Week 9

Day 32 – Monday 13th June 2005

Rabinowitz for Allen & Overy clients cross-examines David Thomas

Page 4: Thomas accepts that it is quite possible that there was no discussion of the DTBP policy at the December 1993 board meeting when it was introduced.

Headdon cross-examines Thomas.

They review at length the previous day’s hypotheticals.

Page 19: Thomas says the Board regarded the marketing side as “rather more important” than the actuarial side when deciding on bonuses.

Page 27: An interesting development is concerned with the Hyman case. Bundle C32 page 188 is a note of the Court Case Steering Group meeting of 22nd June 1999 particularly paras 1.3 and 1.4. “Chris Headdon’s affidavit contains a worst case scenario”.

These affidavits, but not the exhibits, were to be available to any policyholder who asked for a copy. Leaving aside the question of what the “worst case scenario” was – was it the full Scenario 6? – the problem was that it might get into the public domain; non-GARs and/or the press might find out. On the other hand if they did not bring the subject up they would not be able to introduce it at a later stage if the worst case looked likely. Thus they were in a dilemma as to whether it was best to hide the scenario from the non-GARs and possibly weaken their case or to reveal the scenario thereby upsetting non-GARs by telling them the truth. Discussion was lengthy as to whether to “muffle this” – the PR people and also Nash & Headdon were for muffling – the lawyers and Martin for not muffling. The discussion is worth reading.

The outcome was not clear but could it be that their failure to be honest with the non-GARs, at that early stage, sowed the seeds for the catastrophic House of Lords decision?

Page 33: Thomas was at the July 2001 board meeting where the 16% cuts were decided upon.

17 Headdon:. Thank you. One final point, on a completely different

18 point, if I could, Mr Thomas, were you in court when

19 I cross-examined Mr Thomson?

20 Thomas:. I was.

21 Q. Do you remember, I put it to him in connection with the

22 discussion at the board in July 2001 about the need to

23 make the significant bonus cuts, that a decision was

24 taken to blame the previous board for that, and that was

25 a strategy which inexorably led to this litigation, and

33

1 that is something he naturally refuted; do you remember

2 that exchange?

3 A. I remember you asking the question, yes.

4 Q. The reference for the record is Day 13, page 101,

5 starting at line 8.

6 Were you present at the July 2001 board meeting when

7 these cuts were discussed?

8 A. I believe I was, yes.

9 Q. And do you remember anything about the discussion at

10 that board meeting which is relevant to the suggestion

11 I put to Mr Thomson or his rejection of it?

12 A. I can recall a lot of debate about the degree to which

13 policy values should be cut. I can recall issues of

14 duration and so on being put.

15 I can recall it being mentioned without any

16 difficulty that the problem had been exacerbated by the

17 rate of roll-up that had occurred, had been established

18 for policy values so far in 2001, and I think it was at

19 that point that the chairman said that that was

20 extremely unhelpful, and that was clearly down to

21 previous management, at which point Mr Thomson admitted

22 that he was a party to that decision which had been

23 taken in late January/early February of that year, to

24 which Mr Treves said, "Well, that is a pity, we will

25 have to deal with that somehow".

Nice one Headdon! And what did VT do to CT? Stop his pocket money that week?

Page 35: Hapgood for E+Y cross-examines Thomas.

Page 39: Hapgood continues to try and show that nobody wanted to demutualise and has no problem with Thomas.

We then move into the increasingly boring and repetitive hypotheticals like some mating ritual. Would you have? Of course not. If this had happened would you? Etc etc

Page 95: Ms Tolaney introduces her client Mr Bowley. He was:

1961-1969 Actuarial Dept
1969-2001 Management of staff and processes
1989-1997 Director
1997-2001 Part-time
1985-1997 Company secretary

Page 139: It seems that McGeough of Dentons did not receive Board agenda or minutes but Thomas thinks that because he was a policyholder and therefore would have read his policy he would have raised any doubts about he might have had about the legality of the DTBP without any promptings!

The day ended with more hypotheticals.

[Just some comments of my own re Bowley culled from Penrose. He got a severance payment. From about 1996 onwards some Board members tried to get a grip on risk management. Ranson was having none of that kind of interference from the Board and Bowley was the guy in the middle of this argument helping to try and fob Tritton and others off. Penrose’s Chapter 9 details this long rear-guard action at length. The Board won in the end by February 2000 but it was too late. I wonder whether any of that will come out at the trial.]

Day 33 – Tuesday 14th June 2005

A very tedious read.

Milligan for ELAS continues to cross-examine Roger Bowley.

They touch on risk management.

Page 22: Sher for Wilson cross-examines Bowley

Page 23: It is mentioned that Tritton in his witness statement said about the list of risks “the paper failed to identify [the GAR policy] as a risk.” Chapter 9 of Penrose details the long battle Tritton and others had to have risk management properly dealt with – but too late to be of use.

We are into hypotheticals again.

Page 48. Rabinowitz for Allen & Overy clients cross-examines Bowley

Page 52: The same risk list is mentioned.

Page 53: Vaughan for Ms Page cross-examines Bowley

Page 56: Mumford cross-examines Bowley

Page 70: Headdon cross-examines Bowley.

Page 76: Ms Stokes calls her client Shaun Kinnis – General Manager sales and marketing. A Director from the start of 1989 to end of July 1997.

Page 78: Kinnis says that if he had suggested getting legal advice on the DTBP he would have been told to stick to marketing.

Page 107: Sher for Wilson cross-examines Kinnis

Page 120: Rabinowitz for Allen & Overy clients cross-examines Kinnis.

Page 122: Mumford for Ranson cross-examines Kinnis.

Page 131: Ms Stokes re-examines Kinnis

Page 132: Rabinowitz introduces his client Tritton a non-executive director from 1976 to 30th June 1999. A forthright person who in my view did try to get a grip on matters.

Page 136: Tritton on DTBP “as a policy it was not debated, never discussed, there were no papers, nothing”. No such policy was introduced by the Society; it was just an amendment to an amendment put in by the actuaries who never drew the attention of the Board to it.

Back into hypotheticals again.

Day 34 – Wednesday 14th June 2005

Milligan for ELAS continues to cross-examine Tritton.

We start off with the usual hypotheticals.

Page 6: Tritton claims that he always asked the executives at Board meetings, when discussing bonus papers, whether there was any matter of policy in them. He always got a negative answer.

Page 28: He does not like hypotheticals: “I do not know why you are concentrating so much on hypothetical things. It would be so much easier if you concentrated on actual things”.

Instead of Alzheimer’s Tritton is playing the silly old buffer who cannot understand the questions and cannot handle more than one assumption at a time if at all. It reads rather amusingly like a script for Dad’s Army with Tritton as Clive Dunn’s Corporal about two wars behind and Milligan as an exasperated Captain Mannering.

Page 52: “We never actually saw policy values”.

Page 62. Ranson lectured the Board on smoothing in 1987 (Bundle C3 p.85):

You cannot over-allocate continuously. “If payments out of the fund consistently exceed what has been earned for example, then disaster is ultimately inevitable”. How true! Ranson is a past master at covering himself.

Page 71: Tritton: “Naturally I accept we were not shown the policy values. What we were seeing is the investment return and the allocation”.

I wonder whether anyone will point out that the earnings or investment return were always gross before expenses of various kinds and other charges.

Information to the Board improved under Headdon:

Milligan: But you were told on this occasion.

But I do not think they were given the figures. Tritton says all this is the black art of actuaries and beyond non-execs.

From Bundle C16, page 9 there is a letter from Nash of 29th January 1998 enclosing the risk list upon which there is no mention of the GAR problem.

Page 102: Tritton’s letter “Too close to the margins” is discussed. This all appeared in Chapter 9 of Penrose with Nash’s reply saying there was nothing that could be done about it – any other solution would be ‘disastrous’.

By the afternoon Tritton seems to have forgotten to play the old buffer and gets much sharper.

Page 122: Milligan puts to Tritton: “One of the reasons that you adopt your smoothing policy is to ensure that you have a sufficient cushion to smooth out a market correction so that it is not too sharp a correction for the policyholder”.

Tritton becomes very evasive on this and returns to being a old buffer “I am a modest man”. (page 128).

Back into the hypotheticals again and Tritton playing the fool. At 4p.m. Milligan, totally exasperated, asks the Judge if they can pack it in for the day.
I wonder what the Judge makes of this play-acting.

Day 35 – Thursday 16th June 2005

Milligan for ELAS continues to cross-examine Tritton.

Page 1: I suspect Rabinowitz had a quiet word with his client, Tritton, after yesterday as Tritton starts off with an apology to the Judge. To-day Tritton has all his marbles and no trace of Alzheimer’s. There follows an interesting discussion with Milligan with Tritton as the very astute retired commercial banker with an independent mind.

Page 24: Milligan is saying that if you had been told by E+Y to have a one billion provision for GARs you would think about reducing the final bonus. Tritton agrees.

Page 31: On the same assumption changing the investment mix would be a last resort.

Page 35: Using an MVA to stop overpayments would be another tool.

Page 36: However Hapgood for E+Y jumps up and says the question of overpayments has not been pleaded by ELAS and that if he wants to introduce that then he must apply to amend the pleadings. Judge seems to agree but allows Milligan to carry on for the moment.

Page 47: Again assuming the provision required, reducing the reversionary or guaranteed bonus would be difficult as it had already been severely reduced in line with the drop in gilt yields.

Page 51: Tritton says his solution would have been to go for demutualisation as a banker seeing ELAS in dire need of capital. He acknowledges that his fellow board members would not have agreed.

Page 53: Milligan: On a demutualisation would Nash have lost his job?

Tritton: It is a rough world but I do not know.

I suspect he thinks he would have done.

Page 102: Tritton was not keen on litigation and would have gone to the FOS on Hyman. The implication is that he disagreed strongly with Nash on this.

Page 113: Tritton would have preferred Cologne Re (proper reassurance) to IRECO (fictitious reassurance).

Page 115: Tritton was deeply concerned about the full distribution policy. He wanted to build up an estate. (Of course full distribution was incompatible with proper smoothing but he does not say that).

Page 121: Scenario 6 only appeared after Tritton left.

Bundle C26 page 216 The first contingency plan presented to Board on 18th February 1999.

Page 133. 24th February 1999 at Schroders presentation Tritton again proposed demutualisation – sale out of the question he says. Schroders warn: “lifted from the pockets of other policyholders either within the class or across the Society as a whole”.

Page 150: Tritton is scathing about the House of Lords:

1 Tritton. What Lord Steyn did was discriminate against the

2 non-GARs. He landed them with a fine of £1.5 billion,

3 and not only that, because he was either unaware or did

4 not know that the GAR policy contract classes had the

5 flexibility of allowing future premiums and so on and so

6 forth until maturity, that he incepted, as I understand

7 it, a black hole within the accounts which made the

8 Society unsaleable, because nobody would buy the

9 Society, or could not possibly buy the Society when you

10 had an unquantifiable, unlimited, unknown liability

11 imposed on the Society by Lord Steyn.

12 I mean, I think that is actually true, to me as

13 a layman, perhaps it is not true to a lawyer, but to me,

14 that is the case.

Dead silence from all the lawyers.

It is now perfectly obvious that the no ring-fencing decision was totally idiotic but is it fair to blame just Steyn? Why the blazes did not the FSA or ELAS go back to the House of Lords to put them right?

Page 163: Sher for Wilson cross-examines Tritton.

Page 168: If Tritton had known about the complaints about the DTBP (they were never mentioned to the Board) he would have sought advice on the legality of the DTBP.

If Tritton had been an executive I think things might have been different.
I think also that it was a pity he retired in 1999.