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RBoS Shareholders Action Group - Press Article

RBS accused of ignoring warnings over risky investments

Financial Times
Emma Dunkley and Jane Croft
18 November 2016

Former managers at Royal Bank of Scotland disregarded warnings from staff over risky investments and its investment bank's dependency on the "heroin of unsecured funding" before the financial crisis, it has been alleged in court documents.

The claims are part of a £4bn High Court lawsuit brought against RBS and its former directors including former chief executive Fred Goodwin by thousands of RBS shareholders.

The investors claim that they were misled into signing up to the £12bn rights issue months before the bank's near collapse in 2008, and allege the rights issue prospectus contained untrue or misleading statements about the bank's financial position.

RBS denies the allegations and is defending the case. It is due to come to trial next year.

Senior RBS managers were told by internal risk experts, months before the financial crisis, that the bank had overvalued billions of dollars of risky debt, such as subprime mortgage bonds, according to the newly filed court documents.

The stricken bank was left exposed to the subsequent plunge in US property prices and required a £45bn bailout from UK taxpayers in 2008.

An amended particulars of claim filed by the investors at the High Court allege that some RBS managers ignored warnings that this risky debt was being overvalued and that the bank was over-reliant on wholesale funding.

The documents also allege that RBS was in a "highly vulnerable liquidity position" and was dependant upon wholesale, short-term funding where its "liquidity risk was extreme".

John Cummins, a senior RBS manager, told a group internal audit in May 2008 that RBS's global banking markets division was fuelled "by the heroin of unsecured funding," it is alleged in the court papers.

The pursuit of profits appears to have numbed management to the risk being run

David Johnston of RBS's Treasury division wrote in 2008 email

In April 2008, RBS's Treasury division concluded in one paper that if RBS was ever locked out of the wholesale markets then an analysis of RBS's liquidity position "indicated that a survival period of only one-day".

The court claim also states that David Johnston of RBS's Treasury division sent an email in January 2008 to managers reporting the views of Tom Nicol, the departing deputy head of foreign exchange at RBS. "The pursuit of profits appears to have numbed management to the risk being run," the email read.

The bank allegedly failed to disclose in the rights issue prospectus that its liquidity position was "particularly vulnerable".

The court papers claim that RBS was "vulnerable to defections" from wholesale depositors on whom it was relying for £146bn of unsecured funding in April 2008.

Just hours before RBS launched its cash call, the documents allege that a Deloitte partner advising the bank cautioned managers about a draft announcement on the RBS rights issue which talked about future writedowns on troubled assets "in 2008".

Steve Almond, the Deloitte partner, wrote that the statement about 2008 writedowns "implies there will be nothing more in next 8 months. This is the hope but cannot be controlled," according to the court claim.

The lawsuit also alleges that Victor Hong, a former risk manager at the bank, flagged to bosses that risky credit in the form of collateralised debt obligations needed to be reduced in value. He was allegedly told by a senior manager not to highlight the need for markdowns before the end of 2007 as it would mess up "the bonuses".

Mr Hong, who worked at RBS for six weeks, soon left the bank and stated in his resignation letter that it would be intolerable to continue when the valuation of the debt did not match "fair-market values", according to the documents.

RBS denies the claims. "We are continuing strongly to defend the claims that are being brought against the bank in relation to its 2008 rights issue," it said in a statement.

In its 2013 defence to the original claim, RBS said the rights issue prospectus "accurately and fairly set out RBS's liquidity position and the various risks RBS faced with regard thereto and cannot be said to have been misleading in that respect".

"The prospectus set out accurately and fairly the background to the rights Issue and the reasons why the board had concluded that it was necessary, making clear that the rights issue was being undertaken in order to strengthen RBS's capital position," it added in the defence papers.