Early Redemption of ‘Cocos’: Win for LBG in Supreme Court

26 06 2016

BNY Mellon Corporate Trustee Services Ltd v LBG Capital No 1 Plc & Anor [2016] UKSC 29 (16 June 2016)

Almost like the British public on Brexit, the Supreme Court remained closely divided on the issue of whether the Court of Appeal erred in its construction of the terms of enhanced capital notes (ECNs) by relying on technical and specialist information as part of the factual matrix. Formally described as ECNs, the loan notes were contingent convertible securities (or “Cocos”). Lord Neuberger (with whom Lord Mance and Lord Toulson agreed) dismissed BNY Mellon’s appeal whereas Lord Sumption (with whom Lord Clarke agreed) would have done otherwise. As Lord Sumption said in his brief note of dissent, the case was “of considerable financial importance to the parties” but it raised “no questions of wider legal significance”. The outcome in the case is a major blow for investors (receiving up to 16pc interest) who had hoped that the court would not have held that the terms of the bonds (or ECNs) allowed Lloyds Banking Group (LBG) to redeem them early at face value. The High Court found in favour of the bondholders but the Court of Appeal reversed that decision, one that the Supreme Court has upheld: albeit not without doubts and dissent. Led by Mark Taber, the bondholders disputed that the ECNs had been disqualified as capital and resorted to litigation. A disgruntled Taber said that the division between the justices “raises massive issues over the role of the regulators”.

He is particularly aggrieved that the court’s judgment does not engage with the arguments aired about statutory requirements that bond prospectuses must be accurate and provide crystal clear information to investors so that they may make informed choices and decisions. Worse still Taber also complains that he lobbied the FCA’s new boss Andrew Bailey to make germane information – about the exact scope of the regulator and LBG’s knowledge about impending changes to capital requirements when the ECNs were issued – available to the court. But since his request was not granted, he argues that because the courts are not willing to intervene it must be the City regulator’s job to interpret the prospectuses. “I believe the changes they knew about, which were not disclosed in the ECN prospectus, meant that a capital disqualification event was a certainty at the time the ECNs were issued. If the court had been told this I think it would have made a difference,” is how Taber expressed his frustration with the situation. However, his claim appears to directly contradict even Lord Sumption’s dissenting judgment that despite its financial importance the appeal contained no legally significant questions of wider importance. Read the rest of this entry »





LIBOR Roundup: Fraud, Misrepresentation and New Directions in Civil Proceedings

30 03 2016

ICE Benchmark Administration, which took over LIBOR from the BBA in 2014, has published a roadmap for LIBOR and banks will no longer be able to manipulate the interbank rate once a new system comes into place this summer connecting the IBA’s computers to banks’ trading systems. “We built new systems to do the surveillance which run about 4m calculations every day, looking for collusion, or aberrant behaviour, or possible manipulation,” explained the IBA’s president Finbarr Hutcheson. He expressed confidence that traders will no longer be able to lie to improve their trading positions and said that anomalies would be investigated and reported to the FCA. The banks have paid billions in fines in relation to the benchmark’s manipulation. The Wheatley Review 2012 engineered and guided LIBOR’s transformation because the distorted benchmark, underpinning more than US$350 trillion in outstanding contracts, was “not fit for purpose”. But of course, the review’s author Martin Wheatley was ousted from office because of his overt aggressiveness, or his “shoot first” and “ask questions later” policy for bad banks. Under IBA oversight, daily LIBOR rates will be rooted in market transactions “to the greatest possible extent” by using a “waterfall” system devised to begin with transactions but relies on human input in circumstances when trading volumes decline.

IBA is extremely confident that the move will bring rectitude to the scandal ridden financial sector. Hutcheson said that coupled with the earlier changes, the roadmap will ultimately make LIBOR “one of the world’s most trusted, scrutinised and robust financial benchmarks.” Insofar as benchmark rigging from the old days is concerned, after the settlement (2014) in the series of reported judgments in the Graiseley Properties case, new claims have been brought and a series of fresh judgments were published in litigation arising out of disputes between the Property Alliance Group – a property developer with a portfolio worth about £200 million – and the Royal Bank of Scotland. RBS has been in the spotlight recently because of the fact that it has failed to generate profit for eight successive years and that its losses since the global financial crisis 2008 have exceeded £50 billion which is more than the £45 billion of taxpayers’ money used to bail out the ailing institution. Read the rest of this entry »





Navinder Singh Sarao: Criminal Mastermind or Sacrificial Lamb?

28 04 2015

This article examines the charges against Navinder Singh Sarao and it argues that he is put in an invidious position in comparison to traders protected by predatory global banks. The Parliamentary Commission on Banking Standards (PCBS) had dubbed bankers “the masters of the universe” because of their repetitious recklessness and disregard for customers and shareholders. Yet, the banks are routinely able to pay their way out of trouble. From that perspective, Sarao becomes a sacrificial lamb and a scapegoat in America’s quest for bringing abusers of the market to justice. Indeed, Nick Leeson – the historic “rogue trader” from two decades ago, who wrecked Barings Bank by losing £832 million and subsequently went to ground – was of the view that Sarao is a likely scapegoat and he may not have foreseen the consequences of his actions. But can we trust the words of Leeson, who in his professional career, seems to have been nothing short of a congenital liar? On the other hand, the information available in the public domain points to the existence of a double standard that puts Sarao in a relatively prejudiced position in comparison with other bent individuals who remain above the law and are treated leniently.

Applying the hierarchy devised by Roger McCormick in Seven Deadly Sins: ‘Retrospectivity, Culpability and Responsibility’ – save that Sarao was not a bank operative – it is apparent that Case 1: “Clustered Criminality” has controversially been put behind Case 5: “Individual Criminality”. Clustered Criminality, of which benchmark manipulation is a classic case, occurs “where there is at least strong suspicion that a crime has been committed and although the culprits may not be immediately clear it seems likely that more than one person was involved.” Individual Criminality, which the “rogue trader” classically exemplifies, is “where there is clear evidence that a crime has been committed by a bank employee and the culprit (usually acting alone) is identified.” Thus, recent events may be read as turning the hierarchy on its head by putting Case 5: “Individual Criminality” at the apex of culpability. The approach is questionable because Read the rest of this entry »





Raytheon Systems: e-Borders Arbitration Set Aside for ‘Serious Irregularity’

20 04 2015

See my article  Failure to Deal with the Issues: The e-Borders Award and ‘Serious Irregularity’ under the Arbitration Act 1996. These judgments given by Akenhead J relate to the e-Borders controversy. The e-Borders passenger information system was marketed as a one-stop solution to the UK’s immigration and security problems. Under e-Borders the Home Office sought to create an electronic system to examine everyone entering and exiting the UK by verifying their details against immigration, police and security related watch lists. In Raytheon Systems Ltd [2014] EWHC 4375 (TCC), Akenhead J set aside an arbitral award (in e-Borders contractor Raytheon’s favour) because of “serious irregularity” within the meaning of section 68(2)(d) of the Arbitration Act 1996 (“the 1996 Act”). In December 2014, the court held that the arbitration tribunal failed to deal with all the issues (of fault and responsibility attributable to Raytheon which were highly relevant to quantum) put to it. Subsequently, in Raytheon Systems Ltd [2015] EWHC 311 (TCC), in February 2015, Akenhead J set the arbitration award (£200+ million) aside in its entirety for serious irregularity and ordered a fresh hearing.

The arbitrators’ identities remain undisclosed to the public and the rulings did not intend to reflect on their integrity or general competence. Despite successfully challenging the award in court, the government continued to negotiate and the Home Secretary announced on 27 March 2015 that the settlement with Raytheon was “a full and final payment of £150m.” The earlier judgments, in the Home Office’s favour, were made publicly available in February 2015 and are perhaps the only authoritative documents in the public domain that shed light on the dispute. The award was set aside for serious irregularity because of the arbitrators’ failure to address issues, highly relevant to quantum, of fault and responsibility attributable to Raytheon. Signed in 2007, the e-Borders contract was worth around £750 million in total. The government terminated it in 2010 because of delays and key milestones being missed. Read the rest of this entry »





Supreme Court: Widow’s Contractual Claim Against BP Upheld

20 03 2015

Braganza (Appellant) v BP Shipping Limited and another (Respondents) [2015] UKSC 17 (18 March 2015) 

This case was heard on appeal from a decision of Longmore, Rimer and Tomlinson LJJ, see [2013] EWCA Civ 230, and it threw up two connected questions of principle: first of all, the meaning of the general requirement that the decision of a contractual fact-finder must be a reasonable one; and secondly, the proper approach of a contractual fact-finder who is considering whether a person may have committed suicide. On 11 May 2009, Braganza disappeared between 1am and 7am, while on duty as the chief engineer on the British Unity (an oil tanker in the mid-North Atlantic managed by BP). The Court of Appeal was of the view that Braganza, an Indian national, had thrown himself overboard to commit suicide. Consequently, his widow, Mrs Niloufer Braganza, was precluded from receiving death benefits under her husband’s contract of employment, which contained a clause that compensation would not be payable if “in the opinion of the Company or its insurers, the death … resulted from … the Officer’s wilful act, default or misconduct”.

The question for Lord Neuberger PSC, Lady Hale DPSC and Lord Kerr, Lord Wilson and Lord Hodge JJSC concerned the proper test for the court to apply when deciding whether BP was entitled to reach the opinion that it did. Geared towards improving its systems, BP’s own inquiry about the disappearance identified six factors supportive of suicide and concluded that the most likely scenario was that Braganza deliberately jumped overboard. The six points related to (i) his behaviour being notably different on the voyage involving his disappearance than on previous voyages; (ii) the shoes and sandals he usually wore on board were found in his cabin after his disappearance; (iii) e-mail messages received from his immediate family suggested that he had some family and/or financial difficulties that were causing him concern; (iv) he was not aware, before joining the ship, of its status and reputation and was reported to be unhappy about this Read the rest of this entry »





Roger McCormick: We can’t have big, unruly banks that are out of control

26 10 2014

Ever-larger fines for bank misconduct have made headlines around the world, leading the London School of Economics and Political Science‘s Conduct Costs Project to estimate total costs between 2009 and 2013 for 10 major global banks at nearly £100 billion, plus a further £58 billion put aside in provisions at 2013-end. Roger McCormick of the LSE led the project, and he set up and now runs the CCP Research Foundation to build on its efforts. A former partner at law firm Freshfields Bruckhaus Deringer, he spoke with SNL Financial on the sidelines of the British Bankers’ Association annual conference in London about the purpose of fines.

This interview was published on the Conduct Costs Project Research Foundation website and has been republished here with permission and thanks.

By Christian Wuestner

SNL Financial: New U.K. regulations aim to increase accountability of senior managers at banks for failures, including introducing a new criminal offense. Is this a good idea?

Roger McCormick: I am pretty much on exactly the same ground as [Bank of England Governor] Mark Carney on that. I am sympathetic to the concerns it raises for people who are not used to the new regime, but you have to put it in context. Twenty-five years ago, there was a famous legal case in England called the Hammersmith and Fulham Case, sometimes called the Swaps Case, where a lot of banks entered into swaps contracts with English local authorities. The auditors of those authorities challenged the contracts, took it to the courts and won because the contracts were invalid. So the banks could not enforce those contracts. And they all complained to the Bank of England and other people: “We didn’t know about the legal risks involved in these contracts.” Read the rest of this entry »





Flaux J Vindicated: Court of Appeal on Amendment, Implied Representations and the Efficiency of LIBOR

20 01 2014

Graiseley Properties Ltd & Ors v Barclays Bank Plc & Ors [2013] EWCA Civ 1372

The appeals from the High Court in Graiseley Properties Ltd & Ors v Barclays Bank Plc [2012] EWHC 3093 (Comm) (Flaux J, see post here) and Deutsche Bank AG & Ors v Unitech Global Ltd & Ors [2013] EWHC 471 (Comm) (Cooke J, see post here) were decided by the Court of Appeal (Longmore & Underhill LJJ, Sir Bernard Rix) in Graiseley Properties Ltd & Ors v Barclays Bank Plc & Ors [2013] EWCA Civ 1372. In a robust but concise judgment, the Court unanimously allowed the appeal from Cooke J and dismissed the appeal from Flaux J.

The critical question before the Court of Appeal was, in relation to the two cases mentioned above in which banks were seeking to recover sums due under loan or swap agreements, whether the borrowers should be allowed to amend their pleadings in order to allege that the banks had made implied representations in respect of the efficiency of or the non-manipulation of the London Interbank Offered Rate (LIBOR). Read the rest of this entry »