By Ian Fraser
Published: Daily Record
Date: 7 June 2017
It has been one of the longest, most tortuous and expensive legal processes in British history, taking nine years and costing in excess of £190 million in legal fees. The outcome – an out-of-court settlement between investors and the bank that they claim cheated them out of billions – comes as a bitter disappointment for many and draws a veil over a particularly painful episode in RBS’s history.
Less than a year after RBS collapsed and needed to be rescued by taxpayers in the world’s most expensive banking bailout in October 2008, a group of investors who lost a fortune in the bank’s ill-fated rights issue of April 2008 got together to try and sue the bank for allegedly duping them out of their cash. The investors accused RBS of putting together a false or misleading prospectus – a document that was rubber-stamped by City of London firms including Goldman Sachs, Merrill Lynch, UBS, Linklaters and Deloitte, and issued by the bank on 30 April 2008.
The document gave a rosy view of RBS’s prospects and claimed that, once the bank had completed the fund-raising, and with the Amsterdam-based bank ABN Amro under its belt, it was poised for growth and would have sufficient working capital to survive for another 12 months. RBS’s top brass, including chief executive Fred Goodwin and chairman Sir Tom McKillop went on to encourage investors and to coerce and bully their colleagues and staff into putting as much of their money as they could in the newly minted shares.
However, only a few months after investors and staff had handed over their cash, RBS was dead in the water and, effectively, bust. Shares purchased for £2 each had collapsed in value to less than 10 pence and RBS group needed a £45.5bn taxpayer funded bailout to survive.
RBS has for the past few years been doing everything possible to avoid the case coming to court, believing it would be highly embarrassing to have to air its dirty laundry in public. It managed to persuade a large group of the institutional shareholders who had joined the action, including Aviva, M&G, Scottish Widows and Standard Life Investments, to settle for 41p-a-share (20.5p-in-the-pound) last December, shelling out £800m to do so.
However the 9,000 individual members of the RBoS Shareholder Action Group saw this as a derisory offer, and also had a desire to see Fred Goodwin and other former RBS top brass, some of whom they had named as defendants alongside the bank, held accountable in open court. So they vowed to fight on, overcame the obstacles that RBS and its lawyers Herbert Smith Freehills threw in their path, and the case was scheduled commence in the Rolls Building of the Royal Courts of Justice on Monday, 22 May.
However in a dramatic eleventh hour intervention, RBS chief executive Ross McEwan sought to head them off with an enhanced offer 82p-a-share (41p-in-the-pound) offer over the weekend of 20 and 21 May. In doing so, the New Zealander managed to delay the trial, as one extremely wealthy member of the action group, the leisure industry entrepreneur Trevor Hemmings, who was also part-bankrolling the case, opted to settle. The majority of the other investors still preferred to fight on, and the last few weeks have, for them, been a rollercoaster ride as they scrambled to persaude the judge to allow this and to secure replacement funding. The case was adjourned several times as various technicalities were ironed out and until such time as they found the additional £7 million that was required.
The bank, for its part, seems to have been terrified of two things.
The first was it didn’t particularly like the idea of having to rely on the testimony of the very man who is widely considered to have led it to destruction in 2008, and who many bank insiders have over the past nine years blamed for all its current travails — Fred Goodwin — or indeed having him as a co-defendent.
The second is that the claimants’ case now hinges on an explosive claim — that RBS was, knowingly, trading whilst insolvent at the time it was seeking to raise the £12 billion from investors. The claimants’ solicitors gleaned this from emails sent to and from the bank’s former finance director, Guy Whittaker, in the build up to the rights issue announcement. If this were adjudged to be the case, it would have potentially disastrous consequences for the bank (and possibly also for taxpayers who still own 73 per cent of RBS’s equity).
It would have meant that, instead of simply having to compensate those investors who bothered to sign up to the legal action, the bank would have been at risk of having to compensate everyone who participated in the rights issue. This is because the bank’s then board, led by chairman Sir Tom McKillop and chief executive Fred Goodwin, would be considered to have engaged in “deliberate concealment” – suppressing vital information investors should have been told about.
That would have removed the “statute of limitations” blockage, which has prevented any party from joining the legal action against Goodwin and the bank since the cut off point of 6 June 2014 (six years after disputed rights issue completed). With the addition of interest, that could have left RBS with a bill of £11 billion to £12 billion, spelling potential bankruptcy or a second bailout for the bank, as well as potential criminal proceedings for Goodwin and other former members of RBS’s board.
Yet, despite the slam-dunk evidence, the RBoS Shareholder Action Group was last weekend advised by its QC, Jonathan Nash, and its team of four barristers to accept the bank’s 82p-a-share offer. The written opinion meant the action group was no longer in a position to pursue the case to trial, as the counsels’ move rendered critical ‘after-the-event’ insurance void. A full settlement with the group has yet to be ironed out, however.
Overall, RBS has spent £1.129 billion to achieve this outcome (the figure combines the £800m cost of the bank’s December 2016 settlement with the institutional investors, the expected £200m cost of settling with the “hold-out” retail investors, with its own staggering legal fees of £129m).
The reclusive Fred Goodwin, is now laughing all the way to the golf course. The bank and its majority owner Her Majesty’s Treasury arguably also have much to celebrate.
Whether justice has been done is another matter.
An edited version of this article was published on page 18 of the Daily Record on Wednesday 7 June. Ian Fraser is author of the bestselling Shredded: Inside RBS The Bank That Broke Britain