Newspapers made great play on the rewriting of history by Eric Daniels, former Chief Executive of Lloyds, last week, when he appeared to backtrack on his statement that the takeover of HBOS had been done with inadequate due diligence.
Daniels told the Parliamentary banking commission: “We did a very thorough job in terms of our diligence. We understood what we thought were the strengths and weaknesses of HBOS at the time. We also thought that, despite this being a difficult deal, it would serve the shareholders well over time.”
How to reconcile that with Daniels’ statement to the Treasury Select Committee on 11 February 2009 that, given more time, “we probably would have put in somewhere around three to five times as much time as we put in.”
In fact Daniels has been consistent and has always chosen his words carefully. He also said in 2009: “As a publicly traded company, there is a limited amount of diligence that can be done in an acquisition. That said, we put approximately 5,000 man days into the diligence effort. A great part of that was done by people that we had hired as experts, accounting firms, investment banks and so on, in an effort to value the portfolios properly.”
Why does he take such care in what he says? Daniels was candid about the reason last week. Asked by MP John Thurso: “Did the sheer scale of the bad lending in HBOS come as a shock to you?” Daniels replied: “I have to be a little bit careful, because there are legal cases pending.”
Commission chair Andrew Tyrie tried to tempt him further: “You are subject to parliamentary privilege here so you can spill all the beans.” But Daniels wasn’t to be drawn.
“Would that parliamentary privilege, as robust as it is, protect me against class-action lawsuits in the US? I am not sure you would be willing to make that representation, as it might be a mis-sell, Mr Tyrie. I do want to be a little careful, because there are lawsuits pending.”
There is indeed an action underway, led by the tireless Albert A. Ross, who was born in Scotland, but now lives in St. Tammany Parish, Louisiana. He is a retired sailor and relied upon the dividend from Lloyds as part of his pension. He claims he lost more than $300,000 on his investment as a result of misleading statements by Lloyds and its then chief executive and chairman Daniels and Sir Victor Blank.
Ross has been joined in the suit by other US Lloyds shareholders in a so-called “class action,” a mechanism which enables ordinary people to take on large corporations in the courts. The same facility does not exist here and is part of the reason that the UK small shareholder group Lloyds Action Now has so far failed to get a legal action off the ground.
Last year Lloyds applied to have the Ross case dismissed, but failed. Daniels and Blank are almost certainly indemnified by Lloyds or have insurance cover, so do not stand to lose, but if judgement is eventually given against them the bank could face substantial compensation claims in the US.
PS: I was myself a beneficiary of a US class action some years ago. My oldest son ran out of money in New York during his gap year and – this being pre-electronic banking – I had to wire cash to him through Western Union, which had a virtual monopoly on immediate cash transfers. The fees were extortionate and I wasn’t the only one to think so. Sometime later the company lost a class action and I got a daunting-looking legal document from a New York court. I and all other customers of Western Union between certain dates had been joined (unbeknownst to us) in the action.
It was a pyrrhic victory for me. My compensation was in the form of a discount on my next service from the company, but I had already vowed never to use them again.