Australia drops cartel case against banks
A high-profile legal case in Australia that involved several top investment banks and their executives facing criminal cartel charges over a 2015 share placement has collapsed spectacularly, raising questions about whether authorities overstepped the mark.
The Commonwealth Director of Public Prosecutions said on Friday it had dropped the case against underwriters Citigroup and Deutsche Bank plus four current and former executives as “there were no longer reasonable prospects of conviction”. The CDPP had already dropped charges earlier against issuer Australia and New Zealand Banking Group, ANZ’s former treasurer and Citigroup’s former Australia head.
The case sent shockwaves through global capital markets when the Australian Competition and Consumer Commission announced in June 2018 that the three banks plus their staff were accused of colluding to withhold shares and prevent ANZ’s share price from falling after 25.5m shares were left unsold following a A$2.5bn (US$1.79bn) institutional share placement in 2015.
A third underwriter, JP Morgan, was granted immunity in exchange for its cooperation.
Overreach?
Bankers in Australia, not usually known for their reticence when opining on the misfortunes of their competitors, expressed collective dismay at the charges. The banks could have been on the hook for fines of up to A$10m or three times the amount benefited from the offence, and more significantly, individuals faced 10 years in prison and fines of up to A$420,000 if found guilty.
Several bankers said it was standard practice when left with residual shares after a placement to coordinate with one another to dispose of them in an orderly way, which was to the benefit of the stakeholders involved. They said the decision by the CDPP to prosecute for criminal cartel behaviour smacked of regulatory overreach.
As the case inched through the courts during the past three-and-a-half years, several potential missteps by the regulator included JP Morgan’s markets head telling the court he did not believe the banks had engaged in criminal cartel conduct despite ACCC protocol stating that any party that is granted immunity must accept that their actions could be construed as acting as a cartel.
There were also a number of procedural questions regarding the ACCC’s behaviour. The watchdog's general manager of financial services competition said it had pre-populated a witness statement detailing a JP Morgan banker’s concerns about inappropriate coordination between the underwriters.
IFR previously reported that competition lawyers had suggested the chances of a successful criminal prosecution were low. In addition to procedural questions, lawyers said the bar for a criminal case was much higher than for a civil one and the Competition and Consumer Act provides certain exemptions for “collective acquaintances and joint ventures”, which they argued appeared to cover the banks’ conduct.
There have only been four convictions for criminal cartel behaviour in Australia since the law was amended to allow criminal sanctions in 2009. Those cases were far more straightforward, according to lawyers.
Welcome relief
The decision to drop the charges will be a welcome relief to the banks and executives involved, but also to the wider industry, which had been closely watching the trial because of the implications for capital raisings globally. Some bankers previously said a guilty verdict could mean banks would only be willing to act as sole underwriters in future, thereby limiting the size of equity raisings that are possible.
Most banks have taken a wait-and-see approach and capital raisings have largely continued as normal in Australia other than some banks’ legal teams inserting clauses into underwriting agreements to specify when the syndicate ends and banks return to being competitors. Citigroup and Deutsche have continued to work together on ECM deals with JP Morgan – for example on National Storage REIT’s A$325m entitlement offer last year, which was underwritten by Citigroup and JP Morgan.
Deutsche welcomed the decision.
"We have always maintained that our bank and our staff ... acted responsibly, in the interests of clients and in a manner consistent with all rules and regulations. We recognise the significant impact that this case has had on the lives of the individuals involved but we are pleased to see that they have been vindicated," a spokesperson said in an emailed statement.
Citigroup did not respond to a request for comment.
"We respect the independent decision of the CDPP, and with them will consider what lessons can be learnt from this matter," ACCC chair Rod Sims said in a statement.