The Fraud at the Heart of Equitas
The first published "Report and Accounts" of Equitas Holdings Limited
and its subsidiaries (the "Equitas group", or "Group")
were made up to 4th September 1996. On that date, the Group's Accounts
showed that its assets totaled £15,974,000,000, its liabilities £15,386,000,000,
and its purported shareholders' funds £588,000,000. All very substantial
sums of money.
The Group's auditors required 3 pages and more to report that the figures
shown in the Accounts could not be validated. They reported that "the
scope of their work was limited"; that "the quality of syndicates' data
was inadequate"; that "the reserving methodologies were inappropriate";
that "there are significant uncertainties as to the accuracy of the provision
for claims outstanding of £14,757 million, reinsurers' share of claims
outstanding of £4,285 million and reinsurance recoveries of £1,523 million";
that "the evidence we considered necessary for our audit is not wholly
available"; that " we did not receive access to available information
because of the risk of breaches of legal privilege" (surely this is unique
for the audit of an insurance company?), and that "we were therefore unable
to determine whether proper accounting records had been maintained".
Yet in spite of those and other equally meaningful qualifications they
concluded... "Except for material adjustments.... in our opinion the financial
statements give true and fair view of the state of affairs of the company
and the Group as at 4 September 1996".
The audit report was thus essentially worthless.
An examination of the small print of these first Accounts of the Equitas
group and an examination of the Accounts filed with Companies House, the
official government Registry, produces quite different information.
The true shareholders' funds of the Equitas group totaled a mere £101,
the result of the parent company having issued only three small-values
shares of stock.
The additional so-called "Shareholders' Funds" of the Group were shown
as £588,000,000, but they are described as "non-equity interests", and
a further reading shows that shareholders can't ever touch "their"
funds. This huge sum, equivalent to around $1 billion, arose from the
book-keeping used to record a quite remarkable inter-group transaction.
Lloyd's Names were forced to reinsure all their outstanding 1992 and earlier
underwriting commitments with the Equitas group on 4th September 1996,
the date of these first published Accounts. The actual reinsuring company,
Equitas Reinsurance Ltd. (ERL), was a wholly owned subsidiary of Equitas
Holdings limited, the Group's parent company. Like its parent company,
ERL was also a shell company having no assets, liabilities or capital.
The total reinsurance premium which Names paid to ERL was £11,190,000,000.
On that very same day, 4th September 1996, within minutes after ERL received
that premium, an exceptional transaction was made. ERL paid Equitas Limited--
another wholly owned subsidiary of Equitas Holdings Limited-- £10,472,000,000
for the Names' compulsory reinsurance.
ERL booked an apparent profit of £718,000,000-- possibly the largest
"day trade" profit in history!
But that transaction took place between two wholly owned subsidiaries
of Equitas Holdings Limited, and it touched no outsider whatever. Both
of these two companies were, otherwise, shell companies having no assets,
liabilities or share capital. Neither had ever transacted any business.
The second company could never be said to be able to provide any special
expertise or services which the first could not provide. Neither had any
assets, net worth or capital. There could be no valid commercial reason
for that transaction. So what was its purpose?
The answer is evident from the published Accounts of the Equitas group.
The reason for the transaction was to allow the Group to create the fictitious
illusion that it had substantial equity capital. After deducting start-up
costs and expenses of £130,000,000 from the purported trading profit of
£718,000,000, the Equitas group booked £588,000,000 as its capital base.
That capital sum, and the profit from which it was derived, did not result
from trading with anyone outside the Group. The profit was not "realized".
It resulted solely from an inter-group transaction; in other words, all
the owner did was to pass money from his left hand to his right hand.
The reflection of that transaction in the Group's published formal Accounts
was a clearly dishonest maneuver which had been planned well in advance
by an institution, The Society of Lloyd's, which is both effectively immune
from legal suit in England and which has long been associated with deceptions,
misrepresentations and cover-ups. And what is perhaps worse, the Government
was involved. The Department of Trade and Industry approved the details
of these deceptive fraudulent transactions beforehand. Its reasons, of
course, were that it had to appear to enforce its own laws and rules.
The conclusion is clear. Either Names were defrauded directly of £718,000,000
by being required to pay an excessive premium, in that sum, to Equitas,
or Lloyd's, the DTI and Equitas conspired to break the law in seeking
a license for ERL and EL to practice insurance in the UK.
Numerous questions remain unanswered. Is that money retained by ERL available
to pay outstanding claims on Lloyd's pre-1993 policies/contracts? Is any
portion of it available to distribute pro-rata to reinsured Names? Will
Berkshire Hathaway have access to those funds as part of its recent reinsurance
deal with Equitas? Which Equitas group entity(s) did the contract with
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