Week 2

Day 5 - 18th April 2005

I've found the antidote for nodding off - read Peter Martin

But first after Mumford had finished for Ranson, Chris Headdon came on as a litigant in person. I suppose it is understandable that he does not like Lord Penrose but his attempt to rubbish him does not come off.

Again he confirms more about the setting of final bonuses. He says there was really 5% more to add to the assets for intangibles like goodwill etc. We have been through that doubtful argument though already on this board. He did not value intangibles because no need to do so because "calculated ratios [i.e. Aggregate Policy Values v Assets] were not used directly in setting bonus rates". He says such a comparison was a useful management tool but Board used comparison of actual and allocated growth rates.

I suppose he means they worked from those tables that used to appear in bonus notices which showed figures for earnings against the overall rate return (ORR). Some have said that the figures for earnings did not take account of expenses etc and are not really to be compared with the bonus figures.

Aggregate Policy Values v Assets comparison was used by the actuarial department in determining MVAs - Market Value Adjustments which were handled entirely by the actuaries without any reference to the Board.

Peter Martin from page 128 onwards is well worth reading. Particularly pages 157 to 169. He basically accuses Dentons of having made a nonsense of the Hyman litigation by failing to track down the Bretton Seymour case. But this is the really interesting bit:

He alleges that Jeremy Lever QC and Christopher Vadja QC (without being paid a fee - that should you make you sit up and listen) both went to Dentons to ask them to to ask for a revision of the House of Lords judgment. He says EMAG were asking the same thing of ELAS. Dentons on behalf of ELAS agreed to instruct Nicholas Warren QC to give his opinion on the whole situation. However Dentons expressly asked him NOT to deal with EMAG's suggestion of going back to the House of Lords but to deal with non-GARs complaints only and some points raised by Lever and Vadja.

Now I have always warned 'Never take Counsel's opinion at face value without seeing the instructions'. Most of us, I certainly, thought Warren did advise that one could not go back to the House of Lords but Martin is saying that he did not because he was instructed not to. Why did this happen? Well Cindy Leslie is in the box to-morrow and Peter Martin is going to be asking one or two questions.

It that does not keep everyone awake what will?

Finally Sher appeared for Wilson. Unlike the other Directors Wilson is pointing the knife at the actuaries.

Day 6 - 19th April 2005

Sher continued for Wilson a non-executive director. As on the previous day he is the first to refer to the actuaries as keeping the non-executives in the dark, not, he says, a criticism but a defence.

The office valuation was prepared monthly by the actuaries showing Aggregate Policy Values (APV) v assets.. He claimed that it was NEVER shown to the Board (Page 23). He disagrees with Penrose that it is wrong for assets to be always below APV (page 26). Smoothing for him is just a matter of the Overall Rate of Return not going up or down too much from year to year. There is never any mention of the idea that during a bull market you should hold something back for when the inevitable downturn comes so when available assets approaches APV at the top of a bull market as in 2000 there is nothing wrong or any need to have built up a reserve.
Sher said that 'The open ended GAR liability that made it impossible to sell in the first place' was unknown to Wilson (page 81).
He further says that the Warren opinion DID advise on revisiting the House of Lords in contradiction to what Peter Martin said the previous day. (page 84).
He claims that the 2.5% uplift or sop for the non-GARs, in the Compromise, was Wilson's idea for sweetening the pill. I hope they are duly grateful! (page 93).
At page 139 he distinguishes Bratton Seymour from Hyman by saying that in the latter the implication of a term was into the contract not the articles (Bratton Seymour says you cannot implicate a term into the articles). This was not very convincing.
All in all he did go on a bit but it seemed a pretty convincing defence for Wilson who, he claims, did his best on the available evidence as fed to him by the actuaries.

Counsel for E+Y followed drawing the Judge's attention to the fact that Charles Thomson signed the 1999 accounts as being 'true and fair' the same day in April 2002 as he signed his witness statement in the present case saying they were not!

One does get the impression that the case against the Directors is weak and that having to make amendments at the last stage is not doing ELAS any good.

Day 7 - 20th April 2005

My comments on these transcripts are of course subjective - my aim is to note those parts which are may be of use to those uninvited guests - the policyholders. Frankly I do not follow all the ins and outs of the case against E+Y clouded as it is by ELAS's late amendments and there is no point in trying to understand it all as what counts is how Mr Justice Langley understands it and that we won't know until the end.

E+Y's opening statement starts in a flowery literary style which is opaque to say the least; indeed reading the whole document has not added to my understanding - it is not a model of clarity. Good luck Judge Langley.

E+Y claim that, by 1997, it was well established that distribution in line with asset share formed part of PRE and that therefore terminal bonus was part of PRE (p129) and quotes Thomson to that effect (p.293).

Great reliance is put on the doubtful table comparing earnings with overall bonus returns. Nobody has pointed out that the earnings were in fact much less (para 520) although it is admitted that investment performance was unspectacular (page 304 para 530).

E+Y put a somewhat different perspective on the situation at September 1998. Everyone else has been insisting that Scenario 6 or the total loss of Hyman as actually happened was so remote that it could be ignored. (But surely in risk management there is a difference between a very remote chance of some minor loss and a very remote chance of total catastrophe and how the two should be handled?). Anyway E+Y say that at September 1998 the Directors were faced with the choice of either caving in to the GARs and transferring £1.5 billion to them or going to Court to get the matter tested. This strikes me as putting the risk of losing in a rather different category.

Anyway leaving their opening statement and looking at the transcript for Day 7 most of the morning was taken up with objections to ELAS's proposed amendments which nobody seemed to be able to understand based as much of it is on Thomson's evidence whom Rabinowitz says is a person not to be relied upon. Eventually Gaisman continued for E+Y. He was clear and is very supportive of Penrose. Gaisman claims that PRE means asset share and endorses Penrose's claim that some terminal bonus should be provided for. However the excuse for E+Y is that the accounting standards were defective as Penrose states and one cannot say that E+Y were negligent if they followed defective accounting standards. Overall there was not much of interest to policyholders except perhaps that 'not evidence' Penrose seems to be playing an important part and is not easily dismissed.

Day 8 - 21st April 2005

This was Gaisman continuing his opening statement for E+Y. Just reading it through it is extremely difficult to work out what on earth is being talked about. There were no revelations of interest to policyholders.