The Fraud at the Heart of Equitas

The first published "Report and Accounts" of Equitas Holdings Limited and its subsidiaries (the "Equitas group", or "Group") were made up to 4th September 1996. On that date, the Group's Accounts showed that its assets totaled 15,974,000,000, its liabilities 15,386,000,000, and its purported shareholders' funds 588,000,000. All very substantial sums of money.

The Group's auditors required 3 pages and more to report that the figures shown in the Accounts could not be validated. They reported that "the scope of their work was limited"; that "the quality of syndicates' data was inadequate"; that "the reserving methodologies were inappropriate"; that "there are significant uncertainties as to the accuracy of the provision for claims outstanding of 14,757 million, reinsurers' share of claims outstanding of 4,285 million and reinsurance recoveries of 1,523 million"; that "the evidence we considered necessary for our audit is not wholly available"; that " we did not receive access to available information because of the risk of breaches of legal privilege" (surely this is unique for the audit of an insurance company?), and that "we were therefore unable to determine whether proper accounting records had been maintained".

Yet in spite of those and other equally meaningful qualifications they concluded... "Except for material adjustments.... in our opinion the financial statements give true and fair view of the state of affairs of the company and the Group as at 4 September 1996".

The audit report was thus essentially worthless.

An examination of the small print of these first Accounts of the Equitas group and an examination of the Accounts filed with Companies House, the official government Registry, produces quite different information.

The true shareholders' funds of the Equitas group totaled a mere 101, the result of the parent company having issued only three small-values shares of stock.

The additional so-called "Shareholders' Funds" of the Group were shown as 588,000,000, but they are described as "non-equity interests", and a further reading shows that shareholders can't ever touch "their" funds. This huge sum, equivalent to around $1 billion, arose from the book-keeping used to record a quite remarkable inter-group transaction.

Lloyd's Names were forced to reinsure all their outstanding 1992 and earlier underwriting commitments with the Equitas group on 4th September 1996, the date of these first published Accounts. The actual reinsuring company, Equitas Reinsurance Ltd. (ERL), was a wholly owned subsidiary of Equitas Holdings limited, the Group's parent company. Like its parent company, ERL was also a shell company having no assets, liabilities or capital.

The total reinsurance premium which Names paid to ERL was 11,190,000,000.

On that very same day, 4th September 1996, within minutes after ERL received that premium, an exceptional transaction was made. ERL paid Equitas Limited-- another wholly owned subsidiary of Equitas Holdings Limited-- £10,472,000,000 for the Names' compulsory reinsurance.

ERL booked an apparent profit of 718,000,000-- possibly the largest "day trade" profit in history!

But that transaction took place between two wholly owned subsidiaries of Equitas Holdings Limited, and it touched no outsider whatever. Both of these two companies were, otherwise, shell companies having no assets, liabilities or share capital. Neither had ever transacted any business. The second company could never be said to be able to provide any special expertise or services which the first could not provide. Neither had any assets, net worth or capital. There could be no valid commercial reason for that transaction. So what was its purpose?

The answer is evident from the published Accounts of the Equitas group. The reason for the transaction was to allow the Group to create the fictitious illusion that it had substantial equity capital. After deducting start-up costs and expenses of 130,000,000 from the purported trading profit of 718,000,000, the Equitas group booked 588,000,000 as its capital base.

That capital sum, and the profit from which it was derived, did not result from trading with anyone outside the Group. The profit was not "realized". It resulted solely from an inter-group transaction; in other words, all the owner did was to pass money from his left hand to his right hand.

The reflection of that transaction in the Group's published formal Accounts was a clearly dishonest maneuver which had been planned well in advance by an institution, The Society of Lloyd's, which is both effectively immune from legal suit in England and which has long been associated with deceptions, misrepresentations and cover-ups. And what is perhaps worse, the Government was involved. The Department of Trade and Industry approved the details of these deceptive fraudulent transactions beforehand. Its reasons, of course, were that it had to appear to enforce its own laws and rules.

The conclusion is clear. Either Names were defrauded directly of 718,000,000 by being required to pay an excessive premium, in that sum, to Equitas, or Lloyd's, the DTI and Equitas conspired to break the law in seeking a license for ERL and EL to practice insurance in the UK.

Numerous questions remain unanswered. Is that money retained by ERL available to pay outstanding claims on Lloyd's pre-1993 policies/contracts? Is any portion of it available to distribute pro-rata to reinsured Names? Will Berkshire Hathaway have access to those funds as part of its recent reinsurance deal with Equitas? Which Equitas group entity(s) did the contract with Berkshire?

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