City giant Herbert Smith Freehills (HSF) either compromised its independence or provided incompetent advice in its work for Lloyds Banking Group on the Reading scandal, a group of MPs and peers has claimed.
In an unprecedented 21-page submission to the Solicitors Regulation Authority, the All-Party Parliamentary Group on Fair Business Banking (APPG) said it was concerned that HSF consistently fell on the wrong side of the boundary between legitimate action in the commercial interests of a client, and “unethical conduct and a failure in professional independence”.
HSF has acted for Lloyds – which took over HBOS in 2008 – on the fall-out from a £245m loan scam perpetrated at HBOS’s Reading branch.
Six people were jailed in 2017 for pushing business customers into distress or failure between 2003 and 2007 by referring clients to a turnaround consultancy, which led to them being saddled with unmanageable debt.
The APPG said its view was that HSF has “exhibited, over time, conduct that: a. Appears to exhibit a lack of professional independence; b. Suggests that HSF has routinely subordinated higher duties it owed as officers of the court to the immediate short-term commercial objectives of its client; c. Appears to be unethical (though as will appear, incompetence may provide an alternative explanation)”.
The report focused on two particular issues. HSF was retained by Lloyds to help with a review of compensation for victims of the fraud undertaken by Professor Russel Griggs. It does not specify exactly what HSF’s role was.
However, an assurance review by former High Court judge Professor Sir Ross Cranston said that, while there was much about Griggs “for which the bank is to be commended”, there were also “serious shortcomings”.
He wrote: “For example, Professor Griggs was placed in an impossible position and his appearance of independence was undermined by the way the process was structured.
“The most serious shortcoming, however, concerned the bank’s approach when it came to the assessment of direct and consequential loss caused by the fraud.”
It is now being re-run under a different chair, former High Court judge Sir David Foskett.
Lloyds did pay the reasonable fees of customers who took independent legal advice to participate in the Griggs review.
The APPG said the “unreasonableness and unfairness” of the Griggs review found by Sir Ross was either intentional or caused by incompetence. “It will be immediately apparent that there is no obviously available ‘third way’.”
The APPG argued that there was “a strong public interest in the SRA being assured” that HSF was either not responsible for what happened with the Griggs review, or if it was that it was due to incompetence.
The second issue was HSF’s involvement “in what might be termed a ‘culture of denial’” at Lloyds.
A key feature of the scandal was a report produced by a senior HBOS risk manager, Sally Masterton, who found that what was then the Bank of Scotland knew about what was happening at Reading well before 2006.
She was sacked the following year (the APPG said it believed Freshfields Bruckhaus Deringer acted for Lloyds on that), and eventually settled claims she made against the bank.
For several years Lloyds denied that it had commissioned her report, before eventually admitting it had.
The APPG said it did not know at what point HSF became involved in Lloyd’s response to the scandal, but said that, on 30 July 2014, the firm wrote to the Crown Prosecution Service with that denial.
The APPG said it understood a similar statement was made to the Financial Conduct Authority, and demanded to know whether HSF took steps to correct and apologise for making it.
“In the APPG’s view it would be surprising if certain consequences did not flow/professional obligations did not arise from HSF making false statements on behalf its client to a public authority after that fact comes to its attention.
“What those specific obligations are, in the particular circumstances, the APPG considers to be a matter for the SRA.
“One concern, that is immediately apparent, is that (if knowledge is disavowed) HSF’s ability to provide to its client objective advice was itself undermined/compromised by LBG’s misleading statement, for example, to the CPS.”
The Masterton report included reference to a 2009 note from Lloyds’ then solicitors, what is now Dentons, that mentioned “the Reading incident”.
The APPG said: “It would be a surprise if these circumstances were known to Denton Wilde Sapte, but not known subsequently to HSF. Accordingly, what was known to HSF about the ‘Reading incident’, and when, appear to the APPG to be very important questions.”
The group also highlighted that, while the bank’s knowledge of what happened was subject to a private inquiry by the former High Court judge Dame Linda Dobbs, “there is no similar investigation, so far as is known”, into its legal advisers knew.
“Given the circumstances… there appears to be a strong argument in favour of such an inquiry. The SRA is able to undertake it.”
HSF had no comment.