In a major development in swaps litigation, an explosive judgement issued on Friday 13th November by a English High Court judge has held that there is “ample support for an inference of fraud and dishonesty at the highest level of RBS”.

Cat MacLean, partner & solicitor advocate and head of Dispute Resolution at MBM Commercial LLP looks at the detail of Property Alliance Group PLC v RBS, and discusses its implications.

The decision issued by Mr Justice Birss on Friday in the Chancery Division of the High Court in Property Alliance Group PLC v RBS, will be sending shock waves through the upper echelons of RBS management, and causing jubilation amongst those sold RBS swaps using GBP Libor as a reference rate.

PAG had entered into 4 swaps between October 2004 and April 2008, for a total of £60 million, against total underlying borrowing of around £71 million. When PAG terminated their swaps in June 2011, they were required to pay RBS breakage costs of about £8 million, and subsequently raised proceedings against RBS in September 2013, contending that various misrepresentations were made by RBS in the course of selling the swaps which entitled them to damages which included the sums paid under the swaps (c £5 million) together with the breakage costs of c £8 million.

One of the important aspects of the case is an allegation by PAG that misrepresentations were made by RBS in connection with their conduct in setting LIBOR and the nature of LIBOR.

As many will be aware, LIBOR is the rate at which banks are able to borrow funds from one another, and is set by banks making daily submissions on rates to the British Bankers Association. PAG allege that RBS made a number of misrepresentations including the fact that RBS made false or misleading LIBOR submissions to the BBA, and had engaged in attempting the manipulate LIBOR such that it represented a different rate from that defined by the BBA.

RBS defended this aspect of the case on the basis that there have been no regulatory findings of misconduct on the part of RBS relating to GBP LIBOR, which was the currency of PAG’s swaps: RBS pointed out that the only misconduct in respect of which they have been found guilty relate to JPY and CHF LIBOR, which had nothing to do with PAG.

The case had followed a process of disclosure including disclosure relating to LIBOR. After disclosure was completed, PAG applied to the court to amend its Particulars of Claim, and it was this application which came before Mr Justice Birss. The proposed amendments covered a number of issues, but in particular alleged that the analysis of the RBS disclosure showed that the LIBOR related misconduct did involve GBP and USD as well as CHF and JPY, and therefore, as RBS must have known all along, the misconduct was not confined to the matters admitted by RBS. PAG also contended that it could be seen from the disclosure documents that RBS staff at the highest level, including members of the group board of directors, were aware of serious problems with LIBOR in the period from August 2007 until well into 2008. Finally, PAG sought to introduce a plea that RBS made the LIBOR representations fraudulently, in that RBS knew that members of its workforce were proposing to potential customers that they enter into financial transactions containing obligations measured by reference to LIBOR, and that they also knew that RBS staff were making false or misleading LIBOR submissions to the BBA.

As Mr Justice Birss pointed out, allegations of fraud are the subject of special scrutiny by the courts. Any such allegations should be accompanied by “full particulars”, and there must be credible material to support them. In essence, assertions of fraud and dishonesty are easy to make but difficult to prove.

Nevertheless, despite the high test involved, PAG rose to the challenge, and set out detailed information on which their allegations were based. In particular, they listed at least 10 individuals whom they assert had the relevant knowledge: these include Johnny Cameron, then Chairman of Global Banking and Markets, and Fred Goodwin himself. Distinct and detailed allegations concerning all 10 individuals were listed by PAG in a disclosure schedule.

PAG went on to assert that on the basis of the documentation it had seen, RBS’ actual misconduct in relation to LIBOR extended materially beyond that revealed by regulatory findings, and that the documents show an approach and attitude within RBS to the manipulation of LIBOR that goes well beyond isolated instances of wrongdoing and amounts to an ongoing regime or environment within RBS in which misconduct relating to LIBOR benchmarks was practised and condoned from at least August 2007 until well into 2011.

In considering whether or not to allow the proposed amendment, the judge commented that the interrelationship between actual or attempted manipulation of LIBOR and selling swaps is significant. An interest rate swap fixed to a LIBOR benchmark swaps a fixed rate for a floating benchmark rate. A swap contract with a panel bank making submissions on LIBOR rate to the BBA therefore creates a situation in which the bank selling such a swap could, if it was prepared to make wholly improper submissions for the fixing date, try to move the relevant benchmark to suits its derivative position. PAG assert that this is exactly what RBS was attempting to do and in fact did do. PAG make the point that a party offered a swap benchmarked to a LIBOR rate would be unlikely to countenance entering into such an arrangement with a bank if it knew that the very same bank was attempting to manipulate those kids of benchmarks for its own ends, whether successfully or not.. PAG also contend that in the period from August 2007 there is clear evidence that the inter-bank lending market was not functioning and evidence that this was appreciated at the highest level in the bank.

In reaching the view that PAG should be allowed to amend its claim, the judge made a number of comments that will be deeply troubling to the already beleaguered bank. He made the point that he had to bear in mind the seriousness of these contentions, both in that they are allegations of fraud and dishonesty and also in that they are levelled against the most senior executives of a major bank. Nevertheless, with this in mind, he said: “Taken overall PAG’s case is plainly properly arguable. In my judgement the material relied on by PAG…provides ample prima facie support for an inference of fraud and dishonesty at the highest level of RBS. The materials show that, arguably, members of the RBS board were aware that LIBOR was “broken” during a period in which RBS was selling swaps to PAG referable to LIBOR. The ten individuals named in the Amended Particulars of Claim are clearly closely involved in the material relied on….there is evidence from which a properly arguable inference can be drawn that knowledge of serious problems with LIBOR existed at a senior level inside the bank. The issues raised in this action do not only concern the RBS trading floor, the concern top management with overall responsibility for LIBOR and for swaps. Based on the material relied on by PAG, the bank needs to account for the activities of its senior staff as well as the actions on the trading floor.”

In light of the damning comments made about senior RBS staff and their knowledge of LIBOR fixing, Mr Justice Birss went on to order RBS to disclose a wide range of documents from “custodians” at a very senior level, including Johnny Cameron, Fred Goodwin, and 7 others. RBS objected to the order on the grounds that this was an impossible task: the documents in this class along amount to 630,000 and 8 million pages. To review this class of documentation would take 6 months to complete, and would jeopardise the trial scheduled for early summer 2016. Accepting that that could be a likely consequence, Mr Justice Birss nevertheless ordered RBS to produce the entire set of documents to PAG.

The consequences of the PAG judgement, which was handed down on Friday 13th November, will be far-reaching for many swaps customers. PAG is somewhat unusual amongst aggrieved RBS customers in relation to its size and firepower: it is a major property development company with a portfolio worth about £200 million and despite the cost to the company of the swap, PAG was able to pay the breakage charges in order to extricate itself from the swaps. It was then able to field sufficient fire-power to litigate in the High Court, and to undertake the kind of detailed forensic examination of the disclosure documents necessary to be able to make a specific and focussed argument that RBS was guilty at the highest level of fraudulent activity at the highest level of RBS. Many smaller RBS customers will have been similarly affected by RBS’ policy towards GBP LIBOR fixing, where they had been sold swaps based on GBP LIBOR, but may not have had the resource to pursue RBS in the determined manner in which PAG has pursued them. The PAG judgement ought to provide hope to many smaller customers who find themselves in a similar position to PAG, in having been “sold” GBP LIBOR swaps.

The judgement could also prove encouraging to those who were missold LIBOR swaps but who did not raise proceedings in time: in England, where ordinarily there are 6 years in which to make a claim, if there has been fraud, time does not run until after its discovery, or until the point when such fraud could with reasonable diligence have been discovered by the claimant. In Scotland, where a claimant has 5 years from the point at which the wrong and the loss combine, the relevant provisions are similar: if there has been fraud on the part of the other party which can be said to have induced the claimant into refraining from making a relevant claim, then the running of prescription is suspended – that is to say, time does not begin to run at all until the fraud comes to light.

Given the elaborate lengths RBS to which have gone to conceal their fraudulent activity in relation to LIBOR, it would have been very difficult for ordinary customers, without the resource available to PAG, to uncover it. On the basis of Mr Justice Birss’ comments, and assuming that PAG ultimately succeed, there would then be a clear argument open to those whose swaps were benchmarked to LIBOR that the time in which to raise proceedings in relation to those swaps should only start to run from the date of the PAG judgement.”