Week 7

Day 24 – Monday 23rd May 2005

First of all Peter Martin made an intervention about Vanni Treves’ strange remarks at the AGM about fraud and misfeasance being at the centre of this case – would that they were! I sometimes wonder whether is not a bout of Alzheimer’s going the rounds and our dear Chairman…

Mr Justice Langley says “If anything of that sort was said, it plainly should not have been said” - page 7.

Milligan for ELAS continues to cross-examine Headdon

There is a long discussion of bonuses. If ELAS had had to provide for GARs earlier Headdon say he would still have not done anything differently in advising the Board on bonus rates.

Page 28. It is stated frequently that PRE is the belief that bonus rates would not change abruptly. A poor view in my estimation.

Page 30: Headdon claims that he was following an aggressive path of alignment to get policy values back into line with assets in 1997,1998 and 1999:

Milligan: Greater smoothing?
Headdon: More volatility, less smoothing

It is really just playing with words.

It is put to Headdon repeatedly that he could have reduced bonuses faster. I think his claim is that the saving would be small as the amount saved in payments out on contractual events would be small. But this is only a small part of the story.

Page 52: Headdon recognises the injustice done to the non-GARs by House of Lords/Hyman - I think carrying on in a constrained way would have been an option, … because of the inequity … as we perceived it, that had been visited on the non-GAR people.”

Why the blazes did he not do something about it as I wrote suggesting going back to the Court in December 2000?

The more I think about it the more I blame the lawyers particularly those acting for ELAS -- as for the FSA words fail me.

Back on the question of telling anybody about anything:

Page 60: Milligan: “You should have draw the continuation of the DTBP to the attention of the Board”

Headdon: “I do not accept that”.

It is curious how real issues keep cropping up, despite everything, only to be quietly steered away from:

Page 65: Milligan: “We are not concerned with the GIR … somebody should have a wobble about that as well … you may recollect how nervous the Society was that Sumption would run an argument in connection with it.”

…

Milligan “It made you nervous, did it not?”
Headdon: “Of course, yes”

Page 72: Headdon understood the effect of Hyman:

He wrote to the Board 19.10.2000:
”The changes in July 2000 were really nothing to do with the relationship of policy values and assets, they were a redistribution of money between the GAR and non-GAR business”.

Page 90 Headdon: “It would destroy the Society” – same paper.

Page 118. As early as 28.1.1999 Dentons warned that Ring Fencing might not be allowed.

Page 128: The Directors were pretty cynical about the nature of the reinsurance agreement but if it satisfied the Regulators…

Page 159: Cindy Leslie’s (of Dentons) suggestions about ring-fencing new money discussed and rejected. Pretty cynical stuff!
It never seems to occur to Headdon that what he is doing might be seen as less than honest.

Milligan points out that the originating summons did not raise the question of ring-fencing at all.

Page 172: Bundle C39 p.146ff Miss Gloster advised in February 2000 that House of Lords could not consider the question of ring fencing.

The day therefore ended on a bit of a cliff hanger. How did the House of Lords come to ban ring-fencing?

Day 25 – Tuesday 24th May 2005

Milligan for ELAS continues to cross-examine Headdon

Much of this day's questioning was about ring-fencing.

Page 1: C38 p.87 Wilmot´s note of Board Meeting of 21st January 2000.

Could House of Lords make it worse? Cindy Leslie of Dentons says “Risk but very small”.

Page 2: Headdon was aware of the risk. Nash's famous letter of 1st February 2000 gives “reassurance to non-GARs”.

Page 4: Headdon seems to have caught the Alzheimer's that is going the rounds.

There was a letter from Leslie to Headdon of 22nd February 2000 discussing the risks of not being allowed ring-fencing.

Page 13 Bundle C42 p.171. Consultation with Elizabeth Gloster QC 18th April 2000. “She definitely wanted ring-fencing raised in the case”.

Page 36: The message going out to policyholders in the Autumn of 1998 was that ELAS would be able to ring-fence.

Page 39: Milligan, for ELAS, suggests policyholders should have been told what would happen in worst case.

Page 61: But telling the policyholders too much about the Hyman case was telling too much marketing wise for Headdon.

Scenario 6 was the worst case where they lose on the DTBP and cannot ring-fence.

Page 73: “No explanation to the policyholders of the Scenario 6 case” says Milligan. Headdon agrees that that was situation in January 1999 but Dentons were getting worried about Scenario 6.

Page 77: Bundle C25 page 233 Instructions to Counsel. Page 237 para 2.6 - clearly discusses ring-fencing issue.

Page 78: But no detail to be given in pleadings because of marketing issue. “Fudged” says Cindy Leslie.

Page 82: Milligan: Do you recall that you had been requested by the Treasury to include in your regulatory return for 1998 an appropriate statement on contingent liabilities in the regulatory return?”

Headdon: “We forgot to do it”

Milligan suggests not forgetfulness but intentional in order to prevent Scenario 9 contingency getting into public arena.

Headdon: No.

The above is a new revelation. What did the Treasury do one asks?

Page 90 Cindy Leslie says before the judgment at first instance that if you lose you cannot ring-fence.

Pages 100ff. Discussion of Nash's letter of 1.2.2000. This letter was very carefully prepared with input from the Board and Dentons. There was no mention of result of no ring-fencing.

Page 105: Milligan: “Would you agree that the letter was not fair to policyholders in that respect?”

Headdon: “No, I do not.”

His reasons are commercial, the truth might destroy goodwill.
Peter Martin, at the time, called the Nash letter “a red rag to an investigative bull.”

Page 108: Headdon says it was a question of the interests of all versus the interests of non-GARs.
Bundle C39 p.288. Salesforce were told they were not allowed to comment on future unknowns including the results of court cases.

Page 123. AGM 2000. Nothing to be said about scenario 6

Awkward questions at AGM see transcript thereof at pages 166-177.

Page 130. Milligan says they were getting only half the story. Headdon replies that Gloster said the other half i.e. no ring-fencing, was not possible. Milligan corrects him to say Gloster said that ring-fencing must be put to the House of Lords.

Page 132. Comment by Gloster prior to AGM 2000:

The Directors should definitely not attempt to say the matter is sub judice or that to comment would amount to contempt, since these phrases, though regularly trotted out in the media, are entirely inappropriate in these sort of civil proceedings.

An interesting comment in the light of what Vanni Treves had to say prior to the 2005 AGM.

Page 134. Milligan: “Failure to mention Scenario 6 was not fair.”
Headdon: “In a narrow sense, yes”.

Headdon obviously found this quite a tough day.

Sher for Wilson took over the cross-examination of Headdon – page 138.

Pages 146-148: It is clear that the Board when discussing bonuses was told about the earnings and allocations but never shown that ´piece of paper´ the Office Valuation comparing Aggregate policy values with assets – the bottom of a Realistic Balance Sheet.

Day 26 – Wednesday 25th May 2005

Sher for Wilson continues to cross-examine Headdon

Page 5. There was conceding to GARs who complained about the DTBP. Sher follows Penrose in saying this was company policy. Headdon denies that it was company policy – just normal commercial practice to deal with troublesome policyholders. The point is they did it which shows they did not have that much confidence in the legal soundness of DTBP? On page 6 Sher says the policy should have been brought to the Board.

Page 17. Headdon explains that the Treasury´s request to reserve 100% for GARs had a certain intellectual credibility if all Final bonuses were elimated.

Page 22. Sher for Wilson is claiming contributory negligence against Headdon.

Page 29. Sher claims that the 100% reserving requested by the Treasury should have been shown in the Company Accounts but Headdon disagrees – page 31.

Page 65. The side letter that accompanied the reinsurance letter is considered. “However should no mutually agreeable solution be found it is the understanding of both parties , which shall have no legal obligation whatsoever, that the treaty will be cancelled by mutual consent”. Headdon claims that the fact that there was no legal obligation meant the letter could be ignored. Why then was it written? Obviously it was supposed to have legal consequences.

Page 70. Reinsurance was suggested by the Regulators.

Page 77. The side letter was never shown to the FSA.

Page 78. Nor the Board

Page 80. FSA revealed it on their website on 26th November 2001.

Page 82. One is tempted to share Headdon’s cynical view of the Regulators that they were very quick at covering themselves.
Headdon says the reinsurance was regarded as mere window-dressing.
Bundle 70 pages 293 & 294.

Headdon accepts the statement made before the Regulatory Decision Committee that he failed to reveal the side letter when discussing the very subject to which it related at a meeting with the Regulators.
The Committee went on to say (page 84): “The failure to inform the Regulators was not a matter of inadvertence but followed from a decision on your [Headdon’s] part. The Regulators should have been made aware of the existence of a side letter”.

If the Regulators had been made aware would they have allowed the reinsurance treaty or would it have been disallowed and ELAS´s regulatory solvency made plain for all to see? That point does not get discussed.

Page 88. Rabinowitz for Allen & Overy clients cross-examines Headdon.

Rabinowitz established that Chris Matthews was responsible for policyholder communication. Presumably he will be called as a witness.

Page 114. Advice from Dentons on ring-fencing: were the Board advised. Not according to Headdon.

Page 125. Headdon: Goodwill … if it is sufficiently intangible and you cannot ascribe any value to it, you cannot really take it into account for policy value purposes. However he does just that when claiming Penrose´s figures on overbonussing are wrong.

Page 138. Leaver for Miss Page cross-examines Headdon.

Page 151. Headdon using goodwill and other things claims to be in balance in 1999.

Page 154. Mumford cross-examines Headdon

Page 157 Again the question of Matthew’s role is mentioned.

Page 154. Gaisman cross-examines Headdon

Page 183. Hapgood for E+Y cross-examines Headdon

Day 27 – Thursday 26th May 2005

Hapgood for E+Y continues to cross-examine Headdon

Rather Hapgood is using Headdon to support E+Y’s version of the story.

All about the Halifax agreement.

Page 18: Headdon says it was not possible to sell the Society once the Hyman litigation had started.

Page 20. Rectification scheme is discussed.

Page 24. 2000 bonus declaration was seen as a continuation of previous smoothing policy in which they had a very strong belief says Headdon.

Page 27. Headdon claims that only the deterioration in the stock market values caused the July 2001 cuts.

Page 30: Hapgood: There was in a sense a moral aspect to this, because the demands of Mr Hyman raised issues about fairness and equity between policyholders.

Headdon: Exactly.

Page 51: Hapgood and Headdon agreed that the FFA (Fund for future appropriations i.e. the final bonus pool) is not a driver in setting a bonus but a consequence.

Well that is a half truth. The amount of bonus which you declare determines what the FFA will be i.e. what is left over but it must be a factor in deciding whether you can declare a guaranteed bonus and allocate as final bonus.

Page 71. If an external actuary had been invited in by the Board to advise them, Headdon would have probably thought about resigning.

Page 73. A Sidney Carton speech from Headdon – but I do not think he is heading for the guillotine.

He quotes FSA recent guidance that payments should never be less than 100% of asset share. But who believes that discredited organisation?

On page 74 his comparison with bonuses of other offices seems to ignore any question of ELAS’s true investment returns being comparatively poor and cooked in the view of some.

Page 80. Adamyk for Nash examines him in chief.

Page 85. Milligan for ELAS cross-examines Nash.

Another sufferer from Alzheimers. Despite being the Actuary of ELAS he never did any actuarial management of the Society.

Page 118. Nash: I do not think we explained the position to policyholders as well as we could have- i.e. the DTBP policy.

Page 141. Nash comes over in the transcript, at least, as trying to be fair to the policyholders. Milligan for ELAS, gives the impression, of not having much sympathy for non-GARs which is in line with the present Board.

The ease with which they gave into those policyholders who complained about the DTBP suggests a guilty conscience. One wonders whether this point is impressing itself on the Judge.