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Financial Services Authority

My Lords, I am grateful for this opportunity to seek clarification of the preconditions that might justify FSA scrutiny and review, particularly following the experiences of my earlier career. On three occasions, I have placed before the FSA details of cases that seemed to me to be serious breaches of market regulatory practice and control, and on each occasion I have been refused. On two of those occasions, I have proceeded to take independent action; usually, I hasten to add, with the support of the noble Lord, Lord Dear, who now sits in your Lordships’ House and was then the head of the West Midlands Police. On each occasion, I secured custodial sentences for the company chairmen whom I was replacing; one for six years and one for two years. The third case is even more concerning, as it represented a serious security hazard for the country. It unearthed a practice of the IRA, which targeted British listed public companies and used them to raise fictitious invoices that could be satisfied by the proceeds of criminal activity by the IRA, thus ramping up the profits of these companies, and with them their stock exchange values, for the benefit of the friends and allies of the IRA, who had been given prior warning to invest in those companies. Each of those three companies collapsed completely, with an aggregate market value of £2 billion. Unlike at the present time, there was no recession, but it was serious enough in its own terms. I had to spend £10 million of my shareholders’ funds to pursue the first two cases. In each case, that was an unreasonable burden for the official investigating authorities to pass back to the shareholders. There should be some better willingness to pursue investigation on such cases. I got it back, because I managed to sue my auditors for £24 million—but I was lucky. As regards security, their attitude was that it was a financial issue and not one that they could cope with. So we now know at least that James Bond, whatever he is licensed for, is not licensed as an auditor. The FSA’s response was that it was a security issue, so I was caught completely between two stools, and nobody wanted to know. As things stand from that point of view, I regret very bitterly the old days of the DTI. In the inimitable words of my noble friend Lady Gardner of Parkes, with her Australian twang, "you need a go-to person". The DTI used to have a room full of go-to people to whom you could apply for advice and guidance on such issues. We do not have anything like that now; please give us back a go-to room. In each of these cases, a huge amount of investors’ money was lost and there was massive, deliberate manipulation of the London stock market to the detriment of investors. Apart from those cases that I have noted, in both of which I acted as chairman, I have no interest to declare. I confirm that I have no participation in the past or present affairs of the principal concern which I wish to place before your Lordships tonight. My immediate and present concern is with another case in which the FSA has declined to become involved, which raises for me the question that if it does not become involved in such cases what is it for? The issue here is this: Merrill Lynch and its subsidiaries organised a bid for the equity of a company named Greycoat PLC, and that bid was successful. Merrill Lynch then proceeded to suck out the equity from the company without setting aside sufficient cash to repay the company’s bonds, which ranked in priority to the equity. In order to get round the asset covenants in the bond conditions, intercompany loans were put in the Greycoat balance sheet at full value when, in fact, the money had been paid up to Merrill Lynch to repay part of the purchase loans. As the intercompany loan could, thus, never be repaid this treatment was, at best, questionable. When the bonds matured there were, as a result of the Merrill Lynch scheme, insufficient assets to repay more than part of the bonds’ face value, in spite of the fact that such bonds had been covered over five times by real assets before the Merrill Lynch takeover. The liquidator, on the instructions of the liquidation committee, commenced legal action against the directors but, due to their lack of resources, these together with the remaining assets in the company and allowing for several years of unpaid interest since the default still leave today a loss to bondholders in excess of £35 million when the interest is included. Where is that money today? One must assume that it is in the hands of Merrill Lynch. Many of the bonds are held by tens of thousands of smallholders through bond funds, and they will suffer loss as well as the larger holders. As a result, the only way in which compensation can be obtained from Merrill Lynch is through action by the FSA against Merrill Lynch on the grounds of, first, market abuse—leaving the quoted bonds outstanding when bidding for the equity and not putting cash aside for the redemption of the bonds before removing the equity; and, secondly, the FSA’s duty to protect investors, particular small ones, against such manipulation. I am informed that when MEPC was acquired in a similar manner to Greycoat, the purchasers ensured that funds were set aside to repay the bonds in full, before the purchasers took out cash. The FSA, which was initially sympathetic when the case was first presented to it, became progressively less interested and finally stopped answering letters and phone calls. The FSA’s remit in relation to Greycoat must surely relate to the period when it had listed securities and covered only the company’s compliance with listing rules and whether there had been market abuse in relation to the securities. As I have said previously, such matters, whether illegal or not, fall within the FSA remit as they were in effect a device to suck resources from Greycoat via the equity in priority to repayment of the bonds which ranked ahead. Surely, that is market and regulatory abuse in any language. A responsible purchaser of Greycoat would have purchased the bonds at the same time as the equity or ensured that there were sufficient funds left in the company to meet repayment obligations. At the time of the purchase by Merrill Lynch companies, the Greycoat bonds were covered five times by real property assets, yet the holders received nothing. Sir Callum McCarthy, then chairman of the FSA, wrote to me on 20 December 2007 defending the FSA’s position on the grounds that Greycoat had not been a listed company at the time of the alleged offence. I believe his letter contained a crucial error, in that the Greycoat bonds in question were still quoted until 1 October 2003, and payments up to Merrill Lynch companies, which may well have been illegal, were made from September 1999 to May 2003, so they fall directly under the FSA by its own definition. That was during a period when the present FSA’s chairman, the noble Lord, Lord Turner of Ecchinswell, was vice-chairman of Merrill Lynch Europe. That does not cause me any concern, and I am sure that it will not concern the noble Lord, Lord Turner, because we have a reputation in this country of very skilled and knowledgeable people rotating between senior positions, and as such they take with them their integrity, commitment and experience. I know that the noble Lord, in his avowed intention to review the terms of the FSA at this moment, would not be in any way influenced by his past association and would ring-fence himself from any investigation that took place. Callum McCarthy replied to me further on 12 March 2008, stating that the FSA’s remit in relation to Greycoat is limited to its compliance with the listing rules and whether market abuse has been committed in relation to the securities. I can see no reason to doubt that the purchase of the equity in the market, and then the denuding of the company of its assets to the detriment of the quoted bonds left outstanding, is an appalling case of market abuse judged by Callum McCarthy’s own criteria, in that Greycoat remained a listed vehicle throughout the key period. This issue is not less outrageous for being a fairly simple matter. Legally, the bondholders ranked ahead of the equity and were protected by the assets. However, over the period, those assets changed from being tangible properties to being an intercompany loan, given a parent that itself had no assets. Subsequently, after a majority of the assets had been sucked out of the company, Greycoat defaulted on its bonds. The intercompany loans proved worthless, because the parent had used those funds to repay the initial loan to Merrill Lynch together with a substantial profit, which is presumably where the funds remain today. By Callum McCarthy’s own definition, I submit that the FSA rules were severely breached by Merrill Lynch as, I also contend, was the case in examples I quoted earlier, which were refused. I now call on Her Majesty's Government to give clear guidance as to the due process and preconditions required to trigger a proper FSA scrutiny and review in such cases. It could hardly look for a better case on which to start than the one of Merrill Lynch and Greycoat. Given the present state of our national economy, it is now time to seek a clear signal that can be shown to the market in general as to what an FSA is for and what it will do to regulate matters in future. I suggest that a good starting point would be to demonstrate this by initiating the long-overdue scrutiny of the Greycoat-Merrill Lynch bondholder scandal, and initiating the required legal process to obtain compensation for the bondholders from the Merrill Lynch companies. This is the first time that I have ever introduced a quick, short debate. I had assumed that I had a minute at the end in which to wind up. However, as I see I do not, I shall give my last minute now, if I may. I thank all noble Lords who intend to speak in this debate this evening. I hope that we will now receive prompt consideration by Her Majesty's Government of the outstanding issues regarding clarification of FSA reference terms and particularly moving for the FSA to initiate the appropriate legal process for the Greycoat-Merrill Lynch case.