Mr A R Wilson
Senior Legal Advisor,
Serious Fraud Office,
Elm House, 10 - 16 Elm Street,
London,
WC1X 0BJ.

Date: 21st April 2006

Dear Mr Wilson

Poole & Others v HM Treasury (Commercial Court, 2002 Folio S99)

I understand that you are collecting together information, which has been advised to you concerning the Lloyd’s Names’ claim for damages due to alleged fraud. Please find enclosed a copy of the report prepared in relation to the Statutory Instrument 2005 No 1998; the evidence within which is relevant to the underlying fraudulent accounts produced by Lloyd’s of London.

The UK government was obligated to transpose into UK Law the EU First Non Life Insurance Directive 73/239 within five years, which included the requirements to have Insurance Company accounts properly audited and correctly reserved. This was purportedly achieved by way of Statutory Instrument 1979 No 956, in order that the application could be made in particular to cover Lloyd's. I do not pass any comment on other UK Insurance Companies.

The audit system for Lloyd’s dates back to the Lloyd's Act 1911, which audit continued unchanged until the Assurance Companies Regulations Act 1946. This latter Act was transferred into the Insurance Companies Act 1974. The attached extracts are from these Statutes and the Statutory Instruments, which show that there should be an audit of the reserves, in particular by an Actuary for long-term liabilities. Individual Certificates were given to confirm that each Name’s assets exceeded their known liabilities.

It is the job of the Auditor to verify, independently, the assets and liabilities, in accordance with the said instructions. There would, or should, have been a proper actuarial modelling system to calculate the long term liabilities in relation to outstanding claims and known liabilities, which would have projected the potential claims and liabilities. Lloyd's has always maintained the position that it reserved pound for pound for all claims, even if those claims were not likely to be settled for some years. These were the representations, which were given to all Names when they joined, and provided the comfort they needed that the reserving policy at Lloyd’s was more than adequate to meet all known projected liabilities.

This position continued until 1982. You will see from the attached report that up to that time there were already decided legal cases in the USA, which expanded the basis of claims for asbestos victims, which hitherto had been treated under Worker Compensation Policies, but now were being paid under Products Liability policies.

The UK Insurance Companies Act 1982 continued the system of the Audit for Insurance Companies generally, and in particular for Lloyd's, which again confirmed, in the opinion of the Auditor, the Certificate said that:-

"the value of the assets available to meet the underwriters (Names) liabilities in respect of insurance business is correctly shown in the accounts and whether or not the value is sufficient to meet the liabilities calculated:-

• in the case of liabilities in respect of long term business by an Actuary and
• in the case of other liabilities by the Auditor on the basis approved by the Secretary of State"

Once again an Independent Actuary was required to determine the long-term liabilities.

I now refer you to Statutory Instrument 1982 No 136. This states that the Audit should be in accordance with the "said instructions". You will see from the enclosed report, the letter from Neville Russell, the lead panel auditor, dated 26th February 1982, where they refer to the impossibility of determining the liabilities in respect of asbestosis. The Panel Auditors had a severe problem, and wrote to the Council of Lloyds for guidance. This resulted in the form of the letter from Murray Lawrence dated 18th March 1982. The problem was by this time so acute, as you will again see from the leading underwriters letter dated 5th August 1980, which recognised $2 ¼ billion liabilities just from the Johns Manville policies alone. These underwriters had set up The London Market Asbestos Working Party to examine the massive claims originating from the USA.

In order to understand the background to Statutory Instrument 1982 No 136, you need to refer to the 1982 Instructions for the Guidance of Lloyd's Auditors, where under point 6, it states that the Managing Agent has responsibility for determining the liabilities. The Auditor's role is thereby shifted to merely acknowledging that the underwriter's liabilities are recorded within the accounts, and there is no attempt at an independent actuarial projection nor an independent verification by the Auditors. This is dereliction of duty. It also shows how the "goal posts were shifted" so that Lloyd's was moved away from a proper audit system into self-certification. This could only have been achieved with the consent of the Department of Trade & Industry, who issued the change in the Rules.

This change permitted Lloyd's to continue to publish unreal profits from the 1979 year of account, and thereby make large distributions to the membership. It also enabled them to go on a recruitment exercise to bring in new Names, on the basis of what were then known to be false accounts. It has since transpired that the underwriters merely reserved for legal fees to fight the claims under the policies, making little or no attempt to properly reserve under the policies themselves.

It has been held in the United States that the “duty to defend” obligation represents a separate contract of insurance, and reserving for legal fees alone was not reserving for the much larger potential claims if the policies were upheld in the court. Clearly from the 1911 Lloyd's Act through to 1982 Lloyd's accounts had actuarial valuation of liabilities, and an audit as an independent verification. This practice then changed to self-certification, thereby creating a false market. Existing Names were given mistaken confidence to continue in the Lloyd's market, and at the same time allowed new Investors to be recruited. It also gave a window of opportunity for many working Names to resign themselves from high-risk syndicates. This is the basis of the Names claim that Statutory Instrument 1982 No 136 deliberately breaches the EU Directives, and still permits false accounts to be published. I would suggest that the losses suffered could well be in excess of the £1 billion suggested in the current litigation.

The fact that asbestos losses were concealed is self-evident, in that Lloyd's virtually collapsed in the early 1990’s, because of so many declared open years with massive outstanding claims, which required the Reconstruction & Renewal process; resulting in all such outstanding liabilities being reinsured into Equitas. You may care to note that it is strange in the previous years the Auditors were apparently able to sign off the accounts without any qualification, whereas the Accounts of Equitas have had disclaimer of opinion ever since it was formed. It is after all the same liabilities which have been moved out of the syndicates into Equitas. This begs the question why, when the liabilities were within the syndicates, there was no similar disclaimer of opinion. I believe the reason for this is because the Auditors were under no obligation to check or record the liabilities; and also they did not carry any duty towards the Names. Nor indeed were they required to carry out any exercise to check whether the accounts were true and fair, or that the reserves were adequate. Clearly it is now self-evident that there were false accounts and the liabilities were not truly recognised, so that Equitas had to be formed.

In going along with this shift into self-certification, the Auditors of the syndicates have themselves breached the code of practice issued by the Institute of Chartered Accountants from 1980. In particular, the Technical Release no 413, (The Guidance for Relationship between Member and Client) which later became Statement 1-306, Professional Conduct in relation to default or unlawful acts. The guidance of the Institute is clear in that members should not be associated with accounts which have been misleading, nor should they go along with a client who is wishing to carry out an unlawful act or default. Resignation is the only option.

For some reason these firms chose to continue to audit the syndicate accounts, not in the interests of the investors (the Names), but under a new set of Lloyd’s instructions, which removed all their professional responsibility and liability from them. In my opinion, the correct response should have been that all firms resign or insist all years be left open which were affected by the asbestos claims. Clearly this they failed to do, possibly because they thought they were protected under Statutory Instrument 1982 No 136. You may also care to note that the Lloyd's Act 1982 was before Parliament at this time, and was not actually passed into law until July 1982. Under Section 14 of this law, the Council of Lloyd's were guaranteed immunity from suit. This has acted as a means of preventing any legal action against Lloyd's since that time, even though they are no longer the Regulator, and that role has now been taken over by the FSA. It is not coincidental, in my opinion, that they were given such massive immunity from legal action in 1982. Such privilege has never been granted to any other Regulator, before or since. Clearly it was anticipated that disaster could happen and thousands of Names ruined.

This effectively amounts to a State supported fraud upon the Names in creating a false market. The matter which is brought before you to investigate has previously always been met by obstruction, but I trust on this occasion will now be fully examined.

Yours sincerely

Elaine Williams
Director
Enc

Elaine Williams
Director S.A.F.E.
69 Sutton Road, Heston,
Hounslow, London
TW5 OPN
TEL: 0208 630 9990 FAX: 0208 630 9900
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