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BFCSA: Shock twist in bank cartel case ACCC regulator’s case against Citigroup, Deutsche Bank, ANZ

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Shock twist in bank cartel case

Australian Financial Review Mar 22, 2019 12.15am

Chanticleer (Tony Boyd)

 

Panic and pragmatism in equal doses are part of the intriguing back story behind the competition regulator’s case against Citigroup, Deutsche Bank, ANZ Banking Group and six senior bankers for alleged criminal cartel conduct.

The case, which stems from a $2.5 billion capital raising by ANZ in 2015, passed a key milestone this week. On Wednesday the Commonwealth Director of Public Prosecutions emailed a statement of facts to the accused, almost 10 months after they were charged.

Now, local court magistrate, Jennifer Atkinson, has to complete a committal hearing before referring the case to the federal court for a trial by jury, probably in the middle of next year.

Chanticleer has learned from senior banking sources that JPMorgan, which has been granted immunity against prosecution, went into panic mode after it sought external advice on the legal implications  of its involvement in the ANZ capital raising.

The bank wanted to know if there were any breaches of competition law.

The panic started when JPMorgan was told by the leading legal firm that it was conflicted and could not provide advice. This sent a message that another party involved in the deal potentially had the same concerns as JPMorgan about possible breaches of competition law.

JPMorgan then turned to Australia’s leading competition lawyer, Gina Cass-Gottlieb at Gilbert + Tobin, to get advice on the competition issues. The firm’s managing partner, Danny Gilbert, refuses to comment on anything to do with the cartel case.

But it was after receiving this advice that JP Morgan went to the Australian Competition and Consumer Commission to secure an “immunity marker”. The marker was a formal notification of JP Morgan’s intention to take up immunity against prosecution at a later date. Under competition law only one member of a cartel can get immunity.

This is where the pragmatism comes in. Why would a rational banker turn down a free and exclusive option to protect themselves against prosecution? Also, why would a rational banker turn down a free option which, when exercised, would have no material negative commercial consequences?

More than three years after JP Morgan turned its “marker’ into full-blown immunity there has been little impact on its market share in investment banking and equity and debt capital markets. It remains a respected member of a tight-knit group of banks which regularly work co-operatively and happily poach staff from each other.

JPMorgan chairman Rob Priestley refuses to comment on the cartel case. Priestley stepped down from the boards of the Future Fund and the ASX following publication of the criminal cartel charges against six other bankers – Rick Moscati, Stephen Roberts, Itay Tuchman, John McLean, Michael Ormaechea and Michael Richardson.

Before canvassing the legal barriers to proving criminal behaviour beyond a reasonable doubt, it is worth retelling the key facts.

The capital raising started on the night of Wednesday, August 5, 2015, when ANZ group treasurer Rick Moscati approached Citigroup, Deutsche and JP Morgan to be joint underwriters and lead managers of the $2.5 billion placement.

Under immense pressure

Moscati told the three banks they could join the transaction on his terms (a share price of $30.95) or not at all. They had one hour to make a decision.

Moscati was under immense pressure to get the deal away. In the lead up to the transaction ANZ’s chief executive Mike Smith had argued against raising more capital but the board, led by David Gonski, demanded a bigger buffer of equity.

But the bank totally misread the market.  By Thursday night it was obvious institutions had baulked at the price and underwriters were left with $789 million in stock.

The charge sheet says the three banks and the six bankers gave effect to a cartel provision on several occasions starting with a conference call on the morning of Friday, August 7. The allegation is the parties agreed to restrict the supply of goods and services, namely shares in ANZ, in order to directly or indirectly maintain the price of ANZ shares.

Later on that Friday afternoon there was a relatively trivial share trade which would normally go unnoticed. JPMorgan crossed 500,000 ANZ shares to Perpetual Investments.

The transaction was worth about $15 million, which is small relative to average daily turnover in the stock of about $250 million to $300 million. But it quickly came to the attention of the JPMorgan compliance department as well as Citi and Deutsche.

At a conference call meeting on Saturday morning, August 8, Citi raised the issue as to why JPMorgan had traded stock in principle on the Friday afternoon. It was not a crime to do this but it breached the obligation imposed on stockbrokers and investment banks to disclose when trading shares in principal.

Citi and Deutsche were concerned that JPMorgan had not done the right thing by the client, ANZ. But JPMorgan said it was a mistake that the contract note on the trade with Perpetual did not include notification that it was a principal trade by JPMorgan.

Compliance at JPMorgan voluntarily reported the breach to the Australian Securities and Investments Commission. Later, the issue was escalated to senior bankers in Hong Kong.

Extremely difficult

To win this case, the ACCC will have to prove that ANZ shares are a product or service. It will have to prove that two parties holding a shortfall of shares, Citi and Deutsche, and the accused bankers had a knowledge or belief that they were competitors. Proving this requisite state of mind could be extremely difficult.

The ACCC will need to show a prohibited purpose occurred through price fixing. This may raise the question of how competitive markets work. Usually for any restricted supply to be prohibited that restriction has to be distinct to a person or class of persons rather than a general restriction to the world at large.

Cartels are usually a limited group of suppliers of goods and services. They do not usually occur in a very highly liquid market with buying and selling by a range of parties outside of the alleged controlled interests.

Several of the bankers accused in this case have had their lives ruined. It is heavy handed and over the top for the competition regulator to use a judicial process that will extend for possibly three to five years when all appeals are completed.

The banks and individuals involved in this case did their job with no criminal intent. They followed past market custom and attempted to ensure an orderly market in ANZ shares. No one was harmed.

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