Week 12

Day 44 – Monday 4th July 2005

Rabinowitz for Allen & Overy clients calls his client Peter Davis.

Page 5: Miles for ELAS continues to cross-examine Davis.

As I said in respect of day 44 Davis comes across as straightforward in answering questions.

Page 22: Davis eventually agrees that a hypothetical provision which reduces the FFA would have been one of several factors he would have taken into account in deciding the Overall Rate of Return (ORR) which included the non-guaranteed bonus. This is more than some of his fellow directors have admitted. It strikes me as an honest reply.

Page 49. Bundle C39 page 293 is a record of a Board meeting on 23rd February 2000 i.e. shortly after the Court of Appeal decision. Davis is recorded as saying: “Difficult position, if duck the position and case goes against us. Difficult if major effect on person’s fund”. This is in a discussion about what should be said to policyholders or what is being said. The argument is whether he is talking about ringfencing or not. My feeling is that he was.

Page 52. Sher for Wilson cross-examines Davis.

Communications with policyholders handled by management and rarely came to Board.

Page 62: Denton’s suggestion of new ring-fenced fund never came to Board.

Page 78: Vaughan for Ms Page cross-examines Davis.

Page 83: Mumford for Ranson cross-examines Davis.

He tries to re-establish Ranson’s reputation in view of Davis’s earlier remarks about arrogance.

Page 99: Headdon cross-examines Davis.

Page 116: Hapgood for E+Y cross-examines Davis.

Page 132: Davis: The reassurance treaty … “a technical or a presentational device to deal with the technical and unrealistic requirements of the regulators”.

If this was the general view at the time, then it shows how pathetic the regulators were being.

Page 133: Davis holds that the reassurance treaty was a factor in considering the ORR and not just the guaranteed bonus. Hapgood disagrees with him as he does on the earlier point at page 22 above. Hapgood’s argument is that declaring an ORR does not affect the previous FFA and provided you have enough to pay out the policies maturing in the coming year you are alright. The rest of the non-guaranteed bonus, which may have to be paid out in subsequent years, can be illusory. A Ponzi scheme? You are declaring bonuses with no sound hope of being able to honour them. This is surely PRE but in this court PRE seems to be merely an idea that bonuses will not be altered too sharply from year to year.

Day 45 – Tuesday 5th July 2005

Hapgood for E+Y continues to cross-examine Davis.

All hypotheticals and pretty dreary stuff.

Page 48: Rabinowitz re-examines Davis

Page 61: The only entertainment of the day was VT’s apology. I still think that this was a Freudian slip and perhaps an apology is due elsewhere.

Page 63: Rabinowitz introduces his client Jonathan Taylor.

‘And who is he?’ you may well ask – just another non-executive Drector who is interested in marketing and KPIs – Key Performance Indicators.

Page 65: Miles for ELAS cross-examines Taylor.

Page 77: On learning about the GAR problem in 1998 he is somewhat critical:

5 Taylor: Well, I think I wrote a note, did I not?

6 Miles: Yes, if we can go to page 264 of the bundle? You make

7 the point in the second paragraph that you had just

8 received the minutes:

9 "I suppose they are a fair record but they tend to

10 confirm my impression that ELAS finds it difficult to be

11 self-critical except in the gentlest terms. I seem to

12 recall, amongst other remarks:

13 "Peter Martin commenting that the Society's draft

14 communication document was unintelligible.

15 "I raised the issue of governance and the

16 unacceptability of sudden surprises, particularly bad

17 ones.

18 "I recall you remarking that the audit committee had

19 no intimation of the impending problem.

20 "The only new action seemed to be the appointment of

21 a PR consultant. Was there not any move for the

22 president and vice presidents to be closely involved in

23 the monitoring of and response to the guaranteed annuity

24 rates issue?

25 "Overall, I did not get from the record quite the

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1 sense of urgency and concern that the situation seems to

2 warrant."

Page 103: Taylor “self-satisfied management”

Page 104: “Ranson … a tendency towards arrogance”.

These signs of tension exist in the record but they are very much played down in court.

Page 124: Miles for ELAS says that if Hyman had taken place in 1997 then they would have reached the same conclusion that the Society as a whole was unsaleable (because of the top-up problem). So where does this leave the lost sale claim? Or is ELAS claiming only in respect of break-up sale as eventually happened with the Halifax? I am a bit lost!

Day 46 – Wednesday 6th July 2005

Miles for ELAS continues to cross-examine Taylor.

Page 1: Taylor says account was taken of the Hyman litigation in deciding upon bonuses but it did not affect the decision on the Overall Rate of Return (ORR) i.e. the non-guaranteed or final bonuses.

Hypotheticals from then on.

Page 36: Ring-fencing prior to Court of Appeal was taken as a given and never came up as an issue.

Page 38: Revealing the Bayliss £1.5 billion would have been disastrous marketing wise even though a very remote risk says Taylor. As an aside I would say there is a paradox here. Why, if it was so remote a risk, should it be disastrous marketing wise to tell the correct story? Perhaps because it was a risk, however remote, to which no policyholder would want to be exposed? (There is no mention of Risk Factors being disclosed in this court). If Taylor thinks the answer to that question is ‘yes’ then it was a risk to which no policyholder should have been exposed and therefore it should have been disclosed.

Page 44: There is mention again of Jonathan Dawson’s remark at Board meeting of 21st January 2000 when the Nash´s draft letter was discussed:

3 "Mr Nash: need to get over points about £1.5 billion

4 rubbish.

5 "Mr Dawson: a bit in your face, dangerous letter.

6 Use it to get over, financially stable, not taken over.

Now Dawson had only just joined the Board and because he was untainted by earlier events he is not being sued by ELAS. I wonder whether he will be called as a witness. Coming fresh to the Board he might have some interesting views.

Page 47: When one gets to the Nash Letter all the non-executives start to get evasive and sing to a very similar hymn sheet:

16 Miles for ELAS: Quite. Then the paragraph which starts, "Contrary to

17 many of the reports", and so on, is giving the

18 impression, is it not, that the Court of Appeal decision

19 is the worst case outcome for policyholders?

20 Taylor: Yes, I think the first sentence is factual.

21 Q. I do not think that answers my question. The impression

22 which is created is that the outcome in the Court of

23 Appeal was the worst case outcome.

24 A. I think in terms of the understanding of the Court of

25 Appeal's decision, and the basis on which the case had

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1 been brought, it was our advice that an appeal to the

2 House of Lords could only improve the situation, but

3 this is a letter that had been very carefully vetted,

4 and given the advice that the Appeal Court allowed

5 ringfencing, I had no reason to query it or quarrel with

6 it.

7 Q. But you knew that there was a risk that could not be

8 disregarded that the House of Lords would impose a worse

9 outcome.

10 A. I suppose there is the conceivable remote risk, but in

11 terms -- in the terms that the Court of Appeal had

12 decided, that risk had become even more remote.

13 Q. But we have agreed that you were never advised that it

14 was a risk that could properly be disregarded.

15 A. There is always litigation risk.

16 Q. Put yourself in the position of a policyholder reading

17 that letter, and concluding that there was no downside

18 to continuing to invest in the Society. You would have

19 been pretty surprised, would you not, to learn that the

20 directors of the Society knew of a possible outcome

21 which would be very damaging for his investment?

22 A. I am not sure that the directors knew any more than

23 anyone else.

24 Q. Well, they did, because they knew about the need, if it

25 eventuated, for the transfer of value of £1.5 billion.

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1 A. If there was no ringfence.

2 Q. Right.

3 A. If the issue -- but there seemed to be, from both the

4 High Court and then the Appeal Court, and from the way,

5 as I understand it, the case had been formulated, that

6 that risk barely existed, and what came was what has

7 been described as an aberrational judgment.

8 Q. What you were doing, and the directors were doing, with

9 this letter, was treading a very fine line, was it not,

10 wishing to provide reassurance to non-GAR policyholders

11 without telling them the whole position?

12 A. Well, I think it was counteractive of many media reports

13 which were describing the Appeal Court -- I am speaking

14 from very broad memory here: media reports that the

15 Appeal Court judgment had, in effect, spilled over from

16 one class to another class.

17 (12.00 pm)

18 Q. Right, but I am suggesting -- sorry.

19 A. And that this communication was meant to be -- was meant

20 to put the record straight in an accurate way.

21 Q. Right, and what I am suggesting is that it goes a good

22 deal further than that, because it gives the impression

23 that there is no worse case than the Court of Appeal

24 decision.

25 A. Theoretically, there is a worse case, there may be

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1 a case -- a worse case, but at that time, it was looking

2 very, very unlikely.

3 Q. Would you agree with my suggestion that what this letter

4 was doing was treading a very fine line in seeking to

5 provide reassurance to non-GAR policyholders without

6 telling them the full risks?

7 A. It was seeking to provide reassurance based on the

8 factual position.

9 Q. Without telling them all the risks?

10 A. A very, very remote increasing -- as I understood it,

11 after the Appeal Court, increasingly unlikely outcome.

Well the media reports to which he refers said that the cost MIGHT spill over onto the non-GARs and that was accurate.

Page 49: Sher for Wilson cross-examines Taylor.

Taylor thinks that the complaints about DTBP should have been brought to the board prior to 1998. Though later be backtracks on this.

Page 73: Vaughan for Ms Page cross-examines Taylor.

Page 82: Mumford for Ranson cross-examines Taylor.

He tries to deal with the allegation that Ranson did his own thing about the subordinated loan without reference to considerable expertise of investments bankers on the board.

Page 99: Headdon cross-examines Taylor.

Page 114: Hapgood for E+Y cross-examines Taylor.

Is the lost sale claim now just for a Halifax-style break-up claim.

Day 47 – Thursday 7th July 2005

Bomb day. Dawson who was being cross-examined the previous day had not arrived in Court at the start and it was suggested that Ms Page be interposed. Mr Price, another non-executive Director, is so unwell that he cannot attend court. His witness statement will stand with such weight as the Judge things necessary. Sher, Counsel for Wilson, was reported as gridlocked in Russell Square.

Page 2: Leaver introduces his client Miss Jennifer Page.

Page 4: Miles for ELAS cross-examines Ms Page who was a non-executive Director from April 1994 to April 2001. She says she was keen on communications with policyholders – so it will be interesting to see what she has to say about the Nash letter.

Page 7: On communications she says that “some people could, very easily, find it [the Society] arrogant and patronising”.

Pages 19 & 20: On the question of finding a successor to Ranson Ms Page argued for “open competition” as the way forward. A “choppy” discussion followed and she lost. Nash was appointed as the sole candidate. The Society was seen by her co-Directors as “very special”. Taken in conjunction with the rejection by the execs of an outside consultant actuary one wonders whether it was so special that no outsider should have been allowed to find out the inner workings.

Page 22: Taylor having arrived he went back into the witness box to continue being cross-examined by Hapgood for E+Y.

Back into the hypotheticals he is shown a document prepared by E+Y’s team presumably: “Mr Headdon’s evidence on his reaction to and the implications of a higher GAR provision”. This was presumably collated from the transcript of his evidence of the answers Headdon gave in response to a hypothetical suggestion that there should be a provision. So what he said was based on a hypothesis that something happened that in fact did not happen and Taylor is now cross-examined as to his hypothetical reaction to Headdon’s hypothetical reaction to something that did not happen. This is where it all becomes so unreal and I wonder whether we are getting anywhere.

Page 51: Taylor is re-examined by Rabinowitz.

Page 52: Ms Page returns to the stand and Miles for ELAS continues cross-examining Ms Page.

Page 87: A discussion develops as to what is meant by “betting the farm”. I have always thought it meant betting your all in the hope of retrieving earlier large losses. Ms Page thinks it means betting on a certainty. Not sure what the relevance of this is??

We are deep into the hypotheticals.

Page 109: The Nash letter – she claims that to tell the policyholders would mean spelling out a whole range of possible outcomes.

Page 114: Apparently, when discussing the draft Nash letter, Nash did not give the Board copies but just read it out to them. Was he being coy about its contents?

Page 115: Ms Page says she is not sure that she ever read the final version sent to her as she had the builders in at that moment. When Miles puts it to her that it was misleading she claims it was not and if you studied the punctuation and the grammar it was essentially correct. Miles suggests that relied on a very close textual analysis.

Page 121: Funny that Mr Martin, a lawyer, is quoted by Headdon as having found the letter “somewhat cryptic”. So much for Ms Page’s interest in clear communication. I do believe that this Nash letter could be a major stumbling block for all the Directors in the mis-selling claims. [Fools will remember that the idea is to get back this money so that those who are claiming for mis-selling can be paid out by ELAS without any argument – tell that to the Marines].

15 Miles: This letter was treading a very fine line, was it not,

16 between wishing to provide reassurance to non-GAR

17 policyholders on the one hand and not telling them about

18 the risks on the other?

19 Ms Page: It was a letter which was designed to counteract a great

20 deal of misleading information in the press. It was, as

21 I understand it, specifically targeted to do that.

22 Q. Can we just look at bundle C39, please, page 84? This

23 is a letter from Mr Headdon to Mr Martin, and if you

24 could look at page 86, in the last paragraph:

25 "Alan has asked me to say in conclusion that he is

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1 sorry you found part of his 1st February letter somewhat

2 cryptic. We were trying to tread a fine line between

3 offering a necessary measure of reassurance to non-GAR

4 policyholders whilst not being so explicit that it

5 caused further agitation amongst the discontented GAR

6 policyholders, possibly leading to an attempt by

7 Sumption to get a more onerous position imposed on us

8 than was implied by the Court of Appeal ruling. That is

9 why we were careful to tie the comment in to the

10 'upholding of the Court of Appeal judgment' rather than

11 a more general statement about the Society losing."

12 Is that not what the purpose of the letter was,

13 Miss Page, to tread this very fine line?

14 A. From my own knowledge, that was not part of my

15 understanding where we started from.

16 Q. You see, it was really a half truth, was it not? It was

17 saying something which, on a very narrow grammatical

18 analysis, might just about be true, but gave the

19 entirely false impression that non-GAR policyholders

20 would not be any worse off than the decision of the

21 Court of Appeal.

22 A. Mr Miles, I cannot comment on that, I was not party to

23 this correspondence between Mr Headdon and Mr Martin,

24 and I knew nothing about it at the time.

25 Q. Reading it now, can you see that seeing the way that

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1 Mr Headdon is putting it, does that not serve to

2 demonstrate that this really was a half truth?

3 A. No, I do not think it does. I think what it does is

4 say, "We are telling the truth in our letter, what we do

5 not want to do is to wave a flag in front of Mr Hyman's

6 lawyers in connection with the Court of Appeal".

7 Q. Was not the idea of treading a very fine line the tenor

8 of the discussion at the meeting on 26th January?

9 A. Not that I recollect.

10 Q. Is that not what Mr Dawson was talking about when he

11 described it as a dangerous letter?

12 A. I have already said I have no precise recollection of

13 what the danger referred to there was. My suspicion is

14 that it was criticism of the Court of Appeal.

15 Q. You see, I suggest again, in relation to this letter,

16 that the Society --

17 A. Mr Miles, sorry, which letter; are we on Mr Headdon's

18 letter or the letter to the policyholders?

19 Q. The 1st February letter to the policyholders. In

20 relation to that, I suggest that it was not a way of

21 dealing fairly with policyholders, and that if you were

22 going to tell them anything about the potential

23 consequences, you should have told them about the worst

24 case that they could be facing.

25 A. I reject that.

Page 145: Ms Page says she would have been surprised and shocked if she had learnt that the GAR policyholders had not been told about the DTBP. [A bit selective in being shocked?]

On the whole she seems to come over as a straightforward witness with no sign of Alzheimer’s.