It seems that the major players in the RBS Action Group have accepted the latest RBS offer. See http://files.constantcontact.com/2fe662f5101/de78446f-b327-4d5e-9eee-5fcd584c7e8c.pdf
This has, in effect, enabled RBS to bully the small individual shareholders into also accepting the settlement. I say “bully” because RBS are threatening anyone who pursues the case to risk having costs awarded against them.
So now the case will be settled. No-one will be found guilty. RBS will pay out £800 million (of shareholders’ money) to a group of its shareholders without admitting any culpability or liability. It all gets swept neatly under the carpet and no one goes to jail. It has taken 9 years for this to happen. It is not just RBS – the HBOS Reading trial took nearly ten years to be investigated and brought to court.
The key players do not come out of this well. Something is wrong with the SFO, CPS, FCA, FRC, BEIS, etc when £12 billion of RBS’ shareholders’ money raised in a rights issue can disappear so quickly.
Very, very few people in the UK have gone to jail as a result of their actions that led to the 2007/08 Financial Crisis, yet millions of people have suffered severe hardship as a result. The SFO, Crown Prosecution Service and/or BEIS should be given more resources and told to pursue problem cases much more speedily. Companies should not be allowed to hide behind expensive lawyers. The whole process of settlements where management admit no blame and shareholders pay the fines/settlement amounts mean management get off scot free and also needs a review. These steps (plus others no doubt) are required to rebuild trust in business and to tackle what Mrs May calls the “anything goes” business culture.
If it’s really true that the small shareholders are forced to settle, it will be a tragedy for all of us. When we buy shares in a company, and when we choose not to dispose of an existing holding, we do so on the basis of the information issued to the market by that firm’s directors. If we cannot rely on such representations, the cost of capital will rise and such money may become unavailable. One of the foundation stones of capitalism is destroyed.
When RBS raised fresh capital in its rights issue it did so on the basis of information that was materially incomplete and inaccurate. That’s fraud. It’s no different than Quindell, Globo and a shameful list of AIM-listed Chinese companies. If we’re wondering why nothing has been done about those smaller companies, by the way, I suspect it’s because it would be impossible to take robust action against their directors without also taking aim at Fred the Shred and his cronies. And that would be embarrassing for a number of current and past senior figures in government, the Bank of England, the FSA/FCA…
If the civil claim is heard, I’m pretty sure evidence would be placed in the public domain that would make it impossible for the FCA not to prosecute. We couldn’t possibly have that, which is why the pressure is being ramped up on the little guys to live with their losses. But it’s crucial to remember what will be lost if we don’t follow the logical path that leads to jailing the culprits. If RBS is forced to compensate misled shareholders and the victims of its GRG and IRHP scams and pays the US Department of Justice a big fine for its misdeeds in relation to mortgage-backed securities, its balance sheet will be weakened. Throw in a painful Brexit or the long-overdue Chinese banking crisis and the still-wounded Scottish bank will need recapitalisation. Private and institutional shareholders won’t put their hands in their pockets, because they will expect the prospectus to be misleading and will fear that the fresh money will again be frittered away on what’s euphemistically known as ‘conduct costs’ (fines and compensation for bankers’ criminality). Taxpayers will block government from saving the bank because they rightly perceive that bankers haven’t yet learned the lessons of the last crisis. RBS will finally, and justly, die. Which will be a good thing, in the long run – but could cause a lot of collateral damage to the real economy, including employees and shareholders, in the meantime.
The best outcome for all but the bankers is therefore that this case proceeds. Let’s hope that still happens.
There seems to be some confounding of the merits of accepting the RBS offer (or forcing them to fight in court) and the problems of inaction by the regulatory authorities and the fact that the current shareholders will be liable for the settlement. Let’s take these three issues separately:
1. The decision by the RBoS Shareholders Action Group to accept the offer of 82p per share looks sensible to me for a number of reasons. Most of them are given in the letter to shareholders from the Action Group. And it would be perverse for them to reject the views of their legal advisors on the matter. If they ignored that advice there would be a substantial risk of not achieving any compensation for investors- or even worse. Apart from the fact that the result of any legal action is uncertain in such complex cases (they tend to be decided on technicalities rather than simple moral principles as perceived by investors), even if won the judgement on liability quantum would be even more uncertain. And if a settlement offer is made but rejected that is more than the final judgement then the costs could not be recovered and RBS’s costs might be deducted (at least I think that’s correct – perhaps any lawyers reading this could advise). You also have to bear in mind the stance of the litigation funders who were involved in this case. Their support would be necessary to continue the case, which clearly they would not give based on the legal advice. So the outcome was very much to be expected as this is the way most such cases tend to be concluded. But in effect RBS have conceded defeat so the moral victory is certainly that of the investors.
2. It is certainly very reprehensible that the SFO, FCA and other regulatory authorities have been so lax in pursuing the issues that arose in this case. There should have been a much more vigorous examination of the defects in accounting statements that enabled RBS to raise money based on figures that were extremely dubious. And regrettably it is easy for directors in the UK to avoid criminal liability – there is no concept of “fraud on the market” as there is in the USA for example. One also has to bear in mind that proving criminal liability is a very different matter to proving civil liability in court. The latter is much less onerous than the former. This blog format is too brief to cover all these issues in full – one could write a whole book on the subject, but in essence the legal framework of companies in the UK does need substantial reform to fix these ills.
3. Yes it is unfortunate that the current shareholders (who own the RBS company), will effectively be compensating the former shareholders – they could be the same people of course. And the Government (i.e. the public purse) who were so kind to bail out RBS back in 2008 will also be contributing. Some investors take a different view on this, but I have always considered it not unreasonable to pursue companies and directors via such legal cases. It does bring out into the open the failings of companies and their directors, and ensures they are discouraged in future. Unfortunately one of the main beneficiaries of this action will be the lawyers for both sides whose total fees will be well over £100 million – the enormous costs of pursuing such civil actions also needs reform. Having been involved in the early years in the RBoS Shareholders Action Group I think they should be complimented on bringing this affair to a reasonable conclusion. Few people understand the effort involved in progressing such complex cases where there are so many litigants with an interest in the matter. It requires enormous persistence to have got this far.
Good points, Roger. Just on the last one, it is worth noting that the treasury, via UKFI owns 73% of RBS, So, once again, it is primarily the taxpayer who will suffer for the results of action by former management. Meanwhile, “Fred the shred” continues to enjoy his £300,000+ p.a. RBS pension..
Indeed. Outrageous that the rascals are able to buy their way out of it with other peoples money, and even more so that this is taxpayer money. UKFI has been silent on this matter.
I agree there’s conflation, but I think it’s probably inevitable, and no bad thing.
In a perfect world, directors who issue misleading or materially deficient prospectuses would be prosecuted and compensation would flow first from their personal resources and only second from the firms they direct.
In an imperfect world, there are a lot of people looking at the RBS rights issue and wondering how they can prevent something similar happening again. If the civil claim proceeds to its conclusion it is likely that sufficient evidence will emerge that not even the weak and captured FCA could fail to prosecute Fred and his pals.
Yes, I fully understand that the litigation funders call the shots and that RBS has taken pains to incur such vast legal costs that the jeopardy involved in fighting on past a halfway sensible part 36 offer would be prohibitive for anyone who was in this for the money, as opposed to the principle. But that doesn’t stop me hoping that a ‘white knight’ with deep pockets will rock up at the 11th hour and buy out the litigation funder and those who want to settle, who then pursues this to the end.
The FCA could have pursued action over the false prospectus years ago if they had a mind to do so. They have very strong powers in that regard, but simply failed to act, perhaps because that would have revealed the incompetence of the FSA/FCA in approving the prospectus in the first place. Likewise the Government, who control the FCA, were not in a mind to do so no doubt because of their financial interest in RBS and the general embarrassment they would face over the events of 2008. I fear that any civil court result would not affect that position and given the length of time now since the events took place, the chance of any action is now very low.
I agree with you about the FSA/FCA; FSMA s397 was written for cases such as this and would likely have resulted in jail sentences had there been prosecutions.
My view differs from yours in that I believe that the civil case would have put evidence in the public domain that would have resulted in such pressure being placed on the FCA that it would have prosecuted the directors. Sadly, if there’s a settlement, we will never know who’s right.
I completely agree with Roger’s comments on the defects of the civil litigation process. I have spent much of my professional life fighting banks and insurers on behalf of ordinary citizens in cases just like the RBS litigation. Regrettably, we have reached a point where a well funded defendants can take ridiculous points and run them at great expense, effectively winning by outspending their opponents. Then the matter is settled on terms that the settlement, even the existence of the settlement, is secret. The judges go along with this.
Nobody seems interested in putting this right. The politicians speak of a “compensation culture” being undesirable, when it should be obvious that in a civilised and law abiding society unlawful conduct causing damage ought to attract compensation from the wrongdoer.
I shall shortly retire after nearly 50 years in the law. I am sorry that a nation that gave so much law to the world should have come to this point.
Cliff’s note got published as a letter in the Financial Times today.
This is Wednesday’s most read letter! And after the letter there are 4 interesting comments so far. Please add your comments there as well as on the ShareSoc blog if you want them to have a very wide audience.