Wednesday 27 June 2012

Sticking It To Fred Goodwin

If Jeff Skilling of Enron can be serving 24 years 4 months in gaol (with fine of $45 million for good measure), all because he misled investors, we've wondered here several times why UK banksters couldn't be pursued on similar grounds.

In fact, belatedly some of them are indeed being pursued - if only in a civil suit - on exactly that basis.  Not surprisingly it's Fred Goodwin and the RBS boys: let's face it, the RBS case was pretty egregious.

We'll be watching with interest.  The article linked above suggests that focus is on the prospectus for an RBS rights issue.  This is an aspect that I've never really understood: corporate lawyers are always very much more twitchy about what gets said in a prospectus than what gets written in annual reports and accounts.  As we know, many AR's are a crock of the rankest ordure, but a prospectus is held to higher standards.  Could one of our lawyers explain why this is ?



Anonymous said...

I suggest that's because lawyers vet what's said in a prospectus, whereas errors in the AR should have been picked up by the auditors.

Elby the Beserk said...

Is it not a criminal offence to knowingly run a business which is insolvent? As RBS clearly was? I really do NOT see what the problem is, or why Goodwin has not been dealt with - in the courts - some time back.

Anonymous said...

Could it be that the politicos Nick DO NOT want to pursue these "bankers" and other such people, because they "are one of us" through out recent times there have rather spectacular collapses RBS,Lloyds/Hbos/GEC, Polypeck, just as examples, and very little has been done about how these companies collapsed, indeed the leading lights were even enobled or knighted

dearieme said...

Could it be because ARs are primarily addressed to the shareholders (i.e. the nominal owners of the company) while a prospectus is aimed at the man on the Clapham omnibus?

Nick Drew said...

Anon 1 - but surely lawyers would get more involved with ARs if there were more legal consequences ?

Elby - exactly: any prosecutor determined to make an example could, at the very least, scare some of these buggers rigid

so, Anon 2, something like that must indeed be at work

Dearieme - there's still something missing in that logic: today's private shareholder was yesterday's man-on-the-'bus - why does he deserve less protection after he has actually been parted from his £ ?

measured said...

It is all about vested interests. It usually is, unless lay members are involved to uphold standards.

It would be very difficult to get a successful prosecution from an AR. So much else is going on elsewhere and oh dear, the unexpected happened. One has to have knowingly misled or created a false market, but on the other hand, at the time we thought the outlook was rosy and we didn't want to scare the market. The truth is that management like to keep existing shareholders on side so the urge to mislead is not that strong. Large shareholders are more interested in staying in with management so they are most reluctant to criticise existing management teams in public and less reliable management teams are accorded lower ratings so typically the market pursues a form of natural justice.

Small shareholders have neither the resources or sufficient share in total to make themselves count and anyway they are the last to know, despite the endeavours to level out the playing field.

With a prospectus the forecasts are short term and everyone wants to make a quick buck, so the urge to mislead is far greater and the regulators are far more aware of this. It is easier to gain convictions. There will be email trails and minuted meetings, not just the Chairman's final sentence.

As far as I am concerned, Fred Goodwin was grossly negligently expanding the balance sheet so rapidly, but do bankers have a professional body to prosecute him? The FSA do not enforce a Code of Conduct to the best of my knowledge so I do not know what rule he breached. If they can't make it stick on war crimes,, you will realise (and I know you know most this already Nick), that if there is no will, there is no way.

Nick Drew said...

management like to keep existing shareholders on side so the urge to mislead is not that strong

one would like to think that's right, measured, but I fear there are sometimes circumstances where it goes by the, errr, board (ahem)

I can think of some examples of big, festering problems that were hidden from shareholders for years, until they were so big they could be disguised no longer

the case of the former National Power plc comes to mind: no provisions made in the books for a gigantic trading loss for several years, until demerger when they revealed it - over a billion, from memory

(and of course this came about because they were issuing, yes, a prospectus for new shares !)

Anonymous said...

Do Americans require work permits / work visas. If so why are these not withdrawn when person is shown to be unfit either by inccompetence of malparctice?

Disgausted Grange over Sands

measured said...

"Well, we based our forecasts on this premise." The accountants have vested interests too. Who is going to pay to police ARs?

Accountants also have conflicts of interest, especially when winding up entities and yet the measures in place don't adequately tackle this. I suspect that is because only the Government can grasp this nettle.

When I refer to a Code of Conduct I mean bringing a Charge that the individual has "engaged in conduct that is discreditable to a banker" or "engaged in conduct that bring brings the banking profession into disrepute". My word, such prosecutions are unheard of amongst bankers.

Oil companies. Do you trust the reserves they state in their ARs? I expect there will be some nasty shocks there along the way.

Nick Drew said...

Oil companies. Do you trust the reserves they state?

indeed: we had the Shell debacle a few years ago