The bank, the regulator and the Vavasseur fraud
November 8th, 2009 (first published January 2009) (Minor edit on 20 March 2014)
No touch regulator? John Tiner was the FSA’s boss from April 2001 to July 2007
One of the FSA’s roles is supposed to be to protect consumers from being ripped off by crooks and charlatans in the financial world. But the City regulator has in recent times had no appetite for this. Ian Fraser examines the multifarious failings of “no touch” regulation.
During the laissez-faire era that has caused so much financial destruction, neither the Securities & Exchange Commission (SEC) in Washington nor the Financial Services Authority (FSA) in London’s Canary Wharf had any real interest in protecting consumers from predatory and unethical banks and financial services operations.
Taking their cue from pro-bank politicians such as Gordon Brown, who had fallen under the spell of ‘market fundamentalists’ including Federal Reserve chairman Alan Greenspan, the regulators’ preference was to ignore major frauds in the interests of so-called “financial stability”.
As the dust slowly settles on the banking and financial crisis, it is becoming increasingly clear what a flawed approach this was. Indeed its ramifications could take years, if not decades, to work themselves out. For more on this theme read my Crimes of the regulators piece, published in January 2009.
I have a personal interest in this. In September 2004, I was aware that a formal complaint was made to John Tiner (pictured above), who at the time was the FSA’s chief executive. The complaint concerned the abuse of off-balance-sheet vehicles by HBOS’s Bank of Scotland Corporate division to minimize its corporate bad debt position and deceive City investors.
Even though this was a serious and documented complaint, Tiner chose to sweep it under the carpet. The FSA finally gave the complainant the brush off in February 2005 — three years before HBOS’s demise — arguing it wasn’t its role to police regulated firms’ business models.
Crosby’s two step
One wonders whether the regulator’s lack of interest had anything to do with the presence on its board of Sir James Crosby, HBOS’s then chief executive.
Crosby, a nominee of chancellor Gordon Brown and H.M. Treasury to the FSA role, stepped onto the regulator’s board in January 2004 fully two and half years before he stepped down the from the bank.
Throughout the period when Crosby simultaneously played poacher and gamekeeper, there was clear scope for conflict of interest. Interestingly, HBOS was fined a total of £2.25m by the FSA in the 12 months to December 2003 (for crimes and misdemeanours including sloppy record-keeping in its PEP and ISA division and lax anti-money laundering controls) but has been fined absolutely nothing since. Strange, that.
Brown, who as I said is a close friend of Crosby’s who apparently regularly spent weekends at Crosby’s home in the Yorkshire spa town of Harrogate, ought never have allowed this situation to arise. Apart from anything else, the Bank of Scotland had, since a few months before its merger with Halifax in 2001, been encouraging its own retail customers to “invest” millions of pounds in the Vavasseur ‘Ponzi’ scheme.
The bank’s Manchester-based head of specialist mortgages, Fraser Mackay, is alleged to have been peddling the scheme at the same time as urging customers to take out large equity-release loans on their homes on a self-cert basis to fund their ‘investments’ in the Vavasseur scheme. The loans were allegedly conditional on the money going into Vavesseur, which customers were told represented a series of offshore “custodian accounts” offering spectacular returns of up to 5% a month.
Other UK-based firms involved with luring hapless investors into the fraud included St James Place Capital (60% owned by HBOS, and where James Crosby was also a director) and Scotts Private Client Services, a close affiliate company run by the Scottish chartered accountant John Dryburgh. These and several other UK-based organisations were actively promoting the Vavasseur fraud in 2001-02.
Their enthusiasm for Vavasseur was, to say the least, surprising. The US authorities, including the Securities & Exchange Commission and the FBI, had already lifted the lid on Bahamas-based Vavasseur Corporation and were in the process of bringing its founder, the swindler Terry Dowdell, to justice.
Needless to say the UK investors who were duped into putting money into the scheme lost everything — and it appears that a massive state-sponsored cover up ensued.
Supposed regulators and other authorities including the FSA and Serious Fraud Office have, for the past seven years, appear to have been seeking to protect the interests of the perpetrators of the fraud against the interests of the victims, many of whom are now having to live in penury.
One way in which the Canary Wharf-based FSA achieved this was by winding up Dobb White & Co — a Midlands-based accountancy firm which had become a UK lynchpin for promoting the fraudulent scheme.
In doing so, the FSA ensured Dobb White’s professional indemnity policies were void, which had the advantage of letting the insurance market Lloyds of London off the hook. (By the way, the FSA’s liquidation of Dobb White & Co on 2 December 2003 was questionable, given it was granted in contravention of EC Regulation 1346/2000, since Dobb White could be characterized as a “collective investment undertaking”) and the lack of definitive evidence of a proper winding up petition in the High Court).
Another way in which the FSA ensured investors in Vavasseur did not get any of the stolen funds back was through the issuance of a worldwide ‘Mareva’ injunction on 22 October 2002.
Taken together, the FSA’s actions substantially reduced investors’ chances of getting their cash back. The Mareva injunction enabled the FSA to freeze creditor funds in the ‘Vavasseur’ infrastructure of offshore accounts, effectively handing control of the missing funds to the US Department of Justice and SEC — neither of which were particularly inclined to return it.
Liz Watson, who lives in Bournemouth and is one of the UK victims of the Vavasseur fraud, claims that on 2 December, 2003, the FSA perjured itself in the High Court by denying it had any knowledge of the Vavasseur money’s whereabouts and failing to disclose the existence of the Mareva injunction. She has been investigating this fraud for the past seven years and has formed the One Voice Action Group in the hope of securing compensation for investors.
Rather than investigate and hold banks and bankers accountable, the FSA and SFO have preferred to target players lower down the food chain. These have included Dobb White & Co’s Shinder Gangar and Alan White, each of whom was sentenced to seven and a half years in jail following an eight-month jury trial in Birmingham Crown Court in April 2008.
During the trial, witnesses for the prosecution were advised by counsel for the Crown that they must not, under any circumstances, mention the name ‘HBOS’ when giving their evidence.
Dobb White liquidators Baker Tilly have been claiming that they have been working hard to retrieve creditors’ cash since they were appointed in January 2004. But in six years, they have only managed to track down £6m of UK creditors’ missing £125m . They got this from Roy Terry, a partner in Virginia-based law firm Durette Bradshaw, who is acting as Vavasseur’s receiver and trustee in the US.
Geoff Carton-Kelly, joint liquidator and joint trustee at Baker Tilly told me he believes that a further £10m to £12m might be secured for distribution to creditors “at some point in time.” He said that Baker Tilly’s fees to date on this assignment have been £1m, although other sources have claimed they are more than has been retrieved for creditors.
Watson accuses Baker Tilly of being asleep at the wheel. In a recent letter to Carton-Kelly, she wrote: “We hold major evidence that Baker Tilly have abused their power in public office, along with Durrette Bradshaw, the FSA, the Insolvency Service, and the SFO on this Case.”
Ever considerate, HBOS has sought to evict “investors” from their homes if they missed repayments on their loans. It clearly hasn’t occurred to anyone at the Edinburgh-based bank, which was subsumed into Lloyds Banking Group in the wake of its own collapse in January 2009, that the only reason these people were unable to keep up with their repayments was because it had, allegedly, defrauded them.
“The FSA has become an enabler, rather than an enforcer of financial crime. The FSA is turning a Nelsonian blind eye to things like money-laundering on a daily basis and is actually capitalizing from that. The FSA’s only interest is to defend itself through the use of loopholes and by neutralising complaints through its own interpretations of the Financial Services & Markets Act. In my view, however, what they’re doing is running a form of racketeering; they’re a liability to the public, undemocratic, self-serving and failing in their own remit.”
She claims that the FSA has received some £20m in fines from various banks and financial institutions for money laundering and other offences related to the Vavasseur fraud — none of which has found its way back to the consumers who were fleeced. She and her husband Craig served a claim against Halifax Bank of Scotland at the High Court in London on June 8th, 2009.
Alan Steel, founder and chairman of Linlithgow-based Alan Steel Asset Management who exposed similarly shabby behaviour by the FSA during the Equitable Life scandal, says:
“The guys at the top of the FSA should get the bullet. There’s 3,500 people at Canary Wharf just farting about. They make the lives of people like us very difficult but what they’ve allowed through at the top of banking and finance has been extraordinary. They were asleep at the wheel, allowing millions of people to get ripped off. They haven’t a clue about the real world.”
It seems to me the during the years of “regulatory capture” which commenced in about 2003, the FSA became so obsessed with propping up fraudulent institutions that its understanding of things like truth and justice became warped.
And remember what happened on 16th September 2008? On that day, the FSA stepped in to reassure depositors and investors that HBOS was a sound bank. The FSA issued a statement saying: “We can confirm that, as HBOS already stated, HBOS has a strong capital base and continues to fund satisfactorily.”
At the time HBOS, led by chairman Lord Stevenson of Coddenham and chief executive Andy Hornby, was almost certainly trading whilst insolvent and had been doing so for several months. It was hours away from bankruptcy. As a result of its recklessness, the incompetence of its board and the fact it was probably corrupt from top the bottom, the bank’s capital was shot to pieces and it was struggling to fund itself at all, let alone “satisfactorily”.
HBOS would have gone bust had it not been rescued by Lloyds TSB two days later. Hornby was apparently so desperate to do that deal, he was “in a state of high anxiety” and willing to accept even a few sous from the Lloyds TSB board led by chairman Sir Victor Blank and chief executive Eric Daniels.
It’s also worth remembering HBOS’s board misled its own investors at a general meeting held in Edinburgh on June 26th, 2008, four months before the bank’s implosion, At that time Hornby reassured investors that a planned £4bn rights issue would make HBOS “really strong versus all peer groups on a UK and European scale and therefore be in a position to take appropriate market share”. HBOS got the money from its underwriters but was officially bust three months later.
Now that the FSA is investigating the truthfulness of such claims, as well as the HBOS Reading situation, one can only hope the regulator has re-ordered its priorities. If it remains more preoccupied with propping up fraudulent, kleptocratic institutions than with protecting their customers, the FSA should be quietly put out of its misery.
- To read an article on the Treasury Select Committee’s failure to bring the FSA to account, click here
- To read Ian Fraser’s earlier article on the future of financial regulation, click The end of laissez-faire .
- For an in-depth analysis of HBOS’s calamitous seven-year life, click HBOS: When did the rot set in? And were investors asleep at the wheel?
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