By Andrew MacAskill and Sinead Cruise | LONDON
Just hours before Royal Bank of Scotland (RBS.L) launched a massive cash call in 2008 to shore up its capital, the bank’s senior advisers were still discussing whether its financial figures were potentially misleading for investors, court documents allege. Late into the night, adviser Goldman Sachs (GS.N), auditor Deloitte and a lawyer for RBS exchanged emails discussing the writedowns on troubled assets that RBS was about to publish, according to the “particulars of claim” filed by lawyers acting for shareholders now suing the bank. Goldman Sachs and Deloitte feared that some figures in the prospectus for the RBS cash call were vulnerable to misinterpretation, according to the particulars of claim. The advisers thought investors might conclude RBS’s ability to withstand losses was stronger than it actually was, the claimants’ filings, seen by Reuters, allege. The late-night emails were part of a series of warnings from outside advisers that were rejected by senior RBS executives as the bank sought to raise 12 billion pounds ($15 billion), according to court documents.
RBS denies the allegations that it misled investors. In court documents for the defense seen by Reuters, lawyers for RBS say the valuation figures were reasonable and composed to help the bank decide an appropriate size for its cash call, not to guide investors on losses on the bank’s assets. RBS, Goldman Sachs and Deloitte all declined to comment. The allegations are part of a 4-billion-pound lawsuit brought by thousands of RBS’s investors who bought shares in the 2008 cash call and lost most of their money when the bank nearly collapsed a few months later. RBS had to be rescued by the UK government with a bailout that ended up costing 45.5 billion pounds. British taxpayers still own more than 70 percent of the bank. The investors are suing for compensation, alleging RBS did not give a proper picture of its finances at the time of the cash call.
Under English law a business publishing a prospectus to raise capital must disclose an accurate record of its finances to investors. If it fails to do so, it can be found liable for damages. Claimants allege that RBS advisers and lawyers questioned an estimate in the April 2008 prospectus that described writedowns “in 2008.” The advisers said the estimate, which appeared in a table of credit market exposures, could be misconstrued as a forecast of writedowns for the whole of 2008, rather than just the first four months of the year, the particulars of claim allege. Steve Almond, the Deloitte partner responsible for the firm’s involvement in RBS’s capital raising, told senior RBS executives in an email dated April 21 that “in 2008” implied “there will be nothing more in the next 8 months. This is the hope but cannot be controlled,” according to the particulars of claim. In the email, Almond warned the executives the bank had not estimated full-year losses and would break accounting rules if it published the table. He deleted the disputed “in 2008” and called for the table to be revised, the particulars of claim allege. Almond wrote in the email: “The writedowns reflect assumed exit prices in current markets – not provisions for the rest of the year,” according to the claimants’ documents. Almond, who retired from his role as global chairman of Deloitte in May 2015, declined to comment.Instead of acting on advice to clarify the timeframe, RBS allowed the ambiguous estimate to be published despite knowing the asset values and writedowns had only been calculated to mid-April 2008, the claimants’ lawyers say. They allege the bank did not want to clarify the estimate because it was worried that doing so might increase concerns about the bank’s capital position.
A spokeswoman for RBS declined to comment for this article on that allegation and others made by the claimants. As Reuters reported on Nov. 16, the lawsuit also includes allegations that senior management dismissed calls from subordinate staff to mark down the values of distressed U.S. mortgage-backed assets more aggressively in the final quarter of 2007, as a global crisis in credit markets began to take hold. RBS rejects those allegations, and says in court documents for the defense that a lack of trading in such assets at the time made it difficult to pinpoint what the correct values were. The case, scheduled to start in March, is expected to last six months and to hear from scores of witnesses.
The joint financial advisers and sponsors of RBS’s 2008 capital raising plan were Goldman Sachs and Merrill Lynch. As part of their due diligence, those advisers undertook a review and valuation of some RBS asset-backed securities and complex credit funds called collateralised debt obligations (CDOs). At the same time, RBS had its own estimates for writedowns and the current value of the assets. The claimants lawyers say a draft of the bank’s assessment, circulated on April 17, 2008, estimated what it described as “Total writedowns 2008” at 5.9 billion pounds. They allege that figure was originally described as the figure “to date” – to April, not for the whole year. According to the claimants’ documents, the draft announcement for the rights issue circulated on April 20 or April 21, 2008, described the 5.9 billion figure as a pretax “estimated capital effect from write-downs in respect of credit market exposures in 2008,” which the bank said was based on “the outlook in credit markets at this point. The table which followed cited the 5.9 billion pounds figure in a column called “Estimated write-downs before tax.” A footnote to the column added the phrase “in 2008. According to the particulars of claim, Goldman Sachs, like Deloitte, specifically objected to the phrase “in 2008.” The documents seen by Reuters do not say whether Merrill Lynch made any objections.
Goldman Sachs, Deloitte and Merrill Lynch, which is now owned by Bank of America, declined to comment. In addition to his original warning in the April 21 email, Deloitte’s Almond repeated his objections in a further email later that day, the claimants documents allege. That email was addressed to colleagues at Deloitte and later forwarded to RBS’s then finance director Guy Whittaker, the claimants’ documents allege. Whittaker declined to comment.In defence documents, lawyers for RBS say the figures were not misleading but reasonable estimates made for capital planning purposes, based on what the board considered to be prudent assumptions in view of credit market conditions. Lawyers for RBS deny in the defence documents that Almond’s comments were disregarded. They point to an email exchange between him and Tom Shropshire, a partner at RBS’s law firm Linklaters, which referred to a conversation between him and Almond on the same evening. In that April 21 conversation Almond allegedly said his concerns were “not of a fundamental nature,” the defense documents allege.
Shropshire declined to comment. At 00:43a.m. on April 22, the day the rights issue was launched, Goldman Sachs Executive Director Julien Petit also emailed objections to Shropshire, according to the claimants’ particulars of claim. “We at Goldman Sachs still believe that this is a problem … We find it is misleading to say estimated writedowns before tax in 2008 as there may be further writedowns in 2008,” the email said, according to lawyers for claimants. Two minutes later, Shropshire replied to Petit and advised him to contact the bank directly and to “resolve the issue before publication,” the claimants’ documents allege. At 00:47a.m., according to the particulars of claims, Petit emailed Shropshire to say that the message had been relayed to a senior executive of the bank. Petit allegedly added: “You cannot assume that it has been resolved as the client (RBS) did not want to take our comment.”
Petit declined to comment. In the defence documents, lawyers for RBS said Goldman Sachs signed off the sponsor declaration approving RBS’s cash call as required by financial regulators, indicating that the adviser did not consider the information to be misleading.
Claimants’ lawyers allege RBS acted as it did because it wanted to avoid disclosing how its capital position had deteriorated until after it had completed the critical cash call. In emails dated April 18, 2008, Almond told Deloitte colleagues he felt the timing of writedowns was “an issue” for RBS, and if they happened before the rights issue, the bank’s total capital would be “down to 8.59 percent,” according to the claimants’ documents. At the time, Individual Capital Guidelines (ICG) set by UK regulators stipulated minimum total capital of 9 percent of “risk-weighted assets” – assets whose valuations take into account the perceived risk those assets pose to a bank’s financial health. Almond wrote in the email that RBS had “not got the capacity” to take further assets writedowns at that time, according to the claimants’ documents. In defence documents, the bank says it did not recognise all of the writedowns in its books immediately because it did not consider that the accounting rules required it to do so. UK corporate accounting rules allow some leeway in how companies interpret them. Claimants’ lawyers allege that Ian Tyler, then RBS group head of capital, raised the issue of writedowns and capital levels with senior management. According to claimants’ particulars of claim, Tyler sent an email on April 20, 2008, to a senior RBS colleague, saying that booking the estimated writedowns in April would trigger falls in the bank’s capital, potentially taking it below regulatory requirements. Tyler declined to comment. In the defence documents, RBS says it did not consider that it had suffered losses of 5.9 billion pounds by the prospectus date. The bank says it complied with accounting rules and took a reasonable approach to the timing of the expected writedowns.