Re-Re-Amended Defence under CPR rule 17.

1(2)(a) dated [ ] pursuant to the Order of Hildyard

J dated [ ]
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Claim Nos. HC13F01247

HC13C03047
HC14F01973
HC14F01992
HC14F02111
HC14F02112
HC14F02157
HC14F02199
HC14F02235
HC14F02246
HC14F02264
HC-2015-004843
HC13D01192 HC-2013-000106
HC14F01714
HC14F01704
HC14F01971
HC14F02211

BETWEEN:
JOHN GREENWOOD
DAVID JAMES LAMONT and the other claimants in Claim No HC13C03047 (named in the
schedule to the Claim Form therein)
ABBEY LIFE ASSURANCE COMPANY LIMITED and the other claimants in Claim No
HC14F01973 (named in schedules 2 to 5 to the Claim Form therein)
GULF INTERNATIONAL BANK (UK) LIMITED and the other Claimants in Claim No.
HC14F01992 (named in Schedules 1 and 2 to the Claim Form therein)
KEVA OY and the other Claimants in Claim No. HC14F02111 (named in Schedules 1 and 2 to
the Claim Form therein)
GULF INTERNATIONAL BANK (UK) LIMITED and the other Claimants in Claim No.
HC14F02112 (named in Schedules 1 and 2 to the Claim Form therein)
IAN MALCOLM JONES and the other Claimants in Claim No. HC14F02157 (named in
schedules 1 to 3 to the Claim Form therein)
FREDERIC SEBASTIAN AARON BINDING and the other Claimants in Claim No.
HC14F02199 (named in Schedule 1 to the Claim Form therein)
DAVID JAMIESON and the other Claimants in Claim No. HC14F02235 (named in Schedule 1
to the Claim Form therein)
D P BLUNDELL and the other Claimants in Claim No. HC14F02246 (named in Schedules 1 to
3 to the Claim Form therein)
CHINATRUST COMMERCIAL BANK (AS TRUSTEE FOR ITS BENEFICIARY, JPM
(TAIWAN) GREATER EUROPE FUND) and the other Claimants in Claim No. HC14F02264
(named in Schedules 1 to 3 to the Claim Form therein)
JAYENDRA SURINDER LAKHAN and other Claimants in Claim No. HC-2015-004843
(named in the Schedule to the Claim Form therein)
Claimants
-and-

(1) FREDERICK GOODWIN

(2) SIR THOMAS MCKILLOP
(3) JOHN CAMERON
(4) GUY WHITTAKER
(5) THE ROYAL BANK OF SCOTLAND GROUP PLC
Defendants

AND BETWEEN:
TRUSTEES OF THE MINEWORKERS' PENSION SCHEME LIMITED
AND OTHERS as listed in Schedule 1 to the Re-Re-Re-Amended Claim Form in Claim HC2013-000106
LEGAL AND GENERAL ASSURANCE SOCIETY LIMITED and others as listed in the
Schedule to the Claim Form in Claim HC14F01714
DOROTHY LAMOUREUX and others as listed in the schedule to the Claim Forms in Claim
Nos HC14F01704, HC14F01971, and HC14F02211
Claimants
-andTHE ROYAL BANK OF SCOTLAND GROUP PLC
Defendant
THE RBS RIGHTS ISSUE LITIGATION

RE-RE-AMENDED DEFENCE

CONTENTS
Page
The structure of the pleadings ............................................................................................................. 4
Summary of the Defendants' defence.................................................................................................. 5
Introduction ......................................................................................................................................... 9
Background and events ..................................................................................................................... 10
Legal framework ............................................................................................................................... 10
Process of preparation for the Rights Issue ....................................................................................... 17
Purpose of the Rights Issue and use of its proceeds.......................................................................... 28
Capital ............................................................................................................................................... 61
Liquidity............................................................................................................................................ 93
The extent of credit market exposures ............................................................................................ 143
Monoline and CDPC and Financial Guarantor exposures .............................................................. 253
Market Risk and the Use of VaR .................................................................................................... 277
Operating Profits ............................................................................................................................. 316
RBS's management, risk controls and management information systems ...................................... 397
Defences under Schedule 10 of FSMA ........................................................................................... 504
Causation and loss........................................................................................................................... 510
The Defendants' lack of liability ..................................................................................................... 510
Schedule 1 Dramatis Personae ....................................................................................................... 513
Schedule 2 Glossary and Abbreviations ........................................................................................ 516

The structure of the pleadings

1.

For convenience in this Re-Re-Amended Defence, unless otherwise stated or the context
demands:
1.1

References to paragraphs are to paragraphs so numbered in the "Amended

Consolidated Particulars of Claim and SL Group Points of Difference" served by the
SL Group and dated 15 July 2014 October 2013 ("the Composite Amended
Consolidated Particulars of Claim").

1.2

The same abbreviations and headings are adopted as are used in the Composite
Amended Consolidated Particulars of Claim. Additional definitions and a glossary
of terms appear in the Schedule hereto.

2.

Paragraphs 0A, 0B and 0C and 0DA are noted. This Re-Re-Amended Defence pleads to the
Amended Consolidated Particulars of Claim. both the Greenwood Particulars of Claim and
the SL Group Points of Difference, as set out in the Composite Particulars of Claim. In this
Re-Re-Amended Defence, the Director Defendants plead only to the allegations made in the
claims issued by the BB ClaimantsGreenwood Particulars of Claim.

Responses to the

allegations contained in the SL Points of Difference appear in small capitals. Matters relied
on in relation to such responses claims made by the SL Claimants and/or the QE Claimants
and/or the LK Claimants and/or the MdR Claimants will also be relied on as necessary by the
Defendants in response to the allegations made by the BB Claimantsin the Greenwood
Particulars of Claim. Where reference is made in this document to "the Defendants", to the
extent that it appears in a response to a claim advanced by the SL GroupClaimants and/or the
QE Claimants and/or the LK Claimants and/or the MdR Claimants, that reference should be
taken to be to RBS only.
2A.

The claims made by the Claimants referred to in paragraph 0B(1)(l) were issued on 20
November 2015, more than six years after those Claimants' alleged causes of action accrued.
Those claims are therefore time-barred under the Limitation Act 1980, and should be
dismissed for that reason alone.

The Defendants plead to those claims herein without

prejudice to this position, and all of their rights are reserved.

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Summary of the Defendants' defence

3.

The Defendants deny that they have any liability to the Claimants under s.90 of FSMA as
alleged in the Composite Amended Consolidated Particulars of Claim. The basis for that
denial is set out in detail in the body of this Re-Re-Amended Defence. In summary:
3.1

The Prospectus set out accurately and fairly the background to the Rights Issue and
the reasons why the Board had concluded that it was necessary, making clear that
the Rights Issue was being undertaken in order to strengthen RBS's capital position.
Contrary to the allegation made by the Claimants, the Rights Issue was not forced
on RBS by the FSA. The decision to undertake it was made voluntarily by RBS in
light (as the Prospectus made clear) of the developments in the financial markets in
March 2008, including the severe deterioration in credit markets and the worsening
economic outlook. By the time Goodwin met Mr Sants of the FSA on 9 April 2008,
RBS had already begun preparations for the Rights Issue.

3.2

The preparation of the Prospectus was carried out with the assistance of a highly
experienced group of professional legal and financial advisers/underwriters who, in
particular, advised on the matters required to be included in the Prospectus, and was
subject to an extensive process of due diligence overseen by those advisers. Further,
it was published only after being approved by the UKLA, which had been in regular
communication with the bank's financial advisers and sponsors from an early stage
and which had provided detailed comments on three separate drafts of the
Prospectus.

3.3

The Prospectus made clear that the capital plan, of which the Rights Issue formed
part, assumed that significant write-downs would be needed on certain of RBS's
credit market exposures over the course of 2008. The extent to which those writedowns were anticipated to have an impact on RBS's regulatory capital position, and
the exposures on which they arose, were clearly set out in the Prospectus. Prior to
their inclusion in the Prospectus, the financial advisers/underwriters had
independently assessed the appropriate marks for those credit market exposures and
confirmed that in their view the marks proposed by RBS were reasonable.

3.4

The Prospectus set out over some eight pages a range of existing and future material
risk factors attaching to RBS's business, making clear that those risks expressly

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identified were not the only ones that RBS would face. Those risk factors included
the risks that: RBS's business performance could be affected if its capital was not
managed properly; the value of certain financial instruments recorded at fair value
was determined using financial models incorporating assumptions, judgements and
estimates which might change over time; RBS's future earnings could be affected by
depressed asset valuations resulting from poor market conditions; liquidity risk was
inherent in RBS's operations; and proposals for the restructuring of ABN were
complex and might not realise the anticipated benefits for RBS.
3.5

The Prospectus was approved by the Board following a detailed process of

verification, co-ordinated by RBS's legal advisers.

Based on that verification

process, and in light of their own knowledge of the bank's business, the directors
reasonably concluded that the information contained in the Prospectus was accurate,
not misleading and materially complete.
3.6

In the circumstances, save to the limited extent required as a result of nonadmissions below:
(a)

The Prospectus, in combination with the various documents incorporated by

reference therein, contained all the information necessary for investors to
make an informed assessment of RBS's financial position and prospects.

(b)

The Prospectus accurately set out RBS's financial position and prospects
and its anticipated capital position going forward with the benefit of the
proceeds of the Rights Issue, which was fully underwritten.

(c)

The Prospectus did not contain or omit any information which rendered it
misleading.

(d)

To the extent that particular matters have been identified by the Claimants
which it is alleged should have been, but were not, disclosed in the
Prospectus, those allegations are either wrong in fact or those matters were
either immaterial or not sufficiently material to require specific disclosure
and their disclosure was not necessary for investors to make an informed
assessment of RBS's financial position or prospects.

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3.7

Following publication of the Prospectus and prior to the Closing Date, detailed and
on-going consideration was given, in conjunction with RBS's legal and financial
market advisers, to whether any changes had occurred which gave rise to the need
for the publication of a supplementary prospectus. As they concluded, no such
changes had occurred.

4.

To a very significant degree, the allegations made by the Claimants are, impermissibly, made
with the benefit of hindsight. In particular:
4.1

The Claimants fail to take account of the fact that the period leading up to and
around the time of the Rights Issue was one of volatility and uncertainty in the
financial markets and in the global economy generally, a matter which was in any
event apparent from the Prospectus itself.

4.2

The last four months of 2008 witnessed unprecedented and unforeseeable turmoil in
financial markets. Contrary to the impression sought to be created in the Composite
Amended Consolidated Particulars of Claim, the catalyst for RBS's need to seek
Emergency Liquidity Assistance ELA from the Bank of England was the aftermath
of the collapse of Lehman Brothers in September 2008. During this period, a large
number of financial institutions globally were forced to seek assistance from central
banks and other government agencies. In this regard:
(a)

In the period following the Rights Issue and up to immediately prior to the
Lehman Brothers' collapse, RBS was able not only to meet its short-term
wholesale funding needs but also issue longer-term debt. Further, until
October 2008 it retained a long-term credit rating from S&P of AA-.

(b)

The collapse of Lehman Brothers resulted in a massive tightening of global

credit markets and an almost total seizure of the inter-bank markets.

4.3

The Lehman Brothers collapse also brought about a crisis of confidence in the
global financial system and in financial institutions generally. Approximately 4.5
trillion was allocated by governments and central banks to support the financial
system.

4.4

Throughout much of 2008 there remained significant industry-wide uncertainty

about the impact of the transition from the Basel I to Basel II regulatory capital

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regime, which in practice took place over an extended period and was not completed
until after the close of the Rights Issue.
4.5

The scope and detail of the disclosure given by RBS in the Prospectus can only
relevantly be assessed by reference to the standards and expectations reasonably
prevailing at the time.

The disclosure provided was adequate when measured

against those standards. The events experienced in the financial markets in late
2007 and 2008 led to an extensive review by both regulators and accounting bodies
of the requirements for classification and valuation of financial instruments and
disclosure generally by financial institutions.
4.6

At the time of the Rights Issue, those standards were therefore in a state of evolution
and change. This process led, from about mid-2008 onwards, to:
(a)

The introduction of new standards and guidance, including (amongst other

things): (i) changes to IAS 39 and IFRS 7 introduced in October 2008,
relating to the re-classification of non-derivative financial assets and the
disclosure of re-classified assets; (ii) guidance issued by the IASB Expert
Advisory Panel in October 2008 on the measurement and disclosure relating
to financial instruments in non-active markets; and

(b)

The expectation in the market that disclosure by financial institutions would

be wider in scope and of greater detail.

4.7

The Claimants impermissibly seek to judge the disclosure given by RBS against
these later standards and expectations, which were not applicable at the time of the
Rights Issue.

5.

Further and in any event, a number of the matters alleged by the Claimants to be material
omissions were in fact matters which were already known to the market. Accordingly, even if
they were not expressly disclosed in the Prospectus, those facts:
5.1

Could not have and did not render the Prospectus misleading; and

5.2

Had no bearing on the market value of RBS shares, as the information had already
been taken account of by the market and was therefore 'priced in'.

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6.

If (which is denied) the Prospectus contained any untrue or misleading statement, or omitted
any matter required to be included by s.87A of FSMA, each of the Defendants will say that at
all times prior to the Claimants' acquisition of the shares and/or the admission of those shares
to trading they reasonably believed, having made reasonable enquiries, that the relevant
statements were true and not misleading and that any matters omitted had been properly
omitted within the meaning of Schedule 10, paragraph 1 of FSMA, and will claim the benefit
of the defence provided therein.

7.

In the circumstances, it is denied that any of the Defendants have any liability to the
Claimants for any losses they have suffered on RBS shares purchased in the Rights Issue or in
the after-market.

Introduction
8.

Paragraphs 1 and 2 are admitted.

9.

As to paragraph 3, it is admitted that RBS and the Director Defendants, along with each of the
other directors of RBS at the relevant time, were responsible for the Prospectus for the
purposes of s.90 of FSMA.

9A.

Paragraph 3A is noted.

10.

Save that the third sentence is denied and that it is not admitted that RBS was "effectively
nationalised", paragraph 4 is admitted.

11.

As to paragraph 5:
11.1

The first sentence is admitted. Sentences two and three are admitted to the extent
that they accurately reflect the price at which RBS shares were trading on the dates
stated.

11.2

The fourth to eighth seventhand fifth sentences are not admitted.

11.3

As to the final sentence, it is denied the shares bought by the SL Group Claimants
were worthless. No admission is made at this stage as to the actual value of those
shares. The Defendants will plead further in this regard in due course.

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12.

Save that: (a) it is admitted that in October 2008 RBS became dependent on ELA from the
Bank of England and that there were other banks which did not do so; and (b) it is denied that
there was any material change in RBS's position during the Rights Issue pPeriod, paragraph 6
is not admitted.

13.

Paragraphs 7 and 7A areis denied.

14.

Paragraph 7AB is denied.

The truth about RBS's financial position and prospects was

disclosed in the Prospectus.

15.

Paragraph 8 is denied.

16.

No admission is made in respect of paragraph 9.

Background and events

17.

Save that Goodwin did not resign (as alleged at paragraph 21) but left the bank by agreement,
iIt is admitted that the averments in paragraphs 10 to 23 are accurate. Those paragraphs
provide only a partial account of the relevant "Background and Events", which will be
addressed more extensively as appropriate in evidence.

Legal framework
18.

Paragraph 24 is noted.

19.

Paragraph 25 is admitted. For the avoidance of doubt:

19.1

As a matter of construction, the word "untrue" in s.90(1)(b)(i) means "materially

untrue" and the word "misleading" in s.90(1)(b)(i) means "materially misleading".
Alternatively, by necessary implication from the legislative context, s.90(1)(b)(i)
only applies to statements that are untrue or misleading to a material extent. To be
caught by s. 90(1)(b)(i) of FSMA a mistake or inaccuracy causing a statement to be
untrue or misleading must be material. having regard to the subject matter of the
Prospectus, the market to which it is addressed and the facts and matters otherwise
known to that market. The Defendants will contend that a mistake or inaccuracy is
only material in this sense if it would prevent investors reaching an informed
assessment of the matters referred to in s.87A(2). For the avoidance of doubt,
materiality is put in issue in respect of each statement in the Prospectus that is

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alleged to have been untrue or misleading.Particulars of certain pleaded allegations

in the CPOC to which this point is relevant are provided in Annex 1.

The

Defendants are not presently able to provide particulars in respect of either (i)
unparticularised allegations that statements contained in the Prospectus were untrue
or misleading, or (ii) any other potential respects in which either sides' experts may
conclude that statements contained in the Prospectus were untrue or misleading.
19.2

Whether a statement is "misleading" for the purposes of s. 90(1)(b)(i) of FSMA, is

an objective question to be determined in light of the circumstances as a whole,
including the facts and matters otherwise known to the market to which the
Prospectus is addressed.

19.3

The only persons capable of acquiring rights under s. 90 of FSMA are those who
acquire the transferable securities "to which the prospectus applies".

The

Prospectus applied to the shares offered by RBS in the Rights Issue. As a result
persons who did not acquire RBS shares by subscription to the Rights Issue (for
example, any persons who purchased shares in the after-market) are not capable of
obtaining a right of action under s. 90 of FSMA.
20.

Paragraph 26 is admitted.

21.

Schedule 10 of FSMA provided in material part (as it applied to a prospectus) that:

Statements believed to be true
1.
(1)

(2)

"In this paragraph "statement" means

(a)

any untrue or misleading statement in [a prospectus]; or

(b)

the omission from [a prospectus] of any matter required to be included by

section [87A] or [87G].

A person does not incur any liability under section 90(1) for loss caused by a
statement if he satisfies the court that, at the time when the [prospectus was]
submitted to the competent authority, he reasonably believed (having made such
enquiries, if any, as were reasonable) that

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(a)

the statement was true and not misleading, or

(b)

the matter whose omission caused the loss was properly omitted,

and that one or more of the conditions set out in sub-paragraph (3) are satisfied.
(3)

The conditions are that

(a)

he continued in his belief until the time when the [transferable securities] in
question were acquired;

(b)

they were acquired before it was reasonably practicable to bring a

correction to the attention of persons likely to acquire them;

(c)

before the [transferable securities] were acquired, he had taken all such
steps as it was reasonable for him to have taken to secure that a correction
was brought to the attention of those persons;

(d)

he continued in his belief until after the commencement of dealings in the

[transferable securities] following their admission to [trading on a
regulated market] and they were acquired after such a lapse of time that he
ought in the circumstances to be reasonably excused.

[...]
6.
A person does not incur any liability under section 90(1) or (4) if he satisfies the court that
the person suffering the loss acquired the [transferable securities] in question with
knowledge
(a)

that the statement was false or misleading,

(b)

of the omitted matter, or

(c)

of the change or new matter,

as the case may be.

7.

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A person does not incur any liability under section 90(4) if he satisfies the court that he
reasonably believed that the change or new matter in question was not such as to call for [a
supplementary prospectus]."
22.

The first sentence of paragraph 27 is admitted. For the avoidance of doubt, the directors who
were responsible for the Prospectus were those directors holding office at RBS at the time that
the Prospectus was published.

23.

In relation to the second sentence of paragraph 27:

23.1

It is admitted and averred that the Prospectus was published with the knowledge and
consent of the Director Defendants.

23.2

The Director Defendants only approved the Prospectus after a detailed due diligence
exercise had been carried out, as particularised more fully at paragraphs 33-47
below.

24.

Paragraph 28 is admitted. For the avoidance of doubt, for the purposes of s. 87A(2) of FSMA
the information necessary to enable investors to make an informed assessment must be
determined objectively having regard to the subject matter of the Prospectus, the market to
which it is addressed, and the facts and matters otherwise known to that market.

25.

As to paragraph 29:
25.1

It is admitted and averred that:

(a)

RBS was, at the time of the Rights Issue, a FTSE 100 company whose
existing shareholders included both institutional and retail investors;

(b)

Those shareholders could be expected to vary in their level of sophistication

from highly sophisticated institutional investors to retail investors who
would not necessarily possess specialist knowledge of RBS's position.
Further, the following risk warning appeared at the top of page 1 of the
Prospectus:
"If you are in any doubt as to what action you should take, you are
recommended to seek immediately your own financial advice from your
stockbroker, bank manager, solicitor, accountant, fund manager or other
appropriate independent financial advisor, who is authorised under the
Financial Services and Markets Act 2000 if you are resident in the United

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Kingdom or, if not, from another appropriately authorised independent

financial adviser."
(c)

The Rights Issue was an offer of shares made to RBS's existing shareholders
who would, accordingly, be the purchasers of those shares.

25.2

It is denied that the foregoing were matters which formed part of "the particular
nature of the transferable securities and their issuer" within the meaning of
s. 87A(4) of FSMA.

25.3
26.

Save as aforesaid paragraph 29 is denied.

As to paragraph 30, it is admitted that pursuant to s. 87A(1)(c) of FSMA, the Prospectus was
required to comply with the requirements of the Prospectus Regulation which implemented
the Prospectus Directive. It is denied (so far as relevant) that this obligation separately arose
under the Prospectus Rules.

27.

As to paragraph 31:
27.1

It is admitted that the Prospectus Regulation required the Prospectus to comply with
the disclosure requirements set out in paragraph 31; and

27.2

It is denied (so far as relevant) that this obligation arose separately under the
Prospectus Rules.

27A.

As to paragraph 31A:
27A.1

The first three sentences are admitted.

27A.2

Save that paragraph 125 of the CESR Guidelines: (a) provides that procedures
undertaken to support the Working Capital Statement "would normally include"
rather than "would include" (emphasis added); and (b) refers to "reasonable worst
case scenario" rather than "realistic scenarios" as alleged in paragraph 31A.1,
paragraphs 31A.1 to 31A.5 are admitted as a materially accurate summary of the
content of the relevant paragraphs.

The Defendants will rely on the CESR

Guidelines at trial for their full content and effect.

27B.

As to paragraph 31B:

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27B.1

It is admitted and averred that the SSG Report made recommendations for the
enhancement of disclosure practices among financial institutions. As such, the
Report itself was intended to be forward looking and served as an illustration of the
evolving nature of disclosure practices at the time of the Rights Issue.

27B.2

The SSG Report identified what it regarded as leading practice in disclosure across a
variety of risks and exposures, on the basis that such disclosure had been given by at
least one of the twenty firms surveyed. As such, it did not purport to prescribe the
minimum required level of disclosure or to identify the extent of "necessary
information" for the purposes of s.87A of FSMA.

27B.3

It is denied that when considering what information to include in the Prospectus

there was any requirement for RBS to have specific regard to the recommendation
in the SSG Report.

27B.4

The final sentence is admitted.

27B.5

Save to the extent consistent with the foregoing, paragraph 31B is denied.

27C.

Paragraph 31C is admitted.

28.

Paragraph 32 is admitted. For the avoidance of doubt, s. 87G of FSMA only applies to
significant new factors, mistakes or inaccuracies that are material having regard to the subject
matter of the Prospectus, the market to which it is addressed and the facts and matters
otherwise known to that market.

29.

Paragraphs 33 and 34 are admitted.

30.

The Defendants plead in detail to the allegation at paragraph 35 in paragraphs 32 to 377

below.

30A.

Paragraph 35A is denied.

31.

As to paragraph 35BA, it is admitted and averred that RBS was obliged to disclose by way of
supplementary prospectus any significant new factor, material mistake or material inaccuracy
relating to the information contained in the Prospectus which arose or was noted between the
Prospectus Date and the Closing Date. It is also admitted that the Director Defendants were
obliged to give RBS notice of any new factor, mistake or inaccuracy which may have required

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the submission of a supplementary prospectus and of which they were aware.

It is denied

that any such information or factor arose or was noted in the present case. For that reason, no
supplementary prospectus was required and none was issued. Neither were the Director
Defendants required to give RBS any notice of the kind referred to.
31A.

Paragraph 35C is noted.

31B.

As to paragraph 35D:
31B.1

It is denied that "overall tone" is a concept recognised for the purposes of s.90 of
FSMA, which relates to loss suffered as a result of "... misleading statement(s)".
The allegation in paragraph 35D therefore does not give rise to a cause of action
available to the Claimants.

31B.2

It is in any event denied that the Prospectus painted too positive a picture of RBS's
position and prospects. The allegation is based solely on the particulars set out in
paragraphs 35D.1 to 35D.435D.5, each of which has been dealt with in the body of
this Re-Re-Amended Defence below, in which regard:
(a)

As to paragraph 35D.1, see paragraphs 54 to 156 below.

(b)

It is denied that the Prospectus downplayed the liquidity risks faced by RBS,
as alleged at paragraph 35D.2, as to which see paragraphs 157 to 194 below.

(c)

It is denied that the Prospectus was misleading in the manner alleged at

paragraph 35D.3. In that regard, the allegation of an over optimistic and
aggressive approach is denied, both with regard to individual judgments and
assumptions referred to in the sub-paragraphs thereof (each of which is dealt
with below in the relevant section of this Re-Re-Amended Defence) and as
to their collective effect.

(d)

As to paragraph 35D.4, it is denied that the Prospectus was required to make

the disclosure alleged in relation to the approach adopted by the FSA, as to
which see paragraphs 107A, 142A-B and 146C-D below.

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(e)

It is denied that the Prospectus' presentation of the acquisition and ABN's

financial position and prospects was misleading in the manner alleged at
paragraph 35D.5, as to which see paragraphs 281 to 355 below.

Process of preparation for the Rights Issue

32.

As set out further at paragraphs 69 to 76 below:

32.1

At its meeting in February 2008 the Board reviewed RBS's capital position in detail
and considered options for strengthening that position, including the possibility of
undertaking a rights issue which it agreed to keep under review.

32.2

Contingent planning work was carried out in February 2008 by members of the
Group General Counsel's office and Group Transactions & Projects to identify the
steps required to carry out a rights issue if it were determined that one was
appropriate.

32.3

At its meeting in March 2008, the Board once again considered the bank's capital
position and discussed various options for accelerating capital regeneration, which,
in addition to progressing the possible sale of RBS Insurance, continued to include
the possibility of raising additional capital through a rights issue, particularly in the
event that market conditions deteriorated further.

32.4

On or around 4 April 2008, following the discussions at the March 2008 Board
meeting and in light of further extensive falls experienced in the credit markets and
the depressed business outlook, Goodwin, McKillop and Whittaker concluded,
subject to Board approval, that RBS should undertake the Rights Issue and shortly
thereafter the bank began active preparations to do so. RBS notified the FSA of this
decision early in the week commencing 7 April 2008. around this time.

33.

As part of the preparations for the Rights Issue, a team of highly experienced external
professionals was engaged to advise on and assist in the process of bringing the Rights Issue
to the market as follows:
33.1

Linklaters were engaged as legal advisers to RBS as to English, US and Dutch law.

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33.2

Goldman and Merrill were engaged as Underwriters, Joint Financial Advisers, Joint
Sponsors and Joint Bookrunners.

33.3

UBS was engaged as Underwriter and Co-Bookrunner.

33.4

Deloitte, RBS's auditors, were engaged as reporting accountants.

33.5

Freshfields were appointed as legal advisers to the Joint Financial Advisers, Joint
Sponsors, Underwriters, Joint Bookrunners and Co-Bookrunner as to English, US
and Dutch law.

34.

Under the Listing Rules (as then in force) in relation to rights issues, the Joint Sponsors:
34.1

Were not permitted to submit an application to the UKLA for the admission of the
Rights Issue shares unless they had, amongst other things, come to a reasonable
opinion, after having made due and careful enquiry, that:
(a)

RBS had satisfied all applicable requirements set out in the Prospectus
Rules; and

(b)

RBS's directors had a reasonable basis on which to make the working

capital statement required under the Listing Rules (LR 8.4.8R); and

34.2

Were required to submit a Sponsor's Declaration to the UKLA and ensure that all
matters known to them which, in their reasonable opinion, should be taken into
account by the FSA in considering the application for listing had been disclosed
with sufficient prominence in the Prospectus (LR 8.4.9R).

35.

Initial discussions with a number of the advisers took place over the weekend of 5/6 April
from 4 April 2008.

36.

On 10 April 2008, preparations for the Rights Issue were formally authorised by the
Chairman's Committee, a committee of the Board with authority to exercise all powers of the
Board in respect of, inter alia, material matters requiring an immediate decision.

37.

At an early stage, in order to allow them (1) to comply with their obligations under the Listing
Rules, (2) and to ensure that the Prospectus complied with all relevant legal and regulatory
requirements, and (3) to satisfy themselves that it was appropriate for them to agree to

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underwrite the Rights Issue, an extensive financial due diligence exercise was planned and coordinated by Goldman and Merrill.. During the course of the due diligence process, extensive
work was carried out by RBS, in conjunction with its professional advisers, to ensure that
each material statement made in the Prospectus and the accompanying press release was
accurate.
37A.

During the course of the due diligence Rights Issue Pprocess (as defined in Response 5 of
RBS's Further Information dated 6 November 2015), extensive work was carried out by RBS,
in conjunction with its professional advisers, to ensure that each material statement made in
the Prospectus and the accompanying pPress Rrelease was accurate. By way of summary
only:
37A.1.

In the course of the financial due diligence, Goldman and Merrill made detailed
requests for information about RBS and various aspects of its business, including in
relation to credit market exposures, liquidity and capital.

RBS provided the

information sought by Goldman and Merrill. Goldman and Merrill also requested
meetings with various RBS employees who had responsibility for areas of the
business relevant to the due diligence exercise. These meetings, some of which
were also attended by representatives of Linklaters, took place as requested.
37A.2

Linklaters and Freshfields conducted a legal due diligence exercise which, amongst
other things, was used to support their respective 10b-5 comfort letters referred to in
paragraph 48A.2 below.

37A.3

In addition to the due diligence process, Linklaters conducted a detailed verification

exercise, and produced detailed Verification Notes, in relation to each of the
Prospectus and the Press Release. The purpose of this exercise was to ensure the
accuracy of the material statements made in these documents, and to collate
underlying documentary evidence in support of those statements.

37A.4

Deloitte acted as reporting accountant in relation to the Rights Issue and participated
in the preparation of the Press Release and the Prospectus, alongside RBS and the
other professional advisers. Deloitte also prepared the Working Capital Report in
which it provided the opinion that the Directors, on behalf of RBS, had a reasonable
basis on which to make the Working Capital Statement, and provided various
comfort letters referred to in paragraph 48A.3 below.

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38.

A wide-ranging and detailed process was undertaken, of which formal due diligence was part,
to ensure the accuracy of the financial information to be included in the Prospectus. That
process included, without limitation:
38.1

The preparation of a 'bottom up' so-called "3+9 Re-Forecast", which contained

revised projected results for RBS for 2008, taking account of the results from the
first quarter along with the bank's assessment of the likely out-turn for the remainder
of the year;

38.2

The preparation of a detailed capital plan setting out the bank's projections for its
capital position out to the end of 2010, taking account of the receipt of the Rights
Issue proceeds;

38.3

Detailed consideration of RBS's liquidity position and its likely funding

requirements going forward, which was reviewed and reported on by Deloitte; and

38.4

The work carried out in relation to by the credit market exposures working group,
referred to in paragraph 39 below.

39.

As part of the process of verifying RBS's credit market exposures and estimated write-downs,
and determining the extent and nature of the disclosure which needed to be made in the
Prospectus in relation thereto:
39.1

As part of the due diligence process, A working group was established comprising
representatives from RBS, Goldman and Merrill. That working group had a, with
the assistance of RBS, investigated RBS's credit market exposures and considered
the appropriate marks for these assets. A series of meetings took place between
RBS, Goldman and Merrill (some of which were in addition attended by
representatives of Linklaters and Freshfields), at which detailed consideration was
given to RBS's credit market exposures and, in particular, to its exposure to CDOs,
ABSs, Mmonolines, assets held through conduits, both US and European CMBS
and RMBS, leveraged finance and mezzanine finance.

39.2

Representatives from Goldman and Merrill had the opportunity to and did engage in
extensive questioning of RBS's representatives, and requested and were provided
with further information, to satisfy themselves in relation to the extent and nature of
RBS's exposures.

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39.2A

The results of the work undertaken by RBS in relation to credit market exposures
were reflected in a paper circulated to both the Group Audit Committee and the
Chairman's Committee and considered by those Committees at meetings on 19 April
2008.

39.3

Both Goldman and Merrill had independently considered the appropriate marks for
RBS's various different exposures. Representatives of both firms attended the
meetings of the Group Audit Committee and the Chairman's Committee on 19 April
2008 and confirmed that in their view the proposed marks, as set out in the paper
tabled at those meetings, were reasonable.

39.4

Consideration was given by RBS the working group to the appropriate level of
estimated future write-downs on certain of RBS's credit market exposures.

39.5

The results of the work undertaken in relation to by the credit market exposures
working group were reflected in a paper circulated to both the Group Audit
Committee and the Chairman's Committee and considered by those Committees at
meetings on 19 April 2008. At the said meetings, each of Goldman and Merrill
confirmed that in their view the proposed marks and write-downs were reasonable.

40.

In addition to the documents referred to above, the results of the financial due diligence
process were reflected in (amongst others documents) a short regulatory capital plan prepared
by RBS setting out the Bank's projected capital ratios out to the end of the first quarter of
2009 on the basis of different assumptions about the size of the Rights Issue. This was the
following documents provided to the Board.:
40.1

A short regulatory capital plan prepared by RBS setting out the bank's projected
capital ratios out to the end of the first quarter of 2009 on the basis of different
assumptions about the size of the Rights Issue;

40.2

The Working Capital Report prepared by Deloitte in which they confirmed that in
their opinion the directors, on behalf of RBS:
"have a reasonable basis on which to make the Working Capital Statement. For
this purpose "reasonable basis" means that the Directors have based the Working
Capital Statement on Projections which have been prepared and considered by the
Directors after due and careful enquiry.";

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40.3

A number of other supporting documents prepared by Deloitte dealing with different

aspects of RBS's financial position and prospects described in the Prospectus; and

40.4

Detailed Verification Notes, prepared with the assistance of Linklaters, recording

the factual basis for each of the material statements in the Prospectus, along with
supporting documentation.

41.

Further, during the first quarter of 2008 the Board regularly considered RBS's capital position
in the light of reports dealing with risks to the bank's capital plan and the results of additional
capital stress tests that had been carried out. The reports referred to in paragraphs 38 and 40
above therefore supplemented the Board's existing knowledge and should be considered in
conjunction therewith.

42.

The process of drafting the Prospectus began on or about 9 April 2008. That process was led
by Linklaters, with active involvement from Merrill and Goldman as well as representatives
of RBS, and continued alongside the due diligence exercise being co-ordinated by Goldman
and Merrill.

43.

At a very early stage in the drafting process, Merrill, in its capacity as Joint Sponsor (with
Goldman) of the Rights Issue, made contact with the UKLA, the division of the FSA which at
all material times was the competent authority for the purpose of approving the Prospectus
pursuant to s.87A of FSMA. Thereafter until the date of publication of the Prospectus,
Merrill was in regular communication with the UKLA about the content of the Prospectus. In
this regard, the UKLA was sent and provided detailed comments on three separate drafts of
the Prospectus. In the course of reviewing the Prospectus the UKLA also spoke to Mr
Wharton and Mr Sants of the FSA. In particular, amongst other things, the UKLA:
43.1

Informed Merrill that it (the UKLA) would pay particular attention to the
information in the Prospectus dealing with working capital and the reason for the
bank undertaking the Rights Issue;

43.2

Gave specific consideration to whether it was necessary for RBS to disclose in the
Prospectus that it had reported to the FSA that its capital might have fallen below its
ICG, and was satisfied that it was not necessary for such disclosure to be made and
approved the Prospectus without it;

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43.3

Commented that: (a) information on the bank's capitalisation should be derived from
that contained in the 2007 Accounts; (b) because the reporting date for those
accounts was more than 90 days old, a "no material change" statement should be
provided; and (c) the capitalisation information did not otherwise need to be
amended from that contained in the 2007 Accounts, and in particular did not need to
include capital ratios as at the end of March 2008;

43.4

Requested the inclusion of projected capital ratios on both a proportional and fully
consolidated Basel II basis for June 2008 and December 2008, which ultimately
appeared in the table at page 28 of the Prospectus; and

43.5

Requested the inclusion in the Chairman's letter section of the Prospectus of

information explaining the impact of credit market write-downs, the Rights Issue
proceeds and planned asset disposals on the bank's projected capital ratios, which
ultimately appeared in the Chairman's letter.

44.

At a meeting of the Board on 21 April 2008, the Board: (a) gave final approval for the Rights
Issue, which was to be announced the following day; and (b) approved an advanced draft of
the Press Release and the Prospectus on behalf of RBS. It only did so after the following had
occurred:
44.1

An advanced draft of the Press Release and Prospectus was provided to each
member of GEMC and each head of RBS's divisional group functions who had been
involved in providing or reviewing the information required for the Prospectus.
Having reviewed the draft Press Release and Prospectus each of those persons was
asked to sign, and did sign, a Verification Certificate confirming that the advanced
drafts of the Press Release and Prospectus: (a) did not contain any untrue statements
of material fact; and (b) did not omit to state any material fact necessary to make the
statements made therein, in light of the circumstances in which the statements were
made, not misleading.

44.2

Prior to the meeting convened to approve the Press Release and Prospectus, each
member of the Board was provided with an advanced draft of these documents the
Prospectus.

Each of the members of the Board carefully reviewed the drafts

Prospectus and considered its their contents in light of their own particular
knowledge and experience of RBS's business. The Directors concluded that the

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contents of the Press Release and Prospectus were accurate, fairly presented and
provided investors with sufficient information to make a properly informed
assessment of RBS's assets and liabilities, financial position, profits and losses, and
prospects and to take a properly informed decision as to the merits and demerits of
the Rights Issue. The Defendants continued to hold this opinion at all material
times.
44.3

The Directors considered the Verification Notes, which had been prepared by
Linklaters and were tabled at the meeting.

45.

Also at the meeting on 21 April 2008, the Board approved the establishment of two additional
committees, the Approvals Committee and the Rights Issue Committee, with authority to take
various steps necessary in connection with the Rights Issue.

46.

Between 26 and 28 April 2008, the Board as well as the Rights Issue Committee was provided
with and gave detailed consideration to a further draft of the Prospectus which took account
of, amongst other things, comments made by the UKLA following its review of the previous
draft.

47.

On 29 April 2008, pursuant to the power delegated to it by the Board at its meeting on 21
April 2008, the Rights Issue Committee (comprising McKillop, Goodwin, Whittaker and
Mark Fisher) approved the final version of the Prospectus, subject to final approval being
received from the UKLA and subject to further non-material changes. It did so following
detailed consideration of, amongst other things: (a) the final draft of the Prospectus; (b) the
outcome of the verification exercise (which included detailed Verification Notes prepared by
Linklaters); (c) further signed Verification Certificates, from each member of GEMC and
each head of RBS's group functions who had been involved in providing or reviewing the
information required for the Prospectus, given in respect of the final draft Prospectus and in
the form referred to in paragraph 44.1 above; and and (dc) various other material produced by
Deloitte dealing with the accuracy of financial statements made in the Prospectus. The
members of the Rights Issue Committee present at the meeting confirmed, amongst other
things, that the statements in the Prospectus could properly be made and that all statements of
fact contained in the Prospectus were true and accurate in all material respects and not
misleading, and that the Prospectus contained sufficient information to enable investors to
make an informed assessment of RBS's assets and liabilities, financial position, profits and

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losses, and prospects. The members of the Rights Issue Committee continued to hold this
belief at all material times.
48.

On 30 April 2008, the Prospectus was approved in its final form by the UKLA, which
approval would not have been given if the comments made and questions raised by the UKLA
during the Prospectus review process had not been satisfactorily addressed or if the UKLA
believed on the basis of the information known to it that the Prospectus did not:
48.1

Contain the information necessary to enable investors to make an informed

assessment of the assets and liabilities, financial position, profits and losses, and
prospects of the issuer of the transferable securities and of any guarantor; and

48.2

Satisfy all of the applicable requirements imposed by Part VI of FSMA, the

Prospectus Rules, the Prospectus Directive and the Prospectus Regulation.

48A.

Also on 30 April 2008:

48A.1

In their capacity as RBS's UK legal adviser, Linklaters wrote a letter to Goldman

and Merrill (in their capacities as Joint Sponsors of the Rights Issue) in which they
(Linklaters) confirmed (among other things) that, in connection with the Rights
Issue, and subject to the qualifications as set out in that letter, all applicable
requirements of the relevant Listing Rules and Prospectus Rules had been satisfied.

48A.2

In their capacity as RBS's and the Underwriters' US counsel respectively, Linklaters

and Freshfields each wrote a "10b-5 disclosure letter" to Goldman, Merrill and UBS
(in their capacities as underwriters of the Rights Issue) (the Linklaters letter was also
addressed to The Royal Bank of Scotland plc), in which they (Linklaters and
Freshfields respectively) confirmed (among other things) that nothing had come to
their attention during the course of their work in connection with the Rights Issue
which had caused them to believe that the Prospectus contained any untrue
statement of a material fact or omitted to state a material fact necessary in order to
make the statements therein, in the circumstances in which they were made, not
misleading.

48A.3

Deloitte provided various comfort letters in relation to the financial information set
out in the Prospectus. They also issued their Working Capital Report, in which

25
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(among other things) they expressed the opinion that the Directors had a reasonable
basis on which to make the Working Capital Statement.
48A.4

Each of Merrill and Goldman, in their capacities as Joint Sponsor of the Rights
Issue, made declarations to the FSA that (among other things) they had, based on
their professional experience and after due and careful enquiry, come to a
reasonable opinion that (a) RBS had satisfied all applicable requirements of the
relevant Listing Rules and Prospectus Rules; and (b) the directors of RBS had a
reasonable basis on which to make the Working Capital Statement.

49.

Following its approval by the UKLA, the Prospectus was published on 30 April 2008.

50.

On 14 May 2008, a meeting of the Rights Issue Committee attended by each of the Director
Defendants considered, amongst other things, the Prospectus in the form published. Each
director present confirmed (as they had done in relation to the advanced draft at the Board
meeting on 21 April 2008 and as the members of the Rights Issue Committee had done in
relation to the final version at the meeting of the Committee on 29 April 2008) that:
50.1

The Prospectus had been reviewed and that all statements of fact made therein
continued to be true and accurate in all material respects and not misleading;

50.2

There were no other facts relating to RBS not disclosed in the Prospectus which
ought to be disclosed having regard to the responsibilities of the directors under
FSMA or which would make any statement therein misleading; and

50.3

Confirmations had been received from all members of the GEMC that the
Prospectus continued to be true and accurate in all material respects and not
misleading.

51.

Also on 14 May 2008 an Extraordinary General Meeting of RBS shareholders was held and
passed resolutions authorising the Rights Issue. Over 95% of those voting supported the
resolutions.

52.

Also, following publication of the Prospectus:

52.1

Due diligence work continued to ensure that all statements made in the Prospectus
were accurate and to ensure that there were no material changes in the period prior

26
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to the close of the Rights Issue which would require the publication of a
supplementary prospectus.
52.2

A series of meetings (so called 'bring down due diligence meetings') took place
involving representatives of RBS, Goldman, Merrill, Linklaters and Freshfields at
which specific consideration was given to whether there had, since publication of
the Prospectus, been any material change in relation to information contained in the
Prospectus which would give rise to the need to publish a supplementary prospectus.
On each occasion, after detailed consideration, it was concluded that there had been
no such change and that no supplementary prospectus was required.

52.3

On 15 May and 12 June 2008, Linklaters and Freshfields each wrote a bring-down
10b-5 comfort letter to Goldman, Merrill and UBS (in their capacities as
underwriters of the Rights Issue) (the Linklaters letters were also addressed to The
Royal Bank of Scotland plc), in which they (Linklaters and Freshfields respectively)
confirmed (among other things) that nothing had come to their attention during the
course of their work in connection with the Rights Issue which had caused them to
believe that the Prospectus contained any untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements therein, in
the circumstances in which they were made, not misleading.

52.4

Further confirmations (in addition to those referred to in paragraph 50.3 above) were
provided by relevant RBS personnel:
(a)

In June 2008, that, to the best of their knowledge, and in relation to the
Prospectus, they were not aware of any material developments or changes
since the stamping of the Prospectus on 30 April 2008 (being the date on
which the Prospectus was stamped by the UKLA and published).

(b)

Separately, in May 2008 and June 2008, in the context of Linklaters' and
Freshfields' respective bring-down 10b-5 disclosure letters referred to in
paragraph 52.3 above, that they were not aware of any material
developments or changes since 30 April 2008.

27
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53.

The subscription period for new shares began on 15 May 2008 and closed on 6 June 2008.
Dealings in the fully paid new shares began on the London Stock Exchange and Euronext on
9 June 2008.

Purpose of the Rights Issue and use of its proceeds

54.

Contrary to the allegations contained in paragraphs 36 to 60, the Prospectus gave an accurate
account of the reasons for and the purpose of the Rights Issue and accurate information about
RBS's capital position, sufficient for investors to make an informed assessment of the bank's
financial position and prospects. The market cannot have been and was not in fact misled in
this regard by the Prospectus. In summary, and as set out in further detail below:
54.1

The market was aware that: (a) RBS had for some years adopted an efficient capital
model; and (b) following its acquisition of ABN, RBS's capital ratios were expected
to be below normal levels until rebuilt by the bank.

54.2

At the time of the 2007 Results Announcement, RBS expressly stated that as at 31
December 2007 its Core Tier 1 ratio on a fully consolidated basis was 4.5%.

54.3

The market knew that the same ratio on a proportional consolidated basis would be
significantly lower than that and Whittaker had said at the 2007 Results analysts'
conference that on a proportional basis the number "does begin with a four".

54.4

Against that background, the market understood the Core Tier 1 ratio at the end of
2007 on a proportional basis to be approximately 4%. That understanding was
reflected in research material published by market analysts at the time and was, in
any event, confirmed by McKillop at the Rights Issue Ppresentation to analysts.

54.5

At the time of the Rights Issue announcement, the market also knew that:
(a)

The transition from Basel I to Basel II had resulted in a reduction in the

bank's capital ratios (as was stated in the Prospectus); and

(b)

As was also stated in the Prospectus, the severe deterioration in credit

markets in the first quarter of 2008, and particularly in March, had resulted
in the bank taking further write-downs on its exposures to certain assets.

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The market well appreciated that the consequence of this was a further
erosion of capital ratios.
54.6

The Prospectus did not provide details of RBS's capital ratios as at April 2008.

54.7

As a result of the matters set out above, it was clear to the market that RBS's Core
Tier 1 ratio at the time of the Rights Issue was significantly below 4%.

54.8

Further, it was made clear in the Prospectus that the Rights Issue was being
undertaken in order to strengthen RBS's capital position.

In this regard, the

Prospectus provided anticipated capital ratios taking account of, amongst other
things, both the Rights Issue proceeds and the projected credit-market write-downs
set out. In particular, it stated that at 30 June 2008 the Core Tier 1 ratio on a
proportional basis was expected to be in excess of 5%. As things turned out, the
actual figure as at that date was 5.7%.
54.9

The Prospectus also made clear that, in light of the market deterioration and
worsening economic outlook, the Board had taken the decision to raise RBS's
capital ratio targets and that the Rights Issue formed part of a plan which reflected
that. Both tThe decision to undertake the Rights Issue and the decision as to the size
of the Rights Issue was one were decisions taken voluntarily by RBS and was were
not imposed on it by the FSA.

55.

The Defendants respond as follows to the specific allegations in paragraphs 36 to 61.

56.

Subject to paragraphs 57 to 60 below, it is admitted that the passages reproduced at

paragraphs 36 to 40 appeared in the Prospectus, the 2007 Accounts and the Annual Results
for the year ended 31 December 2007 respectively. The Defendants will rely on those
documents at trial for their entire content, full terms and true effect. The Prospectus (in
combination with the documents incorporated therein by reference) accurately and fairly set
out the background to the Rights Issue, the reasons why RBS had taken the decision to carry
out the Rights Issue and the anticipated use of the proceeds thereof.

57.

The passage from the Prospectus reproduced at paragraph 36 omits the following paragraphs:
"For capital planning purposes, the Board has used the values detailed in paragraph 3 of
Part I of this document as the basis for its estimates of write-downs in 2008 in respect of
certain credit market exposures. These estimates are based on what the Board considers to

29
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be prudent assumptions reflecting the further sharp deterioration in market conditions and
outlook in credit markets at this point."
and
"In addition, RBS envisages containing the capital demands of certain business lines,
including Global Banking & Markets, through active management of its balance sheet."
58.

In addition to the extract reproduced at paragraph 38, the section of the Chairman's letter
headed "Capital" contained the further wording referred to at paragraph 51, with which it
should be read in conjunction.

59.

Further, the Prospectus also contained the following statements:

59.1

The extract referred to at paragraph 50, headed "RBS's business performance could
be affected if its capital is not managed effectively".

59.2

At page 8, under the heading "Current trading and prospects", in addition to the
extract referred to at paragraph 49:
"The operating performance of many of RBS's businesses since the beginning of
2008 has remained good, but results have been held back by the effects of the
continuing deterioration in credit markets, which has resulted in additional writedowns on credit market exposures in the first quarter."

59.3

At page 11, under the heading "Risk Factors":

"RBS's business and earnings may be affected by general business and
geopolitical conditions.
The performance of RBS is significantly influenced by the economic conditions of
the countries in which it operates, particularly the United Kingdom, the United
States and Europe. A downturn in these economies, including any further
deterioration in the US real estate or other markets, could result in a general
reduction in business activity and a consequent loss of income for RBS. It could
also cause a higher incidence of impairments and trading losses in RBS's lending,
trading and other portfolios"
"Changes in interest rates, foreign exchange rates, bond and equity prices, and
other market factors have affected and will continue to affect RBS's business.
The most significant market risks RBS faces are interest rate, foreign exchange and
bond and equity price risks.

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While RBS has implemented risk management methods to mitigate and control these
and other market risks to which it is exposed, it is difficult to predict with accuracy
changes in economic or market conditions and to anticipate the effects that such
changes could have on RBS's financial performance and business operations."
60.

In relation to the presentation of financial information, the Prospectus stated (amongst other
things) as follows (at p.18):
"RFS Holdings and consolidation of ABN AMRO.
RFS Holdings, the investment vehicle through which RBS, Fortis and Santander acquired
ABN AMRO, is jointly owned by RBS, Fortis NV, Fortis SA/NV and Santander. However, it is
controlled by RBS and is therefore fully consolidated in RBS's financial statements.
Consequently, the results of the Group for the year ended 31 December 2007 include the
results of ABN AMRO for the period 17 October 2007 to 31 December 2007. The interests of
Fortis and Santander in RFS Holdings are included in minority interests in the Group's
financial statements."

61.

In the circumstances, the Prospectus accurately, clearly and fairly set out the necessary
information in relation to RBS's capital position and the risks connected therewith.

62.

By way of putting into their proper context the allegations made at paragraphs 41 to 44, the
Defendants will say as follows:

63.

RBS's previously announced capital plan, which had been in place since at least March 2006,
was to maintain (amongst other things) a Tier 1 capital ratio within the range 7% to 8%, with
the aim of operating around the middle of that range and a preference capital content in the
range 25% to 30%. As was made clear in the 2007 Accounts (at p.70), these ranges were used
by the bank for its long-term capital planning. Further, they were significantly in excess of
the minimum regulatory requirements then in place.

64.

RBS did not publish a target or target range for RBS's Core Tier 1 ratio, although the bank
had from March 2006 (again for long-term planning purposes) identified a target range for
internal planning purposes of 5 to 5.5% for Core Tier 1 and monitored RBS's Core Tier 1 ratio
against that range.

65.

In keeping with good practice and as the market would expect, RBS kept its capital position
under regular review and made adjustments to its capital plan as necessary, in light of

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developments in the financial markets, the economic outlook generally and any other events
likely to impact on the bank's capital position going forward.
66.

One such event was the bank's acquisition of ABN. At the time of the acquisition, RBS
recognised that the structure adopted for funding the transaction meant that the equity and
preferred share components of its capital ratios were expected to fall outside its normal
operating parameters for a period, and its intention was to rebuild its equity capital organically
over the following 2 to 3 years. This approach was consistent with that adopted following
previous acquisitions and was understood by the market. By way of example only:
66.1

On 17 July 2007, S&P published a research note in connection with RBS's revised
offer for ABN which included the following:
"The ratings [for RBSG] could be lowered if Standard & Poors does not consider
that RBSG will be able to rebuild or show the willingness to rebuild capitalization
as planned, that is, by achieving an equity Tier 1 ratio of at least 4.8% by 2010"

66.2

On 19 October 2007, UBS published a research note which included the following:
"RBShaving paid a significant proportion of the cost of the ABN acquisition in
cash is expected to see its core equity Tier 1 fall from 5% at the interim stage to just
4.25% at the end of the year (this drops by a further 50bps if we exclude the final
dividend). This would be one of the lowest core equity Tier 1 ratios in our
European banking universe."

66.3

On 6 December 2007, Redburn published a research note which included the

following:
"RBS's capital ratios are within the Group's target ranges, including a tier 1 ratio of
7-8%. This means that the equity tier 1 ratio will still be low in an industry context
(c.4.5%), but RBS management will no doubt be at pains to remind us that it will
build at a rate of 0.4-0.5% per annum (IF they don't find something else to spend
the money on)."

66.4

On 28 February 2008, Goldman published a research note which included the

following in relation to the capital position:
"The key to the outlook, in our view, remains the on-going capital generation of
the group and whether they are able to rebuild capital ratios to levels with which
investors are comfortable. We currently forecast RBS to have a pro-forma core Tier
1 ratio of 4.7% in 2010, vs. 4% at the end of 2007. Until investors can get

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comfortable with levels of Tier 1we believe that the shares are likely to continue
to trade at a discount"
67.

This capital rebuilding process included an intention to rebuild the Core Tier 1 ratio towards
5% by the end of 2010 and to return to a preference capital content in the range 25 to 30%.

68.

During late 2007 and the first quarter of 2008, a further downward move in credit markets and
concerns about the potential consequences for the global economy heightened both market,
regulatory and ratings agency focus on bank capital ratios and led to pressure for a deleveraging of the financial system.

69.

Against that backdrop, in February 2008:

69.1

At a meeting on 14 February 2008 between RBS and the FSA attended by, amongst
others, Whittaker, RBS presented details of its projected capital position going
forward, taking account of the impact of the ABN acquisition and the transition to
Basel II, including the bank's intention to rebuild the Core Tier 1 capital ratio to
about 5% by the end of 2010. At or sShortly after that meeting, the FSA indicated
that it would prefer RBS to accelerate its capital regeneration plan so as to achieve a
Core Tier 1 ratio of 5% by the end of the first quarter of 2009 and asked the bank to
investigate options for doing so.

69.2

The RBS Board discussed at length the bank's capital position, agreed that in the
then current climate its capital ratios should not be at the lower end of the bank's
target ranges and considered options for strengthening its capital position. It further
agreed that work should be undertaken to identify how a Core Tier 1 ratio of 5%
could be achieved by the end of the first quarter of 2009 and that, although it was at
that stage premature to approach the market for additional capital, the possibility of
a rights issue would be kept under review.

69.3

A steering group was formed within the bank to consider options for the
acceleration of capital regeneration, with the objective of achieving a Core Tier 1
ratio (on a proportional basis) of 4% by 30 June 2008 and 5% by 31 March 2009.
Amongst other things, those options included raising additional capital.

69.4

As part of that exercise, contingent planning work was carried out by members of
the Group General Counsel's office and Group Transactions & Projects to identify

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the steps required to carry out a rights issue if it was determined that one was
appropriate.
70.

During the first half of March 2008, market conditions continued to deteriorate. On or about
14 March 2008, Bear Stearns, unable to obtain funding from the market, was rescued by the
Federal Reserve and subsequently purchased by JP Morgan, resulting in a 'step change' in the
outlook for the financial markets.

71.

On 19 March 2008, the RBS Board considered once again the bank's capital position in light
of the deterioration in market conditions and discussed various options for accelerating capital
regeneration to achieve a Core Tier 1 ratio of 5% by 31 March 2009, which included the
possibility of raising additional capital through a rights issue, particularly in the event that
market conditions deteriorated further. The Board also agreed that preparatory work should
be carried out in relation to possible disposal of certain of the bank's non-core assets,
including RBS Insurance.

72.

In early April 2008, it became clear that, as a result of the further extensive falls experienced
in the markets, the bank would have to make substantial write-downs on its credit market
exposures at the end of the first quarter of 2008, that the business outlook for the remainder of
the year was depressed and that this would have a detrimental effect on the bank's capital
ratios. In light of this, and following the discussions which had taken place at the March 2008
Board meeting, on or around 4 April 2008 Goodwin, McKillop and Whittaker once again
discussed a rights issue and concluded that, subject to formal Board approval, RBS should
proceed with such an issue. Over the following two days preliminary discussions took place
with potential external advisers.

73.

On 7 April 2008, the bank began active preparations for the Rights Issue. Between 7 and 9
April 2008, that preparation included the following:
73.1

Goodwin spoke by telephone with Mr Sants and indicated to him the conclusion
reached as a result of the discussions between Goodwin, McKillop and Whittaker
referred to in paragraph 72 above and further explained that a meeting of the Board
would take place that week;

73.2

(on 7 April 2008) internal meetings and meetings with potential external advisers;

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73.3

(on or around 8 April 2008) the instruction of Linklaters to act as legal adviser and
the involvement of Goldman and Merrill to advise and act as potential underwriters;

73.4

(on 8 April 2008) numerous meetings with the external advisers and the agreement
of an intended timetable, leading to the announcement of the Rights Issue by market
opening on 22 April 2008; and

73.5

(on the morning of 9 April 2008) further meetings with external advisers and the
arrangement of a meeting of the Chairman's Committee of the RBS Board at 10am
on 10 April 2008 to approve the preparations and agree in principle the appointment
of Goldman and Merrill as advisers to assist with those preparationsunderwriters.

74.

At 11am on 9 April 2008, Goodwin attended a meeting with Mr Sants, which had been
suggested by Mr Sants some two weeks previously to discuss the bank's accelerated plans for
capital regeneration. During the course of that meeting:
74.1

During the course of that meeting, Goodwin explained again to Mr Sants that it had
been concluded that, subject to Board approval, the bank should undertake the
Rights Issue and that although the Board had not at that stage met to approve the
proposed course of action, it would be meeting in the near future. He also explained
that preparations for the Rights Issue were underway and that although RBS had not
yet decided what the size of the Rights Issue would be, it was likely to be large
because the bank wanted to ensure that it would not need to return to the market at a
later stage for further capital. At no point did Mr Sants ask or direct RBS to raise as
much capital as possible.

74.2

During the course of that meeting or shortly thereafter, Mr Sants asked that RBS
provide written confirmation of the bank's intention once the Board had considered
the matter.

75.

On 10 April 2008, the Chairman's Committee met to discuss the Rights Issue and formally
authorised the appointment of Goldman and Merrill to advise in relation to the Rights Issue
and also on possible asset disposals to raise additional capital.

76.

On the same day, RBS (by Mr McLean) wrote to Mr Sants as had been requested, indicating
that "The Board is minded to proceed, subject to market conditions, confirmation of relevant
financial projections and contract, with a view to announcing an underwritten Rights Issue

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during the next two to three weeks. The Board has formally engaged investment banking
advisors to assist in this process and we will obviously keep you advised of progress."
77.

As to paragraph 41:
77.1

The allegation contained in the first sentence appears to be based (in part at least) on
the premise that a reasonable reader of the Prospectus would have understood that
the proceeds of the Rights Issue were to have the sole purposes of increasing capital
ratios or offsetting capital write-downs, and as such were to be ring-fenced and/or
specifically allocated solely for those purposes. That premise is denied. In fact, a
reasonable reader of the Prospectus would have appreciated that the proceeds of the
Rights Issue would become part of and thereby increase the overall capital resources
available to management, which would deploy those capital resources in the way
deemed most appropriate for the well-being of the bank's business as a whole. In
this regard, the Prospectus properly and clearly explained that:
(a)

The revised overall capital plan, of which the Rights Issue was an important
part, was intended to result, by 2008 year end, in RBS's Tier 1 capital ratio
being raised to in excess of 8% and its Core Tier 1 ratio being raised to in
excess of 6% (on a proportional consolidated basis).

(b)

In setting and planning the new target ratios, management anticipated

amongst other things that the bank's capital would be reduced during 2008
by the amount of projected write-downs of certain credit market exposures,
details of which were set out at page 26.

77.2

Accordingly, the purpose of the Rights Issue was to allow RBS to strengthen its
capital position. That purpose was stated expressly at page 16 of the Prospectus and
was clear from, amongst other things, the content of the sections headed
"Background to and reasons for the Rights Issue" at page 7 and "Current trading
and prospects" at page 8.

77.3

It is admitted that there was no suggestion in the Prospectus that the Rights Issue
was anything other than voluntary.

As set out above, the Rights Issue was

voluntary.
77.4

Save as otherwise indicated above, paragraph 41 is denied.

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78.

For the reasons set out below in relation to the allegations made in paragraph 43, paragraph 42
is denied. The true position was disclosed in the Prospectus.

79.

Paragraph 43 is denied. It is not accurate to say that RBS's previous capital plans had not
been complied with. As set out at paragraphs 63 to 66 above, the capital planning process
was not a static one. Rather, as would be expected, RBS kept its capital position under
regular review, and made adjustments to its capital plan as necessary in response to changes
in the commercial environment.

80.

In late 2007 and 2008, the process of capital planning and presentation, and the comparison of
RBS's actual capital position with its historic position and its long-term targets, was
complicated by:
80.1

The transition from the Basel I to Basel II regulatory capital regime, which came
into force from 1 January 2008 and which led to a significant change in the way
RWAs were calculated. The difficulties arising from the transition from Basel I to
Basel II were not specific to RBS but were common to the majority of financial
institutions and well known to the market. In this regard:
(a)

The Basel II regime contained a highly complex set of rules and the
transition to that regime created a large number of uncertainties at an
industry level about how RWAs should be treated, many of which remained
outstanding on 1 January 2008.

(b)

In particular, by the time the Basel II regime came into force, the FSA had
not been able to approve all the AIRB models submitted to it by banks
wishing to use such models to measure their RWAs (as to which see further
paragraphs 132 to 140 below).

(c)

Further, the changes introduced by Basel II resulted in a higher level of

volatility in RWAs since under the Basel II methodology as markets fell,
perceived credit risk grew and risk weightings were increased.

(d)

During the first half of 2008, matters were in a state of considerable flux as
banks worked through the outstanding issues in relation to the transition to
Basel II. Those transitional issues were not specific to RBS, but were
common to most of the banking entities regulated by the FSA.

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(e)

In practice the transition to Basel II took place over a prolonged period and
was continuing throughout the first half of 2008 and thereafter.

80.2

The acquisition of ABN by RBS, as a result of which:

(a)

The entirety of the assets and liabilities of ABN were required initially to be
consolidated onto the RBS balance sheet and the interests of its consortium
partners, Fortis and Santander, reflected as "minority interests".

(b)

The bank was required to report its regulatory capital on this "fully
consolidated" basis, despite the fact that a significant proportion of the
assets and liabilities included in the fully consolidated figure was ultimately
to be acquired by either Fortis or Santander.

From a statutory and

regulatory perspective, until the interests of Fortis and Santander were

formally separated, RBS's capital position was represented by this fully
consolidated figure.
(c)

RBS also calculated and at the time of the Rights Issue presented its capital
position on a "proportional" or "look through" basis, taking account only of
businesses which were to remain with RBS as part of the consortium
agreement.

80.3

Further, the transition to Basel II gave rise to the need for negotiation between the
FSA (which regulated RBS) and the DNB (which regulated ABN) about certain
aspects of the approach proposed by ABN to comply with the new regime, which
led to further delays in its implementation within ABN.

81.

With the approval of the UKLA, RBS provided in the Prospectus details of its capital ratios as
at 31 December 2007 (as a result of the incorporation by reference of the 2007 Accounts) and
projected capital ratios for June 2008, taking account of (amongst other things) the receipt of
the Rights Issue proceeds and the anticipated write-downs set out in the Prospectus. Further,
although the 2007 Accounts were not required to and did not themselves contain details of
RBS's Core Tier 1 ratio as at 31 December 2007, that ratio was provided by RBS in its 2007
Results Announcement released on 27 February 2008 and the proportional consolidated figure
was confirmed by McKillop at the Rights Issue Ppresentation.

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82.

The Composite Amended Consolidated Particulars of Claim contain a number of allegations

about those ratios on various different bases. For clarity, therefore, the Defendants set out the
actual ratios on those dates, on both a fully and proportionally consolidated basis, in the tables
below ("the Capital Ratio Tables"):
31 December 2007
Core Tier 1

Tier 1

Total capital

Consolidated, Basel I

4.5%

7.3%

11.2%

Proportional, Basel I

4.0%

7.0%

11.3%

Core Tier 1

Tier 1

Total capital

Consolidated, Basel II

6.7%

9.1%

13.2%

Proportional, Basel II

5.7%

8.6%

13.1%

30 June 2008

82A.

The Amended Consolidated Particulars of Claim refers repeatedly (and in particular at

paragraphs 43.2B, 43.2C, 43.2C.4, 44.2B.1, 44.2B.2, 47E.3, 47E.3A, 47E.6.1 and 47E.6.2) to
amounts of Core Tier 1 capital allegedly equivalent to given amounts of RWAs and/or capital
ratio basis points. Those calculations, which are properly a matter for expert evidence, are
denied.

83.

For the avoidance of doubt, it was not necessary for the Prospectus to provide details of RBS's
capital ratios as at the date of the Rights Issue and it did not do so. As was confirmed by the
UKLA's approval of the Prospectus (as to which see paragraphs 43-48 above), the scope of
the disclosure requirements was satisfied by the provision of the anticipated ratios taking
account of the receipt of the Rights Issue proceeds.

84.

Paragraph 43.1 is denied. As set out above, RBS had not previously published a target for its
Core Tier 1 ratio. It had an internal target range for Core Tier 1 of 5% to 5.5%, which had
been established in March 2006 and was used for long-term planning purposes.

Any

reference to a target of 5.25% simply reflects the fact that that was the middle of the longterm target range. Further, as the market was aware, the bank had recognised at the time of

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the ABN acquisition that the Core Tier 1 ratio was likely to be below that internal long-term
target range for a period, while capital levels were rebuilt.
85.

As to paragraph 43.2:
85.1

The first two sentences are admitted. RBS's Core Tier 1 ratio at 31 December 2007
was 4% on a proportionally consolidated Basel I basis. Basel II did not apply on 31
December 2007. The second sentence is admitted. As the market was aware, the
period following the bank's acquisition of ABN had been characterised by
significant and unforeseen market disruption and falls in asset prices, which had led
RBS (in common with the majority of other market participants) to write-down the
values attributed to certain of its assets, in particular CDOs. That fact had been
announced to the market in both the 2007 Accounts (at pp. 11, 32, 43-44, 49) and
the 2007 Results Announcement (at p.57).

85.2

Further, although the 2007 Accounts did not contain details of the bank's Core Tier
1 ratio (which they were not required to do), since the bank did disclose information
about both its Tier 1 capital ratio and the extent of its preference share capital, it was
possible for the market to produce an accurate estimate of Core Tier 1 ratio and it
did so.

85.3

The first part of the third sentence is admitted. No admission is made as to the
"Average Ratio for European Financial Institutions". It is, however, admitted and
averred that RBS had adopted an efficient capital model. In keeping with this
strategy, in 2006 the bank had carried out a 1 billion share buy-back and had
increased its dividend distribution by 25% in each of the previous two years, which
was welcomed by investors. The strategy remained in place until the time of the
Rights Issue, which as was made clear in the Prospectus represented a significant
departure from that strategy, and was well known to both market participants and
observers, and to the FSA.

85.4

It is denied that a Core Tier 1 of 6% was regarded by the market as the minimum
acceptable, or that 6% was an important benchmark for equity investors.

As

reflected at paragraph 518 of the FSA Report, the FSA's own target for banks' Core
Tier 1 at the time of the Rights Issue was 5%.

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85.5

It is denied that RBS was under-capitalised as at 31 December 2007. Further and in

any event:
(a)

As set out above, as was known to the market, following the ABN
acquisition it had planned to rebuild its capital base over the following 2 to 3
years.

(b)

Both its Tier 1 ratio and the extent of its leverage were apparent from the
2007 Aaccounts.

(c)

Its Core Tier 1 ratio as at 31 December 2007 (on both a fully and
proportional consolidated Basel I basis) was publicly disclosed by the bank
at the time of the Rights Issue and therefore known to the market.

(d)

The Prospectus made clear that in the first quarter of 2008 the bank had
taken further write-downs on its credit market exposures. It would have
been clear to the market that this had caused a reduction in the bank's capital
ratios from the position existing as at the previous year end.

85.6
86.

Save as otherwise indicated above, paragraph 43.2 is denied.

In support of the assertion that RBS's capital position was well known to the market, it the
Defendants will rely amongst other things on:
86.1

Market analyst comment at the time of and following completion of the acquisition
of ABN, as to which see paragraph 66 above.

86.2

Market analyst comment following the 2007 Results Aannouncement in February

2008. By way of example:
(a)

On 29 February 2008, Lehman Brothers published a research note which

included the following:
"We believe the pro-forma group ratios are weaker than they appear. The
group has not published a pro-forma balance sheet The FD commented
that the pro-forma Tier 1 ratio and core Tier 1 ratio excluding businesses to
be acquired by the [ABN consortium] partners would 'begin with a 7 and 4'
respectively"

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(b)

On 29 February 2008, Deutsche Bank published a research note which

included the following:
"Capital ratios reported in line with our forecast with look through core tier
1 of ~ 4%, the lowest of the European large cap banks.
Until fears overcapital ease, we expect the shares will trade at a discount
to peers"

86.3

Market analyst comment at the time of the Rights Issue Announcement. By way of
example:
(a)

On 18 April 2008, HSBC published a research note which included the

following:
"The potential need to raise capital at RBS is not new. For some years
now investors have applied a discount rating to the stock relative to peers to
reflect the perception of over-gearing within the balance sheet. But the
issue has come to the fore in recent months given the combination of the
ABN AMRO acquisition and the deteriorating macro backdrop.

While RBS might be the most extreme example of undercapitalisation (at

least on tier 1 ratios) we believe a number of other UK banks are also in
sub-optimal positions."

(b)

On 18 April 2008, BNP Paribas published a research note which included

the following:
"Does RBS need a rights issue today? That depends on whether or not you
believe that the equity to assets ratio is a useful measure of capital strength.
Using this measure, which we call Basel 0, RBS' balance sheet looks shot to
pieces. However, Basel 0 is not intellectually robust we believe that
different assets have different risks attached to them, and therefore require
different amounts of capital to back them, a concept embodied in Basel 1
and Basel 2."
And, in relation to credit market write-downs:
"Reference prices have deteriorated sharply in March, triggering further
write-downs, but we doubt that this development represented any material
surprise to the market or to the company itself."

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86.4

Press and other media reporting and comment. By way of example:

(a)

On 11 November 2007, the Financial Times published an article which

included the following:
"Investors are worried about RBS's capital position. The bank's core tier 1
ratio, by its own estimate, has dropped to 4.25 per cent following its
acquisition of ABN AMRO's wholesale division. That is tight, but in normal
circumstances should not cause too much concern. RBS's core Tier 1 fell to
3.9 per cent after it bought NatWest in 2001, but then recovered quickly.
If RBS cut its dividend which cost 2.1 bn in 2006 and full year earnings
come in as expected at about 6.5 bn, this would add 1.6 percentage points
to Tier 1 capital. Even after paying a dividend, RBS should be able to
increase capital by 1 percentage point a year on a stand alone basis. But
these are not normal times."

(b)

On 6 December 2007, the Daily Telegraph published an article which

included the following:
"A 1.5 bn write-down could have significant implications for RBS. It had
forecast its core tier one capital would fall to 4.25pc after absorbing ABN.
Every 1 bn write-down reduces that ratio by 0.15 percentage points
pushing it precariously close to 4pc".

86.5

Meetings with and statements made by rating agencies. By way of example:

(a)

The S&P research note referred to at paragraph 66.1 above.

(b)

On 28 February 2008, S&P published a research note which included the

following:
"Because of the complications of the deal to acquire ABN AMRO, the group
is apparently not in a position to disclose details of its underlying capital
position, or of the elements of the transition to Basel 2, although it
maintains that it would still have a core Tier 1 ratio of 4%. After
adjustments for the lenient UK approach, in our view this could be weaker."

86.6

The content of discussions between RBS and key UK investors in January/February

2008.

86A.

As to paragraph 43.2A, it is denied that RBS's position was worse than the position stated in
the 2007 Accounts. It is denied that the figures stated in the 2007 Accounts were achieved by

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manipulation of RBS's position. The capital ratios set out in the 2007 Accounts were
expressly stated to be ratios 'as at 31 December 2007' and were accurate statements of RBS's
capital ratios as at that date. It is admitted that RBS set year end targets for reduction in RWA
figures for constituent businesses and divisions within RBS as part of its ordinary business
planning and balance sheet management, and that divisions within RBS took steps as part of
their ordinary, active balance sheet management to control RWA usage in order to meet those
targets. It is denied that any such balance sheet management constituted 'manipulation' of the
RWA position or (save in respect of the transactions referred to at paragraph 43.2A.5) had 'no
business purpose other than to reduce RWAs for the 2007 year end'. In so far as the process of
balance sheet management imposed costs on the businesses or other disadvantages, such costs
and disadvantages were legitimate commercial costs as part of the ordinary operations of a
bank managing its capital position. As to the specific examples particularised by the
Claimants:
86A.1 It is admitted that the emails referred to in paragraphs 43.2A.1 to 43.2A.4 and
43.2A.6 to 43.2A.7 contain the words quoted. The Defendants will rely on the emails
for their full contents and meaning.
86A.2 It is admitted and averred that as part of GBM's active management of its capital
position, GBM employees were asked to assess planned transactions and consider the
cost implications of capital used by those transactions to reach a commercial decision
as to whether the transaction justified the regulatory capital which it used in light of
GBM's year end RWA targets. It is denied that this constituted manipulation or gave
rise to any 'artificial' reduction in RWAs.
86A.3 It is further admitted that in addition to reduction of RWAs in the manner referred to
at paragraph 86A.2 above, GBM entered into a number of capital management
transactions intended to reduce the regulatory capital required. It is denied that this
constituted manipulation or gave rise to any 'artificial' reduction in RWAs such
transactions were well-known to the market and the FSA (there being an inter-bank
market for such transactions), were considered entirely legimitate and formed an
ordinary part of active capital management by banks at the time. Save that the value
of transactions was approximately 16.9 billion, paragraph 43.2A.5 is admitted.
86A.4 Paragraph 43.2A.8 is denied. The email stated that the transactions would cost GBM
'around' 96 million.

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86A.5 Save as is consistent with the account set out above, paragraph 43.2A is denied.
86B.

As to paragraph 43.2B:
86B.1 It is denied that the reduction to RWAs was artificial. Paragraph 86A above is
repeated.
86B.2 RBS's RWAs as at the end of November 2007 (excluding ABN AMRO) on a Basel I
basis were approximately 474.2 billion.
86B.3 RBS's RWAs were approximately 440.5 billion (excluding ABN AMRO) on a Basel
I basis on 31 December 2007.
86B.4 It is admitted that RBS's RWAs in January 2008, as calculated contemporaneously on
a Basel I basis excluding ABN AMRO, were approximately 462 billion. It is denied
that RBS's RWAs in January 2008, as calculated on a Basel I basis excluding ABN
AMRO, were relevant to the position stated in the 2007 Accounts or the Prospectus.
By January 2008 RBS was required to calculate capital requirements on a Basel II
basis and accordingly the management of its capital position reflected the new
requirements. On a Basel II basis as implemented at that time (and excluding ABN
AMRO) RBS's RWAs were estimated to be 442.8 billion at the end of January 2008.
On a proportionally consolidated basis, RBS's RWAs fell to approximately 486
billion on 1 January 2008 under Basel II.

86C.

As to paragraph 43.2C, it is admitted that RBS expected the implementation of Basel II to be

broadly neutral once fully implemented. As set out at paragraph 80.1(e) above, the Basel II
regime was not fully implemented by the FSA on 1 January 2008, especially in regard to the
process for approving and overseeing AIRB models, the understanding and implementation of
Pillars 2 and 3 of the Basel II regime, and the interpretation of a number of the significant
rules in Pillar 1 and it is denied, if it be alleged, that RBS expected a benefit to its capital
position as at 1 January 2008. The estimate referred to in paragraph 43.2C (which is an
estimate prepared by Group Treasury), is dated 15 February 2008, and it is denied that it is
relevant to RBS's expectations in 2007. The estimates of 15 February 2008 reflected RBS's
best estimate of the impact of Basel II based on the extent of implementation as it then was.
The transition to Basel II continued throughout and beyond the first half of 2008. In any
event, it is denied that it was estimated that there would be a net benefit of 40.2 billion to

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RWAs on transition to Basel II. According to the spreadsheet containing the figure of 40.2
billion identified by the Claimants, RBS's estimates also included other factors increasing
RWAs (including certain factors identified by the Claimants at paragraph 43.2C.2), with the
result that the net change to RWAs on transition to Basel II was estimated to be an increase of
33.8 billion. As to the specific changes alleged by the Claimants, the Defendants plead as
follows:
86C.1 It is admitted that RBS's RWAs were approximately 490 billion on a Basel I,
proportionally consolidated basis as at 31 December 2007. RBS's 2008 Accounts
confirm that, on a proportionally consolidated basis, RBS's RWAs fell to
approximately 486 billion on 1 January 2008 under Basel II.
86C.2 It is denied that RBS was unable to assess the impact of Basel II properly. While the
transition was still ongoing RBS was unable to calculate the impact of Basel II with
complete certainty, but it was able to calculate proper and reasonable estimates of the
impact of Basel II as understood at the relevant time. As to the specific estimates
referred to by the Claimants at paragraph 43.2C.2:
86C.2.1 It is admitted that in the transition from Basel I to Basel II, RBS ceased to be
able to claim the benefit of rules in respect of calculations concerning Overthe-Counter derivatives referred to as an 'OTC waiver', and it is further
admitted that the impact of this was estimated on 15 February 2008 to be 23
billion.
86C.2.2 It is admitted that the estimate of 15 February 2008 referred to a change in
respect of 'CDS/FX' with an impact of 15 billion on RWAs.
86C.2.3 It is admitted that under Basel II, RBS was required to include an additional
element of RWAs amounting to 36 billion in respect of operational risk as at
the time of the estimates.
86C.3 It is admitted that RBS was required to report ABN AMRO's RWAs at 130% of its
Basel I figure from 1 January 2008, as set out at paragraph 107A.6A below. That
decision by the FSA was the result of discussions between RBS and the FSA during
February and March 2008. It is denied, if it be alleged, that RBS should have

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anticipated the decision of the FSA to require an additional 30% on top of ABN
AMRO's Basel I RWAs, in its expectations during 2007.
86C.4 It is denied that the above changes amounted to approximately 90 billion of RWAs
on a proportionally consolidated basis or 125 billion of RWAs on a fully
consolidated basis. Paragraph 86C.1 above is repeated.
86C.5 As to paragraph 43.2C.5, the total capital deductions required from Tier 1 capital on 1
January 2008 were 1.187 billion (on a proportionally consolidated basis) or 1.457
billion (on a fully consolidated basis). As to the figures alleged in the subparagraphs
thereto:
86C.5.1 Paragraph 43.2C.5.1 is admitted. As set out at paragraphs 132 to 135 below,
RBS applied for and obtained permission from the FSA to use an Advanced
Internal Ratings Based ('AIRB') approach to calculate its RWAs. Basel II
required any institution using an AIRB approach to make a deduction from
its capital in respect of expected losses. In respect of Tier 1 capital, RBS's
calculations as at the time of the Prospectus accounted for this as a net
deduction of 884 million.
86C.5.2 As to paragraph 43.2C.5.2, it is admitted that the estimate referred to in
paragraph 43.2C.2 referred to capital deductions in respect of securitisations
amounting to 2.177 billion, and that this figure included deductions for
material holdings.
86C.5.3As to paragraph 43.2C.5.3, it is admitted that the estimate referred to in
paragraph 43.2C.2 referred to other 50:50 deductions in the sum of 401
million.
87.

Save that, it is admitted that RBS's Core Tier 1 capital ratio weakened between 31 December
2007 and 30 April 2008, paragraph 43.3 is denied. In particular: (a) as set out above, RBS
had no published target for its Core Tier 1 ratio,; and (b) RBS's Core Tier 1 ratio as at 30
April 2008 was 3.03% on a proportional consolidated basis, as set out at Response 28 of the
Part 18 Response. It is denied that the Core Tier 1 ratio was lower than 3.03% by reason of
the factors alleged at paragraph 43.6, as to which see paragraph 90 below. The reduction in

47
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the Core Tier 1 ratio included the effect of the significant credit market losses which had been
taken in the first quarter of 2008 and which were referred to in the Prospectus.
88.

As to paragraph 43.4:
88.1

It is admitted that the Tier 1 ratio target range and the fully consolidated figure
contained in the 2007 Accounts were as alleged.

88.2

As to the actual proportional consolidated figures, see the Capital Ratio Tables at
paragraph 82 above.

88.3

It is admitted and averred that Basel II came into force on 1 January 2008, although
as set out above in practice the implementation took place over a period of time.

88.4

It is admitted that RBS's Tier 1 capital ratios were lower on a proportional than a
fully consolidated basis.

88.5
89.

Save as aforesaid, paragraph 43.4 is denied.

Save that iIt is admitted that RBS's Tier 1 capital ratio weakened between 31 December 2007
and 30 April 2008, Pparagraph 43.5 is denied. It is admitted that Aas at 30 April 2008, RBS's
Tier 1 ratio was 5.201% on a proportional consolidated Basel II basis., as set out at Response
51 of the Part 18 Response. Paragraph 43.5 is otherwise denied.

90.

As to paragraph 43.6:
90.1

The passage prior to the numbered sub-paragraphs is admitted denied.

90.2

As to paragraph 43.6.1, the capital plan was an iterative document updated

frequently by RBS and does not amount to a document of record of RBS's capital
ratios at any particular time. It is admitted that the ratios stated in paragraph 43.6.1
appear in the version of the capital plan used by RBS at the time of finalising the
Prospectus (the "Capital Plan"). Save as identified in paragraph 89 above, RBS's
actual capital ratios were as set out in its Response dated 16 June 2015 to the
Request for Further Information dated 4 February 2015.

90.3

Paragraph 43.6(ii) is denied, as to which see paragraphs 120 to 130 below.

Paragraph 43.6.2 is denied. No adjustment to the Capital Plan was required, in that

48
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the assumptions underpinning the Capital Plan were reasonable and appropriate
assumptions to be used. In particular:
(a)

Paragraph 43.6.2(i) is denied. No further deduction needed to be made in

respect of ABN AMRO securitisations (see paragraph 107A.6 below).

(b)

Paragraph 43.6.2(ii) is denied (see paragraph 107A below).

(c)

As to paragraphs 43.6.2(iii) and 43.6.2(iv), see the section below dealing

with Credit Market Exposures.

(d)

No increase in RWA figures was required in respect of RWA targets (see

paragraph 145A.2 below).

(e)

No deductions were necessary in respect of ABN AMRO capital

instruments (see paragraph 107A.5A below).

90.4

Save to the limited and non-material extent set out in paragraphs 195 to 0 below,
paragraph 43.6(iii) is denied.

90.5

Paragraph 43.6.4 is noted. The Defendants' position as to any further amendments to

the Amended Consolidated Particulars of Claim is reserved in full.

91.

It is denied that any of the matters pleaded to at paragraphs 79 to 90.4 above support the
allegation at paragraph 43 that the true position was not disclosed by the Prospectus.

92.

As to paragraph 44, the actual reasons for and purposes of the Rights Issue were as set out in
the Prospectus. Save to the extent otherwise set out below with regard to the allegations
contained in the sub-paragraphs thereof, paragraph 44 is therefore denied.

93.

As the Prospectus made clear: (a) RBS's capital position had been adversely affected by the
market conditions experienced in late 2007 and the first quarter of 2008, and in particular by
the deterioration in credit markets which had necessitated significant write-downs of the
bank's exposures; (b) the transition from Basel I to Basel II had resulted in an increase in
RBS's RWAs; and (c) in light of the change in the financial environment, it had been decided
that it was appropriate for the bank to strengthen its capital base and operate going forward
with a higher degree of capitalisation. Further, as set out above, as had been recognised
within the bank and was also well known to the market, the financing structure adopted for

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the acquisition of ABN meant that RBS's capital ratios were likely to be outside its normal
operating parameters until rebuilt over a period of 2 to 3 years. Save to the extent consistent
therewith, paragraph 44.1 is denied.
94.

Save that it is admitted that the market conditions experienced in late 2007 and the first
quarter of 2008 had adversely affected RBS's capital rebuilding plans, paragraph 44.2 is
denied.

94A.

Paragraph 44.2A is denied, in which regard paragraphs 86C, 92 and 93 above are repeated.

94B.

As to paragraph 44.2B:
94B.1

The true sequence of events in relation to RBS's discussions with the FSA in respect
of the use of its Basel II models is set out at paragraphs 132 to 136 below. As
described there, the FSA agreed in January 2008 that RBS could take the benefit of
recalibrations of the PD Model and the EAD Model prior to formal approval being
given by the FSA, but this was withdrawn on 28 March 2008. It is denied that this
decision was 'confirmed'. On the contrary, in the first week of early April 2008 the
FSA altered its position communicated to RBS at the end of March 2008 and
indicated that it would allow RBS to implement 50% of the model benefits with
effect from April 2008. In fact, on 18 April 2008 the FSA approved the use of a
scalar approach which allowed RBS to implement approximately 60% of the model
benefits. It is admitted that Goodwin and Whittaker discussed with the FSA its
decision on whether to allow RBS to take the benefit of recalibrations to its PD and
EAD Models, although the timing and content of those discussions are not admitted.
No admissions are made as to any such discussions between the FSA and Mr Tyler.

94B.2

At the time of the Rights Issue, RBS had obtained FSA approval for the majority of
its AIRB models and had sought approval from the FSA of its recalibration of three
specific models. Iit was RBS's reasonably held expectation that it would ultimately
be able to satisfy most of the FSA's remaining concerns and obtain the majority of
the benefit of its remaining the recalibration of the remaining proprietary models.

94B.3

The projected consequences of the position reached with the FSA in relation to both
the capital required to be held in respect of ABN's RWAs and RBS's own model

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reliefs had been taken into account in the capital plan of which the Rights Issue
formed part.
94B.4

The matters referred to therefore did not make the goal identified at the time of the
Rights Issue to "accelerate its plans to increase its capital ratios and to move to a
higher target range" misleading and/or unachievable. That goal was realistic and
achievable at the time of the Rights Issue.

94B.5

Save to the extent consistent with the contents of paragraphs 132 to 136 below, the
first three sentences of paragraph 44.2B.1 are denied. As to the final sentence
thereof, it is admitted that the July Draft GIA Reports referred to an increase in
RWAs of 51.5 billion, but it is denied that the July Draft GIA Reports made
reference to a capital "deficiency" of 3.1 billion.

94B.6

Save that: (a) it is denied that the July Draft GIA Reports made reference (a) to a
capital "deficiency" of 3.0 billion; and (b) to the requirement for RBS to hold
capital against 130% of ABN's Basel I RWAs being 'determined' by the FSA; and
(c) that ABN withdrew its waiver application on or after 1 April 2008, having
previously agreed with the DNB that it would do so, paragraph 44.2B.2 is admitted.

94B.7
95.

Save to the extent consistent with the foregoing, paragraph 44.2B is denied.

As to Pparagraph 44.3 is denied.:

95.1

The FSA had not required RBS to undertake a rights issue. The circumstances in
which the decision to undertake the Rights Issue came about are set out at
paragraphs 69 to 76 above.

95.2

Both tThe decision to undertake the Rights Issue and the decision as to the size of
the Rights Issue were was voluntary and the FSA did not exert "substantial
pressure" on RBS to undertake it the Rights Issue or to set the quantum of the
Rights Issue at any particular level.

95.3

Save to the extent that RBS's capital planning was at all times informed by
regulatory requirements and that, as set out in paragraph 69 above, in mid-February
2008 the FSA had indicated that it would prefer RBS to accelerate its capital

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regeneration plan, it is denied that the decision to undertake the Rights Issue was
driven by pressure from the regulator.
95.4

The question of whether the FSA would have required RBS to undertake a rights
issue if RBS had not voluntarily decided to do so did not arise. As set out in
paragraphs 69 to 76 above, RBS took the decision to undertake the Rights Issue in
response to the changed circumstances which existed in early April 2008 and
subsequently informed the FSA of that decision soon thereafter.

95.5
96.

Save to the extent set out above, paragraph 44.3 is denied.

As to paragraph 44.3A, as set out above and as noted in the FSA Report, in the first quarter of
2008 there was heightened regulatory focus on bank capital ratios generally. Against that
background, it is admitted that (in common with other banks regulated by the FSA) RBS was
in regular contact with the FSA and that one of the matters discussed was the steps being
taken by RBS to rebuild its capital position following the acquisition of ABN.

96A.

Against that backdrop, paragraph 44.3A.1 is admitted.

96B.

As to paragraph 44.3A.2, paragraph 143 below is repeated.

96C.

As to paragraph 44.3A.3, it is admitted that RBS met the FSA on 14 February 2008 and that at
that meeting no rights issue was proposed. The nature of the discussions between RBS and
the FSA at that time are set out in paragraph 69 above. It is admitted that at that time a rights
issue was not regarded by RBS as an option that would need to be considered other than in
exceptional circumstances (such as were in fact encountered in the period leading up to the
decision to undertake the Rights Issue). Without identification of the source of the passage
quoted in paragraph 44.3A.3, no admission is made as to whether that option was regarded
specifically as the most "severe/extreme" response.
96.1

Paragraph 44.3A.41 is denied. As set out in paragraph 69.1 above, in February 2008
the FSA indicated that it would prefer RBS to accelerate its existing capital
regeneration plans so as to achieve a Core Tier 1 ratio of 5% by 31 March 2009 and
asked the bank to investigate options for doing so.

96.2

As to paragraph 44.3A.52:

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(a)

It is denied that the first statement was made by McKillop. It was made by
Goodwin. It is admitted that Goodwin and McKillop made the second
statements alleged attributed to him. Those statements were both truthful
and accurate. As set out at paragraph 69 above, during the first quarter of
2008 the possibility of a Rights Issue was kept regularly under review, but
as at the end of February 2008 no plans existed for one to be undertaken.

(b)

It is denied that the reference to "inorganic capital raisings" included asset

sales. To the contrary, and as was well known to the market, RBS had
already disposed of a number of assets and had announced plans to dispose
of others.

96.2AA Paragraph 44.3A.5A is admitted, save that the FSA confirmed its decision on 28
March 2008.
96.2A

The capital planning document referred to in paragraph 44.3A.6 made clear that it
was concentrating on the proportionate balance sheet which represented the assets
and liabilities RBS expected to have post separation. On that basis, the central case
set out in the planning document assumed a total capital ratio of 10.57% at the end
of March 2008. It was only the fully consolidated figures provided in the appendix
which assumed a March end ratio above 11%. Save to the extent consistent with the
foregoing, paragraph 44.3A.6 is denied.

96.3

As set out above a steering group had been established in February 2008 to consider
options for the accelerated rebuilding of RBS's capital ratios and that group had
identified and begun investigation of a number of options for doing so. On 19
March 2008, the Board agreed that the initiatives already underway should be
continued. Save to the extent consistent with the foregoing, paragraph 44.3A.37 is
denied.

96.3A

As to paragraph 44.3A.8, paragraph 94B above is repeated.

96.3B

As to paragraphs 44.3A.9 and 44.3A.9A:

(a)

Paragraphs 144 and 145.3 below and Response 68 of the Part 18 Response
are repeated.

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(b)

RBS's ICG at the relevant time was 9.03%.

(c)

There was no single set of provisional figures; rather, there was routinely a
series of sets of updated figures as the definitive position at a particular
point of time was firmed up. In the absence of particulars of which set of
provisional figures is being referred to, the allegation that "its provisional
figures indicated a total capital ratio of 9.01%" is not admitted.
Notwithstanding what was indicated in provisional figures, RBS's actual
total capital ratio as at the end of March 2008 was 9.11% on a fully
consolidated basis and 9.10% on a proportionally consolidated basis.

(cc)

It is admitted that the March 2008 capital ratios for RBS reflected an
element of active capital management, although it is denied that the steps
taken are properly described as double-leveraging.

(d)

Save to the extent consistent with the aforesaid and save that the email
referred to in paragraph 44.3A.9A contained the words quoted therein,
paragraphs 44.3A.9 and 44.3A.9A are is denied.

96.3C

As to paragraph 44.3.A.10, it is admitted that a meeting took place between RBS

and the FSA on 7 April 2008 at which the concern that RBS might breach its ICG
was discussed.

96.4

Paragraphs 44.3A.114 and 44.3A.11A are is not admitted.

96.5

The circumstances in which Goodwin met Mr Sants on 9 April 2008 are set out in
paragraphs 74 to 76 above. Save to the extent consistent with the content of those
paragraphs, paragraph 44.3A.125 is and 44.3A.12A are denied. In particular, it is
denied that there was a requirement imposed by Mr Sants at that meeting that RBS
establish definitively its capital position as at the end of March 2008.

96.5A

Paragraph 44.3A.12B is admitted, save that no admissions are made as to whether

the note of the meeting quoted therein (which is a note of issues arising at the
meeting and is not a complete record of discussions) reflect the conclusion of the
meeting overall. It is denied, if it be alleged, that the 'removal of concessions' would
have necessitated capital raising in the absence of other factors having an impact on

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RBS's capital position. As pleaded above, senior management had already

concluded that it would be necessary to undertake a Rights Issue.
96.5B

As to paragraph 44.3A.12C, it is admitted that the note of the meeting contains the
text quoted. The note is a note of issues arising at the meeting and is not a complete
record of discussions at the meeting. The statement was made by one of RBS's legal
advisers, not present at the earlier meeting. Accordingly it is denied that any
inference as to statements made by Mr Sants can properly be drawn from the note,
which does not record any basis for the statement made. As to the second sentence
of paragraph 44.3A.12C, it is admitted that during the meeting on 9 April 2008,
Goodwin requested that the FSA approve the recalibration of RBS's AIRB models.
It is denied, if it be alleged, that Goodwin requested that approval be given as a
result of the Rights Issue.

96.6

As to paragraph 44.3A.136 and 44.3A.13A:

(aa)

It is denied that by 10 April 2008 RBS's total capital ratio was 8.72% (on
either a fully or proportionally consolidated basis). Definitive capital ratio
figures are only available as at month end reporting dates, but the total
capital ratio as at the end of March 2008 was 9.11% and 9.10% and as at the
end of April 2008 was 9.26% and 9.43%, on a fully and proportionally
consolidated basis respectively.

(ab)

No admissions are made as to the final sentence of paragraph 44.3A.13,

save that it is admitted that the memorandum referred to contained the
words quoted.

(a)

As set out at paragraphs 72 to 76 above, by the time Mr McLean wrote to

Mr Sants on 10 April 2008 RBS had already begun preparations for the
Rights Issue and had informed the FSA that it had done so. Mr McLean's
letter was simply confirmation of the Board's position following the meeting
of the Chairman's Committee that morning. Save to the extent consistent
with this, the first second sentence is denied.

(b)

It is admitted that the FSA memorandum contained the statements referred

to in paragraphs 44.3A.13 and 44.3A.13A. A final decision about the exact

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size of the Rights Issue was not taken until by RBS, independently of the
FSA, on 20 April 2008. The FSA was informed of this shortly thereafter.
(c)

Save as aforesaid, paragraphs 44.3A.613 and 44.3A.13A are denied.

96.6A Paragraph 44.3A.13B is denied. Paragraphs 95.2 and 96.6(b) above are
repeated.
96.7

Save that: (a) once the FSA had been informed by RBS of its decision to undertake
the Rights Issue there was (as was to be expected) regular contact between them; (b)
it is admitted that the Rights Issue was announced on 22 April 2008,; and (c) that the
Prospectus was published on 30 April 2008 and (d) that RBS's Board decided that
RBS should produce a 'roadmap' of initiatives to strengthen its capital position on 21
February 2008, paragraph 44.3A.714 is denied. In particular:
(a)___As already set out above, it is denied that the Rights Issue was imposed on
RBS, either at the meeting on 9 April 2008 or otherwise.
(b)

It is denied that the FSA pushed RBS to raise more capital than RBS had
originally proposed. The size of the Rights Issue was determined by RBS.

96.8

As to paragraph 44.3BA.8:
(a)

No admission is made in relation to what is shown by the exchanges at the

analysts' conference call on 22 April 2008. Without prejudice to that nonadmission, the Defendants fully understood the obligation to provide a clear,
comprehensive and truthful account of the background to and reasons for
the Rights Issue and complied with that obligation.

(b)

The statements attributed at paragraphs 44.3B.1A.8(I) to 44.3B.3A.8(III) to

McKillop and Goodwin are admitted. Those statements were truthful. In
this regard, the circumstances in which RBS took the decision to undertake
the Rights Issue set out at paragraphs 69 to 76 above are repeated.

(c)

Save as aforesaid, paragraph 44.3BA.8 is denied.

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97.

Paragraph 44.4 is denied:

97.1

As set out above, the proceeds of the Rights Issue could not be and were not to be
ring-fenced and/or allocated for a specific purpose. Rather, they were to become
part of RBS's overall capital resources, which were deployed by its management in
the way deemed most appropriate for the well-being of the bank's business as a
whole.

97.2

In that context, it is denied that paying off short-term and/or very short-term funding
or paying a 2.3 billion dividend (the fact of which is admitted, but which was in
any event paid prior to receipt by RBS of the proceeds of the Rights Issue) were
purposes of or reasons for the Rights Issue, either prior to its announcement or
during the Rights Issue Pperiod.

98.

Paragraph 44A is denied. The Rights Issue was fully underwritten. Further, it was not
necessary for RBS to identify in the region of 4 billion of new capital in addition to the
Rights Issue proceeds in order to achieve its target 6% Core Tier 1 ratio. As was reflected in
the statements made in the Prospectus at pages 7 and 24-25, RBS's capital plan at the time of
the Rights Issue assumed that an increase of 4 billion in Core Tier 1 capital would be
generated from asset disposals. On that basis, and taking account of the receipt of 12 billion
Rights Issue proceeds, the capital plan projected a Core Tier 1 ratio at 31 December 2008 on a
proportional basis of 6.46%. That capital plan was a reasonable one at the time of the Rights
Issue. As to the allegations concerning the potential sale of RBS Insurance see paragraphs
273A and 274 below. It is denied that RBS could not meet the 6% target except by selling
assets yielding a net capital gain of 36bps CT1 capital, as to which see paragraph A280.4
below.

99.

As to paragraph 44A.1:
99.1

It is denied that 12bn of new capital was insufficient by a substantial margin to

increase RBS's capital ratios to the levels referred to. At the end of June 2008,
following receipt of the 12 billion proceeds of the Rights Issue and after taking
account of the projected write-downs disclosed in the Prospectus, but without the
benefit of any of the possible asset sales referred to in the Prospectus, RBS's Core
Tier 1 ratio on a proportional basis was 5.7%. This was significantly in excess of
the 5% target for June 2008 identified in the Prospectus.

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99.2

On the reasonable assumption of a further 4 billion increase in Core Tier 1 capital

from asset sales, the capital plan projected a Core Tier 1 ratio on a proportional basis
at 31 December 2008 of 6.46% and a Tier 1 ratio of 8.91%. It is denied that RBS
assessed the likelihood of each possible asset sale as 25%: see paragraph 276.5
below.

99.3 Save as aforesaid, paragraph 44A.1 is denied.

99.4 With regard to the allegations contained in the sub-paragraphs of paragraph 44A.1:

99.5
100.

(a)

Paragraph 44A.1.1 is denied, as to which see paragraphs 272 to 276 below.

(b)

Paragraph 44A.1.1A is denied. Paragraph 98 above is repeated.

Paragraph 44A.1.2 is denied, as to which see paragraphs 195 to 0 below.

Paragraph 44A.2 is denied. As a matter of fact, at the time of the 2008 Interim Results RBS's
Core Tier 1 ratio was 5.7% on a proportional consolidated basis, 0.4% ahead of the level
expected at the time the Rights Issue was announced.

101.

Paragraph 45 is denied. In response to the particulars alleged in the sub-paragraphs thereof,

the Defendants will say as follows:
101.1

Save that it is admitted that the statements referred to created the impression that the
purpose of the Rights Issue was to increase Core Tier 1 and Tier 1 ratios (which was
indeed an intended purpose of the Rights Issue), Pparagraph 45.1 is denied, in which
regard paragraphs 92 to 100 above are repeated. It is specifically denied that any
relevant matters were not properly disclosed in the Prospectus.

101.2

Paragraph 45.2 is denied. As set out above, the decision to undertake the Rights
Issue was one made voluntarily and freely by RBS. It was not required to do so by
the FSA. Save as is consistent with the account set out above, paragraph 45.2 is
denied.

101.3

Paragraph 45.3 is denied:

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(a)

The quoted statement from the Prospectus accurately reflected the tenor of
the confirmation given in the 2007 Results Announcement. That statement
was itself accurate.

(b)

It is denied that the further statement alleged is to be implied from the words
actually used, which are to be taken at face value.

(c)

As to RBS's actual capital ratios, see the Capital Ratio Tables above at
paragraph 82.

(d)

As to paragraph 45.3(a): (i) as set out above, RBS had not published a Core
Tier 1 target; (ii) Basel II did not come into force until 1 January 2008 and
was not relevant to the results for the year ending 31 December 2007; (iii) as
was in any event understood by the market, following the ABN acquisition,
RBS's capital ratios were likely to be outside its normal operating
parameters for a period while the capital base was rebuilt; and (iv) in respect
of RBS's actual capital ratio as at 1 January 2008, paragraph 86C above is
repeated.

(e)

Paragraph 45.3(b) is denied, in which regard paragraph 79 to 89 and 94 are

repeated.

(f)

Paragraph 45.3(C) is denied, in which regard see paragraphs 144 to 145

below.

101.4

Paragraph 45.4 is denied. The confirmation in the 2007 Results Announcement

related to the period ending 31 December 2007, during which time the relevant
capital regime was Basel I. The Basel II methodology had no relevance to the
calculation of capital ratios for that historical period. As to the further, forward
looking, statement (that reported ratios under Basel II were expected to be similar to
their Basel I equivalents), to the extent that statement turned out not to be the case, it
was clearly disclosed in the Prospectus, which stated (at p.28) that: "The transition
from Basel I to Basel II on 1 January 2008 resulted in certain definitional changes
which led to an overall increase in the Group's risk weighted assets and an increase
in deductions applied to regulatory capital, together resulting in a decline in RBS's

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Tier 1 capital ratio." As set out at Response 51 of the Part 18 Response, at 30 April
2008 RBS's Tier 1 ratio was 5.201% on a proportional consolidated Basel II basis.
101.4A Save that it is admitted that the Tier 1 capital ratio on a proportionally
consolidated basis would have been below 7% as at 31 December 2007 if calculated
on a Basel II basis and that, as is clear from Response 51 of the Part 18 Response,
the Tier 1 ratio on a proportionally consolidated Basel II basis was 5.201% as at 30
April 2008, paragraph 45.4A is denied. As was clear from the 2007 Accounts
themselves:
(a)

for the period to which those accounts related the relevant regulatory regime
was Basel I and it was on that basis that the regulatory and capital ratios
data in the 2007 Accounts were reported;

(b)

the statement referred to (which was contained in RBS's 2007 Annual

Report and 2007 Accounts) related to that same period; and

(c)
101.5

the Basel II methodology was applied only from 1 January 2008 onwards.

Paragraph 45.5 is denied. In particular:

(a)

As set out above, RBS did not have a target of 5.25% for Core Tier 1 capital.

(b)

It is denied that the Non-Executive Directors were not comfortable with

decisions taken by RBS in respect of its Capital Plan. As set out above,
RBS's Board (including the Non-Executive Directors) agreed on 18 March
2008 that in light of the circumstances at the time it was proper to accelerate
RBS's rebuilding of its capital ratios.

(c)

As to the position taken by the FSA, paragraphs 69.1 and 95 above are
repeated.

101.6

Paragraph 45.6 is denied.

The statements referred to were neither untrue nor

misleading. Both were proper statements to make based on reasonable projections

about RBS's business going forward.
102.

As set out above, the allegations of omissions and/or inadequate disclosure contained in
paragraphs 43, 44 and 44A are denied. In the circumstances, paragraph 46 is also denied.

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103.

As to paragraph 47:
103.1

It is denied that any of the matters alleged arose after the Prospectus was approved
so as to give rise to the need to produce a supplementary prospectus.

103.2

It is admitted that RBS did not produce a supplementary prospectus, as alleged at

paragraph 47.2. For the reasons set out above, no supplementary prospectus was
required.

103.3

Accordingly, paragraph 47.3 is denied.

103A. Paragraph 47.4 is denied. As set out above, it is denied that there arose any new matters such
as to require the submission of a supplementary prospectus. None of the Director Defendants
was therefore under any obligation to give notice to RBS of any such new matters pursuant to
section 87G(5) of FSMA. It is accordingly denied that any of the Director Defendants is
liable to pay compensation under section 90(4) of FSMA.
Capital
104.

As to paragraph 47A:
104.1

It is admitted that in the period leading up to the Rights Issue there were concerns
amongst market analysts and investors about RBS's capital position. As set out
above, RBS had adopted an efficient capital model and this was well known to both
market participants and observers, and to the FSA.

104.2

As the Prospectus made clear, in light of the severe market deterioration that had
been experienced and the worsening economic outlook, the bank had taken the
decision to move to a higher level of capitalisation reflecting the generally
weakened business environment. It is admitted that, in this context, enhancement of
RBS's capital position was the main stated purpose of the Rights Issue.

104.3

The disclosure requirements for the Prospectus were those set out in ss. 87A and 90
of FSMA, the Prospectus Rules and the Prospectus Regulation, which it is admitted
encompassed a requirement that the Prospectus present any information regarding
the bank's capital position and its capital ratios accurately. If it is intended to allege
that the requirements could only be satisfied by the provision of details of RBS's

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capital ratios as at the date of the Rights Issue, that allegation is denied. To the
contrary, the scope of the disclosure requirements were satisfied in this regard by the
provision in the Prospectus of details of the anticipated capital ratios following
receipt of the Rights Issue proceeds, as was confirmed by the UKLA's approval of
the Prospectus (as to which see paragraphs 43-48 above). The term "fully" does not
appear in ss. 87A or 90 of FSMA, the Prospectus Rules or the Prospectus Regulation
and is not relevant.
104.4

Save as aforesaid, paragraph 47A is denied.

105.

As to pParagraph 47B is admitted.

106.

Paragraph 47C is not admitted.

107.

As to paragraph 47D:
107.1

From late 2007 onwards there was an increased focus on the Core Tier 1 ratio as the
preferred measure of banks' capital adequacy by market analysts and investors, who
previously had concentrated on the Tier 1 ratio. At the time of the Rights Issue
there was however no requirement for banks to disclose their Core Tier 1 ratio,
neither was there any express regulatory minimum Core Tier 1 ratio which banks
were required to maintain nor was there any commonly agreed definition of Core
Tier 1. Against that background, the precise extent to which most investors and
analysts preferred to base their assessment of capital adequacy is not admitted. The
Prospectus in any event presented projected Capital Ratios for June 2008 and
December 2008 on both a Tier 1 and Core Tier 1 basis.

107.2

As to the final two sentences: (a) no admission is made as to the practice adopted by
"most banks"; (b) RBS disclosed its 2007 capital ratios on a Basel I basis, thereafter
they were disclosed on a Basel II basis.

107.3

Save as the contrary is indicated above, paragraph 47D is denied.

107A. As to paragraph 47E, the allegation implies that the FSA's treatment of RBS had been less
strict than the FSA's treatments of RBS's peers. The FSA's treatment of RBS's peers is not
and was not at the time within the Defendants' knowledge and would not therefore have been
a matter capable of disclosure. Without prejudice to that response, the waivers afforded to

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RBS were available to other institutions which satisfied the relevant requirements imposed by
the FSA and cannot accurately be described as "indulgences". In so far as certain waivers and
other arrangements with the FSA were temporary, this formed part of the gradual
implementation of Basel II and it was reasonable for RBS to assume, for the purposes of
capital planning, that similar arrangements would ultimately be concluded once Basel II was
fully implemented. The process partially set out in sub-paragraphs 47E.1 to 47E.6 was part of
the routine supervisory dialogue entered into between the FSA and the entities it regulated.
As to the specific allegations made:
107A.1 As to paragraph 47E.1:
(a)

It is denied that the FSA had rejected RBS's ICAAP submission as

inadequate, as alleged at paragraph 47E.1 The FSA in fact informed RBS
that it had not had time to review all aspects of RBS's ICAAP report. In its
Arrow letter of October 2007 the FSA said that it had noted considerable
improvement in the quality of the quantitative information available to aid
decision making at Board level, most notably in relation to the outputs from
stress testing work but that, as a new discipline for RBS, unsurprisingly
there was further work to be done to integrate the ICAAP disciplines within
the Group's existing control framework. It also explained that, since the
Pillar 2 process was new to both the FSA and RBS, the FSA would be
suggesting a programme of work, involving both the FSA and RBS, to
enable it to better understand the Group's approach to articulating its risk
appetite and assigning capital values to certain risks, with a view to
establishing a common understanding in relation to these matters.

(b)

It is admitted that, for that reason, the FSA set a temporary ICG to allow this
work to be carried out.

(c)

It is denied that the interim ICG was intended to apply for no more than 6
months. The FSA had indicated simply that it expected to provide a revised
ICG "around Q2 2008".

(d)

The process was envisaged by the FSA to be both a collaborative and an

iterative one, in relation to which the FSA had not imposed a fixed
timescale. In this regard, RBS maintained a regular dialogue with the FSA

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during the first half of 2008. With the FSA's agreement, RBS submitted a
further ICAAP in August 2008.
107A.2 In carrying out comparative analysis across firms using models based on various
confidence levels, the reference point taken by the FSA was to assume the
equivalent of a BBB rating, which it took to imply a solvency confidence level of
99.9%. On this basis, there were differences between the assessment made by RBS
in its ICAAP (which was based on 96% confidence levels that it would comply with
its Basel II capital requirements) and that made by the FSA. For the avoidance of
doubt, the approach adopted by RBS was designed to ensure both that it maintained
a 99.9% confidence level with regard to solvency and a 96% confidence level of
complying with Basel II minimum capital requirements. It was the differences in
calculation approach and interpretation which were to be the subject of the further
programme of work referred to in paragraph 107A.1(a) above. Although the FSA
did ask RBS to re-estimate certain aspects of its calculations during the 2007
ICAAP review process, it did not require RBS to perform an overall ICAAP
assessment based on a confidence level of 99.9%. Save as aforesaid, paragraph
47E.2 is denied.
107A.3 Paragraph 47E.3 provides an incomplete account of the position adopted by the
FSA, which is set out at paragraphs 132-136A below. Save to the extent consistent
therewith, paragraph 47E.3 is denied.
107A.3A No admissions are made as to the precise contents of the telephone call between
Sants and Goodwin, which the Defendants believe took place on 18 April 2008
rather than 23 April 2008 as alleged. It is admitted that Sants informed RBS on
behalf of the FSA that RBS would be permitted to assume an additional benefit from
the model relief recalibrations equivalent to up to 20 basis points on its Core Tier 1
capital ratio for planning purposes. RBS included a corresponding reduction of
RWAs of 20.5 billion in its capital plan but it is denied that there was no basis for
this assumption, which reflected a reasonable assessment of the likely outcome of
the application to the FSA for approval of the recalibration of the outstanding
models. Save to the extent consistent therewith, paragraph 47E.3A is denied.
107A.4 Paragraph 47E.4 is denied.

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107A.5 As to paragraph 47E.5:

(a)

The FSA monitored backtesting exceptions reported by all banks, and noted
an increase in backtesting exceptions across the industry. This fact, together
with a discussion of various responses to it that the FSA recommended or
was considering, was set out in a letter dated 22 April 2008 from the FSA to
the BBA.

(b)

Backtesting exceptions to VaR models used for capital calculations were

provided for in the regulatory framework, in particular by the application of
a plus factor that increased the VaR Multiplication Factor (as described
further in paragraph 258A below). Backtesting exceptions recorded by
RBS's VaR models were duly reported to the FSA and resulted in an
increase in RBS's VaR Multiplication Factor via the addition of a plus
factor.

(c)

It is not admitted that: (1) RBS's VaR model appeared to give rise to more
severe exceptions than the models operated by other banks; or (2) the
backtesting exceptions to which RBS's VaR model gave rise thereby
indicated a specific understatement of market risk. It is denied that the
relative severity of exceptions produced by RBS's models as compared with
those produced by the models operated by other banks was a matter within
the knowledge of the Defendants at the material time, so as to be capable of
being disclosed in the Prospectus.

(d)

It is denied (if alleged) that the FSA had indicated to RBS prior to the end of
the Rights Issue Period that RBS needed to seek re-approval for its VaR
model. It is correspondingly denied that RBS's plans at the material time
were predicated on any assumptions about obtaining such approval.

(e)

Save as set out above and in paragraphs 253 to 271 below, paragraph 47E.5
is denied.

107A.5A As to paragraph 47E.5A, it is admitted that RBS was engaged in discussions with
the FSA at the time of the Rights Issue concerning the treatment of certain capital
instruments issued by ABN AMRO, relating to the treatment of those instruments as

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regulatory capital by the FSA under its own rules, as opposed to the rules specified
by the DNB. While those discussions were ongoing, RBS continued to apply the
same categorisation to the capital instruments as was currently applied by ABN. The
concerns about the treatment of the relevant instruments were raised by RBS itself
with the FSA. It is denied that these discussions constituted any form of lenient
treatment or temporary indulgence. As at the time of the Prospectus these
discussions were ongoing.
107A.5B As to paragraph 47E.6A, at the date of the Rights Issue, RBS was required by the
FSA to account for ABN AMRO'S RWAs on a Basel I basis with an addition of
30% . This decision was based on a calculation performed by RBS of a conservative
estimate of the likely position of ABN AMRO following transition to Basel II. It is
denied that RBS assumed that this position would apply indefinitely. The calculation
was intended to be a prudent calculation of the likely position under Basel II and
RBS accordingly made the conservative assumption in its capital planning, in the
absence of any better data, that ABN AMRO's position would be broadly equivalent
to this position under Basel II.
107A.6 As to paragraph 47E.6:
(a)

Save that no admission is made as to any difference in capital requirements

which resulted from the approach required by the FSA, paragraph 47E.6.1 is
denied. Although consideration had been given by RBS to how it should
account for ABN RWAs and it had had discussions with the FSA about it,
the Basel I plus 30% approach was not something which RBS had applied
or sought approval for. The FSA had taken the decision to require RBS to
treat ABN AMRO RWA's on a Basel I plus 30% basis. Paragraph 47E.6.1
is denied. The Capital Plan did not assume a benefit of 51 billion from the
use of the PD and EAD models. The Capital Plan assumed a benefit of
25.5 billion from those models with effect from April 2008 and a further
aggregate reduction in RWAs of 20.5 billion from the outstanding models
(including the PD and EAD) from June 2008.

(b)

As to paragraph 47E.6.2, it is admitted that the Rights Issue Capital Plan

explicitly assumed 50% of the benefit of the EPE model. It is denied (if
alleged) that RBS assumed that it would ultimately get approval to take

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100% benefit of that model.

(c)

As to pParagraph 47E.6.3 is denied. RBS's capital planning was not based

on assumptions as to the DNB's treatment of ABN AMRO securitisations,
but was based on the FSA's treatment of the same securitisations. it is
denied (if alleged) that RBS assumed that it would receive approval to take
100% benefit of its EAD model.

(d)

Paragraph 47E.6.4 is admitted, save that the expected impact on RWAs was
a reduction of US$2 billion.

(e)

Paragraph 47E.6.5 is admitted.

107B. Paragraph 47F is denied, in which regard paragraph 95 above is repeated. RBS was not the
beneficiary of 'indulgences'. Further or alternatively the assumptions made in RBS's capital
planning were appropriate, prudent and reasonable. As to the particular factors alleged in the
sub-paragraphs of 47F, the Defendants plead as follows:
107B.1 Paragraph 47F.1 is denied. RBS's estimates of the effect of the change from Basel I to
Basel II were reasonable. RBS had no 'history' of models being rejected by regulators.
On the contrary, its AIRB models had been approved. RBS had sought the FSA's
approval of the recalibration of specific models used and those requests were
outstanding. In respect of the outstanding requests for approval, it is denied that the
FSA had rejected those requests in whole or in part. Paragraph 94B.2 above is
repeated.
107B.2 As to paragraph 47F.2, it is denied that RBS recognised it was 'subject to the mercy'
of the FSA. The quotation from the email is incomplete and does not properly reflect
the meaning of Mr Peters's statement. The email stated that the:
"recognition

of the PD/EAD benefits has been subject to the mercy of

the FSA's wavering comments on the timing and quantum of available
relief so the movements you see depend on the timing of the schedule in
relation to the FSA's stance on that particular day"

107B.3 Save that it is admitted that further work on the recalibration of the PD and EAD
models was relevant in the FSA's decision to withdraw permission for RBS to use the
PD and EAD models pending final approval, paragraph 47F.3 is denied. The model

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applications were not rejected by the FSA. In April 2008, the FSA recognised that
RBS would achieve the majority of the benefit of the PD and EAD models.
Paragraphs 94B.1 and 94B.2 above are repeated.
107B.4 Paragraph 47F.4 is admitted. The same estimates also provided both an 'optimistic'
estimate and a 'realistic' estimate, on which the Claimants rely at paragraph 43.2C.2.
It is denied, if it be alleged, that the 'worst case' assessment on 20 February 2008
reflected RBS's understanding of the position at the time of the Rights Issue or that
the worst case assessment would have been an appropriate assumption to make for
the purposes of the Capital Plan.
107B.5 Paragraphs 47F.5 and 47F.7 are denied. RBS did not ask the FSA to approve only a
percentage of the relief applied for.
107B.6 Paragraph 47F.6 is not admitted. The figure of 20.5 billion was calculated by RBS
for its own capital planning purposes. No admissions are made as to whether the FSA
also calculated a figure of 20.5 billion.
107B.7 Paragraph 47F.8 is admitted.
107B.8 As to paragraph 47F.9, it is admitted that Oliver Wyman identified a 'mapping error'
in the LCGS model which, once corrected, had the effect of reducing the RWA
benefit by 11 billion.
107B.9 As to paragraph 47F.10, paragraph 107A.5A above is repeated.
108.

Paragraph 48 is noted, in which regard paragraph 56 above is repeated.

109.

It is admitted that the passages reproduced at paragraphs 49 to 54 appeared in the Prospectus.

110.

Paragraph 55.1 is admitted.

111.

Paragraph 55.2 is denied. As was clear from the table at page 184 of the 2007 Accounts, that
table referred only to assets and associated liabilities for securitisations and asset transfers
where substantially all the risks and rewards of the assets had been retained by RBS. It was
not, and did not purport to be, an exhaustive statement of all assets held by RBS sponsored
commercial paper conduits and consolidated on RBS's balance sheet.

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112.

Paragraph 56 is admitted.

113.

Save that it is denied that the making of "prudent assumptions" as the basis for detailed
estimates of RBS's credit market exposures and write-downs carries the implication alleged,
paragraph 56A is admitted.

114.

As to paragraph 57, it is denied that the Prospectus failed to disclose, or adequately disclose,
any features of RBS's capital position which ought to have been disclosed. In relation to the
specific allegations made in the sub-paragraphs of paragraph 57, the Defendants will say as
follows.

115.

Paragraph 57.1 is denied. Amongst other things, the Prospectus made clear that:
115.1

RBS had made further write-downs on its credit market exposures in the first quarter
of 2008 (see p.8), which (as the market was aware) had the effect of reducing the
capital ratios from their level as at 31 December 2007.

115.2

The transition from Basel I to Basel II had resulted in an increase in RBS's risk
weighted assets RWAs and consequently a decrease in its Tier 1 capital ratio (see
p.28).

115.3

In light of the deterioration in market conditions and the generally weakened

business environment, RBS had concluded that it was appropriate for the bank to
operate with a higher level of capitalisation. The Rights Issue was expressly stated
to be part of the process by which it intended to move to that position (see for
instance the Summary at p.7).

116.

Paragraph 57.2 is denied:

116.1

In the circumstances set out above, the Prospectus was not required to disclose
details of RBS's capital ratios as at the date of the Rights Issue.

116.2

It is denied that the Prospectus should have stated that RBS's capital ratios had
fallen "significantly" between 31 December 2007 and the date of the Rights Issue,
which description amounts to a qualitative judgment which would not have assisted
the reader in making an informed assessment of RBS's financial position or
prospects. To the extent that there had been a fall in the bank's capital ratios (which

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is admitted), that fact was apparent from the Prospectus; paragraph 54.5 above is
repeated.
116.2A It is further denied that the Prospectus should have stated that such a fall in capital
ratios was 'unexpected'. RBS's internal estimates predicted a fall in capital ratios
during early 2008 in light of the transitional arrangements under the Basel II regime.
In so far as other factors caused RBS's capital ratios to fall by an unexpected degree,
the existence of such factors was apparent from the Prospectus, paragraph 54.5
above is repeated.
116.2B RBS's capital ratios at 31 December 2007 were not 'artificially' high. Paragraph 86A
above is repeated.
116.3

The Prospectus did not imply that the only cause of the fall in RBS's capital ratios
was the credit market write-downs taken in the first quarter of 2008.

117.

Paragraph 57.3 is admitted. I Save that it is further admitted that the capital ratios as at 30
April 2008 were not disclosed in the Prospectus (as to which, Aas set out above, there was no
requirement for them to be disclosed) paragraph 57.3 is denied. In particular, as at 30 April
2008, on a proportional consolidated Basel II basis, RBS's Core Tier 1 ratio was 3.03% (as set
out at Response 28 of the Part 18 Response) and its Tier 1 ratio was 5.210% (as set out at
Response 51 of the Part 18 Response). It is denied that the ratios were lower than these levels.

117A. As to paragraph 57.3A, it is admitted that the fall in capital ratios had been caused in part by
the transition to the Basel II regime. This was disclosed in the Prospectus. Paragraphs 54.5
and 101.4 above and paragraph 118.2 below are repeated. Save as aforesaid, paragraph 57.3A
is denied.
118.

As to paragraph 57.4:
118.1

It is admitted that a rise in RWAs in the first four months of 2008 had contributed to
a decline in RBS's capital ratios, that there was some evidence of an acceleration of
growth in RWAs in GBM in the first quarter of 2008 and that the size of the overall
that increase was larger than had been projected in the 2008 capital plan. By the
time of the Rights Issue:

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(a)

Steps were in place to address the increase in RWAs, including for instance
a reduction in the balance sheet usage by GBM, disposal of certain non-core
assets and the prioritisation of asset transfers from ABN's to RBS's balance
sheet to optimise their Basel II capital usage. RWAs in fact decreased in the
second quarter of 2008.

(b)

RWAs were projected to fall by December 2008 to levels consistent with

those projected in the 2008 capital plan.

118.2

Part of the rise in RWAs was due to the effect of the transition from the Basel I to
Basel II method of computation, the upward effect of which on RWAs was
expressly disclosed in the Prospectus (at p.28). In particular, under the Basel II
methodology there was a higher degree of volatility in RWAs, which tended to
increase in response to sharp market falls.

118.2A As to the three two matters alleged to have been causative of the fall in capital ratios
in the first quarter of 2008:
(a)

Debt Issuance: although the 2008 capital plan had envisaged Tier 2 debt
issuance in the first quarter of 2008, in the event RBS took the decision to
postpone that issuance due to the worsened market conditions, which were
well known and clearly flagged in the Prospectus. As a result, the total
capital ratio was lower at the end of the first quarter than had been
projected. That ratio was, however, increased by the issue of over EUR 2
billion of Tier 2 debt in April 2008, which was noted at page 73 of the
Prospectus. Issuance of Tier 2 debt would, in any event, have had no impact
on either the Tier 1 ratio or the Core Tier 1 ratio, which were the ratios for
which targets were set out in the Prospectus. Further, at the time of the
Rights Issue RBS reasonably expected to be able to access the public
markets over the remainder of 2008 if necessary and no further disclosure
was required in this regard.

(b)

Antonveneta: it is denied that the delay in the completion of the disposal of

Antonveneta had any impact on RBS's capital ratios on a proportionally
consolidated basis. Antonveneta was one of the business units acquired by
Santander and the only impact of the delay was therefore on the projected

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ratios on a fully consolidated basis. At the time of the Rights Issue, it was
anticipated that completion would occur by the end of May 2008 (which it
ultimately did) and the projected fully consolidated ratios in the capital plan
reflected this. No further disclosure was required in this regard.
(c)

LaSalle: the LaSalle sale proceeds had been received by ABN in October
2007 and were being held for the benefit of the share of ABN to be retained
by RBS. It is denied that their delayed receipt by RBS had any impact on
the consolidated capital ratios, on either a full or proportional basis.

118.3

It is denied that it was necessary for the Prospectus to make any further disclosure
about the bank's underlying RWAs position or its impact on the bank's capital ratios
at 30 April 2008.

118.4

Save as aforesaid, paragraph 57.4 is denied.

119.

Paragraph 57.5 is denied, in which regard paragraphs 79 to 89 above are repeated.

120.

The first sentence of paragraph 57.6 is denied. RBS's exposure to conduits was adequately
and properly disclosed in the Prospectus. In particular, the Prospectus disclosed that:
120.1

RBS provided liquidity facilities to its own sponsored conduits totalling some 64
billion, of which 48 billion related to ABN sponsored conduits and 16 billion to
RBS sponsored conduits (2007 Accounts p.83).

120.2

All of the RBS and ABN sponsored conduits were consolidated (ibid). As a result,
the market would have been aware that the assets held by those conduits appeared
on the balance sheet at Group level. Therefore, the assets were included in the
calculation of RBS's RWA and capital ratios, together with the undrawn
commitments to those conduits, in accordance with regulatory rules.

120.3

In addition, RBS had small exposures to other selected conduits.

120.4

As at the end of 2007, two small conduits had drawn on the back up liquidity lines
provided by RBS.

120.5

ABN acted as dealers to the ABCP programmes operated by its conduits.

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120.6

As at 31 December 2007, ABN held ABCP issued by its sponsored conduits of EUR
4.9 billion (ABN Form 20-F Annual Report for the year ending 31 December 2007
p. 188, incorporated by reference into the Prospectus).

121.

The second and third sentences of paragraph 57.6 are admitted. As to the allegations in the
following sub-paragraphs of 57.6, the Defendants will say as follows.

122.

As to paragraph 57.6.1, it is admitted that RBS had economic exposure to assets held by
certain conduits. The conduits were consolidated on the balance sheet at Group level which,
as set out in paragraph 120.2 above, was disclosed in the 2007 Accounts.

123.

As to paragraph 57.6.2:
123.1

It is denied that the 2007 Accounts recognised only 32 billion in respect of conduit
assets. All assets of RBS sponsored conduits were recognised in the balance sheet
in the 2007 Accounts. The figure of 32 billion, which appears in the table at page
184 of the 2007 Accounts, relates (as is clear from those accounts) only to assets and
associated liabilities for securitisations and asset transfers where substantially all the
risks and rewards of the assets had been retained by RBS. It was not, and did not
purport to be, an exhaustive statement of all assets held by RBS sponsored
commercial paper conduits and consolidated on RBS's balance sheet.

123.2

It is admitted that the 2008 Accounts stated (correctly) that the total value of the
assets held by conduits which were recognised in the RBS balance sheet as at 31
December 2007 was 48 billion. In addition, the 2008 Accounts disclosed (in the
table at p.249) under the heading "Securitisations and other asset transfers", the
same information as had been given in the 2007 Accounts. That table recorded that
the value of those assets as at 31 December 2007 was 32 billion (i.e. the same
figure disclosed in the 2007 Accounts).

123.3
124.

In relation to the final sentence, paragraphs 120 to 122 above are repeated.

As to paragraph 57.6.3:
124.1

It is admitted that RBS's exposure to conduit assets as at 30 April 2008 would have
been similar to the 48 billion figure for 31 December 2007.

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124.2

It is denied that there was no disclosure of exposures to conduit assets, in which

regard see paragraph 120 above. It is admitted that no disclosure was given of
write-downs in respect of conduit assets. For the reasons set out at paragraphs 177
to 180 and 0 to 0 below, such disclosure was not necessary.

125.

As set out at paragraph 120 above, and as was apparent from the Prospectus, North Sea was at
all material times consolidated on RBS's balance sheet at Group level. In February 2008
North Sea stopped issuing commercial paper. At the time of the Rights Issue, consideration
was being given to various options for North Sea, one of which involved transferring it from
the ABN balance sheet to the RBS balance sheet and the subsequent potential sale of the
underlying assets, but no final decision had been made on which approach to adopt by 30
April 2008. Save as aforesaid, paragraph 57.6.4 is denied.

126.

As to paragraph 57.6.4A:
126.1

It is admitted that North Sea's rating was withdrawn in April 2008. It is further
admitted that performance reporting to ABCP investors ceased, although the bank
continued to monitor the assets held in North Sea for its own internal reporting and
regulatory capital purposes.

126.2

The fourth sentence is admitted.

126.3

The assets in the conduits were included in the calculation of RBS's RWA and
capital ratios, together with the undrawn commitments to those conduits, in
accordance with regulatory rules.

126.4

It is admitted that RBS was the only provider of liquidity to North Sea other than
that obtained by North Sea via its commercial paper issuance and that at 30 April
2008 North Sea had drawings of 5.3 billion under that liquidity facility.

126.5

Paragraph 125 above is repeated. It is admitted and averred that the North Sea
assets were acquired by RBS and moved from ABN's balance sheet to RBS's
balance sheet in the third quarter of 2008 for a total consideration of EUR 5.6
billion, which crystallised a loss of approximately EUR 1.1 billion in ABN. This
did not affect the RBS Group consolidated position. Save as aforesaid, paragraph
57.6.4A is denied.

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127.

As to paragraph 57.6.5, the first clause is admitted, the second clause is denied. Although as
part of a larger structured transaction RBS had sold put options which allowed the relevant
assets to be sold to it, it had protection against default of those assets in the form of credit
protection put in place with IKB and AMBAC.

128.

As to paragraph 57.6.5A:
128.1

To the extent that the paragraph relates to the third party conduit structure referred
to at page 134 of the 2008 Aaccounts and in paragraph 57.6.5, RBS did not provide
credit enhancement.

128.2

It is averred that RBS provided liquidity to the structure through options on a

portfolio of ABS, in respect of which it was fully hedged, and that exposure was
taken into account in calculating RBS's capital ratios.

128.3

To the extent that the paragraph does not relate to that structure, the paragraph lacks
particularity and is not understood.

128.4
129.

Save as aforesaid, paragraph 57.6.5A is denied.

As to paragraph 57.6.6, it is admitted, as set out above, that RBS's RWA increased between
31 December 2007 and 30 April 2008. It is denied that the RWA reported in the 2007
Accounts was understated.

130.

Save as aforesaid, paragraph 57.6 is denied.

130A. As to paragraph 57.6, it is denied that the Prospectus should have contained any such
statement, which would have been inaccurate and/or misleading. RBS was not and could not
have been aware of how the FSA treated other institutions, and no proper statement that RBS
had received 'lenient' treatment could have been made in the Prospectus. RBS was not the
beneficiary of temporary 'indulgences' and no such disclosure was either necessary or proper.
130B. As to paragraph 57.6AA, see the section below dealing with Credit Market Exposures.
130C. As to paragraphs 57.6A and 57.6B:

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130C.1 As set out in the Prospectus, RBS's capital plan at the time of the Rights Issue
targeted a Tier 1 ratio in the range 7.5% to 8.5% and a Core Tier 1 ratio of 6% by 31
December 2008, both on a proportionally consolidated basis.
130C.2 It is admitted that the capital plan assumed net Tier 2 issuance of 5.031 billion
during the course of 2008, but it is denied that it depended on such issuance to
achieve the capital ratio targets set out in the Prospectus, which would not have been
affected by the issuance of Tier 2 capital instruments. The Prospectus did not
contain a target for the total capital ratio. Further and in any event, Tier 2 issuance
was just one element of the plan. There was sufficient flexibility in the plan to
allow for a situation in which the full 5.031 billion net issuance did not take place.
130C.3 Whilst Tier 2 capital issuance previously planned for March 2008 had not been
completed due to difficult market conditions, such delays were unremarkable and
were a normal facet of operations in the international capital markets.
130C.4 In the circumstances, it is denied that it was necessary for RBS to set out specifically
in the Prospectus the assumptions made in the capital plan with regard to Tier 2
issuance and it did not do so.
130C.5 Save as aforesaid, paragraph 57.6A and 57.6B are denied.
131.

As to paragraph 57.7, as set out above, the transition from Basel I to Basel II created
uncertainty generally during the first half of 2008 amongst the financial institutions subject to
the new regime. Relevant background is as follows.

132.

One option open to financial institutions subject to Basel II was to operate under the AIRB
regime, which allowed an institution to develop its own models for measuring the capital
required to comply with Basel II. In order to be allowed to do so, the institution required
approval, a so-called "AIRB waiver", from its home regulator (in RBS's case, the FSA),
which would only be granted if it satisfied certain regulatory standards. In December 2006,
RBS, in common with most of its UK based peers, applied to the FSA for approval.

133.

That application was approved by the FSA in July 2007, subject to consent being obtained
from other European regulators. That consent was obtained in or about early November 2007
and a final decision approving RBS's AIRB waiver was communicated to it on 14 November

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2007. That waiver did not, however, include ABN, which remained for those purposes
regulated by the DNB.
134.

Amongst other things, the final AIRB waiver notification from the FSA stated as follows
(under the heading "Reasons for the decision Summary"):
"Subject to the conditions in Schedule 5, the consolidated supervisor and the relevant
competent authorities are satisfied, on the basis of the facts and matters described below, that
the applicants' systems for the management and rating of credit risk exposures are sound and
implemented with integrity and, in particular, that they are adequate for purposes of meeting
the standards set out in Article 84(2) in accordance with Annex VII Part 4."

135.

In common with the waivers granted to its peers, and as was public knowledge by virtue of
the fact that it was published on the FSA's website, RBS's AIRB waiver was granted by the
FSA pursuant to and subject to certain conditions set out in the final decision communicated
to RBS on 14 November 2007 and the subsequent Waiver Directions notice of 19 December
2007. RBS was not therefore unusual in having conditions attached to the approval of its
waiver.

136.

Once granted the AIRB waiver, iInstitutions were required to obtain individual approval for
each proprietary model intended to be used in the calculation of its capital requirements.
Although the majority of the models submitted for approval by RBS were approved by the
FSA, by 1 January 2008 there remained a number of models in relation to which issues had
been raised by the FSA and for which final approval had not been given, on or about 11
December 2007 RBS informed the FSA of its intention to recalibrate certain models and in
due course sought approval of those recalibrations. These models included RBS's 'Probability
of Default ('PD') Model and EAD Model. During the first half of 2008, discussions continued
with the FSA about these models. In particular:
136.1

In early January, the FSA informed RBS that it should implement those models
pending its review and prior to their formal approval.

Accordingly, RBS

incorporated those models into its capital plans, including those which were shared
with the FSA.
136.2

In March, the FSA changed its position and indicated that it might require RBS to
reverse out some or all of the benefits of those models while its review continued.
On 28 March 2008, the FSA informed RBS that, pending formal approval, RBS

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should not take the benefit of those models, and that RBS should remove them from
its capital calculations completely. Accordingly, RBS did so.
136.3

In the first week ofearly April 2008, the FSA indicated that it would allow RBS to
implement 50% of the benefit of those models with effect from April 2008 while its
work continued, an indication that was subsequently confirmed in calculations
provided by the FSA on 18 April 2008, approving the implementation of
approximately 60% of the benefit of those models.

136.4

At the time of the Rights Issue, it was RBS's reasonably held expectation that it
would ultimately be able to satisfy any most of the FSA's remaining concerns on the
part of the FSA and obtain the majority of the full benefit from the models when the
approvals process concluded at the end of June.

136A. RBS also applied for approval of an 'Expected Positive Exposure' ('EPE') Model in respect of
its calculations of counterparty credit risk in derivative transactions. At the time of the Rights
Issue this application remained under consideration by the FSA, and it was RBS's reasonably
held expectation that it would ultimately obtain approval for at least half of the full benefit of
the EPE Model.
137.

In this context, it is averred that at page 13, under the heading "Each of the Group's
businesses is subject to substantial regulation and oversight. Any significant regulatory
developments could have an effect on how the Group conducts its business and on its results
of operations" the Prospectus contained a risk warning which included the following:
"RBS continues to work with regulators to refine the methods by which the calculation of
risk weighted assets is made"

138.

Against that background, the Defendants plead as follows to the allegations in the subparagraphs of paragraph 57.7.

139.

As to paragraph 57.7.1, it is admitted that as a result of concerns held by the DNB about its
models, ABN was not permitted by the DNB to adopt the AIRB approach. As a result, the
FSA required RBS to calculate ABN's capital position on the basis of Basel I plus a 30%
uplift. Paragraph 94 above is repeated.

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140.

Save to the extent consistent with the matters set out at paragraphs 132 to 139 above in
relation to the AIRB waiver application and model approval process, paragraph 57.7.2 is
denied.

141.

Paragraph 57.7.3 is admitted, save that it is denied that the continuing discussions were a
deficiency in RBS's capital models or regulatory capital calculations. Paragraph 107A.5A
above is repeated. As the FSA Report records, the concerns about the treatment of the relevant
instruments were raised by RBS itself with the FSA, which did not form a concluded view
prior to the end of the Rights Issue Period.

142.

Save as aforesaid, paragraph 57.7 is denied.

142A. Paragraph 57.7A is denied. RBS's ability to reach its capital targets was not dependent on
receiving full model approval from the FSA in respect of its AIRB EPE, PD and EAD models
and its capital plan did not assume that it would do so. The dialogue with the FSA with
regard to the use of its AIRB models (the PD and EAD Models) is set out at paragraphs 132 to
136 above and was part of the on-going regulatory process arising from the transition from
Basel I to Basel II. Any risk resulting from this process was adequately disclosed in the
Prospectus by the risk warning referred to at paragraph 137 above. It is denied that specific
disclosure was required of the matters set out in paragraphs 57.7A.1 to 57.7A.6.
142AA. Paragraph 57.7A.7 is denied. No specific disclosure of the ABN AMRO position was
required. Paragraph 107A.6A above is repeated.
142B. As to paragraph 57.7B, it is denied that specific disclosure was required of the matters set out
in paragraphs 57.7B.1 to 57.7B.3 4, which formed part of the on-going process arising from
the transition from Basel I to Basel II. Any risk resulting from this process was adequately
disclosed in the Prospectus by the risk warning referred to at paragraph 137 above. With
regard to the specific matters referred to:
142B.1 As to paragraphs 57.7B.1.1 to 57.7B.1.5, paragraph 107A.6 above is repeated. It is
denied that the capital targets set out in the Prospectus were dependent on RBS
receiving each approval referred to in paragraphs 57.7B.1.
142B.1A Paragraph 57.7B.1.6 is denied. RBS's capital planning was not based on
assumptions as to the DNB's treatment of ABN AMRO securitisations, but was

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based on the FSA's treatment of the same securitisations. The FSA treatment was
properly taken into account in RBS's capital planning.
142B.1B Paragraph 57.7B.1.7 is denied. Any risk resulting from the ongoing discussions with
the FSA on the treatment of these capital instruments was adequately disclosed in
the Prospectus by the risk warning referred to at paragraph 137 above.
142B.2 Paragraphs 57.7B.2 and 57.7B.4 are is denied.
142B.3 As to paragraph 57.7B.3, paragraph 107A.6(a) above is repeated.
143.

As to paragraph 57.8:
143.1

No admission is made as to whether RBS was, at any time prior to 30 April 2008, on
an FSA capital watch-list.

143.2

It is denied that at any time prior to the Closing Date RBS was informed by the FSA
that it was on such a watch-list.

143.3

As set out above, and in common with many of its peers at that time, it is admitted
and averred that RBS had regular discussions with the FSA about its capital position
and, in particular, about its decision to undertake the Rights Issue.

144.

143.4

Paragraphs 95 and 96 above are repeated.

143.5

Save to the extent consistent with the foregoing, paragraph 57.8 is denied.

As to paragraph 57.9:
144.1

It is admitted that, as a result of its on-going monitoring of its capital position, RBS
raised with the FSA the possibility that it might fall below its ICG. That cautionary
approach to the FSA was made by RBS in light of preliminary indications of the
GBM result its 'flash' results for March 2008 which, as a result of the disruption in
the financial markets, had been significantly worse than anticipated.

144.2

It is denied that RBS did in fact breach its ICG, as was confirmed to the FSA by
RBS in July 2008. RBS plc's total capital ratio at the end of March 2008 was 9.8%
as againt an ICG of 8.8%.

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144.2A It is admitted that ABN AMRO came close to breaching its target ratio for total
capital of 12.5% as specified by the DNB at the end of April 2008, but it is denied
that ABN AMRO did breach its target ratio of 12.5%.
144.2B It is admitted that RBS fell below its internal target ratio ("ITR") in March/April
2008. The ITR was a purely internal measure for RBS management in order to ensure
that a significant fall in its capital ratios was identified and remedied prior to any
breach of the FSA's ICG.
144.2C It is denied that RBS breached the United States Federal Reserve's 'well-capitalised
status' in March 2008 or at all. RBS was not subject to the United States Federal
Reserve's 'well-capitalised status', but was instead subject to a separate regime
applicable to holding companies of banks.
144.2D As to the documents referred to in paragraphs 57.9.1, 57.9.2, 57.9.4 and 57.9.6 to
57.9.8, it is admitted that the documents referred to contain the data quoted. During
early April 2008 RBS's capital ratios for the end of March 2008 were still estimates as
final figures were prepared. It is denied, if it be alleged, that the figures quoted were
anything other than estimates. In fact, at the end of March 2008 RBS's capital ratios
on a fully consolidated basis (the basis on which RBS was required to report its ratios
to the FSA) were: Core Tier 1 3.79%, Tier 1 5.87%, and total capital 9.11%.
144.2E As to the final sentence of paragraph 57.9.8, it is denied that RBS asked the FSA for
permission to deconsolidate Antonveneta in order to circumvent any breach of capital
ratios, or that any increase to capital ratios from a properly-approved retrospective
calculation would be 'artificial'.
144.2F Paragraph 57.9.3 is denied. The spreadsheet referred to does not provide figures for
the start of any month. The spreadsheet shows RBS's estimates of its total capital ratio
(on a fully consolidated basis) as 8.99% at the end of March 2008 and Tier 1 capital
at 5.9%. The equivalent figures for the end of April 2008 were 8.69% and 5.49%.
144.2G It is admitted that the email referred to in paragraph 57.9.5 contains the statement
quoted. It is denied that anything in Tyler's email demonstratres a breach by RBS of
the regulatory capital ratios. Paragraphs 144.1 to 144.2D above are repeated.

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144.3

Further, as to paragraph 57.9.4, it is denied that RBS's total capital ratio had fallen
below 8.72% by 10 April 2008 (as to which paragraph 96.13(a) above is repeated).
It is admitted that in late March / early April 2008 the total capital ratio had dropped
below the ITR, that RBS had not anticipated this and that RBS's forecasts suggested
that Total Capital would remain close to the ICG at the end of April and the end of
May 2008. The ITR was an internal target level designed to act as an early warning
and the fall below it, which was brought about in large part by the unprecedented
and unforeseeable downturn in global markets, did not have any formal regulatory
significance. By the time the total capital ratio fell below the ITR, RBS was already
actively addressing its capital position and considering options for boosting it.

144.3A It is admitted that at the time of the Rights Issue, RBS expected that prior to the
receipt of the Rights Issue proceeds it would remain close to its ICG at the end of
April 2008.
144.3B Save that the first sentence is denied, paragraph 57.9.10 is admitted. In respect of the
Antonveneta transaction, paragraph 118.2A(b) above is repeated.
144.3C Paragraph 57.9.11 is denied see the section below dealing with Credit Market
Exposures.
144.4

Save as aforesaid, paragraph 57.9 is denied.

144A. As to the first sentence of paragraph 57.9AA, it is admitted that the decision was taken in
March 2008 to stop any assets being transferred from ABN to RBS temporarily, due to the
capital position of each institution. The second sentence of paragraph 57.9AA is admitted,
save that it is denied that the fact that capital could not be transferred from ABN to RBS was a
consequence of the decision to halt the intended transfer of assets to RBS.
145.

As to paragraph 57.9A:
145.1

Paragraph 59.9A.1 is denied. There was no such requirement at the said meeting.

145.2

Paragraph 57.9A.2 is denied.

145.3

It is admitted that complete balance sheet data was not available until three weeks
after the month end, in accordance with the normal monthly reporting cycle. Save

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as aforesaid, paragraph 57.9A.3 is denied. As the FSA Report states at paragraph 31

on pages 356-357, RBS was always within the relevant legal minimum requirements
for capital and did not breach the Pillar 1 rules. RBS was able to demonstrate the
adequacy of its capital resources at any particular time if asked to do so by the FSA
in accordance with GENPRU.
145.4

Save as aforesaid, paragraph 57.9A is denied.

145A. Paragraph 57.9B is denied. The assumptions contained in the capital plan were realistic
prudent and reasonable at the time of the Rights Issue and remained so throughout the Rights
Issue Period. As to the specific matters relied on by the Claimants not addressed elsewhere in
this Re-Re-Amended Defence:
145A.1 As to paragraph 57.9BA:
(a) It is admitted that the RWA targets assumed approval of model relief in respect of
the AIRB model. It is denied that the capital plan assumed that the model relief
would be approved. In order to reflect the additional RWAs arising as a result of
the reversal of the FSA's position on model relief, the assumed benefit of 51
billion was reversed out in March 2008. Following the FSA's decision to allow
the use of a scalar approach pending final approval, 25.5 billion was restored to
the capital plan in respect of the PD and EAD models. An additional benefit of
20.5 billion was also included as set out above.
(b) The last sentence of paragraph 57.9BA.3 is not admitted. In the absence of proper
particulars as to the source or derivation of the figure referred to, the Defendants
are unable to understand the figure of 4.4 billion referred to by the Claimants.
(c) On the basis of the figures set out in the memorandum referred to at paragraph
57.9BA.1, paragraph 57.9BA.4 is admitted.
(d) Save to the extent consistent therewith, paragraph 57.9BA is denied.
145A.2 As to paragraph 57.9BB and the sub-paragraphs thereto, it is admitted that the capital
plan assumed that divisional targets would be met by the divisions within RBS. That
assumption was reasonable and prudent. The targets were set to be reasonable targets
which the divisions could reasonably be expected to achieve by careful control of

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their capital positions. In so far as it is alleged in paragraph 57.9BB.2 that the targets
were unreasonable or unrealistic, that is denied. Further:
(a)

As to paragraph 57.9BB.4, it is admitted that the factors referred to would

tend to increase RWA levels. However, it is not admitted that economic
conditions in April 2008 would necessarily have made it likely that RWAs
would increase in a manner inconsistent with RWA targets. The same
economic conditions also gave rise to factors reducing RWAs such as a
decline in business and trading activities resulting in lower levels of organic
growth than in stronger economic conditions. Pending provision by the
Claimants of proper particulars of any alleged increase which would have
resulted to overall RWA targets, it is not admitted that economic conditions
in April 2008 made it likely that RWAs would increase.

(b)

Paragraph 57.9BB.5 is denied. GBM had met its year end target for 2007
through a number of measures including close management of the capital
used by its business as well as capital management transactions. Paragraphs
86A and 116.2B above are repeated.

(c)

As to paragraph 57.9BB.6, the view of the FSA is not within RBS's

knowledge and is not admitted.

(d)

The relevance of paragraph 57.9BB.7 is denied. The email referred to the

position as at 18 March 2008. The targets on which assumptions were based
in the capital plan were set in or around early April 2008.

(e)

It is admitted that RWA targets meant that businesses within RBS could not
conduct unlimited trading because they were required to consider the capital
utilisation of doing so. Paragraph 57.9BB.8 is otherwise denied.

(f)

As to paragraph 57.9BB.10, it is admitted that the transfer pricing policy in

operation prior to March 2008 did not operate in a way which ensured that
each business was subject to an internal charge fully reflecting the costs of
acquiring additional RWAs. RBS did not have a single uniform incentive
system and different business divisions operated on different bases. The
incentive systems within RBS variously took into consideration a number of

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factors including profitability and RWAs. Paragraph 57.9BB.10 is otherwise

denied.
(g)

Paragraph 57.9BB.11 is denied. Paragraph 145A.1 above is repeated.

145A.3 Save as aforesaid, paragraph 57.9BB is denied.

145B. Such risks to capital of which RBS was aware (including such of the specific risks referred to
in paragraph 57.9C as actually existed) were referred to in the Prospectus, either by specific
disclosure or more generically in the risk factors summarised on page 10 and described in
further detail on pages 11 to 16 and the section headed "Forward-looking statements" at page
18. Further:
145B.1 The 2007 Accounts (at page 203) recorded provisional fair value adjustments in
respect of ABN's assets and liabilities and noted that initial accounting for those
adjustments was provisional because of the complexity of the acquisition. That
remained the position as at the date of the Prospectus. No further disclosure was
necessary in this regard. Further, paragraphs 315 to 326 below are repeated. It is
admitted that RBS was exposed to the risk of a downturn in economic conditions,
including increased impairment losses and problems with deteriorating credit
quality. These risks were disclosed. Paragraph 59.3 above is repeated. Save that no
admission is made as to the 11.2 billion figure referred to, the second sentence of
paragraph 57.9C.1 is admitted.
145B.2 It is denied that the need for a top-up of Fortis equity represented a material risk to
RBS's capital plan. That requirement was assumed as part of the central case for the
purposes of the capital plan (although top-up capital would not necessarily all have
come from RBS) and the precise form the top-up took did not have a material
impact on capital ratios.
145B.3 Although the planned reduction of RWA on the GBM balance sheet had not been
completed by the time of the Rights Issue, the programme of reduction remained ongoing and no further disclosure was required in this regard.
145B.4 A possible increase in regulatory capital requirements was not a matter requiring
specific disclosure. The capital targets contained in the capital plan and set out in
the Prospectus were significantly in excess of any likely regulatory minimums.

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145B.5 Save as aforesaid, paragraph 57.9C is denied.

146.

Paragraph 57.10 is denied, in which regard paragraphs 95 to 97 above are repeated. Paragraph
57.11 is denied. The purported derivation contained therein is noted and is also denied.
Paragraphs 90, 99, 107A.6, 145A and 145B are repeated.

146A. Paragraph 57A is denied. In circumstances where the Working Capital Report concluded that
there was a reasonable basis on which to make the Working Capital Statement, no further
elaboration was required.
146B. Paragraph 57.B is denied. In relation to the allegations contained in the sub-paragraphs
thereof, the Defendants will say as follows.
146B.1 RBS's capital plan for meeting its target capital ratios was set out in sufficient detail
in the Prospectus. In this regard, paragraphs 54, 57 to 61, 81 to 86, 91 to 93, 98, 101
to 104 and 107 to 119 above are repeated. Further, no actual '2007 year end' position
on a Basel II basis could properly have been disclosed without a real risk that any
estimates disclosed would have been misleading. The actual 2007 year end position
(on a Basel I basis) was disclosed, as was the fact that the transition had an impact
on RBS's capital ratios. Save as aforesaid, paragraph 57B.1 is denied.
146B.2 As to paragraph 57B.2:
(a)

The first sentence is admitted. As set out in paragraphs 114 to 118 above, it
was not necessary for the Prospectus to give details of RBS's capital ratios
as at the date of the Rights Issue.

(b)

It is admitted that capital ratios had fallen from the levels at 31 December
2007. Adequate disclosure was made in this regard. Paragraphs 115, 116.2116.3 and 118 above are repeated.

(c)

To the extent that by use of the word "assess" it is intended to allege that
prospective investors were not able independently to calculate the figures
described in paragraphs 57B.2.1 57B.2.3, that is admitted. It was not
necessary for the Prospectus to provide information to allow prospective
investors to do so.

The Prospectus was required to, and did, contain

sufficient information to allow investors to make an informed assessment of

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its overall capital position.

Further and in any event, RBS's ICG (in

common with the ICG for other banks regulated by the FSA) was a matter
which was confidential between the bank and the FSA.

It was not

information that was necessary or appropriate for the Prospectus to disclose

and investors would not have expected it to do so.
(d)

Save as aforesaid, paragraph 57B.2 is denied.

146B.3 As to paragraph 57B.3, it is assumed that the partially quoted statement was that
contained in the notes on p.67 of the Prospectus, which read as follows: "Save as
disclosed above, there has been no material change in the total capitalisation and
indebtedness of the Group since 31 December 2007". RBS's total capitalisation and
indebtedness was not a measure of its capital ratios and it is denied that that
statement was untrue or misleading, either "in respect of RBS's capital ratios" as
alleged or otherwise. Further, at page 134 the Prospectus contained statements to
the effect that, save for the matters therein disclosed, there had been "no significant
change" in the trading or financial position of either RBS or ABN since 31
December 2007. ThoseThat statements were was also true and were was not
misleading.
146B.4 As to paragraph 57.B.4, it is admitted that it was important for the Prospectus to
state the true position, and it did so. That requirement was not made more acute by
the statements made during the analysts' call on 28 February 2008 or the capital
ratios as at the date of the Prospectus.
146B.5 It was neither necessary nor appropriate for the Prospectus to set out each and every
assumption made in the capital plan underpinning the Rights Issue. The Prospectus
appropriately provided relevant information about assumptions made by RBS in its
capital planning process (including the Rights Issue proceeds, the anticipated extent
of credit market write-downs, anticipated capital gains from asset disposals, balance
sheet management of business areas including GBM and its views on current and
future trading prospects) and identified various risks to the success of its capital plan
(see for instance those set out at pages 8 to 16 of the Prospectus).
146B.6 Further: (a) as set out above, it was neither necessary nor appropriate for RBS to
give details of its on-going dialogue with the FSA about the basis of capital

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calculations; (b) RBS set out targets in the Prospectus for its Tier 1 and Core Tier 1
ratios (but not the total capital ratio, to which the section of the Working Capital
Report referred to related), neither of which would be affected by issuance of Tier 2
capital instruments. Save as aforesaid, paragraphs 57.B.5 and 57.B.6 are denied. As
to the final sentence of paragraph 57B.6, see paragraph 98 above.
146B.7 It was self-evident that failure to achieve any key aspect of the capital plan could
have a detrimental impact on the success of the plan as a whole. No specific
disclosure was required in this regard. Save to the extent consistent with this,
paragraph 57.B.7 is denied.
146B.8 Paragraph 57.B.8 is denied. The risks to the success of RBS's capital plan were
adequately set out in the Prospectus, in particular at pages 8 to 16 thereof.
146B.9 As to paragraph 57.B.9, RBS's capital plan took account of all necessary issues on a
prudent and conservative basis and sufficient disclosure was made of the basis for
the capital plan in the Prospectus. It was neither necessary nor appropriate for the
Prospectus to set out each and every assumption made in the capital plan
underpinning the Rights Issue, and it did not do so. The Defendants will say the
following in relation to the allegations made in the sub-paragraphs:
(a)

as to paragraph 57.B.9.1, the capital plan made proper assumptions about

material write-downs. The capital ratios at the time of the Rights Issue are
dealt with in paragraphs 82 to 83 above and in Responses 28 to 30 of the
Part 18 Response.

(b)

as to paragraph 57.B.9.2, it is denied that RBS had fallen below its ICG.
Paragraph 144 above is repeated. As to the allegations in respect of RBS
Solo (there being no entity identified by that name), paragraph 144A above
is repeated. The balance of the allegation is not sufficiently precise to plead
to.

(c)

paragraph 57.B.9.3 is denied, in relation to which paragraph 107A above is

repeated.

(d)

paragraph 57.B.9.4 is denied, in relation to which paragraphs 107A and

145A.1 above is are repeated.

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(e)

paragraph 57.B.9.5 is denied.

The assumptions made in the Working

Capital Report were suitably prudent and appropriate.

(f)

paragraph 57.B.9.6 is denied.

(g)

paragraph 57.B.9.7 is denied.

146B.10 It is admitted that the Prospectus did not contain the explanation referred to in
paragraph 57.B.10, which would not have been accurate.
146B.10A As to paragraph 57B.10A, see the section below dealing with Credit Market
Exposures.
146B.11 It is admitted that the Prospectus did not contain the explanation referred to in
paragraph 57.B.11, which, save to the extent consistent with paragraphs 107A.1 and
107A.2 above, would not have been accurate. At all times during the Rights Issue
process, RBS's projected capital ratio significantly exceeded RBS's estimated ICG
following the 2008 ICAAP process.
146C. Paragraph 57C is denied. It was neither necessary, nor would it have been appropriate, for the
Prospectus to set out such information and investors would not have expected it to do so.
146D. As to paragraph 57D, it is denied that such disclosure was either possible or necessary, in
which regard paragraph 107A above is repeated. Further and in any event, as set out in
paragraph 136 above, at the time of the Rights Issue it was RBS's reasonably held expectation
that it would ultimately be able to satisfy most of the FSA's remaining concerns and obtain the
majority of the benefit from its AIRB models.
147.

Paragraph 58 is denied. In relation to the allegations to the sub-paragraphs thereof, the

Defendants will say as follows.

148.

Paragraph 58.1 is denied. As is apparent from paragraph 53, the passage from which the
quote is taken went on to say as follows:
"It is RBS policy to maintain a strong capital base, to expand it as appropriate and to utilise it
efficiently throughout its activities to optimise the return to Shareholders while maintaining a
prudent relationship between the capital base and the underlying risks of the business. In
carrying out this policy, RBS has regard to the supervisory requirements of the FSA"

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149.

That was an accurate statement and was not misleading. Further, as set out above, RBS's
efficient capital model was well known to the market and, as the Prospectus also made clear,
the Rights Issue was being undertaken in the context of a decision by the Board to make a
strategic change and move to a higher level of capitalisation. In that context, it is denied that
a reasonable reader of the Prospectus could have been misled. With regard to RBS's Core
Tier 1 ratio as at 30 April 2008, paragraph 87 above is repeated.

150.

Paragraph 58.2 is denied. The statement referred to was accurate and related expressly and
solely to the impact of the move from Basel I to Basel II. It was neither intended to nor could
it in fact be reasonably regarded as having created the impression that the move from Basel I
to Basel II was the sole reason for the increase in RWAs or created any impression about the
extent of declines in the Tier 1 capital ratio.

151.

With regard to the allegations in sub-paragraphs 58.2.1 to 58.2.4, which do not in any event
support the allegation that the statement referred to was misleading:
151.1

As to paragraph 58.2.1, paragraphs 90.2, 94 and 120 to 130 above is are repeated.

151.1A Save that it is admitted that RWAs increased between 31 December 2007 and the
time of the Rights Issue, paragraph 58.2.1A is denied, in which regard paragraphs
94 and 120 to 130 above are repeated.
151.1B It is admitted that RBS considered whether it could describe the impact of the Basel
II transition as 'small' and concluded that it could not do so. It is denied, if it be
alleged, that this was because RBS considered that the impact was not small. In fact,
it was considered that RBS was not in a position to assess the impact of Basel II
completely and that it would be potentially misleading to include any statement on
the materiality of the impact.
151.2

As to paragraph 58.2.2, on a fully consolidated basis RWAs increased over the

relevant period.

The effect of the transition from Basel I to Basel II was a

significant contributory factor to that increase, in particular the tendency under

Basel II for RWAs to increase in response to sharp market falls (a fact of which
specific disclosure was not necessary). As to the impact of the FSA's position in
relation to AIRB model benefits, see paragraphs 132 to 136 above. No admission is
made in relation to the allegation that RWAs increased due to "other factors such as

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growth in risky assets", which allegation is not sufficiently precise to plead to. Save
as consistent with the foregoing, paragraph 58.2.2 is denied.
151.2A As to paragraph 58.2.2A, paragraphs 132 to 140 above are repeated. It is denied
that those matters rendered the reference in the Prospectus to the "transition" to
Basel II misleading or that that reference implied that it had been completed without
difficulty, in which regard paragraph 80.1 above is repeated.
151.3

Save that it is denied that RBS's Tier 1 ratio on a Basel II proportionally

consolidated basis as at 1 January 2008 was less than 6.8% (the figure being in fact
6.8%, not materially lower than the proportionally consolidated Basel I figure of
7.0% as at 31 December 2007), Pparagraph 58.2.3 is admitted.

151.4

Save that, as set out at Response 51 of the Part 18 Response, as at 30 April 2008
RBS's Tier 1 ratio was 5.210% on a proportionally consolidated Basel II basis,
Pparagraph 58.2.4 is admitted.

152.

As to Pparagraph 58.3 is denied.:

152.1___Paragraph 144 above is repeated in relation to RBS's compliance with its ICG. The
non-disclosure of RBS's report to the FSA in this regard was considered by the
UKLA at the time it reviewed the draft Prospectus, which did not challenge it and
approved the Prospectus without that disclosure.
152.2

In relation to breach of the ITR, paragraph 144.3 above is repeated.

152.2A In relation to the alleged breach of the 'well-capitalised' status, paragraph 144.2C is
repeated.
152.3

It is denied that RBS had lost control over its capital position, or that it did not have
adequate knowledge of its up to date capital position., that it had difficulties in
managing its RWAs (other than the difficulties inherent in operating during a
challenging economic climate under a new regulatory regime, which were wellknown to the market and in any event disclosed on pages 11 and 13 of the
Prospectus), that it had mismanaged the impact of Basel II on its RWAs or that it
had failed to obtain regulatory approvals for capital adequacy requirements.

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152.4
153.

Save to the extent consistent with the aforesaid, paragraph 58.3 is denied.

Paragraph 58.4 is denied. RBS's AIRB waiver was not "qualified" as alleged. The true
position is set out at paragraphs 132 to 136 above. As set out above, in common with other
financial institutions and as was in any event in the public domain, RBS was required to
satisfy certain conditions as part of its AIRB waiver approval. It is denied that this rendered
the statements misleading. As further set out above, at paragraph 135, it is admitted that ABN
had not received an AIRB waiver.

154.

Paragraph 58.5 is denied. The significant changes in RBS's trading and financial position
were disclosed in Part XII of the Prospectus. It was apparent to a reasonable reader of the
Prospectus, as a result of those disclosures, that between 31 December 2007 and 30 April
2008 there had been a rise in RBS's RWAs and a decline in its capital ratios.

154A. Paragraph 58.6 is denied.

155.

As set out above, adequate disclosure of RBS's capital position was provided in the
Prospectus and the allegations of omissions and/or inadequate disclosure contained in
paragraph 57 are denied. To the extent that any of the matters therein referred to were not
disclosed, those were not matters disclosure of which was required to allow a reader of the
Prospectus to make an informed assessment of RBS's financial position or prospects and were
not matters required to be included under the provisions identified in paragraphs 59.1 and
59.2. In the circumstances, paragraphs 59 and 60 are also denied.

156.

As to paragraph 61:
156.1

It is denied that any of the matters alleged arose after the Prospectus was approved
so as to give rise to the need to produce a Supplementary Prospectus.

156.2

It is admitted that RBS did not produce a Supplementary Prospectus, as alleged at

paragraph 61.2. For the reasons set out above, no Supplementary Prospectus was
required.

156.3

Accordingly, paragraph 61.3 is denied.

156A. Paragraph 61.4 is denied. As set out above, it is denied that there arose any new matters such
as to require the submission of a supplementary prospectus. None of the Director Defendants

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was therefore under any obligation to give notice to RBS of any such new matters pursuant to
section 87G(5) of FSMA. It is accordingly denied that any of the Director Defendants is
liable to pay compensation under section 90(4) of FSMA.
Liquidity
157.

The Prospectus (in combination with the documents incorporated therein by reference)
accurately and fairly set out RBS's liquidity position and the various risks RBS faced with
regard thereto and cannot be said to have been misleading in that respect. In summary:
157.1

The 2007 Accounts set out in detail information about RBS's funding sources and
maturities and its liquidity commitments. That information was consistent with the
IFRS requirements and market practice at the time.

157.2

It was apparent from the disclosure provided, and was in any event well understood
by the market generally, that RBS (in common with most large banks) made
extensive use of, and was reliant on access to, the wholesale funding markets,
including the short-term wholesale funding and interbank markets.

157.3

The market was aware (and it was in any event set out in the 2007 Accounts) that
late 2007 had witnessed a period of market wide liquidity stress which for many
banks had impacted adversely on the overall supply and cost of funding and
liquidity for other than very short-term maturities.

157.4

During that period of market wide liquidity stress:

(a)

RBS had been, and at the time of the Rights Issue continued to be, able to
meet its funding requirements, including by raising large amounts from
customers and in the wholesale markets.

(b)

RBS benefitted from a "flight to quality", as a result of which it attracted

additional customer deposits.

(c)

In the first four months of 2008 RBS issued over 5bn of term notes with
varying maturities of up to 10 years and an additional 5 billion of various
debt securities and other financial instruments under a debt issuance
program.

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157.5

In the circumstances, and contrary to what is alleged, the market had no material
concerns with regard to RBS's solvency at the time of the Rights Issue.

157.6

The Prospectus nonetheless contained prominent risk warnings about the liquidity
risk that was inherent in RBS's operations and the fact that RBS's ability to access
funding could be constrained as a result of current and future market conditions.

157.7

The allegations made by the Claimants are made with the benefit of hindsight. At
the time of the Rights Issue, neither RBS nor its management could have predicted
the severity of the financial crisis that followed the collapse of Lehman Brothers in
September 2008. As at April 2008, RBS was well placed to access wholesale
funding sources from a wide range of counterparties and over a wide range of
maturities and it continued to do so until the time of the collapse of Lehman
Brothers, in both the short and long-term debt markets.

157.8

To the extent that information identified by the Claimants was not contained in the
Prospectus, it was not information that RBS was required or expected to disclose
and was not information that was necessary for investors to make an informed
assessment of RBS's financial position or prospects.

158.

Amongst other things, the following information was provided in the 2007 Accounts about
RBS's liquidity position as at 31 December 2007 (including ABN):
158.1

A breakdown of the sources of RBS's funding, as follows (p.80 of the 2007

Accounts):
(a)

Customer deposits and long term funds represented 53% of RBS's total
funding.

(b)

Collateralised borrowing by way of repurchase agreements represented 21%

of RBS's total funding.

(c)

Debt securities in issue with up to one year residual maturity represented

11% of RBS's total funding.

(d)

Deposits by other banks with up to one year residual maturity represented

10% of RBS's total funding.

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(e)
158.2

Short positions represented 5% of RBS's total funding.

A breakdown of RBS's short-term funding (call accounts and contractual positions

with remaining maturity of up to one year), as follows (p.190 of the 2007 Accounts):
(a)

Deposits by banks with a maturity of 0 3 months were approximately 220

billion and with a maturity of 3 12 months were approximately 22
billion.

(b)

Customer accounts with a maturity of 0 3 months were approximately

561 billion and with a maturity of 3 12 months were approximately 31
billion.

(c)

Debt securities in issue with a remaining maturity of 0 3 months were

approximately 111 billion and with a remaining maturity of 3 12 months
approximately 37 billion.

158.3

A breakdown of RBS's short-term wholesale market activity with remaining

maturity of under one month, showing that it had within this category approximately
112 billion of deposits from other banks and approximately 66 billion of debt
securities in issue (p.82 of the 2007 Accounts).

158.4

In August 2007 a systemic liquidity stress event had been triggered by difficulties in
the US sub-prime market, which had then spread to the global asset backed market,
impacting adversely on the overall supply and cost of funding and liquidity for other
than very short-term maturities (p.81 of the 2007 Accounts).

158.5

An explanation of RBS's provision of liquidity back-up facilities to its own conduits

and the existence of small exposures to other selected conduits. Limits for such
facilities totalled approximately 64 billion at 31 December 2007. Those conduits
had experienced a shortage of market liquidity during November and December
2007 for issuance over one month. RBS had purchased commercial paper issued by
its conduits and two small ABN conduits had drawn on the liquidity lines (p.83 of
the 2007 Accounts).

159.

This information is not, and could not properly be, said by the Claimants to be inaccurate.

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160.

It was therefore apparent from the disclosures made in the Prospectus, and was well
understood by the market generally, that RBS made extensive use of, and was reliant on
access to, the wholesale funding markets, including the short-term wholesale funding markets.

161.

As reflected at paragraph 188 of the FSA Report, in autumn 2007 the FSA believed that it was
"very unlikely" that RBS would be unable to meet its overnight wholesale funding
requirement. This remained a reasonable view, which was held by market participants and
RBS management, at the time of the Rights Issue. Moreover, despite the market disruption
that had resulted from the failure of Northern Rock:
161.1

RBS had by the end of September 2007 successfully raised EUR 17.3 billion of
senior and bridge financing and a further EUR 6 billion of hybrid capital (preferred
shares) to fund the acquisition of ABN;

161.2

RBS benefitted from a 'flight to quality' in late 2007 and the first quarter of 2008.
By way of example only, in the immediate aftermath of Bear Stearns' collapse in
March 2008, RBS received nearly 10 billion in additional deposits;

161.3

RBS continued to fund its significant overnight wholesale funding requirement; and

161.4

In the first four months of 2008, RBS issued over 5 billion of term notes with
varying maturities up to 10 years and an additional 5 billion of various debt
securities and other financial instruments under a debt issuance program.

162.

Against that background, RBS responds as follows to the specific allegations made in
paragraphs 61A to 70.

163.

As to paragraph 61A:
163.1

It is admitted that: (i) lack of liquidity had caused Northern Rock to need the Bank
of England's support in September 2007 and led to its nationalisation in February
2008; (ii) Bear Stearns collapsed in March 2008 due to lack of liquidity; and (iii)
central banks had taken measures in late 2007 and early 2008, including injecting
significant amounts into the market, to alleviate strains in longer-maturity money
markets. It is further admitted that both Northern Rock and Bear Stearns had
suffered from a collapse in market confidence and that this had led to them being
unable to access short term wholesale funding.

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163.2

It is admitted that inadequate liquidity was the immediate cause of RBS's need for
ELA in October 2008. Neither RBS nor its management could have predicted in
April or June 2008 the severity of the financial crisis that followed the collapse of
Lehman Brothers in September 2008. It is denied that at the time of the Rights Issue
there was any reasonable basis to believe that RBS would be unable to fund itself in
the wholesale markets and it is averred that there was no material concern in the
market that it would not be able to do so. In this regard paragraph 161 above is
repeated.

163.3

It is further admitted that the Prospectus was required to present the bank's liquidity
position accurately. The allegation that it was essential that RBS gave investors a
"full picture of its liquidity" is insufficiently precise to plead to. Without prejudice
to that, further and in any event, the requirements for the Prospectus were those set
out in ss. 87A and 90 of FSMA, the Prospectus Rrules and the Prospectus
Rregulation, in which the term "full" does not appear and is not relevant.

163.4

Save to the extent consistent with the aforesaid, paragraph 61A is denied.

163A Paragraph 61B is noted. The Integrated Liquidity Group also excluded RBS Insurance, and it
is assumed that where the Claimants refer to "RBS" in Section C they do not intend to refer to
RBS Insurance, unless otherwise expressly indicated.
163B

As to paragraph 61C, no admission is made in relation to the Claimants' understanding of

RBS's policy. As to that policy:
163B.1 Paragraphs 61C.1 to 61C.5 are admitted.
163B.2 It is admitted that the extracts quoted at paragraphs 61D.1 to 61D.3 accurately
reflect the relevant provisions of the Liquidity Policy. The Defendants will rely on
the Liquidity Policy at trial for its full terms and true effect.

164.

It is admitted and averred that the specific risk factors quoted at paragraphs 62 and 63 were
expressly identified in the Prospectus. Those passages accurately described RBS's approach
to liquidity management and reflected the fact that it had met all of its liquidity policy metrics
even during the period of market liquidity stress which had been experienced in the months
prior to publication of the Prospectus. The passages also properly identified various risks to
RBS's ability to access liquidity. Further:

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164.1

Under the heading "Risk factors" (on p.11), the Prospectus made clear that the risks
specifically identified were not the only ones RBS would face, that some risks were
not yet known, that others not then deemed material could later turn out to be
material, that all of those risks could materially affect (amongst other things) RBS's
liquidity position, and that in such a case the price of RBS shares could decline and
that shareholders could lose all or part of their investment.

164.2

Under the same heading "Risk factors" (on p.11), shareholders were expressly urged
to consider the risk arising from the fact that RBS's borrowing costs and its access to
the debt capital markets depended significantly on its credit ratings and that a
reduction in RBS's credit ratings could adversely affect its access to liquidity.

165.

It is admitted that the 2007 Accounts contained the information (amongst other information)
about RBS's funding position identified at paragraph 64. No criticism is made about the
accuracy of that information.

166.

Paragraph 64A is admitted.

167.

It is admitted that the Prospectus contained the Wworking Ccapital Sstatement referred to at
paragraph 65. That statement was supported by the Working Capital Report produced by
Deloitte, RBS's auditors, in which Deloitte confirmed that in their opinion the directors, on
behalf of RBS, "have a reasonable basis on which to make the Working Capital Statement.
For this purpose "reasonable basis" means that the Directors have based the Working Capital
Statement on Projections which have been prepared and considered by the Directors after
due and careful enquiry."

168.

In the Working Capital Report, Deloitte also noted (at p.9) that:
168.1

Modelling carried out to test the impact on one week and one month liquidity of a
two notch credit rating downgrade demonstrated that a neutral cash-flow position
could be maintained.

168.2

RBS's base of large depositors had remained stable during the previous twelve
months and that as at 17 April 2008 they accounted for 60% of RBS's short-term
funding requirement and over 50% of RBS's unsecured funding (p.35).

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168.3

RBS had not had to seek liquidity from central banks other than in the normal
commercial course of business.

168.4

There had been a one notch credit rating downgrade by Fitch on 22 April 2008, but
that the impact on short-term borrowing had not to that point been material.

169.

Paragraph 66 is noted, in respect of which paragraph 109 above is repeated.

169A. As to paragraph 66A, it is admitted that the Prospectus conveyed the impression that RBS's
liquidity risk management was prudent having regard to the standards and expectations
reasonably prevailing at the time of the Rights Issue and that the aim of that risk management
was to maintain RBS's liquidity position within prudent limits. It is denied that the Prospectus
conveyed the impression that:
169A.1 At all times RBS's liquidity position was within such limits; or
169A.2 There were no areas of RBS's liquidity risk management arrangements about which
criticism could reasonably be made, and/or which could reasonably be improved,
and reasonable investors would not have made an assumption to that effect.
169B. As to paragraph 66B, the requirements of prudent liquidity risk management can only
relevantly be assessed by reference to the standards and expectations prevailing at the time.
Against those standards and expectations:
169B.1 It is denied that at the Prospectus Date (or at any time during Q1 2008) prudent
liquidity risk management required either monthly sensitivity analysis on the basis
of a Lockout Scenario or maintenance of a 3 month Survival Horizon, as alleged at
paragraphs 66B.1 and 66B.2. A Lockout Scenario, in which a wholesale funding gap
would need to be met in full, was an extreme scenario, and was not a scenario on
which a prudent liquidity risk management policy needed to be based.
169B.2 It is denied that prudent liquidity risk management required maintenance of a
centrally managed Liquidity Buffer, as alleged at paragraph 66B.3. As to the subparagraphs thereof:

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(a)

Paragraph 66B.3.1 is denied.

(b)

The first sentence of paragraph 66B.3.2 is not admitted.

The second

sentence of paragraph 66B.3.2, and particularly the reference to a "25

working day Liquidity Buffer", is not understood. Further, although the
Claimants' Glossary at Schedule 2 defines "short term funding liabilities" as
"funding liabilities with up to 30 business days' maturity" (and the
Claimants' other expressions using the words "short term" including in
paragraph 66B.3.2 apparently rely on this definition), the FSA Report, to
which that definition refers, in fact stipulates merely 30 days, not 30
business days. For this purpose, in responding to Section C, the Defendants
use "short term" to mean 30 days, unless otherwise stated.
169B.3 Paragraph 66B.4 is denied.
169B.4 As to paragraph 66B.5:
(a)

The 'RAG' STMR Ratio ranges set out at section 3.11.3 of the Liquidity
Policy were guidelines established to assist with balance sheet management
in conjunction with a range of other liquidity metrics.

In particular, from

September 2007 onwards RBS generated and provided to the FSA twice
weekly 'current status indicator' reports ("CSI reports") which set out
details of both sterling and non-sterling wholesale inflows and outflows over
the following 25 days and which provided a better insight into RBS's short
term liquidity position. In those circumstances, maintenance of the STMR
Ratio out of the 'red' zone was not of itself a requirement for prudent
liquidity risk management.
(b)

It is denied that monthly reporting to GALCO of the STMR Ratios was

required for prudent liquidity risk management.

(c)

Accordingly, paragraph 66B.5 is denied.

169B.5 Paragraph 66B.6 is denied. The purpose of so-called operational limits was to
provide an early warning if a particular metric was getting close to the 'hard' limit
set out in the Liquidity Policy. Prudent liquidity risk management did not require
all currency mismatch ratios to be within operational limits at all times.

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169B.6 As to paragraph 66B.7, it is unclear precisely which 'metrics' are being referred to.
Without prejudice to that, save as set out above it is denied that prudent liquidity
risk management required the matters referred to in paragraph 66B to be reported to
GALCO.
169B.7 Paragraph 66B.8 is admitted, on the basis of the meaning of "Funds Transfer
Pricing" used within RBS during the Relevant Period. The Defendants are unable to
locate the definition referred to in paragraph 66B.8.
169B.8 It is denied that prudent liquidity risk management required stress testing for either a
Lockout Scenario or against a 3 month Survival Horizon, as alleged at paragraph
66B.9.
169B.9 It is denied that prudent liquidity risk management required RBS's liquidity risk
appetite to be defined by reference to either the length of the Survival Horizon or the
size of the Liquidity Buffer, in which regard paragraph 190AA.8 below is repeated.
Paragraph 66B.10 is accordingly denied.
170.

It is denied that the Prospectus made inadequate disclosure as alleged at paragraph 67.

171.

As to paragraph 67.1:
171.1

At the time of the Rights Issue it was generally the practice amongst RBS's peer
group of UK and other major banks that disclosure was not provided of short-term
funding beyond setting out details of the amount of funding falling due in less than
one month. The FSA did not require the provision of that information, even for its
own internal monitoring purposes, until late August 2007 and at the time of the
Rights Issue there was no requirement on banks to include this information in their
statutory accounts.

171.2

Further, accepted practice at the time was to provide the same level of disclosure in
a prospectus as in statutory accounts. It is accordingly not information that investors
would have expected to be disclosed in the Prospectus and was not necessary for
them to make an informed assessment of RBS's financial position or prospects.

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171.3

In common with the generally accepted practice, RBS made disclosure of its shortterm wholesale funding with remaining maturity of less than one month at page 82
of the 2007 Accounts.

171.4

The term "very short term wholesale funding" was introduced for the first time by
the FSA in its Report and was defined there as "wholesale funding falling due on a
contractual basis within 5 business days". In this regard, the Defendants do not
understand the purpose of the deletion of the word "wholesale" in the first sentence
of paragraph 67.1, the defined term in the glossary being "wholesale funding gap",
to which term it is understood the Claimants are intending to refer throughout
section C when using the expression "funding gap", unless otherwise indicated.

171.5

"Funding gap" is a term routinely used to describe a mismatch between the duration
and quantum of funding and that of corresponding assets, such mismatch being a
normal facet of commercial banking. It does not connote a shortage of available
funding.

171.6

It is admitted that, for the reasons set out above, the Prospectus did not disclose the
size of RBS's very short-term wholesale funding gap (as defined in the FSA Report).
For those same reasons, it is denied that it should have done so. In particular, it is
denied that it should have disclosed that its very short-term funding gap was "very
large" and a "high proportion" of its short-term funding requirement, such
descriptions being meaningless in the absence of useful comparators, which were
not available to either RBS or the market generally.

171.7

It is denied that RBS's very short term wholesale funding gap was imprudent
compared to its QLAs and it is not admitted that RBS's very short-term wholesale
funding gap was any more volatile than that of other similar banks. Information
about the very short-term funding requirement of other banks at the time of the
Rights Issue was not and is still not available to RBS.

171.8

Although iIt is admitted that RBS's short-term funding requirements increased

between 2007 year end and the announcement of the Rights Issue:
(a)

The figures alleged at paragraph 67.1.1 are deniedadmitted. The very short
term wholesale funding gap at the 2007 year end was approximately 80

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billion and At the time of the announcement of the Rights Issue the very
short term wholesale funding gap was approximately 84 billion. As at 31
December 2007, RBS's total funding was approximately 1,433 billion and
RBS's very short-term funding gap amounted to less than 6% of the total
funding.

In this context, neither the 4 billion increase to the

announcement of the Rights Issue nor the increase to the Prospectus Date
does not constitute a "significant increase".
(b)

Although there had been a rise in the very short-term funding gap between
December 2007 and April 2008, the requirement had in fact fallen between
the end of September 2007 and the 2007 year end and by the start of May
2008 had fallen once again to approximately 72 billion.

(c)

As to pParagraph 67.1.2, it is admitted. It is further admitted and averred

that overnight funding accounted for almost 50% of RBS's short-term
wholesale funding gap in on 27 December 2007.

At the time of the

announcement of the Rights Issue, that proportion had fallen to

approximately 40% and as at the Prospectus Date it was just above 50%. As
set out above, it was not market practice to disclose this information and it is
denied that RBS would have been expected to do so.
(d)

As to pParagraph 67.1.3 is admitted. The text referred to was draft wording

for inclusion in an information pack to be sent to the GBM Board and was
intended to highlight the need for RBS, and GBM in particular, to take steps
to reduce its reliance on short term unsecured funding, which it
subsequently did.RBS's level of reliance on very short-term funding relative
to its peers is not admitted. It is in any event denied that its level of reliance
on very short-term funding at the Prospectus Date was indicative of market
doubts about its solvency. It is further denied that there were such doubts.
In this regard, paragraph 161 above is repeated. In the absence of any
particulars of where, other than in the market, doubts are said to have been
harboured, no admission is made as to the wider allegation introduced by
amendment.

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(e)

Paragraph 67.1.3A is admitted. The agreement referred to was one of the

steps taken by RBS aimed at reducing its reliance on short term unsecured
funding.

(f)

Paragraph 67.1.4 is admitted. For the avoidance of doubt, reference in the

paper to "the short term markets" was to markets for funding of maturity of
under one year, not to "short term" as used by the Claimants (as to which,
the last two sentences of paragraph 169B.2(b) are repeated).

(g)

Paragraph 67.1.5 is denied. Prudent liquidity risk management did not

require maintenance of QLAs sufficient to cover 5 working days of
contractual outflows. Further and in any event, as to paragraphs 67.1.5.1
and 67.1.5.2, on 24 April 2008 RBS had assets eligible at the Bank of
England, ECB and/or US Federal Reserve of at least 74.78 billion against
overnight wholesale contractual net outflows of approximately 62 billion
and 5 day wholesale contractual net outflows of approximately 93 billion
(as reflected in the CSI Report for that date).

171.9

Although RBS did not disclose details of its very short-term wholesale funding
requirement:
(a)

It was made clear in the 2007 Accounts (at p.81) that funding maturities had
shortened.

(b)

The Prospectus expressly referred (at p.73) to a further reduction in term

funding across the board.

172.

In the circumstances set out above, it was not necessary for the Prospectus to disclose details
of RBS's very short-term funding requirements in order for investors to make an informed
assessment of its financial position or prospects. The onus is on the Claimants to prove
otherwise. Save as aforesaid, paragraph 67.1 is therefore denied.

173.

As to paragraph 67.2, it is admitted that RBS's short-term wholesale funding gap increased
from 113 billion on 27 December 2007 to 131 billion on 29 April 2008. In the context of
RBS's normal funding operations it is denied that the increase in the short-term funding gap
was significant. The variation was not unusual and amounted to a business as usual variance.

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By way of illustration, on 16 January 2008 the corresponding figure was 109 billion, on 15
February 2008 it was 134 billion and on 4 April 2008 it was 119 billion.
173.1

In the context of RBS's normal funding operations it is denied that the increase in
the short-term funding gap was significant. The variation was not unusual and
amounted to a business as usual variance.

173.2

No admission is made as to anyAs to paragraph 67.2.1, it is admitted that there had

been an increase in RBS's reliance on short-term wholesale funding in the years up
to the Rights Issue. To the extent that the 281 billion figure referred to by the
Claimants is the gross wholesale contractual outflows occurring within 25 days from
and including the Prospectus Date, that figure is admitted. The relevance of both
those matters to the present claim is not understood. or to the extent of its reliance
on short-term capital markets funding at the end of 2007 (being in each case funding
falling due within twenty five business days). As at 31 December 2007:
(a) RBS's short-term wholesale funding was less than ten per cent of its
total funding.
(b) RBS's debt securities in issue with a remaining maturity up to one month
was approximately five per cent of its total funding.
(c)

It is denied that the variations in the size of RBS's short term wholesale
funding requirement increased "liquidity stress". RBS was well able to
manage such variations.

(d)

It is admitted that reliance on short term wholesale funding made RBS, as

with any bank relying on such funding, sensitive to the risk of wholesale
funding outflow on maturity and the risk of refinancing / rollover. It is
further admitted that that sensitivity increased with greater reliance on short
term wholesale funding.

173.3

From about late 2007 onwards, the bank formed the view that it would be beneficial
to reduce the proportion of its funding obtained from the short-term wholesale
markets and measures were put in place to extend the term of its funding profile. In
this regard: It is denied that it is accurate to describe its reliance on short-term
wholesale funding and short-term capital markets funding as excessive.

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(a)

Save that the contents of the email from Phil Leverick is admitted,
paragraph 67.2.2 is denied. Whilst it would have been imprudent for RBS
to continue over the long term without taking steps to reduce the level of
reliance on short term wholesale funding, in fact RBS was taking such steps.

(b)

As to paragraph 67.2.3 it is admitted that the STMR Ratio (including repos)

was estimated in December 2007 to be about 58% by April 2008. It is
further admitted that, as reported to GALCO in September 2008, the STMR
Ratio (including repos) was about 63% in April 2008, and that the STMR
Ratio (excluding repos) was in the green or amber zone throughout the
period January to July 2008. Save as aforesaid, paragraph 67.2.3 is denied,
and paragraphs 169B.4 above and 190A.7(d) below are repeated.

173.4

No admission is made as to whether RBS's reliance was greater than that of its
peers.

173.5
174.

Save as aforesaid, paragraph 67.2 is denied.

As to paragraph 67.2A:
174.1

As part of its routine supervisory relationship, in the autumn of 2007 the FSA raised
with RBS a number of questions about its liquidity management. It is admitted that,
in this context, the FSA indicated that RBS appeared to be an outlier in respect of its
1 week net outflow position. No admission is made as to whether at that time RBS
was exposed to significantly greater risk than its peers.

174.2

RBS provided comprehensive responses to the questions raised by the FSA

explaining why RBS was comfortable with its liquidity risk management
arrangements.

174.3

It is admitted that there was no material change in Save to the extent experienced by
all banks as a consequence of the difficult market conditions experienced in early
2008 (which were specifically referred to in the Prospectus), it is denied that there
was any material worsening of RBS's liquidity position between the end of 2007 and
the Prospectus Date.

174.4

Save as aforesaid, paragraph 67.2A is denied.

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174A. As to paragraph 67.2B:

174A.1 The first sentence is admitted, as a matter of Group Treasury's belief (but is
otherwise not admitted). The second sentence is admitted.
174A.2 The third sentence is denied. It is specifically denied that individual counterparties
routinely informed RBS of their lending limits to RBS.
174A.3 The final sentence is admitted.
174B. As to paragraph 67.2C, on or about 10 March 2008 GBM agreed to reduce its unsecured
funding requirements by a total of 40 billion by April 2008. This reduction was to be
achieved from a combination of measures, including reduction in reverse repos, increased
repo funding of assets previously funded on an unsecured basis and the sale of assets. In
support of this objective (and other related initiatives aimed at reducing the size of and derisking the GBM (and therefore RBS) balance sheet), work was carried out within GBM to
analyse the P&L impact of proposed strategies to "de-risk" various assets (including asset
disposals and hedges). It is admitted that, in the event, the targeted 40 billion reduction was
not achieved by the Closing Date, although significant progress was made towards it. Save as
aforesaid, paragraph 67.2C is denied.
174C. Save that it is admitted that GBM's assets moved to the extent alleged between December
2007 and March 2008, paragraph 67.2D is denied. In particular: (i) RBS did not fail to
manage its balance sheet as alleged; (ii) as the Claimants note at paragraph 73A, the derisking exercise was not established until March 2008 and any change in the size of RBS's
balance sheet could not therefore properly be said to have occurred "notwithstanding" that
strategy.
175.

As to the preamble of paragraph 67.3:

175.1

It is admitted that some market counterparties had reduced lending limits to the
combined entity between October 2007 and the Prospectus Date. No admission is
made about the extent to which this in fact was attributable to the acquisition of
ABN rather than to other factors such as country risk, sector risk, concentration risk,
the ability of the relevant counterparty to provide such funding or the economic
situation generally.

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175.2

As set out above, the risk that corporate and institutional counterparties might look
to do so was expressly adverted to in the Prospectus (at p.13). That risk would, in
any event, have been apparent to informed observers at the time of the Rights Issue
and would consequently have been taken account of in the market.

175.3

To the extent that the phrase "had increased RBS's liquidity coverage needs" is
intended to mean that as a result of the acquisition of ABN, RBS had a larger overall
funding requirement, that is admitted. That increased requirement was the natural
and inevitable consequence of the combination of the two banks' balance sheets and
did not require separate disclosure. In any event, the position was made clear in the
2007 Accounts, which set out (at p.80) RBS's funding position both including and
excluding ABN.

175.4

The penultimate sentence is admitted.The funding structure to be adopted for the

acquisition of ABN was set out in the Prospectus issued by RBS on 20 July 2007 for
the issue of new RBS ordinary shares in connection with the acquisition (at p.65).

175.4A The final sentence is denied, in which regard:

(a)

The figure of 294 billion relates to the position in May, not April as
alleged.

(b)

"volatile funding" was the term used within ABN to refer to all funding
from professional counterparties that might not survive a stress. The last
sentence is admitted. The said breach was quickly remedied and, by the
time of the Rights Issue, ABN was operating well in excess of its DNB
liquidity requirements.

175.4B As to the sub-paragraphs of paragraph 67.3:

(a)

As to paragraph 67.3.1, it is admitted that as part of the process of

integrating ABN AMRO with RBS it was intended that assets would be
transferred from the ABN AMRO balance sheet to the RBS plc balance
sheet so that the respective businesses could be managed as one going
forward.

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(b)

It is further admitted that in order for this to take place, and to reduce overall
reliance on short-term wholesale funding, it was necessary for there to be a
reduction in the overall size of the GBM balance sheet across the existing
RBS and ABN AMRO businesses and that steps were put in place to
achieve this. In this context, paragraphs 67.3.2 and 67.3.3 are admitted.
However, the 200 billion targeted reduction was subsequently reduced to a
total of 130 billion.

(c)

Paragraph 67.3.4 is denied. The Prospectus stated (at p.73) that a wide
series of asset and liability measures had been instituted by RBS to enhance
its liquidity position.

Those measures included the planned funding

reduction referred to at paragraph 67.3.4.

No further disclosure was

required.
(d)

It is admitted that it was likely that the desired reduction in the use of
wholesale, unsecured funding would result in losses on the sale of certain
assets. It is denied that this was a step "which [RBS] was not willing to do".
The de-risking exercise was, amongst other things, intended to identify the
most efficient way to achieve the desired reduction, including by limiting
losses on asset disposals.

This amounted to prudent balance sheet

management of which no justifiable criticism can be made.

Save as

aforesaid, paragraph 67.3.5 is denied.

(e)

As to paragraph 67.3.6, it is admitted that the text quoted accurately reflects

the content of a note prepared by Group Internal Audit of a meeting between
Cummins and Group Internal Audit. No admission is made as to whether
the note accurately and/or completely records the content of the discussion
at the meeting. Further, it is denied that the note accurately reflects the
actual position; in particular, as set out above, the agreement with GBM was
that it would reduce unsecured funding by 40 billion, not 45 billion as
recorded in the note.

(f)

As to paragraph 67.3.7, it is denied that there was any target for a 200
billion reduction by October 2008. No admission is made as to whether the
40 billion target had been achieved by October 2008, although significant
progress had been made in reducing GBM's need for unsecured funding

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such that by the end of June 2008 it had been reduced by approximately 30
billion.
175.5
176.

Save as aforesaid, paragraph 67.3 is denied.

As to paragraph 67.3A:
176.1

Save that the 328 billion figure included also treasury and other eligible bills, Tthe
preamble and paragraph 67.3A.1 are admitted.

176.2

It is admitted that ABS and senior bond markets had been strained in late 2007 and
early 2008.

176.3

It is admitted that the value of some of the assets declined as market conditions
deteriorated. To the extent that assets had impaired marketability, necessary writedowns reflecting management's assessment of the state of the market had been taken
and were reflected in the information provided in the Prospectus.

176.4

It is admitted that the market for some senior unsecured bank securities became
illiquid during the first half of 2008. No admissions are made as to the liquidity of
the market for particular securities or as to the extent (if any) to which securities
forming the remainder of the 328 billion of debt had thereby become
unmarketable.

176.5

Further, for liquidity purposes, the marketability of assets in such a portfolio was not
limited to the ability to sell them in the wholesale markets. Such assets could also
be used as collateral for other transactions and during 2008 could be pledged with
certain central banks in exchange for more liquid treasury bills. As is reflected at
page 139 of the 2008 Aaccounts, during 2008 RBS pledged AAA-Rated ABS with
major central banks.

176.6

Paragraph 67.3A.4 is noted.

176.6A As to paragraphs 67.3A.5 and 67.3A.6:

(a) The first sentence of paragraph 67.3A.6 is admitted. The 81 billion figure was
in respect of RBS including ABN AMRO, and was calculated on a different basis

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from the figures in the table at pages 82 and 190 of the 2007 Accounts. The
relevance of the 144 billion figure is denied.
(b) It is admitted that customer deposits from wholesale customers were not
included in the table at pages 82 and 190 of the 2007 Accounts (and it is admitted
and averred that customer deposits from retail customers were also not included).
This was plain from the face of that table, and it is denied that the table was
misleading as a result.
176.7
177.

Save as aforesaid, paragraph 67.3A is denied.

It is denied that RBS was subject to substantial undisclosed liquidity commitments to

conduits, as alleged at paragraph 67.4. As set out above, its liquidity commitments to
conduits as at 31 December 2007 were disclosed in the 2007 Accounts (at p.83) as follows:
177.1

RBS provided liquidity back-up facilities to both its own conduits and "other
selected conduits which take funding from the asset-backed commercial paper
market", a reference to so called third party conduits;

177.2

The facilities provided to its own conduits totalled 64 billion (split as to 16 billion
for RBS conduits and 48 billion for ABN conduits); and

177.3
178.

RBS had small exposures to selected third party conduits.

The figure of 64 billion disclosed at page 83 of the 2007 Accounts accurately described
RBS's liquidity exposure to consolidated conduits. It did not take into account program wide
credit enhancements, which on 31 December 2007 amounted to approximately 3 billion.
The figure of 69.974 billion referred to in paragraph 67.4 (which is taken from the table at
page 141 of the 2008 Accounts) does not represent RBS's maximum exposure to loss, since
that figure includes both exposure from liquidity lines and programme wide credit
enhancement, which from an exposure perspective involves double counting. The true figure
for maximum exposure to loss was 66.878 billion (the figure of 68.878 billion in the table
at page 141 of the 2008 Accounts being a typographical error). In line with the greater focus
on conduits which came about in the second half of 2008, and in particular following the
collapse of Lehman Brothers, that figure included commitments to both RBS's own conduits
and third party conduits.

As the 2008 Accounts record (at p.141), the latter category

amounted to approximately 3.9 billion.

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179.

It is admitted that approximately 3.8 billion of liquidity lines were drawn by conduits as at
31 December 2007. Of this, approximately 1.5 billion reflected the disclosure in the 2007
Accounts (at p.83) that ABN "saw two small conduits draw liquidity". The drawn amount
was less than 2.5% of RBS's Ttotal exposure to own conduits. The balance of 2.3 billion
was drawn by the third-party conduits. In the context of the size of RBS's overall exposure to
conduits, these draw-downs were not sufficiently material to require separate disclosure.

180.

As to paragraph 67.5:
180.1

It is denied that RBS's exposures to conduits were imposing significant liquidity

burdens on RBS.

180.1A As to paragraph 67.5.1, by 15 April 2008 the North Sea conduit (along with Orchid
and Grand) had been unwound and its assets were held directly on the ABN AMRO
balance sheet.
180.2

Paragraph 67.5.2 is admitteddenied.

As at 22 April 2008 (the day of the

announcement of the Rights Issue) the remaining RBS and ABN AMRO conduits
had drawn a total of approximately 1.3 billion. In addition, the assets previously
held by Orchid, Grand and North Sea were funded directly on the ABN AMRO
balance sheet, amounting to funding of about 7 billion. Those total drawings of
slightly under 8.5 billion represented less than 15% of RBS's and ABN AMRO's
overall previous liquidity commitments to conduits. In that context, those drawdowns neither imposed a significant burden on RBS nor were they a matter
requiring separate disclosure.
180.3

It is admitted that RBS was, largely by virtue of assets previously held through
North Sea, indirectly exposed to ABS through conduits.

It is denied that a

significant amount of those exposures arose from "troubled assets" as alleged at

paragraph 67.5.2A.

Further, as set out in the table at page 142 of the 2008

Accounts, only 2.129 billion of the total assets held by RBS and ABN conduits
arose from CDOs.
180.4
181.

Save as aforesaid, paragraph 67.5 is denied.

Save that: (a) the first sentence is admitted; (b) it is admitted that the 2008 Aaccounts made
reference to a funded exposure to CDOs of 2.1 billion of CDO exposure through

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consolidated conduits as at 31 December 2007. The same table also identified total (including
undrawn exposure) of 2.4 billion; and (c) it is admitted and averred that RBS had liquidity
commitments to third party conduits of some 2.5 billion (none of which involved exposure to
CDOs), paragraph 67.5A is denied.not admitted. The Defendants will plead further in this
regard if and when further allegations are advanced by the Claimants.
182.

Paragraph 67.6 is denied. By the time of the Rights Issue the funding previously made
available to the Canadian conduits had been repaid and, under the "restructuring agreements"
referred to, liquidity lines had been cancelled with the result that RBS had no remaining
liquidity commitments to either Skeena or any other Canadian conduit. As to the final two
sentences of that paragraphQE Claimants' allegation introduced by amendment, as set out
above, no disclosure was made because no exposure existed.

183.

At to paragraph 67.6A:
183.1

Save that it is averred that Goodwin in fact responded that "for all practical
purposes" the funding for RBS's conduits was externally provided, the first sentence
of paragraph 67.6A is admitted.

183.2

Goodwin's comment was intended to and did refer to the fact that there had for all
practical purposes been no material drawings by conduits on liquidity facilities
provided by RBS. RBS does not now have complete figures for 6 December 2007,
the date on which Goodwin made the said statement. On the figures set out in the
2007 comparatives, the amount of deal specific drawn liquidity as at 31 December
2007 was 1.5 billion (approximately 2.5% of RBS's total exposure to conduits).
Goodwin's comment was therefore accurate.

183.3

As set out above, as at 31 December 2007 ABN held approximately EUR 4.9 billion
of ABCP issued by its own conduits. That fact was disclosed in the ABN Form 20F Annual Report for 2007 (which was incorporated by reference in the Prospectus).

183.4

The fourth sentence of paragraph 67.6A is denied. North Sea had no direct US subprime exposure and less than 2% of its portfolio consisted of indirect US sub-prime
exposure.

183.5

In any event, the said statements do not form part of the Prospectus and accordingly
cannot provide a basis for a claim under s.90 of FSMA.

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183.6
184.

Save as aforesaid, paragraph 67.6A is denied.

As to paragraph 67.7:
184.1

As was explained in public announcements at the time, there was a wide range of
reasons behind RBS's desire to acquire ABN, of which LaSalle was one. Others
included, without limitation, the opportunities to be derived from the combining
GBM and ABN's global wholesale business, which had extensive geographic reach
and large customer franchises in continental Europe, the US and Asia and the fact
that ABN was one of a relatively small number of banks with a strong capability in
international cash management, payment and trade finance.

184.2

It is admitted that ABN sold LaSalle's Holding Company, ABN North America
Holding Company, to Bank of America in a deal that concluded on 1 October 2007.
In the light of ABN's decision to sell LaSalle, RBS re-considered the desirability of
the ABN acquisition and reasonably concluded that the reasons for it remained
compelling. Further, the acquisition of ABN was approved by RBS's shareholders
in the knowledge that it would not result in RBS acquiring LaSalle.

184.3

It is admitted that prior to the acquisition RBS expected the repatriation of the cash
proceeds to take place within three months of October 2007. By the time of the
preparation and publication of the 2007 Accounts, RBS was aware that receipt of
those proceeds was delayed and would not occur any earlier than May 2008. In the
event, those funds were not transferred from ABN to RBS and were therefore
absorbed by losses suffered by RBS's share of ABN.

184.4

Although receipt of the funds by RBS would have allowed repayment of part of the
debt used to fund the acquisition, the delay did not have any material effect on the
overall funding position of the consolidated Group, since the proceeds received by
ABN from the sale of LaSalle resulted in ABN having a lower wholesale funding
requirement.

184.5
185.

Save as aforesaid, paragraph 67.7 is denied.

As to paragraph 67.8, as noted in the Prospectus at page 73, as part of its on-going liquidity
management programme, from late 2007 onwards RBS had "instituted a wide series of assets
and liability measures" aimed at enhancing its liquidity position to meet the challenges of the

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global credit crisis. It is admitted and averred that one aim was to decrease the extent to
which RBS was required to rely on funding from the very short-term and short-term
wholesale markets and that one measure adopted to achieve this was to aim to increase the
extent of its term debt issuance. It is further admitted that, by the time of the Rights Issue,
only limited term issuance had been possible, since:
185.1

Between 1 January 2008 and 27 February 2008 RBS was in a so-called 'black-out'
period in advance of the publication of the 2007 Accounts and therefore did not
have access to the public debt capital markets.

185.2

From about mid-February 2008 onwards, there was a renewed period of turbulence
in the money markets generally, with the result that access to longer maturity
funding was impaired. Those market difficulties were exacerbated following the
rescue of Bear Stearns by the Federal Reserve on 14 March 2008.

186.

It is admitted that, in common with the rest of the market, as a result of the market stress
experienced during early 2008, RBS was often forced to refinance maturing term debt with
shorter term funding. The market events referred to above were not specific to RBS and were
already in the public domain. Further, other initiatives put in place by RBS remained in
progress at the time of the Rights Issue as part of the bank's on-going liquidity management
exercise.

187.

In the circumstances, it is denied that additional disclosure was required in the Prospectus as
alleged at paragraph 67.8.

188.

Save as expressly set out below, paragraph 67.9 is denied. Although RBS made use of
various central bank funding facilities, it did so as part of business as usual, not because it was
compelled to do so to meet its wholesale funding requirement. As to the specific matters
alleged in paragraphs 67.9.1, and 67.9.2 and 67.9.3:
188.1

The SLS was a system-wide market liquidity initiative on the part of the Bank of
England, and, as confirmed in the Winter's' review conducted in 2012, larger banks
were persuaded to join the scheme and to draw on it. Under the terms governing
membership of the scheme, RBS and all other participating banks were precluded
from disclosing details of their use of the facility. Further and in any event:

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(a)

RBS did not make "large scale" use of the SLS, as alleged. At the time of
the SLS's announcement on 21 April 2008, RBS did not expect the SLS to
have any significant effect on its funding. Between the launch of the SLS
and the close of the Rights Issue, RBS's use of the SLS was not sufficiently
material (totalling less than 2 billion) to require separate disclosure and/or
to seek a special dispensation from the Bank of England allowing RBS to
make any such disclosure; and

(b)

RBS used the SLS as a means of enhancing its liquidity profile and not as a
source of funding, by exchanging with the Bank of England less liquid
assets for UK treasury bills. At all material times, those treasury bills were
retained by RBS as part of a liquidity buffer established by RBS and were
not used to obtain funding in the wholesale market.

188.1A It is admitted that during Q1 2008 RBS accessed repo funding of approximately 11
billion through ECB facilities and that RBS intended to use central bank repo
facilities to provide approximately 15 billion of eligible securities for use in a
liquidity buffer, as set out at paragraph 188.1(b) above.
188.2

It is denied that either TAF or TSLF was a "secret liquidity facility extended by the
Federal Reserve".

Neither TAF nor TSLF were secret.

TAF was publicly

announced by the Federal Reserve on 12 December 2007 and TSLF was publicly
announced by the Federal Reserve on 11 March 2008. Both were systemic facilities
put in place by the Federal Reserve to improve liquidity in the market as a whole,
were well known to market participants and were part of a concerted effort by a
number of central banks to address the well-publicised difficulties in the financial
markets. The Federal Reserve encouraged many depository institutions, including
RBS, to make use of those facilities, which offered a competitively priced source of
short-term wholesale funding. RBS, in common with many other institutions, did so
and intended to continue to do so as part of business as usual, not because it was
otherwise unable to fulfil its wholesale funding requirement. Its use of the facilities
did not constitute information necessary for investors to make an informed
assessment of RBS's financial position and prospects.
188.3

RBS's use of the Federal Reserve facilities was in any event minimal. It is admitted
that on 22 April 2008 RBS's outstanding funding from Federal Reserve facilities

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was US$11.9 billion and that during the referred period its use of those facilities
averaged US$8.4 billion, compared to its total funding as at 31 December 2007 of
1.433 trillion.

Further, RBS's use of the Federal Reserve facilities was

considerably more limited that many of its peers, as shown in the table below which
deals with the position for the period from 22 April 2008 to 6 June 2008 (source:
Bloomberg):

RBS

Average

Barclays

BNP

Citigroup

Credit

Deutsche

Societe

Suisse

Bank

Generale

UBS

8.4

18.3

15.1

20.2

32.1

36.1

15.3

24.8

11%

33.6%

15.8%

16.3%

52%

59.1%

24%

35.66%

daily
indebtedness
(US$ billion)
Average per
cent of
market
capitalisation

188.3A To the extent that RBS's use of the central bank funding facilities was not disclosed
(in keeping with the terms of the schemes and with the practice adopted by other
banks using them), the final sentence of paragraph 67.9.2 is admitted. As as set out
above, in the context of its overall funding requirement, RBS's use of the facilities
was minimal and represented business as usual which did not require disclosure,
either in the Prospectus or otherwise.
189.

Paragraph 67.9A is denied. Paragraph 188 above is repeated.

190.

As to paragraph 67.10:
190.1

It is admitted that, in common with other banks making use of the wholesale
markets for part of their funding requirement, RBS was vulnerable to any events
which caused disruption to those markets or restricted its access to them. Those
risks were expressly addressed in the Prospectus. It is denied that any further
disclosure was necessary in this regard.

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190.2

The extent of RBS's reliance on the wholesale funding markets was clearly
disclosed in the 2007 Accounts and the pressures created by the market disruption in
late 2007 and early 2008 expressly referred to in the Prospectus.
disclosure was necessary.

No further

It is denied that RBS's wholesale funding was not

managed within prudent limits (in which regard paragraph 171 above is repeated) or
that RBS should have stated that the pressure on its wholesale funding position was
"significant" or "growing", which descriptions would not have assisted an informed
assessment of its financial position or prospects.
190A. Save to the extent admitted below, paragraph 67.11 is denied.
190A.1 It is admitted that the limits referred to in paragraph 67.11.1 appear in the Group
Liquidity Policy (which limits refer to sterling outflows only (as is clear from their
title) and to RBS excluding ABN).
190A.2 On 21 September 2007 the 5 working day limit was raised, by agreement with the
FSA, to 17.5 billion.
190A.3 Save that it is admitted that overnight sterling net wholesale outflow represented
more than 70% of the 5 day wholesale net sterling outflow (which it is assumed is
what is meant by use of the term "exposure"), paragraph 67.11.3 is denied. In
particular, RBS's 5 day wholesale net sterling outflow was less than 10 billion.
190A.4 Between 31 December 2007 and the date of the Rights Issue there were no breaches
of the Group limits set out in the Group Liquidity Policy. In June 2007 an error was
discovered in the reporting of certain foreign exchange transactions which had
resulted in the sterling stock ratio falling below the prescribed limit. The currency
ratio was correspondingly mis-stated. That error was reported to the FSA as soon as
it was discovered and the position immediately rectified.
190A.5 Paragraph 67.11.4 is denied.
190A.6 As to paragraph 67.11.5, as set out at paragraph 169B.5 above the purpose of socalled operational limits was to provide an early warning if a particular metric was
getting close to the 'hard' limit set out in the Liquidity Policy. Prudent liquidity risk
management did not require all currency mismatch ratios to be within operational
limits at all times. In that context, it is admitted that on occasions the mismatch

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ratios were in excess of operational limits. Save that the Defendants believe there
may be discrepancies in a small number of the figures in Schedule 5 to the APOC,
that schedule is admitted. The final sentence of paragraph 67.11.5 is denied.
190A.7 As to paragraphs 67.11.6:
(a)

It is admitted that the Liquidity Policy set the guidelines identified.

(b)

It is denied that section 3.1.6 of the Liquidity Policy, or Appendix B section

B.4.1(c) and (d) required Group Treasury to calculate the STMR Ratios on a
weekly basis or report them to GALCO on a monthly basis. It is, however,
admitted that until December 2007 the STMR Ratios were included in the
monthly GALCO report.

(c)

It is admitted that STMR Ratios were not calculated or reported between

January and July 2008, but denied that they were not calculated or reported
in August 2008. It is denied that this was a failure in prudent liquidity
management or that it meant that RBS was not in a position to make the
representations in the Prospectus. During this period, Group Treasury had
available to it and made use of alternative measures of RBS's reliance on
short term funding, in particular the data contained in the twice weekly CSI
Reports submitted to the FSA. Moreover, Group Treasury was in any event
closely focussed on RBS's use of short term funding and had put in place
initiatives to reduce the extent of that reliance.

(d)

Paragraph 67.11.7 is denied. As reported to GALCO in August 2008, RBS's

STMR Ratio including repos was 59.6% in May 2008, in the amber zone.
Further, whilst the STMR Ratio including repos reported to GALCO in
September 2008 was in the red zone between January and May 2008, the
STMR Ratio excluding repos was not in the red zone at any time between
January and July 2008. Moreover, for June and July 2008 the STMR Ratio
including repos dropped back into the amber zone.

As the September

GALCO report itself noted, the initiatives then underway to reduce the size
of the unsecured wholesale funding were expected to improve the STMR
Ratios further over time.

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(e)

As to paragraph 67.11.8, although it is admitted that the STMR Ratios were

not calculated between January and May 2008, it is denied that this
amounted to a breach of the Liquidity Policy as alleged.

Paragraph

190A.7(b) above is repeated. It is further denied that it meant that liquidity

risk management was imprudent, in which regard paragraph 190A.7(c)
above is repeated.
(f)

As to paragraph 67.11.9, management action prompted by Group Treasury

and approved by GALCO was already underway to address the extent of
RBS's reliance on short term unsecured funding. It is denied that further
action would have resulted had the STMR Ratios been reported to GALCO
or GEMC.

190.AA From late 2007 onwards, and in particular following completion of the acquisition of ABN
AMRO, Group Treasury recognised that RBS was becoming too heavily reliant on short-term,
unsecured, wholesale funding and formed the view that RBS should reinforce is liquidty risk
position by the creation of a centrally held 'liquidity buffer'. Group Treasury accordingly
initiated steps aimed at reducing the extent of the Bank's reliance on short term funding and at
putting in place such a buffer. That process included much of the analysis reflected in the
documents referred to in paragraph 67.12. It is denied that that analysis showed that RBS's
liquidity risk was "extreme" as alleged. With regard to the specific allegations contained in
the sub-paragraphs of paragraph 67.12:
190AA.1 It is admitted that the passages quoted at paragraphs 67.12.1 and 67.12.2 accurately
reflect extracts of the Funding and Liquidity Paper. As is clear from that Paper, its
purpose was to be a catalyst for discussion about the process of reducing the bank's
reliance on short term, unsecured funding and building a centrally held liquidity
buffer.
190AA.2 Paragraph 67.12.3 is admitted.
190AA.3Paragraph 67.12.4 is admitted. Each of the measures approved by GALCO had been
recommended by Group Treasury in the Funding and Liquidity Paper.
190AA.4Paragraph 67.12.5 is admitted. The email made clear that it paraphrased the contents
of a discussion between David Johnson and Tom Nicol.

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190AA.5 Save that the fifth bullet point stated that "A one month duration would represent an
appropriate balance" not "the appropriate balance" as alleged, paragraph 67.12.6
is admitted. The Risk Appetite Paper was part of the process initiated by Group
Treasury and referred to above, the aim of which was to reduce RBS's reliance on
short term unsecured funding and to begin building a centrally held liquidity buffer.
It also:
(a)

made clear (on slide 3) that other measures for controlling and managing
balancesheet structure were also important; and

(b)

set out (on slide 5) a variety of initiatives that were already underway to
achieve the intended objectives.

190AA.6 As to paragraphs 67.12.7 and 67.12.8, the "comments" referred to in paragraph

67.12.7 amounted to nothing more than a summary of the contents of the Risk
Appetite Paper submitted to GALCO by Group Treasury. The final sentence of
paragraph 67.12.7 is denied and paragraph 67.12.8 is admitted. The proposal was
not rejected by GALCO, which requested that further analysis be undertaken and
submitted for consideration before a final decision was taken.
190AA.7 As to paragraphs 67.12.9 to 67.12.16:
(a)

Paragraph 67.12.9 is admitted as a matter of what that sensitivity test showed.

The test was still in its early stages of development at that time, and it is
denied (if it is alleged) that the 43.2 billion of assets identified in the test
represented all the assets that RBS could call upon in the event of a severe
stress scenario.

(b)

Paragraphs 67.12.10 to 67.12.12 are admitted. The Liquidity Policy Paper

was withdrawn to allow additional analysis to be carried out, and an updated
version of this paper was presented to GALCO the following month, in the
form of the Liquidity Policy Review.

(c)

As to paragraph 67.12.13, the first two sentences are admitted. As to the third
sentence, GALCO reported to GEMC on 12 May 2008 that GALCO had
discussed the question of building a portfolio of liquid assets to cover net
wholesale outflows in the event that RBS had no access to wholesale markets,

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and that GALCO "supported the need to survive for at least five weekdays as
an initial target", from which it could reasonably be understood that RBS did
not yet have sufficient QLAs to ensure it could survive for five weekdays in a
Lockout Scenario.
(d)

As to paragraph 67.12.14, the allegation that Group Treasury established that

"as at 1 May 2008 approximately 10bn of assets could not be considered
QLA" is denied, but the first sentence is otherwise admitted. The second and
third sentences are accordingly denied. The final sentence is admitted.

(e)

Save that the last sentence of paragraph 67.12.15.2 is denied, paragraph

67.12.15 is admitted. On the basis of the GALCO meeting on 12 May 2008,
Group Treasury commenced work to build the initial liquidity portfolio, as
reflected in the minutes of the ad-hoc GALCO meeting on 29 May 2008. It is
therefore to be inferred that GALCO's support was regarded as sufficient
approval to proceed with the implementation of the proposal.

(f)

Paragraph 67.12.16.1 is denied: the calculations producing the 1-week

Survival Horizon in January 2008 and those producing the shorter Survival
Horizon in May 2008 had been prepared on different bases and were not
comparable. On a like-for-like basis, RBS's assets eligible at the Bank of
England, ECB and/or US Federal Reserve, as reported in its CSI reports, were
at least about 62 billion on 27 December 2007, and at least about 70 billion
on 29 April 2008.

(g)

Paragraph 67.12.16.2 is admitted, save that the reference to a "25 weekday

Liquidity Buffer" is not understood. In any event, GALCO did not approve the
creation of a Liquidity Buffer to cover a Survival Horizon of 25 days, before
the Prospectus Date or at any other relevant time, nor was it required to do so
as a matter of prudent liquidity risk management. The relevance of this
allegation is therefore denied.

(h)

The first sentence of paragraph 67.12.16.3 is admitted. As to the remainder of

paragraphs 67.12.16.3 and 4, GALCO's decision to "support" the creation of a
30 billion liquidity portfolio, with a view to creating a five weekday Survival
Horizon, was taken on 12 May 2008. It is therefore inaccurate to describe

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RBS as having been "in breach" of this Survival Horizon from April 2008. It
is also denied that it was a requirement of prudent liquidity risk management
for there to be provisions in RBS's Liquidity Policy requiring a Liquidity
Buffer and/or specifying a Survival Horizon. Paragraphs 169B.1 and 169B.2
above are repeated. The final sentence of paragraph 67.12.16.4 is denied: the
paper considered by GALCO on 12 May 2008 was expressly framed in terms
of changes to the Group's Liquidity Policy.
(i)

Paragraph 67.12.16.5 is denied. Paragraph 190AB below is repeated.

(j)

Paragraph 67.12.16.6 is denied. RBS's liquidity risk management was not "in
crisis" in Q1 2008. RBS was demonstrating the necessary flexibility to
respond to a period of market-wide liquidity stress.

190AA.8 As to paragraph 67.12.17, it is denied that RBS did not have a clearly defined
liquidity risk appetite. Its liquidity risk appetite was defined by reference to a range
of metrics set out in the Liquidity Policy, which had been approved by GALCO. In
particular, the Liquity Policy made clear that the bank regularly reviewed its
capacity to meet additional potential outflows in the event of specific liquidity stress
scenarios which were set out in Appendix 1 of the Contingency Funding Plan. At
the time of the Rights Issue, those included amongst other things the impact of a one
and two notch credit rating downgrade.
190AB Although section 5.3 of the Liquidity Policy provided for it to be reviewed on an annual
basis, in late 2007, in light of the fact that the acquisition of ABN AMRO had recently been
completed and the fact that in December 2007 the FSA published Discussion Paper 07/7
which formed part of a wider review of its approach to the regulation of liquidity risk
management, RBS took the decision to postpone its review of the Liquidity Policy until it
could take full account of the impact of the acquisition and of the emergence of the FSA's
revised approach. Despite this, the Liquidity Policy remained flexible enough to allow for
changes to be made as necessary to reflect the changed market environment. Save to the
extent consistent with the foregoing, paragraph 67.13 is denied.
190AB.1 As to paragraph 67.13.1:
(a)

The first sentence is admitted.

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(b)

RBS was obliged under the regulatory regime then in force to comply with
the sterling stock regime. That regime focussed on coverage of RBS's
sterling liabilities by "sterling liquid assets" as defined in IPRU.

(c)

In recognition of the fact that it also had significant non-sterling flows, in

addition to the sterling stock regime RBS also followed the FSA
guidelines in relation to the management of those non-sterling flows via
the Currency Policy set out in section 4 of the Liquidity Policy.

(d)

It is admitted that by the Prospectus Date the majority of the assets and
liabilities in its balance sheet were denominated in currencies other than
sterling.

(e)

From at least early 2007 RBS had appreciated that the currency-segregated
approach to liquidity risk management resulting from the then regulatory
framework was not ideal from either an analytical or operational
perspective and had been developing an all currency mismatch approach
which combined sterling and non-sterling flows. In March 2008 GALCO
approved a proposal by Group Treasury to move to the new,
comprehensive 'all currency' approach, which took effect from 1 May
2008 (although RBS was still required in addition to meet its previous
sterling stock and currency mismatch limits for regulatory purposes).

(f)

Save to the extent consistent with the aforesaid, paragraph 67.13.1 is

denied.

190AB.2 The first sentence of paragraph 67.13.2 is admitted. The second sentence is denied,
in which regard paragraphs 169B.1 and 169B.2 above are repeated.
190AB.3 Save that it is admitted that the Contingency Liquidity Funding Plan had not been
updated since December 2006, paragraph 67.13.3 is denied, in which regard
paragraph 169B above is repeated.
190AB.4 Paragraph 67.13.4 is admitted.

Citizens and ABN operated under different

regulatory regimes, which had different requirements for asset eligibility and
liability coverage. For that reason, the comparison sought to be drawn by the
Claimants is a false one.

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190AC Paragraph 67.14 is denied.

190AC.1 As to paragraph 67.14.1, it is admitted that at the time of the Rights Issue the pool
of liquid assets was managed by GBM. It is denied that it was not managed
specifically for liquidity purposes, although section 3.16 of the Liquidity Policy
permitted such assets in certain circumstances to be allocated for other limited
purposes, such as for use of intra-day collateral. The balance of the paragraph is
denied. GBM acted prudently by managing the liquid asset pool in such a way as to
ensure that RBS at all times met its regulatory requirements and Liquidity Policy
limits.
190AC.2 Paragraphs 67.14.2 and 67.14.3 are admitted. Neither of those matters imposed a
severe constraint on RBS's ability to create a centrally held liquidity buffer within
Group Treasury.
190AD Paragraph 67.15 is denied. In late 2007 Group Treasury initiated discussions regarding
changes to the FTP to reflect the difficult market conditions that had been experienced from
about August 2007 onwards. Subsequently, changes were approved by GALCO in March and
April 2008. Accordingly, at the Prospectus Date, RBS had an up to date and appropriate
system of FTP. As to the specific allegations made in the sub-paragraphs of 67.15:
190AD.1 It is admitted that prior to the changes being made the premia were set by GBM and
that they had not been a sufficiently effective restriction on its use of short term
funding.
190AD.2 It is admitted and averred that changes to the FTP, including revised premia, were
approved by GALCO in March 2008. It is self evident that those changes could not
have an impact on pre-existing balance sheet growth.
190AD.3 For the reasons set out, paragraph 67.15.3 is denied.
190AE As to paragraph 67.16, it is denied that by the time of the Prospectus Date RBS had not
achieved any of the Liquidity Measures to a material degree: Group Treasury had made
significant progress towards securing RBS's participation in the SLS (improving liquidity of
loan assets) and in developing proposals to build a centrally held liquid asset portfolio for
consideration by GALCO. It is admitted and averred that the Liquidity Measures as a whole

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were long term processes, as they were part of RBS's ongoing prudent liquidity risk
management. Save as aforesaid, paragraph 67.16 is denied.
190AF As to paragraph 67.17, it is admitted that the Prospectus gave the impression that RBS had a
prudent and up to date liquidity management policy. It is denied, if it is so alleged, that it
gave the impression that RBS had a 3 month Survival Horizon or a 25 day liquidity buffer of
QLAs. The impression created by the Prospectus was true and was not misleading.
190B. Paragraph 67A is admitteddenied.
190B.1 The first sentence of paragraph 67A.1 is admitted. To the extent that it is alleged
that working capital fell to be considered exclusively by reference to RBS's liquidity
position, that is denied.

RBS's ability to make the working capital statement

required consideration of both RBS's regulatory capital and liquidity position, as

was carried out in the Working Capital Report (as set out in paragraph 190E below).
It is denied that RBS failed sufficiently to consider liquidity.
190B.2 Paragraph 67A.2 is denied. RBS had commissioned Deloitte to prepare the Working
Capital Report, and to give an opinion ("the Working Capital Opinion") on
whether there was a reasonable basis to make the Working Capital Statement. In
preparing the Working Capital Report, and in giving the Working Capital Opinion,
Deloitte prudently and appropriately considered RBS's liquidity position, in which
regard paragraph 190B.1 above is repeated.
190B.3 As to paragraph 67A.3, it is denied that during the Rights Issue Period RBS was in
an extreme risk position. It is admitted that Group Treasury's analysis showed that,
in the extreme scenario of a total market lockout and on a particular set of
assumptions as to available marketable assets, its Survival Horizon was less than
one day. As RBS was properly able to make a 'clean' Working Capital Statement, in
accordance with the CESR Guidelines it would not have been appropriate to caveat
that statement.
190B.4 Paragraph 67A.4 is denied; a prudent analysis was carried out. It is further denied
that, even if true, the matters alleged in the sub-paragraphs thereof support the
allegation that RBS could not truthfully provide the Working Capital Statement. As
to those sub-paragraphs:

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(a)

Paragraph 67A.4.1 is admitted. As set out at paragraph 190G.3(b) and (c)

below, a Lockout Scenario did not represent a "reasonable worst case
scenario" and RBS's Survival Horizon therefore did not determine whether
it could properly make the Working Capital Statement.

(b)

As to paragraph 67A.4.2, it is admitted that RBS did not have a Liquidity

Buffer as defined by the Claimants. RBS's ability to make the Working
Capital Statement did not depend on the existence of such a Liquidity
Buffer. No admission is made as to the allegation contained in brackets.

(c)

Paragraph 67A.4.3 is admitted. The purpose of the Rights Issue was not to
generate funds to build a Liquidity Buffer, but to bolster RBS's capital
position which would itself have a beneficial impact on the bank's ability to
attract both retail and wholesale funds and thereby improve its liquidity
position.

The fact that the Rights Issue proceeds were not themselves

sufficient to achieve a 5 day Liquidity Buffer had no bearing on RBS's

ability to make the Working Capital Statement.
(d)

Paragraph 67A.4.4 is denied.

(i)

As to paragraph 67A.4.4.1, quarterly reforecasting could only take

place once data for the end of Q1 was available, which it was not by
the Prospectus Date.

(ii)

As to paragraph 67A.4.4.2, by the time the Funding Plan was

provided to Deloitte, GBM had agreed to reduce RWAs and its use
of unsecured wholesale funding and the need to fund an additional
61 billion of 'pipeline' assets had not materialised.

(iii)

It is admitted that the Funding Plan contained the assumptions

referred to in paragraph 67A.4.4.3.

Those assumptions were

reasonable and it is denied that those assumptions rendered the

Funding Plan unreliable or inaccurate as alleged.
(iv)

As to paragraph 67A.4.4.4, the Funding Plan did not take account of

the agreement by GBM to reduce its unsecured funding requirement

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by 200 billion by the end of 2008. That agreement was only

reached in March 2008.
190B.5 As to paragraph 67A.5, it is denied that the Working Capital Statement was required
to address whether RBS had sufficient working capital for the following 12 months
in the absence of the proceeds from the Rights Issue and it did not do so. The
Rights Issue was fully underwritten. RBS was therefore entitled to take the Rights
Issue proceeds into account in considering whether it could properly make the
Working Capital Statement and, as the Working Capital Statement itself made clear,
did so.
190B.6 The first sentence of paragraph 67A.6 is admitted. The second sentence is denied.
In particular, it is denied (if it be alleged) that the Board itself was required to
address the question of what would be a reasonable worst case scenario. The Board
had taken steps to ensure that the Working Capital Statement was based on the
reasonable worst case scenario of liquidity risk. In particular, the Board
commissioned Deloitte to provide an opinion on whether there was a reasonable
basis to make the Working Capital Statement, and relied on Deloitte's professional
judgment in this regard. Further, in considering appropriate scenarios for internal
management stress testing purposes, the Board properly delegated to GALCO the
task of setting and maintaining the Group Liquidity Policy. Paragraph 190AA.8 is
repeated.
190C. Paragraph 67B is denied.
190CA Paragraph 67B(1) is denied, in which regard paragraph 169B above is repeated.
190D. Paragraph 67C is denied.
190E. As to paragraph 67C.1:
190E.1

In January 2005 the CESR published the CESR Guidelines intended to facilitate the
consistent implementation of the Prospectus Regulation. The CESR Guidelines
themselves made clear that they did not constitute European Union legislation.

190E.2

Paragraph 2 of the CESR Guidelines provided as follows: "When producing the

recommendations, CESR has taken into consideration the overarching principle of

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article 5 and 7 of the Directive whereby the information included in a prospectus

has to be given according to the particular nature of the issuer" (emphasis
added).

In the present case, the information disclosed in the Prospectus was

therefore required to reflect the fact that the issuer was a bank.
190E.3

As noted on page 11 of the Working Capital Report, banks are not constrained by
working capital in the same way as other types of trading company. In particular, it
is inherent in the business of deposit taking institutions that there will be a temporal
mismatch between their assets and their short term contractual liabilities.

In

accordance with the overarching principles identified in paragraph 2 of the CESR

Guidelines, the particular nature of banks as issuers must be taken into account
when applying the CESR Guidelines in the present case.
190E.4

It is admitted that, as stated at page 11 of the Working Capital Report, the directors
considered regulatory capital to be a proxy for working capital and Deloitte
concurred with this approach. As was also made clear on page 11: (a) regulatory
capital was not the only measure taken into account for the purposes of the Working
Capital Statement; and (b) the directors recognised that the other key influence on a
bank's working capital is liquidity. It is denied (if it be alleged) that a bank's
regulatory capital is irrelevant to or has no bearing upon its working capital or that
the approach adopted in the Working Capital Report of analysing both regulatory
capital and liquidity was inappropriate or imprudent.

190E.5

In addition to RBS's regulatory capital position, the Working Capital Report

therefore considered in detail RBS's liquidity position and the Working Capital
Statement was made in light of that consideration. It is denied that the analysis of
liquidity risk contained in the Working Capital Report was inadequate.

190E.6

Subject to paragraphs 190E.1 to 5 above, paragraph 67C.1.1 is admitted.

190E.7

Paragraph 67C.1.2 is admitted. Any assessment of an issuer's ability to access cash

and other available liquid resources and of the size of its liabilities as they fall due is
required to take account of behavioural factors which might affect those matters.

190E.8

Save that it is admitted that regulatory capital requirements are not set by reference
to the dates on which a bank's liabilities fall due, paragraph 67C.1.3 is denied. A

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bank's regulatory capital includes equity and qualifying liability instruments, such as
certain preference shares and subordinated debt, and does not include assets as
alleged. As set out above, the Working Capital Report considered the constraints
imposed on the bank by both its regulatory capital position and its liquidity position
and the Working Capital Statement was made on that basis.
190F. In light of the foregoing, paragraph 67C.2 is denied.
190G. Paragraph 67C.3 is denied. In this regard the Defendants will say as follows:
190G.1 Paragraph 67C.3.1 is denied:
(a)

The Claimants have not accurately quoted the CESR Guidelines Guidance
stated, which was that the procedures undertaken to support the Working
Capital Statement would "normally include", amongst other things,
sensitivity analysis based on a "reasonable worst case scenario".

The

scenarios adopted for the stress testing which informed the Working Capital
Report and the Working Capital Statement complied with this
recommendation.
(b)

There was no requirement to conduct such analysis against the most extreme
worst case scenario.

(c)

At the time of the Rights Issue, the assumptions set out on page 40 of the
Working Capital Report were appropriate assessments of the reasonable
worst case scenario.

(d)

Conducting sensitivity analysis on this basis was in any event just one of a
number of procedures which the CESR Guidelines suggested would
normally be undertaken to support the Working Capital Statement and was
just one of the procedures which were, in fact, undertaken.

190G.2 As to paragraph 67C.3.2:

(a)

It is admitted and averred that RBS regarded its credit rating, and in
particular the risk of a downgrade in that rating, as one of the biggest threats
to its liquidity. It was for that reason that it used a two-notch downgrade in

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its credit rating as a "reasonable worst case scenario" against which to

stress test for the purpose of the Working Capital Report and the Working
Capital Statement.
(b)

The stress test based on the assumption of a two-notch downgrade used as

its starting point the lowest of RBS's long term ratings with the three main
rating agencies, S&P, Moody's and Fitch.

(c)

At the time of the stress tests the lowest rating was that by S&P, which rated
RBS AA- (compared to Fitch, which rated RBS AA+).

(d)

Even following the downgrade by Fitch to AA, the S&P rating remained the
lowest and remained the appropriate starting point for a two-notch
downgrade stress test. No adjustment was therefore necessary.

(e)

Save as aforesaid, paragraph 67C.3.2 is denied.

190G.3 As to paragraph 67C.3.3:

(a)

TheExcept that the characterisation of RBS's stress testing as 'retrospective'

is too simplistic and therefore denied, Tthe first sentence is admitted. That
assumption as to the reduction in wholesale funding was an appropriate one
as a "reasonable worst case scenario". The stress tests were performed
upon actual data as at particular dates (which were necessarily historical)
but were prospective in nature in that they projected what would have
happened in the stressed scenario in the following 1 week and 1 month from
that date.

(b)

A reasonable worst case did not require the assumption that: (i) RBS's
access to wholesale markets would be disrupted for a period in excess of
one month; and/or (ii) there would be an inability to access private capital
markets wholesale funding altogether. Such scenarios were not at that time
the reasonably foreseeable worst case(s). It is denied (if it be alleged) that
RBS's stress testing did not comply with sections 2.1.2(d) and 3.17.2 of the
Liquidity Policy.

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(ba)

At the time of the Rights Issue, it was not practicable to forecast pro forma
balance sheets over a period of 12 months at a sufficient level of granularity
to enable stress tests of the type run by RBS over 1-week and 1-month
periods to be carried out. The last sentence of paragraph 190G.5(b) below is
repeated.

(c)

At about the time of the Rights Issue, Group Treasury had proposed to
GALCO an additional stress test for internal liquidity monitoring purposes
against a scenario of the bank having no access to wholesale markets, with a
target of the bank being able to survive in such circumstances for up to a
month. That scenario was, however, regarded by Group Treasury as a very
extreme baseline stress-test scenario and was not the appropriate basis on
which to conduct the stress tests required to support the Working Capital
Statement.

(d)

Save as aforesaid, paragraph 67C.3.3 is denied.

190G.4 In the absence of proper particulars, no admissions are made about the particular
tests undertaken by "other financial institutions and regulators" or whether those
tests are properly comparable to those carried out by RBS, which could not, in any
event, have been known by RBS. Save as aforesaid, paragraph Paragraph 67C.3.4 is
denied. Prudent financial institutions would have stress tested reasonable worst case
scenarios. The reasonable worst case scenarios against which the stress tests were
carried out were appropriate given market conditions. and suitable assumptions were
made about the so-called haircuts to be taken on assets which might be used as
collateral for funding purposes.
190G.5 Save that it is denied that the Working Capital Report concluded that RBS would
"just" have sufficient liquidity to survive under the hypothesis that formed the basis
of the stress tests, paragraph 67C.3.5 is admitted. The Working Capital Report in
fact recorded (at page 40) that: "Stress tests demonstrate that the Group has access
to adequate resources to meet its current funding requirements". It is denied that
the additional tests alleged at paragraphs 67C.3.5.1 and 67C.3.5.2 were necessary, in
which regard:
(a)

There was no significant change during the Rights Issue period in any of the

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liquidity metrics monitored by RBS. Accordingly there was no need for the
stress tests to be re-run to include more recently available data.
(b)

The commonly accepted approach for liquidity risk management purposes

was to focus on liquidity risk over a one month time horizon, this being the
period of highest risk during a time of liquidity stress. Additionally, a
qualitative analysis was undertaken of various factors influencing RBS's
funding over a twelve month period and the results of that analysis were set
out at pages 31 to 36 of the Working Capital Report. The one month
liquidity stress tests carried out by RBS involved establishing the
contractual maturity of many thousands of lines of data, often at a deal level,
and modelling how each of those would perform under a stress scenario.
Given the complexity of this process, the balance sheet that was forecasted
one year forward was at an aggregated level and did not have the necessary
granularity to allow stress testing to be performed in the same way as for the
one month stress tests.

190G.6 As to paragraph 67C.3.6:

(a)

It is denied (if it be alleged) that at the time of the Rights Issue it was
possible to carry out: (i) 'prospective' stress testing starting from the date of
the stress test using actual data, as there was an approximate 6 week delay in
such data becoming available; or (ii) credible forward looking stress testing
over a period of 12 months since, in light of the large number of untestable
assumptions that would have needed to be made, any such stress testing
would have had little or no value or utility.

(b)

It is admitted that if RBS had carried out a stress test of the Lockout
Scenario at the time of the Rights Issue RBS would not have achieved a 3
month Survival Horizon. However, it was not necessary to stress test such a
scenario for the purposes of the Working Capital Report for the reasons set
out in paragraph 190G.3(c) above.

190H. As to paragraph 67C.4, such testing was not necessary. In particular:

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190H.1 Appropriate assumptions about the so-called 'haircuts' required on assets being
pledged as collateral with lending counterparties or central banks (which was a
significantly smaller pool of assets than that comprising the assets reflected in the
table at page 190 of the 2007 Accounts) were made as part of the stress tests
supporting the Working Capital Statement.
190H.2 Inflows from events such as asset disposals and capital raisings were only assumed
in liquidity stress tests if they were contractually due to be received during the stress
test period. There was therefore no need to perform sensitivity analysis on the basis
of possible variations in their quantum and/or timing.
190I.

Save that (a) the reference to Section B is not understood; and (b) it is denied that the capital
projections contained in the Prospectus were flawed (as to which see in particular paragraphs
98-99 to 130A-136 and 145A above) or that they were based exclusively on subjective
assumptions, or that those assumptions were not tested by Deloitte, paragraph 67C.5 is
admitted. The Working Capital Statement was indeed based on information which had been
prepared and considered by the directors after due and careful enquiry.

That did not

undermine the validity of the Working Capital Report.

190J.

Save that it is admitted that it was possible that RBS's ICG might change following the
submission of its next ICAAP (as was always a possibility given the dynamic nature of RBS's
business and the markets in which it operated), paragraph 67C.6 is denied. In relation to the
allegations regarding the sufficiency of RBS's ICAAP submission, paragraph 107A above is
repeated.

190K. In light of the denials in paragraphs 190D to 190J above and 190M below, paragraph 67D is
also denied. The matters set out in the Working Capital Report supported the Working
Capital Statement and it was appropriate for RBS to make that statement. Moreover:
190K.1 As an FSA regulated entity, at the time of the Rights Issue, RBS was subject to the
Threshold Conditions set out in the 'COND' sourcebook in the FSA Handbook,
which were the "minimum conditions [RBS] is required to satisfy, and continue to
satisfy, in order to be given and to retain Part IV permission".
190K.2 Threshold Condition 4 (COND 2.4) provided that RBS's resources "must, in the
opinion of the FSA, be adequate" (emphasis added) and COND 2.4.2G made clear

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that "adequate" meant "sufficient in terms of quantity, quality and availability" and
that "resources" included financial resources.
190K.3 At the time of the Rights Issue, the FSA remained of the opinion that RBS satisfied
Threshold Condition 4. That fact is consistent with it being appropriate for RBS to
make the Working Capital Statement.
190L. Paragraph 67E is denied, in which regard paragraph 190G.5 above is repeated.
190M. It is denied that additional disclosure was required in the Prospectus regarding RBS's liquidity
position, either of the sort alleged at paragraph 67F or at all. The Prospectus made adequate
disclosure of RBS's liquidity position, as to which paragraphs 157 to 161 above are repeated.
190M.1 Save that reference in the Working Capital Report (from which it is assumed the
allegations are taken) is to "non-structural funding", rather than "non-structured
funding" as alleged, pParagraphs 67F.1 and 67F.2 are admitted. Neither were
matters of which specific disclosure was required.
190M.2 As to paragraph 67F.3 it is not admitted that RBS had significant refinancing needs.
Further and in any event, to the extent that comparison of RBS's position with that
of other banks is relevant, the Prospectus provided sufficient information to allow
investors to make that comparison. With regard to the allegations made in the subparagraphs thereof:
(a)

The figure of 156 billion is derived from page 80 of the 2007 Accounts and
included both term debt securities with a remaining maturity of one year or
less and debt securities with an initial maturity of one year or less (which
made up the vast majority of the 156 billion total). To the extent that refinancing was required in the term markets, although at the time of the
Rights Issue those markets were challenging, RBS had been able to access
them in the first quarter of 2008, as to which paragraph 161.4 above is
repeated. RBS's reasonably held expectation was that it would be able to
complete any necessary re-financing. Save as aforesaid, paragraph 67F.3.1
is denied.

(b)

The first two sentences of paragraph 67F.3.2 are is deniedadmitted. The

second sentence is denied. It is admitted that there had been a shortening of

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available maturities in the funding markets and that that posed a risk to
liquidity. That fact was disclosed in the Prospectus and was a factor which
applied to all banks, not just RBS. It is denied that any further disclosure
was required in this regard, or otherwise in relation to RBS's liquidity risk.
190M.3 Paragraph 67F.4 is not admitted.
190M.4 As to paragraph 67F.5, it is denied that large inter-bankwholesale depositors
constituted 1468 billion of RBS's unsecured funding as at the date of the
Prospectus. That true figure of 146 billion (which is taken from page 35 of the
Working Capital Report) relates not to inter-bank funding but to large deposits from
a diversified depositor base including foreign governments, multi-national
corporates and large investment banks (and would not include wholesale funding
which did not meet the definition of "large deposits"). It is admitted that the identity
of the top 20 depositors varied over time and that of the 20 top depositors as at the
Prospectus Date, 11 had at some point over the preceding year not had funds
deposited with RBS.

As the Working Capital Report recorded, RBS had a

diversified depositor base which had been maintained during the recent market
conditions. Save to the extent consistent with the foregoing, paragraph 67F.5 is
denied.
190M.5 Save that the Working Capital Report dates from April 2008, the first sentence of
paragraph 67F.6 is admitted. In addition to the 29 billion figure referred to: (a)
RBS was already accessing substantial funds through the open market which it
expected to be able to re-finance; and (b) RBS had some 40 billion of assets that
could be used as collateral to obtain funding from central banks. The second
sentence is accordingly denied.
190MA Save as admitted in paragraph 190B.3 above, for the reasons set out above paragraph 67F.7 is
denied.
190MB As to paragraph 67F.8, it is admitted that the Working Capital Report did not expressly
consider RBS's overnight outflow position. It did, however, address the "impact on the Group
if the wholesale market were to close" and in that context considered RBS's 5 day and one
month net wholesale outflows. It is further admitted that the Working Capital Report "made
no plans to improve RBS's Survival Horizon"; it was not its function to do so.

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190N. Paragraph 67G is denied.

190P. Paragraph 67I is denied. In accordance with the provisions of paragraph 127 of the CESR
Guidelines, the Prospectus contained a statement to the effect that, save as otherwise disclosed
in the Prospectus, there had been no material change in RBS's total capitalisation or
indebtedness since 31 December 2007. Further and in any event, as set out in paragraph
146B.3 above, RBS's total capitalisation and indebtedness was not a measure of its capital
ratios and the CESR Guidelines did not require capital ratios to be included in a statement
thereof.

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190Q Paragraph 67J is denied. As to the allegations contained in the sub-pararaphs thereof:
190Q.1 Paragraph 67J.1 is denied, and paragraph 190AA.7(f) is repeated.
190Q.2 The first sentence of paragraph 67J.2 is denied, and paragraph 190AA.7(d) above is
repeated. The second sentence is admitted, as to which paragraph 171.8(a) above is
repeated.
190Q.3 Paragraph 67J.3 is admitted. As set out in paragraph 190A.7 above the STMR Ratio
was not a central measure of RBS's liquidity position.
190Q.4 Save that it is admitted that GBM had agreed in March 2008 to reduce is
requirement for unsecured funding by 200 billion by the end of 2008 (although this
figure was subsequently revised down, as set out at paragraph 175.4B(b) above) to
accommodate transfers of assets from ABN, paragraph 67J.4 is denied. Paragraph
175.4B above is repeated.
190Q.5 Paragraph 67J.5 is denied, in which regard paragraph 190B.4(d) above is repeated.
190Q.6 As to paragraph 67J.6, it is admitted that Cummins sent an email containing the
passage quoted. Cummins was referring to the deterioration in the money markets
generally rather than commenting on RBS's position in particular.

That

deterioration was expressly referred to in the Prospectus.

191.

Paragraph 68 is denied. In response to the particulars alleged in the sub-paragraphs thereof,

the Defendants will say as follows:
191.1

Paragraph 68.1 and the first sentence of paragraph 68.2 are denied. The Claimants
have quoted selectively from the relevant paragraph on page 73 of the Prospectus,
which in full reads as follows:
"Liquidity management within RBS focuses on both overall balance sheet structure
and the control, within prudent limits, of risk arising from the mismatch of
maturities across the balance sheet and from undrawn commitments and other
contingent obligations. The structure of the balance sheet is managed to maintain
substantial diversification, to minimise concentration across its various deposit
sources and to contain the level of reliance on total short term wholesale sources of
funds (gross and net of repurchase agreements) within prudent levels. As part of
RBS's planning process, the forecast structure of the balance sheet is regularly
reviewed over the plan horizon."

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191.2

Those statements were accurate and reflected RBS's liquidity policy and
management at the time. Further, as set out above, the extent of RBS's reliance on
short-term wholesale funding, and the fact that funding maturities had shortened
during 2007 and again in early 2008, was disclosed. The Prospectus was neither
untrue nor misleading in this regard. It is denied that the Prospectus should have
stated that RBS's existing short-term wholesale funding levels were "too high",
which description amounts to a meaningless qualitative judgment which would not
have assisted the reader in forming an informed assessment of RBS's financial
position or prospects.

191.3

It is in any event denied that the Prospectus should have stated that RBS's liquidity
management and controls were "risky" as alleged at paragraph 68.2, which
description amounts to a meaningless qualitative judgment which would not have
assisted the reader in forming an informed assessment of RBS's financial position or
prospects. As to the allegation that RBS had exceeded the limits set in 2006,
paragraph 190A above is repeated.With regard to the specific allegations at
paragraph 68.1:
(a)

As to paragraph 68.1(i), paragraph 173.3 above is repeated.

(b)

As to paragraphs 68.1(ii) and 68.1(v), paragraphs 190AA.7 to 190AA.8

above are repeated.

(c)

As to paragraphs 68.1(iii) and 68.1(iv), paragraphs 171.8(e), 174B and

175.4B(f) above are repeated.

191.3A With regard to the specific allegations at paragraph 68.2:

(a)

Paragraph 68.2(i) is denied.

(b)

Paragraph 68.2(ii) is admitted. RBS had initiated steps intended to reduce

the bank's reliance on short term wholesale funding.

(c)

Paragraph 68.2(iii) is denied, in which regard paragraph 190A.6 above is

repeated.

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(d)

The first paragraph 68.2(iv) is denied, in which regard paragraph 190A.7(d)

above is repeated.

(e)

As to the second paragraph 68.2(iv), paragraphs 171.8(e), 174B and

175.4B(f) above are repeated.

(f)

As to paragraphs 68.2(v) to 68.2(vii), paragraphs 169B.1, 169B.2 and

190AA.7 to 190AA.8 above are repeated.

191.4

Paragraph 68.3 is denied. Both statements quoted were accurate. Neither required
to be supplemented in the manner alleged to avoid being misleading. In particular,
RBS was well placed to access wholesale funding sources from a wide range of
counterparties and over a wide range of maturities and it continued to do so
following the conclusion of the Rights Issue until immediately prior to the collapse
of Lehman Brothers in September 2008, in both the short and long-term debt
markets. With regard to allegations in sub-paragraphs (a) to (d). , paragraphs 185,
171 and 188 above respectively are repeated.
(a)

Paragraph 185 above is repeated.

(b)

Sub-paragraph (b) is admitted. The modest increase in the STMR Ratio did
not render the statements in the Prospectus untrue or misleading.

(c)

Sub-paragraph (c) is denied, in which regard paragraph 188 above is

repeated.

(d)

Sub-paragraph (d) is denied. There was no 'funding gap' of the sort alleged
which needed to be filled by RBS. The 80 billion figure was simply the
figure identified in the Risk Appetite Paper as being the gap (based on the
particular assumptions used in that paper) between the estimated 1 month
outflow in an extreme event, with no market access, and the value of
available liquid assets within the 1 month period.

191.4A As to paragraph 68.3A:

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(a)

The Prospectus stated that "Since 31 December 2007, RBS has met all of its
liquidity policy metrics" That statement was true and was not misleading.
Paragraph 190A above is repeated.

(b)

As to the final sentence, paragraph 190A.7 is repeated.

191.4B As to paragraph 68.3B, it is admitted that by the date of the Prospectus some market
counterparties had reduced their lending limits to the combined entity. It is denied
that the risk warning referred to would have misled investors as to RBS's liquidity
position.
191.5

Paragraph 68.4 is denied. In particular, although in common with all banks RBS
had suffered the effects of tightening liquidity markets generally as a result of the
global financial crisis, which had made longer-term funding more difficult to
achieve, it is denied that there had been a significant or material deterioration in
RBS's liquidity position between 31 December 2007 and the time of the Rights
Issue.

191.6

Paragraph 68.4A is denied, in which regard paragraphs 167 and 190B to 190P above
isare repeated.

191.7

Paragraph 68.5 is denied. As set out above, adequate disclosure was made by RBS
of its liquidity exposure to conduits.

191.8

Paragraph 68.6 is denied. Adequate disclosure was given in relation to conduits, in

which regard paragraphs 177 to 183 are repeated.

191A Paragraph 68.7 is denied. With regard to the numbered allegations therein, paragraphs 169B,
171.8(g), 190AA and 190AB above are repeated.
191B. Save that the first sentence is admitted (as to which paragraph 169A above is repeated),
paragraph 68.8 is denied for the reasons set out above.
192.

Paragraph 69 is denied. As set out in paragraphs 170 to 190 above, the Prospectus neither
omitted any of the matters referred to in paragraphs 69.1 and/or 69.2, nor was the disclosure
of those matters inadequate.

Accordingly, it is denied that there has been a breach of

s.90(1)(b)(ii) of FSMA.

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193.

As to paragraph 70:
193.1

It is denied that any of the matters alleged arose after the Prospectus was approved
so as to give rise to the need to produce a supplementary prospectus.

193.2

As set out above, it was not necessary for the Prospectus to disclose details of RBS's
very short-term wholesale funding requirement. Further and in any event, the
changes in the very short-term funding gap in the period between publication of the
Prospectus and the closure of the Rights Issue were part of the normal variability of
the bank's funding requirement in the course of business as usual and did not give
rise to the need for further disclosure.

193.3

It is averred that at close of business on 29 May 2008 the very short-term funding
requirement was 92.715 billion and that at close of business on 5 June 2008 it was
95.429882 billion. Save as aforesaidthat the figures quoted in the first sentence are
admitted, paragraph 70.2 is denied. It is in particular denied that the increase was
sufficiently material to require disclosure by a supplementary prospectus.

193.4

It is admitted that RBS did not produce a supplementary prospectus, as alleged at

paragraph 70.3. For the reasons set out above, no supplementary prospectus was
required.

193.5

Accordingly, paragraph 70.4 is denied.

193.5A Paragraph 70.5 is denied. As set out above, it is denied that there arose any new
matters such as to require the submission of a supplementary prospectus. None of the
Director Defendants was therefore under any obligation to give notice to RBS of any
such new matters pursuant to section 87G(5) of FSMA. It is accordingly denied that
any of the Director Defendants is liable to pay compensation under section 90(4) of
FSMA.
193.6
194.

Save as aforesaid, paragraph 70 is denied.

In the premises, it is averred that the Prospectus contained the necessary information to enable
shareholders to make an informed assessment of the matters identified in s.87A(2) of FSMA
so far as relevant to RBS's liquidity position.

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D1

The extent of credit market exposures

195.

Save that it is denied that Citizens was a "leading participant" in the structured credit market
and that CDPCs were used to hedge exposures to cash assets, paragraphs 70A and 70B are
admitted.

196.

As to paragraph 70C:
196.1

It is admitted that some (but by no means all) of the ABS originated and traded by
RBS were based on US sub-prime mortgages.

196.2

Although conditions in the US housing market deteriorated during 2006 and 2007, it
is denied that the market generally was in crisis from early mid-2007.

196.3

It is further denied admitted that it is accurate to describe the US sub-prime mortgage

markets as were being described by some financial commentators as "in crisis" from
early mid-2007. No admission is made as to the accuracy of that label, which, to the
extent relevant, will be a matter for expert evidence in due course. While it is
admitted that the deterioration in the housing market was particularly acute in the
sub-prime sector, and that delinquencies and foreclosures increased sharply during
the year, the full scale of the problem in the sub-prime market unfolded over the first
half of 2008.

196.4

No admission is made in relation to the scale or timing of losses experienced by, or

bankruptcy of, sub-prime lenders.

196.4A The final two sentences appear to be a reference to an email written by RBS's chief
credit strategist, Bob Janjuah, on 7 November 2007. It is admitted that the email
was circulated within RBS and outside RBS to the extent shown in the address field
of the email. No admissions are made as to it being reported on by the financial
press. It is admitted that the email referred to the need for some firms (by which Mr
Janjuah was referring to some US banks) to revalue assets hitherto valued using
"mark to make believe". The context of this was the introduction in the US of a new
accounting standard, FAS 157, dealing with the valuation of "Level 3 assets" (assets
valued using techniques under which at least one potentially significant input could
not be based on observable market data) by US banks. It is admitted that Mr

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Janjuah predicted in the email that the credit crisis would see losses across the
industry of $250 billion to $500 billion.
196.5 Save as aforesaid, paragraph 70C is denied.
197. As to paragraph 70D:
197.1

It is admitted that the acquisition of ABN considerably increased RBS's exposure to

structured credit instruments.

197.2

It is denied that in By July 2007, at which time RBS's offer for ABN became
irrevocable, it was obvious apparent that some such instruments were causing
massive significant losses to institutions exposed to them, but . Aalthough with
hindsight it is clear that large losses were suffered, by mid-2007 the scale of those
losses were not apparent or foreseeable. Further: (a) the trading statement issued by
ABN on 30 July 2007 reported no losses or exposure to US sub-prime; (b) in a further
statement in September 2007 ABN announced, amongst other things, that it had very
limited exposure to the sub-prime sector; and (c) to the extent that write-downs had
been suffered by those who were exposed to sub-prime, RBS reasonably held the
view, in common with many others in the market, that the US housing market was
likely to recover and that the value of assets based on that market would do likewise
and that, in any event, the deterioration in the housing market would not have a longterm material impact on the value of super senior tranches of CDOs.

197.3

It is admitted that ABN did not enter the CDO market to any significant extent until
early 2007 and that assets underlying CDOs originated in 2007 were perceived by the
market as being of lower credit quality than those underlying earlier CDOs.

Save as aforesaid, paragraph 70D is denied.

198.

It is admitted that the extract referred to at paragraph 71 appeared at page 26 of the

Prospectus. In further tables on page 27, the Prospectus went on to provide additional details
of certain of the exposures referred to, in particular the exposures to monolines and super
senior tranches of ABS CDOs.

198A. The quotations set out in the subparagraphs to paragraph 71(1) are admitted. RBS will refer to
the documents referred to therein at trial for their full terms and effect. It is admitted that by

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paragraph 20.9 of Annex 1 of the Prospectus Regulation the Prospectus was required to
include a description of any significant change in the financial or trading position of the
Group which had occurred since the end of the last financial period for which audited
financial information had been published, or provide an appropriate negative statement.
198B. As to paragraph 71(2):
198B.1 Save that the table on page 26 of the Prospectus (the "Write-Downs Table") did not
just purport to contain, but did in fact contain, RBS's estimates for capital planning
purposes of total year-to-date and future write-downs in respect of the listed
exposures estimated to be incurred in 2008, paragraph 71(2).1 is admitted.
198B.2 The description in paragraph 71(2).2 is unnecessarily convoluted, and as such is
denied. The 4th column of the Write-Downs Table was accurately described in Note
(2) on page 26 of the Prospectus as showing "Current exposure net of hedges and
estimated write-downs".
198B.3 In paragraph 71(2).3 the Claimants have combined, in an imprecise manner and
taking them out of their context, words or phrases used on several different pages of
the Prospectus. The Defendants will refer to those pages at trial for their full terms
and effect. Without prejudice to that:

(i) The statement on page 18 to which the Claimants refer was part of a cautionary
statement concerning write-down and credit market exposure estimates, which made
clear that such estimates were "prepared for capital planning purposes and not to
predict future results" and warned that "although management believes that it has
taken reasonable care in producing such estimations and projections, there can be no
assurance that the estimated capital effect of the projected capital market exposures
will be equivalent to any actual write-downs or credit market exposures appearing in
RBS's accounts to be prepared in the future". It warned that any additional writedowns may have a material adverse impact on RBS's reported financial condition and
results of operations.
(ii) The statement on pages 24 and 26 to which the Claimants refer was an accurate
statement that the capital planning estimates set out on page 26 of the Prospectus
were based on what the Board considered to be prudent assumptions "reflecting the

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further sharp deterioration in market conditions" (i.e. since 31 December 2007) and
reflecting the "outlook in credit markets at this point". It is denied (if alleged) that
RBS was thereby or otherwise in the Prospectus indicating that its capital planning
estimates were based upon the assumption that further substantial deterioration in the
markets was likely. It is further denied (if alleged) that RBS believed that this was
likely.
(iii) There is an important distinction to be recognised in this respect between; (a) (as
was prudently assumed) the continuation of distressed markets, causing liquidation
values that RBS did not consider to be reflective of fair value to become generally
accepted as fair value (thus leading to RBS having to take write-downs); and (b) (as
RBS reasonably did not consider likely) substantial and sustained further
deterioration in the markets such that fair values fell substantially below current
liquidation values.
199.

Save that:
199.1

The assumptions did not just purport to be, but were in fact, prudent assumptions; and

199.2

It is denied that the Prospectus treated almost the whole of the credit market writedowns as offset, or likely to be offset, by 4 billion of asset disposals. At no point did
the Prospectus state that this was the case. The Prospectus simply stated that RBS
had assumed in its capital plan that a 4 billion increase in Core Tier 1 capital could
be achieved by means of disposal of certain assets;

paragraph 71A is admitted.

199A. As to paragraph 71B:
199A.1 Detailed disclosure in respect of certain credit market exposures taken into account
by the bank for capital planning purposes was set out on pages 26 and 27 of the
Prospectus.
199A.2 As the reasonable investor would have understood, the table on page 26 of the
Prospectus ("the Write-Downs Table") supplemented the information in the 2007
Accounts by showing the exposures on which write-downs had been estimated for
capital planning purposes. The Write-Downs Table indicated the average prices

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estimated for each of those exposures, both on a forecast basis and for 31 December
2007. The nature of the Write-Downs Table is addressed further in paragraphs 204
to 204B below.
199A.3 The final sentence is noted. Paragraph 81A isSections D5 and D7 are addressed
below.
199A.4 Save as set out above, paragraph 71B is denied.
200.

As to paragraph 72:
200.1 The first sentence is admitted.
200.2

It is admitted that CDOs based on (or predominantly on) underlying assets of US subprime and US Alt-A originated RMBS, leveraged loans and exposures to monolines
were of particular interest to the market by the time of the Rights Issue. RBS's
estimated write-downs on such assets for 2008, and their associated exposure, were
set out in the Prospectus. Save as aforesaid, the list of asset classes set out at
paragraph 72 is denied.

In particular, it is denied that there were at that time

significant concerns about ABS (including CDOs, RMBS and CMBS) based on
underlying assets of European origin.
200.3

The allegation that "information about that exposurethose exposures and others
exposed to the same or similar credit markets was necessary for a fair assessment of
RBS's financial position" is (assuming it represents a summary of the matters alleged
in further detail in the sections that follow) denied as set out below. insufficiently
specific to plead to, since it fails to provide any particulars of the scope or nature of
the information alleged to be necessary.

200A. As to paragraph 72A:

200A.1 It is denied that the Prospectus portrayed RBS's problems associated with its credit
market exposures as exclusively the result of the external environment in which it
operated, or that the words quoted from page 26 of the Prospectus conveyed any
such meaning. The Prospectus expressly referred on page 29 to changes to the
North American management structure and the control environment within GBM
that had been made in response to difficulties in its credit markets business.

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200A.2 It is denied that RBS's problems associated with its credit market exposures were
caused or exacerbated by systemic gross mismanagement, or that the bank was
aware of the same at the material time.
200A.3 It is denied that there had been a reckless and aggressive drive by RBS Greenwich
to increase revenue without proper risk controls, or that the bank was aware of the
same at the material time.
200A.4 The Defendants will refer to the Draft GIA Reports at trial for their true meaning
and effect. Those reports were produced following an investigation. As to the
nature and purpose of GIA's investigation, see paragraphs 308A and 348.2 to 348.4
below.
200A.5 The first sentence of paragraph 72A.2 contains the implied premise that the
valuation of RBS's super senior CDO positions was exclusively based upon the LSD
model from the end of October 2007. That premise is incorrect.
(a)

In valuing those assets for the purposes of the December 2007

trading update and the 2007 Accounts, a buffer was applied to the output of
the LSD model to produce valuations that RBS considered to be appropriate,
taking account of, among other things, the marks applied by RBS's peers
and RBS's views as to the relative quality of its CDO exposures as
compared with those marked at lower values by some of its peers.
(b)

In estimating write-downs for the purposes of the Write-Downs

Table, RBS adopted the approach of using marks that were based upon net
asset value calculations. That approach was reasonably considered by RBS
at the time to be conservative.
200A.6 The values used in the 2007 Accounts were independently reviewed by Deloitte
when auditing the 2007 Accounts. Their valuation analysis led them to conclude
that RBS's valuation reached by applying a buffer to the output of the LSD model,
although outside what they considered to be an acceptable range for valuation
purposes, was not outside that range by a material amount.
200A.7 The marks used in the December 2007 trading update, the 2007 Accounts and the
Prospectus were set out in those documents, so it was possible for investors to see

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how RBS's valuations had changed over time, and how they compared with the
published marks used by RBS's peers.
200A.8 The LSD model was the subject of a review by Group Market Risk in November
2007, which questioned the validity of some assumptions, and a more detailed
expert assessment by RBS's Quantitative Research Centre in April 2008.
200A.9 It is denied that, even if the LSD model had been grossly inadequate at any stage,
this was known to RBS at the material time or that this had caused or exacerbated
the issues with credit market exposures faced by RBS at the time of the Rights Issue.
200A.10 Save as set out above, paragraph 72A is denied. It is denied that RBS misled
investors in any of the respects alleged in paragraph 72A.
200A.As to paragraph 72B:
200A.1 The first sentence is admitted. For the avoidance of doubt, for the purpose of
s.87A(2) of FSMA, the information necessary to enable investors to make an
informed assessment must be determined objectively having regard to the subject
matter of the Prospectus, the market to which it is addressed, and the facts and
matters otherwise known to that market.
200A.2 It is admitted that paragraph 20.9 of Annex I of the Prospectus Regulation required
that RBS provide a description of any significant change in the financial or trading
position of the group which had occurred since 31 December 2007, or provide an
appropriate negative statement.
200A.3 The remainder is denied. In particular, it is denied that RBS was required to disclose
significant changes in the present value of credit market exposures (including any
changes in AFS reserves) other than where this amounted to a significant change in
the financial or trading position of the Group.
200B. It is admitted that paragraph 72BB contains an accurate quotation from CESR's
recommendations.
200C. The first sentence of paragraph 72C is admitted save that RBS did not 'purport' to, but rather it
did, disclose certain credit market exposures, the write-downs on those exposures which were

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estimated to be incurred in 2008, and current asset values if such losses were assumed to have
occurred. It is admitted that the estimated write-downs were an important part of the Rights
Issue capital plan and the decision as to how much capital to raise.
200D. As to paragraph 72D, it is noted that the Claimants say that they are still attempting to
understand and extract information, and consider certain information to be lacking. The
Defendants have provided a substantial body of information in the "Batch 3" updated
response to the Claimants' Request for Further Information in relation to the Write-Downs
Table made on 14 August 2015, dated 7 March 2016 (and referred to compendiously as the
"CME RFI Response"). They have also provided a witness statement (the First Witness
Statement of Adam Novitt) describing relevant aspects of their systems. Further information
is also being provided as part of the process involving the preparation of the structured credit
experts' reports. As to subparagraphs 72D.1 to 72D.3:
200D.1 Paragraph 72D.1 is admitted.
200D.2 Paragraph 72D.2 is denied. The H1 2008 Interim Results to June 2008 showed
58.6bn (rounding up) of the 96.2bn to be accounted for on a HFT basis and
13.3bn to be either rated other than AAA or not publicly rated.
200D.3 The fraction stated in paragraph 72D.3 does not reflect a meaningful calculation, and
no admissions are made as to it. The relationship between the exposures disclosed in
the 2008 Interim Results and those disclosed in the Prospectus is set out in the CME
RFI Response.
200E. As to paragraph 72E:
200E.1 Paragraph 72E.1 is denied. It was obvious to the reasonable reader of the Prospectus
(who would also have read the statement on page 29 that the continuing deterioration
in credit markets since the beginning of 2008 had resulted in additional write-downs
on credit market exposures in the first quarter) that the "estimates of write-downs for
2008" in the Write-Downs Table included first quarter write-downs as part of the
estimated write-downs for 2008.
200E.2 Paragraph 72E.2 is denied. The Prospectus contained estimates that both RBS and its
advisers considered it was reasonable to make for capital planning purposes.

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200E.3 Paragraph 72E.3 is denied. The figures were based on prudent assumptions. There
was no inconsistency between the estimates being (as they were) (i) a conservative
estimate of current value, (ii) estimates of write-downs which it was assumed
prudently would be taken by 30 June 2008, and (iii) estimates of write-downs for
capital planning purposes which were estimated to be incurred in 2008.
200E.4 As to paragraphs 72E.4 and 72E.5, it is admitted that certain credit market exposures
(including, in some non-material instances, write-downs or changes in fair value)
were excluded from the Write-Downs Table. It is denied that the information omitted
was necessary information, or that the information provided was misleading.
200E.5 Paragraphs 72E.6 and 72E.7 are denied.
200F. Paragraph 73 is noted. The contentions contained therein are responded to below.
D2 RBS's de-risking exercise
200G. As to paragraph 73A:
200G.1 In early March 2008, Crowe was appointed to undertake an analysis of the GBM
balance sheet, identifying asset categories on both the RBS and ABN balance sheets
in respect of which by various initiatives (including asset disposals and hedges), the
following objectives could be advanced: (i) a reduction in GBM's balance sheet; (ii) a
reduction in RWAs; and (iii) a reduction in RBS's levels of unsecured funding.
Details of and progress made in respect of these objectives throughout March were
set out within (amongst other places) a presentation (headed "GBM Balance Sheet
Optimisation") to the GBM Senior Executive Team dated 31 March 2008 (and
subsequently updated).
200G.2 In early April 2008, as a part of this ongoing exercise, Crowe sought information
from relevant businesses and support functions (including Finance, Treasury and
Market Risk) within GBM, RBS Greenwich, and ABN as to; (i) the extent and value
of their assets; (ii) potential strategies for de-risking those assets; and (iii) estimates of
the profit and loss impacts of these strategies. This data was collected by Crowe
(supported by GBM Executive Officers including Herrmann, Aparicio and Maspetiol)
and summarised in a presentation, drafts of which were produced between 10 April
and 17 April 2008 (the "De-risking Presentation").

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200G.3 It is admitted that the de-risking exercise involved considering whether certain
businesses should be discontinued along with the most efficient methods for doing so
(including hedges, asset disposals, and unwinds). From 15 April 2008 onwards, drafts
of the De-risking Presentation divided the identified asset categories between
"continuing business" and "possibly discontinued" business. However, although
various strategies were considered and certain structured credit exposures were
already being managed by a dedicated work-out unit, no final determinations had
been made as to the total set of assets to be so managed by 17 April 2008, the date of
the final version of the De-risking Presentation. The SAU was not announced
internally until 9 May 2008.
200G.4 Save as consistent with the aforesaid paragraph 73A is denied.
200H. As to paragraph 73A.1, it is admitted that one of the objectives of the de-risking exercise was
a reduction in GBM and hence RBS's balance sheet and that, as at 3 April 2008, the stated
targeted reduction was 230bn with the remainder not admitted.
200I.

As to paragraph 73A.2, it is admitted that one of the objectives of the de-risking exercise was
a reduction in GBM's (and hence RBS's) RWAs and that, as at 3 April 2008, the targeted
reduction was stated to be by 36bn to approximately 245bn by June 2008.
200I.1 Paragraph 73A.3 is admitted.

200J.

As to paragraph 73B:
200J.1 From approximately 2 to 17 April 2008, Crowe (supported by his Executive Office)
requested and assessed the information as set out above from the relevant businesses
and support functions.
200J.2 It is admitted that multiple individuals (including those named) were involved (to
varying degrees the extent of which is not admitted) in the production and collation of
the underlying data and estimates, some of which informed the figures and estimates
contained within the De-risking Presentation. It is denied that the individuals named
were "closely involved" in compiling and producing the De-risking Presentation. The
De-risking Presentation was prepared by Crowe, supported by his Executive Office.

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200J.3 It is admitted that between 2 April and 17 April 2008 Crowe and/or members of his
Executive Office conducted regular meetings, including with the appropriate
businesses and support functions, to progress this initiative.
200J.4. Save as consistent with the aforesaid, paragraph 73B is denied.
200K. As to paragraph 73C:
200K.1 It is admitted that the potential future profit and loss effects of implementing the derisking strategies identified were presented by reference to two hypothetical
scenarios, variously described.

The combined estimates in the "March YTD

Markdown Actual" and "Scenario 1" columns in the De-risking Presentation, dated
17 April 2008, corresponded substantially with the estimates set out in the WriteDowns Table, and in that respect accorded with RBS's estimate of the likely writedowns in 2008.
200K.2 The second scenario was described in the latest version of the De-risking
Presentation as "Future potential". It collated a number of other possible future
P&L impacts, not all write-downs and not all capable of being incurred in 2008, the
assumptions behind which were explained in the De-risking Presentation.

It

reflected a more conservative set of assumptions than the expected outcome.

200K.3 It is denied that the estimates in either scenario presumed an orderly sale of the
assets or that they represented fair value. As is clear from the De-Risking
Presentation, the estimates involved presumptions of sales of large portfolios over
short time periods.
200K.4 It is denied that the term "p&l surprise" corresponded to the "Future potential"
scenario as set out in the latest version of the De-risking Presentation. "p&l
surprise" described a different concept, being concerned with potential sharp profit
and loss movements during periods when no observable price is available.
200K.5 Save as consistent with the aforesaid, paragraph 73C is denied.
200L. Paragraph 73D is admitted. As described above the results of the de-risking exercise were
reported in the De-risking Presentation (headed "Managing the Balance Sheet - Asset de-risk
Strategy and Estimated Impact on P+L and RWA"), the final version of which was dated 17
April 2008. Earlier drafts of the De-risking Presentation (along with other reports and
spreadsheets) were circulated, analysed and discussed between 2 April 2008 and 17 April
2008.

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200M. As to paragraph 73E:

200M.1 The De-risking Presentation was still being drafted as at 15 April 2008 with several
versions circulated on that date. It is admitted that one version of the De-risking
Presentation, circulated by Herrmann at 11:14 (and updated by a version circulated at
18:10), included the figures pleaded at paragraphs 73E.1 to 73E.3.
200M.2 The accuracy of the calculations pleaded is also admitted but the relevance of
comparison between the figures referred to by the Claimants and those in the WriteDowns Table is denied.
200M.3 Save as consistent with the aforesaid, paragraph 73E is denied.
200N. As to paragraph 73F:
200N.1 It is admitted that the document referred to contains the statements quoted in
paragraph 73F. On 15 April 2008 Hermann (at 11:14) sent Goodwin and Whittaker
(cc'ing Nathanial, Cameron, Robertson, and Crowe) a draft of the De-risking
Presentation attaching the covering memo referred to.
200N.2 The relevance of the figures contained within that memo is denied. Later that same
day, Herrmann circulated (at 18:10) to Cameron, Crowe, Nathanial and Robertson an
updated version of the De-risking Presentation. The updated De-risking Presentation
recorded 1bn lower projected scenario 1 losses. It was then subsequently further
amended as set out above the final version was produced on 17 April 2008.
200N.3 Save as consistent with the aforesaid paragraph 73F is denied.
200O. As to paragraph 73G:
200O.1 The meaning of the words quoted, to the extent that it can be inferred from those
words and their context, is a matter for submissions.
200O.2 It is admitted that there was an inter-relationship between the de-risking exercise and
the estimation of write-downs for capital planning purposes, in the sense that the work
on each informed the other, and to that extent only paragraph 73G.1 is admitted.

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200O.3 The email referred to at paragraph 73G.2 is admitted and will be addressed at trial. It
confirms the inter-relationship referred to in paragraph 200O.2 above.
200P. Save that it is admitted that the de-risking exercise and estimation of write-downs for the
Prospectus informed each other, paragraph 73H is denied (and the allegations regarding
specific asset classes are addressed below). In formulating their allegations in relation to the
Write-Downs Table and the inter-relationship between it and the De-risking Presentation, the
Claimants have adopted the inappropriate approach of selectively quoting and relying upon
figures from non-final drafts of working documents. Such documents by their nature tend to
contain errors and preliminary judgements corrected or superseded by further analysis
reflected in later drafts. As to subparagraphs 73H.1 to 73H.3:
200P.1

Paragraph 73H.1 is denied. Specifically:

(1) The relevance of the Scenario 1 loss figure relied upon by the Claimants is
denied. The final version of the De-risking Presentation (that dated 17 April 2008
and utilised subsequently) set out total Scenario 1 losses of 6.007bn (or 6.371bn
removing the deduction for Own Credit), as compared to 5.902bn as disclosed in
the Prospectus.
(2) Insofar as the Write-Downs Table excluded asset categories for which scenario 1
write-downs were contained within the final version of the De-risking Presentation,
there were legitimate reasons for this (as pleaded below).

200P.2 Paragraph 73H.2 is denied save as consistent with paragraph 200K above.
200P.3

Paragraph 73H.3 is denied. The statement in the Prospectus referred to by the

Claimants was accurate and sufficient. At the date of the Prospectus, discussions and
consideration were ongoing as to which assets would be transferred to a
discontinued business unit (which was announced internally as the SAU on 9 May
2008).

D3 RBS's plans to transfer assets from ABN AMRO and Citizens to RBS
200Q. As to paragraphs 73I, 73J and 73K:

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200Q.1 It is admitted that, as part of the integration of ABN AMRO, RBS had planned from
late April 2008 to transfer a portion of ABN AMRO assets onto RBS's balance sheet.
It is admitted that the assets to be transferred included North Sea, the Structured Real
Estate Capital Portfolio, and the ABN AMRO US Mortgage book. It is denied that the
assets planned to be transferred by the Closing Date included Citizens SBO or ABN
AMRO leveraged loans.
200Q.2 The purpose of those transfers was, amongst other things, to help to realise business
synergies between RBS Solo and ABN AMRO and to benefit from a regulatory
capital perspective, by bringing the ABN AMRO assets within RBS plc's approved
AIRB model framework.
200Q.3 The planned timing of the transfers, as at the Prospectus Date is not clear from the
documents reviewed, but is likely to have been after the Rights Issue proceeds were
received. The timing of these transfers was a commercial decision in which all
relevant factors (including capital planning considerations) would have taken a part.
200Q.4 As to paragraph 73K, it is admitted that transfers of assets from ABN AMRO to
RBS Solo would take place at fair value, such that where fair value was below
carrying value a loss would crystallise in ABN AMRO.
200Q.5 Save as aforesaid, paragraphs 73I, 73J and 73K are denied. As any loss arising from
an intra-group transfer would be eliminated on consolidation, the transfer would be
profit and loss neutral from the RBS Group perspective and thus would not affect
the Group's projected capital ratios.
D4 The presentation of the figures in the Write-Downs Table as estimated future write-downs
200R. Generally, as regards Section D4 of the APOC:
200R.1 In the circumstances prevailing in early 2008, assessment of the fair value of certain
credit market exposures became difficult, particularly for exposures trading in
distressed and illiquid markets.

In such markets, pricing information such as

indices did not necessarily reflect the price that would be paid for an individual
security or derivative by a willing buyer to a willing seller in an arm's length
transaction.

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200R.2 In preparing the 2007 Accounts and RBS's monthly management accounting,
including its March month-end accounting, RBS made judgements that were
appropriate and compliant with the applicable accounting rules. These included
judgements as to the fair value of certain credit market exposures, the markets for
which were distressed and illiquid.
200R.3 In the context of the decision to raise capital, RBS estimated for capital planning
purposes the write-downs likely to be required in 2008. The estimates reflected
"current" values, in the sense that they were based (for the most part) upon estimated
liquidation prices in current market conditions. They did not reflect RBS's assessment
of what was fair value at that time under the accounting rules.
200R.4 Consistently with this, RBS's estimated values were near or below the bottom end of
the range of current market values independently assessed by Goldman Sachs and
Merrill Lynch.
200R.5 Although recognising that it was a possibility (as reflected in the risk factors set out
on page 12 of the Prospectus and the "Important Information" set out on pages 18 to
19) RBS did not consider that a further substantial fall in credit markets was likely
during 2008. That view was consistent with the view of the Bank of England as
reflected in its Financial Stability Report published on 1 May 2008, which contained
the following observations in the Overview section on page 5:
"An adjustment in both the price and quantity of risk-taking was clearly needed after
an extended credit boom and was bound to have costs. But estimates implied by
prices in some credit markets are likely to overstate significantly the losses that will
ultimately be felt by the financial system and the economy as a whole, as they appear
to include unusually large discounts for illiquidity and uncertainty. In effect, risk
premia in some markets have swung from being unusually low to temporarily too
high relative to credit fundamentals. The most likely path ahead is that confidence
and risk appetite turn gradually as market participants recognise that some assets
look cheap on a fundamentals basis."
200R.6 In those circumstances, the use of conservatively estimated current market values
was appropriate for capital planning purposes, and it was accurate and not misleading
for the Prospectus to state that such estimated values were used as the basis for RBS's

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estimates of write-downs in 2008 in respect of the credit market exposures set out in
the Write-Downs Table and were based on what the Board considered to be prudent
assumptions. The Prospectus would not have been understood by the reasonable
investor as indicating that RBS's estimated write-downs assumed another substantial
deterioration in credit markets between April and December 2008, and it would have
been evident from the average marks set out in the Write-Downs Table that no such
assumption had been made.
200R.7 The approach adopted, as described above, was clearly communicated to and
discussed with the advisers.
200S

Save that the stated purpose of the review is denied, the first sentence of paragraph 73L is
admitted. The purpose of the review was as stated in paragraph 37 above. As to the second
sentence, it is admitted that the minutes of the meeting referred to record that Andy Chisholm
indicated that disclosure of the current position in relation to the value and mark of portfolios
would be required at the time of any capital raising. That indication was not provided in the
context of an assessment as to whether it would be appropriate and sufficient to provide
details of the write-downs estimated for capital planning purposes. The precise form and
content of disclosure was not at that point settled.
200S.1 Paragraphs 73M and 73M.1 are admitted. As regards paragraph 73M.2, Goldman
Sachs assessed, with an upper and lower range, what it considered RBS would likely
realise if, liquidity permitting, it sold the assets into the market environment at the
time. It estimated write-downs based on this.

200T. Paragraph 73N.1 is admitted. As regards paragraph 73N.2, the marks in the documents
referred to implied that Goldman Sachs' preliminary assessment was that, on a mark-tomarket basis, write-downs of between 4,509m and 5,243m (taking account of own debt and
hedging volatility) needed to be taken at that date. Goldman Sachs did not (to the Defendants'
knowledge) conduct any analysis as to whether, in the then prevailing market conditions, the
use of a model based valuation methodology was appropriate for RBS's SS CDOs.
200U. As regards paragraph 73O, the description of RBS's assessments in the documents referred to
as assessments of the then present values of the specified exposures is denied. In reaching the
estimates that were ultimately set out in the Write-Downs Table, RBS adopted an approach
that was more conservative than it considered was required by the applicable accounting rules

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for the assessment of fair value. It did so in order to reach values that it considered to be
appropriate for capital planning purposes (as write-downs estimated to be incurred in 2008)
and for the purpose of deciding how much capital to raise. Save as aforesaid, paragraph 73O
is admitted.
200V. Save that the words "i.e. to date" are denied except to the extent consistent with what is set out
above, paragraph 73P is admitted.
200W. Paragraph 73Q is admitted as an accurate description of the documents referred to (save that it
is to be inferred from the meeting minutes that the version under discussion at the meeting
was version 14, with write-downs at year end stated as 1.569bn). The words "mark downs
for year to date" and "mark downs for the period year end to date" do not, however, fully and
accurately reflect the nature of RBS's estimates under discussion. That was more accurately
reflected by the descriptions in the minutes of the valuations of Sub-prime, Alt-A and US
commercial mortgages. It was also more fully and accurately reflected in an email from Kyle
to Whittaker and Kapoor at 21:53 that evening summarising the main areas of interest from a
meeting between Kyle and Almond at which the estimated marks had been discussed. This
included the following:
"1) Does this affect our year end assessment of valuation. Ie have / are changing
valuation methodology.

4) Mainly associated with 1) above wanted clarification of whether we intended to

book all of the loss in April. I indicated that we had approximated the marks to
NAV but intended to use a revised LSD model. He seemed more comfortable with
the thought that these marks were part of the capital planning process but wasn't
sure how we would announce/position with the mark. I noted he should have that
chat with you."
In short, the marks were estimates for capital planning, not marks that were
considered by RBS or Deloitte to be required to be taken immediately.
200X. As regards paragraph 73R:
200X.1 As regards the first and second sentences, the draft paper upon which the Claimants
rely did not fully and accurately reflect the nature of RBS's estimates.

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It was

subsequently redrafted and the final version of the same paper provided to the Audit
Committee on 19 April 2008 accurately reflected the distinction between RBS's
booked Q1 write-downs and the additional write-downs estimated for capital planning
purposes. The wording in the draft referred to by the Claimants came from Bennett
who had been asked to send his wording as it stood. Bennett was aware when working
on the draft that the marks referred to were not marks that RBS proposed to take
immediately. As explained in his witness statement dated 14 April 2016 at paragraph
36, his intention was not to suggest that the March month end marks were
unreasonable, but rather to explain how the much lower marks contemplated in the
context of the capital raising could be judged as appropriate.
200X.2 The third sentence is denied. The draft referred to by the Claimants appears to have
used figures from the fourteenth version of the draft Write-Down Table ("the Recon
Tables").
200X.3 The fourth sentence is admitted.
200Y. The documents referred to at paragraph 73S are admitted. The Claimants' characterisation of
the write-downs (to the extent inconsistent with RBS's contemporaneous position as explained
above) is denied.
200Z. Paragraph 73T is admitted.
200AA. As regards paragraph 73U, it is denied (to the extent alleged) that the position presented in
the final version of the Group Chief Accountant's paper or by Whittaker at the meeting was
inconsistent with the true position. As those attending the meeting would have understood,
in the paper comparing RBS's marks and write-downs with those taken by peers, the "RBS
April 08" marks and write-downs were the marks and write-downs estimated by RBS for
capital planning purposes. There was no inconsistency between preparing marks for capital
planning purposes and comparing those marks with the latest available marks from RBS's
peers. It was rightly anticipated to be one of the things that investors would do, as part of
their assessment of RBS's position in the light of the marks disclosed.
200AB. As to paragraph 73V, it is admitted that Crowe provided draft de-risking proposals to
Goodwin and Whittaker (which were subsequently further amended) on 15 April 2008.

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That aspect of the chronology (and the Defendants' response to Section D3 including
paragraph 73F) is addressed above.
200AC. Paragraph 73W is admitted.
200AD. Paragraph 73X is admitted.
200AE.

Paragraph 73Y is denied.

As is clear from the text of Almond's comments on the draft

Press Release, Almond was stating his understanding (which was correct) that the estimated
write-downs reflected assumed exit prices in current markets. Almond was not saying that,
being assumed exit prices in current markets, the estimated write-downs either (i) were
required to be booked immediately and/or (ii) were inappropriate as capital planning
estimates for 2008. As explained in Almond's email on 21 April 2008 at 15:24, his concern
was that he perceived a risk that readers would interpret the write-downs "as including
provisions for what may happen through to the end of 2008". This was a concern that
readers might misunderstand the accounting status of the estimates (i.e. that they were
estimates, not accounting provisions, because there is no accounting concept of a provision
for a future write-down). The fact that the estimated write-downs reflected assumed exit
prices in current markets was not inconsistent with the statement in the Prospectus that the
values set out in the Write-Downs Table had been used as the basis for RBS's capital
planning estimates of write-downs in 2008 in respect of the exposures set out in the table.
Nor did that fact indicate (and it was not the case) that it was inappropriate for RBS to have
used the estimated write-downs in that way for capital planning purposes.
200AF. As regards paragraph 73Z, Almond's comments and proposed revisions were not
"disregarded". They were engaged with, as reflected in an email from Shropshire to
Almond at 23:29 on 21 April 2008, in which he said as follows:
"I understand through conversations this evening that this has been communicated
to and considered by the company. I further understand from you that these
comments were aimed at potentially clarifying matters that you thought could
possibly be misinterpreted. During our conversation earlier this evening, you
indicated that these were not of a fundamental nature and that they were your
suggestions about how to address your concern about potential misinterpretation.
However, I did not understand from your e-mail or your comments during our

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phone conversation that there is a question about the appropriateness of the

company's position or the nature of its disclosure.
I hope that these matters have been resolved sufficiently and to your reasonable
satisfaction. Should you want to discuss any of the foregoing, please do not
hesitate to call me directly."
200AG. Paragraph 73AA is admitted.
200AH. Save that the final two sentences are noted, paragraph 73BB is admitted. The email
exchange referred to continued with a call being set up between the advisers (including
Linklaters, Freshfields and Goldman Sachs) to discuss the matter raised. It is evident from
(among other things) the Sponsor's Declaration provided by Goldman Sachs that whatever
concerns Goldman Sachs may have continued to have after that call regarding the wording
used in the Press Release, they were insufficient to cause it to consider that the Prospectus
was materially untrue or misleading.
200AI.

As regards paragraph 73CC, it is denied that the marks and write-downs in the WriteDowns Table had been calculated as present day fair valuations as at mid-April 2008. They
were exit prices in current (illiquid) markets, which were also considered to be reasonable
estimates for capital planning purposes, and which were close to or more conservative than
the conservative end of the range of present day valuations made by Goldman Sachs and
Merrill Lynch. As to its subparagraphs:
200AI. 1 Paragraph 73CC.1 is denied. The Prospectus stated that it set out RBS's estimates
of write-downs which would be incurred in 2008 on the exposures set out in the
table.

That statement was accurate, and the Prospectus was not in fact

misleading as regards the point that had been raised by Almond in relation to the
Press Release.

The reasonable investor would have understood that the

estimated write-downs were estimates for capital planning purposes, and would
not have been caused to think that RBS had purported to book provisions against
future write-downs.
200AI.2

It is denied that RBS pre-ordained when the estimated write-downs would be

taken, as alleged in paragraph 73CC.2. RBS did not recognise all of the writedowns in its books immediately, because it (correctly) did not consider that the

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accounting rules required it to do so. It did not pre-ordain when they would be
taken, but it made the prudent assessment for capital planning purposes that they
would all be taken by the end of June 2008. That assessment was supported by
the analysis set out in the Kyle Memo.
200AI.3

As regards the first sentence of paragraph 73CC.3, it is denied that the Kyle
Memo indicates that RBS recognised that all the additional write-downs would
have to be taken and booked by 30 June 2008 at the latest. The memo stated
"Given the above it is not possible to predict precisely when the various p&l may
or may not be recorded. For the purposes completeness (sic) all losses are
assumed to be crystallised by June 30th with June as the default month. Where
known p&l events have a specific date this has been reflected accordingly, e.g.
Clear Channel. For CDO's the assumption is that April and May will reflect the
performance of these assets under the current LSD model until the review work
is completed. The ultimate outcome is uncertain therefore June reflects the
default result". The second sentence of paragraph 73CC.3 is denied. There was
no inconsistency between the write-downs being estimates of write-downs which
would be incurred in 2008, and it being assumed for capital planning purposes
that they would all be taken by 30 June 2008.

200AJ. As regards paragraph 73DD:

200AJ.1

RBS did not consider that it had already suffered losses of 5.9bn by the
Prospectus Date. It reasonably considered that (i) the marks booked for Q1 were
consistent with the applicable accounting rules, (ii) the values estimated in the
Prospectus were more conservative than fair value, and (iii) the approach taken
with respect to the timing of the expected write-downs was reasonable.

200AJ.2

It is admitted that RBS management was taking a close interest in RBS's capital
position and had this in mind when considering all aspects of RBS's business
with the potential to affect its capital position (an example of this being the email
from Tyler to Kapoor referred to at paragraph 73DD.4), including when
discussing the possibility of taking write-downs.
inappropriate.

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It is denied that this was

200AJ.3

It is admitted that the documents referred to in 73DD.1 to 73DD.8 contain the

words quoted. The Defendants will refer to those documents at trial for their full
contents and context.

200AJ.4

Save to the extent consistent with the above, paragraph 73DD is denied.

200AK.Save that the first sentence is admitted, paragraph 73DDD is denied. As to the individual
matters alleged to have amounted to manipulation:
200AK.1

As to paragraph 73DDD.1, it is denied that the use of the LSD model plus buffer
approach amounted to manipulation. Paragraphs 74(1)-(4) are addressed in
paragraphs 205A to 205AA below.

200AK.2

As to paragraph 73DDD.2, it is denied that the use until early June 2008 of the
monoline threshold approach amounted to manipulation and that this approach
was against the wishes of Deloitte and Ernst & Young. Paragraphs 85B to 85D
are addressed in paragraphs 242A to 242C below.

200AK.3

As to paragraph 73DDD.3, it is denied that the decision to hold certain leveraged

loans (and the obtaining of credit approval for that decision) enabling their
classification as L&R upon drawdown amounted to manipulation. Paragraphs
74.6A-74.6A.4B are addressed in paragraphs 221A to 221A.7 below.

200AK.4

As to paragraph 73DDD.4, it is denied that the matters described in the email

chain (to which the Defendants will refer at trial) amounted to manipulation. The
direction of the proposed adjustment should also be noted. At a time when it was
contemplated that the Q1 write-downs would be disclosed, an adjustment was
being made (at Cameron's request) that increased one aspect of those writedowns. That is inconsistent with the Claimants' allegation that manipulation of
marks was taking place in order to avoid adverse market reaction and make
RBS's position appear better to investors than it actually was.

200AK.5

As to paragraph 73DDD.5, it is denied that the decision not to book a 135m

write-down for Clear Channel in March 2008 (because it was considered at that
time that the deal would not complete) amounted to manipulation. Paragraph
74.6A.3 is addressed in paragraph 221A.5 below.

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200AL. In the premises, as regards paragraph 73EE:

200AL.1

Paragraph 73EE.1 is denied. The figures in the 4th column of the Write-Downs
Table did not represent RBS's determination of current fair values for those
exposures (see paragraph 200U above), and the description of those exposures in
the Prospectus was accurate and not misleading.

200AL.2

The first sentence of paragraph 73EE.2 is denied. The 5.902bn of "estimated

write-downs" did not all represent losses and write-downs already suffered, and
those write-downs should not all have been booked by the Prospectus Date. As
regards the last sentence of paragraph 73EE.2 and its subparagraphs:
(a)

It is admitted that the facts set out in paragraph 73EE.2.1 were true
and not disclosed. Paragraphs 74.6A.6 and 74.5DD are addressed in
paragraphs 221C and 220B.2 below.

(b)

Paragraph 73EE.2.2 is denied. Paragraph 73AI.2 above is repeated.

(c)

Paragraph 73EE.2.3 is denied. The estimated write-down in respect

of monolines was based on current values, but assuming the
introduction of a more conservative methodology (the removal of the
threshold) and not assuming the likely introduction of a further
refinement to the CVA methodology that would reduce the CVA.
(See paragraph 242D below.)

(d)

The two sentences below paragraph 73EE.2.3 are denied. The risk
warnings relating to forward looking statements were appropriate and
not misleading.

200AL.3 Paragraph 73EE.3 is denied. As to its subparagraphs:

200AL.3.1 As to paragraph 73EE.3.1:
(a)

The estimated write-downs did not purport to include all "potential

future losses"; they indicated the losses that were estimated and taken
into account as such in RBS's capital planning. The assumptions
made in that respect were reasonable and prudent.

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(b)

It is denied that it was likely (assuming that is what is intended to be

conveyed by "there was every likelihood") that future losses would
be severe.

(c)

The words quoted out of context in the last sentence will be referred
to in their proper context.

200AL.3.2 As to paragraph 73EE.3.2:

(a)

It is unclear what "process of estimation, analysis, forecasting or

stress-testing of potential losses over the whole of 2008" the
Claimants allege should have been carried out. It is averred that the
exercise carried out by RBS was reasonable in the circumstances. No
suggestion was made to the contrary by any of the advisers.

(b)

RBS was aware of the potential for losses suffered to be greater than
those estimated. Consideration had been given to this in the derisking exercise, and this was also the subject of an email exchange
between Cameron and Crowe (at 10:09am and 10:24am) during or
shortly after the Audit Committee meeting on 19 April 2008.
Possible market developments were also discussed with the advisers
at the Chairman's Committee meeting at 11am on 19 April 2008.

(c)

The estimated write-downs did not purport to be the result of a stresstesting of potential losses, so as to indicate a worst case or adverse
case as to how the market might develop. The possibility that losses
might turn out to be greater than those estimated was clearly set out
in the Prospectus (pages 12 and 18), and was taken into account by
RBS and its advisers (as discussed at the Chairman's Committee
meetings on 19 and 20 April 2008) in deciding how much capital to
raise.

200AL.4

As to paragraph 73EE.4, it is denied that the taking of the write-downs was

"engineered" by RBS to take place after the Prospectus Date to "avoid" any of
the matters set out in paragraphs 73EE.4.1 to 73EE.4.3. Paragraphs 200AI and
200AJ above are repeated.

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200AL.5

Paragraph 73EE.5 is denied. As to its subparagraphs:

(a) Paragraph 73EE.5.1 is denied. The losses incurred in Q1 were those booked
in Q1.
(b) Paragraph 73EE.5.2 is admitted. This was not an undisclosed significant
change. The reasonable reader would have understood that the estimated
write-downs (which were drawn attention to as not being included within the
no significant change statement) included substantial write-downs already
taken.
(c) Paragraph 73EE.5.3 is denied.

200AL.6 Paragraph 73EE.6 is denied.

200AM Paragraphs 73FF and 73GG are denied.
200AN As to paragraph 73HH:
200AN.1 It is admitted that the write-downs booked in April and May 2008 were as set out
in paragraphs 73HH.1 and 73HH.2.
200AN.2 It is admitted that the write-downs booked in April and May were thus greater than
the losses assumed for those months in the Kyle Memo.
200AN.3 It is denied that by the Closing Date RBS's losses for the year to date were nearing
or had exceeded the estimate for 2008 stated in the Prospectus (as alleged in
paragraph 73HH.3). The last finalised Group Results available before the Closing
Date (the April results, dated 29 May 2008) showed write-downs totalling
3,839m (as compared with the 5,902m estimated in the Prospectus). As at the
Closing Date, RBS had calculated that credit market losses to the end of May 2008
were 4,761m (including losses on North Sea, Flow Credit and Structured Credit,
which had not been included as line items in the Write-Downs Table) and RBS
was estimating that the equivalent figure by the end of June would be 5,271m less than the 5,902m that had been estimated in the Kyle Memo for the end of
June.

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200AN.4 It is denied that this indicated that the estimated write-downs for 2008 were no
longer reasonable, or was otherwise significant new information that should have
been disclosed by way of supplementary prospectus. RBS's estimate of writedowns for the year remained unchanged, as indicated by the GBM 4+8 forecast
presentation dated 28 May 2008 and the final 4+8 reforecast produced in June
2008.
200AN.5 Save that it is admitted that the Director Defendants were aware of the April Group
Results before the Closing Date, paragraph 74HH.4 is denied.
200AO. Paragraph 73II is admitted. The total write-downs in the year to 30 June 2008 were not
materially out of line with those estimated to be incurred by that date in the Kyle Memo.
D5 AFS and L&R assets
200AP. The body of paragraph 73JJ is admitted. As to its subparagraphs:
200AP.1 Paragraph 73JJ.1 is admitted. However, this did not mean that every asset had to be
actively revalued daily. For example, if a model was used because of a lack of
available market data reflecting transactions between willing buyers and willing
sellers, the model did not need to be re-run daily if it was not practical and/or useful
to do so.
200AP.2 As to paragraph 73JJ.2:
(a)

It is admitted that changes in the fair value of HFT assets were required to be
immediately recognised in the P&L account, whilst changes in the value of
AFS and L&R assets were only recognised in the P&L when an impairment
took place or when the asset was sold.

(b)

It is denied that a change in the value of an AFS or L&R asset was required
to be recognised in the P&L at group level upon the transfer of the asset
within the Group.

(c)

It is admitted that changes in the fair value of AFS assets were booked to
reserves as unrealised losses, and were reported as such in the statutory
accounts.

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(d)

As to the period of marking AFS assets, paragraph 200AP.1 is repeated.

200AP.3 As to paragraph 73JJ.3, "the asset's exposure to market or other risks" (emphasis
added) is not a meaningful concept it is the effect on the entity that holds it that is
important. The classification of an asset as HFT, AFS or L&R has a substantial
effect on the exposure to market risk of the holder of the asset, especially in
dislocated markets, in which market values for assets fall without there being
considered to be a fall (or the same fall) in the likely cashflows from those assets.
Accordingly, paragraph 73JJ.3 is denied.
200AQ. As to paragraph 73KK:
200AQ.1 The first sentence (and in particular the word "huge") is embarrassingly vague.
200AQ.2 Page 134 of the 2007 Accounts disclosed that the Group held approximately 95bn
of Treasury and other eligible bills and debt securities on an AFS basis as at 31
December 2007.
200AQ.3 As to the second sentence, the document for which the Claimants have supplied a
reference covers only GBM (excluding ABN), and the figures provided are not
admitted because there does not appear to be an issue as to their precise amounts
such as to justify seeking to verify them. Further information as to the size and
breakdown of the Group's AFS ABS exposures is provided in the CME RFI
response.
200AR. As to paragraph 73LL:
200AR.1 As regards the net of tax figure, paragraph 73LL.1 is admitted.
200AR.2 Paragraph 73LL.2 is denied.
200AR.3 Save that it is admitted that Tobin used the words quoted in the email referred to,
paragraph 73LL.3 is denied. Paragraph 74.6A is addressed below.
200AR.4 As to paragraph 73LL.4:
(a)

The holder of an asset is directly exposed to the risk of market falls causing
P&L losses on HFT assets.

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(b)

The same risk does not exist as regards AFS and L&R assets.
Correspondingly, in circumstances where there is a dislocation between
fundamental value and market value, AFS and L&R classification protects
against the P&L impact of that dislocation.

(c)

It is admitted that a significant unrealised loss may become realised upon the
sale of an AFS or L&R asset, but the decision whether to sell lies with the
holder of the asset. The same is true of any asset valued in the books of any
company on a basis other than fair value through P&L.

(d)

It is denied that there is any inherent reason why impairments should be large
or sudden.

200AR.5 Paragraph 73LL.5 is denied. As to its subparagraphs:

(a)

As to paragraph 73LL.5.1, RBS was indeed taking a prudent and

conservative approach to estimating its write-downs for capital planning
purposes. It is denied that this was a circumstance that required it also to
provide further disclosure in the Prospectus regarding its AFS and L&R
exposures, beyond those already provided in the 2007 Accounts.

(b)

Paragraph 73LL.5.2 is denied. In April, credit markets had stabilised and in

some cases strengthened following the sharp falls in March. For example,
during April to June 2008, corporate credit spreads tightened markedly, as
evidenced by both the CDX and iTraxx indices. The same is reflected in the
one year CDS spreads for UK banks' senior debt, which reduced from mid
March 2008 through to June 2008 and only increased significantly in early
September 2008.

(c)

Save that it is admitted that RBS was estimating its credit market losses in
2008 for capital planning purposes, paragraph 73LL.5.3 is denied.

(d)

As to paragraph 73LL.5.4, it is denied that disclosure of AFS and L&R assets

was required where an anticipated transfer within the Group could trigger a
recognition of a change in value only in the selling entity's P&L, without
there being any material P&L impact at Group level.

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(e)

As to paragraph 73LL.5.5: As to the first sentence, it is denied that the sale

of significant quantities of AFS or L&R assets to third parties at a loss was
likely, and it is denied that the possibility of such sales was a matter that
required the disclosure of these assets. It is denied that it was necessary to
make the assumption set out in the second sentence, or that the reasonable
reader of the Prospectus would have assumed from the reference to "prudent
assumptions" that any such assumption had been made.

(f)

As to paragraph 73LL.5.6, it is denied that the change in value of AFS assets

was a significant change in the trading or financial position of the RBS
Group, so as to make the no significant change statements untrue or
misleading.

200AS. As to paragraph 73MM, it is admitted that RBS did not disclose AFS and L&R exposures
that it did not expect to be impaired during 2008.

As to the second sentence and

subparagraphs:
200AS.1 As to paragraph 73MM.1, it is denied that AFS and L&R assets were wrongly
omitted from the Prospectus. It is denied that any historic or predicted changes in
the value of such assets that should properly have been included in the capital plan
were omitted from it. As set out in the CME RFI Appendix 3, there were some
HFT exposures, not material in amount, where it has not been established why the
net exposure was not included in the Prospectus disclosures.1
200AS.2 Paragraph 73MM.2 is denied.
200AS.3 As to paragraph 73MM.3, it is admitted that RBS's AFS reserves of 113m in the
2008 Interim Results, published on 7 August 2008, were approximately 900m
lower than those shown in the 2007 Accounts. It is denied that this constituted a
significant change in RBS's financial position. It is denied that an estimate of the
AFS reserves for 2008 was required, or that a prudent estimate of such reserves at
the Prospectus Date would have been that they would be substantially lower than
113m.

CME RFI response Appendix 3 rows 3(a)-(c), 7(c), 9(a), 32(a)

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D6 The categories of exposure set out in the CME Table

201

Save that the paragraph references to allegations in relation to different asset classes set out
later in the Composite Consolidated Particulars of Claim are noted, and save to the limited
extent expressly set out below, paragraph 73 is denied. Page 12 of the Prospectus contained
clear risk warnings in relation to the valuation of financial instruments and the possibility of
further losses (beyond those already estimated for capital planning purposes) on RBS's credit
market exposures.

202.

As part of its obligation to provide sufficient information in the Prospectus to allow investors
to make an informed assessment of its financial position and prospects, in addition to the
information contained in (amongst other things) the 2007 Accounts and in unaudited pro
forma financial statements set out in the Prospectus itself, the Prospectus also contained
additional specific information about certain aspects of RBS's business which the bank
believed would assist investors. One example of that additional information was the table at
page 26 of the Prospectus ("the Write-Downs Table").

203.

As was apparent from the preamble to the Write-Downs Table, it provided information in
relation to the basis on which RBS had, for capital planning purposes, arrived at its estimates
of likely write-downs during 2008 on its credit market exposures.

204.

The Write-Downs Table was not intended, and did not purport, to set out the entirety of RBS's
holdings of credit market assets, or even of those asset classes in relation to which the market
had specific concerns. In keeping with its stated purpose, the Write-Downs Table contained
details only of those assets on which the bank expected to take material write-downs in 2008
and which would as a consequence have a material impact on its regulatory capital position.
The table therefore did not need to and did not include details of, for example:
204.1

ABS (including CDOs, RMBS and CMBS) or warehouses of assets being held for the
purpose of securitisation into ABS of these categories, based on underlying assets of
European origin, since at the time RBS did not anticipate that it would need to make
material write-downs on them; and

204.2

Assets held by RBS on an '"available for sale"' basis ("AFS"), which at the time
unless the bank was of the view that those assets were not likely to become
permanently impaired. As explained in the 2007 Accounts (at page.128), under the

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relevant accounting principles, changes in the fair value of AFS assets were reflected
in a separate component of shareholders' equity until either permanent impairment or
disposal, at which point the cumulative gain or loss is recognised as a profit or loss.
204A. As to paragraph 73NN:
204A.1 In selecting the exposures and write-downs to disclose, RBS and its advisers
adopted an appropriate process. This focused in particular on the categories of
exposure that were known to be problematic or were of concern to the market, in the
sense that they were generating losses for RBS and other banks. RBS cooperated
with the investment banks by providing them with information in relation to all
categories of exposure on which they requested information. RBS also took account
of information gathered as part of the de-risking exercise (referred to above).
204A.2 The process followed in this respect was not the same as the process followed, using
H21A templates, when gathering information for the 2008 Interim Results, and as
such differed from the approach that it is alleged in paragraph 73NN.1 that RBS
should have taken. The H21A templates were created after the Prospectus Date, as
part of the exercise described in paragraph 119 of the First Witness Statement of
Rajan Kapoor dated 14 April 2016. It would not have been practicable, and was not
necessary, to complete that exercise before the Prospectus Date.
204A.3 Paragraph 73NN.2 is denied. The booked marks, CVA reviews, impairments and
other adjustments to fair value were all reached following RBS's normal month-end
accounting, and the exposures considered in the context of the de-risking exercise
and for the purposes of the Rights Issue and its associated due diligence were further
reviewed in that context. It is denied that a further or different process should have
been conducted in this respect.
204A.4 Paragraph 73NN.3 is denied. The approach followed, as outlined in paragraphs
204A.1 to 204A.3 above and paragraph 204B below, was appropriately systematic.
204B. Paragraph 73OO is denied. The categories of exposure for inclusion in the Write-Downs
Table were readily identified as those that were generating losses at the time, these being also
the categories of exposure that investors were concerned about at the time because they were
also generating losses for other banks. As regards the categories of exposure about which

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information was provided to the advisers, the advisers themselves identified to RBS the
categories of exposure on which they wished to have information - in particular on pages 7 to
8 of the Due Diligence Outline circulated on 11 April 2008. This included exposures that
were not ultimately included in the Write-Downs Table, the main example being European
ABSs, as to which, having reviewed them, the investment banks agreed with RBS's
assessment that they were not a matter of concern.
204C. Paragraph 73PP is admitted. It is denied that either an IPV process or the involvement of
Deloitte was required, given the involvement of and review conducted by Goldman Sachs,
Merrill Lynch and (in respect of certain exposures) UBS.
205.

The Defendants respond as follows to the allegations about specific categories of exposurein
paragraph 74 in relation to CDOs, CLOs, US RMBS, and CMBS, leveraged loan exposures
and other exposures such as other counterparties, SBO home equity loans and loan loss
provisions.

For convenience, the comparative figures for 2007 contained in the 2008

Accounts (on which the majority of the allegations are based) are referred to below as "the
2007 Comparatives".As regards paragraph 74:
205.1

The exposures included in and excluded from the Write-Downs Table, the
organising principle for inclusion and the rationale for exclusion are addressed in
Appendix 3 of the CME RFI Response. It is denied that there were material
omissions or understatements.

205.2

In the premises, the allegations set out in the tables at paragraphs 74.e and 74L are
denied. Those tables (to the extent that the basis for them can be understood from
the particulars provided) are based upon flawed analysis, including:
(a)

Pessimistic assumptions as to the likelihood of further substantial market falls

in 2008, which investors would not have understood to be factored into RBS's
estimated write-downs set out in the Prospectus (not least because they would
have been inconsistent with the average prices shown next to RBS's estimated
write-downs), and which did not need to be made as part of a reasonable
capital planning exercise.

(b)

Pessimistic assumptions (which were inconsistent with those referred to in (a)

above) as to the likelihood of markets strengthening or holding onto recent

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gains where this impacted upon (and hence reduced the P&L benefit assumed
to be received by RBS from) hedges, notably the CDS hedging and the hedge
on leveraged loans.
(c)

The selective and inappropriate use of numbers derived from non-final drafts
of working documents (as referred to in paragraph 200P above).

(d)

Duplication, whereby the same exposures or estimated losses are deployed in

support of two or more sets of allegations and then presented as omissions or
errors having a cumulative effect.

205.3 As to the tables set out at Appendix 1:

[Note: paragraph 205.3 refers to Appendix 1 as provided in its original unparticularised form. A
process is now being followed with a view to understanding and narrowing the issues between both
parties in relation to the allegations contained within Appendix 1, with further responses due to be
provided on 29 July 2016.]
(a)

Unhelpfully, other than certain limited information contained in documents

referred to or in the APOC (which falls far short of providing a full
explanation) the Claimants have not explained their figures or identified the
source material (or location within the source material) on which their figures
are said to be based.

(b)

The Defendants' case as to the exposures is as set out in the CME RFI
Response, which contains a great deal of detail and is (unlike APOC
Appendix 1) exhaustively referenced.

(c)

As regards the level of exposures, the Defendants made it clear from before
the commencement of the substantial forensic exercise conducted to produce
the CME RFI Response that the information provided would be focused
(where available) upon the "current" exposures rather than the exposures as at
31 December 2007. Those are the exposures that would have been of more
interest to investors. It would not be proportionate or practical (or have any
material impact on the outcome) for the expert evidence and trial of this
action to have to focus upon the level of exposures at both 31 December 2007
and the Prospectus Date for each category of exposure.

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(d)

The allegations as to the write-downs which the Claimants allege should have
been estimated are advanced on an "at least" basis, and do not even purport to
be based upon a detailed expert analysis of the kind that the Claimants still
wish to be conducted by their structured credit experts.

(e)

The achievable scope of any revaluation exercise that may be carried out
remains to be the subject of discussion between the parties and (importantly)
the structured credit experts and accounting experts. Subject to any opinions
to the contrary reached by their relevant experts in any revaluation or reestimation exercise that is carried out, the Defendants maintain the accuracy
of the valuations and estimations produced by RBS's contemporaneous
valuation processes and (as applicable) the assessment by RBS and the
investment banks in the context of the Rights Issue.

D6.1 CDOs

205A. As regards paragraph 74(1):

205A.1 The quotation from the email referred to by the Claimants is taken out of context, so
as to give the misleading impression that Rebonato's recommendation was to mark
to market rather than to mark to model. In fact, in that email (to which RBS will
refer at trial for its full terms and effect), Rebonato stated that "With the team in
Greenwich we will very soon decide the most defensible and logical marking level.
From then on I strongly propose that, while prices are still virtually invisible, we
should move to a model-based marking."
205A.2 Accordingly and in circumstances where super senior tranches of ABS CDOs ("SS
CDOs"; the ABS CDOs are referred to as "CDOs" in this section) could no longer
be marked to market prices and verified as they had previously, RBS, following a
period of considered discussion, decided on 19 November 2007 to mark its SS
CDOs by reference to the LSD Model.
205A.3 Save as consistent with the above, paragraph 74(1) is denied.
205B. As regards paragraph 74(2), it is denied that the use of the LSD Model was deficient and
imprudent in circumstances where RBS was unable to identify fair value by reference to

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observable market indicators. RBS's choice to use the LSD Model (plus a valuation
adjustment referred to as a buffer) was appropriate and in accordance with applicable
accounting rules:
205B.1 The LSD Model, based upon an adapted RMBS model used by RBS traders, produced
what was regarded as the SS CDOs' fundamental value, derived from the expected
cash flows of the securities underlying the CDOs. It did so utilising tailored economic
scenarios and with regularly updated data relating to the loans which had been
securitised into RMBS.

205B.2 In order to arrive at fair value, a buffer was applied to the LSD Model's output. This
buffer took account of, among other things, alternative pricing indicators (such as
prices implied by the net asset value of the underlying securities (commonly referred
to as "NAV") and the ABX indices), market reports, model uncertainty, and RBS's
views as to the relative quality of its SS CDO exposures as compared with those
marked by some of its peers.

205B.3 RBS's use of the LSD Model was reviewed and approved by Deloitte.
205C. As regards paragraph 74(2).1:
205C.1 The prior paragraph is repeated. RBS did not seek to use the LSD Model to assess a
market value by reference to observable market prices. The lack of reliable
observable markets prices was the reason for the adoption of the LSD Model.
Further, to the extent that market indicators were available, RBS took account of
those in its determination of the buffer.
205C.2 It is admitted that RBS considered that the output of the LSD Model did not
represent fair (as opposed to fundamental) value. RBS considered the output of the
LSD model plus buffer to be the best assessment of fair value for accounting
purposes.

205C.3 Paragraph 74(2).1 is otherwise denied.

205D. Paragraph 74(2).1A is denied save that:

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in early 2008 RBS marked its 'closed' SS CDO risk (in respect of which protection
had been purchased from monoline insurers) utilising different methodologies to its
open SS CDOs. RBS: (i) used the LSD Model without the application of a buffer in
respect of its ABS SS CDOs insured by monolines and held within RBS Greenwich
(as set out at paragraph 241F.4(b) below); and (ii) used the CCPTABS model for
ABS SS CDOs insured by monolines and held within RBS London. It is further
denied (if alleged) that RBS used the LSD Model alone to mark its open SS CDOs.
As set out elsewhere, RBS utilised the LSD Model plus buffer.

205E. As to paragraph 74(2).2:

205E.1. (in part formerly 200A.8) It is admitted that the LSD Model had not been reviewed
by RBS's QuarC (of Group Market Risk) at the time of its adoption. Having already
been escalated to the highest levels within RBS, the LSD Model was also the subject
of an initial review by Group Market Risk prior to its adoption in November 2007
and a subsequent more detailed expert assessment by QuaRC. Save as consistent
with the aforesaid, paragraph 74(2).2 is denied.

205E.2. The second sentence is denied as set out at paragraph 205F.2 below.

205F. As to paragraph 74(2).3:

205F.1. The first sentence is denied.

205F.2. The email and quotation (which has been taken out of context) referred to in
the second sentence is admitted. It is denied that this draft report "expressly
disapproved" of the LSD Model (as alleged at 74(2).2). As the report
concludes (without disapproval) ABN had "developed a similar but simpler
model." As to the passage quoted, the author was correctly recognising that
the LSD Model could produce expected cash flows for RMBS securities
underlying the SS CDOs but could not do so for any non-RMBS securities
(such as CMBS or ABS CDOs). For non-RMBS underlying securities, RBS
made appropriate assumptions as to their expected cash flows. It is therefore

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denied (if it is alleged) that the LSD Model could not calculate fundamental
value for SS CDOs holding a percentage of underlying securities other than
RMBS.

205F.3. The third sentence is admitted insofar as Kyle's February 1 memo describes
the LSD Model as an RMBS valuation model using RMBS bonds inputs and
denied otherwise.

205G. As to paragraph 74(2).4, paragraph 205B above is repeated. It is denied that the LSD Model
was inherently incapable of itself generating fair value for the SS CDO exposures.
Nevertheless, given the nature of the inputs into the LSD Model and the distressed market
conditions prevailing at the time, RBS recognised that the output of the LSD Model did not in
itself represent fair value. The LSD model was used to calculate fundamental value in
circumstances where fair value could not be ascertained from observable market prices. In
order to reach fair value, RBS applied a buffer that was carefully discussed and considered
and, as set out above, took account of multiple factors (and, accordingly, was not a constant).
Deloitte, as RBS's auditors, determined that the use of the LSD Model plus a buffer was an
appropriate methodology and met the applicable accounting standards. Save as consistent
with the aforesaid, paragraph 74(2).4 is denied.

205H. As to paragraph 74(2).5, in circumstances where a significant element of judgement existed as

to the balance between fundamental value and market indicators from distressed markets, it
was appropriate for RBS's senior management to be involved and in agreement with the basis
upon which such judgements were being made.

The allegation that this involved an

inappropriate overriding of market prices and IPV processes is denied.

205I.

As to paragraph 74(2).5.1, the minutes and quotation referred to are admitted. It is admitted
that the buffer was determined in November 2007 without a formal guidance framework in
place or an independent review. It is denied that either was required in a context where the
LSD Model and the size of the buffer was being discussed at the highest levels within RBS
and following detailed consideration utilising input from the GBM business and a number of
appropriate functions including GBM Finance and Market Risk. Save as consistent with the
aforesaid, paragraph 74(2).5.1 is denied.

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205J.

As to paragraph 74(2).5.2, the quotation and document referred to are admitted. In the same
paragraph referred to by the Claimants, Deloitte confirmed: (i) that the controls (i.e. the IPV
performed to evaluate the outputs from the LSD model and evaluate the level of buffer) were
appropriate, recording that "an appropriate independent price verification exercise was
performed in respect of the super senior positions"; and (ii) that "the controls were operating
effectively."

205K. Paragraph 74(2).5.3 is admitted. Deloitte's conclusions do not support the contention that use
of the LSD Model enabled RBS to override the market prices and RBS's IPV. As
acknowledged by Deloitte within the paper referred to by the Claimants, there was an
"absence of observable trade data". As to the appropriateness of RBS's IPV, the prior
paragraph is repeated.

205L

The documents referred to within paragraph 74(2).5.4 are admitted and will be referred to at
trial for their full terms and effect.

205M. The call and quotations referred to at paragraph 74(2)5.5 (which are admitted) have been
taken out of context. In this call Cameron was recognising the need to continue improving the
LSD Model and seeking to calibrate to a level that was closer to NAV implied prices. This
would reduce the size of the buffer, bringing the output of the model closer to RBS's view of
fair value (reached taking account of the model output and other factors as described above).

205N. The documents referred to within paragraph 74(2).5.6 are admitted and will be referred to at
trial.

205O. The word "dramatically" in the first sentence of paragraph 74(2).6 is denied. It is admitted that
RBS considered the output of the LSD Model to be above fair value (hence the decision to
apply a buffer). It is denied (if intended to be alleged) that the value produced by the LSD
Model plus buffer approach was not fair value.

205P. The first sentence of paragraph 74(2).6.1 is denied with the balance admitted. Although they
had raised issues for discussion, Ernst & Young (following discussions and their audit work)
formally approved of ABN's use of the LSD Model and the 2007 Accounts, stating "in the
absence of sufficient market data we support the move to a mark to model approach as long

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as the model is calibrated to current market conditions, including current credit spreads and
the relative liquidity of the market."

205Q. The Claimants' interpretation of the memo referred to at paragraph 74(2).6.2 (which is admitted
and will be referred to at trial) is denied. The memo does not record Kyle's view as being
either that the ABX index should be adopted or (if it is alleged) that the value implied by the
index represented fair value. The reference to ABX being "the best observable indicator of
fair value" (emphasis added) would only have indicated fair value at that time if, as made
clear in the memo, it reflected "real two-way normal trading (between willing buyers and
sellers)", the market in fact being "a distressed market where there appears to be no level at
which there are both willing buyers and willing sellers". The memo discussed the arguments
for and against various approaches to arriving at a fair value mark in such circumstances,
noting there was some evidence that ABX comparisons were "becoming the market norm"
and, accordingly, the "key question" as to whether or not to adopt a valuation implied by the
ABX index was whether "there continues to be a lack of transparency."

205R. Paragraph 74(2).6.3 is admitted. As recognised by Kyle in the 20 February 2008 paper, the
NAV approach suffered "significant limitations" as an indicator of fair value, including
concerns as to "[t]he reliability of ABS prices in current market conditions".

205S. As to paragraph 74(2).6.4:

205S.1. It is admitted that a document entitled "Peer Group Sub-Prime Disclosures" was
circulated on 20 February 2008 and that it showed (at slide 3) RBS's average marks to be
generally (but not invariably) higher than those of its peers.

205S.2. Paragraph 205B.2 above is repeated. The fair value marks of another bank's CDOs
did not provide a definitive indication of the fair value of RBS's CDOs.

205S.3 Save as aforesaid, paragraph 74(2).6.4 is denied.

205T As to paragraph 74(2).6.5:

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205T.1. The email on which the Claimants rely is admitted and does not support the
Claimants' allegation that the LSD Model was known to overvalue the SS CDO
exposures dramatically. It simply contained David Green's analysis produced in
response to an email sent from James Hamilton in GBM to Tobin, stating: "As I
understand it for Cohen and Harding we have not sold a significant amount of the
capital structure below super-senior. To that extent the choice of using market
value versus LSD (with write-offs of junior tranches) should be justified. Can you
let me know what the valuation difference in the two approaches would be?"

205T.2. This transfer was not continued for the reasons set out above at paragraph 144A.

205T.3 Save as consistent with the aforesaid, paragraph 74(2).6.5 is admitted.

205U. As to paragraph 74(2).6.6:

205U.1. It was understood by RBS that the LSD Model had limitations (as was inevitable
given its complexity and the extraordinary market conditions at the time) and, as set
out above, it was in recognition of these limitations (amongst other things as set out
above) that RBS applied a downward buffer to the model's output. On or around 17
March 2008, RBS produced a draft QuaRC report, reviewing the LSD Model in
detail. The QuaRC report identified a number of limitations, including: (1) as to the
assumed house price appreciation scenario (described as relatively benign); (2) the
modelling of prepayment and default rates meaning the loss severity upon default
was underestimated; and (3) that this led to an underestimation of loss. A number of
recommendations arising from QuaRC's work were implemented for the April 2008
marks.

205U.2. Save as consistent with the aforesaid, paragraph 74(2).6.6 is denied.

205V. Paragraph 74(2).6.7 is responded to on the presumption that within that paragraph the
Claimants intend to refer to the document headed "Valuation exercise 12 April 2008," in
respect of which Kainth was asked for and provided his views on the 13th and 14th April
2008. If this presumption is correct, the Claimants have mischaracterised the document. The
reference to CDOs being "100% written off at 36 months" was a reference to the assumption

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applied in the LSD Model to the expected cash flows from securities underlying the SS CDOs
which were themselves CDOs. Save as consistent with the aforesaid, paragraph 74(2).6.7 is
denied.

205W. As to paragraph 74(2).6.8:

205W.1. As to the first sentence, it is admitted that Crowe and his team (with the input of
GBM Finance), for the purpose of the de-risking exercise (and not for fair value
assessment), estimated write-downs using marks below those implied by the LSD
Model plus buffer (as previously set).

205W.2. As to the second sentence, it is admitted that the total impact in the De-risking
Presentation of proposed de-risking initiatives and mark-downs since 31 December
2007 on SS CDOs (which, in the De-risking Presentation, included RBS ACA CDO
and ABN ACA ABACUS in addition to the high grade and mezzanine SS CDOs)
was estimated to be 2.234bn under "Scenario 1", and 2.757bn under "Future
Potential". Scenario 1 was calculated conservatively, applying a reduction to the
NAV implied marks.

205W.3. As to the third sentence, it is admitted that the memo referred to contained the words
pleaded. It is denied that that constitutes the basis upon which any prudent estimate
of likely write-downs in 2008 should have been carried out.

205X. Paragraph 74(2).6.9 is denied. On 29 May 2008, Deloitte estimated (in a document that RBS
will refer to at trial) a "likely judgmental overstatement" in valuation of circa US $120-130
million. In reaching this estimation Deloitte explicitly acknowledged that there was "very
limited observable data available to management" such that "the range of valuations can be
very wide." This figure was included in Deloitte's summary of unadjusted items.

205Y. As to paragraph 74(3):

205Y.1. It is admitted that Hong arrived at RBS Greenwich Capital in late September 2007
and resigned on 8 November 2007.It is denied that Hong was improperly prevented
from performing his IPV role.

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205Y.2. By the time of Hong's arrival, Rebonato had already recommended a need to move
to a model based approach to marking SS CDOs, for the reasons set out in his email
of 14 August 2007 referred to in paragraph 205A.1 above. The question of what
valuation approach should be taken had been appropriately escalated to senior
management, and was being discussed. At the time of Hong's resignation these
discussions were ongoing. Senior management ultimately opted for the approach of
marking to the LSD Model with a buffer, an approach approved by RBS's auditors,
Deloitte. Whether or not perceived as such by Hong, this was an appropriate
approach. Further, Hong was informed by at least Mathis that the issue as to the
valuation of SS CDOs had been escalated to senior management and a process
needed to be followed. Insofar as others made similar statements to Hong, those
statements were correct and appropriate.

205Y.3. Save as consistent with the aforesaid, the body of paragraph 74(3) is denied. As to
the sub-paragraphs of 74(3):

(a)

Paragraph 74(3).1 is denied. As set out above, Hong was informed by at least
Mathis that the issue as to the valuation of SS CDOs had been escalated to
senior management. It followed from this that a decision had yet to be made
as to what write-downs would be taken in respect of the SS CDOs in
Greenwich. In the event, the SS CDOs were written down within a month of
Hong's departure, as shown by RBS's trading update dated 6 December 2007.

(b)

Save that it is admitted that the RBS Greenwich IPV Report dated September
2007 stated "results do not cover the independent price verification of ABS
Super Seniors (mkt value $3.5bb mkt value) which due to lack of market
liquidity and transparency has not been performed since 07/31/07" (which
was true) paragraph 74(3).2 is denied.

(c)

Paragraph 74(3).3 is denied

(d)

As to paragraph 74(3).4:

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(i)

It is admitted that Hong did not sign off on the September

2007 IPV report and that that report was signed by Rieder. It
is denied (insofar as it is alleged) that it was inappropriate for
Rieder to sign the report in circumstances in which Rieder
was Hong's immediate predecessor and Hong had only
recently taken up his position.

(ii)

It is admitted that the September IPV report contained the

words quoted, which were approved (if not personally added)
by Rieder.

(iii)
(iv)

It is denied that those words were untrue.

It is denied that the activities carried out by Hong prior to the
signing of the September 2007 IPV report had amounted to
the performance of IPV in respect of the SS CDOs. Those
activities did not amount to substantive analysis of the value
of RBS's SS CDOs but rather consisted, predominantly, of
the unstructured provision of press reports, research notes
and market information relating to the valuation of SS CDOs
held by other institutions.

(v)

Save as aforesaid, no admissions are made

205Z. Paragraph 74(3).5 is admitted. No admission is made as to what, if any, basis Hong had for
making that allegation. There was a reasonable justification, as described above, for the
difference (perceived by Hong as a "discrepancy") between RBS's marks for SS CDOs and
marks that Hong considered to be fair value.

205AA. As to paragraph 74(4), the matters referred to do not provide any support for the allegation,
implicit in the Claimants' use of the word "similarly", that Hong was not allowed properly to
perform his IPV role. Specifically:

205AA.1.

The email dated 5 October 2007 is admitted, but is not accurately

paraphrased by the Claimants. The email suggested a meeting to discuss the

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super senior marks in the light of developments including significant writedowns by UBS and Merrill Lynch. In response to Matera's suggestion that
super senior marks should be discussed, Jin emailed Hong, noting: "This is a
good sign in that [Matera] is taking the initiative." And in response to
Hong's email saying "May I arrange a meeting today with Fred", Jin replied
"Sure. Why don't you give him a call?"

205AA.2.

The quotation in paragraph 74(4).2 is admitted.

205AA.3.

Paragraph 74(4).3 is admitted. No admission is made as to the reasons for

Matera's resignation (to the extent that any are intended to be alleged; none are
expressed).

The SS CDO Marks in the Prospectus

205AB. Paragraph 74(5) is, in the premises, denied.

205AC. The document referred to in paragraph 74(5).0 is admitted. It is denied that the different
valuations used on the two trades referred to indicated that the fair value assessed for the open
SS CDO exposures using the LSD Model and buffer approach was an overvaluation.

205AD. Paragraph 74(5).1 is admitted.

205AE. As to paragraph 74(5).1A, there were discussions with Deloitte with respect to the SS CDO
marks in the March management accounts, both before and after 8 and 9 April 2008, within
the context of Deloitte's work relating to their profit verification for March 2008. Those
discussions were reflected in Deloitte internal document headed "RBS PLC - Profit
Verification 31.3.08 for GBM". It is admitted the marks ultimately decided upon for March
2008 (those referred to in the second sentence) were less conservative than those first
discussed with Deloitte (those referred to in the first sentence). It is denied that this supports
the allegations made in paragraph 74(5).

205AF. Paragraph 74(5).2 is admitted.

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205AG. The marks referred to at paragraph 74(5).3 are admitted. It is denied (if alleged) that the
marks represented the FSA's considered view. As recorded by the FSA, the marks represented
a "very quick and dirty" estimate.

205AH. The document and marks referred to at paragraph 74(5).4 are admitted.

205AI. Paragraph 74(5).5 is admitted. Paragraph 200K.2 above is repeated. Scenario 2 reflected a
more conservative set of assumptions than the expected outcome. Further, the 2.757bn figure
referred to by the Claimants includes additional line items which were correctly not included
in the Prospectus under SS CDOs (but were included under monolines).

205AJ. As to paragraph 74(5).6 it is admitted that, on 24 April, Mike Lloyd of Deloitte sent Kyle a
spreadsheet containing the marks. It is noted that updated versions of the same spreadsheet
contained higher marks as at Q1 2008 (namely 81% for RBS HG; 48-60% for ABN AMRO
HG; and 32-33% for RBS mezzanine).

205AK.As to paragraph 74(5).7:

205AK.1 The first sentence is denied.

205AK.2 It is denied that the matters referred to in the second sentence demonstrate the
allegation made in the first sentence. (It is noted in respect of the reference to
paragraph 74(2).1A that the Knollwood trade was not monoline-insured). There
were sources of market information (for example the ABX indices) the issue was
whether those represented fair value. That was a matter that was carefully
considered by RBS and Deloitte in relation to the open SS CDO exposures, and a
reasonable judgement was reached. If and to the extent that different marks were
used within the Group in relation to certain other exposures or trades, it is denied
that that undermines the validity of that judgement.

205AL. As to paragraph 74(6):

205AL.1. The first sentence is admitted.

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205AL.2 The second sentence is denied save as consistent with paragraph 200W above. The
marks were estimates for capital planning purposes, not marks that were
considered by RBS or Deloitte to be required to be taken immediately.
205AL.3. As to the third sentence, the marks in the Prospectus were established by reference
to ABS collateral NAV (i.e. the NAV of the ABS securities underlying the CDOs)
as at the end of March 2008 and were below those produced by the LSD Model.
Save as consistent with the aforesaid, the final sentence is denied.

205AM.Paragraph 74(7) is denied. The Write-Downs Table was not only "said to", but did in fact
contain RBS's estimates for capital planning purposes of write-downs in 2008, based on
prudent assumptions reflecting the deterioration in market conditions. As to the subparagraphs
of 74(7):

205AM.1 Paragraph 74(7).1 is denied. Paragraphs 200R and 200W above are repeated.

205AM.2 As to paragraph 74(7).2 it is admitted that the write-downs set out in the
Prospectus were less than those in Scenario 2. The relevance of the comparison is
denied. As set out in paragraph 200K.2 above, Scenario 2 reflected a more
conservative set of assumptions than the expected outcome and included additional
line items which were correctly not included in the Prospectus under SS CDOs
(but were included under monolines).

205AM.3 Save that it is admitted that part of the estimated write-downs was attributable to
the difference between a model-based valuation and a market valuation in
distressed markets, paragraph 74(7).3 is denied. The estimated marks for SS
CDOs used in the Prospectus did reflect recent market deterioration. They did not
assume (and it was reasonable not to assume) substantial and sustained further
deterioration in the markets causing fair values to fall substantially below current
liquidation values.

205AM.4 As to paragraph 74(7).4, the allegation that the marks were inconsistent with lower
marks used on closed SS CDOs is insufficiently particularised and not understood
in circumstances where: (i) ABN did not hold any closed high grade SS CDO
exposures; (ii) the specific marks the Claimants rely on to support this allegation

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are not identified and (iii) no particulars have been provided to support the
allegation that the assets are comparable. In any event it is denied that the marks
used for calculating the write-downs in the Write-Downs Table (which were
independently reviewed by the investment banks) were inappropriate.

205AN. As to paragraph 74(8):

205AN.1 There was no inconsistency between RBS's continued use of the LSD Model plus
buffer as the best approximation of fair value (as was recorded by Kyle on 25
April 2008) and using a NAV approach to determine the marks for use in the
Prospectus. As explained above at paragraph 200R, the SS CDO marks in the
Prospectus were RBS's estimates for capital planning, reflecting "current" values
in the sense that they were based (for the most part) upon estimated liquidation
prices in current market conditions. They did not reflect RBS's assessment of what
was fair value at that time under the accounting rules.

205AN.2 It is not correct that RBS made or implemented a decision not to book any post-Q1
2008 SS CDO markdowns until June 2008, after the Rights Issue proceeds were to
be received. As set out in the Kyle Memo, RBS made the prudent assessment for
capital planning purposes that the estimated write-downs would all be taken by the
end of June 2008. That assessment did not (as alleged) involve a decision that
post-Q1 write-downs on SS CDOs would not be taken until the end of June 2008.
It was merely a capital planning assumption, the important part of which was the
prudent assumption that the estimated write-downs would all be taken by the end
of June (such that they were reflected in the capital plan that underpinned the
expectation, set out on page 28 of the Prospectus, as to capital ratios by 30 June
2008). As the Kyle Memo made clear, a review of the LSD Model was underway
and well progressed.

205AN.3 The quotation in the last sentence of paragraph 74(8) is taken out of context and
the allegation contained in that sentence is denied. RBS did not "propose not to
recognise SS CDO losses" until June 2008, and the reference to the buffer being
held constant to March levels was simply an assumption made, as stated, "For the
purposes of this paper".

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205AN.4

RBS did in fact book further losses on SS CDOs in April and May 2008, as
shown in the CME RFI Response.

205AN.5

Save as consistent with the aforesaid, paragraph 75.4CC is denied.

205AO. As to paragraph 74(9):

205AO.1

Save that it is admitted that there was a drop in ABS collateral NAV figures
between March and June 2008, the first sentence of paragraph 74(9) (which is
insufficiently particularised) is denied.

205AO.2.

The second sentence is admitted.

205AP. As to paragraphs 74(9A) and 74(9B):

205AP.1

For the reasons explained above at paragraph 205.2, RBS is unable to plead to
the unreferenced allegations set out within paragraph 74(9A); and

205AP.2

Paragraph 74(9B) is denied. The "Gross open exposure" figures on page 27 of

the Prospectus related only to open SS CDOs and not those which were 'closed.'
Where applicable (i.e. protected by monolines), these exposures were included
within the monolines disclosures on page 27 of the Prospectus.

205AQ. As to paragraph 74(10):

205AQ.1

Paragraph 74(10).1 is denied. Further, all those figures were reviewed by the
advisers and the Defendants had reasonable grounds to believe that they were
true and not misleading.

205AQ.2

Paragraph 74(10).2 is denied. It is specifically denied that RBS's use of the LSD
Model plus buffer was inappropriate. What the Claimants refer to as "the plan
set out in the Kyle memo" was simply a documenting of the assumptions that fed
into the capital plan with respect to the timing of the estimated write-downs, and
was likewise not necessary information for investors. In any event, the approach
adopted by RBS was transparent to the advisers and the Defendants had

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reasonable grounds to believe that the Prospectus contained all the information
that investors needed in relation to these matters.

205AQ.3 As to paragraph 74(10).3:

(a)

It is admitted that there was a decrease during the Rights Issue Period in the
value of SS CDOs (as booked). It is further admitted that there was a
decrease in ABS collateral NAV values between 31 March 2008 and 30 June
2008. No admission is made as to whether there was a decrease in Collateral
NAV values prior to the Closing Date.

(b)

It is denied that there was an additional 2.593bn of SS CDO write-downs

booked during the Rights Issue Period. The SS CDO write-downs for April
and May (which included those set out in the Group Results that were not
available until after the Rights Issue Period) were 449m in April and 176m
in May (as shown in the CME RFI Response, "CDOs" sheet at rows 369 to
374.) The total of 625m was well inside the post Q1 SS CDO write-downs
of 1,376m included in the capital planning estimates set out in the
Prospectus.

(c)

It is admitted that the Director Defendants were aware before the Closing
Date of the Group Results for April. It is denied that they were aware of the
Group Results for May, which were not produced until after the Closing
Date. It is denied that such information (even had it included the results for
May), or any other information available before the Closing Date, amounted
to a significant new factor, material mistake or inaccuracy requiring the
submission of a supplementary prospectus. Until well after the Closing Date,
including as reflected in the 4+8 Reforecast produced later in June, it
remained RBS's expectation that SS CDO write-downs in 2008 would be no
greater than those estimated in the Prospectus.

(d)

It is admitted that Whittaker and the other Director Defendants were aware by
the Prospectus Date that the SEC was conducting an investigation with
respect to RBS's sub-prime and US RMBS exposures. It is denied that this
knowledge gave rise to any obligation to disclose the fact of the investigation

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in the Prospectus. The SEC investigation was subsequently discontinued with

no enforcement action taken.
(e)

Save as aforesaid, paragraph 74(10).3 is denied.

D6.2 Other CDOs

206. As to paragraph 74.1 and 74.1A:
206.1

The figures in the tables at pages 26 and 27 of the Prospectus represented both cash
and derivative exposure to super senior tranches of ABS CDOs. Those disclosed
exposure at 31 December 2007 of 3.834 billion, comprising 2.581 billion for high
grade CDOs and 1.253 billion for mezzanine CDOs. For the reasons set out above,
and as the reasonable investor would have appreciated, that figure did not include
exposure to CDOs held on an AFS basis (2.153 billion as at 31 December 2007) or
net HFT exposure to CDOs based on underlying assets of European origin other than
the US (0.889 billion as at 31 December 2007).

206.2

By contrast, the figures for ABS CDO exposures shown on page 131 of the 2008
Accounts represented RBS's cash exposure to CDO securities, including those held
on an AFS basis and those with non-US underlyings.

206.3

In addition, amongst other things, the 2007 Comparatives included certain exposures
which:
(1)

Had been disclosed in the Prospectus in the 'Sub-prime RMBS'

category; and

(2)

Had been reclassified from the CMBS category to the CDO category
without the associated credit protection and which (as a result of that
credit protection) did not in reality give rise to any net exposure.

206.4 It was not correct in the 2007 Comparatives to record the total cash CDO exposure as
being split between the 3.834 billion super senior SS CDO exposure which had been
disclosed in the Prospectus and 1.569 billion of '"Other CDOs"'.

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206.5 Accordingly, it is not appropriate to compare the 2007 Comparatives with the net
exposure of 3.834 billion for super senior tranches of ABS CDOs disclosed in the
Prospectus.
206.5A It is admitted that an FSA Note dated 10 April 2008 records (in respect of RBS London and
Greenwich but not ABN) that RBS had 487m of exposure to ABS which were "more junior"
than SS CDOs and that these positions were marked at between 15 and 70. For further details
as to RBS's exposure to "Other CDOs", see the CME RFI Appendix 3, row 3.
206.6 Save as aforesaid, paragraph 74.1 is denied.
206.7 Paragraphs 81B to 81C 73JJ to 73MM and 74TT to 74VV are addressed in paragraphs 236B
and 236C 200AP to 200AS above and 225AR and 225AV below.
207. As to paragraph 74.2:
207.1

RBS's consolidated conduits held (as set out in the table at page 142 of the 2008
Accounts) 2.129 billion of CDOs as at 31 December 2007. Those assets were held
on an AFS basis. It is admitted and averred that, for the reasons set out above, this
exposure did not need to be and was not, disclosed in the Write-Downs Table.

207.2

It is not admitteddenied that RBS had exposure of approximately 4.6 billion in

respect of CDOs held through conduits. Paragraph 180 above is repeated. The total
exposure in July 2008 amounted to 2.116 billion (105m in Tulip and 2.011bn in
North Sea): see the CME RFI Response sheet "CDOs" rows 329 to 332.

207.3

Save as aforesaid, paragraph 74.2 is denied.

208. Paragraph 74.2A is noted. [not used].

D6.3 CLOs
209.

It is admitted that the row labelled "CLOs" could reasonably have been understood by
investors to refer to CLOs, where those investors did not appreciate (as many investors and
analysts will have done, in particular any who asked the bank any questions about this line
item) what it in fact related to. That row should have been given a label that made clear that
the assets referred to were leveraged loans that had been warehoused by RBS for the purpose
of future securitisation into CLOs (as set out in paragraph 210 below). For the avoidance of

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doubt, it is denied that the failure to use such a label was material in the sense referred to in
paragraph 19.1 above. It is denied that the Prospectus understated RBS's exposure to CLOs
by at least 2.696 billion. Whilst (in fact incorrectly) understanding the figure of 1,386
billion to refer to CLOs, a reasonable investor who understood this to refer to CLOs would
have understood only that this referred to CLOs on which the bank expected to have to take
material write-downs in 2008 (as to which see paragraph 211 below).
210.

The 1.386 billion exposure labelled '"CLOs"' in the Write-Downs Table appeared under the
heading 'Leveraged Loans'. It referred in fact corresponded to the bank's net exposure, as at
31 December 2007, to leveraged loans which had been warehoused by RBS for the purpose of
future securitisation into CLOs (rather than CLOs securitiesthemselves asset backed
securities).
210.1

That figure was identical to the figure recorded in the table at page 43 of the 2007
Accounts which, although also incorrectly labelled "CLOs", set out corresponded to
RBS's exposure arising from inventory held for the purpose of securitisation of
commercial mortgages and leveraged loans. It is therefore not comparable with
figures for RBS's exposure to CLOs securities themselves.

210.2

Disclosure was provided of the figure for exposure to warehoused leveraged loans
(albeit labelled incorrectly) due to the fact that material write-downs on these
exposures in 2008 (in fact incurred in Q1) were expected: (a) due to the risk that,
because of the deteriorating financial climate, it would not be possible to complete
the securitisations for which the inventory was held; and (b) the bank's belief that
further material write-downs (to reflect further material movements in the fair value
of the underlying loans) would be necessary.

211.

It is admitted that, asAs at 31 December 2007, RBS's actual total net exposure to CLOs
(rather than warehoused loans), was 4.0822.060 billion (as recorded in 2007 Comparatives
at page 131 of the 2008 Accounts). and that That exposure is likely to have been was similar
as of April 2008. It was not necessary to give disclosure of that exposure in the Prospectus as,
at the time of the Rights Issue, the assets giving rise to it were not considered to be at
increased risk and it was not anticipated that material write-downs would need to be taken on
them during 2008. See also the CME RFI Response Appendix 3, response 33.

211A. D6.6 is responded to below from paragraph 221 to 221I.

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211B. As to paragraph 74.3AA, it is admitted that "residual CLO paper" (approximately 122m)
was considered as a part of the de-risking exercise (as set out in drafts of the De-Risking
Presentation circulated between 10 and 12 April 2008). The document to which the Claimants
have referred does not support the allegation that this asset category was transferred to the
SAU from early April (which was not in any event announced internally until 9 May 2008).
212.

Save as aforesaid, paragraphs 74.3 to 74.3B is are denied.

212A. (Largely formerly 236E) As to paragraph 74.3C:

212A.1 It is admitted that the Write-Downs Table did not (save incorrectly as set out in
paragraph 209 above) make any disclosure in respect of CLO securities. As set out in
paragraphs 209 and 211 above, it did not need to do so.
212A.2 It is admitted that the Prospectus did not expressly state that no disclosure was made
in respect of CLO securities. It is denied that any such statement was necessary, or
that it was necessary to include any of the other matters alleged in paragraphs 74.3C.
212A.3 It is admitted that the CLO securities held by RBS were credit market exposures. It is
denied that they were relevantly similar to the exposures disclosed in the WriteDowns Table, so as to require them to be disclosed.
212A.4 It is denied that there were substantial concerns about CLO securities at that time.
212A.5 The matters set out within paragraph 74.3C.3A are admitted and responded to at
paragraph 209 above.
212A.6 Save as aforesaid, paragraph 74.3C is denied.
D6.4

CMBS US Commercial Mortgages

213. As to paragraph 74.4:

213.1 The first sentence is admitted.
213.2

It is admitted that RBS provided the FSA with information indicating that, as at
February 2008, it had an exposure of 1.65bn to US commercial mortgage whole
loans. The breakdown of RBS's commercial mortgage exposures held for
securitisation is provided in the corresponding sheet of CME RFI Response Appendix

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2. (As shown in cell E86 of the "Commercial mort - To be sec" sheet, the 2007
Accounts indicated that the US commercial mortgage gross exposure as at 31
December 2007 was 1.65bn.)
213.

The 1.809 billion exposure labelled '"US commercial mortgages"' in the Write-Downs Table
referred to the bank's net exposure, as at 31 December 2007, to US commercial mortgages
which had been originated or sourced by RBS for the purpose of future securitisation into
CMBS (rather than asset backed securitiesCMBS themselves). That exposure formed part of
the 8.808 billion exposure to '"Commercial mortgages"' recorded in the table at page 43 of
the 2007 Accounts (which set out RBS's exposure arising from inventory held for the purpose
of securitisation of commercial mortgages and leveraged loans), the balance of the 8.808
billion being exposure to non-US commercial mortgages. It is therefore not comparable with
figures for RBS's exposure to CMBS.

213A. The reasonable investor would have appreciated that RBS had other forms of exposure to US
commercial real estate. However, the 1,809 billion was the appropriate figure to disclose in
the Write-Downs Table, as it was on these exposures that the bank expected material writedowns.
214.

As to paragraph 74.4B, it is admitted that, contrary to paragraph 213 of the Defence dated 14
November 2015, the reference to "US commercial mortgages" denoted both mortgages held
for securitisation and CMBS (securities). The figures referred to in the second sentence
(which have evidently been calculated from the table below CME RFI response, Appendix 1,
paragraph 52) are admitted. CME RFI Response Appendix 2 "CMBS" sheet rows 13-30 show
the corresponding breakdown of 1,397m current exposure as between CMBS securities and
loans.

214.

Disclosure was provided of the this US commercial mortgage exposure due to: (a) due to the
risk that, because of the deteriorating financial climate, it would not be possible to complete
the securitisations for which the inventory was held; and (b) the bank's belief that further
material write-downs in the fair value of the underlying mortgages would be necessary.
Disclosure was not provided in the Prospectus in relation to non-US (i.e. European)
mortgages because it was not anticipated at the time of the Rights Issue that those mortgages
would require material write-downs in 2008.

215.

Paragraphs 74.4C is denied.

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It is admitted that, as at 31 December 2007, RBS had net exposure of 2.739 billion to US
CMBS (carrying value 3.284 billion) and 2.04 billion to European CMBS (carrying value
2.1 billion).

It is admitted that disclosure of that exposure was not provided in the

Prospectus. Such disclosure was not necessary because:

215.1It was not anticipated that European CMBS would require material write-downs in 2008.
215.2

A proportion of the US CMBS was held on an AFS basis.

215.3

Materially all of the US CMBS that was held for trading was either US Government
agency issued or guaranteed or otherwise AAA rated and RBS did not anticipate
that it would need to take material write-downs on that exposure.

216. Paragraph 74.4D is noted. Save as aforesaid, paragraph 74.4 is denied.

216A. As to paragraphs 74.4A to 74.4C:
216A.1 It is denied that the reasonable interpretation of the reference to "US Commercial
Mortgages" was that the entry was a reference to US CMBS, or to all US CMBS.
The reasonable interpretation was that the entry was a reference to credit market
exposures relating to US commercial mortgages, on which the bank expected to take
material write-downs in 2008 and which would as a consequence have a material
impact on its regulatory capital position.
216A.2 Paragraph 213A above is repeated.
216A.3 It is denied that it was misleading not to explain in the Write-Downs Table what was
denoted by "US Commercial Mortgages", or that the use of the term without
clarification in the Write-Downs Table obscured the fact that the Write-Downs
Table did not include any reference to exposure to CMBS.
216A.4 It is admitted that the Prospectus did not make any specific disclosure of RBS's net
exposure to CMBS in the Write-Downs Table. No material write-downs were
anticipated on that exposure.

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217.

As to paragraph 74.4DA: [not used].

217.1

The first sentence is admitted. Such exposures did not need to be disclosed since
RBS did not anticipate that they would give rise to the need for material write-downs
during 2008. Further and in any event the extent of RBS's liquidity commitments to
conduits was disclosed in the 2007 Accounts.

217.2

No admission is made with regard to the exact level of commercial real estate prices
during the Rights Issue Pperiod.

217.3

It is denied that there were any events during the Rights Issue Pperiod sufficiently
material to give rise to the need for a supplementary prospectus.

218.

As to paragraph 74.4EB:
218.1

It is admitted that, as set out in the table at page 152 of the 2007 Aaccounts, as at 31
December 2007 RBS had approximately 89 billion of direct, non-CMBS exposure to
commercial real estate and a further 6 billion of exposure through derivatives and
other sources.

218.2

It is further admitted that the increase in this exposure from the previous year was in
part a result of the acquisition of ABN. Although the ABN exposure included loans
intended for securitisation, it is denied that it arose '"largely"' from that source.
Further, as set out in the table at page 43 of the 2007 accounts, as at 31 December
2007 RBS's total exposure to commercial mortgages held for that purpose was 8.808
billion (i.e. less than 10% of its direct exposure to commercial real estate).

218.3

Save that the Claimants' formulation of "omitted to report this exposure except by
incorporation" is a tendentious way of describing the disclosure of this exposure,
Pparagraph 74.4 EB.1 is admitted. No further disclosure was required.

218.4

Paragraph 74.4 EB.2 is denied. Although it did not include loan to value ratio, the
information contained in the 2007 Aaccounts was sufficient for investors to make an
informed assessment of RBS's financial position and prospects. That information
included (at pp. pages 151- to 152) a breakdown by region and (at page. 218) details

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of impairment provisions.

Further, the extent of the information provided was

consistent with that provided by other comparable financial institutions.

218.5

At the time of the Rights Issue, RBS reasonably considered its commercial real estate
portfolio to be well diversified and of high quality.

Accordingly, no further

disclosure was necessary.

218.6

Save as aforesaid, paragraph 74.4 EB is denied.

D6.5 RMBS US Residential Mortgages

219.

Paragraph 74.5 is admitted. As to paragraph 74.5:

219.1
219.2

The first and second sentences are admitted.

It is denied that exposure to Alt-A RMBS was understated. The Write-Downs Table
set out details of exposure to Alt-A RMBS which were held-for-trading, along with
projected write-downs on those assets during 2008. It did not (and did not need to)
give details of exposures to Alt-A RMBS which were held on an AFS basis and
which were not expected to be subject to permanent impairment. Paragraph 0 is
repeated.

219.3

It is denied that exposure to sub-prime RMBS was understated by 1.661 billion in

the Prospectus. In this regard:
(a)

The figure of 2.953 billion recorded in the 2007 Comparatives

overstated RBS's net exposure as at 31 December 2007 by approximately

905 million.
(b)

Additional net exposure of approximately 470 million was

included in the 2007 Comparatives which was not at the Prospectus Date
classified as sub-prime but which by 31 December 2008 had been
reclassified as sub-prime. It is in any event averred that the amount of that
exposure was not material in the context of RBS's overall financial position
and prospects.
(c)

The Prospectus recorded as sub-prime RMBS approximately 424

million of CDOs of sub-prime RMBS which were reported as CDOs in the

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2007 Comparatives as well as approximately 100 million of residuals (i.e.

sub-prime loans rather than securities).
(d)

The Prospectus recognised the benefit of 762 million of index and

other hedges against sub-prime RMBS which were not so recognised in the
2007 Comparatives.
(e)

Approximately 32 million of sub-prime RMBS exposures held in a

credit flow book in RBS London was not included in the exposure recorded
in the Write-Downs Table.
219.4 Save as aforesaid, paragraph 74.5 is denied.
Sub-prime
219A. For the reasons explained above at paragraph 205.2 RBS is unable to plead to the
unreferenced allegations set out within paragraph 74.5AA.
220.

As to Tthe first sentence of paragraph 74.5A, it is admitted that the average price set out in the
Prospectus for sub-prime exposures was 38% of nominal value. The actual average price of
the values used was 31%, however, as set out in CME RFI Appendix 2, Sub-Prime, rows 385
to 411. The balance of the paragraph is denied. There is no inconsistency:
(a)

Although the ABX.HE indexindices provided a benchmark for general

movements in the market, itthey referenced a basket of specific assets with
their own particular characteristics, which did not necessarily reflect those of
the assets held by RBS. Further, by the time of the Rights Issue the market
for the securities comprising the ABX.HE indexindices was itself illiquid and
volatile, in particular because the market for CDS contracts (which was the
general way of trading the indices) was also disrupted and illiquid during this
period.

and tThe index wasindices were therefore not a wholly reliable

source.
(b)

As alleged at paragraph 70D, the assets contained in the ABN portfolio were
of later vintage. They were therefore perceived by the market as being of
lower credit quality and traded at a greater discount than those held by RBS.

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(c)

Further, to the extent that it is alleged that marks reflected in the Prospectus
were too high, as set out above both Goldman and Merrill confirmed that in
their view the proposed marks were reasonable.

Alt-A
220A. Save as covered below, for the reasons explained above at paragraph 205 RBS is unable to
plead to the unreferenced allegations set out within paragraph 74.5BB.
220B.1 As to paragraph 74.5CC, it is admitted that the calculation of the estimated writedown for 2008 appears to have involved an error in the use of the 231m figure
(which was the monthly loss for March). The Q1 loss figure for Greenwich as
shown by the risk report available when the Write-Downs Table was being prepared
was 291m (as described in the CME RFI, Appendix 1, paragraph 39).

The

difference between that figure and the 392m referred to in the exposure tracking
spreadsheet referred to in CME RFI Appendix 2, "Alt-A", row 178 appears to be due
to a write-down having been re-allocated from "sub-prime" to "Alt-A". Save as
aforesaid, paragraph 74.5CC is denied.
220B.2 As to paragraph 74.5DD:
(a)

The first sentence is admitted.

(b)

As to the second sentence, it is admitted that the year to date loss of 680m
booked by the end of April 2008 was larger (albeit not materially so) than the
666m estimated write-downs on Alt-A exposures set out in the Write-Downs
Table.

(c)

The third sentence is denied.

RBS did not expect further material

deterioration during 2008 in the value of its Alt-A exposures, and the
reasonable reader of the Prospectus would not have concluded that such
further material deterioration was assumed in the capital planning estimate of
losses on those exposures. It is further denied that a prudent capital planning
estimate for 2008 would have assumed higher losses on those exposures.
(d)

The fourth sentence is admitted. By the Closing Date, the year to date losses
on those exposures had not risen from the 680m booked by the end of April

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(the end of May year to date loss figure was marginally lower at 677m) and
the expectation reflected in the 4+8 forecast was that the total losses on Alt-A
exposures in 2008 would be in line with those estimated in the Prospectus.
(e)

The fifth sentence is denied, both as to the logic and the end result. Although
the summary page of the 17 April 2008 De-risking Presentation included a
Scenario 1 write-down of 615m, the analysis on pages 13 and 14 of the
presentation did not support that figure, still less suggest that it ought
logically to be added to the 392m (which was not a figure used in that
presentation).

220B.3 Paragraph 74.5EE is denied. The current net exposure figure took account of the
130m of ABN AMRO Alt-A exposures, as set out CME RFI Appendix 1,
paragraphs 30, 31 and 36. It is therefore clear that those exposures were not
overlooked in ascertaining the size of the exposures; it is further to be inferred from
the average price calculation set out in CME RFI Appendix 3, "Alt-A", rows 202 to
229, which indicates an average price (of 49%) that is very close to the average
price of 50% shown in the Prospectus, that the ABN-AMRO exposures were not
overlooked in the calculation of the average price; it is to be inferred that they were
not overlooked in the estimation of the write-downs in 2008 either (both by RBS
and the investment banks).
220B.4 As to paragraph 74.5FF, it is admitted that Jin expressed the view in the email
exchange referred to that average marks across asset classes could be misleading. It
is denied that they were in fact misleading. The presentation of useful information
in the Prospectus inevitably required aggregation of sets of exposures that
reasonable investors would have appreciated were not all identical.

In any event,

the limitations inherent in such aggregation of data would have been well-known to
the investment banks, and their agreement to the form of presentation adopted
(among other things) provided a reasonable basis for the Defendants' belief that such
presentation was not misleading.
220C

As to the (first of two so numbered) paragraph 74.5GG, it is denied that it would be

proportionate for further investigation to take place with respect to the make-up of the 31
December 2007 Alt-A net exposure figure. Paragraph 205.2(c) above is repeated.

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Other non-agency
220D. For the reasons explained above at paragraph 205.2, RBS is unable to plead to the
unsubstantiated allegations set out within the second paragraph labelled 74.5GG with
74.5A(2) noted.
Citizens SBO
220A. As to paragraph 74.5B:
220A.1 It is admitted that RBS had an exposure to an "SBO" portfolio held by Citizens. The
amount of that exposure was $8.4 billion as at 31 December 2007, falling to $7.7
billion as at 30 June 2008.
220A.2 It is admitted that the amount of that exposure was not separately disclosed in the
Prospectus. It is denied that such disclosure was necessary.
220A.3 Because this was an asset accounted for on a "loans and receivables" basis,
expected losses were relevant to forecast impairments but not to forecast writedowns. The impairments expected by RBS on the SBO portfolio were taken into
account in RBS's internal profit forecasting used for capital planning purposes.
220A.4 Page 29 of the Prospectus referred to "increased delinquencies in a specific US
retail portfolio", which was a reference to the SBO portfolio. Further disclosure in
relation to this was provided on page 30 in the section of the Prospectus dealing
with RBS's current trading and prospects, where it was stated that "US Retail &
Commercial Banking has continued to achieve modest income growth while
maintaining good cost discipline, but overall results have been held back by
increased impairments in one specific loan portfolio", and that "Citizens' credit
portfolio continues to perform satisfactorily, with the exception of a specific
portfolio within its home equity book, referred to in RBS's trading update of 6
December 2007. Delinquencies on this portfolio have risen markedly as the housing
market has continued to weaken and the Group has continued to increase
provisions".
220A.5 The exposure to the SBO portfolio was also included in the 2007 Accounts within
the 71.8 billion of Citizens' credit risk assets disclosed on page 73, and it was taken

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into account in the credit risk quality breakdown on page 74, the geographical
breakdown on page 76, and the loan impairment analysis on pages 77 to 79.
220A.6 RBS also had a small exposure (of not more than $200m) to loans held through RBS
Greenwich that were serviced by third parties. That exposure was not material in
this context.
220A.7 Save as set out above, paragraph 74.5B is denied. RBS's disclosure in relation to the
SBO portfolio was appropriate and sufficient, particularly in circumstances in which
RBS's internal expectations of future profits (taking account of the forecast
impairments on the SBO portfolio) were not materially out of line with the market's
expectations.
D6.6 Leveraged Loans
221. As to paragraph 74.6:
221.1

The first sentence is admitted.

The allegation in the second sentence that

"information about that exposure was necessary for a fair assessment of RBS's
financial position" is insufficiently specific to plead to, since it fails to provide any
particulars of the scope or nature of the information alleged to be necessary.
221.2

It is admitted that the figures alleged for net exposure to leveraged loans appeared in
the Prospectus, which also made clear that 8.7 billion of the total exposure as at 31
December 2007 was funded exposure. Those figures included exposures arising from
underwriting positions remaining following syndication to the extent that the
exposures were in excess of RBS's intended long-term participation. RBS's long-term
intended investment participation in such syndications was accounted for on a "'loans
and receivables'" basis, with the result that a change in fair value would only have
there would only be a regulatory capital impact when the asset was either
permanently impaired or disposed of. Such long-term participations would therefore
only have been included in exposures set out in the Write-Downs Table if a needed to
be disclosed if a material permanent impairment was either required or anticipated if
a projected impairment caused RBS's expectations of future profits to be materially
out of line with the market's expectations.

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221.3

Further and in any event, the definition of '"leveraged finance"' as applied in 2009 by
the Asset Protection Agency under the Asset Protection Scheme was wider than that
used by RBS at the time of the Rights Issue, and included letters of credit, bank
guarantees and banking facilities made available to UK mid-tier corporates.

221.4

It is denied that RBS's actual exposure to leveraged loans (as that term was
understood at the time of the Rights Issue) was 32 billion as at 31 December 2007 or
33 billion as at the Prospectus Date or that the Prospectus under-stated RBS's
exposure by 17 billion at the 2007 year end or 21 billion at the Prospectus Date., as
alleged by the SL Group.

221.5 The final sentence is admitted.

It is further denied that RBS had non-disclosed leverage loan exposure of "between
7 billion and 215 billion", as alleged by the BB Claimants Group. The source of
the figures included in that range is not known to the Defendants.
221.6 Save as aforesaid, paragraph 74.6 is denied.
221A As to paragraphs 74.6A.1 to 74.6A.4:
221A.1 Save that the original hold portfolio was 16% in the deals shown in the schedule upon
which the Claimants rely for the ABN percentage in the next paragraph, paragraph
74.6A.1A is admitted.
221A.2 As to paragraph 74.6A.1B: The first sentence is admitted. The second sentence is
admitted as an accurate statement of ABN AMRO's accounting approach and of the
percentages implied by the spreadsheet to which the Claimants refer, in respect of the
deals listed in it. The final sentence is denied. Although ABN AMRO's approach
differed from RBS's, it was approved by ABN AMRO's auditors and was within the
range of approaches adopted by market participants at the time.
221A.3 Save that the total of over 9.7bn was as at the end of 2008 (not at the end of 2007 as
alleged), paragraph 74.6A.1 is admitted.
221A.4 Paragraph 74.6A.2 is admitted.
221A.5 As to paragraph 74.6A.3:

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(a)

It is admitted that the original hold percentages for BCE and Clear
Channel were 3% and 8% respectively, and that a decision was made in
Q1 to hold the whole exposure.

(b)

It is admitted that the effect of this decision was that the loans would be
classified as L&R upon drawdown, which would (as Kyle told UBS)
protect the profit and loss account against significant write-downs on
exposures thus classified.

It is denied that this amounted to

manipulation (as alleged in paragraph 73DDD.3). The exposures could

only be designated as hold exposures after going through the process of
obtaining credit approval.
(c)

The decision to hold these exposures had no impact on the write-downs

booked in March 2008 because the unfunded exposures were
derivatives that were classified as HFT irrespective of the intention to
hold the loan once drawn down.

d)

It is denied that the obtaining of credit approval to hold these loans,

once drawn down, affected their treatment in the Write-Downs Table.

(e)

Save as consistent with the aforesaid, paragraph 74.6A.3 is denied.

221A.6 As to paragraph 74.6A.4A:

(a)

The HFT leveraged finance exposures other than Clear Channel

(including Bell Canada, on which a write-down of 275m was booked)
were written down in March 2008. There were Q1 2008 write-downs
of 615m on leveraged loans, which were included within the
estimated write-downs of 1,250 disclosed in the Prospectus (as set out
in CME RFI, Appendix 1, paragraph 65).

(b)

It is admitted that a fair value write-down of 135m on the Clear

Channel exposure was not taken in the March month-end marks. It is
denied that there was no legitimate reason for this. At the time when
the March monthly figures were closed, RBS considered that the Clear
Channel deal would not complete. It became clear during April 2008

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that the deal was likely to complete, and the exposure was marked to
fair value in April.
(c)

It is denied that the sell portfolio exposures were not marked to fair
value, or subjected to IPV in February. The BCE and Clear Channel
exposures were not marked to fair value or subjected to IPV in respect
of the February month-end values because RBS did not consider that
they were required to be, following the decision that these loans would
be held following drawdown. Following discussion with Deloitte, RBS
subsequently changed its interpretation of the applicable accounting
treatment, and BCE was marked to fair value and subjected to IPV in
respect of the March month-end values. Clear Channel was not marked
to fair value until April, for the reasons set out above.

221A.7 As to paragraph 74.6A.4B:

(a)

It is denied that the Write-downs Table entry for leveraged loans was
confusing or misleading. All the leveraged loans other than RBS's
already funded hold portfolio were disclosed, with write-downs in 2008
estimated on the basis of the average price of 88% (including for BCE
and Clear Channel) as set out in the Prospectus. This was a reasonable
estimate for capital planning purposes. It was also appropriately
presented investors were able to assess for themselves whether they
considered that 88% was a reasonable price upon which to estimate
write-downs on leveraged loans in 2008.

Investors may not have

appreciated that the disclosed exposures included a portion of L&R

exposures (ABN AMRO's) but the disclosure was simply conservative
in this respect, not confusing or misleading.
(b)

As regards subparagraph (i), it is admitted that about 2.5bn of the

leveraged loans exposures was held by ABN AMRO and classified
L&R, and that the Kyle Memo assumed that 250m of the estimated
losses on leveraged loans would be incurred in ABN AMRO. It has not
been established whether that assumption was based on the calculation
carried out by the Claimants (so as to support the implication of an
assumed price of 90% for the ABN AMRO leveraged loans), or was

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based upon a more approximate allocation of the estimated additional

losses as between RBS and ABN AMRO.
(c)

As regards subparagraph (ii), the Claimants' statement that "Over 7bn

of the 12bn balance was initially held HFT" is denied, because it
incorrectly implies that that 7bn was no longer held HFT. All the
unfunded exposures were held HFT, whether or not they were part of
the intended hold portfolio.

It is denied that the 1.25bn estimated

write-downs included no amount for write-downs after March 2008.

As set out in CME RFI, Appendix 1, paragraph 64, the 1.25bn
estimated write-downs included 635m estimated write-downs
additional to those booked in March 2008, resulting in an estimated
average price of 88% across the whole portfolio (including BCE and
Clear Channel) as calculated in CME RFI Appendix 2, "Lev loans
Funded and Unfunded", rows 463 to 490.
(d)

The basis of the calculation set out in subparagraph (iii) is unclear, as is

its relevance.

(e)

Save that (i) the figure of 9.7bn is denied (because it relates to the
position as at 31 December 2008) and (ii) it is not admitted that the
ABN AMRO hold portfolio was excluded,

subparagraph (iv) is

admitted.
221A.8 As to paragraph 74.6A.4, the first sentence is denied: the inclusion of the ABN
AMRO L&R leveraged finance exposures was conservative. The second sentence is
denied; European leveraged loans were experiencing write-downs and were the
subject of concerns, in a manner that was not true of the European equivalents of the
items disclosed above leveraged loans in the Write-Downs Table.
221B. The 1.386bn of leveraged loans warehoused for securitisation referred to at paragraph
74.6A.5 has been pleaded to above at paragraph 210.
221C. As regards paragraph 74.6A.6, the 106m represented RBS's prudent estimate of losses to be
incurred in 2008 in respect of the leveraged loans warehoused for securitisation into CLOs.
No further write-downs were estimated to take place in addition to those which had already

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been taken by the end of March. The words quoted from paragraph 210.2 of the Amended
Defence were incorrect and have been deleted. RBS did not expect there to be further
material falls in the fair value of these exposures, and it was reasonable for it not to do so.
221D. Paragraph 74.6A.7 is admitted. The equivalent book value figure was 8,255m, as explained
in CME RFI Appendix 1 paragraph 59.
221E. As regards paragraph 74.6AA and the additional particularised allegations contained in the
"Notes" column of the Leveraged Loans table in Appendix 1:
221E.1 It is admitted that only the 724m element of the LyondellBasell loan was included.
This was the bridge loan. The rest of the LyondellBasel loan was treated by ABN as a
corporate loan (which had been originated by the leveraged finance desk) rather than
as a leveraged loan.
221E.2 It is denied that it was inappropriate to include the benefit of the hedge when
calculating the exposures, or that this should have been netted off at a lower figure as
an estimate for 2008. It is further denied that netting off the hedge had a 760m
impact (or in fact any material impact) on the estimated write-downs, as the Claimants
allege.
221F. The allegation in paragraph 74.6B.1, in respect of which the Claimants have provided no
supporting documentation, is denied. The loans warehoused for securitisation were
categorised as "continuing business" within the 17 April 2008 De-risking Presentation and, as
at 30 May 2008, were not included amongst the SAU positions.
221G. As to paragraph 74.6B.2 the allegation of over-marking is insufficiently explained. The
allegation that it was improper for the ABN AMRO sell portfolio to be held on the L&R basis
is denied (as above).
221H. The email referred to in paragraph 74.6B.3 is admitted. It is further admitted that discussions
took place regarding the potential transfer of ABN AMRO leveraged loans to RBS in or
around April 2008. Save as consistent with the aforesaid and paragraph 200Q above,
paragraph 74.6B.3 is denied.
221I.

Paragraph 74.6C is denied for the reasons set out above.

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D6.7

Other Counterparties

222.

The first sentence of paragraph 74.7 is admitted. The second sentence is denied. The figure for
H1 2008 was 132m, from which it is to be inferred that "a significant part" of the 2008
increase of 1.5bn had not been incurred by the Prospectus Date or Closing Date.

222A. (In part formerly 233) Paragraph 74.7A is denied. The allegation that RBS's approach was
imprudent "if and to the extent" that it used a CVA methodology (to which see paragraphs
242A to 242C below) for adjustments "to other risky or credit-sensitive counterparties"
embarrassingly vague in circumstances where it fails to identify said counterparties.
Warehoused Loans
222A. As to paragraph 74.7A:
222A.1 It is admitted that successful and reasonably prompt securitisation of certain
warehoused loans was at risk. The Write-Downs Table contained (in the rows
labelled "US commercial mortgages" and "CLOs") figures for certain exposures of
this kind on which write-downs were expected.
222A.2 It is admitted that page 8 of the Leveraged Finance Report of the July Draft GIA
Reports referred to RBS having been left holding a large portfolio of leveraged loan
exposures which it could not syndicate without offering significant discounts to par
value. This exposure was disclosed by the row headed "leveraged loans funded and
unfunded" in the Write-Downs Table.
222A.3 It is admitted that the Write-Downs Table did not disclose all loans held by RBS for
securitisation or syndication. The Defendants' current understanding is that there
were in addition approximately 1.8 billion loans held for the purposes of
securitisation (the vast majority of which was comprised of UK residential
mortgages and US prime loans) and approximately 5.6 billion loans held for the
purposes of syndication (the main elements of which were EMEA and Asia Pacific
corporate loans, loans typically relating to the finance of long-term infrastructure
projects or public service assets, predominantly EMEA and UK and EMEA
commercial real estate loans). It is denied that these should have been disclosed. No
material write-downs were anticipated on these exposures.

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222A.4 Save as set out above, paragraph 74.7A is denied.

D6.9

Loan Loss Provisions

223.

Like many of the other allegations in the Composite Amended Consolidated Particulars of
Claim, the allegations in paragraphs 74A to 74E concerning RBS's loan loss provisions are
made with the benefit of hindsight. With regard to those allegations:
223.1

The first sentence of Pparagraph 74A is denied. The second and third sentences
isare admitted.

The bulk of this increase was impairment losses on the SBO

portfolio, which is addressed separately in Section D7.1 below paragraphs 220A

above and 233A below. These impairments did not cause RBS's internal profit
projections to be materially out of line with the expectations of the market.
223.2

Paragraph 74B is denied. The figures referred to were loan impairment losses (or
charges), not balance sheet loan loss provisions. Further and in any event:
(a)

The loan loss ofwas approximately 1.5 billion (not 1.5 billion as

alleged) for the first half of 2008 was not a material increase on the loss of
1.2 billion reported for the second half of 2007.
(b)

Balance sheet loan loss provisions in the first half of 2008 were only

increased from 4.95 billion to 5.01 billion.

223.3

Those increases (which would in any event not have been were not sufficiently
material to require disclosure by way of a supplementary prospectus even if they had
been expected by Closing Date) were disclosed in the 2008 Interim Results, which
were published on 7 August 2008, and did not reflect information available by the
Closing Date. A better indication of the information available at or near to the
Closing Date is provided by the 4+8 Reforecast, which was issued to the Group
Board on or about 24 June 2008. The 4+8 Reforecast projected impairment losses for
2008 of 2,847m (of which 302m related to SBO). This was not a material increase
from the 2,728m projected in the 3+9 reforecast that was reflected in the capital
plan.

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223.4

Paragraph 74C is not admitted.denied. The Claimants have not advanced a proper
basis to challenge the validity of the forecasting of impairment losses conducted by
RBS, as reflected in the 3+9 reforecast and then subsequently in the 4+8 reforecast.

223.5

Paragraph 74D is denied. The profit projections included in the capital plan took
account of budgeted loan expected loss charges during the course of 2008 as set out
in the 3+9 reforecast.

223.6

Paragraph 74E is denied. The expected impairments in 2008, as reflected in the 3+9
reforecast, were properly reflected in the narrative provided in the Current trading and
prospects section of the Prospectus. In any event, the Defendants reasonably believed
that this was so, the advisers having taken account of the 3+9 reforecast in providing
their advice as to the wording of the Prospectus.

223.6A. Save that the loan losses reported for 2007 (2,104m) and 2008 (6,496m rather than
6.48bn) are admitted, paragraph 74F (formerly 80.5) is denied. In this regard,
paragraph 223 above is repeated. The expected loan losses incorporated in RBS's
capital plan were reasonable based on matters then known to the bank.
224.

Further and in any event, at page 13 the Prospectus contained the following risk warning:
"The financial performance of RBS may be affected by borrower credit quality.
Risks arising from changes in credit quality and the recoverability of loans and
amounts due from counterparties are inherent in a wide range of RBS's businesses.
Adverse changes in the credit quality of RBS's borrowers and counterparties, or in
their behaviour, or a general deterioration in the UK, US, European or global
economic conditions, or arising from systemic risks in the financial systems, could
affect the recoverability and value of RBS's assets and require an increase in the
provision for impairment losses and other provisions."

D6.10 CDS Hedging

224A. Paragraph 74G is admitted.
224B

It is denied that the presentation of this item was untrue or misleading as alleged in paragraph
74H. What this line item conveyed, and why that was true and not misleading, is addressed in
paragraphs 224C to 224E below. Save as set out in those paragraphs, paragraph 74H is
denied.

224C

As to paragraph 74I:

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224C.1 The hedges comprised within the Write-Downs Hedging line had been taken out in
relation to corporate loans that were not themselves in the Write-Downs Table, and were held
as L&R. Details of those hedges were provided in CME RFI Appendix 1.
224C.2

Because the hedges were marked to market on a daily basis, this gave rise to
P&L volatility.

224C.3

It is unclear what the Claimants mean by describing this as "a mere

accounting accident" (in paragraph 74I.3, further addressed below).

In

adverse credit markets, the volatility tended to produce P&L gains that were
not offset by losses on the loans in respect of which the hedges had been
taken out, because those loans were accounted for on an accrual basis.
224C.4

It was reasonable to show these gains in the Write-Downs Table, because

they were a relevant feature of RBS's financial position in the market
conditions prevailing in early 2008, which (though not a direct hedge) was
reasonably expected to mitigate the estimated losses on leveraged loans and
other items in the Write-Downs Table comprising or referencing corporate
loans.

224D

Turning to the individual subparagraphs of paragraph 74I:

224D.1

As to paragraph 74I.1, the trades have been identified as set out in CME RFI
Appendix 1.

224D.2

As to paragraph 74I.2, it is admitted that the hedges had been taken out in
relation to corporate loans that were not themselves in the Write-Downs
Table, and were held as L&R. Because the hedges were marked to market,
this gave rise to P&L volatility.

224D.3

The first sentence of paragraph 74I.3 is denied. It was the volatility of the
hedge (which was marked to fair value) that conferred P&L gains in adverse
market conditions. The second sentence is denied - the corporate loans were
not marked to fair value, and it was reasonable to identify the P&L volatility
on the CDS Hedging as a factor offsetting the volatility on RBS's credit
market exposures.

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224D.4

As to paragraph 74I.4, it is admitted that the volatility on the CDS Hedging

was not restricted or tied to particular exposures in the Write-Downs Table,
but it is denied that it is to be treated in the same way as any other profit or
gain in GBM. The CDS Hedging volatility tended (albeit imperfectly) to
move in the opposite direction to the fair value of exposures in the WriteDowns Table.

224D.5

As to paragraph 74I.5, it is admitted that a widening of credit spreads in

relation to the assets in the Write-Downs Table would not necessarily lead
to (or, more accurately, be accompanied by) an increase in the value of the
corporate loan book CDS hedging, and it was, as such, an imperfect hedge.
It is denied that this made it unreasonable to take it into account.

224D.6

It is denied that the CDS Hedging figure was a snapshot of the fair value at
the end of March 2008. The March value was 45m higher, at 515m, as
set out in CME RFI, Appendix 1, paragraph 72. The figure of 470m was a
reasonable estimate for capital planning purposes of the gains in 2008, taken
alongside the estimated write-downs. It is denied that its presentation was
unreasonable or untrue.

224D.7

As to paragraph 74I.7, it is denied that prudent estimates for 2008 would

have excluded the CDS Hedging figure altogether, or estimated a 300m
reversal of gains in respect of it. It is admitted that a figure of 300m
appeared in the "worst case" column of a version of the De-risking
Presentation produced on 10 April 2008 (the "central case" in that
document being a loss of 100m). In the latest version of the De-risking
Presentation produced on 17 April 2008, there was no loss in Scenario 1,
only a "Future potential" loss of 100m.

224D.8 As to paragraph 74I.8:

224D.8.1.

It is admitted that the CDS Hedging year to date gain had dropped
before the Prospectus Date, and then dropped further by the Closing
Date. The Defendants have not been able to confirm the precise
figures alleged by the Claimants, and it is not necessary to do so. As
shown in CME RFI Appendix 2, "CDS hedging", rows 83 and 84, the

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year to date gain was 141m on 30 April 2008 and 118m on 31 May
2008.
224D.8.2.

The quote from the GBM 4+8 presentation, recognising that the
reduction in the gain on the CDS hedging was due to tightening
corporate spreads (indicating at that time a more benign credit
environment), but recording that it was considered that the 470m
P&L gain was still valid for forecast purposes, is admitted. The
470m P&L gain shown in the Prospectus was thus still, at the
Closing Date, considered to be an appropriate estimate for 2008 as an
offset to the estimated write-downs, which remained unchanged in
that presentation from those set out in the Prospectus.

224D.8.3.

It is denied that the decrease in the value of the hedge was a matter
that was required to be disclosed by way of supplementary
prospectus.

224D.8.4.

It is admitted that Cameron was aware of the contents of the GBM

4+8 presentation, including the part relating to CDS Hedging, before
the Closing Date.

224D.8.5.

It is denied that it can be inferred that Whittaker or the other Director

Defendants were aware of that part of the presentation before the
Closing Date, but in any event, if they had been, they would
reasonably have concluded that no supplementary prospectus was
required from (among other things) the fact that GBM still
considered the 470m figure to be an appropriate forecast for 2008.

224D.9 As to paragraph 74I.9:

224D.9.1.

As shown in CME RFI Appendix 1, paragraphs 71 to 73, the CDS

Hedging year to date gain as at the end of March was 515m, before
costs.

224D.9,2.

The before costs figure was the appropriate figure for capital
planning purposes, because it represented the P&L volatility. The
cost of the hedging was a cost attributable to the L&R corporate

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loans and is likely to have been taken into account for capital
planning purposes within the forecast for the income and expenditure
attributable to the corporate loan book.
224D.9.3.

At the end of March 2008, the gain taking account of costs was
415m, not 370m as alleged.

224E. The allegations relating to hedging in paragraph 74K are misconceived. The aim of the hedge
(as opposed to an option) is to protect against further downside risk in respect of the exposure
being hedged. Hedging has an opportunity cost, in the loss of the potential to gain from
increases, but, to the extent that it was anticipated that hedging would take place at the
estimated lower values, that cost was already reflected in the estimated write-downs. The
premium cost of hedging was a business as usual expense. Without prejudice to the aforesaid,
it is admitted that, as a part of the de-risking exercise, RBS identified and considered hedges.
As to the subparagraphs of 74K:
224E.1 Subparagraph 74K.1 (and in particular the word "huge") is stated without context,
embarrassingly vague, and denied. As to the subparagraphs of 7K.1:
224E.1.1

As to paragraph 74K.1.1, it is admitted that, in April 2008, 760m of

hedges were recorded against RBS's EMEA Underwriting portfolio
and that a proposal was made to enter into further hedges to protect
against price volatility whilst selling down as a part of a proposed derisking strategy. (see CME RFI Response, Appendix 1, points 62 and
63).

224E.1.2

Paragraph 74K.1.2 is denied. As at 17 April 2008, the De-risking

Presentation recorded hedges of $730m and an intention to continue
entering into CDS hedges until 50% of that exposure was covered.
As at 1 May 2008, the total hedge figure was $1,525m.

224E.2

As to paragraph 74K.2, it is admitted that the exposures disclosed within the WriteDowns Table were, as explicitly stated, net of hedges (i.e. hedges that had already
been taken out). This was appropriate. RBS did not estimate any material writedowns, impairment, CVA or other change in value which would be incurred upon
hedged assets and, accordingly (and as investors would have reasonably understood)

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it did not disclose exposures in respect of them. It is denied (if that is what is
intended to be alleged by paragraph 74K.2), that any exposures were excluded from
the Write-Downs Table because of an intention to hedge them in future.
224E.3

As to Paragraph 74K.3:
(a)

It is admitted and averred that the hedging of an exposure had the effect of
locking in the P&L cost of any mark to market loss to date on that exposure
at the date of the hedge, but equally (as was the objective) protecting against
further losses. That P&L cost was already reflected in RBS's disclosures and
capital planning via the estimated write-downs. To disclose it and plan for it
separately would have been double counting and confusing to investors.

(b)

As to any additional element of the hedging cost (not covered by (a) above),
it is denied that this would have been likely to exceed its business as usual
equivalent to an extent that would have been material within the context of
RBS's capital planning, or was information necessary for investors.

224E.4 Paragraph 74K.4 is, in the premises, denied.

D7

The categories of exposure omitted from the Prospectus

224F. The exposures and alleged prudent estimated write-downs in paragraph 74L are addressed
category by category below. It is denied that there were material omissions or undisclosed
prudent estimated write-downs or impairments.
D7.1
225.

Citizens SBO
As to paragraph 74.M (former 74.5B) (includes text from what was AmDef 220A):
225.1 It is admitted that RBS had an exposure to an "SBO" portfolio held by Citizens. The
amount of that exposure was $8.4 billion as at 31 December 2007, falling to $7.7
billion as at 30 June 2008. It is admitted that the loans within the portfolio had high
loan to value ratios, with 32% being over 100%.
225.2 It is admitted that the amount of that exposure was not separately disclosed in the
Prospectus. It is denied that such disclosure was necessary.

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225.3

Because this was an asset accounted for on a "loans and receivables" basis, expected
losses were relevant to forecast impairments but not to forecast write-downs. The
impairments expected by RBS on the SBO portfolio were taken into account in
RBS's internal profit forecasting used for capital planning purposes. Whilst this
exposure shared with certain of RBS's credit market exposures an exposure to the
US real estate market, it was itself a loan book (upon which losses fell to be incurred
over time) not a "credit market exposure" exposed directly to the credit markets by
being held at fair value. At the time of the rights issue, Citizens was a profitable
business generating an annual pre-provision income of more than 1.6 billion which
could be offset against future losses. The SBO portfolio was a part of that business.
Disclosure relating to the performance of the bank's loan books was appropriately
made in Section 7 ("Current trading and prospects"), not Section 3 ("Credit market
exposures") of Part I of the Prospectus.

225.4

Page 29 of the Prospectus referred to "increased delinquencies in a specific US

retail portfolio", which was a reference to the SBO portfolio. Further disclosure in
relation to this was provided on page 30 in the section of the Prospectus dealing
with RBS's current trading and prospects, where it was stated that "US Retail &
Commercial Banking has continued to achieve modest income growth while
maintaining good cost discipline, but overall results have been held back by
increased impairments in one specific loan portfolio", and that "Citizens' credit
portfolio continues to perform satisfactorily, with the exception of a specific
portfolio within its home equity book, referred to in RBS's trading update of 6
December 2007. Delinquencies on this portfolio have risen markedly as the housing
market has continued to weaken and the Group has continued to increase
provisions".

225.5

The exposure to the SBO portfolio was also included in the 2007 Accounts within
the 71.8 billion of Citizens' credit risk assets disclosed on page 73, and it was taken
into account in the credit risk quality breakdown on page 74, the geographical
breakdown on page 76, and the loan impairment analysis on pages 77 to 79.

225.6

RBS also had a small exposure (of not more than $200m) to loans held through RBS
Greenwich that were serviced by third parties. That exposure was not material in
this context.

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225.7

Save as set out above, paragraph 74M is denied. RBS's disclosure in relation to the
SBO portfolio was appropriate and sufficient, particularly in circumstances in which
RBS's internal expectations of future profits (taking account of the forecast
impairments on the SBO portfolio) were not materially out of line with the market's
expectations.

225A. As to paragraph 74N.1:

225A.1 The first sentence is admitted. The figures referred to by the Claimants (contained
within a presentation produced for discussion purposes only), represented projected
remaining lifetime losses over a seven year period in the worst of three scenarios
projected by Citizens. RBS will refer to the presentation for its full terms and effect at
trial.
225A.2 The second sentence is denied. RBS's accounting policy did not involve amortising
lifetime losses over the lifetime of the loans, it involved (as the applicable accounting
rules required) booking losses as they were incurred. Booking impairments purely
based upon estimated lifetime losses would have been inconsistent with accounting
rules.
225B. Paragraph 74N.2 is admitted. The $650m was reflected in the 3+9 reforecast, which was
taken into account by RBS and its advisers when deciding what needed to be said in Section 7
of Part I of the Prospectus. It was also taken into account (via the 3+9 reforecast) in the
capital plan.
225C. Paragraph 74N.3 is admitted. The 331m is the Sterling equivalent of the $650m which the
Claimants themselves refer to in paragraph 74N.2.
225D. As to paragraph 74N.4:
225D.1 It is admitted that, on 15 April 2008, a Goldman Sachs presentation records a
potential additional provision of 0.4-0.6bn in respect of the SBO book and it is noted
that this provision was absent from Goldman Sachs's summary assessment of RBS's
portfolio and marks the following day. It is denied (if intended to be alleged) that
Goldman Sachs's estimates contained an immediate markdown of 400-600m for
the SBO book.

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225D.2 It is admitted that a draft Write-Downs Table, circulated on 17 April 2008, recorded
(for approximately 90 minutes before being superseded by a following draft) a
markdown of 500m for the SBO Book. No reference was made to the SBO Book in
the draft circulated earlier and later that same day. Paragraph 225.3 above is repeated.
The SBO portfolio exposure was not a credit market exposure in which write-downs
had been forecast for the purpose of capital planning and, as such, was appropriately
excluded from the Write-Downs Table. RBS's disclosure in relation to the SBO
portfolio (the narrative disclosure in the "Current trading and prospects" section) was
appropriate and sufficient.
225E. As to paragraph 74N.5:
225E.1 It is admitted that it was proposed by Brian Crowe that the SBO book should be
managed as discontinued business.
225E.2 It is denied that the proposal set out in Crowe's 21 April 2008 memo was for the
ownership of the SBO book to be transferred from Citizens to RBS, or that any
decision had been taken to that effect (and no such transfer in fact took place). It is
admitted that if such a transfer had taken place, this would have crystallised a loss for
Citizens, but there would have been no such loss at the consolidated level.
225F. As to paragraph 74N.6:
225F.1 The first sentence is denied.
225F.2 The second sentence is admitted and its relevance denied in circumstances where no
sale to a third party was intended to take place.
225F.3 The third sentence does not accurately characterise the email, which was not
discussing the possibility of a sale to a third party, but rather the possibility of a
transfer from Citizens to RBS, which would have crystallised a loss in Citizens (but
not at the consolidated level). It is denied if it be alleged that the potential loss
referred to, itself stated to be based on "soft data" (as to the market value of the
portfolio), represented the considered view of RBS and/or Citizens as to the likely
level of the loss in Citizens if such a transfer occurred.
225G. As to Paragraph 74O:

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225G.1 It is admitted that on 9 May 2008 Greenwich provided preliminary results suggesting
lifetime losses on the SBO Book, suggesting a range from $1.2bn to $2.3bn
(depending on house price assumptions). This estimate compared with Citizens'
estimate at this time of $1.515bn.
225G.2 It is denied that it is to be inferred that the H1 2008 SBO impairment of 164m had
been decided before the Closing Date. That figure was made up of 112m in Q1
(which was decided before the Closing Date) and a Q2 impairment of 52m, as
shown in CME RFI Appendix 2, "Citizens SBO", at row 57.
225H. (Amended from what was formerly 233A responding to 80.4A). As to paragraph 74P:
225H.1 The first sentence is denied. Paragraph 225.3 above is repeated.
225H.2 It is admitted that anticipated lifetime losses on the SBO portfolio (as estimated by
Citizens) were approximately 772 million ($1.5 billion) by July 2008. At the
Prospectus Date, the most recent calculation of expected lifetime losses on the SBO
portfolio was $1.035bn (as set out in the presentation titled "Summary of Loan Loss
Forecasts of SBO Home Equity Purchased Pools" dated 8 April 2008) and
impairments on the SBO portfolio in 2008 were expected to be 331 million as
described in paragraph 225C above. That assessment was relevant to impairments,
not write-downs. Such impairments (164 million for the first half of 2008, as
disclosed in RBS's 2008 Interim Results, 319 million for the full year, as disclosed
in the 2008 Accounts) had the effect of reducing RBS's profits from US Retail &
Commercial Banking, as disclosed on page 30 of the Prospectus. Paragraphs 225.3 to
225.5 and 225.7 above are repeated.
225H.3 Save as set out above, paragraph 74P is denied.
225I.

Paragraph 74Q is, in the premises, denied. The expected loss in 2008 was the expected
impairment provision of 331m ($650m) as set out above.
provision in 2009 was $500m.

The expected impairment

It was not expected that there would be a sale of the SBO

portfolio to a third party crystallising a capital loss. The expected impairment in 2008 was
adequately reflected in the narrative on page 30 of the Prospectus. The (lower) expected
impairment in 2009 was not necessary information for investors.

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225J.

Save that it is admitted that RBS's capital planning needed to (and did in fact) take account of
expected impairments on the SBO portfolio, paragraph 74R is denied. The performance of
the SBO portfolio was adequately disclosed in Section 7 within Part I of the Prospectus further information was not necessary for investors. The "no significant change" statement
was expressly made subject to (among other things) Section 7 within Part I of the Prospectus.
The US Residential Mortgages line of the Write-Downs Table would have been understood
by reasonable investors to be concerned with credit market exposures, and not with the SBO
portfolio or any other part of Citizens' L&R loan book. In any event, the material facts
relating to the SBO portfolio were known to the advisers and their approval of the Prospectus,
in which disclosure relating to the SBO portfolio was addressed in narrative form within the
"Current trading and prospects" section, provided reasonable grounds for the Defendants'
belief that appropriate disclosure was made in this respect.

225K. As regards paragraph 74S, it is denied that any information contained in the Credit Risk
Headlines document produced on 9 May 2008, or otherwise arising between the Prospectus
Date and the Closing Date, gave rise to an obligation on any of the Defendants under section
87G of FSMA.
225L. Paragraph 74T is admitted.
225M. Paragraph 74U is denied.
225N. Paragraph 74V is noted. It is denied that any basis exists for an allegation that the capital plan
was imprudent or that untrue statements were made in relation to it.
D7.2

The North Sea Conduit

225O. As to paragraph 74W:

225O.1 North Sea was a securities arbitrage conduit established by ABN in July 2004
consisting of a portfolio containing, as at 31st December 2007, approximately
$10.5bn of structured finance assets (including those listed at 74W) with a weighted
average rating of approximately AA+.
225O.2 North Sea's assets contained no direct US sub-prime exposure and only 2% of the
portfolio comprised indirect US sub-prime exposure. However, North Sea was
affected by the US sub-prime related credit market re-pricing and general market

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sentiment in early 2008. Accordingly, from 8 February 2008, North Sea stopped
issuing commercial paper and was subsequently taken onto ABN AMRO's balance
sheet. The Prospectus incorporated the 2007 Accounts by reference, within which
ABN AMRO's liquidity exposure to North Sea and other conduits was set out at p.83
(within the section on liquidity exposures).
225O.3 By the Prospectus Date, the North Sea portfolio had declined in fair value in the year
to date by approximately 400m. Because the portfolio was held on the AFS basis,
that decline in fair value did not have to be taken to P&L, but was instead booked to
equity reserves. Consequently, RBS's regulatory capital position was not vulnerable
to this decline in value, with the relevant issue for capital planning purposes being
what impairments it was expected would have to be taken. As shown in the 3+9
reforecast and taken into account in the capital plan, the expected level of
impairments in 2008 in GBM (including impairments on North Sea) was 363m as at
the Prospectus Date. Although an increase of 238m from the 2007 impairment
figure of 125m (up 202m from the figure in the 2008 budget), this remained low
relative both to impairments costs in other divisions, and to the other components of
GBM's operating performance. The expected impairments of 363m fed into the
expectation that GBM's operating contribution after impairments but before writedowns would be 4,970m in 2008, only slightly below the 5,073m generated in
2007.
225O.4 It was reasonable in the circumstances not to disclose in the Prospectus the GBM
expected impairments figure, or (more specifically still) an expected impairment
figure for North Sea. It was not part of RBS's "estimates of write-downs in 2008 in
respect of credit market exposures", and as such did not fall within the description of
the exposures and estimated write-downs disclosed in the Write-Downs Table. A
separate disclosure of this one small (in relative terms) component of GBM's
expected operating profit before write-downs would have been anomalous and
potentially confusing, and was not necessary to enable investors to make an informed
assessment of RBS's financial position and prospects. Sufficient information overall
for an assessment of RBS's likely profitability in 2008 was provided by the capital
targets set out in Section 5 within Part I of the Prospectus and the narrative
description of its current trading and prospects set out in Section 7.

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225O.5 In any event, the advisers were provided with information relevant to the decision as
to what disclosure to make in relation to North Sea, and their approval of the
Prospectus in a form that did not disclose it provided a reasonable basis for the
Defendants' belief that the Prospectus was not deficient in this respect.
225O.6 Save as consistent with the aforesaid, paragraph 74W above is denied.
225P. As to paragraph 74X.1 to 74X.3:
225P.1 Paragraph 74X.1 is admitted save that that it is denied that North Sea was seeking to
attract any funding in March 2008. As set out above, North Sea stopped marketing
commercial paper in February 2008.
225P.2 Paragraph 74X.2 is admitted.
225P.3 As to paragraph 74X.3:
225P.3.1

As to the first sentence it is admitted that in or around March and

April 2008 RBS was considering various options, including
transferring the North Sea exposures to a specifically designated unit
for discontinued business (which would later come to be referred to
as the SAU). One of these options, discussed from March 2008, was
the possibility of transferring the North Sea assets from ABN to
RBS. This option (with strategic control resting with the RBS
Strategic Asset Unit) was chosen and approved (with conditions) on
12 June 2008.

225P.3.2

It is admitted that a transfer to RBS would crystallise certain changes

in fair value as a P&L loss in ABN AMRO, but not at the
consolidated level. It is admitted that the options under consideration
included the sale by the Group of some North Sea assets (which
could crystallise a loss for the Group on those assets, depending on
the sale prices achieved), but not the whole portfolio.

225P.3.3

As to the third sentence it is admitted that one of the conditions for

the proposed transfer of North Sea's assets was that they were made
following the receipt of additional capital into RBS and denied that

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this was because of a potential P&L loss at ABN AMRO. The precondition was introduced to preserve RBS plc's capital ratios.
225Q. As to paragraph 74X.4 it is admitted that, between 14 and 15 April 2008, drafts of the Derisking Presentation estimated a Scenario 1 mark-down of 800m. It is denied that this
represented RBS's considered view as to estimated losses likely to be incurred for North Sea
in 2008. As Tobin explained on 8 May 2008, the 800m figure included in the De-risking
Presentations was "based on selling down over a two week horizon". This was not something
that RBS would do. The final version of the De-Risking Presentation estimated a Scenario 1
loss of 200m, and every version of the De-risking Presentation expressly stated that North
Sea exposures were considered "low risk from a P&L perspective".
225R. As to Paragraph 74Y the first sentence is admitted save that it is denied that any likely
impairment was substantial. The second sentence is denied. The email referred to in support
of the allegations that discussions referred to a "likely immediate impairment of $341m"
merely reference $341m as the high point from which to consider whether North Sea assets
might be impaired. In accordance with the IFRS rules and RBS processes, an impairment of
108.1m was recorded on 30 June 2008 and approved on 10 July by the Group Risk
Committee. It is denied (if alleged) that the impairment was delayed for any reason related to
the Rights Issue. At the Closing Date, a final decision had not yet been made.
225S. As to paragraph 74Z:
225S.1 Subparagraphs 74Z.1 and 2 are denied. Paragraph 225O above is repeated.
225S.2 Paragraph 74Z.3 is denied. Expected impairments in GBM were included within the
3+9 and capital plan as described in paragraph 225O.3 above.
225T. As to paragraph 74AA:
225T.1 It is admitted that Cameron was aware of the contents of the GBM 4+8 presentation
before the Closing Date.

It is denied that that document evidences significant

information relating to North Sea that was required to be disclosed by way of

supplementary prospectus. Specifically, it is denied that "the sale of North Sea had or
would crystallised (sic) a c.800m loss". The document merely identified, as one of
the "risks" on a slide headed "Risks and Opportunities", that losses of that order

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would be crystallised if there was a sale of North Sea. No North Sea Assets were
sold in 2008.
225T.2 It is denied that it can be inferred that the other Director Defendants were aware of
that part of the presentation, but in any event, if they had been, they would reasonably
have concluded that no supplementary prospectus was required for the reasons set out
within the preceding paragraph.
225U. As to paragraph 74BB it is admitted that the North Sea assets were transferred from ABN to
RBS (with the transfer finalised in August 2008) at an unrealised loss of approximately
830m (1,035m). The transfer did not affect the RBS Group consolidated position.
225V. Paragraph 74CC is noted (and the justification for further amendments not accepted).
D7.3

Structured Real Estate Capital

225W. As to paragraph 74DD:

225W.1 ABN AMRO's Structured Real Estate Capital book consisted (at all material times)
of approximately 5-6bn of loans, warehoused for securitisation, and themselves
secured against European commercial real estate, the vast majority (approximately
89% in April 2008) of which was in Germany. These included (as at 14 April 2008)
a small proportion of non-performing Italian loans (approximately 300m) and
CMBS (150m).
225W.2 Information about ABN AMRO's SREC book was not disclosed in the Prospectus.
Such information was not necessary for an informed assessment of its financial
position and prospects in circumstances where:
225W.2.1

The SREC portfolio was composed entirely assets of European

origin, secured against commercial real estate, which were not, at the
time of the Rights Issue, of significant concern to investors.

225W.2.2

The SREC portfolio was accounted for as L&R (save for the CMBS,
on which there was no mark to market loss in Q1 2008) and no
material impairments were expected on it in 2008. Any impairments
that were expected would have been included within the GBM total

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impairment forecast of 363m referred to in paragraph 225O.3

above.
225X. As to Paragraph 74EE:
225X.1 Paragraph 74EE.1 is admitted.
225X.2 On or around 27 April 2008 it was decided that the SREC portfolio (described as
having relatively few credit risk issues) would be transferred from ABN AMRO to
RBS plc and managed as part of RBS's structured real estate business.
225X.3 Any transfer of assets from ABN AMRO to RBS plc would be at fair value such that
a loss would crystallise in ABN AMRO. As any loss arising from an intra-group
transfer would be eliminated on consolidation, the transfer would be materially
neutral from the Group's profit and loss perspective. See paragraph 200Q.3 above.
225X.4 Save as consistent with the aforesaid, paragraph 74EE is denied.
225Y. As to paragraph 74FF:
225Y.1 The potential transfer was proposed and discussed before the Closing Date, with a
proposal to transfer approximately 5bn ABN AMRO London-booked SREC loans
submitted on 11 June 2008 and with the necessary approvals obtained by 17 June
2008.
225Y.2 As to the third sentence it is admitted that one of the conditions for the proposed
transfer of the SREC portfolio was that it was made following the receipt of
additional capital into RBS and denied that this was because of a potential P&L loss
at ABN AMRO. The pre-condition was introduced to preserve RBS plc's capital
ratios.
225Y.3 Save as consistent with the aforesaid, paragraph 74FF is denied.
225Z. Paragraph 74GG is denied. This was a predominately L&R portfolio on which no material
losses were expected. Information about it was not necessary for an informed assessment of
RBS's financial position and prospects. It is denied that the "no significant change" statement
was untrue or misleading in this respect.

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225AA. Paragraph 74HH, which sets out no particulars as to any facts that should have given rise to
disclosure (or an obligation to disclose) by way of supplementary prospectus is, in the
premises, denied.
225AB. As to paragraph 74II, the majority of the SREC portfolio was acquired by RBS and moved
from ABN AMRO's balance sheet to RBS's balance sheet on or around 25 June 2008,
resulting in a loss of approximately 400m in ABN AMRO. This did not materially affect
the RBS Group consolidated position.
225AC. Paragraph 74JJ is noted.
D7.4

White Knight

225AD. As to paragraph 74LL:

225AD.1

White Knight was a special purpose vehicle (akin to a CDPC) set up by ABN
AMRO in December 2007 for the purpose of re-structuring ABN's existing
exposures to Canadian conduits. This followed disruption in the commercial
paper market in Canada (which led to the temporary freezing of the Canadian
CP market pursuant to the Montreal Accord Standstill Agreement in August
2007) and calls for advance funding for the Skeena and SAT Neurus conduits
(which ABN AMRO faced as a swap counterparty and as a liquidity provider).

225AD.2

At the time of the Rights Issue, RBS held an exposure to White Knight on the
ABN AMRO credit exotics desk. This exposure referenced Super Senior credit
derivative tranches, the vast majority of which themselves referenced corporate
underlyings (as opposed to ABS). Exposures with corporate underlyings were
not of particular concern at the time of the Rights Issue.

225AD.3

The Prospectus did not separately disclose either its notional exposure
($20,311m as at 30 June 2008) or CVA (see paragraph 225AF below) to White
Knight. However the ABN Form 20-F Annual Report for the year ending 31
December 2007, the relevant sections of which were incorporated by reference
into the Prospectus, disclosed CDPC exposures of 969m (MtM) net of CVA
(including White Knight). See paragraph 248 below. Further, White Knight's
notional exposure was included within the total "Derivatives" figure as set out
at page 121 of the 2007 Accounts (also incorporated by reference).

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225AD.4 Save as consistent with the aforesaid, paragraph 74LL is denied.

225AE. As to paragraph 74MM it is admitted that in late 2007 there was disagreement between
Ernst & Young (ABN's auditors) and ABN AMRO as to the best approach to calculating the
CVA on White Knight. Ernst & Young's preference was for a "market implied" approach,
relying on credit derivative spreads. ABN AMRO's judgement, which was supported by
RBS Group's auditors (Deloitte), was that an analysis of credit risk as a predictor of
expected losses was to be preferred. Following discussions Ernst & Young, Deloitte, RBS
and ABN AMRO determined that the figures resulting from the differing approach CVA
calculation were not material in the light of the overall results of the Group such that the
auditors could "agreed to disagree." Ernst & Young agreed the 2007 accounts, leaving
230m as an unadjusted item; the net difference of all the unadjusted items raised by Ernst
& Young was 143m.
225AF. It is admitted that 74MM.1 accurately describes what is stated in the document referred to
by the Claimants, with respect to the gross CVA increase on White Knight in Q1 (before
hedging). It has not been ascertained why the Q1 CVA increase of 245m referred to differs
(immaterially) from the 198m figure set out for Q1 in the "Significant Focus Analysis"
dated 1 May 2008. As that document shows, a positive movement of 51m in April had
resulted in year to date estimated loss of 147m. That figure was for the gross CVA,
excluding the benefit of the hedges that had been taken out in respect of it.
225AG. As to paragraph 74MM.2:
225AG.1

As to the first sentence, it is admitted that from about March 2008 ABN
AMRO valued the CVA for White Knight using a CDO squared valuation
approach allowing for defaults within the structure up to CAD$2.51bn. It is
denied that that assumption was "false and imprudent". ABN's approach, based
upon a fundamental credit analysis, was appropriate, and agreed as such by
Deloitte. There were not at any stage any defaults losses associated with White
Knight that were incurred above the attachment point of the credit derivatives
between White Knight and ABN.

225AG.2

As to the second sentence, the email referred to (and selectively quoted) by the
Claimants is admitted and will be referred to at trial for its full terms and effect.

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225AG.3

The final sentence is, in the premises, denied. As set out above, RBS's approach
was appropriate and agreed as such by Deloitte. The figure is specifically
denied for the reasons set out below.

225AH. As to paragraph 74MM.3 it is admitted that ABN AMRO held CAD$50M of White Knight
floating-rate notes. The basis of the balance of the Claimants' contentions are unclear (neither
particulars nor supporting material has been referred to) and are denied.
225AI. As to paragraph 74MM.4:
225AI.1

It is admitted that mark-downs of 700-800m for White Knight were included

in (i) a paper prepared by Rebonato and circulated internally within RBS dated
8 April 2008; and (ii) also in early versions of the De-Risking Presentation next
to the subject line "Exotic credit (ABN) - White Knight and correlation book."

225AI.2

It is denied that the figure of 700-800m represented a conservative estimate

(for capital planning purposes or at all) of RBS's losses in respect of White
Knight for 2008. As explained by Rebonato on 8 April 2008 in an email to
Kyle and Hallett: "The White Knight value was obtained assuming that in the
time frame of two weeks a buyer would be found on a 'thin-tranche' (ie CDO^2)
valuation basis. This has no implications as to the best 'money-good' internal
valuation" and in an email to Nielsen of the same day "Exit of White Knight
trade 700 800 Based on assumption that thin tranche has virtually no
capital."

225AJ. Paragraph 74MM.5 is admitted. The White Knight trades were novated from ABN to RBS in
November 2008.
225AK.As to paragraphs 74NN.1 and 74NN.2:
(a)

Information as to the discussions between RBS, Ernst &Young and Deloitte regarding
the accounting treatment (in which Deloitte supported RBS's position as described
above) was not necessary for an informed assessment of RBS's financial position and
prospects.

(b)

The net increase in the CVA during 2008 (as addressed in paragraph 225AF above)
was not material in the context of the Rights Issue, and as such was neither of itself

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necessary information nor a significant change from the position as disclosed in the
2007 Accounts, particularly in circumstances in which RBS had the benefit of hedges
that were likely to (and did) prevent further increases.
225AL.Paragraph 74NN.3 is denied. The increase in the CVA in Q1 will have been taken into
account (via the Q1 results) in the capital plan. Further increases were not likely because of
the hedges.
225AM. As to paragraph 74OO:
225AM.1

The first sentence is denied. As set out in RBS's CME RFI response
Appendix 2 (sheet "other Cpty CVA and CDPC" rows 124 to 128) White
Knight's CVA movement in H1 2008 was 177m (excluding the benefit of
hedges).

225AM.2

The second sentence is denied. The reference in the document relied upon by
the Claimants was not to a loss in ABN AMRO but to a loss in RBS solo, and
is not currently understood. The exposure was accounted for on the HFT
basis and transferred at fair value, so the transfer should not have caused a
loss to be realised by either ABN AMRO or RBS.

225AM.3

As to the third sentence, it is admitted that the gross CVA as at 31 December

2008 was 600m. The net figure after hedges would have been substantially
lower. An analysis of hedge effectiveness carried out in October 2008 shows
that, between May and September 2008, the CVA on White Knight increased
by 84.8m whilst the value of the counterparty risk hedges increased by
80.6m, leaving a net CVA increase of only 4.2m.

225AN. Paragraph 74PP is noted.

D7.5

"European ABS, RMBS, CMBS and Mortgage-covered bonds"

225AO. Save in the respects admitted below, paragraphs 74QQ is denied:

225AO.1

It is admitted that the Write-Downs Table did not set out RBS's exposures to
European ABSs (as defined). The reasonable reader would have appreciated
from the heading "US Residential Mortgages" and the row label "US

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commercial mortgages" that the disclosure in respect of credit market

exposures relating to residential and commercial mortgages was restricted to
US exposures.
225AO.2

It is admitted that RBS's assets at December 2007 included (by carrying

value) over 23bn of European RMBS and 4.7bn of UK RMBS with
approximately 50% HFT and 50% AFS. See the CME RFI Response,
Appendix 2 (sheets "sub-prime" row 31-32; "Other non-agency" rows 26,
406; "Guaranteed RMBS" rows 32-33; "Alt-A" row 29)

Europe
Subprime RMBS
Non-Conforming RMBS
Other Non-Agency RMBS
Guaranteed RMBS

UK
Subprime RMBS
Non-Conforming RMBS
Other Non-Agency RMBS
Guaranteed RMBS

HFT
324
0
9,429
0
9,753

AFS
0
0
7,880
6,012
13,892

Total
324
0
17,309
6,012
23,645

150
724
2,614
126
3,614

7
157
906
30
1,100

157
881
3,520
156
4,714

(The Topaz, Uropa, Britannia and Landmark deals loans held for
securitisation (as disclosed in CME RFI, Appendix 2, "Loans held with the
intention of securitisation") were not RMBS and are not included in these
figures.)
225AO.3

These are types of exposure that investors would have expected to be

comprised, in large quantities, within the 68bn of mortgage backed securities
disclosed on page 157 of the 2007 Accounts.

225AO.4

The allegation in paragraph 74QQ.1 that European ABS exposures were

excluded from the Write-Downs Table on a blanket basis merely because of
their origin is denied. Information regarding European ABS exposures on the
RBS EMEA desk and in ABN was provided to the investment banks (as
further set out in paragraph 225AQ.3 below), and reviewed by them and RBS.
The exclusion of these exposures from the Write-Downs Table, following that

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review, was because neither RBS nor the investment banks considered them
to be of concern. That assessment was reasonable.
225AO.5

It is denied that it was necessary for the Prospectus to contain any of the
matters alleged in paragraph 74QQ.2 and 3.

225AP. As to paragraph 74RR:

225AP.1 As to paragraph 74RR.1 and 74RR.2 (European RMBS):
(a)

The Claimants' analysis in these paragraphs is a good example of both (i) the
Claimants' inappropriate approach of selectively quoting and relying upon
individual figures from non-final drafts of working documents and (ii) the
duplication of allegations (both as referred to in paragraph 205.2 above).

(b)

Paragraphs 74RR.1 and 74RR.2 involve such duplication, because they

involve relying upon figures for losses or estimated losses in the flow credit
business area, which is the subject of a purportedly free-standing set of
allegations in section 7.8 below.

(c)

In terms of the evolution of the CME Recon Table, 70m of the 185m Q1
losses referred to in paragraph 74RR.1, and the 265m referred to in
paragraph 74RR.2, started life in version 2 of the CME Recon Table in a row
labelled Flow Credit. In the next version those figures remained in the same
row, but this time next to a note saying "Some of this 265m relates to
RMBS?" That note and the Flow Credit row came out of the table when those
numbers appeared, in version 5, in the row labelled RMBS (which was
populated with figures for the first time).

(d)

The summary page of the De-Risking Presentation also contained a row

labelled Flow Credit, representing the total of the three rows listed above it.
The 70m Q1 2008 loss on Flow Credit was shown in the summary page of
the final version of the De-Risking Presentation, together with a total
Scenario 1 estimated P&L impact of 200m. An earlier version of the DeRisking Presentation had estimated Flow Credit Scenario 1 losses of 265m,
which corresponds with the additional write-downs figure in versions 5 and 7
of the CME Recon Table.

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(e)

Consequently, the allegations made by the Claimants in this section, in which

they allege that the disclosed write-downs were understated by 450m in
respect of European RMBS (70m+115m+265m) duplicates Section 7.8
below, by recycling 70m of Q1 2008 losses and 265m of additional losses
clearly relating to the Flow Credit area. The claim also overstates the total of
those losses as they appeared in the De-Risking Presentation (70m+200m
on the summary page of the final version). Instead of basing their claim upon
that number (which would itself be unsustainable as an alleged omission, for
the reasons explained below) the Claimants use numbers derived from the
Flow Credit line to support both the 450m omission alleged in paragraph
74RR.3 and the 1,015m omission alleged in paragraph 74AAA.

(f)

In the premises, the allegation of an omission of write-downs set out in

paragraphs 77RR.1 and 77R.2 are unsustainable as allegations distinct from
the allegations made separately in relation to the Flow Credit area. The
allegations of omissions relating to that area are dealt with in Section D7.8
below.

(g)

As regards the exposure figure of 5,577m shown in versions 5 and 7 of the

CME Recon Table and referred to in paragraph 74RR.1, this is the same
figure as the 31 March 2008 total market value shown for the RBS EMEA
ABS Exposures (which included, but was not limited to, RMBS) in a
document provided to the investment banks, and it is inferred that that
document is the source of the figure, as well as of the average mark of 94%.

(h)

As to the level of Q1 RMBS losses purportedly shown in versions 5 and 7 of

the CME Recon Table, the P&L analysis contained in CME RFI, Appendix 2,
"HFT write-downs", shows losses on European ABS and Flow Credit (thus
not limited to RMBS) totalling 280m in H1 2008. The equivalent analysis
for Q1 2008 (as explained in the further spreadsheet titled "March 2008 HFT
write-downs" provided herewith labelled CME RFI Appendix 4) showed a net
profit position of 5m in Q1 for those two areas (32m net profit in Flow
Credit and 27m net loss in European ABS rows 35 and 39). The 70m Q1
loss in versions 5 and 7 of the CME Recon Table corresponds to the Flow
Credit Q1 loss figure shown in the summary page of the final version of the

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De-risking Presentation (thus not limited to RMBS) the 115m does not
appear in that document. Given that the 70m was not material in itself, it is
averred that there had not been material losses on European RMBS in Q1
2008.
225AP.2 As to paragraphs 74RR.3 and 74RR.4 (European CMBS):
(a)

It is admitted that version 5 of the CME Recon Table included, in a row

labelled "CMBS" that appeared under the heading "European ABS/RMBS",
exposures as at 31 December 2007 of 8,808m, Q1 write-downs of 139m
and an estimated additional write-down of 360m, at an average mark of
93%.

(b)

The 31 December 2007 exposure of 8,808m in version 5 of the CME Recon

Table corresponded to the total commercial mortgages figure of 8,808m
disclosed on page 43 of the 2007 Accounts, indicating that the figures that the
Claimants rely upon as relating to European CMBS in fact include the US
commercial mortgages disclosed in the Prospectus. Version 17 of the CME
Recon table shows the same exposure figure in row 43, with the
corresponding 139m Q1 loss figure and estimated additional write-downs of
200m at an average mark of 95%.

(c)

From this, US exposures and estimated write-downs were isolated (in row 42)
and these (including a Q1 write-down of 101m and estimated additional
write-down of 100m) were disclosed in the US commercial mortgages row
of the Write-Downs Table.

(d)

The basis (if any) for the remaining 38m Q1 write-down and 100m
estimated additional write-down (derived by subtracting the figures in row 42
from those in row 43 of version 17 of the CME Recon Table) has not been
ascertained. As shown in CME RFI Appendix 4, row 37, European
Commercial Mortgages had made a positive P&L contribution of 101m in
Q1. The equivalent figure by 30 June 2008 was a positive contribution of
92m.

225AQ. Paragraph 74SS is denied. Specifically:

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225AQ.1

Having regard to the matters set out in paragraph 225AP.1 above, it was
reasonable to conclude that the European RMBS were not likely to give rise to
material write-downs in 2008 and that information about them was not
necessary for investors.

225AQ.2

The European commercial mortgages were sufficiently disclosed as part of the

8.808bn referred to on page 43 of the 2007 Accounts, which explained that
this commercial mortgage exposure consisted of loans originated for the
purposes of securitisation, consisting predominantly of commercial mortgages
originated in Europe. It was reasonable not to disclose estimated write-downs
in relation to it.

225AQ.3

Further and in any event, both of these categories of exposure were considered
by the investment banks as part of their due diligence, and their approval of the
Prospectus without the inclusion of these items in the Write-Downs Table of
itself provided a reasonable basis for the Defendants' belief that the Prospectus
was not misleading and did not omit necessary information in this regard.
Specifically:
(a)

The investment banks received information about the breakdown of

the 68bn mortgage backed securities disclosed on page 157 of the
2007 Accounts in the Q&A list (Q6 on page 11) and the GBM
Credit Briefing (on page 30, "Slide 34").

(b)

The investment banks received further information about RBS's

RMBS exposures in the 'RBS EMEA desk ABS Exposures' table
dated 31 March 2008 and the 'European ABS Analysis' Spreadsheet
of 14 April 2008.

(c)

The investment banks received further information about RBS's

commercial mortgage exposures (the 8.8bn) in the 'Commercial
Property Loans Originated for Securitisation' spreadsheet dated 15
April 2008.

D7.6 CMBS
225AR. As to paragraph 74TT:

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225AR.1

The first sentence refers to the figures provided in paragraph 215 of the
Defendants' original Defence (but inaccurately reproducing the net figure for US
CMBS).

225AR.2

The second and third sentences are admitted. Those figures were carrying values,
not net exposures.

225AR.3

As regards the fourth sentence, it is admitted that carrying values at April 2008
are likely to have been in the region of those shown in the accounts for 31
December 2007 and 30 June 2008. It is admitted that the FSA was provided with
information to the effect stated.

225AR.4.

The CME RFI provides, as summarised in rows 22 to 24 of Appendix 3, a

breakdown of the net exposures to CMBS securities, identifying which were and
were not disclosed, and the organising principle for disclosure.

225AS. (Formerly 217) As to paragraph 74.4UU:

225AS.1

The first sentence is admitted. Such exposures did not need to be disclosed since
RBS did not anticipate that they would give rise to the need for material writedowns during 2008. Further and in any event, the extent of RBS's liquidity
commitments to conduits was disclosed in the 2007 Accounts.

225AS.2

No admission is made with regard to the exact level of commercial real estate
prices during the Rights Issue Period.

225.AS.3

It is denied that there were any events during the Rights Issue Period sufficiently
material to give rise to the need for a supplementary prospectus.

225AT.

As to paragraph 74UU(1) and the position in relation to Appendix 1 see paragraph 205
above. The overall allegation of material omissions or understatements is denied, and the
Defendants specifically take issue with the following unjustified elements of the
Claimants' allegations:
(1)

The Claimants' contention that general hedges should not have been taken into
account is unjustified. Taking account of hedges (including general hedges) provided
an accurate indication of the net exposure from a risk perspective;

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(2)

The use of 2 January 2008 rather than 31 December 2007 figures did not make a
material difference;

(3)

It was reasonable not to include US CMBS guaranteed by Ginnae Mae;

(4)

It was reasonable not to include non-US HFT CMBS, as well as AFS, L&R and DFV
CMBS.

(5)

Insofar as the calculated write-downs are based upon the contention advanced in
paragraph 74VV.4 to the effect that a 7% write-down was required, that is denied. To
the extent appropriate, issues relating to valuation will be addressed further in expert
evidence.

225AU. As to paragraph 74VV:

225AU.1

Paragraph 74VV.1 is denied. With the non-material exception of the exposure of

78m referred to in row 22(b) of Appendix 3 to the CME RFI Response, the
approach adopted by RBS was reasonable. In particular, it was reasonable for the
disclosures to focus on US HFT CMBS exposures other than those guaranteed by
Ginnie Mae.

225AU.2

Paragraph 74VV.2 is denied. The Prospectus made clear that the exposures
disclosed were those on which RBS expected to take material write-downs.

225AU.3

As to paragraph 74VV.3, it is admitted that CMBS that were not disclosed were
"credit market exposures" but, with the non-material exception of the exposure
referred to in paragraph 225AU.1 above, it is denied that they were relevantly
similar to disclosed exposures such that they should have been disclosed.

225AU.4

Paragraph 74VV.4 is denied. To the extent appropriate, issues relating to

valuation will be addressed further in expert evidence.

225AU.5

It is denied that the points of explanation set out in paragraphs 74VV.5 were
necessary information.

D7.7 European Commercial Mortgages

225AV. As to paragraph 74WW:

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225AV.1

As at 31 December 2007, RBS had exposure of 7.1bn non-US commercial

mortgages held for securitisation and syndication. Of this, 4.3bn were held in
ABN for the purposes of securitisation and 2.8bn was held in RBS for
securitisation and syndication. See the CME RFI response, Appendix 2,
Commercial Mortgages, rows 138 to 144.

225AV.2

These exposures are double-counted in the claim they form part (the balance
being the US commercial mortgages disclosed in the Write-Downs Table) of the
same 8.8bn of exposures to which the Claimants refer in Section 7.5 above,
specifically in paragraph 74RR.3.

225AV.3

As set out in Section 7.5 above, those 8.8bn of commercial mortgages were
sufficiently disclosed on page 43 of the 2007 Accounts. It is denied that the fact
that the RBS European commercial mortgages were marked at 98% was
necessary information. On the contrary, the mark was indicative of the fact that
these exposures were not of concern.

225AV.4.
225AW.

Save as consistent with the aforesaid, paragraph 74WW is denied.

The allegations in paragraph 74XX duplicate those set out in paragraphs 74RR.3 and
74RR.4 above, and are denied for the reasons set out in Section D7.5 above.

D7.8 Flow Credit

225AX. As to paragraph 74AAA:
224AX.1.

As to the first and second sentences, it is admitted that RBS and ABN held "Flow
Credit" trading inventory books (within several desks) and that, as at 30 April
2008, RBS and ABN had a combined exposure of 15.065bn. The Flow Credit
trading inventory included, as at 17 April 2008: (i) ABS trading positions
including RMBS, CMBS and CLOs; (ii) a principal strategies' portfolio of
RMBS, ABS and Corporate exposure; and (iii) a trading inventory including
leveraged finance positions, high yield positions, investment grade corporate
positions, and fixed income bond positions.

225AX.2

The third sentence is not admitted. The Defendants' present understanding is that,
whilst the Q1 and expected future write-downs in the Flow Credit area were

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considered in the preparation of the Write-Downs Table, there was no direct

overlap between the estimated write-downs disclosed in the Write-Downs Table
and the 270m estimated Flow Credit write-downs set out in the De-Risking
Presentation.
225AX.3

As explained below, it was in fact reasonable not to disclose in the Write-Downs

Table the Flow Credit exposures or the 270m estimated write-downs, and it is
inferred from the documents that the decision not to disclose them was made for
these reasons or other equally valid reasons.
(a)

All of RBS's exposures were disclosed, in aggregate terms, via the 2007
Accounts, for example within the 68bn of mortgage backed securities
disclosed on page 157 of the 2007 Accounts.

(b)

It was reasonable not to include the Flow Credit exposures in the WriteDowns Table because they were not incurring losses so as to be of
significant concern at the time of the Prospectus. The Flow Credit area
made a net profit of 32m in Q1 2008.

(c)

As regards the 200m (in the summary) or 265m (on slide 16)
estimated additional losses in the Flow Credit area, the rationale for these
projections in the context of the de-risking proposals was set out on slide
16 of the final De-Risking Presentation. They represented the aggregate
expected liquidation cost of the voluntary disposal of certain subsets of
the exposures comprising a still profitable trading area, details of which
it was not necessary for investors to have to be able to make an informed
assessment of RBS's financial position and prospects.

225AX.3 In the premises, the fourth and fifth sentences of paragraph 74AAA are denied.
225AY. As to paragraph 74BBB:
225AY.1.

Paragraph 74BBB.1 is admitted. As set out above, this formed part of a net
profit of 32m in the Flow Credit area in Q1 2008.

225AY.2.

The document and quotation referred to by the Claimants in paragraph 74BBB.2

is admitted and will be referred to at trial. That document was a draft with

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subsequent versions (including that circulated on April 10, 2008) amending the
first of the two quotations. A 40m overmark was not material on a portfolio of
this size.
225AY.3. Paragraph 74BBB.3 is denied.
225AY.4 Save as consistent with paragraph 225AP.1 above, paragraph 74BBB.4 is denied.
225AY.5. As to paragraph 74BB.5:
(a)

It is admitted that the Flow Credit area was considered by RBS as part of the
de-risking exercise and that steps were being taken within RBS to reduce
exposures in that area.

(b)

It is denied that the Principal Strategies portfolio was to be discontinued. The

proposal as at 15 April 2008 was to hold the RMBS until the market returned
to a more balanced supply/demand position.

225AZ. As to paragraph 74CCC1:

225AZ.1 It is admitted that the document to which the Claimants refer, which was prepared
by Tobin, referred to an expected write-down of 270m. That was consistent with
the Q1 write-down of 70m and the Scenario 1 estimated liquidation costs of 200m
referred to on the summary page of the final De-Risking Presentation. It is admitted
that the document to which the Claimants refer stated that the 270m was not
included in the 3+9 reforecast, but it is to be inferred that 70m of that was in fact
included in the 3+9 reforecast because it was included in the Q1 2008 write-down
total of 1,802m (shown on the summary page of the final version of the De-Risking
Presentation), which corresponds with the 1,802m credit market write-downs taken
into account in the 3+9 reforecast.
225AZ.2 .As to the second sentence, it is admitted that there was a year to date loss of 197m
in the Flow Credit area as at 30 June 2008.
225BA. Paragraph 74CCC.2 is admitted.

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D7.9 Structured Credit

225BB. As to paragraph 74DDD:
225BB.1

RBS held various categories of "structured credit" exposures, which were at the
relevant time held on several desks. It is admitted that, for the purpose of the derisking exercise, certain categories of exposures contained within both RBS and
ABN were collated within the De-Risking Presentation under the heading
"structured credit."

225BB.2

These exposures included (i) RBS's structured loan warehouses, comprising CLO
warehouses, ABS warehouses, unsold CLO liabilities plus an ABS assets
portfolio within ABN; (ii) RBS's exotic credit books including its TABS book;
and (iii) ABN's correlation book.

225BB.3

Save as consistent with the aforesaid, paragraph 74DDD is denied.

225BC. As to paragraph 74EEE, it is admitted that the correlation books totalled approximately
2.18bn, mainly consisting of ABN's correlation book with a notional of 2bn. It included
White Knight, which is the subject of separate allegations addressed in Section D7.4 above.
The other part was an RBS correlation book with a notional of approximately 180m. Each
correlation book was described in a summary of structured credit exposures sent to
Herrmann by Matteo Mazzocchi as being a "Dynamically hedged book, essentially flat with
respect to continuous market moves".
225BD. As to paragraph 74FFF:
225BD.1

It is denied that the TABS exposures totalled over $1.5bn. The notional was
approximately $1.05bn, comprised of long protection ABS tranches (total
notional $485m, as of 11 April 2008) and short protection CDS of ABS (total
notional $581m). The book was broadly hedged with a basis risk of $81m.
Closure of the book was under consideration because it would eliminate a capital
deduction of 220m. The estimated unwind cost was $75m. In the 17 April 2008
De-Risking Presentation, this corresponded to the estimated 40m markdown "to
re-balance the risk", which was included in the "future potential" column of the
summary.

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225BD.2

It is denied that either the exposure or the estimated cost of unwinding the TABS
book (should RBS opt to do so) was information necessary for investors to make
an informed assessment of RBS's financial position and prospects. Disclosure of
the total notional exposure of $1.05bn in the Write-Downs Table would have
been particularly misleading, given that it comprised an approximately equal mix
of long and short positions.

The 40m estimated unwind cost was "future

potential" not Scenario 1, and was in any event immaterial in the context of the
Rights Issue.
225BD.3

It is admitted that there was an email exchange raising the question whether
structured credit (including the TABS exposures) should be moved to SAU in
May 2008.

Crowe's response was that they should only be included in

discontinued when it made sense to do so. That was consistent with the 17 April
2008 De-risking Presentation, which included TABS under 'continuing business'.
225BE. As to paragraph 74GGG:
225BE.1

As to the first sentence, the early drafts of the De-Risking Presentation will be
referred to as appropriate. In the final version of the De-risking Presentation,
dated 17 April 2008, there was no Scenario 1 additional P&L impact estimated
for either of these items. There was instead:
(a)

An estimated "future potential" loss of 80m in respect of the ABN

correlation book.

It is denied that this estimated potential future loss

was information necessary for investors to make an informed assessment

as to RBS's financial position and prospects.
(b)

An estimated "future potential" loss of 40m relating to TABS, which is

addressed in paragraph 225BD above.

225BE.2

As to the second sentence, it is admitted that early drafts of the Write-Downs

Table (up to version 5) included additional estimated write-downs in respect of
structured credit.

They were subsequently removed.

Such removal was

appropriate because information regarding these exposures and estimated "future

potential" write-downs was not necessary information.
225BE.3

Save as consistent for the aforesaid, paragraph 74GGG is denied.

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225BF. As to paragraph 74HHH:

225BF.1

It is denied that 165m was the prudent estimated write-down for 2008.

225BF.2

As to the second sentence (and on the presumption that the Claimants have
mistakenly referred to "flow credit" rather than "structured credit") it is admitted
that there was a year to date loss of 168m in the structured credit area as at 30
June 2008.

225BF.3

The final sentence is denied.

D7.10 Other ABS

225BG. As to paragraph 74III:
22BG.1 The Claimants' summary of RBS's exposure to other ABS at the end of 2007 (based
upon rows 114, 120, 126 and 140 of the "Other ABS" spreadsheet in CME RFI
Response Appendix 2) is admitted. It is denied that these exposures were relevantly
similar to those in the Write-Downs Table, or that information in relation to them
beyond that already disclosed in the 2007 Accounts (for example on page 158) was
necessary to enable investors to make an informed assessment of RBS's financial
position and prospects.
225BG.2 It is denied that there was a significant change in the trading or financial position of
the Group arising from changes in the value of these exposures during 2008, and it
is noted that the Claimants advance no basis for the contention that there was.
D8. Misstatements and omissions
Alleged failure to explain omissions
224A.
225BH.The second sentence of paragraph 74F75A is noted. The third sentence of paragraph 74F75A
is denied. Paragraphs 200AP to 200AS and 221, 81B and 81D are addressed abovebelow.
225BI. (Formerly 225) For the reasons set out above and at paragraph 236A below, paragraph 75 is
denied.

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226.

As set out above, the omissions and/or inadequate disclosure alleged in paragraph 76 are
denied. To the extent that any of the exposures therein referred to were not disclosed, those
were not exposures disclosure of which was required to allow a reader of the Prospectus to
make an informed assessment of RBS's financial position or prospects and were not exposures
required to be included under the provisions identified in paragraphs 76.1 and 76.2. In the
circumstances, the breach of s.90(1)(b)(ii) of FSMA alleged in paragraph 76 is also denied.

226A. Paragraph 76A is denied.

226A (in part formerly 236G) As to paragraph 77A:
226A.1 The SSG Report, published on 11 April 2008 only shortly before the publication of
the Prospectus, did not contain guidance. It contained a review of disclosure
practices, for the purposes of assisting firms to assess and enhance their own
disclosures. As noted by the FSA in an internal memorandum dated 28 April 2008
and addressed to Mr Sants, "It would not be reasonable to expect UK banks
necessarily to be already at the leading edge identified by SSG/FSF for each area of
disclosure relevant to the current turbulence. What is important is that they continue
to strengthen their disclosures in response to those reports. In that context, we note
that in their latest disclosures RBS has provided more detail on exposures to
monolines." It was further noted that "Examples of good practice include the
granular data on high risk exposures (ABS, CDOs etc) by RBS" a reference to the
information provided in the Press Release that was repeated in Section 3 of the
Prospectus. RBS's disclosure practices were reviewed and enhanced through the
course of 2008, and subsequently. Enhanced disclosures were provided, in particular,
in the 2008 Interim Results, published in August 2008.
226A.2 The information referred to in paragraphs 77A.3 and 77A.4 was provided on page 27
of the Prospectus.
226A.3 The disclosures contained in the Prospectus were reasonable and sufficient at that
time.
226A.4 Save as set out above, paragraph 77A is denied.
226B. Paragraph 77B is denied.

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226C. In the absence of specific particulars of alleged knowledge, paragraph 77C is embarrassing
and impossible to plead to in detail. It is denied that any of the Director Defendants was
aware of any new factor, mistake or inaccuracy requiring the submission of a supplemental
prospectus.
Estimated write-downs of credit market exposures
227.

It is admitted that the passages set out in paragraphs 77 and 78 appeared in the Prospectus.

228.

Paragraphs 79 and 80 are denied. In assessing the need for write-downs, and the likelihood of
future write-downs, RBS had considered a range of assets held on its balance sheet. The
Write-Downs Table was the product of that process and set out details of those assets in
relation to which RBS had concluded that a material write-down was required and/or was
likely to be required over the remainder of 2008.

CDOs and CLOs

229.

Paragraph 80.1 is denied, in which regard paragraphs 0 to 0 and 0 to 0 above are repeated. To
the extent that the 1 billion figure is based on the size of actual write-downs incurred in
2008, the allegation is once again made with the benefit of hindsight.

CMBS
230.

Paragraph 80.1A is denied.

Further, actual write-downs experienced in 2008 on US

commercial mortgages were 95 million, some 106 million lower than the estimate
contained in the Write-Downs Table.
RMBS
231.

The first sentence of paragraph 80.2 is denied. The second sentence is noted. Any additional
write-down arising from undisclosed sub-prime RMBS exposure would have been nonmaterial in which regard paragraphs 0-0 above are repeated. Further, actual write-downs
experienced in 2008 on US RMBS were 1.47 billion, only 296 million more than the
estimate contained in the Write-Downs Table.

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Leveraged loans
232.

As to paragraph 80.3, for the reasons set out in paragraph 0 above, it is denied that additional
loan provisions were required in respect of leveraged loans. It is further denied that writedowns for leveraged loans as at either the Prospectus Date or the Closing Date were
significantly greater than 1.25 billion.

Actual write-downs experienced in 2008 on

leveraged loans were 1.33 billion, slightly lower than the total estimate contained in the
Write-Downs Table for leveraged loans.
Other Counterparties
233. Paragraph 80.4 is denied.
Citizens SBO
233A. As to paragraph 80.4A:
233A.1 The first sentence is denied. Paragraph 220A.3 above is repeated.
233A.2 It is admitted that anticipated lifetime losses on the SBO portfolio (as estimated by
Citizens) were approximately 772 million ($1.5 billion) by July 2008. At the time
of the Rights Issue, impairments on the SBO portfolio in 2008 were expected to be
331 million. That assessment was relevant to impairments, not write-downs. Such
impairments (164 million for the first half of 2008, as disclosed in RBS's 2008
Interim Accounts, 319 million for the full year) had the effect of reducing RBS's
profits from US Retail & Commercial Banking, as disclosed on page 30 of the
Prospectus. Paragraphs 220A.3 to 220A.5 and 220A.7 above are repeated.
233A.3 Save as set out above, paragraph 80.4A is denied.
Loan Loss Provisions
234.

Save that the loan losses reported for 2007 and 2008 are admitted, paragraph 80.5 is denied.
In this regard, paragraph 223 above is repeated. The budgeted loan losses incorporated in
RBS's capital plan were reasonable based on matters then known to the bank.

235.

For the reasons set out above, paragraph 81 is denied.

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236.

As set out above, the omissions and/or inadequate disclosure alleged in paragraphs 79 and 80
are denied. To the extent that any of the matters therein referred to were not disclosed, those
were not matters disclosure of which was required to allow a reader of the Prospectus to make
an informed assessment of RBS's financial position or prospects and were not matters
required to be included under the provisions identified in paragraphs 82.1 and 82.2. In the
circumstances, the breach of s.90(1)(b)(ii) of FSMA alleged in paragraph 82 is also denied.

236A. As to paragraph 81A:

236A.1 It is admitted that the Write-Downs Table appeared in a section headed "Credit
Market Exposures".

It is denied that that section was misleading or omitted

necessary information.
236A.2 Save for the accuracy of the words quoted from the Prospectus, paragraph 81A.1 to
81A.4 and their respective subparagraphs are denied.
236A.3 As regards paragraph 81A.5:
(a)

It is admitted that the Prospectus did not state in those words that the
exposures in the Write-Downs Table set out "exposures to certain
categories of asset from a risk perspective". The nature and purpose of the
Write-Downs Table was clear from the context and the words that were
used.

(b)

It is denied that RBS had reclassified certain CDOs as CMBS when

preparing the Prospectus, or that that is what paragraph 93 of the Part 18
Response states. Paragraph 93 of the Part 18 Response is repeated. Detailed
information regarding the reconciliation between the 2007 Comparatives
and the Write-Downs Table has now been provided in the CME RFI
Response.

(c)

It is admitted that the Prospectus did not state in those words that the
Prospectus used index and other general hedges to reduce the level of
exposures stated. The reasonable investor would have assumed from the
description of the exposures as "net" that any applicable index and other
hedges had been taken into account.

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(d)

It is denied that the Write-Downs Table was misleading in any of these

respects.

236B. As to paragraph 81B:

236B.1 It is admitted that the Write-Downs Table did not include any assets accounted for
on an AFS basis.
236B.2 It is denied that the Prospectus should have included any of the matters set out in
paragraphs 81B.1 to 81B.5, or that this was necessary information. Specifically:
(a)

With regards to paragraph 81B.1, it is denied that RBS had "decided to

exclude from the Write Downs Table" the AFS assets.

The expressly

described nature of the Write-Downs Table (as a table of assets on which

RBS expected to take write-downs, prepared for capital planning purposes)
was such that it would have been inappropriate to include AFS assets.
(b)

As regards paragraph 81B.2, even where underlying assets held on an AFS

basis were similar in nature to those held for trading assets on which writedowns were expected, the difference in accounting treatment meant that the
assets held on an AFS basis did not need to be disclosed where RBS did not
anticipate a need to make material impairments, because any reduction in
the fair value of the AFS assets would have no impact on regulatory capital
or future profits unless there was an impairment.

(c)

As regards paragraph 81B.3, it is denied that, at the time of the Rights Issue,
there had been any movements in the market value of credit market assets
held on an AFS basis that were sufficiently material to RBS's liquidity
position to need to be disclosed for investors to understand RBS's liquidity
position. As at 30 June 2008, RBS's AFS reserves had fallen by less than 1
billion from their level at 30 December 2007. The fall in asset values that
this reflected was not material in the context of RBS's liquidity position.

(d)

As regards paragraphs 81B.4 and 81B.5, it is denied that such statements

were necessary. The extent of RBS's AFS credit market instruments was
apparent from the 2007 Accounts, in particular on pages 158 and 159, which
disclosed, for example, that RBS held approximately 23.7 billion of

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mortgage-backed securities on an AFS basis, with gross unrealised losses of

approximately 115 million on these assets as at 31 December 2007.
236C. Save in the respects admitted below, paragraphs 81C and 81C.1 to 81C.3.2 are denied:
236C.1 It is admitted that the Write-Downs Table did not set out RBS's exposures to
European ABSs (as defined), and that the Prospectus did not contain any express
statement to this effect.
236C.2 The allegation in paragraph 81C.1 that European ABSs were excluded from the
Write-Downs Table on a blanket basis merely because of their origin is denied. The
European ABSs were excluded because (as stated in paragraph 204 above) RBS did
not anticipate that it would need to make material write-downs on them.
236C.3 It is denied that any of the European ABSs should have been included in the WriteDowns Table. As stated in paragraph 200.2 above, it is denied that there were at
that time significant concerns about ABSs based on underlying assets of European
origin.
236C.4 It is denied that it was necessary for the Prospectus to contain any of the matters
alleged in paragraph 81C.3 to have been necessary.
236D. As to paragraph 81D:
236D.1 It is admitted that (as set out in paragraph 221.2 above) the Write-Downs Table did
not include leveraged loans accounted for on a loans and receivables basis, in which
RBS participated as a long-term investor. It is admitted that the Prospectus did not
expressly state this. It is denied that it was necessary to do so, or to set out any of
the matters alleged in paragraphs 81D.1 to 81D.6.2 or otherwise.
236D.2 Further:
(a)

It is denied that leveraged loans held by RBS as a long term investor were
"credit market exposures", as that term would have been understood by a
reasonable investor.

(b)

It is denied that there is a valid distinction to be drawn in this context, as

alleged in paragraph 81D.3, between an accounting and an economic

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rationale. The leveraged loans that RBS intended to hold as a long term
investor did not give rise to an exposure to the credit markets needing to be
disclosed to investors seeking to understand RBS's financial position and
prospects. RBS's treatment of these assets (which were accounted for on a
loans and receivables basis) did not assume that the fall in the fair value of
leveraged loans (on the credit markets) was temporary; it assumed that the
leveraged loans held by RBS on a loans and receivables basis would not be
disposed of or traded on the credit markets at all.
(c)

Paragraph 81D.4 is denied. The leveraged loans in question were not a

likely source of collateral at that time, and changes in their value on the
credit markets were not material to RBS's liquidity position.

(d)

The first sentence of paragraph 81D.5 is denied. With regards to the second
sentence of paragraph 81D.5, it is admitted that, because of the stressed state
of the credit markets, there were concerns about credit market exposures
relating to leveraged loans, and it was for that reason that disclosure of such
exposures were made in the Write-Downs Table. It is denied that there were
substantial concerns at that time relating to leveraged loans held on a loans
and receivables basis.

(e)

Paragraph 81D.6 is denied.

236E. As to paragraph 81E:

236E.1 It is admitted that the Write-Downs Table did not (save incorrectly as set out in
paragraph 209 above) make any disclosure in respect of CLOs. As set out in
paragraphs 209 and 211 above, it did not need to do so.
236E.2 It is admitted that the Prospectus did not expressly state that no disclosure was made
in respect of CLOs. It is denied that any such statement was necessary, or that it
was necessary to include any of the other matters alleged in paragraphs 81E.1 to
81E.5.2.
236E.3 It is admitted that the CLOs held by RBS were credit market exposures. It is denied
that they were relevantly similar to the exposures disclosed in the Write-Downs
Table, so as to require them to be disclosed.

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236E.4 It is denied that there were substantial concerns about CLOs at that time.
236E.5 Save as aforesaid, paragraph 81E is denied.
236F. As to paragraph 81F:
236F.1

It is admitted that the Write-Downs Table did not include CMBS exposures, and
denied that it was necessary to do so. Paragraph 215 above is repeated.

236F.2

It is denied that it was necessary to deal with CMBS exposures as alleged in

paragraphs 81F to 81F.5.4.

236F.3

Paragraph 81F.1 is denied.

236F.4

Save that it is admitted that CMBS were asset backed securities and (where held for
trading) were credit market exposures, paragraph 81F.2 is denied.

236F.5

The first sentence of paragraph 81F.3 is denied. As to the second sentence, it is

admitted that there were concerns in the market about US sub-prime residential
mortgages. It is denied that there were similar concerns at that time more generally
in relation to global real estate markets. It was stated on page 12 of the Global
Banking and Markets Structured Credit Report (July Draft GIA Reports) that it
had been possible at all times to observe market prices for CMBS positions.

236F.6

Paragraph 81F.5 is denied.

236G. As to paragraph 82A:

236G.1

The SSG Report, published on 11 April 2008 only shortly before the publication of
the Prospectus, did not contain guidance. It contained a review of disclosure
practices, for the purposes of assisting firms to assess and enhance their own
disclosures. RBS's disclosure practices were reviewed and enhanced through the
course of 2008, and subsequently.

Enhanced disclosures were provided, in

particular, in the 2008 Interim Accounts, published in August 2008.

236G.2

The information referred to in paragraphs 82.A.3 and 82.A.4 was provided on page
27 of the Prospectus.

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236G.3

The disclosures contained in the Prospectus were reasonable and sufficient at that
time.

236G.4 Save as set out above, paragraph 82A is denied.

236H. Paragraph 82B is denied.
Monoline and CDPC and Financial Guarantor exposures
237.

As to paragraph 82CA:
237.1

It is admitted and averred that RBS calculated CVA for monoline counterparties on
the basis of exposure to the counterparty, credit spread and loss given default. At the
time of the Rights Issue there was no industry-wide prescribed method of calculating
CVA. CVA is an accounting adjustment, which should not be confused with the
wider assessment of credit risk applicable to monoline and CDPC exposures, or
exposures to other financial guarantors. At the time of the Rights Issue there was no
industry-wide prescribed method of calculating CVA.

237.2

The second sentence is admitted.

237.3

Save that the calculation took account of the probability of default (which in part was
based upon the credit spread of the counterparty), and the loss-given-default, the first
sentence of paragraph 82C is denied. Save as aforesaid, paragraph 82C is denied.

238.

Paragraph 83 is noted, in respect of which paragraphs 198 to 199A.3200 above are repeated.
As regards paragraph 83, paragraphs 198 to 200 above are repeated.

238A. Paragraph 83A is admitted.

239.

It is admitted that the tables reproduced at paragraph 84 appear on page 27 of the Prospectus.
In addition to those tables and the information contained in the table on page 26 of the
Prospectus, the Prospectus also contained the following information relevant to RBS's
exposure to monolines:
239.1

At page 10, under the heading "Summary of risk factors" and "Risks related to RBS",
the Prospectus stated:

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"The value or effectiveness of any credit protection which RBS has purchased from
monoline insurers may fluctuate depending on the financial condition of the
insurer."
239.2

At page 12, under the same heading:

"Financial markets are sometimes subject to significant stress conditions where
steep falls in perceived or actual asset values are accompanied by a severe
reduction in market liquidity, as exemplified by recent events affecting asset-backed
CDOs, the US sub-prime residential mortgage market and leveraged finance. In
dislocated markets, hedging and other risk-management strategies may not be as
effective as they are in normal market conditions due, in part to the decreasing
credit quality of hedge-counterparties, including monoline insurers. Severe
market events are difficult to foresee and, if they continue to occur, could result in
RBS incurring significant losses." (emphasis added)

239.3

At page 12-13, under the same heading:

The value or effectiveness of any credit protection which RBS has purchased from
monoline insurers may fluctuate depending on the financial condition of the
issuer.
RBS's credit exposure to the monoline sector arises from over-the-counter derivative
contracts mainly credit default swaps ("CDS") which are carried at fair value.
The fair value of these CDSs, and RBS's exposure to the risk of default by the
underlying counterparties, depends on the valuation and the perceived credit risk of
the instrument against which protection has been bought. Towards the end of 2007,
monoline insurers were adversely affected by their exposure to US residential
mortgage-linked products. If the financial condition of these counterparties or their
perceived credit worthiness deteriorates further, RBS could record further credit
valuation adjustments on the CDSs bought from monoline insurers in addition to
those already recorded, as described in Part I of this document."

240. As to paragraph 85:

240.1

The 2007 Accounts disclosed, on page 43, 2,547m net direct exposure to "financial
guarantors".

This all related to monoline exposures (as set out in CME RFI

Appendix 2, Monoline, row 24).

240.2

The ABN AMRO 2007 Annual Report disclosed, on pages 26 and 138, 1,026m
exposure to "financial guarantors".

240.3

It is denied (as impliedly alleged) that the reasonable reader of these documents
would have interpreted the reference to financial guarantors as including (or

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indicating that there were no) exposures to CDPCs. In particular: (i) The term
"financial guarantors" was a reasonable term to use to describe monolines (or
entities acting like monolines), at a time when the term "monoline" did not have the
wide familiarity with investors that it later acquired.

It would not have been

generally understood as including counterparties to financial contracts such as CDS

(which CDPCs generally wrote). (ii) ABN's 969m exposure to CDPCs was
separately disclosed on page 138 of its 2007 Annual Report, in terms which made
clear that this was not included within the exposure to "financial guarantors".
240.4

It is admitted that the only disclosure of CDPCs in the Prospectus was by

incorporation of ABN's financial statements (containing the information set out in
(2) and (3)(ii) above.

240.5

It is denied that the Prospectus was misleading in this respect.

240. Paragraph 85 is denied:

240.1

The 2007 Accounts disclosed exposure to monoline insurers at page 43 as follows:

"The Group hedges some of its positions with counterparties including financial
guarantors. At 31 December 2007 the Group had 2.5 billion of derivative
exposure to financial guarantors."

240.2

The ABN Form 20-F Annual Report for the year ending 31 December 2007, the relevant
sections of which were incorporated by reference into the Prospectus, disclosed exposures to
monoline insurers at page 26 as follows:
"Towards the end of 2007, monoline financial guarantors were adversely affected
by their exposure to the US sub-prime mortgage market. At 31 December 2007 the
Group had a gross direct exposure of EUR 1,632 million mainly relating to credit
default swaps (CDSs) and high grade ABS CDOs. Against this amount a credit
valuation adjustment of EUR 606 million has been taken of which EUR 379 million
relates to non-investment grade financial guarantors."
These figures were also included in the overall group exposure of 2.5 billion to
financial guarantors disclosed in the 2007 Accounts. It made further disclosure in
relation to monolines and CDPCs at page 138 as follows:
"Direct exposures to financial guarantors of EUR 1,026 million are recorded in
derivative financial instruments.

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This item also includes CDS exposures of EUR 969 million to highly rated credit
derivative product companies".
241.

Save that:
241.1

The Defendants adopt the definition of monolines at page 442 of the FSA Report.

241.2

No admission is made about the size of RBS's monoline exposure compared to that
of other UK banks or that the comparison is in any event meaningful in the present
context.

Paragraph 85A is admitted.

241A. As regards paragraph 85B:
241A.1 Save that it is denied that the extent of the exposure to the underlying assets was not
disclosed, paragraphs 85B.1 to 85B.3 are admitted insofar as they refer to exposures
insured by monolines.

The notional and fair value of the insured assets were

disclosed in the "Notional" and "Fair value of underlying asset" columns in the first
two tables on page 27 of the Prospectus.
241A.2 As regards paragraph 85B.4:
(1)

The first sentence is admitted in respect of RBS solo; ABN applied a CVA
calculation using market implied probabilities of default at all relevant times.

(2)

For the 2007 Accounts, and until early June 2008, RBS used a blended
approach, under which (i) a CVA valuation methodology taking into account
CDS spreads rather than historic probabilities of default was used for the
exposure above RBS's credit risk appetite threshold, and (ii) a CVA valuation
methodology taking into account historic probabilities of default was applied
to the exposure below the threshold. In early June 2008, and for the purposes
of the May 2008 month-end accounts, RBS moved to a CDS spread
methodology for the whole exposure. The historic probabilities of default
used in the CVA valuation were based on a combination of tables showing
probabilities of default published by Moody's and RBS's own, internal,
assessment of the probability of default for each monoline.

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(3)

It is admitted that historic probabilities of default for monolines were low, but
it is denied that the use of this element in the calculation of CVA for
exposures below the credit risk threshold was "broadly the same thing" as
assessing no CVA. It was simply another way (coupled with an additional
assessment of credit risk in the setting of the threshold) of assessing the value
of the accounting adjustment required for that part of the exposure.

(4)

The allegation that the use of a methodology including CDS spreads for
calculating the CVA was "a much more accurate measure of monoline credit
risk" than the use of a methodology including historic probabilities of default
is denied. There were reasonable arguments to be made in favour of each
approach; both approaches were considered reasonable and were applied by
market participants at the time of the Rights Issue. Although using market
implied probability of default was considered more conservative (in that it
was known to lead to a higher CVA in the market conditions prevailing at the
time), both approaches involved the assessment of a probability of default.
The difference was that the historic probability of default approach relied
upon and reflected rating agency views and historic outcomes (including
internal assessment), whereas a methodology using CDS spreads relied upon
and reflected prevailing market sentiment. While CDS spreads represent a
market implied probability of default, they are also affected by market
volatility and sentiment (which could lead to potentially misleading
fluctuations in CVA over short periods of time), as well as liquidity (or lack
of it) in the relevant market. Market practice in respect of calculation of
CVA shifted over several years from late 2007 from the use of historic
probability of default to market implied probability of default. For example,
a Group Finance report to the Group Audit Committee on 23 February 2009
stated, with respect to the calculation of monoline CVAs, that there was
"no clear market consensus on approach we understand that Barclays
and JP Morgan reserve using historic default probabilities whereas other
houses reference credit derivative spreads but do not apply these consistently
across all exposures".

(5)

The application of a credit risk threshold reflected RBS's assessment of credit

risk in the setting of the threshold.

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241B. As to paragraph 85C:

241B.1 Paragraph 85C.1 is denied. The application of a credit risk threshold was known, at
that point in time, to produce a lower CVA than the application of CDS spreads to the
whole exposure, but it remained a reasonable approach. The application of this
approach reflected the rationale that, for monoline exposures within RBS's credit
appetite, an assessment of credit risk based on historic probability of default was
reasonable, whereas for exposures outside this appetite, it was reasonable to align the
CVA with an approach that (in theory at least) reflected the cost of hedging.
Paragraphs 241A.2 (3) to (5) above are repeated.
241B.2 Paragraph 85C.2 is denied. The threshold approach to the calculation of CVA
adopted, applying a threshold representing RBS's credit risk appetite, was compliant
with the applicable accounting standards. This approach was approved by Deloitte in
the context of the preparation of the 2007 Accounts, as set out in paragraphs 139 to
140 of the witness statement of Rajan Kapoor dated 14 April 2016.

As to

subparagraphs 85C.2.1 to 85C.2.4:

(a)

As regards the documents referred to in paragraph 85C.2.1, it is denied that it

was reported that Deloitte's view was that the threshold approach should be
abandoned. Their view was that applying credit derivative spreads without a
threshold was the most appropriate approach for distressed counterparties.

(b)

It is admitted that the email referred to in paragraph 85C.2.2 was sent, and
was forwarded to Kapoor. The last sentence is denied. Goodwin would not
have given an instruction to Hourican to reverse a CVA increase in ABN
AMRO.

(c)

The document referred to in paragraph 85C.2.3 is admitted.

(d)

The document referred to in paragraph 85C.2.4 is admitted.

241C. Save that: (1) the statements to the investment banks were made in the context of the capital
planning estimates included in the Prospectus; (2) the threshold used in calculating the CVA
on monolines was reduced to zero (such that no threshold was applicable) as a result of an
ongoing and systematic process within RBS of evaluation of its CVA calculation
methodology, rather than the threshold being "abandoned"; and (3) the De-Risking

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Presentation did not "propose", but rather set out scenarios based upon the removal of the
threshold, paragraph 85D and sub-paragraphs 85D.1 to 85D.4 are admitted.
241D. As to paragraph 85E:
241D.1 The first sentence is admitted.
241D.2 The second sentence is denied. The estimated monoline write-downs disclosed in the
Prospectus contained an additional layer of conservatism, in that they took no account
of a further (and appropriate) refinement to the CVA methodology that would reduce
the CVA applicable (as described in paragraphs 69 and 70 of the first witness
statement of Bruce Bennett dated 14 April 2008).
241D.3 The third sentence is denied.

The figure was a reasonable estimate for capital

planning purposes. The suggestion that the use of current CDS spreads did not
adequately estimate the possibility of future downgrades or future deterioration in
CDS spreads is misconceived, because CDS spreads inherently reflect the market's
perception of likely future developments, including the risk of default, and
downgrade.
241D.4 The fourth and fifth sentences are admitted.
241E. As to paragraph 85E(1) and the allegations contained in the table at Appendix 1, see
paragraph 205.3 above.
241F. Paragraph 85F is admitted. As to its sub-paragraphs:
241F.1 Paragraph 85F.1 is admitted.
241F.2 As to the first sentence of paragraph 85F.2, the table on page 27 did not (as is clear
from its face) break down the valuation or marks as between RMBS and CDO of
RMBS, or sub-categories of the same.
average marks.

It did, however, provide total values and

The allegations in the second and third sentences that further

information on marking levels was necessary information are denied.

241F.3 As to paragraph 85F.3:

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(a)

Exposures to other ABS, CMBS and non-ABS assets were not set out within
the Write-Downs Table.

(b)

The allegation that an estimate as to the decrease in fair value of the

underlying exposures in this respect for 2008 would have been of "at least a
similar order" to the decrease in fair value of the uninsured assets included in
the Write-Downs Table is embarrassingly vague. Discussion is required
between the experts as to what, if any, analysis it is proportionate to conduct
in relation to this allegation.

(c)

Save as aforesaid, paragraph 85F.3 is denied.

241F.4 As to the sub-paragraphs of paragraph 85F.4:

(a)

As to paragraph 85F.4.1, the document on which the Claimants rely in

support of this paragraph sets out data sources used for valuing insured
exposures, and sets out certain limitations of those sources where identified.
In some cases, the information was identified as being updated monthly,
where information was sourced from lead managers, and in some instances it
was stated that information had not been subject to IPV. It is denied that this
supports the allegation that the valuations for insured exposures were
significantly higher than any comparable uninsured exposures.

(b)

As to paragraph 85F.4.2:
(i)

the allegation in the first sentence is insufficiently precise to plead to,

identifying neither specific closed nor comparable open SS CDO
positions, and is denied accordingly. Without prejudice to the
foregoing, it is admitted that the Pascal and Cairn closed ABS CDOs
held within RBS Greenwich were valued utilising the LSD Model
without the application of a buffer.

(ii)

As to the second sentence it is admitted that Pascal and Cairn closed

ABS SS CDOs were marked at 85% and 80% respectively as at the
28th March 2008.. As to the balance of the sentence, alleging that a
mark of 20% should have been applied by reference to other
mezzanine CDOs: (i) the basis of the Claimants' contention is not

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understood in circumstances where the closed ABS Pascal and Cairn

SS CDO deals were categorised as High-Grade ABS SS CDOs; (ii)
the re-marking of the Millerton closed CDO (about which no
admissions are made in respect of the circumstances) is insufficiently
particularised. It is denied that the read across which the Claimants
seek to make from the re-marking of the Millerton CDO is valid. The
fact that one closed CDO position was marked to a certain level does
not support the contention, without more, that other positions should
have been marked to that same level. The valuation of the Pascal and
Cairn CDOs will be addressed by the structured credit experts; and
(iii) in October 2008 and following a worsening of prices, the Cairn
and Pascal closed positions were both still marked above 20%.
(iii)

As to the final sentence, it is admitted that a lower mark would have

led to an increase in net monoline exposure and CVA, with the
Claimants' calculation in the premises denied.

(c)

Paragraph 85F.4.3 is embarrassingly vague and impossible to plead to in

circumstances where it provides no detail of the alleged "similar
overmarking" of "other underlying exposures".

241G. As to paragraph 85G.1:

241G.1 The first sentence is admitted.
241G.2 The second to fourth sentences are admitted. RBS understood that its $3bn protection
from AMBAC UK was also subject to recourse against AMBAC US. By the end of
May 2008, there were doubts as to this, which RBS was seeking to resolve through a
restructuring proposal.
241H. Paragraph 85G.2 is admitted.
241I.

As to Paragraph 85G.3, paragraph 242G.2 above is repeated. The CVA on AMBAC at the
end of June 2008 was 39%, not 34% as alleged. It is denied that the CVA should have been
over 750m as alleged.

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241J.

As to paragraph 85G.4 it is admitted there was an error in the weekly MTM report used for
the RBS CVA calculation and that this was reported in late April 2008 to individuals
including Crowe and Hallett. It is denied that this error was due to a failure to include a
$417m increase in CVA, but rather was an increase in MtM of RBS's exposure to AMBAC. If
this error had been corrected for in the monoline disclosures in the Prospectus, the CVA
would have been approximately $65m greater (32.7m). This would not have been a material
change.

241K. As to paragraph 85H.:

241K.1 The summary of the ABM AMRO Event Report dated 1 July 2008 contained in the
body of paragraph 85H is admitted.
241K.2 Paragraph 85H.1 is admitted, save that CIFG requested credit ratings be withdrawn
from Fitch for CIFG Guaranty, CIFG Assurance North America, Inc. and CIFG
Europe on 31 March 2008.
241K.3 Paragraph 85H.2 is admitted.
241K.4 As to paragraph 85H.3, no admission is made as to Mogador's rating.
241K.5 It is admitted that RBS should have included in its monoline disclosures both its
exposure to CIFG pursuant to the Mogador trade and a CVA in this respect. The
additional CVA for this (calculated on the same basis as the Prospectus calculations
as at the Prospectus date, using the spread for FGIC because there was no
observable spread for CIFG) would have been approximately $53.5m (26.9m). It
is denied that this was material.
241K.6. The remainder of the paragraph is denied.
241L. Paragraph 86.1 is admitted save that the relevant figures of the approximately $14bn indirect
exposures were $11,903mn in ABN AMRO and that RBS and ABM AMRO had combined
indirect exposure of $7,320 to AMBAC and $1,623m to MBIA.
241M. Save for the words in parentheses at the end of the first sentence, paragraph 86.1A is
admitted. It is denied that this was necessary information.

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241N. As to paragraph 86.2, it is admitted that by the Closing Date RBS planned to move
sponsorship of the Windmill, Tulip and Amsterdam conduits from ABN AMRO to RBS
241O. As to paragraph 86.2A:
241O.1 It is admitted that RBS reported the indirect exposures internally and to ratings
agencies.
241O.2 It is denied that there was no disclosure of this in the Prospectus. The fact (though
not the amount) of ABN's indirect monoline exposure was disclosed on pages 26 and
140 of its Annual Report, which was incorporated by reference into the Prospectus.
241O.3 Further, to the extent that monoline-wrapped assets fell within the categories of
exposure included within the Write Downs Table, those exposures and any estimated
write-downs on them were included in the Prospectus disclosures.
241O.4 It is denied that further disclosure in relation to this was necessary.
241P

The allegations made in paragraph 86.3, which are impossible to respond to in detail because
they are made without any supporting analysis, are denied. Many monoline-wrapped
securities were marked at par because they were held on a L&R basis and were not impaired.
Where the securities were held at fair value, the monoline protection often made little
difference to their value.

241Q

As to paragraph 86.4 the first sentence is denied, the second sentence is admitted, and the
third sentence denied. A CVA in respect of indirect exposures would not and should not have
been included in the 2007 Accounts and/or the capital plan. The valuation of a wrapped asset
already takes account of the effect, if any, on the valuation of the wrap.

242.

As to paragraph 86: [not used].

242.1

At page 27 of the Prospectus, RBS estimated a total CVA balance of 2.7 billion, of
which 1.752 billion was expected to be recognised in the profit and loss account (or
income statement) in 2008. It is admitted that the bank had recognised (as opposed to
"realised" as alleged in paragraph 86, the relevant amount having been reflected
through the income statement, but not written down on the balance sheet) a CVA
adjustment of 0.862 billion in 2007.

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242.2 It is admitted that the monoline CVA balance as at 31 December 2008 was 5.988 billion.
242.3

It is denied that the 3.557 billion recognised as a net income statement effect in 2008
was "written down", or that it was "in addition" to the 1.737 billion that had been
"realised" (i.e. written down on the balance sheet) as alleged. The two figures
represented different things and were not cumulative.

242.4

The change in CVA balance during the course of 2008 was due principally to the
unforeseen and unforeseeable market conditions which occurred in the second half of
2008, and which resulted in a large fall in value of underlying assets protected by
contracts with monoline insurers and a widening of credit spreads for monolines
generally. Those risks were identified in the passage in the Prospectus quoted at
paragraph 0 above.

243.

As to paragraph 86A:
243.1

The Prospectus did not 'purport' to, rather it did, set out information breaking down
monoline exposures by counterparty credit quality and grouped those counterparties
by rating. It is averred that, for each ratings group, the Prospectus also disclosed:
(a)

The notional value of the assets in respect of which monoline protection had
been purchased;

(b)

The fair value of the underlying assets;

(c)

The gross exposure to the monolines (being the difference between the
notional and fair values of the underlying assets, in other words, the gross
value of the protection purchased from the monolines);

(d)

The estimated CVA, calculated by reference to the gross exposure, loss

given default and credit spreads of each counterparty;

243.2

(e)

The value of hedges purchased in respect of those monoline exposures; and

(f)

The net exposure.

It is further averred that the Prospectus also set out monoline exposures by collateral type.

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243.3 It is admitted that within each rating, there werewas a range of CDS spreads. It is admitted
that credit ratings, in isolation, had ceased to provide a reliable indicator of counterparty credit
quality.
243.3A In relation to the allegations introduced by amendment at paragraphs 86A.1-86A.3, although
it is admitted that disclosure of RBS's exposure to each monoline would have allowed
investors to make an assessment of those exposures by reference to individual CDS spreads,
such disclosure was not necessary for investors to make an informed assessment of RBS's
financial position and prospects. In this regard paragraph 244.1 below is repeated mutatis
mutandis.
243.4

Save as aforesaid, paragraph 86A is denied.

244.

Paragraph 87 is denied. The information identified above and contained in the Prospectus
provided an accurate, clear and comprehensive account of RBS's exposure to monoline
insurers, approximately 80% of which was to monolines rated either AAA or AA. The
disclosure was sufficient for the reader to make an informed assessment of RBS's financial
position and prospects. In relation to the particular allegations made:
244.1

As to paragraph 87.1, it is admitted that the Prospectus did not state that RBS's
monoline exposure was "heavily concentrated".

Such a description would have

amounted to a meaningless qualitative judgment which would not materially have

assisted the reader in reaching an informed assessment of RBS's financial position or
prospects. It is further admitted that the Prospectus did not disclose separately the
amount of RBS's exposure to AMBAC. Such disclosure was not necessary. In
March 2008 AMBAC's AAA rating had been confirmed by S&P and Moody's. It is
further admitted that the Prospectus did not state that RBS was significantly exposed
to ACA, BluePoint Re or FGIC. In the light of the disclosures that had been made,
and in particular, the tables on page 27 of the Prospectus, no such disclosure was
necessary. With regard to the final sentence allegation introduced by amendment,
paragraph 244.3(a) below is repeated. As to the amounts of the exposures, the figures
for AMBAC, BluePoint Re and FGIC are admitted. The counterparty risk for ACA
was fully written-off from the end of January 2008.
244.2

As to paragraph 87.2:

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(a)

It is admitted that the majority of RBS's protection with AMBAC

related to underlying CDO and CLO exposure and that the size of
RBS's exposure to AMBAC was therefore at least partially correlated
with the size of its CDO exposure. A breakdown of RBS's monoline
exposure by collateral type was provided in the table on page 27 of
the Prospectus.

(b)

It is denied that at the time of the Rights Issue AMBAC was

perceived by the market to be one of the higher risk monoline
insurers. No admissions are made as to whether it was so perceived
by "many investors". As set out above, at the time of the Rights Issue
AMBAC's AAA rating had recently been confirmed by S&P and
Moody's.

(c)

Given the volatility of monoline CDS spreads at the relevant time, it

is not meaningful to refer to 'average' spreads. It is denied, however,
that the CDS spread for AMBAC at the relevant time was higher than
that for other AAA rated monoline insurers generally. Although it
typically had a higher CDS spread than Financial Security Assurance,
in the period leading up to the Rights Issue, its CDS spread was
typically lower than that of MBIA.

Further, any increase in

AMBAC's CDS spread was in any event reflected in an increase in

the CVA made in relation to the bank's exposure to AMBAC.
(d)

It is denied that AMBAC's CDS spread was over 19% "by" June, or
at any stage during the Rights Issue period. No admission is made in
relation to the CDS spreads alleged in the final paragraph in the
absence of particulars of which CDS spreads are being referred to.

244.3

As to paragraph 87.3:
(a)

No new exposures to AMBAC had been booked by RBS since the

start of Q4 of 2007 and, in common with all monolines except
Financial Security Assurance, the bank's internal credit limit for
AMBAC had been frozen. As a result of widening CDS spreads and
the fall in the value of underlying assets, it is admitted that in

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February 2008 RBS's exposure to AMBAC had risen to

approximately US$ 2.5 billion and that this exceeded that frozen
limit by approximately US$ 1 billion.
(b)

It is admitted and averred that in Q4 of 2007 RBS had entered into a

hedge against about US$0.4 billion of its exposure to AMBAC. It is
denied that the bank had "only been able to hedge" to this extent. As
a result of the illiquidity in the market that resulted from the
disruption in Q1 2008, purchasing credit protection against monoline
exposures became more difficult and RBS reasonably considered that
it would be uneconomic to hedge the bank's full exposure at the then
prevailing spreads. Nevertheless, by the end of March 2008 the
bank's net exposure to AMBAC had fallen to approximately US$1.9
billion and, by the close of the Rights Issue, RBS had hedged
US$890 million of notional exposure to AMBAC, having purchased
US$225 million in protection during the course of the Rights Issue
alone.

(c)

It is admitted that RBS participated in a capital raising into AMBAC

in early 2008. The purpose was to prevent (not delay, as alleged)
AMBAC being downgraded. Following the capital raising, Moody's
noted on 29 February 2008 that it believed AMBAC was "betterpositioned relative to certain less-established competitors with
respect to business franchise, prospective profitability and financial
flexibility".

244.3A As to paragraph 87.4, it is admitted that from April 2008 RBS adopted a new
methodology for calculating CVA on monoline exposures and that that methodology
resulted in an increase in the CVA figures. That methodology was adopted for the
calculations of monoline CVA which appeared in the Prospectus.:
(1)

It is admitted that concentration risk was an aspect of internal credit

risk monitoring, and was monitored by RBS.

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(2)

The last sentence and sub-paragraphs 87.4.1 to 87.4.3 are admitted.

The disclosure of that degree of detail would have been commercially
prejudicial to RBS and was not necessary information.

(3)

The concentration risk inherent in RBS's monoline exposures was not

out of line with what reasonable investors would have understood to
be the position from the information that was provided. There were
relatively few monoline insurers, and even fewer large enough to
protect sizable tranches of assets. Investors would therefore have
appreciated that the substantial monoline protection disclosed would
necessarily have been provided by a small number of entities.

(4)

In any event, as pleaded by the Claimants, information on

counterparty concentration risk (including monolines) was provided
by RBS to the investment banks.

It was reasonable for the

Defendants to be guided by the investment banks as to the degree of

detail required.
245.

As to the first sentence of paragraph of 88, it is denied (as is implied in paragraph 88) that the
disclosure relevant to "these matters" was confined to disclosure of a 1.1 billion CVA on
notional exposure to AAA/AA monolines of 19.8 billion. To the contrary, that disclosure
included all the matters identified in paragraphs 239 to 243 above, which was adequate to
allow the reader to make an informed assessment of RBS's financial position and prospects.
The second sentence is noted, save that it is averred that 1,752 billion was the estimated
monoline CVA for 2008. The overall monoline CVA recognised in the Prospectus (in the
table at the top of p.27) was 2.7 billion.

246.

As to paragraph 89:
246.1

As to paragraph 89.1 and 89.3, it is admitted that FGIC and MBIA were downgraded
on the dates mentioned. These downgrades had been expected and were already
priced into the CDS curves and had no material impact from a CVA perspective.

246.2

As to paragraph 89.2, the note made by Bruce Bennett "All over limit except XL" did
not refer to stress limits, but instead to the fact that a CVA calculation without the
application of a credit risk threshold should be used for all monolines other than XL.

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In any event, the breach of an internal stress limit would not have been necessary
information for investors.
246.3

As to paragraph 89.4:
(a)

No admission is made as to what Crowe said at the meeting recorded in the

document referred to. Other sources of Crowe's views at the relevant time
regarding monolines include (i) the last version of the De-Risking
Presentation produced on 17 April 2008, (ii) the Prospectus itself, in respect
of which Crowe provided a verification certificate, and (iii) the email from
Crowe to Cameron on 19 April 2008, in which he said "Monolines, other than
for default should, I think be roughly OK as it's hard to imagine CDS spreads
widening substantially further, over the medium term, unless we get defaults.
The exposures may rise somewhat further, and therefore we might allow for
about another GBP400m".

(b)

In any event, the view attributed to Crowe was not the market consensus.

246.5 Paragraph 89.5 is admitted. The expectation of such results was already priced into the CDS
spreads. AMBAC did not lose its AAA rating from S&P and Moodys until 5 June 2008.
246.1

AMBAC did not file for Chapter 11 relief until November 2010, some two-and-a-half
years after the Rights Issue.

246.2

The reference to losses incurred "subsequently" is vague and impossible to plead to,
since it provides no proper indication of the timescale of the losses being referred to.

246.3

Without prejudice to that fact, only about 25% of the CVA recognised in respect of
monolines at the end of 2008 related to exposures to AMBAC. To the extent that the
"losses subsequently recognised" refer to CVA recognised in 2008, the second
sentence of paragraph 89 is therefore denied.

246A. As to the allegations made in paragraph 89AB.1:

(i)

The Claimants' allegations relating to the valuation of underlying assets are

addressed in paragraph 241F above.

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(ii)

It is denied that a CVA should have been estimated in relation to indirect

monoline exposures. CVAs were not applicable to the monoline exposure
included within a wrapped exposure, the credit risk on the monoline being
reflected within the value of the exposure.

(iii)

The allegation that the CVA calculation should have allowed for future
deterioration in credit ratings or CDS spreads is denied. See also paragraph
241D above.

(iv)

RBS's CVA calculations for monolines used in the Prospectus were not
sensitive to recovery rates.

247. As to paragraph 89A:

247.1

It is denied that the CVA balance at the Prospectus Date was 3.2 billion. As
appeared in the 2008 Interim Results, that was the balance as at 30 June 2008. As
was set out in the table at page 27 of the Prospectus, the comparable balance at the
Prospectus Date was 2.7 billion. The P&L movements in respect of monoline
CVA between the end of March 2008 and the end of June 2008 are set out in CME
RFI, Appendix 1, "Monoline", rows 135 to 141.

247.2

By the close of the Rights Issue the CVA balance had increased to 2.9 billion. It
is therefore denied that the increase between the Prospectus Date and the closing
date was over 2 billion, as alleged. The year to date write-down on monoline
exposures as at 31 May 2008 was 1,689m, as compared with the estimated writedown in 2008 of 1,752m disclosed in the Prospectus.

247.3

It is admitted and averred that by the end of 2008 the monoline CVA balance was
6 billion (more accurately 5.988 billion).

Reliance on this fact would be

impermissible hindsight.
247.3A

As to the second sentence, weighted 5yr average CDS spread increased from
approximately 7% in April 2008 to 14% by 16th June 2008 and 20% by 30 June,
before dropping to 13% by the end of July 2008.

273.3B The third and fourth sentences are admitted.

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273.3C The fifth sentence is admitted, save that S&P downgraded XL and CIFG on 6 June
2008.
247.4 Save as aforesaid, paragraph 89A is denied.
CDPCs
248.

Paragraph 90 is denied. As set out in paragraph 240.2 above, the ABN Form 20-F Annual
Report for the year ending 31 December 2007, the relevant sections of which were
incorporated by reference into the Prospectus, disclosed CDPC exposures of approximately
EUR 1 billion. As to the specific allegations in paragraph 90.1 and 90.2:
248.1

The figures contained in paragraph 90.1 are admitted. Those figures relate to the
notional amount of assets protected by contracts obtained from CDPCs, not to
RBS's exposure to CPDCsCDPCs themselves. It is admitted that those assets were
predominantly tranched credit derivatives, specifically, credit default swaps on
portfolios or indices of corporate names. It is denied that, as at the time of the
Rights Issue, such instruments were viewed as a significant credit risk to the bank.
It is further admitted that the corresponding figure as of 31 December 2008 was
25.2 billion as alleged in the second sentence of paragraph 90.2.

248.2

As to the other allegations contained in paragraph 90.2, as appears from the table
at page 137 of the 2008 Accounts, as at 31 December 2007 RBS had net exposure
to CDPCs of 819 million, gross 863 million. It is admitted that the exposure as
at 30 April 2008 would have been similar and that the corresponding gross figure
as of 31 December 2008 was 4.776 billion.

248.3

Paragraph 90.3 is admitted.

248.4

As to paragraph 90.4, the first sentence is admitted (save that it is assumed that the
reference was intended to be to CDPCs rather than monolines). It is impossible to
plead to the rest of the paragraph, no explanation having been provided of the
allegation that the approach applied was imprudent, or of the figures provided.

248A. As to paragraph 90A:

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248A.1 As to the body of the paragraph, save that it is unclear what definition the Claimants
are applying to the term "financial guarantors", the first sentence is admitted and the
second sentence is denied. As to the third sentence, it is admitted that the term used
was "Financial Guarantors" (See also paragraph 240.1A above).
248A.2 As to paragraphs 90A.1:
(a)

It is admitted that AIG Financial Products ("AIG") was not included

in the monolines disclosures, that AIG was included in internal
reporting relating to monolines (though it was not a monoline) and
that the CVA methodology used in respect of this exposure retained a
threshold after the threshold for credit risk for monoline exposures
had been removed. It is denied that information in relation to this
exposure was necessary for investors to make an informed
assessment.

(b)

RBS's exposure to AIG is admitted save that, as at the Closing Date

(and as demonstrated in the document referred to by the Claimants)
RBS's net direct exposure to AIG amounted to 187m. It is denied
that it was inappropriate to use historic default probabilities to
calculate the CVA on AIG.

The additional CVA that would have

been calculated if a market implied approach had been adopted in

relation to AIG would have been $29m (not 20m as alleged by the
Claimants). This would have been immaterial in the context of the
Rights Issue (as would the 20m alleged by the Claimants).
248A.3 As to paragraph 90A2 it is admitted that Dexia Bank Belgium SA ("Dexia") was not
included in the monolines disclosure in the Prospectus or the calculation of the CVA
on monolines. It is denied that it should have been, because Dexia was not a
monoline. In any event, the CVA alleged by the Claimants for this would not have
been material.
249. As regards Pparagraph 91: is denied.
249.A1 As at 30 April 2008 the total CVA in respect of CDPCs was approximately 157
175 million. That figure is the total balance (not the year to date P&L) and

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includes the CVA on White Knight (163 million). This was not a figure of which
separate disclosure was required in the Prospectus. As regards the allegations
made in the sub-paragraphs
249.A2 The allegation in 91(d) that by the Prospectus Date the CVA for non-White Knight
CDPCs was around 50m is denied. As shown in CME RFI, Appendix 2, "Other
Counterparty and CDPC CVA", rows 137 and 138, the total CVA of $103m as at
the end of March 2008 had fallen to $25m by the end of April. To reach the year
to date P&L movement from these figures, the 31 December 2007 balance of
$21m needs to be subtracted.
249.A2 The approximate year to date P&L figures as at 30 April 2008 (allowing for
variations arising from currency treatment, and taking an approximate $/
exchange rate of 2) were:

249.1

White Knight
(Gross of hedging)

Other CDPCs

Total

-128m

-2m

-130m

The figures referred to at paragraphs 91(a) and 91(bc) are admitted. The Claimants'
reliance on the fact of the increase in CVA over the course of 2008 amounts to
illegitimate use of hindsight and does not make good the assertion that either an
additional CVA or further disclosure was required at the time of the Rights Issue.

249.2

As to paragraph 91(ce), it is admitted that spreads for synthetic CDOs widened in the
early part of 2008, particularly those referencing US sub-prime RMBS ABS. It is
admitted that RBS's exposure to tranched credit derivatives referencing investmentgrade corporate loans and bonds had increased by the time of the Rights Issue.
Despite that widening, the extent of RBS's exposure to CDPCs was not, as at the time
of the Rights Issue, considered to be, and was not in fact, a material credit risk
requiring disclosure.

249.3

The "mutatis mutandis" repetition of paragraph 85F is embarrassing, because the

points made in paragraph 85F are specific to the assets directly protected by

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monolines.

The mutation of those allegations into comprehensible allegations

regarding the undervaluation of exposures protected by CDPCs is not a task that the
Defendants can reasonably be required to carry out for the Claimants.
Negative Basis and Intermediation Trades
249A. As to paragraph 91A, the first and third sentences are admitted. By notional value, the
amounts were as follows:
Negative Basis Trades
Monoline
Ambac
Assured Guaranty
BluePoint
FGIC
FSA
MBIA
Radian
XL

$m
2,323
9,702
50
712
1,099
4,428
1,534
192
20,040

Other
AIG FP
Banca Intesa
CIBC
Dexia
Goldman
Merrill Lynch International

Total Negative Basis Trades

1,185
406
420
2,763
295
1,508
6,577
26,617

Intermediation Trades
Monoline
ACA
Ambac
Assured Guaranty
MBIA
Radian

$m
909
379
1,380
8,239
669
11,575

Other
Banque AIG
Credit Derivatives Limited

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1,262
345
1,607

Total Intermediation Trades

13,182

249B. Paragraph 91B is admitted.

249C. As to the first sentence of paragraph 91C, it is admitted that it was decided that the negative
basis and intermediation trades would be transferred to the SAU, and they were so transferred
in 2008. It is denied that any were transferred in April 2008. No admissions are made as to
how many, if any, were transferred in May 2008 (this not being a material issue). As to the
second sentence, the final version of the De-risking Presentation included a P&L impact of
800m in the "Future potential" column, identified as a funding cost over four years, present
valued.
249D. It is denied that information about the negative basis and intermediation trades was necessary
for investors to be able to make an informed assessment of RBS's financial position and
prospects.

The material estimated CVA losses relating to these trades (which were on

monolines) were included within the monoline disclosures in the Prospectus. Singling out for
disclosure the potential future funding costs attributed to these trades in the De-Risking
Presentation (given the wider context of RBS's balance sheet and its overall funding
requirements) would have been confusing to investors and was not information necessary for
investors to reach an informed assessment of RBS's financial position and prospects.
250.

Paragraph 92 is denied. As set out in paragraphs 237 to 249 above, the statements made in the
Prospectus in respect of monolines (which covered monoline exposures arising out of
negative basis and intermediation trades), CDPCs and CVA were not misleading. To the
contrary, they were accurate, clear and as comprehensive as was necessary for investors to be
able to make an informed assessment of RBS's financial position and prospects. Further, the
reference in s.23.1 of Part XII of the Prospectus to information about credit market exposures
appearing at pages 24 and 25 was self-evidently a typographical error and should have been a
reference to the information, including information about changes in monoline exposures, at
pages 26 and 27. It is denied that the statement on page 134 of the Prospectus was misleading
or untrue. Accordingly, it is denied that there has been a breach of s.90(1)(b)(i) of FSMA.

251.

Paragraph 93 is denied. As set out in paragraphs 237 to 249 above, the Prospectus neither
omitted any necessary matters alleged in paragraphs 87, 90, or 91 orto 93, nor was the
disclosure of such matters inadequate. All information required by the provisions identified in

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paragraphs 93.1 and 93.2 was disclosed. Accordingly, it is denied that there has been a breach
of s.90(1)(b)(ii) of FSMA.
252.

As to paragraph 94:
252.1

It is denied that any of the matters alleged arose after the Prospectus was approved so
as to give rise to the need to produce a supplementary prospectus.

252.2

It is admitted that RBS did not produce a supplementary prospectus, as alleged at

paragraph 94.2. For the reasons set out above, no supplementary prospectus was
required.

252.3

Accordingly, paragraphs 94.3 and 94.4 isare denied.

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Market Risk and the Use of VaR

253.

Like many of the other allegations in the Composite Amended Consolidated Particulars of
Claim, many of the criticisms of RBS's use of the VaR methodology are made with the
benefit of hindsight and do not reflect neither the appreciation of the limitations of VaR in
practice nor the prevailing industry and regulatory view at the time of the Rights Issue. rights
issue. The FSA report, on which the majority of the allegations are based, itself acknowledged
that those limitations only became fully apparent with hindsight (see by way of example p.82
para 69; p.154 paras 315-316).

254.

In common with almost all of its peers, RBS utilised the VaR methodology as part of its
approach to the assessment of its market exposures. The VaR methodology was not only
accepted as standard across the industry, but was adopted by regulators as the basis for
calculating trading risk and required capital (being incorporated, for instance, within the
European capital adequacy directive).

255.

Under the FSA rules in force at the time of the Rights Issue, RBS was only permitted to use
VaR models to calculate capital in relation to its market exposures if it had approval from the
FSA for it to do so, in the form of a so-called VaR model permission or waiver. The FSA
rules provided that the FSA would not normally grant a VaR model permission unless it was
satisfied about the quality of (see BIPRU 7.10.8):

256.

255.1

The internal controls and risk management relating to the VaR model.

255.2

The VaR model's standards.

255.3

Stress-testing and back-testing backtesting procedures relating to the VaR model.

Further, the FSA rules also provided that in order for a VaR model permission to be granted,
the FSA was likely to undertake a review to ensure that the model was adequate and
appropriate for the relevant 'position risk requirement' calculation (BIPRU 7.10.11).

257.

At the time of the Rights Issue, RBS had a VaR model permission (to calculate capital) from
the FSA which had first been granted in 1999/2000 and the terms of which were, prior to the
Rights Issue, last amended in January 2007 2008. The VaR model permission covered RBS's
use of its proprietary UNIVAR system (amongst others), which used a historical simulation
methodology, to compute produce 'the UNIVAR estimate of value at risk' a computed to a 10

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day VaR number with 95 per cent confidence interval,; and which this figure was then
converted into a the VaR number at (a 10 day 99 per cent value at risk estimate) by
multiplying by 2.326/1.645 confidence for use in capital calculations.
258.

If the FSA had had any major concerns about the integrity of RBS's use of VaR models at any
time up to the close of the Rights Issue, it could, and would have been expected to, either
revoke the VaR model permission or vary it by increasing the "minimum multiplication
factor" element of the VaR Multiplication Factor (explained in paragraph 258A below). It did
not do so.

258A. The VaR Multiplication Factor was a factor by which the output of a bank's VaR model was
multiplied when ascertaining the required level of market risk capital. This factor was able to
reflect both: (a) any concerns the FSA had as to the integrity of a bank's VaR model; and (b)
the occurrence of backtesting exceptions. Specifically, the VaR Multiplication Factor was
comprised of two elements. The first was the "minimum multiplication factor". This could
never be less than 3, but could be higher if the FSA so specified. In particular, if the FSA
perceived there to be weaknesses in the VaR model that might otherwise be considered a
breach of the minimum standards referred to in BIPRU 7.10.24R, a higher minimum
multiplier could be applied to mitigate those weaknesses. The FSA conducted quarterly
reviews of VaR models, but could also revoke or vary VaR model permissions at any
timeunder and in accordance with BIPRU 7.10.110.

The second element of the VaR

Multiplication Factor was a "plus factor" of up to 1 that was applied by reference to the
number of backtesting exceptions that had occurred during the previous 250 business days.
As stated in BIPRU 7.10.123, this was "designed so that the more often a VaR model [had]
under-predicted losses in the past, the higher should be the capital requirement based on the
VaR model."

This element increased for RBS legal entities as a consequence of the

backtesting exceptions reported by RBS to the FSA, and duly produced an increase in RBS's
capital held against market risk.
259.

Although it was widely accepted as standard, at the time of the Rights Issue it was understood
by both the market and FSA that there were limitations to the VaR methodology. Those
limitations, and the implications of them, were clearly disclosed by RBS. The 2007 Accounts
(incorporated by reference into the Prospectus) stated (amongst other things) at page 84 as
follows:

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"[RBS] calculates both general market risk (i.e. the risk due to movement in the general
market benchmarks) and idiosyncratic market risk (i.e. the risk due to movements in the value
of securities by reference to specific issuers) using its VaR models.
[RBS's] VaR should be interpreted in light of the limitations of the methodology used. These
limitations include:

Historical data may not provide the best estimate of the joint distribution of risk
factor changes in the future and may fail to capture the risk of possible extreme
adverse market movements which have not occurred in the historical window used
in the calculations.

VaR using a one-day time horizon does not fully capture the market risk of positions
that cannot be liquidated or hedged within one day.

VaR using a 95% confidence level does not reflect the extent of potential losses
beyond that percentile.

[RBS] largely computes the VaR of trading portfolios at the close of business and positions
may change substantially during the course of the trading day. Further controls are in place
to limit [RBS's] intra-day exposure, such as the calculation of VaR for selected portfolios.
These limitations and the nature of the VaR measure means that the group cannot guarantee
that losses will not exceed the VaR amounts indicated. The Group [RBS] undertakes stress
testing to identify the potential losses in excess of the VaR."
Further, page 19 of the Prospectus stated that:
"-the potential exposure of RBS to various types of market risks, such as interest rate risk,
foreign exchange rate risk and commodity and equity price risk. For example, certain of the
market risk disclosures are dependent on choices about key model characteristics and
assumptions and are subject to various limitations. By their nature, certain of the market risk
disclosures are only estimates and, as a result, actual future gains and losses could differ
materially from those that have been estimated"
259A. In the context of capital required to be held against market risk, the VaR Multiplication Factor
was designed to reflect and adjust for such limitations.
260.

As set out in the 2007 Accounts (at p.85), RBS did not rely exclusively on the VaR
methodology to monitor its market exposures. In addition to VaR RBS the bank employed:
260.1

Stress testing to measure the impact of abnormal changes in market rates and prices
on the fair value of its trading portfolios.

260.2

Position risk and sensitivity analysis to provide additional controls.

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261.

Although, since it relied on the use of historical data-sets, the usefulness of stress testing
diminished in the context of the unprecedented market disruption experienced in late 2007
and 2008 RBS along with many other financial institutions could not have anticipated the
impact of those events on stress testing (as acknowledged in the FSA Report (at pp. 374-375,
para 89).

262.

Further and in any event in December 2007 RBS moved its US super senior exposures certain
SS CDOs (i.e. those in RBS / Greenwich, as opposed to ABN AMRO) from the regulatory
trading book to the regulatory banking book, following which the capital attributable to them
was they were no longer calculated assessed on a VaR basis but on a credit risk weighting
basis, and subsequently on a securitisation basis.

RBS's approach to VaR

263.

Against that the background set out above, the Defendants respond to the allegations
contained in paragraphs 94A to 94GK as follows.

264.

As to paragraph 94A:
264.1

Paragraphs 253 to 261 262 are repeated.

264.2

VaR was not used to assess the value of actual write-downs taken by RBS, which
were based on fair value calculations arrived at from the bank's proprietary models,
observable benchmarks and prudent valuation adjustments.

264.3

As set out above, VaR was one of the components of RBS's assessment of its credit
market exposures and projected write-downs and its market risk generally. It was
not the only component and it is denied that the use made of it was excessive. RBS
used it to the extent to which it was required to and/or expected to by the FSA.

264.4

The estimates made by RBS were reasonable ones at the time they were made. It is
admitted with hindsight that, in common with the rest of the market and the FSA,
they proved to be an underestimate of the risks on elements of its trading book.

264.5

It is denied that RBS failed to identify an "appropriate" amount of capital to set

aside against projected losses. Although with hindsight it is now apparent that those
losses were underestimated:

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(a)

RBS's assessment of required capital was based on a methodology approved

by the FSA.

(b)

RBS held a capital 'buffer' in excess of the amount of capital required by the
RegulatorFSA to be held against losses on market exposures.

(c)

This approach, viewed without the benefit of hindsight, was both reasonable
and prudent.

264.5A With regards to the new second and third sentences of paragraph 94A, it is denied (if
so alleged) that there was a standard confidence interval of 99.9% used by other
banks in their market risk capital calculations. RBS's approach of using a 10 day
95% confidence interval converted to a 99% confidence interval was expressly set
out in the model approval granted to it by the FSA, and accorded with BIPRU. In
particular, BIPRU paragraphs 7.10.26 and 7.10.27 expressly: (i) indicated that the
required confidence limit was 99%; and (ii) indicated that this could be achieved by
using the output of a model applying a 95% confidence limit and applying a
conversion factor. It is further and separately denied (if that is what is being alleged)
that RBS's use of a 95% confidence interval in the contexts in which it was used was
inappropriate.
264.5B It is denied that there is any lack of clarity in the Re-Amended Defence regarding
the confidence intervals applied, as alleged by the QE Claimants in the last sentence
of paragraph 94A.
264.5C The allegation in paragraph 94A.1 is embarrassingly imprecise because it fails to
indicate the purpose for which it is alleged that RBS ought to have minimised its
reliance on VaR and relied more heavily on stress testing and sensitivity analysis,
and what form such reliance should have taken. It is denied, if so alleged, that RBS
ought to have relied more heavily on stress testing and sensitivity analysis for the
purpose of its market risk capital calculations. The approach that RBS followed in
conducting its market risk capital calculations was reasonable and accorded with the
regulatory framework in place at the time. It is further denied, if so alleged, that
RBS made insufficient use of stress testing and sensitivity analysis for internal risk
management purposes. By way of example, RBS applied a market risk stress test
limit that used a historical time series of more than 10 years to look at the worst case

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losses in certain asset classes. The largest hypothetical stress testing loss (to which
the limit then applied) was typically generated by the market movements that
occurred during September or October 1998 following the Russian debt default and
subsequent Long-Term Capital Management L.P. hedge fund collapse.
264.5D With regards to paragraph 94A.2, it is denied that RBS ought to have applied more
conservative parameters, market data sources and methodology when employing
VaR analysis. It is irrelevant whether such a conclusion may now be drawn with
hindsight, and no admission is made in that respect. Paragraphs 255 to 258A and
paragraph 264.5A are repeated.
264.4

Save to the extent consistent with the aforesaid, paragraph 94A is denied.

264A. As to Paragraph paragraph 94AA: is denied. The standard VaR confidence interval for
market risk capital calculations was 99%, not 99.9%, and it was expressly contemplated by
BIPRU that the 99% confidence interval could be reached by applying a conversion factor
from VaR analysis conducted by reference to a 95% confidence interval.

The VaR

confidence intervals used by RBS were sufficiently disclosed on pages 84 and 85 of the 2007
Accounts. Paragraph 264.5A above is repeated:
264A.1 The quotation in paragraph 94AA contains a material omission, and does not
accurately set out the text found in the relevant part of 2007 Accounts. In particular,
the final paragraph of the quote omits the bold text set out below, and should read:
""The Group uses historical simulation models in computing VaR. This approach,
in common with many other VaR models, assumes that risk factor changes
observed in the past are a good estimate of those likely to occur in the future and is,
therefore, limited by the relevance of the historical data used. The Group's method,
however, does not make any assumption about the nature or type of underlying loss
distribution. The Group typically uses the previous 500 trading days of market data."
264A.2 Further, the quoted text was followed, on the same page of the 2007 Accounts, by
(among other things)

the text set out in paragraph 259 above, explaining the

limitations of VaR.
264A.4 Save as aforesaid, paragraph 94AA is admitted.

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264B. Paragraph 94AB does not entirely accurately paraphrase or completely quote the text in the
2007 Accounts to which it refers. RBS will refer to the full text of the relevant parts of the
2007 Accounts as necessary at trial.
264C. Paragraph 94AC is admitted. Its relevance is denied.
264C.1 No further update or qualification was necessary or should have been included in the
Prospectus. Without prejudice to the generality of the foregoing:
(a)

During the relevant period RBS removed the SS CDOs from RBS's VaR
limits and the VaR regime for regulatory capital purposes (as discussed
below) and did not consequentially decrease its VaR limits.

(b)

However, due to their commercial sensitivity, it was not in accordance with

market practice to disclose: (i) which particular assets fell within the scope
of VaR limits; or (ii) information about VaR limits.

(c)

Further and in any event, the FSA had deemed it "inappropriate and
unnecessary" for firms to disclose the full text and schedules of VaR model
waiver directions. In particular, it was felt that, to disclose such detail might
prejudice, to an unreasonable degree, the commercial interests of the firms
concerned.

264C.2 In any event, the third bullet point on page 84 of the 2007 Accounts referred to
RBS's market risk function being able to determine appropriate policies and
methodologies to measure and control market risk, disclosing that RBS could
modify its market risk policies and methodologies.
Backtesting exceptions and inadequacies of the VaR model
265.

As to paragraph 94B:
265.1

Paragraphs 253 to 261 are repeated. In particular, RBS's capital plan did not rely
exclusively to an inappropriate extent on VaR for the calculation of the risk
weighting of its net exposure to CDO, sub-prime and Alt-A assets. Further as set
out above from December 2007 the US super senior exposures were no longer
assessed on a VaR basis. The first sentence broadly paraphrases text found on pages

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83 85 of the 2007 Accounts. RBS will refer to the full parts of those sections of
the 2007 Accounts as necessary.
265.2

It is denied that it was necessary (or that the only prudent course was) for RBS to set
aside capital on a one-for-one basis against the full extent of its net exposure to
those assets. The extent of the projected write-downs was reasonably assessed, a
fact confirmed by both Goldman and Merrill, and capital set aside in the plan for
those write-downs. That approach was an appropriate one to take in the
circumstances. The second sentence broadly paraphrases BIPRU 7.10.124 125.
RBS will refer to the full text of BIPRU 7.10.124 125 as necessary.

265.3

Save to the extent consistent with the aforesaid, paragraph 94B is denied. In relation
to the third sentence:
(a)

The third sentence broadly paraphrases BIPRU 7.10.109 110. RBS will
refer to the full text of BIPRU 7.10.109 110 as necessary.

(b)

Whether a review of a firm's VaR model would have, or would be likely to

have very serious attendant consequences would depend upon the outcome
of that review.

265.4

The fourth sentence is admitted. The FSA did not withdraw RBS's VaR model
permission or threaten to do so and throughout the relevant period it would have
been unlikely to do so.

265.5
266.

Save as aforesaid, paragraph 94B is denied.

As to paragraph 94C, in relation to which paragraphs 253 to 261 above are again repeated:
266.1

It is admitted that all VaR models had limitations as a measure of market risk. Those
limitations were particularly obvious during the global financial crisis, when RBS
and other institutions were taking write-downs. Notwithstanding this, VaR remained
a useful measure of market risk and its use was required by the FSA (once a VaR
waiver had been granted to RBS), and RBS reasonably believed the same.

266.1A The limitations of VaR as a measure of market risk were sufficiently disclosed in
the 2007 Accounts and the Prospectus. Investors did not need to be further informed

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that RBS's VaR model (like those of other banks) could not be regarded as
providing a definitive indication of the maximum market losses that could
potentially be incurred by it. Nor did they need to be further informed that RBS had
incurred substantial write-downs, or that there was a risk that RBS would incur
further write-downs that would adversely affect its financial position. That risk was
(as well as being obvious) expressly disclosed on page 12 of the Prospectus. The
existence of such a risk was one reason why, in uncertain markets, investors were
keen for RBS to increase its capital ratios.
266.2

As to paragraph 94C.1 It it is admitted that the utility of the VaR model is

diminished if there is insufficient short-term liquidity to enable the relevant
instruments to be sold within the holding period assumed in RBS's VaR
computation, but it is denied that this obvious fact needed to be the subject of further
disclosure. Moreover:
(a)

The FSA required banks, once a VaR waiver had been granted to
them, to use VaR for both capital purposes and risk management.

(b)

The FSA was unlikely to permit RBS to move any given asset classes
out of the VaR regime, notwithstanding a lack of liquidity in relation
to such assets. Insofar as RBS moved the SS CDOs out of the VaR
regime (a move which RBS pleads to in detail below), those assets
were an extreme case.

(c)

RBS had, and made appropriate use of, measures of market risk
other than VaR including, by way of example, stress testing.

266.3

Paragraph 94C.2 is not admitted. is denied as a particular of the allegation that RBS
knew that its VaR model had severe limitations. No admission is made as to
whether some remarks were made by Drake-Brockman to Cameron or Crowe, and it
is denied that anything said by Drake-Brockman was such as to indicate and convey
knowledge of severe limitations.

266.4

As to paragraph 94C.3, It it is admitted that, as set out at page 84 of the 2007

Accounts, RBS's VaR model typically used historic market data from the previous
500 trading days. (At the time of the Rights Issue, that data would therefore have

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originated from 2006, 2007 and 2008. andIt would therefore have included periods
of lower volatility and greater liquidity than existed at the time of the Rights Issue.
However, since the VaR calculation looks at the tail of the event, and is not an
average over the period, even a relatively short period of volatility can quickly feed
into the tails and affect the VaR calculation.) It is denied that no or insufficient
allowance was made for this by RBS when considering the reliability of the output
of the model. In any event, no historical data would have shown sufficient volatility
or illiquidity for many of the relevant instruments, given the extent of market stress
at the time of the Rights Issue. In addition to the matters set out at paragraphs 259 to
261 above, in addition to the amount of capital required by the FSA to be held in
respect of its market exposures, RBS maintained a capital buffer to take account of
any additional losses incurred. This practice was reported to and approved by the
FSA. Save as aforesaid, paragraph 94C.3 is denied.
266.5

Further, other methods for calculating VaR e.g. parametric methods, or a Monte
Carlo simulation must be calibrated using historical data; accordingly, any method
of calculating VaR would, ultimately, be dependent on the use of historical data.

266.6

As to paragraph 94C.4:
(a)

It is admitted and averred that 'back-testing backtesting was used both

within the banking industry and by the FSA as a way of retrospectively
testing the accuracy of the projections from VaR models against the actual
outcomes. Given the basis on which such models operate, a certain number
of back-testing backtesting exceptions are to be expected.

(b)

In 2007, RBS suffered only three such exceptions at the consolidated Group
level, the fact of which was set out at page 85 of the 2007 Accounts. In the
four months to the end of April 2008, given the extreme and unforeseen
market disruption experienced, a further four such exceptions were
experienced. It is denied that on any such occasion the loss exceeded the
VaR estimate by a factor of eight. Insofar as the Claimants allege that the
backtesting exceptions referred to were "significant", that allegation is
impermissibly vague, in that it is not clear whether the Claimants allege that
they were significant by reference to their number, their magnitude, their

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cause, or other facts and matters. Pending clarification, no admissions are

made as to the significance of those backtesting exceptions.
(c)

This increase in back-testing backtesting exceptions was not unique to RBS,

but was a market wide phenomenon.

(d)

It is denied that this rendered the output of the VaR model unreliable
generally. Rather, it illustrated the limitations of the VaR methodology
which used historic data, in circumstances where extreme adverse market
movements are encountered, as had been identified in the risk warning
contained in the 2007 Accounts. The majority of backtesting exceptions
experienced by RBS in the relevant period were a result of unprecedented
market conditions; in the premises, such backtesting exceptions did not
indicate that the output of the VaR model was unreliable generally.

(e)

Insofar as backtesting exceptions occurred within NatWest, such backtesting

exceptions did not render the output of the VaR model unreliable. The
Defendants will rely (in addition to the matters set out above) on the matters
set out in paragraph 266.8 below

266.7

As to paragraph 94C.4.1:
(a)

The backtesting exceptions of 18 and 30 April 2008 occurred in the Royal

Bank of Scotland plc reporting entity.

(b)

They were caused by the facts and matters set out in RBS's letter to the FSA
dated 8 May 2008, reporting such backtesting exceptions to the FSA. In
summary: (i) the 18 April 2008 backtesting exception was caused by losses
sustained in relation to the sale of Alt A positions to Fortress to reduce risk,
Itraxx index tightening and CDS movements, movements in swap curves,
and other movements; (ii) the 30 April 2008 backtesting exception was
caused mainly due to markdowns in US mortgage-backed and ABS
positions.

(c)

It is denied that the occurrence of the backtesting exceptions set out therein
showed that the output of the VaR model was unreliable;

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(d)
266.8

Save as aforesaid, paragraph 94C.4.1. is admitted.

As to paragraph 94.C.4.2:
(a)

Insofar as the Claimants refer to backtesting exceptions at the "sub-Group"

level in the first sentence the Defendants assume that the Claimants mean
the entity level. Save as aforesaid the first sentence is admitted.

(b)

The second sentence is denied. NatWest's trading book was small,

undiversified, and concentrated. It was therefore more likely to generate
backtesting exceptions than a larger, more diversified trading book. Further,
at the time when the relevant backtesting exceptions occurred, GBP interest
rates were volatile. Moreover, the relevant trading book was of little
economic significance to RBS. Therefore, the relevant backtesting
exceptions were not significant, and did not indicate that the VaR model
was not fit for purpose, or at any rate unfit for purposes of measuring market
risk in relation to other legal entities covered by RBS's VaR waiver.

(c)

For the reasons set out above, the third sentence is denied.

(d)

It is admitted that the email pleaded in the fourth sentence was sent and that
the sender and recipients had the pleaded roles. Save as aforesaid, the fourth
sentence is denied. Mr. Papadopoulos did not, in his email, suggest that the
NatWest backtesting exceptions called the whole VaR methodology into
question. Instead, Mr. Papadopoulos made, in his own words, "a quick
comment" of an open-ended nature to the effect that "it may be worthwhile
to also revisit the VaR methodology itself", unaccompanied by any specific
suggestions as to what should be done.

266.9

Save that it is admitted that the passage quoted appears in the July Draft 2008 GIA
Reports, (save that the word "significantly" did not appear in the passage in that
draft of the report), paragraph 94C.5 is denied. Paragraph 107A.5 above is repeated.
As to paragraph 94C.5:
(a)

It is admitted that liquidity in the ABS markets declined from Q4 2007

onwards and that in the illiquid markets being experienced, the availability
of reliable market data was reduced. In the case of the SS CDOs, this was

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particularly severe, to an extent that justified their removal from VaR (as
addressed below). It is denied that that position was reached in relation to
other exposures.
(b)

It is admitted that RBS moved certain SS CDOs out of the VaR regime in
Q4 2007. It did so due to a change in the fundamental characteristics of
those positions from traditional trading instruments as a result of market
conditions. That move was reasonable and appropriate. The Defendants
plead to the detailed allegations concerning that move in paragraphs 271A
to D below.

(c)
266.10
267.

Save as aforesaid, paragraph 94C.5 is denied.

Save to the extent consistent with the aforesaid, paragraph 94C is denied.

As to paragraph 94D:
267.1

It is admitted that the figures referred to at paragraphs 94D.1 and 94D.2 appear in
the FSA Report and that they accurately reflect the position as at 31 December
2007.

267.1A As stated in the 2007 Accounts, the majority of RBS's trading assets were held
within its GBM division, and had a value of 579.4bn. No admissions are made as
to whether as at the Prospectus Date the value of such assets was over 550bn or
whether the market risk capital charge in respect of such assets was 1.4bn. In any
event, the relevant comparison would not be between the market risk capital charge
and RBS's trading assets, but between the capital charge and the risk-weighted asset
figure produced in respect of RBS's trading assets. Page 69 of the 2007 Accounts
showed risk-weighted assets of c.44bn. The capital charge in respect of such assets
would have been around 4.1bn (giving a capital ratio of 9.26% at 30 April 2008),
excluding any other capital required to be held under in relation to these trading
assets - for instance under Pillar 2 requirements or capital that may have been
allocated to "trading assets" in the Banking Book.
267.2

It is admitted that, with hindsight, the output of the VaR model turned out to be
inadequate to predict the scale of the losses ultimately incurred by RBS on its
market exposures. As was reflected in the FSA Report at page 41, that inadequacy

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was common to both the market as a whole and to the regulatory capital regime
under which it operated. In that regard, the allegations are once again made with the
benefit of hindsight.
267.3
268.

Save to the extent consistent with the aforesaid, paragraph 94D is denied.

It is admitted that the passage quoted at As to paragraph 94E: appears in the FSA Report. In
this regard, it is noted that from January 2008 RBS, in common with other banks, was
required to hold an additional capital buffer, amongst other things to take account of specific
features of its business (which in RBS's case included the ABN acquisition) and increased
market volatility.

268.1

As to the first sentence:

(a)

In relation to the pleaded backtesting exceptions, paragraphs 266.6 to 266.8

are repeated.

(b)

The potential consequences of ten backtesting exceptions occurring within a

250 day period are set out in BIPRU 7.10.109 110. What consequences
ultimately occurred would depend upon, among other things, the
significance of the relevant backtesting exceptions and their causes.

(c)
268.2

Save as aforesaid the first sentence is denied.

Paragraph 94E.1 is denied. The explanation of backtesting and number of

exceptions to date in the 2007 Accounts (repeated by incorporation in the
Prospectus) was, notwithstanding any additional backtesting exceptions recorded
between 1 January 2008 and the Closing Date, accurate in relation to the period
covered by the 2007 Accounts. The no significant change statement did not render
that explanation untrue or misleading. The number and frequency of backtesting
exceptions described in paragraph 94C.4 and their occurrence did not constitute a
significant change from the position set out in the 2007 Accounts.

268.3

Paragraph 94E.2 is denied. The necessary information was included in the

Prospectus. Without prejudice to the generality of the foregoing:

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(a)

RBS was not otherwise obliged to disclose backtesting exceptions to any

party other than the FSA.

(b)

Disclosure of backtesting exceptions would not have assisted investors in

making and/or was not necessary for them to make an informed assessment
of the matters set out in FSMA.s87A(2). Without prejudice to the generality
of the foregoing, to draw meaningful conclusions from the fact that a
backtesting exception had taken place, an investor would have needed to
know (among other things) the composition of each position relevant to that
exception, the sensitivity of each such position to each relevant risk factor
and have sufficient data regarding the relevant portfolio.

(c)

As set out above, the backtesting exceptions relied upon by the Claimants
were not caused by or evidence of inadequacy in RBS's VaR model; instead,
they were caused by the facts and matters set out in paragraphs 266.6 to
266.7 above. In the then prevailing market conditions disclosure of the
relevant backtesting exceptions would have told investors that when markets
were volatile, RBS could suffer significant losses. However there was
already sufficient disclosure of that obvious risk in the Prospectus (in
particular, in the risk warnings on page 12).

(d)

Further, in relation to the NatWest backtesting exceptions, the Defendants

will rely upon the matters set out in paragraph 266.8 above.

268.4

For the same reasons set out above, it is denied that the additional backtesting
exceptions occurring during the Rights Issue Period needed to be disclosed in a
supplementary prospectus, as alleged in paragraph 94E.3.

VaR limits and limit breaches

269.

As to paragraph 94F.1:
269.1

RBS did carry out stress tests on a daily basis to determine whether there was a need
for additional capital to be set aside in respect of market exposures (as made clear at
p.85 of the 2007 Accounts). As to paragraph 94F.1:

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(a)

The first three sentences are admitted.

(b)

As to the final sentence, from at least 1 January 2008 RBS's VaR

waiver required historical data to be updated monthly. Before then,
RBS was required to report and/or update historical data on a
quarterly basis.

(c)

Paragraph 266.4 above is repeated.

(d)

Save as aforesaid paragraph 94F.1 is denied. The final sentence is

admitted.

269.2

As set out above, RBS maintained a capital buffer which was intended to cover
additional Pillar 2 risks (being residual risks not captured under Pillar 1). As to
paragraph 94F.2:
(a)

RBS breached its VaR limit only once in January 2008, on 22 January 2008.
It breached its VaR limit twice in February 2008, on 7 February 2008 and
29 February 2008, and once in April 2008, on 2 April 2008. Thereafter,
RBS did not breach its VaR limit again before the Closing Date.

(b)

The seriousness of a limit breach would depend on its cause(s).

(c)

The relevant limit breaches were caused by increased volatility and market
deterioration, not an increase in RBS's risk appetite.

269.3

To the extent that it is alleged that RBS failed to comply with its obligations under
GENPRU 1.2.30, that is denied. As to paragraph 94F.3:
(a)

In Q3 and Q4 2007, in respect of data collected up to the end of October

2007, RBS updated the historical data used in its VaR model at least
monthly.

(b)

RBS updated the historical data used in its VaR model to the end of
December 2007 on or about 29 February 2008, and then to the end of
January 2008 on or about 31 March 2008. From May 2008 onwards, the
historical data used in RBS's VaR model was updated monthly.

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(c)

As set out above, RBS implemented updates from Q1 2008 (including in

relation to November and December 2007, and January 2008 historical data)
in a controlled and staggered fashion. It did so to manage the orderly
disposal of positions (particularly illiquid positions), which was a prudent
approach in the turbulent market conditions.

(d)

RBS informed the FSA of the frequency of updates in the VaR Model
Quarterly Notifications and Reporting Packs which it provided to the FSA.
The FSA did not indicate that it was concerned about the frequency with
which RBS updated the historical data used in its VaR model.

(e)
269.4

Save as aforesaid, paragraph 94F.3 is denied.

As to paragraph 94F.4:
(a)

Paragraph 94F.4.1 is denied. Without prejudice to the generality of the

foregoing VaR limits, limit breaches and updates of historical data were not
disclosed in the 2007 Accounts, as they were commercially sensitive, and
therefore not disclosing a change to them could not make what was said in
the 2007 Accounts misleading. Further, this did not amount to a significant
change to the financial and trading position of the RBS group as disclosed in
the 2007 Accounts.

(b)

Paragraph 94F.4.2 is denied. Without prejudice to the generality of the

foregoing: (i) VaR limits were not disclosed, as they were a commercially
sensitive matter; (ii) without disclosure of VaR limits, disclosure of a breach
of one of RBS's many VaR limits would be of no significant utility to an
investor; (iii) to draw meaningful conclusions from the fact that a breach of
a VaR limit had taken place, an investor would have needed to know
(among other things) the composition of each position relevant to that limit,
the sensitivity of each such position to each relevant risk factor and have
sufficient data regarding the relevant portfolio; (iv) in any event, in the then
prevailing market conditions, disclosure of VaR limit breaches resulting
from increases to VaR which were themselves attributable to increased
volatility and market deterioration would have told investors that when
markets were volatile, there was a greater risk that RBS could suffer

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significant losses. However there was already sufficient disclosure of that

obvious risk in the Prospectus (in particular, in the risk warnings on page
12); (v) any limited changes to the frequency with which historical data was
updated or departures from monthly updating of such data were not
necessary information within the meaning of s.87A(2) of FSMA; and (vi)
once historical data was updated, any consequences of that update would be
immediate, and, prior to the Prospectus Date, RBS's historical data had last
been updated on or around 31 March 2008, and therefore was sufficiently up
to date.
(c)

For the reasons set out above, paragraph 94F.4.3 is denied.

269A. Paragraph 94F.1A is denied. Paragraphs 264.5A, 264.5B, and 264A above are repeated.
270.

[not used].
270.1 [not used].
270.2 [not used].

SS CDOs and market risk

271.

As to paragraph Paragraph 94G is admitted.:

271.1

Paragraph 94G.1 is denied. As set out above:

(a)

RBS's use of VaR to calculate its market risk, along with the limitations of
that methodology, were expressly referred to in the 2007 Accounts, which
were incorporated by reference into the Prospectus.

271.2

(b)

RBS was applying Pillar 2 of Basel II.

(c)

In the circumstances, no further disclosure was required.

Paragraph 94G.2 is denied. As set out at page 26 of the Prospectus, RBS's capital
plan assumed write-downs of 5.9 billion before tax on credit market exposures set
out in the Write-Downs Table and treated a corresponding amount of capital as
being applied to meet those losses. Further, as set out above, RBS also maintained a
capital buffer in excess of the amount of capital required by the Regulator FSA to be

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held against losses on market exposures. That approach was both reasonable and
prudent given the position at the time it was adopted.
271.3

Paragraph 94G.3 is denied.

271.4

For the reasons set out above, paragraph 94G.74 is denied.

271A. As to paragraph 94GA:

271A.1 In mid-November 2007, RBS moved some mezzanine and high grade SS CDOs out
of its VaR limits. In December 2007, RBS moved the SS CDOs to its regulatory
banking book. The carrying value of these assets was set out in Annex 1 of a letter
sent by Chris Kyle to the FSA on 6 December 2007 and was $4.712bn. Kapoor
approved the latter move - of the SS CDOs out of the VaR regime for regulatory
capital purposes - in accordance with RBS's Trading Book Policy Statement. The SS
CDOs were removed from RBS's historical stress loss limit on 29 February 2008,
following a breach of that limit.
271A.2 It is denied that the SS CDOs were moved out of RBS's VaR regime as a result of the
matters pleaded in paragraph 94G. They were transferred to the regulatory banking
book for the reasons stated in the letter sent to the FSA on 6 December 2007. In the
premises, moving the SS CDOs out of RBS's VaR regime was reasonable and
appropriate. Further, by letter dated 6 December 2007, RBS informed the FSA that,
for regulatory capital purposes, it had moved the SS CDOs out of the VaR regime.
The FSA subsequently approved this move.
271A.3 For the reasons set out above, the relevance of the SS CDOs in question no longer
being subject to the VaR limits is denied. In November 2007, the SS CDOs were
moved out of the VaR limits because retaining these assets within RBS's VaR limits
at that time would have made it more difficult for RBS to properly monitor the
market risk associated with other positions; in the circumstances it was reasonable
and prudent to remove these assets from the VaR limits. Once the SS CDOs were
moved to RBS's regulatory banking book and out of the VaR regime, there was no
reason for them to be subjected to VaR limits; to subject them to VaR limits
following this transfer would have been inappropriate.

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271A.4 It is admitted that for regulatory capital purposes the SS CDOs were moved into
RBS's regulatory banking book and were initially subjected to a credit ratings-based
approach. For the reasons set out above that move was appropriate and reasonable.
271A.5 It is admitted that from around 29 February 2008 the SS CDOs were no longer subject
to either RBS's VaR limit or 10-day historical stress testing. For the reasons set out
above, subjecting them to such market risk controls and/or methods of measuring and
monitoring market risk in the same way as before they were moved out of the VaR
regime, would have been inappropriate. Further and in any event:
(a)

RBS stress tested the SS CDOs in order to assess the total amount it might
stand to lose based on the positions it held in certain scenarios.

(b)

From November 2007 onwards, RBS monitored its notional exposure in

relation to the SS CDOs (i.e. their value).

(c)

While the SS CDOs were not subject to RBS's VaR limit, it did calculate and
monitor VaR in relation to the SS CDOs.

271A.6 Paragraphs 94GA.1 and 2 are admitted.

271A.7 As to paragraph 94GA.3:
(a)

It is admitted that the SS CDOs were intended to be sold.

(b)

It is denied that their transfer to RBS's regulatory banking book was a

breach of RBS's trading book policy. RBS's trading book policy contained
guidance providing that where there were issues as to RBS's compliance
with the trading book policy, or doubts about the interpretation and
application of FSA rules related to the policy statements, these would be
referred to the Group Chief Accountant for assessment of their significance
and a decision on the appropriate treatment to be adopted in capital
adequacy reporting. That guidance was applied in relation to the transfer of
the SS CDOs, and Kapoor approved the transfer. Accordingly, there was no
breach of RBS's trading book policy statement.

271A.8 Save as aforesaid paragraph 94GA is denied.

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271B. As to paragraph 94GB:

271B.1 Save that in relation to the second sentence, the 95% VaR figures referred to are 95%,
1-day VaR figures, paragraph 94GB.1 is admitted. Its relevance is denied.
271B.2 As to paragraph 94GB.2:
(a)

No admissions are made as to whether had the relevant assets been left in the
VaR trading book calculation, RBS would have suffered numerous
backtesting exceptions or limit breaches.

(b)

Further and in any event, it is denied, if it is alleged, that limit breaches

would affect whether or not the FSA would withdraw RBS's VaR model
permission; as set out below, the relevant FSA guidance at the time (BIPRU
7.19.110G) linked withdrawing model permission to backtesting exceptions,
and not breaches of internal VaR limits.

(c)

From 24 April 2008 RBS's Group VaR limit was 50m on a 1-day, 95%
basis.

(d)

If ten or more backtesting exceptions happened within a 250 business day

period then the FSA could apply a plus factor greater than one, or consider
revoking RBS's VaR model permission. At the relevant time BIPRU
7.10.110G contained guidance providing that the FSA could withdraw RBS's
VaR model permission if backtesting revealed severe problems with the basic
integrity of RBS's VaR model. As set out in paragraph 265.4 above however,
the FSA did not, at any relevant time, withdraw RBS's VaR model
permission or threaten to do so, and it would have been unlikely to do so, had
circumstances arisen in which it could have done so.

(e)

Save as aforesaid the first sentence is denied.

(f)

No admissions are made as to whether the removal of the SS CDOs had the
effect of reducing the number of backtesting exceptions suffered.

(g)

Save as aforesaid the second sentence is denied. If and to the extent that the
SS CDOs had caused backtesting exceptions, had they remained within the

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VaR regime that would not have revealed severe problems with the basic
integrity of RBS's VaR model. It would have revealed that the SS CDOs were
no longer suitable for VaR treatment, and backtesting exceptions relating to
assets which were no longer suitable for VaR would not reveal anything
regarding the integrity of the model itself.
271B.3 As to paragraph 94GB.3:
(a)

The first sentence is admitted.

(b)

It is admitted that, as set out in the second sentence, RBS did not immediately
reduce its VaR limit when the SS CDOs were removed from VaR. That nonreduction was considered, and reasonable and appropriate. A decision was in
fact subsequently taken to increase the Group VaR limits. That decision was
also considered, and reasonable and appropriate: (i) to assist with the orderly
disposal of positions (particularly illiquid positions); and (ii) in circumstances
in which RBS had to take account of the integration of ABN AMRO and
Sempra into RBS.

(c)

Save as aforesaid, paragraph 94GB.3 is denied.

271B.4 As to paragraph 94GB.4:

(a)

Paragraph 271A above is repeated.

(b)

RBS had not determined the VaR approach to be inadequate. It had

determined that the SS CDOs' market risk should not be monitored and
managed through VaR.

(c)

Save as aforesaid paragraph 94GB.4 is denied.

271B.5 As to paragraph 94GB.5, it is admitted that as at the Prospectus Date the SS CDOs
had been included in the de-risking initiative, and that it was proposed that these
assets be "discontinued business". It is further admitted that, as at the Closing Date,
it was planned that the SS CDOs be transferred to the SAU (which was internally
announced on 9 May 2008) as discontinued business, and that it was intended that
actions be taken to manage those assets, including, as appropriate, hedging, selling

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or unwinding them. The discontinuance of certain structured credit activities and the
management of problematic US sub-prime mortgage-related assets by a dedicated
work-out unit with a view to minimising risk and reducing positions at an
appropriate pace was referred to on page 29 of the Prospectus. Save as aforesaid,
paragraph 95GB.5 is denied.
271B.6 Paragraph 94GB.6 is admitted. Its relevance is denied. As set out more fully below,
RBS was not required to say anything, in the Prospectus, about the transfer of the SS
CDOs out of the VaR regime.
271C. Paragraph 94GC is denied for the reasons set out below:
271C.1 In relation to paragraphs 94GC.1 and .2:

(a)

The phrase "most-market risky of assets" is not understood.

(b)

Paragraphs 271A and B above are repeated. As set out in those paragraphs
(in summary): (i) after the SS CDOs were moved to the regulatory banking
book it would have been inappropriate to apply market risk monitoring or
limit setting to them in the manner alleged; and (ii) the assets were
monitored (in the manner set out in paragraph 271A.5). Save to the extent
they are consistent with those paragraphs, paragraphs 94GC.1 and .2 are
denied. The Defendants note that the Claimants do not allege what would
have been achieved by subjecting such assets to VaR limits.

(c)

In any event, the changes referred to did not amount to a significant change
in the trading or financial position of the RBS group beyond that already
indicated by the estimated write-downs disclosed on page 26 of the
Prospectus.

271C.2 Paragraph 94GC.3 is denied.

(a)

It is not understood what "limits referred to in the 2007 Accounts" the

Claimants are referring to in paragraph 94GC.3 or how the SS CDOs were
subject to or contributed to those limits.

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(b)

The reference to "previous Accounts" is impermissibly vague and it is

unclear to which Accounts the Claimants refer. Pending clarification, no
admissions are made in respect of the "previous Accounts".

(c)

VaR limits were not disclosed in the 2007 Accounts at all.

(d)

Further, a reader would not have known that the SS CDOs were within
RBS's VaR limits at the time of the 2007 Accounts at all (as the 2007
Accounts did not say that the SS CDOs were within RBS's VaR limits).
Accordingly not disclosing their removal from those limits could not be and
was not misleading.

(e)

As to backtesting exceptions, the 2007 Accounts did not list which assets
fell within the scope of RBS's VaR waiver. Accordingly a person reading
those accounts would not have known whether or not the SS CDOs fell
within the scope of the VaR waiver. Further, paragraph 268.2 above is
repeated. In addition, as set out in paragraphs 266.6(d) and 268.3 above, the
cause of the relevant backtesting exceptions was market volatility, the
existence of which was clearly disclosed in the Prospectus. RBS will rely
upon (in addition to the disclosures referred in paragraph 268.3 above) the
disclosures made on pages 24 and 26 of the Prospectus, and the fact that the
existence of a deterioration in market conditions and market volatility was
apparent from the write-downs being made, and disclosed, by RBS. In the
premises, the removal of the SS CDOs from the VaR regime did not make
the reference to the backtesting exceptions in the 2007 Accounts and earlier
accounts misleading.

271C.3 As to paragraph 94GC.4:

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(a)

The documents referenced by the Claimants in support of 94GC.4 do not

support the allegation that the SS CDOs VaR was 17m at the end of 2007.
No admissions are made as to that allegation.

(b)

The VaR of the SS CDOs held by RBS and ABN AMRO at the end of June
2008 was approximately 204m. No admissions are made as to whether the
VaR of those SS CDOs was over 204m as at the Closing Date.

(c)

In any event, the relevance of paragraph 94GC.4 is denied.

271C.4 The unnumbered paragraph following paragraph 94GC.4 is denied.

(a)

As to the disclosure of VaR limits and which assets fell within the scope of
the VaR regime, paragraph 264C.1(b) above is repeated.

(b)

In any event, the removal of the SS CDOs from the VaR regime and RBS's
decision not to consequentially reduce its VaR limits was not necessary
information.

(c)

Without prejudice to the generality of the denial in (b) above, disclosure of

the matters that the Claimants allege should have been disclosed (or clarified
to avoid misleading) in relation to the removal of the SS CDOs from the VaR
model, and the effects on the VaR numbers that would have resulted from
leaving them in, would not have provided investors with any more useful
information as regards the market risk faced by RBS in relation to those
exposures than investors could already see from the information provided
about them.

In particular, the nature and extent of the exposures was clear

and it was clear that they carried substantial market risk. Thus, in short, the
disclosure suggested would have been a technical and potentially confusing
way of repeating the substance of information already provided in the
Prospectus.
271D. As to paragraph 94GD:
271D.1 RBS did not apply a credit-ratings based approach to the capital treatment to the SS
CDOs after March 2008. After that time, it applied a securitisation-based approach.

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This approach was reasonable in the circumstances. Save as aforesaid, paragraph

94GD.1 is admitted.
271D.2 Save that it is denied that the RWAs for the SS CDOs rose to $24.4bn by the
Prospectus Date, paragraph 94GD.2 is admitted.
271D.3 Paragraph 94GD.3 is denied:
(a) The relevance to the introduction to 94GD.3 is denied. By the time of the
Rights Issue, RBS was not applying a credit risk weighting approach to the
capital treatment of the SS CDOs. Instead, RBS applied a securitisation based
approach to those assets. Following this approach, the capital treatment of the
SS CDOs took into account the seniority of its holding in the SS CDOs
because RBS had concluded that to focus on the credit rating of the underlying
assets that formed part of those SS CDOs would give rise to a capital treatment
that was mis-aligned with its internal view of the fundamental valuation of the
SS CDOs.
(b) Further, the Claimants' contentions in paragraph 94GD.3 take no account of
the substantial impact on RWAs regarding the SS CDOs of the write-downs
estimated on them, as set out in the Prospectus.
(c) Point (i) of paragraph 94GD.3 is denied. The SS CDOs were priced
individually via a valuation exercise undertaken in respect of the underlying
securities for each SS CDO. The prices in the Write-Downs Table were
average weighted prices based on the aggregate value of the individually
priced SS CDOs.
(d) Point (ii) of paragraph 94GD.3 is denied. It is not understood on what basis the
Claimants allege that the relevant SS CDOs all had similar underlying asset
structure and quality. It is to be inferred from the difference in credit rating
between some of them that there were relevant differences in the details of
their structure and differences in the type of underlying assets, as well as
quality.

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(e) In relation to point (iii) of paragraph 94GD.3, it is admitted that significant

numbers of bonds were being downgraded by ratings agencies. However no
admissions are made as to the effect of that on the relevant SS CDOs' RWAs.
(f) As to point (iv) of paragraph 94GD.3, it is admitted that some downgrades to
the SS CDOs referred to were likely, but it is denied that the extent of such
downgrades was likely to go beyond, or exceed the position implied by the
level of write-downs estimated in respect of such SS CDOs in the Prospectus.
271E. Paragraph 94GE is denied:
271E.1 It is denied that RBS's capital assumptions were imprudent or unreasonable for the
reasons set out in point (i) of paragraph 94GE:
(a) As indicated in a memorandum of 26 March 2008, sent by Christopher Kyle to
Rajan Kapoor, as at the end of March 2008 the RWAs in respect of the SS CDOs
were estimated to be c.$9.382bn.
(b) For capital planning purposes, however, RBS made the more conservative
assumption that there would be a total capital deduction of 950m with respect to
the SS CDOs. This equated to an RWA figure of 11.9bn, or $23.8bn given the
exchange rates at the time. This deduction was assumed to apply throughout
2008, and thus built in a substantial buffer of conservatism from the outset, which
became greater over the forecasting period as the estimated write-downs on the
SS CDOs were not allowed for by a corresponding reduction in the capital
charge.
271E.2 It is denied that RBS's capital assumptions were imprudent or unreasonable for the
reasons set out in point (ii) of paragraph 94GE:
(a) For the reasons set out in paragraphs 271D.3 and 271E.1 above.
(b) Further, no admission is made as to whether the RWAs for the SS CDOs
referred to in paragraph 94GD were $7bn.
(c) In any event, the relevance of paragraph 94GE(ii) is denied for the reasons set
out in paragraph 271D.3 above.

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Other credit market exposures

271F. Save as set out in section 2 of the Re-Re-Amended Defence, paragraph 94GF is denied.
271G. As to paragraph 94GG:
271G.1 As to the first sentence, insofar as the Claimants are alleging a fixed and settled plan,
that is denied. It is admitted that the email on which the Claimants rely (i) described
the approach adopted in respect of RBS's SS CDOs as being that they were removed
from the Group VaR limit and Stress limit but that for management information
purposes the VaR and Stress on these positions was monitored separately, and (ii)
indicated that by 10 June 2008 there was a working assumption that assets transferred
to the SAU would be "treated on a similar basis".
271G.2 As to the second sentence: it is admitted that such treatment, if and to the extent it
was applied to other assets, would (by definition) be consistent with the treatment
described as being applied to the SS CDOs. The SS CDOs were not moved to the
SAU by May 2008. They were moved to the SAU in or about June 2008. They were
not moved to the SAU because the trading book policy no longer justified their
retention in the regulatory trading book or VaR; that was the reason for their being
moved out of the VaR regime, not their reason for being moved to the SAU.
271G.3 As to the third sentence and its subparagraphs:
(a) As to paragraph 94GG.1, it is denied that the working assumption referred to in
paragraph 271G.1 above contemplated a change to RBS's market risk
management amounting to a significant change in RBS's trading or financial
position. Further and in any event, page 84 of the 2007 Accounts stated and
disclosed that RBS could determine appropriate policies and methodologies to
measure and control risks, which it did in relation to assets moved into the SAU.
(b) As to the first sentence of paragraph 94GG.2, it is denied that the capital plan
under-estimated the RWAs that should have been allowed for. The second
sentence is noted.

Likely additional capital charges

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271H. As to paragraph 94GH:

271H.1 As to the first sentence:
(a) It is not understood what "significantly increased VaR" means (in that it is not
understood what magnitude of increase the Claimants would deem
significant). Pending clarification no admissions are made as to whether any
increases in VaR resulting from the March and April 2008 updates in the
historical data used in the VaR model were significant.
(b) Save as aforesaid the first sentence is admitted.
271H.2 As to the second sentence:
(a) RBS was aware of its VaR limit breaches and that it might sustain ten
backtesting exceptions.
(b) It is admitted that the email referred to in the second sentence was sent.
(c) RBS was not concerned about triggering "a full model review" in the sense of
permission to use its VaR model being withdrawn. Paragraphs 265.3 and
265.4 above are repeated. Further and in any event, it is denied that RBS was
concerned about limit breaches triggering "a full model review"; the relevant
FSA guidance at the time (BIPRU 7.19.110G) linked withdrawing model
permission to backtesting exceptions, and not breaches of internal VaR
limits.
(d) Save as aforesaid the second sentence is denied.
271H.3 As to the third sentence:
(a)

It is admitted that RBS sought a meeting with the FSA and that as a result a
meeting was held with the FSA on 2 May 2008.

(b)

The meeting was sought in order to discuss: (i) RBS's backtesting history; (ii)
the factors causing increased VaR for a given portfolio; (iii) steps taken
and/or to be taken by RBS in relation to risks not in VaR; (iv) future steps;
and (v) the potential exclusion of future backtesting exceptions.

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(c)
271I.

Save as aforesaid the third sentence is denied.

As to paragraph 94GI:
271I.1 In relation to the alleged inadequacies in the VaR model, paragraphs 266 to 267 above
are repeated.
271I.2 Save that it is admitted that from on or around 22 April 2008, RBS expected the FSA
to require it hold some extra market risk capital, paragraph 94GI.1 is denied.
(a)

From on or around 23 April 2008, at the latest RBS believed that there was a
risk that if RBS did not proactively offer the FSA potential solutions
regarding market risk capital, then the FSA may, ultimately, arrive at an
unsatisfactory solution.

(b)

It is denied that RBS was worried during the Rights Issue Period that FSA
would very quickly require it to hold a large amount of extra market risk
capital for trading assets. RBS's belief as to steps which the FSA may take is
set out in paragraph 271H.2 above, and is reflected in the emails relied upon
by the Claimants.

(c)

The 4+8 forecast did not record a risk that the FSA would very quickly
require RBS to hold a large amount of extra market risk capital for trading
assets as a 'key risk'. It referred to an unquantified "Risk to Delivery" as a
result of additional capital that may be needed as a result of backtesting
exceptions.

271I.3 Save that for the reasons set out above it is denied that the preparation referred to in
paragraph 94GI.2 was carried out as a consequence of the matters pleaded in
paragraph 94GI.1, paragraph 94GI.2 is admitted. The preparation referred to in
paragraph 94GI.2 was carried out as a result of RBS's belief set out in paragraph
271I.2 above.
271I.4 Paragraph 94GI.3 is admitted. Its relevance is denied in circumstances in which the
FSA made no clear reference to market risk capital when requesting an ICAAP
submission.

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271J.

As to paragraph 94GJ:
271J.1 It is admitted that RBS did not take the steps set out in the first sentence, but denied
that RBS should have taken those steps.
271J.2 The second sentence is noted. Such an increase in RWAs would not have been
significant in the context of the capital ratio estimates set out in the Prospectus.
271J.3 In any event, if and to the extent Pillar 2 capital would have been required (which is
denied) this would not have led to an increase in RWAs but rather to an increase in
the ICG, which could not have been disclosed in the Prospectus and would not have
affected the capital projections contained in the Prospectus.
271J.4 Save as aforesaid, paragraph 94GJ is denied.

271K. Paragraph 94GK is denied. Without prejudice to the generality of the foregoing, it is denied
that any of the matters relied upon by the Claimants necessitated preparing a supplementary
prospectus, or that the Director Defendants had knowledge of matters necessitating the
preparation of a supplementary prospectus.
Asset Sales
272.

Paragraph 94H is denied:

272.1

It was not necessary for RBS to identify 4 billion of new capital in addition to the
Rights Issue proceeds in order to achieve its target 6% Core Tier 1 ratio. As was
reflected in the statements made in the Prospectus at pages 7 and 24-25, on the basis
of RBS's capital plan at the time of the Rights Issue, the 6% Core Tier 1 target ratio
could have been achieved with asset sales which generated an increase in Core Tier
1 capital of less than 4 billion. That capital plan was a reasonable one at the time
of the Rights Issue.

272.2

The purpose of the asset sales was not to prevent a third of the proceeds of the
Rights Issue being swallowed up by write-downs as is implied. Rather, the proceeds
of asset sales were intended to be used in conjunction with the Rights Issue proceeds
to strengthen RBS's capital position and assist it in reaching its stated capital targets.

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273.

Save that it is admitted that the extracts referred to appeared in the Prospectus, paragraph 94I
is denied. Further, the SL Group Claimants have chosen to quote selectively from the
relevant section of the Prospectus, which should be read in full and in its proper context, and
is as follows:
"As part of an ongoing exercise, in the context of its decision to increase capital levels, the
Board has identified for possible whole or partial disposal RBS Insurance and other smaller
assets which are not central to the very strong UK and international banking franchises that
RBS has built. RBS is determined to achieve full and fair value in respect of any such
disposals. At this stage RBS has assumed in its capital plan that a 4bn increase in Core Tier
1 capital by the end of 2008 can be achieved in this way, although there is scope for fewer
disposals to be made, whilst still exceeding the target Core Tier 1 ratio of 6 per cent."
(Emphasis added)

273A As to paragraph 94IA, it is admitted that the Working Capital Report indicated that the capital
plan assumed the sale of RBS Insurance, yielding a capital gain of 4 billion. It also indicated
under the heading "Underlying assumptions for capital projections" that numerous other
disposals were anticipated. In fact, as the Prospectus made clear, the assumption underlying
the Capital Plan was that an increase of 4 billion in Core Tier 1 capital could be achieved
from the whole or partial disposal of RBS Insurance and other smaller assets.
274.

Paragraph 94J is denied. The Rights Issue Capital Plan assumed that 4bn of capital gains
could be generated from asset disposals and that assumption was a realistic and prudent
one. In any event, the sale of RBS Insurance for circa 7 billion was consistent with
valuations provided by both Merrill Lynch and Goldman Sachs, and with the valuation put on
RBS Insurance by RBS's own Group Corporate Finance team. In particularWith regard to the
sub-paragraphs of paragraph 94J:
274.1

Neither the Prospectus nor the capital plan on which it was based had been put
together in a very short time period:
(a)

The capital plan had not been put together from scratch in connection with
the Rights Issue. Rather, as set out above in the section headed "purpose of
the Rights Issue and use of its proceeds", in keeping with good practice and
as the market would expect, RBS kept its capital position under regular
review, and made adjustments to its capital plan as necessary, in the light of
developments in the financial markets, the economic outlook generally and

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any other events likely to impact on the bank's capital position going
forward.
(b)

The period within which the Prospectus was put together was consistent
with the normal timescale for transactions of this sort.

274.2

Contrary to what is implied in paragraph 94J.1 RBS did not have a plan to raise
4bn by asset sales. As the Prospectus made clear, that was the figure that RBS had
at that stage assumed in its capital plan as being the increase in Core Tier 1 capital
from asset sales by the end of 2008. In fact, as Goodwin made clear at the analysts'
conference on 22 April 2008, the anticipated capital gain from disposal of all assets
identified for possible sale would have been more than 4 billion.

274.3

The possibility of asset sales as a means of raising additional capital had been under
consideration by the Board in early 2008 and had been kept under review. Further
and in any event, as Whittaker made clear during the analysts' conference on 22
April, possible asset sales were kept under review on an on-going basis within RBS
by the Group strategy and Group Corporate Finance teams. It is not therefore
accurate to say that the 'plan' for asset sales had been put together in a very short
time period.

274.4

The assumption in the capital plan that the necessary disposals could be achieved
within eight months was both reasonable and prudent. In this regard, by the date of
the Prospectus RBS had identified a list of 7 assets for possible disposal during the
course of 2008, which based on the valuations as at the Prospectus Date advisers
had been appointed on four of the main possible disposals and progress had been
made on those projects, which would together have been expected to generate an
increase in Core Tier 1 capital in the order of 6 billion.

275.

Save that it is admitted that the possible disposal of RBS Insurance had been considered prior
to March 2008, paragraph 94K.1 is denied:
275.1

As set out above, possible asset sales were kept under review on an on-going basis
within RBS by the Group strategy and Group Corporate Finance teams.

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275.2

In particular, the possible disposal of RBS Insurance had been the subject of general
discussion by RBS's senior management, including Goodwin and Whittaker, in
2007.

275.3

Further work was carried out in January 2008 to assess the financial impact of a
sale, making a range of different assumptions about the sale proceeds.

275.4

In February and March 2008, detailed preparatory work was carried out by Merrill
Lynch, including a detailed valuation and an assessment of potential acquirers of the
business.

275.5

McKillop's comments at the analysts' conference reflected the fact that as a result of
the events in March 2008, the work previously carried out in relation to the possible
disposal was escalated and active steps were taken to pursue it.

276.

As to pParagraph 94K.2 is denied. With regard to the matters alleged in the sub-paragaphs
thereof:
276.1

As set out above, possible asset sales were kept under review on an on-going basis
within RBS by the Group strategy and Group Corporate Finance teams.

276.2

Against that background, a list of 19 assets had been identified and considered by
the Board for possible disposal. Preparations for possible disposal varied between
the different assets.

276.3

At the analysts' conference, Whittaker simply explained that the precise combination
of disposals from the list of assets identified was not finalised and would be
dependent amongst other things on whether the bank believed it was able to achieve
full value for particular assets. Further, he also made clear that RBS was in quite
advanced negotiations with potential acquirers in respect of some of the assets
identified.

276.4

Save as aforesaid, paragraph 94K.2 is denied.

276.5

As to paragraph 94K.2.1 and 94K.2.2:

(a)

In the Morrison email of 14 April 2008 referred to in paragraph 94K.2.2

attaching the "Group Capital Options Summary Project Pipeline"

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document ("the Project Pipeline Table"), Morrison stated that "These

[disposals] are all expected to complete in 2008." The disposals being
referred to included RBS Insurance.
(b)

The Project Pipeline Table attached to the Morrison email contained a

column headed "probability" in which the figure of 25% was entered in
respect of each of the 7 projects at that time in execution. That figure of
25% did not represent RBS's view of the likelihood of each of the respective
assets being sold in 2008 and, it is to be inferred, was set to 25% as a
'placeholder' on 14 April 2008. In this regard, the Defendants will rely
amongst other things on the facts that: (i) previous versions of the document
had contained differing percentages in the probability column in respect of
the 7 projects; (b) after being re-set on 14 April 2008, the entry in the
probability column for each of the 7 projects remained at 25% in later
versions of the Project Pipeline Table, despite some of those projects
nearing completion.

(c)

On the same date (14 April 2008) Calum Osborne, the then head of RBS's
Group Corporate Finance team which was dealing with the disposal of RBS
Insurance, sent an email to Morrison, amongst others, indicating that in his
view the probability figure in relation to RBS Insurance should be changed
to 75%.

276.6

Paragraph 94K.2.3 is admitted. Tyler was not directly involved in the arrangements
being made for the disposal of RBS Insurance and the view he expressed in his
email as to the likelihood of the sale of RBS Insurance being completed did not
accord with the views of those directly involved in the sale process.

277.

As to paragraph 94K.3:
277.1

is denied. As set out at paragraph 276 above, by the time of the announcement of
the Rights Issue, RBS was in quite advanced negotiations with potential acquirers in
respect of some of the assets identified. It is admitted and averred that following an
unsolicited approach, a potential purchaser of RBS InsuranceAllianz had been given
access to a data room over the weekend of 12-13 April 2008 in advance of the
formal bid process. It is denied that Allianz informed RBS on 15 April 2008 that it

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would not make an offer. In fact, Allianz informed RBS that as it was then involved
in a corporate restructuring it would not be in a position to make an offer for RBS
Insurance in the short term, but that it continued to be interested in a possible
purchase of RBS Insurance. In the event, it remained involved in the formal bid
process and subsequently made a non-binding offer as part of the formal bid that
process.
277.2

It is admitted and averred that prior to 6 June 2008 three offers had been received
for RBS Insurance. Those offers were non-binding and conditional, consistent with
the requirements of the 'bid packs' circulated on RBS's behalf by Goldman Sachs
and Merrill Lynch, which had requested a "non-binding indication of interest"
including "details of any conditions to which any final offer would be subject". It
was anticipated by RBS and its advisers, and the bid pack indicated, that following
this initial round of bidding there would be a second round, including further due
diligence material being provided to those parties involved, with the expectation that
improved offers could be achieved. Moreover, in addition to the three potential
trade buyers who had submitted offers, interest had also been received from private
equity firms.

277.3

The final sentence of paragraph 94K.3.2 is denied. As set out above, the assumption
was that a capital gain of 4 billion could be achieved from the sale of RBS
Insurance and other smaller assets.

278.

As to paragraph 94K.4:
278.1

There had been a strong level of interest in RBS Insurance by the closing date and
discussions were on-going with a number of potential acquirers.

278.2

The allegation that RBS had had to extend the bid deadline "without effect" is not
understood.

278.3

It is averred that indicative bids had originally been invited by 28 May 2008. Two
indicative bids were received on that date.

278.4

A further indicative bid was received from a potential trade buyerAllianz on 4 June
2008., after additional time had been given to that party it to consider its bid. RBS

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was happy to allow this bid, amongst other things, to put pressure on other interested
parties.
278.5

By mid-June 2008 negotiations were continuing with two of the bidders, who had
been given access to the data room. Two private equity groups subsequently joined
the process and made bids.

278.6

The bids received would, if they had resulted in a sale, have generated a capital gain
to RBS of approximately 2.65 billion. Ultimately, following negotiations which
continued until late November 2008, RBS took the decision to retain RBS
Insurance.

278.7

In addition, by June 2008 two further significant asset disposals were at an advanced
stage of negotiation. Between them they were expected to result in a capital gain to
RBS of approximately 1.5 billion.

278.8
279.

Save to the extent consistent with what is said above, paragraph 94K.4 is denied.

Since the allegations in 94J and 94K are denied, it follows that paragraph 94L is denied:
279.1

The description of the possibility of asset sales, and their potential impact in terms
of capital gain, was accurately and fairly disclosed in the Prospectus. There were no
material omissions.

279.2

There was no material change during the Rights Issue Period giving rise to the need
for disclosure by way of a supplementary prospectus.

279.3

It is admitted that by the Closing Date Goodwin and Whittaker were aware of the
bids that had been received for RBS Insurance. No admission is made as to whether
Cameron or McKillop were aware of the bids by the Closing Date. It is admitted
that Goodwin's and Whittaker's assistants and Cameron received emails attaching
the said broker report. It is denied that their belief in the prospects of achieving the
anticipated asset sales was, or should have been, informed by that report. For the
reasons set out above, RBS and the Director Defendants reasonably believed that the
anticipated capital gains could be generated.

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279.4

The final two sentences of paragraph 94L are denied. As set out above, it is denied
that there arose any new matters such as to require the submission of a
supplementary prospectus. None of the Director Defendants was therefore under
any obligation to give notice to RBS of any such new matters pursuant to section
87G(5) of FSMA. It is accordingly denied that any of the Director Defendants is
liable to pay compensation under section 90(4) of FSMA.

280.

Paragraph 94M is denied.

280.1

As set out above, the Prospectus did not indicate that RBS would raise 4 billion
through asset sales. Rather, that was the figure that RBS had at that stage assumed
in its capital plan as being the increase in Core Tier 1 capital from asset sales by the
end of 2008. That assumption was realistic and reasonable at the time it was made
and remained so throughout the Rights Issue Period. Although for the purpose of
the Capital Plan the sale proceeds were modelled as being received in September
2008, as was explained in the Prospectus the underlying assumption was that the
necessary disposals and the corresponding increase in Core Tier 1 capital would be
achieved by the end of 2008.

280.2

It was reasonable for RBS to believe that it could make sufficient disposals at full
and fair value and the Claimants have provided no proper support for any assertion
to the contrary.

280.3

The statements in the Prospectus set out at paragraph 94I were not misleading. To
the contrary, they set out the position accurately and fairly.

280.4

Paragraph 94M.3 is denied, in which regard paragraphs 276 to 279 above are
repeated.
(a)

As to paragraph 94M.3.1, it is admitted that during April and May RBS did
revise down its initial valuation of RBS Insurance. It is denied that the
figures alleged represented RBS's concluded valuation on the relevant dates.
As at the end of May 2008, the valuation range for RBS Insurance was 5.7
billion-6.6 billion, giving a capital gain range of 2.1 billion-3.0 billion.
On this basis, it remained realistic to assume that RBS could generate 4
billion in capital gains from asset disposals by the end of 2008.

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(b)

As to paragraph 94M.3.2, paragraph 277 above is repeated.

The final

sentence is admitted.
(c)

Further, even if the prospects of achieving capital gains of 4 billion from

asset sales changed between the Prospectus Date and the Close Date, no
disclosure was required by way of supplementary prospectus unless those
changes materially affected the likelihood of RBS being able to meet the
projected Core Tier 1 target of 6% by 31 December 2008.

A280. Save that it is denied that the assumption was that the entire 4 billion capital gain would
come from the sale of RBS Insurance, the preamble to paragraph 94MA is admitted. As to
the sub-paragraphs thereof:
A280.1 Paragraph 94MA.1 is denied, in which regard paragraph 276.5 above is repeated.
A280.2 The first two sentences of paragraph 94MA.2 are admitted. It is denied that the
likelihood of sale of each asset was 25% and the final sentence is accordingly
denied.
A280.3 It is admitted that, if RBS was unable to sell RBS Insurance in 2008, it was unlikely
that it would be able to raise 4 billion of capital gains through asset sales.
A280.4 Save that it is admitted that the sale of Opal, Ship and Ash would have generated
greater than 36 basis points of Core Tier 1 capital, paragraph 94MA.4 is denied.
The Defendants will say that 26 basis points of Core Tier 1 capital would have been
sufficient to meet the 6% Core Tier 1 capital ratio target by the end of 2008.
B280. Paragraph 94MB is denied. In particular:
B280.1 It is denied that the Prospectus was misleading with regard to asset sales. As the
Prospectus made clear, the RI Capital Plan assumed 4 billion capital gain from the
sale of RBS Insurance and other smaller assets. That assumption was reasonable on
the Prospectus Date and continued to be reasonable as at the Close Date.
B280.2 It is denied that the matters set out in paragraph 94MA (even if true, and to which
see paragraph A280 above) constituted 'necessary information' of which disclosure
was required. It is further denied that it was necessary for additional disclosure to

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be made of "the prospect of raising through asset sales" the amounts referred to in
(a) and (b). In circumstances where the assumption made in the Capital Plan, and
expressly set out in the Prospectus, was a reasonable one, no further disclosure was
required.
Operating Profits
280A. The "no significant change" statements were qualified by, among other things, the description
of the Group's current trading and prospects set out on pages 29 to 31 of the Prospectus. The
quotation from that section of the Prospectus at paragraph 94N is incomplete because it omits
the text in bold below:
"7 Current trading and prospects (1)
The operating performance of many of RBS's businesses since the beginning of 2008 has
remained good, but results have been held back by the effects of the continuing deterioration
in credit markets, which has resulted in additional write-downs on credit market exposures in
the first quarter. Some Global Banking & Markets businesses have experienced a reduced
level of activity, although others continue to perform well, as do Global Transaction
Services and Regional Markets. Overall, the Group's underlying results, excluding writedowns, have remained satisfactory
Note:
(1)

This information has been taken from the trading update issued by RBS on 22
April 2008 which also constitutes RBS's Interim Management Statement for the
period from 31 December 2007 to 22 April 2008. Comments relate primarily to
pro forma unaudited results for the Group including ABN AMRO businesses to
be retained by RBS and cover the first quarter of 2008. Comparisons are with the
first quarter of 2007, on the same pro forma basis, unless otherwise stated"

280B. Further detail was provided in the text which followed the general statements quoted in
paragraph 280A above, including:
280B.1 Lower on page 29, it was stated immediately under the heading "Global Markets"
that:
"Global Banking & Markets has been acutely affected by credit market conditions,
particularly in March, with further write-downs in credit markets during the quarter. There
were good performances in rates and currencies, but lower business volumes in credit
markets and equities, with corresponding reductions in costs".
280B.2 On page 30, it was stated that:

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"US Retail & Commercial Banking has continued to achieve modest income growth while
maintaining good cost discipline, but overall results have been held back by increased
impairments in one specific loan portfolio Citizens' credit portfolio continues to perform
satisfactorily, with the exception of a specific portfolio within its home equity book, referred
to in RBS's trading update of 6 December 2007. Delinquencies on this portfolio have risen
markedly as the housing market has continued to weaken and the Group has continued to
increase provisions".
280B.3 On page 31, under the heading "Outlook" it was stated that:
"The outlook is inevitably clouded by the disruption to markets, as a result of which volumes
are likely to be significantly lower in some areas of Global Banking & Markets".
280C. In the Press Release issued on 22 April 2008 announcing the Rights Issue and providing an
update on credit market exposures, disposals, capital, trading conditions and outlook, the
operating performance was summarised as follows in the bullet points on the first page:
"Overall underlying performance of the Group has remained satisfactory with the principal
exception of a slowdown in capital markets activity in Global Banking & Markets."
280D. The allegations made in paragraphs 94O to 94R are misconceived, because they are based
upon a comparison between: (i) RBS's budget for 2008 (the "2008 Budget", which was an
internal profit forecast produced on 12 December 2007) and; (ii) the reforecast for operating
profits for 2008 contained in RBS's 3+9 Reforecast produced on 19 April 2008 (the "3+9
Reforecast"). Specifically:
280D.1 The reasonable investor would not have understood that the statements made in the
Prospectus about current trading and prospects (including the statements quoted in
paragraphs 280A and 280B above) were making comparisons with the 2008 Budget.
On the contrary, the reasonable investor would have understood from Note (1) at the
bottom of page 29 of the Prospectus (quoted above in paragraph 280A) that any
comparisons were with the first quarter of 2007.
280D.2 The Prospectus did not state, expressly or by implication, that RBS's latest internal
forecasts for the 2008 operating profits remained at the same level as had been
forecast 5 months earlier in the 2008 Budget, and it was not the expectation of
analysts at the time of the Rights Issue that 2008 earnings would be at the level
forecast (initially) by RBS in the 2008 Budget. The 2008 Budget had implied
earnings per share of 72.5p, whereas the consensus amongst the analyst community
on 22 April 2008 when the Rights Issue was announced was in the region of 64 to

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65p per share. The 3+9 Reforecast implied earnings per share of approximately 67p
per share. The consensus expectation of analysts was thus not materially out of line
with RBS's own expectations when the Rights Issue was announced, and Whittaker
confirmed this fact at the Rights Issue Presentation.
280E. The statements quoted in paragraphs 280A and 280B above were true and not misleading.
Underlying operating performance as budgeted in the 3+9 Reforecast was 10,395 million,
which remained in line with the 2007 figure of 10,419 million. Forecast 2008 profit before
impairment losses and write-downs was 13,123 million, which was higher than the
corresponding figure of 12,518 million for 2007.
280F. With regards to paragraph 94O:
280F.1

The first sentence is denied.

Excluding the write-downs, there had been no

significant decline in RBS's forecast financial performance for 2008 as compared

with 2007. The true position was as set out in the Prospectus, in particular in the
text quoted in paragraph 280A above.
280F.2

As regards the second sentence, it is admitted that RBS's latest internal forecast for
underlying operating profits for 2008 was lower than its previous internal forecast,
to the extent shown by the 3+9 Reforecast (to which the Defendants will refer in
relation to the nature and extent of the changes in the forecast). It is denied that this
was a matter that was required to be disclosed.

Internal profit forecasts are

inherently variable, and do not constitute information that investors would

reasonably require, or expect to find in a prospectus, for the purpose of making an
informed assessment of the issuer's position and profits.
280F.3

As regards the third sentence, tThe decline in the operating profits of some RBS
businesses (such as it was) was sufficiently disclosed in the text quoted in paragraph
280A above.

280F.3A As regards paragraph 94O.1, the figures are admitted but the Claimants' reliance
upon a comparison between actual operating profits and budget is misconceived
because, as stated above, the reasonable investor would not have understood the
Prospectus to be making a comparison between such figures. The operating profit of
2,282 billion was 5% ahead of the prior year equivalent.

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280F.3B Paragraph 94O.2 is not comprehensible as a particular relied upon in support of the
allegation in 94O that there had been a significant decline in RBS's financial
performance "over and above the write-downs". Logically, profits after write-downs
would have been lower if the write-downs had been greater, but that truism does not
support the Claimants' case in relation to operating profits. The allegations in APOC
sections D and F are addressed separately above.
280F.3C Similarly, paragraph 94O.3 does not support the allegation made in 94O. If goodwill
had been written down (as to which the Defendants' case is as addressed below in
response to APOC section J) this would have been an exceptional item that would
not have been indicative of underlying operating performance.
280F.4

As regards the fourth sentenceparagraph 94O.4, the Claimants' reliance upon a

comparison between predicted operating profits of 10.395 billion (in the 3+9
Reforecast) and 11.572 billion (in the 2008 Budget (which was approved on 12
December 2007, not "at the beginning of the year")) is misconceived because, as
stated above, the reasonable investor would not have understood the Prospectus to
be making a comparison between such forecasts. Moreover:
(a)

The predicted figures of 10,395 million in the 3+9 Reforecast and 11,572
million in the 2008 Budget were for profits after impairment losses (but
before write-downs). Forecast impairment losses for 2008 rose by 454
million from 2,274 million in the 2008 Budget to 2,728 million in the 3+9
Reforecast, principally as a result of the forecast rise in impairments in US
Retail & Commercial Banking by 447 million from 992 million to 1,439
million. The fact that there had been a significant rise in impairments in US
Retail & Commercial Banking was disclosed, as quoted in paragraph
280B.3 above.

(b)

The 722 million change in the forecasts for profit before impairments (a
reduction from 13,845 million forecast in the 2008 Budget to 13,123
million forecast in the 3+9 Reforecast) was principally the result of the
reduction of 445 million from 5,777 million to 5,332 million in
projected profit before impairments in Global Banking & Markets. The fact
of significantly reduced activity in Global Banking & Markets was

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disclosed, in particular as quoted in paragraphs 280A (in the text omitted by

the Claimants), 280B.1 and 280B.3 above.
(c)

The predicted underlying operating profit figure in the 3+9 Reforecast was
adjusted by 1,604 billion to take account of credit market write-downs and
further adjusted by 150 million for other exceptional items, resulting in a
predicted operating profit figure of 8,941 billion.

(d)

As to the final sentence of paragraph 94O.4, it is denied that the part of the
3+9 Reforecast relating to GBM was either unreasonably or imprudently
optimistic for reasons addressed in paragraphs 280F.5 280F.14 below.

280F.5 As regards paragraph 94O.4.1, the allegation that the forecast did not include
additional write-downs that RBS did not expect to incur (but the Claimants allege it
should have done) adds nothing to the allegations already made in sections D and F
of the APOC, which are addressed in the appropriate paragraphs above.
280F.6. As to paragraph 94O.4.2:
(a)

From March 2008, a balance sheet management project was led by Brian
Crowe. The objectives of that project included, broadly, reducing the size of
the balance sheet, reducing funding requirements, reducing RWAs and
(thereby) reducing the risk to capital;

(b)

As part of the balance sheet management project, a presentation dated 10

April 2008 and titled "GBM Balance Sheet Optimisation" [RBS079886]
("the April Presentation") was prepared. It set out 26 possible product
initiatives, as well as regional specific and GBM-wide initiatives. The
presentation estimated the effect of certain of these 26 potential product
initiatives on unsecured funding, the size of the balance sheet and the level
of RWAs, as well as an estimate of their revenue impact. The purpose of
this was to enable RBS to weigh up the options available to it, including by
assessing possible RWA reduction (and other) benefits against the P&L
costs of achieving them. At the Prospectus Date the process of investigating
and deciding which initiatives to pursue was still on-going;

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(c)

The total of the quantified estimates of RWA reductions in the April

Presentation was 38-41 billion, as shown on page 5 of the presentation.
Page 4 of the presentation referred to a total targeted RWA reduction of 50
billion. These RWA reduction figures were considerably higher than the
24.6 billion RWA reduction target included in the capital plan.

(d)

It is admitted that the 3+9 Reforecast did not take account of the estimated
revenue impact of all 26 product initiatives. It is denied that this indicates
that the 3+9 Reforecast was overoptimistic in circumstances where, as set
out above;
(i)

The potential RWA reduction identified in the April Presentation

substantially exceeded the RWA reduction assumed in the capital
plan; and

(ii)

At the time of the 3+9 Reforecast, the process of investigating and

deciding which initiatives to pursue was still on-going.

280F.7 As set out above GBM's RWA target for June 2008 used in the capital plan was
24.6 billion. Save as consistent with that, paragraph 94O.4.2.1 is denied.
280F. 8 As to paragraph 94O.4.2.2, the revenue impact was estimated for 5 of the 26 potential
product initiatives in the April Presentation (namely, Reverse Repo, Equities, Nth Sea
Conduit, Leveraged Finance and Strategic Capital Transactions), and resulted in an
estimated total of "310m pa + 155m one-off". It is denied, to the extent it is
alleged, that the entirety of this estimated 465 million would have been incurred by
RBS in 2008, as these initiatives were being considered for implementation later in
2008 meaning that any revenue impact would have been sustained during 2009 as
well as 2008.
280F.9. As to paragraph 94O.4.2.3, it is admitted that an estimate of the potential revenue
impact of the "Intl Sov Debt Prop", "Credit Flow B/S", and "Local Mids Credit Flow"
and "SREC" was not included in the 3+9 Reforecast. It is denied, however, that an
estimate of the revenue impact of these potential product initiatives should have been
included in the 3+9 Reforecast because:

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(a)

As stated above, the capital plan only included an RWA reduction of 24.6
billion, and as such did not include the estimated RWA benefits of all of the
initiatives addressed in the April Presentation;

(b)

Only "Intl Sov Debt Prop" was shown as having been agreed in the April
Presentation. As to the other initiatives to which the Claimants refer:
(i)

"Credit Flow B/S" was shown only as agreed in principle, with

timing and other benefits to be confirmed;

(ii)

"Local Mids Credit Flow" and "SREC" were under further

consideration.

280F.10. As to paragraph 94O.4.2.3.1.1, it is admitted that:

(a)

In a presentation titled "YTD Performance and 4+8 Forecast GBM Finance"

dated 12 May 2008 ("the May Presentation") there is an update on the
estimated revenue impact of "Intl Sov Debt Prop", "Credit Flow B/S" and
"Local Mids Credit Flow", which amounted to 156 million; and

(b)

These estimates, which were not included in the April Presentation, were
not included in the 3+9 Reforecast.

It is, however, denied that the 3+9 Reforecast was overstated because an estimate of
the revenue impact of these potential product initiatives was not included, as such an
estimate should not have been included in the 3+9 Reforecast for the reasons given
in paragraph 280F.9 above. If, which is denied, the absence of an estimated revenue
impact of these potential product initiatives resulted in an overstatement of the 3+9
Reforecast, it is denied that any such overstatement was material.
280F.11. In relation to paragraph 94O.4.2.3.1.2:
(a)

It is admitted that no estimate is provided in either the April or the May

Presentation of the revenue impact of SREC, and that no figure for the
potential revenue impact of SREC was included in the 3+9 Reforecast.

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(b)

It is denied that the 3+9 Reforecast was overstated because no such figure
was included. It was not necessary to include an estimated revenue impact
for this initiative in the 3+9 Reforecast, because:
(i)

SREC was not an initiative which was required to secure the 24.6
billion RWA reduction figure used for the capital plan; and

(ii)

At the Prospectus Date, the SREC initiative was merely under

consideration to determine whether the potential reduction in both
the RWAs and the nominal assets in the GBM balance sheet would
outweigh the P&L costs of achieving these benefits.

In the event, following further investigation of this product initiative, RBS chose
instead to transfer SREC from ABN AMRO to RBS, which had no revenue impact.
280F.12. As to paragraph 94O.4.2.3.2, the Claimants' failure to plead a case in relation to "US
Auto

Conduits",

"Other

Conduits",

"Fund

Derivatives",

"SovRisk",

"IG

Loans/Regions", "Alt-A", "CDO Super Snr" and "Monolines" is noted. It is denied

that the Claimants have any justification for reserving their position in this respect.
280F.13: As to paragraph 94O.4.3:
(a)

It is admitted that the 3+9 Reforecast (which was made up of the forecasts
for the individual businesses within GBM) anticipated a return to previously
expected performance for the majority of GBM's businesses in the
remaining 9 months of 2008. It is denied that the forecast for all of GBM's
businesses involved an improvement in performance; in particular the 3+9
Reforecast predicted a reduction in the performance of Rates, LM, Curr. &
Commodities of 43% in Q2, and 41% in Q3 and Q4;

(b)

It is denied that the anticipated performance of any of GBM's businesses in

the rest of 2008 was either imprudently or unreasonably overoptimistic for
the reasons set out in paragraphs 280F.13 (c) 280F.14 below;

(c)

It is further denied that the performance of any of GBM's businesses in the

month of March 2008 required a more negative reforecast for those
businesses for the remaining 9 months of 2008. Each of the businesses

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within GBM would forecast on the specific circumstances they each faced;
and
(d)

The Claimants' reference to "the then prevailing market conditions and the
market outlook" is embarrassing for want of particularity and consequently
the Defendants do not plead to the same (save to the extent some
particularity is provided in sub-paragraphs (c) and (d), which are pleaded to
as appropriate below).

(e)

As to sub-paragraph (a):
(i)

It is admitted that the 1+11 Reforecast (which included actual

figures for February as well as January 2008 and which was,
therefore, in substance a 2+10 reforecast) was used as the starting
point for the 3+9 Reforecast. The use, with adjustments, of the most
recent previous forecast was a reasonable approach to forecasting;

(ii)

It is denied that using a 2+10 reforecast as the starting point for the
creation of a 3+9 Reforecast was either imprudent or unreasonable;

(iii)

The adjustments made to the 1+11 Reforecast were made to take

account of the conditions at the time. It is denied that making such
adjustments did not constitute "re-forecasting according to the
conditions at the time".

(f) As to sub-paragraphs 94O.4.3 (b) and (c):

(i)

It is admitted that the 3+9 Reforecast predicted an additional

reduction in revenue of 700 million, but anticipated a return to
performance previously expected in the 1+11 Reforecast in the
income forecast for the remaining 9 months of 2008;

(ii)

It is denied, to the extent that it is suggested, that the relatively poor

performance of GBM businesses in March necessitated a prediction
that there would be no improvement in performance for the
remaining 9 months of 2008. Indeed, the performance of GBM
businesses did recover in the months immediately following March,

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with a 131% increase in income in April and a further 40% increase

in income in May 2008. The effect of the improved performance of
GBM's businesses in April 2008 was to increase the underlying
operating contribution (after impairment losses and excluding writedowns) in the year to date to a 33% improvement compared to prior
year (from 5% growth in the year to date figures as of March 2008),
which equated to a 17% improvement compared to the 2008 Budget
(from 9% adverse to budget in March 2008) Further, the 4+8
Reforecast which was produced in June 2008 projected an increased
GBM operating profit compared to the 3+9 Reforecast; and
(iii)

It is denied that the state of the credit markets, or the relatively poor
performance of GBM's businesses in March, required any further
adjustment to the 1+11 Reforecast in order to effect the 3+9
Reforecast.

(g) The figures quoted in sub-paragraph 94O.4.3 (d) are admitted. It is also
admitted that the 3+9 Reforecast did not project an additional reduction in
income in the Credit Markets business, but it is denied:
(i)

That insufficient adjustments were made to the 1+11 Reforecast to

create the 3+9 Reforecast: and

(ii)

To the extent it is alleged, that insufficient account was taken of the

state of credit markets,

for the reasons given in paragraph 280F.13(f) above.

(h) As to sub-paragraph 94O.4.3 (e), the figures relating to the reduction in the
costs forecast from the 1+11 to the 3+9 Reforecast are admitted. It is denied
that there is no reasonable basis for this reduction, as RBS identified a number
of factors which explain the projected decrease. The most significant of these
factors was a change control item which reflected the need to align RBS and
ABN treatment of support costs, removing ABN costs from GBM and
transferring them to the "Manufacturing" division (a central cost centre).
(i) Sub-paragraph 94O.4.3 (f) is denied:

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(i)

The document relied on by the Claimants is a comment made by

John Cameron in an email to Guy Whittaker in which the
assumption of no further write-downs in the 1+11 Reforecast is
referred to as optimistic. This does not support the allegation that
the entirety of the 1+11 Reforecast was regarded as "overoptimistic"
by John Cameron, and clearly fails to do so in relation to Guy
Whittaker; and

(ii)

This sub-paragraph fails to support the general allegation in

paragraph 94O.4.3 that the 3+9 Reforecast was imprudently and
unreasonably overoptimistic, as the write-downs were analysed
separately from the 3+9 Reforecast in the capital plan. Any
comment about the way write-downs are dealt with in the 1+11
Reforecast is therefore irrelevant to the question of the
reasonableness of the 3+9 Reforecast.

(j) Sub-paragraph 94O.4.3 (g) is denied:

(i)

The document relied on by the Claimants is a comment made by

Jeremy Sharp that the 3+9 Reforecast is expected to be a stretch in
relation to only two of the 6 areas within GBM, (namely Credit
Markets and Rates, LM, Curr. & Commodities);

(ii)

The use of the phrase 'stretch' does not equate to either imprudence
or unreasonable overoptimism;

(iii)

With the GBM division generating annual revenue of more than 13

billion, a possible drop of 300 million in revenue is less than 2.5%
and not material; and

(iv)

As pleaded in paragraph 280F.13 (f) (ii) above:

i.

The improved underlying performance of GBM's businesses in

the April and May 2008; and

ii. The increased GBM operating profit projected in the 4+8

Reforecast,

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demonstrate that the 3+9 Reforecast's projection that the GBM

businesses would return to their previously expected performance
was neither imprudent nor unreasonably overoptimistic.
280F.14 Paragraph 94O.5 is derivative of (and as such adds nothing to) paragraph 94O.3,
which is pleaded to at paragraph 280F.3C above.
280FA. As regards paragraph 94OO:
280FA.1 The figures quoted in paragraph 94OO are admitted, but the Claimants' reliance upon a
comparison between operating profits and budget is misconceived because, as set out above,
the reasonable investor would not have understood the Prospectus to have been making a
comparison between those figures. The performance of RBS's businesses was expressly
reported in comparison with the same businesses' performance in the first quarter of 2007 (see
paragraph 280A above). For the reasons set out below, it is denied that:
a) The figures quoted by the Claimants demonstrate that two thirds 'or more' of RBS's
businesses had performed poorly; or
b) A comparison with a budget created for purely internal purposes was necessary for
investors to make an informed assessment of RBS's financial position and prospects.
280FA.2.

According to the March 2008 Group Results Report, all but one of RBS's businesses
had achieved increased operating profits in the first quarter of 2008 compared to the
same period in 2007, while the underlying operating profit for the first quarter of
2008 was 5% higher than the equivalent results for the previous year on a pro forma
basis. With the sole exception of US Retail & Commercial Banking (the performance
of which was described on page 30 of the Prospectus), the performance of all of
RBS's businesses remained good compared to the equivalent 2007 results. The results
in the March 2008 Flash Results were similar, but with the underlying profit shown as
3% higher than the previous year results.

280FA.3.In addition, the Prospectus highlighted the effect of changed market conditions on the
performance of RBS's businesses, including:

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b) Stressing that the group net interest margin in the quarter was "lower reflecting increased
funding costs" (p. 8, p. 29, Prospectus); and
c) Stating "Global Banking & Markets has been acutely affected by credit market
conditions, particularly in March, with further write-downs in credit markets during the
quarter. There were good performances in rates and currencies, but lower business
volumes in credit markets and equities, with corresponding reductions in costs" (p. 29,
Prospectus).

280FA.4. As regards the fourth sentence of paragraph 94OO, it is admitted that operating profit
numbers taking account of write-downs would (inevitably) have been lower than operating
profit numbers which did not take into account write-downs. The relevant numbers to look at
for present purposes, however, are the operating profit numbers before write-downs because
the narrative description in the Prospectus with which they are being compared related to
operating performance before write-downs. It is denied, to the extent that it is suggested, that
there was insufficient disclosure of write-downs in the Prospectus.

280FA.5Save as aforesaid, paragraph 94OO is denied.

280G. Paragraph 94P is denied. Specifically:

280G.1 The statements quoted in paragraph 280A above were not misleading.
280G.2 The preparation of internal profit forecasts is a normal business practice. The
forecasts thereby produced are inherently variable, and the fact that a 3+9 forecast is
lower than the original budget does not of itself amount to a significant change in
the financial or trading position such as to require specific disclosure or make a "no
significant change" statement inaccurate.
280G.3 The statements that there had been no significant change in the financial position of
the RBS Group and ABN AMRO since 31 December 2007 referred to the absence
of changes from disclosed financial performance, save as disclosed in the
Prospectus. They did not contain any representations as to RBS's internal forecasts
of operating performance in 2008 as compared with previous forecasts.
280G.4 Moreover, the "no significant change" statements made on page 134 of the
Prospectus were expressly made "save as regards" "the current trading and

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prospects of the RBS Group described on pages 29-31 of [the Prospectus]" and "the
adverse effect of current market conditions as described on pages 29 and 31 of
Part 1 of [the Prospectus]", including the statements quoted in paragraphs 280A and
280B above which, as explained in 280F.4 above, disclosed the main factors that
accounted for the difference between the profit forecasts in the 2008 Budget and the
3+9 Reforecast.
280H. Paragraphs 94Q and 94R areis denied.
280I.

In any event, the Defendants believed that the appropriate metric for evaluating performance
was a comparison between the 2008 Q1 results and the equivalent 2007 results, that that
comparison was reasonably reflected in the text in Section 7 of the Prospectus, and that any
comparison between the 2008 Q1 results and the 2008 Budget was neither material nor
something which needed to be disclosed. That belief was reasonable in itself. But in any
event, the involvement of the advisers provided a reasonable basis for the Defendants to hold
it.

The advisors had the 2008 Budget figures (which were clearly set out in the 3+9

Reforecast) as well as the 2007 full year results (in the 2007 accounts and also in the 3+9
Reforecast) and the 2008 Q1 results (in the March 2008 Flash Results Report, which also
contained a comparison with the equivalent 2007 Q1 results). They also had access to, and
meetings with, relevant RBS employees via the due diligence meetings. They advised upon
the wording of the Press Release and the Prospectus (via the drafting process) with the benefit
of that information, and the ability to seek any further information they considered relevant.
At no point did the advisers advise the Defendants that the comparison between the 2008 Q1
results and the 2007 results was misplaced, or that the Prospectus should instead compare the
2008 Q1 results with the 2008 Budget.
280J As regards paragraph 94R:
280J.1

There was a change between March and April 2008 in the manner of presentation of
the monthly data. Specifically, gains on the fair value of own debt were extracted
into the "credit markets" line in the March results {RBS004706}, but not into the
credit markets line of the April and May results ({RBS006868} and {RBS572132}).
The breakdown of the credit markets write-downs figure was provided in each case.

280J.2

No 5+7 Group reforecast has been disclosed because no such document was
produced.

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280J.3

It is noted that the Claimants do not plead a case in relation to a supplementary

prospectus. It is denied that the Claimants have any justification for reserving their
position in this respect.

The acquisition and performance of ABN

281.

In relation to paragraphs 95 98 to 103, the Defendants will rely upon the full text of the
Prospectus (including the documentation incorporated into it) for its full terms and cumulative
effect.

Without prejudice to the generality of this position, the Defendants plead to

paragraphs 95 98 to 103 more particularly below.

282.

As to paragraph 95:
282.1

Paragraph 0 above is repeated.

282.2

Under the heading "Summary of risk factors" and the sub-heading "Risks related to
RBS", the Prospectus provided (at p.10) that, amongst other things:

282.3

The value of certain financial instruments recorded at fair value is

determined using financial models incorporating assumptions, judgements
and estimates which may change over time.

RBS's future earnings could be affected by depressed asset valuations

resulting from poor market conditions.

The section on "Risk Factors" also relevantly provided (at p.12) as follows:
The value of certain financial instruments recorded at fair value is determined using
financial models incorporating assumptions, judgements and estimates which may
change over time.
[...] RBS's internal valuation models require RBS to make assumptions, judgements
and estimates in order to establish fair value. In common with other financial
institutions, these internal valuation models are complex, and the assumptions,
judgements and estimates RBS is required to make often relate to matters that are
inherently uncertain, such as expected cash flows, the ability of borrowers to service
debt, house price appreciation and depreciation, and relative levels of defaults and
deficiencies. Such assumptions, judgements and estimates may need to be updated to
reflect changing trends and market conditions. The resulting change in the fair
values of the financial instruments could have a material adverse effect on RBS's
earnings.

283.

Paragraph 96 is admitted.

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284.

As to paragraph 97:
284.1

Save for minor errors of punctuation, it is admitted that the text in italics accurately
reproduces wording that appears on pages 18 to 19 of the Prospectus.

284.2

However, the Claimants have omitted relevant wording from the quoted passage.
The second paragraph of the quoted passage should read as follows (the omitted text
has been inserted in bold):
These forward-looking statements are not guarantees of future performance.
Rather, they are based on current views and assumptions and involve known and
unknown risks, uncertainties and other factors, many of which are outside the
control of RBS and are difficult to predict, that may cause actual results to differ
materially from any future results or developments expressed or implied from the
forward-looking statements. Factors that could cause actual results to differ
materially from those contemplated by the forward-looking statements include,
among other factors:

the extent and nature of future developments in the credit markets, including
the sub-prime market, and their impact on the financial industry in general and
RBS in particular;

the effect on RBS's capital of write-downs in respect of credit market

exposures;

[]

RBS's ability to achieve revenue benefits and cost savings from the integration
of certain of ABN AMRO's businesses and assets;

[]

the adequacy of RBS's impairment provisions and loss reserves;

[]
These statements are further qualified by the risk factors disclosed in or
incorporated by reference in this document that could cause actual results to differ
materially from those in the forward-looking statements. See "Risk Factors".
These forward-looking statements speak only as at the date of this document.
Except as required by the FSA, the London Stock Exchange, the Part VI Rules or
applicable law, RBS does not have any obligation to update or revise publicly any
forward-looking statement, whether as a result of new information, further events or
otherwise. Except as required by the FSA, the London Stock Exchange, the Part VI
Rules or applicable law, RBS expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statement
contained herein to reflect any change in RBS's expectations with regard thereto or

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any change in events, conditions or circumstances on which any such statement is

based.
284.3

Further the section on "Important Information" on pages 18-19 of the Prospectus

also relevantly provided as follows:
Cautionary statement relating to write-down and credit exposure estimates
The information set out in the "Summary" and Part I of this document relating to the
estimated capital effect of RBS's estimated capital market exposures constitutes
"forward-looking information" and is subject to risks and uncertainties, as set out
under "Risk Factors" and below under "Forward-looking statements". In
particular, there are a number of assumptions and judgements that underpin such
estimates, including assumptions and judgements about the underlying performance
of RBS's operations, the state of the current and future credit markets (including
credit markets in the United Kingdom, the United States and Europe), asset
valuations, default rates, access to liquidity, the timing of disposals relating to the
ABN AMRO restructuring and general economic conditions. Such information was
prepared for capital planning purposes and not to predict future results and
although RBS's management believes that it has taken reasonable care in producing
such estimations and projections, there can be no assurance that the estimated
capital effect of the projected capital market exposures will be equivalent to any
actual write-downs or credit market exposures appearing in RBS's reports and
accounts to be prepared in the future. Any additional write-downs may have a
material adverse impact on RBS's reported financial condition and results of
operations.

285.

As to paragraph 98:
285.1

The Claimants have omitted relevant text when reproducing section 6 ("Board
management"); the section should provide as follows (the omitted text has been
inserted in bold):
This has been a difficult period for financial institutions worldwide, including RBS.
In addition to consideration of the capital position, the Board has taken the
opportunity to stand back and look at the management and governance of the
business and how effectively it is functioning.
The Board of RBS has full confidence that the executive team will be able to lead
RBS through the current challenging conditions, deliver the transaction benefits
relating to the acquisition of ABN AMRO, and realise the substantial value in RBS's
UK and international franchises.
In response to the difficulties in its credit markets business, RBS has made
significant changes to its North American management structure and has
strengthened the control environment within Global Banking & Markets. Certain
structured credit activities have been discontinued and problematic US sub-prime

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mortgage-related assets are now managed by a dedicated work-out unit with a

view to minimising risk and reducing positions at an appropriate pace. [...]
285.2

It is admitted that the text in italics accurately reproduces wording that appears on
pages 29 and 31 of the Prospectus, however Tthe Claimants have omitted the
footnote to section 7 ("Current trading and prospects") which directed the reader of
the Prospectus to the detailed documentation upon which the quoted statements
were based.

286.

Paragraph 99 is admitted. Part IV, "Information on RBS" also relevantly provided (at p.63) as
follows:
Global Markets
Global Markets is focused on the provision of debt financing, risk management and
transaction banking services to large businesses and financial institutions in the United
Kingdom and around the world. Its activities have been organised into two divisions, Global
Banking & Markets and Global Transaction Services, in order to best serve RBS's customers
whose financial needs are global.
Global Banking & Markets is a leading banking partner to major corporations and financial
institutions around the world, providing an extensive range of debt financing, risk
management and investment services to its customers. It includes the global banking and
markets business of ABN AMRO, with the exception of its transaction banking division.

287.

Paragraph 100 is admitted. By the paragraph of the Prospectus quoted therein RBS:
287.1

disclosed that some 2.3 billion of the total 5.9 billion of write-downs estimated
for capital planning purposes for the RBS Group as a whole was referable to ABN;
and

287.2

referred investors (as matters specifically relevant to ABN's financial or trading

position) to the description of adverse market conditions on pages 29 and 31 of the
Prospectus, where RBS had explained (amongst other things) that:
(a)

GBM had been acutely affected by the continuing deterioration in credit

market conditions and some GBM businesses had experienced reduced
levels of activity (p.29); and

(b)

the outlook was inevitably clouded by the disruption to markets, as a result

of which volumes were likely to be significantly lower in some areas of
GBM (p.31).

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288.

As to paragraph 101:
288.1

It is admitted that the quoted passages appear within the 2007 Accounts on the pages
identified and were incorporated by reference into the Prospectus.

288.2

The Claimants have omitted relevant text from the passage quoted from page 8 of
the 2007 Accounts.

The passage provided as follows (omitted text has been

reproduced in bold):
The Group entered 2007 focused on continued organic growth, for which we had
created a range of attractive options. When it emerged that ABN AMRO was
seeking alternative options for that company's growth, it was incumbent on us to
consider the implications and opportunities raised by that decision. Following
very thorough analysis and debate by the Board, and consultation with
shareholders, the Group decided to bid for ABN AMRO as part of a consortium
involving our partners Banco Santander and Fortis.
It was, and remains the Board's view that the acquisition of ABN AMRO will deliver
good, long-term value enhancement to shareholders. The businesses which the
Group has secured will enable us to accelerate the implementation of our growth
strategy and also provide the Group with a significant presence and options for
expansion in the world's most rapidly growing economies.
288.3

It is denied that the 2007 Accounts "painted a positive picture of the success of the
ABN AMRO transaction":
(a)

The 2007 Accounts contained a balanced presentation of RBS's provisional

views on that transaction.

(b)

Those views were necessarily provisional because they were expressed only
a few months after the acquisition completed (on 17 October 2007), at a
point when the process of integrating ABN into the RBS Group remained at
a very early phase. It was made clear in the 2007 Accounts that:
(i)

while the integration of ABN to RBS's businesses had started and

"good progress" had been made, the integration process would
remain one of the main tasks facing RBS during 2008 (pp.12, 21);

(ii)

ABN had not yet been separated between the business units to be
held by RBS and those held by the other Cconsortium members
(p.28); and

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(iii)

the proposals for the restructuring of ABN were complex,

challenging, would involve management resource previously
devoted to RBS's existing businesses and might not realise the
anticipated benefits, either within the planned timescales, or at all
(p.33).

(c)

Against this background, RBS explained that it continued to believe that the
ABN transaction would deliver "good, long-term value enhancement".
However, this was one of many forward-looking statements that were
subject to numerous risks and uncertainties (p.29).

(d)

Further, it was clear from the 2007 Accounts that the acquisition of ABN
had (amongst other things):
(i)

increased RBS's exposure to financial assets (p.151-153); credit risk

assets; reverse repurchase agreements (p.73); non-performing loans
(p.77) and loan impairment (p.79); debt securities including assetbacked securities (p.158-159);

(ii)

increased RBS's reliance on short-term wholesale borrowing (p.8082);

(iii)

increased the extent of the liquidity back-up facilities RBS had to

provide to conduits (p.83);

(iv)

increased RBS's market risk when measured by VaR (p.84); and

(v)

increased RBS's structural foreign currency exposures (p.87).

288.3A Further, the Prospectus also contained a number of risk factors and warnings in
relation to ABN:
(a)

Under the heading "Risk Factors" (at pages 14 to 15), the Prospectus stated:
"Proposals for the restructuring of ABN AMRO are complex and
may not realise the anticipated benefits for RBS.
The restructuring plan in place for the integration and separation of
ABN AMRO into and among the businesses and operations of the
Consortium Banks is complex involving substantial reorganisation of

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ABN AMRO's operations and legal structure. In addition, it

contemplates activities taking place simultaneously in a number of
businesses and jurisdictions. Implementation of the reorganisation
and the realisation of the forecast benefits within the planned
timescales will be challenging. Execution of the restructuring
requires management resources previously devoted to RBS
businesses and the retention of appropriately skilled ABN AMRO
staff. RBS may not realise the benefits of the acquisition or the
restructuring when expected or to the extent projected."
(b)

Under the heading "Important Information", the Prospectus stated (at page
18):
"This document contains or incorporates by reference "forward
looking statements"regarding the belief or current expectations of
RBS, RBS's Directors and other members of its senior management
about RBS's businesses and the transactions described in the
document, including statements relating to possible future write
downs and RBS's capital planning projections.
These forward-looking statements are not guarantees of future
performance. Rather, they are based on current views and
assumptions and involve known and unknown risks, uncertainties and
other factors, many of which are outside the control of RBS and are
difficult to predict, that may cause actual results to differ materially
from any future results or developments expressed or implied from
the forward-looking statements. Factors that could cause actual
results to differ materially from those contemplated by the forwardlooking statements include, among other factors:

the extent and nature of future developments in the credit markets,

including the sub-prime market, and their impact on the financial
industry in general and RBS in particular;

the effect on RBS's capital of write-downs in respect of credit market

exposures;
[]

RBS's ability to achieve revenue benefits and cost savings from the
integration of certain of ABN AMRO's businesses and assets;
[]

the adequacy of RBS's impairment provisions and loss reserves;

[]
These statements are further qualified by the risk factors disclosed in
or incorporated by reference in this document that could cause

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actual results to differ materially from those in the forward-looking

statements. See "Risk Factors".
These forward-looking statements speak only as at the date of this
document. Except as required by the FSA, the London Stock
Exchange, the Part VI Rules or applicable law, RBS does not have
any obligation to update or revise publicly any forward-looking
statement, whether as a result of new information, further events or
otherwise. Except as required by the FSA, the London Stock
Exchange, the Part VI Rules or applicable law, RBS expressly
disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statement contained
herein to reflect any change in RBS's expectations with regard
thereto or any change in events, conditions or circumstances on
which any such statement is based."
(c)

Further the section on "Important Information" on pages 18-19 of the

Prospectus also relevantly provided as follows:
"Cautionary statement relating to write-down and credit exposure
estimates
The information set out in the "Summary" and Part I of this
document relating to the estimated capital effect of RBS's estimated
capital market exposures constitutes "forward-looking information"
and is subject to risks and uncertainties, as set out under "Risk
Factors" and below under "Forward-looking statements". In
particular, there are a number of assumptions and judgements that
underpin such estimates, including assumptions and judgements
about the underlying performance of RBS's operations, the state of
the current and future credit markets (including credit markets in the
United Kingdom, the United States and Europe), asset valuations,
default rates, access to liquidity, the timing of disposals relating to
the ABN AMRO restructuring and general economic conditions.
Such information was prepared for capital planning purposes and
not to predict future results and although RBS's management believes
that it has taken reasonable care in producing such estimations and
projections, there can be no assurance that the estimated capital
effect of the projected capital market exposures will be equivalent to
any actual write-downs or credit market exposures appearing in
RBS's reports and accounts to be prepared in the future. Any
additional write-downs may have a material adverse impact on RBS's
reported financial condition and results of operations."

288.4

Save as aforesaid, paragraph 101 is denied.

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289.

As to paragraph 102:
289.1

It is admitted that in the Chairman's letter, on page 8 of the 2007 Accounts,

McKillop stated that RBS had decided to bid for ABN only after "very thorough
analysis and debate", and that this statement was incorporated by reference into the
Prospectus.

289.2

It is further admitted that this statement conveyed the impression that (as was
actually the case) the acquisition had been "properly considered" in that it had been
subject to such analysis and debate as was reasonable in all the circumstances
having regard to the standards and expectations reasonably prevailing at the time for
a hostile takeover.

289.3
290.

Save as aforesaid, paragraph 102 is denied.

The acquisition of ABN was a contested takeover. In keeping with the standard market
practice for contested takeovers at that time, RBS (together with its Cconsortium partners
Fortis and Santander) was provided with limited due diligence material. RBS therefore
necessarily relied, to a significant degree, upon scrutinising the large quantity of publicly
available material concerning ABN and its underlying businesses. The public material that
RBS consulted included (amongst other things):
290.1

legal and regulatory filings (including prospectuses);

290.2

interim and annual accounts, including SEC filings, and associated presentations;

290.3

company announcements and other investor relations material;

290.4

equity analyst and rating agency coverage;

290.5

company, legal and property searches; and

290.6

industry records covering, for example, transaction participation (for example,

league tables).

291.

In addition, representatives of RBS held discussions with certain ABN executives (currently
in post), former ABN employees, and others knowledgeable about ABN's business and
market position, such as consultants.

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292.

The level of due diligence to which RBS had access was, as variously acknowledged in the
FSA Report, "in line with standard practice for contested takeovers" (p.4098), reflected
"market practice" (p.33) and was "typical of contested takeovers" (p.8).

293.

The proposed ABN acquisition was the subject of sustained discussion and analysis within
RBS's senior management commencing in March 2007 and continuing through to the
completion of the acquisition in October 2007. These discussions involved (amongst many
other things) an acknowledgment of the risks necessarily associated with being unable to
carry out full due diligence; consideration of the potential effects of the merger on RBS's
capital ratios, and discussion as to whether to proceed with the bid in light of changing market
conditions. RBS was supported in its preparation for the bid by a team of expert advisers
comprising Deloitte, Merrill and Linklaters.

294.

Paragraph 103 is admitted.

295.

As to the first sentence of paragraph 104:

295.1

The allegation is embarrassingly vague: it fails to identify the "important problems"

associated with ABN that were allegedly withheld. RBS pleads to the allegation on
the understanding that by referring to "important problems" the Claimants intend to
refer to matters that RBS was obliged to disclose pursuant to s.87A(1)(b)-(c) of
FSMA.

295.2

The first sentence is denied. Detailed disclosures concerning the ABN transaction
were made both within the Prospectus itself and the various documents incorporated
to it. RBS disclosed each of those matters that it was required to disclose pursuant
to s.87A(1)(b)-(c) of FSMA and the other rules and regulations referred to therein.
For the avoidance of doubt, the assessment of what information was "necessary" for
this purpose, or what particular disclosures had to be made, is not to be carried out
with hindsight in light of developments occurring after the Rights Issue.

296.

As to the second sentence of paragraph 104:

296.1

It is denied that the statements concerning ABN in the Prospectus and in the 2007
Accounts were "specifically intended to reassure potential investors". RBS set out
to provide (and in fact provided) a balanced presentation of its then current
understanding of the ABN transaction and the matters relevant thereto.

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296.2

It is admitted that, as at April 2008, some market analysts and commentators had
made negative comments concerning the acquisition of ABN.

Favourable

observations had also been made, for example that:

(a)

RBS had demonstrated the scope for improved synergy benefits over and
above those identified at the time of acquisition;

(b)

Costs synergies were ahead of schedule; and

(c)

The acquisition would, over time, broaden the geographic diversity of RBS's
earnings.

296.3
297.

Save as aforesaid the second sentence is denied.

As to paragraph 105, it is admitted that the acquisition of ABN was of major importance to
the market's investors' assessment of RBS at the time of the Rights Issue. It is denied that the
ultimate success or otherwise of theat acquisition was a matter about which a conclusive view
could at that stage be taken.

298.

As to paragraph 105A and the sub-paragraphs thereto:

298.1

It is admitted that, in keeping with normal market practice, RBS made various
public statements to analysts and investors concerning the integration of ABN and
the financial benefits, such as the and synergies, RBS expected to achieve. Those
statements were intended to (and did) reflect RBS's own best assessment of the
matters concerned. It is denied that RBS "promoted" the financial benefits and
synergies of the combination.

298.2

It is admitted that RBS's pre-close trading update announcement (dated 6 December

2007) contained the words quoted at paragraph 105A.1.

298.3

It is admitted that Goodwin made the statements attributed to him in paragraph

105A.2 at an analysts' conference on 28 February 2008. Those statements formed
part of a more wide-ranging discussion which (amongst other things) touched on
certain negative as well as positive aspects of the ABN businesses which RBS had
acquired.

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298.4

Following the Claimants' amendments, Tthe passage quoted at paragraph 105A.3 is

now accurately reproduced but omits has been inaccurately reproduced and has
omitted material text. The passage should read as follows (text that was omitted
appears in bold; deletions and substitutions have been struck-through or underlined
respectively; deletions and substitutions from the Composite Particulars of Claim
have been struck-through or underlined respectively):
Over the last six months we have been able to confirm our positive view of the ABN
AMRO businesses we have secured. Our teams have also had the opportunity to
confirm their view of the financial benefits we can derive from combining our
businesses.
Indeed, we now expect these those benefits to be even greater than those we
originally anticipated. By 2010, when we have completed the integration process,
we expect to achieve synergies totalling almost 2.3 billion euros a year.
As a result, the financial returns are now expected to be even more attractive than
we had thought when we were first considering considered this transaction.
It is admitted that McKillop made these statements at the RBS AGM on 23 April
2008. The statements accurately reflected RBS's assessment at the time of the
synergies it was likely to achieve. In the event, the costs synergies which RBS
actually achieved ultimately exceeded its initial estimate.

298.5

For the avoidance of doubt none of the statements reproduced at sub-paragraphs

105A.21-3 were incorporated into the Prospectus. Their relevance to the Claimants'
claim has not been identified and is not admitted.

299.

In relation to paragraph 105B, the Defendants will say as follows.

300.

As to paragraph 105B.1:
300.1

As set out in paragraph 66 above, at the time of the acquisition, RBS recognised that
the structure adopted for funding the transaction meant that the equity and preferred
share components of its capital ratios were expected to fall outside its normal
operating parameters for a period, and its intention was to rebuild its equity capital
organically over the following 2 to 3 years. This approach was consistent with that
adopted following previous acquisitions and was understood by the market.

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300.2

Save that the amounts of goodwill referred to are admitted and that it is admitted
that RBS was obliged to deduct goodwill recognised on the acquisition from its
capital resources, paragraph 105B.1.1 is denied.

300.3

Save that it is denied that RBS fell below its ICG, paragraph 105B.1.2 is admitted,
in which regard paragraphs 94B, 139 and paragraph 144 above are repeated.

300.4

In relation to paragraph 105B.1.3, the decision to raise significant amounts of debt

to fund the ABN acquisition, which it is admitted had the effect of reducing RBS's
capital ratios, was a reasonable one at the time it was made, was not objected to by
the FSA, was approved by RBS's shareholders at the time of the acquisition and was
well known to the market.

300.5
301.

Save to the extent consistent with the aforesaid, paragraph 105B.1 is denied.

The extent of RBS's use of debt and wholesale markets as a source of funding, which included
funding for the ABN acquisition, was disclosed in the 2007 Accounts. Save that it is admitted
that the use of debt finance increased RBS's reliance on short-term wholesale funding and that
EUR 12.3 billion was raised with a term of one year or less, paragraph 105B.2 is denied.
EUR 12.3 billion represented less than 1% of RBS's overall funding as at 31 December 2007.
Further in this regard, paragraphs 171.8, 173 and 174 above are repeated.

302.

As to paragraph 105B.3:
302.1

No admission is made in relation to what constituted "risky" assets, which

description is insufficiently precise to plead to.

302.2

Without prejudice to that, paragraphs 200 and paragraph 196.5 above and 329A.2
below are repeated.

302.3
303.

Save to the extent consistent with the aforesaid, paragraph 105B.3 is denied.

As to paragraph 105B.4:
303.1

It is admitted that the acquisition of ABN resulted in RBS's committed liquidity

facilities to own sponsored ABCP conduits quadrupling. At the time of the Rights
Issue only 8.5 billion of those facilities was drawn. In the context of RBS's overall

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liquidity operations, it is denied that that represented a significant drain on its

liquidity.
303.2

The liquidity lines to North Sea were drawn in February 2008 while consideration
was given to whether it would remain on ABN's balance sheet or be transferred to
RBS.

By the time of the Rights Issue, RBS had no remaining liquidity

commitments to Canadian conduits. In this regard, paragraphs 120 to 130 and

paragraphs 177 to 183 above are repeated.
303.3
304.

Save as aforesaid, paragraph 105B.4 is denied.

To the extent that the phrase "the presentation of the acquisition and its impact" refers to the
way in which RBS's financial position and prospects were presented in the 2007 Accounts and
the Prospectus, paragraph 105B.5 is denied. Whilst it is admitted and averred that the
requirement under IFRS and the FSA regulatory framework for the entirety of the assets of
ABN to be consolidated onto the RBS balance sheet and the interests of its Consortium
partners, Fortis and Santander, reflected as 'minority interests' complicated the presentation of
RBS's financial position and prospects, it is denied it was obscured. Although RBS was
required by the FSA to report its capital position on a 'fully consolidated' basis, in order to
achieve transparency at the time of the Rights Issue RBS also presented its figures on a
'proportional' or 'look through' basis. Paragraph 80.2(c) above is repeated. Further, at all
material times the position of RBS and ABN continued to be monitored by the FSA and the
DNB respectively as they had been prior to the acquisition. To the extent that the phrase is
not intended by the Claimants to have the meaning assumed by the Defendants, no admissions
are made.

305.

Paragraph 105B.6 is denied. Paragraph 304 above is repeated.

306.

As to paragraph 105B.7:
306.1

The arrangement by which RBS took the lead role in the acquisition and
consolidated the whole of ABN on its balance sheet before transferring assets to the
other Consortium partners was the most appropriate one in the circumstances, in
particular given that (a) RBS had previous experience at successfully managing the
integration of significant acquisitions, and (b) the parts of ABN that RBS was
acquiring were less easily separated out from the ABN business than the parts that

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were to be transferred to the other Consortium partners, (c) the DNB required that
one of the Consortium partners should lead discussions and accept responsibility for
the management of ABN until the individual businesses were transferred to the
Consortium partners, and (d) RBS was required, pursuant to IAS 27, to consolidate
the whole of ABN on its balance sheet since RBS had overall control of ABN.
306.2

It is admitted that the integration and separation process was complex and that it
inevitably involved uncertainties. Those uncertainties were expressly averted to in
the Risk Factors at page 14 of the Prospectus.

306.3

The allegation that it introduced "vulnerabilities" is embarrassingly vague and is

therefore not admitted.

306.4
307.

Save as aforesaid, paragraph 105B.7 is denied.

As to paragraphs 105C and 105D:

307.1

As with any corporate acquisition of comparable scale and complexity the purchase
of ABN involved substantial commercial risks. The fact that the purchase was a
contested takeover and therefore was based on limited due diligence, was one source
of risk and was specifically identified and disclosed as such at the time (see
paragraphs 286 and 287 above330 below). Save as aforesaid it is denied that the
acquisition was a "gamble". The acquisition had been subject to such analysis and
debate as was reasonable in all the circumstances having regard to the standards and
expectations reasonably prevailing at the time for a contested takeover.

307.2

It is admitted that in December 2011, more than four years after the acquisition of
ABN and three years into the worst financial crisis of modern times, the FSA
published a Report in which (amongst other things) it criticised RBS's decision to
acquire ABN and expressed the view that, "on balance", RBS's decision-making had
been "defective" (p.228). That assessment was reached with hindsight and the FSA
specifically acknowledged that:
(a)

it could not apply standards of conduct retrospectively since to do so would

give rise to "serious issues of unfairness" (pp. 31 and 356);

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(b)

the due diligence RBS had conducted was (as above) typical of contested
acquisitions at the time and in line with standard market practice (pp. 8, 33
and 4098);

(c)

even if it had been possible to carry out a full due diligence process, the
RBS Board might still have been satisfied with the outcome and decided to
proceed with the acquisition of ABN (p.179);

(d)

when viewed at the time, RBS's decision to acquire ABN had fallen within
the range of reasonable responses (p.408); and

(e)

there was, in consequence, no basis for bringing enforcement action against

RBS or its directors on this issue (ibid).

307.3

The RBS Board's decision to acquire ABN was reasonable at the time at which it
was made. Further it is specifically denied that at the time of the Rights Issue the
acquisition of ABN was, or should have been, seen by RBS as a "catastrophic
serious mistake" or failure. At the time of the Rights Issue, RBS considered that the
integration of ABN would deliver synergy benefits in excess of those originally
forecast and that, over the longer-term, it would materially increase shareholder
value by (amongst other things) facilitating RBS's expansion into developing
economies. Those expectations were reasonable at the time at which they were
made.

As above, the costs synergies that RBS actually achieved exceeded its

original estimate.
307.4
308.

Save as aforesaid paragraphs 105C and 105D are denied.

As to paragraph 105E:
308.1

At the time of the Rights Issue RBS knew that the integration of ABN would be
complex and challenging and that it would consume management resources that had
previously been devoted to RBS's existing businesses.

308.2

This fact was specifically disclosed to investors on page 14 of the Prospectus under
the heading "Risk Factors".

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308.3

It is admitted that on or about 16 July 2008, RBS's Group Internal Audit Function
GIA division provided McKillop with a series of preliminary draft reports
concerning the RBS Group and aspects of its business., being the July Draft GIA
Reports.

308.4

Those preliminary drafts stated (amongst other things) that the acquisition and
integration of ABN had been a distraction and had diverted management attention
away from managing and monitoring GBM's existing business, including business
risks. It is denied that the draft reports July Draft GIA Reports stated that RBS had
previously "underestimated" these matters the operational and integration risks that
arose from the ABN acquisition.

308.5

The drafts July Draft GIA Reports were the subject of review, consideration and
comment from senior management as a result of which a number of amendments
were made. On 23 December 2008, a further draft was sent to the FSA., being the
December Draft GIA Reports. That further draft did not contain the statement
referred to in paragraph 308.4 above either.

308.6

RBS knew before it acquired ABN that the integration process would bring with it
operational and integration risks and would engage management time and resources
that were previously devoted to RBS's existing business, including (amongst other
things) the management of risk. It is denied that these matters were underestimated.
To the contrary, they were acknowledged by RBS and disclosed in the Risk Factors
contained in the Prospectus on page 14.

308.6A As pleaded at paragraphs 308M to 308P below, it is denied that ABN-R's trading and
financial position at the Closing Date was or had been "disastrous", and it is denied, if
it be so alleged, that the July GIA Reports, or the December Draft GIA Reports,
stated that to be the case.
308.7

The last two sentences of paragraph 105E and its sub-paragraphs are further pleaded
to below. Save as aforesaid, paragraph 105E is denied.

308A. As to the last two sentences of paragraph 105E:

308A.1 The penultimate sentence refers to various alleged problems with ABN or the
integration of ABN, that were allegedly identified by RBS prior to the Closing Date.

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For convenience these will be referred to below as the Alleged ABN Problems.
308A.2 The Claimants' purported reservation of their case in relation to the Alleged ABN
Problems is noted. The Claimants have failed to identify what it is alleged the
matters pleaded in sub-paragraphs 105E.2 to 105E.11 are examples of. In any
event, the Claimants' case must be properly particularised, rather than proceeding
"by way of example". Accordingly, the particulars matters currently pleaded in subparagraphs 105E.12 to 105E.11 inclusive are understood to comprise the Claimants'
full case regarding the Alleged ABN Problems.
308A.3 As to the Claimants' references to the Draft GIA Reports in general:
(a)

First, the July Draft GIA Reports were, as above, preliminary, working
documents, that were substantially revised and corrected following
consultation with and input from the relevant parts of RBS's business.
Accordingly, if and to the extent that reference is to be made to the Draft
GIA Reports, it should be made to the December Draft GIA Reports.

(b)

Second, the Draft GIA Reports were internal reporting documents drafted to
be read and used by RBS management. The language used in the Draft GIA
Reports was (as was to be expected) less precise than is required in a legal
pleading. As more particularly set out below, the Claimants have failed to
observe this distinction when adopting passages from the Draft GIA Reports
into the Amended Consolidated Particulars of Claim.

(c)

Third, the Claimants have extracted isolated statements from the July Draft
GIA Reports without regard to their wider context. The Defendants will
refer to the Draft GIA Reports as a whole for the context, true purpose,
meaning and significance of those statements. To avoid repetition, this
qualification should be read as repeated in relation to each of the Claimants'
pleas that are founded on statements within the Draft GIA Reports.

(d)

Save as expressly set out herein, no admissions are made as to the

correctness of statements made in the Draft GIA Reports. For the avoidance
of doubt, references herein to particular statements within the Draft GIA
Reports (particularly when made to correct or contextualise quotes or

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references contained in the Claimants' pleading) do not (unless expressly

stated to the contrary) involve concessions of the factual accuracy of those
statements.
308A.4 Save as aforesaid, the last two sentences are is denied.
308B. As to paragraph 105E.1:
308B.1 Paragraph 105E.1 inaccurately summarises GIA's conclusion and ignores the
context within which it was made.
308B.2 The statement in the July Draft GIA Reports to which the Claimants intend to refer
provided as follows: "The CDO business [within ABN] did not develop a model to
value ABS CDO positions" (July Draft GIA Reports, ABN AMRO Report, p. 12; the
same wording appears in the December Draft GIA Reports, ABN AMRO Report,
p.13).
308B.3 When read in context, it is apparent that this statement related to a period: (a) prior
to RBS's acquisition of ABN; and (b) several months prior to the Rights Issue. GIA
reported that, by the time of the Rights Issue, a CDO valuation model had been in
place for several months. In particular, by January 2008, ABN valued its ABS
CDOs "using [RBS's] LSD model valuation with an additional buffer determined by
RBS management." (July Draft GIA Reports, ABN AMRO Report, p.8; December
Draft GIA Reports, ABN AMRO Report, p.9).
308B.4 It is specifically denied that the statement reproduced in paragraph 308B.2 above
indicates that RBS's disclosures relating to the ABN acquisition or integration were
inaccurate or misleading, or that problems existed at the time of the Rights Issue that
needed to be disclosed.
308B.5 Save as aforesaid, paragraph 105E.1 is denied.
308C. As to paragraph 105E.2:
308C.1 It is admitted that the words in quotation marks appeared at p. 11 (not p. 12) of the
ABN AMRO Report of the July Draft GIA Reports. They also appeared at p. 12 of

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the ABN AMRO Report of the December Draft GIA Reports. The factual accuracy
of those words is not admitted.
308C.1A As to the accuracy of GIA's conclusions, Response 102 of the Defendants' Response
to the Request for Further Information made on 4 February 2015 by the Claimants is
repeated herein.
308C.2 It is denied that, even if they were well founded (which is not admitted), any of
GIA's conclusions indicate that RBS's disclosures relating to the ABN acquisition or
integration were inaccurate or misleading, or that problems existed at the time of the
Rights Issue that needed to be disclosed.
308C.3 Save as aforesaid, the paragraph is denied.
308D. As to paragraph 105E.3:
308D.1 It is admitted that, following the acquisition of ABN, RBS undertook two projects
internally referred to as "Project Hercules'' and "Project Shield". Project Hercules
was commenced on 13 March 2008; Project Shield arose out of Project Hercules
and was commenced by 8 April 2008. It is further admitted that both projects
involved taking steps to identify and implement enhancements to the integrity of
ABN's financial reporting which RBS considered should be made as part of the
integration process.
308D.2 It is denied that the above indicates that RBS's disclosures relating to the ABN
acquisition or integration were inaccurate or misleading, or that problems existed at
the time of the Rights Issue that needed to be disclosed. To the contrary, the
initiation of Projects Hercules and Shield was indicative of effective systems for
review and process enhancement.
308D.3 Save as aforesaid, paragraph is 105E.3 is denied.
308E. As to paragraph 105E.4:
308E.1

The Defendants will refer to the text of the December Draft GIA Reports, rather
than the Claimants' purported summary. The statement from which the allegation in

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105E.4 appears to have been constructed appeared in the December Draft GIA
Reports as follows:
"Subsequent to the rights issue announcement, ABN AMRO credit trading desks
have been integrated with the equivalent desks within RBS. The ABN AMRO Credit
and Alternatives Trading division now reports into the RBS Head of Credit Trading
and risks are managed jointly [...] Full novation of the existing ABN AMRO
positions is due to take place in Q4 2008." (December Draft GIA Reports, ABN
AMRO Report, p.5).
308E.2

It is noted that this passage was descriptive and did not purport to identify an
Alleged ABN Pproblem with the integration.

As to the substance of facts

themselves:
(a)

The speed at which RBS could accomplish the various steps in the
integration process was, in part, dependent upon the obtaining of regulatory
approval from the DNB.

(b)

By early April 2008 RBS was in discussions with the DNB to permit the colocation and co-management of the RBS and ABN credit trading business.

(c)

The best particulars that RBS can currently provide is that, following those
discussions, the co-location of the credit trading team commenced on or
around the week commencing 14 April 2008.

(d)
308E.3

Save as aforesaid the facts asserted in paragraph 105E.4 are not admitted.

Save as admitted or not admitted above, paragraph 105E.4 is denied.

It is

specifically denied that the arrangements in relation to the integration of the credit
trading desks indicate that the disclosures relating to the ABN acquisition or
integration were inaccurate or misleading, or that problems existed at the time of the
Rights Issue that needed to be disclosed.
308F. As to paragraph 105E.5:
308F.1

It is admitted that the words in inverted commas appeared within the July Draft GIA
Reports (ABN AMRO Report, p. 10). They also appeared in the December Draft
GIA Reports (ABN AMRO Report, p.11).

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308F.1A As to whether GIA's observations were correct, Response 103 of the Defendants'
Response to the Request for Further Information made on 4 February 2015 by the
Claimants is repeated herein.
308F.2

It is denied that GIA's observations indicate that RBS's disclosures relating to the
ABN acquisition or integration were inaccurate or misleading, or that problems
existed at the time of the Rights Issue that needed to be disclosed. In particular,
even if GIA's observations were correct (as to which no admissions are made
pending the completion of document review and factual investigations):
(a)

they related to events which substantially pre-dated both the Rights Issue
and RBS's acquisition of ABN, such events having occurred "prior to" the
time at which ABN had itself commenced trading in the CDO business; and

(b)

losses arising from ABN's CDO exposures were included in the writedowns disclosed in the Prospectus.

308F.3

Save as aforesaid, paragraph 105E.5 is denied.

308G. As to paragraph 105E.6:

308G.1 It is admitted that a statement in substantially the same terms appeared in the Draft
GIA Reports (July Draft GIA Reports, ABN AMRO Report, p.12; December Draft
GIA Reports, ABN AMRO Report, p.13).
308G.2 It is admitted that ABN used a significant number of contractors as part of the
Product Control team; no admissions are made as to the percentage alleged by the
Claimants.Pending the completion of document review and factual investigations,
no admissions are made as to the accuracy of this statement. However, it is noted
that, at the time of the Rights Issue, it was not unusual for a substantial proportion of
Product Control staff to be contractors. This reflected market demand for their skills
and the improved contractual terms on which contractors were engaged.
308G.3 It is denied that, if correct (which is not admitted), GIA's statement indicates that
RBS's disclosures relating to the ABN acquisition or integration were inaccurate or
misleading, or that problems existed at the time of the Rights Issue that needed to be
disclosed.

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308G.4 Save as aforesaid, paragraph 105E.6 is denied.

308H. As to paragraph 105E.7:
308H.1 It is admitted that the words in inverted commas in paragraph 105E.7 appeared in
the July Draft GIA Reports (ABN AMRO Report, p. 11). They also appeared in the
December Draft GIA Reports (ABN AMRO Report, p.12).
308H.2 The wider context for that statement is to be found in the December Draft GIA
Reports which (as explained above) benefited from a process of amendment and
amplification following consultation with the business. As to which, it is noted
(without limitation) that:
(a)

GIA reported that, following the acquisition, overall trading oversight over
ABN was provided by Mr Crowe (the CEO of GBM), who had been
seconded to ABN.

(b)

GIA acknowledged that by April 2008 (when the Rights Issue was
announced), ABN's desk level trading activity was being overseen by RBS.
This followed the obtaining of DNB approval for the relevant parts of RBS's
transition plan. (Prior to obtaining that mandatory authorisation GBM was
inhibited from assuming direct control over ABN's operations.)

308H.2A As to the accuracy of GIA's observations, Response 104 of the Defendants'

Response to the Request for Further Information made on 4 February 2015 by the
Claimants is repeated herein.
308H.3 In any event, even if GIA's observation was correct (as to which no admissions are
made, pending the completion of document review and factual investigations), it is
denied that it GIA's observations indicated that RBS's disclosures relating to the
ABN acquisition or integration were inaccurate or misleading, or that problems
existed at the time of the Rights Issue that needed to be disclosed.
308H.4 Save as aforesaid, paragraph 105E.7 is denied.

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308I.

As to paragraph 105E.8:
308I.1

It is admitted that the words in inverted commas appeared on page 11 of the ABN
AMRO Report of the July Draft GIA Reports. In the December Draft GIA Reports,
the statement was amended to provide as follows:
"Overall oversight of trading was provided by Brian Crowe, seconded from RBS,
however trading activity at a desk level for the CDO desks was not overseen by RBS
until April 2008 following approval of the transition plan by DNB." (ABN AMRO
Report, p.12).

308I.2

In making this statement: (a) GIA confined its observation to oversight at "desk
level"; and (b) GIA linked the start of this oversight to the obtaining of regulatory
approval by the DNB. As to the accuracy of GIA's observations, it is denied that
there was no oversight from RBS of trading activity at a desk level for the CDO
desks until April 2008. Even iIf GIA's comments on desk level oversight were
factually correct (as to which no admissions are made pending the completion of
document review and factual investigations), it is denied that GIA's observations
indicate that RBS's disclosures relating to the ABN acquisition or integration were
inaccurate or misleading, or that problems existed at the time of the Rights Issue that
needed to be disclosed.

308I.3
308J.

Save as aforesaid, paragraph 105E.8 is denied.

As to paragraph 105E.9:
308J.1

The Claimants quote from and purport to summarise statements which appear on
page 13 of the ABN AMRO Report of the July Draft GIA Reports and page 14 of
the ABN AMRO Report of the December Draft GIA Reports.

However, the

Claimants have omitted materially relevant text. The relevant passage provides as
follows (text that was omitted appears in bold):
"The valuation of CDO positions was transferred from ABN AMRO to RBS in
November 2007 (as the LSD model was introduced for valuation purposes). As a
result, traders on the desk refused to sign-off their daily P&Ls as they could not
identify how their prices had been derived." (Emphasis added).
308J.2

It is admitted that some ABN traders refused to sign-off their daily P&Ls for the
reasons recorded in the July Draft GIA Reports. As GIA noted this issue was

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temporary and was escalated and resolved (July Draft GIA Reports, ABN AMRO
Report, p.13; December Draft GIA Reports, ABN AMRO Report, p.14). It is
denied that this indicates that RBS's disclosures relating to the ABN acquisition or
integration were inaccurate or misleading, or that problems existed at the time of the
Rights Issue that needed to be disclosed.
308J.3

Save as aforesaid, paragraph 105E.9 is denied.

308K. As to paragraph 105E.10:

308K.1 It is admitted that the quoted text appeared in the July Draft GIA Reports (ABN
AMRO Report, p. 13). It also appeared in the December Draft GIA Reports (ABN
AMRO Report, p.14). The Claimants have ignored the wider context within which
this statement was made. GIA stated that:
"As per the IIF [Institute of International Finance] report: "Compensation policies
should be linked to the achievement of long-term strategic goals which maximise
shareholders' interests. These policies should also be linked to business strategy and
communicated to shareholders". Within CAT there was no incentive to manage
revenue in relation to the risks incurred. Given the integration to RBS we would
recommend that this is factored into any review that RBS may perform of the
Group's compensation processes" (Draft July GIA Reports, ABN AMRO Report,
p.13; Draft December GIA Reports, ABN AMRO Report, p.14).
308K.2 In the circumstances, it is clear that GIA was not criticising a perceived failure, but
making recommendations for RBS to consider as part of the integration process
going forwards, and that those recommendations were formulated by reference to a
recent statement of best practice (the final IIF Report was published in July 2008).
308K.2A As to the factual accuracy of GIA's statement, Response 105 of the Defendants'
Response to the Request for Further Information made on 4 February 2015 by the
Claimants is repeated herein.
308K.3 In any event, if GIA's statement was factually correct (as to which no admissions are
made pending the completion of document review and factual investigations), it is
denied that GIA's observations indicate that RBS's disclosures relating to the ABN
acquisition or integration were inaccurate or misleading, or that problems existed at
the time of the Rights Issue that needed to be disclosed.

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308K.4 Save as aforesaid, paragraph 105E.10 is denied.

308L. As to paragraph 105E.11:
308L.1

It is admitted that the Draft GIA Reports contained a chronology which referred
(amongst other things) to the departure of each of the individuals named, on the
dates specified and for the reasons given (July Draft GIA Reports, ABN AMRO
Report, p. 15; December Draft GIA Reports, ABN AMRO Report, p.16). It is
admitted that those departure details were accurate.

308L.2

It is denied that GIA referred to this as an "exodus of key staff"; that is a tendentious
phrase, which does not appear in the Draft GIA Reports, and does not fairly
characterise the account it provides. Further, it is denied that an "exodus of key
staff" in fact took place.

308L.3

It was a necessary feature of the integration process that there would be a headcount
reduction, including departures from within the ABN business.

Further, the

uncertainty naturally attending an integration prompted some staff within ABN to

seek employment elsewhere. These were inevitable and unremarkable features of
the integration process. Q1 2008 and, specifically, April 2008 were significant in
this regard because, having obtained DNB approval for certain relevant parts of
RBS's transition plan, RBS was proceeding at that time with further integration of
the ABN business.
308L.4

It is denied that GIA's chronology indicates that RBS's disclosures relating to the
ABN acquisition or integration were inaccurate or misleading, or that problems
existed at the time of the Rights Issue that needed to be disclosed.

308L.5

Save as aforesaid, paragraph 105E.11 is denied.

The Trading and Financial Position of ABN

308M. In paragraphs 105F to 105H, the Claimants refer to figures produced by ABN for the purposes
of ABN's internal reporting on ABN-R after the acquisition. The Claimants rely on those
figures to support their case that there had been a "dramatic downturn" in the performance of
ABN-R by the Prospectus Date. For the reasons set out below, this is misconceived.

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308N. Following the acquisition, ABN was required to continue producing internal reports in order
to comply with its regulatory reporting requirements; however, it is denied that those figures
were (or were intended to be) a meaningful or appropriate measure of performance for ABNR's business or for the overall success of the acquisition. The rationale for the acquisition
included the realisation of substantial costs synergies, increased global reach, access to new
clients and ABN's global transaction banking business, which were not measurable by
reference to the financial performance of ABN-R in isolation or at all. Further, given the
distortions caused by the effects of the acquisition, the figures contained in ABN's internal
reports could not properly be relied upon in isolation to provide an accurate picture of the
performance of ABN-R's underlying businesses in the period between the acquisition and the
Prospectus Date:
308N.1 In the late part of 2007 after the acquisition and increasingly in the first part of 2008,
the business of a number of clients migrated from ABN-R to RBS. Whilst the effect
of these migrations was neutral if the ABN-R and RBS figures were viewed on a
consolidated basis, the migrations had a negative effect on ABN-R's Global to
standalone figures since revenues which would ordinarily have been booked in ABNR were instead being booked in RBS, whilst the associated costs remained in ABNR's accounts.
308N.2 By the Prospectus Date, the integration of ABN-R into RBS was underway and RBS
was seeking to progress the integration as quickly as possible. As a result, ABN-R
was a smaller unit than had been the case previously. Comparing the figures for
ABN-R at the Prospectus Date with the figures for ABN-R earlier in 2008 or in 2007
would not therefore be comparing like with like. Furthermore, whilst the effect of the
integration was neutral if the ABN-R and RBS figures were viewed on a consolidated
basis, the impact on the standalone ABN-R figures was negative.
380N.3 The restructuring costs and redundancies which arose as a result of the integration
were booked in ABN-R's accounts. This had a negative impact on ABN-R's
standalone figures, however was not reflective of any decrease in the performance of
ABN-R's underlying business.
308O. By the Prospectus Date, RBS's figures showing RBS's and ABN-R's results on a consolidated
basis were the most accurate representation of the performance of the businesses.
Furthermore, the consolidated figures were the most relevant given that RBS's aim was to

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financially consolidate and physically integrate the ABN-R businesses within RBS's existing
businesses rather than manage ABN-R as a separate business. Indeed, from March 2008
onwards the figures for the ABN-R businesses to be integrated into RBS were not separated
from the RBS businesses in reports provided to the RBS Group Board. Forecasts and
financial results were instead prepared on a divisional basis and the contribution of the ABNR businesses was reflected within the divisions of RBS into which they were being integrated.
308P. Even if, which is denied, it was appropriate to review ABN-R's results on a standalone basis
when assessing ABN-R's performance following the acquisition, it is denied that ABN-R's
standalone results showed that there had been a "dramatic downturn" in the performance of
ABN-R's underlying businesses.
308P.1 As pleaded in more detail below, the decrease in ABN-R's operating profit figures
was mainly caused by the write-downs incurred by ABN-R in the period between the
acquisition and the Prospectus Date. Those write-downs were incurred as a result of
the adverse market conditions and were one-off events; as such, they did not indicate
problems with ABN-R's underlying businesses. RBS disclosed the figure which had
been estimated for capital planning purposes in respect of ABN-R's write-downs
since 31 December 2007, on page 134 of the Prospectus in the context of the "no
significant change" statement.
308P.2 Any decrease in ABN-R's operating profit figures excluding write-downs was
properly attributed to (i) the market conditions at the time, which were believed to be
temporary, and/or (ii) the ongoing restructuring and integration of ABN, rather than
being indicative of any problems with ABN-R's underlying business. The adverse
effect of the market conditions on certain of ABN's businesses and the impact of the
ongoing restructuring and integration of ABN were specifically disclosed on page
134 of the Prospectus in the context of the "no significant change" statement.
308Q. Without prejudice to the generality of the above, the Defendants plead more specifically to
paragraphs 105F to 105N as follows.
ABN-R Q4 2007 Results
308R. As to paragraph 105F:

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308R.1 It is admitted that in Q4 2007, ABN-R generated (i) an operating income of 395
million, (ii) an operating result of -1.267 billion and (iii) an operating profit before
tax, of -1.444bn. The percentage declines since Q3 2007 pleaded by the Claimants
are admitted.
308R.2 The decrease in ABN-R's operating profit figures between Q3 2007 and Q4 2007 was
not caused by any underlying issues or problems in the ABN-R business. The
decrease was primarily a result of the write-downs incurred by ABN-R in Q4 2007.
ABN-R's operating profit figures were also adversely affected by the difficult market
conditions at the time, such as the decline in asset values in the sub-prime mortgage
market, and the ongoing restructuring and integration of ABN. In any event, it is
denied, for the reasons pleaded at paragraphs 308N and 308O above, that it is
appropriate to review ABN-R's results on a standalone basis when assessing ABN-R's
performance following the acquisition.
308R.3 Save as aforesaid, paragraph 105F is denied.
ABN-R's Q1 2008 Results
308S. In Q1 2008, ABN-R again incurred a number of substantial market write-downs. These writedowns, as well as the difficult market conditions and the on-going restructuring and
integration of ABN, negatively affected ABN-R's operating profit figures for Q1 2008.
308T. As to paragraph 105G:
308T.1 It is admitted that ABN-R's operating profit figures for Q1 2008 were worse than had
been budgeted for previously and were worse than ABN-R's results for the equivalent
period in the previous year. ABN-R's results varied from what had been budgeted,
since the sharp deterioration in market conditions, which had caused the credit market
write-downs incurred in Q1 2008, had not been anticipated at the time the budget for
2008 was being set. Similarly, ABN-R's operating profit figures were worse than the
previous year's results because the market conditions in the equivalent period of 2007
had been much better than they were in Q1 2008.
308T.2 It is denied that any comparison can properly be made between ABN-R's results from
the start of 2008 to the Prospectus Date, and GBM's results in that same period, for
the following reasons:

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(a)

The businesses of ABN-R and GBM were not identical; whilst some of
ABN-R's businesses were similar to existing businesses in GBM, others
were not. Indeed, some of ABN-R's businesses, such as its global
transaction banking business, were to be integrated into businesses other
than GBM.

(b)

As pleaded at paragraph 308N.1 above, in the late part of 2007 after the
acquisition and increasingly in the first part of 2008, the business of a number
of clients migrated from ABN-R to GBM. As a result, revenues which would
ordinarily have been booked in ABN-R were instead being booked in RBS,
whilst the associated costs remained in ABN-R's accounts.

(c)

As pleaded at paragraph 308N.2 above, in the period from the start of 2008
to the Prospectus Date, the integration of parts of ABN-R into GBM had
begun, such that GBM could not properly be treated as a distinct entity from
ABN-R by the Prospectus Date.

308T.3 As to the unreliability of ABN-R's operating profit figures as an indicator of the

performance of ABN-R's underlying businesses following the acquisition, paragraphs
308N and 308O above are repeated herein.
308T.4 Save as aforesaid, paragraph 105G is denied.
308U. As to paragraph 105H, it is admitted that ABN-R's Q1 2008 results were finalised before the
Prospectus Date, on or around 18 April 2008. It is however denied, for the reasons pleaded at
paragraphs 308N and 308O above, that ABN-R's results on a standalone basis were an
accurate representation of the performance of ABN-R businesses. Without prejudice to the
foregoing, the Defendants plead to the individual sub-paragraphs of paragraph 105H as
follows.
308V. As to the first sentence of paragraph 105H.1, it is admitted that the Q1 2008 results for ABNR showed that ABN-R had an operating profit before tax of -1.332bn, and that that result
was 1.793bn below the figure cited in ABN's 2008 Reforecast Presentation (dated 25 April
2008) (461 million) as having been budgeted for Q1 2008 (or 1.4bn below, if the exchange
rate pleaded by the Claimants is applied).

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308W. As to the second sentence of paragraph 105H.1, it is admitted that once write-downs and other
normalisation adjustments were excluded, ABN-R's operating profit before tax for Q1 2008
was -21 million, which was 482 million below the figure cited in ABN's 2008 Reforecast
Presentation, as having been budgeted for Q1 2008.

The monthly ABN-R Results for

January 2008 and February 2008 showed an operating profit before tax of 101 million and
123 million respectively, once write-downs and other normalisation adjustments were
excluded from the figures.
308X. As to the third sentence of paragraph 105H.1, it is admitted that Mr Hourican sent an email to
Mr Whittaker dated 7 April 2008, in which he (i) described the ABN-R results he expected for
March 2008 and Q1 2008, and (ii) referred to "the continuing underperformance of the core
wholesale banking business". It is averred that Mr Hourican, in referring to the "continuing
underperformance of the core wholesale banking business" in the final paragraph of his email,
was referring to the large write-downs which he listed in the first paragraph of the email. It is
denied, if it be so alleged, that Mr Hourican was referring to issues with, or underperformance
of, ABN-R's underlying business, or suggesting that ABN-R was underperforming relative to
its peers.
308Y. As to the first sentence of paragraph 105H.2:
308Y.1 It is admitted that ABN's 2008 Reforecast Presentation stated that the "revenue
normalisations" applied to arrive at ABN-R's underlying business performance for
Q1, totalled 1.187 billion.
308Y.2 For the reasons pleaded at paragraph 308T.2 above, it is denied that any proper
comparison can be made between GBM's and ABN-R's write-downs.
308Y.3 Save as aforesaid, paragraph 105H.2 is not admitted.
308Z. As to the second sentence of paragraph 105H.2:
308Z.1 It is admitted that Q1 2008 write-downs in relation to White Knight, CDPCs and
Correlation (as defined in paragraph 225B.2 above) were not included in the WriteDowns Table or elsewhere in the Prospectus.

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308Z.2 As to the extent of the Q1 2008 write-downs (if any) in respect of these assets see
paragraphs 225AF, 249, the CME RFI response sheet "Other Cpty CVA and CDPC"
with the total figure of approximately 400m is not admitted.
308AA.As to paragraph 105H.3, it is denied, for the reasons pleaded at paragraph 308T.2 above that a
comparison can properly be made between the Q1 2008 ABN-R Results and those for GBM.
308BB. Paragraph 105H.4 is denied. The Q1 2008 results did not lead ABN to breach the applicable
DNB ICG-equivalent requirement. As at 31 March 2008 (the end of Q1 2008), the DNB
ICG-equivalent was 10.5% not 12.5%, and ABN's capital ratio at that time was in any event
around 12.86%.
ABN-R April Reforecast
308CC. As to the first sentence of paragraph 105I, it is admitted that on 19 December 2007, ABN had
budgeted that ABN-R would achieve an operating result of 1.862 billion and would achieve
an operating profit before tax (unadjusted) of 1.481 billion, in 2008.

As pleaded at

paragraph 308T.1 above, at the time the budget was being set the deterioration in market
conditions, which had caused ABN-R to incur the credit market write-downs that were
incurred in Q1 2008, had not been anticipated. Save as aforesaid, the first sentence of
paragraph 105I is denied.
308DD.As to the second and third sentences of paragraph 105I, it is admitted that in April 2008 ABN
undertook a full year reforecast ("the ABN-R April Reforecast"), which estimated that ABNR would achieve an operating result of -2.019 billion and an operating profit before tax of 2.419 billion in 2008.
308EE. Save that it is admitted that the difference between the figure ABN had included in respect of
ABN-R's operating result in 2008 in its budget of 19 December 2007, and the operating result
figure included in the ABN-R April Reforecast was 3.881 billion (or 3.07 billion applying
the exchange rate pleaded by the Claimants), the fourth sentence of paragraph 105I is denied.
The figures included in the ABN-R April Reforecast in respect of ABN-R's expected
operating result (and operating profit) for 2008 did not indicate that ABN expected the ABNR underlying business to be "severely loss-making" in 2008. The estimated operating result
and operating profit figures included the estimated impact of write-downs, and were not
therefore indicative of ABN's expectations as to the performance of the underlying business in

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2008. Further and in any event, given the matters pleaded at paragraphs 308N and 308O
above, it is denied that the ABN-R April Reforecast, which considered ABN-R on a
standalone basis, can be relied upon in isolation to provide an accurate picture of the forecast
performance of ABN-R's underlying businesses. The more relevant forecast was the 3+9
Reforecast which contained revised projected results for RBS on a proportionally
consolidated basis.
308FF. As to paragraph 105J, it is denied that the expected operating result figure for ABN-R for
2008 was "overstated" in the ABN-R April Reforecast.

The Defendants plead to the

individual sub-paragraphs of paragraph 105J as follows.

308GG.As to the first sentence of paragraph 105J.1, it is admitted that the expected operating result
figure for the businesses constituting ABN-R for 2008 in the ABN-R April Reforecast,
depended upon those businesses achieving 65% of the income stated in ABN's 2008
Reforecast Presentation to have been budgeted for Q2, Q3 and Q4 2008. However, given the
matters pleaded at paragraphs 308N and 308O above, it is denied that the ABN-R April
Reforecast can be relied upon in isolation to provide an accurate picture of the forecast
performance of ABN-R's underlying businesses.
308HH.Save that it is admitted that in Q1 2008, the businesses constituting ABN-R had actual
average monthly operating income (excluding write-downs) of 381 million, which amounted
to 53% of the monthly figure cited in the ABN 2008 Reforecast Presentation as having been
budgeted for Q1 2008 (714 million), the second sentence of paragraph 105J.1, is denied. In
particular, it is denied that it was "imprudently optimistic" to expect the businesses
constituting ABN-R to achieve 65% of budgeted operating income in Q2, Q3 and Q4 2008.
The Defendants will rely on the following:
308HH.1 In January and February 2008, ABN-R's actual operating income (excluding writedowns) far exceeded 65% of the monthly operating income cited as having been
budgeted. In January 2008 ABN-R's operating income (excluding write-downs) was
570 million (i.e. 79.8% of the figure cited in the ABN 2008 Reforecast
Presentation as having been budgeted for the month), and in February 2008 it was
598 million (i.e. 83.8% of the figure cited as having been budgeted for the month,
in the ABN 2008 Reforecast presentation).

Whilst ABN-R's actual monthly

operating income (excluding write-downs) in March (which was less than 65% of
the budgeted monthly operating income figure) brought down the average figure for

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Q1 2008, it was not unreasonable for ABN at the time it was preparing the ABN-R
April Reforecast to (i) take into account the performance of ABN-R in January and
February 2008, and (ii) not assume that the performance in March alone was
indicative of the likely performance in Q2, Q3 and Q4 of 2008.
308HH.2 ABN could not reasonably have been expected, when preparing the ABN-R April
Reforecast, to have planned on the basis that the conditions in March 2008 were
representative of the outlook for the remainder of the year or to have foreseen the
events, such as the collapse of Lehman Brothers, that occurred in Autumn 2008. To
the extent that the Claimants allege that ABN should have done so, their claims are
made with the benefit of hindsight.
308II. As to the first and second sentence of paragraph 105J.2:
308II.1 As to the alleged transfers and the losses which are alleged to have arisen upon
transfer, paragraphs 200Q, 221H, 225U, 225AB, 225AM, and 225BA above, are
repeated herein.
308II.2 It is admitted that the ABN-R April Reforecast did not take into account the transfers
which subsequently took place however, since the transfers were intra-group, their
inclusion or omission had no effect at all on RBS's consolidated results or forecasts.
The transfers were profit and loss neutral from the RBS Group perspective, therefore
any over-estimate in ABN-R's results or forecasts would be offset by a corresponding
under-estimate in RBS's solo results or forecasts.
308II.3 Save as aforesaid, the first and second sentences of paragraph 105J.2 are not
admitted.
308JJ. The third sentence of paragraph 105J.2 is embarrassingly vague in that it fails to identify the
transfers which it is alleged were "deliberately delayed" to avoid breaches of the DNB ICGequivalent. Without prejudice to the foregoing, it is admitted that some transfers had been
planned by the Prospectus Date. (See further paragraph 200Q above). However, RBS was
entitled to choose when to make the transfers, subject to any regulatory approvals that may
have been required. In any event, as pleaded at paragraph 308II.2 above, any delay had no
effect at all on RBS's results or forecasts, when viewed on a consolidated basis.

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308KK.Paragraph 105J.3 is denied. It is denied that a reasonable and prudent forecast operating loss
for ABN-R for 2008, at the time of the ABN-R April Reforecast, was in the region of
approximately 5 billion. The Claimants' allegation is made with the benefit of hindsight.
For the reasons stated at paragraph 308HH above, it is denied that there is any proper basis for
the contention that ABN's forecasts (operating result of -2.019 billion and operating profit
before tax of -2.419 billion) were imprudent or unreasonable, at the time.
Statements in the Prospectus relating to ABN-R's performance
308LL.Save that it is admitted, as pleaded in paragraphs 308R.1, 308T.1 and 308EE above, that (i)
there was a decrease in the expected operating result in 2008 included in ABN's budget of 19
December 2007, and the expected operating result figure included in the ABN-R April
Reforecast, and (ii) there was a decrease in ABN-R's actual operating profit figure between
ABN's Q3 2007 results and its Q4 2007 results and between its Q1 2007 result and its Q1
2008 results, the first sentence of paragraph 105K is denied. The Claimants' characterisation
of these decreases as a "dramatic downturn" is vague and tendentious. Without prejudice to
the generality of the foregoing, it is denied that there was a "dramatic downturn" in the actual
or expected performance of ABN-R's underlying businesses. Paragraphs 308N to 308P above
are repeated herein. RBS did however disclose in the Prospectus, in the context of the "no
significant change" statement on page 134 of the Prospectus, that:
308LL.1 It had estimated, for capital planning purposes, write-downs of approximately 2.3
billion since 31 December 2007, in respect of ABN-R's credit market exposures.
308LL.2 Market conditions had had an adverse effect on certain of ABN's businesses. The
"no significant change" statement referred back to pages 29 and 31 of the Prospectus
which referred to the disruption to the markets affecting GBM, and stated that GBM
had been "acutely affected by credit market conditions".
308LL.3 Since 31 December 2007, the ongoing restructuring and integration of ABN had
affected the financial and/or trading position of ABN.
308LL.4 It is denied, if it be so alleged, that RBS was required to make any further
disclosures in the Prospectus in relation to ABN-R's actual or expected performance
than it in fact made. The Defendants will rely on the fact that RBS's external
advisers in relation to the preparation of the Prospectus (Goldman and Merrill), were

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provided with financial information on the performance of ABN-R on a standalone

basis, and did not consider that RBS needed to make any further disclosures than
were made in the Prospectus.
308MM.Save that it is admitted that Mr Robert Topley, of Deloitte, sent emails to Mr Kapoor on 25
April 2008 at 8.16am and on 26 April 2008 at 2.50pm, in relation to the content of the "no
significant change" statement, the second sentence of paragraph 105K is denied. Mr Topley's
emails related to early drafts of the Prospectus which contained a placeholder for the ABN
"no significant change" wording. The issues raised by Mr Topley in his emails in relation to
the earlier drafts were appropriately addressed in the final wording of the "no significant
change" statement in the Prospectus.
308NN.Save that it is admitted that the April 2008 results were finalised by the Closing Date, the first
sentence of paragraph 105L is denied. The May 2008 results were not finalised until after the
Closing Date, on or around 12 June 2008.
308OO.The second sentence of paragraph 105L is embarrassingly vague, in that it fails to identify
against what standard ABN-R's performance is being judged when it is alleged that ABN-R
"underperformed". To the extent that the Claimants are seeking to make a comparison
between ABN-R's actual operating profit in April and in May and those estimated in the
ABN-R 19 December Budget, paragraph 308T.1 above is repeated.
308PP. The third sentence of paragraph 105L is not admitted. In any event, the relevance of the May
results (which were finalised after the Closing Date) to the Claimants' claim is denied.
308QQ.As to paragraph 105M.1, it is denied, if it so be alleged, that the statement from the
Prospectus to which the Claimants refer, related specifically to ABN-R.

The relevant

statement (which was at page 29 of the Prospectus) was as follows: "Overall, the Group's
underlying results excluding write downs, have remained satisfactory." (Emphasis added).
That statement was true in relation to the Group's underlying results (i.e. RBS and ABN-R)
and was not misleading. RBS provided more detail in respect of the deterioration in the credit
markets and the resultant write-downs in the text preceding that statement and provided
further information as to the write-downs estimated in relation to ABN-R specifically and the
effects of the adverse market conditions on ABN on page 134 of the Prospectus in the context
of the "no significant change" statement.

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308RR.As to paragraph 105M.2, it is denied, if it be so alleged, that the statement from the Prospectus
to which the Claimants refer related specifically to ABN-R. The statement referred to GBM
as a whole, into which certain businesses of ABN-R had been consolidated for accounting
purposes by the Prospectus Date. It is in any event denied that the statement was misleading.
The first part of the paragraph from which the words the Claimants refer to have been taken,
specifically referred to the fact that GBM had been "acutely affected by credit market
conditions, particularly in March, with further write-downs in credit markets during the
quarter."
308SS. Paragraph 105M.3 is denied. It was not untrue or misleading for the Prospectus to incorporate
the statement referred to at page 21 of the 2007 Accounts. Confidence in the opportunities the
acquisition of ABN offered RBS had deepened since the acquisition. For example:
308SS.1 By the Prospectus Date, the total annual synergies which RBS expected to derive
from the integration had increased from the 1.7 billion originally forecast to 2.3
billion and cost savings and revenue benefits were being realised ahead of budget;
308SS.2 GBM had made a good start on exploiting the businesses it had acquired from ABN
and a significant number of deals had already been recorded from combining the
product expertise and customer franchises of the two businesses. By the Prospectus
Date, the consolidated GBM entity was winning mandates which neither RBS nor
ABN on their own would have won; and
308SS.3 ABN's global transaction banking business which formed part of GTS had enabled
RBS to benefit from ABN's global reach and to deliver cash management, trade
finance and payment services to customers on the ground in over 50 countries. By
the Prospectus Date, transaction volumes had increased and the division had
obtained new mandates in cash management, trade finance and financial institutions.
Furthermore, the rolling forecasts for GTS's performance in 2008 had been revised
modestly upwards with RBS predicting further growth for 2009.
308TT. Paragraph 105M.4 is denied.

The "no significant change" statement was not untrue or

misleading. As pleaded at paragraphs 308N to 308P above, there had not been a severe
deterioration in the underlying performance of ABN-R as at the Prospectus Date. Whilst it is
admitted that there had been a decrease in ABN-R's operating profit figures, it is denied that
that constituted a "significant change" since the decrease was as a result of write-downs, the

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adverse effect of market conditions and the ongoing restructuring and integration of ABN,
rather than indicating any significant change in the performance of the underlying ABN-R
business. In any event, the "no significant change" statement in the Prospectus specifically
drew the reader's attention the write-downs which had been estimated for capital planning
purposes, the adverse effect of market conditions on certain of ABN's businesses and the
impact of the ongoing restructuring and integration of ABN.
308UU.Paragraph 105M.5 is embarrassingly vague in that it (i) fails to provide any, or any proper,
particulars as to the respects in which it is alleged that the true nature and extent of the writedowns was worse than had been presented in ABN's budgets and forecasts and (ii) fails to
identify which specific budgets and forecasts are being referred to. Pending proper
particularisation, paragraph 105M.5 is denied and paragraphs 195 to 236H above are repeated
herein.
308VV. As to paragraphs 105M.6 and 105M.7:
308VV.1

In relation to the alleged deterioration in ABN-R's financial and trading position,

paragraphs 308N to 308P above are repeated herein.

308VV.2

It is specifically denied that RBS failed to disclose any "necessary information",

within the meaning of s.87A(1)(b) and 87A(2) of FSMA. Investors were able to
make an informed assessment of the financial position and prospects of RBS and
the rights attaching to the Rights Issue shares from the consolidated results and
the information about write-downs disclosed in the Prospectus.

308VV.3

It is denied that a supplementary prospectus was required.

308WW. As to paragraph 105N, it is denied that the statements in the capital plan as to capital ratio
targets and their prudence and their achievability, were untrue or misleading. The capital
plan took account of the 3+9 Reforecast, which contained revised projected results for
RBS on a proportionally consolidated basis. For the reasons pleaded at paragraphs 308N
and 308O above, that was the most relevant forecast for the purposes of the capital plan.
Goodwill
309.

As to paragraphs 106, 106A, 106B and 107, the correct position in relation to the goodwill
attributed to the ABN businesses is as follows:

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309.1

RBS initially recognised goodwill of 23.3 billion arising from the ABN
acquisition, of which 5.8 billion (EUR 8.3 billion at an exchange rate of 1.4350 at
17 October 2007) was attributable to those parts of ABN that RBS was to retain, and
the remaining 17.5 billion (EUR 25.1 billion at an exchange rate of 1.4350 at 17
October 2007) related to the parts that Fortis and Santander were to acquire.

309.2

When preparing its 2007 Accounts, RBS tested the carrying value of this goodwill
for impairment. As to which:
(a)

As contemplated by IAS 36.84, RBS had not at that stage allocated the
goodwill to cash generating units, and the assessment was therefore
undertaken at the level of groups of business units to be acquired by each
Consortium member.

(b)

RBS applied a "fair value less costs to sell" (as opposed to a "value in use")
approach to the assessment of goodwill in newly-acquired entities.

(c)

RBS calculated fair value by taking the price paid on the acquisition and
assessing whether the expectations on which the acquisition had been based
required adjustment in light of the circumstances prevailing at the time.
This was specifically in accordance with paragraph 69 of the Basis for
Conclusions accompanying IAS 36, which provides that "the best evidence
of a recently acquired unit's fair value less costs to sell is likely to be the
arm's length price the entity paid to acquire the unit, adjusted for disposals
costs and for any changes in economic circumstances between the
transaction date and the date at which the estimate is made".

(d)

Although market conditions were adverse, RBS (in common with many
other financial institutions, investors and commentators) did not anticipate a
permanent downturn in the financial markets or the wider economy.
Further, having started the integration of ABN, the total annual synergies
which RBS expected to derive had increased from the EUR 1.7 billion
originally forecast to EUR 2.3 billion.

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(e)

Both Fortis and Santander informed RBS that they had concluded that their
share of the ABN goodwill remained unimpaired. RBS reviewed their
explanations for this conclusion and was satisfied that it was reasonable.

(f)

In the circumstances, RBS concluded that events since the acquisition had
not significantly affected the assumptions supporting the investment
decision and therefore that the goodwill at 31 December 2007 was
unimpaired.

RBS's impairment testing was considered by its auditors,

Deloitte, who confirmed that they agreed that no impairment was required.
309.3

RBS did not (and was not required to) test the ABN goodwill for impairment at the
time of the Rights Issue. However, at that time the bank was closely monitoring
market developments, and the ABN integration process. Although conditions had
deteriorated, RBS did not consider that the developments were such as to materially
alter the long-term value of the businesses acquired from ABN, or consequently the
goodwill attributed to them. By Part XIII of the Prospectus RBS incorporated by
reference those parts of the 2007 Accounts which recorded the goodwill referable to
the ABN businesses.

309.3A Save that it is admitted that the "no significant change" statement in the Prospectus
could reasonably be interpreted as representing that the ABN goodwill had not been
materially impaired or written down significantly since 31 December 2007, paragraph
106B is denied. The "no significant change" statement did not mean, and could not
reasonably have been taken as representing, that there were no indicators of
impairment or matters requiring an impairment review or likely to lead to the value of
ABN's goodwill being significantly written down. The Claimants have failed to
provide any particulars as to the basis on which it is alleged that such a meaning can
be implied or inferred.
309.4

RBS tested the ABN goodwill for impairment once again when preparing its interim
results for the half-year ending 30 June 2008. As to which:
(a)

By this point RBS had allocated the goodwill from the ABN acquisition to
particular divisions of its business (which were cash generating units for the
purposes of IFRS) and goodwill was accordingly evaluated at divisional
level. RBS used both a "fair value less costs to sell" and a "value in use"

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approach and made use (amongst other things) of earnings multiples from
an independent broker's report, 2008 projected earnings and integration
synergies.
(b)

RBS concluded that the goodwill attributable to RBS's share of ABN

remained unimpaired.

RBS's impairment testing was reviewed by its

auditors, Deloitte, who concurred that the goodwill was not impaired.
309.5

In its 2008 Accounts, RBS finalised the fair values of ABN's assets and liabilities
resulting in a final goodwill amount of 23.9 billion as at the date of acquisition, of
which 6.4 billion was attributable to RBS's interest and 17.5 billion to Fortis and
Santander. At 31 December 2008, the goodwill (before write-down) attributable to
RBS's interest had risen to 8.9 billion as a result of the strengthening of sterling
during 2008.

309.6

In the 2008 Accounts, RBS's share of the goodwill from the ABN acquisition was
allocated to the different RBS divisions (or "cash generating units") into which
ABN's businesses were being integrated. It is admitted that in light of the changed
conditions prevailing at the time (as further particularised below) the 2008 Accounts
recorded the following write-downs in respect of RBS's share of the assets acquired
from ABN:

309.7

(a)

Goodwill: 7.7 billion;

(b)

Other intangible assets: 1.04 billion;

(c)

Fixed assets: 7.0 million; and

(d)

Credit market exposures: 2.3 billion.

After making these write-downs 1.2 billion (EUR 1.3 billion at then current
exchange rates) of goodwill originating from the ABN transaction was still
recognised in respect of RBS's GTS division.

309.8

The figure of 14.2 billion referred to in paragraph 107 is not recognised and is
therefore not admitted.

309.9

Save as aforesaid paragraphs 106, 106A, 106B and 107 are denied.

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310.

Paragraphs 108-112 proceed on a misapprehension as to the application and effect of IAS 36.
The correct position is as follows:
310.1

An entity's goodwill is impaired if the carrying amount of the goodwill exceeds the
recoverable amount (IAS 36.8). The carrying amount is the amount recognised by
the entity in its accounts and the recoverable amount is the higher of its fair value
less costs to sell and its value in use (IAS 36.6).

310.2

An entity is required to test goodwill for impairment annually irrespective of

whether there is any indication of impairment (IAS 36.10). This test may be
performed at any stage during the annual period, provided that it is performed at the
same time each year (ibid). RBS carried out its annual test for impairment at 30
September. This was specifically disclosed on page 163 of RBS's 2007 Accounts.

310.3

In addition to the annual test, an entity is required to assess on each reporting date
whether there are any indications that goodwill is impaired (IAS 36.8). A reporting
date is the date of the balance sheet in an entity's annual accounts and (where
applicable) the date of its interim financial report in accordance with IAS 34
('Interim Financial Reporting' ('IAS 34')). A number of indications are listed, nonexhaustively at IAS 36.12. If one or more of those indications is present, the entity
is required to formally estimate its recoverable amount (IAS 36.6).

310.4

Therefore there are only two circumstances in which an entity is required by IAS 36
to test goodwill for impairment, namely:

310.5

(a)

once a year on the date appointed for the annual test, and

(b)

on a reporting date if there are one or more indications of impairment.

The reporting dates of relevance to these proceedings are 31 December 2007 (being
the balance sheet date for RBS's annual accounts) and 30 June 2008 (being the date
for RBS's interim financial report).

311.

Against this background, RBS pleads to paragraphs 108-112 more particularly below.

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312.

As to paragraph 108:
312.1

The content and requirements of IAS 36.8 and 36.12 have been summarised above
and the Defendants will refer to them for their full terms, true meaning and effect. It
is denied that IAS 36.12 "requires" an impairment review of assets. IAS 36.12
identifies certain indications of impairment. The circumstances in which an entity is
required to test goodwill for impairment have been set out at paragraph 310 above.

312.2

Save that the reference to "the asset's value" in paragraph 108.1 should be to "the
asset's market value", it is admitted that paragraphs 108.1 to 108.4 paraphrase some
of the indications of impairment within IAS 36.12.

312.2A The circumstances in which an impairment review is required and in which an

impairment should be recognised have both been set out at paragraphs 310.1 to
310.5 above, and:
(a)

save as there stated, it is denied that indicators of impairment require an

impairment review, whether pursuant to IAS 36.8, 36.88, 36.90 or
otherwise; an impairment review is only required on the two occasions
specified in paragraph 310.4 above; and

(b)

it is further denied that indicators of impairment, where present,

automatically require that goodwill be treated as impaired. The Claimants
have confused impairment testing with the recognition of an impairment.
The two are fundamentally distinct.

312.3

Save as aforesaid paragraph 108 is denied.

312A As to paragraph 108A:

312A.1 It is admitted that the words reproduced in inverted commas appeared on page 138
of the 2007 Accounts, that those words formed part of RBS's then applicable
accounting policies, and that they were incorporated by reference into the
Prospectus.
312A.2 In this respect, RBS's policy did no more than reflect the relevant provisions of IAS
36 and it is denied (if it be alleged) that the policy required that an impairment

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review be carried out other than in the circumstances summarised in paragraphs

310.1 310.5 above.
312A.3 Save as aforesaid, paragraph 108A is denied.
313.

As to paragraph 109:
313.1

It is denied admitted that between 31 December the acquisition of ABN on 17

October 2007 and the Prospectus Date, 30 April 2008, RBS had not tested for any
indicators of impairment or conducted any or any proper impairment review, save
for the impairment review carried out in the course of preparing its 2007 Accounts.
It is however denied, if it be so alleged, that RBS was required to do so.
(a)

The first reporting date following the acquisition of ABN was 31 December
2007. As set out above, in the course of preparing its 2007 aAccounts in
January and February 2008, RBS tested for impairment and concluded that
the goodwill was unimpaired. Paragraph 309.2 above is repeated.

(b)

The second reporting date for RBS following the acquisition of ABN was 30
June 2008. As set out above, when preparing the 2008 Iinterim Rresults,
RBS tested for indicators of impairment and conducted an impairment
review and (again) concluded that the goodwill was unimpaired.

313.2

In the circumstances, the Defendants plead as follows to the individual subparagraphs of 109.

313.3

The first sentence of paragraph 109.1 is admitted. The second sentence is denied:
RBS tested for impairment when drawing up its 2007 Accounts in January and
February 2008.

313.4

As to paragraph 109.2, iIt is admitted that RBS did not test for indicators of
impairment or conduct an impairment review between the publication of the 2007
Accounts on 28 February 2008 and the Closing Date. opening of the Rights Issue on
22 April 2008 (a period of less than two months) RBS did not carry out a further test
for impairment.

RBS was not required to do so since the publication of the

Prospectus was not a reporting date, within the meaning of IAS 34 or 36, and
therefore was not a date on which an impairment review could be required. The

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next reporting date was 30 June 2008: the ABN goodwill was tested for impairment
at that time and it was concluded that it was unimpaired. As stated above, RBS
closely monitored developments in the interim but did not consider that the longterm value of the businesses acquired from ABN had been impaired.
313.5

The first sentence of paragraph 109.3 is denied. RBS did not test the ABN goodwill
for impairment at the time of the Rights Issue because (a) RBS tested for
impairment prior to the publication of the 2007 Accounts; (b) the publication of the
Prospectus was not a reporting date within the meaning of IAS 34 or 36 and
therefore did not trigger any requirement to test the ABN goodwill for impairment;
and (c) RBS had been monitoring developments following publication of the 2007
Accounts but did not consider that the long-term value of the businesses acquired
from ABN had been materially impacted.

313.6

As to the second sentence of paragraph 109.3:

(a)

It is admitted that Goodwin made the statements attributed to him during a

conference with market analysts on 22 April 2008. So far as relevant, the
conference was a face-to-face presentation, not (as alleged) a conference
call.

(b)

Those statements were not (as alleged) made in response to a question as to

"why there was no impairment in September 2007": Goodwin was
responding to a question as to the likelihood of RBS recognising an
impairment of goodwill in the future.

(c)

The Claimants have omitted relevant wording from the quoted passage. The
second passage should read as follows (the omitted text has been inserted in
bold):
I think you covered it earlier Tom [McKillop] in terms of your view of the
business. We were six months into the ownership of ABN Amro, the depths
of a global financial crisis; I don't think that is the point at which to start
making too precise judgments about these things. We will see that we
believe as the Chairman described the outlook of the business; the
underlying business case remains robust. These are good businesses, the
businesses that have synergies with our business and give us new
opportunities and improve our franchise going forward. But six months
in, I would hesitate to say whether we are in the middle or the beginning of

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the end a serious global financial crisis; there are many things that look less
good that it did a little while ago, and look less good than it will look in the
forthcoming, in the future.
(d)

In that passage Goodwin was referring back to and adopting statements

made earlier in the presentation by McKillop. Those statements included
the following:
ABN AMRO combined with the RBS businesses, is going to deliver excellent
synergies, synergies that are substantially higher than the original case, and
are broadly on track to deliver that. It also is opening up many options for
us, many parts of the ABN businesses are performing very well, and are
very robust for the economic environment we are in today. They also give
us much increased presence in areas of the world where the economic
outlook is nothing like so gloomy, and the Board is convinced that going
forward, it may take somewhat longer, because of the events that have
happened, but going forward we are absolutely convinced that in the long
term this will prove to add value for shareholders who hold for the long
term. So, yes of course we take responsibility, but there are many positives
and we've got to get on and deliver them.
And:
[...] it's often in adversity that competitive advantage is won. The Board has
acted decisively to re-position the bank for the future. We have outstanding
franchises, considerably enhanced following the acquisition of ABN AMRO,
whether it's in a geographic spread, client base, or the product range, our
priorities are clear and we're all focussed on delivering the full potential of
the many opportunities we see ahead of us.

(e)

In the circumstances it is denied that Goodwin was acknowledging that RBS

should have undertaken an impairment review over and above the one
conducted for the 2007 Accounts, or should have recognised an impairment.

(f)

It is denied that Goodwin's statements (which, as set out in (b) above, were
addressing a different question to that alleged) constituted the "true reason"
for not testing for impairment. RBS did not test the ABN goodwill for
impairment at the time of the Rights Issue because:
(i)

RBS tested for impairment prior to the publication of the 2007

Accounts on 28 February 2008.

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(ii)

The publication of the Prospectus was not a reporting date within

the meaning of IAS 34 or 36 and therefore was not a date on which
an impairment test could be required.

In any event, RBS had been monitoring developments following publication

of the 2007 Accounts but did not consider that the long-term value of the
businesses acquired from ABN had been materially impacted.
313.7
314.

Save as aforesaid, paragraph 109 and the sub-paragraphs thereto are denied.

As to the first sentence of Pparagraph 110, it is denied that RBS was required to test for
indicators of impairment between the publication of the 2007 Accounts and the Prospectus
Date or in the period to the Closing Date. If RBS had tested for indicators of impairment
between the publication of the 2007 Accounts and the Closing Date, it is admitted that RBS
may have found that such indicators were present. However, as pleaded at paragraph 312.2A
above, it is denied that the presence of indicators of impairment would have required that an
impairment review be undertaken or required that goodwill be treated as impaired. As to the
second sentence of paragraph 110, Iit is specifically denied that any "trigger" requiring an
impairment review had been engaged at the Prospectus Date or the Closing Date; an
impairment review could not be triggered without a reporting date, as to which paragraphs
310 and 312 above are repeated. Without prejudice to the generality of the above, which
should be read as incorporated into RBS's plea to each of the sub-paragraphs of paragraph
110, RBS pleads to those sub-paragraphs more particularly as follows.

315.

As to paragraph 110.1:
315.1

It is admitted that by 30 April 2008 the Prospectus Date and the Closing Date, RBS
had concluded that the value of certain assets that it had acquired from ABN had
substantially decreased. RBS acknowledged this in the Prospectus by estimating for
capital planning purposes write-downs of some 2.3 billion for 2008 in relation to
credit market exposures acquired from ABN. Save as aforesaid it is denied that the
market value (fair value less costs to sell) of RBS's share in ABN had significantly
declined.

315.2

For the avoidance of doubt, given that the Consortium had acquired ABN in order to
separate it into its constituent parts, rather than to operate it as a joint venture, it is

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denied that the value of RBS's share in ABN can be calculated as being a proportion
of the total value of ABN.
315.3

It is admitted that McKillop made the statement attributed to him in the third
sentence.

315.4

It is further admitted that the share price in a number of investment banks fell
between 15 October 2007 and 30 April 2008.

However, the picture was not

uniform. JP Morgan's share price rose from US$46.27 to US$47.65 over this period
and, notwithstanding the adverse conditions experienced during March 2008, its
share price rose from US$42.44 on 28 February 2008 to US$45.65 on 22 April 2008
(the date that the Rights Issue was announced). The share prices of certain major
British banks (including Barclays, HSBC and Lloyds) also fell between 15 October
2007 and 30 April 2008. However, there was volatility during this period. For
example, between 15 February 2008 and 22 April 2008 there were rises in the share
price of Barclays (from 384.8099p to 414.7221p), HSBC (from 636.15p to 737.67p)
and Lloyds (from 196.3277p to 218.1557p).
315.5
316.

Save as aforesaid, paragraph 110.1 is denied.

As to the first sentence of paragraph 110.2:

316.1

It is admitted that between 17 October 2007 and 22 April 2008 there had been a
significant adverse change in the credit markets.

316.2

This was repeatedly acknowledged within the Prospectus, in particular at pages 7, 8,

12, 13, 24, 26, 28, 29, 31, 73 and 134.

316.3

As to the value of RBS's share in ABN, paragraph 315 above is repeated. Save as
aforesaid, it is denied that the market value (fair value less costs to sell) of RBS's
share of ABN had declined.

316.4

The Defendants plead more specifically to the first sentence when pleading to the
particulars of the allegation set out in paragraph 110.2.1-3 below.

316.5

Save as aforesaid, the first sentence is denied.

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317.

As to paragraph 110.2.1:
317.1

It is admitted that the financial markets (specifically the credit markets) had
significantly worsened in the first quarter of 2008 and that this adversely affected
parts of the GBM division.

317.2

As to the performance of GBM:

(a)

In the first 3 months of 2008 GBM made a total operating contribution of

1,191 million (including 226 million for March 2008), excluding the
impact of credit markets and volatility.

(b)

Losses only resulted from credit market write-downs and volatility. In

March 2008 GBM suffered net credit market mark-downs of 1,477 million.
Accordingly, it is admitted that factoring in credit market write-downs,
GBM recorded an overall loss of 1,251 million for March 2008.

317.3

Save as aforesaid, the first sentence of paragraph 110.2.1 is denied.

317.4

As to the second sentence of paragraph 110.2.1, it is admitted that McKillop made

the statement attributed to him. This statement was made in the course of a freeflowing question and answer session with the Treasury Select Committee. It was
expressed in very general terms. If (as appears to be the case), the Claimants intend
to adopt this statement and plead it as an account of the events following the
acquisition, then it is embarrassingly vague. In the circumstances this statement is
not admitted. The Defendants will plead further to this statement should it be
properly particularised.

317.5

The third sentence of paragraph 110.2.1 is admitted.

317.6

As to the fourth and fifth sentences of paragraph 110.2.1:

(a)

It is admitted that by the Prospectus Date there had been a worsening of the
general economic outlook. The precise moment at which this worsening
took hold is not admitted. However (in common with many other financial
institutions, market analysts and commentators, and investors), RBS did not

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anticipate a recession.

This was made clear by Goodwin during the

presentation on 22 April 2008 ("we don't see a UK recession coming up").

(b)

The outlook for RBS's businesses varied according to their particular nature
and geographic focus. As McKillop pointed out during the presentation on
22 April 2008, parts of the ABN businesses were performing very well and
gave RBS a "much increased presence in areas of the world where the
economic outlook is nothing like so gloomy". Parts of GBM had been
acutely, adversely affected by credit market conditions during March 2008.
However, RBS anticipated a market recovery in 2009 and was forecasting
strong growth in Credit Markets and Equities that year.

(c)

It is admitted and averred that RBS drew appropriate attention to the

worsening of the economic outlook in the Prospectus and during the
presentation on 22 April 2008.

317.7
318.

Save as aforesaid, paragraph 110.2.1 is denied.

As to paragraph 110.2.2:
318.1

Paragraph 110.2.2 is admitted. Northern Rock was taken into state ownership on 22
February 2008. However, confidence had collapsed in Northern Rock long before
that occurred. In September 2007, Northern Rock sought and received liquidity
support from the Bank of England, following which there was a "run" on Northern
Rock as large numbers of depositors sought to withdraw their funds.

318.2

For the avoidance of doubt, it is denied that the matters stated in paragraph 110.2.2
constituted significant changes in the market environment.

318.3
319.

Save as aforesaid, paragraph 110.2.2 is admitted.

As to paragraph 110.2.3:
319.1

It is not admitted that UBS, Citibank or Bank of America were "comparable to the
ABN AMRO businesses acquired by RBS" as alleged.

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319.2

It is admitted that they had taken large write-downs on credit market exposures and
that the said write-downs were substantially larger in absolute terms than those
recorded by RBS in the 2007 Accounts.

319.3

It is not admitted, however, that the assets written down by those banks were
properly comparable to the assets giving rise to the write-downs contained in the
2007 Accounts.

319.4

No admissions are made with regard to the position of other investment banks.

320.

Paragraph 110.3 is admitted.

321.

As to paragraph 110.4:
321.1

From March 2008 onwards RBS did not produce separate financial reports or
forecasts for the businesses it acquired from ABN. Forecasts were instead prepared
on a divisional basis and the contribution of the ABN businesses was reflected
within the forecasts for the divisions of RBS to which they had been integrated.

321.2

Parts of the ABN businesses formed part of GTS, which had seen a growth in both
income and profit during the first quarter of 2008. Over that period, transaction
volumes had increased and the division had obtained new mandates in cash
management, trade finance and financial institutions. By the time of the Rights
Issue, the rolling forecasts for GTS's performance in 2008 had been revised
modestly upwards with RBS, predicting further growth for 2009.

321.3

Other parts of the ABN businesses formed part of other divisions, including GBM.
GBM had made a good start on exploiting the businesses acquired from ABN and a
significant number of deals had already been recorded from combining the product
expertise and customer franchises of the two businesses. GBM had been acutely
adversely affected by credit market conditions (as the Prospectus specifically
acknowledged, see pages 7, 24 8 and 29). In particular, certain structured credit
portfolios of the investment banking assets acquired from ABN had declined in
value due to credit market losses experienced in March 2008 incurred in Q1, and
RBS had concluded that they were likely to suffer further losses in 2008. RBS
properly disclosed these conclusions in the Prospectus by, amongst other things,
recognising estimating 2.3 billion estimated write-downs in respect of credit

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market positions acquired from ABN. However, RBS anticipated a market recovery
in 2009 and projected strong growth in Credit Markets and Equities for that year.
321.4

In the circumstances it is denied that RBS's internal reporting showed that the longterm value of the ABN businesses was impaired, or that it constituted an indication
of impairment capable of triggering a goodwill impairment review given that (a)
RBS had conducted an impairment review at the previous reporting date of 31
December 2007; (b) the next reporting date was not until at 30 June 2008; and (c)
RBS's regular annual date for reviewing goodwill was not until September 2008.

321.5

Save as aforesaid, paragraph 110.4 is denied. Paragraphs 308N to 308P above are
repeated herein.

322.

As to paragraph 110.5:
322.1

Paragraph 321 is repeated. It is admitted that the market and economic deterioration
had adversely affected parts of the businesses acquired from ABN. Save that it is
admitted that certain structured credit assets in GBM had been written down, it is
denied that the realisable value (fair value less costs to sell) of the businesses
acquired from ABN had been reduced. Save as aforesaid, the first sentence of
paragraph 110.5 is denied.

322.2

It is denied that there had been a general increase in long term rates over the period
from the acquisition of ABN until the Closing Date. Over that period, the rates were
volatile.

322.3

The Claimants have failed to specify the type of RBS's capital of which the cost is
alleged to have increased. No admissions are made in relation thereto.

322.4

It is admitted that ABN had significant credit market exposures. To the extent that
the allegation that it derived "much of its cash flows" from such exposures is
intended to mean that a significant proportion of those cash flows derived from that
source, that allegation is denied.

322.5

It is admitted that the credit markets had seriously deteriorated in the period leading
up to the Rights Issue. This was specifically acknowledged in the Prospectus which
referred (at pages 7 and 24) to the "severe and increasing deterioration in market

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conditions" and "the increased likelihood that the credit markets could remain
difficult for some time". Between 22 April 2008 and 6 June 2008, the credit markets
continued to deteriorate in a manner consistent with the statements in the
Prospectus.
322.6

Save that the Prospectus (at page 26) stated the capital effect of the total estimated
write-downs to be 4.3 billion net of tax and 5.9 billion before tax, Tthe last
sentence of paragraph 110.5 is admitted. Save as aforesaid, paragraph 110.5 is
denied.

323.

The first sentence of paragraph 110.6 is admitted. The second sentence is denied. For the
reasons given at paragraph 313 above, RBS was not required to test for impairment. It is
noted that when the goodwill arising on the acquisition of ABN was tested for impairment in
the course of preparing RBS's half-year results it was found to be unimpaired.

324.

Paragraph As to paragraph 110.7:

324.1

It is admitted that the 2007 Accounts contained the quoted passages.

324.2

It is denied that the reasonable interpretation of those passages was that ABN's
goodwill had been allocated to CGUs, or that the 2007 Accounts were misleading or
omitted to state the methodology used for the valuation of the ABN goodwill. The
Defendants will refer to the 2007 Accounts for their full terms and effect. In
particular (but without limitation):
(a)

The 2007 Accounts stated on page 138 that "Goodwill is the excess of the
cost of an acquired business over the fair value of its net assets."

(b)

Under the heading "Impairment review" on page 163, RBS then stated that,
following the acquisition of ABN on 17 October 2007, it had conducted a
preliminary allocation of fair values, and recognised goodwill in ABN of
23.3 billion as at the date of the acquisition.

(c)

At this point, the text cross-referred to Note 35, which contained a table
setting out the calculation of preliminary fair values. As to this:
(i)

This table showed in parallel columns: (i) the pre-acquisition

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carrying amounts which RBS had attributed to ABN's assets and

liabilities; (ii) the provisional fair value adjustments to those
amounts which RBS had concluded should be made; and (iii) the
provisional acquisition values which RBS now recognised, having
applied those adjustments.
(ii)

It was clear from this table that the adjustments to pre-acquisition

values resulted in a 3.932 billion increase to the provisional fair
value of ABN's net identifiable assets, when valued as at the date of
acquisition. In line with the principle (as stated on p.138) that
goodwill is the difference between the cost of an acquired business
and the fair value of its net assets, the goodwill was calculated by
subtracting the value of the net assets from the consideration paid,
which (following adjustments), yielded a provisional figure for
goodwill at the time of acquisition of 23.255 billion.

(iii)

The table informed the reader that the goodwill arising on the
acquisition was attributable to anticipated cost and revenue
synergies and long-term earnings potential of the acquired
businesses.

(d)

The text on page 163 then proceeded to state that, having recognised the
value of the goodwill as at the date of acquisition: "Subsequent events have
not significantly affected the assumptions and estimates supporting the
consortium's investment decision and the Group has therefore concluded
that there is no impairment of the goodwill recognised at 31 December
2007."

(e)

The methodology RBS had adopted was clear and was in keeping with IAS
36 which, as above, allowed RBS to test ABN's goodwill for impairment by
reference to "the arm's length price the entity paid to acquire the unit,
adjusted for disposals costs and for any changes in economic circumstances
between the transaction date and the date at which the estimate is made."

324.3

Save as aforesaid, Pparagraph 110.7 is denied. The goodwill relating to RBS's share
of the ABN businesses was not assessed on the basis of price/earnings ratios.

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325.

As to the first two sentences of Pparagraph 111 is denied.:

325.0

It is denied that RBS was required to conduct an impairment review between the
publication of the 2007 Accounts and the Closing Date. Paragraph 313.4 above is
repeated herein.

325.1

It is specifically denied that at the time of the Rights Issue the goodwill was
materially impaired and needed to be written down.

325.2

RBS will rely on the fact that Aan impairment test was conducted in the course of
preparing the 2008 Interim Results and concluded that the goodwill remained
unimpaired. This was a reasonable conclusion at the time that it was reached.

325.3

Goodwill was written down by 7.7 billion in the 2008 Accounts. However, as the
2008 Accounts specifically recorded (at p.221), the write-downs were a response to
"unprecedented market conditions".

During the second half of 2008, a global

financial crisis fundamentally altered expectations as to future activity both within

the financial services sector and the wider economy, both within the UK and
overseas.
325A. As to the second final sentence of paragraph 111 and the sub-paragraphs contained therein:
325A.0 Paragraph 111.1 is denied. If RBS had undertaken an impairment review between
the publication of the 2007 Accounts and the Closing Date, it would not have been
conducted for RBS's share in ABN as a separate cash-generating unit. By the
Prospectus Date, RBS had allocated the goodwill from the ABN acquisition to
particular divisions of its business (which were cash generating units for the
purposes of IFRS) and goodwill would accordingly have been evaluated at
divisional level (as occurred in the impairment review undertaken at the time of the
2008 Interim Results).
325A.0A Paragraph 111.2 is denied. Without prejudice to the generality of the foregoing:
(a)

If RBS had undertaken an impairment review between the publication of the

2007 Accounts and the Closing Date, in order to determine whether goodwill
was impaired RBS would have had to assess whether the "recoverable
amount" of goodwill was less than the amount recorded on the balance sheet.

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(b)

Pursuant to IAS 36, the "recoverable amount" of an asset is the higher of its
"value in use" and its "fair value less costs to sell". Therefore, goodwill
would only have been impaired if the "recoverable amount" of goodwill was
less than the amount recorded on the balance sheet, both when the "value in
use" was used to calculate the "recoverable amount" and when the "fair value
less costs to sell" was used.

(c)

It is denied that both the "fair value less cost to sell" approach and the "value
in use" approach would have shown that the "recoverable amount" of
goodwill was less than the amount recorded on the balance sheet. At the very
least, the "value in use" approach would have shown that the recoverable
amount of goodwill was not less than the amount recorded on the balance
sheet, and therefore that goodwill was not impaired. The Defendants will
rely on the fact that goodwill was found not to have been impaired in the
2008 Interim Results, using the "value in use" approach to calculate the
"recoverable amount" of goodwill.

325A.0B Paragraph 111.3 is denied. Goodwill was not materially impaired and did not need
to be written down. Paragraph 325 above is repeated herein.
325A.0C If, which is denied, an impairment review had been undertaken by RBS between the
publication of the 2007 Accounts and the Closing Date using the methodology
pleaded above, and had shown that goodwill was materially impaired and needed to
be written down, save that it is admitted that the write-down would have indicated to
investors that the future profitability was not as had been anticipated by RBS, it is
denied that a write-down would have had the impact alleged by the Claimants in
paragraphs 111.4 and 111.5. Without prejudice to the generality of the foregoing:
(a)

A goodwill write-down is unlikely to have had an impact on profits and

future dividends since the market generally will have already anticipated a
goodwill write-down prior to any write-down actually being taken.

(b)

Furthermore, it is denied that a goodwill write-down would necessarily have

been a determining factor, or changed investors' views as to the wisdom of
the acquisition or the price paid by RBS. Indeed, many analysts disregarded

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goodwill, which is a non-cash item and therefore does not feature in the NPV
calculation when valuing a bank.
(c)

It is also denied that a write-down to goodwill would have raised "serious

question-marks" with investors as to the "competence and continued viability
of the management personnel of RBS who completed the deal but were still
at the helm". If a write-down had been necessary (which it was not) it might
have been small, seen as of limited significance and/or attributed to market
conditions, rather than erroneous decision-making by senior management. A
write-down to goodwill would not have prevented RBS from making the
statements it did in the Prospectus as to the merits of the purchase of ABN;
those statements would not have been rendered untrue or misleading simply
because of a write-down to goodwill.

325A.1 It is admitted that an RBS Group Finance Capital Ratios paper dated 18 March 2008
reported that work on fair value adjustments relating to ABN was in progress with a
placeholder estimate of EUR 1 billion. The placeholder was included solely for
prudential reasons and reflected the fact that (in accordance both with normal
accounting practice and the clear statements that appeared on pages 163 and 203
(Note 35) of the 2007 Accounts) the fair values that RBS had attributed to ABN's
assets and liabilities as at the date of acquisition remained, at that stage, provisional
rather than final.
325A.2 The Claimants' reliance on this document in support of their case on goodwill is
misconceived: the paper made no mention of an impairment of goodwill, which
would in any event have had no cash impact and minimal impact on RBS's capital
ratios.
325B. Save as aforesaid, paragraph 111 is denied.
326.

As to paragraphs 112.1 and 112.2:

326.1

It is admitted that at the time of the Rights Issue RBS did not state in the Prospectus
(or elsewhere) that the goodwill was materially impaired and needed to be written
down.

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326.2

It is denied that RBS was under an obligation to do so. The goodwill was not
materially impaired and did not need to be written down. Indeed, it is noted (as
above) that ABN's goodwill was tested for the purposes of the 2008 Interim Results
and was found to be unimpaired. Accordingly, it is denied that there had been a
significant change in the financial position of ABN.

326.3

In any event, it is noted that the second sentence of paragraph 112.1 proceeds on the
assumption that RBS was obliged to undertake an impairment review and to then
report on its results in the Prospectus, even though no such review was required by
any applicable accounting rules or practices. This assumption is misconceived.

326.4

Further, if (which is denied) the ABN goodwill was materially impaired and/or
needed to be written down significantly, it is denied that this was necessary
information. Investors and analysts were able to (and did) form their own views
about RBS's future profits.

326.5
327.

Save as aforesaid, paragraphs 112.1 and 112.2 is are denied.

As to paragraph 112.23:
327.1

It is admitted that RBS did not formally test for impairment at the time of the Rights
Issue. Paragraph 313 above is repeated.

327.2

It is denied that on a reasonable interpretation of the accounting rules RBS was

required to carry out an impairment review at that time. Paragraphs 310 and 313 are
repeated.

327.3

It is noted that RBS did not indicate in the Prospectus that an impairment review had
been carried out in the course of preparing the Rights Issue.

328.

Save as aforesaid, paragraph 112 and its sub-paragraphs are denied.

Alleged overvaluation of, or overpayment for, ABN businesses

329.

As to the first sentence of paragraph 113.1:

329.1

Save that RBS had concluded that the value of certain assets acquired from ABN
had declined (a fact which RBS disclosed in the Prospectus by recognising

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substantial additional write-downs), it is denied that it was reasonably apparent by

the Prospectus Date 30 April 2008 (or the Closing Date 6 June 2008) that the
businesses acquired from ABN were materially overvalued; that their value had
declined, or that the associated goodwill would need to be written down
significantly. As set out above, the goodwill was assessed for impairment at 30 June
2008 and found to be unimpaired.
329.2

Therefore, it is admitted that the Prospectus did not contain statements to this effect
but it is denied that it should have done so.

329A. As to the second and third sentences of paragraph 113.1:

329A.1 Point (I) is embarrassing for vagueness, the Claimants have failed to identify: (i)
which "risk management controls" they are referring to; (ii) what is meant by
"proper" controls; or (iii) how and in what respects ABN's actual arrangements are
said not to have been "proper". In the circumstances, the Defendants are unable to
plead to those matters and no admissions are made as a result. However, even if any
relevant controls were not "proper" in any material respect, it is denied that this
indicated: (a) that the ABN businesses were overvalued in RBS's books; (b) that
their value had declined; (c) that ABN's goodwill needed to be written down; or (d)
that any of these matters were "reasonably apparent" to RBS at the time of the
Rights Issue. Save as aforesaid point (I) is denied.
329A.2 As to point (II), it is admitted that: (i) substantial write-downs were estimated on
some of ABN's super senior CDO exposures were written-down at the time of the
Rights Issue; and that (ii) those estimated write-downs were proportionately larger
than those estimated taken on RBS's super senior CDOs. These write-downs were
fully disclosed in the Prospectus. Paragraphs 197 and 302 above are repeated. Save
as aforesaid, point (II) is denied and it is specifically denied that the taking of the
write-downs indicated: (a) that the ABN business was overvalued in RBS's books;
(b) that their value had declined; (c) that ABN's goodwill needed to be written
down; or (d) that any of these matters were "reasonably apparent" to RBS at the
time of the Rights Issue.
329A.3 As to points (III) and (IV): paragraph 308D.1 above is repeated in relation to the
origin and purpose of Projects Hercules and Shield. Save as aforesaid, points (III)

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and (IV) are denied. It is specifically denied that the commissioning of Projects
Hercules and Shield indicated: (a) that the ABN businesses were overvalued in
RBS's books; (b) that their value had declined; (c) that ABN's goodwill needed to be
written down; or (d) that any of these matters were "reasonably apparent" to RBS at
the time of the Rights Issue.
329A.4 As to point (V), save that an integration of the scale and complexity in question, was
necessarily challenging and that the Rights Issue was occurring in the context of
adverse market conditions (as acknowledged in the Prospectus), it is denied that the
integration was encountering "significant difficulties". DNB approval enabled RBS
to further progress the integration programme prior to the announcement of the
Rights Issue. It is admitted that certain individuals had left ABN's employment, as
particularised in the chronology in the Draft GIA Reports, ABN AMRO Report,
Appendix 1. It is denied that this constituted a "significant difficult[y]" with the
integration, as to which paragraph 308L.3 is repeated. It is admitted that in the Draft
GIA Reports, GIA reported that it had been told that certain staff had become
demotivated. No admissions are made as to who made this observation or whether
it is actually correct. Save as aforesaid point (V) is denied. It is specifically denied
that the progress of the integration indicated: (a) that the ABN businesses were
overvalued in RBS's books; (b) that their value had declined; (c) that ABN's
goodwill needed to be written down; or (d) that any of these matters were
"reasonably apparent" to RBS at the time of the Rights Issue.
329A.5 As to point (VI), paragraph 308E above is repeated. Save as aforesaid, point (VI) is
denied. It is specifically denied that arrangements in respect of the integration of
ABN's trading book indicated: (a) that the ABN businesses were overvalued in
RBS's books; (b) that their value had declined (save to the extent of the write-downs
acknowledged in the Prospectus); (c) that ABN's goodwill needed to be written
down; or (d) that any of these matters were "reasonably apparent" to RBS at the
time of the Rights Issue.
329B. As to the final sentence of paragraph 113.1, paragraphs 308 and 308A to 308L above are
repeated.
329C. Save as aforesaid, paragraph 113.1 is denied.

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330.

As to paragraph 113.2:
330.1

It is admitted that, as above, prior to acquiring ABN, the Consortium (including

RBS) was given access to only limited due diligence comprising (a) information on
LaSalle accessible via an online data room and (b) two lever arch folders and one
CD ROM.

330.2

Whilst it is admitted that the bulk of the due diligence was undertaken prior to 3
May 2007, Iit is denied that RBS's review of this the material referred to in
paragraph 330.1 above was confined to the week between 30 27 April 2007 and 3
May 2007, or that no substantial due diligence was conducted after 3 May 2007. It
is further denied that the due diligence exercise was confined to reviewing material
provided by ABN. RBS scrutinised the large amount of publicly available material
concerning ABN's financial position. Paragraph 290 above is repeated.

330.3

It is admitted that the FSA Report contained the words reproduced at lines 7-11 of
paragraph 113.2.

This observation was made with hindsight and involved the

retrospective application of regulatory expectations prevailing in December 2011 to

events which occurred in 2007. It is denied that RBS should have reached this view
and disclosed it to investors at the time of the Rights Issue. As above, the FSA
report repeatedly acknowledged that the due diligence RBS obtained had been "in
line with standard practice for contested takeovers" (p.4098) had reflected "market
practice" at the time (p.33) and was "typical of contested takeovers" (p.8).
330.4

At the time of RBS's acquisition of ABN it was a characteristic feature of contested

takeovers that purchasers were given limited due diligence material. As to which:
(a)

Self-evidently, this placed limitations on a purchaser's knowledge of his

target's circumstances and any limitations in that regard necessarily affected
the degree of certainty with which a purchaser could value the target's assets
and liabilities so as to mitigate the risk of overvaluation or overpayment.

(b)

RBS was subject to these limitations, and the risks to which they gave rise,
just as Barclays was when making its offer for ABN, and as any other
purchaser in RBS's position would have been. The assertion that these risks

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were "significant" is embarrassingly vague and is not admitted. The risks

were material and were recognised by RBS as such.
(c)

As the FSA concluded in the FSA Report, even had it been possible to carry
out a full due diligence process, the RBS Board might still have been
satisfied with the outcome and decided to proceed with the acquisition of
ABN (p. 179).

(d)

When judged by the standards then prevailing, it is denied that, in the period
leading up to the acquisition, RBS had been unable to provide the FSA with
sufficiently complete, accurate or timely data on its likely impact. The FSA
did not reach that view at the time, and its comments to this effect in the
FSA Report (published more than 3 years later) were an ex post facto
assessment shaped by hindsight. It is not admitted, and so far as relevant
(although the relevance is specifically denied), the Claimants are required to
prove that had further due diligence been possible (which it was not) this
would have altered the information provided to the FSA.

330.4A The Claimants' confirmation in the final sentence of paragraph 113.2 that (i) they do
not allege that RBS ought to have performed any different due diligence and (ii)
they do not challenge the adequacy of the due diligence performed by RBS, is noted.
330.5

As noted in the FSA Report, "It was well known to investors, regulators and
observers at the time [of the acquisition] that the consortium conducted only a
limited due diligence review of ABN AMRO" (FSA Report, p.407). The limitation in
the due diligence was clearly stated in (amongst other places) the listing particulars
dated 20 July 2007 prepared in connection with the acquisition of ABN in
particular:
(a)

In the summary under the heading "Risk Factors" at page 12:

"the Banks [defined as RBS, Fortis and Santander] have only conducted a
limited due diligence review of ABN AMRO and may become subject to
unknown liabilities of ABN AMRO";

(b)

In Part II on "Risk Factors" at page 15:

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"The Banks have conducted only a limited due diligence review of ABN
AMRO and, therefore, RBS may become subject to unknown liabilities of
ABN AMRO, which may have an adverse effect on RBS's financial
condition and results of operations.
In making the Offers and determining their terms and conditions, the Banks
have relied on publicly available information relating to ABN AMRO,
including periodic and other reports for ABN AMRO, filed with or furnished
to the SEC on Form 20-F and Form 6-K. The Banks have also conducted a
due diligence review of limited additional information about ABN AMRO.
This information in relation to ABN AMRO has not been subject to comment
or verification by ABN AMRO or the Banks or their respective directors. As
a result, after the completion of the Offers, RBS may be subject to unknown
liabilities of ABN AMRO, which may have an adverse effect on RBS's
financial condition and results of operations";
(c)

In Part VII on "Plans and Proposals for ABN AMRO" at page 42:
"Following completion of the Offers, the Banks will work with the
management of ABN AMRO to verify and expand the information received
from, and assumptions made on the basis of, the limited due diligence
access granted before announcement of the Offers";

(d)

In Part VII on "Plans and Proposals for ABN AMRO" at page 45:
"During the first 45 days after completion of the Offers, GBM will work with
the management of ABN AMRO to verify and expand the information
received and assumptions made on the basis of the limited due diligence
access granted before completion".

330.6

In the circumstances, it is denied that the limitations in the due diligence undertaken
prior to the ABN acquisition was information that RBS was required to disclose
pursuant to s. 87A of FSMA (or at all).

In any event, the passages cited at

paragraphs 330.5(c) and 330.5(d) above were incorporated in to the Prospectus

under Part XIII, page 138. As a result, RBS specifically recorded that, in purchasing
ABN, it had been given access to only limited due diligence and that it had been
forced to make assumptions based on that material.
330.7

Save as aforesaid, paragraph 113.2 is 113 and its sub-paragraphs are denied.

330A. As to paragraph 113.3, it is denied that it was clear to RBS, either by the Prospectus Date or
by the Closing Date, that RBS had overpaid for ABN. RBS continued to believe at the
Prospectus Date and at the Closing Date, that the ABN transaction would deliver good, longterm value enhancement" (as had been stated in the 2007 Accounts at page 8) and as pleaded

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at paragraph 308SS above, confidence in the opportunities the acquisition of ABN offered to
RBS had increased since the acquisition. RBS therefore believed that the underlying business
case for the acquisition remained robust and the price it paid remained justifiable. Without
prejudice to the generality of the foregoing, the Defendants plead more particularly to the subparagraphs of paragraph 113.3 as follows:
330A.1 The first sentence of paragraph 113.3.1 is admitted. As to the second sentence of
paragraph 113.3.1, it is admitted that:
(a)

At the time of the public offer in July 2007, LaSalle was to be sold to Bank of
America for 11.1 billion and the balance to be paid by RBS for the
remainder of ABN-R was 16.1 billion; and

(b)

By the completion date in October 2007, share price and other movements
and the receipt by ABN-R of the Global Clients Brazil proceeds, resulted in
the net price payable by RBS for the remainder of ABN-R being reduced to
14.3 billion.

Save as aforesaid, the second sentence of paragraph 113.3.1 is denied.

330A.2 As to paragraph 113.3.2, it is denied that the value of the parts of ABN (excluding
the LaSalle sale proceeds) which RBS acquired was less than the price RBS paid for
those parts, 14.3 billion. The price paid by RBS was based on financial modelling
that indicated an expected internal rate of return of 15.5%, a return on invested
capital of 13.2% and EPS accretion of 7% in 2010. RBS's proposed purchase price
and the calculations in respect thereof were reviewed by Merrill, which concluded
that the consideration RBS was proposing to pay in respect of the parts of ABN
which it was to acquire was fair to RBS from a financial point of view.
330A.3 As to the first sentence of paragraph 113.3.3, it is admitted that the share price of a
number of banks fell between May 2007 and 17 October 2007, the date of the
completion of the acquisition. However, the picture was not uniform. HSBC's
share price rose from 945.50p to 964.00p between 3 May 2007 and 17 October
2007, Goldman Sachs' share price rose from US$221.56 to US$227.62, Santander's
share price rose from EUR13.20 to EUR14.17, and Standard Chartered's share price
rose from 1,545.00p to 1,700.00p in the same period. The falls in value were

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predominantly caused by issues in the US mortgage market, in particular in relation

to sub-prime borrowers, and were in any event generally considered at the time to be
temporary. The long-term benefits anticipated to accrue to RBS from the parts of
ABN which it was to acquire outweighed the near term challenges posed by the
prevailing market conditions, therefore RBS decided to proceed with the acquisition.
Save as aforesaid, the first sentence of paragraph 113.3.3 is not admitted.
330A.4 The second sentence of paragraph 113.3.3 is embarrassingly vague in that it fails to
identify what "European banks" are being referred to here as "relevant";
accordingly, it is not admitted and the Claimants are put to proof in relation thereto.
Breaches of section 90 of FSMA
331.

As to paragraph 114 above:

331.1

It is denied that the Prospectus contained any untrue or misleading statements in

relation to ABN. Without prejudice to the generality of this denial, RBS pleads
more particularly to the sub-paragraphs of paragraph 114 as follows.

331.2

Paragraph 114.1 and 114.2 are is denied. The trading and financial position of
ABN-R (as to which paragraphs 308N to 308P above are repeated herein) did not
render any of the statements in the Prospectus misleading. At the time of the Rights
Issue the goodwill referable to ABN did not need to be written down, whether to a
significant extent or at all. Alternatively, it was not reasonably apparent that this
was required.

331.2A Paragraph 114.2 is denied. At the time of the Rights Issue the goodwill referable to
ABN did not need to be written down, whether to a significant extent or at all. It is
denied that ABN-R's trading and financial position was or had been "disastrous",
and denied, for the reasons pleaded at paragraphs 308N to 308P above, that any
additional disclosures were required.
331.3

Paragraph 114.3 is denied. It was not reasonably apparent that the businesses
acquired from ABN were overvalued in RBS's books and the decline in value of
certain assets acquired from ABN was properly acknowledged by the additional
write-downs recognised in the Prospectus.

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Further, RBS had not encountered

"significant difficulties" with the ABN integration: paragraph 329A.4 above is

adopted and repeated.
331.4

Paragraph 114.4 is denied. The acquisition of ABN had been the subject of very
thorough analysis and debate. The limitations in the due diligence RBS had been
able to undertake were well known and were in any event referred to in the
Prospectus.

331.5

Paragraph 114.5 is denied. The 2007 Accounts were prepared in accordance with
IFRS.

331.6

Paragraph 114.6 is denied. The value of ABN's goodwill was unimpaired. In any
event, given that there was no obligation to test for impairment under IAS 36 and
RBS believed that that the long-term value of the ABN businesses had not
deteriorated.

331.7

As to paragraph 114.7:
(a)

Paragraphs 227 195 to 236H, 299 to 308L 306, 308NN to 308PP, 309 and,
314 to 324 and 329 to 330A are repeated.

(b)

Out of completeness, if the Claimants intended to quote directly from Part

XII, paragraph 23.2 of the Prospectus (the intention is unclear since
paragraph 114.7 contains a single, unmatched inverted comma), then the
Claimants' quotation is not accurate.

(c)

Save as aforesaid paragraph 114.7 is denied. It is specifically denied that

the no significant change statements referred to were was either misleading
or untrue.

331.7A As to paragraph 114.8, paragraph 308WW above is repeated herein.

332.

For the avoidance of doubt, if (notwithstanding the matters set out above) anything said by
RBS in the Prospectus concerning ABN is found to have been incorrect, the Defendants
reserve the right to argue that the inaccuracy or mistake relevant statement would not have
been material to the marketinvestors and was not therefore caught by s.90(1)(b)(i) of FSMA.

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333.

As to paragraph 115:
333.1

In relation to the matters pleaded at paragraphs 105B, to 105E 105L 105C, 112 and
110 to 113, paragraphs 300299 to 308L 308PP and 326 314 to 330.7 330A above
are repeated;

333.2

It is specifically denied that RBS failed to disclose any "necessary information",

within the meaning of s.87A(1)(b) and 87A(2) of FSMA.

333.3

It is further specifically denied that RBS failed to disclose any information that was
required to be included pursuant to s.87A(1)(c) of FSMA or Annexes I or III of the
Prospectus Regulation.

333.4
334.

Save as aforesaid, paragraph 115 (including its sub-paragraphs) is denied.

As to paragraph 116:
334.1

It is admitted that RBS did not provide a supplementary prospectus;

334.2

It is denied that a supplementary prospectus was required.

334.3

In relation to the matters pleaded at paragraphs 105B to 105L and 110 112 to 113,
paragraphs 326 to 330.7 299 to 308PP and 314 to 330A are repeated.

334.3A It is denied that any of the Director Defendants were in breach of section 87G(5) or
are liable to pay compensation under section 90(4) of FSMA.
334.4

Save as aforesaid, paragraph 116 (including its sub-paragraphs) is denied. It is

specifically denied that RBS was in breach of s.87G(2) and s.90(4) of FSMA.

335.

Paragraph 116A is denied.

335.1

It is denied that the Prospectus had a "positive content or tone": the Prospectus
adopted an appropriately balanced approach to the material issues.

335.2

It is denied that had RBS recognised "any impairment" this would necessarily have
affected the overall effect of the offer presented by the Prospectus, or the market's
reaction to it. Many analysts disregard goodwill which is a non-cash item and
therefore does not feature in the NPV calculation when valuing a bank.

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335.3

It is denied that "any impairment" would in all likelihood have led to the departure
of RBS's senior management. If a write-down had been necessary (which it was
not) it might have been small, seen as of limited significance and/or attributed to
market conditions, rather than erroneous decision-making by senior management.

335.4

It is denied that if RBS had recognised any impairment this would have prevented
the Rights Issue from proceeding.

RBS's management, risk controls and management information systems

335A. The Claimants' case in Section K is that the Prospectus was misleading or omitted necessary
information concerning RBS's risk management and controls practices, management
information and reporting, the ability and skill of senior individuals and governance ("RBS's
risk management systems") systems or controls as they stood at the time of the Rights Issue.
That case is denied.
335B. For the avoidance of doubt, the Defendants note that the Claimants' case is not, therefore,
directed to the efficacy, adequacy or otherwise of those arrangements RBS's risk management
systems prior to 2008 or after 6 June 2008 and the Defendants plead below to Section K this
section on that basis. Nothing in the pleas below this Re-Re-Amended Defence should be
interpreted as qualifying or departing from the above.
336.

Paragraph 117 is noted; paragraphs 109, 164, 165 and 285 above are repeated.

337.

Paragraphs 118 and 119 are is admitted.

338.

It is admitted that the statements quoted at paragraph 119A.1 appeared on pages 11, 12 and 30
of the Prospectus. The relevant context for the quoted statements on pages 11 and 12 was as
follows:
338.1

Both statements appeared within a section entitled "Risk Factors".

338.2

The first statement was preceded by a summary of the market risks to which RBS
was subject. RBS then cautioned investors that:
"While RBS has implemented risk management methods to mitigate and control
these and other market risks to which it is exposed, it is difficult to predict with
accuracy changes in economic or market conditions and to anticipate the effects

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that such changes could have on RBS's financial performance and business
operations."
338.3

The second statement appeared in a discussion of the importance of capital to RBS's

business and regulatory obligations. RBS then cautioned investors that:
"Although RBS mitigates the risk of not meeting capital adequacy requirements by
careful management of its balance sheet and capital, through capital-raising
activities, disciplined capital allocation and the hedging of capital currency
exposures, any change that limits its ability effectively to manage such resources
(including, for example, reductions in profits and retained earnings as a result of
write-downs or otherwise, delays in the disposal of certain assets or the inability to
syndicate loans as a result of market conditions or otherwise) could have a material
adverse impact on its financial condition and regulatory capital position."

338.4

Following both statements on pages 11 and 12 were further risk warnings, including
the following on pages 14-15 of the Prospectus, which provided as follows:
"Proposals for the restructuring of ABN AMRO are complex and may not realise
the anticipated benefits for RBS.
The restructuring plan in place for the integration and separation of ABN AMRO
into and among the businesses and operations of the Consortium Banks is complex
involving substantial reorganisation of ABN AMRO's operations and legal
structure. In addition, it contemplates activities taking place simultaneously in a
number of businesses and jurisdictions. Implementation of the reorganisation and
the realisation of the forecast benefits within the planned timescales will be
challenging.

Execution of the restructuring requires management resources

previously devoted to RBS businesses and the retention of appropriately skilled ABN
AMRO staff. RBS may not realise the benefits of the acquisition or the restructuring
when expected or to the extent projected."
339.

As to paragraph 119A.2, it is admitted that the Prospectus explained (on pp. 7, 24 and 26) that
the assessment of RBS's credit market exposures had been based on what the RBS Board
considered to be prudent assumptions. The Prospectus also explained (amongst other things)
that these estimates rested upon "a number of assumptions and judgements", that they were

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"subject to risks and uncertainties", and that "recent market volatility and illiquidity ha[d]
made it difficult to value certain of RBS's exposures" (pp. 18 and 12). RBS cautioned
investors that changes in conditions could result in "significant changes" to the value of these
exposures which could in turn "require RBS to recognise further write-downs or realise
impairment charges, any of which may adversely affect its financial condition and results of
operations" (p.12).
340.

As to paragraph 119A.3, it is admitted that the Prospectus stated:

340.1

That it was RBS's policy to (amongst other things) maintain a prudent relationship
between the capital base and the underlying risks of the business (p.72); and

340.2

That RBS's liquidity management focused on (amongst other things) controlling

within prudent limits the risk from the mismatch of maturities across the balance
sheet and from undrawn commitments and other contingent obligations (p.73).

341.

The Prospectus also relevantly informed investors that:

"Liquidity risk is inherent in RBS's operations" (pp. 10, 13);

"[...] financial markets are sometimes subject to significant stress conditions where
steep falls in perceived or actual asset values are accompanied by a severe
reduction in market liquidity, as exemplified by recent events affecting asset-backed
CDOs, the US sub-prime residential mortgage market and leveraged finance"
(p.12); and

"RBS's ability to access sources of liquidity during periods of liquidity stress (such
as have been experienced in recent months), including through the issue or sale of
complex financial and other instruments, may be constrained as a result of current
and future market conditions" (p.13).

341A.

It is admitted that the statements quoted at paragraph 119A.4 appeared on page 73 of the
Prospectus. The paragraph following those statements was as follows: "Further disclosures
about the Group's management of capital resources and liquidity are set out in paragraph 5
of Part I of this document and in the Annual Report and Accounts for 2007 on pages 69 and
80 to 83, respectively, which are incorporated herein by reference."

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341B.

It is admitted that the statement quoted at paragraph 119A.5 appeared on page 119 of the
Prospectus. The full description given for the responsibilities of the audit committee was as
follows:
"The audit committee is responsible for:

342.

assisting the Board in discharging its responsibilities and in making all relevant
disclosures in relation to the financial affairs of the RBS Group;
reviewing accounting and financial reporting and regulatory compliance;
reviewing the RBS Group's systems of internal control; and
monitoring the RBS Group's processes for internal audit, risk management and
external audit."

Save as aforesaid, paragraph 119A (including its sub-paragraphs) is denied.

342A. As to paragraph 119B:

342A.1 It is admitted that the statement quoted at paragraph 119B.1 appeared on page 32 of
RBS's 2007 Accounts. Immediately following that statement, RBS's 2007 Accounts
also explained that "it is difficult to predict with accuracy changes in economic or
market conditions and to anticipate the effects that such changes could have on the
Group's financial performance and business operations."
342A.2. It is admitted that the statement quoted at paragraph 119B.2 appeared on page 70 of
RBS's 2007 Accounts, which also explained that the Board is supported by the
GAC, Advances Committee ("AC") and GEMC.
342A.3. It is admitted that the statement quoted at paragraph 119B.3 appeared on page 70 of
RBS's 2007 Accounts, which also explained that the GEMC is supported by
the GRC, GCC and GALCO.
342A.4. Paragraphs 119B.4 and 119B.5 are admitted.
342A.5 It is admitted that the statements quoted at paragraphs 119B.6 and 119B.7 appeared
on pages 70 and 71 of RBS's 2007 Accounts. Those statements were separated by a
description of the "main risks facing the Group" which "should be considered in
conjunction with the Risk factors set out on pages 32 and 33 which could affect the
Group's performance." The risks were described on page 71 of RBS's 2007
Accounts as credit risk, funding and liquidity risk, market risk, pension obligation
risk, equity risk, insurance risk, operational risk and regulatory risk.

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342A.6. Paragraphs 119B.8, 119B.9 and 119B.10 are admitted.

342A.7 It is admitted that the statement quoted at paragraph 119B.11 appeared on page 86
of RBS's 2007 Accounts but the Claimants have omitted part of the statement,
which reads, "VaR, like all interest rate risk measures, has limitations when applied
to retail banking books and the management of Citizens Financial Group's interest
rate exposures involves a number of other interest rate risk measures and related
limits. Two measures that are reported to Citizens ALCO and the Board are:

The sensitivity of net accrual earnings to a series of parallel movements in interest

rates; and

Economic value of equity ("EVE") sensitivity to a series of parallel movements in

interest rates."

342A.8 Paragraphs 119B.12 to 119B.19 are admitted.

342A.9 It is admitted that the statement quoted at paragraph 119B.20 appeared on page 102
of RBS's 2007 Accounts. On the same page, prior to that statement, the text read:
"In devising internal controls, the Group has regard to the nature and extent of the
risk, the likelihood of it crystallising and the cost of controls. A system of internal
control is designed to manage, but not eliminate, the risk of failure to achieve
business objectives and can only provide reasonable, and not absolute, assurance
against the risk of material misstatement, fraud or losses". The text subsequent to
the statement quoted at paragraph 119B.20 read: "In addition, the Group's
independent auditors present to the Audit Committee reports that include details of
any significant internal control matters which they have identified. The system of
internal controls of the authorised institutions and other regulated entities in the
Group is also subject to regulatory oversight in the UK and overseas. Additional
details of the Group's regulatory oversight are given in the 'Supervision and
regulation' section on pages 231 to 233."
342A.10 It is admitted that the statement quoted at paragraph 119B.21 appeared on page 102
of RBS's 2007 Accounts. The context that preceded that statement was as follows:
"The Group is required to comply with Section 404 of the US Sarbanes-Oxley Act of
2002 and assess the effectiveness of internal control over financial reporting as of

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31 December 2007. The Group assessed the effectiveness of its internal control over
financial reporting as of 31 December 2007 based on the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in 'Internal
Control Integrated Framework'." Further, that statement was immediately
followed by a paragraph which read, "The Group's auditors have audited the
effectiveness of the Group's internal control over financial reporting and have given
an unqualified opinion."
342A.11 Paragraph 119B.22 is admitted.
342A.12 It is admitted that the statement quoted at paragraph 119B.23 appeared on page 74
of the 2007 Accounts. The next sentence read as follows: "Customers are assigned
an internal credit grade based on various grading models that reflect the probability
of default. All credit ratings across the Group map to a Group level asset quality
scale."
342A.13 It is admitted that the statement quoted at paragraph 119B.24 appeared on page 80
of the 2007 Accounts. The remainder of the paragraph reads: "The management of
liquidity risk within the Group is undertaken within limits and other policy
parameters set by GALCO. Compliance is monitored and coordinated by Group
Treasury both in respect of internal policy and the regulatory requirements of the
Financial Services Authority. In addition, all subsidiaries and branches outside the
UK ensure compliance with any local regulatory liquidity requirements and are
subject to Group Treasury oversight."
342A.14 Paragraphs 119B.25, 119B.26 and 119B.27 are admitted.
342A.15 It is admitted that the statement quoted at paragraph 119B.28 appeared on page 85
of RBS's 2007 Accounts. The context that preceded that statement was as follows:
"The Group undertakes a programme of daily backtesting, which compares the
actual profit or loss realised in trading activity to the VaR estimation. The results of
the backtesting process are one of the methods by which the Group monitors the
ongoing suitability of its VaR model. Backtesting exceptions are those instances
when a realised loss exceeds the predicted VaR. At the 99% confidence level, no
more than one backtesting exception is expected every 100 trading days. The Group

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experienced three backtesting exceptions at the consolidated Group level during

2007."
343.

As to paragraph 120:
343.1

It is admitted that the Prospectus (and the parts of the previous 2007 Accounts
incorporated therein) conveyed the impression that the standard of RBS's
management (which relied, amongst other things, on the skills, controls, and
information systems available to it) was, as a whole, reasonable in all the
circumstances, having regard to the standards and expectations reasonably
prevailing at the time of the Rights Issue. Save as aforesaid, the first sentence is
denied. For the avoidance of doubt, the Prospectus did not convey the impression
that there were no areas of RBS's risk management, systems or controls about which
criticism could reasonably be made, and/or which could reasonably be improved,
and reasonable investors would not have made an assumption to that effect.

343.2

The second sentence is denied. The Prospectus contained numerous qualifications

and express acknowledgments of uncertainty, including the passages cited at
paragraph 339 above. By way of further example (but without limitation), RBS
informed investors that certain financial instruments were valued using internal
valuation models that required RBS to make assumptions, judgements and
estimates, and that "In common with other financial institutions [...] the
assumptions, judgements and estimates RBS is required to make often relate to
matters that are inherently uncertain" (Prospectus, p.12).

344.

As to paragraph 121:Paragraph 120A is denied. Without prejudice to the generality of the

foregoing denial:
344.1

RBS's risk management systems and controls can only relevantly be assessed by
reference to the standards and expectations reasonably prevailing at the time. The
global financial crisis revealed systemic weaknesses in the financial markets and
prompted a re-examination of how, going forwards, risk should be managed by both
regulators and market participants.

These ex post facto developments are not

relevant to what RBS should have known or should have disclosed to investors at
the time of the Rights Issue. References in the Amended Composite Consolidated
Particulars of Claim to whether or not particular systems or conduct were, at the

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material time, "effective", "adequate", "suitable" or "appropriate" have been

approached on this basis.
344.2

It is noted that:
(a)

Throughout 2007 and 2008 RBS was subject to on-going regulatory

supervision by the FSA. This involved the FSA supervising the adequacy of
RBS's management and control arrangements, including (but without
limitation) under the FSA's risk assessment process, ARROW, Advanced
Risk-Responsive Operating Framework ("ARROW") and by requiring the
submission by RBS of an Internal Capital Adequacy Assessment ICAAP
Report which incorporated a qualitative assessment of RBS's risk
management processes ("ICAAP").

(b)

Had the FSA considered that RBS's management or control arrangements

were fundamentally flawed, it would have required RBS to address these
matters. It did not do so. To the contrary, when, in 2007, the FSA wrote to
inform RBS of the findings of both its ARROW risk assessment and ICAAP
review, it stated (amongst other things) that "We ... feel able to continue to
place considerable reliance on the overall governance and control
structures within the Group and on the work of key control functions such as
Risk, Finance and Internal Audit".

(c)

In its Report in December 2011 the FSA acknowledged that standards of

conduct could not be applied retrospectively and concluded that RBS's
governance, systems, controls and decision-making fell within the bounds of
reasonableness given all the circumstances, including the FSA's own
awareness of issues and the approach it took at the time (pp. 31, 34-35 and
356).

345.

The allegations contained in paragraph 121 are embarrassingly vague. In particular, they fail
to identify what aspects of RBS's management, risk management controls, risk modelling,
management information or knowledge of its own financial position and prospects are being
criticised, or how and in what respects they are alleged to have been either inadequate or
incomplete. In the circumstances, save to the extent denied below in response to paragraph
122 to 124C, the Defendants do not admit the matters stated in paragraph 121.

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The

Defendants will plead further to paragraph 121 should the allegations within it be properly
particularised.
345A. For the avoidance of doubt, even if elements of the criticisms made of RBS's risk
management, systems and controls in paragraphs 122 to 124C are upheld, it is denied that
this falsified or rendered misleading the impression in paragraph 343.1 above, or was
information necessary for investors to make an informed assessment of RBS's financial
position or prospects.
345B.

As to paragraph 120B.1:

345B.1.

As set out in the Defendants' Request for Further Information dated 9 March
2016, in Section K, the Claimants variously allege that RBS contravened
some vague and inconsistent "standards" and/or test, proper particulars of
which the Claimants have failed to provide. The Claimants' approach has
been formulated with hindsight, by reference to the risks that in fact
materialised, in order to construct a case that RBS's risk management systems
should have anticipated and prevented the same.

That approach is

misconceived.

345B.2.

The correct approach to be taken to the assessment of RBS's risk management

systems will be set out fully in expert evidence. For present purposes, the
Defendants' position can be summarised as follows:
345B.2.1.

The purpose of RBS's risk management systems was to identify,

manage and mitigate risk (balancing risk with reward), and to
report on exceptions to accepted risks.

345B.2.2.

Managing risk does not mean eliminating risk (RBS's business

necessarily and appropriately involved it being exposed to risk in
order to achieve reward) and therefore effective risk management
systems do not guarantee that risks (and losses) cannot and will
not materialise.

345B.2.3.

Further, decisions as to how to manage risk require consideration

of inter alia the nature and extent of the risk, the likelihood of it

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crystallising and the cost of internal systems and controls. Such

decisions are necessarily a matter of judgment, based upon a
range of possible outcomes and accordingly there will always be
a spectrum of possible approaches and not, as the Claimants'
allege, one approach with one intended result.
345B.2.4.

Further, an assessment of whether RBS's risk management

system was "suitable", "adequate" or "effective" requires that
regard be had to what would reasonably have been expected of a
bank in RBS's position at the time of the Rights Issue, as
determined by reference to the prevailing practices of peer banks
and regulatory requirements at that time having regard, inter alia,
to applicable laws and regulation. Paragraph 344.1 above is
repeated.

345B.2.5.

In all instances in this Re-Re-Amended Defence where it is said

that RBS's risk management systems were "suitable", "adequate"
or "effective" (or, alternatively, where it is denied that they were
"unsuitable", "inadequate" or "ineffective"), the position in this
paragraph 345B has been adopted.

345B.2.6

Further, the approach set out in this paragraph 345B has also
been adopted in relation to all other "standards" variously
alleged by the Claimants, including "not working well",
"deficient", "inappropriate" and "not fit for purpose".

345C.

Paragraph 120B.2 is denied. RBS's risk management systems were functioning effectively,
as set out below. The findings and materials produced by GIA as a part of the Project Snow
Review ("GIA Snow Materials") were not matters of which RBS and the Director
Defendants were aware or ought to have been aware as at the Prospectus Date or the Closing
Date, since the Draft GIA Reports were only first produced after the Closing Date (in July
2008).

345D.

Further, in Section K, the Claimants have relied on a number of the GIA Snow Materials,
including the Draft GIA Reports. As to the Claimants' references to reliance on the GIA
Snow Materials, including the Draft GIA Reports in general:

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345D.1.

First, the July Draft GIA Reports were, as above, preliminary, working
documents, that were substantially revised and corrected following
consultation with and input from the relevant parts of RBS's business.
Accordingly, if and to the extent that reference is reliance is to be made to on
the Draft GIA Reports, it should be made to on the December Draft GIA
Reports.

345D.2.

Second, the Draft GIA Reports were internal reporting documents drafted to
be read and used by RBS management. The language used in the Draft GIA
Reports and other GIA Snow Materials was (as was to be expected) less
precise than is required in a legal pleading. As more particularly set out
below, t The Claimants have failed to observe this distinction when adopting
relying on passages from the Draft GIA Reports and other GIA Snow
Materials into the Consolidated Particulars of Claim.

345D.3.

Third, the Claimants have extracted isolated relied on statements from the
July Draft GIA Reports and other GIA Snow Materials without regard to their
wider context. The Defendants will refer to the Draft GIA Reports and other
GIA Snow Materials as a whole for the context, true purpose, meaning and
significance of those statements.

To avoid repetition, this qualification

should be read as repeated in relation to each of the Claimants' pleas that are
founded on statements within the Draft GIA Reports and other GIA Snow
Materials.
345D.4.

Save as expressly set out herein, no admissions are made as to the correctness
of statements made in the Draft GIA Reports and other GIA Snow Materials.
For the avoidance of doubt, references herein to particular statements within
the Draft GIA Reports and other GIA Snow Materials (particularly when
made to correct or contextualise quotes or references contained in the
Claimants' pleading) do not (unless expressly stated to the contrary) involve
concessions of the factual accuracy of those statements.

345D.5.

Further, T the Draft GIA Reports and other GIA Snow Materials were
produced as part of an investigation a review which was undertaken in light
of the write-downs disclosed at the time of the Rights Issue announcement.

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The purpose of that investigation, which continued until after the close of the
Rights Issue, was to identify the lessons that could be learned from the events
leading to the write-downs and the process improvements that could be made
going forward.
345D.6.

Further, m Many of the comments relating to systems, controls and practices

in the Draft GIA Reports and other GIA Snow Materials were concerned not
with RBS's current systems, controls and practices, but with those that had
prevailed at the time that RBS acquired the exposures that were subsequently
written-down.

This involved considering systems, practices and controls

which dated back (in some instances) several years prior to the Rights Issue
and/or related to business activities which, at the time of the Rights Issue, had
already been discontinued (for example the acquisition of SBO mortgages or
the acquisition of assets for packaging into CDOs).
345D.7.

The Draft GIA Reports noted various respects in which RBS's systems,
practices and controls either had been, were being, or could be strengthened
in response to lessons learned.

345D.8.

The Draft GIA Reports did not seek to identify (and did not identify) whether
any particular aspects of RBS's systems, practices and controls (whether
existing or historic) were unreasonable, having regard to the standards and
expectations prevailing at the relevant time. Paragraphs 344.1 and 345B.2.4
above are repeated. Instead, the Draft GIA Reports made a number of
findings and recommendations and advised that they be considered by
management going forwards. GIA specifically acknowledged that it had not
sought to validate those findings and recommendations with everyone that
they had spoken to, and that operational management might have different
views on the issues and/or the conclusions that it had reached (December
Draft GIA Reports, RBS Group Report, p. 4).

345D.9.

The preparation of the Draft GIA Reports and other GIA Snow Materials was
itself part of RBS's control structure, reflecting its on-going commitment to
fortifying its own risk management controls and processes in light of past
experience.

345D.10.

The Defendants will refer to the Draft GIA Reports (and, in particular, for the
reasons set out in paragraph 308A.3(a) above, the December Draft GIA

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Reports) and other GIA Snow Materials for the full context, true purpose,
meaning and significance of the statements contained within them. In the
circumstances, it is denied that the findings and recommendations in the Draft
GIA Reports constitute a proper basis for (or otherwise support) the
allegations advanced in Section K of the Consolidated Particulars of Claim.

345E.

As to paragraph 120B.3, it is admitted that as a general matter, effective risk management

systems include appropriate management information and reporting.

The Claimants'

reference to "management" (as distinct from "risk management") in this allegation is

embarrassingly vague and the Claimants' case must be read as confined to the matters set out
in Section K. Save as aforesaid, paragraph 120B.3 is denied.
345F.

Paragraph 120B.4 is noted. Paragraph 335B above is repeated.

345G.

As to paragraph 120B.5, the term "Senior Management" is used inconsistently by the

Claimants in the Amended Consolidated Particulars of Claim and without specifying the
individuals who are the subject of each allegation where that term appears.

345H.

Paragraph 120C is denied. Without prejudice to the generality of the foregoing denial:

345I.

As to paragraph 120C.1:

345I.1.

It is denied that the integration of ABN AMRO risk management into RBS
was slow. The process involved integrating the risk management functions of
two very large banks and it occurred at a reasonable pace.

345I.2.

It is unclear what "improvements" the Claimants allege should have been

implemented, what amounts to "quickly" in the circumstances, and what
specific "operational and financial difficulties" it is alleged were being
experienced. Pending the provision of further particulars, paragraph 120C.1 is
denied.

345J.

As to paragraph 120C.2, the allegation is embarrassingly vague and the Claimants have
failed properly to identify the "significant risk concentrations" to which reference is made.
Pending the provision of further particulars, paragraph 120C.2 is denied.

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345K.

As to paragraph 120C.3, the allegation is embarrassingly vague. In particular, the Claimants

have failed to identify the precise respects in which it is alleged that the Board and "Senior
Management" "failed to react adequately to the financial crisis", what "lessons" should have
been learned from the "failure of other significant institutions" and which "significant
institutions" are referenced. Pending further particulars, paragraph 120C.3 is denied.

345L.

Paragraph 120D is admitted. As set out below, the Board determined and monitored the risk
appetite of RBS, and RBS's risk appetite was implemented by GEMC and GRC and
regularly reviewed through reporting mechanisms including the RMMRs.

345M. As to paragraph 120E:

345M.1.

The Board determined the Group's risk appetite for 2007 and 2008
respectively. It did so by reference to, inter alia, papers entitled,
"Commentary on 2007 Budget and resulting Risk Appetite" ("2007 Risk
Appetite Paper") and "2008 Risk and Capital Assessment" ("2008 Risk
Appetite Paper"), which were presented to the Board on 13 December 2006
and 12 December 2007 respectively.

345M.2.

The Board monitored the Group's risk appetite, including through the
RMMRs.

345M.3.

As regards implementation: the GEMC, with technical assistance from the

GRC, translated the Group's risk appetite into a framework of principles,
policies, procedures, limits and qualitative risk acceptance criteria. The
GEMC and GRC ensured compliance with the designated risk appetite,
including via the implementation of policies.

345M.4.

Implementation of risk appetite was achieved via a 'cascade' or 'waterfall' to

sub-allocate that risk appetite to the various divisions and business units,
which therefore operated within the risk appetite set at an overarching level
by the Board.

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345M.5.

In the premises:

345M.5.1.

It is denied that the Board had not determined the risk appetite,
alternatively an effective risk appetite, for RBS for 2007 and 2008.

345M.5.2.

It is admitted that the Board had not determined the risk appetite for
ABN AMRO in 2007, since ABN AMRO was not acquired until 17
October 2007 and approval for the ABN AMRO transition plan was
required from the DNB, and this was only given on 10 March 2008.
Prior to the acquisition, the Managing Board of ABN AMRO set the
risk appetite for ABN AMRO.

345M.5.3.

Further, in relation to the sub-paragraphs of 120E:

345M.5.4.

There is no one way to determine a risk appetite;

345M.5.5.

RBS determined a risk appetite incorporating a variety of measures

that the Board (advised by GRM) considered was appropriate;

345M.5.6.

It is denied that a failure to incorporate the particular components

alleged by the Claimants in the sub-paragraphs of 120E as being
necessary rendered RBS's risk appetite ineffective;

345M.5.7.

The Claimants have not identified the basis upon which they say that
an effective risk appetite required the particular components referred
to by the Claimants in the sub-paragraphs of 120E, but
notwithstanding this, the Defendants respond to the sub-paragraphs
of 120E as follows.

345N. As to paragraph 120E.1:

345N.1.

It is denied that an effective risk appetite required the inclusion of a target or

target range for economic capital or earnings volatility.

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345N.2.

It is admitted that as at the Prospectus Date, RBS did not have a Group-wide
overall target or target range for economic capital and/or earnings volatility.
In any event, during 2007 and as at the Prospectus Date, RBS was in the
process of implementing a methodology for measuring economic capital
(with earnings volatility as an aspect of this) as part of its implementation of
Basel II.

345O. As to paragraph 120E.2:

345O.1.

It is denied that an effective risk appetite required the statement of an external

ratings target.

345O.2.

It is admitted that there was no stated external ratings target for RBS
specified in terms of a specific written statement or policy. However, the
business was managed to maintain its existing external credit ratings, which
were amongst the highest of its peer banks.

345P. As to paragraph 120E.3:

345P.1.

It is admitted that a Group-wide VaR limit, together with a 10-day historical

stress test limit, had been set in respect of market risk only. This is because
VaR was designed to apply only to market risk.

345P.2.

Although VaR had certain limitations, it is denied that the Group-wide VaR
limit and 10-day historical stress test limit were "unsuitable to constitute
RBS's risk appetite for market risk". Paragraphs 266, 269.2, 271A, 271.B.3
and 271C.1 above are repeated.

345P.3.

As to paragraph 120E.3.1, it is admitted that RBS was aware that there may
be a need for an additional capital charge during 2008. Save as aforesaid,
paragraph 120E.3.1 is denied. Paragraphs 266, 267 and 271H to 271J above
are repeated.

345P.4.

As to paragraph 120E.3.2:

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345P.4.1.

The first sentence is denied.

345P.4.2.

As to the second sentence:

P.4.2.1.

It is denied that there were five breaches of the

Group VaR limit between November 2007 and
April 2008; there were four.

Paragraph

269.2(a) above is repeated.

P.4.2.2.

It is admitted that GEMC approved extensions

of the limit on 4 March 2008, 31 March 2008
and 8 April 2008, and a new combined limit
(for RBS and ABN AMRO) on 24 April 2008,
following significant discussion.

345P.4.3.

As to the third sentence, the response to paragraph 120J.2 set out

below is repeated.

345P.5.

Save as aforesaid, paragraph 120E.3 is denied.

345Q. As to paragraph 120E.4:

345Q.1.

It is denied that there was no "suitable over-arching statement of credit risk

appetite". As set out at paragraph 345M.1 above and paragraph 345W.1.1
below, the Board determined risk appetite on an annual basis, and this
included a statement as to credit risk appetite. RBS utilized a number of
credit risk appetite measures in addition to CELT, including those set out in
the 2007 Risk Appetite Paper and the 2008 Risk Appetite Paper:

345Q.1.1.

Single name concentration limit;

345Q.1.2.

Total underwriting limit;

345Q.1.3.

Sub-investment grade underwriting limit;

345Q.1.4.

Buy-to-let mortgages sector limit;

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345Q.2.

345Q.1.5.

Speculative commercial property sector limit; and

345Q.1.6.

Unsecured lending to airlines sector limit.

It is denied that credit risk "formed at least 70% of RBS's risk usage". Credit
risk accounted for 70% of the Group's risk capital usage, as at 12 December
2007 (according to the 2008 Risk Appetite Paper). Specifically, of RBS's
capital that was risk-adjusted based on all of the Group's activities, 70% of it
was used for credit.

345Q.3.

If by "predominant measure" it is alleged that there was over-reliance on

CELT, this is denied. Paragraph 345Q.1 above is repeated. If it is alleged
that CELT was the "predominant measure" in the sense of being the main, or
principal, measure used, this is not admitted.

345Q.4.

It is denied that CELT was not a suitable risk appetite measure. In particular:

345Q.4.1.

CELT was one of a number of measures utilised by RBS to

measure its credit risk appetite.

345Q.4.2.

In addition, the FSA was aware of RBS's usage of CELT and

was supportive of it as a useful addition to the Bank's stress
testing methodologies.

345Q.5.

As to paragraph 120E.4.1, it is admitted that CELT was a stress test

comparing single risk factors. However, it is denied that CELT was not a
comprehensive measure of Group credit risk across multiple asset classes.
The events that CELT covered spanned a wide portfolio encompassing
various asset classes, and therefore CELT was a comprehensive measure
across multiple asset classes. It did not purport to cover all asset classes, but
it is not alleged by the Claimants that CELT should have covered "all" asset
classes only "multiple" asset classes.

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345Q.6.

The term "major concentrations of risk" is embarrassingly vague. Pending

further particulars as to the meaning of this term, paragraph 120E.4.2 is
denied.

345Q.7.

The term "excessively theoretical" is embarrassingly vague. Pending further

particulars as to the meaning of this term, paragraph 120E.4.3 is denied.

345Q.8.

Paragraph 120E.4.4 is admitted.

However, both GRC and GAC were

provided with regular reporting on exposure against the CELT limit. Further,
breaches would have been reported to GEMC on an ad hoc basis under
delegated authority of the Board. It is denied that the matters referred to in
paragraph 120E.4.4 evidence that CELT was not a suitable risk appetite
measure (which is denied).

345Q.9.

Paragraph 120E.4.5 is not admitted. RBS had a set of measures in relation to

credit risk appetite which were effective.

Paragraph 345Q.1 above is

repeated.

345Q.10.

Save as aforesaid, paragraph 120E.4 is denied.

345R. As to paragraph 120E.5, it is denied that an effective risk appetite required a liquidity survival
horizon to be set. Paragraph 345M.6 above is repeated. Paragraph 120E.5 is otherwise
admitted. Paragraphs 190AB.2 and 190AB.3 above are repeated.

345S. As to paragraph 120E.6:

345S.1.

It is admitted that the 2008 Risk Appetite Paper states that the "risk profile
and outlook is for RBSG (excluding ABN)". This was, however, unsurprising,
given that the 2008 Risk Appetite Paper was determined by the Group Board
on 12 December 2007, being less than two months after the acquisition of

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ABN AMRO and at a time when DNB approval had not yet been granted for
the transition plan. DNB approval was granted on 10 March 2008.

345S.2.

It is further admitted that the 2008 Risk Appetite Paper stated that "[a]ll
limits will be reviewed during 2008 as a result of the ABN AMRO
acquisition." The Defendants do not admit that this process was incomplete at
the time of the Rights Issue.

345S.3.

It is admitted that the Group's credit risk appetite policy applied to "all
Divisions which take credit risk." Save as aforesaid, the last sentence of
paragraph 120E.6 is not admitted.

345S.4.

Save as aforesaid, paragraph 120E.6 is denied.

345T. Paragraph 120E.7 is denied.

GRC's work was reported to the Board and/or GEMC as

appropriate. As to the last sentence of paragraph 120E.7, GRC's Terms of Reference were set
out in the High Level Controls Report and included its responsibilities in relation to the risk
appetite setting process. The GRC's Terms of Reference will be referred to by the Defendants
at trial for their full meaning and effect. It was appropriate for the GRC to carry out these
activities; see paragraph 345RR below in respect of paragraph 120V. Paragraph 345M.6
above is repeated.

345U. Paragraph 120F is denied. RBS's businesses were managed within the parameters set by the
Board-determined risk appetite, as described above. Paragraph 345M.6 above is repeated.
Without prejudice to the generality of the foregoing denial, as to paragraph 120F.4, it is
denied that the FSA instructed RBS to constrain the growth of GBM to manageable levels via
its regulatory Risk Mitigation Programme.

345V. As to paragraph 120G:

345V.1.

It is denied that there was an "issue of a failure to set risk appetite", since the
Board did set risk appetite. Paragraph 345M above is repeated.

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345V.2.

The GIA meeting note of 10 June 2008 is admitted as a document. It is

admitted that the quoted statements are contained in that note, although the
accuracy of the note as a record of the discussion is not admitted. The
Defendants will refer to the full note at trial for its meaning and effect.

345V.3.

It is denied that this note evidences that there was a failure to set risk appetite
or that Sir Steve raised this as an issue with the Board, given that there was
no such failure.

345V.4.

Save as aforesaid, paragraph 120G is denied.

345W. As to paragraph 120H, it is denied that the Board systematically failed to review and manage
effectively the risk exposure and strategy of RBS. Without prejudice to the generality of the
foregoing denial, the Defendants respond to paragraphs 120H.1 to 120H.4, on the basis that
the Claimants' case is confined to the matters set out therein:

345W.1.

Paragraphs 120H.1 to 120H.3 are denied:

345W.1.1.

The Board set the risk appetite each year alongside the budget
process. Paragraphs 345M.1 and 345Q.1 above are repeated.

345W.1.2.

Risk appetite was implemented by GRC and GEMC.

345W.1.3.

The Board received regular risk reports, including the RMMRs.

345W.1.4.

GAC was also responsible for monitoring the Group's risk

management it also received the RMMRs and its meetings
were regularly attended by Peter Nathanial.

345W.2.

As to paragraph 120H.4, the Board's December 2007 self-assessment is

admitted as a document. It is denied that such self-assessment evidences the
alleged failure to review and manage effectively the risk exposure and risk
strategy of RBS (which alleged failures are denied in any event). In fact, in

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relation to the first statement to which the Claimants have referred, 60% (and
therefore the majority) of Board members agreed with the statement, and only
13% disagreed. Similarly, the majority of Board members agreed with the
second statement to which the Claimants have referred, and only 13%
disagreed. Further, in respect of the statement, "The Board has sufficient
input into the development and review of strategy", 73% of the Directors
agreed with the statement, and only 7% disagreed.

345X.

Paragraph 120I is denied. Without prejudice to the generality of the foregoing denial, the
Defendants respond to the sub-paragraphs of 120I, on the basis that the Claimants' case is
confined to the matters set out therein:

345X.1.

Save that it is admitted that the staged implementation of Basel II led to

inevitable market-wide uncertainty about certain RWA calculations during
the implementation process, paragraph 120I.1 is denied. RBS's Risk and
Finance functions managed the development and implementation of its Basel
II models effectively. Paragraphs 86C and 131 to 137 above are repeated,
both as to the implementation of Basel II models and in relation to the alleged
uncertainty of the total RWA figures.

345X.2.

As to the first sentence of paragraph 120I.2, it is denied that RBS failed to

comply with requirements on stress testing of its capital position. RBS
conducted comprehensive and Group-wide Basel II stress tests in connection
with the 2007 ICAAP. The FSA's response in the ARROW letter of 23
October 2007 commended RBS for the considerable improvement in its stress
testing programme and identified only one specific issue as a matter for
further improvement as part of a proposed risk mitigation programme. The
second sentence of paragraph 120I.2 is denied. There was appropriate
engagement in stress testing by senior management and the Board, sufficient
to comply with the requirements of the Basel II regime.

345X.3.

As to paragraph 120I.3, paragraphs 144.1 and 144.2 above are repeated.

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345X.4.

The first sentence of paragraph 120I.4 is admitted. The second sentence is

denied. The outputs of the RWA models were frequently reviewed by both
senior management and the Board, which received monthly updates on RBS's
financial position including RWA figures. The methodology and assumptions
of the models were also properly reviewed by the appropriate individuals and
committees.

345X.5.

As to paragraph 120I.5:

345X.5.1.

The first sentence of paragraph 120I.5 is admitted. Paragraphs

86C.3 and 94B.6 above are repeated.

345X.5.2.

As to the second sentence of paragraph 120I.5, paragraphs

107B and 132 to 136A above are repeated.

345X.5.3.

As to the third sentence of paragraph 120I.5, paragraphs 86C.3

and 94B.6 above are repeated. It is denied that work on ABN
AMRO's models remained problematic. In the event, given the
deconsolidation of ABN AMRO's assets onto the consortium
partners' balance sheet, work on ABN AMRO's Basel II models
was not separately progressed.

345Y.

Paragraph 120J is denied. Without prejudice to the generality of the foregoing denial, the
Defendants respond to paragraphs 120J.1 to 120J.6 on the basis that the Claimants' case is
confined to the matters set out therein:

345Y.1.

As to paragraph 120J.1, paragraphs 253 to 271K above are repeated.

345Y.2.

As to paragraph 120J.2, it is admitted that VaR was supplemented by a 10day historical stress test, but this was subject to a Group-level limit, not a
"Board-level limit". The second sentence is denied. As to the third sentence,
the response to paragraph 120O.8 set out below is repeated.

345Y.3.

As to paragraph 120J.3:

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345Y.3.1.

It is admitted that significant credit market write-downs were

estimated in Q1 2008 and that the Board decided on or around
23 April 2008 to launch a review, called the 'Project Snow
Review', the terms of which were finalised on or before 2 May
2008 and which led to the production of the Draft GIA Reports.
Paragraph 345D.5 above is repeated.

345Y.3.2.

It is denied that the Prospectus ought to have disclosed the

Project Snow Review, which was ongoing during the Rights
Issue Period. It is denied that the reasons for the review were
not disclosed: the reasons for the review were the estimated
write-downs, which were disclosed at the time of the Rights
Issue announcement and in the Prospectus. Paragraph 345D.5
above is repeated.

345Y.3.3.

It is denied that the Terms of Reference of the Project Snow

Review constitute evidence of "concerns" held by RBS
regarding management, risk management and controls of its
credit market business as at 2 May 2008.

The Terms of

Reference, which will be referred to by the Defendants at trial

for their full meaning and effect, reflected a desire to
understand the background to, and any lessons to be learned
from, the events that led to the write-downs.

345Y.3.4.

345Y.4.

Save as aforesaid, paragraph 120J.3 is denied.

As to paragraph 120J.4, the allegations are embarrassingly vague and the

Claimants have failed properly to particularise the "trading book exposures",
"structured credit exposures" or "some market positions" to which reference
is made or to explain what is meant by "a more fundamental credit risk
assessment". Pending further particulars, paragraph 120J.4 is denied.

345Y.5.

As to Paragraph 120J.5, paragraphs 308E, 308J, 329 and 329A to 329C above
are repeated.

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345Y.6.

As to paragraph 120J.6:

345Y.6.1.

The GIA meeting note of 9 July 2008 is admitted as a

document and it is admitted that the words "GEMC not
understood GBM business and therefore not discussed" are
contained in that note. The accuracy of the note as a record of
the discussion is not admitted. The Defendants will refer to the
full note at trial for its meaning and effect.

345Y.6.2.

GEMC's Terms of Reference are set out in the High Level

Controls Report, which will be referred to by the Defendants at
trial for its full meaning and effect. It was not the role of
GEMC to manage GBM's business; that was for the senior
executives of the GBM business. The members of GEMC
understood GBM's business sufficiently to enable GEMC to
engage in effective discussion of that business as necessary to
fulfil its mandate.

345Z.

Paragraph 120K is denied. Without prejudice to the generality of the foregoing denial, the
Defendants respond to paragraphs 120K.1 to 120K.7 on the basis that the Claimants' case is
confined to the matters set out therein.

345Z.1.

As to paragraph 120K.1, it is admitted that the "Credit Risk Appetite" policy

dated 3 January 2007 was approved by GRC in December 2006 and had not
been amended as at the time of the Rights Issue. However, it is denied that
this is evidence of ineffective management of credit risk in circumstances
where:

345Z.1.1.

As set out in the policy, it provided the "framework for setting,

monitoring and updating credit risk appetite" only;

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345Z.1.2.

RBS's credit risk appetite was set each year by the Board and
implemented by GEMC and GRC. Paragraphs 345M.1 and
345Q.1 are repeated.

345Z.1.3.

RBS's credit risk was therefore managed against the above

appetite and limits and was managed effectively.

345Z.2.

As to paragraph 120K.2:

345Z.2.1.

As to the first sentence, it is admitted that RBS used a macroeconomic stress test and CELT.

345Z.2.2.

As to the second sentence, it is admitted that the macroeconomic stress test was presented to the Board annually but it
is denied that it only targeted capital adequacy. For example, it
also considered impact on P&L, liquidity and credit risk.

345Z.2.3.

As to the third sentence, is admitted that GRC stress tested

credit risk using CELT.

It is denied that CELT was an

inadequate stress test and paragraph 345Q.4 to 345Q.9 above

are repeated.

345Z.2.4.

It is denied that the matters referred to in paragraph 120K.2

evidence that RBS's management of credit risk was ineffective
(which is denied).

345Z.3.

As to paragraph 120K.3, it is denied that "several significant credit risk

models" were not accepted by the FSA in respect of Basel II usage.
Paragraphs 107B and 132 to 136A above are repeated. The RMMR of May
2008 to which the paragraph refers is admitted as a document, and it is
admitted that it reflects that the FSA had concerns about the Group's
independent validation of certain divisional credit models. The Defendants
will rely at trial on the full RMMR for its terms and effect. The FSA's
concerns related to the process by which certain divisional credit models

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were independently validated; the concerns did not relate to the underlying
models themselves.

345Z.4.

As to paragraph 120K.4, the paragraph lacks sufficient specificity as to the

respects in which it is alleged that "the wrong credit approval process" was
followed in relation to products, including those listed, and as to the products
referred to. Pending further particulars, paragraph 120K.4 is denied.

345Z.5.

As to paragraph 120K.5:

345Z.5.1.

It is denied that RBS did not have an appropriately robust

country risk framework. There was a set of country risk limits in
place. It is admitted that in April 2007, GIA indicated that the
systems for identifying, monitoring and reconciling the Group's
country risk exposure were no longer fit for purpose. However,
by the time of the Rights Issue, appropriate steps were being
taken to address it. Further, in the meantime, RBS implemented
interim measures to ensure that cross-border country risk was
being managed effectively within the new enlarged Group, as is
evidenced by GRC minutes dated 10 January 2008 and 29 May
2008.

345Z.5.2.

345Z.6.

Save as aforesaid, paragraph 120K.5 is denied.

The allegations in paragraphs 120K.6 and 120K.7 are embarrassingly vague.

Pending further particulars, those allegations are denied. Paragraphs 241 to
247 above are repeated.

345AA. Paragraph 120L is denied. Without prejudice to the generality of the foregoing denial, the
Defendants respond to paragraphs 120L.1 to 120L.7 on the basis that the Claimants' case is
confined to the matters set out therein.

345AA.1.

Paragraph 120L.1 is denied. Paragraph 190AB above is repeated.

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345AA.2.

Paragraphs 120L.2 and 120L.3 are admitted. Paragraphs 190AB.2 and

190AB.3 above are repeated.

345AA.3.

As to paragraph 120L.4, it is denied that RBS was exposed to an "extreme

liquidity risk", in which regard paragraph 190AA above is repeated.

345AA.4.

Paragraph 120L.5 is denied. The Balance Sheet Management team and the
Capital Management team were both situated within Group Treasury and
their respective heads both reported to the Group Treasurer. Further, the
Group Treasurer, the Deputy Group Treasurer and the Head of Capital
Management were members of GALCO.

345AA.5.

As to paragraph 120L.6, Iit is admitted that at the time of the Rights Issue,
save that it did stress test the impact on liquidity of a reduction in its own
credit rating, the stress tests undertaken by RBS did not explicitly link
counterparty credit risk and market risk with liquidity. To the best of the
bank's knowledge, such linkages were not at the time routinely incorporated
in stress tests carried out by either regulators or RBS's peers and their absence
from the stress tests carried out by RBS did not render its liquidity risk
management ineffective or inadequate by the then prevailing standards.

345AA.6.

As to paragraph 120L.7, it is admitted that the EVE limit for Citizens was
suspended between March and September 2008 in respect of the -200bp
limit.

345BB. As to paragraph 120M:

345BB.1.

The first sentence is embarrassingly vague. It is not clear what "accurate,

relevant and up to date management and risk exposure information" the
Claimants allege was not provided and which members of "Senior
Management" this information ought to have been provided to. The support
the Claimants provide for that allegation is the 2007 Board Performance
Evaluation, which necessarily related only to the Board. Paragraph 345BB.2
below is repeated. Accordingly, this broad allegation should be limited to the

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particulars provided at paragraphs 120N and 120O, and is denied on that

basis.

345BB.2.

The second sentence is admitted. However, the Claimants have omitted key
information from the document on which they have relied in support of this
allegation, and the Defendants will rely on the document at trial for its full
terms and effect. In particular, in December 2007, 60% of Board members
agreed with the statement in question; 75% either agreed or were neutral;
only 25% disagreed; and none strongly disagreed. Further, the disagreement
with the statement in question was limited to the term "timely": Board
members considered that timely circulation of papers was an area for concern
on occasion.

345CC. Paragraph 120N is denied. Without prejudice to the generality of the foregoing denial, the
Defendants respond to paragraphs 120N.1 to 120N.7, on the basis that the Claimants' case is
confined to the matters set out therein:

345CC.1.

Paragraph 120N.1 is denied. Paragraphs 86A, 86B, 144 and 145 above are
repeated.

345CC.2.

Paragraph 120N.2 is denied. Without prejudice to the generality of the

foregoing denial, the Defendants respond to paragraphs 120N.2.1 to 120N.2.4
on the basis that the Claimants' confined to the matters set out therein.

345CC.2.1. It is denied that market pricing was late and unreliable.

345CC.2.2. As to paragraph 120N.2.1:

CC.2.2.1.

The first and second sentences are denied, save as

consistent with the response to the Claimants'
allegations in relation to the LSD Model set out
above in paragraphs 205B to 205X.

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CC.2.2.2.

As to the third sentence, it is denied that RBS did

not

comply

with

the

applicable

regulatory

requirement that a model used for valuation

purposes

should

be

independently

verified.

Paragraph 205E.1 above is repeated. Further, RBS's

model-based

valuation

was

subject

to

an

independent audit by Deloitte for the 2007

Accounts.

345CC.2.3. As to paragraph 120N.2.2:

CC.2.3.1.

It was an applicable regulatory requirement that all

Trading Book positions were marked to market on a
daily basis.

CC.2.3.2.

All positions within the Trading Books were

required

to

be

independently

reviewed

and

validated. Where possible, IPV was performed to a

frequency

that

matched

the

availability

of

independent price information. Thus where prices

(or model inputs) were readily available on a daily
basis, IPV was performed daily. Where prices (or
model inputs) were available on a less regular basis,
IPV would occur on a less regular basis also with a
minimum requirement that IPV be conducted
monthly.

CC.2.3.3.

Save as aforesaid, paragraph 120N.2.2 is denied.

The

Claimants'

broad

allegation

as

to

the

insufficiency of RBS's IPV process is not supported

by the limited instances pleaded (which are
responded to below).

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CC.2.3.4.

As to paragraph 120N.2.2.1: Save as consistent with

the case set out above at paragraph 205Y, paragraph
120N.2.2.1 is denied.

CC.2.3.5.

As to paragraph 120N.2.2.2:

CC.2.3.5.1.

From mid-March 2008, there was

ongoing discussion within RBS as to
the marking methodology to be
utilised

for

the

London

TABS

portfolio (and not, as the Claimants

allege, the TABs 2006-6 SS CDO).
As a result of these discussions the
London Exotic Credit ABS desk
proposed certain

changes

in

its

marking methodology. These changes

included changes to recovery rate
assumptions, marking positions to the
MarkIT CDS of ABS pricing service,
and

changing

critical

horizon

estimates. These were introduced in

April 2008, with the prices produced
by this change being subject to IPV.
CC.2.3.5.2.

As to the first to third sentences, the

20 March 2008 email from Aidan
Hanby (Group Market Risk) to
Nathanial

giving

rise

to

the

allegations (to which the Defendants

will refer at trial) is admitted. The
accuracy of this email's contents as a
description of the issue and events set
out

within

the

preceding

subparagraph is denied. It was not the

case that "it was discovered that no

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price update had taken place": IPV

was performed on the TABS portfolio
for January and February 2008 month
ends. As set out above, changes in
prices to the TABS portfolio were the
result

of

changes

in

marking

methodology and market movements.

Hanby's email was superseded by a
detailed

Global

Pricing

Unit

memorandum dated 27 March 2008.

CC.2.3.5.3.

In the premises, the last sentence is

denied.

345CC.2.4. As to paragraph 120N.2.3:

CC.2.4.1.

The first sentence is, in the premises, denied.

Paragraphs 205A to 207 above are repeated.

CC.2.4.2.

The balance of the paragraph is admitted. It is

denied that this supports the allegation that market
pricing was late and unreliable (which is denied).

345CC.2.5. As to paragraph 120N.2.4:

CC.2.5.1.

It is admitted that, on 30 March 2008, DrakeBrockman forwarded Robertson a preliminary

assessment setting out a number of observations and
criticisms of ABN Finance's control environment.
This email (setting out a proportion of the alleged
problems referred to by the Claimants) will be
referred to at trial for its full meaning and effect.

CC.2.5.2.

It is further admitted that Drake-Brockman raised

other concerns in his time as Head of GBM

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Americas with the particulars of those concerns not

admitted. It is averred that those concerns were
considered by the appropriate individuals.

CC.2.5.3.

Save as aforesaid, paragraph 120N.2.4 is denied.

345CC.3.

Paragraph 120N.3 is denied. Paragraph 145 above is repeated.

345CC.4.

Paragraph 120N.4 is denied.

Without prejudice to the generality of the

foregoing denial, the Defendants respond to paragraphs 120N.4.1 to

120N.4.5, on the basis that the Claimants' case is confined to the matters set
out therein:

345CC.4.1. As to paragraph 120N.4.1:

CC.4.1.1.

The document to which the Claimants have referred

in respect of this allegation is an RMMR, and
therefore it is understood that the reference to
"reporting" in the context of paragraph 120N.4.1 is
limited to the RMMRs and the Defendants plead on
that basis.

CC.4.1.2.

It is admitted that fully consolidated risk exposure

figures including ABN AMRO were not reported to
Group level management until the RMMR of April
2008. However, RBS did have combined figures
including ABN AMRO in respect of some
exposures from at least December 2007. Further,
full consolidation of data from the two institutions
could reasonably be expected to take time:
paragraph 345I.1 above is repeated.

CC.4.1.3.

Save as aforesaid, paragraph 120N.4.1 is denied.

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345CC.4.2. As to paragraph 120N.4.2:

CC.4.2.1.

As to the first sentence, the GIA meeting note of 10

June 2008 is admitted as a document and it is
admitted that the quoted statement is contained in
that note, although the accuracy of the note as a
record of the discussion is not admitted.

The

Defendants will refer to the full note at trial for its

meaning and effect.

CC.4.2.2.

As to the second sentence, it is admitted that GIA

noted in the Project Snow Review that ABN AMRO
did not have a single general ledger system and that
such a system would have enabled "greater"
analysis of the exposures, but it is denied that GIA
concluded that a single general ledger system would
have enabled "proper" analysis of exposures and
"highlighted further problems with its risk systems".

CC.4.2.3.

Paragraph 345D above is repeated.

345CC.4.3. As to paragraph 120N.4.3:

CC.4.3.1.

As to the first sentence, the reference to "ABN

AMRO's risk limits" is embarrassingly vague. The
Claimants' case should be limited to its allegation in
relation to VaR (as particularised in the second
sentence) and the Defendants respond on that basis.

CC.4.3.2.

As to the second sentence, it is admitted that a

combined VaR including ABN AMRO was
implemented in April 2008, shortly after the DNB
had given its approval of the transition plan on 10
March 2008.

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CC.4.3.3.

As to the third sentence, the phrases "concentrations

of risk", "persisted much longer than they should
have", "management did not take prompt action"
and "overall exposures to more prudent levels" are
embarrassingly vague. Pending further particulars,
the third sentence is denied. In any event, even if
ABN AMRO's risk limits could have been
integrated sooner, this would have had no effect on
risk concentrations; the syndication market closed
on 9 August 2007, such that concentrations could
not be reduced from that date.

CC.4.3.4.

In any case, it is denied that the fact that a combined

VaR including ABN AMRO was not implemented
until April 2008 is evidence that reporting in
relation to ABN AMRO was late and unreliable
(which is denied).

CC.4.3.5.

Save as aforesaid, paragraph 120N.4.3 is denied.

345CC.4.4. As to paragraph 120N.4.4:

CC.4.4.1.

The phrases "reporting to Senior Management" and

"for six months" are embarrassingly vague.

The

Claimants rely on the ABN GBM Monthly Risk and

Controls Report dated June 2008.

As such, the

Defendants respond to paragraph 120N.4.4 on the

basis that "reporting" is a reference to the ABN
GBM Monthly Risk and Controls Reports and that
the reference to "for six months" is a reference to the
six month period following the acquisition of ABN
AMRO.

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CC.4.4.2.

The Claimants have failed to identify which

specific "operational risk issues" it is alleged were
not

included

in

reporting.

Pending

further

particulars as to those issues, the allegation is not

admitted. Without prejudice to the foregoing, it is
denied that it was necessary for any such issues to
be reported.

345CC.4.5. Paragraph 120N.4.5 is admitted.

Paragraph 345I.1 above is

repeated.

345CC.5.

Paragraph 120N.5 is denied.

Without prejudice to the generality of the

foregoing denial, the Defendants respond to paragraphs 120N.5.1 to

120N.5.4, on the basis that the Claimants' case is confined to the matters set
out therein:

345CC.5.1. As to paragraph 120N.5.1, the Claimants have failed properly to

identify which systems are being referred to, in what respects
they were said to be difficult to "adapt to new business needs" or
"use to extract aggregated information" or the respects in which
Sabre was "not fit for purpose". The document to which the
Claimants have referred in relation to this allegation is admitted
as a document and it is admitted that the document stated: "The
core Credit Risk System (Sabre) is nearing end of life current
infrastructure could only be scaled to support a further 18-24
months at current projections of growth and post-integration
volumes". Save as aforesaid and pending further particulars,
paragraph 120N.5.1 is denied.

345CC.5.2. As to paragraph 120N.5.2:

CC.5.2.1.

The document to which the Claimants have referred

in relation to this allegation is admitted as a
document and it is admitted that the document

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stated: "Risk infrastructure requires enhancement to

address operational risks that have been highlighted
by Group Risk and Audit, i.e.:
- Issuer risk methodologies are not aligned with
agreed Group Policy.
- The excess management process is manual.
- -20K overwrites growing at 5-10% a month".

CC.5.2.2.

The Claimants have failed properly to identify the

respects in which credit management information is
said to have been late or unreliable as a result. Save
as aforesaid and pending further particulars,
paragraph 120N.5.2 is denied.

345CC.5.3. As to paragraph 120N.5.3, it is admitted that GBM should have

had fit-for-purpose risk systems, and it did so. The Claimants
have failed properly to particularise which "risk systems" are
being referred to and in what respects they are said to have been
"particularly poor". Save as aforesaid and pending further
particulars, paragraph 120N.5.3 is denied.

345CC.5.4. As to paragraph 120N.5.4, the document to which the Claimants

have referred in relation to this allegation is admitted as a
document and it is admitted that the document contained the
statements referred to in paragraph 120N.5.4. The Claimants
have failed properly to identify the respects in which credit
management information is said to have been late or unreliable
as a result. Save as aforesaid and pending further particulars,
paragraph 120N.5.4 is denied.

345CC.6.

Paragraph 120N.6 is admitted.

The FSA was informed and appropriate

action was taken to resolve this matter and strengthen financial reporting.

345CC.7.

As to paragraph 120N.7:

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345CC.7.1. The first sentence is admitted.

345CC.7.2. As to the second sentence, it is admitted that manual

amendments were required, but the reference to "enormous
number" is embarrassingly vague and is not admitted.

345CC.7.3. As to the third sentence, it is admitted that Peter Nathanial sent

an email to Guy Whittaker about the topics listed in April 2008.

345CC.7.4. Save as aforesaid, paragraph 120N.7 is denied.

345DD. Paragraph 120O is denied. Without prejudice to the generality of the foregoing denial, the
Claimants have failed properly to identify the respects in which RBS's risk management
information and reporting are said to have been inadequate and ineffective.

Without

prejudice to the foregoing, the Defendants respond to paragraphs 120O.1 to 120O.10 on the
basis that the Claimants' case is confined to the matters set out therein:

345DD.1.

As to paragraph 120O.1:

345DD.1.1. The Claimants' definition of "risk profile" is admitted, save that

it is averred that "what risks affected RBS" means examining
material categorisations of risk affecting RBS.

345DD.1.2. Save as aforesaid, paragraph 120O.1 is denied.

There was

adequate and effective reporting of the risk profile of RBS to

GEMC, GRC, GAC and the Board via several mechanisms,
including the RMMRs, meetings and presentations within those
meetings, and informal communication channels (such as ad hoc
meetings and emails).

345DD.2.

As to paragraph 120O.2:

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345DD.2.1. It is assumed that in referring to "the structure of RBS", the

Claimants are referring to "the structure of monthly risk
reporting at RBS".

345DD.2.2. Not all "risk management information" was aggregated and

produced by GRM. Risk management information for inclusion
in the RMMR was aggregated and produced by GRM.

345DD.2.3. Although the RMMR was a "regular reporting tool of GRM", it

was not the only such reporting tool and not the only information
relied upon by GEMC, the Board, GRC and GAC to discharge
their respective risk management and control functions.

345DD.2.4. It is denied that the matters to which the Claimants refer in

paragraph 120O.2 evidence that RBS's risk management
information and reporting were inadequate or ineffective (which
is denied).

345DD.2.5. Save as aforesaid, paragraph 120O.2 is admitted.

345DD.3.

As to paragraph 120O.3:

345DD.3.1. The term "systematically inadequate" is embarrassingly vague.

The Claimants' case should be limited to the particulars set out at
paragraphs 120O.3.1 to 120O.3.10. Without prejudice to the
foregoing, it is denied that the RMMRs were inadequate,
systematically or otherwise.

345DD.3.2. Paragraph 120O.3 appears to have been based at least in part on

statements from the December Draft GIA Reports and other GIA
Snow Materials.

Paragraph 345D above is repeated.

GIA's

statements were drawn, in significant part, from observations

made in the OW Report prepared by the consulting firm, OW,
regarding the RMMRs that were provided to both the Board and

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GEMC.

The OW Report was commissioned by RBS Risk

Management GRM and was provided on 23 May 2008.

345DD.3.3. Far from indicating that RBS's management information,

reporting and controls were defective, the commissioning of this
independent third-party report itself illustrates the responsible
and effective operation of RBS's risk management function.

345DD.3.4. Further, the OW Report did not purport to find that this aspect of
RBS's risk reporting was "inadequate" or "ineffective". Instead it
provided

"commentary

and

suggestions"

and

proposed

"improvements" and "adjustments", many of which were of a

cosmetic or presentational nature (p. 1). It is particularly noted
that, in relation to the coverage of market risk, the OW Report
concluded that "The market risk section [in the RMMRs provided
to the Board] contains a good/industry-standard set of
information, hence our comments relate mainly to adjusting the
structure to improve "readability"." (p. 11). The OW Report
also observed that:

"Many aspects of Board risk reporting are institution specific, with Boards
favouring particular presentation styles (e.g. text, graphics or tables), length, level
of detail, metrics/measures etc. There is no "one size fits all best practice" approach
[]".

345DD.3.5. Paragraph 120O.3.1 is denied: the RMMRs were not "backward

looking only" and they appropriately projected and identified
existing and anticipated risks, or recommended actions.

345DD.3.6. As to paragraph 120O.3.2:

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DD.3.6.1.

It is admitted that in the period leading up to the

Rights Issue, the RMMRs were compiled using data
from two months prior.

DD.3.6.2.

This was an adequate approach, and was due to the

necessary delay caused by the process of collating
and analysing large volumes of data. Further, if
there were issues requiring more immediate
attention and/or on an ongoing basis, there were
mechanisms for reporting those issues quickly,
including at GCEAG meetings.

345DD.3.7. As to paragraph 120O.3.3:

DD.3.7.1.

The first sentence is denied. From the December

2007 RMMR onwards, a number of risk metrics
were combined. Further, in the January, February
and March 2008 RMMRs "RBS Group" was
defined as RBS and ABN AMRO on a fully
consolidated basis.

DD.3.7.2.

As to the second sentence, the phrase "risk exposure

and positions" is embarrassingly vague. To the
extent that it refers to risk metrics, this is denied. In
the RMMRs from December 2007 to March 2008,
risk issues for ABN AMRO were reported in the
text and a number of risk metrics showed combined
figures for RBS and ABN AMRO. Paragraph
345DD.7.4 above is repeated.

DD.3.7.3.

It is admitted that from April 2008 onwards the

RMMR contained fully consolidated risk metrics.

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345DD.3.8.

Paragraph 120O.3.4 is denied. The RMMRs made effective

use of graphics, diagrams and descriptions to address the risk
profile of RBS.

345DD.3.9.

Paragraph 120O.3.5 is denied. The most important metrics

were identified and included in the RMMRs, as well as in the
oral reports that were provided by the CRO to the Board,
GEMC, GAC and GRC.

345DD.3.10.

As to paragraph 120O.3.6, it is admitted that the RMMRs did

not report that Citizens had suspended the -200bp EVE
limit, but the suspension was reported to the GEMC by means
of the GALCO monthly update which summarised the key
points arising from the GALCO meeting dated 10 March
2008.

345DD.3.11.

Paragraph 120O.3.7 is admitted. Paragraphs 190AB.2 and

190AB.3 are repeated.

345DD.3.12.

As to paragraph 120O.3.8:

DD.3.12.1. It is denied that RMMRs did not report on the SLS

and SAU and that "risk data and metrics" of the
SLS and SAU divisions were excluded from the
RMMRs. In both cases, from October 2008, the
RMMRs contained a stand-alone section in relation
to the SLS and SAU. Prior to then, and well in
advance of the Rights Issue, the RMMRs reported
on:

DD.3.12.1.1. the super-senior CDOs that were

housed in the SAU.

Paragraph

345DD.3.12.4.1 is repeated;

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DD.3.12.1.2. early

problem

cases,

including

transfers into the SLS, and nonperforming loans.

DD.3.12.2. Paragraph 120O.3.8 is otherwise not admitted.

DD.3.12.3. As to paragraph 120O.3.8.1:

DD.3.12.3.1. The first sentence is admitted, save

that SLS covered some USD 9bn
not 9bn of assets.

DD.3.12.3.2. The second sentence is not admitted.

DD.3.12.4. As to paragraph 120O.3.8.2:

DD.3.12.4.1. It is admitted that the SAU housed

the

super-senior

CDOs.

The

expression "other structured credit

exposures" is embarrassingly vague
and this part of the allegation is not
admitted. It is denied that the SAU
was the "'bad bank' unit".

DD.3.12.4.2. It is admitted that the super-senior

CDOs in the SAU "were no longer
part of the strategic businesses and
would be sold if conditions allowed",
but only in the sense that the SAU
held

assets that were RBS's

Discontinued Business Lines, and the

purpose of the SAU was to minimise
the risks associated with those assets
while at the same time extracting

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maximum economic value from them

which in some cases involved
selling them if conditions permitted.

DD.3.12.4.3. It is admitted that the prospectus

announced that certain structured
credit

activities

had

been

discontinued and problematic US

sub-prime

mortgage-related

assets

were managed by a dedicated workout unit with a view to minimising

risk and reducing positions at an
appropriate pace. That disclosure was
accurate and sufficient.

While the

SAU was not announced internally

until 9 May 2008. However, by the
time of the Prospectus, RBS had
commenced

the

procedure

for

implementing the relevant operational

processes and it was reasonable that
this would take some time to be
completed.

DD.3.12.4.4. As to the third sentence, it is admitted

that the November 2008 RMMR
indicated that by August 2008, the
SAU contained assets notionally
worth 75 billion. The Defendants
plead to paragraph 120O.3.8.2 on the
basis that the reference to "risk
reporting" is limited to the RMMRs.
Without prejudice to the foregoing, it
is admitted that until October 2008,
the RMMRs did not contain a stand-

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alone section in relation to the SAU.

However, it is denied that the
RMMRs did not report on the SAU
until that time; there were references
to the SAU in as early as the May
2008 RMMR, being the same month
that it was announced that the SAU
had been established. Further, even if
(which is denied) risk reporting to the
Board in respect of the SAU did not
begin until after the Rights Issue
period, ie 6 June 2008, it is denied
that this was unreasonable, given that
the SAU was not established until
May 2008.

345DD.3.13.

Paragraph 120O.3.9 is denied.

DD.3.13.1. In their response to the Defendants' Request for

Information, the Claimants have identified as
particular "major market events/conditions" certain
events relating to BNP, IKB, Northern Rock and
Bear Stearns.

Although these events were

important, the Claimants' explanation generally of

this phrase is not accepted by the Defendants, and is
a matter for expert evidence (as the Claimants
identify).

DD.3.13.2. The RMMRs did report and comment on major

market

events/conditions

which

significantly

impacted upon RBS's risk profile, including in

particular the deterioration in the credit markets and
its effect on RBS, as well as other notable events in

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the period leading up to, and including, the Rights

Issue.

DD.3.13.3. Moreover, in addition to the RMMRs, the topic of

deteriorating market conditions was the subject of
frequent discussion, including by the Board, and
including in respect of the above-mentioned
financial institutions (as well as others).

DD.3.13.4. For the avoidance of doubt, if (which is denied), the

Claimants'

explanation

of

"major

market

events/conditions" in their response to the Request

for Further Information is applicable, the RMMRs
as well as associated methods of reporting did
comment on "key events in the credit crisis" and
"the worsening credit crisis in 2008".

345DD.3.14.

As to paragraph 120O.3.10:

DD.3.14.1. As to the first sentence, it is unclear which "Groupwide limits" and "exposure" the Claimants allege
ought to have been included. The Claimants' case
should be limited to the example given in respect of
VaR in the second sentence, and is denied on that
basis.

DD.3.14.2. The second sentence is denied. VaR usage at the

end of 2007 was reported in the December 2007
RMMR.

345DD.3.15.

345DD.4.

Save as aforesaid, paragraph 120O.3 is denied.

Paragraph 120O.4 is embarrassingly vague. In particular, the Claimants have

failed to specify what is meant by "adequate economic and market condition

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reports" and how precisely it is alleged that these "ought to have considered
the impact upon RBS's risk profile in light of market conditions". Pending
further particulars, this allegation is denied. Without prejudice to the
foregoing, RBS had effective reporting mechanisms to report to the Board on
economic and market conditions, including the RMMRs, presentations at
meetings, risk updates, ad hoc reports and informal reporting channels, and
these reporting systems considered the impact of prevailing market
conditions on RBS's risk profile.

345DD.5.

Paragraph 120O.5 is denied. The statements referred to in paragraph 120H.4

(and referred to in paragraph 120O.5) did not relate to risk management
information. In any event, 13% of Board members is not a "substantial
number"; and moreover there was no "lack of confidence" expressed as
regards risk management information. There was no problem to be remedied
by the time of the Rights Issue.

345DD.6.

Paragraph 120O.6 is denied. Paragraph 169B.1 above is repeated.

345DD.7.

Paragraph 120O.7 is denied, for the reasons stated above in relation to RBS's
risk management and reporting processes.

345DD.8.

As to paragraph 120O.8, it is not admitted that there was no separate training

session. Save as aforesaid, paragraph 120O.8 is denied.

345DD.9.

As to paragraph 120O.9:

345DD.9.1. It is denied that the risk reports that GRC provided to GEMC
were not fit for purpose. The Claimants have alleged in their
Response to the Defendants' Request for Information that "fit for
purpose" means "appropriate" and "of a quality necessary to
achieve the particular task". The risk reports that GRC provided
to GEMC were of a quality to achieve their particular task,
namely to update GEMC on particular decisions taken at the

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GRC. The purpose was not to permit the GEMC to "understand

and assess the most serious risks facing the Group".

345DD.9.2. Accordingly:

DD.9.2.1.

It is admitted that the reports were typically one

page of A4 long. This length was adequate for the
purpose in question. Save as aforesaid, paragraph
120O.9.1 is denied.

DD.9.2.2.

Paragraph 120O.9.2 is denied. The risk reports in

question presented GRC's decisions, often together
with explanation. It is admitted that the reports did
not contain recommendations; the purpose of these
reports was not to make recommendations.

DD.9.2.3.

Paragraph 120O.9.3 is denied. The risk reports in

question did contain clear descriptions of serious
risks facing the Group (to the extent that such risks
were relevant to decisions of GRC).

These

descriptions were sometimes briefer than appeared

in, for example, the RMMRs. However, these
descriptions were adequate given the purpose of
these reports.

DD.9.2.4.

Paragraph 120O.9.4 is denied. The risk reports in

question did report upon major risk issues such as
stress testing and credit models (to the extent that
these were relevant to decisions of GRC). These
reports were briefer than, for example, the RMMRs.
However, these descriptions were adequate given
the purpose of these reports.

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345DD.10.

Paragraph 120O.10 is denied, for the reasons stated above in relation to

RBS's risk management and reporting processes.

345EE. As to paragraph 120P:

345EE.1 It is denied that the Board did not possess the ability and skills to fulfil its role in
Q1 2008. Further, it is denied that it was the Board's role to "manage the business"
of RBS. The Defendants will rely on the Board's full Terms of Reference, the 2007
HLCR, and upon any other relevant material, as evidence of the Board's proper
role.
345EE.2 Without prejudice to the generality of the foregoing denial, it is averred that the
Claimants have, in any event, failed properly to identify the "ability and skills" that
the Board is alleged not to have possessed nor have the alleged "challenging
conditions" been properly particularised.
345EE.3 Without prejudice to the foregoing, the Defendants respond to paragraphs 120P.1
to 120P.3 in paragraphs 345FF below on the basis that the Claimants' case is
confined to the matters set out therein.
345EE.4 For the avoidance of doubt, it is noted that the Claimants' allegations are limited to
"Q1 2008" and that, accordingly, the Claimants make no allegations regarding the
"ability and skills" of the Board outside of that period.
345EE.5 It is averred that the Board was a collective decision-making body, and its ability to
fulfil its role is therefore to be assessed collectively.
345FF. As to paragraph 120P.1:
345FF.1 The allegation that there was a "general lack." is embarrassingly vague. If it is
intended to be alleged that the Board had insufficient education and/or training
and/or understanding in respect of the matters set out in sub-paragraphs 120P.1.1 to
120P.1.3 having regard to the standards and expectations reasonably prevailing at
the time, that allegation is denied. Without prejudice to the generality of the
foregoing denial:

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345FF.1.1

The Board was comprised of highly experienced and knowledgeable

individuals with an appropriate mixture of skills and backgrounds,
including broad business and commercial experience and technical
experience.

345FF.1.2

Each of the Directors had been selected by the Nominations

Committee on the basis of his or her skills and experience, and each
had been approved for his or her role by the FSA.

345FF.1.3

The Board had an appropriate level of understanding of each of the

matters set out in paragraphs 120P.1.1 to 120P.1.3. Each Director
received a thorough induction upon joining RBS and the Board had
access to appropriate education and training in respect of each of
these matters (paragraph 345FF.2.1 is repeated). The Board was
provided with formal presentations and/or ad hoc reporting in
relation to all three areas, including the RMMRs and Nathanial's risk
presentations to the Board. Subparagraphs 120P.1.1 to 120P.1.3 are
accordingly denied.

345FF.1.4

If (which is specifically denied) the education and/or training and/or

understanding of any member of the Board in respect of any of the
matters set out in subparagraphs 120P.1.1 to 120P.1.3 is found to
have been inadequate, it is denied that this caused the Board as a
whole to be unable to discharge its role effectively in Q1 2008.

345FF.2 Paragraph 120P.2 is denied:

345FF.2.1

RBS had in place a system by which the Board could, and did,
receive education and/or training in relation to any matters relevant to
RBS's business as necessary.
(a) Upon their appointment, each new Director underwent a
thorough induction programme as part of which they visited
different businesses within the Group and received briefings
from senior management. These included briefings on risk
management.

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(b) Any Director could request a briefing on any topic on which

they required further information. Such briefings were available
to the whole Board or on a one-on-one basis, as appropriate.
Further, senior management were available to provide further
information outside of the formal Board meetings.
(c) The Directors were advised by the Group Secretary of
appropriate training and professional development sessions
provided by external firms (such as major auditors) and were
able to avail themselves of those sessions as they considered
necessary.
(d) The members of GAC made visits to businesses; other NEDs
were encouraged to, and did, accompany them on those visits.

345FF2.2

If (which is denied) RBS's system for providing education and/or

training to the Board was not effective, it is denied that this resulted
in the Board lacking the skill and ability to fulfil its role in Q1 2008.

345FF.3 Paragraph 120P.3 is denied. Without prejudice to the generality of the foregoing
denial, the Defendants respond on the basis that the Claimants' case is confined to
the matters pleaded in paragraphs 120P.3.1 to 120P.3.3 as follows:
345FF.3.1

It is admitted and averred that GAC was responsible for monitoring

the Group's risk management and internal control processes. The
Defendants will rely on the full Terms of Reference of GAC as
evidence regarding its remit.

345FF.3.2

It is averred that GAC was a collective decision-making body, and its

ability to fulfil its mandate is therefore to be assessed collectively.

345FF.3.3

GAC had an appropriate level of risk management expertise and

understanding to fulfil its mandate.
(a) It is denied that each member of GAC was required to have
expertise in investment banking risk management and controls
or, in particular, risk management of structured credit
exposures.

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(b) GAC met the requirements of the 2006 Combined Code on

Corporate Governance as required by the listing rules of the
FSA.
(c) GAC met the requirements of the NYSE's corporate governance
listing standards.
(d) Each member of GAC was appropriately designated an "Audit
Committee Financial Expert" as defined in the SEC rules under
the US Exchange Act.
(e) The members of GAC had extensive and complementary
relevant previous experience. The Defendants will rely on their
full educational and employment histories as evidence in that
regard.
(f) GAC made formal visits each year to the senior management of
GRM and GIA.

345FF.4 In the light of the foregoing, the Defendants plead to subparagraphs 120P.3.1 to
120P.3.3 as follows.
345FF.4.1 As to paragraph 120P.3.1:
(a) Hunter had appropriate experience to chair GAC. He had been
senior partner at KPMG in Scotland, a past president of the
Institute of Chartered Accountants in Scotland, and was an
auditor by background.
(b) It is admitted that Hunter had no previous professional role in a
risk management and controls department. However, his
background as an auditor gave him appropriate understanding
and experience of risk management and controls.
(c) It is admitted that he had no formal investment banking
experience beyond his experience as a Board member of RBS
since 2004.
(d) He was well qualified to chair GAC and was supported in that
role by the other members of GAC, by Nathanial, and by GRM.

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(e) Save as aforesaid, paragraph 120P.3.1 is denied.

345FF.4.2 As to paragraph 120P.3.2:

(a) Paragraph 345FF.3.3(a) is repeated. It is admitted and averred
that Buchan had expertise in investment banking risk
management and controls. It is denied that Buchan did not also
have expertise in relation to the risk management of structured
credit exposures.
(b) Further, MacHale had experience of investment banking risk
management and controls and other members of GAC had
relevant experience in relation to risk management and controls.
(c) Save as aforesaid, paragraph 120P.3.2 is denied.

345FF.4.3

Paragraph 120P.3.3 is denied. It is denied that GAC lacked adequate

risk management ability and skill for the reasons given above in
paragraphs 345FF.3 and 345FF.4. It is further denied that GAC failed
in its function as alleged in paragraph 120Z. Paragraph 345WW is
repeated.

345FF.5 If (which is specifically denied) GAC did not perform its role adequately or
effectively in any of the respects set out in paragraph 120Z, and if (which is also
specifically denied) GAC is found to have lacked adequate risk management skill
and understanding, it is not admitted that the latter was the cause of the former.
345GG As to paragraph 120Q:
345GG.1 It is denied that Group divisions or functions were led by individuals who lacked the
ability and skills to manage their respective divisions and functions in Q1 2008.
345GG.2 Without prejudice to the generality of the foregoing denial, it is averred that the
Claimants have, in any event, failed properly to identify the "Group divisions and
functions" being referred to, the "individuals" who are alleged to have lacked the
"ability and skills" to manage the divisions of RBS, or indeed what "ability and

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skills" those individuals are alleged to have lacked. Nor have the alleged
"challenging conditions" been properly particularised.
345GG.3 Without prejudice to the foregoing, the Defendants respond to paragraphs 120Q.1 to
120Q.3 in paragraphs 345II to 345MM below on the basis that the Claimants' case is
confined to the matters set out therein.
345GG.4 For the avoidance of doubt, it is noted that the Claimants' allegations are limited to
"Q1 2008" and that, accordingly, the Claimants make no allegations regarding the
"ability and skills" of the individuals who led the Group divisions or functions
outside that period.
345GG.5 It is assumed that the word "division" contains a typographical error and should read
"divisions".
345GG.6 It is denied, if it is intended to be alleged, that the individuals managing Group
functions were required to possess the ability and skills to manage Group divisions.
345HH.In the light of the foregoing, the Defendants plead to subparagraphs 120Q.1 to 120Q.3 as
follows:
345II. As to paragraph 120Q.1:
345II.1 It is admitted Cameron's role within RBS was a significant influence function for the
purposes of s.59 of the Financial Services and Markets Act 2000. The nature and
extent of the requirements under s.59 are matters for legal argument.
345II.2 Cameron worked for RBS in corporate markets for nearly 10 years prior to his
resignation in October 2008. He had been Chief Executive of Corporate Banking and
Financial Markets from October 2001 until January 2006, when it was restructured to
become Corporate Markets. He was Chief Executive of Corporate Markets from
January 2006 until March 2008, and was thereafter Chairman of Global Markets. At
the time of the Rights Issue, Cameron was highly regarded in the market and was
seen (both within RBS and outside) as having done an outstanding job leading his
division.

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345II.3 Further Both Corporate Markets and Global Markets included comprised the
Corporate Banking and GBM divisions, each of which had their its own Chief
Executive Officer responsible for the day-to-day management of those that business,
who were was in turn supported by an experienced team. As such, at all material
times Cameron formed part of a management team that brought together the skills,
market experience and expertise reasonably required for the proper stewardship of
GBM's business.
345II.4 In the result:
345II.4.1 It is denied that Cameron was incompetent or lacked the skills needed to
fulfil the function allotted to him, in particular when judged by
contemporaneous standards and reasonable expectations.
345II.4.2 In any event, in the circumstances prevailing both at the time of the
Rights Issue and at all material times thereafter, the Defendants were
reasonably entitled to conclude (and did conclude) that Cameron was
sufficiently competent and skilled.
345II.5 If (which is specifically denied) Cameron's skills or competence were in any respect
lacking, it is denied that this rendered any statement in the Prospectus untrue or
misleading or constituted information that needed to be disclosed.
345II.6 The Prospectus contained no specific statements concerning Cameron's experience or
expertise. It is denied any such statements should have been included, whether
pursuant to s.87A(1) or 90 of FSMA. So far as relevant, Cameron was a respected
senior City figure and was well known to market analysts.
345JJ. In light of the foregoing, the Defendants plead as follows to the sub-paragraphs of 120Q.1
122.
345JJ.1 Paragraph 120Q.1.1 122 is denied.
345JJ.2 As to paragraph 120Q.1.2 122.2:
345JJ.2.1

It is admitted that the words in inverted commas appeared within an

internal memorandum prepared by the Remuneration and Benefits

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division of RBS's Human Resources function on 2 June 2006. They

formed part of a wider passage which (in relevant part) provided as
follows:
"Market view
- Johnny Cameron is very well regarded in the market and is seen to
have done an outstanding job as Chief Executive, Corporate
Markets. Johnny is recognised as the head of the Corporate Markets
business, with responsibility for delivery of the business results
delegated to two experienced managers, Alan and Brian.
- In terms of responsibility for GBM, Johnny is seen more as Brian's
line manager than as being directly responsible for the delivery of
GBM's results; he is not considered a true Markets person who could
run GBM without Brian. On this basis, the view from the recruitment
consultants was that Johnny would not be a candidate for running a
major FM business at a competitor, particularly in relation to the
management of market risk. [...]"
345JJ.2.2

The words quoted in paragraph 120Q.1.2 122.2 did not record RBS's
assessment of Cameron. Further, they reported the views of
recruitment consultants.

345JJ.2.3

Yet further, they concerned the level at which Cameron should be

remunerated, not his competence to fulfil the role he occupied (which
was not in doubt). The point being made was that in view of the
division of roles between Cameron and Crowe, Cameron should not
be paid as if he had day-to-day responsibility for delivering GBM's
business, which he did not.

345JJ.3 As to paragraph 120Q.1.3 122.3:

345JJ.3.1

It is admitted that the words in inverted commas appear at page 387 of

the FSA Report.

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345JJ.3.2

It is denied that the exchanges to which the Claimants refer amounted

to an admission by Cameron that he did not "adequately" understand
CDOs for the purposes of carrying out his role within RBS.

345JJ.3.2

Alternatively, if they did amount to such an admission, that admission

was made in error and did not reflect the true factual position.

345JJ.3.3

The full content, context and significance of those exchanges is a

matter for evidence and argument.

345JJ.3.4

Save as aforesaid, paragraph 120Q.1.3 122.3 is denied.

345JJ.4 As to paragraph 120Q.1.4:

345JJ.4.1

It is admitted that the words in inverted commas in the first sentence

appear within an email sent by MacHale to McKillop dated 5 May
2008. The email went on to state "We believe that he needs to be
replaced as a matter of urgency by a very capable banker who reports
to Fred and who we believe is a credible successor to Fred (by all
means retain Johnny as Chairman of GBM dealing with clients etc.)".

345JJ.4.2

It is further admitted that the words in inverted commas in the second

sentence appeared within a note of a meeting with MacHale
conducted by Kevin Simons and Sally Wharton as part of the Project
Snow Review which included the following: "Then discussed planned
Board actions with respect to individuals. JANC to go within next
year, BJC to leave by year end, HJB to retire. New big hitter needed
to run GM who is likely to bring in GBM head of his/her own." The
note was not intended to be, and was not, a complete record of what
was said at that meeting.

345JJ.4.3

The Defendants will refer to each of the email and the note for their
full contents. The full context and significance of the documents are
matters for evidence and argument.

345JJ.4.4

It is denied, if it is intended to be alleged, that these documents

indicated that Cameron was not sufficiently competent or did not have

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the ability or skill necessary to fulfil his role as Chairman of Global

Markets, or that the Board held that view.
345JJ.4.5

Save as aforesaid, paragraph 120Q.1.4 is denied.

345JJ.5 As to paragraph 120Q.1.5:

345JJ.5.1

It is admitted that Cameron sent a handwritten letter to Goodwin dated

27 March 2008. The letter voiced Cameron's concerns about the level of
his remuneration and its contents were drafted to that end. The
Defendants will refer to the letter for its full contents. The full context
and significance of the letter are matters for evidence and argument.

345JJ.5.2

Save as aforesaid, paragraph 120Q.1.5 is denied. In particular, it is

denied that Cameron was unaware of his role and responsibilities.

345JJ.6 Paragraphs 120Q.1.6 122.4 and 120Q.1.7 122.5 are admitted. As regards the FSA's
position concerning Cameron and GBM:
345JJ.6.1

At all material times prior to Cameron's voluntary resignation in

October 2008, the FSA approved Cameron as (amongst other things) a
person fit and proper with the necessary competence and capability to
act as a director of RBS and to carry out significant management
functions (as admitted in paragraph 120Q). The FSA only started its
investigation into Cameron after he had resigned from RBS.

345JJ.6.2

The FSA made clear in its Report that it had not found Cameron to be
incompetent when assessed by the standards prevailing during the
period of his employment at RBS (FSA Report, p.406). It considered
that Cameron would not meet its "current standards" (i.e. those
applicable in December 2011) for approval as a holder of a significant
influence function.

However, the FSA acknowledged that these

standards reflected the new and "more robust approach" which it now
applied to the approval of senior managers (ibid).
345JJ.6.2

In any event, the FSA specifically recorded in its Report that it was
satisfied that the mixture of skills and experience across the GBM
senior management had not been inappropriate and that no enforcement

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action should therefore be taken concerning the decision to appoint

Cameron as Chairman of GBM (FSA Report, p.399).
345JJ.7 As to paragraph 120Q.1.8:
345JJ.7.1

It is denied that Cameron's ability and skills were limited in any way that
weakened the Board's management of structured credit risks.

345JJ.7.2

Without prejudice to the generality of the foregoing denial, it is averred

that the Claimants have, in any event, failed properly to identify the
respects in which Cameron's "abilities and skills" are alleged to have
been "limited".

345JJ.7.3

Without prejudice to the foregoing, the Defendants plead to 120Q.1.8 on

the basis that the scope of the allegation as regards Cameron's ability and
skill is confined to the scope of the allegation pleaded at 120Q.1.1.

345JJ.7.4

Further:
(a) the Defendants plead to the allegation that "Cameron did not bring
to the Board's attention critical risks which he should have
appreciated and escalated" on the basis that it is confined to the
particulars given in paragraph 23 of the Claimants' response to the
Defendants' RFI dated 9 March 2016; it is not understood in what
respects the risks identified therein are alleged to have been
"critical" risks; and
(b) the Defendants plead to the allegation that "the 2006 plans for the
expansion of the structured credit business displayed a failure of
understanding of proper risk management" on the basis that its
scope is confined to the second and third sentences of paragraph 23
of the Claimants' response to the Defendants' RFI dated 9 March
2016.

345JJ.7.5

It is denied that the 2006 plans for the expansion of GBM's structured
credit business displayed a failure of understanding of proper risk
management. It is averred that the risk implications of those plans

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were brought to the Board's attention in the GBM presentation to the

Board and GEMC members at the June 2006 strategy session and
considered by the Board. The risk implications of those plans were
considered further by the Board in conjunction with the 2007 Group
Budget.
345JJ.7.6

It is averred that Cameron had the skills and ability to report on risks
in relation to structured credit. It is in any event denied that the Board
was reliant solely on Cameron's skill and ability in relation to the
reporting to it of such issues.
(a) Cameron was supported in his role by Crowe, including in the
preparation of his reporting on GBM, and Crowe was in turn
supported by a larger team within GBM.
(b) Cameron was not the only channel by which the risk issues
relating to GBM were brought to the Directors' attention. For
example these could be, and were, brought to the Board's
attention by Crowe, Nathanial and by the other Executive
Directors.
(i)

Typically written reports on GBM were prepared by

Crowe and Cameron provided oral reports at Board
meetings.

(ii)

Crowe and Nathanial (among others) attended the

Board's strategy sessions.

(iii)

Crowe regularly reported issues within GBM to

GCEAG and GEMC, which were attended by the
Executive Directors and by Nathanial.

(iv)

In addition to his formal presentations to the Board,

Nathanial made informal presentations to the Board,
had frequent access to the NEDs and the Executive
Directors, worked closely with GAC and attended
meetings of GCEAG and GEMC.

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(v)

At Board meetings the other Executive Directors

commented on risk issues as appropriate.

345JJ.7.7

Issues relating to VaR were discussed at Board, GEMC and GCEAG

level and Cameron played an active role in these discussions. Further,
from at least November 2007 onwards there were frequent discussion
of VaR limits and stress testing at GEMC and GCEAG meetings as
market conditions meant that, at least in respect of super senior
CDOs, VaR became a less useful tool for the assessment of their
market risk. Save as aforesaid, paragraph 23.1 of the Claimants'
response to the Defendants' RFI dated 9 March 2016 is denied.

345JJ.7.8

The Board was adequately informed and aware of RBS's liquidity

position. While the Group's liquidity position remained within Board
and regulatory approved limits that were considered prudent, the
disclosed market-wide conditions were causing pressure in funding
markets that had an effect on RBS and its liquidity limit utilisation at
that time. Paragraphs 157.2, 157.3, 169A and 186 are repeated. It is
denied that asset growth in GBM was unconstrained. GBM adopted a
plan to reduce RWAs and unsecured funding needs in March 2008.
Paragraph 174B is repeated. It is denied that there was "no effective
FTP system". The funds transfer pricing system was revised in March
2008. Paragraph 190AD is repeated.

345JJ.7.9

Save as aforesaid, paragraph 120Q.1.8 is denied.

345JJ.8 As to paragraph 120Q.1.9:

345JJ.8.1

It is denied that Crowe was Cameron's "deputy".

345JJ.8.2

It admitted that Crowe was seconded to ABN AMRO from October

2007 to March 2008. However, it is denied that this was something
which ought to have been disclosed.
(a) Although Crowe was on secondment, he continued to contribute
to the management of GBM. He retained his GBM office and his
office at ABN AMRO was close by. He remained the leader of

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GBM SET and had the authority to continue to play a significant

management role in GBM, which he did. He also continued to
attend GBM and GCEAG morning meetings.
(b) During that period, Leith Robertson was appointed Acting CEO
and was responsible for the day-to-day running of GBM. He was
supported by Peter Nielsen and Symon Drake-Brockman, who
both had extensive markets experience.
(c) It is admitted that the words quoted in the last sentence appeared
in the FSA Report. The Report also stated "Crowe's secondment
came at a time when interview evidence shows that Cameron
had acquired a much better understanding of structured credits
and other staff were able to provide an acceptable level of skills
and experience to compensate for Crowe's absence." The full
content, context and significance of the Report are matters for
evidence and argument.
345JJ.9 Save as aforesaid, paragraph 120Q.1 is denied.
345KK. As to paragraph 120Q.2:
345KK.1 It is denied that Whittaker lacked the risk management skill and understanding to
perform his role with respect to GRC effectively, or to be a conduit through which
the concerns of GRM and GRC were brought to the Board.
345KK.2 Without prejudice to the generality of the foregoing denial, it is averred that the
Claimants have, in any event, failed to identify the specific "risk management skill
or understanding" that Whittaker is alleged to have lacked.
345KK.3 Without prejudice to the foregoing, the Defendants respond to paragraphs 120Q.2.1
to 120Q.2.3 on the basis that the Claimants' case is confined to the matters set out
therein.
345LL In the light of the above, the Defendants plead to subparagraphs 120Q.2.1 to 120Q.2.3 as
follows:

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345LL.1 As to paragraph 120Q.2.1:

345LL.1.1

It is admitted that Whittaker had not previously held a senior position

in a risk management department.

345LL.1.2

Whittaker was highly experienced and had been Group Treasurer of

Citigroup for 5 years, a role which required him to keep senior
management informed of risk issues.

345LL.1.3

Save as aforesaid, paragraph 120Q.2.1 is denied.

345.LL.2 As to paragraph 120Q.2.2 and the allegations made in paragraph 24 of the

Claimants' response to the Defendants' RFI dated 9 March 2016:
345LL.2.1

It is averred that Whittaker did not usually chair GRC; in practice

Nathanial chaired and was in charge of the agenda for almost all of
the meetings of GRC between his appointment and the Rights Issue.
The main responsibility of GRC was to recommend and approve
(subject to delegated authority from GEMC) limits, policies and
procedures and the meetings were often technical in nature. As such
it was therefore appropriate for them to be led by the Group's CRO,
who had a specialised focus on risk management.

345LL.2.2

As to Whittaker's attendance at GRC, the Defendants will rely upon

the full minutes of GRC.

345LL.2.3

It is denied that GRC was not functioning effectively. Paragraphs

345SS and 345WW are repeated.

345LL.2.4

Nathanial was in charge of GRC's agenda and ensured that it was

appropriate and complete. It is averred that risk issues were
appropriately reported to GEMC. The Defendants will rely upon, as
necessary, minutes and papers of GRC and GEMC, in their proper
context, and upon any other relevant material, as evidence in relation
to GRC's fulfilment of its mandate and reporting of risk issues to
GEMC.

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345LL.2.5

As to GRC's reporting to GEMC, paragraph 345DD.9 is repeated.

Matters raised at GRC were reported to the Board as appropriate.

345LL.2.6

The concerns of GRM were reported to the Board in the RMMRs,

which were produced by GRM under Nathanial's leadership.

345LL.2.7

Nathanial had other opportunities to report GRM's concerns to the

Directors, and did so. Paragraph 345KK.7.6 is repeated.

345LL.2.8

Paragraph 24.4 of the Claimants' response to the Defendants' RFI

dated 9 March 2016 is embarrassingly vague.

345LL.2.9

Save as aforesaid, paragraph 120Q.2.2 and the allegations made in

paragraph 24 of the Claimants' response to the Defendants' RFI dated
9 March 2016 are denied.

345LL.3 As to paragraph 120Q.2.3:

345LL.3.1

It is denied that Whittaker failed to escalate significant risk

management problems to the Board, and in any event denied that
there were such problems for the reasons set out in paragraphs 335A
to 377A.

345LL.3.2

If (contrary to the Defendants' case) Whittaker did not escalate to the

Board significant risk management issues which were reported to
him, it is denied that the Board thereby lacked information necessary
for it to perform its function. Risk management issues were escalated
to the Board as appropriate. Paragraphs 345DD and 347JJ.7.6 are
repeated.

345LL.3.3

Without prejudice to the generality of the foregoing denial, the

Defendants plead to paragraph 120Q.2.3 on the basis that it is
confined to the particulars given by the Claimants in paragraph 25 of
their response to the Defendants' RFI dated 9 March 2016.

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345LL.3.4

The Defendants will rely on Nathanial's memo to Stephen Hester

dated 20 February 2009 for its full content. The context and
significance of that memo are matters for evidence and argument.

345LL.3.5

Without prejudice to the foregoing:

(a)

It is denied that the three matters identified in the memo that

are relied upon by the Claimants at paragraphs 25.1 to 25.3
of their response to the Defendants' RFI dated 9 March 2016
constituted "significant risk management problems".

(b)

It is averred that LGD was used as a concentration limit.

Nathanial wanted to consider the use of a range of other
measures to complement LGD. The second sentence of
paragraph 25.1 of the Claimants' response to the Defendants'
RFI dated 9 March 2016 is accordingly denied.

(c)

It is admitted that in August 2007 information in a paper

prepared by Nathanial was used in the preparation of a slide
presented to the Chairman's Committee (and it is admitted
that this was a committee of the full Board, which the whole
Board was invited to attend). It is denied that there were
significant risk matters in the paper that were not otherwise
reported to or understood by the Board. The words after the
comma in the second sentence of paragraph 25.2 of the
Claimants' response to the Defendants' RFI dated 9 March
2016 are accordingly denied.

(d)

As to paragraph 25.3 of the Claimants' response to the

Defendants RFI dated 9 March 2016, it is admitted that
Goodwin's handwritten annotation appeared on the first page
of a draft "Risk Highlights" document dated December 2007.
That single word annotation which related to the entirety of
the draft "Risk Highlights" document dated December 2007,
reflected Goodwin's preference that there be one form of
report to the Board and that that should be the RMMR. The

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"highlights" were therefore set out on the first page of the

RMMR for December 2007 rather than in a separate
document. It is accordingly admitted that a separate "Risk
Highlights" document was not circulated in December 2007.
It is denied that the Board was not informed of, or otherwise
unaware of, important risk matters. Save as aforesaid,
paragraph 25.3 of the response is denied.
345LL.3.6

Save as aforesaid, paragraph 120Q.2.3 is denied.

345LL.4 Save as aforesaid, paragraph 120Q.2 is denied.

345MM As to paragraph 120Q.3:
345MM.1

It is admitted that the Board was disappointed with the losses sustained in
Citizens' SBO portfolio. However, it is denied that the Board was of the view
that Fish had positively misled the Board or had been dishonest, and denied in
particular that this was Goodwin's view. MacHale's view is not admitted. It is in
any event denied that MacHale's view represented the view of the Board.

345MM.2

It is admitted that Fish was not suspended or otherwise disciplined and that the
matter was not referred to Compliance for an investigation. The circumstances
surrounding the SBO portfolio were reviewed in the course of the Project Snow
Review by GIA and reported to and discussed by the Board. It is denied that the
matter needed to be separately reported to Compliance for an investigation.

345MM.3

It was already planned that Fish would leave RBS. He was moved from an
Executive role as CEO of Citizens to a role as non-executive Chairman of RBS
America and Citizens effective 1 January 2008, and to a position as a NED
effective 16 May 2008 and it was planned that he would retire from that role too
by the end of 2008.

345MM.4

It is accordingly denied that the Board's response in relation to Fish's

involvement with the SBO portfolio, including the plans for his retirement,
constituted any breach of (or for the avoidance of doubt, any shortcoming in) risk
management.

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345MM.5

Save as aforesaid, paragraph 120Q.3 is denied.

345NN As to paragraph 120R, it is denied that RBS's governance did not function effectively for the
reasons given below. For the avoidance of doubt, the Defendants plead to this allegation on
the basis that it is limited to the particulars given in paragraphs 120S to 120AA.
345OO Further, paragraph 120S is denied. Without prejudice to the generality of the foregoing denial,
the Defendants plead to paragraph 120S on the basis that the Claimants' case is confined to
the particulars given in sub-paragraphs 120S.1 and 120S.2.
345OO.1Paragraph 120S.1 is denied:
345OO.1.1

It is assumed that the second appearance of the word "Board" in this

allegation is a typographical error and that "risk appetite of the
Board" should read "risk appetite of the Group".

345OO.1.2

It is denied that the Board's Terms of Reference did not require it to

set and review the risk appetite of the Board, or were defective. The
Defendants will rely on the full Terms of Reference of the Board and
on the HLCR (which contained the Board's Terms of Reference) as
evidence regarding the Board's remit. In any event, as a matter of
practice, the Board did set and review the risk appetite of the Group.
Paragraphs 345L to 345W are repeated.

345OO.2 As to paragraph 120S.2:

345OO.2.1

It is admitted that GAC's Terms of Reference did not expressly

require it to advise the Board as to RBS's risk appetite and strategy. It
is denied that they were defective for this reason (or at all) or that this
meant that RBS's governance was not functioning effectively. The
full content and meaning of GAC's Terms of Reference are matters
for evidence and argument.

345PP Paragraph 120T is denied for the reasons given immediately below.
345PP.1 As to paragraph 120T.1:

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345PP.1.1

It is admitted that Nathanial's formal executive and functional

reporting lines as CRO were to Whittaker, Group Finance Director,
and that Whittaker reported to Goodwin, the Group CEO. It is denied
that this meant that GRM did not report to the Board independently
of senior management, and averred that this was not uncommon
practice and did not constitute any material shortcoming in
governance as assessed as at the time of the Rights Issue.

345PP.1.2

In practice both Nathanial and Whittaker communicated directly with

senior management and the Board, including Goodwin, both formally
and informally.

345PP.1.3

Nathanial also had a non-executive reporting line to Hunter,

Chairman of GAC, which was a committee of the Board. Nathanial's
reporting line to Hunter was independent of senior management.

345PP.1.4

Save as aforesaid, paragraph 120T.1 is denied.

345PP.2 As to paragraph 120T.2:

345PP.2.1

It is denied that Whittaker or Goodwin controlled the content of the

RMMRs or Nathanial's oral reporting to the Board, GEMC and GAC.
Nathanial along with GRM, was responsible for producing the
RMMRs. Whittaker and Goodwin reviewed draft RMMRs with a
focus on form and clarity.

345PP2.2

Nathanial was able to, and did, raise all matters that he considered
necessary with the Board, GAC and GEMC.

345PP2.3

It is denied that Whittaker or Goodwin's review represented any

shortcoming in governance, or that the reporting of risk issues by
GRM to the Board, GEMC or GAC was thereby inappropriately
restricted. Save as aforesaid, paragraph 120T.2 is denied.

345QQ Paragraph 120U is denied. Without prejudice to the generality of the foregoing denial, the
Defendants respond on the basis that the Claimants' case is confined to the particulars given
in sub-paragraphs 120U.1 to 120U.4 as follows.

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345QQ.1 As to paragraph 120U.1, revenue was necessarily one of the metrics upon which the
Board and senior management were focussed. However, this was not to the
exclusion of appropriate consideration of risk management and control issues. Save
as aforesaid, paragraph 120U.1 is denied.
345QQ.2 As to paragraph 120U.2:
345QQ.2.1

The words prior to the first parenthesis are embarrassingly vague. In

particular, the Claimants have failed properly to specify what is
meant by the phrase "general complacency", nor have the alleged
"market conditions" been properly particularised.

345QQ.2.2

Without prejudice to the foregoing, the Defendants plead to

paragraph 120U.2 on the basis that the Claimants' case is confined to
an allegation that the Board and/or senior management made an
assumption, the content of which is described by the words in
parentheses. That allegation is denied. It is specifically denied that as
to this, it is denied that as at the time of the Rights Issue there was an
assumption among the Board or senior management that there was no
need for a re-assessment of risk profile and strategy in response to the
market conditions of Q1 2008.

345QQ.3 Paragraph 120U.3 is denied.

345QQ.3.1

Board meetings were chaired by McKillop, who sought to ensure that

all Directors had the opportunity to speak openly, challenge others'
views, and raise any questions they wished, which they did. Issues
were debated openly and decision making was not dominated by any
single individual. The Directors challenged Goodwin as they felt
necessary.

345QQ.4 As to paragraph 120U.4:

345QQ.4.1

There were 8 or 9 scheduled meetings of the Board each year.

Further meetings of the Board were called in addition to these
scheduled meetings as required. The Board's use of additional
meetings where appropriate in this way was a strength rather than a

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weakness. It is denied that these additional meetings were

"prevalent" in any negative sense or that they represented a failure of
governance.
345QQ.4.2

The Board's meetings were not hurried.

345QQ.4.3

It is admitted that typically there were Directors' dinners the night

before Board meetings. It is denied that agenda items were agreed at
those dinners. The purpose of the dinners was not to pre-empt the
formal meeting the following day. Rather, they provided a forum for
the Directors to interact outside the formal Board meetings and to
discuss relevant matters.

345QQ.4.4

Some of the Directors' dinners were attended by the NEDs only,

some by all of the Directors, and some by the NEDs and Goodwin
only. The latter arrangement was used, for instance, in order to
enable Goodwin to update the NEDs on succession plans (which
required no decision to be taken) without taking time away from
other matters at the formal meeting the following day.

345QQ.4.5

It is admitted that the Directors' dinners were generally un-minuted.

345QQ.4.6

As to oral briefings, these were used as appropriate to supplement

written briefings and reporting. Each of the Executive Directors
reported orally to the Board on their areas of responsibility as a
supplement to the written Group financial report. The use of oral
briefings in this way represented a strength rather than a weakness,
and did not constitute a shortcoming in governance.

345QQ.4.7

Save as aforesaid, paragraph 120U.4 is denied.

345RR As to paragraph 120V, it is admitted that the words quoted in this paragraph appeared in the
HLCR of 2007. The Defendants will rely on the full wording of the HLCR as evidence in
relation to GRC's mandate as regards risk appetite. It is denied that GRC was deficient in
carrying out that mandate for the reasons set out below in response to paragraphs 120V.1 to
120V.5 and 120W. The Defendants will rely upon, as necessary, minutes and papers of GRC,

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in their proper context, and upon any other relevant material, as evidence in relation to GRC's
fulfilment of its mandate. Save as aforesaid, paragraph 120V is denied.
345RR.1 As to paragraph 120V.1, it is admitted that GRC was a sub-committee of GEMC.
As to the attendance of GEMC members, the Defendants will rely, so far as
relevant, upon the records of actual attendance at GRC meetings. It is admitted that
Whittaker attended fewer than a quarter of GRC meetings in 2007 and 2008. It is
denied that this represented ineffective governance. GRC meetings were often
technical in nature and it was therefore appropriate that they should be led and
attended by individuals with specialised risk management expertise Paragraph
345LL.2 is repeated.
345RR.2 As to paragraph 120V.2:
345RR.2.1

GRC's role in relation to risk appetite was set out in the HLCR. The
HLCR stated that the responsibilities of GRC included: "to provide
appropriate input to the risk-appetite setting process" and "To
approve and refine as necessary Group-wide credit risk, enterprise
risk, market risk and regulatory risk policies, processes and
procedures considered and approved in the context of the Group's
risk appetite, the Group's risk profile, and information on the
effectiveness of existing risk policies.".

345RR.2.2

GRC fulfilled its role as set out in the HLCR. It is specifically denied
that GRC was required to set risk appetite independently of the Board
or GEMC, or that it did so. It is accordingly also denied that it
required a formal methodology for doing so.

345RR.2.3

The allegation that "the papers presented to it adopted no consistent

or consolidated approach to risk appetite" lacks sufficient specificity
to be comprehensible as a particular of the allegation that GRC was
deficient in carrying out its mandate.

345RR.2.4

Without prejudice to the foregoing, it is denied, if it is intended to be

alleged, that the papers presented to GRC were inadequate to allow
GRC to fulfil its mandate.

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345RR.2.5

Save as aforesaid, paragraph 120V.2 is denied.

345RR.3 Paragraph 120V.3 is denied. GRC's role in relation to risk appetite was set out in the
HLCR, which was approved by the Board and GEMC.
345RR.4 Paragraph 120V.4 is denied. RBS's risk appetite was set by the Board. Paragraph
345RR.1 is repeated. Paragraphs 345RR.2 and 345M are repeated.
345RR.5 As to paragraph 120V.5, the reports provided by GRC to GEMC were appropriate
given their role. Paragraph 345DD.9 is repeated. The Defendants will rely upon the
full set of reports as evidence as to their form and content. It is denied that it would
have been appropriate, or constituted effective governance, to pass on all of the
information in those reports to the Board. Information was reported to the Board as
appropriate given the Board's role. Save as aforesaid, paragraph 120V.5 is denied.
345SS As to paragraph 120W:
345SS.1 The first sentence is embarrassingly vague. Without prejudice to the foregoing, the
Defendants plead to paragraph 120W on the basis that the Claimants' case is
confined to the allegations made in the second and third sentences.
345SS.2 The policies and procedures at RBS were subjected to a major review and overhaul
under Nathanial's leadership which was ongoing at the time of the Rights Issue.
Prior to that review, the term 'policies' had been used to refer to documents that were
in fact processes, in addition to policies. It is admitted that there were over 600 such
documents. Of these, the great majority were processes, rather than policies.
345SS.3 It is not admitted that GRC reviewed fewer than 20 of the 600 documents referred to
in paragraph 120W in the 18-month period from February 2007 to October 2008,
that they were "difficult to locate" or that compliance with them was "not
systematically monitored". The relevance of these allegations is denied in the light
of the foregoing paragraph. It is in any event denied that GRC's review of these
documents constituted ineffective governance. The Defendants will rely upon, as
necessary, minutes and papers of GRC, in their proper context, and upon any other
relevant material, as evidence of its fulfilment of its role. The timescale in which
policies were to be reviewed was specified in each policy itself. Further, where
policies were not risk policies, it was not for GRC to review them.

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345SS.4 Save as aforesaid, paragraph 120W is denied.

345TT As to paragraph 120X, it is specifically denied that the arrangments for the SAU or the SLS
constituted ineffective governance or meant that RBS's governance did not function
effectively. The Defendants respond to sub-paragraphs 120X.1 to 120X.3 below.
345TT.1 As to paragraph 120X.1:
345TT.1.1

It is admitted that Nathanial was given oversight of the SAU and that
this was outside his job description. It is denied, if it is intended to be
alleged, that he headed the SAU's day-to-day operations. The SAU
was led by John Anderson.

345TT.1.2

Nathanial was made responsible for the SAU: (i) precisely in order to
ensure that the assets which it contained were managed
independently of the business; and (ii) because he had extensive
restructuring and remedial experience from his previous roles at
Citigroup. Because Nathanial's role was one of oversight and the
SAU was performing a function independent of the business it was
not necessary for a further independent function to oversee this work.

345TT.1.3

Save as to the extent consistent with the foregoing, paragraph 120X.1

is denied.

345TT.2 As to paragraph 120X.2, it is averred that the allegations made before the second
comma are embarrassingly vague. Without prejudice to the foregoing, the
Defendants respond to paragraph 120X.2 on the basis that the Claimants' case is
confined to the matters set out in paragraph 120O.3.8. Paragraph 345DD.3.12 is
repeated.
345TT.3 As to paragraph 120X.3, the SAU was a newly formed unit and, as such, it was still
establishing its staff, key processes and controls. This was to be expected and did
not constitute ineffective governance, as was also the case in relation to its
compliance with Sarbanes-Oxley. Save as aforesaid, paragraph 120X.3 is denied.
345UU Paragraph 120Y is denied. Paragraph 345JJ.5 is repeated.

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345VV As to paragraph 120Z, it is denied that GAC did not fulfil its function with respect to the
review of the Group's internal controls and risk management adequately and effectively.
345WW Without prejudice to the generality of the foregoing denial, it is averred that paragraph 120Z
is embarrassingly vague. The Defendants respond to paragraphs 120Z.1 to 120Z.6 in
paragraphs 345WW.1 to 345WW.6 below on the basis that the Claimants' case is confined to
the matters set out therein.
345WW.1 As to paragraph 120Z.1, it is denied that it was the proper role of GAC to conduct
an independent assessment of the Group's risk management and control system.
GAC received assessments from the control functions within RBS, from RBS's
independent auditors and from the FSA as to the effectiveness of RBS's risk
management and controls, and those assessments applied substantive criteria and
standards. Save as aforesaid, paragraph 120Z.1 is denied.
345WW.2 As to paragraph 120Z.2:
345WW.2.1

The allegation that GAC failed to assess the RMMRs in a "systematic

and critical way" lacks sufficient precision to be understood, and in
particular fails properly to identify what it is alleged "systematic and
critical" assessment of the RMMRs would have entailed.

345WW.2.2

Without prejudice to the foregoing, it is denied that GAC's

assessment of the RMMRs was inadequate or ineffective. GAC
discussed and analysed the RMMRs as appropriate, and was aided in
so doing by Nathanial. Paragraph 345FF.3 is repeated. Further, all
GAC members were also members of the Group Board, and the
RMMRs were also discussed and analysed as appropriate in that
forum. It is specifically denied that the RMMRs were flawed and
ineffective. Paragraph 345DD.3 is repeated.

345WW.3 As to paragraph 120Z.3, it is not understood what is meant by "annual risk

reporting by GRM". It is denied that the document relied upon by the Claimants in
relation to this paragraph (the "Risk Outlook 2008") constituted annual risk
reporting by GBM. Without prejudice to the foregoing, paragraph 120Z.3 is
denied. It is denied that the risk reporting provided to GAC by GRM was

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inadequate. Paragraph 345DD is repeated. GAC challenged risk reporting by GRM

as appropriate.
345WW.4 As to paragraph 120Z.4, the Claimants' reference to the December 2007 GAC
performance evaluation is selective and misleading: as to the statement "The
Committee receives appropriate and timely information of the right length and
quality", 40% of respondents agreed, 20% were neutral and 40% disagreed. To the
extent that an issue was identified in the responses to that statement, it concerned
the timeliness with which information was provided, not a lack of information.
The full content, context and significance of the 2007 GAC performance
evaluation are matters for evidence and argument. Further, the timeliness with
which information was reported was improved following this Evaluation. In the
2008 GAC Performance Evaluation, only 10% of respondents disagreed with the
statement quoted above. Save as aforesaid, paragraph 120Z.4 is denied.
345WW.5 As to paragraph 120Z.5:
345WW.5.1

It is admitted that GAC approved the annual Risk and Control

Assessment dated February 2008 without an independent assessment
of the paper supporting it, but denied that this represented any failure
of governance. GAC had obtained the Risk and Control Assessment
from a control function (GRM) and it was not necessary or
appropriate to require an independent assessment of the integrity of
the supporting paper. It is in any event denied that the paper was
inadequate. Save as aforesaid, paragraph 120Z.5 is denied.

345WW.6 Paragraph 120Z.6 lacks sufficient specificity to be understood as a particular of the

allegation made at 120Z (which is in any event embarrassingly vague). It is in any
event denied, if it be so alleged, that GAC failed to engage adequately with the
issue of whether an impairment to goodwill was required. Paragraphs 310 to 313
above are repeated herein.
345XX Paragraph 120AA is denied.

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345XX.1 It is denied that GIA performed its function inadequately. GIA was reviewed every
three years by an external auditor and every year by GAC. It received positive
reviews from both in early 2008.
345XX.2 GIA's function was as set out in the HLCR. To fulfil this function it conducted a
rotating programme of audit assessments according to an Audit Plan agreed with
GAC. These assessments evaluated the processes and controls over key business
risks and targeted those areas of the business that were considered to be higher
risk. It was not GIA's function to identify all issues across RBS simultaneously.
345XX.3 As to the Project Snow Review, this was not part of the Audit Plan. It was focused
on learning lessons from particular, known outcomes, with the benefit of
hindsight. To the extent that it identified issues not previously identified in the
execution of the Audit Plan, it is therefore denied that those should have been
identified earlier.
345XX.4 It is therefore denied that GIA should have identified such risk management and
control issues as are alleged elsewhere in section K, which are in any event
specifically denied. Paragraphs 120AA.1, 120AA.2 and 120AA.3 are accordingly
also denied.
345XX.5 Paragraph 120AA.4 is denied. It was not GIA's role to review or report on the
functioning of GAC as to do so would have created a conflict of interest between
the two bodies. It is in any event denied that GAC was not functioning properly.
345YY If (which is specifically denied), any of the matters alleged at paragraph 120R to 120AA and
the subparagraphs thereto are found to have constituted ineffective governance, it is denied
that RBS's governance overall was ineffective.
346-366 [not used; where text from paragraphs with those numbers within the Re-Amended Defence
has been preserved in this Re-Re-Amended Defence, that has been indicated above].
367.

The parenthesis in paragraph 124B120AB is noted. As to paragraph 124b120AB.1:

367.1

It is admitted that in February 2013, RBS reached regulatory settlements with the
FSA, the CFTC and the DoJ, pursuant to which it was required to pay financial

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penalties in the amounts stated in paragraph 124B.1. The regulators' reasons for
requiring RBS to pay those penalties were set out as follows:
(a)

in the case of the FSA, in an FSA final notice dated 6 February 2013 ("the
FSA Notice");

(b)

in the case of the CFTC, in an order dated 6 February 2013 (CFTC Docket
No. 13-14) ("the Order"); and

(c)

in the case of the DoJ, in a deferred prosecution agreement ("DPA"), dated 5

February 2013.

367.2

RBS The Defendants will refer to each of those documents for their full contents,
true meaning and effect, and the Claimants' purported gloss of the regulators'
reasons is denied.

367.3

RBSThe Royal Bank of Scotland plc made various admissions, acceptances and
acknowledgments within the DPA. In particular, RBSTthe Royal Bank of Scotland
plc admitted that the allegations described and the facts stated within a statement of
facts incorporated to the DPA (as Attachment A) were true and accurate ("the DoJ
Statement of Facts"). Those admissions, acceptances and acknowledgments are
adopted and adhered to here by RBS and nothing in this document (for the
avoidance of doubt, including Schedule 3) should be read as RBS denying,
contradicting or qualifying the same.

367.4
368.

Save as aforesaid, paragraph 124B120AB.1 is denied.

As to paragraph 124B120AB.2 and the subparagraphs thereto:

368.1

As set out above, the Defendants will refer to the FSA Notice for its full contents,
true meaning and effect; the Claimants' purported gloss of that document is
therefore denied.

368.2

It is admitted that the FSA found on 6 February 2013 (as recorded in the FSA
Notice) that:
(a)

Between October 2006 and November 2010, RBS had breached Principle 5
of the FSA's Principles for Businesses by failing to observe proper standards

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of market conduct in relation to LIBOR in the manner and to the extent set
out in paragraphs 6-14, 46-74 and 104-113 of the FSA Notice.
(b)

Between January 2006 and March 2012, RBS had breached Principle 3 of
the Principles for Businesses by failing to have adequate risk management
systems and controls in place in relation to the LIBOR rates submissions
processes, in the manner and to the extent set out in paragraphs 15-23, 75102 and 114-116 of the FSA Notice ("the Alleged Principle 3 Failures").

(c)

The duration and extent of the Aalleged Pprinciple 35 Ffailures was

exacerbated by RBS's inadequate systems and controls.

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368.3

To the extent that within paragraph 124B.2 (and the sub-paragraphs thereto) the SL
Group Claimants adopt the findings of the FSA and advance them as allegations in
these proceedings, the Defendants respond as follows:
(a)

Paragraph 124B is pleaded by the SL Group as the a particular (the fifth of

five) of an allegation (advanced in paragraph 121 and limited by the words
in parenthesis in paragraph 124B) that at the time of the Rights Issue RBS's
management, risk management controls, risk modelling and management
information were allwas inadequate.

(b)

The Claimants rely on that allegation in support of their case that the
Prospectus was misleading (paragraph 125) and failed to make mandatory
disclosures (paragraph 126), or alternatively that a supplementary
prospectus should have been produced before the Closing Date (paragraph
127).

(c)

In the circumstances, the adequacy (or otherwise) of RBS's systems and

controls in the period after the Closing Date is not relevant to the claims
advanced by the Claimants in these proceedings.

(d)

As a result, to the extent that paragraph 124B.2 (including the subparagraphs thereto), concerns matters post-dating the Closing Date
(including RBS's systems and controls during that period), it is not relevant
to these proceedings and the Defendants do not plead to it.

(For the

avoidance of doubt, no admissions are made as a result.)

(e)

To the extent that the allegations in paragraph 124B.2 (including the subparagraphs thereto) relate to the period on or pre-dating the Closing Date,
then save as already admitted in the Defendants plead to the substance of
those findings as set out in Schedule 3, which is incorporated hereto. As
more fully particularised within that Schedule, it is admitted (with
hindsight) that RBS's systems did not detect and prevent the misconduct of a
small number of employees in the period prior to the Closing Date (as
particularised within the DoJ Statement of Facts, the paragraph is not
admitted).

However, it is denied that RBS was thereby in breach of

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Principle 3 as at the time of the Rights Issue; RBS's relevant systems and
controls were reasonable in the circumstances prevailing at that time.
(f)

Further, and for the avoidance of doubt, it is denied that the Alleged
Principle 3 Failures, even if established, were matters that were required to
have been disclosed, or rendered untrue or misleading any of the statements
in the Prospectus. It is noted that, in relying on the findings made with
hindsight by the FSA in February 2013, the Claimants do not identify the
matters that were or could reasonably have been known by the Defendants
at the time and could and should have been disclosed in the Prospectus, as
information necessary to enable investors to make an informed assessment
of RBS's financial position or prospects.

368.4

By their Amended Consolidated Particulars of Claim, the Claimants no longer adopt

the findings in the FSA Notice or advance them as allegations in these proceedings.
The Defendants therefore do not plead further to the content of the FSA Notice, nor
to the correctness of the findings made within it, many of which concern matters
post-dating the Closing Date.

368.5

Save as aforesaid, paragraph 120AB.2 is denied.

368A. Paragraphs 120AB.3 and 120AB.4 are noted.

368B. As to paragraph 120AC:
368B.1 The Claimants contend that there was a "real risk" that RBS's LIBOR submitters
would manipulate or attempt to manipulate LIBOR by taking into account one of
two inappropriate factors when making their submissions, namely (i) RBS's P&L on
derivative or money market trades, or (ii) RBS's alleged desire not to be perceived
as a greater credit risk than other LIBOR Panel Banks. These two forms of potential
manipulation will be referred to as 'Trader Manipulation' and 'low-balling'
respectively.
368B.2 The implied distinction between 'real' and 'unreal' risks is not understood and, absent
clarification, the Defendants plead as follows:

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(a)

It is admitted and averred that certain RBS employees were involved in the
manipulation and attempted manipulation of LIBOR, in the manner, and to
the extent, and in the currencies set out within the DoJ Statement of Facts
during the periods set out therein (see DoJ Statement of Facts, in particular,
but without limitation, paragraphs 14-82) ("the Admitted Misconduct").

(b)

It is noted that the Claimants do not allege that RBS was involved in any
misconduct in relation to LIBOR other than the Admitted Misconduct
(confirmed by inter-solicitor correspondence on 10 March 2016). There is
therefore no issue between the parties as to the fact or extent of the
misconduct in relation to LIBOR.

(c)

To the extent that the Admitted Misconduct occurred on or before the

Closing Date it follows that there was a risk that it might do so in the limited
sense that such misconduct was, with hindsight, possible.

(d)

However, if (as the Defendants infer) by referring to a "real risk" the

Claimants mean to allege that there was a risk of misconduct within RBS of
the sort that a reasonable bank in RBS's position should have identified by
the Closing Date as being sufficiently material (or "real") as to necessitate
the taking of targeted measures to address it, then the allegation is denied.
For the reasons given below, there was no such real risk at any time prior to
the Closing Date. Unless stated to the contrary below, references to a "real
risk" are to a risk possessing the characteristics described within this subparagraph.

368B.2 Save as aforesaid, paragraph 120AC is denied.

368C. The Claimants rely on eight matters as allegedly showing that the putative real risk existed
and that RBS was, or ought reasonably to have been, aware of it during the Rights Issue
Period. These matters are set out at paragraphs 120AD.1 to 120AD.8, and are individually
pleaded to below. In addition, and without limitation, the Defendants rely on the following
five matters as demonstrating that there was no real risk of which RBS should reasonably
have been aware at the time of the Rights Issue.

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368C.1 The putative real risk is a product of hindsight. In the years following the Closing
Date there has been a substantial review, analysis and debate concerning LIBOR,
involving the financial services industry, regulators, and the press. This process
unearthed previously unknown misconduct involving a number of financial
institutions, and has drawn attention to risks that were not previously appreciated. It
has resulted in the introduction of new legislation and regulations together with an
industry-wide reorganisation of arrangements for submitting rates for LIBOR. These
developments do not provide the context against which to assess the existence and
perception of risk during the Rights Issue Period. The question of risk and the
appropriateness of RBS's own arrangements for submitting rates for LIBOR both
fall to be assessed by reference to the circumstances prevailing at that time. As to
which, the Defendants note that:
(a)

Prior to the liquidity squeeze and resulting financial crisis LIBOR had
operated for over 20 years without major incident or, so far as the
Defendants are aware, any suggestion that it was systematically at risk of
manipulation.

(b)

The making of rates submissions for LIBOR was not specifically regulated
by the FSA; indeed, it did not become so until 2 April 2013, by which stage
the FSA had itself been dissolved and its relevant functions transferred to
the newly-formed FCA.

(c)

At no stage prior to the Closing Date was there any regulatory requirement,
regulatory guidance, industry guidance or market practice that required
LIBOR Panel Banks to have specific systems and controls to prevent the
manipulation of rates submissions for LIBOR.

(d)

The foregoing reflects the fact that neither the regulator, nor the industry,
treated submitting rates for LIBOR as a material source of risk, still less a
real risk in the sense defined above.

368C.2 Second, there were a number of features of LIBOR that made it intrinsically
resistant to manipulation and/or could reasonably have been viewed as having that
effect at the time of the Rights Issue. In particular (but without limitation), at all
material times:

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(a)

All LIBOR data and all LIBOR Panel Banks' rates submissions were subject
to the governance and scrutiny of the BBA's independent Foreign Exchange
and Money Markets Committee ("FXMM Committee").

(b)

The LIBOR Panel Banks' rates submissions were submitted to and

monitored by an independent third party (Thomson Reuters).

(c)

The rates submissions made by the LIBOR Panel Banks were not
anonymised and were therefore transparent to the entire market. This meant
that participants in the cash market could compare a LIBOR Panel Bank's
rates submissions for LIBOR with the actual rates at which it was known to
be transacting, or offering to transact, and identify differences between the
two. Where discrepancies were identified, they could be, and sometimes
were, reported to the FXMM Committee.

(d)

The published LIBOR rate was a 'trimmed average', meaning that the top
and bottom quartiles of the various rate submissions were excluded. This
trimming process was applied so as to prevent the LIBOR rate from being
affected by outlier submissions. At the time of the Rights Issue it could
reasonably have been concluded that this mechanism made manipulation of
LIBOR impossible or (alternatively) very difficult, at least in the absence of
a pre-meditated, dishonest and well orchestrated conspiracy involving
multiple LIBOR Panel Banks of the sort that was neither foreseen nor
reasonably foreseeable.

368C.3 Third, there were features of RBS's own arrangements for submitting rates for
LIBOR and money market activities that made its submissions further resistant to
manipulation and/or could reasonably have been viewed as having that effect at the
time of the Rights Issue. In particular (but without limitation):
(a)

Those principally responsible for making RBS's rates submissions were the
money market traders who managed RBS's funding needs in the same
currencies for which they submitted rates ("the Rates Submitters"). This
was in keeping with reasonable market practice at the time, which was for
those principally responsible for rates submissions to be the members of
staff with primary responsibility for managing a LIBOR Panel Bank's cash.

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Most, if not all, of RBS's Rates Submitters had been employed at RBS and
involved in making rate submissions for many years. They were highly
experienced and trusted employees, and it was reasonable for RBS to view
them as such.
(b)

At the material time RBS set the pricing on its money market desk by
maintaining pricing curves, which displayed bid and offer rates for the
different currencies in different tenors. Those pricing curves were widely
disseminated within, and scrutinised by, the different parts of RBS's
business. RBS's rate submissions for LIBOR were derived from those
pricing curves. This was significant because:
(i)

if a Rates Submitter manipulated the pricing curve so as to alter his

rates submission then, by introducing an inaccuracy into the pricing
curve, he risked prejudicing his own book, for example by failing to
obtain funding or by obtaining funding at an excessive price;

(ii)

conversely, if a Rates Submitter improperly amended the figure

derived from the pricing curve before submitting it, with the result
that the submission diverged from the curve in a manner
unrepresentative of RBS's actual pricing and/or the wider market,
this would create a discrepancy which might be detected, within
RBS itself and/or externally within the cash market. As to the latter,
RBS posted its standard pricing curve on both Bloomberg and
Thomson Reuters and its pricing levels would in any event have
been apparent to counterparties and other participants in the cash
market.

368C.4 Fourth, specifically as regards low-balling: there were a number of additional factors
that made such conduct highly unlikely and/or could reasonably have been viewed
as having that effect at the time of the Rights Issue. In particular (but without
limitation and in addition to the matters pleaded above):
(a)

RBS had no motive to low-ball: its creditworthiness was not thought to be a

subject of concern prior to the Closing Date;

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(b)

Even had such concern been thought to exist (which it was not), it would
have been obvious that low-balling would not have been an effective means
of addressing it. In particular, since RBS's actual pricing levels would have
been widely known in the cash markets, it would have been unrealistic to
think that RBS could 'hide' those levels by suppressing its rate submissions.
In any event, there were other more informative metrics of a bank's
perceived health (in particular CDS spreads and equity/bond prices).

(c)

Rather than conferring a reputational advantage, low-balling would have

exposed RBS to reputational risk, since it would have opened up a
systematic discrepancy between RBS's actual trading and its rate
submissions.

(d)

The alleged risk that Rates Submitters would be put under "pressure to
understate [RBS's] LIBOR submissions", appears to contemplate pressure
being applied by RBS's management to manipulate the Bank's LIBOR
submissions. This alleged risk would appear to require a conspiracy
involving not only the Rate Submitters themselves but also the Bank's senior
management. This was intrinsically unlikely.

(e)

To the extent that, prior to the Closing Date, concerns were expressed (in
the press and/or elsewhere) about movements in LIBOR rates, these could
largely, if not wholly, have been explained by reference to the effect of
market factors on the LIBOR metric that did not involve low-balling or
Trader Manipulation (in particular the effects of low liquidity in the
interbank market).

(f)

Further, there was no suggestion that RBS itself was 'under-shooting' its
peer-group; in particular (but without limitation):
(i)

In an email on 18 April 2008, which was sent or forwarded to,

amongst others, John Cummins and Scott Nygaard (Head of ShortTerm Markets and Financing), Paul Walker (senior US$ trader)
reported that (a) RBS's rate submissions in US$ generally fell in the
middle of the 16 LIBOR Panel Banks that submitted US$ rates and
was rarely an "outrider", and (b) RBS remained one of the most

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active banks in the European US$ market and felt that it was
accurately setting the correct level;
(ii)

In an email on 2 May 2008 sent to Graham Niblock (Head of

Money Markets), Carrick Mollenkamp (the author of the Wall Street
Journal Article on 16 April 2008) commented that "RBS was in the
middle of the pack on average discrepancy between 23 January and
16 April".

368C.5 Fifth, specifically as regards Trader Manipulation, there were a number of additional
factors that made such conduct highly unlikely and/or could reasonably have been
viewed as having that effect at the time of the Rights Issue. In particular (but
without limitation and in addition to the matters pleaded above):
(a)

It would have been reasonable to believe that it was impossible or,

alternatively, extremely difficult, for Rates Submitters to manipulate LIBOR
to benefit their trading positions; in particular it would have been reasonable
to believe that:
(i)

The trimmed average procedure would prevent any individual bank

from successfully manipulating LIBOR to favour its own trading
positions;

(ii)

It was highly unlikely that Rates Submitters from different LIBOR

Panel Banks would orchestrate a dishonest conspiracy to move
LIBOR so as to benefit their trading positions. It is noted that even
if (which is denied), it should reasonably have been anticipated that
the Rates Submitters at different banks could each have
simultaneously identified what particular movement in LIBOR
would have favoured their books, there was no reason to anticipate
that their interests would have aligned and/or that a Rates Submitter
from one LIBOR Panel Bank would manipulate his submissions to
suit another LIBOR Panel Bank's positions;

(iii)

If a Rates Submitter manipulated his submissions in an attempt to

favour particular transactions, this would not only be ineffective but

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could be expected to involve erratic movements in his submissions

of the sort that would have risked being questioned by other
participants in the cash markets and/or financial commentators.
(b)

Further, it would have been reasonable to believe that Rate Submitters had
no motive to engage in Trader Manipulation to favour their own books
and/or no motive capable of giving rise either to a material conflict of
interest or to a real risk that Trader Manipulation would occur. In particular:
(i)

A money market trader's principal function was to service RBS's

funding and liquidity needs, rather than to engage in trading
positions geared to LIBOR with a view to revenue generation.

(ii)

This was reflected in money market traders' remuneration

arrangements; in particular (a) the most important consideration in
determining the size of a money market trader's bonus was how well
he had fulfilled his principal function (as above), and (b) although
the P&L generated on his book was potentially relevant, it was not a
significant factor and/or not a very important one. In practice, the
single most important determinant of the size of bonuses was the
size of the bonus pool, and this depended on the wider performance
of RBS and/or GBM, not the money market trader's own book.

(iii)

Even to the extent that the money market trader's P&L was relevant,
daily movements in LIBOR had a limited effect on this. Money
market traders ran accrual books and P&L was generated by, in
particular, mismatching RBS's cash positions in different maturities
over an extended period of time. The LIBOR rate on a given day
might affect particular transactions (for example when loans were
re-pricing); however these had a relatively modest and/or limited
effect on a trader's P&L. Further, in view of the size, complexity
and changing complexion of RBS's money market books (in
particular its larger books, specifically GBP, US$ and Euro), it
would have been difficult, if not impossible, for a Rate Submitter to
have identified what movement in LIBOR would have favoured (or
prejudiced) one of those books on any given day.

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(c)

Derivative traders might have had an interest in the published rate of LIBOR
on any given day, but RBS's Rate Submitters were money market traders,
not derivative traders, and had no foreseeable interest in altering their
submissions in an attempt to favour a derivative trader's positions. Altering
their submissions in this way would not have benefited the Rates Submitters
themselves and would have exposed them to detection as well as, in theory,
to the risk of prejudice on their own book. It is noted that a move in LIBOR
that would have been favourable to one derivative trader might have
prejudiced others within RBS.

(d)

As recorded in the DoJ Statement of facts, on occasions derivative traders in

JPY and CHF acted as 'substitute submitters' when the Rate Submitter in
those currencies was absent. The Claimants do not allege that this practice
occurred in relation to the making of RBS's rate submissions in any other
currencies. This arrangement was not unreasonable at the time, nor did it
give rise to an obvious conflict of interest or a real risk of Trader
Manipulation in circumstances in which:
(i)

It was reasonable market practice for those principally responsible

for the submission of rates for LIBOR to be the members of staff
with primary responsibility for management of a LIBOR Panel
Bank's cash in that currency. When the relevant Rates Submitter
was absent these derivatives traders assumed responsibility for his
money market book and therefore had primary responsibility for the
management of that aspect of RBS's funding needs for that interim
basis.

(ii)

It would have been reasonable to believe that Trader Manipulation

was impossible or, alternatively, extremely difficult; in particular
(but without limitation) in light of (a) the factors pleaded above (in
particular the existence of the trimmed average procedure) and (b) it
being highly unlikely that a derivative trader who was standing in
ad hoc for an absent Rate Submitter would orchestrate or participate
in a dishonest conspiracy with other banks to move the rate.

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368D. Paragraph 120AD is noted. For the avoidance of doubt it is denied that there was a "real risk",
or that RBS was or should have been aware of the same.
368E. As to paragraph 120AD.1:
368E.1

The first sentence is denied. There was no obvious conflict of interest. Paragraph
368C above is repeated.

368E.2

As to the second sentence:

(a)

If and to the extent that there were risks in RBS's arrangements for
submitting rates for LIBOR (as to which paragraph 368B.2 above is
repeated), it is admitted and averred that those same risks existed in all
LIBOR Panel Banks whose traders were involved in making LIBOR rate
submissions.

(b)

As above, at all material times it was reasonable industry practice that a

LIBOR Panel Bank's traders should make its rate submissions. Paragraph
368C.5(d)(i) is repeated; and

(c)

So far as the Defendants are aware, during the material period, no LIBOR
Panel Bank had specific systems and controls in place targeted at preventing
the manipulation of LIBOR rates submissions.

Save as aforesaid the second sentence and paragraph 120AD.1 are denied.
368F. As to paragraph 120AD.2:
368F.1

Paragraph 368C.5 above is repeated.

368F.2

Save as aforesaid, the paragraph 124B.2 is denied. For the avoidance of doubt, it is
specifically denied that the arrangements in respect of profit and bonuses meant that
there were real risks or that RBS was or should have been aware of the same.

369.

The first sentence of paragraph 124B.3 is not admitted; paragraph 368.3 above is repeated.

370.

To the extent that paragraphs 124B.3.1-3 refer to matters post-dating the Closing Date, those
matters are not relevant to the Claimants' claims and the Defendants do not plead to them

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(and no admissions are made in relation to any of those matters). Without prejudice thereto,
the Defendants plead to those sub-paragraphs as follows.
371.

As to paragraph 124B.3.1120AD.3:
371.1

It is admitted that in 2008, the BBA conducted a review of LIBOR (the precise dates
of that review are not admitted), and that prior to the Closing Date the BBA had
writtenwrote to LIBOR Panel Banks (among them RBS), on a number of occasions
referring to concerns raised about LIBOR rates submissions within the financial
community.

371.1A For the avoidance of doubt, tThe focus of theose concerns lay not on whether traders
might be seeking to influence rates to benefit their trading positions (which was the
central issue in the FSA Notice) but on the distinct question of on whether LIBOR
Panel Banks' US$ rate submissions reflected their true borrowing costs as distinct
from any possibility of Trader Manipulation. The BBA noted that it had been
suggested that LIBOR Panel Banks were understating their submissions to avoid
adverse scrutiny of their borrowing costs.
371.1B On 17 April 2008, it was reported in the financial press that the BBA had made clear
that it did not believe that LIBOR Panel Banks had made false submissions.
Further, on 6 May 2008, the BBA noted that the discussion of LIBOR in the
financial community had "overflowed into commentary in the media, much of which
is inflammatory, sensationalist and inaccurate."
371.1C In a paper distributed to LIBOR Panel Banks on 6 May 2008 entitled "Suggestions
for the Evolution of BBA LIBOR A Discussion Document" the BBA observed that
the LIBOR calculation was "resistant to manipulation" and that: "rates are created
by ranking the contributors, discarding the top and bottom quartiles and then
averaging the 2 central quartiles. It is therefore difficult to influence the rates as
any submitted rate that is far enough away from the average to move the fixing
materially will be discarded".
371.1D It is admitted that in 2008, the BBA conducted an annual review of LIBOR. (the
precise dates of that review are not admitted).

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371.1E The BBA did not at any stage prior to the Closing Date express any specific
concerns about RBS's own rates submissions.
371.2

Save as aforesaid, paragraph 124B.3.1120AD.3 is not admitteddenied. It is

specifically denied that either the BBA review, or any communications received
from the BBA prior to the Closing Date, meant that there were real risks or that RBS
was or should have been aware of them. Paragraph 368C above is repeated.

372.

As to paragraph 124B.3.2120AD.4:
372.1

It is admitted that on 16 April 2008, The Wall Street Journal published an article
about LIBOR rate submissions.

372.2

It is denied that the article "suggest[ed]" that LIBOR Panel Bbanks had been
suppressing submissions: it reported concern that this might be occurring. The
article also reported that "[no] specific evidence has emerged that banks have
provided false information about borrowing rates, and it's possible that declines in
lending volumes are making some Libor averages less reliable".

372.2A It is noted that tThe focus of the article lay on whether LIBOR Panel Banks' US$
rate submissions reflected their true borrowing costs and not on whether traders
were seeking to influence rates to benefit their trading positions (which, as above,
was the central issue in the FSA Notice)any possibility of Trader Manipulation.
372.3

Save as aforesaid, paragraph 124B.3.2120AD.4 purports to provide a summary of

the contents of the article, whereas the Defendants will refer to the article for its full
contents, true meaning and effect. No admissions are made as a result.

372.4

Save as aforesaid, paragraph 120AD.4 is denied. It is specifically denied that the

article in the Wall Street Journal supports the allegations at paragraphs 120AC and
120AD. Paragraph 368C above is repeated.

373.

As to paragraph 124B.3.3120AD.5:
373.1

As set out above, it is admitted that prior to the Closing Date, the BBA wrote to
LIBOR Panel Banks (among them RBS) (including on 17 April 2008), referring to
concerns raised about LIBOR rates submissions within the financial community. It

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is admitted that theThe BBA made clear that if LIBOR Panel Banks were not
properly reporting LIBOR rates submissions that would be unacceptable. It also
made clear (as above) that it did not believe that LIBOR Panel Banks had in fact
submitted false quotes.
373.2

Save as aforesaid, paragraph 120AD.5 is denied. The second sentence of paragraph

371.2 above is repeated.

373A. As to paragraph 120AD.6:

373A.1 It is admitted that on 25 April 2008 Cameron attended a meeting at the Bank of
England attended by representatives of the BBA together with other banks. It is also
admitted that on 30 April 2008 Cameron sent an email containing a note of that
meeting to (amongst others) Mary McCallum (Goodwin's executive assistant),
Whittaker, Cummins, Nielsen and Niblock.
373A.2 It is apparent from Cameron's note that the focus of that meeting lay on market and
liquidity issues, and it appears that LIBOR was referred to in that context. Cameron
does not specifically recall the meeting but infers that the Bank of England's
comments about LIBOR may have related to the divergence between the cost of
US$ funding in Europe and the US, which the Bank of England was concerned
risked undermining the status of US$ LIBOR, which it considered to be an
important part of the London financial infrastructure.
373A.3 Subject to this qualification, and save as aforesaid, paragraph 120AD.6 is denied. It
is specifically denied that either the meeting, or the note of it, meant that there were
real risks or that RBS was or should have been aware of them.
373B. As to paragraph 120AD.7:
373B.1 The paragraph selectively paraphrases parts of two emails which, it is admitted,
were exchanged on 28 May 2008 between the persons alleged, save that Nygaard
was also copied into Cummins' reply. Save as admitted below, the Defendants will
refer to those emails (together with the email chain of which they formed part) for
their full contents, context and true meaning.

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373B.2 It is admitted that in his email Cameron informed Cummins and Niblock that, during
a call the previous day, Tucker had expressed concern that the BBA might appear
too complacent about the problem of LIBOR fixing. Cameron understood the Bank
of England's concern to be primarily focused on defending the status of LIBOR as
part of London's financial infrastructure and resisting a move to a US-based
benchmark; it therefore wanted the BBA to take the issue seriously and be seen to
do so. For the avoidance of doubt, "fixing" was commonly used as a synonym for
"setting" and the expression "LIBOR fixing" did not connote manipulation.
373B.3 It is also admitted that in Cummins' reply, he stated, amongst other things, that the
prime area of concern was US$ LIBOR settings in London and the view that they
did not reflect reality. In so doing Cummins did no more than acknowledge, in very
general terms, the content of relevant press comment and discussion at the time.
373B.4 The precise extent, content and timing of those communications is not admitted.
Save as aforesaid, paragraph 124B.3.3120AD.7 is not admitteddenied. It is
specifically denied that the two emails demonstrate that there were real risks or that
RBS was or should have been aware of them.
374.

As to paragraph 124C120AD.8:
374.1

As to the Alleged Principle 3 Failures, paragraph 0 above is repeated.

374.2

As to the alleged "fraudulent conduct":

(a)

It is admitted that a small number of RBS certain employees of RBS,

engaged in fraudulent conduct in connection with LIBOR rates submissions
in the manner, to the extent and in the currencies set out within the DoJ
Statement of Facts, during the period set out therein ("the Fraudulent
Conduct"); and

(b)

It is admitted that this conduct has exposed RBS to serious financial and
reputational loss.

374.3

Save as aforesaid, paragraph 124C is not admitteddenied.

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374.4

It is admitted that on 28 May 2008 Cummins sent Cameron and Crowe a draft email
to Tucker. The Defendants will refer to that draft email for its full contents, context
and true meaning.

374.5

The draft email reported on various proposals that had been mooted to strengthen
LIBOR in order to address speculation about LIBOR. The discussion of these
proposals was accompanied by the observation that "The BBA must be ready to
present a serious Q&A / factsheet about LIBOR to debunk some of the myths
expounded by analysts and journalists."

374.6

It is admitted that the draft email contained the passage quoted in inverted commas.
That passage contained one of several proposals, which included moving the fixing
to later in the day (to cater for the opening of the US markets); having two fixings
per day; extending the number of panel banks (so as to increase representation), and
changing the definition of LIBOR. It is denied that the quoted passage (or the email
as a whole) demonstrates that there were real risks within RBS or that RBS was or
should have been aware of them.

374.7

Save as aforesaid, paragraph 120AD.8 is denied.

374A. As to paragraphs 120AE:

374A.1 As to the concept of a "real risk", paragraph 368B.2 above is repeated mutatis
mutandis. It is specifically denied that there was a "real" or "obvious" risk of the
occurrence of so-called "wash trades" in interest rate derivatives traded over the
counter (for convenience the Defendants adopt the Claimants' definition of that
term; no admissions are made thereby). On the contrary, this form of alleged
misconduct was, or could reasonably have been seen as being, intrinsically unlikely;
in particular (but without limitation):
(a)

A wash trade would have required the collusion of at least two counterparties and a broker, meaning that it needed (at least) three different people
to knowingly participate in a dishonest enterprise.

(b)

Each of those three persons would have had to operate out of different
organisations, viz. the broking firm and the two trading counterparties.

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(c)

The transaction would have involved one of those counter-parties ("A")

making a gratuitous payment to the broker and the other counter-party ("B")
facilitating that payment without receiving any benefit. B therefore had to be
willing to participate in a dishonest enterprise in which it had no direct
interest.

(d)

Counterparty A would also have had no obvious motive for wanting to make
a gratuitous transfer of funds to the broker. If, as the Claimants allege, the
motive was sometimes to "reward" brokers for facilitating the attempted
manipulation of LIBOR, then the putative wash trades were additionally
unlikely since (as above) RBS neither was, nor reasonably should have
been, aware of a real risk of the actual or attempted manipulation of LIBOR
within RBS.

(e)

Wash trades in interest rate derivatives traded over the counter could not be
seen by the market and therefore could not be used to attempt to improperly
influence perceptions of market activity.

374A.2 As to the second sentence of paragraph 120AE, it is admitted that the 30 wash trades
occurred after the Closing Date. It is denied (as above) that the occurrence of these
trades demonstrates that there was a real risk prior to the Closing Date of which
RBS was or should have been aware or (as below) that RBS was reasonably
required to design and implement systems to monitor for such trades.
374A.3 Save as aforesaid, paragraph 120AE is denied.
374B. Paragraph 120AF is denied. When assessed by reference to the standards reasonably
prevailing at the time, it was not unreasonable for RBS not to have identified the matters
referred to at paragraphs 120AB to 120AE as real risks nor to have introduced specific
measures to address them. For the avoidance of doubt, if (which is denied) there were real
risks of which RBS should have been aware (whether due to the matters pleaded in paragraph
120AD or otherwise) it is denied that in the circumstances RBS could reasonably have been
expected to have put in place prior to the Closing Date different or additional arrangements in
relation to its LIBOR rates submissions or that RBS's arrangements were unreasonable as a
result.

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374C. As to paragraph 120AF.1:

374C.1 It is denied that RBS had no guidance, policies and training concerning the matters
set out in paragraphs 120AF.1.1 to 120AF.1.3:
(a)

it was RBS's policy that Rates Submitters should be (as they were) money
market traders; and

(b)

training in relation to submitting rates for LIBOR (including, in particular,

the matters to be taken into account when setting the pricing curve from
which the rates submission was derived), was provided on the money
market desk by established Rates Submitters who were highly experienced
in, and familiar with, the LIBOR submission process.

374C.2 It is admitted that RBS did not provide specific training concerning the making of
inappropriate requests by derivative traders in relation to rate submissions. It is
denied that such training was reasonably required having regard to the standards
reasonably prevailing at the time. It is noted that:
(a)

RBS's derivatives traders and money market traders were at all material
times subject to RBS group and/or divisional conduct, compliance and
competition policies, and reporting and disciplinary procedures.

Those

policies and procedures covered (amongst other things) personal conduct,

business integrity and ethical standards, the fixing (directly or indirectly) of
prices or other market conditions, market abuse, conflicts of interest,
confidentiality, FSA and other regulatory requirements, and the appropriate
procedures for the escalation of issues.
(b)

At all material times it was obvious that to manipulate the rates submitted
for LIBOR so as to favour trading positions would have been manifestly
improper and a contravention of RBS's policies and procedures. No specific
training was reasonably required in order to make this point clear.

(c)

At no stage prior to the Closing Date was there any regulatory requirement,
regulatory guidance, industry guidance or market practice that required
LIBOR Panel Banks to have specific training concerning the making of
inappropriate requests by traders.

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374C.3 It is denied that the arrangements set out above were unreasonable or that RBS was
reasonably required to have put different or additional arrangements in place, having
regard to the standards reasonably prevailing at the time.
374C.4 Save as aforesaid, paragraph 120AF.1 is denied.
374D. As to paragraph 120AF.2:
374D.1 As to point (i): the allegation proceeds on a false premise and is denied. There were
no obvious conflicts of interest of which RBS was or should have been aware and/or
which RBS's risk, compliance or audit functions should reasonably have taken steps
to address at the material time.
374D.2 As to point (ii): the allegation proceeds on a false premise and is denied. There was
no real risk of which RBS was or should have been aware and/or taken steps to
address that inappropriate submissions would be taken into account when making
RBS's rates submissions.
374D.3 As to point (iii): the allegation proceeds on a false premise and is denied. There
were line managers with clear supervisory responsibility over LIBOR. It is denied
that they were required to take specific steps to address an alleged risk which at the
time was not "real" (in the sense defined above) and of which RBS neither was nor
should have been aware.
374D.4 Save as aforesaid, paragraph 120AF.2 is denied. It is specifically denied that RBS
failed to take any steps, or put in place any arrangements, that it was reasonably
required to take or put in place having regard to the standards reasonably prevailing
at the time.
374E. As to paragraph 120AF.3, it is admitted that RBS had not designed and put in place a
"monitoring system" that monitored for "wash trades" in interest rate derivatives traded over
the counter. It is denied that it was reasonably required to have any such system in place.
Paragraph 374A is repeated. Save as aforesaid, paragraph 120AF.3 is denied.
374F

As to paragraph 120AF.4:

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374F.1

The allegation proceeds on a false premise, namely that RBS was reasonably
required to have in place the safeguards and processes to which the Claimants refer.
As to this, paragraph 374A above is repeated.

374F.2

It is admitted that GIA did not routinely "check" that the alleged systems and
processes were in place. It is denied that GIA was reasonably required to do so. In
particular it is denied that GIA was required to confirm the existence of systems and
processes that RBS could not reasonably have been expected to have in place.

374F.3

For the avoidance of doubt, it is denied that GIA failed to audit the money markets
business appropriately. GIA ran a rotating programme of audit assessments and
appropriately prioritised the focus of those assessments on a risk basis. At the time
LIBOR rates submissions were reasonably not considered to be an area in which
there was a real risk.

374F.4

Save as aforesaid, paragraph 120AF.4 is denied.

374G. As to paragraph 120AG:

374G.1 The Claimants have confirmed by correspondence that the "well-known misconduct"
refers to the Admitted Misconduct.
374G.2 It is admitted and averred that the Admitted Misconduct was not identified and
stopped before the Closing Date and that it occurred in the manner, to the extent,
and in the currencies set out within the DoJ Statement of Facts, during the periods
set out therein.
374G.3 It is unclear what the Claimants consider to be "effective risk controls" or when they
maintain that those risk controls were put in place. As above, in the years following
the Closing Date there has been a substantial review, analysis and debate concerning
LIBOR, involving the financial services industry, regulators, and the press. Further
to this there has been an industry-wide reorganisation of the arrangements for
submitting rates for LIBOR. If, by referring to "effective risk controls", the
Claimants intend to refer to arrangements of the sort currently in place, it is denied
that RBS could reasonably have identified the need for such arrangements, still less
have put them in place, prior to the Closing Date.

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374G.4 It is admitted that as the result of the Admitted Misconduct RBS suffered substantial
reputational and financial loss arising from LIBOR related regulatory criticism and
sanction, which resulted from regulatory investigations. It is denied that these
matters were the result of systems or controls failures within RBS: RBS's systems
and controls were reasonable when assessed by reference to the standards
reasonably prevailing at the time.
374G.5 Save as aforesaid, paragraph 120AG is denied.
374H. Paragraph 120AH is denied. Paragraphs 367 to 374G above are repeated. In light of the same,
it is specifically denied that RBS's risk controls were inadequate or ineffective, or that any
statements in the Prospectus were either untrue of misleading. For the avoidance of doubt, if
(which is denied) RBS's arrangements were deficient in any respect, it is denied that that this
would have rendered either untrue or misleading the statements relied on at paragraphs
119B.4, 119B.6, 119B.7, 119B.8, 119B.12, 119B.18, 119B.19 or 119B.20 (as to which
paragraph 342A above is repeated), or the alleged "overall impression" (as to which paragraph
343 above is repeated).
374I.

As to paragraph 120BB, in each instance that a statement alleged by the Claimants to be

untrue and/or misleading has been placed in its proper context in paragraphs 338 to 342A
above, the Defendants plead to the allegations regarding that statement in the light of that
context. The allegations made by the Claimants within sub-paragraphs 120BB.7, 120BB.8,
120BB.16.2, 120BB.16.5, 120BB.16.8, 120BB.17 and 120BB.30 are embarrassingly vague.
Without prejudice to the foregoing, the Defendants respond to each such sub-paragraph on the
basis that the allegations relied on are confined to the case as particularised therein by the
cross-references to other paragraphs in the ACPoC.
374I.1 It is denied that the statement referred to in paragraph 120BB.1 was untrue or
misleading. It is denied that the words quoted suggested that a "specific and
comprehensive review had taken place other than in the ordinary course of business"
of the management and governance of RBS's business. It is averred that the Board
had looked at the management and governance of RBS, as stated, prior to issuing the
Prospectus, including as set out in the subsequent three paragraphs of the Chairman's
letter.

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374I.2 It is denied that the statement referred to in paragraph 120BB.2 was untrue or
misleading. The strengthening of the GBM control environment referred to was the
assumption by the RBS product control function of responsibility for relevant areas
within ABN AMRO. It is admitted and averred that David Coleman was Group Chief
Credit Officer at RBS and that he had been seconded to be Chief Risk Officer of
ABN AMRO as at the date of the Rights Issue. It is denied that this did not strengthen
the control environment within GBM. The Claimants' state of knowledge is not
admitted.
374I.3 It is denied that the statement referred to in paragraph 120BB.3 was untrue or
misleading. It is admitted that the SAU was a "siloed unit" insofar as it was managed
separately from RBS's business units. Save to that extent, the meaning of this term or
its applicability to the SAU is not admitted. It is denied that the SAU suffered from
major governance failings. Paragraphs 345DD.3.12 and 345TT are repeated. It is in
any event denied that the matters pleaded here and in paragraphs 120O.3.8 and 120X
"would, if anything, increase the risk associated with" the assets managed by the
SAU. The objective of the SAU was to limit and reduce risk associated with those
assets and it did so.
374I.4 It is denied that RBS did not allocate capital in a disciplined fashion as a result of its
approach to capital forecasts and targets. It is admitted that RWAs formed one
element of RBS's forecasts of its future capital requirements. The Claimants'
reference to targets is vague and is not understood. It is admitted that certain targets
in place within RBS were calculated with reference to revenue growth. The
allegations in respect of allocation of capital are otherwise denied. In particular it is
denied, if it be alleged, that targets were included within RBS's capital forecasts
unreasonably. Paragraph 145A.1 above is repeated. It is further denied that RBS did
not manage its balance sheet or capital carefully. The sections on Capital and
Liquidity above are repeated.
374I.5 It is denied that the statement referred to in paragraph 120BB.5 was untrue or
misleading. Paragraphs 345Z and 195 to 236 are repeated.
374I.6 It is denied that the statements referred to in in paragraphs 119A.3 and 119A.4 were
untrue or misleading, for the reasons given in paragraphs 157 to 194, and paragraph
345AA above.

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374I.7 It is denied that the statement referred to in paragraph 120BB.7 was untrue or
misleading. Paragraphs 345VV and 345WW are repeated. Even if (contrary to the
Defendants' case) the allegations made in paragraph 120Z are found to have been
proven, it is in any event denied that the statement referred to in paragraph 120BB.7
was untrue or misleading.
374I.8 It is denied that the statement referred to in paragraph 120BB.8 was untrue or
misleading. Paragraph 345Y is repeated. If (contrary to the Defendants' case) it is
found that RBS's methods to mitigate and control market risk were not operating
well, or alternatively effectively, as at the time of the Rights Issue, it is in any event
denied that the statement in paragraph 120BB.8 was thereby rendered untrue or
misleading.
374I.9 It is denied that the statement referred to in paragraph 120BB.9 was untrue or
misleading. Paragraphs 345L to 345V are repeated.
374I.10 It is denied that the statement referred to in paragraph 120BB.10 was untrue or
misleading. Paragraphs 345L-V, 345Y.4 and 345Y.6 are repeated. It is denied that
GEMC did not discuss any of the risk topics raised at GRC. As to the allegation that
"the minutes only record that the RMMRs were "noted", and even then only on four
occasions between July 2007 and the Prospectus Date", that is a matter for evidence
and the Defendants will rely on the full minutes of GEMC in that regard. The
Claimants have failed to specify the respects in which it is alleged that "GEMC did
not ensure that the implementation of strategy and operations were in line with the
agreed risk appetite". Without prejudice to the foregoing, that allegation is denied.
374I.11It is denied that the statement referred to in paragraph 120BB.11 was untrue or
misleading. It is averred that the Claimants have failed to provide a proper crossreference to the other paragraph or paragraphs of the ACPoC upon which they rely in
support of the allegation that "all material non-balance sheet risks were not
effectively managed". The Defendants reserve the right to respond further pending
provision of a proper cross-reference. Pending provision of a proper cross-reference,
the Defendants reserve their right to refer to such further paragraphs of this Re-ReAmended Defence as they see fit. In any event, paragraphs 345RR and 345SS are
repeated.

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374I.12 It is denied that the statements referred to in paragraph 120BB.12 were untrue or
misleading. Paragraphs 157 to 194, and paragraph 345AA above are repeated.
374I.13 It is denied that the statement referred to in paragraph 120BB.13 was untrue or
misleading. Paragraphs 335A to 377A are repeated.
374I.14 It is denied that the statement referred to in paragraph 120BB.14 was untrue or
misleading. Paragraphs 335A to 377A are repeated.
374I.15 It is denied that the statement referred to in paragraph 120BB.15 was untrue or
misleading. Paragraphs 345CC.2, 345PP, 345RR, 345TT and 345WW.5 are
repeated.
374I.16 It is denied that the statements referred to in paragraph 120BB.16 were untrue or
misleading for the reasons given below in relation to subparagraphs 120BB.16.1 to
120BB.16.8.
374I.16.1

Paragraph 120BB.16.1 is denied. Paragraphs 345L to 345V are

repeated.

374I.16.2

It is denied that the statement referred to in paragraph 120BB.16.2

was untrue or misleading. Paragraphs 345L to 345W are repeated.

374I.16.3

It is denied that the statements referred to in paragraph 120BB.16.3

were untrue or misleading. Paragraphs 335A to 377A are repeated.

374I.16.4

The allegation in paragraph 120BB.16.4 is embarrassingly vague.

Paragraph 345Z.6 is repeated.

374I.16.5

It is denied that the statement referred to in paragraph 120BB.16.5

was untrue or misleading. Paragraph 345CC.2.3 is repeated.

374I.16.6

It is denied that the statement referred to in paragraph 120BB.16.6

was untrue or misleading. It is denied that the SAU had no
independent oversight or that its operation improperly involved the
bypassing of credit processes. Paragraphs 345DD.3.12 and 345TT
are repeated. Save as aforesaid, paragraph 120BB.16.6 is denied.

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374I.16.7

Paragraph 120BB.16.7 is denied. As set out at paragraphs 94B and

135 to 136 above, the FSA had approved RBS's models and had
agreed in January 2008 that RBS could incorporate in its capital
planning the benefit of recalibrations to a number of those models,
for which approval had been sought from the FSA, prior to formal
approval being given.

374I.16.8

It is denied that the statement referred to in paragraph 120BB.16.8

was untrue or misleading. Paragraphs 345P, 345Q, 345Y.2, 345Z.2,
345AA.5, 345DD.9.2.4 and 345DD.10 are repeated.

374I.17 It is denied that the statement referred to in paragraph 120BB.17 was untrue or
misleading. Paragraphs 345CC.2, 345PP, 345RR, 345TT, 345WW.5 and 345Y are
repeated. If (contrary to the Defendants' case) the allegations made at
paragraphs120N.2, 120T, 120V, 120X, 120Z.5 or 120J are found to have been
proven, it is denied that the statements referred to at paragraph 120BB.17 were
thereby rendered untrue of misleading.
374I.18 It is denied that the statement referred to in paragraph 120BB.18 was untrue or
misleading. Paragraphs 345AA.6 and 345DD.3.10 are repeated.
374I.19 It is denied that the statement referred to in paragraph 120BB.19 was untrue or
misleading. Paragraphs 345EE to 345YY are repeated. If, which is specifically
denied, it is found that RBS's governance was in any respects ineffective, or
alternatively not of a high standard, it is denied that the statement referred to in
paragraph 120BB.19 was thereby rendered untrue or misleading.
374I.20 It is denied that the statement referred to in paragraph 120BB.20 was untrue or
misleading. Without prejudice to the foregoing, it is averred that the Claimants have
failed properly to identify: (i) which "provisions of the Combined Code" RBS is
alleged not to have complied with; (ii) the "annual assessment" that is alleged not to
have considered "the nature and extent of significant risks since the last
assessment"; and (iii) the "significant risks since the last assessment" that are
alleged not to have been considered in that "annual assessment". The Defendants
reserve their right to plead further to this allegation on provision of proper
particulars.

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374I.21 It is denied that the statement referred to in paragraph 120BB.21 was untrue or
misleading. Paragraphs 345L to 345W and 345QQ are repeated.
374I.22 It is denied that the statement referred to in paragraph 120BB.22 was untrue or
misleading. Paragraphs 345BB to 345DD are repeated.
374I.23 It is denied that the statement referred to in paragraph 120BB.23 was untrue or
misleading. Paragraphs 345EE to 345MM and 345QQ are repeated.
374I.24 It is denied that the statement referred to in paragraph 120BB.24 was untrue or
misleading. Paragraphs 345BB to 345DD are repeated.
374I.25 It is denied that the statement referred to in paragraph 120BB.25 was untrue or
misleading. It is denied that the Board as a whole did not have an adequate
understanding of the matters set out in paragraph 120P or that there was no system
or programme of Board education or training. The allegation that William Friedrich
"cannot have undertaken the training and professional development he considered
necessary" is embarrassingly vague. Paragraphs 345EE to 345FF are repeated.
374I.26 It is denied that the statement referred to in paragraph 120BB.26 was untrue or
misleading. The statement referred to is inaccurately summarised in paragraph
120BB.26. The statement was that "[a] system of internal control is designed to
manage, but not eliminate, the risk of failure to achieve business objectives and can
only provide reasonable, and not absolute, assurance against the risk of material
misstatement, fraud or losses." That statement was true and not misleading. In any
event the allegation that RBS's system of internal controls was "flawed and did not
provide reasonable assurance against the risk of material misstatement, fraud or
losses" is embarrassingly vague. The Defendants respond to paragraph 120BB.26 on
the basis that this allegation is confined to the matters set out in the paragraphs
elsewhere in Section K upon which the Claimants rely. Paragraphs 335A to 377A
are repeated.
374I.27 It is denied that the statements referred to in paragraph 120BB.27 were untrue or
misleading. Paragraph 371I.26 is repeated. The allegations that "the Board did not
follow any process to provide reasonable assurance against the risk of material
misstatement" and that "the process for the identification, evaluation and

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management of significant risks facing RBS was ineffective" are embarrassingly

vague. The Defendants respond to paragraph 120BB.27 on the basis that these
allegations are confined to the matters set out in the paragraphs elsewhere in Section
K upon which the Claimants rely. Paragraphs 335A to 377A are repeated.
374I.28 It is denied that the statements referred to in paragraph 120BB.28 were untrue or
misleading. The allegations that "the Board did not effectively review the
effectiveness of RBS's internal control system" and that this control system "was
ineffective" are embarrassingly vague. The Defendants respond to paragraph.
120BB.28 on the basis that these allegations are confined to the matters set out in
the paragraphs elsewhere in the ACPoC upon which they rely. It is in any event
averred that the Claimants have failed to provide a proper cross-reference to the
other paragraph or paragraphs of the ACPoC upon which they rely in support of thse
allegations. The Defendants reserve the right to respond further pending provision of
a proper cross-reference. Pending provision of a proper cross-reference, the
Defendants reserve their right to refer to such further paragraphs of this Re-ReAmended Defence as they see fit. It is denied that neither the Board nor executive
management committees received effective risk reporting. Paragraph 345DD is
repeated. It is denied that GAC did not receive regular or effective risk reporting
from GRM. Paragraph 345WW is repeated.
374I.29 It is denied that the statements referred to in paragraph 120BB.29 were untrue or
misleading. Paragraphs 345BB to 345CC are repeated.
374I.30 It is denied that the statements referred to in paragraph 120BB.30 were untrue or
misleading. Paragraphs 345P, 345Q, 345Y.2, 345Z.2, 345AA.5, 345DD.9.2.4 and
345DD.8 are repeated.
374I.31 It is denied that the statement referred to in paragraph 120BB.31 was untrue or
misleading. The allegation made after the comma in paragraph 120BB.31 is
embarrassingly vague, with (i) no particulars provided of the internal reporting
and/or oversight of risk assets said to render the statement at paragraph 119B.23
untrue and/or misleading; (ii) no particulars, save for an non-specific reference to SS
CDOs, of the "significant credit assets" located within the trading book; and/or (iii)
the manner of "differentiation" allegedly adopted by RBS in support of the
allegation that such differentiation was not "principally" by "credit ratings".

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Accordingly, it is denied. Further, and without prejudice to the foregoing denial it is

averred that RBS's use and/or reliance upon credit ratings was reasonable and
appropriate, varying according to context.
374I.32 It is denied that the statements referred to in paragraph 120BB.32 were untrue or
misleading. Paragraphs 157 to 194 above are repeated.
374I.33 It is denied that the statement referred to in paragraph 120BB.33 was untrue or
misleading. Paragraphs 157 to 194 above are repeated.

In particular, it was

reasonable to describe customer accounts as "a well-diversified and stable source of

funds".
374I.34 It is denied that the statement referred to in paragraph 120BB.34 was untrue or
misleading. Paragraphs 157 to 194 above are repeated.
374I.35 Paragraph 120BB.35 is denied. Paragraph 190AD above is repeated.
374I.36 It is denied that the statement referred to in paragraph 120BB.36 was untrue or
misleading. Paragraphs 253 to 271K are repeated.

375.

As to p Paragraph 125 and the sub-paragraphs thereto is denied. save to the extent of the nonadmissions above.:
375.1

The first sentence of paragraph 125 is denied. It is specifically denied that the
Prospectus was untrue and/or misleading and in breach of s.90(1)(b)(i) of FSMA.
Paragraphs 343 to 344345 above are repeated. For the avoidance of doubt, if
(contrary to the above) some part or parts of RBS's management, risk management
and controls, risk modelling or management information and reporting, ability and
skill of senior individuals or governance are found to have been inadequate,
ineffective or deficient, the Defendants reserve the right to argue that any defects
were not material when viewed in the circumstances as a whole and did not cause
any statement contained within the Prospectus to be misleading.

375.2 Paragraph 125.1 is denied. Cameron was competent to carry out his role and
the senior management of GBM contained an appropriate mixture of skills
and experience. Paragraph 346 above is repeated.

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375.3 Paragraph 125.2 is denied.

In relation to the deficiencies alleged at

paragraphs 124.1 to 124.2, paragraphs 363 to 381 above are repeated. The
words in inverted commas were not misleading.
375.4 Paragraph 125.3 is denied.

RBS's risk management controls were not

inadequate; paragraphs 344, 345, 348, 351 and 369 are repeated.
376.

As to paragraph 126:

376.1.

In relation to the matters pleaded at paragraphs 122120A to 125124C, paragraphs

346344 to 375374I above are repeated;

376.2.

Save to the extent of the non-admissions above:

(a)

It is specifically denied that RBS failed to disclose any "necessary

information", within the meaning of s.87A(1)(b) and 87A(2) of FSMA.

(b) It is further specifically denied that RBS failed to disclose any information that
was required to be included pursuant to s.87A(1)(c) of FSMA or Annexes I or
III of the Prospectus Regulation.

376.3.

For the avoidance of doubt, if (notwithstanding the matters set out above) some part
or parts of RBS's management, risk management and controls, risk modelling or
management information and reporting, ability and skill of senior individuals or
governance are found to have been inadequate, ineffective or deficient, the
Defendants will say reserve the right to argue that any defects were not matters that
would have been material to the market, or which RBS was required to identify
within the Prospectus, whether pursuant to s.87A(1) of FSMA or at all.

376.4.

377.

Save as aforesaid, paragraph 126 (including its sub-paragraphs) is denied.

As to paragraph 127:

377.1.

It is admitted that RBS did not provide a supplementary prospectus.

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377.2.

Save to the extent of non-admissions set out above, iIt is denied that a
supplementary prospectus was required: no significant new factor, material mistake
or inaccuracy arose or was noted by RBS between the publication of the Prospectus
and the closure of the Rights Issue.

377.3.

In relation to the matters pleaded at paragraphs 122 120A to 125 124C, paragraphs
346344 to 367 375374I above are repeated.

377.4.

Save as aforesaid, paragraph 127 (including its sub-paragraphs) is denied. It is

specifically denied that RBS was in breach of s.87G(2) and 90(4) of FSMA.

377A Paragraph 127AA is denied. As set out above, it is denied that there arose any new matters
such as to require the submission of a supplementary prospectus. None of the Director
Defendants was therefore under any obligation to give notice to RBS of any such new matters
pursuant to section 87G(5) of FSMA. It is accordingly denied that any of the Director
Defendants is liable to pay compensation under section 90(4) of FSMA.

Defences under Schedule 10 of FSMA

378

If (notwithstanding the matters set out above) the Prospectus contained any untrue or
misleading statement, or omitted any matter required to be included by s. 87A of FSMA, each
of the Defendants will say that at all times prior to the Claimants' acquisition of the shares
and/or the admission of those shares to trading they reasonably believed, having made
reasonable enquiries, that the relevant statements were true and not misleading and that any
matters omitted had been properly omitted within the meaning of Schedule 10, paragraph 1 of
FSMA, and will claim the benefit of the defence provided therein.

379

In support of the reasonableness of that belief and of the enquiries upon which it was based,
the Defendants will each rely upon the relevant circumstances leading up to the Rights Issue
and the approval of the Prospectus including (without limitation) the following:
379.1 RBS was reasonably believed by the Defendants to have management systems and
controls that were reasonable in the circumstances and could be relied upon to
provide accurate information concerning RBS's business. Paragraphs 336 335A to
365375 above are repeated.

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379.2 An extensive due diligence and approval process was undertaken to confirm the
accuracy of each material statement contained within the Prospectus, as more
particularly set out at paragraphs 33 to 4748A above. In particular (but without
limitation):
379.2.1 In preparing the Prospectus, RBS worked alongside a team of highly
experienced professionals comprising Linklaters, Goldman, Merrill, UBS,
Deloitte and Freshfields, each of whom advised upon and assisted with the
process of bringing the Rights Issue to market.
379.2.2 Pursuant to Chapter 8 of the Listing Rules, RBS's Sponsors were not
permitted to proceed with their sponsorship, unless they had come to a
reasonable opinion, based on their professional experience and after having
made due and careful enquiry, that RBS had satisfied all of the applicable
requirements set out in the Prospectus Rules (Listing Rule 8.4.82(2)).
Further, they were required to submit to the FSA a Sponsor's Declaration
confirming that they had satisfied themselves to this effect (Listing Rule
8.4.93).
379.2.3 Both Goldman and Merrill independently considered the appropriate marks
for RBS's various different credit market exposures and confirmed that in
their view the proposed marks were reasonable.
379.2.4 Deloitte confirmed that in their opinion RBS had a reasonable basis on
which to make its working capital statements.
379.2.5 Each member of RBS's GEMC and each head of RBS's divisional group
functions who had been involved in providing or reviewing the information
required for the Prospectus (and the Press Release) was asked to sign, and
did sign, Verification Certificates confirming that the Prospectus and Press
Release were was accurate, complete and not misleading.
379.3 Each of the Ddirectors (including the Director Defendants) had, by the time the
Prospectus was finally approved, received and reviewedconsidered the material
tabled at those Board and Committee meetings which they attended or to which they
were invited referred to at paragraph 40 above and was satisfied that the contents of

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the Prospectus were accurate and complete having regard to their own particular
knowledge, experience and understanding of RBS's business. In this regard, the
Director Defendants repeat Response 8 as set out in their Further Information dated 6
November 2015, and RBS repeats Response 19 as set out in its Further Information
dated 6 November 2015.
379.4 On 21 April 2008, the Board established an Approvals Committee and a Rights Issue
Committee and between 26 and 29 April 2008, the Rights Issue Committee gave
further, detailed consideration, to the text of a final draft of the Prospectus (as to
which paragraphs 46 to 47 above are repeated).
379.5 The Prospectus was published only after the UKLA had (1) reviewed and
commented upon three separate drafts of the Prospectus; (2) proposed that certain
additional matters be included within the Prospectus (which additions were duly
made); (3) given consideration to whether further additional disclosures should be
made (and concluded that none were required); and (4) satisfied itself that the
Prospectus:
379.5.1 contained the information necessary to enable investors to make an
informed assessment of the assets and liabilities, financial position, profits
and losses, and prospects of the issuer of the transferable securities and of
any guarantor; and
379.5.2 satisfied all of the applicable requirements imposed by Part VI of FSMA,
the Prospectus Rules, the Prospectus Directive and the Prospectus
Regulation.
379A. As to the defence advanced by RBS under paragraph 1 of Schedule 10 to FSMA, RBS's case
is as follows:
379A.1 The reasonable belief to be attributed to RBS for the purposes of paragraph 1 of
Schedule 10 is:
379A.1.1

That held by the majority of the members of the Rights Issue

Committee which on 29 April 2008 authorised the
publication of the Prospectus (as set out in paragraph 47

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above) ("the 29.4.08 RIC"). The members of the 29.4.08

RIC were McKillop, Goodwin, Whittaker and Mark Fisher.
379A.1.2

Alternatively, if the beliefs of the members of the Rights

Issue Committee which met on 14 May 2008 ("the 14.5.08
RIC") became relevant from 14 May 2008 onwards: (i) up to
14 May 2008, the majority of the 29.4.08 RIC; and (ii) from
14 May 2008, the majority of the 14.5.08 RIC. The members
of the 14.5.08 RIC were McKillop, Goodwin, Whittaker,
Cameron, Mark Fisher, Gordon Pell, Colin Buchan, Jim
Currie, Bill Friedrich, Archie Hunter, Charles Koch, Janis
Kong, Sir Steve Robson, Bob Scott and Peter Sutherland.

379A.2 In the alternative, the reasonable belief to be attributed to RBS is that held by:
(a) Each of the members of the 29.4.08 RIC.
(b) Alternatively, if the beliefs of the members of the 14.5.08 RIC became relevant
from 14 May 2008 onwards: (i) up to 14 May 2008, each of the members of the
29.4.08 RIC; and (ii) from 14 May 2008, each of the members of the 14.5.08
RIC.
379A.3 In the further alternative, the reasonable belief to be attributed to RBS is that held by
a majority of the members of the Board of RBS.
379A.4 In the yet further alternative, the reasonable belief to be attributed to RBS is that
held by each of the members of the Board of RBS.
379A.5 RBS's case will be, to the extent necessary, that each of the persons identified above,
having made reasonable enquiries, believed (and continued until the Closing Date to
believe) (1) that each of the statements made in the Prospectus was true and not
misleading; and (2) that the Prospectus contained all of the information necessary
for an informed assessment of the assets and liabilities, financial position, profits
and losses, and prospects of RBS.
379B. RBS notes the Claimants' case, as set out in their updated Further Information dated 12
February 2016, as to the persons whose beliefs are to be attributed to RBS for the purposes of

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paragraph 1 of Schedule 10 to FSMA. Insofar as the Claimants' case is that the belief of any
person, other than those referred to in paragraph 379A above, is relevant, that case is
denied. Without prejudice to this position, if and in so far as the Claimants establish such
case, RBS's case will be that each such person, having made reasonable enquiries, believed
(and continued until the closure of the Rights Issue to believe) (1) that each of the statements
made in the Prospectus was true and not misleading; and (2) that the Prospectus contained all
of the information necessary for an informed assessment of the assets and liabilities, financial
position, profits and losses, and prospects of RBS.
Belief that no supplementary prospectus was required
380

If (which is denied) a supplementary prospectus should have been submitted, the Defendants
will say that they reasonably believed that any relevant change, new matter or error was not
such as to require a supplementary prospectus and will accordingly claim the benefit of the
defence under Schedule 10, paragraph 7 of FSMA.

381

In support of the reasonableness of that belief the Defendants will rely upon the matters stated
in paragraph 379 above concerning the accuracy of the Prospectus at the time of publication
and, in addition, upon the steps taken and the events occurring between the publication of the
Prospectus and the closure of the Rights Issue, in particular (but without limitation):
381.1 the meeting of the Rights Issue Committee on 14 May 2008 at which it was
concluded that no additional disclosures were required and that the Prospectus
continued to be true, accurate and not misleading in all material respects (as to which
paragraph 50 above is repeated);
381.2 the due diligence work that continued after the publication of the Prospectus to
identify whether there were any material changes such as would require a
supplementary prospectus (as to which paragraph 52.1 above is repeated); and
381.3 the series of meetings involving representatives of RBS, Goldman, Merrill,
Linklaters and Freshfields where it was carefully considered whether there had been
any material changes necessitating the publication of a supplementary prospectus
only for it to be concluded that there were none (as to which paragraph 52.2 above is
repeated).

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381AA. As to the defence advanced by RBS under paragraph 7 of Schedule 10 to FSMA, RBS's case
is as follows:
381AA.1 The reasonable belief to be attributed to RBS for the purposes of paragraph 7 of
Schedule 10 is:
(c)

Up to 14 May 2008, that held by the majority of the 29.4.08 RIC.

(d)

As from 14 May 2008, that held by the majority of the 14.5.08 RIC.

381AA.2 In the alternative, the reasonable belief to be attributed to RBS is that held by:
(a)

Up to 14 May 2008, each of the members of the 29.4.08 RIC.

(b)

As from 14 May 2008, each of the members of the 14.5.08 RIC.

381AA.3 In the further alternative, the reasonable belief to be attributed to RBS is that held by
a majority of the members of the Board of RBS.
381AA.4 In the yet further alternative, the reasonable belief to be attributed to RBS is that
held by each of the members of the Board of RBS.
381AA.5 RBS's case will be, to the extent necessary, that each of the persons identified above
reasonably believed (and continued until the Closing Date to believe) that there were
no changes or new matters which called for a supplementary prospectus.
381AB. RBS notes the Claimants' case, as set out in their updated Further Information dated 12
February 2016, as to the persons whose beliefs are to be attributed to RBS for the purposes of
paragraph 7 of Schedule 10 to FSMA. Insofar as the Claimants' case is that the belief of any
person, other than those referred to in paragraph 381AA above, is relevant, that case is denied.
Without prejudice to this position, if and in so far as the Claimants establish such case, RBS's
case will be that each such person, reasonably believed (and continued until the closure of the
Rights Issue to believe) that there were no changes or new matters which called for a
supplementary prospectus.
381AC. For the avoidance of doubt, the Defendants' case is that:
381AC.1 Insofar as it is found that the Prospectus omitted any matter required to be included
by s.87A of FSMA, it is not necessary, in order for them to be able to claim the

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benefit of the defence available under paragraph 1 of Schedule 10 to FSMA, for the
Defendants to prove that they were aware of the matter in question and of its
omission from the Prospectus.
381AC.2 Insofar as it is found that a supplementary prospectus was required pursuant to
s.87G of FSMA, it is not necessary, in order for them to be able to claim the benefit
of the defence available under paragraph 7 of Schedule 10 to FSMA, for the
Defendants to prove that they were aware of the change or new matter in question.
381A. If, contrary to the Defendants' primary case set out above, it is found that any Claimant(s) has
suffered loss as a result of any statement(s) in the Prospectus which was untrue or misleading,
and/or the omission from the Prospectus of any material matter(s), and/or a wrongful failure
on the part of RBS to submit a supplementary prospectus, to the extent that that Claimant(s)
knew that the relevant statement(s) were untrue or misleading, or had knowledge of the
omitted matter(s) or of the relevant change(s) or new matter(s), as a result of the provisions of
paragraph 6 of Schedule 10 of FSMA the Defendants are not liable to that Claimant(s). The
extent of the knowledge of individual Claimants is a matter which, subject to the outcome of
the currently directed Trial 1, will need to be the subject of further directions after that trial
has been heard.
Causation and loss
382

The Defendants will plead to paragraphs 128 to 129F in due course their separate Re-ReAmended Defence on Causation and Quantum.

The Defendants' lack of liability

383

As to paragraph 130, for the reasons set out above, it is denied that the Defendants (or any of
them) committed the alleged breaches of ss.87G, 90(1) or 90(4) of FSMA. It is further denied
that the Defendants (or any of them) are liable to the Claimants as alleged or at all.

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384

Accordingly, it is denied that the Claimants are entitled to interest as alleged at paragraph 131
or at all.

JONATHAN GAISMAN Q.C.

DAVID BLAYNEY Q.C.
SIMON HATTAN
JAMES McCLELLAND
DAVID BLAYNEY Q.C.
SIMON HATTAN
JAMES McCLELLAND
DAVID BLAYNEY Q.C.
SIMON HATTAN
DAVID MURRAY
DAVID RAILTON Q.C.
SONIA TOLANEY Q.C.
DAVID BLAYNEY Q.C.
SIMON HATTAN
JAMES McCLELLAND
DAVID MURRAY
NATASHA BENNETT
DEBORAH HOROWITZ

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Statement of truth
The Defendants believe that the facts stated in this statement of case are true. I am duly authorised by
the Defendants to sign this statement.
Name:
Position held:
Date:
Signed: .
Served this 13th14th 1ST [ ] day of [ ] DecemberNovember March 20161413 by Herbert Smith Freehills
LLP, Exchange House, Primrose Street, London EC2A 2EG.

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SCHEDULE 1
DRAMATIS PERSONAE
ABN 2

ABN AMRO Holding N.V., a Dutch investment bank acquired by

the Consortium.

ABN North America

Holding Company

The holding company of LaSalle, prior to LaSalle's sale to Bank

of America in October 2007.

ACA

ACA Capital Holdings, Inc. and its subsidiaries, a monoline

insurer.

Antonveneta

Banca Antoniana Popolare Veneta.

BB Claimants

Those Claimants set out in paragraph 0B(1) of the Amended

Consolidated Particulars of Claim.

BBA

British Bankers' Association.

BluePoint Re

BluePoint Re Limited, a monoline insurer.

BNP Paribas

Banque BNP Paribas.

Citibank

Citibank International plc.

CFTC

The US Commodity Future Trading Commission.

Mr Crowe

Mr Brian Crowe, RBS Chief Executive of Global Banking &

Markets from November 2005 to 2008.

Deloitte

Deloitte & Touche LLP, RBS's auditors and reporting accountants

at the time of the Rights Issue.

Deutsche Bank

Deutsche Bank AG.

DoJ

The US Department of Justice.

Euronext

Euronext N.V., the Amsterdam Stock Exchange.

Mr Farrall

RBS's Group Head of Market Risk.

Federal Reserve 3

The Federal Reserve Bank of New York.

FGIC

Financial Guaranty Insurance Company, a monoline insurer.

Financial Security
Assurance

Financial Security Assurance, Inc., a monoline insurer.

2
3

The definition adopted in the Composite Consolidated Particulars of Claim is "ABN AMRO".
The definition adopted in the Composite Consolidated Particulars of Claim is the "Federal Reserve Bank of New York".

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Fitch

Fitch Ratings, one of the leading, globally recognised, ratings

agencies.

Freshfields

Freshfields Bruckhaus Deringer, legal advisers to the Joint

Financial Advisers, Joint Sponsors, Joint Bookrunners and CoBookrunner as to English, US and Dutch law.

Goldman

Goldman Sachs International, Joint Financial Adviser, Joint

Sponsor and Joint Bookrunner for the Rights Issue.

HSBC

HSBC Bank plc.

IASB

The International Accounting Standards Board.

IASB Expert Advisory Panel

The expert advisory panel of IASB, comprising measurement

experts from preparers and auditors of financial statements, users
of financial statements, regulators and others.

IIF

Institute of International Finance, Inc.

IKB

IKB Deutsche Industriebank AG.

Mr Janjuah

RBS's Chief Credit Strategist.

Linklaters

Linklaters LLP, legal advisers to RBS in connection with the

Rights Issue.

LK Claimants

Those Claimants set out in paragraph 0B(4) of the Amended

Consolidated Particulars of Claim.

Lloyds

Lloyds Bank plc.

London Stock Exchange

The preeminent stock exchange in London.

Merrill

Merrill Lynch International, Joint Financial Adviser, Joint

Sponsor and Joint Bookrunner for the Rights Issue.

Mr McLean

Mr Miller McLean, RBS Group Secretary from 1988 to April

2010 and Group General Counsel from 20038 to February April
2010 (previously held the position of General Counsel from
2003).

Moody's

Moody's Investors Service, the bond credit rating business of

Moody's Corporation, one of the leading, globally recognised,
ratings agencies.

Northern Rock

Northern Rock plc.

OW

Oliver Wyman.

QE Claimants

The members of the QE Claimants, as set out in Schedule 4 of the

Amended Consolidated Particulars of Claim, as may be amended
from time to time.

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RBS Insurance

In 2008, the UK's second largest general insurer and the largest
personal lines insurer by gross written premiums.

Redburn

Redburn Partners.

Mr Sants

Mr Hector Sants, Head of the Financial Services Authority FSA

from July 2007 to July 2012.

SL Group Claimants

The members of the SL GroupClaimants, as set out at Schedule 3

of the Composite Amended Consolidated Particulars of Claim, as
may be amended from time to time.

S&P

Standard & Poor's, one of the leading, globally recognised, ratings

agencies.

Treasury Select Committee

The committee, established under Standing Order No. 152, and

appointed by the House of Commons to examine the expenditure,
administration and policy of HM Treasury, HM Revenue &
Customs, and associated public bodies, including the Bank of
England and the Financial Conduct Authority.

Mr Wharton

Mr Mark Wharton of the FSA Major Retail Groups Division.

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SCHEDULE 2
GLOSSARY AND ABBREVIATIONS
2007 Comparatives

The comparative figures for the year ending 31 December 2007

contained in the 2008 Accounts.

2007 Results Announcement

The announcement of RBS's Annual Results for 2007, made on 28

February 2008.

2008 Budget

RBS's internal budget for 2008.

2008 Interim Results

RBS's Interim Results as at 30 June 2008.

3+9 Reforecast

The reforecast for operating profits for 2008 contained in RBS's

3+9 Reforecast produced on 19 April 2008.

ABN Form 20-F Annual

Report

The ABN SEC Form 20-F Report for the year ending 31
December 2007, as filed with the SEC on 31 March 2008.

ABX.HE Index

Asset-backed securities index.

AFS

Available for Sale.

Alleged ABN Problems

Various alleged problems with ABN or the integration of ABN,

that were allegedly identified by RBS prior to the Closing Date.

Approvals Committee

A committee of the Board, formed on 21 April 2008, as part of the

implementation structure for the Rights Issue, with the purpose of
finalising and releasing the press announcement and granting final
approval of the Rights Issue documentation.

ARROW

Advanced Risk-Responsive Operating Framework.

BIPRU

Waivers Prudential Sourcebook for Banks, Building Societies and

Investment Firms, issued by the Financial Services AuthorityFSA.

Capital Ratio Tables

The tables at paragraph 82 of the Re-Re-Amended Defence,

setting out details of RBS's capital ratios as at 31 December 2007
and 30 June 2008.

CESR Guidelines

The recommendations published by CESR in January 2005.

Chairman's Committee

A committee of the RBS Board with authority to exercise all

powers of the Board in respect of material matters requiring an
immediate decision.

CHF

Swiss Franc.

Citizens

Citizens Financial Group Inc.

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Composite Particulars of
Claim

The Particulars of Claim and the SL GroupClaimants Points of

Difference, served by the SL GroupClaimants dated 15 October
2013.

Amended Consolidated
Particulars of Claim

The Amended Consolidated Particulars of Claim dated 15 July

2014.

December Draft GIA

Reports

The Draft GIA Reports dated 23 December 2008.

De-risking Presentation

Presentation entitled "Managing the Balance Sheet Asset de-risk

Strategy and Estimated Impact on P+L and RWA", drafts of
which were produced between 10 and 17 April 2008"

DoJ Statement of Facts

The statement of facts incorporated into the DPA as Attachment

A.

DP 07/7

The Discussion Paper issued by the FSA in December 2007 titled,

"Review of the liquidity requirements for banks and building
societies".

DPA

The Deferred Prosecution Agreement dated 5 February 2013.

Draft GIA Reports

The six draft reports, each dated either 15 July 2008 or 23

December 2008, prepared by GIA as part of the "Project Snow
Review", namely: (1) RBS Group Report; (2) Global Banking and
Markets Structured Credit Report; (3) ABN AMRO Report; (4)
Monolines Report; (5) Leveraged Finance Report; and (6) Citizens
Financial Group SBO Portfolio Report. Taken together, these
reports are referred to as the Draft GIA Reports. 4

EAD Model

The Exposure at Default model.

ELA

Emergency Liquidity Assistance.

EPE Model

Expected Positive Exposure Model

FAS

Financial Accounting Standard.

FSA Notice

The FSA final notice dated 6 February 2013.

GALCO

Group Asset and Liability Committee.

GCEAG

The Group Chief Executive's Advisory Group.

The definition adopted in the Consolidated Particulars of Claim is GIA Report.

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GEMC

RBS's "Group Executive Management Committee", which

provided executive support to the RBS Board, reviewed high level
strategic issues in advance of such issues being discussed by the
RBS Board, formulated and reviewed policy relating to risk, and
oversaw the operational management of the business of the RBS
Group.

GENPRU

General Prudential Sourcebook, issued by the Financial Services

AuthorityFSA.

GIA

Group Internal Audit division of RBS.

GMRC

Group Market Risk Committee of RBS.

Group Risk Committee

GRC

Group Risk Committee, a A sub-committee of the Executive Risk

Forum which recommended and approved limits, policies,
processes and procedures to enable the effective management of
risk across the RBS Group.

Greenwood Particulars of
Claim

The Particulars of Claim dated 2 April 2013 in claim no.

HC13F01247

Group Audit Committee

A committee of the RBS Board with responsibility for, amongst

other things, reviewing the draft disclosure statement on internal
control for the Group's Annual Report and Accounts.

Group Liquidity Policy

RBS Group statement of liquidity policy approved by GALCO on

11 December 2006

Group Transactions &

Projects

An in-house legal department providing legal support to the

directors and senior executives of the RBS Group in relation to
planning, negotiation, documentation, and on-going legal and
regulatory aspects of strategic corporate transactions and projects.

GTS

Global Transaction Services, a division of RBS's Markets and

International Banking Services.

ICAAP

Internal Capital Adequacy Assessment Report.

IFRS

International Financial Reporting Standards.

IIF Report

The Final Report of the IIF Committee on Market Best Practices:

Principles of Conduct and Best Practice Recommendations
published on 17 July 2008.

ITR

Internal Target Ratio.

JPY

Japanese Yen.

July Draft GIA Reports

The Draft GIA Reports dated 15 July 2008.

LIBOR

The London Interbank Offered Rate.

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10/50136243_3

LIBOR Panel Banks

The banks which, from time to time, submitted LIBOR to the

BBA in one or more currencies.

Listing Rules

The Listing Rules made by the FSA acting in its capacity as the
UKLA.

LSD model

The Loss Severity of Default model.

market

Unless otherwise indicated, or the context so requires, means the

market in shares in RBS.

NAV

Net Asset Value

NPV

Net Present Value.

OW Report

The report commissioned by RBS Risk Management prepared by

OW dated 23 May 2008.

Order

The order dated 6 February 2013 (CFTC Docket No. 13-14).

P&L

Profit and loss

Part 18 Response

Defendants' Response dated 8 May 2014 to the Claimants' Part 18

request dated 3 March 2014.

PD Model

Probability of Default Model

Press Release

The press release issued by RBS on 22 April 2008 announcing the

Rights Issue.

Principles for Businesses

The Principles set out in the FSA's Handbook, which provided a

general statement of the fundamental obligations of authorised
firms.

QuarC

RBS's Quantitative Research Centre

RBS Board / the Board

The RBS Group board of directors from time to time.

Remuneration and Benefits

division

A division within RBS's Human Resources function responsible

for determining remuneration and benefits.

Rights Issue Committee

A committee of the RBS Board, formed on 21 April 2008, as part

of the implementation structure created following the main
approval by the RBS Board of the Rights Issue and its
documentation, with the objectives of on-going monitoring of the
resolutions passed at the Board Meeting of 21 April 2008 and with
the powers to modify documents, terms and all powers of the RBS
Board in relation to the Rights Issue.

Rights Issue Presentation

The investor presentation held by Goodwin, Whittaker and

McKillop on 22 April 2008, following the announcement of the
Rights Issue.

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RMMR

The risk management monthly reports of RBS which were

provided each month to the Board and GEMC.

SLS

The Special Liquidity Scheme, introduced by the Bank of England

in April 2008 to improve the liquidity position of the banking
system by allowing banks and building societies to swap their
high quality mortgage-backed and other securities for UK
Treasury Bills for up to three years.

Sponsor's Declaration

A Sponsor's Declaration on an Application for Listing, required to

be submitted to the UKLA under LR 8.4.3R.

SREC

Structured real estate capital.

STM

Short Term Money Markets.

UNIVAR

RBS's proprietary system for VaR modelling.

VaR

Value at Risk.

VaR Multiplication Factor

The multiplier required to be applied by UK banks to the output of

their VaR models when calculating capital.

Verification Certificates /
Verification Certificate

Certificate(s) confirming that the an advanced draft of the Press

Release or Prospectus did not contain any untrue statements of
material fact and did not omit to state any material fact necessary
to make the statements made therein, in light of the circumstances
under which statements were made, not misleading.

Verification Notes

Detailed notes, prepared with the assistance of Linklaters,

recording the factual basis for each of the material statements in
the Press Release and the Prospectus, along with supporting
documentation.

Wall Street Journal

An American daily newspaper with a special emphasis on

business and economic news.

Winters' review

Review by Bill Winters of the Bank of England's framework for

providing liquidity to the Banking System presented to the Court
of the Bank of England in October 2012.

Working Capital Report

The working capital report prepared by Deloitte, dated 30 April

2008.

Working Capital Statement

The statement at page 124 of the Prospectus titled "22 Working

Capital".

Write-Downs Table

The table at page 26 of the Prospectus.

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ANNEX 1
FURTHER PARTICULARS OF PARAGRAPH 19.1

1. The table below identifies, from amongst those parts of the CPOC containing particularised
allegations that statements contained in the Prospectus were untrue or misleading, the
allegations in respect of which the Defendants contend that the alleged mistake or inaccuracy
was not material.
2. The Defendants are not presently able to provide particulars in respect of either (i)
unparticularised allegations that statements contained in the Prospectus were misleading, or
(ii) any other potential respects in which either sides' experts may conclude that statements
contained in the Prospectus were untrue or misleading.
3. In a number of places in the CPOC, the Claimants allege that certain undisclosed information
was (a) necessary within the meaning of s.87A and/or (b) needed to be disclosed by way of
qualification ("Qualifying Information") in order to avoid investors being misled by certain
statements contained in the Prospectus. In respect of the latter case, the Defendants contend
that the omission of Qualifying Information without which a statement in the Prospectus was
misleading only caused the statement to be materially misleading if, which is in each case
denied, that Qualifying Information was necessary (given the statement contained in the
Prospectus) to enable investors to make an informed assessment.

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CPOC
Ref

Allegation

Materiality Particulars

45.1

See the whole of the The allegation that the statements made in the
paragraph
Prospectus about the reasons for the Rights Issue were
misleading is very closely related to the allegations
(made in paragraphs 43, 44, 44A and 46) that the
disclosure of information about the allegedly true
reasons for the Rights Issue (the "Omitted Information")
was necessary for an informed assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:

45.2

"It was misleading to

state that "the Board has
determined that it is
appropriate to raise
12bn through the Rights
Issue",
giving
the
impression that this was
a voluntary decision,
without making clear that
the Rights Issue had been
required by the FSA
alternatively
was
undertaken
under
pressure from the FSA
and not voluntary or
freely"

It is denied that the Prospectus was misleading

because of its omission.

Even if that is wrong, and the Prospectus was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading. The contents of
the Prospectus were not such as to have caused
the Omitted Information to be necessary (when
it would not otherwise have been) to enable
investors to make an informed assessment

This allegation is very closely related to the allegations

(made in paragraphs 44 and 46) that disclosure that the
Rights Issue had been required by the FSA, alternatively
that the FSA had exerted substantial pressure on RBS to
undertake it (the "Omitted Information") was necessary
for an informed assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

It is denied that the Prospectus was misleading

because of its omission.

Even if that is wrong, and the Prospectus was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading. The contents of
the Prospectus were not such as to have caused
the Omitted Information to be necessary (when

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it would not otherwise have been) to enable

investors to make an informed assessment.

45.3

See the whole of the This allegation is very closely related to the allegations
paragraph
that disclosure that RBS's previous capital plans had not
been complied with satisfactorily (made in paragraphs
43 and 46) and that RBS was unable to establish its
capital position with any clarity or certainty (made in
paragraphs 57.9 and 57.9A) (the "Omitted Information")
was necessary for an informed assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:

45.4

"It was further

misleading to state
without correction that
"At the time of its 2007
results announcement
RBS confirmed that it
was operating within the
parameters of this plan"
given that in the
confirmation in the
Annual Results referred
to (quoted at paragraph

It is denied that the Prospectus was misleading

because of its omission.

Even if that is wrong, and the Prospectus was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading. The contents of
the Prospectus were not such as to have caused
the Omitted Information to be necessary (when
it would not otherwise have been) to enable
investors to make an informed assessment.

This allegation is very closely related to the allegations

(made in paragraphs 43 and 46) that disclosure that
RBS's previous capital plans had not been complied with
satisfactorily and of information about RBS's capital
ratios (the "Omitted Information") was necessary for an
informed assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

It is denied that the Prospectus was misleading

because of its omission.

Even if that is wrong, and the Prospectus was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading. The contents of
the Prospectus were not such as to have caused
the Omitted Information to be necessary (when
it would not otherwise have been) to enable
investors to make an informed assessment.

40 above) RBS had also

stated (incorrectly) that
its Basel II reported
capital ratios were
"expected to be similar to
their Basel I
equivalents", but in fact

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under Basel II (on a

proportional
consolidated basis) RBS's
Tier 1 core capital ratio
of no higher than 6.8%
had been below the
7.0%-8.0% range at 31
December 2007, and by
30 April 2008 its ratio
was still further below
that range, being lower
than 6.3 4.86%
alternatively 5.21%."

45.5

"It was untrue or

misleading to say that
RBS's previous core Tier
1 capital plan had
"assumed that it would"'
"rebuild its core Tier 1

This allegation is very closely related to the allegation

(made in paragraphs 43.1 and 46) that disclosure of an
existing Core Tier 1 target of 5.25% (the "Omitted
Information") was necessary for an informed
assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:

capital ratio towards 5

per cent. by 2010", given
the existence of

It is denied that the Prospectus was untrue or

misleading because of its omission.

RBS's 5.25% target for

core Tier 1 capital."

Even if that is wrong, and the Prospectus was

untrue or misleading because of the omission of
the Omitted Information, it is denied that it was
thereby materially untrue or misleading. The
contents of the Prospectus were not such as to
have caused the Omitted Information to be
necessary (when it would not otherwise have
been) to enable investors to make an informed
assessment.

45.6

"It was untrue or

misleading to state or
imply that there was
leeway built into the
figures and that RBS
would comfortably
achieve its capital ratio

This allegation is very closely related to the allegation

that disclosure of the matters set out at paragraph 44A
(the "Omitted Information") was necessary for an
informed assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

524
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It is denied that the Prospectus was untrue or

target"

misleading because of its omission.

-

58.1

"It was misleading to

state that "It is RBS
policy to maintain a
strong capital base""

Even if that is wrong, and the Prospectus was

untrue or misleading because of the omission of
the Omitted Information, it is denied that it was
thereby materially untrue or misleading. The
contents of the Prospectus were not such as to
have caused the Omitted Information to be
necessary (when it would not otherwise have
been) to enable investors to make an informed
assessment.

This allegation is very closely related to the allegation

(made at paragraphs 57.3 and 59) that disclosure that
RBS's Core Tier 1 ratio on 30 April 2008 was 2.7%,
alternatively 3.03% (the "Omitted Information") was
necessary for an informed assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:

58.2

It is denied that the Prospectus was misleading

because of its omission.

Even if that is wrong, and the Prospectus was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading. The contents of
the Prospectus were not such as to have caused
the Omitted Information to be necessary (when
it would not otherwise have been) to enable
investors to make an informed assessment.

See the whole of the This allegation is very closely related to the allegations
paragraph
(made at paragraphs 44.2, 46, 57.6, 57.7, 59) that
disclosure of information regarding changes in RBS's
RWAs and information about its changes in its capital
ratios from Basel I to Basel II (the "Omitted
Information") was necessary for an informed
assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

It is denied that the Prospectus was misleading

because of its omission.

Even if that is wrong, and the Prospectus was

525
10/50136243_3

misleading because of the omission of the

Omitted Information, it is denied that it was
thereby materially misleading. The contents of
the Prospectus were not such as to have caused
the Omitted Information to be necessary (when
it would not otherwise have been) to enable
investors to make an informed assessment.

58.3

57.7A,
57.7B
and 58.4

"It was untrue or

misleading to state that
RBS "mitigates the risk of
not meeting capital
adequacy requirements
by careful management
of its balance sheet and
capital", which implied
that RBS had been
successful in this
regard"

The Prospectus was

misleading and/or
omitted necessary
information in that it
failed to disclose RBS's
capital plan and ability
to reach its capital
targets as set out in the
Prospectus was
dependent on receiving

This allegation is very closely related to the allegations:

- made at paragraphs 44.3A.9, 44.3A.12, 57.9, 59) that
disclosure of RBS's breach or near breach of its ICG and
breach of its ITR;
- made at paragraphs 57 that disclosure of the decline in
RBS's capital ratios and disclosure that RBS did not
have adequate knowledge of its up-to-date capital
position (together the "Omitted Information") was
necessary for an informed assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

It is denied that the Prospectus was untrue or

misleading because of its omission.

Even if that is wrong, and the Prospectus was

untrue or misleading because of the omission of
the Omitted Information, it is denied that it was
thereby materially untrue or misleading. The
contents of the Prospectus were not such as to
have caused the Omitted Information to be
necessary (when it would not otherwise have
been) to enable investors to make an informed
assessment.

This allegation is very closely related to the allegations

made in paragraphs 57.7, 57.7A and 57.7B that
disclosure of issues surrounding the FSA's approach to
the treatment of ABN RWAs and to RBS's use of
proprietary AIRB models for aspects of its RWA
calculations (the "Omitted Information") was necessary
for an informed assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

526
10/50136243_3

It is denied that the Prospectus was untrue or

full model approval from

the FSA in respect of its
AIRB models"

misleading because of its omission.

-

"The Prospectus was

misleading and/or
omitted necessary
information in that it
failed to disclose that
RBS's capital plan and
ability to reach its capital
targets as set out in the
Prospectus was
dependent on receiving
approvals for various
other changes to its
treatment of RWAs, and
the risks associated with
this"

"It was untrue or

misleading to
incorporate by reference
the statement in the 2007
Accounts that RBS "has
received agreement
(called a"waiver" to
adopt the Advanced
Internal Ratings Based
(AIRB) approach for
calculating capital
requirements for the
majority of its business
with effect from 1
January 2008. The
Group, therefore, will be
one of a small number of
banks whose risk systems
and approaches have
achieved the advanced
standard for credit" and
it was also misleading
and incomplete to say
that "RBS continues to
work with regulators to

527
10/50136243_3

Even if that is wrong, and the Prospectus was

untrue or misleading because of the omission of
the Omitted Information, it is denied that it was
thereby materially untrue or misleading. The
contents of the Prospectus were not such as to
have caused the Omitted Information to be
necessary (when it would not otherwise have
been) to enable investors to make an informed
assessment.

refine the methods by

which the calculation of
risk weighted assets is
made"

58.6
"It was untrue or
misleading to state that
the capital projections at
p28 of the Prospectus
were based on
"conservative estimates""

68.1-68.3

This allegation is very closely related to the allegation

(made at paragraph 57.B) that disclosure of information
about an alleged lack of conservatism in the assumptions
underpinning RBS's capital plan ("the Omitted
Information") was necessary for an informed
assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

It is denied that the Prospectus was untrue or

misleading because of its omission.

Even if that is wrong, and the Prospectus was

untrue or misleading because of the omission of
the Omitted Information, it is denied that it was
thereby materially untrue or misleading. The
contents of the Prospectus were not such as to
have caused the Omitted Information to be
necessary (when it would not otherwise have
been) to enable investors to make an informed
assessment.

See the whole of those The allegations contained in these paragraphs are very
paragraphs
closely related to the allegations made in paragraph 67
that information about the level of RBS's reliance on
short term wholesale funding, the steps being taken to
address this and the alleged vulnerability of RBS's
liquidity position generally (the "Omitted Information")
was necessary for an informed assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

It is denied that the Prospectus was misleading

because of its omission.

Even if that is wrong, and the Prospectus was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading. The contents of

528
10/50136243_3

the Prospectus were not such as to have caused

the Omitted Information to be necessary (when
it would not otherwise have been) to enable
investors to make an informed assessment.

68.3A

"It was untrue or

misleading to say that
"RBS has met all of its
liquidity policy metrics"
when in fact the
parameters in the Group
Liquidity Policy had been
breached (or if not
breached, only because
they had been diluted to
the point of being
meaningless)."

These allegations are very closely related to the

allegations made in paragraph 67.11 that information
about alleged breaches of RBS's liquidity metrics (the
"Omitted Information") was necessary for an informed
assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

It is denied that the Prospectus was untrue or

misleading because of its omission.

Even if that is wrong, and the Prospectus was

untrue or misleading because of the omission of
the Omitted Information, it is denied that it was
thereby materially untrue or misleading. The
contents of the Prospectus were not such as to
have caused the Omitted Information to be
necessary (when it would not otherwise have
been) to enable investors to make an informed
assessment.

68.3B
"It was misleading to say
that there was a risk that
corporate and
institutional
counterparties with
credit exposures "may
look to consolidate their
exposure to the enlarged
Group" without
disclosing that in fact
market counterparties
had already reduced
their lending limits to the
combined entity".

The allegation contained in this paragraph is very

closely related to the allegation made in paragraph 67.3
that the fact that the merger of ABN AMRO with RBS
had caused market counterparties to reduce lending
limits to the combined entity (the "Omitted
Information") was necessary for an informed
assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

It is denied that the Prospectus was misleading

because of its omission.

Even if that is wrong, and the Prospectus was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading. The contents of
the Prospectus were not such as to have caused

529
10/50136243_3

the Omitted Information to be necessary (when

it would not otherwise have been) to enable
investors to make an informed assessment.

68.5
"It was misleading to
state only that ABN
AMRO had seen "two
small conduits draw
liquidity without
disclosing the full picture
of ABN AMRO's and
RBS's liquidity exposure
to conduitsor what had
in fact happened in
relation to North Sea"

68.6

"68. In the
circumstances, the
statements made in the
Prospectus in this regard
and in respect of liquidity
generally were
misleading, and included
untrue misstatements, in
breach of section
90(1)(b)(i) of FSMA. In
particular:

The allegations contained in this paragraph are very

closely related to the allegations made in paragraphs
67.4 to 67.6 and 67.6A that information about the ABN
AMRO's and RBS's liquidity exposure to conduits and
the allegations made in paragraph 67.5.1 that
information about what happened to North Sea (the
"Omitted Information") was necessary for an informed
assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

It is denied that the Prospectus was misleading

because of its omission.

Even if that is wrong, and the Prospectus was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading. The contents of
the Prospectus were not such as to have caused
the Omitted Information to be necessary (when
it would not otherwise have been) to enable
investors to make an informed assessment.

The allegation contained in this paragraph is very

closely related to the allegation made in paragraphs 67.5
to 67.6 that information as to the type and quality of
conduit assets to which RBS was exposed, including the
extent of the CDO exposure (the "Omitted Information")
was necessary for an informed assessment. If (as the
Defendants contend) the Omitted Information was not of
itself necessary information:
-

It is denied that the Prospectus was untrue or

misleading because of its omission.

Even if that is wrong, and the Prospectus was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading or untrue. The

530
10/50136243_3

68.6 The Prospectus, or

a supplementary
prospectus, ought to have
disclosed the type and
quality of the conduit
assets to which RBS was
exposed, including the
extent of the CDO
exposure."
71B, 73, "71B. The reasonable
74F, 75, investor would have
81A
to understood the Write81D
Downs Table to set out
the entirety of RBS's
credit market exposures
in
respect
of
the
categories of assets it
identified.
But RBS
misled
investors
by
excluding some credit
market exposures from
the Write-Downs Table
and not disclosing the
nature and significance
of the exclusions. See
further paragraph 81A
below"

contents of the Prospectus were not such as to

have caused the Omitted Information to be
necessary (when it would not otherwise have
been) to enable investors to make an informed
assessment.

These allegations of the making of misleading or untrue

statements are very closely related to the allegations
(also made by the Claimants) that the disclosure of
additional exposures and/or additional information as to
the nature and significance of the exclusions (the
"Omitted Information") was necessary for an informed
assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

It is denied that the Prospectus was untrue or

misleading because of its omission; and

Even if that is wrong, and the Prospectus was

untrue or misleading because of the omission of
the Omitted Information, it is denied that it was
thereby materially untrue or misleading. A
misunderstanding as to the extent of RBS's total
exposures to the particular categories of
exposure at issue would not in the circumstances
(on the assumption that the Omitted Information
was not of itself necessary information) have
materially affected an informed assessment of
the matters referred to in FSMA s.87A(2).

"73.
However, the
Prospectus understated
RBS's exposures in these
respects and in respect of
other sensitive exposures
which should have been
disclosed,
which
exposures and necessary
provisions are currently
estimated to total several
billion pounds.
These
understatements
are
addressed below"
(See also the whole of
paragraphs 74F, 75 and
81A to 81D.)

531
10/50136243_3

72A

"While the Prospectus

portrayed the source of
RBS's
problems
associated with its credit
market exposures as the
external environment in
which it operated (for
example, "deterioration
in market conditions and
outlook
in
credit
markets" p.26), it misled
investors by failing to
reveal that the Bank
knew that the problem
had been caused or
exacerbated
by
the
systemic
gross
mismanagement of its
structured
credit
business, including in
particular the reckless
and aggressive drive by
RBS
Greenwich
to
increase revenue without
proper risk controls. In
particular:

This allegation of the making of a misleading statement

is very closely related to the allegation (also made by the
Claimants) that the disclosure of the matters alleged (the
"Omitted Information") was necessary for an informed
assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

it is denied that the Prospectus was misleading

because of its omission; and

even if that is wrong, and the Prospectus was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading. The contents of
the Prospectus (for example, the reference to
"deterioration in market conditions and outlook
in credit markets" quoted by the Claimants)
were not such as to have caused the Omitted
Information to be necessary (when it would not
otherwise have been) to enable investors to
make an informed assessment.

72A.1 The July

2008 GIA Report
reported
the
inadequate risk
management
practices.
72A.2 The Loss
Severity
of
Default
model
(or LSD model)
used by RBS to
value the super
senior
CDO
positions
from
the
end
of
October
2007
was
grossly
inadequate"
74.3A,
74.3B,

"The
reasonable This allegation of the making of an untrue or misleading
interpretation of the statement as to the extent of RBS's exposures to CLOs is

532
10/50136243_3

81E

reference to "CLOs" in
context was that this
entry was a reference to
CLOs. Accordingly, the
Prospectus represented
that net CLO exposures
at 31 December 2007
was 1.386bn. On this
basis, the Prospectus
therefore
understated
CLO exposures by at
least 2.696bn as of 31
December 2007, and it
can be inferred that it
understated them by a
similar amount as of
April 2008."

very closely related to the allegation (also made by the

Claimants) that the disclosure of the full extent of RBS's
exposure to CLOs (the "Omitted Information") was
necessary for an informed assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

"CLO exposures were

understated
in
the
Prospectus by 4.082bn."
"The description was
misleading as it obscured
the fact that CLOs were
not covered by the WriteDowns table and no CLO
write-downs had been
taken into account by
RBS."
(See also the whole of
81E.)

74.4A,
74.4B,
81F

As already pleaded in paragraph 209 of the ReRe-Amended Defence, it is denied that the
failure to use a label that made clear that the
assets referred to were leveraged loans that had
been warehoused by RBS for the purpose of
further securitisation into CLOs was material.
Whilst (in fact incorrectly) understanding the
figure of 1.386bn to refer to CLOs, a
reasonable investor who understood this to refer
to CLOs would have understood that this
referred to CLOs on which the bank expected to
have to take material write-downs in 2008. If
that is correct, the failure to use a label that
made clear that the reference was to warehoused
leveraged loans did not cause the Prospectus to
be materially inaccurate or materially
misleading. It would simply have caused some
investors to misunderstand that the 1.386bn of
assets in this category on which RBS expected
to take writedowns of 106m in 2008 were CLO
securities rather than leveraged loans
warehoused for securisation into CLOs.
It was not necessary for an informed assessment
to know that the 1.386bn on which RBS
expected to take writedowns of 106m in 2008
(as referred to in the ninth row of the WriteDowns table) were loans warehoused for
securitisation into CLOs rather than CLO
securities.

(See the whole of these This allegation of the making of an untrue or misleading
paragraphs.)
statement as to the extent of RBS's exposures to CMBSs
is very closely related to the allegation (also made by the
Claimants) that the disclosure of the full extent of RBS's
exposure to CMBSs (the "Omitted Information") was
necessary for an informed assessment.
If (as the Defendants contend) the Omitted Information

533
10/50136243_3

was not of itself necessary information:

-

If (which is denied) reasonable investors would

have understood the row labelled "US
commercial mortgages" to be a reference to
CMBS securities rather than mortgages
warehoused for future securitisation (but would
not have understood this to refer to all such
exposures, only to those on which RBS expected
to take material writedowns), the Prospectus was
not thereby materially in error or materially
misleading.
It was not necessary for an informed assessment
to know that the 1.397bn of current exposures
on which RBS expected to take writedowns of
291m in 2008 (as referred to in the seventh row
of the Write-Downs table) were loans
warehoused for securitisation into CMBSs rather
than CMBS securities.

92.

94P.

"In the circumstances,

the statements made in
the Prospectus in respect
of monolines and in
respect of CDPCs and
CVA were misleading, in
breach by the Defendants
of section 90(1)(b)(i) of
FSMA. In particular, by
reason of the matters
above, they failed to give
a fair presentation of
RBS's risks in respect of
monolines, CDPCs, and
CVA."

This allegation of the making of a misleading statement

is very closely related to the allegation (also made by the
Claimants) that the disclosure of the matters alleged (the
"Omitted Information") was necessary for an informed
assessment.

"In the circumstances,

the statements in the
Prospectus in respect of
operating performance,
and in particular those

This allegation of the making of misleading statements

is very closely related to the allegation (also made by the
Claimants) that the disclosure of the matters alleged in
paragraph 94O (the "Omitted Information") was

If (as the Defendants contend) the Omitted Information

was not of itself necessary information:
-

it is denied that the Prospectus was misleading

because of its omission; and

even if that is wrong, and the Prospectus was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading. The contents of
pages 26 and 27 of the Prospectus were not of
such a nature as to cause the Omitted
Information to be necessary (when it would not
otherwise have been) to enable investors to
make an informed assessment.

534
10/50136243_3

pleaded at paragraph necessary for an informed assessment.

94N
above,
were
misleading in breach of If (as the Defendants contend) the Omitted Information
sections 87A and 90 of was not of itself necessary information:
FSMA."
- it is denied that the Prospectus was misleading
because of its omission; and
-

114.4

"It was misleading or

untrue to say that the
acquisition
of
ABN
AMRO had been decided
on after "very thorough
analysis and debate",
when in fact RBS had
acquired ABN AMRO on
the basis of due diligence
confined to two lever
arch files and one CD."

This allegation of the making of an untrue or misleading

statement as to the decision to acquire ABN AMRO is
very closely related to the allegation (also advanced) that
information as to the extent of the due diligence as
alleged in CPOC113.2 (the "Omitted Information") was
necessary for an informed assessment.
If (as the Defendants contend) the Omitted Information
was not of itself necessary information:
-

it is denied that the statement on page 8 of the

2007 Accounts that the acquisition had been
decided on "after very thorough analysis and
debate" was misleading or untrue because of its
omission; and

even if that is wrong, and that statement in the

2007 Accounts was misleading or untrue
because of the omission of the Omitted
Information, it is denied that it was thereby
materially misleading or untrue. The statement
that the acquisition had been decided on "after
very thorough analysis and debate" was not
such as to have caused the Omitted Information
to be necessary (when it would not otherwise
have been) to enable investors to make an
informed assessment.

535
10/50136243_3

even if that is wrong, and the Prospectus was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading. The statements
on page 29 of the Prospectus referred to by the
Claimants were not of such a nature as to cause
the Omitted Information to be necessary (when
it would not otherwise have been) to enable
investors to make an informed assessment.

114.5

"The 2007 Accounts had

not been prepared in
accordance with IFRS
(as the Prospectus stated
they had at pp.9 and
18)."

If this statement was untrue but the goodwill was not in

fact impaired, the statement was not materially untrue
because knowledge that there had been a technical
breach of the accounting standards was not necessary to
enable investors to make an informed assessment of the
matters set out in FSMA s.87A(2).

125.1

"It was misleading to

state that "The Board of
RBS has full confidence
that the executive team
will be able to lead RBS
through
the
current
challenging conditions",
without explaining the
limitations of Cameron's
relevant experience (as
pleaded in paragraph
122 above)."

This allegation as to the making of a misleading

statement is very closely related to the allegation (also
advanced) that the information alleged in relation to
Cameron ("the Omitted Information") was necessary to
enable investors to make an informed assessment.

125.2

"It was misleading to

state that RBS "mitigates
the risk of not meeting
capital
adequacy
requirements by careful
management
of
its
balance
sheet
and
capital" (p.11 of the
Prospectus, quoted at
paragraph 50 above),
without qualification by
reference
to
the
deficiencies identified at
paragraphs 124.1 to

If such information was not of itself necessary

information:
-

it is denied that the statement that "the Board of

RBS has full confidence that the executive team
will be able to lead RBS through the current
challenging conditions" was misleading;

even if that is wrong, and that statement was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading. The statement
that the Board had full confidence that the
executive team would be able to lead RBS
through the current challenging conditions was
not such as to have caused the Omitted
Information to be necessary (when it would not
otherwise have been) to enable investors to
make an informed assessment.

This allegation as to the making of a misleading

statement is very closely related to the allegation (also
advanced) that information as to the deficiencies alleged
in CPOC paragraphs 124.1 to 124.3 ("the Omitted
Information") was necessary to enable investors to make
an informed assessment.
If such information was not of itself necessary
information:
-

536
10/50136243_3

it is denied that the statement that RBS

"mitigates the risk of not meeting capital
adequacy requirements by careful management

124.3 above."

of its balance sheet and capital" was misleading;

-

125.3

"It was misleading to

suggest
that
RBS
managed
liquidity
"within prudent limits"
(p.72 of the Prospectus,
quoted at paragraph 63
above), when in fact
RBS's risk management
controls in respect of
liquidity
were
inadequate."

This allegation as to the making of a misleading

statement is very closely related to the allegation (also
advanced) that information as to the alleged inadequacy
of RBS's risk management controls in respect of
liquidity ("the Omitted Information") was necessary to
enable investors to make an informed assessment.
If such information was not of itself necessary
information:
-

it is denied that the statement that RBS

"mitigates the risk of not meeting capital
adequacy requirements by careful management
of its balance sheet and capital" was misleading;

even if that is wrong, and that statement was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading. The statement
that RBS managed liquidity within prudent
limits was not such as to have caused the
Omitted Information to be necessary (when it
would not otherwise have been) to enable
investors to make an informed assessment.

537
10/50136243_3

even if that is wrong, and that statement was

misleading because of the omission of the
Omitted Information, it is denied that it was
thereby materially misleading. The statement
that RBS mitigated the risk of not meeting
capital adequacy requirements by careful
management of its balance sheet and capital was
not such as to have caused the Omitted
Information to be necessary (when it would not
otherwise have been) to enable investors to
make an informed assessment.