EQUITABLE LIFE MEMBERS

EQUITABLE LIFE:  PENROSE AND BEYOND

- ANATOMY OF A FRAUD 

A paper by Dr. Michael Nassim

Last Updated: Friday, February 11, 2005 09:58 AM

Conclusions

•         Over the disturbed and inflationary period 1973-87 the Society consumed all its ancient traditional assets, and moved into over-allocation of bonus to current members so as to boost its performance figures in support of a sales drive to compensate for loss of  FSSU business.

•         In 1973 un-guaranteed terminal bonuses were introduced.  Thereafter they were intentionally made the dominant bonus form. Because they could be -and were- subsequently reneged, not reserving for them was in conscious bad faith.

•         In 1982/3, with a null fund, all free assets gone and the possibility of falling investment interest rates, a senior management team privately formulated a retrospective terminal bonus claw-back policy (DTBP) to fund previously given annuity rate (GAR) guarantees.  This too was done in deliberate bad faith.

•        By 1987 all the assets and more had been allocated to existing members, but new regulations provided an opportunity to end onerous GAR policies. The senior management team elected to include new non-GAR members in what was now a with-liabilities fund and continue using the unrepeatable  boosted performance figures, thereafter trading on an entirely false basis.

•         At this stage there was by any reasonable standard an absolute requirement to disclose the risks to which both existing and new members would be exposed, given the resulting inequities, over-allocation and existence of the DTBP.  And since no competent non-executive director would  have approved this situation, the non-disclosure is understandable but necessarily fraudulent.   Institutional & corporate business &  interests are a contingent issue.

•          If the full Board was not informed, then nor could be anyone else.  Hence, once ignorant commission-earning sales staff commenced selling the new policies, the fraud became established, finally trapping over 1 million people.

•           In 1989/90 the Society’s actuaries delivered and published a manifesto paper, which was a series of interdependent sophistries purporting to justify running a so-called with-profits fund containing diverse policies without free asset backing and resorting to periodic over-allocation.  The paper proclaimed that because the Society’s practice was to pay out policy values in full, it did not much matter whether bonuses were guaranteed or not.  Given over-allocation plus the undeclared DTBP, the entire exposition was also in fraudulent bad faith.  The actuarial audience was understandably sceptical.

•          Over the period 1987-2001 over-allocation was extended by devices that eroded statutory solvency margins, subordinated debt and inappropriate adjustments which anticipated future premium income, such that the fund degenerated further into a Ponzi scheme.

•          The DTBP emerged in 1993, but was not rightly and finally declared illegal until 2000.  The hugely expanded £32 billion fund unravelled, indicating a deficit of £8-10 billion.  The deficit comprised a nominal 1.6 billion GAR liability, 1.3 billion of loans and adjustments, 0.5 billion extra assets to cover Gordon Brown’s new tax, necessary free reserves of £3-5 billion, and the remaining over-allocation gap which became exacerbated by recent stock market falls.

•          Both prudential and conduct of business regulators failed to react to any of the many warning signs of this progression despite their special knowledge and responsibilities. Their failure was in part systemic, but predominantly operational and hence attitudinal.  Regulators engaged in sometimes self-absolving debate about the inches while the ship was off course by miles and headed for the rocks.

•          Some of the regulators, and most notably the FSA, remain locked in denial in continuance of self-absolution.  The FSA deliberately ignored the evidence for fraudulent mis-selling before the Compromise, since claiming to have investigated and rejected the case without revealing its grounds. It denies operational and attitudinal failure, and its current Chairman does not acknowledge the need for a second Parliamentary Ombudsman Inquiry.

•          Despite continuing denial, overwhelming contrary evidence has shifted the burden of proof to the FSA and the Society. They must now demonstrate that the with-profits Fund did not lose its status on disappearance of its free assets; that it was not thereafter trading on a false basis by using unrepeatably boosted performance figures, that it did not then become a with-liabilities fund under circumstances of chronic over-allocation complicated by the GAR/DTBP issue, and that at no time did it degenerate further into a modified Ponzi scheme implemented by an ignorant sales force.  If so, then no fraud.

•          As anticipated, although he filled many crucial gaps Lord Penrose stopped short of the whole story or according blame. The current situation demands an Eliot Spitzer.

•          If the Society became the antithesis of its former self, so has the FSA, which is now a public danger. It is no ordinary loose cannon because it fires on its own side as it rolls unaccountably around the decks.  It stands urgently in need of reform, and of being made properly subject to Parliament and the Nation.