Farepak collapse caused by bankers, says judge

http://www.guardian.co.uk/business/2012/jun/21/farepak-collapse-caused-bankers-judge

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A high court judge has accused bankers of forcing the collapse of the Farepak Christmas savings club by sucking it dry of millions of pounds of savers' hard-earned cash.

The court heard that HBOS forced Farepak's directors to continue collecting savers' deposits – cash which the bankers derided as "Doris money" – when it was clear that the savings club was going to go bust.

"HBOS knew that those deposits would be paid … and that the only beneficiary of those deposits would be HBOS," said Mr Justice Peter Smith.

The judge said that HBOS, which is now part of the bailed-out Lloyds Banking Group, did not break the law by taking £4m of savers' deposits when it was clear that Farepak was on the brink of collapse. But he added that the bank's behaviour "might not be regarded in the public's eyes as being acceptable".

In an extraordinarily impassioned speech delivered in open court after the collapse of a case against Farepak's former directors, Smith said he was not presiding over a "court of morality", but suggested HBOS should make amends to Farepak's savers by donating millions more to a distress fund.

The judge said Fraser Kelly, HBOS's head of corporate banking, had taken "almost a pride" in his "hardball" approach to getting the bank's money back from Farepak, part of a larger firm called European Home Retail, which also went bust.

Farepak's 116,400 savers, most of whom were low-income families, had no inkling that anything was amiss and continued to pay in £1m a week right up to the company's collapse in October 2006.

The savers eventually collected just 15p for every £1 they saved for Christmas, while HBOS's £31m loan was repaid in full.

The judge said HBOS could have saved Farepak from collapse if it had pumped in just £3m-5m more cash. "The unchanging attitude of the bank not to give anything during this period was the reason why the companies failed," he said.

Celebrities and supermarkets rallied round to help save the Farepak victims' Christmases. HBOS donated £2m to the fund in November 2006. But Judge Smith said HBOS "ought to make a further substantial payment to the compensation fund". But he added: " I cannot force them, it is entirely a matter for them."

A spokesman for Lloyds said: "The bank and its employees acted entirely appropriately throughout its relationship with European Home Retail plc. It made entirely reasonable decisions based on the information available to it at the time."

"On the matter of a contribution to the fund, we contributed £2m after Farepak collapsed and we will consider the comments that the judge made today."

Smith also criticised Vince Cable, the business secretary, for bringing the case against Farepak's former directors, including Sir Clive Thompson, a former president of the CBI and ex-chief executive of Rentokil.

Cable's attempt to bar the bosses of Farepak from the corporate world for up to 15 years collapsed on Wednesday when the Insolvency Service, which brought the case on Cable's behalf, was forced to abandon the case owing to a series of errors.

The judge said witnesses were forced to retract key evidence when it became clear they did not understand, and in some cases had not even read, their witness statements.

Judge Smith also criticised the Insolvency Service's lawyers for introducing witness statements that ran to 700 pages or, as the Judge said, "the size of a novella".

The collapse of the case is likely to cost the taxpayer about £20m in legal fees. A costs hearing will be heard next Friday, but it is expected that the Insolvency Service will be asked to pick up the bill for the legal costs of all the parties except Lloyds.

The taxpayer then faces the prospect of further multimillion-pound payouts in the future as Farepak's former directors are understood to be considering suing for damages to their reputations and loss of earnings.

Thompson told the Guardian that he is also planning to sue three MPs, including former Commons leader Jack Straw, for defamation after they publicly attacked him over the company's collapse. Shortly after the collapse Straw branded Farepak's demise a "truly scandalous situation" and said: "The more we find out about it the more, bluntly, it stinks."