The Incredible Shrinking HBOS Fraud

Yves here. Readers are strongly encouraged to take the trouble to read the Hansard passages linked to below, in full, to get a clearer idea of fraud allegations that were made, in 2009, under UK parliamentary privilege. The allegations contained in Hansard are, with a few honourable exceptions, unreported in the UK press, much of which is subject to UK libel laws and English contempt laws. The UK press has apparently chosen silence, by and large, rather than the complexity, risk and expense of tangling with untested legal defences, rich men’s libel lawyers, and the Crown Prosecution service. Of course, in the paper and broadcast media, you can’t actually link to Hansard passages, either…perhaps that’s the problem.

By Richard Smith

Charges have been made at last in the long running investigation into large-scale fraud at HBOS, a roughly Lehman-sized commercial bank in the UK. HBOS was so bust, in late 2008, that its would-be rescuer, Lloyds Bank, which bought HBOS, also needed rescuing, by the UK taxpayer.

The local press coverage of the fraud charges was intriguingly diverse in quality, depth and sourcing, but seemed slow to draw out the implications, and in some cases, got them flat wrong.

So a gold star must go to the well-informed Harry Wilson at the Daily Telegraph, who quietly points out the most striking feature of the charges, and introduces the HBOS Eight, as I shall call the defendants:

Two former senior managers at HBOS were among eight people charged on Tuesday night in connection with an alleged £35m fraud.

The allegations involved “kick-backs” being paid to bank managers to hand lucrative administration contracts to a small group of external consultants.

Lynden Scourfield, 50, and Mark Dobson, 52, formerly senior managers in the Reading and London offices of HBOS, were charged by police with conspiracy to corrupt, following a two-year investigation codenamed ‘Operation Hornet’.

As well as the two bankers, consultants David Mills and Michael Bancroft were charged along with their wives, Alison Mills and Beverley Bancroft.

Mr Scourfield’s wife, Jacqueline Scourfield, was also charged, as was John Cartwright, who was described as an “associate” of Mr Mills and Mr Bancroft.

The alleged fraud is one of the largest uncovered in the banking industry since the financial crisis and sources have suggested the true scale of the alleged conspiracy could run into hundreds of millions and even billions of pounds. Last year, Peter Cummings, the former head of wholesale banking at HBOS, was banned for life from working in the City and fined £500,000 following a report by the Financial Services Authority into the lender’s collapse.

Mr Cummings has been widely held to be responsible for the risky lending that forced HBOS to request an emergency multi-billion pounds bailout in late 2008. The lender was subsequently merged with Lloyds TSB to create Lloyds Banking Group.

Mr Cummings has not been connected in any way with the alleged fraud at HBOS Reading.

So there’s quite a discrepancy, then, between what the ‘sources’ think about the size of the fraud (“billions”), and the scope of the charges (£35 million). How did that happen? The Telegraph’s way of pointing this out is intriguingly muted. What else do they know?

The BBC is even more indirect:

For years there were allegations – which were reported under privilege in the House of Commons as long ago as June 2009 – that a banker at HBOS’s so-called high risk lending unit in Reading was in cahoots with a consultancy called Quayside, to strip assets from financially troubled customers of the bank.

After years of pressure on HBOS’s board and on regulators from customers who lost millions and felt shoddily treated, the Financial Services Authority finally investigated and then passed the file to Thames Valley police.

Today’s charges include conspiracy to corrupt, fraudulent trading and money laundering.

Referring to the Beeb’s mid-2009 archives, one finds this story:

A BBC News investigation has uncovered alleged lending irregularities at HBOS, the bank now owned by Lloyds.

File on 4 has heard from firms that claim they were ruined by the actions of a senior executive, and management consultants recommended by the bank.

The bank and management consultants Quayside Corporate Services have denied any wrongdoing.

The loans from HBOS’s “high risk” unit between 2002 and 2007 are said to have led to losses at the bank of £250m.

The unit was based in Reading, Berkshire.

File on 4 heard from businesses alleging that a bank executive, Lynden Scourfield, required them to employ consultants Quayside Corporate Services as a condition for getting a loan.

Nikki and Paul Turner, whose music production and publishing business needed loan finance from HBOS, claimed the business suffered as a result of the involvement with Lynden Scourfield and Quayside and are currently facing eviction from their home by the bank. Their account of events is strongly disputed by the bank and Quayside.

The Turners’ MP, James Paice, told File on 4 that HBOS’s new owners Lloyds were not taking seriously their complaints and those of other businesses.

A further intriguing observation: the BBC’s not really hammering the point that the charges (conspiracy to corrupt, fraudulent trading, and money laundering) have at best a tangential connection with the original complaints, which came from owners of small companies who believed that their businesses had been deliberately wrecked, by predatory lending, by HBOS itself. In fact, it’s not at all clear who the police believe to be the victim of the alleged “conspiracy to corrupt, fraudulent trading, and money laundering”; if that matters (in a legal sense; obviously it does matter to the people whose businesses and lives have been ruined). It’s almost as if, in the three years since the Thames Valley Police started investigating, the role of the victim has come to be played by the (originally alleged) perpetrator, HBOS. How did that happen?

Whatever, just three of the 200 companies believed to have been targeted by this fraud (see Hansard, 2nd June 2009, here (2/3rds of the way down the page) and here) feature in any way in the final set of charges raised against the HBOS Eight.

Also striking: the BBC’s latest coverage has nothing to say about the difference between the £35 million in fraud charges and the billions that may have gone missing. Back in 2009, £275 million lent by HBOS to 18 companies had gone for a walk, by the reckoning of a forensic accountant engaged by the BBC. But that’s not the whole story: there are the “billions” alleged by the Telegraph’s sources, and also implied by the admittedly very rough estimate that, if 18 debtor companies of various sizes investigated by the BBC can lose £275 million, the 200 victim companies estimated in Hansard can lose £3Billion. Why does this discrepancy between the allegations and the ultimate fraud charges not rate more of a mention from the BBC? Has someone nobbled the BBC, and muted the Telegraph? Who?

One obvious candidate is the Thames Valley Police, of course. Fraud prosecutions in the UK are notoriously prone to collapse even before reaching court, and prejudicial media coverage is often highlighted (by the defendants’ attorneys and by the fraud investigators, at any rate) as a potential cause of miscarriages of justice or failed prosecutions. Journalists may be threatened with proceedings for contempt of court. But if, as seems to be the case, the police have abandoned any attempt to prosecute the much larger fraud alleged by numerous unhappy HBOS customers, it’s hard to see how covering those wider allegations could be prejudicial, any more.

So perhaps it’s not the police.

A lackadaiscal report by Laura Kuenssberg of ITV News does show how the small size of the fraud that is being prosecuted can induce an underprepared journalist to misread the story:

The charges are connected to business loans that were made to a value of more than £35million, and are thought to relate back to well before the financial crisis.

The investigation, Operation Hornet, unlike the Libor scandal or PPI, does not suggest long-term, widespread bad behaviour, yet the case which will start in court in the next few weeks, is another blow to the banking industry’s reputation.

Evidently Laura is unfamiliar with the background, and didn’t have time, or couldn’t be bothered, to read it up; or perhaps we simply have a calibration of where Laura thinks long-term widespread bad behaviour starts: “long term” must mean somewhere north of 7 years (the frauds ran from 2002-2008 at least) and “widespread” must mean more than 200 companies, and involve more than billions of pounds.

Who benefits from the kind of misreading that is exemplified by Laura’s report? One must always remember that the UK Government is a 40%+ shareholder in Lloyds Banking Group, not-so-proud owner of HBOS. With an eye on the value of its stake, the Government would most likely want all this fraud talk to go away.

But there is also quite a list of other folk who might have difficult questions to answer if the HBOS fraud was, as indicated, much, much larger than the £35Mn that Thames Valley Police think they can safely prosecute. One determined obfuscator has been the FSA, the UK’s financial services regulator; the FSA report into HBOS’s risk controls gives you a flavour of how keen they are to lay bare HBOS’s inner workings. So one might start with some FSA luminaries:

  • Hector Sants, who joined the FSA in 2004, and was until recently its CEO, who took two years to get around to passing on the fraud allegations, initially made in 2007, to the police;
  • Sir James Crosby, Chairman of HBOS 2001-2006, covering the period when the alleged frauds were at their height, who became Deputy Chairman of the FSA, also in 2004.

Or one might want to interrogate former or current members of the board of the various other companies involved; for instance, the board of Lloyds Banking Group, whose obfuscatory contortions are documented here. Or most saliently, of course, members of the board of HBOS at the time of the frauds:

  • Sir James Crosby again, whose nonexistent credit risk control is documented here.
  • Lord Stevenson of Coddenham, who was chairman of HBOS throughout its calamitous seven year life. In a 10 January 2008 letter to the FSA, eight month before the bank’s implosion, the Teflon Peer claimed to be “legally responsible for the business”. But somehow not responsible for its susceptibility to fraud, one supposes.
  • Peter Cummings, head of Corporate lending, and a veteran (Q1156) of the Corporate Recovery business that was allegedly perverted for profit, some years after Cummings ran it, by the HBOS Eight.

Here’s another oddity. One of the HBOS Eight, Lynden Scourfield, who was HBOS Corporate’s ‘Director of mid-market high-risk for southern England’, must have had a direct, or at most very short, reporting line to Peter Cummings, during the period of the alleged frauds. So Cummings’ involvement, if not criminal, was certainly close, if one pictures the organisation chart. We note, again, how Harry Wilson of the Daily Telegraph chose to express this last little fact:

Mr Cummings has not been connected in any way with the alleged fraud at HBOS Reading.

…and we wonder what made Mr Wilson go out of his way to write up that part of the story, like that. The organisational connection of Cummings to Scourfield is plain enough.

Someone’s showing their hand, but whose hand is it? Or, whose lawyer’s hand?

Perhaps time will tell. It had better. All of this: the media coverage, the investigation, the conduct of the various company boards and of the regulators, and maybe the CPS and the police too, looks decidedly warped.

Not warped, and undeterred by legal complications: the very tenacious Ian Fraser, who, in dozens and dozens of blog posts, has been digging into HBOS since 2008 (and before); proper journalism, that. All those posts: they make the media silence elsewhere even more striking, don’t they?

Meanwhile the real victims of the HBOS fraud, two hundred small business owners who were cheated, are still waiting for justice.

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  1. Aussie F

    The victims will be waiting for a long time for justice. The British establishmet has its own way of doing things, and the absence of a written constitution removes any impediment to deliberate inaction.

    The CPS can simply decide that it is not in the ‘public interest’ to prosecute, knowing that Parliament will not challenge the decision, and the obedient media will not raise any really embarassing questions. It’s a tight club, and the ‘old boys’ have some unwritten rules they all abide by – judges, bankers, policemen, politicians and respectable journalists.

    Those who doubt that this is the way the system works need only cast their minds back to 2006, when the Al Yamamah bribery investigation was halted by executive fiat. Tony Blair simply declared the investigation was not in the public interest and would be halted. With a casual wave of his hand Caeser dismissed the entire business. There was hardly a murmur from the political and intellectual class.

    Of course, there are occasional breaches of etiquette. Ernest Saunders was foolish enough to perepetrate a particularly vulgar series of offences and was actually jailed. However, he was released after a few months, diagnosed with a peculiar species of Alzheimers disease that miraculously vanished the moment he left prison!

  2. ambrit

    Mr Smith;
    The Hansard testimony is chilling, especially the bland boilerplate uttered by the Treasuries Mr Pearson.
    The entire business reminds me of Conan Doyles’ famous ‘Dog that did not bark in the night’ from the Sherlock Holmes story “Silver Blaze.” It was proven to have been an inside job then, and looks to be one such again. Are there provisions for ‘clawback’ in fraud cases in the UK?

  3. allcoppedout

    I doubt we have the cops and legal services to deal with stuff like this in the UK. Commercial fraud was a backwater in my day. We got the odd small fish – bank managers who bet investors’ money on horses, spent on mistresses and the odd Ponzi (Barlow Clowes was an example). We were never allowed to get after Bill Black’s crimogenic culture. There are legends in police culture about ‘pushing bodies across rivers’ to put the costs of murder enquiries onto an adjoining force – and even hauling them back when it was realised we’d nicked the perpetrator (low cost enquiry with a wanted ‘result’). Back of a fag packet estimates of costs in fraud enquiries led to most work being ‘cuffed’ in my time and I was reduced to ‘fitting up’ perpetrators with simpler criminal offences (which I hasten to say they had committed).
    There’s an interesting quote in a CPS review into the sex abuser Jimmy Saville in which he threatens detectives with his LLD (falsely claiming it not to be honorary) and high-powered lawyers – he was a feeble-minded cretin by then and never part of an establishment as powerful as the banksters. The story of our cops and CPS from antisocial behaviour to fraud is contemptible – and every cop will tell you the first decisions being made in any enquiry is a business decision. Even going after low-life drug businesses involves a priority of getting evidence that will lead to a guilty plea in order to save the £40K costs of a not guilty plea (with a likely outcome of 1 – 3 year sentences).

    It’s likely to be worse over here than even Yves and I might think. An enquiry into Saville (after he died) has thrown up more than 400 likely offences and more than 30 rapes – this is what the ‘uncle of the country’ was up to. A CPS review of just a few cases reveals they should have been prosecuted and the legal reasons given not to be hapless – but says nothing on how to get on with investigating and prosecuting properly in the interests of victims. The silence on criminal investigation into the banks is deafening. I’ve written a novel about it – the only outcome so far from the process is realising even our literature has gone missing in this area. My conclusion is we need to catch the banksters in some grim paedophile ring and link on to their financial crimes in order to get the penny to drop.
    Bill Black and the new untouchables need to ride out – though I’m sure readers here will know Eliot Ness wrote his own legend!

  4. allcoppedout

    We have a ‘Proceeds of Crime Act’ over here and a long list of crooks (mostly petty) owning money to Court in respect of same. Most of our law works rather badly and access to justice here ranks badly against most of Europe – our lawyers are too expensive, courts old fashioned and slow.
    Our legal system serves the rich by excluding ordinary suit – lawyers’ fees in libel are 140 times the EU average. Much of the money we’d want to claw back is already offshore – and often the costs of even finding where it is are enough to prevent anyone bothering to get as far as the two-fingered response from Lichtenstein or increasingly Russia.

    1. ambrit

      Dear allcoppedout;
      Thanks for that tutorial. I know I’m slow but, what’s the two fingered response? The same as the doctor during the rectal exam? Keep writing, it’s good for you, and it sounds like you have a lot to impart.

    2. DSP

      Journalist Evan Whitton has written extensively on the immorality of the Anglo legal system and the tricks lawyers use to pervert justice.
      His website and one of his books can be found here <ahref=" Home.asp"
      Or,in case I bugger that up, Home.asp

        1. Procopius

          I suppose because of the missing space “ahref” is not an HTML token. It should have been “a href=…”

  5. gepay

    A Spanish proverb: the law is like a spider web, it catches the fly but the hawk goes free.
    This has been going on a long time but these days the scale is bigger and the criminal behavior more widespread.

    Which too big to fail bank got fined over 6 billion dollars for money laundering drug money and nobody went to jail?

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