Week 3

Day 9 - 25th April 2005

This was Gaisman for another full day although there was a short intermission whilst Mumford explained the inverse differential with which I presume all Fools are totally familiar with already.

Generally all parties are living in this parallel universe where ELAS was a marvellous company with a wonderful Board intent on keeping everything going and making rational decisions. The important thing was not to frighten the horses and ensure that public presentation was A1 so that there would not be a run on the bank. Page 2 reminds us that the competition factor was what really determined the bonuses. From page 9 I am still very uncertain that the Board were ever shown the Office Valuation which would have starkly reminded them that they did not have the assets to cover the bonuses they were allocating. They just announced bonuses that felt right. The idea that they might have misrepresented the state of the company to the world at large does not seem to enter into anyone's head - or rather such a thought is never articulated.
The story continues that everyone did the right thing. Hyman could not possibly be lost and if it was then they could ringfence. The story was sanitised and fed through to the sales force so that the punters could be kept happy (page 67). Generally no new revelations. As citymj has pointed out all the wrong issues are being tried.

Day 10 Tues 26th April 2005

This makes more interesting reading with Gaisman for E+Y cross-examining CT. However it does take an awful long time. CT finds it difficult to answer a straight question but then I suppose he has some difficulty trying to remember which version of the story he is supposed to be telling. Humility is obviously not his forte when it comes to writing his own reference but that is not very relevant. Basically he is trying to say he had doubts about the E+Y accounts when he got round to looking at them but in the meantime he was quite happy to sign them off or rather not object to them. However the doubts seem to have arisen only towards the end of 2001 when it seemed it might be a good idea to sue E+Y in order to pacify us chaps who were greedy, fearful and baying for blood.
Presentational problems were very much to the forefront in adjusting the accounts. He had been used to making 100% take-up provision for GARs and was surprised to find ELAS only providing 10% and when the takeup suddenly went up to 60% he and VT were very worried as providing at that level would make the accounts look worse than they had hoped and this was when they had the Compromise coming up - oh dear!
There was an awful lot he could not remember but what I find so extraordinary is the discovery of documents or disclosure. The defendants complain that they are not getting copies of all the relevant documents and that ELAS is being very selective. But when they do produce a document they go in for this redaction business i.e. blacking out whole sections which they claim to be confidential, privileged or something. When you have a witness who has produced these documents and has sworn to tell the truth, the WHOLE truth and nothing but the truth you really wonder whether this is good tactics. Anybody must wonder whether the blacked out bits were blacked out because they were unhelpful to ELAS's case rather than that they are still commercially sensitive or something. If I was the judge I would be dead suspicious and say so. When CT is asked about these things (page 137) he disclaims all knowledge of why things were not disclosed or blacked out and yet it is he who is putting these documents forward. But then he claims that he really has nothing to do with any of this. He is only acting on advice or what he was told at the time. You begin to wonder whether he has much grasp of anything that was going on.
The expression 'sexed-up' comes to mind but perhaps that is how the world is today. There is no honest account of what happened but just a presentation. Charles Bellringer gets a mention and I wonder whether he did not get sick of the whole business and leave ELAS. Overall slightly more entertaining but no great revelations.

Day 11 - Wednesday 27th April 2005.

This was Hapgood for E+Y cross-examining Charles Thomson.

CT continued to be unable to explain things like the Lost Sale claim on page 4 or just not remembering anything. Surely somebody who is being paid a million per annum should not appear so bumbling?

The line being taken by ELAS is that the Court of Appeal in Hyman allowed ring-fencing. In fact they were never asked that question and Waller LJ just mentioned it in obiter dicta as a suggestion. If it was allowed why did ELAS appeal? But for ELAS the CofA differs from the House of Lords decision in that one respect and the House of Lords was totally unexpected.

CT described his reaction to Penrose and the possible complaints arising from Penrose. "If these claims were valid, then we would have a duty and the Regulators would have a duty to make us try and find some way of settling these claims". But in his eyes Penrose was wrong. Hapgood took CT to the Factsheet of last October where ELAS attacked Penrose saying Penrose-related complaints were ill-founded. ELAS and the Directors had done nothing wrong, according to the ELAS fact sheet, which the policyholders could complain of. If the Directors had done nothing wrong then why are they now being sued by ELAS asked Hapgood:

It does not matter what it is about, it is the utter hypocrisy and two-faced nature of the Society's stance over the years. You are saying one thing to this court and you were saying something completely different to your policyholders after the publication of the Penrose report.

CT was the actuary of the company and the Appointed Actuary from January 2001 till about April. During that time he approved the 8% bonus for 2000. Peter Nowell took over as Appointed Actuary in about April and for the first time ever ELAS had an independent Appointed Actuary from outside and the post was separated from Chief Executive which should have been the position all along. Nowell produced a note for the Board on 18th May 2001.

Hapgood: Mr Nowell's note of 18th May 2001:
"Recommendation to reduce policy values and the rate of increase in policy values."
On the second page of this note in the prepenultimate paragraph, Mr Nowell notes this:
"However, the position is not that all policy values are 10 per cent above asset shares. The attached graphs and tables show that it is policies where premiums stretched back before 1990 which have been particularly overpaid."
Thomson:. Correct.
Hapgood:. Was this the first time you became aware of this?
Thomson: To the best of my memory, yes.

Now we know that 'Office Valuations' were prepared each month. These showed the total value of policies including non-guaranteed bonuses (the Accrued Policy Value - APV) as against the available assets. My belief is that these were never shown to the full Board including the non-executives when Bonuses were being allocated. It was like issuing post-dated cheques without every checking the bank statements to see if they had the money. Up to 2000 they always had the money as new money flooded in. It was only Nowell who introduced them to the novel idea of looking at the bank statement - the Office valuation - or realistic balance sheet and this happened, for the first time, prior to the July 2001 cuts.

Hapgood: The realistic balance sheet position was actually important, in your eyes, to the bonus decision, was it not?
Thomson: Sorry, you use the term --
Hapgood: Realistic balance sheet.
Thomson: I am not sure what you mean by that.
Hapgood: All right, can we please have C70, page 182? If you can keep C67 to hand?
Thomson: Yes.
Hapgood: Thank you. This is Mr Nowell's bonus paper dated, at page 197, 22nd February 2002. Paragraph 3:
"There are three presentations of the Society's financial position which directors should consider in the setting of bonuses." Over the page, (iii):
"Both of the published presentations set out in (i) and (ii) compare a market valuation of assets with the valuation of general liabilities on a realistically prudent and a prudent solvency basis respectively.
A further comparison is required to fully appreciate the financial position of the fund. This is a comparison of policy values with available assets and is sometimes described as a realistic balance sheet."
Thomson: Thank you, that is helpful.
Hapgood: You must have known what that meant before I asked you the question.
Thomson: I was wondering if this was what you meant. This was sometimes described within the Society as a realistic balance sheet.
Hapgood: You feign ignorance very well.
Thomson: I can usually manage ignorance quite genuinely. It is known or was known as a realistic balance sheet within the company, and was the way they, as you say, compared policy values with assets.
Hapgood: Thank you. Could you just go on to page 187, where we see Mr Nowell's assessment of the importance of this realistic balance sheet? Under the heading:
"Realistic balance sheet, policies values compared with asset values.
"The realistic balance sheet is especially important in setting maturity values and therefore levels of non-guaranteed final bonus."
You can see he has done a comparison at the end of December 2001, and the figure is 105.1 per cent.
A. Yes.
(3.45 pm)
Q. You always thought that the realistic balance sheet was especially important in deciding overall policy growth, did you not?
A. In other companies or in this company?
Q. In this company.
A. When you say "always", I am not sure what period you have in mind. Certainly in recent years --
Q. From 17th January 2001.
A. Certainly from July 2001 onwards, we have regarded this figure as extremely important. The point that I alluded to yesterday is that in the early period, I was not sufficiently aware of just how limited the capital was, and therefore the limited opportunity to go out with the very tight ranges that we have been following in recent years.

Well it seems that the highly experienced Thomson learnt something from Nowell in July 2001!

A further interesting point is Nowell saying in his paper of 22nd February 2002 that there was an imbalance at 31st December 2001 of 105.1%. Now the Compromise hearing had concluded on 8th February 2001 and it is difficult to imagine that that imbalance was not known about at that time as it meant that the uplift for the non-GARs was entirely illusory because there would have to be cuts..

Hapgood finished his cross-examination of Thomson by accusing him of lying.

Day 12 - Thursday 28th April 2005

This was the day when we were told that Treves regarded certain policyholders as 'jackals' and all of us as the 'mob' who were 'baying for blood' so something had to be done to appease them so this action had to be launched.

Most of the day was absorbed with Rabinowitz, for certain non-executive Directors, cross-examining Charles Thomson. It was pointed out that the Statement of Claim claimed that the Directors had mis-sold policies to policyholders. Further that the FOS had picked up on this as being an admission by ELAS that they had mis-sold policies - see their recent decision for Ms E. Now that, of course, was not good news for ELAS. So a long correspondence ensued between ELAS and the FOS to draw the latter's attention to the fact that not everyone agreed with ELAS's claim and the FOS should really read the Defences and loads of other paper put in by the old Directors and FOS would then see that there was some doubt about this mis-selling and all in all FOS therefore should decide that there was no mis-selling or at least wait and see. As in some Parisian farce the FOS kept saying they did not want to see these papers.

As Rabinowitz put it CT was 'putting out two different stories to two different people depending on the story you want some people to believe'.

Rabinowitz hammered away at CT to see if he could get him to admit that there was something rather curious about conducting a Court action with maximum publicity effectively accusing the old Directors of mis-selling whilst at the same time secretly trying to persuade the FOS that there had not been mis-selling. But CT would have none of it. They were two quite separate matters and he did not want conflicting results. It seems to me though that he was getting muddled at this point as he does, surely, want conflicting results:

1. That the old Directors were negligent in allowing mis-selling claims so that he can claim the losses in these mis-selling claims.

AND

2. For the FOS to accept the old Directors' defences and rule that there was no mis-selling so that the remaining policyholders suffer no losses out of the fund.

Am I being too clever by half in pointing out that there if there are no losses under 2 then you cannot claim anything under 1? Talk of smoke and mirrors this is Alice Through the Looking Glass country!

But perhaps this means that the whole action is a charade where ELAS is meant to lose but at the same time ensure that the FOS rules against all complainants as it will have been proved that there was no mis-selling.
But are the gains by wiping out the mis-selling claims sufficient to cover £100,000,000 in costs? Somebody please remind us what the current provisions are for mis-selling. But then if it all does not quite add up any difference is a very useful contribution to the Poor and Destitute Lawyers Fund.