Highland result suggests RBS bankers no longer above the law

April 13th, 2013

Finally, we have evidence that banks and bankers are not above the law in the United Kingdom. It seems the courts have finally woken up to the fact that allowing them to lie, cheat, deceive and defraud without legal impediment may not be a particularly good idea. As such, yesterday’s appeal court ruling, which reveals RBS to have behaved in what might, at best, be described as a slippery and underhand fashion, is a cause for celebration which I hope will come to be seen as a turning point.

Three appeal court judges yesterday overturned an earlier court judgment in asset-management group Highland Capital Management‘s long-running dispute with the Royal Bank of Scotland. The judges said the earlier verdict had been obtained through the “fraud of RBS”, given that one of the Edinburgh-based bank’s bankers, a former leveraged loan trader, Sam Griffiths, had lied in court (full judgement available via Cooke, Young & Keiden).

The dispute centres on RBS’s 2008 decision to call-in a collateralised debt obligation (CDO) that it had financed for Highland Capital and to start terminating it at the height of the financial crisis. In 2010, an earlier court ruling in the dispute found that RBS’s conduct was legal, but was highly critical of RBS and of Griffiths’s actions. Highland Capital appealed against the decision to the Court of Appeal, which on Friday said the earlier ruling should be set aside.

Lord Justice Aikens ruled on Friday:

“In my view the liability judgment was obtained by the fraud of RBS through the misstatement and concealment of facts by SG [Sam Griffiths].”

Dallas-based Highland Capital was effectively robbed of as much as $100 million by RBS when the bank improperly terminated a collateralized-debt obligation (CDO) and seized the underlying loans in 2008, at the height of the credit crisis that followed the collapse of Lehman Brothers.

In a statement, Dallas-based Highland Capital said (full press release published below):

“This judgment validates Highland’s position that no financial institution, regardless of size, is above the law.”

Highland Capital has assets under management of $18 billion, mainly in the credit markets. The case dates back to October 2008, when without telling Highland, Griffiths staged a “sham” auction of loans and transferred 36 from RBS’s trading book to its banking book in order to mislead investors about its capital position through the gaming of amended IAS 39 accounting rules.

In an interesting twist, RBS kicked its law firm Herbert Smith off the case in September 2011, and brought in Linklaters instead. Even so, RBS still seems to be using Herbert Smith to defend the £4 billion to £12 billion suit brought by shareholders who claim they were duped into putting some £12 billion into RBS shares as a result of an “untrue and misleading” rights issue prospectus that the bank put together in April 2008 with the assistance of Goldman Sachs, Merrill Lynch, UBS, Deloitte and Linklaters. Switching legal horses mid-case does not appear to have made any difference for the bank. The undeniable fact — that in order to avoid compensating its victim (Highland Capital), the bank was allegedly willing to instruct Griffiths to perjure himself in court — remains. Highland Capital was represented by London-based litigation lawyers Cooke, Young & Keiden. Lord Justice Aikens added:

“There can be no argument that the acts of SG [Sam Griffiths] must be attributed to RBS, so there was a positive misstatement by RBS of the true position.”

Whatever happens, there are strong grounds for a jail sentence for Griffiths, who lied in two trials, which I believe to be a more serious offence than anything the Liberal Democrat politician Chris Huhne did. Could this be the first time that a British banker is imprisoned as a result of fraudulent activity before, during, or after the banking crisis?

This may be the day that the dam (built not of concrete, but of lies, deceit, fraud and the continued persecution of their victims) burst for Britain’s beleaguered banking sector. The mollycoddling that has been extended to Britain’s banks by the UK government and judiciary since the crisis of 2007-09 has been both nausea-inducing and highly damaging to society and the real economy. Perhaps the combination of this Appeal Court ruling and the highly damning Parliamentary Commission on Banking Standards report on HBOS (“An accident waiting to happen”) might persuade the likes of David Cameron and George Osborne to reconsider their misguided support for an increasingly criminalised sector?

Founded by James Dondero and Mark Okada in Dallas in 1993, Highland Capital Management, had $40 billion under management before the credit crisis decimated its business model. It was the world’s largest non-bank buyer of leveraged loans in 2007 — but that was not a good year to reach the top of that particular tree (many so called ‘leveraged loans’ were used to fund leveraged buyouts or mega buyouts – including the £12 billion takeover of Alliance Boots and the $45 billion acquisition of Texas energy giant TXU in 2005-07). Highland was forced to close down several of its funds following the seizure of global financial markets in 2007-08.

The Lawyer has a good explainer on the legal niceties of the case, the result of which means Highland Capital Management is able to sue Royal Bank of Scotland in the Texas courts.

COOKE, YOUNG & KEIDEN PRESS RELEASE 12 April 2013 Highland and CYK score major victory against RBS and Linklaters in the Court of Appeal: in an

historic development RBS has its £20 million judgment struck down for fraud Today the Court of Appeal handed down judgment: (1) Upholding Highland’s case that the liability and quantum judgments obtained against it by

RBS in 2010 (for approx. £20 million) were obtained by or as a consequence of RBS’s fraud

and should be set aside; and (2) Refusing RBS’s appeal against the Commercial Court’s refusal to grant an anti-suit

injunction stopping Highland from suing RBS (and two of its employees) for fraud in the

Courts in Texas, where the sum claimed is at least US$ 100 million. The judgment is the latest, and most significant, in a series of judgments criticising RBS’s dishonest

and fraudulent conduct, both in the events giving rise to the litigation and, even more seriously,

through the litigation itself, including the bank’s repeated attempts to deceive the English Court up

to and including early 2012. It is believed that this is the first ever case in England where a major UK

bank has had a judgment struck down due to it having been obtained by the bank’s fraud. It is

understood that state-owned RBS has spent many millions, of what are effectively taxpayer funds, in

legal fees in dishonestly pursuing, since mid-2009, the litigation in the English Courts against the

funds managed by Highland Capital, based in Texas. The failed application for an anti-suit injunction

is also believed to be one of the most expensive such applications in English legal history (in terms of

the legal fees that RBS spent) and it potentially leaves the way open for Highland to pursue its fraud

claims in Texas. Extract from the Judgment of Lord Justice Aìkens: “178. In my view the Liability judgment was obtained by the fraud of RBS through the

misstatement and concealment of facts by [former RBS senior employee Sam Griffiths]. I would

therefore allow the cross-appeal of Highland from Burton J’s May 2012 judgment on that issue. The

Liability Judgment, the Court of Appeal’s judgment on Liability and the Quantum judgment must

therefore all be set aside. 179. Whether or not that conclusion is correct, the judge was right to refuse to grant RBS an anti-

suít injunction restraining Highland and Scott Law from pursuing the Texas proceedings on the

ground that [Nlr Griffiths’] misconduct in relation to the 2012 trial was sufficiently closely related to

the equitable relief sought by RBS. Highland and Scott Law could therefore rely on the defence of

“unclean hands” to prevent RBS obtaining the anti-suit injunction. | would therefore dismiss RBS’

appeal from Burton J’s May judgment on that issue.” Highland, commented: “As far as we are aware, this case is the first time that a major UK bank has

ever had a High Court judgment struck down by the English Court on grounds of the bank’s fraud. In

that respect it is dramatic and unprecedented. We are naturally very pleased to have obtained this

superb result for our clients in a hard fought case against the first-class lawyers who represented

RBS.” Marc Keidan, a partner of CYK who also also acting on the case, added: “RBS’s conduct in this

matter from start to finish, including the repeated attempts to deceive Highland as well as the Court,

has been nothing short of disgraceful and we are pleased that the Court has fully recognised that. The

judgment also demonstrates that clients represented by specialist firms with the requisite expertise,

are well able to successfully take on the banks and their Magic Circle advisers in substantial litigation,

when the facts support that. l would also take this opportunity to thank our superb barrister team for

their sterling efforts. ” CYK instructed barristers Mr. Stephen Auld QC, Mr. Ben Strong and Mr Laurence Emmett of One

Essex Court. Highland’s successful co-defendant, Scott Law, was represented by directors John Day and Michael

Sparkes of boutique firm DaySparkes, who instructed barristers Mr. Graham Dunning QC and Mr.

Jeremy Brier of Essex Court Chambers. RBS was represented by Linklaters partner Andrew Hughes, who instructed barristers Mr. John

Nicholls QC and Ms. Louise Hutton of Maitland Chambers. In the earlier stage of the case (up to

September 2011), RBS was represented by Herbert Smith partner Damien Byrne-Hill. A brief summary of some of the background and related developments is set out in the Annex, albeit

we would encourage reading the judgment which sets out the background in detail. Note to the editors: CYK is a leading boutique litigation law firm based in the City of London and which was founded in

January 2009. We specialise in complex and high-value commercial and financial dispute resolution.

CYK is one of the few top quality London law firms willing and able to act adverse to the banks on

substantial High Court litigation. The case concerned the termination by RBS in late 2008 of a CLO “warehouse” of leveraged loans.

The CLO warehouse had been set up by entities managed by Highland Capital Management, a large

Texan based hedge fund, with a view to issuing a CLO securitisation. RBS had lent sums to enable

leveraged loans to be acquired and put into the warehouse. RBS obtains judgment on liability and the truth subsequently starts to emerge RBS, at that time represented by Herbert Smith, applied for and obtained judgment on the question

of liability in January 2010 and this judgment was upheld by the Court of Appeal in June 2010. A trial

to deal with the quantification of RBS’s claim was then held in September 2010. Following the liability judgment being obtained by RBS, upon pressing by CYK, documents and

information emerged, in a piecemeal fashion, which set Highland’s legal team on a trail which ended

up uncovering a pattern of serious dishonest conduct on the part of RBS. lt transpired that following

the taxpayer bail-out of RBS and after relevant accounting rules (IAS 39) had been changed, on

instructions from RBS’s senior management, the bank desired to make what it described in internal

documents as a “windfall” by transferring some of the loans in the warehouse onto its banking book,

by disposing of the balance or, if it could not do so, by putting them onto its trading book. The object

of the exercise was to enable RBS to book a substantial profit by reversing losses it had previously

put on its trading book. Pursuant to this scheme, RBS led Highland to believe that having terminated the warehouse it would

operate a genuine auction (known as a BWIC “bids wanted in competition”), that it would sell the

loans to the highest bidders, that RBS would itself bid in the auction and that it would give the

warehouse credit for all the sales, so that the warehouse could repay the loan owed to RBS. RBS

subsequently conducted a BWIC. The values allegedly produced by the auction were in many cases

substantially lower than those which RBS had internally ascribed to the loans as part of its plan to

make a “windfall”. Quantum trial and judgment ln December 2010 Burton J handed down judgment in the Commercial Court after the Quantum

Trial. He found that RBS had behaved dìshonestly but were nevertheless owed a sum of money in the

region of the around £20 million, a much smaller sum than RBS had claimed. He found that “the true

position was not revealed at the time by RBS” to Highland and that RBS had a “serious conflict of

interest” with its customer Highland. Unknown to Highland, because RBS had already decided to and

had taken certain of the loans onto its banking book it was unable to and had no interest in selling

those loans to third parties. lt did not bid in the auction. Therefore the auction was (as the Court

described it) “a sham”. Quite apart from RBS having misled Highland as to what was truly occurring,

the Court also found in its judgment that RBS had knowingly lied to third parties during the BWIC The Judge criticised the foundation of RBS’s case, namely that the BWIC was genuine and was

“commercially reasonable” as being untrue. The Judge further observed that the witness statement

sworn by RBS’s lead witness IVlr Griffiths was “disingenuous” and that the true position had only

emerged from RBS at trial. Following the December 2010 Judgment, in early 2011 Mr Griffiths was subject to disciplinary

proceedings within RBS. He was given a warning. However, this was accompanied by him being

awarded as part of the January “bonus season”, an approx. £500,000 bonus, as well as being

promoted within the Bank to the role of Managing Director working in the European Credit Special

Situations Group. Texas proceedings and RBS anti-suit injunction application Following the English Court judgment in early 2011 Highland sued RBS for fraud in Texas claiming a

sum of at least US$100 million. RBS reacted by applying to the English Court for an anti-suit

injunction to block Highland’s Texas court proceedings, and was granted the injunction on a

temporary basis pending a full hearing. Highland counterclaimed that RBS’s original judgment

obtained against Highland was obtained by fraud and so should be set aside. In September 2011 RBS dismissed its lawyers Herbert Smith and replaced them with Linklaters. The full hearing took place before Burton J over 17 days in early 2012. Judgment was handed down

in May 2012. The Judge found that RBS, through Mr Griffiths, had lied yet again in the lead up to and

at the trial. As a result of this misconduct, the Judge found that RBS had “unclean hands” and refused

to grant the anti-suit injunction sought by RBS. However, he also declined to set aside RBS’s earlier

judgment for fraud. Both sides appealed to the Court of Appeal on the points they had lost and the appeal hearing took

place over 3 days in November 2012. Mr Griffiths evidently left RBS at some point in 2012. In late March 2013 Bloomberg reported that he

was suing RBS in the employment tribunal for unfair dismissal. Court of Appeal Judgment – 12 April 2013 The Court of Appeal found, upholding the Judge’s decision, that RBS’s dishonest conduct meant that

the bank was not entitled to an anti-suit injunction and that accordingly Highland was not to be

prevented from proceeding with its Texas fraud action. The Court also found, overturning the Judge’s

initial decision, that the dishonest conduct and the misleading of the Court, meant that RBS’s

judgments also had to be struck down for fraud. The Court in so finding referred to RBS having made “deliberately misleading” statements and to its

“deliberate, conscious and dishonest” suppression of material facts – see paragraphs 110, 112, 116,

120, 122, 125 and 127 of the leading judgment of Lord Justice Aikens. As regards Mr Griffiths, it was

expressly found (paragraph 165) that “his lies and his unsuccessful attempt to explain away his

conduct at the 2012 trial were themselves grave misconduct. Bluntly, [Mr Griffiths] perjured

himself again. His misconduct must be attributed to RBS …”. RBS has suggested that will attempt to appeal to the Supreme Court in respect of the refusal to grant

the anti-suit injunction. However, RBS has indicated that it is not intending to appeal the finding

setting aside the judgment which it obtained by fraud, so that matter may be considered without

doubt as final.