“Equitable has finally had to face the obvious,” says Clare Canning, head of commercial litigation at Barlow Lyde & Gilbert, which is acting for the accountants in defence of the claim. “It’s no surprise to us given that from day one we said that the claim was rubbish.”
It is the action for some £1.3bn for ‘lost sale’ proceeds that has been jettisoned, which, Equitable claimed represented the value the business fell by as a result of E&Y’s failure to spot the company’s financial difficulties. The claim against the auditors for some £705m in damages for alleged negligence remains. “This is one of the worst examples ever seen of the disreputable tactic of making a hugely inflated claim, now admittedly hopeless, against a deep pocket in the hope of forcing a settlement out of fear of litigation risk,” says Canning.
By contrast, Equitable has been equally scathing of the last-minute withdrawal of five E&Y partners due to be defence witnesses. “The move is intended to avoid their work being publicly ridiculed in cross-examination,” says Equitable’s chairman (and former Macfarlanes senior partner) Vanni Treves. “E&Y must now recognise that their defence to this allegation is bleak, fruitless and doomed to failure and we call on them to admit negligence,” he adds.
E&Y insisted that the dropping of the claim did not weaken the overall claim value. The days after Equitable’s legal team was re-doing its sums last month, the Department of Trade and Industry published its plans to allow auditors to limit liability and negotiate the size of claims according to their blame.
So, what do the recent dramas in Equitable mean?
“The scope of the auditor’s liability, and how far it goes in terms of the losses claimed, has long been a theme running through a lot of the bigger audit cases,” notes Philip Hill, a partner at Clifford Chance. He advised Deloitte & Touche, which was reported as having to pay the liquidators of Barings Bank £1.5m in a settlement to a claim arising from alleged negligence in auditing the bank’s Singapore office, where maverick trader Nick Leeson was based. That figure was considerably less than the £131m that Barings had sought at the beginning of the trial over the issue of the auditor’s liability. Equitable watchers were not surprised at the recent dropping of the claim. Not least because the judge, Mr Justice Langley, had originally struck out allegations that E&Y was liable for losses suffered by Equitable as a result of the insurer’s failure to sell its business in 2003. However, in July that year the appeal judges reinstated it. They ruled that, while they had sympathy for E&Y’s complaint that the size of the claims represented an ‘unwarranted burden’ to have to bear, it was not for the court to cut down the claim.
“The allegation against E&Y was that, had they made the necessary provisions, then the directors should have sold Equitable Life earlier to raise capital,” explains Val Davies, a litigation partner at Norton Rose. “It now appears that the factual evidence given by the directors in the witness box is that they wouldn’t have done that.”
DLA Piper Rudnick Gray Cary litigation partner Matthew Saunders says that it was always going to be “a fairly high hurdle to establish in terms of causation. How would you establish that there would have been a sale?”
But does the slashing of the claim undermine Equitable’s case? “It’s only the lost sale claim that enables the mutual to go on saying to the press, week after week, that they’re claiming and inferentially may recover £2bn from Ernst & Young,” E&Y’s lead counsel Mark Hapgood QC of Brick Court Chambers told the court in June. “[It] is quite probably the thought of the embarrassment of having to climb down from that figure that is keeping the case alive.”
One lawyer comments that most sensible judges will “just ignore the kind of noise that’s going on in the press”, adding: “But if you come to court running a case, the large part of which has a questionable credibility, it can damage your overall credibility in the eyes of the court.”
Langley J appeared to show some frustration with Equitable prior to the summer break. “We have… a considerable amount of expert evidence still to come. What targets are still seriously being aimed at? I would have thought it would be helpful to everyone to know the answer to that,” he told the mutual’s lawyers.
E&Y’s decision not to call on the five partners responsible is not so easy to read. The mutual argued that it was “unprecedented for professional people charged with negligence”. Legal commentators agree it is an unusual move, but they are not sure whether it is a show of weakness or the opposite. “Normally, one would expect evidence from the individuals involved where there is an issue of professional conduct at stake,” says Saunders. “It could be that the issues in the case are actually clear-cut as far as E&Y is concerned and there’s little they would be adding.”
The case has been adjourned until 19 September.
Herbert Smith instructing Iain Milligan QC of 20 Essex Street and 4 Stone Buildings’ Robert Miles QC for Equitable.
Barlow Lyde & Gilbert instructing Mark Hapgood QC for Ernst & Young.
Allen & Overy instructing One Essex Court’s Laurence Rabinowitz QC for six former non-executive directors.
There are also a number of firms and barristers acting for the rest of the individual defendants.