Royal Bank of Scotland has lost a high profile legal dispute against a US hedge fund.
Three senior judges found that an earlier court judgment in its favour had been obtained by the “fraud of RBS” through dishonest evidence given in court by one of its bankers.
The long running dispute centres on RBS’s 2008 decision to call-in a collateralised debt obligation (CDO) it had financed for Highland, the US hedge fund, and to start terminating it at the height of the financial crisis.
In 2010, an earlier court ruling in the dispute found RBS’s conduct was legal but was highly critical of RBS and the actions of one of its former bankers Sam Griffiths, who was a leveraged loan trader.
Highland had appealed against the decision to the Court of Appeal which on Friday said the earlier ruling should be set aside.
“In my view the liability judgment was obtained by the fraud of RBS through the misstatement and concealment of facts by SG [Sam Griffiths],” Lord Justice Aikens ruled on Friday.
The complex dispute centres around claims that RBS, under the direction of Mr Griffiths and without telling Highland, had held a “sham” auction of loans and transferred 36 from its trading book to its banking book in October 2008 to take advantage of amended IAS 39 accounting rules designed to bolster RBS’s capital positions.
The events took place just weeks after Lehman Brothers collapsed, as RBS was struggling to survive and later had to accept a government bail out. It is now 82 per cent taxpayer-owned after its £45bn bailout.
In the earlier ruling, Mr Justice Burton had criticised RBS for failing to disclose the true reason for calling in the loans and said Mr Griffiths “had lied” in two trials about what he knew and what his motives were in relation to the 36 loans.
Court of Appeal judge Lord Justice Aikens agreed with the earlier findings and said he found that Mr Griffiths was “continuing positively to mislead both Highland and the court as to what had happened in relation to the 36 loans and was doing so consciously and deliberately. For these purposes, there can be no argument that the acts of SG must be attributed to RBS, so there was a positive misstatement by RBS of the true position.”
Philip Young, partner at Cooke, Young & Keidan, the law firm representing Highland, said: “As far as we are aware, this case is the first time that a major UK bank has ever had a High Court judgment struck down by the English court on the grounds of the bank’s fraud. In that respect it is dramatic and unprecedented.”
Court documents state that Mr Griffiths was subject to an RBS internal investigation which found he was guilty of serious misconduct and issued him with a final written warning. He has now been dismissed from the bank but is thought to be appealing. RBS would not comment. Mr Griffiths has never commented on the case and his lawyer did not respond to requests for comment.
The ruling comes as RBS has been hit by a series of scandals including the Libor rate-rigging affair where it agreed a £381m settlement with US and UK regulator.
It has also set aside £2.2bn to resolve its share of the industry-wide scandal of mis-selling Payment Protection Insurance and has reserved £650m to cover the cost of compensating small and medium-sized businesses who were mis-sold interest rate hedging products.
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