Week 11

Day 40 – Monday 27th June 2005

Milligan for ELAS is to continue his cross-examination of Sclater all day, but first Sclater wants some amendments to the transcript.

Page 2: Sclater mentions his membership of a dining club “The Parlour” – to which some eminent law lords belong? Quite irrelevant he says but is this the verbal equivalent of a Masonic handshake or just name-dropping?

Page 11: The Equitable as a mutual admiration society?

Page 21: Sclater saw the DTBP as being fair – an attempt to ensure people got asset share.

Page 26: Sclater and others do not seem to appreciate the role of the Appointed Actuary – they think him frightfully important and erudite – but seem to overlook that he is supposed to be a Devil’s Advocate on behalf of the policyholders and the Regulators to check what the Society’s Actuary and his executives are doing. Not obvious though if the two roles are combined in one.

Page 42: Sclater says he is an agnostic as to where interest rates are going so cannot predict them. Fair enough but surely it was not the probability of interest going down that was the point but the possibility. Anyway if interest rates have been very high there is surely a reasonable probability, based on history, that they are likely to go down.

One feels he is starting to be difficult.

Page 50: Telling the policyholders about the DTBP: he says the Reps were the key interface. He did not know until recently that there was nothing in the literature. There is no mention or discussion of how the reps were briefed.

He becomes somewhat evasive.

Page 57: Bundle 54 page 155: 25th September 2000 note by Sclater saying the NEDs feel they have been led up the garden path i.e. kept in the dark. “NEDs cannot go on as they are”. “There could now be a substantial extra cost to the non-GAR policyholders”. There was an independent meeting of the NEDs in Schroders on 3rd October 2000 but we learn nothing more about that.

Page 60: Bundle C44, page 303: Note by Sclater of telephone conversation with Nash on 22nd June 2000:

Milligan:. Can you put away C54, and be given for a moment C44, at

9 page 303? You will find there another of your notes,

10 and we have that transcribed at page 304. It is the

11 note of a telephone conversation with Mr Nash on

12 22nd June 2000, which is, I think, shortly after the

13 hearing in the House of Lords but before judgment is

14 given.

15 You refer in the first sentence to a conversation

16 that you have had with Mr Nugee about the hearing in the

17 House of Lords, and in the bottom paragraph, you say:

18 "In 1994 (early) re 1993 we introduced differential

19 bonus scheme first. We were remiss about not informing

20 all policyholders what we were doing clearly. Woolf

21 commented on this. The way in which we expressed the

22 change was also a bit devious."

A bit further on:

11 Q. At the foot of the page, you say:

12 "JRS became president May 1994 luckily."

13 So that is after the decision on the DTBP. I take

14 it that in retrospect, as at June 2000, you were

15 particularly concerned about what had happened in

16 December 1993, were you not?

17 A. With retrospect, in June 2000, I frankly wished I had

18 never ever been asked to become a director of the

19 Equitable Life.

20 Q. Was this because you felt that a nonsense had been made

21 21 in December 1993, and you would have been responsible,

22 or that much more responsible, had you been the

23 president at the time?

24 A. No, I just felt that the whole thing was just

25 overwhelming, and a huge problem, and an intense worry

1 to me.

Milligan continues with the hypotheticals.

Page 92: After lunch Milligan says ELAS is not pursuing the question of the overpayments. The experts have advised “too many complications”. Milligan accepts that ELAS will have to pay the costs of this episode and the Judge so orders. Should not have cost ELAS more a million or two so we can breathe again.

It is a strange episode. The claim for overpayments strikes me as being very similar to the overbonusing claim so why was it left out? Nobody seems to accept that they only just thought of it.

Anyway back to Sclater:

Page 108: Sclater adopts the detached patrician attitude – he seems to have no firm opinions and would always need actuarial/accountancy/legal advice before coming to any conclusion – un gentilhomme est un homme qui se foute de rien.

Page 109: We get onto smoothing:

4 Milligan: There are two important things: one is if markets have

5 risen your assets will have grown and therefore for that

6 reason you would expect the FFA to be larger, but in

7 addition, if your smoothing cycle is in broad terms

8 aimed at anticipating the investment cycle, so that you

9 are aiming to smooth out the peaks to enable you to

10 smooth out troughs, whether in the future or in the

11 past, then you are expecting, all being well, your FFA

12 to be ahead of your terminal bonus at a time when you

13 believe or anticipate that you are at the peak or near

14 the peak of the investment cycle.

15 A. No, I would not see it in those terms. All that I ever

16 saw was that we were aiming to keep in balance over

17 periods of time of unpredictable duration -- and that

18 I could not really say that I expected any particular

19 relationship to obtain between the FFA and the accrued

20 terminal bonus at any particular moment.

21 Q. If you were in balance, then you would expect the FFA to

22 be equal to the accrued terminal bonus, would you not?

23 A. I guess that is pretty close to what being in balance

24 means.

25 Q. Absolutely. Therefore, if you are looking at the

110

1 smoothing cycle, you would expect the FFA to oscillate

2 about the accrued terminal bonus.

3 A. Well, I never looked at it quite like that. As I have

4 said 100 times before now, I knew that each year, we had

5 a difficult decision to make, and I knew that over

6 periods of time, we needed to get back into balance. In

7 the decade we are talking about, we were broadly

8 speaking in balance on two occasions, and it was jolly

9 bad luck that we had those two rotten years, but if you

10 had added in our so-called -- the value of the goodwill,

11 et cetera, et cetera, things that we have spoken about

12 in the past, we were almost certainly actually in

13 surplus from time to time.

“I never looked at it quite like that” - a favourite phrase of Sclaters.

Page 135: Judge Langley intervenes to say maybe it is getting so hypothetical as not to be very clear.

Page 138: Sclater would not have been reluctant to move substantial e.g. 5% of fund into gilts to improve solvency if E+Y had recommended £1 billion GAR provision.

Page 144: Judge intervenes again to ask whether the experts could not be asked to agree upon some of these hypothetical figures.

I mention this as Judge Langley hardly ever intervenes and I wonder whether he is not getting a little impatient with these tedious hypotheticals.

Page 161: Bundle C18 page 124 1st September 1998. Memo from Headdon to Non-executive directors about GAR problem. On page 167 the note implies that it could be very unfair to non-GARs as no ring-fencing.

Day 42 – Wednesday 29th June 2005

Milligan for ELAS continues his cross-examination of Sclater.

Page 7: “We had been very, very strongly advised … not tospeculate on outcome of legal situation”.

Does this preclude them from making contingency plans which involve looking at the various possible outcomes? Of course not, because they did just that. What it undoubtedly means is that they should not speculate i.e. guess what the outcome will be – they did just that assuming they would win.

Page 17: Bundle C39, p.294 Wilmot’s note of the Board Meeting of 23rd February 2000 i.e. just after Court of Appeal decision:

8 Milligan: If you turn to page 296, you will find, halfway down

9 the page, Mr Davis's initials, do you see that?

10 Sclater: Yes.

11 Q. He says:

12 "What advice are salesforce giving re 'I have got

13 half a million pounds, how should I react', eg should

14 I take annuities now.

15 "Mr Weller: not allowed to comment on future

16 unknowns, eg stock market, interest rates, court case.

17 "Mr Nash: but saying 'fair return with no cross

18 subsidy'.

19 "Mr Davis: difficult position, if we duck position

20 and case goes against us. Difficult if major effect on

21 person's fund.

22 "Mr Weller: effect of loss on whole class is not

23 widely known.

24 "Mr Headdon: seeking fallback position to allow to

25 carry on as close as possible to current approach (where

19

1 people do not want to use GAR) eg endorsement to

2 policy."

3 So far as Mr Nash saying "fair return with no cross

4 subsidy" is concerned, you would have understood by that

5 that he was referring to no cross subsidy between

6 classes, would you not?

7 A. Well, you will have to ask him, I am not sure what he --

8 Q. I am concerned about what you may have understood,

9 Mr Sclater.

10 A. I do not remember this conversation.

11 Q. If that is what he was suggesting, you would have been

12 aware that, in effect, the salesforce was saying to

13 a non-GAR policyholder, "No subsidy of the GARs".

14 A. Sorry, say that again, if he --

15 Q. Yes, that the salesforce were effectively saying to

16 non-GAR policyholders, "You are not subsidising the

17 GARs".

18 A. Well, I really do not know what he was saying, or what

19 I would have deduced, but the line above, it is

20 Mr Weller, I think:

21 "Not allowed to comment on future unknowns, eg stock

22 market, interest rates, court case."

23 So I mean, I really -- that evidently is what the --

24 Weller was the chap, John Weller, who was in charge of

25 the salesforce, and it seems that the line he was taking

20

1 was, "We must not comment on future unknowns, stock

2 market, interest rates, court case".

3 Q. Yes, Mr Nash is correcting him or amplifying the

4 position by saying "but saying", ie the salesforce are

5 saying, "No cross subsidy".

6 A. You will really have to ask Mr Nash what he had in his

7 mind.

8 Q. If that is the gist of what he was saying, then you

9 would have appreciated that that was potentially

10 misleading to non-GAR policyholders, would you not?

11 A. I have absolutely no recollection of thinking any such

12 thing.

13 Q. No, but if you had understood that that is what he was

14 saying, you would have appreciated that that was

15 potentially misleading, would you not?

One wonders whether he was paying attention to what was being said at the Board Meeting.

Page 22: Bundle C43 p.127 “Defence Committee” meeting:

2 Milligan reading note of this meeting:

"Mr Sclater: do not say what worst case can be if

3 House of Lords upheld the Court of Appeal judgment,

4 financial strength not affected. Supplementary what if

5 not, hypothetical cannot answer."

6 My understanding of the gist of that last part of

7 the discussion is that you were content for questions to

8 be answered as to the outcome in the House of Lords in

9 terms of the Court of Appeal result, but not to say

10 anything about whether or not there could be a worse

11 outcome, is that fair?

12 A. It is very difficult to know, because these are

13 scribbles made by Mr Wilmot at that time, and he did not

14 write things down verbatim, et cetera, et cetera, so it

15 is really hard to know exactly what all this does mean,

16 but what rings a bell with me is particularly this:

17 "Supplementary what if not, hypothetical cannot

18 answer."

19 That goes back to this point I keep on making, that

20 we had been very, very specifically advised that we

21 should not speculate on what the outcome of this

22 litigation might be, and for my part, if anybody said to

23 me, "Could the outcome be worse than £50 million?", or

24 whatever it is, I would have said, "I am just in the

25 hands of the judge, I just do not know".

But surely he did know what the worst possible outcome was - £1.5 billion to be borne by the non-GARs in large part.

Page 26: Scher for Wilson cross-examines Sclater.

Page 34: Sclater “I am not sure they [lawyers] are ever necessary, but that they are evil I would agree with you.” Apparently he would not have consulted lawyers about the legality of the DTBP even if the legality had been challenged by a policyholder. [Several had but he was not told.].

I doubt if this did Sclater much good.

Page 46: Leaver cross-examines Sclater.

Page 54: Bundle 68 p.194.1 Phone call of 1st April 2001(?) with VT saying he is looking for deepest pocket.

Page 56: p.260.1 Another note of phone call with VT. Sclater notes (page 57) “Herbert Smith have started gentle work on published material and books of minutes”. Why ‘gentle’? Were they not really trying? At all costs not to find fraud?

Page 68: Milligan says that his clients ELAS have decided to continue with the lost sale claim.

Page 69: Hapgood objects.

Page 70: Mumford for Ranson cross-examines Sclater.

Page 84: Headdon cross-examines Sclater.

Page 115: Headdon re Lenon’s note in reply to Jeremy Leaver referred to yesterday. All this meant was that ELAS was relying on legality of DTBP rather than ring-fencing.

Page 119: Headdon refers to Wilson’s contributory negligence claim against him.

Page 121: He brings up the Nomination Committee minutes. Mr Wilson is referred to as a fish out of water and was to be asked to step down.

Page 124: Hapgood for E+Y cross-examines Sclater.

Page 151: Bundle C25 p.133. Letter from Mr Allen of the FSA to Alan Nash of 1st February 1999(?). Sclater says absurd reserving requirements of GAD. He met Patrica Hewitt, the Secretary of State, who said “I want to look into it”.

Page 153: Problem solved by the reassurance treaty. Sclater calls it a technical solution to a technical problem. Others might see it as just a fudge. New labour spin?

Page 183: The suggestion that an external actuarial advisor might have been called in: “It is about the last thing one would have done.”

Why is getting a second opinion such a no-no?

Day 43 – Thursday 30th June 2005

Rabinowitz for Allen & Overy clients calls his client Peter Davis.

Page 3: Miles for ELAS cross-examines Davis

Davis was a non-executive Director from 1st July 1995 to April 2001.

Chartered Accountant with a law degree and one-time partner in Price Waterhouse.

Page 7: Davis was instrumental in introducing internal audit and risk management to ELAS – unfortunately too late.

Page 8: Bundle C11 p.78 Letter from Bowley to Martin, Davis & Tritton. Lord Penrose quoted it on page 309. It is basically telling them to get lost on the subject of risk assessment. “Completely unsatisfactory” is how Davis saw it at the time – “a totally unwarranted if not downright rude response”.

Page 10: However to-day he is toning it down.

Page 12: Davis: ‘“Arrogant” is a word which was used about the management attitude within the Equitable on several occasions.’

He says however that things gradually improved.

Page 15: Table of risks produced – Jan 1998. Davis still not clear whether it contained any reference to the GARs. I wonder whether this point will be cleared up.

Page 16: Davis called Society v. arrogant, especially Ranson in May 1997.

Page 18: In July 1997 Ranson wrote “The greatest danger to the Society is, in my view, for what it is worth, not the offer of a bid but the unwillingness of the non-executive directors to listen to the executives”.

Blimey!

The hypotheticals follow.

Davis comes across as straightforward honest person who endeavours to answer the questions – certainly no signs of Alzheimers. Joining the board in 1995 it was probably already too late.

Page 184: Rabinowitz re-examines Sclater.

Page 187: Mr Reid asks questions at AGM 1999.
Nash: “I cannot speculate” NOT “I do not want to speculate” OR “I have been advised not to speculate” as to the outcome but “I cannot” which was untrue as he was speculating quite happily that they would win.

Page 196: Submission by Hapgood about Arnold’s Report. Are ELAS going to use his evidence? Judge says Hapgood can ask this after all the Directors have given evidence.

Page 201. Hapgood asks whether the point about the external advisor is being pursued and also the point about whether Schroders should have been dropped.

Page 205: Submission by Headdon: so complicated I could not follow but generally that some claims should be dropped or reduced.