Earlier this week charges were laid against some of Australia’s most senior investment bankers over alleged “cartel” behaviour in relation to a $2.5bn capital raising by ANZ (ASX: ANZ) in 2015.
The former local heads of global investment banks Citibank and Deutsche Bank, along with the current ANZ Treasurer, were among six individuals charged, while the companies themselves were also charged.
These are serious allegations that potentially carry up to 10 years in jail and large fines for the individuals charged. The companies themselves could face fines of $10m, three times the profit gained or up to 10% of their turnover (which in ANZ’s case could mean a $2bn fine).
ANZ capital raising
ANZ needed to raise $2.5bn in equity in August 2015 to help it comply with increased capital requirements imposed by APRA.
As ANZ didn’t want to risk failing to raise all of the $2.5bn required, it arranged for the raising to be underwritten by Citibank, Deutsche Bank and JP Morgan (which has been granted immunity for dobbing in its alleged co-conspirators).
That is, in the event that ANZ couldn’t raise the full $2.5bn, its underwriters would step in and purchase any unsold shares from ANZ.
And this is precisely what happened.
In the end, the three investment banks were forced to purchase 25.5m shares that remained unsold, costing them a cool $789m (or around 32% of the total amount raised).
Apparently, the “cartel” like behaviour relates to how the three investment banks (consulting with ANZ) agreed to subsequently sell these 25.5m ANZ shares on the ASX (ASX: ASX).
The ACCC alleges ANZ and the three investment banks reached “an arrangement or understanding” to ensure that the shares weren’t dumped on the market all at once and thereby likely pushing down ANZ’s share price and leading to losses for the three investment banks.
To say these charges came as a shock to the investment banking industry would be an understatement.
The first thing to note is that such “arrangements or understandings” appear to be commonplace in capital raisings, yet the regulators have turned a blind eye until now.
Ignorance of the law isn’t a legitimate defence in the Australian legal system. Even so, that something that has previously been blessed by the regulators is now potentially illegal is very concerning.
Rather than retrospectively criminalising previously-accepted behaviour, the proper response by the ACCC should have been to announce that it now viewed such “arrangements or understandings” as potentially illegal, while also providing specific guidance on what behaviour is – and isn’t – accepted.
Yet the ACCC have decided to take a much more aggressive path.
As such, I wouldn’t be surprised if the regulators are taking advantage of legitimate public disgust with bankers to try to claim a few high-profile scalps and burnish their reputation as a result.
Yet even unpopular investment bankers are entitled to due process and the rule of law.
And who are the “victims” here?
Generally speaking, a cartel – whether its OPEC in oil or De Beers in diamonds – tries to reduce the supply of a good or service and hence push up its price.
In such cases, the victims are easy to identify: consumers or businesses who are forced to pay higher prices for oil or diamonds than they otherwise would have paid in the absence of the cartel.
A different beast
But the stock market is a different beast. It is a zero-sum game: for every investor who makes a profit by buying a share and then selling it at a higher price, there is another investor who loses a similar amount.
According to the ACCC, the “victims” are those investors who were forced to pay higher prices for ANZ shares due to the “cartel” restricting the supply of ANZ shares and hence (presumably) pushing up the price.
But logically, these “victims” have corresponding “victors”: namely, existing ANZ investors who were able to sell their shares at higher prices than if the 25.5m ANZ shares had just been dumped on the market (as the ACCC seems to suggest should have occurred).
So if the ACCC wins its case, will it force the “victors” to hand over their ill-gotten gains to the “victims”? Assuming of course the relevant victors and victims can be identified, and that the judge in question can also calculate the price at which ANZ shares would supposedly have changed hands in the absence of the alleged “cartel’s” behaviour?
I am not a lawyer, but I think the ACCC may have overreached here. Time will tell.
Disclosure: the author isn’t, never has been, and never wants to be, an investment banker.