On the second day of trial before Federal Court Justice Mark Moshinsky on Wednesday, ANZ’s barrister John Sheahan KC rejected the Australian Securities and Investments Commission’s argument that the bank had no choice but to have unallocated shares taken up by the underwriters Deutsche Bank, Citigroup and JP Morgan after the disappointing placement – telling the court that the book was covered and that the underwriters instead elected to take the shares themselves up on the basis of “real commercial incentives.”

“We say the book was covered, and we say that’s significant – it makes it very hard to see this as something warranting disclosure,” Sheahan said.

“Coverage provides the opportunity for us to make an election whether to allocate to a hedge fund or to themselves.

“They elected to take allocable shares to themselves.”

On the first day of trial on Monday, ASIC’s barrister Christopher Caleo KC pre-empted arguments about the book being covered, noting that the figure of 103 per cent demand remained unchanged across various spreadsheets produced by the underwriters throughout the night of the raise and the next morning, even as the amount of unallocated shares bounced around from $735 million to $790 million worth.

But Sheahan said Wednesday there was “no reason to be cynical about that bids column being as it was at the close.”

The day after the placement, ANZ announced that it had raised $2.5 billion in new equity capital through the placement of approximately 80.8 million ordinary shares at the price of $30.95 per share, but said nothing of the fact that between $754 and $790 million was to be allocated to the underwriters.

The underwriters allocated approximately 31 per cent of the total placement shares, with Citigroup taking the largest proportion of that, at 40 percent, and Deutsche Bank and JPMorgan purchasing 30 percent each, according to ASIC.

On Monday, Caleo said ANZ was required under the continuous disclosure regime “to disclose the known fact of the underwriter acquisition of the placement shares, and…the amount, or at least the proportion, of the shares that had been taken.”

“It was material to the price of ANZ’s shares and to the trading positions of people who commonly invested in securities,” Caleo said.

ASIC alleges that the fact of the underwriter acquisition and the proportion of shares taken was likely to influence investors in deciding whether to acquire or dispose of ANZ shares, for reasons including the expectation that the underwriters would promptly dispose of their shares.

The regulator says investors might have refrained from acquiring the shares until they were offloaded by the underwriters at a lower price if they had had the benefit of the underwriter acquisition information.

On Wednesday, Sheahan pointed to “explicit, contemporaneous, documentary evidence” of discussions between the underwriters and with ANZ showing that the underwriters had “real commercial incentives” to take up and hold the stock themselves rather than promptly sell them or allocate them to bidders who were expected do the same, which would create “a disorderly market” or “excessive volatility unrelated to underlying value.”

“The explicit rationale, at the time, for the underwriters acquiring the shares, was to avoid the shares going to people whose selling – they were anticipated to be sellers – would be such as to create a disorderly market,” he said.

“It’s not in the underwriters’ interests for that to happen, because they want to deal with these people again, on both sides of the transaction.”

Sheahan took the court to evidence from ANZ treasurer Rick Moscati, who said the underwriter banks “weren’t concerned about managing the position.”

Former Citigroup CEO Stephen Roberts reportedly said he was “happy to hold” the stocks, while Deutsche Bank managing director Geoffrey Tarrant said the underwriters would “manage the position appropriately.”

ANZ attacks ASIC’s ‘entirely novel’ case

Sheahan also told the court on Wednesday that the regulator’s case failed to allege that the underwriter acquisition information was relevant to the value of the bank’s shares, and that the underwriters intended to sell the shares promptly and ANZ believed or knew that to be the case.

“Information of this kind says nothing about ANZ’s likely revenues or the risks attached to them, and speaking in broad terms, that is what the value of the shares depends upon,” he said.

“The second thing ASIC does not say – it does not seek to prove in fact that the underwriters were intending to be prompt sellers of the shares….nor that ANZ knew or believed that was their intention.

“We have a situation where ASIC does not allege that the principal circumstance that is said to make the informational material – the underwriters as prompt sellers – was in fact true at the time.”

Sheahan told the court that the “entirely novel case” was not supported by precedent.

“It’s novel because the information it says should have been disclosed is not said to be relevant to value, and it’s novel because it’s not said that the expectation of the market participant that’s said to make it material was a true expectation,” he said.

“And it’s novel, at least in a pragmatic sense, because ASIC does not point to any precedent for disclosure happening in a case of an underwriting where there had been a shortfall.

“So there’s no suggestion in any of the material that there was some — not even market practice, but even an instance – where there has been such a disclosure.”

Civil trial kicks off a year after collapse of ‘experimental test case’ 

ASIC’s case, first filed in 2018, was delayed by a long-running criminal cartel case over the share placement that was dropped by the Commonwealth Director of Public Prosecution last year.

The CDPP alleged that underwriters JPMorgan, Citigroup and Deutsche Bank engaged in cartel conduct by agreeing to pick up a shortfall in the sale of shares to maintain ANZ’s stock price and limit the number of shares they subsequently sold. JPMorgan and its employees received immunity after cooperating with the Australian Competition and Consumer Commission.

The case was dropped in February last year, just hours before a scheduled four-day hearing on a demurrer application by the banks to shut the case down for lacking sufficient legal grounds. The ACCC was accused of running an “experimental test case” that tried to fit the shares market within the scope of the Competition and Consumer Act.

Two legal questions had been flagged for the demurrer: whether shares are actually ‘services’ under the cartel provisions of the Competition and Consumer Act and whether the bank’s conduct amounted to a ‘restricted supply’ under the Act.

Deutsche Bank CEO Michael Ormaeche, Deutsche Bank former head of equity capital markets Michael Richardson, Citigroup global head of foreign exchange Itay Tuchman and Citigroup managing director John McLean were named as individual defendants in the case.

ASIC is represented by Christopher Caleo KC and Premala Thiagarajan, instructed by Johnson Winter & Slattery.  ANZ is represented by John Sheahan KC and Paul Liondas, instructed by Allens.

The case is Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited.

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