Sue banker fat cats

By Neil Behrmann


March, 2009   Enough is enough. Time to take action. Sue the banker fat cats who are walking away with huge bonuses and pensions.

The press can shriek, Government ministers and politicians can bleat and frustrated employees, shareholders, pensioners and others can fume. That will help us all blow off steam. At worst, however, it will damage egos of bankers who are so greedy and thick skinned that psychiatrists may well diagnose them as sociopaths, to some degree. Instead find a solution that will hurt them where it hurts most ---- their pockets.

An inexpensive way to use the law

Use the law and take action against bank directors and their companies. Local and international shareholders, employees and pensioners can unite. They can join together as a body, either in a class action via the US courts or group litigation in the UK, Asia and elsewhere. Shrewd Lawyers acting on their behalf will rummage through the Companies Act and case precedents. It need not be expensive. Plaintiffs can hire lawyers on a “contingency fee” basis. The lawyers receive a percentage of the winnings but no fee if they lose. Litigants have to pay court costs and the defendants’ costs if they lose, but as part of a group action, they can insure against these potential expenses. Revenge will be sweet. Sued directors will fret and won’t sleep terribly well. If they settle or lose, their undeserved takings will shrink considerably.

Directors have a fiduciary duty to shareholders and employees

Damaged shareholders, employees and others can make several allegations against errant bank directors. The Companies Acts in the UK states that directors have a fiduciary duty to shareholders and employees. It is an all encompasing duty. They must exercise reasonable care, skill and diligence as company officers. Directors are entrusted with custody of the company's money and assets and must take care of them. Damaged plaintiffs can thus allege that directors did not carry out their fiduciary duties and that they were negligent.

Under the UK Fraud Act directors have a legal duty to disclose information. Failure to disclose may amount to a fraud. It is therefore essential that directors are aware of the circumstances when they have a duty to disclose to avoid liability by omission. Fraud would be more difficult to prove for damaged parties as they would have to prove beyond reasonable doubt that the directors were acting in bad faith with dishonest intentions. So company law where the company and directors can be sued, appears to be the best way forward.

Actions underway and about to take place

Take some examples of actions under the Companies Act. Jonathan Bloch, a shareholder of Lloyds Banking Group and Councillor of Harringey, a north London borough, is taking legal advice on a potential suit against chairman Sir Victor Blank, Eric Daniels chief executive and other board members. The allegations, amongst others are that they failed in their fiduciary duties as directors and were negligent by agreeing with the government to acquire stricken bank HBOS. At the time, shares of Lloyds a former staid, safe British bank paying a good dividend to pension funds and other shareholders, was trading around 300 pence. In the autumn of last year, Gordon Brown, British Premier, reportedly persuaded Sir Victor to instruct the Lloyds Board to acquire HBOS. Several shareholders warned that the deal would be as spectacular failure as HBOS had a huge mortgage loan book in an imploding UK property market. On the recommendation of the Board, major shareholders agreed. HBOS losses were worse than Board forecasts and are so huge that there are fears that the government, with already a sizeable stake, may nationalise the bank. Lloyds shares have sunk to 49 pence. Mr Daniels has admitted to the Commons Treasury committee that Lloyds committed 5,000 man hours of effort in assessing HBOS’ worth, but added that in normal circumstances the bank "would have put in three or five times more than we put in".

Royal Bank of Scotland is facing a US class action brought by Natalie Gordon, an individual investor. The suit alleges that when the bank announced a sale of up to $10 billion of American Depository Shares in June 2007, it failed to disclose the damage inflicted by its debt securities. The bank is also accused of allegedly failing to disclose poor internal controls, the damage of the ABN Amro purchase and other deteriorating assets. The legal filing in the US court for the Southern District of New York names Sir Tom McKillop, RBS's former chairman, and Sir Fred Goodwin, its former ex-chief executive, along with other directors and executives. A retired Scottish barrister, who lost money on his shares is also seeking to sue the bank via the small claims court.

Stricken legal community only too willing to take revenge

The public and press are furious that Sir Fred has negotiated an annual pension of around £700,000 ($990,000) at the age of fifty. He refuses to back down on the grounds that it is a contractual payment. If nothing can be done about that, the above case, shows that he still can be sued on other grounds.

There is considerable support within the legal community as members are also suffering from the banking mess. So top lawyers will only be too willing to get involved.

“Our system for regulating markets and for prosecuting market crime is completely broken,” contends Sir Ken Macdonald QC and former UK Director of Public Prosecutions and a member of Matrix Chambers. “If you mug someone in the street and you are caught, the chances are that you will go to prison. In recent years mugging someone out of their savings or their pension would probably earn you a yacht.”

A London barrister contends that there are more than sufficient avenues to take action against bank and other directors: “The question we should be asking is whether the banks under new management are pursuing civil financial claims against those responsible for the losses. If their level of culpability is as great as Sir Ken appears to believe, then there should be no difficulty in obtaining a judgment.”


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