By Ian Fraser
Date: 5 May 2017 (updated)
It promises to be one of the most sensational trials of recent times. On Monday 22 May, in the Rolls Building of the Royal Courts of Justice on Fetter Lane, and after eight years of expensive and tortuous legal throat-clearing, the RBoS Shareholder Action Group, which represents the interests of more than 28,800 individual investors in the bank, will finally get its day in court, with Fred Goodwin, the former chief executive of Royal Bank of Scotland the key defendant.
Proceedings – which relate to whether or not Goodwin and his fellow RBS directors duped shareholders, including thousands of the bank’s own staff, into piling £12.3 billion into the bank’s shares as the financial crisis intensified in April to June 2008 – are scheduled to start on 22 May and are expected to last for 12 weeks.
Back in spring 2008, Goodwin and his acolytes on the RBS board were making all sorts of positive noises about RBS’s financial position. As they sought to persuade investors to put money into a £12.3 billion capital raising or “rights issue”, they were reassuring about the purpose of the exercise, about the bank’s prospects, and about its ability to successfully integrate ABN Amro, a toxic Dutch bank they had bought the previous year.
Yet four months after tapping investors for £12.3bn, RBS collapsed. Shares which were purchased at the supposed “bargain basement” price of £2 had plummeted in value to less than 10 pence and, without a £45.5 billion taxpayer-funded bailout, the Royal Bank of Scotland Group, then the largest bank in the world by assets, would have gone down the tubes.
The shape of the legal proceedings has altered considerably over the past few months as RBS, still 72 per cent owned by the British government, and its lawyers Herbert Smith Freehills, have used a variety of means to spare Fred Goodwin’s blushes and prevent the case from happening. Over and above a 21p-in-the-pound settlement with four groups of investors in December, these have included contacting remaining institutional investors which had agreed to be part of the action, and dangling an out-of-court settlement in front of their faces. Many have accepted.
RBS has also been spending money like water in its defence, leading to accusations that it is engaged in a form of “financial terrorism” – seeking to intimidate its opponents into accepting out-of-court settlements.
The bank recently admitted it has already paid out £100m in legal fees to defend itself, including over £6.5m to defend Goodwin and three other former directors, and that it envisages spending a further £25m to see the case through. To put this into perspective, it is more than the UK government spent on the Bloody Sunday Inquiry and nine times more than what was spent on the Chilcot Inquiry into the run-up to the Iraq war. It prompted former Liberal Democrat minister Sir Vince Cable to say: “The government should not be allowing [RBS to spend taxpayers’] money on defending one of the architects of the credit crunch and financial crisis.”
In one of the countless pre-trial hearings on 3 May, the judge who is handling the case Mr Justice Hildyard took aim at RBS over its escalating legal costs, saying they were “not proportionate in relation to the value of the case”. He mocked the bank over its “staggering” costs and its use of 13 barristers and QCs (counsel), demanding to know the bank’s ongoing daily trial rate costs, which he suspected for 3 May alone were £181,000.
However the small, individual investors who are members of the action group are undaunted by such tactics and determined to see the case through, presumably out of a belief they are likely to win, given the powerful evidence their lawyers have collected, including emails sent by senior RBS executives and their external advisers at the time of the rights issue announcement in April 2008, that the bank will be humiliated, and that their compensation will be five times greater, on a per share basis, than those who have settled thus far.
The excitement for me and many other watchers of the UK’s still rotten banking system, is that Goodwin (who incidentally remains a member of both the Institute of Chartered Accountants of Scotland and the Chartered Banker Institute) and three other former directors of RBS will finally be forced to explain themselves under oath, and in front of experienced silks. They will be asked to explain why, for example, they mismanaged the bank in such a way that investors were left penniless and that a trail of financial destruction was left, from which the UK has yet to fully recover.
Top billing goes Goodwin, who is due to be cross-examined on 8-9 June (during and immediately after the general election, which may limit the media coverage), and his former finance director Guy Whittaker, who is due to be questioned on 13-15 June. The other two named defendants due to take the stand are RBS’s former chairman Sir Tom McKillop and its former head of investment banking Johnny Cameron.
Other than a relatively light grilling in front of the Treasury Select Committee in February 2009, it will be the first time these former bank directors have been obliged to explain themselves in a public forum.
Ian Fraser is author of the bestselling Shredded: Inside RBS the Bank That Broke Britain. A edited version of this article was published on 5 May 2017 by Scottish Business Insider. View on the insider.co.uk website
Background to the shareholders vs Royal Bank of Scotland court case
By law, a rights issue prospectus must reflect a company’s true reasons for raising capital, present an accurate picture of its financial state and offer an accurate picture of its future prospects. However according to the action group’s particulars of claim, errors of omission or commission made by RBS and its advisors in the 30 April 2008 rights issue prospectus included:
- failure to disclose that the rights issue was effectively ordered by Hector Sants, the then chief executive of the FSA
- failure to disclose that, by the time the prospectus was published on 30 April 2008, the bank was making use of $11.9 billion of clandestine emergency loans from the US Federal Reserve
- understating RBS’s exposure to exotic credit derivatives and short-term funding requirement
- neglecting to mention that RBS’s core tier-1 capital had fallen as low as 3.6 per cent by 30 April 2008 and that it had breached or was close to breaching its individual capital guidance (ICG)
- playing down problems with the ABN integration
- failure to acknowledge ABN was overvalued on RBS’s books
- failure to admit the inadequacies of RBS’s ‘back office’, risk management and controls
- failure to admit that RBS had incomplete knowledge of its own financial position.
Members of the action group include more than 4,500 RBS staff, and these individuals are among the most militant most upset participants in the action. More keep trying to join by the day through it is not certain that Hildyard will permit this because of time bar considerations. Some members of the action group are current and former senior executives at time of bank. People and organisations that have recently joined or attempted to join the action group as claimants include RBS’s former deputy chairman, Sir Angus Grossart, and Sir Brian Souter, the founder and chairman of Stagecoach. The UK Ministry of Justice also recently signed up as member on behalf of the Accountant-General of the Senior Court, who is representing 200 claimants who have become incapacitated through dementia or other ailments.
Three ways in which RBS and its law firm, Herbert Smith Freehills, have effectively sought to obstruct, or at least delay, justice over this trial include:-
- deliberately ratcheting up of costs (already £100m to date plus an expected £25m still to go) in hope of intimidating and exhausting the resources of its opponents (the judge, Mr Justice Hildyard, has referred to this disparagingly)
- dragging their heels during the “discovery” process
- eventually overloading the claimants with 10 million “unique” documents
- picking off institutional members of the RBoS Shareholder Action Group for settlement without consent of the group
- seeking to persuade the judge to remove Fred Goodwin, Tom McKillop, Johnny Cameron and Guy Whittaker as defendants (the judge, Mr Justice Hildyard, gave RBS and HSF short shift on this)
- seeking disclosure of identity of litigation funders and the existence of ATE insurance
- seeking an £11.6m security from their pursuers