Citi, Deutsche Face Cartel Charges in $1.9 Billion Share Sale

(Bloomberg) -- Australia's banking industry faces an unprecedented criminal prosecution as Australia & New Zealand Banking Group Ltd. and two of its underwriters, Deutsche Bank AG and Citigroup Inc., brace for cartel charges over a A$2.5 billion ($1.9 billion) share sale.

The case follows probes by both Australia's securities regulator and competition watchdog into ANZ Bank's institutional placement of 80.8 million shares in August 2015. Investigators have focused on why the Melbourne-based lender didn't disclose that underwriters had to soak up 25.5 million shares worth A$789.2 million and how they subsequently sold them onto the market.

“The charges will involve alleged cartel arrangements relating to trading in ANZ shares” after the placement, Rod Sims, chairman of the Australian Competition and Consumer Commission, said in a statement Friday. ANZ Bank's Group Treasurer Rick Moscati is also likely to be charged, he said.

In separate statements, the three banks said they had complied with market rules and will defend the allegations.

With the nation's lenders scrambling to meet new regulatory requirements in 2015, the sale was aimed at lifting ANZ Bank's capital reserves. According to Citigroup, a criminal case would be an unparalleled foray by prosecutors into an area of Australia's capital markets that has successfully used underwriting syndicates for decades.

“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,” Citigroup said in a statement.

The competition watchdog is alleging the underwriters “reached an understanding with respect to the disposal” of the stock -- which represented less than 1 percent of ANZ Bank's outstanding ordinary shares, Citigroup said.

‘Strong Case'

A prosecution of this type “is almost unique,” said Andrew Grant, who specializes in banking at the University of Sydney Business School. “Resorting to criminal charges against the ANZ and others would suggest that the authorities feel that they have a particularly strong case.”

Read more about allegations of wrongdoing by Australian banks

The allegations, which sent ANZ Bank shares lower in Sydney trading, add to a litany of woes for the banking industry in Australia. An inquiry into misconduct in the financial industry has uncovered extensive wrongdoing, from lying to regulators, falsifying documents and taking bribes, to extracting fees from customers long since dead. ANZ Bank last year paid A$50 million to settle allegations it rigged a benchmark interest rate.

Shares Fall

ANZ Bank closed down 1.5 percent at A$26.80, valuing the lender at A$77.6 billion.

The lender said it believes it acted in accordance with the law and intends to defend itself and its Group Treasurer Moscati.

Deutsche Bank said it takes matters of conduct “extremely seriously” and it has cooperated fully with the ACCC during the investigation process.

“The bank believes it and its staff acted responsibly and in a manner consistent” with market integrity rules, it said.

A spokesman for JPMorgan, the third underwriter on the share sale, declined to comment on reports by the Australian and Australian Financial Review newspapers that it received immunity from prosecution in return for information.

It's set to be the first criminal case against a bank by the ACCC, which three years ago set up a unit dedicated to investigating criminal cartels.

“There will be an increasing number of these prosecutions and I would be confident we'll see more this year,” Chairman Sims told reporters in Sydney. He declined to provide any additional details on the case.

The institutional placement was completed at A$30.95 per share, at a 5 percent discount to the previous closing price. ANZ Bank's shares slumped 7.5 percent on Aug. 7, 2015, the day after it announced the placement. That was the biggest fall in almost seven years.

The Australian Shareholders' Association said the allegations were a “wake-up call to reform capital raisings by ASX-listed companies” and that current structures unfairly favor institutional shareholders.

--With assistance from Matthew Burgess.

To contact the reporter on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net

To contact the editors responsible for this story: Edward Johnson at ejohnson28@bloomberg.net, Peter Vercoe

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