In another peculiarly British situation—no U.S. executives have seen the inside of a courtroom for their actions during the financial crisis in 2008—around 6,000 shareholders have filed a claim against the banking group Lloyds and five of its former directors, including former Chairman Sir Victor Blank and ex-Chief Executive Eric Daniels. The former finance director Tim Tookey, former Head of Retail Helen Weir, and former Head of Wholesale Banking Truett Tate are also named in the case and are scheduled to give evidence during the 14-week trial over Lloyds acquisition of failing bank HBOS in 2008, days after the collapse of Lehman Brothers. The Lloyds shareholders’ case is centered on the claim that it was not given a true picture of HBOS’ financial health when it voted to let the deal go ahead in November 2008, as the company was not told that it was already a failed bank, bolstered up only by loans from the Bank of England and from Lloyds itself.
In a further development a few days ago, Hector Sants, the chief executive of the Financial Services Authority (FSA), predecessor of the Financial Conduct Authority (FCA), throughout the 2008 banking crisis, has agreed to give evidence in public in the trial. Sir Hector had been given permission to give evidence behind closed doors, but following an open justice intervention by Guy Vassall-Adams QC on behalf of five media groups, Sir Hector has now agreed to give his evidence in public. He is due to testify in December. The case claims that the FSA’s requirement that the bank had to raise £7 billion (U.S.$9bn) in capital, even if it didn’t take over HBOS, rather than the £3 billion (U.S.$4bn) it claimed was necessary, was an attempt by the FSA, the Treasury, and the Bank of England to “bully” Lloyds into completing the HBOS deal.
It has emerged that by October 2008, HBOS was reliant on an undisclosed £10 billion (U.S.$13bn) loan from Lloyds as well as emergency support from the Bank of England. Neither of these loans were disclosed in the circular issued to investors who voted on the deal.
Prior to the financial crisis, the deal would normally have been prevented because of problems with the competition authorities, although earlier in the trial the court heard that Lloyds’ chairman, Blank, met the then-prime minister, Gordon Brown, a few days before the deal was announced who reassured him that competition concerns could be overcome if the deal was done and that the government was in favour of the deal in order to avoid the necessity of having to privatise HBOS. Lloyds announced the takeover of HBOS on 18 September 2008; nevertheless, the government eventually took a 43 percent stake in Lloyds to prevent its collapse, funneling £20.5 billion (U.S.$27.2bn) into the bank.
On the first day of the trial, Richard Hill QC, acting for the shareholders, told the court that HBOS was effectively bust after a “massive hemorrhaging of cash.” At the time of the deal, it emerged that Brown had discussed the deal with Blank at a Citibank drinks party just days before it was announced to the market. “The government was encouraging Lloyds to buy HBOS and to relieve the government of the burden of nationalising HBOS,” said Hill, adding that this left Lloyds shareholders with “catastrophic losses.” In correspondence Hill read out in court, a Lloyds banker is said to have described the HBOS deal as “transferring the monkey from theirs to our shoulders.”
Helen Davies QC, in Lloyds defence, said it was the responsibility of the bank’s investment banking advisers at Merrill Lynch, UBS, and Citibank to make sure that the information sent to Lloyds shareholders was correct. She said that UBS was the adviser with primary responsibility for dealing with the U.K. Listing Authority, which analysed the information. “This is not just a box-ticking exercise,” Davies said. The deal was undertaken after advice from a list of advisers which ran to 50 pages, she claimed.
Not only Davies, but also Tookey, on his appearance in court, claimed that the board decided that the deal was in shareholders’ best interests. Tookey also denied pressure and said that the Lloyds loan to HBOS did not need to be disclosed to investors because it was an “ordinary course of business” interbank loan. During the same appearance, however, he agreed the loan structure was “unusual” and said it was “very unusual” that the loan had to be cleared by Sir Hector at the FSA. Tookey also gave evidence that he was unhappy about the Bank of England’s plans in 2009 to disclose the HBOS accessed emergency funding from the BoE. He apparently told Andrew Bailey, then at the Bank of England and now head of the FCA, that he would it remain confidential until after Lloyds had completed its rights issue announced in November 2009, citing concerns about “media speculation.”
But in a long and testy exchange with the prosecution lawyer, Hill, Tookey said he was not “ducking” a question about whether HBOS’ assets could be described as liquid—meaning they could easily be converted into cash. Hill responded: “I’ve asked you five times now. I’m going to give you another chance to answer,” adding “That has not remotely answered my question as you well know, Mr Tookey.”
Under cross-examination, Tookey defended the agreement to pay a premium to HBOS’ market value, saying that the directors thought “it was an appropriate price to pay.” The court was also told that Alex Pietruska, former head of strategy and corporate development at Lloyds, however, had warned against buying HBOS in an August 2008 briefing document about the deal that was nicknamed Project Dover. The document said that any potential deal was littered with red flags. Tookey said in a witness statement that he did not “specifically recall seeing Mr Pietruska’s presentation,” but added it did “reflect my understanding of the challenges facing Lloyds at the time.”
Tookey said that over the weekend of 12 October 2008—when the government was working on a so-called recapitalisation of the entire U.K. banking sector—the board had to make quick decision about whether to proceed with the deal. The offer price was reduced to £5.9 billion (U.S.$7.8bn) pounds, while the original offer of £12.2bn (U.S.$16.2bn) was already less than half the alleged book value of HBOS was £25 billion (U.S.$33bn) at the time. While this seemed like a good deal, it evidently did not transpire so, as has been shown not only by the necessity of the government bailout, but also in the continuing costs of another scandal that Lloyds bought in the HBOS deal.
In this entirely separate case, Lloyds is still paying out large amounts of compensation to small-business owners who were the victims of fraud of the notorious HBOS Reading branch, a fraud which may cost the bank more than £1 billion (U.S.$1.3bn) when it is over. Lloyds denied that any wrongdoing had taken place for almost a decade and refused to compensate those who were affected. More recently, the bank has admitted problems and apologised “for the effect the criminality relating to HBOS Impaired Assets Office in Reading has had on customers.” Both the takeover and the fraud case are also under investigation by the FCA.