What happened at Custom House Capital? Part 2

This is part two of out blog on what happened at Custom House Capital. Part 1 can be found here.

Ponzi Scheme

Mister Justice Gerard Hogan described Custom House Capital as “a sort of irish ponzi scheme”. Money was taken from clients accounts to pay fees, commissions, buy shares in Custom House Capital, pay French, German and Spanish banks as well as other clients who looked to redeem their accounts.

• Question to Harry Cassidy “Are you aware of or have you authorised the use of client assets or deposits in bank accounts for held-for clients to be used as security or collateral against any of those loans those banks might have been providing to the SPV’s?

Harry Cassidy: “There is one…the total is either €7.6m or €7.8m…We needed it to complete on a property known as Alliamanic…we were looking to see if we could we again bridge the equity that we hadn’t raised…they asked us if there is some asset that we could provide and we have a portfolio that is with Barclays Capital. So we transferred the deposit from that into Hauck & Aufhauser and they gave us a back to back facility, circa 80%, and then that cash was then put into the and, when the property is sold, we will repay the bank and then they will repay us the deposit.”

• A property known as Jardín D’Osaka was sold in approximately April 2010. At the time that the report was written in October 2011, there is no evidence as to where the proceeds of that property sale went. It is suspected that the money was used for the Alliamanic fund in Germany.
• Client 13 believed he had approximately €1m in his ARF. In reality, he only had €6,900. His funds were invested in a property. When he sought repayment of his funds, they were taken from an equity fund.
• €150,000 transferred from a pooled fund to  to cover a payment to a stockbroker for a client.
• €80,000 taken from pooled funds to a bank for a bond. The client thought his money was in cash when it was invested in a property.
• €295,000 to a bank for a deposit.
• €305,053 transferred to a Euro account.

The Mezzanine Bond Fund

In February 2009, the Central Bank received information that clients’ monies were being invested in a Mezzanine fund without their knowledge or consent. The information the Central Bank received was that not all of these were discretionary clients, so Custom House Capital did not have a mandate to invest on their behalf.

This Bond was being used by Custom House Capital to provide loans to leveraged property deals they had entered into. The idea was that the money would be repaid with interest over a 5 year period as new investors were found and properties were sold.

On receipt of this information, the Central Bank imposed the following directions on Custom House Capital in March 2009:

• Custom House Capital was required to state the financial position of each syndicated SPV, identifying current valuations compared to valuations at the time of purchase and any shortfalls in equity being raised.
• Directions given that no more monies were put into the Mezzanine Bond Fund and when bridging finance was no longer required, these monies would be returned.
• Custom House Capital  increase their regulatory capital requirements to €5m to cover potential liabilities under the Mezzanine Bond Fund.

In April 2010, the Central Bank also requested that Custom House Capital obtain an independent third party guarantee in relation to this Bond which was done in May of that year. They also told Custom House Capital to segregate any returns from that Bond and not to make any payments out of that account.

The audited financial statements of Custom House Capital for the year ended March 2010 included a note from the director’s that the maximum liability of Custom House Capital on foot of guarantees given for a Mezzanine Bond Fund was €16,558,349 in 2009  and €15,800,709 in 2010. But in the event of a default, the contingent liability would be €3,867,833.

In their report, the Auditors questioned the ability of the company to continue as a going concern.

It was not until two years after the initial reporting of Custom House Capital to the Central Bank, that they issued letters to Custom House Capital and Harry Cassidy outlining alleged contraventions of regulatory requirements relating to the sale of the Mezzanine Bond to clients.

As of the time of the writing of the report in October 2011, €10.4m (exclusive of interest) is owed to Mezzanine Bond investors.

Client Mandates

A regulatory requirement is that investment firms establish and maintain records that include the documents agreed between the firm and its clients that sets out both their rights and obligations.

Sworn testimony was given that Custom House Capital did not maintain adequate records with regards to clients mandates, some were blank and not signed. The practice of deliberately manipulating records for the purpose of issuing misleading client statements suggested that some transactions were without the clients consent or knowledge.

On 18 June 2010 and again on 17 June 2011, the Central Bank instructed that Custom House Capital were not to conduct any transactions on behalf of clients without the prior completion of a written confirmation by two people designated by the Financial Regulator. Those people being senior people in Custom House Capital.

After those instructions were given, the Compliance Officer confirmed that transaction packs received for review were often returned due to insufficient information to determine that the transaction was suitable to the client. In these cases, the transaction should not receive approval to proceed.

The Central Bank’s instructions for the completion of transaction packs prior to any transactions were often ignored, with transactions for millions of euro being completed without packs, with the senior people in Custom House Capital being the ones circumventing the Central Banks instructions. In the case of the high risk Mezzanine Bond Fund, just one transaction pack was completed.

Joint Bank Account & Ownership of Custom House Capital

In the course of their investigation, KPMG found a joint account in Luxembourg in the names of Harry Cassidy & John Mulholland. At least 12 payments were made from pooled client accounts either directly or indirectly into this account. A total of €2.317m was transferred from Custom House Capital  client accounts into this joint account and €2.415m was transferred out of it.

John Mulholland explained that this money “were additional fees or commissions that would have been earned as a result of securing investments”. He did not adequately explain why these commissions were paid to himself and Harry Cassidy and not to Custom House Capital. The records for these payments were found on the home computer of the Head of Finance and not on the Custom House Capital server.

All but one of the payments into the joint account were almost immediately paid out to an account in the Isle of Man held in the name of John Caldwell (of Flood Tribunal fame). One of the payment instructions stated “This represents a payment being made for the buyback of shares in respect of a company (The European Pensioneer Trustee Company Limited). Shares are currently held by the above beneficiary to whom payment is being made. This payment is the third of four installments which will be made over the next 18 months”. A total of €2m was paid to John Caldwell.

The Inspectors could not locate a record of John Caldwell appearing as a shareholder of either The European Pensioneer Trustee Company or Custom House Capital. As is required, the Central Bank were not informed of John Caldwell’s shareholding either.

The Inspectors are satisfied that €500,000 of the €2m transferred was for shares in EPT and the other €1.5m was for shares in Custom House Capital. The other €415,000 was paid to purchase a property in Tenerife for John Mulholland. This money was paid from clients accounts and not from Custom House Capital’s  company accounts.

The Central Bank shut Custom House Capital down in July 2011.

What happened next?

The Inspectors report was issued almost 3 years ago, in October 2011. What has happened since?

• There have been 479 compensation claims under the ICCL amounting to €6,826,305. The maximum payout under this scheme is just €20,000. Considering the average amount owed by those being pursued by Bank of Ireland is €250,000, this compensation is little comfort.
• Those who have money invested in Custom House Capital do not know what is happening with their money.
• The liquidator, KPMG, wants the investors to pay their liquidation fees as well as legal costs.
• The matter of the Custom House Capital is listed for mention in the Examiner’s Court today, 1 September 2014.
• One of the directors of Custom House Capital is still authorised by the Central Bank to operate as a financial advisor.
• Nobody has been charged for what happened in Custom House Capital.

If you have any questions, please contact me directly at steven@bluewaterfp.ie