Tuesday, August 08, 2006

NatWest 3 May Testify Against RBC

The Toronto Star, Tara Perkins, 8 August 2006

Three British bankers who are in Houston awaiting trial on criminal charges related to the Enron Corp. scandal have been subpoenaed to give depositions in a separate, class-action civil suit against the Royal Bank of Canada.

The so called NatWest Three have been ordered to appear at the Houston Deposition Centre on Sept. 28 in connection with a suit against the Royal Bank that was launched two years ago by the regents of the University of California in Houston district court.

The suit was filed on behalf of people who bought Enron stock and bonds between Jan. 9, 1999, and Nov. 27, 2001. The university's board of regents, which oversees an investment portfolio of more than $54 billion (U.S.), lost more than $144 million on Enron shares.

The suit alleges that the Royal Bank "engaged in or participated in the implementation of manipulative or deceptive devices to inflate Enron's reported profits and financial condition. ...

"By this fraudulent scheme and course of business, (Royal) pocketed millions of dollars in fees, interest and credit facility payments," the suit states.

The claim alleges that Royal knew Enron considered it to be a second tier bank and that it wanted to become one of Enron's top 10 banks.

The lawsuit alleges the bank hired the NatWest Three to help boost its relationship with Enron — and subsequently helped Enron hide debt on its balance sheet.

The Royal Bank, which lost a battle to have the case dismissed last December, denies the allegations in the civil suit. Royal is in no way implicated in the criminal case against the NatWest Three.

The U.S. government had the three men — Gary Mulgrew, Giles Darby and David Bermingham — extradited July 13 on criminal wire fraud charges for allegedly bilking their former employer, National Westminster Bank, out of $7.3 million (U.S.) in a scheme engineered by former Enron finance chief Andrew Fastow.

The three, who wear electronic monitoring devices around their ankles and are not allowed to leave southern Texas, have all pleaded innocent. They came to the U.S. after losing all appeals in a two-year extradition battle.

In Britain, human rights advocates, lawyers and opposition politicians argue that the case should be tried in England because the three stand accused of defrauding a British bank.

They also say a fast track extradition system enacted in 2003 to fight terrorists allows the U.S. to demand a Briton's extradition without providing evidence.

The case received even more attention last month after a banker who was a witness for the FBI was found dead in a London park.

The three former bankers left Greenwich NatWest in 2000 and went to work for the Royal Bank, Canada's biggest bank where, the lawsuit alleges, they helped Enron hide debt on its balance sheet in order to raise the bank's stature with the Houston-based energy trader.

"We consider the allegations to be false, and we intend to aggressively defend against them," said Royal Bank spokeswoman Beja Rodeck.

A few weeks ago, the men were served subpoenas that will require them to give depositions next month for the plaintiffs in the Royal suit.

The subpoenas were served as they sat in a Houston courtroom moments before a bail hearing was to begin for their criminal charges, Bermingham said in a telephone interview Thursday from his lawyer's office.

"We were just looking at it, thinking, `As if we thought things couldn't get any worse,' they just keep piling shit on us," he said. "We had been in the country less than 24 hours when lawyers for whoever, the ambulance chasing lawyers, came out with their subpoenas," Bermingham said from Houston.

The criminal trial against the three was scheduled to start in September, but Bermingham said it now looks like it will begin early next year, largely because Mulgrew and Darby haven't scraped together the funds for lawyers.

"The terms of the bail package that were set were so financially constraining, they required so much cash to be put out front, that Gary and Giles were not able to maintain the retainers that were necessary to instruct their counsel," Bermingham said. "So they're trying to raise the funds elsewhere by selling other assets in order to retain counsel."

In the meantime, "we have curfews, we have electronic monitoring, we have non-association clauses," said Bermingham, whose wife and three children remain in England.

The criminal charges relate to activities that took place when the men worked for Greenwich NatWest, which has since been bought by the Royal Bank of Scotland.

Bermingham said that in 2000, NatWest was the subject of a hostile takeover bid from two Scottish banks. Part of NatWest's defence strategy was to sell its branch network business, he said.

"And RBC happened to be one of the banks that was actively interested in buying the Greenwich NatWest business. RBC made it very clear that they were very interested in setting up a structured finance group," he said.

"And so, around the time we were leaving, (NatWest) they put an advertisement in the paper saying they would like to set up a structured finance group. I had actually resigned in March of 2000 (from NatWest). And so I was the first to make contact for them."

Soon after, Bermingham helped establish a structured finance group for the Royal Bank of Canada in London of about 50 people, some from NatWest, some from elsewhere, he said.

"RBC moved towards accomplishing this by hiring approximately 25 bankers in August 2000 from the NatWest structured finance group," the civil suit states.

"The NatWest bankers included Gary Mulgrew, who led NatWest's structured finance group and then Royal Bank's global structured finance group; Giles Darby, a managing director in NatWest's structured finance group and the Enron `relationship manager'; and David Bermingham, a director in NatWest's structured finance group," the suit states.

Once at the Royal, the NatWest bankers sought to raise the bank's profile within Enron and thereby increase its fees, the suit adds.

As an example, it claims that the Royal's first Enron transaction after hiring the NatWest bankers was the so-called Alberta prepay.

In August 2000, the province of Alberta auctioned a number of 20-year power purchase agreements. Enron Canada was one of the successful bidders.

While Enron had no interest in purchasing gas, RBC helped to finance a transaction that allowed Enron to treat the financing as a sales contract rather than debt on its balance sheet, the suit alleges.

In a response to the civil suit, filed this March, the Royal acknowledged it hired the NatWest Three and that it entered into a $147.5 million (Canadian) prepaid gas contract in September 2000 in connection with Enron's financing of its power purchase deal with Alberta.

But it outlines 37 defences, arguing that the claims are barred by the statutes of limitations or repose, and that the "plaintiff's claims, at most, allege aiding and abetting the principal conduct of third parties" and are barred by case law.

The Royal argues that it was engaged solely in private transactions with Enron and engaged in no conduct in connection with the purchase or sale of any security, and that the Royal had no "... duty to review, supervise, approve or correct Enron's public financial disclosures, nor were the RBC defendants under any duty to make public disclosure of Enron's financial condition."

The Royal also argues that it proceeded in good faith in relying on disclosures from Enron and that it was ultimately deceived by the company.

The University of California also has class-action claims against Toronto Dominion Bank, Crédit Suisse First Boston, Arthur Anderson LLP, Goldman Sachs, Merrill Lynch, the Royal Bank of Scotland and others related to Enron.

Last August, CIBC settled a class-action suit for $2.4 billion (U.S.). Others have also settled in amounts ranging from $32 million to $2.2 billion, the second largest settlement, which was paid by JPMorganChase in June.