November 3rd, 2009 (first published June 9th, 2009)

A circa £925m* fraud involving Bank of Scotland Corporate, now part of Lloyds Banking Group, and the self-styled ‘turnaround consultancy’ Quayside Corporate Services, owned by David Mills, has caused scores of businesses across south-east England to go to the wall. The effected businesses subsequently had their assets seized by the bank or the bank’s associates. The alleged fraud involved BoS forcing its own business customers to appoint known embezzlers onto their boards; BoS executive Lynden Scourfield allegedly being provided with prostitutes and briefcases full of cash to “ease the loans”; the FSA and SFO naturally turning a blind eye; and an increasingly desperate cover-up by the bank and the UK government. Ian Fraser investigates.

A recent debate in the House of Commons has highlighted the behaviour of Lynden Scourfield, Bank of Scotland Corporate’s director of high-risk for South-east England. The debate followed a BBC Radio 4 ‘File on 4′ investigation into the scandal he perpetrated (you can listen to the File on 4 programme, which I helped to make and which first broadcast on Radio 4 on May 26th 2009, on BBC iPlayer).

The parliamentary debate focused on the way Scourfield forced scores of BoS’s business customers into using the services of self-styled “turnaround consultants”, Quayside Corporate Services, a firm belonging to former Lombard North Central executive David Mills — or else appointing Quayside personnel onto their boards as directors.

Many of the small and medium-sized firms concerned had no desire to be advised by Quayside or have its personnel on their boards — often, they didn’t particularly like the cut of their jibs. But they were given no choice by Scourfield. He told customer firms they would be shut down if they failed to appoint Quayside. In other cases, BoS customers willingly acquiesced, wrongly assuming that advisers recommended by a bank must be above board.

Once Quayside had been manoeuvred into  the driving seat at client firms, the fun and games really started.

Quayside’s mere presence as consultants or as directors on the customers’ boards was, for some as yet unknown reason (possibly related to Peter Cumming’s desire to grow HBOS’s corporate loan book irrespective of asset quality or true valuation of collateral), seen by Bank of Scotland as sufficient grounds to ratchet up the lending to the companies, irrespective of their financial health or chance of repaying the loans.

In some cases, the new lending reached astonishing proportions. For example, the Isle of Man-based aviation business Corporate Jet Services (parent of Club328 and Euromanx) found itself being lent £113m, despite having an overdraft facility of just £800,000.

All but £7m this money has disappeared and what remained of the company’s assets after it had been driven into the ground by Quayside was picked up from administrators PwC for a few pounds by Quest Aviation Services, a “phoenix” company whose three other directors (Andrew Jackson, Tony Shakesby and Robin Southwell, the UK chief executive of aerospace and defence group EADS) had been responsible for driving CJS imto the ground and were close associates of Mills.

Neither the bank nor Quayside seems to have had any desire to nurse the firms with which they became involved back to health, or if they did they had a strange way of going about it. Indeed, Quayside’s main preoccupations seem to have included syphoning out as much cash as possible, misappropriating corporate assets and sabotaging the businesses.

One of the ways in which Quayside achieved this was by deliberately neglecting to pay critical suppliers. The goal — presumably approved by Scourfield’s bosses at Bank of Scotland Corporate — appears to have been to make the firms unviable and force them into administration.

In almost every case, no accounts were filed at Companies House subsequent to Quayside becoming involved. If accounts were filed, they were usually heavily qualified (unless the auditors were Brett Adams). Just before companies were forced into administration, Quayside destroyed companies’ financial records, either through the scrubbing of computer hard drives or burning company documents — in itself a serious criminal offence.

Within hours of the administrations occurring, Bank of Scotland Corporate permitted Quayside or its affiliates to expropriate what was left of the companies’ assets through widespread and serial abuse of pre-packaged administrations.

The paper trail at Companies House indicates that several of the UK’s highest profile professional services firms, including ‘Big four’ accountants PricewaterhouseCoopers and KPMG and established corporate law firms such as Burges Salmon, were more than happy to assist HBOS with the scam. Perhaps they were just so partial to the fees paid by Bank of Scotland and Mills that they were willing turn a blind eye to any ethical or moral considerations?

Scourfield, who came up from the asset-backed lending side of the bank, is understood to have suffered a nervous breakdown in about March 2007 and after a period of “sick leave” was fired by the bank. The bank has since claimed this was for “unauthorized” or “over-generous” lending.

However it is impossible that Scourfield was acting alone — he reported straight to BoS Corporate managing director Paul Burnett, who was eased out by the bank in early 2008 and ended up working for Mills, and to Peter Cummings who left later that year. It’s possible the bank decided to hang Scourfield out to dry in order to protect some of his seniors.

A parliamentary debate into this shocking saga was held in Westminster Hall on June 2nd 2009. The debate, fully reported in Hansard, (see column 43WH) was instigated by the Conservative MP for South-East Cambridgeshire, James Paice.

Exasperated by the failure of BoS Corporate’s new owners, Lloyds Banking Group, to acknowledge any wrongdoing in the affair, Paice used parliamentary privilege to bring elements of the affair that the mainstream media don’t seem interested in reporting into the public domain

During that debate Paice said: “I believe that Lynden Scourfield was responsible for making what may or may not have been poor financial positions into impossible ones, and in doing so probably enriched himself and others.”

Outraged at the way some of their constituents had been treated by BoS and Quayside, Paice and five other MPs sought a meeting with HBOS’s former chairman, Lord Stevenson of Coddenham (pictured right), last December. At the very least they expected the peer might provide an explanation of what had been going on. But Stevenson didn’t even show up.

Instead, Stevenson passed the buck to Philip Grant, Lloyds Banking Group’s chief operating officer for wholesale banking, a man who was (astonishingly) earlier this year appointed president of the Chartered Institute of Banking in Scotland (CIOBS).

Like everyone else HBOS/Lloyds, Grant was firmly in denial. In a letter to the MPs dated February 2009, he claimed there was “a lack of evidence of direct personal benefit on the part of Mr Scourfield from his relationship with Quayside.” The bank apparently reached this conclusion following “an extensive internal review” following Scourfield’s dismissal.

Commenting on Grant’s claim that Scourfield received no personal benefit from Quayside and Quayside-controlled companies, Eric Pickles, Conservative MP for Brentwood and Ongar said: “Does [Mr Paice] agree that in the last point, the gradual sweeping of dirt under the carpet can be heard?”

One certainly wonders how thorough this whitewash review, which I believe was carried out by PwC, actually was. Evidence suggests Scourfield was receiving benefits in kind and other inducements in exchange for lending to Quayside and Quayside-controlled businesses. So far, it’s proved impossible establish whether other HBOS executives such as Burnett, who declined to be interviewed for this article, were receiving kickbacks too.

Paice told parliament he had received a letter saying that the P.A. to the owner of the Birmingham-based golfing equipment company, Seoul Nassau — which was advised by Quayside and been generously lent to by Scourfield, and which went bust owing BoS £34m in August 2007 — used to “deliver a briefcase full of cash to Mr Scourfield to assist the loan”.

Paice added: “This allegation follows other stories that Mr. Scourfield was benefiting from being, as the bank said, “overly supportive”, including, I am afraid, lurid stories of prostitutes being paid for from the funds of Quayside clients.”

Another Quayside-controlled company, Mezzanine Group, picked up the £1,000 plus tab for his 42nd birthday party at the Attica nightclub in London. Scourfield was given flights on private jets and scheduled flights to destinations including the West Indies, Portugal, Miami, Las Vegas, Chicago, the South of France and Thailand.

Ahead of a visit to the gaming tables in Las Vegas he was, allegedly, handed £10,000 in cash by a Quayside-controlled company to which he had lent. Another Quayside controlled business, Seoul Nassau, regularly gave him top of the range sets of golf clubs and picked up his bills at the Birmingham lap-dancing joint, the Rocket Club.

In his letter Grant then sought to adopt a “divide and rule approach” to the scores of business-people across the UK whose lives and businesses have been destroyed by the scandal. He did this by offering varying amounts of compensation — or in some cases no compensation — in the hope of buying their silence. However, the victims told him they had no intention of to accepting Lloyds’s “hush” money unless the bank accepts wrongdoing.

In conclusion to the debate, Paice and the other seven MPs called for a “full and exhaustive” investigation into the whole scandal. He asked:

“Why was HBOS the only bank not to work with Institute for Turnaround Specialists, given that Quayside was not a member of the institute? If everything was satisfactory, why did HBOS stop using Quayside?

“Finally, should there not be clear rules that if a consultancy is involved with a business that goes down, no company or individual involved with the consultancy should then benefit by purchasing the company or its assets, which clearly appears to have happened?

“I hope this debate demonstrates to the minister that he should invite the regulatory authorities to investigate the whole matter thoroughly. The public now own most of HBOS, and, although there were many reasons for its decline, it seems clear to me that some of its losses, probably hundreds of millions, stemmed from malpractice at the Reading office.

“All of us are taxpayers, and we are justified in demanding to know how that happened, why it was allowed to happen and whether any criminality was involved.”

Dr. Andrew Murrison, a Conservative MP for Westbury in Wiltshire, said:

“My interest derives from my constituent Mr. Andrew Reade who has been discommoded in connection with his business Keenets by the gross failure in governance at HBOS and by its associate Quayside in the manner that has already been described.

“It is simply not credible to characterize Scourfield as some autonomous rogue banker and leave the matter at that. Loans of that order must have been sanctioned and remitted at a much higher level—in this case, at HBOS headquarters in Edinburgh by Mr. Scourfield’s immediate superior at least.

“Lloyds has pretty well dismissed all criticism and paid lip service to cleaning up the act of its acquisition HBOS. That simply will not do. It is unedifying in the current climate of distrust in greedy, cynical bankers for Lloyds Banking Group to behave in that way.

“It is evident that Mr. Lynden Scourfield had a close relationship with Quayside’s Mr. Bancroft and Mr. Mills.

“What remains opaque is the extent to which those now liquidated companies were acquired by undertakings associated with Quayside. From his Keenets experience, my constituent suggests that the Quayside-associated companies Seoul Nassau and Speyside should be explored by the FSA in that regard. Given the apparent murkiness of the situation, there is every reason for the FSA to undertake a comprehensive investigation, and I urge the minister to use his good offices to ensure that that happens.

Ed Vaizey, Conservative MP for Wantage, said:

“It is now up to HBOS to come to the table, following a moral course rather than a legalistic one, and put those people back in the position that they would have been in before dealing with HBOS.”

Given that he is a minister in Gordon Brown’s government, and given the close personal friendship that once existed between Brown and the disgraced former HBOS chief executive Sir James Crosby, it is perhaps unsurprising that the economic secretary to the Treasury, Ian Pearson, was underwhelming in his summing up.

Pearson claimed to be “deeply concerned to hear the allegations that have been made,” adding, “I have been advised that the FSA has investigated the Reading office case and the internal breach of controls that occurred at HBOS.”

“The control systems have been changed and strengthened, and HBOS has written off a considerable amount … I have also been advised that the FSA continues to monitor HBOS, that it considers carefully any allegations of fraud by an authorized firm, and that it works closely with other law enforcement agencies to protect consumers from financial crime. I add, however, that it is important that any victim of an alleged fraud should report the matter to his or her local police force.

“Following the Hon. gentleman’s representations, I shall write to the FSA, enclosing a transcript of this debate, to seek assurance that all appropriate consideration is given to these matters. I shall also ask it to write to me and the hon. gentleman to outline the FSA’s role in dealing with this affair and the approach that it takes when there may have been financial crime. I also undertake to write to other hon. members who have attended the debate.

Pearson added:

“The debate has raised issues and allegations that require full examination of the evidence, and I am happy to pass on any evidence that is not already available to the FSA. If appropriate, I am also happy for the FSA to refer matters to the police.”

If either the FSA or the police can be bothered to properly and thoroughly investigate this matter — and, contrary to what we heard from Pearson during the debate, they have been asked to do so repeatedly* — they might care to start by properly investigating the nature of the relationship that existed between Mills, the owner of Quayside, and Bank of Scotland Corporate.

• Why did Bank of Scotland Corporate allow David Mills and his associates to run riot through its own customer base?
• Why was the mere involvement of  Mills and his associates with business customers of the bank seen as sufficient grounds by Bank of Scotland Corporate to lavish new loans on them, even where businesses were technically insolvent?
• What is the Sandstone Organisation, which was used to expropriate the assets of former BoS customers that Quayside had destabilised? Was it Mill’s vehicle? Or is the accountancy firm PwC correct in describing it as an “off-balance-sheet share repository of HBOS”?
• Why do so many of the companies of which Mills is a director, including the Aim-listed surveillance company Petards Group, file their annual accounts late, fail to file any annual accounts, or else have to restate their accounts? Why do so many of Mill’s companies use Brett Adams as their auditors?
• Has Her Majesty’s Revenue & Customs ever investigated Mills and his new vehicle Core Enterprise Management group, a company incorporated in April 2008 and where EADS UK chief executive Robin Southwell is chairman?
• Has HMRC ever investigated other companies owned or part-owned by Mills including Quayside Corporate Services (where Southwell remains a director), Clode Retail Finance or The Sandstone Organisation?
• Has HMRC ever investigated the multiple phoenixing of companies associated with Mills and his associates in which both the bank and HMRC were significant losers (accountants and IPs Vantis and MCR invariably handle such “restructurings” on Mills’s behalf)?  The most recent example of serial phoenixing by Mills came when Concord Office Products was put into administration and reborn within minutes as Concord Filing Products, shorn of all debt including millions owed to HMRC.
• Why did the Aim-listed “investment bank” Interregnum / Parkmead, of which former energy minister Brian Wilson and Tory MP Ian Taylor are or were non-executive directors, acquire Mill’s Quayside Corporate Services for £6m in February 2006 only to sell it back to Mills for £630,000 in November 2007? (Parkmead was meant to be receiving an additional £1.97m from Mills for Quayside by November 2008, but this looks unlikely ever to be paid).

Other areas that the FSA and other UK authorities might care to examine include:-

• Who within the Bank of Scotland Corporate was authorising Scourfield’s loans? Was it his immediate boss, managing director of BoS Corporate Paul Burnett, who was “eased out” of the bank in mid-2008 only to resurface as a director of several firms associated with Mills and his associates, including Pareto Golf, Marn Productions and Nordic Saunas? Or was it people above Burnett such as the so-called “banker to the stars” and head of corporate, Peter Cummings?
• How aware were other past and present BoS Corporate executives — including George Mitchell, Ian Robertson, Hugh McMillan, Eddie Morrison, Alistair Webster, Tom Abraham, Mike Wooderson, Ian Robertson and Tom Angus — of what was going on?
• Could Colin Swanson, BoS’s director of structured finance, who committed suicide in the Millennium Hotel on London’s Grosvenor Square in March 2007, have been responsible for signing off Scourfield’s loans?
• Why was Mike Ellis — a man with a predeliction for keeping the bank’s board in the dark about internal abuses (see Paul Moore’s evidence to the Treasury Select Committee) — brought back as HBOS finance director? Ellis resigned as finance director in December 2004, about a year after the fraud gained traction. In January 2005 he was replaced by Mark Tucker (who lasted three months). Tucker was replaced by Phil Hodkinson in March 2004. Ellis resurfaced as HBOS’s group finance director in September 2007, exactly a year before the bank went bust.
• Given that two Quayside consultants — Tony Cartwright and Michael Bancroft — embezzled £1.5m from the publicly-listed group Ritz Design Group PLC in 1990-91, an act which led to them being forced to step down as Ritz’s chairman/chief executive and finance director respectively, why did BoS consider them ‘fit and proper persons’ to impose as directors of its own business customers?
• If the FSA has already investigated BoS’s Reading Branch, as the Treasury minister claimed in the parliamentary debate, what did the regulator find? Was this the sort of investigation where the words of miscreant bankers are taken at face value? Did it bother to question any of the business customers of BoS’s Reading branch, some of whom legitimately got the police involved to keep Quayside personnel off their premises? Did it discover anything about how Scourfield and Mills had been treating customers? Did the FSA/PwC bother to examine the track records of Mills, Cartwright and Bancroft as part of their so-called”inquiry”?
• Were insolvency practitioners including David Crawshaw of KPMG, Rob Birchall and Matthew Hammond of PwC, Andrew Gordon-Stoneman of Menzies Corporate Restructurin (MCR), Simon Glyn of Vantis and Paul Ellison of Hurst Morrison Thomson complicit in the alleged fraud, in that they made it easier for BoS, Mills and/or Mills’ associates to expropriate customers’ assets through abuse of pre-packaged administrations?
• Were HBOS’s auditors, KPMG, so stupified by the fees they were receiving from HBOS (some £100m in audit and non-audit fees since 2000) that they were willing to turn a blind eye to the possibility of fraud?
• Did the FSA fail to properly investigate the BoS Reading situation because it feared that bringing this into the open might destabilise the wider HBOS group, where similar “irregularities” are well known to have occurred?

Speaking in March 2009, Hector Sants, the FSA’s chief executive (pictured left), said: “There is a view that people are not frightened of the FSA. I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA.”

The FSA investigation that Pearson described in the parliamentary debate was presumably one of the feeble, half-hearted affairs done at a time when, as a result of “regulatory capture“, and generally flawed thinking about Britain’s status as a global financial centre, the FSA turned a blind eye to rampant fraud in the banking sector and was extremely lenient towards bankers. I sincerely hope that Sants means what he says, but given the track record to date I am not holding out too much hope.

This is despite the fact many would consider it inconscionable that, while we as taxpayers are having to stump billions to keep a basket-case of a bank in business, beneficiaries of its earlier largesse continue to live high on the hog — with their overseas properties, private jets, jumbo yachts and extravagant, Coke-fuelled lifestyles untouched.

In a statement Lloyds Banking Group said:

“We simply cannot comment on individual circumstances. However, we strongly believe that we have acted throughout in a fair and responsible way. Bank of Scotland deals in a sensitive and fair way with all of its corporate banking customers, including those experiencing difficulties. We stand by our customers and support them closely in managing their financial difficulties.”

Gosh, Shane O’Riordain, was that a pig I just saw flying past my window?

Core Enterprise Management;s David Mills has denied any wrongdoing, saying:

“I and Quayside Corporate Services acted as advisers to a number of banks and accounting firms to help implement commercial decisions made by our clients to try to turn around failing businesses. I always kept the banks fully informed of progress with the businesses. Unfortunately, in a number of cases, companies were unable to pay off large debts incurred before Quayside Corporate Services’ involvement.”

* In December 2007, Paul and Nikki Turner, the owners of Cambridge-based music publishers Zenith, reported their findings about Scourfield and Quayside to the fraud squad. Peter Savage from Cambridge Fraud Squad visited them and examined the evidence. His conclusion was that the bank itself was the main victim of the fraud and that the associated companies (i.e. the bank’s customers) were “collateral damage”. He told the Turners that no action could be taken unless the bank itself requested a fraud squad investigation, since the biggest loser from the alleged fraud was the bank. Savage contacted HBOS regarding this and it replied four months later saying it didn’t believe there was anything to investigate.

* The £925m figure was formally confirmed by sources with close knowledge of this matter in February 2010. The original £250m figure used by BBC ‘File on 4′ in May 2009 was a conservative figure based on an examination of a small sample of the companies that were defrauded by BoS Reading.

• To read more on HBOS please click here
• To read an in-depth piece on HBOS’s toxicity click here
• For a full transcript of the ‘File on 4′ programme click here. To listen to the programme on BBC iPlayer click here
  
• HBOS’s former board of directors who include Lord Stevenson (aka Baron Henry Dennistoun Stevenson of Coddenham), Sir James Crosby, Andy Hornby, Peter Cummings, Mike Elllis, Jo Dawson, Dan Watkins, Phil Hodkinson, Colin Matthew, Mark Tucker, Phil Hodkinson, Charles Dunstone, Sir Ron Garrick, Sir Brian Ivory,  John MacLean, Coline McConville, David Shearer, Kate Nealon, Richard Cousins, Anthony Hobson, Karen Jones and Sir Bob Reid have obviously done absolutely nothing wrong.

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