Week 10

Day 36 – Monday 20th June 2005

An unenlightening day.

Leaver cross-examines Tritton.

Page 7: Mumford for Ranson cross-examines Tritton

Page 22: Tritton says that if he had been told about the complaints about DTBP he would have wanted to know more and get legal advice.

Page 29: Headdon cross-examines Tritton

Page 34: Hapgood for E+Y cross-examines Tritton

Discussion of possible flotation, sale etc.

Page 80: Tritton would not have reduced bonuses across the board because it would have impacted the non-GARs and he was determined to keep costs within policy classes – the practice of the life assurance industry for 150 years.

Page 100: Tritton felt he did not need to see the Office Valuation when deciding upon bonuses.

Page 115: Tritton found Headdon more open than Ranson.

Page 139: Rabinowitz re-examines his client Tritton.

Page 165: Rabinowitz introduces his client Peter Sedgwick.

Page 166: Milligan for ELAS cross-examines Peter Sedgwick.
Sedgwick non-exec 1991 to 2001.

Page 183: It seems that this mutual Society was really a mutual admiration Society and this trial is a meeting thereof. All the non-executive Directors were wonderful people.

Day 37 – Tuesday 21st June 2005

This was the dullest day yet.

Milligan continues to cross-examines Sedgwick

Page 4: Sedgwick joined the Board as an investment expert not as an actuarial expert so he did not pretend to understand actuary speak.

Page 10: He relied upon the special nature of the Appointed Actuaries role. Nobody asks him whether the Appointed Actuary should also be Chief Executive.

All just the same hypotheticals and assumptions as before. He gives much the same line as Tritton though less colourful.

Day 38 – Wednesday 22nd June 2005

Milligan for ELAS continues to cross-examines Sedgwick

Page 23: Sedgwick. Well, in a wholly hypothetical world, and as I have said

17 before, having to accept a hypothesis which in fact was

18 highly improbable, highly unlikely, et cetera, I cannot

19 say otherwise than if somebody had said to me that there

20 is a danger of this, rather than it was remote, then

21 obviously in facing something that was not remote,

22 I would feel slightly different to facing something when

23 I was told it was remote.

What on earth is all this about?
But it get mildly more interesting:

Page 52:

Sedgwick: To be sending out

12 letters which ran against all of the expectations of the

13 results of this situation, and which could lead to

14 completely unnecessary damage to the Society which had

15 responsibility for many, many people's pensions, was one

16 that had to be carefully judged.

17 This was a business judgment. Now, years later, the

18 nature of the debate is very difficult for me to

19 resurrect, and the pros and cons, but it was not just

20 simply a question, it was a moment in time when a major

21 problem had to be considered.

My feeling is that telling the truth does not come into business judgments in Sedgwick’s world.
Such information could be relayed with a note that it was very low in their expectations but that there was still a risk, however small. Just denying it was not on. It might have delayed people making further investments for a few months but that was all or were those payments so necessary because one was running a Ponzi scheme?
Fortunately Milligan did not let him get away with this but Alzheimer’s takes over at that point.

Page 59: Re Nash’s letter of 1st February 2000:

2 Milligan. And you would have seen, in the second last paragraph,

3 that it says:

4 "Contrary to many of the reports which have appeared

5 in the press, there would be no significant costs

6 imposed on the Society if the Court of Appeal's decision

7 were upheld in the House of Lords. The speculation

8 regarding financial difficulties and costs to be borne

9 by with profits policyholders is therefore unfounded.

10 Your Society remains, and will continue to remain,

11 financially secure."

12 The difficulty with that paragraph, Mr Sedgwick, is

13 that it does not identify at all the risk of a less

14 palatable outcome, and it would lull the policyholder

15 into believing that nothing can get worse, do you agree?

16 Sedgwick:. Well, what I read this as saying is that we have been to

17 the High Court and we have been to the Court of Appeal,

18 and the Court of Appeal's decision, if it is upheld,

19 would create no significant costs for the Society. That

20 is a statement of fact.

21 Q. Yes, it is a half truth though, because you knew that if

22 the House of Lords were to adopt a less palatable

23 solution, then it would be disastrous for the Society,

24 and indeed for non-GAR policyholders.

25 A. Well, I think the judgment that no doubt was applied to

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1 this letter, which was approved, as I understood it, by

2 Dentons, but which I did not draft, but which

3 I subsequently read, was that in the normal course of

4 events, you do not point out to people what is highly

5 unlikely is going to happen. You do not write to them

6 and say, "If the equity market halves, your bonus might

7 halve this year".

8 Q. But if you are pointing out something to an investor,

9 Mr Sedgwick, and you are saying something, you need to

10 make sure that what the something is is fair, do you

11 not?

12 A. I personally believe that everything we were doing

13 throughout this was the fairest thing that we could

14 possibly do, and try to achieve an equitable solution to

15 a problem, a historical problem which had arisen, as far

16 as we were concerned, out of nowhere, and I think this

17 was a statement of fact -- I did not draft the letter,

18 if it had gone to Dentons, and our lawyers felt that

19 this was a fair letter to be sending to policyholders,

20 and was not misleading, and was not a half truth, then

21 I would have assumed that Mr Nash and the executives

22 were satisfied by that.

23 (12.15 pm)

24 Q. I am just focusing on you, Mr Sedgwick, reading this

25 letter, as an intelligent and experienced man, you would

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1 have seen that that was a half truth, would you not,

2 because you were well aware that if the House of Lords

3 came up with a less palatable solution, that would be

4 disastrous for the Society.

5 A. Well, I think it is self-evident, as we have said, that

6 there is risk in litigation, so if one goes to the House

7 of Lords, then there is going to be a litigation,

8 however improbable, risk, there is always two results to

9 any case; the judgment that has to be made by the

10 executive in drafting this letter is, as we have come

11 back to again: is the risk so remote that it is not

12 a risk that needs to be included or otherwise? I think

13 that was again something which the executives had

14 decided with the lawyers was an appropriate way without

15 putting the Society unnecessarily at risk, which

16 I believe was a very important issue in this.

17 Milligan for ELAS talking about the Society telling ‘half truths’ – perish the thought! But more seriously here we have Sedgwick, the great investment expert from Schroders, on what investors should be told. He must know that he would have been hung, drawn and quartered if he had tried that tack in a share issue.

Page 64: Sher for Wilson cross-examines Sedgwick.

Of course Sher’s tack is as before to show that the Board were not properly informed about any of these matters.

Page 65: DTBP was never flagged up to the Board as being an issue before Autumn 1998.

Page 83: And even then no question of communicating the problem to policyholders.

Page 84: There has been no discussion of policyholder communication in 1998 or 1999.

Page 87: Vaughan for Ms Page cross-examines Sedgwick.

Page 95: Sedgwick has no recollection of Ranson talking the Board through the DTBP in 1993.

Page 117: Headdon cross-examines Sedgwick.

Headdon, of course, wants to show that all the Board, executive and non-executive were at one.

Page 146: Hapgood for E+Y cross-examines Sedgwick.

Page 192: Sedgwick sees the position of the FFA (policy values v assets) as one of gradual improvement during the 1990s. The fact that this was because of a strong bull market is ignored.

Page 203: Rabinowitz for Allen & Overy clients cross-examines Sedgwick.

Page 217: The press reports after the Court of Appeal are again mentioned. They strike me as accurate in saying that there could be disaster if Court of Appeal decision upheld by Lords.

Page 220: Submission to be heard all next morning followed by Sclater in the afternoon.

Day 39 – Thursday 23rd June 2005

A second day of over 200 pages of transcript!

Milligan for ELAS makes a submission to amend.

It concerns over-payments although without seeing the skeleton arguments it is difficult to know exactly what is being asked for.

Some comment by me to give the background as I understand it:

It is already claimed by ELAS that the Directors over-bonussed in the latter part of the 1990s (latter part only because of the Statute of Limitations). By over-bonussing is meant the excessive declaration of guaranteed bonuses and/or the over-allocation of final non-guaranteed bonuses. This is explained in detail by Penrose. It is denied by ELAS when speaking to members who have claims but argued for by them when suing the Directors – ‘rank hypocrisy’ said Rabinowitz QC when speaking for certain of the non-executive Directors. Over-bonusing in respect of final bonuses can be corrected by cutting the final bonus.

Over-payments happen when the over-allocated policies mature and there you are losing real money as you are paying out the excessive bonuses. When Headdon took over from Ranson he began to draw the attention of the Board to this problem and I think he said that it might take some 15 years to unravel the situation. In 1997 he prepared a table showing the overpayments and it was this table that Lord Penrose extended using Headdon’s methodology and in respect of which he said the calculations were ‘necessarily crude’ – a phrase the FSA and ELAS have tried to say extends to other calculations.

Anyway Headdon, when giving evidence about what he would have done if E+Y had insisted upon a one billion pound provision for GARs, mentioned that one of the tools in the toolbox, to deal with, this was the imposition of an MVA on non-contractual surrenders. According to Milligan this lit a light in the minds of ELAS, who had not previously thought about it, that they could claim an extra £100 million from E+Y hence their submission to amend the pleadings.

Well, in my view, you can tell that to the Marines. Of course ELAS knew about the losses through not having an MVA in the late 1990s. But they had a problem in pleading over-bonussing when they had persuaded the FSA and the FOS that there had been none. Perhaps they thought that in pleading over-payments that was a deviousness too far in view of what they had said about Penrose?

Anyway back to the transcript:

Page 3: Headdon mentioned it in evidence. Nash apparently suggested it and Thomas, Tritton and Sedgwick would have used this MVA tool if recommended by Headdon.

Page 4: Why does it come up now? Because nobody thought of it!!!!!
We are into re-re-re-re amendments but nobody can remember the exact number of re’s.

Page 23: Milligan says that in considering this we ought to look at “Attitude of management, attitude of old board, and by way of a sanity test, attitude of new board”. Well I do not doubt their sanity.

Page 39: Judge Langley suggests the question of MVAs is rather complicated as does one not take into account the age of the policyholder, the length of time held etc?

Milligan replies: “My understanding is that these were applied crudely” – referring to MVAs imposed prior to 1995. Another example of Equitable fairness?

Page 72: Submission by Hapgood for E+Y:

“We are 10 weeks into the trial and here we have a new claim for £100 million. “ He explains it will be a formidable task to identify the non-contractual surrenders.

Page 136: Reply submission by Milligan.

Page 137: Judge Langley: “It is inexcusably [late] in the sense that you do not offer an excuse for it”.
Milligan: “I agree”.

Page 141: Milligan says it is not that complicated as the method was crude – there was no means to adopt a sophisticated approach as CT has pointed out. [means or will?]. This is the Equitable.

Page 151: Hapgood has complained that he has not had time to consult his experts. Milligan hasn’t either but thinks E+Y have had time to do so. Judge Langley “I do think that that is perhaps more than a little over the top”.

Page 153: Miles for ELAS intervenes to give some technical detail which I am sure is very useful but the relevance thereof escapes your scribe.

Page 156: Hapgood replies again.

Page 162: Judge Langley tells both sides to consult their experts and come back to him at close of play on Monday.

If ELAS loses their attempt to amend they may have lost a £100 million claim for the members by being devious in trying to screw member claimants who have genuine claims?

Page 164: Milligan introduces Sclater. Non-executive director since 1985. President 1994 to 2001.

Page 166: Before becoming President, Sclater talked to McNamara (who is he?) who said “it was completely wrong for one person to have as much power as Mr Ranson did”. But Sclater thought that Ranson would never abuse his position.

Page 179: The fact that the Regulators never said anything comforted Sclater.

Page 184: Sclater on smoothing cycles: “a whole lot of bunk that you could pigeonhole things in three to five-year brackets like that”.

Page 191: Sclater is very vague about the need for a negative phase in a smoothing cycle where assets exceed policy values. He is not very impressive.

Page 198: Sclater relied on the “comparison of actual and allocated growth rates” which many of us regard as phoney.