Week 15 + the odd short sessions on 3 and 10 October (days 60 and 61).

A personal interpretation of the transcripts, by retired trust solicitor, Nicolas Bellord.

Day 56 – Monday 19th September 2005

Page 1: Milligan for ELAS introduces the Society’s first expert witness: Mr David Law, who has produced two reports at E1.2 pages 2.1 to 2.99 and E1.3 pages 3.156 to 3.210

Page 2: Sher QC for Wilson has no questions. Gaisman QC for Ernst & Young (E+Y) is the only one who does.

Page 7: It is agreed that the members are entitled to place reliance on the audit of the Society.

Page 17: Gaisman is trying to get Law to agree that if an item has been calculated in accordance with basis A, then if the auditor tests it on basis B and comes to the same answer there is no cause for complaint. Mr Law seems unable to answer whether he agrees with this.

Page 20. Mr Law seems unable to answer the question.

Page 24: Gaisman claims that Law has agreed that if basis A is wrong but basis B produces the same answer as basis A then there is no cause of complaint.

Page 30. Gaisman claims that if basis A is correct and basis B used by the auditor is wrong but they come to the same figure then the member still has no cause for complaint.

Page 35. Gaisman goes on to establish that if both basis give the same answer, then there is no need to “make a note”.

Page 46: It would seem that the SAS (Statement of Accounting Standards) says that a report has to be made to the management only where fraud or error is suspected. Thus, I think what is being shown is that provided the figures in the accounts are right, the method of getting at them is irrelevant. Thus both the company and the auditors may each use separate and erroneous methods for calculating a figure but it does not matter and is not a matter for report, so long as the figure so calculated is identical in each case and is identical to what the correct method would produce. I would hardly have thought that this gives rise to confidence in the accounts or the auditors.

Page 50: We now seem to be moving into hypotheticals. We are asked to assume that E+Y should have seen the need to provide for the GAR and the question is when should they have first seen this. The point seems to be that they could identify the problem and get the answer at any stage in the audit process before signing the audit report.

Page 57: Gaisman seems to be making the point that the answer was being sought in January/February for the audit year in 1999.

Page 61: The point of identifying the moment when the answer was being sought is that Headdon and the management were quite content to recommend the bonuses for 1998 and the interim for 1999 without knowing what the accountants were going to say about the GAR provision. So, effectively, Gaisman is saying that the ELAS management were announcing bonuses without having the benefit of audited accounts. A little bit risky?

Page 70: Law confirms that he still thinks E+Y were negligent in signing the audit reports but that this view is based upon accepting that the reports by Arnold and Parmee (actuaries) are correct.

Page 84: This leads to the conclusion that if Law had relied upon different actuaries, then his view on negligence might have been different.

Page 86: But Law claims that if he had to rely upon E+Y’s expert Creedon, he would not have accepted his advice without question and would have gone for a second opinion.

By lunchtime things have got rather heated. I find it becomes difficult to follow and all rather vague with Gaisman pummelling away but not making precise hits.

Page 115: An argument develops about when errors become negligence. Not much light is shed on this.

Page 123: We then move on to the fact that Price Waterhouse, in auditing the 2001 accounts, would have used the figures from the E+Y 2000 accounts as comparisons and in doing so Gaisman suggests that they therefore endorsed E+Y’s work. This goes back to the point that Thomson accepted the 2000 accounts at the same time as getting Herbert Smith to attack them. Oh dear me!

Page 124: What is worse is that Law DID ask his firm – PWC - for the audit files so that he could find out why they accepted 2000 accounts and was refused access. Oh dear! But then if PWC got it wrong as well, do two wrongs make a right, I ask?

Page 138: Gaisman says that it is unreasonable for Law to disagree with the non-exec directors on the subject of provisions. However, Law is looking at the accounts as an expert accountant whereas the non-execs were relying on what was being told them by their execs and accountants so it is rather a different ball-game in my view.

Page 168: Law is having Thomson’s evidence quoted against him. Disastrous? Does this not put a big question mark over Thomson from first to last?

Day 57 – Tuesday 20th September 2005

Page 1: Gaisman for E+Y continues to cross-examine David Law, expert witness for ELAS.

Page 5: Gaisman shows that Law does not fully understand the workings of the DTBP.

Page 8: The same problem is raised as yesterday. If E+Y should have done something different in making GAR provision why should not PWC (from whence Law comes) have equally have required the previous year’s figures (audited by E+Y) to be restated when doing the subsequent year’s audit? One would have thought that this line of argument was one which ELAS must have anticipated. We will have to see whether Milligan can refute it.

Page 45: It seems clear that PWC did look at the previous year’s provisions and did not object to them. But here we have Law from PWC objecting to them saying that E+Y were negligent.

Page 51: Law is getting desperate and even Mr Justice Langley expresses his incredulity at some of his answers. Bad news.

Page 64: It gets worse:

24 Gaisman: Q. The reason why there was a Chinese wall is because it

25 was clear within PWC that PWC was doing two different

1 things which are flatly inconsistent, and receiving

2 a large fee for both; that is right, is it not?

3 Law A. I do not believe they were inconsistent, but one was

4 looking at a 1999 audit and one was doing a 2001 audit.

5 Q. That is not really the point, is it, as you well know?

6 On the question of principle which we agree arises, PWC

7 as auditors were saying "no problem"; PWC as experts

8 were saying, "Such a problem that we will launch legal

9 proceedings on the strength of it". You do not see any

10 inconsistency there, do you?

Page 77: Para 46 of Schedule 9A of the Companies Act says that the computation of provisions should have due regard to the actuarial principles laid down in the European Directive. Gaisman says that this means it does not have to be followed slavishly.
Is this an example of ‘light touch’ regulation?

Page 79: Law is trying very hard to support the ELAS case:

4 Gaisman: Q. Are you worried that if you do agree, then it somehow

5 undermines your case, because it is a very simple point.

6 I believe it is actually common ground on the reports

7 that "due regard" does not mean slavish acceptance. Can

8 you agree that, or disagree it, with a yes or no answer?

9 Law: A. It does not say slavish acceptance, I agree.

10 Q. And it does not mean slavish acceptance, does it?

11 A. It does not say slavish acceptance, so therefore it does

12 not mean --

13 Q. I cannot believe we are having this conversation,

14 Mr Law.

15 MR JUSTICE LANGLEY: Nor can I, to be frank.

But he succeeds in annoying the judge.

Page 127: Still on the question of reserving for GAR guarantees: Gaisman is saying there was no established practice for reserving for such so it was reasonable not to. I think Law is right in saying that if there is a guarantee you should reserve for it regardless of what everyone else does.

Page 152: Gaisman labours the point about lack of guidance but it seems to me that Equitable was in a unique position and some independent thinking was required.

Page 174: As far as I can make out Gaisman is arguing that if someone has £100 in non-guaranteed bonus and another has £40 guaranteed bonus and £60 non-guaranteed bonus then there is no need to reserve for the £40 guaranteed bonus as both get £100 in the end, so what is the difference?

Page 181: Gaisman keeps arguing that the DTBP made the GAR worthless. However, this is only the case if there is non-guaranteed bonus. If, for some reason, the non-guaranteed bonus was cut back (as it should have been!), then the GAR will be worth something and therefore should be provided for just - in case such happens. Law fails to make this point and one wonders whether Milligan will.

Page 198: Gaisman puts forward the view that if a company is in trouble then provisioning can be less prudent. It is not clear where he gets that from!

That was it for the day. Not quite the demolition that we had yesterday and I have a growing sympathy for Law’s point of view.

Day 58 – Wednesday 21st September 2005

Page 1: Gaisman for E+Y continues to cross-examine David Law, expert witness for ELAS.

Page 10: We are now looking at the rate of take up of GARs and whether actual experience of such was the proper basis for reserving.

Page 32: Gaisman continues to labour the point about the GAR having had all its value removed by the DTBP and that, therefore, there was no need to reserve for it.

Page 34: Gaisman refers to the Arnold report at bundle E1.1, page 55, paragraph 24. He is claiming that Arnold and Milligan QC for ELAS have both said that the value of the GAR was negated or eliminated by the DTBP. But I agree with Law that that is just one way of looking at it and characterising it and does NOT eliminate the need to reserve for the guaranteed part of the GAR.

Page 46: Gaisman does go on and on. And now we are back into hypotheticals.

Page 49: Gaisman does seem to realise that if terminal bonus disappeared, then the GAR will do better than the non-GAR but does he believe this could never have happened? Has he not heard of the 2nd black hole and the possibility of the market going – but the 2nd black hole is not mentionable in Court 76.

Page 68: This is really Alice in Wonderland stuff, as they just go round and round in circles with the same argument getting absolutely nowhere.

Gaisman: “As at the particular balance sheet date in 1997, 1998 and 1999, there was an ample terminal bonus cushion in relation to column C,”

Well of course, in the real world, we know that there was a shortfall of assets to cover this ‘ample terminal bonus’ but, hush, we must not mention that!

Page 70: But perhaps the real world does come in to it some times:

Q. If I replace my Saab with a Porsche, my Saab is not

13 going to operate.

14 A. You have got a Porsche.

I wonder how many days he has to spin this out in order to afford his new Porsche?

Page 102: Time for lunch:

18 MR JUSTICE LANGLEY: I think you both need your lunch now,

19 Mr Gaisman.

20 ………………

25 MR JUSTICE LANGLEY: It is definitely time for lunch.

Page 103: After lunch:

MR GAISMAN: Mr Law (to audible universal groans) “I am going

5 to put the question once more.”

Is Gaisman losing the sympathy of the judge?

10 Gaisman: Q. Should not; if he should have done, then that is the end

11 of any point you have on paragraph 43, is it not? That

12 is the only point you have. There is no other point

13 that you make on paragraph 43.

14 Law: A. Sorry, can I just -- I am struggling to understand your

15 question.

16 MR JUSTICE LANGLEY: I am not surprised, Mr Gaisman. Can

17 you put it again?

Page 132: We are now getting onto the question of what would have happened if terminal bonus had been cut. Mr Law says that this was a possibility as it HAS happened in the last few years. Mr Gaisman takes the view that that is hindsight and one must look at the position at the time when terminal bonus had not been cut in the previous twenty years. But surely, the fact of calling it non-guaranteed was just to indicate that it might be cut?

Page 134: 6 Q. And so to assume that terminal bonus would be removed is

7 an excessively prudent or pessimistic assumption about

8 the value of assets, is it not?

Surely this is nonsense?

Page 160: The argument has moved on to interest rates used in actuarial calculations which is beyond me (and possibly beyond Judge Langley as well?).

The day wraps up with the Judge asking Mr Law whether he is not tired and a discussion of what will happen to-morrow.

Day 59 – Thursday 22nd September 2005

NB OPINION: Before starting on this, I just want to recap on what has happened so far – purely MY opinion of course.

I have always thought that Ernst & Young should have made some provision for the GAR liabilities as soon as they came “into the money”. Nothing that Gaisman has said to Law over the previous three previous days has shifted me from that point of view. Of course, their failure with regard to the second black hole is not in issue in these proceedings.

Whether their failure over the GAR provisioning amounted to negligence would be for the judge to decide and has not really been discussed. However, the fact that PWC did not require the E+Y accounts to be restated must be a point in E+Y’s favour. However, even if negligent - what damage did the negligence cause? Here, I am afraid ELAS has failed to prove anything. So, in my view E+Y were wrong but the damage caused was minimal to the Society - regardless of what damage was done to the members and policyholders who are not parties to this action. At the most, ELAS might be entitled to refund of the audit fee.

As to the directors: The result of suing them all, and for nothing more than negligence, is that they have all ganged up to support E+Y. The only discordant element is Wilson blaming something on Headdon. I think they do have a problem over the Nash letter of 1 February 2000, but in varying degrees and not all of them e.g. Wilson was not a director at the time.

So that is my guess at the situation on this auspicious morning.

Page 1: Instead of Gaisman continuing his cross-examination of Law and Milligan then putting certain matters right Milligan announces that the case against E+Y has been settled on terms that the claim be discontinued each party bearing its own costs, and in addition, costs which have been paid to date to be repaid to E & Y.

Each side will pay its own costs. However, costs which have been paid by E & Y to date will have to be repaid. Ernst & Young applied for a strike-out order at the start and lost. E+Y had to pay ELAS’s costs in that respect ELAS will now have to repay that £900,000. There was also an attempt to amend back in the summer by ELAS which the judge disallowed awarding costs to E+Y with E+Y saying they would claim on the indemnity basis i.e. at a more expensive rate to cover all their costs of this diversion. It is not possible to quantify the cost to ELAS but it is obviously going to be substantial. Anyway, E+Y will be VERY pleased.

Next Milligan asks that the case against the directors be adjourned until Monday week i.e. 3rd October.

Page 2: Hapgood confirms that the costs being repaid are the costs of the strike out.
Hapgood thinks that justice has been done but the Judge says he could not possibly comment!

Page 3: Sher QC is completely surprised and says he has only heard about the settlement in the last few minutes. He asks for an extra week till 10th October.

Page 7. The Judge wants to stick to 3rd October but says anyone can apply later for a later date.

NB OPINION: What to make of it?
I still believe that the whole action had serious problems from the start, because of the difficulty of proving damage and that was pretty obvious to anyone who gave it ten minutes thought. The performance of Milligan QC, IMO, lacked vim. One frequently wondered when he would land a punch.

So why did it all happen? Was it a charade? Just a pretence that Vanni and his crew were doing something for the policyholders, to hide the fact that they have done nothing to get money out of the government through the PO or Europe? It has cost the policyholders TENS of millions which they can ill afford. On the plus side, we have learnt more to confirm what many of us have only been able to speculate about or what we have learnt from Penrose.
So the farce continues against the directors – but there again, the action is arguably misconceived and does not address the real issues.

Day 60 – Monday 3rd October 2005

This was the day the case against the directors was supposed to resume.

Page 1: First we are told there has been a settlement with Mr Martin and Mr Kinnis. It does not actually say that each side will be paying their own costs. Mr Kinnis’s role in all this seems to have been minimal. However, the entertaining Mr Martin, as a lawyer on the board who seems to have had some idea of what was going on, is probably wise to have settled.

In respect of Headdon, “the reporting actuary claim” has been abandoned. This, as far as I can remember, is the claim that he did not keep the board informed about the real financial position i.e. the office valuation. I have no idea why that claim should have been dropped – perhaps some embarrassing material would have emerged if it had been pursued?

Anyway Mr Headdon is going to get ALL his costs associated with this one on an indemnity basis – so that is another outflow from the WP fund. I think we are entitled to an explanation but we won’t get one!

Page 4: Only 100 pages out of 360 of Mr Arnold’s report will now be put into evidence.

Headdon mentions the conundrum of Wilson’s claim against him:

12 Thirdly, to a very considerable degree, the

13 provisioning claim against me spawned Mr Wilson's

14 contributory negligence allegations against the

15 actuarial management. That in turn created a further

16 new aspect to my defence, and by extension that of

17 Mr Ranson, with the need for further witness statements

18 and expert evidence.

It will be interesting to hear whether Wilson’s QC has any views on this.

Milligan, for ELAS, says that the claim against Headdon that has been dropped was a good one:

MR MILLIGAN: My Lord, I would like to take two points. The

11 first is that the Society remains of the view that there

12 is a good claim against Mr Headdon in respect of his

13 conduct as reporting actuary; however, it has reached --

14 this is the second point -- a pragmatic conclusion,

15 taking account of the costs and the question of recovery

16 now that he alone is defending that point.

Page 6: Barrister Mr Handyside, for Allen & Overy’s six clients who are on a Conditional Fee Agreement (CFA), makes a submission on costs. They want an interim costs order on the indemnity basis in respect of the dropped claims. It all becomes very complicated and technical.

Page 16: Handyside makes the interesting point that the six directors, for whom he acts, were never asked by ELAS prior to the trial what they were likely to say as to what they would have done if E+Y had insisted on extra provisions! You couldn’t make it up!

it is quite

23 extraordinary the Society should commence this massive

24 litigation against Mr Headdon and against Ernst & Young,

25 and in particular against Ernst & Young, without taking

1 basic steps to establish whether it had a case on

2 causation.

Page 19: The CFA was only in place from January 2005 and his clients incurred costs prior to that date as follows:

Mr Davis' costs, for example, to 11th January,

20 in excess of half a million. Mr Price, just under half

21 a million. Mr Sclater, Mr Sedgwick, Mr Taylor, just

22 under half a million. Mr Tritton, just in excess of

23 £300,000.

Page 25: Handyside makes the point that the directors have been used to “get at” E+Y, as stated by VT himself and this is relevant to the costs issue. Another own goal by VT.

Page 27: Submission by Leaver QC on behalf of Jenny Page on costs. She was a” litigant in person”, before getting a CFA with Simmons & Simmons.

Page 33: Somewhere, since the previous hearing, it appears that the continuing case against the directors will NOT start until Monday 10th October.

Page 34: Submission by Mr Milligan for ELAS on costs,

Page 43: Reply by Mr Handyside.

Page 45: Reply by Mr Leaver

Page 47: Ruling by Mr Justice Langley in which he declines to make any interim ruling on costs.

Page 52: They turn to housekeeping.

Day 61 – Monday 10th October 2005

This was the day the case against the directors was to resume.

Page 1: First we are told there has been a settlement with Mr Wilson and Mr Bowley. It does not actually say that each side will be paying their own costs.

I suppose that if Mr Wilson could afford it (with a reputed £400m +), he may well feel it is worth paying his own costs to get rid of the worry of this claim even though I think ELAS didn’t have much of a case against him. Mr Bowley has probably done the sensible thing. This presumably means that Wilson’s call for a contribution from Headdon on the grounds that he did not keep him informed also disappears. Pity.

Mr Whitworth will not be giving evidence and Mr Ranson and Mr Headdon will not be calling Mr McBride.

Page 2: The result of this is that we are going to hear Mr Arnold but there will then be a break until 20th October – presumably some timetable is being adhered to and the witness that have dropped out create a gap until then.

Page 3: Mr Arnold is then called on behalf of ELAS. He is a famous actuary who issues reports on many demutualisations – a master of approving deals such as the Equitable’s “conpromise”.

Page 4: Milligan QC introduces Mr Arnold.

Page 6: Apparently he would have suggested bonuses in line with earnings. This might seem like very original thinking but one wonders whether he takes into accounts such matters as expenses.

Page 7: It is Mr Headdon that sets out to cross-examine Arnold.

Page 9: At this point we are going to be referred to documents which none of us have seen. What about that old adage: “Justice must not only be done but it must be seen to be done”? We could remind some lawyers of that when they come to refuse to let us have sight of these documents.

Headdon starts discussing the role of an “independent actuary”. We, of course, know that he would have threatened to resign if the opinion of any independent actuary had been sought on HIS work.

Page 12: Headdon launches into an attack on Arnold saying he has not dealt with many mutuals. An approach which suggests a certain weakness in his own case.

Page 32: Headdon’s argument seems to be that IF the directors had taken action earlier the Society would just have gone down hill earlier. This might however have saved more of us from investing in the Society, but that is not the point here and it is rather galling to have this pointed out to us by one of the executive present throughout the disaster. One wonders whether, in the current culture of spin, there is not a tendency to believe one’s own propaganda - with disastrous results.

Page 85: It’s all a long conversation, with many disagreements. How much of it adds up to any points of real substance it is difficult to tell.

Page 116: Headdon mentions Arnold’s role in the compromise scheme. A tantalising reference to the Halifax sale:

25 Q. In the revised sale process, it became apparent that the

1 potential acquirers of the sales force, even though they

2 were not acquiring an interest in the with profits fund,

3 were keen to see the fund stabilised through

4 a compromise scheme; that is right, is it not?

5A. That is right, yes.

Page 146: Much is made of Lord Penrose’s one error in his figures.

Page 153: Headdon claims that there was more than half a billion more assets than Lord Penrose has shown.

Leaver QC starts to cross-examine Arnold:

Leaver takes Arnold through the factors which the directors would have had in mind when deciding on bonuses. He seems to want to suggest that the commercial reasons were sufficient to outweigh the fact that you do not have the assets to cover the bonus – a justification of the Ponzi scheme?

Page 156: Milligan re-examines Arnold.

Milligan refers Arnold to his experience of the demutualisation of Scottish Amicable where there were GARs and lack of capital. It seems Scottish Amicable had different bonus rates for different classes, which made managing the problem much easier.

Page 163: Hearing adjourned until Thurs 20th October 2005.

I do think Langley J. has a better grasp of what is going on than I do but he does have the advantage of being able to see the written evidence, reports etc. It is interesting that others who were in court on that day – 10th October – were impressed by Headdon’s talents and felt he had got Arnold rattled. This impression does NOT come out from reading the transcript and it is not particularly obvious where Headdon has demolished Arnold - but then I have not fully understood all the arguments.

Day 62 – Thursday 20th October 2005

Now that part of the case has been dropped there has been a gap in the timetable after having heard Mr Arnold being cross-examined on 10th October.

Page 1: Mr Miles for ELAS: The timetable is to be discussed.

Judge Langley says he is lost and asks what claims are still being pursued against whom.

Mr Miles replies saying that, first, all claims against the directors relating to bonus decisions in 1996 to 1998 and the claims are that the litigation should have started or would have started earlier are alive but limited to the DTBP and the hypothetical and actual Hyman cases.

Second, once Hyman started they should have been more cautious with bonuses in 1999 and 2000. In addition there are the mis-selling claims.

Page 3: Ranson is subject only to the first lot of claims.

Headdon is being claimed against in his position as Appointed Actuary from 1998 onwards. After he became a director in 1999, he becomes subject to the second lot of claims.

Page 18: It is suggested that the next hearing date shall be 12th December.

Page 22: They move onto costs regarding interim payments.
An expert for the defendants, Mr Franklin, charged £77,000. ELAS is offering £50,000.

Page 29: It is said that ELAS have spent £10,000,000 on their own experts.
The Judge awards £60,000 as interim payment for Mr Franklin’s fees.

Page 31: Headdon spent £260,000 in legal fees until he became a litigant in person. An argument develops as to what part of that relates to claims against him and which have been dropped.

Page 35: An unemployed litigant in person is entitled to £9.75 an hour.

Page 38: Mr Headdon claims he should be entitled to £100 per hour.

Page 39: Rabinowitz QC for the Allen & Overy clients disputes Charles Thomson’s claim that the lost sale claim was abandoned “to save time & costs”. He says that it was abandoned because ELAS’s expert said it was unsustainable.

Mr Miles for ELAS refuses to disclose the reason for abandoning the claim – something which he is entitled to do.

This was the last time this litigation will be heard in Court 76, for when (and if) it reconvenes on 12th December, it will be in a much smaller Court.