The stonewalling and crocodile tears over HBOS Reading must stop. Time for Lloyds to provide some answers

Lloyds Banking Group chief executive Eric Daniels may not have known precisely what he was buying with HBOS. But, given today’s revelations about the Bank of Scotland / HBOS Reading debacle, writes Ian Fraser, the “Quiet American” ought to consider a more open and honest approach.

Douglas Flint, the finance director of HSBC, was interviewed by the magazine Financial Director a few years ago. Echoing some earlier words from Sir Peter Burt, Flint said that banks shouldn’t be at the exciting end of business. “They should be predictable and shouldn’t produce surprises. If predictable means dull, I still think that is important.”

But who was running HBOS after Burt’s departure in January 2003? Was it sensible and boring chaps like Captain Mainwaring? Or was it unscrupulous good-time-Charlies, like the spiv Private Walker?

Tonight, a programme I helped make for BBC Radio 4’s File on 4 slot, Badly Behaving Bankers, has provided at least some of the answers. It has shone a spotlight on one aspect of how HBOS was managed under chairman, Lord Stevenson, and chief executives, Sir James Crosby and Andy Hornby.

More is to be be revealed in the House of Commons next Tuesday. The Tory MP James Paice has requested a debate following the bank’s failure to acknowledge any wrongdoing in the saga, which includes reckless lending by the bank to companies advised by self-styled “turnaround consultants” Quayside Corporate Services.

This evening, Paice told Cambs 24: “I will use the debate to give evidence that these businesses were forced to use consultants who proceeded to bankrupt them whilst the bank official and the owner of the consultants both did very nicely.

“This will be the first time in my career that I have used parliamentary privilege to expose wrongdoing in this way, but I and my colleagues have become so frustrated at the failure of HBOS to admit that there was anything wrong that I have no alternative. The case must be investigated by the regulatory authorities and probably by the police.”

The File on 4 programme revealed how a single bank manager based in one branch of the basket-case bank lost 95% of the money he lent. His behaviour has cost HBOS — and by extension the taxpayer who rescued the bank last autumn — somewhere between the reported, conservative figure of £250m and a more probable £500m-£1 billion.

Lynden Scourfield, the manager in question, did this by lavishing loans on corporate customers of the bank, some of which were already technically insolvent. Many were already heavily-indebted and struggling with poor leadership. Few had much chance of fully recovering, especially once they were obliged to service the additional loans the bank gave them (although it’s worth pointing out that a number of healthy businesses were also sucked into Bank of Scotland and Quayside’s black hole).

Sources tell me no sane bank would ever have thrown as much in fresh loans these businesses’ way. Indeed, seasoned bankers have told me that they would have put many of the firms in question into administration long before Scourfield even became involved. So what on earth were Scourfield and HBOS up to?

Well it seems remuneration had something to do with it. I believe that people in BoS Corporate, including Scourfield’s boss Paul Burnett, managing director of high risk Hugh McMillan and the bank’s head of corporate banking, Peter Cummings, would have enhanced their personal earnings via bonuses on the strength of the value of the loans proferred.

But was there something else in it for them…?

One expert I’ve spoken compared what Scourfield and his superiors were doing to “opening the window and throwing money out.” He described business plans put together by Quayside for companies it “advised”, as a means of persuading senior people in the bank to throw money at them, as “cloud cuckoo-land stuff”, which his lot would have seen through in a trice. And HBOS’s impressive risk-management architecture — detailed in 21 pages of its 2008 annual report and accounts — where was that all the while?

Every banker I’ve spoken to about the scandal is baffled and perplexed by the sums lent by Scourfield. They have told me said that, in their banks, it could not have happened. For a start, they say, the bank’s chief executive would have seen red lights flashing on their computer screen with even a tiny proportion of the level of exposure Scourfield and his colleagues were creating — unless someone within the bank had circumvented the system. Hmm. Interesting.

So why was Scourfield doing it?

The common denominator to all the firms involved — which included Mezzanine (a restaurant and nightclub group), Magenta Studios (a textiles business found in 1896 and previusly known as Frank Theak & Roskilly), Remnant Media (a publisher of top-shelf magazines), Seoul Nassau (a golfing equipment company), Sharpe’s Holdings (a fishing-tackle supplier), Corporate Jet Services / Club 328 / Euromanx (an aviation company) and Fransen (a hairdresser) — was not just that Scourfield was their bank manager. It eas also that each was forced to use the self-styled “turnaround” consultancy Quayside Corporate Services.

Despite Quayside’s apparent incompetence, Scourfield was very enamoured with it. So enamoured, in fact, that he imposed it not just on the companies above but on a total of 50-200 of the companies committed to his care.

It would appear that Scourfield was rewarded handsomely for his pains. In exchange for his support, Quayside and Quayside-controlled companies provided him with various exotic forms of “corporate entertainment” and, according to some sources, “briefcases full of cash.”

Soon after Quayside became involved with the businesses in question, Scourfield opened the monetary taps and lavished additional loans on them (by the way, the sheer number of ‘cases’, coupled with the fact that the bank imposed Quayside on so many of them,  also baffles people with knowledge of ‘high risk’ in other banks).

The phrase “turnaround specialists” might suggest that Quayside had some sort of desire to turn around the business to which it was referred by the bank — restore them to health, even. But it had something rather different in mind.

In almost every case — despite the hundreds of millions pounds worth of fresh loans lavished these companies’ way — Quayside prioritised payments to itself and sought to destablise the businesses in question.

Quayside executives who ended up sitting on the companies’ boards added nothing of value, with some described as “rogues” incapable of even drafting a business plan, who spent their limited time in the office chatting up female members of staff. Two of them — Michael Bancroft and Tony Cartwright — had expropriated about £1.5m from the listed company Ritz Design Group PLC on whose board they sat in 1991.

The businesses concerned were forced to pay monthly fees of £2,000 to £12,000 a month to Quayside for these “services”, fees which were usually removed by BoS from their corporate accounts without consent, and which they could ill afford. And, remember, it was Bank of Scotland Corporate that had told them they must have these guys on board as consultants and often also on their boards — or else have their funding removed.

Almost all the affected companies found themselves being forced into administration.

It was then that the truly interesting stuff started. Quayside and its associates, who included entrepreneur Craig Treharne, have since indulged in something called “multiple phoenixing”. Through the use of tame insolvency practitioners — so far at least six have been identified, three of whom worked for “big four” firms of accountants — and through widespread abuse of pre-packaged administrations, the bank enabled Mills and his associates to assemble mini-conglomerates on the cheap.

Mills and his cronies were able to enrich themselves by mopping up the assets of former business customers of Bank of Scotland Corporate (many of which their firm had emasculated and tipped over the edge). Once the businesses had been pre-packed, they were of course shorn of their debts and other liabilities. Major losers included unsecured creditors including Her Majesty’s Revenue & Customs.

The process may have been designed by HBOS to launder duff loans and pretend these had suddenly become new loans (on which more later), as a means of flattering its own balance sheet, thereby taking the City of Lonndon for a ride, boosting its share price and inflating directors’ pay. Echoes of Enron here, perhaps?

Many of the assets involved ended up being owned by The Sandstone Organisation which has variously been described as owned by David Mills and “an off-balance-sheet share repository of the bank”

Gerry Metcalfe, former chairman and chief executive of the fishing tackle business Sharpe’s Holdings, who claims to have lost an estimated £7m as a result of the Bank of Scotland Reading fraud, said: “The modus operandi of Quayside was to try and de-stablise the businesses with which they became involved, then get more and more of their associates on the board then slowly take control and then run the thing into a pre-pack administration and then pick it up on the other side.”

David Mills, the founder and owner of Quayside Corporate Services (who is not the lawyer husband of the Labour politician Tessa Jowell), claims neither he nor Quayside have done anything wrong and he insists his firm always had the companies’ best interests at heart.

Mills earlier told me: “You could speak to many other chairmen and managing directors of business who would tell you they are absolutely delighted with the services Quayside provided because it saw them through a difficult time. It kept the staff from losing their jobs and it kept the businesses going.”

It’s worth noting, however, that Mills has a taste for the high life. Among other things, he ensured that he had the use of a 100-foot jumbo yacht, the Powder Monkey, which was part-paid with funds from one of the businesses crippled by Quayside, the Southampton and Isle if Man-based private aviation group Corporate Jet Services (parent group of executive jet company Club 368 and scheduled airline Euromanx), and, yes, the money was advanced by Bank of Scotland Corporate.

It’s also worth noting that, of the £113m that the ‘Private Walkers’ at Bank of Scotland Corporate lent to CJS, which was pre-packed into new vehicle of Mills’s, just £7.4m was actually recovered by the administrators PricewaterhouseCoopers. This raises serious questions about where the remaining £105.6m went — and why ‘big four’ accountancy firm PwC was unable to recover more.

And what about all the other loot? Don’t we, as taxpayers, without whose generosity banks like HBOS would have ceased to exist, have a right to know?

The whole shameful saga is something which Lloyds Banking Group, including its seemingly naive chairman, Sir Victor Blank, and chief executive, Eric Daniels, are sooner or later going to have to come clean about.

We need to know, for example, whether the Lloyds board was aware that these sort of things were going on inside their prey (HBOS) before they pounced last September.

The Fundamentally Supine Authority (FSA) must also become more transparent. Did it know these things were going on? If so, did it believe they represented acceptable behaviour? Given that the HBOS chief executive, Sir James Crosby, joined the FSA’s board as a non-executive director in January 2004, one wonders if the “regulatory capture” at the Canary Wharf-based regulator intensified at that point and it deliberately turned a blind eye.

More is expected to be flushed out in the House of Commons on Tuesday. The constituency MPs of some of the affected businesses, including James Paice MP, are baying for blood and can be expected to demand some actual answers from Lloyds, instead of the mealy-mouthed mixture of stonewalling and crocodile tears we’ve seen so far.

Lloyds’s spin doctors would have us believe that the way in which it was treating these businesses was “sensitive” and  “fair”. This is laughable. The businesses that became embroiled with Bank of Scotland Corporate’s Scourfield and Quayside say, almost without exception, that they felt they had become “mixed up with the mob”. Others say it was like being faced with some sort of “protection racket”. Another said: “This sort of thing doesn’t even go on in Sicily”.

Perhaps Lloyds Banking Group should take a leaf out of Douglas Flint’s book — by belatedly recognising that transparency and honesty are the best policy (Flint said in a 2002 interview: “Our culture [at HSBC]  is one where hiding a problem is the worst thing you can do and sharing a problem is career-advancing.”)

And perhaps also by rediscovering the Mainwaring-esque art of making banking boring again, while not permitting the Private Walkers of take it into a world of predatory swindling.

• To listen to the File on 4 programme, ‘Badly Behaving Bankers’ on iPlayer, click here
• To read a BBC article by Allan Urry based on the programme click here
• To read how the Sunday Herald broke this story in November 2008 click here
• To read a Daily Mail article on the scandal, click here
• For a fuller account of HBOS’s calamitous seven-year life, click here
  

This blog post was published on 26 May 2009, to coincide with the transmission on BBC Radio 4 of ‘Badly Behaving Bankers‘ an investigative ‘File on 4’ documentary on which I worked.

Note: After 22 September 2010, this article was subject to defamation lawsuit by Mr Lynden Scourfield. The action, on which I incurred substantial defence costs, faded away after Scourfield pleaded guilty to six counts, including corruption, on 12 August 2016 at Southwark Crown Court.