The Foskett Panel

IAR Fraud and the Causation of Loss

Introduction

  1. As stated in our Scope and Methodology Statement, our objective is:
    1. to adopt a fair and generous approach to all our decision-making relating to a Customer’s case; and
    2. to apply a common sense approach to our assessment of whether a Customer sustained D & C losses as a result of the IAR Fraud.
  2. In this guidance note, we describe in general terms both the kind of information that will help us and our approach to evaluating that information. As our process is non-legalistic and inquisitorial, there is no requirement on you, the Customer, to “prove your case” as there would be in an adversarial legal process. We hope that this guidance note will help you in responding to our enquiries and alerting us to information that may be relevant in your case.
  3. As noted in the Scope and Methodology Statement, there are a number of matters that we need to be able to establish before an award for D & C losses (in other words, financial losses) can be made. The first step will be for us to understand whether there is a sufficient link between the IAR Fraud and what happened to you, or your Company, for it to be said that financial losses were caused by the fraud. That is the focus of this section.
  4. Before you read further, there are a few things we would like to emphasise:
    1. We will be looking at each Customer’s case afresh and without making any assumptions or presumptions, one way or the other. For example, (i) we will not assume that your Company was in a poor financial position simply because it was put into the IAR, and (ii) we will not assume that, because your Company was dissolved or put into administration after the influence of those involved in the fraud had ceased, any continuing financial losses could not have been caused by the fraud just because that influence had ceased. Everything will depend on what our inquiries reveal, not on how your case may have previously been considered.
    2. Our remit is to consider whether we can award compensation for quantifiable, financial losses resulting from the fraud. We are aware that Customers will have suffered distress and inconvenience because of the fraud and we know that some awards were made for that distress and inconvenience (called ‘D & I awards’) during the Customer Review. It is not within our remit to reconsider those awards. Our focus is on financial losses.
    3. We are aware that some Customers received a D & I Award during the Customer Review because they had dealings with the fraudsters. As we have said, and as was specifically recommended by Sir Ross Cranston, our focus is on financial losses caused by the IAR fraud and we have to confine our work to that issue.

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The scope and definition of the IAR Fraud

  1. For the purposes of our Re-Review, the IAR Fraud refers to the fraudulent activity perpetrated through the HBOS Impaired Assets unit based in Reading and Bishopsgate in London (the ‘IAR’) and/or the company called Quayside Corporate Services Limited (‘QCS’) and/or its Associates, between about 2000 and 2010, which was the subject of the Criminal Trial in 2016 to 2017.
  2. In order for us to understand how you and/or your Company were affected by the IAR Fraud we will first need to consider what influence or involvement any of the convicted criminals had on you and your Company, whether directly or indirectly (including by directing others acting at their behest). For example, the Panel will consider matters such as whether either Scourfield or Dobson agreed to, encouraged, or influenced behaviour or actions that led to the eventual destruction, demise or other damage to a company placed in the IAR, or caused the company representatives to take evasive action to their own detriment. In doing so the Panel will be able to draw inferences from all the material and circumstances available. These are not the only examples, but the important factor is that the Panel is able to establish a link between the IAR Fraud and a detrimental financial impact on you/your business. We will look at all the circumstances, particularly the extent to which the actions, inactions or influence of Lynden Scourfield or Mark Dobson or David Mills or any of the other three convicted individuals can be seen in your case. This will be for the Panel to decide.
  3. We understand that some Customers believe that their Companies were wrongly placed in the IAR at the outset and suffered financial losses as a result. Assessing whether this was the case will form part of our inquiries if Customers raise the issue.
  4. Just as we will not make the assumptions referred to in paragraph 4(a) above, we will not be able to assume that losses suffered by you or your Company arose as a result of the IAR Fraud solely on the basis that you (or someone else involved in your business) had involvement or contact with the convicted individuals or members of their teams. We will also need to understand (i) the degree to which they influenced your affairs or those of your business and (ii) that the influence was part of the fraudulent activity.

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The link between being affected by the IAR Fraud and D & C losses

  1. Once we have ascertained how you were (or your Company was) affected by the IAR Fraud, the next step will be to consider whether the fraud then caused financial losses that would not have occurred but for that fraud. If your financial position would have been the same in any event, irrespective of the IAR Fraud, we will not be able to conclude that the IAR Fraud caused the losses you may have suffered.
  2. There is a key question in relation to each Company which, in The Cranston Review, Sir Ross Cranston identified as:

    “What would have happened to this company but for the involvement of the fraudsters?”
  3. Answering that question will require us to consider, amongst other things, the issue of whether, with honest, proper and reasonable actions by a “Hypothetical Reasonable Bank” and honest, competent and reasonable advice from a hypothetical non-fraudulent turnaround consultant (if one were needed at all) at the relevant time, the Company would, or could, have survived either in the way it had previously operated or in some different or modified way, either temporarily or permanently.
  4. The situation of each Company will be unique and we will consider each Company’s position on its individual merits. The Cranston Review highlighted some of the issues that will need to be addressed where a Company may justifiably have been placed in the IAR and we record the relevant paragraph here:

    “The question of what would have happened had the business been managed by a reasonable (and non-fraudulent) turnaround team is not an all or nothing question, but involves a number of possibilities: Would the company have had any chance of turnaround at all? If so, what would have happened to it along the way? Even if, on the balance of probabilities, ultimately it would not have been successfully turned around, would this have been immediate? Or would it have survived for some time before being put into administration (or equivalent)? If so, when, what would the administration have looked like, and what would have happened in the interim period? What would the directors’ liabilities have been (for example, under their personal guarantees) had the business been put into administration at a different point in time? Would the directors have invested (and lost) less of their own funds without the influence of the fraudsters?”
  5. Addressing questions such as these will help to determine a reasonable hypothetical Non-Fraudulent Scenario (something lawyers call a “counterfactual” scenario) for the Company. This simply means the likely or possible state of things if the Customer had not been exposed to the fraudulent activity.
  6. That hypothetical scenario would have depended on many factors: (i) some within the Customer’s control (i.e. what would the Customer have done?) and (ii) others which would not have been within the Customer’s control, but rather would have depended on the conduct of third parties. Examples of the latter given by Sir Ross Cranston included questions such as:
    1. Whether a Hypothetical Reasonable Bank would, if properly and fairly advised about the Company’s position and prospects, have continued funding the Company and, if so, upon what terms?
    2. Would a party other than the Bank (for example, another potential investor or finance provider) have provided funding and upon what terms?
    3. Could arrangements have been made with a landlord of premises occupied by the business to help it through a difficult period?
    4. Could arrangements have been made with suppliers and end customers that might have helped the Company?
  7. Our job will be to consider matters such as these. We will try to determine whether the Customer would have had a better outcome financially had the Company and/or its directors been honestly, properly and reasonably guided through the Company’s difficulties (if there were genuine difficulties) during its time in the IAR. Following Sir Ross’ recommendations, we will decide whether it is more probable than not that the Customer would have acted in a particular way in the absence of the fraud - in other words, by reference to the “balance of probabilities”.
  8. By contrast, where we have to assess what a third party or third parties would or could have done for the Customer and/or the Customer’s business in the Non-Fraudulent Scenario, we will do so on the basis of (a) the “chances” of those third party interventions occurring and (b) a better financial outcome resulting for the Customer. If we can conclude that a better financial outcome was not merely speculative, but was a real possibility, we will try to put a value on the lost opportunity (or lost chance) of achieving that outcome.
  9. We will look at each case on its own particular facts. The value of the lost chance referred to in paragraph 16 may be calculated by applying a percentage (reflecting the overall estimated chance of achieving the better financial outcome) to the amount of that better financial outcome (assessed by taking a balanced view of what may have been achieved). We explain this further in our Explanatory Notes and we give an example of how we will go about our calculations in our separate guidance note ‘Our Assessment Methodology’.
  10. As we have said, we will make no assumption that a Company was in financial difficulties merely because it was put into the IAR. However, our inquiries may lead us to the view that a particular Company was in enough financial difficulty for it to have been properly placed in the IAR and possibly that the only sensible conclusion is that there was no realistic prospect of its returning to financial health. As The Cranston Review highlighted, even in that situation it does not necessarily mean that a Customer has suffered no D & C losses. Sir Ross put it this way:

    “If the only possible counterfactual were immediate administration (rather than any chance to resurrect the company having been lost), the correct assessment of the individual’s loss would involve an enquiry into what alternative earnings the individual would have made, in the absence of the fraudsters’ actions (e.g. through employment by another company). Any earnings deriving from the IAR fraud (i.e. salary during the continued life of the company) would then fall to be set off against any such counter-factual income. But the simple fact that the individual continued to receive income from the company as a result of (or despite) the IAR fraud does not mean that they have net benefitted from it. The enquiry must engage with the non-fraudulent counterfactual, including alternative income streams.”
  11. It follows that we will consider these kinds of D & C losses even where we must conclude that a particular Company had no long-term future. We say more about this in our separate guidance note ‘Our Assessment Methodology’.
  12. We emphasise also that in our inquisitorial process it will not be necessary for the Customer to “prove” to us the viability and likelihood of a particular counterfactual Non-Fraudulent Scenario. It will be our job to evaluate the information the Customer wishes us to consider and make an assessment about that scenario.

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Our approach to the information we obtain

  1. Our approach throughout the Re-Review process will be inquisitorial. Although we will take a more generous view than a court would necessarily take of the information we receive, our conclusions will still be evidence-based.
  2. Since our process will be non-legalistic it follows that the strict rules of evidence observed in a legal process will not apply. We will, of course, be guided to some extent by the way information would be evaluated by a court, but only in a very broad way.
  3. As with all aspects of our fact-finding exercise, we will be able to draw inferences (common sense conclusions) from the information and documentation we have (and sometimes from the fact that, for example, a document we might have expected to find cannot be found). We will ensure Customers have the opportunity to provide explanations in their own words to provide context to the materials available.
  4. One principle applied in the Courts is that where uncertainties exist about what a victim of some wrongdoing by another party would have done if the wrongdoing had not occurred, reasonable assumptions in favour of the victim, erring on the side of generosity, will be made if the wrongdoing was the cause of those uncertainties. That general principle is one which we will apply in our consideration of a Customer’s case if it is applicable.
  5. As we have said in the Explanatory Notes, we recognise that care has to be taken when interpreting documents that may have been created by the fraudsters or those acting under their direction or influence (including, for example, a Customer acting on the instructions of one of the fraudsters or members of their team). Equally, the fact that documents that might normally be expected to be found are missing may not be as significant as in other contexts. The documents may, for example, have been destroyed or deliberately not created as a way of the fraudsters covering their tracks.
  6. Contemporaneous documents (those created at or about the time of material events) are often regarded as very important in deciding what actually happened in the past. We recognise the relevance of that consideration, but equally we appreciate that the availability of supporting documents may be more limited in circumstances where the events occurred many years ago and where relevant contemporaneous documents may not be in the hands of a Customer.
  7. We will look at all reasonable sources of information relevant to a Customer’s case to build as clear a picture as possible of the history and the reasons or motivations for the events that occurred. As described in our Scope and Methodology Statement, we will search for additional documentary material where it is believed to exist if alerted to it by a Customer. We will conduct focused and proportionate searches of the materials held by the Bank to try to identify particular documents where sufficiently narrow search parameters can be provided. We may have to consider claims for “legal professional privilege” or “confidentiality” (which are legal reasons why documents may not be disclosed, as explained in our Explanatory Notes) where they are raised, but we will explain this and any steps we have taken to avoid the problem if these issues arise.
  8. We will also consider information supplied by other Customers connected with the same Company or connected companies where there is agreement between Customers to this effect. This may help to support a Customer’s recollection of what happened, or their belief about what would have happened, had it not been for the fraudulent activity. It will also help us where those now representing a Company in the Re-Review were not involved in running it at the time of the IAR Fraud.
  9. The important principle that we propose to adopt is that we will look at all the information, both documentary and otherwise, in the round and we will consider the weight of each piece of information in the context of the whole picture, not simply in isolation.
  10. As you will see, we have tried to express in non-legalistic language what Sir Ross Cranston said in the report called ‘Cranston Re-Review Panel Recommendations’. He mentioned certain specific matters relating to the evaluation of the “evidence” that we record here for completeness. He said that -
    1. Customer submissions should be given due evidential weight, including the corroborative value of submissions of different individuals, where they relate to the same business.
    2. It would not be appropriate for the panel to reject submissions solely because they do not accord with the documentary record. “Where they are not expressly underpinned by the documentary record, this means that the assessment must consider the circumstantial evidence, other witness evidence, commercial common sense, the acknowledgment that fraudsters will not deliberately record their fraudulent conduct, and any other relevant matters.”
    3. Allowance should be made for any incompleteness of the file build (this refers to the Customer Review File and for the potential unreliability of the documentary record as a result of the fraud).
    4. A sensible approach must be applied to what it is fair to expect Customers to have produced by way of evidence, in particular when hypothetical non-fraudulent counterfactual scenarios are in question such as contentions of loss of earnings and alternative opportunities. A contention should not be dismissed on the grounds that it is bare assertion without exploring the matter further with the Customer.

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