SFO - Serious Fraud Office

The trial

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Left to right: Michael Bright, Philip Condon and Dennis Lomas.
(Illustration courtesy of Priscilla Coleman)

As 30 May 2007 loomed, the case team remained nervous about the outcome; could a jury really understand this case?

"The decision to charge had been a long and difficult process with Andrew Baillie producing papers on various issues and us seeking his views on various points of law," says Graham More. "As time went on we became more and more convinced that we'd made the right decision, but we didn't really become confident of the outcome until the trial was well underway".

But Andrew Baillie had a different perspective: "I always thought it would be possible for the jury to know enough to understand the story and to then focus on who had been telling lies, what was the significance of those lies, and who knew what. These are not complex questions - they are not questions which only an actuary could answer. Once they understood the story it was a case for ordinary people to decide."

So Baillie's opening speech sought not only to introduce the complex material about reserving and reinsurance but also to reassure jurors that this case was well within their competence. Their verdict would not depend upon the quality of their understanding of 'incurred but not reported' claims, he told them. They would not need to pass exams in actuarial science. Getting to know the technical information that now seemed so daunting would be like getting to know London itself: an initial impression of "a vast and impenetrable place" would slowly give way to"small clearings in the forest"; some of these then merge into larger areas until, after a while, whilst you do not know everything, and never will, you do know enough.

The rest of the case team are unanimous in their admiration for how Baillie made such a difficult case so accessible. "An important part of getting the jury off on the right foot in a case as complex as Independent is to reassure them about the demands it will make on them. Andrew did this brilliantly," says Emma Lindsay.

Expert testimony

Lis Gibson entered the witness box on 20 August, the day before Michael Bright. Her evidence would now prove invaluable in helping Andrew Baillie explain to the court the crucial but very technical 'gearing' mechanism by which the withheld data came to cause a hole several times its own size in Independent's finances. It was a challenge she relished. Having tried out various explanations on the case team she had finally settled on a motoring analogy; a routine drive to work is hampered by unexpectedly heavy traffic (adverse claims development) and an unreliable timepiece (inaccurate claims data) so that the driver struggles to make an accurate prediction of her final arrival time (total reserves). But would the jury 'get it'? There was only one way to find out. "The best fun I had during the whole case was explaining to the jury how actuarial reserving methods work," says Gibson. "If you take it slowly enough, and break things down into pieces, these things can be understood. The car journey analogy is one we use with our trainees and it seemed to work very well with the jury too. The judge made a comment that he disliked the cartoon style, but he asked a question in the language of the analogy, so he certainly seemed to get it - and that's what matters."

The SFO team cannot speak highly enough of Gibson's contribution, combining great technical expertise with a rare talent for explaining tricky material in a way that is clear and entertaining even for the uninitiated.

Bright in the witness box

there was no innocent reason for keeping claimsdata off the system because the outcome was always the same; it caused the system severely to understate the situation and so to mislead

When Bright came to give his evidence in chief his counsel did all he could to paint the allegations against his client as absurd: as CEO, Bright was a broad brush man, uninvolved in detail; he showed his faith in Indy by buying shares as late as February 2001; in the collapse he'd lost his entire personal fortune and his reputation. It makes no sense to think of Bright as a fraudster, the defence insisted. Where's the benefit? Where's the motive?

"The main shape of the cross examination of Bright," says Baillie, "was first to get him to acknowledge for the jury that his case was that he had not known about any of the three aspects of the dishonest system; then to go through a series of documents and show that he had known about each; then to get him to admit that that was the case; and finally to say that what he'd said at the beginning had not, therefore, been right."

When Bright was interviewed by the SFO he had insisted he had no idea what senior staff like Patricia Clarkson and Stewart Pettet meant when they referred to 'lists of increases' being 'managed through'. During his evidence in chief he changed tack, trying instead to portray 'managing through' as simply part of his dogged determination to secure accuracy in reserving."Did you think they were being managed through?" his counsel asked. "Yes" he replied. "And not kept off the system?" "No".

But during cross examination Andrew Baillie showed that this distinction, between 'managing through' and 'withholding', was a false one. In fact, he said, there was no innocent reason for keeping claims data off the system because the outcome was always the same; it caused the system severely to understate the situation and so to mislead anyone - actuary, auditor, analyst, investor - who relied on its information. What mattered, insisted Baillie, was the time the data spent off the system, not the reason: "In the evidence in chief Bright and his lawyer between them treated the allegation that he was a party to keeping things off the system as if that meant keeping things off the system for ever. We weren't really saying that; sooner or later they had to pay each claim. What we were saying was that they kept things off the system when those things should have been on the system. I think that was quite deliberately done by the defence, but it put Bright in a false position. Then it was easy to show that he did know about cases being kept temporarily off the system."

Regarding the reinsurance contracts, really Bright's case was hopeless, says Baillie. "It was quite clear that he had had to know about what we called 'the bad contracts' and there were several reasons for that, in particular the hand-written letters, which he was never able to explain."

Lomas's surprise defence

The press made much of Michael Bright's witness box display of tearful regrets on 23 August, but arguably the true moment of high drama presented itself less ostentatiously two weeks later.

Lomas took the prosecution by surprise when, under cross examination, he tackled Gibson's expert evidence head on. Baillie asked Lomas whether he agreed with Gibson's calculation that the minimum consequence of the withheld data was a reserve shortfall of £130 million. Lomas replied "I would challenge it." "As a matter of professional opinion?" asked Baillie. "Yes" replied Lomas, adding that Watson Wyatt did not "take into account in their calculations the full weakness [of Independent's reserves] and they should have been able to identify [that] in the data without any reference to the additional data."

Lomas went on to say that he had deceived Watson Wyatt knowingly but that he'd been justified in so doing for three reasons: the actuaries had had enough data anyway; they were already allowing for inadequacies in the Independent data; and, finally, he believed that had Watson Wyatt been told the truth they would have over-reacted, causing the company to collapse needlessly.

"The Lomas defence was really important for the actuarial profession and the insurance industry in the UK," says Lis Gibson. "If a finance director can legitimately choose to deceive his advisors and manipulate their opinions to mirror his own, just because he disagrees with them and thinks he is right, then the advisors' formal opinions no longer have any meaning."

The next day Baillie probed Lomas's actuarial defence closely. It did not stand up well. The whole argument rested precariously on the notion that Lomas's opinion was more valuable than Watson Wyatt's, even though it was the actuaries' which the market relied upon. "Have you ever had any formal training in being an actuary?" Baillie asked. "No," Lomas replied. "Did you put pen to paper ...[or] cursor to spreadsheet to make an analysis?" "No."

Lomas's 'reasoning' had done him no favours. Andrew Baillie's close inspection had revealed it to be not much more than an admission of guilt by his own account.

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