 per cent to the fund’s joint venture partners for originating and structuring the transactions. This fee was calculated on the gross property value. Anglo’s offer documents also show that the bank charged loan arrangement and other fees, equivalent to about 1 per cent of the amount borrowed.

It is true that Anglo informed investors that the investments were high-risk. In particular, the Anglo documents clearly warned about the dangers of borrowing to invest. It noted that a fall in the capital value of the investment of 20 per cent would reduce the value of investor equity to zero.

Some of the investors have hired solicitors LKG to examine whether there is the basis for taking a case that Anglo’s wealth division was either incompetent or failed in its fiduciary responsibility to its customers.

At the time of writing, the solicitors had been contacted by 15 disgruntled investors after the firm placed an ad in a national newspaper.

It remains to be seen if there is any basis for taking legal action, and whether the investors will show willing to throw good money after bad.
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