3 April 2000
The High Court postmortem of the collapse of the UK's oldest bank, Barings, will be a public spectacle with high stakes and complex issues, but will there be implications for legal firms or is it just a case of the vultures picking the bare bones of a bank that fell from grace? Abigail Townsend reports.
Who could have foreseen in 1992 how the simple act of appointing a single trader to an office in Singapore would result in the collapse of Barings?
Nick Leeson's actions have reverberated across the globe, sending shock waves through the City and challenging some of the oldest institutions and professions.
And in February 2001, those left arguing about it will have their day in court. Or rather their year.
The extremely complex case, which is actually two pieces of litigation, is being brought by the London and Singapore liquidators Ernst & Young and Arthur Andersen.
They are suing auditors Coopers & Lybrand (as was) London and Singapore and Deloitte & Touche Singapore for negligence, and are aiming to pick up estimated damages of £1bn along the way.
But the auditors are hitting back. Yes, they say, there was negligence, but only by the managers that let a rogue trader run up debts of nearly £600m and so bring the UK's oldest bank to its knees.
The Bank of England Report of the Collapse of Barings criticised both respondent and claimant when it slated the internal managers and external auditors.
It concluded there was a "serious failure of controls and managerial confusion within Barings". But it also noted: "The true position had not been detected prior to the collapse by the external auditors, supervisors or regulators of Barings."
But will anyone ever be made to shoulder the blame alone? And what are the ramifications for accountants, auditors and the lawyers who advise them?
Since that weekend in February 1995, when Barings pleaded with the Bank of England governor Eddie George and some of the country's leading banks, the regulatory institutions have come under considerable fire for letting the collapse happen in the first place.
The Bank of England has been stripped of much of its regulatory power. The Financial Services Authority (FSA) was set up in 1997 to take on the bulk of this.
The Government, mainly through the Treasury and the Department of Trade and Industry, has made it clear that the regulatory institutions cannot be permitted to allow such a calamity to occur again.
But one insider believes that despite the publicity, complexity and high financial stakes, and the drubbing the regulators have already received, it will actually change little for the legal and accountancy professions.
He says: "The management has obviously been horribly negligent and the courts may lay down something a bit clearer about what [management] should do. But what can we learn? It is hard cases that make law. This is not really cutting edge."
The key issue boils down to negligence and how much those involved can be expected to pay if found guilty.
One insider believes the accountants have created a rod for their own backs by not paying enough attention to basic principles in the rush to consolidate.
He says: "They have invented a world where they have all brought the price down because they are competing with each other. The accountants have turned auditing into a commodity but it is one that can have enormous liability."
The aggressive search for answers though comes down to what was narrowly avoided as the bank fell rather than what actually happened.
Dutch bank ING stepped in to buy the bank for £1 from the receivers in 1995. Part of the deal, which was the first such transaction carried out in the UK, meant that it took on liabilities worth £660m.
It was imperative the deal was done quickly - one lawyer involved comments wryly that he did not sleep for six days solid - if the rest of the City was not to crumble.
Says another of the deal: "If ING had not bought it then the effects on the financial markets would of been quite different. It would have been a monster insolvency like BCCI."
But the market was already in flux despite ING's swift work. Within months of the collapse two major mergers were announced, SG Warburg with Swiss Bank Corporation and Kleinwort Benson with Dresdner Bank.
One of the Barings litigators believes that it is par for the course that people go for the auditors after a collapse when so much is at stake.
He says: "It is like those big corporate collapses that happened at the beginning of the 1990s which came out of economic problems. Barings is slightly different in that it collapsed in the middle of a boom and the only people left standing were the auditors so as usual, people go after them.
"It is about a long line of people to blame [by the] inevitable vultures picking over the bones of the dead companies."
He also echoes the beliefs of many of those working on the case, that despite the trial and regulatory changes, another Barings is inevitable.
One litigator believes professional negligence is simply the latest excuse. "There have been, and there always will be, insolvency of financial institutions. Things change and new reasons will crop up for that insolvency."
He also believes that the size of collapses in recent history - such as Polly Peck, BCCI, Barings and the more recent cases of TransTec and Versailles - will be seen again, only bigger.
Because despite regulatory changes and professions attacking each other in the never-ending search for blame, as the market consolidates and monster institutions are created, when the next giant falls its reverberations will be even bigger. Ultimately, rogue traders, greed and fraud - plus the very nature of fluctuating markets - means that trying to legislate away the next Barings is a fool's dream.
As one commentator puts it: "Who ever thought Barings would collapse?"
But whatever the outcome of the trial, at least one thing is guaranteed - a line will finally be drawn under this particular collapse. As one weary lawyer says: "I'm looking forward to wiping my white board."
The main players
ING Barings Japan - Lovells is the main UK law firm. The partners working on the case are insolvency and restructuring department co-ordinator Nicholas Frome and consultant Deborah Gregory.
Counsel led by Mark Hapgood QC of Brick Court Chambers.
Barings Plc and Ernst & Young - Slaughter and May, led by partner Richard Grandison. Counsel led by Stanley Burnton QC of One Essex Court.
Barings Futures Singapore and Arthur Andersen - Ashurst Morris Crisp, led by head of litigation Edward Sparrow.
Counsel led by Christopher Bathurst QC and Michael Brindle QC of Fountain Court.
Coopers & Lybrand London - Barlow Lyde & Gilbert, led by professional indemnity partner Julian Randall.
Counsel led by Peter Goldsmith QC of Fountain Court and Mark Howard QC of Brick Court Chambers.
Coopers & Lybrand Singapore - Herbert Smith, led by partners Tim Parkes and Sonya Leydecker.
Counsel led by Richard Field QC now of One Essex Court (formerly at 11 King's Bench Walk)
Deloitte & Touche Singapore - Clifford Chance with partner Philip Rocher (formerly at Denton Wilde Sapte) and head of litigation Chris Perrin. Counsel led by Jonathan Gaisman QC of 7 King's Bench Walk.
Francis Baring sets up merchant's business, the foundation of Barings Bank.
Nick Leeson moves from Jakarta operation to Singapore office of Barings as general manager of Simex Exchange
3 July Sets up error account 88888 to hide a £20,000 mistake made by one of his employees. He makes up the short-fall instead of firing her and logging the error. Realising that no one notices the glitch, he continues using the account to hide his losses over the next three years. Barings Plc continues to send money to Barings Futures Singapore (BFS) not realising Leeson has created a black hole. Eventually it will be this that causes the UK parent company to collapse as well as BFS.
17 January Kobe earthquake strikes causing Far East exchanges to fluctuate, particularly the Nikkei. Leeson buys huge amounts of futures to try and hold the market up.
23 January Tokyo stock market plunges but Leeson continues to buy in a frantic bid to keep the market up and to prevent huge losses.
23 February Leeson and wife Lisa flee the country for Malaysia, leaving Barings with £860m debts.
25 and 26 February Lifeboat operation held involving Bank of England, Barings and a range of other banks. Barings pleads with Bank of England governor Eddie George to save it but to no avail.
27 February Administrators called in.
6 March Dutch bank ING Groep buys Barings for £1 and takes on estimated liabilities of £660m. It also puts £350m into a fighting fund.
22 March Leeson lands in Frankfurt after failing to get a direct flight back to the UK where he wanted to be tried. Was willing to provide a full written confession to the Serious Fraud Office (SFO). Bondholders are also keen to prosecute Leeson. But SFO refuses and he is deported to Singapore.
16 July Bank of England senior manager in charge of merchant banking supervision Christopher Thompson resigns.
1 December Leeson sentenced to a six and a half year jail sentence after pleading guilty to two charges of deceiving Barings' auditors and to cheating the Simex Exchange.
28 May Barings chief finance officer Geoffrey Broadhurst is first of 10 directors banned from holding directorships for a matter of years.
17 December Damning report published by the all-party Treasury Select Committee after 13 months' gathering evidence. Describes Bank of England as 'cheerleader for the City' and recommends that its banking supervision may have to be removed.
October Financial Services Authority (FSA) created when much of the Bank of England's regulatory role is removed.
4 July Leeson released early and returns to the UK after receiving treatment in jail for colon cancer.
February Trial against auditors Coopers & Lybrand London and Singapore and Deloitte & Touch Singapore commences.
The Case of the Multimillion pound black hole
The litigation, which is actually two cases, will commence in February 2001. Originally one case was to be heard in London with the other in Singapore but both will now be held in the High Court.
Parent company Barings Plc and liquidators Ernst & Young are suing auditors Coopers & Lybrand (as was) in both London and Singapore.
Barings Futures Singapore (BFS) and the Singapore liquidators Arthur Andersen are suing auditors Deloitte & Touche Singapore.
Both acted for Barings between 1992 and 1994.
The liquidators are claiming the auditors were negligent in that they failed to find Leeson's error account 88888 and the multimillion pound black hole he created. They are seeking damages of £1bn.
The auditors are claiming that they could not have been expected to spot this because the managers and directors were negligent in their roles.
They also argue that while Leeson eventually lost £860m during the three-year period, he would sometimes get the account back to even (ie cleared the account) and sometimes made considerable profit.
In response to the Treasury Select Committee report into the collapse, which was critical of nearly all the parties involved, Coopers & Lybrand said: 'We are not responsible for the collapse of Barings. It collapsed because of management failure.'
But even before the two cases comes before Mr Justice Evans-Lombe, who will hear them in tandem, they have already been fraught with problems.
For a start, many of those involved believe it ridiculous that separate liquidators for effectively the same company are bringing the same claim.
Several long months of mediation have failed, with one insider attributing this to parties failing to agree to payments.
But one litigator still believes proceedings could be concluded prior to the commencement of court action.
'There must be a serious question as to whether it is going to get to trial or not. It should not be necessary to pursue it through the courts to the bitter end. One hopes a solution can be found without a very protracted hearing with appeals and so on.'
However, it is expected to be an extremely lengthy, complex and expensive case. One barrister says: 'Everybody has got the whole of the year knocked out.' An opposing counsel adds: 'There is a lot of money being thrown around. It is going to take a very long time to sort out.'
The solicitors involved are also under no illusions. Says one: 'It will be a very long trial. The hardest cases are always the ones with the most evidence and there's enough here to fill garages.'
Surprisingly though, despite the size and complexity of the case, there have only been a couple of cases of conflict so far.
Price Waterhouse was originally appointed as liquidators in Singapore but following its merger with Coopers & Lybrand in 1998, pulled out.
Slaughter and May, which is acting for Barings Plc and Ernst & Young, was also acting for Arthur Andersen. Ashurst Morris Crisp stepped into the breach and is now acting for Arthur Andersen.