Mafiosi Bankers: What the HBOS Fraud Tells Us About the State of British Banking

By Ian Fraser (Twitter @ian_fraser). This piece, cross-posted from Ian’s web site, is a fully revised, updated and extended version of ‘Mafioso bankers and my part in their downfall‘ published in the Sunday Herald on 5 February 2017

On Thursday 2 February, two former senior bankers at Halifax Bank of Scotland (HBOS) and four consultants with whom they closely worked were jailed for periods stretching from three-and-a-half year to 15 years for their part in a £245 million loans scandal.

Four days earlier, the ‘HBOS six’ were found guilty of offences including corruption, fraudulent trading and money laundering – offences that caused losses of up to £1 billion at HBOS’s parent, Lloyds Banking Group, and caused the destruction of up to 200 viable small-business customers of the bank’s. For me, it was the culmination of an investigation with which I’d been involved for almost a decade as a journalist.

Seasoned journalists often say “never look below the line; that way madness lies”. They mean that you shouldn’t read the comments underneath articles you’ve written – as they can be a minefield of pedantry, grandstanding, semi-coherent rage and abuse. So when I saw that my “Call to sack HBOS directors” article, published in the Sunday Herald at the banking crisis’s nausea-inducing height on 28 September, 2008 – days after HBOS had collapsed and when RBS was perched on the brink – had over 400 comments under it, what did I do?

I ignored colleagues’ advice and delved in. Amid the bluster and outrage that an iconic 300-year-old Scottish institution should have been led to destruction by such hopeless directors as Lord Stevenson and Andy Hornby, one short comment stood out. It was from a Cambridge-based businesswoman called Nikki Turner, and read “if anyone is interested in finding out more about a £1 billion fraud in a single HBOS branch, please get in touch.”

It didn’t take me long to contact her. On Tuesday, 30 September, I had several long phone calls with both Nikki, a lyricist and a mother of two daughters, and her husband Paul, a rock music entrepreneur who had done the lighting for acts including Bob Marley, Dire Straits, The Jam, Fleetwood Mac, Thin Lizzy and Bruce Springsteen. I learned the couple had launched an independent music label, Zenith Cafe, together in 2003. They told me this had been on the cusp of a major breakthrough in 2007 when, for no apparent reason, HBOS and its preferred management consultants had tried to snuff it out.

The Turners blamed this on a rogue Bank of Scotland senior manager whose improbable name sounded like that of a Victorian villain – Lynden Scourfield. They alleged that Scourfield, lead director of impaired assets at HBOS’s Bank of Scotland Corporate unit, had been working in cahoots with a band of self-styled “turnaround consultants” dubbed Quayside Corporate Services, which was led by David Mills, who I later discovered had left his former employer, Lombard North Central, the factoring and invoice discounting arm of National Westminster Bank,  under a cloud in 1995.

The seemingly wilful destruction of Zenith sounded bad enough. But what made me realise this story had legs was that the Turners had documentary evidence to back up every claim, and had already done a significant amount of research into the activities of Scourfield, Mills and Quayside. Critically, they had discovered that Zenith was not alone in having been treated shabbily.

They had identified dozens of other businesses across the UK which had been through the mill at the hands of Mills and Scourfield and, in many cases, the punishment meted out had been far worse than that endured by Zenith. The affected firms came from a wide range of sectors including aviation, consumer credit, music publishing, packaging, nightclubs, restaurants, sporting goods, textiles and top-shelf magazines – and included well-known brands like Smollensky’s on the Strand, Euromanx airline and magazine Asian Babes.

The modus operandi of the fraud, which I confirmed in interviews with directors of other affected firms, included that the companies would, often arbitrarily and without notice, see their bank accounts transferred to the tutelage of Mr Scourfield’s “high risk” team based at Beauclerc House, Reading. Many of the companies that were transferred were not in default or financial difficulties. Triggers included that they had sought additional facilities to fund acquisitions or growth, or just that Scourfield and his cronies had taken a fancy and had cherry-picked them from across the Bank of Scotland network.

The next step was that Scourfield would force the companies to adopt Quayside personnel as advisers, shadow directors or directors, effectively using blackmail to ensure the companies acquiesced. The standard threat was, if they did not comply, they would be “shut down”. With Quayside in the driving seat, Scourfield would then turn on the monetary taps, granting huge and usually unserviceable additional loans to the firms concerned, a process sometimes eased through by the writing of fake business plans, which Scourfield used to placate his seniors in the bank. Those who were responsible for signing off his loans are believed to have included Paul Burnett, who wound up working for Mills.

The next thing that the legitimate owners and managers of the affected firms knew was that Quayside personnel – the most unsavoury of whom were David Mills, Michael Bancroft and John “Tony” Cartwright – started behaving like trumped up Mafiosi, treating the companies as their own personal ATMs and syphoning out cash, dressed up as “consultancy fees”, to fund lavish lifestyles, exotic holidays, foreign real estate buying binges and romps with high-class hookers as well as generous bribes and “inducements” along similar lines for Scourfield, who was sometimes also known as “Gerard”. All the while, Mills and Co were destabilizing the businesses, plundering their assets, and setting them on a path towards insolvency.

One reason Scourfield and his subordinate Mark Dobson were able to get away with this sort of thing was that the checks and balances within Bank of Scotland Corporate were either weak or non-existent. During the recent trial, it emerged that, during 2003, an internal auditor at Bank of Scotland Corporate alerted his superiors to the fact the CODA financial reporting system, which was supposed to flag up unexpectedly large loans, was “broken”, and that the bank failed to repair it. It has yet to emerge whether this was a deliberate oversight on the part of the bank — but it certainly suited Scourfield and probably loads of other people within Bank of Scotland Corporate. Furthermore in the three years between 2004 and 2007, it emerged that the Reading office that Scourfield ran wasn’t audited once!!

Some of the firms’ legitimate owners and managers told me they felt like they had been overrun by the mob, with metaphorical “guns” frequently “held to their heads”. Others said they they felt like they’d entered a Kafkaesque nightmare, especially when their complaints to HBOS’s headquarters on Edinburgh’s Mound fell on deaf ears. I was shocked that a supposedly reputable bank, founded in 1695 and which once advertised itself as “A Friend for Life”, should have given a gang of utter reprobates free rein to ride roughshod over its small and medium-sized enterprises base, but have studiously ignored the victims’ cries of help.

The Turners’ tale might have been possible to dismiss as a sob story, a failed business blaming its woes on a bank, allied to a wild conspiracy theory that could not possibly be true but, unlike some other journalists they approached, I was fairly convinced this was not case. This was something major and abhorrent, which I felt was crying out for exposure, especially since the bank seemed so desperate to keep it under wraps. I also felt that, since HBOS was about to be acquired by Lloyds in a “shotgun wedding” demanded by UK prime minister Gordon Brown, that Lloyds TSB shareholders deserved to know of the true toxicity of the bank they were being expected to absorb.

The Turners had issued a formal complaint, which detailed the scale and scope of the alleged internal fraud, to all sixteen members of HBOS’s board, including chairman Lord Stevenson, chief executive Andy Hornby, finance director Mike Ellis and non-executives Sir Ron Garrick and Charles Dunstone on 3 September 2007, sending the letters by both email and recorded delivery. The bank’s response was astonishing.

Instead of thanking them for alerting it to alleged criminal wrongdoing, reporting the perpetrators to the police, and seeking to put things right, HBOS sent a menacing legal letter via the ‘silver circle’ solicitors Denton Wilde Sapte which, among other things, invited the music industry duo to notify and provide evidence to the police if they believed that crimes had occurred. Then, in an apparent campaign to silence the Turners, HBOS through solicitors Wragge & Co but with Dentons also in attendance, sought to have them evicted from their home and place of business in 22 subsequent court hearings.

This was despite the fact their inability to service their mortgage had been caused by the destruction of their business by Scourfield and Quayside!

After the Turners reported the alleged fraud to the Cambridgeshire Constabulary three months later, the police approached the Edinburgh-based bank to find out what was going on. But the bank’s Corporate Financial Crime Prevention team sought to put a lid on things by claiming that no criminal activity had taken place, a claim that put the cops off the scent. Unless the alleged crime was reported by its largest “victim”, no criminal inquiry could proceed. In an email dated 21 April 2008, Brenda McMeechan, investigations manager in HBOS’s corporate financial crime prevention team told police who were making inquiries:

“I would advise that we are not undertaking an investigation into Lynden Scourfield’s conduct, as we have no evidence of criminal activity on his part. Without proof to corroborate any act of deception or fraud, I cannot offer any information that would support or substantiate any allegations of wrongdoing.”

It later emerged that Lloyds, which completed its highly contentious takeover of HBOS on Monday, 19 January 2009, thereby assuming full responsibility for addressing the matter, had also been obstructive. Anthony Stansfeld, police and crime commissioner of Thames Valley, later suggested that the Gresham Street-headquartered bank was uncooperative during the subsequent police probe. He said Lloyds “made every effort to make it difficult for the police to investigate … Everything was put under legal privilege — it required a host of barristers and lawyers to untangle it and get it out of the bank,” he said.

As a financial journalist I was well aware that reckless lending, inadequate controls and delusional thinking had fuelled the UK’s banking crisis. But what I had learned since first picking up the phone to the Turners seemed off the scale. To summarize, Mills and Co were acting like the gangsters in Martin Scorsese’s classic movie, Goodfellas, in which Ray Liotta’s Henry Hill and Paul Sorvino’s Paul “Paulie” Cicero take over a night club, the Bamboo Lounge, then loot it, abuse the owner’s credit and run it into the ground. Once the owner, Sonny, is unable to pay them anymore, they torch it for the insurance money. As Liotta’s Hills narrates: “And, finally, when there’s nothing left, when you can’t borrow another buck from the bank or buy another case of booze, you bust the joint out”

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