Week 1 (11 April) Trial Digest

Some Preliminaries:

Finished reading the ELAS skeleton. Actually, it is quite readable.

The claims against the Directors are interesting. They are being “done” for not realising the DTBP was dodgy and for not cutting back the bonuses in 1996, 1997 etc. They are NOT being done for overbonusing per se. They are also being done for mis-selling. However it does vary from Director to Director. For instance Ranson, whom many, having read Penrose, would regard as the chief architect of all that happened, is only accused of setting the wrong bonuses in 1996 and 1997.
There is no question of anyone being accused of fraud (dishonesty) so that the 6 year period under the Statute of Limitations applies. This means that nobody can be done for any mistakes outside of that period and if you think that the mistakes were made way back or particularly in the early 1990. For instance Ranson, whom many, having read Penrose, would regard as one of the chief players in all that happened, is only accused of setting the wrong bonuses in 1996 and 1997.
Nash is up for mis-selling only and Headdon just for setting the wrong bonus in 2000 and mis-selling but also for not telling his fellow Directors about the Aggregate Policy Values (APV) against assets i.e. the Office Valuation.

ELAS's account of E+Y makes E+Y sound pretty dopey and here I think the case is strong that they failed. But the idea that ELAS lost anything as a result of E+Y's failure is going to depend upon whether they can convince the Judge that the company was saleable. That is going to be a difficult job. The killer ability of GARs to top up their premiums is not, so far, explicitly mentioned anywhere although it seems that Mike Ross might have referred to in mentioning 'open-ended GAR liabilities'. Mike Ross v Charles Thomson - could be interesting.

Day 1 – Monday 11th April 2005

The most significant point is on page 49 where Milligan shows the judge table G5 from Penrose which is the roughly the same as Table 6.3 which Penrose uses to demonstrate overbonussing. Milligan says a correction needs to be made for 1998 whereby the excess of Aggregate Policy Values over assets was only 104% instead of 110%. If he is correct, and he has not proved it, that there was such an error it does show a straighter line for the five years to 2000: 111%, 107%, 104%, 103% and 112% instead of 111%, 107%, 110%, 103% and 112%. However he made no other comment on this and I take this means that everyone accepts there was overbonussing.

Are the Directors going to challenge these figures which seems difficult? Or will they accept that there was overbonussing but it was not due to their misunderstanding of the DTBP but because they had not got a clue what they were doing because they did not have the figures? As they are not being accused of being utterly clueless I would have thought that was the better line of defence.

At page 46 he describes smoothing as when the bonuses are not the same as the earnings. A somewhat inadequate description.

At page 70 Milligan mentions the Bratton Seymour case upon which Peter Martin is putting such a lot of weight. Milligan says the refusal to imply a term into the Articles in BS was due to the point arising from facts known to both parties whilst in Hyman it was 'strict necessity' that required the implication of a term. A fine legal point upon which he may well be right.

At page 83 Re the Rectification Scheme the independent Actuary Hairs thought the cost should be borne by the GARs and not the non-GARS as a matter of fairness. Lord Browne-Wilkinson said that would not be lawful.

At page 146 Despite protest from Rabinowitz that Penrose was not evidence and not admissible Milligan read out certain of the conclusions of Penrose and although admitting they were not evidence said the evidence in this case would support them as being correct.

Day 2 – Tuesday 12th April 2005

This was the second day of Milligan opening the case for ELAS. No excitements - really just a lecture on how it all worked. ELAS seem to be trying to amend their case at the eleventh hour, much to everyone's annoyance. One claim for £1,900,000,000 has been reduced to £6,700,000 - a 99.65% reduction. How this affects the overall amounts claimed I do not know.

Day 3 – Wednesday 13th April 2005.

This was Rabinowitz QC for the non-executive directors instructing Allen & Overy. It is all very plausible. The Directors had to plough through over a hundred pages of information when making their bonus decisions and there was no mention of the DTBP so how can they be accused of negligence? The idea that allocating a bonus might suggest that they had actually the money in the bank to pay it in due course is never mentioned; there are many excellent reasons for paying higher bonuses - mainly of a marketing nature. Also reducing bonuses now means that the current generation is being deprived of this fairy gold to the benefit of the next generation. The fact that in these bonus packs of over a hundred pages the executive management never mentions the looming problem of GARs excuses the non-executives in his view.

PRE for Rabinowitz is merely the policyholder's expectation that because he has had high bonuses to date he will continue to get high bonuses.

More amazing is the advice the Board received from Dentons after the Court of Appeal that it was alright as ring-fencing was permitted in any case. Miss Gloster their new QC apparently agreed with this advice: hence Nash's infamous letter of 1st February 2000. If this is the correct version of events then it seems to me that it may be undermining the decision made by the FOS that Nash's letter was misrepresentation.

Day 4 – Thursday 14th April 2005

Have just ploughed through day 4 and the opening statements/skeletons of Jennie Page, Bowley and Thomas and Roy Ranson - well over 300 pages in all.

The most significant point, for me at least, is Ranson's statement as to how the final bonus is calculated on page 29 para 53(5). It is explained how the declaration of the guaranteed bonus used up all the calculated surplus each year. Then:

Final bonuses, by contrast, were announced by application of a prospective growth rate anticipated to apply in the year to come, for policies that became claims before the next valuation.

Well there you have it. The final bonus does not represent anything in the bank but merely a guess of profit in the coming year sufficient to cover the payments out on policies maturing in the coming year. There is no question of comparing Aggregate Policy Values with available assets or anything fancy like that. Therefore no need to show the Office valuation to anyone. One is really just looking at estimating a fairly small sum needed for payments in the coming year. From memory I think they usually got it wrong. So the gradual piling up of final bonus on the statements we were sent each year was just might-have-been money with no basis in reality whatsoever. He goes on at page 44 para 91: Moreover they were simple decisions about how the amount of surplus arising in a given year... was to be distributed amongst those policyholders

Thus it was the policyholders, whose policies matured in a given year, who got the whole surplus and the rest were just told about funny money. No wonder there was a black hole. But this is not something the court will consider.

Miss Page's skeleton is about how important she regarded brand image as being and the importance of PR - as to actual content - well she had problems with that ludicrous Dome.

As to the activities in Court on that day it seems that ELAS is going to be landed with a costs order in any event in respect of the claims it has had to withdraw. So the amounts claimed shrink in one direction and the costs is has to pay, as well those it may have to pay, go up. One wonders when the two will cross over. ELAS's amendments were still causing confusion.

Symons for Bowley & Thomas criticised Milligan's opening as being without content as well as VT's non-attendance in Court. Bowley and Thomas were both executive directors but they had nothing to do with the actuarial department they claim. This may be true of Thomas but as I have mentioned in an earlier post Bowley was pig in the middle when the non-execs tried to set up systems - much too late in the day - to extract information from the actuarial department on risk management. Whether he helped or hindered there will not be dealt with in court. Unlike Rabinowitz, Symons claims there was a mirror image DTBP going back to the 1970s. Otherwise the same line is taken - they all behaved very reasonably, were all very good chaps, worked diligently trying to be fair and the House of Lords was a total and unpredictable surprise.

The question remains: Why if the House of Lords was such a surprise did they not go back to their Lordships with proper representation for the non-GARs and attempt to reinstate ring-fencing?

Again the statement is made that ring-fencing was decided in their favour in the Court of Appeal. Simply not true but they seem to have been advised that that was the case. However in March 2000 they began to talk to Hyman's QC Jonathan Sumption who pointed out that ring-fencing was a completely new issue and would be fought over in the House of Lords. So why did they not correct Nash's infamous letter when they realised that?

Mr Leaver for Miss Page describes the problem as an unknown seismic fault line. Unknown?? Ranson knew about it. Leaver went on to point out the contrary stance between the Court action and ELAS's letter of 15th November 2004 to the FOS - previously described as utter hypocrisy.

Mumford for Ranson just repeated at length what the other Directors' barristers had to say. All very plausible if you accept their somewhat approximate version of events.

E O & E