Examination of Witness(Question Number
TUESDAY 22 OCTOBER 2002
280. Well, Mr Alexander, here we go again. You
are advocating a course of action; when I asked you "Who
from?", the sort of answer you have given is that you want
to go to the fund managers and you want to go to the advisers,
and you want to go to the insurers and reinsurers, who may stand
behind the advisers on professional liability. How long is all
of this going to take; a lot of these guys are bust already?
(Mr Alexander) It may not take very long at all. Some
of the cases may be suitable for summary judgment; cases may be
over very, very quickly. There is no point in pursuing people
that have no money; we are not trying to punish anybody, we are
only trying to focus on where there has been a legal duty that
has been broken and there is a real chance of collecting money.
Some of the people that have lost money are in their late eighties,
early nineties; they cannot afford to wait. I have got people,
elderly couples, who are going to be forced to sell their homes
because they have lost their income; they cannot afford to wait.
So, therefore, it is not a matter of "Let's go to law,"
it is a matter of, these people have got a real grievance; only
those cases that are worth bringing will be brought, and only
against those people that have clearly broken their duty of care,
and where there is a real prospect of success.
281. Are you going after the regulators as well,
(Mr Alexander) Not at this stage, no.
282. Despite what you said in your opening presentation
to this Committee, which clearly implied you were going after
(Mr Alexander) Under the procedure now laid down,
the first step in any dispute is to deal with pre-action discovery
and pre-action letters; so the first step following this evidence
is to draft a letter, which will be done this week, to the regulator,
asking him to explain his behaviour and to disclose various documentation.
If, on the basis of that pre-action protocol, which is something
that is now laid down, there are unsatisfactory answers, then,
if the clients decide to do it, there will be an action for misfeasance;
but you cannot just simply issue proceedings, you have your suspicions,
you raise it in correspondence and then you go forward from there.
283. Another thing. I want to be clear, in your
paper to this Committee, what you are actually saying about the
press. For example, let me give you a quote from the Daily Mail,
30 June 1999: "the risk on this is pretty low," talking
about split capital trusts, "a good idea for risk-averse
investors, for school fees planning and those approaching retirement."
Now you are not suggesting that there was anything wrong in the
Daily Mail saying that in 1999?
(Mr Alexander) No, I am not. In any event, newspapers
themselves, it is established, you cannot bring an action against
a newspaper for tipping things. I think it is fair to say that
it may well be that a lot of the press also got it wrong; there
were exceptions. If you go through the records now, you will find
that certainly the Financial Times, right back in 1997, when these
trusts came out, actually were probably the only people warning
about a high risk of investment and collapse. What I think happened
was that there was a huge amount of marketing done by these companies;
some of the documents that you have seen, where it quoted "as
safe as houses," came from supplements in publications such
as Bloomberg Money, which were, if you like, put together by these
funds. I think there was a tremendous amount of very aggressive
marketing by these funds, the journalists wrote about it, and,
it is quite right, zeros were a good investment for school fees,
certain types of zeros, not all of them. And I think the failure
here by those that wrote about them in glowing terms, by the advisers
who advise, was simply not to discriminate between the structural
differences between the good ones and the bad ones; that is the
only mistake, it was just that it did not get beyond that superficial
look at it.
284. You have given the FSA a bit of a kicking,
have you not; you talk about misfeasance, recklessness, and, as
I think Jim Cousins just pointed out, you seem to be rowing back
on that a bit. We have to have cool heads here, you cannot start
throwing these allegations against the FSA without some evidence.
Now let me just explore this. You presented to us, only just this
morning, these faxed documents; one is a draft prospectus, Framlington
Global Financial and Income, 24 August 2001, which I think you
are suggesting contains a paragraph that the Guernsey regulator
put in, which warns about the problems associated with cross shareholding.
And then the second document, 23 February 2001, a similar draft,
BC Income and Growth Fund Ltd, where there is a form of wording,
as I understand it, that warns about the problems associated with
high gearing, rather than specifically cross shareholding. Now
you present these two documents to us as evidence that it should
have put the FSA here on notice, because the Guernsey regulator
is insisting on these things in these prospectuses. What I want
to know is, at what stage were similar forms of words appearing
in UK prospectuses for which the FSA was the Listing Authority;
24 August 2001 and the February one? What is the problem; this
form of wording and these warnings were in prospectuses, were
(Mr Alexander) No. The key bit here, which does not
appear in the UK prospectuses, and it is not the part about the
cross holdings, it is the part about "This may be considered
to give rise to a systemic risk should there be failures within
the sector." That is the key part.
285. Yes; but it refers to cross holdings?
(Mr Alexander) Exactly; it refers to cross holdings.
There were other parts, in some of the UK prospectuses, that relate
to cross holdings and to gearing. But what this deals with, and
this is the very important part of it,
286. This is cross holding, not gearing; the
other one, the second one, is gearing, not cross holding?
(Mr Alexander) Yes.
287. Fine; we know that.
(Mr Alexander) Yes. What we are complaining about
is the following, that the Guernsey regulator, and as I am advised
by the BBC, who have actually spoken to him, and we are now trying
to see him, presented these documents to the regulator; in our
view, it should have put the regulator on notice about the risk,
about the systemic risk and a likely collapse in the market-place.
And the concern is, therefore, why, when they got this severe
risk in relation to a collapse in the system, stronger steps were
not taken to protect the public; it is not the fact that the previous
ones did not have it in them, and I am not even complaining about
the fact why did it take the Guernsey regulator to spot it when
the FSA did not spot it. But, having been given a specific document
that shows that another regulator considered this to be a real
risk, which would mean that large numbers of people would lose
a great deal of money, that no action was taken, because a lot
of people put money in, in May, June, July, even August, even
September 2001, people were still being sold this on the basis
of low risk.
288. Just to be absolutely clear, those months
that you have just mentioned, you are saying that the UK listing
authority, the FSA, did not ensure any comparable wording, whether
it related to gearing, whether it related to cross shareholding,
or indeed both, that did not appear in any UK prospectus at all?
(Mr Alexander) Correct; at all.
289. And that is the subject of your charge?
(Mr Alexander) Yes. So it relates to that group of
people, and it is a large amount of money, that would have bought
towards the end of the period, when, frankly, this could have
290. They are the same people; in terms of the
Listing Authority, the FSA are now the Listing Authority, as I
understand it, the same people have been transferred over, so
substantially we are talking about the same people. One final
question. You are going to be in a litigator's heaven, are you
not, by the sound of it? One specific thing, you are going to
go after IFAs, you are going to go after auditorsthat will
be nice, and expensiveand then you talk about directors;
one specific question, Mr Alexander. Cross shareholdings, the
last time I looked, was not a hanging offence, not a criminal
offence, desperately unwise and depressing for very many people
who have suffered as a result, but not an offence. You have talked
about collusion, you have said these guys knew what they were
doing, you have said it was not a mistake. Just so I am clear
about this, because collusive behaviour is referred to in the
press and it sounds fairly serious stuff, can you just describe
to us what cause of action is disclosed by these cross shareholdings,
it is very unwise, but it is civil, it is not criminal; what is
the cause of action that you are putting down, in relation to
the cross shareholding?
(Mr Alexander) Let me make it absolutely clear, there
is nothing wrong, in principle, with having cross holdings, there
is nothing wrong with people sitting on each other's boards, it
happens all the time; where it goes wrong is in two areas. First
of all, in terms of the directors themselves, as to the independence
of their decision-making process when they agree to invest in
specific trusts, so there may be a breach of fiduciary duty to
their shareholders. In terms of the companies generally, it is
nothing to do with the cross holdings, it is nothing to do with
the cross directorships, it is everything to do with the marketing
material. So, therefore, it is not what they did, it is how they
did it; in other words, had they gone about it, in our view, in
a way that clearly and accurately described the risks involved
then people could have taken a better or more informed decision.
So it is not what they did, it is how they went about it that
is the important thing.
291. So the answer to the question is that the
cause of action is breach of fiduciary duty?
(Mr Alexander) Breach of fiduciary duty and misrepresentation.
292. I have two questions. The first relates
to your very first remarks. You said that the FSA may have behaved
recklessly. By failing to act once they had received the Guernsey
regulator's wording about systemic risk, they were acting grossly
negligently, and therefore, this means that they may not be fit
and proper people to run an investigation. Is that correct?
(Mr Alexander) Yes.
293. Do you think that the fact that the FSA
is immune from action for gross negligence is something which
should be reviewed, in this context?
(Mr Alexander) I have got two answers to this. First
of all, in relation to gross negligence, we would have to go on
misfeasance, where there is no immunity for misfeasance. What
I would tell you though, because it is a matter that has concerned
us in two other cases
294. May I just clarify, where you are saying
misfeasance, what you are talking about is bad faith?
(Mr Alexander) No; misfeasance. And, in fact, if I
just may, in essence, recklessness, which is part of it, and if
I just may quote from Lord Hope, in the Three Rivers case: "Recklessness
is demonstrated when it is shown that the public officer was aware
of a serious risk of loss, due to an act or omission on his part
which was unlawful, but chose deliberately to disregard the risk."
So what we are saying is that he was aware that, by failing to
notify, by failing to act in accordance with his job, there was
a likelihood of serious risk; that is recklessness. In terms of
the immunity of the regulator himself, we have two other matters
which are likely to come before the courts soon, relating to the
whole question of immunity. Under European law there is no immunity;
we are apparently the only country in Europe that has sought to
provide immunity to the regulator. And, therefore, it is a matter
of some considerable interest, where you have got companies selling
products across Europe, particularly, where the home regulator
is the regulator in charge, that, somehow, by coming to buy a
product in the UK, on the face of it, it would seem that you do
not have quite as much protection as if you were to buy the same
product from a company in France. So I think there is a matter
of whether or not our laws are currently in harmony with the rest
of Europe, particularly in relation to the regulator's position.
295. In your view, should the FSA be immune
to action for gross negligence?
(Mr Alexander) No.
296. My second question is on compensation.
Do you think that the level of compensation should take account
of the general market sentiment and conditions; or do you think
it should relate only to the sum invested?
(Mr Alexander) One of the questions that we ask clients
on their questionnaire is, "If you had not invested in this,
what would you have invested in?" Because, quite clearly,
it is not as simple as saying, "Well, I've lost £100,
I want £100 plus interest;" everybody's case is different.
But it is clear that most people have said, because that was what
they were looking for, low risk, they would have looked for another
low risk investment. But I think it is quite fair to say that
you have to look at each case, you have to accept the market has
gone down, you have to accept all of that, when it comes to compensation,
it is not just a matter of simply saying, "I've lost this,
I want that." There is a calculation to be made also based
on the state of the market and what people would have invested
297. Just a quick last question from me. You
mentioned, at the beginning of your evidence, that Aberdeen Asset
Management features disproportionately in the losses that your
clients have experienced. Are all Aberdeen zeros flawed, and,
if not, what is the distinguishing feature between the successful
Aberdeen splits and the unsuccessful?
(Mr Alexander) Not all Aberdeen products are flawed.
The distinguishing features go back to the very fundamentals of
the differences between the good and the bad, and that is whether
or not the money was invested in other companies and had high
levels of gearing; if those two elements are not there then you
will be able to see it. And there has been published statistics
which actually show the differences between the various zeros,
and it has been broken down in relation to the percentage of debt
they have in them and the amount of cross holdings; and it is
quite clear to see, in terms of the performance, the greater the
debt, the greater the cross holdings, the greater the loss, effectively.
And you can go all the way up to the top. And I think the very
first case that I ever got, which was really before the scandal
started, was a chap who had seven different zeros, he bought them
through a stockbroker, the market had gone down, five of them
were perfectly good, five of them had lost 1 per cent, 2 per cent,
two of them had lost 40 per cent. And he could not understand
how it was possible that, seven things, that on a piece of paper
looked the same, five of them had gone down, a small loss, which
was acceptable, and two had crashed so dramatically. And that
was, if you like, the clue to the first way to investigate it,
how was it possible that you could have things that looked the
same yet performed so differently, and I think that was a very
298. So you are saying then that the nature
of some zeros was changed by (a) the high level of debt, (b) the
extent of the cross holdings, and (c) the management fees charges,
(Mr Alexander) The management fees obviously took
a great deal of money out of it, and, yes, of course; but I would
not say the management fees was the defining reason that things
failed, I think it is more the fact the high levels of debt, combined
with the cross holdings, and the system risk, because once, obviously,
one went it then started having the knock-on effect that obviously
had been picked up.
Chairman: You have given us a comprehensive
tour this morning, Mr Alexander; in fact, you have taken us round
the houses. But, as I mentioned at the beginning of our inquiry,
we are interested in this (a) from the consumer's point of view,
and (b) from the industry's point of view. So thank you very much
for your contributions at that level.