Week 8

Day 28 – Tuesday 7th June 2005

Milligan for ELAS continues to cross-examine Nash.

Page 2. Generally the evidence seems incontrovertible that there was inadequate explanation of the DTBP to the policyholders.

Page 4. Nash had described the explanations as being ‘a bit devious’.

Page 5. The GIR is discussed.

Page 7. Tritton’s attempts to introduce proper procedures for risk management are discussed. We know about all this from the Penrose report and how it was all too late in the day.

Page 16. Nash admits that a smoothing policy, which oscillates about a mean, does not mean that an orphan estate is being built up. Nash does wriggle though.

Page 29. SP2.3 p.150 is discussed: a table showing actual v allocated growth for some period in the 1990s. Nowhere, however, does the question of whether actual growth is gross or net of expenses and other charges get discussed.

Page 32. Milligan moves on to the FFA or Fund for Future Allocations and it is equated with the smoothing fund.

Page 58. Milligan’s general line is that bonuses could have been reduced. But Nash keeps insisting that there would have been ‘adverse commercial consequences’ i.e. everyone finding out that the results were not as good as ELAS vaunted.

Nash wriggles at every question. On page 69 he won’t agree that the FFA should approximate to accrued final bonus. Having made his disclaimer in his witness statement that, though an actuary he never really practised his art, it is difficult to see how, as Managing Director, he really had a grasp of the business. But perhaps that is just the impression that we wants to give? But then what was he doing as Managing Director?

Page 130. They have moved onto the Hyman case. Milligan tries to get Nash to admit that the Originating Summons (chancery word for writ) ‘was designed not to address the question of ring-fencing if you lost’. Nash is determined not to give a straight yes or no to that question. Milligan asks whether the Board knew about this. Nash says he does not know but Martin must have read the papers. The burden will fall on “relevant policyholders” – a fudge Bundle C24 page 188 and Bundle C25 page 42.

Page 155: Bundle C25, page 65 is a report by Schroders of 24th February 1999 i.e. just after the Hyman case has begun. It clearly identifies the ring-fencing issue.

Page 176 Bundle C33, page 75 is a fax from Cindy Leslie of Dentons to Mrs Loseby of ELAS of 15th July 1999: “It is my strong view that if there is an adverse judgment, the wording in 11.3 will be inapplicable and we will be in scenario 6, not scenario 5” i.e. no ring-fencing will be allowed. Nash claims he never saw that, but he did receive a memo from Mrs Loseby, an actuary with ELAS, relaying this view in slightly less strong terms.

Page 180. Milligan suggests there should have been separate funds under Article 57. Nash does not agree.

Overall it seems that Nash and ELAS made a crucial mistake in not informing the GARs properly about the DTBP and if they had done so they might not have lost the case. Further they refused to deal properly with the possible scenario 6 possibility – doomsday – for commercial reasons even though at least one policyholder asked the question very pointedly. However I find all the hypothetical questions about whether they should have adjusted the bonuses, a point or two here and there, may show incompetence but they certainly are not the kind of points which ELAS is going to win on, at least against the Directors. The wrong case is being fought. It will be interesting to see what Milligan, in the end, makes of the non-disclosure points about the DTBP and ring-fencing.

Day 29 – Wednesday 8th June 2005

Milligan for ELAS continues to cross-examine Nash.

Page 4: Wilmot’s note of Board Meeting of 21st January 2000 (Bundle C38 page 7) Ring-fencing was assumed (this being after the Court of Appeal) as being possible although Cindy Leslie of Dentons says “Risk but very small”.

Page 6: Nash says the Court of Appeal judgment has been discussed prior to the Board Meeting with Dentons. Apparently we do not have Cindy Leslie’s notes of the discussions. This is peculiar but presumably flows from the assurance given to Dentons, by ELAS, that they would not be sued.

Page 15: Things begin to hot up. Milligan says: ” The one question that then nobody seems to ask is: well, if he is allowed to pursue the question, are we going to win or lose on the point?”

He being Sumption QC for Hyman and the question being ring-fencing.

Nash of course cannot remember whether the question was discussed. His failure to remember anything is truly startling even though it is only some five years ago and he must have been mulling it all over for the past few years with many documents to prompt his memory.

A discussion of bonus rates ensues – not very enlightening.

Page 50: Mis-selling: Bundle C20 page 84: a Mr Pringle, a non-GAR, writes in October 1998 to ask about ring-fencing in the case of ELAS losing the Hyman case. Nash reassures him that there is no problem and his excuse is that they had not thought about ring-fencing, at that juncture, as being an issue.

Page 64: Bundle C21 page 230: it is clear that a month later in November 1998 he knew about the possibility of ring-fencing being disallowed – he was just not telling anyone.

Page 80: Nash says that telling the policyholders in early 1999 about possible outcomes might have affected new business from non-GAR policyholders. Speculation on this would have damaged new business.

Page 91 An important statement: Nash: “ I think a judgment had to be made, based on the advice that we had had and the strength of that advice regarding the legitimacy of the DTBP; taking account of the fact -- the way the originating summons was framed; taking account also, I think, of the fact that there could have been a number of different outcomes besides scenario 6 in the ultimate. I think if we had told policyholders that there might be a scenario 6 type outcome, that would have caused reserving problems, it would have caused the need for a sale of the organisation, transfer of value from one group to another. I think the damage to the business and to policyholders' interests would have been immense, and I think that would have happened with certainty, as compared with a remote, very unlikely possibility of a scenario 6 outcome as then understood.”

The above is really the crux of the matter. In his view the end justifies the means and we have a crude utilitarianism with none of the safeguards.

Page 107: A line had been decided upon by the Society, as we learnt earlier, and despite persistent questioning at the AGM 2000 by a Mr Reid the furthest Nash went was that he could give no assurance as to the eventual outcome.

Page 108: Nash:” I did not know what the full story was.” He claims there were a whole variety of possible outcomes but this is just an excuse for covering up the one outcome, however unlikely, which he admits he knew would be catastrophic.

Page 119. The composition of the 1st February 2000 letter. It was designed to nail the “£1.5 billion rubbish.”

Page 121: Wilson claims in his statement that he used the phrase ‘prospectus-standard verification’ and that that was what was needed in drafting the 1st February 2000 letter. Naturally Nash says he cannot remember and anyway he would not have understood the phrase. I am afraid I just find that totally unbelievable in a man in a major insurance company in the City of London that he should not know about the kind of accuracy that was required in share prospectuses. Okay, as the Society’s Actuary I can accept he had no experience in actuarial matters, but surely anyone working in the financial world would have a general idea of what was meant by ‘prospectus-standard verification’. It is not an important point but is indicative of a persistent economy with the truth.

Headdon regrets in a letter to Martin that he, Martin, found the letter of 1st February ‘somewhat cryptic’. If Martin found it so what about the ordinary policyholder?

Page 141: On being asked whether he should not have been honest about possible outcomes and told people about them Nash comes up with a silly lame excuse with the pot calling the kettle black: Nash. “Can I just make one point? We spent a lot of time discussing giving policyholders more information what would happen should the court case be lost. Can I just make the point that I am a policyholder of the Equitable still: I have received no information from the Equitable about what would happen if they lost this court case..”

Overall it is plain that Nash knew that there was a scenario 6 which was not beyond the bounds of possibility and, in his own words, that scenario was catastrophic. He was asked about it directly by more than one policyholder. He did not give an honest answer. Does that not indicate fraudulent misrepresentation of the true position. Vanni Treves was right at the AGM: this case is about a fraud; it is just that it is not being pleaded as such.

Sher for Wilson then takes over cross-examining Nash (page 145).

Sher is keen to show that the key discussions were in the steering nd other committees and not at board level and in particular that the Board was not apprised about the importance of ring-fencing: page 158.

Also that the advice of Simon Brown of Dentons was followed at all points by the Board.

Day 30 – Thursday 9th June 2005

Sher for Wilson continues to cross-examine Nash.

Page 1: Dealing with complaints about DTBP

Page 4: First complaint was from a Mr Towner in late 1997. Nash said he conceded because “we had made a mess” not because he had doubts about legality of DTBP. However Nash could not recall what the mess was. Sher takes him through but he still cannot find any reason for the concession.
It is clear that they always conceded to complainants as a result of some unspecified failure of service when the real reason was not wanting to argue about the DTBP. In the case of Mr Towner the cost of conceding was taken out of the staff bonus fund!

Page 25: None of these concessions were brought to the Board.

Page 44: Nash never sat down and studied the policies re the DTBP – he just thought it was okay.

Page 53ff: There follows a long examination where Nash is taken through Headdon’s evidence and agrees with everything that Headdon said.

Page 59: Into the hypotheticals. Sher suggests more vigorous smoothing. Nash disagrees.

Page 60: The reassurance agreement is discussed.

Page 67: Mumford cross-examines Nash.
It is said that the Regulators were sent lots of material about the DTBP when the subject came up.

Page 87: Headdon cross-examines Nash.
Differential bonuses were used where policyholders had loans.

Page 102: Hapgood for E+Y cross-examines Nash.

On the lost sale claim Nash says he was committed to mutuality. Hapgood is trying to show there was no question of a lost sale and Nash agrees.

Page 169: ELAS has suggested an external advisor should have been brought in. Nash and Headdon were very close and if Nash had voted for this, it would have destroyed their relationship. Headdon would have been quite justified in resigning. What good would it have done? It took Charles Thomson five months to understand the ELAS finances. No mention is made of the fact that Peter Nowell got there in less than five weeks. It is plain that Nash & Headdon did not want any outsiders looking at the books.

Page 171: Adamyk re-examines Nash

Page 176: They look at the newspaper reports about the £1.5 billion after the Court of Appeal. Nash says “totally incorrect”. To me they seem fairly accurate.

Page 187: Mr Hapgood for E+Y makes a submission:

Is the Society actually any more advancing Mr Arnold’s case? (Drastic cuts in bonuses from 1996(?))
Has the lost sale claim been abandoned?
Various small technical points.

Milligan for ELAS says he will address the Judge the following morning.

Page 190: Something about a Mr Pepper not giving evidence which escapes me.
Ms Tolaney for Thomas: examination in chief of David Thomas the ELAS investment manager.

Mr Miles cross-examined Thomas.

Day 31 – Friday 10th June 2005

The previous day Hapgood for E+Y made a submission suggesting parts of the ELAS case – re Arnold, the lost sale case and some minor points should be dropped. Milligan for ELAS to-day said ELAS were not dropping any part of the case.
Hapgood replied that, if that was the case, and ELAS lose on the lost sale case they would ask for costs on the indemnity case. I believe this means that as well as asking for normal party and party costs, which can be limited by the Taxing Master of the Court, they will ask for all their costs which means an even bigger bill for the poor WP policyholders. Just remember that on the day of judgment!

Page 6: Miles for ELAS continues to cross-examine David Thomas.

[Some comments of my own: David Thomas was the investment Director and obviously a less important player than Ranson, Headdon or Nash. He hardly features in the Penrose report. At Chap 1, para 35, page 9 he mentions annuity guarantees on unit-linked policies being paid for out of the WP fund. He got a severance payment on leaving ELAS in December 2001. With Headdon he negotiated the Halifax sale. He became a Director of ELAS on 1.1.1989.]

Miles puts the hypotheticals to him. Why did you not seek advice on DTBP earlier? What would you have done if you had? Should or would you have cut back on the bonuses? Would you have started the case earlier? Etc etc. But he gets nowhere with Thomas who evades to a certain degree.

Page 115. Doubts as to ring-fencing came to the fore on 26th January 1999.

Page 123. Thomas claims that there could be variants on ‘no ring-fencing’ so it need not have been so bad but he does not convince.

Page 132: Disclosing scenario 6 to the non-GARs: Miles says “There was a question of principle or policy for the Board … which was what, if anything should be said to non-GAR policyholders”
Thomas: “I cannot now recall…”
He is catching Alzheimer’s to the extent that he cannot remember evidence by Headdon and Ransom a few days before.

Page 134: As investment manager he says many of the problems were “not my specific responsibility”. His excuse for not telling the non-GARs is that there were a ‘range of possibilities’ as outcome to the Hyman case and one could not go into all of them. This is the standard excuse from them all, but in fact there was a fairly limited range and this was a catastrophic possible outcome. Miles is quite forceful on this but gets no admission from Thomas.

Page 144. Thomas refuses to admit that the letter of 1st February 2000 was misleading. He has no answer on the subject.

Page 145. Prior to the AGM 2000 there is a ‘defence committee’ meeting at which Sclater is quoted as saying “Do not say what worse case can be…”.
It is not entirely clear what he meant – Bundle C43, page 144.

Page 150. Sher for Wilson cross-examines Thomas.
He takes Thomas thru the complaints. Longest question ever according to Judge Langley. Thomas manages an evasive answer as to what he would have done about seeking legal advice if he had known about such complaints at any stage.

Page 162. Vaughan for Miss Page cross-examines Thomas.
Latterly, it appears, non-execs were chosen for general commercial acumen rather than specialist expertise and were not necessarily city types. (Civil Service, Railtrack, the Dome spring to mind!).

All in all a pretty unenlightening day. I suspect we are in for a great deal more of Directors being questioned about hypotheticals and they just stone-walling. It is not killer material – just costing a lot of our money.