Examination of Witnesses (Questions 60-79)
DEPARTMENT OF
ENTERPRISE, TRADE
AND INVESTMENT
AND INVEST
NORTHERN IRELAND
13 FEBRUARY 2006
Q60 Mr Bacon: You have asked the
Department for Finance and Personnel what it thinks?
Mr Quinn: No, to consider what
action would be appropriate on behalf of the wider system.
Q61 Mr Bacon: Do you not have an
opinion on what action would be appropriate on behalf of the wider
system?
Mr Quinn: I have not formed an
opinion on that yet.
Q62 Mr Bacon: That is extraordinary.
Mr Quinn, in relation to the EBT board there were supposedly practices
in place to deal with conflicts of interest involving EBT managers,
but they were subject to guidance from your Department ultimately,
were they not? Or should have been? Are you satisfied that the
guidance you gave to EBT and to EBT board members was adequate?
Mr Quinn: I am satisfied that
there was sufficient guidance in the system. For instance, in
1994 the Cabinet Office issued guidance on the conduct of board
members; in 1996 LEDU issued a document called the Responsibility
of Board Members; in 1997 the Cabinet Office updated its guidance,
and in 1998 LEDU produced a code of conduct, so there was guidance
available. I think the problem with EBT was that the potential
conflicts of interest were so numerous and some of them were so
fundamental that they were probably beyond management.
Q63 Mr Bacon: But it also says in
the Report, page 25, in paragraph 2.22: "It is disturbing
that LEDU's letters of offer were completely silent on how potential
conflicts of interest between the managers and EBT client companies
should be handled". You basically were not providing adequate
guidance to the directors, were you?
Mr Quinn: Well, it certainly would
have been better if LEDU had indicated it had concerns about the
conflicts of interest in the EBT structure. I would not want anybody
to have the view that the EBT board did not have a duty of skill
and care themselves.
Q64 Mr Bacon: Could I go back to
the question of Arcom referred to earlier, and get the chronology
clear in my own mind? Essentially it was in November 2000, that
is correct, that Mr Townsley purchased the shares?
Mr Morrison: That is correct.
Q65 Mr Bacon: But it was the previous
April that he possessed the knowledge that the board had made
a decision to buy shares at £19.49 at some point in the future?
Mr Morrison: Correct.
Q66 Mr Bacon: So he knew in November
that six months previously there was a decision by this publicly
funded body to spend £19.49 per share at some point in the
future for shares which he was then paying £1.08 for?
Mr Morrison: We assume that he
knew at that stage. Certainly a decision had been taken.
Q67 Mr Bacon: His wife definitely
knew?
Mr Morrison: His wife would have
known.
Q68 Mr Bacon: Because she was a board
member?
Mr Morrison: Yes.
Q69 Mr Bacon: And then in March 2001
the board duly went ahead and purchased these shares at £19.49
11 months after it agreed it would do so. What was the reason
for the 11 month delay?
Mr Morrison: I am not sure about
that exactly.
Q70 Mr Bacon: You are not sure?
Mr Morrison: No. I think it is
to do with the needs of the company when it needed the shares
to be purchased, to do with the corporate finance needs of the
company, when equity was required to be in the company.
Q71 Mr Bacon: I used to work in a
corporate finance department many years ago, and I was not a very
eminent but one of the things I was aware of was that pricing
matters were decided very close to what is called financial close.
Why would this have been agreed 11 months beforehand?
Mr Morrison: I, like you, had
this background and I would have thought that one would have wanted
to re-up the pricing having executed the deal one year after the
price had been determined. I find it quite strange.
Q72 Mr Bacon: Would you agree, if
someone were aware that the board had made a decision some time
in the future to buy shares at £19.49 and in possession of
that knowledge had then purchased them earlier than that at a
much lower price that would have constituted insider trading?
Mr Morrison: It is very complicated
chronology. The difficulty and the complication in this is that
I understand Mr Townsley purchased those shares at a discount
in recognition of services rendered in the past.
Q73 Mr Bacon: You said this to Mr
Trickett, but you have been unable to identify what these services
were?
Mr Morrison: We do not know. We
do not understand what they were exactly and we have seen no valuation
thereof, so we are not in a position to comment.
Mr Quinn: A number of these actions
and transactions were private matters which would almost by definition
be outside the line of sight of public officials.
Q74 Mr Bacon: But it was public money,
was it not?
Mr Quinn: Yes.
Q75 Mr Bacon: If I can pursue this
a little bit further, paragraph 2.10 at the bottom paragraph talks
about: "The risks of the sector and in particular the company
at that time"—that is the risk of the company—"were
considered by the EBT Board. In recognition of this and the lack
of security, the EBT Board recommended the loan be made by way
of the Small Firms Loan Guarantee Scheme whereby EBT were guaranteed
some 85% of the loan by the Department of Trade & Industry."
is this not basically a case of EBT offloading a huge risk directly
to the Department of Trade & Industry, disregarding the fact
it was public money?
Mr Quinn: Our understanding is
that EBT was a qualified lender within the DTI scheme, and as
such I think it would have had a duty to provide the DTI with
all the necessary information in relation to any grant proposal
or loan proposal that it had passed to them. We just do not know
whether that was done or not. Making a speculative point, we would
regard the LEDU representative on the EBT board as having a particular
responsibility to ensure that that would have been done.
Q76 Mr Bacon: I gather that one of
the companies, Fusion, which was supported by EBT was also supported
by two other venture funds which were funded through your Department—Nitech
Growth Fund, which is apparently Invest Northern Ireland's own
fund, and also Veridian Growth Fund. Were you aware that three
different publicly funded bodies were investing in this company
in which Mr Townsley had a stake?
Mr Harding: Through routine case
work we would be aware that other venture capital funds are going
to be providing funding, and we knew about the origins of those,
whether public money or not.
Q77 Mr Bacon: In this case did you
know that you had three publicly funded venture capital funds
who were bank-rolling this company which was one in which Mr Townsley
had an interest? Yes or no?
Mr Harding: Not on this occasion.
We did not know at that time the EBT were making that deal, but
I was talking generally about now situations where we would know
what publicly funded venture capital funds were investing. At
that time the answer is no.
Q78 Mr Curry: I would like to think
that all this stems from some sort of structural failing and that
the guidelines and the geometry of behaviour, as it were, was
not there but when I read this Report I do not believe that. I
think it was perfectly clear how things ought to have carried
on, and I think a number of individuals simply decided they were
not going to obey those particular rules, or they were going to
shortcircuit the rules. I note in paragraph 1.47 it says: "This
failure was compounded by an extraordinary series of lapses".
Now, a lapse is a personal bit of behaviour. Unless a pilot becomes
ill an aircraft does not crash because of a lapse; it crashes
because of structural failure. Would you agree this looks to be
a whole series of individuals simply misbehaving?
Mr Quinn: I certainly think that
a number of individuals did not do everything they should have
done to make sure that the governance structure of EBT and the
funding arrangements from LEDU to EBT were as they should have
been. Can I distinguish between the possibility that they may
have just lacked insight into the matters as distinct from making
a positive decision not to do the right thing?
Q79 Mr Curry: I find the word "insight"
a bit difficult in these circumstances, I have to say. I am not
sure that when I am looking at the way government behaves, insight
is the sort of quality I would normally attribute to it or expect
from it and almost never witness as a matter of fact. What I do
expect is honesty and the common sense observance of rules. Now,
this brings me to my second suspicion, which is that Northern
Ireland is a very small society and the government business community
is all frightfully incestuous and everybody knows everybody else,
and it is very easy for people who might well meet on all sorts
of different social levels to transfer into their business or
professional relationships perhaps an informality which you would
not find in a rather larger pool. Is that a wrong piece of insight?
Mr Quinn: I think the fact that
Northern Ireland is a relatively small place with a relatively
small business community is fair comment. I cannot draw an inference
from it in respect of the matters described in this Report because
the Report itself does not ascribe any significance to that particular
point.
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