The collapse of a criminal cartel case against Citi, Deutsche Bank and ANZ and six of their bankers in Australia is no surprise, and looks like four years wasted for considerable pain and little gain.
From the very outset, the decision to bring criminal rather than civil proceedings against individuals as well as institutions over an unclear area around the marketing of a share placement looked like regulatory overkill.
Here’s the background. In August 2015, a A$2.5 billion ($1.79 billion) share placement by ANZ was underwritten by Citigroup, Deutsche Bank and JPMorgan.
During this placement, ANZ and its arranging banks had a call to discuss 25.5 million shares that had failed to find buyers in the capital raising, in which they discussed selling the shares into the market over a period of time so as to minimize the disruption to the ANZ share price.
Nobody thought anything more about it. Deals like this were commonplace. It’s what bankers call “keeping an orderly market.”
But three years later, in June 2018, the Commonwealth Director of Public Prosecutions alleged cartel conduct among the joint leads, regarding “an arrangement or understanding allegedly made between the joint lead managers in relation to the supply of ANZ shares.”
The CDPP was acting upon a referral from the Australian Competition and Consumer Commission, spearheaded by chairman Rod Sims.
Spooked
Australia’s investment banking community was spooked by several elements of the proceedings.
One, they were criminal charges, which at an institutional level has considerable consequences, particularly for those who advise governments.
Two, in addition to going after the institutions, the CDPP announced proceedings against six individuals: ANZ group treasurer Rick Moscati, retiring Citi Australia country head Stephen Roberts, Citi bankers John McLean and Itay Tuchman, former Deutsche Australia chief executive Michael Ormaechea, and another Deutsche banker, Michael Richardson.
All six potentially faced jail.
The personal cost to the individuals… is enormous and cannot be measured
Lawyer for Michael Ormaechea, Deutsche Bank
The third was the area the proceedings involved. In a prevailing mood of great mistrust and anger about the conduct of Australian banking, with a Royal Commission underway against bank behaviour and regulatory action proceeding against all the big four banks for alleged rigging of the bank bill swap rate, it was no surprise to see regulators going in hard on alleged illegal behaviour.
But few in the market – including competitors – could quite see how equity capital markets bookbuilding could possibly get into the realms of criminal proceedings. There was absolutely no gloating in Sydney or Melbourne at the time, because most banks were looking back at their catalogue of equity raisings from previous years and thinking: are we next?
As Citi said at the time in a statement: “The allegations involve an area of financial markets activity that has not been considered by any Australian court or addressed in any regulatory guidance notes… this is a highly technical area and if the ACCC believes there are matters to address, these should be clarified by law or regulation or consultation.”
JPMorgan’s absence from proceedings was understood to have arisen because the bank self-reported the trade in order to seek clarity around cartel laws, under the advice of lawyers; in doing so, it gained immunity from the action, provided its bankers gave witness testimony.
Four years of legal arguments followed in Australia’s courts, first New South Wales, then Federal. Along the way, charges were dropped against Roberts, against ANZ and against Moscati in October.
Cleared
Today, February 11, the CDPP notified federal court judge Michael Wigney that charges would be dropped. Citi and Deutsche are in the clear; McLean, Tuchman, Ormaechea and Richardson are no longer facing the threat of jail time.
Citi and Deutsche both responded with brief statements. Citi’s said: “Since 2018, Citi has steadfastly denied the allegations and is looking forward to putting this matter behind us.” Deutsche said much the same, but added: “We recognize the significant impact that this case has had on the lives of the individuals involved.”
Indeed it has. Roberts was just entering retirement after a successful career when the charges came. None of the six had anything like a colourful reputation in Australian banking circles. Ormaechea’s lawyer, in a statement today, said: “My client and all the parties have maintained from the outset that this case did not have a proper basis. The personal cost to the individuals, including my client, is enormous and cannot be measured.”
Justice Wigney replied: “I can well understand that sentiment.”
ACCC chair Sims made a statement respecting the independent decision of the CDPP, saying: “We… will consider what lessons can be learnt from this matter.”
We will continue our efforts to deter, detect and dismantle cartels
Rod Sims, ACCC
He added: “While there can be challenges involved in bringing criminal cartel prosecutions, particularly due to the complexity of the cartel laws, we will continue our efforts to deter, detect and dismantle cartels, and will continue to refer serious cartel conduct to the CDPP for its consideration.
“That is our role, and we will continue to fulfil it, even though not all briefs of evidence given to the CDPP will result in the laying of charges or convictions.”
Clarity
Looking back, it seems clear that what the market needed was clarity and discussion around a grey area to see if accepted market practice needed to change.
Perhaps there’s a problem with the widespread idea of maintaining an orderly market through the agreed distribution of a shortfall in an equity trade.
Perhaps there’s even an argument for making something a criminal offence. But the ACCC erred in attempting to do this retrospectively in an area where the law was not clear.
We’re all for regulatory strength in oversight of banking and markets. We’re not ideologically opposed to bankers going to jail when it is appropriate. We think there’s scope for a review of cartel behaviour, and if the rules aren’t clear around that in ECM, then they should be made clear.
But this looked like an attempt by the ACCC to show muscle in the midst of a ravenous public mood, without either the evidence, the rationale or the moral justification to take the action that it did. That doesn’t help regulators.
