The threat of criminal charges has turned a three-year-old ANZ share placement from being just another reputational headache in Australian banking to something that has bankers seriously alarmed.
On Friday, two separate regulatory groups announced proceedings related to a A$2.5 billion ($1.9 billion) share placement by ANZ on August 7, 2015, a placement underwritten by Citigroup, Deutsche Bank and JPMorgan.
In the most serious of the two proceedings, the Commonwealth Director of Public Prosecutions (CDPP) alleges cartel conduct among the joint lead managers, regarding “an arrangement or understanding allegedly made between the joint lead managers in relation to the supply of ANZ shares,” according to a statement from ANZ itself.
|Rick Moscati, ANZ|
This will include proceedings against individuals, including ANZ group treasurer Rick Moscati, former Citi Australia country head Stephen Roberts and former Deutsche Australia CEO Michael Ormaechea.
In addition, the Australian Securities and Investments Commission is looking into the announcement that followed the placement, and specifically is investigating whether or not the announcement should have stated that the joint lead managers took up around 25.5 million of the 80.8 million shares.
The criminal charges will relate to ANZ Bank, Citigroup and Deutsche Bank, but not JPMorgan, which is believed to have self-reported in the case but has declined to comment.
A criminal charge against an institution can have far-reaching consequences: among other things, it could mean the asset-management arms of banks are not allowed to hold assets on behalf of the US government, for example.
The news has rocked the small world of Australian investment banking, already reeling from proceedings by Asic against the big four banks for the alleged rigging of the bank bill swap rate (an allegation Commonwealth Bank of Australia and Westpac contested in court, while ANZ and National Australia Bank settled) and the reputation-shredding salvoes of the continuing Royal Commission into bank behaviour.
The banks involved have said they will defend themselves and their individuals against the allegations.
Citi provided much the most detailed rebuttal.
It said 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 previously published by the ACCC [the Australian Competition and Consumer Commission, which referred the complaint to the CDPP] or Asic.
“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.”
The Citi statement goes on to explain the purpose of underwriting syndicates and notes that the ACCC allegation is that the “joint underwriters reached an understanding with respect to the disposal of less than one per cent of ANZ’s outstanding ordinary shares.”
It concludes: “Any such allegation should be considered in the context that ANZ’s shares are bought and sold freely by thousands of shareholders in volumes representing hundreds of millions of dollars every business day, including the period in question.”
Deutsche offered a shorter defence of its conduct and, like the others, said it would “vigorously defend” itself.
On Monday, the Commonwealth Bank of Australia negotiated a A$700 million settlement of an anti-money laundering case against it (news that pushed its share price up by 1.6%, showing how much worse investors had expected the fine to be).
But none of this has ever involved the prospect of anyone going to jail, and it is the pressing of criminal charges against Moscati, Roberts and Ormaechea – plus Citi’s Itay Tuchman and John McLean and Deutsche’s former ECM head Michael Richardson – that has spooked Australian banking. Somewhat ironically, Moscati is in the process of becoming chief risk officer for ANZ.
Cartel laws only became criminal offences in 2009; they can carry a sentence of up to 10 years in prison. Fines can be up to 10% of the company’s turnover – and since ANZ’s 2017 full-year operating income was A$20.27 billion, its fine could theoretically top A$2 billion.
At the heart of the case is believed to be a recording of a videoconference call between Moscati and the investment banks. The call discusses the 25.5 million shares that had failed to find buyers in the capital raising, and specifically how those shares would be sold into the market over a period of time so as to cause a minimum of disruption to the ANZ share price.
The case has bankers far from the deal nervous, since, on the evidence so far available, they see little that hasn’t been commonplace for many years. JPMorgan appears to have been nervous enough about the trade to self-report it, thus gaining immunity from prosecution, and its actions have bankers looking nervously at their underwriting peers and reviewing past transactions to consider what else might capture the CDPP’s attention.
One school of thought has it that the rules around cartel behaviour as it relates to underwriting were not widely understood at the time of the original trade – hence Citi’s insistence that there is a need for clarification, not prosecution – but that lawyers in Australia had begun looking at the subject in detail and released some guidance notes to clients over the last year or so.
This theory has it that JPMorgan, upon seeing the guidance, became nervous about the ANZ trade and self-reported, leading to its immunity from prosecution here.
A series of calls around Sydney investment banking floors found nobody gloating. Much like UBS’s potential ban on sponsoring IPOs in Hong Kong, many banks are pondering the past and thinking: are we next?