What the HBOS fraud tells us about the state of British banking
8 February 2017
http://www.ianfraser.org/mobile1/hbos-fraud-british-banking/
The £1 billion HBOS Reading fraud, my part in exposing it, and what it tells us about the state of British banking
Note: This is a fully revised, updated and extended version of ‘Mafioso bankers and my part in their downfall‘ published in the Sunday Herald on 5 February 2017
On Thursday 2 February, two former senior bankers at Halifax Bank of Scotland and four consultants with
whom
they closely worked were jailed for periods stretching from
three-and-a-half year to 15 years for their part in a £245 million loans
scandal.
Four days earlier, the ‘HBOS six’ were found guilty of offences
including corruption, fraudulent trading and money laundering – offences
that caused losses of up to £1 billion at HBOS’s parent, Lloyds Banking
Group, and caused the destruction of up to 200 viable small-business
customers of the bank’s. For me, it was the culmination of an
investigation with which I’d been involved for almost a decade as a
journalist.
Seasoned journalists often say “never look below the line; that way
madness lies”. They mean that you shouldn’t read the comments underneath
articles you’ve written – as they can be minefield of pedantry,
grandstanding, semi-coherent rage and abuse. So when I saw that my “
Call to sack HBOS directors”
article, published in the Sunday Herald at the banking crisis’s
nausea-inducing height on 28 September, 2008 – days after HBOS had
collapsed and when RBS was perched on the brink – had over 400 comments
under it, what did I do?
I ignored colleagues’ advice and delved in. Amid the bluster and
outrage that an iconic 300-year-old Scottish institution should have
been led to destruction by such hopeless directors as Lord Stevenson and
Andy Hornby, one short comment stood out. It was from a Cambridge-based
businesswoman called Nikki Turner, and read “if anyone is interested in
finding out more a £1 billion fraud in a single HBOS branch, please get
in touch.”
It didn’t take me long to contact her. On Tuesday, 30 September, I
had several long phone calls with both Nikki, a lyricist and a mother of
two daughters, and her husband Paul, a rock music entrepreneur who had
done the lighting for acts including Bob Marley, Dire Straits, The Jam,
Fleetwood Mac, Thin Lizzy and Bruce Springsteen. I learned the couple
had launched an independent music label, Zenith Cafe, together in 2003.
They told me this had been on the cusp of a major breakthrough in 2007
when, for no apparent reason, HBOS and its preferred management
consultants had tried to snuff it out.
The Turners blamed this on a rogue Bank of Scotland senior manager
whose improbable name sounded like that of a Victorian villain – Lynden
Scourfield. They alleged that Scourfield, lead director of impaired
assets at HBOS’s Bank of Scotland Corporate unit, had been working in
cahoots with a band of self-styled “turnaround consultants” dubbed
Quayside Corporate Services, which was led by David Mills, who I later
discovered had left his former employer, Lombard North Central,
the factoring and invoice discounting arm of National Westminster Bank,
under a cloud in 1995.
The seemingly wilful destruction of Zenith sounded bad enough. But
what made me realise this story had legs was that the Turners had
documentary evidence to back up every claim, and had already done a
significant amount of research into the activities of Scourfield, Mills
and Quayside. Critically, they had discovered that Zenith was not alone
in having been treated shabbily.
They had identified dozens of other businesses across the UK which
had been through the mill at the hands of Mills and Scourfield and, in
many cases, the punishment meted out had been far worse than that
endured by Zenith. The affected firms came from a wide range of sectors
including aviation, consumer credit, music publishing, packaging,
nightclubs, restaurants, sporting goods, textiles and top-shelf
magazines – and included well-known brands like Smollensky’s on the
Strand, Euromanx airline and magazine Asian Babes.
The modus operandi of the fraud, which I confirmed in interviews with
directors of other affected firms, included that the companies would,
often arbitrarily and without notice, see their bank accounts
transferred to the tutelage of Mr Scourfield’s “high risk” team based at
Beauclerc House, Reading. Many of the companies that were transferred
were not in default or financial difficulties. Triggers included that
they had sought additional facilities to fund acquisitions or growth, or
just that Scourfield and his cronies had taken a fancy and had
cherry-picked them from across the Bank of Scotland network.
The next step was that Scourfield would force the companies to adopt
Quayside personnel as advisers, shadow directors or directors,
effectively using blackmail to ensure the companies acquiesced. The
standard threat was, if they did not comply, they would be “shut down”.
With Quayside in the driving seat, Scourfield would then turn on the
monetary taps, granting huge and usually unserviceable additional loans
to the firms concerned, a process sometimes eased through by the writing
of fake business plans, which Scourfield used to placate his seniors in
the bank. Those who were responsible for signing off his loans are
believed to have included Paul Burnett, who wound up working for Mills.
The next thing that the legitimate owners and managers of the
affected firms knew was that Quayside personnel – the most unsavoury of
whom were David Mills, Michael Bancroft and John “Tony” Cartwright –
started behaving liked trumped up Mafiosi, treating the companies as
their own personal ATMs and syphoning out cash, dressed up as
“consultancy fees”, to fund lavish lifestyles, exotic holidays, foreign
real estate buying binges and romps with high-class hookers as well as
generous bribes and “inducements” along similar lines for Scourfield,
who was sometimes also known as “Gerard”. All the while, Mills and Co
were destabilizing the businesses, plundering their assets, and setting
them on a path towards insolvency.
One reason Scourfield and his subordinate Mark Dobson were able to
get away with this sort of thing was that the checks and balances within
Bank of Scotland Corporate were either weak or non-existent. During the
recent trial, it emerged that, during 2003, an internal auditor at Bank
of Scotland Corporate alerted his superiors to the fact the CODA
financial reporting system, which was supposed to flag up
unexpectedly large loans, was “broken”, and that the bank failed to
repair it. It has yet to emerge whether this was a deliberate oversight
on the part of the bank — but it certainly suited Scourfield and
probably loads of other people within Bank of Scotland Corporate.
Furthermore in the three years between 2004 and 2007, it emerged that
the Reading office that Scourfield ran wasn’t audited once!!
Some of the firms’ legitimate owners and managers told me they felt
like they had been overrun by the mob, with metaphorical “guns”
frequently “held to their heads”. Others said they they felt like they’d
entered a Kafkaesque nightmare, especially when their complaints to
HBOS’s headquarters on Edinburgh’s Mound fell on deaf ears. I was
shocked that a supposedly reputable bank, founded in 1695 and which once
advertised itself as “A Friend for Life”, should have given a gang of
utter reprobates free rein to ride roughshod over its small and
medium-sized enterprises base, but have studiously ignored the victims’
cries of help.
The Turners’ tale might have been possible to dismiss as a sob story,
a failed business blaming its woes on a bank, allied to a wild
conspiracy theory that could not possibly be true but, unlike some other
journalists they approached, I was fairly convinced this was not case.
This was something major and abhorrent, which I felt was crying out for
exposure, especially since the bank seemed so desperate to keep it under
wraps. I also felt that, since HBOS was about to be acquired by Lloyds
in a “shotgun wedding” demanded by UK prime minister Gordon Brown, that
Lloyds TSB shareholders deserved to know of the true toxicity of the
bank they were being expected to absorb.
HBOS chairman Lord Stevenson
The Turners had issued a formal complaint, which detailed the scale
and scope of the alleged internal fraud, to all sixteen members of
HBOS’s board, including chairman Lord Stevenson, chief executive Andy
Hornby, finance director Mike Ellis and non-executives Sir Ron Garrick
and Charles Dunstone on 3 September 2007, sending the letters by both
email and recorded delivery. The bank’s response was astonishing.
Instead of thanking them for alerting it to alleged criminal
wrongdoing, reporting the perpetrators to the police, and seeking to put
things right, HBOS sent a menacing legal letter via the ‘silver circle’
solicitors Denton Wilde Sapte which, among other things, invited the
music industry duo to notify and provide evidence to the police if they
believed that crimes had occurred. Then, in an apparent campaign to
silence the Turners, HBOS through solicitors Wragge & Co but with
Dentons also in attendance, sought to have them evicted from their home
and place of business in 22 subsequent court hearings.
This was despite the fact their inability to service their
mortgage had been caused by the destruction of their business by
Scourfield and Quayside!
After the Turners reported the alleged fraud to the Cambridgeshire
Constabulary three months later, the police approached the
Edinburgh-based bank to find out what was going on. But the bank’s
Corporate Financial Crime Prevention team sought to put a lid on things
by claiming that no criminal activity had taken place, a claim that put
the cops off the scent. Unless the alleged crime was reported by its
largest “victim”, no criminal inquiry could proceed. In an email dated
21 April 2008, Brenda McMeechan, investigations manager in HBOS’s
corporate financial crime prevention team told police who were making
inquiries:
“I would advise that we are not
undertaking an investigation into Lynden Scourfield’s conduct, as we
have no evidence of criminal activity on his part. Without proof to
corroborate any act of deception or fraud, I cannot offer any
information that would support or substantiate any allegations of
wrongdoing.”
It later emerged that Lloyds, which completed its highly contentious
takeover of HBOS on Monday, 19 January 2009, thereby assuming full
responsibility for addressing the matter, had also been obstructive.
Anthony Stansfeld, police and crime commissioner of Thames Valley, later
suggested that the Gresham Street-headquartered bank was uncooperative
during the subsequent police probe. He told
The Sunday Times’ Tom Harper
that Lloyds “made every effort to make it difficult for the police to
investigate … Everything was put under legal privilege — it required a
host of barristers and lawyers to untangle it and get it out of the
bank.”
As a financial journalist I was well aware that reckless lending,
inadequate controls and delusional thinking had fuelled the UK’s banking
crisis. But what I had learned since first picking up the phone to the
Turners seemed off the scale. To summarize, Mills and Co were acting
like the gangsters in Martin Scorsese’s classic movie,
Goodfellas,
in which Ray Liotta’s Henry Hill and Paul Sorvino’s Paul “Paulie”
Cicero take over a night club, the Bamboo Lounge, then loot it, abuse
the owner’s credit and run it into the ground. Once the owner, Sonny, is
unable to pay them anymore, they torch it for the insurance money. As
Liotta’s Hills narrates: “And, finally, when there’s nothing left, when
you can’t borrow another buck from the bank or buy another case of
booze, you bust the joint out.”
My next task was to try and get the story published. Sunday Herald
editors Richard Walker and Stephen Penman, who I met in Glasgow on 7
October, gave me the go-ahead to research and write a major
investigative piece alongside experienced investigative journalist Paul
Hutcheon. Paul and I made excellent progress over the next few weeks,
poring over publicly-available data from Companies House, interviewing a
dozen or so businesspeople who had been stripped of their assets and
impoverished, marshalling other evidence from victimised firms,
persuading a whistleblower named Terry Holligan who had worked alongside
Michael Bancroft as managing director of Quayside-controlled textiles
group Magenta Studios to come up to Glasgow to provide an affidavit
about brown envelopes of cash plundered from that and other companies
being used to pay for Scourfield’s high-class hookers and much, much
more.
Bancroft, Mills and Scourfield.
I managed to track down Mills and asked him to respond to allegations
that he had destroyed businesses, seized assets, and gouged millions of
pounds from firms he was supposed to be caring for. In an interview on
27 November 2008, Mills claimed that the “whole principle” of Quayside
was “to come in and actually get [the companies] through a difficult
period.” “You could speak to many other chairmen and managing directors
of business who would tell you they are absolutely delighted with the
services Quayside provided because it saw them through a difficult
time.” It seemed like he was lying through his teeth, and this was
confirmed when, during the recent trial, Bank of Scotland
Corporate’s impaired assets director Tom Angus conceded to the jury
that, as far as he knew, Quayside had never restored a single client of
the bank’s back to health.
HBOS’s response was no less disingenuous. Its spin chief Shane
O’Riordain gave us a statement which read: “We deal in a sensitive and
fair way with all our corporate banking customers, including those
experiencing difficulties … We do everything in our power to reassure
customers while, at the same time, helping them to turn around their
business. We simply cannot comment on individual circumstances. However,
we strongly believe that we have acted throughout in a fair and
responsible way.
“Turnaround consultants or professional advisors are a recognised
resource available to companies who may be facing financial
difficulties. It is a normal approach for both companies and the bank to
mutually engage with such individuals in an attempt to work through
their difficulties. In your letter you referenced a former employee of
Bank of Scotland who was based in our Reading office. We do not intend
to name the individual but can confirm that this colleague left the
group some months ago.”
While we were prevented by in-house lawyers from using some of the material, two lengthy pieces titled “
HBOS faces hard questions overuse of troubleshooters who misappropriated company money” and “
All they seemed to do for us was to take enormous fees”
were published in the Sunday Herald on 30 November 2008. Among other
things, we managed to break the news that two of Quayside’s consultants,
Bancroft and Cartwright, had a history of embezzlement having stolen
more than £1.5 million from textiles group Ritz Design PLC in 1991 and
to convey the suffering they had inflicted on affected firms.
(Incidentally I remember, on the Saturday before these articles were
published, while on a hike in the Pentland Hills, having to spend what
seemed like hours on the phone to Sunday Herald editor Richard Walker
and a solicitor retained by Newsquest Herald & Times, who were
wanting to check up on certain facts and claims).
Perhaps naively I had been expecting the articles to create waves and
to jolt the bank and/or the authorities out of their complacency. But,
partly because we had been unable to convey the full extent of the fraud
and subsequent cover up, the story wasn’t widely followed up (indeed, I
believe the only paper that did follow it up was the now defunct Manx
Herald). Unfortunately it had nowhere near the expected impact.
In early March 2009 I was invited by the BBC Investigations Unit to
help make an investigative documentary on the scandal. From March to May
I worked alongside a team of BBC staffers including Karen Kiernan, Alan
Clayton, Alan Urry and team leader and assistant editor of the
investigations unit, Lynne Jones. The tasks I was given included
researching what had happened at the Quayside-controlled textiles group
Magenta Studios which, after being milked for all it was worth and
destabilized by Quayside over a four-year period, was driven into
administration in early April 2007. Another was to research what sort of
checks and balances were supposed to exist in Bank of Scotland
Corporate.
At Magenta Studios I learned that Quayside’s Bancroft had been
helping himself to fees of some £15,000 to £20,000 a month, and probably
much more, even though he was having an entirely negative effect on the
business. As a result of behaving like a sociopathic bully he had
alienated key staff and customers, causing the company to lose two of
its biggest customers, Marks & Spencer and Next, which in turn
caused turnover to slump from £8m to less than £2m. Meanwhile Magenta
Studios’s borrowings from Bank of Scotland Corporate were going through
the roof, soaring from £5m to £20.564m between 2003 and 2006. One source
formerly at the company told me: “Bancroft was paranoid. He didn’t
trust anybody. I don’t think he cared a toss about the company”.
The source added: “I think Bancroft was charging exorbitant fees but
doing f**k all for it. He only came to the company occasionally, when he
felt like it, and didn’t do anything apart from just sit around
talking. He was not instrumental in any new business or any initiatives.
He was just trying to get money out for himself in fees and expenses.
He even gave his daughter a job with the company, for which she was paid
£33,000, but all she seemed to do was go shopping.”
Within a few days of Scourfield being “rumbled” and ousted, I
discovered that Magenta Studios and a number of associated textiles
business that had fallen prey to the fraud (including Theros, Multi
Sourcing Group and Kangaroo Poo) had been swiftly forced into
administration by the bank. Oddly, the administrators, appointed on 10
April 2007, the day after Bancroft is alleged to have scrubbed the hard
drive on his computer in what has been described as a bid to eliminate
evidence of the fraud, were KPMG’s David Crawshaw and Jane Moriarty.
Scourfield had described David Crawshaw as “a close friend of mine” to
one of the many victims of the fraud.
HBOS CEO James Crosby. Photo: Reuters
The picture I was getting about the systems and controls at Bank of
Scotland Corporate was no less shocking. An obsession with growing its
market share in UK business banking, in a crazed, “growth at any cost”
strategy laid down by HBOS chief executive James Crosby, had been the
bank’s key driver ever since the Halifax merger of 10 September 2001. As
a result, systems and controls had atrophied or, as the CODA scenario
makes clear, were readily over-ridden by any bonus-crazed insider.
I also identified that HBOS was using unorthodox ways of massaging
down its bad debt provisions in order to misrepresent its financial
position to regulators and shareholders and inflate executive bonuses. I
had exposed similar shenanigans at the bank in an earlier article, ‘
Keane’s Last Stand‘,
published on 29 August 2004. These included “rolling over”
non-performing loans and a range of other ruses, including the use
of off-balance-sheet vehicles to hide rancid loans and to avoid the
crystallisation of bad debt.
A senior insolvency expert told me during the course of my research
that HBOS was well-known in banking and insolvency circles for keeping
insolvent business borrowers going, just so that the bank could book the
interest payments as profits, and hide bad debts. He said this was
illegal both for the company directors concerned and probably also for
the bank. He knew of actual examples of companies where it had happened —
where a professional advisory firm had told the bank a business
borrower was bust, but the bank had ignored the advice and continued to
lend. The senior insolvency expert added that “HBOS’s approach towards
distressed corporate customers would have been set at the highest levels
by George Mitchell (chief executive of Bank of Scotland Corporate until
December 2005) and his successor Peter Cummings.”
A forensic accountant retained by the BBC found that some 93 per cent
of the £113 million that Scourfield had lent to the aviation business
Corporate Jet Services, parent of Euromanx, had simply
“disappeared”. One ex HBOS insider told me during the course of my
research that: “They behaved in a very reckless fashion. Nothing was
done properly.”
Two senior people within Bank of Scotland Corporate tried to put me
off the scent, with one claiming that Scourfield was “a red herring” in
that his £1bn losses played no part in the bank’s September 2008
collapse. And, in a letter to the MPs dated February 2009, Lloyds
Banking Group’s chief operating officer for wholesale banking, Philip
Grant, who it later transpired was previously with Bank of Scotland
Corporate, insisted there was “a lack of evidence of direct personal
benefit on the part of Mr Scourfield from his relationship with
Quayside.” In his weasly worded letter to politicians Grant also claimed
the bank had reached this conclusion following “an extensive internal
review” after Scourfield quit in March 2007.
In his letter to MPs, Grant also said that: “While the bank appears
to have been more supportive than it should have been in responding to
requests for increased facilities, this occasioned loss to the bank, and
there is no evidence that it led to the failure of already stressed
businesses.” He also stated “there is no evidence that anybody at the
bank knew, at that time, that the reputation of Quayside (or of
individuals within Quayside) was in any way questionable.”
Seemingly desperate to downplay the scandal, Grant also said “In
early 2007, the bank identified issues concerning Mr Scourfield’s
approach to lending. As pointed out above, the bank was more supportive
than it should have been in responding to requests for increased
facilities from some of the customers in question. After Mr Scourfield
had been suspended from duty on account of these matters, he resigned in
late April 2007.” The statement was replete with half truths.
While researching the BBC programme we also discovered that HBOS had
been using the Sandstone Organisation, a shadowy off-balance-sheet
vehicle of which Mills seemed to have control, as a bounty box for the
equity stakes and other assets seized from affected firms. In 2007,
according to documents filed at Companies House, Sandstone’s only
directors were Mills and his wife Alison, who was also on trial in
Southwark Crown Court from September 2016, and last week was found
guilty and sentenced to three-and-a-half years in jail. The company
secretary at Sandstone was Mills’s daughter Georgina Elizabeth Paffard
Mills, who was not tried.
Though references to “brown envelopes” for Scourfield and the
procurement of sex workers for him using money plundered from affected
firms ended up on the cutting room floor, our findings about rampant
loan abuse, the plundering of cash and assets from innocent businesses
and the human toll of this nefariousness were broadcast in a 40-minute
BBC Radio 4 “
File on 4” documentary on 26 May 2009. The programme was extensively followed up in other media including on BBC news bulletins.
James Paice MP. Photo: BBC
A few days after the ‘File on 4’ was broadcast, the Conservative MP James Paice organised a
parliamentary debate
about the scandal, which was attended by about dozen MPs with
constituents whose firms had been ruined as a result of the actions of
HBOS and Quayside. During the debate, held in Westminster Hall on 2 June
2009, Paice asked: “If everything was satisfactory, why did HBOS stop
using Quayside? I hope this debate demonstrates to the minister that he
should invite the regulatory authorities to investigate the whole matter
thoroughly. … All of us are taxpayers, and we are justified in
demanding to know how that happened, why it was allowed to happen and
whether any criminality was involved.”
Dr Andrew Murrison, Conservative MP for Westbury in Wiltshire, said:
“It is simply not credible to characterize Scourfield as some autonomous
rogue banker and leave the matter at that. Loans of that order must
have been sanctioned and remitted at a much higher level—in this case,
at HBOS headquarters in Edinburgh by Mr. Scourfield’s immediate superior
at least …. It is evident that Mr. Lynden Scourfield had a close
relationship with Quayside’s Mr. Bancroft and Mr. Mills. What remains
opaque is the extent to which those now liquidated companies were
acquired by undertakings associated with Quayside … Given the apparent
murkiness of the situation, there is every reason for the FSA to
undertake a comprehensive investigation, and I urge the minister to use
his good offices to ensure that happens.
Ed Vaizey, Conservative MP for Wantage, said: “It is now up to HBOS
to come to the table, following a moral course rather than a legalistic
one, and put those people back in the position that they would have been
in before dealing with HBOS.”
Occasionally when writing investigative pieces and updates on the
unfolding scandal, I and others with whom I was working had moments of
doubt. If Lloyds was denying any wrongdoing, if David Mills was claiming
he was a legitimate turnaround specialist who had the best interests of
affected firms at heart, and if no UK authority was bothering to
investigate the scandal, then perhaps we were just delusional. Perhaps
the dozen or so cases we had forensically investigated were just
aberrations and Mills and his cronies really were decent coves who were
genuinely aiming to restore the firms with which they became involved to
health. It was a fantasy which generally did not last very long. There
were also occasions when I feared for my own safety, after parties who
had had dealings with Bancroft warned me that he and some of his
Quayside colleagues were prone to violence, and I received menacing
anonymous phone calls.
Between mid-2007 and mid-2010, as well as contacting the banks and
the police, the Turners reported detailed findings of misconduct and
criminal activity by HBOS and its retained advisors to solicitors
representing the banks, the Financial Ombudsman Service, the Financial
Services Authority, the British Bankers Association, the Department of
Business, Enterprise and Regulatory Reform (BERR), the Chartered
Institute of Banking, HMRC, the Serious Fraud Office, prime minister
Gordon Brown, chancellor Alistair Darling, prime minister David Cameron,
chancellor George Osborne, Bank of England governor Sir Mervin King,
the Treasury Select Committee, the Treasury (who were forwarded their
information by Gordon Brown), the Archbishop of Canterbury Justin Welby
and their MP Sir James Paice. With honourable exceptions such as King
and Paice, most just played a game of pass-the-parcel, came back with
disingenuous and meaningless waffle, or totally ignored their missives,
Separately, I sent a comprehensive briefing note to all members of
the Treasury Select Committee on 9 February 2009, a similar note to the
FSA’s chairman Lord Turner and chief executive Hector Sants on 11 June
2009, and sought answers from UK Financial Investments, the government
agency responsible for husbanding the taxpayer’s stakes in bailed out
banks, on 3 December 2009. The only reply, other than a “no comment”
from UKFI’s spokesman Anthony Silverman, came from Sants, who replied on
1 July saying “thank you for the email you sent to me on 11 June in
relation to the allegations made about the HBOS / Reading branch. I
apologise for the delay in responding. The information you provided
raises serious allegations and has been passed to our supervisory group
for review. The supervisory group will, if appropriate, liaise with the
police.”
In May 2010 I became so frustrated with the bank’s stonewalling that I
obtained proxy voting rights from a Lloyds Banking Group shareholder
and asked the bank’s board, then led by chairman Sir Win Bischoff, a few
questions at its annual general meeting in the Edinburgh International
Conference Centre. I said: “The Banking Code states: ‘We promise we will
treat you fairly … We will lend responsibly … We will deal quickly and
sympathetically with things that go wrong …’. In the light of this, do
you believe that you have abided by these principles in your handling of
the Bank of Scotland Corporate Reading scandal?” No sensible answers
were forthcoming. When I spoke to Bischoff over coffee afterwards in the
open-plan lobby of the EICC, he threw the question back at me asking
“well, how would you have handled it?”
Photo: Thames Valley Police OpHornet inquiry
Scourfield used different methods in his attempts to silence me,
including issuing a libel writ over something I had written in a blog at
the time of the ‘File on 4’ programme in May 2009, with the full writ
arriving by recorded delivery on 22 September 2010, just a week before
he was arrested at his Berkshire home. However, this backfired
spectacularly for Mr Scourfield, as it only added to my enthusiasm for
getting the story out there, and obviously lapsed once he pleaded guilty
last year. Now that he has been jailed for 11 years and three months, I
intend to sue him for costs and damages incurred by his failed writ.
After a decade of denial and persecution of the victims, senior Bank
of Scotland Corporate and Lloyds bankers finally owned up, under oath,
during the recent trial, admitting that they first became “suspicious”
of Scourfield and concerned about “many gaps in formal sanctioning” in
January 2006. They conceded that they had launched the first of at least
seven internal and external investigations (which were internal, and
therefore suppressed until the court case) into what he had done in July
2006. The cumulative effect of the reports was that, by July 2007,
according to Thames Valley Police, the bank should have concluded that
fraud had taken place.
Throughout the four years that I was investigating this, I was
genuinely shocked at the level of disinterestedness of the regulators
including the FSA, to the extent I began to wonder whether they might be
more interested in protecting the state-rescued bank than in getting to
the bottom of the scandal or holding those responsible accountable.
The FSA may well have been compromised. In 2003, chancellor Gordon
Brown made the bizarre decision to appoint the then HBOS chief
executive, James Crosby, as a non-executive director on the regulator’s
board, a role Crosby took up on 15 January 2004. The appointment came
hard on the heels of claims from Crosby, made in a speech to a Merrill
Lynch banking conference on 7 October 2003, that the UK government was
guilty of “unnecessary meddling in the SME banking sector”.
After setting HBOS on a catastrophic course, Crosby handed the helm
to the “wunderkind” Andy Hornby when he took early retirement from the
bank in June 2006. He was promptly promoted to FSA deputy chairman, and
chairman of its committee of non-executives, on 11 December 2007 and
didn’t leave the regulator’s board until he was fired on 11 February
2009, after a few of his multifarious failings as HBOS chief executive
were revealed to the Treasury Select Committee via the explosive written
testimony of the bank’s former group head of regulatory risk, Paul
Moore.
Moore had been personally fired by Crosby on 23 November 2004
after seeking to alert the Yorkshire-born actuary and other members of
the HBOS board to the inadequacies of the bank’s control framework and
that its obsession with sales and asset growth meant it had embarked on a
suicidal course. By letter Crosby assured Moore that the decision to
eliminate his role and replace him with someone with no knowledge or
experience of risk management (the saleswoman
extraordinaire Jo Dawson) was “mine and mine alone”.
There are a great many people who wonder whether, during his five
years on the FSA’s board, James Crosby went out of his way to ensure
that the already “light touch” regulator — where Sir Callum McCarthy was
then the chairman and John Tiner the chief executive — was “zero
touch”, or “please look away now” where the crimes and misdemeanours of
the bank he mismanaged were concerned. There can be no doubt that the
modicum of regulatory scrutiny that existed until December 2003 abated
until February 2009 (for more detail on this, see “
HBOS’s Calamitous Seven Year Life“).
Thames Valley Police, the force for which fictional Chief Inspector
Morse works in the Colin Dexter novels and ITV television series, became
involved under the auspices of “
Operation Hornet”
– which the force said was to probe “corruption and large scale fraud
in connection with HBOS” – on or about 11 June 2010. On 14 June 2010,
Thames Valley Police senior investigating officer
Natalie Beresford
–Bolton paid a surprise visit to the Turners at their home near Cambridge.
Beresford
–Bolton told them that, while on a routine visit to
the Canary Wharf-based regulator with her boss in late May 2010, she
had identified Bank of Scotland Corporate Reading as an egregious case
from a list of cases that the regulator had under “Section 166” review.
After the FSA refused to furnish her with much in the way of
documentation on the case (and it had a fair amount by this stage),
Beresford-Bolton spent the next two weeks trawling the internet,
where she read all my coverage of the alleged fraud, as well as blogs
and links to source material compiled by Nikki Turner (who,
incidentally, is a great writer). It was only after having reviewed
this that she persuaded her bosses at Thames Valley Police, who included
detective superintendent David Poole, that the case merited a proper
probe (Poole and other senior policemen at Thames Valley later denied
what Beresford-Bolton told the Turners was true).
The police made an initial series of arrests — Bank of Scotland
Corporate director Lynden Scourfield, his wife Jacqueline, and John
“Tony” Cartwright — on 29 September 2010. It was the first sign that the
UK authorities had any interest in properly investigating the matter.
This was a major breakthrough for me, the victims and others with an
interest in seeing the perpetrators brought to justice. Though I did
update a summary of what had happened at Bank Scotland Corporate,
retitled
Banking’s Abu Ghraib (3
October 2010), in the wake of these initial arrests, my ability to
report on the unfolding scandal was constrained after that. There was,
however, a window of opportunity between the arrests and charges being
pressed, something which happened in January 2013, to cover a few
broader aspects of the case, and I did so in four further articles for
the Sunday Herald, where business editor Colin Donald was supportive and
eager to carry on breaking new ground. The Herald pieces included two
published in March 2011 and July 2011 which raised questions about the
remit and scope of Thames Valley Police’s ‘Operation Hornet’ inquiry,
which had been ratified by the Crown Prosecution Service and I believe
also by the then attorney general, Dominic Grieve. Questions I raised in
these articles included:-
- Why did Operation Hornet only cover the period between 2002 and the
date Scourfield left the bank — 8 March 2007 — when the most severe
financial damage was inflicted on affected firms in a series of
administrations after he left?
- Why were certain key HBOS borrowers that Quayside controlled –
including one or two notorious and egregious cases in which high-profile
businesspeople were involved such as Corporate Jet Services – excluded
from the Operation Hornet probe?
- Critically, why were the police not fully investigating the role of people higher up in the bank?
These questions formed the basis of my pieces
Police dossier says former HBOS directors failed to act on fraud allegations (13 March 2011) and
Board’s role ‘off limits’ in police probe of alleged £1bn HBOS fraud (10 July 2011). Also around this time I wrote a summary piece for Naked Capitalism headlined T
he £1bn-plus HBOS Fraud Investigation That Lloyds Keeps Trying to Brush Under the Carpet (2 March 2011). Then came the swansong Sunday Herald piece, headlined
Corruption allegations, major fraud inquiries, links to pornographic magazines … and a luxury yacht (22 July 2012), which was written following a tip-off that charges were imminent.
There followed a four-year period of purdah, when it was impossible
for me or anyone else to write anything substantive about the case, as
to have done so could have been in contempt of court, or jeopardised
Thames Valley Police’s investigation.
Southwark Crown Court, where the HBOS trial was held from September 2016 to January 2017
Now, after four-month trial in court five of Southwark Crown Court,
ably presided over by judge Martin Beddoe, the purdah is over. The
culprits have been jailed for periods of between three-and-a-half years
and 15 years. I do feel a degree of vindication, especially since so few
others dared touch this story between 2008 and 2012.
Judge Beddoe summed up the feeling of many with his sentencing speech
last Friday, when he said: “This case is not simply about a corrupt
bank manager lending money he should not have done to businessmen who
went on to gamble with it.
“This case goes very much deeper than that. It primarily involves an
utterly corrupt senior bank manager letting rapacious, greedy people get
their hands on a vast amount of HBOS’s money and their tentacles into
the businesses of ordinary decent people … and letting them rip apart
those businesses, without a thought for the lives and livelihoods of
those whom their actions affected, in order to satisfy their voracious
desire for money and the trappings and show of wealth.”
“The corruption, which profited mostly the first three defendants,
subsisted for at least four years. It involved Lynden Scourfield
engaging in as extensive an abuse of position of power and trust as can
be imagined and was motivated on both sides of the corruption by the
expectation of, and the very considerable realisation of, immense
financial gain. That was at the cost of enormous losses to Bank of
Scotland of some £245 million [gross], but also and, in many respects
worse, the destruction along the way of the livelihoods of a number of
innocent hard-working people. Some of these connections were capable of
rescue but what Lynden Scourfield let happen through David Mills and
Michael Bancroft predominantly ensured that they would not.
“The harm for which you were individually and collectively are
responsible can of course be quantified in cash terms, but cannot be so
in human terms. Lives of investors, employers and employees have been
prejudiced and in some instances ruined by your behaviour. People have
not only lost money but, in some instances, their homes, their families,
and their friends. Some who would have expected to be comfortable in
retirement were left cheated, defeated and penniless. These are
circumstances in which you David Mills and Michael Bancroft in
particular show not a shred of remorse.
Beddoe also said that “much of what David Mills told the police has
for the most part been proved to be a lie.” And speaking about Bancroft
he said: “If members of Michael Bancroft’s family think he is an honest
and lovely man they are sadly blinkered from reality, and their
submissions give no consideration for the crimes he committed nor the
damage and destruction he quite wilfully caused to his many victims.”
Addressing Scourfield, who unlike the other defendants had plead
guilty (on 12 August 2016) and therefore had not taken any part in the
proceedings, Judge Beddoe said: “Yours was a monumental betrayal of your
position – exploiting the obvious weaknesses in the bank’s systems and
the lack of proper supervision to which you should have been subject,
lying to your seniors, falsifying documents, removing or avoiding
protections the bank should have had … all over a long period of time …
wholly motivated by greed … mesmerised by the luxury in which as a
result of what you did David Mills let you wallow.”
The judge added that Scourfield had “sold his soul to Mills” for “sex, luxury trips, bling and swag”.
Addressing Mills, Beddoe said: “You are a thoroughly corrupt and
devious man, adept at exploiting the weaknesses of others, particularly
where that weakness is money, and adept too in getting others to do your
dirty work for you. Standing in the shadows, you had Bancroft and his
loyal lapdog, Cartwright, to get their hands dirty at your direction,
and for your mutual financial advantage. In your case, compared to them,
it has to be said, a staggering financial advantage.
Addressing Bancroft, Judge Beddoe said: “You were already clearly a
thoroughly dishonest man as shown by what happened at Ritz (an
aggravating feature in your case). You were Mills’s frontman and heavily
engaged in the process of maintaining the hold both you and he had on
Scourfield. You are clearly a bully, and with Mills you plundered
Theros, Multi Sourcing Group and Remnant Media for fees and any useful
assets you could get your hands on.”
Anthony Stansfeld. Photo: BBC
Anthony Stansfeld, the police and crime commissioner for Thames
Valley, also raised a critical point, highlighting the responsibilities
of HBOS top management, one of whose roles is supposed to be ensuring
systems are in place to stop such crime waves from happening. Stansfeld
said: “A fraud of this size could have taken place either displays
complicity or incompetence, a lack of corporate governance, complacency,
and an absence of proper safeguards.”
The absence of anything resembling proper corporate governance at
HBOS, including the complicity of auditors, regulators and
politicians in allowing this dangerous deficiency to persist for the
seven years, is something that will be further explored in
The Politics of Financial Risk, Audit and Regulation: A Case Study of HBOS. This
book, written by
Dr Atul Shah,
a senior lecturer in accountancy and finance at the University of
Suffolk, is is to be published by Routledge later this year. I have
written the foreward.
Stansfeld also highlighted the risk that white-collar fraud gets
ignored because of the punitive cost of investigating and prosecuting
it. He said that the case had taken more than six years to bring to
court, had involved 151 police officers and staff and had cost more than
£7 million, a sum that having to be borne by the homeowners of
Berkshire, Buckinghamshire and Oxfordshire. Stansfield said: “If Thames
Valley Police had not taken on this case, no one else would have and the
crime would not have been investigated. The principal perpetrators
would have escaped with their reputations intact and with enormous
wealth.”
Stansfeld suggested the cost of probes like Operation Hornet
should be borne
by central government, by the negligent or offending institution and by
the negligent or offending institution’s auditors. In the case of the
HBOS fraud, his proposal would see Lloyds Banking Group and KPMG sharing
the £7m Operation Hornet tab. Stansfeld, a former Army officer who
commanded army helicopters during the Falklands war, added: “There needs
to be an agreed policy that if a major fraud is committed, and the
Serious Fraud Office does not have the capacity to take it on, then the
police force that investigates it is reimbursed by central government,
or through a fine or costs imposed on the auditors, the bank and the
offenders involved,” he said.
Speaking outside the court Paul Turner, without whom the trial would
never have happened, said: “We are glad it has come to an end and they
are going to prison. The bank knew about this since 2006 and has
persecuted us when they knew we were telling the truth. It’s not over
yet.”
Nikki Turner, who played a no less pivotal role in researching the
crimes and bringing them to the attention of the authorities, added:
“They defrauded us, denied for 10 years that the fraud had happened,
ignored the debt from the fraud and tried to evict us 22 times in order
to cover up the fraud. It’s a huge success for us that the trial has
gone on.” She added: “The victims have gone through terrible things,
they have gone through the loss of businesses and lost homes. Other
people lost everything, including marriages broken up, because of this.”
Wearing her hat as founder and director of
SME Alliance,
which is campaigning to level the playing-field when small businesses
are in disputes with their banks, and whose “no-one is above the law”
slogan is a quote from Bank of England governor Mark Carney, Mrs Turner
added: “What’s amazing is that that this fraud cost the shareholders of
HBOS and subsequently Lloyds over £1bn but it isn’t mentioned anywhere
in the accounts. That points to a need for far greater transparency and
much improved corporate governance across the UK banking
sector. Shareholders ought to be jumping up and down with rage that
Lloyds allowed these crooks to effectively steal millions of pounds, and
then kept them in the dark about it.”
Also standing outside court Joanne Dove, whose award-winning
eco-nappy business Cotton Bottoms was wiped out by Scourfield, Mills and
Bancroft, said: “We’ve served a prison sentence for 12 years since this
happened and we have lived in penury. While [David Mills] has been
waiting for trial he has lived a luxury life on all the assets that he
has built up. A mother of five, Freer added: “I will never get the time
back. That’s the sad thing. I will never get my children’s childhoods
back to give them the things they would have had, had they not defrauded
me.”
While it undoubtedly pleasing to see justice done and that at least
some crooked bankers and their accomplices have been brought to book,
the problems with British banking, clearly, go much, much deeper than
this.
I suspect that the ‘Wild West’ of “turnaround consultants”,
insolvency practitioners and banks’ “business support units” will come
under much greater scrutiny and that legislation underpinning these
areas will have to be tightened up. It’s worth noting that Thames Valley
Police’s six-year ‘Operation Hornet’ investigation didn’t even look at
the role played by insolvency practitioners from accountancy firms
including PwC, KPMG, Vantis (now called FRP Advisory), Menzies Corporate
Restructuring (now called Duff & Phelps), and Hurst Morrison
Thomson (now HMT LLP), many of which seconded junior staff to work
alongside Lynden Scourfield in 2003-07, in the scandal.
Insolvency practitioners from all these firms not only played a part
in minimising the fallout by, for example, conducting whitewash
“reviews” during 2006-07 but also by swiftly shutting down affected
firms in what have been described as “skewed” administrations, which
sometimes allowed key Quayside personnel to walk off with prized
corporate assets, from April 2007 onwards. One wonders if the IPs’
failure to file “
suspicious activity reports” to the Police, National Crime Agency or other relevant authorities was in any way related to the level of their fees.
The outcome of the HBOS Reading fraud case, together with the
probability of future criminal trials related to HBOS and advisors, is
said to be causing palpitations over at Royal Bank of Scotland, whose
own ‘business support unit’,
Global Restructuring Group, employed similar tactics to Bank of Scotland Corporate and Quayside, especially after the bank’s infamous “
dash for cash ” programme
was instituted on 9 October 2008 — albeit without the same degree of
blatant criminality, explicit shabbiness, deviant sexual activity or
nausea-inducing bling. If HBOS were the ‘cavaliers’ of insolvency abuse,
RBS were very much the ’roundheads’.
Finally, after trying to evade its responsibilities towards the victims for more than seven years, Lloyds on Tuesday
announced a “review”
of all customer cases affected by Scourfield and Quayside’s crime wave.
The bank said that customer cases would be “considered afresh in the
light of all relevant evidence including new evidence that emerged
during the trial… the group deeply regrets that the criminal actions
have caused such distress for a number if HBOS customers”. Lloyds added
that, in consultation with the Financial Conduct Authority, it would
appoint “an independent third party” as part of the review with which it
would agree scope methodology and individual case outcomes. The bank
said redress would be provided “if appropriate”.
This was welcomed by Nils Pratley
in the Guardian,
who pointed out that there is “an unshakeable principle in takeovers is
that you assume the responsibilities of the business you are buying,
including nasties you didn’t know about.” However there is a degree of
scepticism about the proposed review from former shareholders and
directors of affected firms, largely because a similar review involving
“independent third parties”, the FCA’s interest-rate swaps review,
culminated in derisory compensation for many.
My hope for the future is that that banks and regulators will become
quicker to address these sorts of internal scandals – by, among other
things, punishing the wrongdoers and compensating the victims – as and
when they occur rather than burying them for over a decade before the
most obvious culprits are prosecuted.
As a coda, Court News UK issued a series of hard-hitting but amusing tweets just after the sentencing on Thursday 2 February:-
