Week 5

Day 16 - Monday 9th May 2005

Cindy Leslie of Dentons on the stand all day.

Sher cross-examining.

page 7. As far back as July 1999 when the Hyman case had started in the first court she believed that an adverse judgement would mean no ring-fencing.

page 8. She changed this view after the Court of Appeal when Waller had suggested it.

page 13. Peter Martin "terribly worried" about non-disclosure in accounts - 6th July 2000.

page 15. Peter Martin cross-examines Leslie.

Page 25ff. Peter Martin said, I think in his opening statement, that the instructions to Nicholas Warren restricted him from advising on whether ELAS could go back to the High Court. Leslie confirmed this but said that Vanni Treves spoke to Warren direct and removed the restriction. It is unfortunate that we therefore have no written record of what exactly Warren was instructed to do. I wonder whether Martin will pursue this point and perhaps call VT to give evidence?

Page 30ff. Martin brought up the Bratton Seymour case which says that Articles of Association cannot be subsequently amended by having terms implied into them. Leslie admitted not researching the question of construction of the Articles as she thought at that time that it was a question of constructing (lawyer's term for interpreting) the contract with the GARs.

Page 42. Headdon cross-examines Leslie. He asserts that he always thought that Scenario 6 was "impossible".

Page 65. Headdon denies that he ever suggested ring-fencing new money coming in and Leslie agrees she misunderstood him on this.

Headdon likes to cross every T and dot every I - but I wonder whether this obsessive attention to detail may not prove a bit counter productive.

Page 85 Gaisman for E+Y cross-examine Leslie.

Page 133 Rabinowitz has another go and she is then re-examined by Milligan for ELAS.

Page 155. There is an interesting exchange concerning the Society's PR in January 1999. Scenario 6 (the worst one and the one that happened) said the cost could fall unfairly on the non-GARs. Evidently they saw this could give rise to a claim by the non-GARs. Scenario 6 was therefore something to be kept under wraps and not mentioned publicly and obviously this is why nothing was done about Leslie's suggestion that new money should be ring-fenced. The non-GARs might be about to be screwed but nothing should be done about it. This was Headdon's plan I believe.

3 A. Cindy Leslie: The line came from the Society. Simon Brown and

4 I noticed that certainly as from the beginning of

5 January, the Society was not talking about the cost of

6 the GAR provisions being -- perhaps having to be borne

7 by GAR policyholders -- by non-GAR policyholders, other

8 policyholders. Initially, they had -- the Society's

9 draft letter to policyholders had said that if the

10 Society was required to -- if the Society's differential

11 final bonus practice was struck down by the courts, GAR

12 policyholders would receive more than their asset share

13 and that burden would have to be borne by somebody, and

14 at the beginning of January, that had changed, and the

15 Society was not saying that.

16 Either Simon or I queried why the Society's line

17 appeared to us to have been modified, and the Society

18 said to us in no uncertain terms that would have been

19 a very uncommercial thing for the Society to do.

20 I mean, it knew that there was a risk that the GAR

21 provisions -- the cost of the GAR provisions would have

22 to be borne by all policyholders if it lost the case --

23 if it lost the Hyman litigation and was not allowed to

24 ringfence, and it knew that if it did not tell people

25 that, perhaps there would be a danger of claims, but it

153

1 took the view and came to a commercial decision that to

2 explain that fully would cause irreparable and very

3 major damage to the Society at a time when it was being

4 advised that exactly that situation was being litigated,

5 and that it had good prospects of winning.

6 Therefore, the Society decided that in that context,

7 its line would be the line I took in the discussion with

8 Professor Dale, which was that there was no guarantee as

9 to the level of final bonus, and no guarantee as to the

10 level of future declared bonus.

11 Q. Was this a line of which you personally were informed by

12 some representative of the Society?

13 A. I remember it being -- we were told about it; Simon and

14 I were both attending a meeting at the Society's London

15 office, in the boardroom, and we were told that it was

16 very uncommercial to think that the Society would do

17 anything other than that, and we were told that by

18 Chris Headdon.

19 Q. I think you mentioned in an earlier answer January.

20 A. Yes, I think it was early January 1999.

That was it for the day apart from Hapgood complaining further about non-disclosure by Herbert Smith.

All in all ELAS are wanting to show that the advice from Dentons was that there was a chance of losing whilst the Defendants want to say the advice was unequivocal that they would win. So it was ping-pong as to what Leslie actually meant by 'risk' or 'very unlikely' etc etc. Apparently there is a case which decided that 'real risk' is no different from 'risk'. It is all a bit of a waste of time in my view trying to interpret manuscript notes and attendance notes made at the time as if they were legal documents. The point as I see it is that there was a risk, however remote, of catastrophe and they detailed this under Scenario 6. Should they have done anything about it? Headdon decided that they would not for 'commercial reasons'. I do not think the non-execs were kept fully informed.

Day 17 - Tuesday 10th May 2005

This started on disclosure of documents with Rabinowitz. This arose as a result of Cindy Leslie's evidence the previous day and in particular the revelation that she went to a meeting with Headdon and others at ELAS in January 1999 when she was told in no uncertain terms that Scenario 6 was not to be mentioned - there was to be a new line in which the subject of the non-GARs being screwed was a no-no. Rabinowitz's complaint was that none of the documentation surrounding that meeting had been disclosed. Herbert Smith, solicitors for ELAS, did not want it disclosed because it might help non-GARs claiming against the Society. The result being that the defendants were unable to cross-examine about this. All the other Defendants concurred with this argument and it was suggested that in view of this deliberate non-disclosure the part of the claim relating to mis-selling should be dropped.
Headdon concurred with this which might seem surprising as further revelations about that meeting could be damaging to him but perhaps he was prepared to chance his arm on this in the hope that the mis-selling claims would be dropped in which case no further disclosures. Rather a long shot in my view.

It was pointed out that the non-exec defendants did not have the money to make an application for disclosure. Martin pleads for Langley to take a strong line (page 24) and at page 46 Langley says that in view of this non-application he wants to give a strong steer to Herbert Smith that they have another search in order to disclose more.

Then Ranson took the stand to be cross-examined by Milligan for ELAS. This was pretty dense stuff and my skimming of the transcript probably means that I have missed some points - it needs careful analysis. However this is what I gathered as being important points:

page 82: Ranson "... prudency might lead to constraints on the investment policy in the future".

Page 87 Ranson's now well-known remark that keeping anything back for the inevitable rainy day: "I find that so foreign that I cannot get my mind round it".

Ranson did cover himself (page 105) warning about a possible need to cut back on final bonus" BUT "marketing cannot be ignored" but it should not be "the driving force". Of course it was.

Ranson comes across as having a convenient memory that forgets what actually happened. Milligan seems to approach important subjects but I feel he is always pulling his punches and not following matters through. Milligan approaches the subject of smoothing:

"There has to be a period during the cycle when policy values are less than asset values". Ranson just says 'it depends' and mentions other factors that might affect the situation.

Milligan mentions the Realistic Balance Sheet or Office Valuation (page 119) which elsewhere we have been told was produced monthly. Ranson can only say that he does not know quite what is meant by this, that it was produced sporadically, possibly not in writing and generally he cannot remember.

Page 140 Milligan moves on to the question of how bonuses are set. He suggests that one "... consider whether surplus of assets over liabilities" justifies what you allocate. After dealing with reversionary guaranteed bonus you look at surplus to see whether any left to pay terminal or final bonus.

Ranson replies in typical fashion "Or a deemed surplus, yes; deemed because in the years of over-distribution, you would be deeming surplus ... it does not physically have to exist".

One wonders what is meant by that kind of reply.

Page 145 It is clear that actual numbers from any realistic balance sheet were not discussed at board meetings.

A long discussion ensued about the DTBP. Ranson never gives an unqualified answer to any question. Whether Milligan is landing his punches is not obvious. Frequently Ransons ability to forget important matters comes to his rescue.

Day 18 - Wednesday 11th May 2005.

A full day of Milligan continuing his cross-examination of Ranson. Very hard work!

The Office Valuation or Realistic Balance Sheet was again discussed. You need to read the first few pages of this day's transcript to get a feel for Ranson's answers on every point.

Page 36. The Treasury's position was that a GAR who had a final bonus which was not guaranteed was going to have to have part of that final bonus used in order to pay the policyholder his full GAR when GARs exceeded CARs. Thus that part of the final bonus which was required to do this had to be reserved for. This is why the Treasury were asking for a £1.5 billion reserve regardless of the result of the Hyman litigation.

Ranson is asked about this but he obdurately refuses to see that there is any difference between the part of the terminal bonus that is required to be reserved for in this situation and the rest of the bonus which was to be 'eliminated' - a word which Milligan uses and Ranson does not like.

Milligan compares ELAS's DTBP with Scottish Widows similar policy operated by CT. Effectively they were both the same although in SW's case they topped up the bonus whilst in ELAS they set a much higher bonus and then cut back on it. Milligan suggests Ranson did this as declaring higher bonuses was good PR. Ranson disagrees. (Page 47).

Again Ranson confirms that he did not give the Office Valuation to the Board: "Whilst I did not provide the board with a written financial condition report..." page 48. He did not want to bother them with such details.

Milligan moved on to the subject of why the DTBP was never disclosed to policyholders when it was introduced. If it had been, the Hyman case might have gone differently. Milligan asks why they had not been told in the bonus notices or some literature addressed to all:

Ranson: "No, policyholders would have been told at some stage"

Milligan: "At which stage?"

Ranson: "... at retirement? I do not know".

How was he to know what some salesman might have told the policyholders about DTBP? (page 61).

Page 73: Milligan turns to what the lay directors would have wanted to know about the bonus policy and what Ranson should have told them.

Page 82: Milligan points to a letter of 29th July 1998 by Headdon to the GAD who were posing questions:

"Are policyholders at retirement told about any GAR?

Answer: No."

Milligan asks Ranson:

Was that true during your time?

Ranson: I do not know

Milligan; Probably true?

Ranson: I do not know ...

Milligan goes on to where Flanges Ltd started complaining about the DTBP and accuses Ranson: "You were trying to pull the wool over his eyes?" (Page 88)

Ranson caved in to Flanges and others not because they were right but as a matter of commercial judgement. In the case of Flanges it was also because the complainant was a devout Jehovah's witness who preached in the streets of Aylesbury every Saturday. Very odd.

The next subject was ring-fencing. Ranson says "Not allowing ring-fencing destroyed the whole concept of the with-profits business". He was right. (page 133). Why did those who understood this not go back to the House of Lords?

Milligan at page 138 makes an interesting remark when discussing discrimination between different classes of policyholder:

"That may all depend on whether or not the originating summons [Chancery word for writ] in the Hyman case was originally framed in order to keep people's eyes off the ball". He goes on to say that was not a question for Ranson but something to be explored with another witness. This will be an interesting point to watch out for.

Milligan is obviously having to tread a tricky path with the ELAS case and I wonder if he does not wander off it from time to time. Accusing Ranson of not telling the Board about the DTBP seems to undermine the case against the other non-execs. One wonders... Is this truth rearing its ugly head or is it ELAS not really being serious about the non-execs?

Day 19 - Thursday 12th May 2005

Milligan for ELAS continued to cross-examine Ranson.

Page 2: Milligan says policyholders not informed about DTBP and Ranson agrees.

Page 22: The astonishing exchange I mentioned yesterday

19 Q. I am asking only about new business at the moment.

20 Ranson: Yes, again, I cannot quite get to where you want me to

21 go.

22 Milligan: I do not at present see what the difficulty is,

23 Mr Ranson.

24 A. Well, I am being obtuse, I am sorry.

25 Q. I am so sorry?

22

1 A. I am being obtuse, I am sorry.

2 Q. Let me try once more. If you as a potential investor in

3 a fund know that the value of existing policies is, let

4 us say, 110 per cent of the asset values, and you know

5 there is another otherwise identical fund where the

6 policy values are only 100 per cent of asset values,

7 then all other things being equal, the second of those

8 two funds is more attractive for investment than the

9 first --

10 A. But other things would not be equal, and policyholders

11 are not so discriminating as that, and the information

12 is not available in the marketplace. That is not how

13 the market works, as I used to know it. It may have

14 changed.

Effectively what Ranson is saying is that you can do things with the bonuses to produce marketing effects because the world at large has no idea what the true financial state of the fund is. Reading Chapter 11 of Penrose one sees what a rogue's charter the Insurance Companies Acts have been. Under the Companies Acts accounts have to be 'true and fair' except if you are an insurance company. It seems that the insurance industry managed to convince successive governments that the true position of insurance companies was best kept hidden. It enabled people like Ranson to do what they did.

Sher then took over cross-examining Ranson. It was really a repetition of what Milligan had done.

Page 45: Sher gets Ranson to confirm that policyholders never had DTBP explained to them.

Page 55: Sher tries to get Ranson to confirm categorically that the Office Valuations or Realistic Balance Sheets were never shown to the Board. Ranson replies:

"I am surprised if they were never seen" - a very typical response.

Page 66. Ranson confirms that DTBP was never explained to the Board.

Page 99. Sher drew Ranson's attention to a paper written by Headdon in October 1998 in which Headdon wrote:

21 "Without too much exaggeration, our approach can be

22 characterised as hoping that annuity rates would never

23 go low enough for the topic to become much of an issue

24 and then putting the minimum on annual statements to

25 cover our backs but without drawing too much attention to it"

That would be an interesting paper to get hold of as it is a fairly frank account of how the DTBP issue had been handled up to October 1998.