Report submitted to the Britannia Building
Society by Herbert Smith Solicitors
Project Offenbach
We have now concluded our investigation into this
matter and are writing to you with our advice.
Terms of Reference
We have been instructed to investigate the full circumstances
of the mortgage granted by the Society to The Rt Hon Peter Mandelson
MP in October 1996 and the involvement and conduct of Wegg-Prosser
Farmer ("WPF"), acting on behalf of Mr Mandelson and
the Society, and to determine whether or not there has been a
fraud on the Society, and to make recommendations on whether:
(i) Mr Mandelson's details should be entered
onto CIFAS and/or the National Hunter System by the Society (bearing
in mind the obligations of the Society to other members under
the two schemes)
(ii) WPF's file for the mortgage transaction
should be handed to the Law Society's Fraud Officer
(iii) the files relating to the mortgage transaction
should be handed to the police
(iv) what, if any, action should be taken?
Work Carried Out
We have interviewed the following people: Mr Mandelson,
Stephen Wegg-Prosser, Benjamin Wegg-Prosser and Michael McDermott.
Where necessary, we have also had follow-up telephone discussions
in order to check or confirm points raised by other witnesses.
We have drawn up statements for each witness and, where possible,
the statements have been checked and approved. Finally, we have
considered the Society's papers for this transaction and the original
file for the purchase of 9 Northumberland Place ("Northumberland")
provided to the Society by WPF.
Factual Position
This is set out comprehensively in the attached Statement
of Facts[16]
with areas of conflicting evidence highlighted.
The most significant events are as follows:—
(1) Mortgage Interview at Queensway Branch
There is some uncertainty as to precisely what took
place at Mr Mandelson's interview on 30th August 1996 at your
Queensway branch.
Mr McDermott could not recall Mr Mandelson disclosing
to him details of his constituency property at Hutton Avenue,
Hartlepool ("Hutton"), or his mortgage on the property,
either during the initial discussion on the proposed transaction,
or at any other time. In relation to the questions asked by Mr
McDermott from the mortgage application form, Mr McDermott is
confident that he would have accurately noted Mr Mandelson's answers.
Mr Mandelson cannot now precisely recall exactly
what was said at the interview (one of many appointments he had
during that day alone) but cannot believe that he would not have
mentioned his constituency home, and the mortgage, particularly
as there was no reason for him to have withheld this information
when this liability was to be discharged upon the sale of Wilmington.
Benjamin Wegg-Prosser, who recalls being present
for only part of the interview (Mr McDermott's recollection is
that he was there throughout), cannot confirm that Mr Mandelson
disclosed this information but he thinks that it is unlikely that
Mr Mandelson would have forgotten to mention this as Benjamin
Wegg-Prosser believes (but cannot now recall) that he would have
briefed Mr Mandelson prior to the interview and this item would
have been covered.
Both Mr McDermott and Mr Mandelson did agree that
the interview was "rushed" towards the end which may
mean that little time was available for Mr Mandelson to check
the form before signing. (This may explain why obvious errors—Mr
Mandelson being described as a "Minister" of Parliament—were
not spotted and corrected by Mr Mandelson at the review). Mr Mandelson
confirmed also that he did not take a copy away with him so as
to check its accuracy when more time was available to him, and
that he recalled only giving the form cursory attention.
(2) Payment of the Deposit
Our investigation has revealed that the Rt Hon Geoffrey
Robinson MP was involved in the purchase of Northumberland earlier
than the Society had first thought. After questioning Stephen
Wegg-Prosser at interview as to the source of the deposit monies,
we were informed by him in a subsequent telephone call that his
son, Benjamin Wegg-Prosser recalled collecting a cheque for the
deposit monies from Mr Robinson and delivering this to WPF. Whilst
WPF's Monies Received Form records the money having been received
from Mr Mandelson, Stephen Wegg-Prosser maintained at interview,
and at all times since, that he could not recollect personally
ever seeing the cheque, and that he was not aware of Mr Robinson's
involvement in the transaction until the 14th-15th October 1996.
Mr Mandelson confirmed that Mr Robinson had provided
the deposit monies in order to allow him to keep to the vendor's
strict timetable for completion by exchanging contracts on 3rd
October 1996. Originally Mr Mandelson's mother was to put up the
deposit as well as the balance of completion monies. However,
Mr Mandelson explained that he had only borrowed this money on
a temporary basis from Mr Robinson when, immediately prior to
exchange, his mother had started to waver on providing the purchase
monies. Despite his mother's change of mind, Mr Mandelson believed
this to be only temporary and concluded that at completion she
would put up the necessary monies. Had he not reached this conclusion,
we are instructed that he would not have exchanged contracts.
(3) Mother's Gift
Mr Mandelson told us that, before making any offer
for Northumberland, he had been told by his mother that she would
"gift" him the money he needed for the balance of the
completion monies.
Mr Mandelson said that his mother had changed her
mind at the last minute, possibly under pressure from his older
brother, and that because of this, and in order to avoid the purchase
falling through, he had had to borrow the deposit from Mr Robinson
(who had not previously been involved in any way in financing
the purchase). Mr Mandelson has told us that he believed that
between exchange and completion his mother would become reconciled
to the proposal that she should advance the balance of purchase
monies and that she would ultimately put up the necessary monies,
thus allowing Mr Mandelson to repay the deposit to Mr Robinson.
However Mr Mandelson became worried when he visited her, after
exchange, at the distress his request was causing and, only at
that stage, we were told, did he raise with Mr Robinson the possibility
of Mr Robinson lending the monies required for completion, and
doing so on a long-term basis. Mr Mandelson could not recollect
precisely how the matter of the loan from Mr Robinson was raised,
only that Mr Robinson dealt with the matter very casually.
(4) Sale of Mr Mandelson's flat at Wilmington
Square ("Wilmington")
It is clear that both Mr Mandelson and Stephen Wegg-Prosser
realised from mid to late September that, despite Mr Mandelson's
flat at Wilmington being on the market at the date of the application
for a mortgage, it was unlikely that a sale would be arranged
as quickly as the purchase timetable demanded by the vendor of
Northumberland.
Both Mr Mandelson and Stephen Wegg-Prosser confirmed
that no contracts were sent out for Wilmington until after the
purchase of Northumberland (as no firm offers were received during
the early period) and that it was clear from as early as mid to
late September that there would be no simultaneous sale and purchase
(which explains the lack of reference to a sale on Stephen Wegg-Prosser's
file). A buyer was only eventually found after Mr Mandelson dropped
the price on Wilmington, with contracts being exchanged on 17th
January 1997.
The Legal Position
The offence of "mortgage fraud" is more
particularly that of "obtaining a pecuniary advantage by
deception" which can be found in Section 16 of the Theft
Act 1968:—
"a person who by any deception dishonesty
obtains for himself or for another any pecuniary advantage is
liable on conviction on indictment to imprisonment for a term
not exceeding five years ..."
Two crucial elements of this offence are that the
deception must be the effective cause of the advantage, and there
must be a dishonest intent on behalf of the perpetrator. Furthermore,
although there must be a causal connection between the deception
and the pecuniary advantage obtained, it is not necessary that
the person deceived suffered any loss arising from the deception—R-v-Kovacs
[1974].
There is also a separate offence of being part of
a conspiracy to obtain a pecuniary advantage by deception. The
same elements must be present as for the principal offence but
with the additional requirement of two or more people sharing
the same intent to work together to obtain dishonestly a pecuniary
advantage by deception.
Mr Mandelson's Position
There is no doubt that Mr Mandelson failed to ensure
that all material information was disclosed in the mortgage application
form when he signed it and submitted it to the Society. It is
also clear that Mr Mandelson failed to inform the Society of material
changes to the nature of the transaction: in particular, the loan
from Mr Robinson (first, the deposit and, then, the balance) and
the delay in the sale of Wilmington.
However, the following matters should be borne in
mind in relation to these failures:—
(1) There was no obvious reason/motive for Mr
Mandelson not to disclose details about Hutton when that mortgage
was to be discharged as part of the transaction.
(2) The Britannia mortgage application form in
use at that time was not specifically designed to extract details
of second properties/second mortgages—it is therefore conceivable
that Mr Mandelson was not properly focused by the questions in
sections C and D on his ownership of Hutton.
(3) The interview was clearly "rushed"—Mr
Mandelson informed us and it is clear from obvious mistakes in
the form that it was not properly checked by Mr Mandelson before
it was signed.
(4) A copy of the mortgage application form was
not provided by the Society to WPF (it is not the Society's usual
practice so to do). Accordingly, Stephen Wegg-Prosser could not
later correct any failure by Mr Mandelson to disclose information
during the interview nor, indeed, was he aware of any inaccuracies.
(5) Mr Mandelson was not advised at any time
by Stephen Wegg-Prosser to disclose material changes in the transaction
to the Society, as he should have been—he was let down by
his adviser.
(6) The transaction took place immediately proceeding,
during and immediately after, the last Labour Party Conference
before the 1997 General Election. Mr Mandelson was the principal
organiser and, we are told, was working round the clock. It is
clear that Mr Mandelson's mind would have been fully focused on
the conference and preparations for the forthcoming General Election
throughout the whole of this period.
(7) There was never any financial risk to the
Society in any of the actions/omissions because of the nature
of the transaction and the value of the equity in Northumberland.
The Society had a first charge over Northumberland. The interest
arrangement agreed between Mr Mandelson and Mr Robinson in respect
of the latter's loan was that interest was not immediately payable
but would accrue and only become payable on an eventual sale of
Northumberland. Accordingly, there was no risk that interest payments
to Mr Robinson would prejudice in any way Mr Mandelson's ability
to pay interest to the Society on his mortgage with the Society.
Whilst the press release issued by the Society on
8th January 1999 stated that the Society was satisfied that the
information provided by Mr Mandelson at the time of the mortgage
application form had been correct, it is clear that this statement
was accurate at the time it was made. The Society was not aware
until receipt of a letter on 22nd January, during its enquiries
of WPF, about the existence of another mortgage on Hutton.
Stephen Wegg-Prosser's Position
It is clear that Stephen Wegg-Prosser (and thus his
firm, WPF) ignored express instructions given to him by the Society.
He breached the overall duties he owed to the Society. He failed
to advise Mr Mandelson to make various disclosures to the Society
as the transaction proceeded regarding the changing nature of
the transaction. Stephen Wegg-Prosser admits to his failings in
these respects.
Stephen Wegg-Prosser ought to have informed the Society
as soon as he was aware that
1. there would be no simultaneous sale and purchase
of Wilmington and Northumberland, and
2. Mr Robinson was providing the balance of the
completion monies.
As to why Stephen Wegg-Prosser failed in the above
respects, we can only speculate. However, it is our view that
he was "star struck" in acting for Mr Mandelson and,
on his own admission, he did rather a sloppy job. When we interviewed
Stephen Wegg-Prosser he told us that he had reviewed his file
and was somewhat ashamed of it. He told us that he normally maintained
a meticulous file and accepted that he had not done so on this
occasion.
A further relevant factor was the fact that, shortly
before this transaction started, Stephen Wegg-Prosser's father
was diagnosed as terminally ill with cancer and he died on Monday,
7th October 1996—just four days after exchange, and a week
before Stephen Wegg-Prosser's first contact with Mr Robinson.
It is clear that such a family tragedy would have been, at the
very least, a distraction for Stephen Wegg-Prosser from his work
on this matter. His father was living at the family's country
home and Stephen Wegg-Prosser spent a great deal of time with
him there and was thus absent from the office at a key stage of
this transaction.
Practical Position
As there is no proof that Mr Robinson was involved,
or likely to be involved, at the date when Mr Mandelson signed
the mortgage application form, the only information missing from
the form concerned Mr Mandelson's ownership of Hutton and, obviously,
details of the mortgage.
It is clear from our interview with Mr McDermott
that, if this information had been disclosed and Mr Mandelson
had also said that the mortgage would be discharged out of the
Wilmington sale proceeds, Mr McDermott would still have recommended
this transaction to the Society, albeit conditional upon both
transactions taking place simultaneously. This was, we believe,
Mr Mandelson's original (genuine) intention.
As stated above, on the information given to us,
there was never any financial risk to the Society in lending on
the security of Northumberland. Indeed this statement is borne
out by the fact that Northumberland is expected to sell in the
near future for at least £750,000.
Recommendations
Whilst there are some inconsistencies in the information
given to us, as a result of our investigation (not least from
our interview of Mr Mandelson) we have concluded that Mr Mandelson
did not have any dishonest intent at any relevant time and did
not consciously mislead the Society.
Certainly there were some irregularities and WPF's
handling of the matter was sloppy.
Nevertheless, taking into account all the matters
set out above, it is our recommendation that the Society should
close its file in relation to this transaction.
In so advising, we are particularly conscious of
the fact that any action taken by the Society (such as completing
an entry on the CIFAS or the National Hunter Systems) increases
the chance of this matter becoming public and this would have
a serious and detrimental effect on Mr Mandelson's future career.
In view of our conclusion that there is no dishonesty here, such
a consequence would be wholly inappropriate.
We know from our instructions that, normally, where
there is some irregularity and a suspicion of fraud, further action,
at least involving entries on CIFAS and the National Hunter System
is taken. That is because the Society wishes to put other lenders
on notice of the possibility of a fraud having taken place.
In this case, because of the sensitivity of the individuals
concerned, the Society has (in our view, quite properly) fully
investigated the matter and this enquiry has concluded that no
dishonesty exists. In those circumstances, it would be wholly
wrong for the Society to proceed as though such were not the case.
Indeed, we believe that you could be criticised for taking the
matter any further in these circumstances.
Our comments above relate, of course, to the position
of Mr Mandelson. It is necessary to consider the position of Stephen
Wegg-Prosser and his firm separately.
There is no doubt that the firm let the Society down.
As indicated above, it is our view that Stephen Wegg-Prosser failed
to follow instructions given to him from the Society and as a
result some considerable embarrassment has been caused to the
Society although there has been no financial loss, beyond the
costs of the present investigation.
Contractually, WPF are in breach of their duties
and you would have a claim against them for professional negligence.
However, because no loss has been suffered, it is unlikely that
you would recover any damages. You may be able to argue that WPF
should pay the costs of this investigation but the firm would
certainly have an argument that such a claim was too remote and
that the costs did not necessarily flow from the breach of contract
and negligence.
We suspect that, in those circumstances, the Society
would decide not to embark upon expensive, public and possibly
protracted proceedings where the outcome is uncertain. There would
be little commercial gain to the Society in so proceeding, particularly
after taking account of the irrecoverable costs necessarily expended
in litigation.
On the basis of our conclusion that there was no
dishonest intent by any of the individuals concerned, WPF's file
should not be passed to the Law Society's Fraud Officer. We have
also considered whether you should refer the matter either to
the Office for the Supervision of Solicitors (OSS), which is the
complaints body of the Law Society.
The OSS investigates complaints that relate to the
conduct of solicitors as opposed to matters of professional negligence.
Although WPF may have acted negligently, that is not to say that
they acted in a manner which would be regarded as breach of professional
conduct. They could be criticised for their lax office procedures,
notably in relation to their procedures for the receipt of monies.
However, there is no suggestion whatsoever that they have misappropriated
clients monies or, indeed, not properly maintained at all times
a separate client account (a cardinal sin). There is also no suggestion
that they have benefited in any way, beyond their normal professional
fee, for anything that took place here.
For all of those reasons, an investigation by the
OSS is unlikely to result in anything more than a letter of rebuke
to WPF, if that. The Society might also wish to bear in mind that
if a complaint to the OSS is made, there is a very great likelihood
that the subject matter of this investigation will become public.
What action can be taken against WPF?
In our view the Society would be justified in removing
WPF from its panel of solicitors. The Society may also consider
writing to WPF setting out your reasons for taking that action.
In our view it would accord with the rules of natural justice
to explain to WPF why you are so proceeding and to give them a
chance to respond.
We suspect that WPF will not seek to challenge the
decision, particularly as we believe that they have not acted
for the Society before.
We would be pleased to answer any queries you have
on any of the advice given above.
22 March 1999
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