RBS v Highland Financial Partners: Culture of denial at RBS?

In a recent unanimous judgment of the Court of Appeal in the case of RBS v Highland Financial Partners [2013] EWCA Civ 328, it was held that RBS had procured a previous judgment by fraud, having misled their client, their own lawyers and the court. RBS was held to have deliberately and dishonestly failed to disclose relevant documents in the previous proceedings. The RBS employee concerned, having been disbelieved by the court at an earlier hearing, was given a formal warning, a promotion and (we understand) a half million pound bonus. This judgment must raise grave doubts about the culture of RBS and its approach to litigation.

Bank Litigation Solicitors London
Excerpt from “Shredded: Inside RBS: the Bank that Broke Britain” by Ian Fraser. The book quotes and cites this legal news article by one of our chancery barristers at LEXLAW.

Factual background – CDO Fund

This case concerns what may appear to be a fairly dry commercial dispute between RBS and the Highland Capital Management Group of companies. Highland is a US investment management and advisory group. In 2006, Highland engaged RBS in connection with the launch of a collateralised debt obligation (“CDO”) fund. In preparation for offering this fund to the market, various debts were acquired using money borrowed from RBS. As a result of the deteriorating financial climate and the increasingly negative market outlook on CDOs, this fund never got off the ground. On 15 September 2008, Lehman Brothers collapsed and on 30 October 2008 RBS pulled the plug on the CDO.

Sham Auction conducted by RBS

RBS then realised its security by selling the loan portfolio. The process by which this was done was opaque, but as it is eventually came out in court, what happened was that RBS conducted a “sham auction” (paragraph 61) in which they asked for bids for the loans when in fact, in relation to at least a large number of the loans, there was no possibility that they might be sold at auction, because RBS had already decided to buy them itself and had in fact already moved the loans from its trading book to its banking book.

There was a technical accounting reason for this, which was that there was a change on 13 October 2008 to International Accounting Standard 39. The effect of this was that certain assets could be accounted for by banks on an accruals basis rather than a mark-to-market basis. (We may say in passing that we are not accountants, but we can see no justification for this, which seems to us to be a piece of fudge.) However, in order to take advantage of this, the loans needed to be transferred to RBS’s banking book by 31 October 2008, and the loans in issue were in fact transferred on this date, i.e. the day immediately after RBS had terminated the contract and a week before RBS purported to auction the loans. RBS attempted to argue in court that despite the fact that the loans had been transferred to its banking book, they still might have sold them had they received a sufficiently attractive bid.  RBS’s evidence on this point was disbelieved (paragraph 62).

This operation generated a very substantial notional profit for RBS of some £1.44 billion (paragraph 32). The trader concerned, Sam Griffiths, believed that the transfer of the loans would result in a “windfall profit” and that this profit should be credited to his department or desk (paragraph 62). Mr Griffiths supervisor, Stewart Booth, the Global Head of Credit Trading, was also well aware of this transaction (paragraph 60).

RBS appear to have been oblivious to the obvious conflict of interest with its client, and (the court held) RBS deliberately misled its own client by not disclosing any of this information at the time and by the charade of conducting a dummy auction. This also involved it in instructing its employees to make dishonest statements to potential buyers (paragraph 61). RBS then proceeded to sue its client for the supposed shortfall on its loan for the CDO.

Conduct of the litigation

We frequently tell our clients that they should always be entirely truthful and not attempt to tailor to their recollections to what they think will help their case. No doubt RBS’s lawyers will have said much the same to them, but this message went unheeded.  Mr Griffiths (who by then had been promoted to Head of High Yield Trading) was motivated by “an anxiety not to disclose ‘The Suppressed Fact’ [that 36 of the loans had already been transferred to RBS’s banking book on 31 October 2008 in order to book a profit and were therefore not available for sale]” (paragraph 110). Moreover, it was RBS’s strategy to reveal as little information at possible during the early stages of the litigation (paragraph 63). This, the court held, was motivated by the hope and expectation that they would be able to settle the case before the Suppressed Fact came to light (paragraph 71).

Mr Griffiths was closely involved in the litigation. He falsely instructed RBS’s lawyers that there had been no transfer, with the result that the lawyers refused disclosure of the relevant documents on the basis that they were not material (paragraphs 65, 114, 118 and 127).  He repeatedly signed statements of truth on witness statements in the knowledge that they were not in fact true (paragraphs 61, 63, 65, 91, 115 and 119) and (the court held) he repeatedly lied under oath both in relation to Suppressed Fact and then later in giving a false explanation of his earlier statements (paragraphs 61, 71, 91, 128, 129, 164 and 165).

In an RBS disciplinary hearing in December 2010, Mr Griffiths was found guilty of serious misconduct in directing employees of RBS to make misleading statements to clients (i.e. during the dummy auction) and of making a number of misleading statements in his witness statements and subsequently affirming those statements as fact (paragraph 45). As a result, he was given a written warning.  It strikes us as surprising that RBS do not consider lieing under oath to be a sackable offence. In fact by the 2012 trial, Mr Griffiths had been promoted again, to Managing Director (paragraph 156), and we understand that he also received a bonus of around £500,000.

RBS’s dismissive approach to client complaints

Mr Griffiths wrote to his superior on 10 May 2010 that “IAS/39 is a major worry right now – Highland appear to be claiming that because we put some of the assets on the banking book at 30 June levels we should have given them some credit for that. It’s a nonsense argument of course but one that we need to deal with” (paragraph 66). This dismissive attitude towards its client’s grievances may seem familiar to many of those who have been mis-sold swaps by RBS.