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Crime and misdemeanours: A tale of two law enforcement agencies

Photo: ANZ is facing criminal cartel charges over a $2.5 billion institutional capital raising in 2015. Reuters: David Gray Photo: ANZ is facing criminal cartel charges over a $2.5 billion institutional capital raising in 2015. Reuters: David Gray

It bears all the hallmarks of a falling out amongst ... er, bankers. Whatever you want to call it — treachery or perhaps a royal commission-inspired outbreak of honesty — the ammunition for the latest assault on bank integrity uncharacteristically has come from within.

One of the players has broken ranks.

On Friday, a stunned ANZ found itself facing criminal sanctions after the competition regulator accused it of cartel behaviour over allegations it rigged the pricing of a $3 billion share issue in cahoots with investment banks Citi and Deutsche.

And it's not just the institutions in the firing line.

In a rare departure, ANZ group treasurer Rick Moscati and several other as yet unnamed individuals also are expected to face charges.

There was a mixture of disbelief and bewilderment when it was discovered that investment bank JP Morgan, which was in the tent on the deal, had blown the whistle on the alleged racket in exchange for immunity.

Even more startling has been the reaction from within the world of high finance.

Most players have been left stunned, not so much by the allegations, but that it has even been called out as inappropriate, let alone illegal.

Many simply cannot see that there's anything amiss. It's not as if this has never happened before.

The investment bankers were hired to bump up the price. Standard operating procedure.

There are a couple of other notable observations.

The first is that, given the scale of malfeasance and theft now apparent across the industry and the contempt for consumers and retail investors, it is clear the royal commission — so vehemently opposed by the Government and most of the media — is having a far wider impact than ever imagined.

The second is the yawning chasm in the approach to law enforcement between our corporate regulator and the competition regulator.

For the best part of two decades, the Australian Competition and Consumer Commission, despite being constrained by inappropriate penalties, has diligently enforced the law and routinely covered ground that ASIC, the corporate regulator, has feared to tread.

Dick Pratt's legacy

Unlike America and many other developed nations, until fairly recently, rigging markets and stifling competition was treated as a minor offence here.

Dick Pratt changed all that.

When his privately owned Visy Group and Amcor were unmasked for running a cartel in the cardboard box market more than a decade ago, it paved the way for a fundamental overhaul of the law.

With a combined 90 per cent of the market, every business that required packaging was being gouged, costs that ultimately were being passed on to Australian consumers. The magnitude of the offence was staggering, costing the nation billions of dollars.

While both companies paid combined penalties of $200 million in 2007, it dawned on lawmakers that, had Pratt been caught doing the same thing in his US operations, Australia's richest man may have spent his remaining days in a US Federal prison.

For years, ACCC boss Allan Fels argued for criminal sanctions on serious market rigging and collusion. His successor, Graeme Samuel, who pursued Pratt despite their shared interests and political connections, continued the push.

Unlike ASIC — which since its inception has had the power to launch criminal action — the competition body has only been granted criminal sanctions since 2009 and since then has been flexing its new-found muscle.

Last year, it notched up its first victory against Japanese shipping company Nippon Yusen Kabushiki Kaisha, with a warning that more was to come.

Do the crime, not the time

Why criminal actions? While research suggests the seriousness of a penalty does little to deter general criminal activity, white collar crime appears to be the exception.

The idea of a prison sentence apparently scares the pants off white collar offenders and is a powerful deterrent.

Exactly why the corporate regulator, ASIC, has been reluctant to wield its criminal powers is perplexing. It began shying away from criminal proceedings under David Knott around 2000, arguing that civil actions required a much lower burden of proof and hence were easier to get across the line.

Since then, however, it has retreated further, opting instead for enforceable undertakings; essentially, merely a threat to take action if an offence is repeated.

Perhaps that explains the belligerent attitude our banks and other major corporations hold towards regulators in general and ASIC in particular.

A fortnight ago, a defiant Westpac declared it had won a long-running civil legal battle against ASIC over rigging the Australian interest rate market. The boastful claim came just minutes after Justice Jonathon Beach ruled it had engaged in "unconscionable conduct".

Essentially, the judge ruled that Westpac intended to manipulate the market in its favour. It simply didn't succeed.

It's worth noting the other three major banks raised the white flag on the charges and settled out of court, with NAB and ANZ forking out a combined $100 million in fines while CBA handed over $25 million.

Approving the NAB and ANZ settlements and noting their admission of unconscionable conduct, Federal Court judge Jayne Jago declared the public would be "shocked, dismayed and disgusted" by the behaviour.

Not so Westpac.

To its credit, ASIC did pursue legal action against the big four banks over rigging interest rates. But it had little choice. Regulators in the UK, Europe and the US already had won landmark cases against their banks on the very same issue, extracting billions of dollars in fines.

The case against ANZ

While the Director of Public Prosecutions has yet to formally lay charges, the nub of the case against ANZ relates to an auction of shares in August 2015.

The plan was to raise $3 billion — $2.5 billion from institutions and the rest from small shareholders — to help ANZ fulfil its obligations to bolster its balance sheet under new international guidelines drawn up to improve the health of the global banking sector.

But the deal was mired in controversy. The share price collapsed the day after the auction took place amid accusations the bid had been rigged.

The three investment banks — Deutsche, Citi and JP Morgan — were underwriters, meaning they would have to buy any shares not sold in the auction.

What those bidding for the shares didn't know was that the three investment banks between them had put their foot on a third of all the shares on offer to help bump up the price. Buyer interest at the reserve price apparently was low.

Questions also remain as to who was selling stock the day after the auction, which saw ANZ shares take their biggest tumble in six years.

Not for the first time on bank share issues, small investors had been kept completely in the dark and found themselves well out of pocket.

It's the sort of behaviour that's been outlawed in real estate auctions for years. And yet in the rarefied world of banking, it was considered a job well done.

Not any longer.

This article was first published by
Author: Analysis By business editor Ian Verrender
Last modified onMonday, 04 June 2018 22:01

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