Just hours before Royal Bank of Scotland launched a massive cash call in 2008 to shore up its capital, the bank's senior advisers were still discussing whether its financial figures were potentially misleading for investors, court documents allege.
Late into the night, adviser Goldman Sachs, auditor Deloitte and a lawyer for RBS exchanged emails discussing the writedowns on troubled assets that RBS was about to publish, according to the "particulars of claim" filed by lawyers acting for shareholders now suing the bank.
Goldman Sachs and Deloitte feared that some figures in the prospectus for the RBS cash call were vulnerable to misinterpretation, according to the particulars of claim. The advisers thought investors might conclude RBS's ability to withstand losses was stronger than it actually was, the claimants' filings, seen by Reuters, allege.
The late-night emails were part of a series of warnings from outside advisers that were rejected by senior RBS executives as the bank sought to raise 12 billion pounds ($15 billion), according to court documents.
RBS denies the allegations that it misled investors. In court documents for the defense seen by Reuters, lawyers for RBS say the valuation figures were reasonable and composed to help the bank decide an appropriate size for its cash call, not to guide investors on losses on the bank's assets.
RBS, Goldman Sachs and Deloitte all declined to comment.
The allegations are part of a 4-billion-pound lawsuit brought by thousands of RBS's investors who bought shares in the 2008 cash call and lost most of their money when the bank nearly collapsed a few months later. RBS had to be rescued by the UK government with a bailout that ended up costing 45.5 billion pounds. British taxpayers still own more than 70 percent of the bank.
The investors are suing for compensation, alleging RBS did not give a proper picture of its finances at the time of the cash call.
Under English law a business publishing a prospectus to raise capital must disclose an accurate record of its finances to investors. If it fails to do so, it can be found liable for damages.
Claimants allege that RBS advisers and lawyers questioned an estimate in the April 2008 prospectus that described writedowns "in 2008." The advisers said the estimate, which appeared in a table of credit market exposures, could be misconstrued as a forecast of writedowns for the whole of 2008, rather than just the first four months of the year, the particulars of claim allege.
Steve Almond, the Deloitte partner responsible for the firm's involvement in RBS's capital raising, told senior RBS executives in an email dated April 21 that "in 2008" implied "there will be nothing more in the next 8 months. This is the hope but cannot be controlled," according to the particulars of claim.
In the email, Almond warned the executives the bank had not estimated full-year losses and would break accounting rules if it published the table. He deleted the disputed "in 2008" and called for the table to be revised, the particulars of claim allege. Almond wrote in the email: "The writedowns reflect assumed exit prices in current markets - not provisions for the rest of the year," according to the claimants' documents.
Almond, who retired from his role as global chairman of Deloitte in May 2015, declined to comment. Instead of acting on advice to clarify the timeframe, RBS allowed the ambiguous estimate to be published despite knowing the asset values and writedowns had only been calculated to mid-April 2008, the claimants' lawyers say. They allege the bank did not want to clarify the estimate because it was worried that doing so might increase concerns about the bank's capital position.
A spokeswoman for RBS declined to comment for this article on that allegation and others made by the claimants.
As Reuters reported on Nov. 16, the lawsuit also includes allegations that senior management dismissed calls from subordinate staff to mark down the values of distressed U.S. mortgage-backed assets more aggressively in the final quarter of 2007, as a global crisis in credit markets began to take hold.
RBS rejects those allegations, and says in court documents for the defense that a lack of trading in such assets at the time made it difficult to pinpoint what the correct values were.
The case, scheduled to start in March, is expected to last six months and to hear from scores of witnesses.