EQUITABLE LIFE MEMBERS
EQUITABLE LIFE: PENROSE AND BEYOND
- ANATOMY OF A FRAUD
A paper by Dr. Michael Nassim
Last Updated: Friday, February 11, 2005 09:57 AM
Contents
2) The Story before Penrose: a summary of some EARW main points
· Introduction: cipher, crib and key
· Out with the Auld and in with the New
· The New Equitable first turns sour-
· An illegitimate child: secret birth and prolonged unofficial existence of the DTBP
· Rough news on smoothing generates new insights
· On Ponzi schemes in general, and the Society’s in particular
· Prelude to regulatory considerations
· Regulatory failure I: Conduct of business
· Regulatory failure II: Prudential
· Fat cats and poor mice, or further inequities in conduct of business
· Finale: cipher, crib, key and message
6) Level 3: The evidential base. p40
o Scope and limitations of the PR
o Salient new facts and findings:
o How, when and where did the Society’s estate disappear?
o So who gained the estate, plus further over-distribution at later policyholders’ expense?
o No estate + no un-hypothecated reserves = no smoothing policy…
o Valuation and hypothecation considerations
o Policyholders’ reasonable expectations (PRE), issues of good faith and related duties
o The Opposition view of regulatory failure
o Sophistry, mythology, propaganda, misrepresentation and mis-selling
o Corporate governance and management culture
o Loss and harm suffered by policyholders
8) References
9) Postscript
In
January 2004 the ELTA (Equitable Life Trapped Annuitants) website posted
an account entitled: “An
Equitable Assessment of Rights and Wrongs” (EARW) in advance of the
Penrose Report (PR). It examined what had miscarried at the Equitable, the
wrongs that resulted, and hence what a freely comprehensive investigation
should cover. Therefore we may now add important new findings to this
structure, and authoritatively indicate matters outstanding when assessing
other reports. Even so the PR
is long and detailed, and the opportunities to study it have been
intermittent, during which there have been further developments. Hence the
task has been arranged in stages. An
initial appraisal appeared on the ELTA website in anticipation of the
March House of Commons debate. A second interim evaluation dated April 20th
was intended for committee members various, the Financial Ombudsman
Service and the Society. A
third version covering the non-regulatory aspects of the PR dated June 2nd
was prepared for the ELTA committee.
This fourth version includes some statutory and legal aspects, and
takes into consideration the more relevant developments.
Though
events at the Equitable remain the primary concern its regulatory
dimension is also of great import; continued Government inaction here has
resulted in this aspect being taken up by the Opposition and a vital
handful of concerned MPs. Their
initial success has been to consolidate the effects of the Equitable
Members Action Group (EMAG) judicial review of Parliamentary Ombudsman Ann
Abraham, and help persuade her to re-open her inquiry.
For the sake of completeness this article includes an extract from
a letter dated April 29th 2004 by Shadow Financial Secretary
Andrew Tyrie to Ann Abraham, which lays out the evidence for sustained
organisational and operational failures in the regulatory apparatus as
recorded in the PR. This Mr
Tyrie states to be the view of the official Opposition; with the source
material and his references to hand readers may judge its merits for
themselves. Alternatively, a listing of regulatory omissions and failures
based on the evidence in this article, plus material assembled by the
action groups in co-operation with the Parliamentary Ombudsman’s Office
in preparation for her Second Inquiry, is given in the narrative account
below.
How
to use this article:
First and foremost, the Equitable story is a long and complicated one. Its consequences have been grave, and can only be seen in reasoned perspective when everything has been set out clearly, and of necessity in sufficient detail. Mastering it entails hard work, which requires time and effort. To suit the differing amounts of either that readers may have, this paper is laid out on no less than four scales of detail and complexity, which are:
·
Level 1: An itemised (“bullet point”) summary of main
points, and conclusion.
·
Level 2: A
fuller narrative account to provide overall continuity.
·
Level 3: A categorised and itemised (numbered paragraph)
detailed examination of important contributory issues, and-
·
Level 4: embedded direct quotations from original sources.
Supporting this is a referenced fifth level, which comprises the source material itself. Some duplication of text or subject has proved inevitable in order to assist immediate comprehension and accessibility. And given the attendant responsibilities of the task, or that one must indicate where more facts or investigation may be required, even this sees barely enough. In presenting it the author must also acknowledge and contend with his own interests and limitations.
Because
this paper is the accountable work of a single author, it should also be
as self-sufficient possible.
Hence again this is why, mainly at Levels 3 and 4 important new
findings from the PR and other documents are quoted, summarised and
referenced as numbered points under relevant headings.
The writer has endeavoured always to place the quotations and
summaries in a correct and impartial context. To indicate why they are
important and to give continuity on a straight read through, other
material, much of it also in EARW, is brought forward or referred to. This
“mix and match” approach is much helped by there being no essential
conflict between the PR and EARW, or indeed the several forensic and
regulatory accounting papers by Colin Slater, a partner of Burgess Hodgson
(Chartered Accountants) who was until recently Chairman of EMAG, which can
be found at http://www.emag.org.uk.
Of particular note is “The alternative Penrose Report”.
Readers
may also have their own prior knowledge, but still there may be gaps.
Having so to speak “grown up” with EARW, the writer thinks it
remains a useful general approach to a complex problem, and so it may be
helpful to go back to that. There is another good reason for doing so,
namely that despite considerable overlap on aspects which Lord Penrose
covers much more exhaustively and very well, there are other pre-defined
areas which he has not been free to cover at all.
Hence any gaps in the PR also need emphasis because readers need to
know what these are, and wherever possible why they have occurred.
But in the end nothing beats going back to the source material.
The PR is downloadable by sections in .pdf format from http://www.hm-treasury.gov.uk.
This is much faster on broadband, and upgrading ones reader to
Adobe 6.0 permits searches of all the sections together if they are in one
folder or CD-R. For other
seminal material the EARW reference list and websites mentioned there will
also help. It is also
instructive to re-evaluate the Society’s Compromise prospectus in the
light of subsequent events.
In
level 3 direct quotes are in “quotation marks”, and passages of
outstanding relevance are italicised. The writer has also underlined
those areas of his own text to which he wishes to draw special attention.
In the narrative text these markers could be a potential
distraction from the main thread, and so are not provided.
At the risk of introducing an
element of bias, the writer urges readers always to keep in mind the many
aspects of differing or even conflicting interests as they digest his
offerings. He believes that
they have had a major bearing on events in areas such as:
·
Fiduciary,
ethical and professional competence versus personal ambitions and
feudatory allegiances:
o
at
the Equitable: influential London offices vis-à-vis the
executive/administration arm at Aylesbury; executive vis-à-vis
non-executive; actuarial vis-à-vis sales and marketing
o
in
governmental and regulatory organisations
o
within
professional bodies, e.g. actuarial and accountancy.
o
In
the external relationships of individuals and organisations generally.
·
Party
political interests over the last 30 years or more
·
Between
members of Governments and civil servants, e.g. Treasury and regulators.
·
Within
and between a life office and its participatory pension schemes,
administrators, actuaries and trustees.
·
Between
life offices: individually, or public versus mutual.
·
Reconciliation
of the interests of different categories of policyholders.
·
Emasculation
of official reports in deference to interests.
The
two equal arms of the balance weighing these conflicts are objective
clarity and the integrity of persons or their organisations.
While the air is troubled the balance
cannot
settle, and the best we can do is to reckon the mid point of its swing at
suitable moments, always looking to a steadying influence from those we
may trust.
Regrettably, it is also necessary to recall the five cardinal elements of fraud, which are:
1.
“Scienter” (Latin adverb/noun = “knowingly” in legal
parlance), or knowledge of facts, events or circumstances by one party;
2.
Misrepresentations (including non-disclosure) of that
knowledge by that party in dealings with another;
3.
Reliance on those misrepresentations by the second party;
4.
An agreement, contract, or transaction between the parties
which a reasonable person would not have entered into if privy to the
first party’s knowledge, and
5.
Harm or damage to the second party as a result.
We
should seek also to explain the motives for fraud, what is thereby gained
and who might benefit. But as
is increasingly known, the individual and collective mindset underlying
modern corporate fraud can be complex.
We cannot always expect the final satisfaction of uncovering a
single old-fashioned “villain of the piece”.
The general issues underlying mis-selling and fraud by the
Equitable are also covered in EARW sections 5, 7 & 8.
But as we shall see, a few crucial new factors must now be added to
what was discussed there.