# The Lessons from Customs House Capital



## Brendan Burgess (2 Sep 2012)

Niall Brady of the Sunday Times has written an eBook about the collapse of Customs House Capital. 

It's only 58 pages, so it's a very easy read. I find a lot of books on such topics are 300 pages and filled full of irrelevant stuff which you have to wade through. This gets the right balance between too much and too little detail.  It's a short story instead of a novel. 



> *Product Description*
> 
> In the summer of 2011, investors with Custom House Capital -  some of whom had all their pension savings tied up with the investment  house - faced a nightmare: the possibility that their money was gone,  and that they wouldn't be getting it back.
> 
> ...


It's a good insight into how a business grew from very small beginnings to managing over €1billion in clients' funds.  They were very proactive and took advantage of the changes in PRSA and ARF legislation. 

It's another "victim" of the credit cruch. They were buying commercial properties in Germany and other european markets with syndicated funds from clients. The problem is that they entered into contracts to buy the properties before having raised the funds from clients. When the credit market crashed, they couldn't get the finance to complete the deals so they "borrowed" it from their clients without their clients' knowledge. 

Whom can you trust? This was a highly regarded company. It was regulated by the Financial Regulator. 

Most of the investors in CHC were well-off self-employed people who would have had a reasonably good understanding of business and finance. It surprised me that they did not twig that there was something wrong earlier. There were reports in the Sunday Times and Sunday Business Post that the FR was unhappy with the company, but the company just brushed off those concerns claiming that they were about technical matters such as lack of documentation on identifying clients.

The book illustrates the dilemma the Financial Regulator faced. If they moved in as soon as they saw the problem, the clients would definitely have lost a lot of money. They thought that they could stop them taking on new clients  and that they could force them to sell the business which would save the clients' money.  I got the impression that the FR took the same approach to Irish Nationwide. They knew about the problems but hoped that the sale of the Irish Nationwide to a foreign bank would solve the problem for them.

The firms' auditors will certainly have questions to answer.  It seems that Lavelle Coleman, solicitors, are investigating taking a case against them.


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## Brendan Burgess (2 Sep 2012)

I find it extraordinary how some very senior  employees knew what was going on and participated in it, although they claimed that they did so because they trusted the Chief Executive Harry Cassidy to sort it out. 

One of them did alert the Financial Regulator two years earlier, but other than investigate it, the Financial Regulator did very little. Which is again very similar to the Irish Nationwide situation.  They investigated complaints but did nothing about them.


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## Brendan Burgess (3 Sep 2012)

It is also extraordinary how brazen Harry Cassidy was.

He sold the asset management part of the business to Appian Asset Management. When they tried to find out where the clients had actually invested their money, they realised that it was all gone in loans on these property deals and that it was not invested in equities or cash funds as the books claimed. 

How on earth did Harry Cassidy expect to get away with this?


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## Bronte (3 Sep 2012)

Was Harry Cassidy punished in any way?


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## Brendan Burgess (3 Sep 2012)

Not yet.

However, the book reports that he was arrested last month and questioned. A file has been sent to the DPP on the issue. 

Brendan


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## Bronte (3 Sep 2012)

That's great a file has been sent to the DPP. I suppose in about 3 years time we might even have the beginnings of a court case but after that, well white coller crime, banana republic - don't think so.   As for the financial regulator, yet again a failure.


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## Monksfield (6 Sep 2012)

I look forward to reading the book though having read the Inspectors report I have a good flavour for what happened.

The subsequent "Review of the Regulatory Regime for Safeguarding Client Assets" which was published in April 2012 

[broken link removed]

makes several allusions to CHC. The review is written very carefully written so as not to cast too many aspersions on the regime as was. However between the Inspectors' report and this review one can only conclude that the regime and its implementation came up well short.

It was clearly a difficult situation for the regulator but allowing a management in which they had lost trust to control assets is very hard to excuse.


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## Bronte (25 Sep 2012)

www.askaboutmoney.com/showthread.php?p=1134028

I can't do links but there is a very interesting thread. What is quite amazing is that people borrowed money to go investing. To me it's like borrowing money to gamble. And people are falsely assured by the fact that this company was regulated. It seems being regulated means nothing. The regulater was told by a whistleblower that something was amiss in 2009 and they sent in KPMG to look at the situation, and a slap on the wrist and an assurance from the company that they wouldn't be so bold again was enough for the regulator to be happy. And now we have the situation where it looks like the whole thing was a house of cards. 

I wonder what our esteemed judges et al think now of how regulation works in Ireland. Presumably they have no recourse in law against the lax regulator. Actually what's the point of having a regulator if they cannot undercover wrongdoing even where they have a whisteblower. 

In additon what is the point of auditors like KPMG, they are paid big money and still one cannot be reassured that all is ok. So it's just a complete waste of money paying them in the first place. 

There was a point mentioned somewhere that some of the investors are actually liable for more than their investment but I didn't quite understand that. Maybe someone au fait with this type of investment might clarify.


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## Brendan Burgess (25 Sep 2012)

Bronte said:


> I can't do links


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## Niall Brady (25 Sep 2012)

Hi Bronte,

The Central Bank could argue that it acted decisively after being tipped off by the whistleblower. It sent in KPMG. It installed an independent director, who later became chairman. It ordered a change of auditor. As its concerns deepened, the regulator ordered CHC's owner-managers to sell the business. Interested purchasers did their own due dilligence and nothing strange came to light. In the meantime, the regulator blocked CHC from taking on new business and restricted its dealing with existing clients.

Incredibly, though, the Central Bank never uncovered the wholesale misuse of clients funds. Accountants claim it is very difficult to crack a determined fraud. It didn't take long, though, for the firm that eventually bought CHC's business to uncover what was going on.

The Central Bank cannot be sued for negligence, only for malfeasance. That means you'd have to prove it colluded with illegal activity. Good luck with that one.


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## Bronte (25 Sep 2012)

So the regulator sent in KPMG and they did not spot the fraud, well I think questions should be asked of them. Otherwise what was the point of spending money hiring them to check out what was going on. How much did they cost?

Aren't KPMG now the liquidators? Seems extraordinary to me that the people who didn't manage the first examination of what was going on should now be getting the pickings on the bone in liquidation. If I was an investor I'd be well peeved off at this alone. 

Putting in a new independent director and new auditors didn't show up what was going on. So all those actions of the regulator are pointless. 

If we had the same scenario today would the regulator do anything different.

How come the new owners spotted the problem nearly immediately. 

It's very strange the story with the whistle-blower, did he not tell the regulator where the misuse of client's funds was occuring.

One wouldn't want to have much faith in investing in any companies like CHC. It's like a lottery of whether you'll get your money back.

I guess the guys who were at this carry on are geniuses, able to fool everybody with their complicated going's on.


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## Brokesmurf (22 Oct 2013)

Is anyone going to the custom house meeting in horse and 
jockey tonight?


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## Bronte (10 Apr 2017)

Some people don't go away

http://www.independent.ie/irish-new...66m-coowns-pensions-advice-firm-35608977.html

_The former director of a collapsed investment firm that "misused" €66m of investors' money is the co-owner of a pensions advice company that is advertising for business.

Many of those who lost out were ordinary people who invested pension money with Custom House Capital. Now it has emerged that Mr Mulholland is the co-owner of Dublin-based Windsor Wealth Management, trading as EarlyRetirement.ie._


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## Gordon Gekko (10 Apr 2017)

Wow.

Just wow.

What a country.


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## Steven Barrett (10 Apr 2017)

This is well known in the industry for a long time. Plenty of ads in the paper, especially with an offer to transfer pension funds to Malta and avail of the looser pension rules over there. 

Meanwhile, the victims of CHC are left waiting while Kieran Wallace of KPMG refuses to complete his work until it is confirmed by the court who will pay his fees. That case keeps on being kicked down the road. The whole think stinks.


Steven 
www.bluewaterfp.ie


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## Andrew Low (6 Jul 2017)

What lessons have been learnt?

Investors need to understand the risks to their investments should there be a financial failure of their investment firm or advisor, particularly because of fraud!

When enquiring about the financial security of their investments, investors are often told that investment firms use custodians. The use of custodians did not avoid the financial failure of Custom House Capital or similar firms that failed.

Investors need to make enquiry and establish:

The financial strength of their investment advisor and/or investment firm and the level of insurance that they hold. Will that insurance respond to fraud by directors of the firm?


The value of client investments that are managed by their investment advisor or investment firm.


The management of cybercrime exposure by their investment firm or advisor


The risk to their investments if a fraud or cybercrime occurs that is greater than the financial strength of the investment firm/advisor and any insurance they carry.

Remember, the maximum level of state compensation under the investor compensation scheme is €20,000.

Andrew Low
FundInsure


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