Amended Consolidated Particulars of Claim of the Claimants dated [ ] 2016

amending and replacing the Claimants' previous Consolidated Particulars of Claim

pursuant to paragraph [ ] of the Order of Mr Justice Hildyard dated [ ] 2016

IN THE HIGH COURT OF JUSTICE Claim Nos. [HC13F01247] 1

[HC13C03047] 1
CHANCERY DIVISION
[HC14F01973] 1
[HC14F01992] 1
[HC14F02111] 1
[HC14F02112] 1
[HC14F02157] 1
[HC14F02199] 1
[HC14F02235] 1
[HC14F02246] 1
[HC14F02264] 1
[HC-2015-004843] 1
[HC13D01192] 2
[HC14F01714] 3
[HC14F01704] 7
[HC14F01971] 7
[HC14F02211] 7
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)
05250-80298/8093941.1 1
 JAYENDRA SURINDER LAKHAN and other Claimants in Claim No. HC-2015-004843
(named in the Schedule to the Claim Form therein)] 1

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 HC13D01192] 2
[LEGAL AND GENERAL ASSURANCE SOCIETY LIMITED and others as listed in
the Schedule to the Claim Form in Claim HC14F01714] 3
[DOROTHY LAMOUREUX and others as listed in the schedule to the Claim Forms in
Claim Nos HC14F01704, HC14F01971, and HC14F02211] 7

Claimants

- and –

THE ROYAL BANK OF SCOTLAND GROUP PLC

Defendant

THE RBS RIGHTS ISSUE LITIGATION

____________________________________________________________

AMENDED CONSOLIDATED PARTICULARS OF CLAIM OF THE CLAIMANTS

____________________________________________________________

05250-80298/8093941.1 2
 INDEX

Paragraph Page

The Consolidated Particulars of Claim 0A 5

Background and Events 10 9

Legal framework 24 10

Statements and omissions 35 18

Section A – The purpose of the Rights Issue,

36 21
and the use of its proceeds

Section B – Capital 47A 39

Section C – Liquidity 61A 65

Section D – Credit Market Exposures (CMEs)

70A 98
and write-downs

Section E – [not used]

Section F – Monoline, CDPC and financial

82C 168
guarantor exposures

Section G – Market risk and the use of VaR 94A 182

Section H – Asset Sales 94H 192

Section I – Decline in operating profits 94N 196

Section J – The acquisition and performance of

95 198
ABN AMRO

Section K – RBS’s ineffective risk management,

and controls, management information and 117 217
reporting, management and governance

Claimants who acquired Rights Issue shares through

127A 253
nominees

Causation and loss 127F 254

The Defendants’ liability 130 258

The Claimants' claims 258

Appendix 1 265

05250-80298/8093941.1 3
 Schedule 1 – Dramatis Personae 277

Schedule 2 – Glossary & Abbreviations 282

Schedule 3 – The Share Acquisitions of the SL

292
Claimants

Schedule 4 – The QE Claimants 314

Schedule 5 – RBS Group Currency Mismatch Ratios 323

Note: For the purposes of this statement of case, the Claimants adopt the abbreviations
and terms set out in Schedules 1 and 2 hereto with the explanations and definitions there
given.

05250-80298/8093941.1 4
The Consolidated Particulars of Claim

0A. These are the Consolidated Particulars of Claim of the Claimants in the RBS Rights
Issue Litigation (“the Claimants”).

0B. The Claimants are:

(1) [The BB Claimants, who are:

a. Mr John Greenwood, the Claimant in Claim No. HC13F01247

b. David James Lamont and the other Claimants in Claim No. HC13C03047

c. Abbey Life Assurance Company Limited and the other Claimants in Claim
No. HC14F01973 (as named in Schedules 2 to 5 thereto)

d. Gulf International Bank (UK) Limited and the other Claimants in Claim No.
HC14F01992 (named in Schedules 1 and 2 to the Claim Form therein)

e. Keva OY and the other Claimants in Claim No. HC14F02111 (named in

Schedules 1 and 2 to the Claim Form therein)

f. Gulf International Bank (UK) Limited and the other Claimants in Claim No.
HC14F02112 (named in Schedules 1 and 2 to the Claim Form therein)

g. Mr Ian Malcolm Jones and the other Claimants in Claim No. HC14F02157
(named in Schedules 1 to 3 to the Claim Form therein)

h. Mr Frederic Sebastian Aaron Binding and the other Claimants in Claim

No. HC14F02199 (named in Schedule 1 to the Claim Form therein)

i. Mr David Jamieson and the other Claimants in Claim No. HC14F02235

(named in Schedule 1 to the Claim Form therein)

j. D P Blundell and the other Claimants in Claim No. HC14F02246 (named

in Schedules 1 to 3 to the Claim Form therein)

k. 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)

05250-80298/8093941.1 5
 l. Jayendra Surinder Lakhan and other Claimants in Claim No. HC-2015-
004843 (named in the Schedule to the Claim Form therein),

excluding those Claimants listed at sub-paragraph (5) below].1

(2) [The SL Claimants, who are the Claimants in Claim HC13D01192, as listed in
Schedule 1 to the Re-Re-Re-Amended Claim Form in that Claim]2.

(3) [The QE Claimants, who are the Claimants in Claim HC14F01714]3.

(4) [The LK Claimants, who are the Claimants in Claim Nos. HC14F01704,
HC14F01971, and HC14F02211]7.

(5) [The MdR Claimants are those Claimants listed at Schedule 2 to Claims
HC14F01992 and HC14F02112, at number 44 of Schedule 2 to Claim
HC14F02246 and at numbers 15, 46, 51, 53, 54, 154 and 155 of Schedule 2
(along with two unnumbered entries on Schedule 4) to Claim HC14F01973, as
amended by numbers 3, 5, 6 and 7 of Schedule 1 and number 7 of Schedule 3
to Claim HC14F02264, and by number 43 of Schedule 2 to Claim HC14F02246,
and references to the MdR Group shall be construed accordingly] 8.

0C. The pleas of the respective Claimant Groups are indicated as follows:

(1) unless otherwise indicated, all text is pleaded on behalf of all the Claimants.

(2) bracketed text followed by the superscript "1" is pleaded on behalf of the BB
Claimants alone.

(3) bracketed text followed by the superscript "2" is pleaded on behalf of the SL
Claimants alone.

(4) bracketed text followed by the superscript "3" is pleaded on behalf of the QE
Claimants alone.

(5) bracketed text followed by the superscript "4" is pleaded by the SL and BB
Claimants but not the QE Claimants.

(6) bracketed text followed by the superscript "5" is pleaded by the BB and QE
Claimants but not the SL Claimants.

(7) bracketed text followed by the superscript "6" is pleaded by the SL and QE
Claimants but not the BB Claimants.
05250-80298/8093941.1 6
 (8) The LK Claimants follow the pleas of the SL Claimants, and so with the
exception of paragraphs 5, 127E and 129E below, where bracketed text
followed by the superscript "7" is used for their distinct pleas, their pleas are in
bracketed text followed by the superscript "2" , "4" , "6" respectively.

(9) bracketed text followed by the superscript "8" is pleaded on behalf of the MdR
Claimants alone.

0D. [not used]

Introduction

1. On 22 April 2008, RBS announced a Rights Issue designed to raise £12bn in further
investment in the bank. The Prospectus for the Rights Issue was issued on 30 April
2008. The Prospectus was published under the UK Listing Authority’s Prospectus
Rules. The Rights Issue involved the offer of 6,123,010,462 shares to existing
shareholders at £2 per share, offering to such shareholders the right to purchase 11
shares for every 18 existing shares. By means of the Rights Issue RBS sought to
raise (and did in fact raise) some £12bn of new capital, net of expenses. The Rights
Issue was at the time the largest in UK corporate history.

2. In these Particulars of Claim, “the Defendants” shall refer to RBS and the Director
Defendants. The Director Defendants were directors of RBS at the material times.
Goodwin was RBS’s Chief Executive Officer. McKillop was RBS’s Chairman and
was a non-executive. Cameron and Whittaker were executive directors of RBS.
Cameron was the Chairman of GBM, RBS’s Global Banking and Markets Division.
Whittaker was RBS’s Group Finance Director.

3. [The Director Defendants, and RBS itself, were]1 [RBS was]6, 8 responsible for the
Prospectus for the purposes of section 90 of FSMA.

3A. [The SL, MdR and QE Claimants only make allegations and claims against RBS.
Where reference is made to Defendants in the plural in paragraphs which the SL
Claimants and/or the MdR Claimants and/or the QE Claimants adopt, the SL, MdR
and QE Claimants adopt such paragraphs only against RBS, not against the
Director Defendants.]6, 8

4. In October 2008 RBS ceased to be able to fund itself. It required exceptional public
support from 7 October 2008, and between 7 October 2008 and 19 January 2009

05250-80298/8093941.1 7
 was effectively nationalised, to save it from collapse. The value of the shares
acquired in the Rights Issue has been largely wiped out.

5. The Rights Issue shares were issued at 200p per share (for the shares issued in the
initial rights issue), or at 230p per share (for the shares issued in the Rights issue
rump). By the close of 13 October 2008, they were trading at 65.7p per share. By
the close of 19 January 2009 they were trading at 11.6p per share. [The numbers of
shares acquired by the BB Claimants (and/or by those in respect of whose right they
claim) and the prices at which they were acquired are shown in the BB Claimants’
claim forms and the group register]1. [Schedule 3 to this document shows the
number of shares calculated to have been acquired by each of the SL Claimants
(some of which were acquired at 200p and some of which were acquired at 230p)]2.
[Schedule 4 to this document shows the number of shares acquired by each of the
QE Claimants, all such shares having being acquired at 200p]3. [The numbers of
shares acquired by the LK Claimants (all of which were acquired at 200p save for a
small number acquired after the Rights Issue in the market) are shown in the group
register]7. [The numbers of shares acquired by the MdR Claimants and the price at
which they were acquired are shown in the group register]8. Given RBS’s financial
position, the shares bought by the Claimants were in fact worthless or at best worth
a fraction of the price paid (currently estimated to be in the region of 20 pence to 30
pence per share).

6. RBS’s failure in October 2008 was caused wholly or in part by its inherent financial
weaknesses. Other, stronger, banks did not fail. But RBS’s inherent weaknesses
were not adequately disclosed or fairly represented to investors by the Prospectus.
RBS’s financial weakness by April 2008 was mainly as a result of: its aggressive
growth and massive expansion into structured credit markets; its weak and
deteriorating capital base, compounded by its inability to manage (or even assess)
its capital requirements; its reckless and highly damaging acquisition of ABN AMRO;
and its reducing access to liquid funding. RBS’s financial position had deteriorated
still further by the Rights Issue closing date.

7. The Claimants have suffered their losses as a result of untrue and misleading
statements in, and improper omissions from, the Prospectus (and/or by the failure
during the Rights Issue Period to issue a supplementary prospectus to provide
necessary further information).

7A. If the truth about RBS’s financial position and prospects, and about the insufficiency
of the proposed capital raising, had been disclosed in the Prospectus, the Rights
Issue could not (and would not) have been announced or launched, and would not
have proceeded, or would not have gone ahead on the terms it did or at all.
Whether or not the Rights Issue had proceeded, the RBS share price would have
collapsed.

05250-80298/8093941.1 8
8. As a result, the Claimants are entitled to compensation for their losses, and/or the
losses in respect of which they are entitled to claim, from the Defendants under
section 90 of FSMA.

9. There are many other investors in the same position as the Claimants. The total
losses of the investors in the Rights Issue amount to billions of pounds.

Background and Events

10. On 19 March 2007 Barclays announced a planned takeover of ABN AMRO, and it
confirmed the proposed transaction on 23 April 2007. On 25 April 2007, a
Consortium made up of RBS, Fortis and Santander, made an indicative counterbid.
The Consortium’s plan was to break up ABN AMRO, with each member acquiring
specific parts of the business. The Consortium made a proposed offer for ABN
AMRO on 29 May 2007. A revised offer was made by the Consortium on 20 July
2007.

11. As recorded in RBS’s 2007 Accounts (p. 231), global financial markets entered a
period of unprecedented strain in the second half of 2007.

12. On 14 September 2007, Northern Rock sought and received ELA from the Bank of
England. There was subsequently a run on Northern Rock, and it was nationalised
on 22 February 2008.

13. Barclays withdrew its offer for ABN AMRO on 5 October 2007.

14. The acquisition of ABN AMRO by the Consortium was completed on 17 October
2007. It was the largest takeover in banking history. The total consideration was
€71.1bn, of which RBS paid €27.7bn for the parts of the business it was acquiring.
RBS acquired 38% of ABN AMRO, including its wholesale and investment banking
divisions. This part of ABN AMRO’s business had its own significant exposures to
ABS and sub-prime risk, and created increased liquidity risks for RBS.

15. RBS was the consolidator for the purposes of the acquisition, and ABN AMRO was
formally acquired in the name of RFS Holdings BV, a subsidiary of RBS. As a result,
RBS retained the assets and liabilities of ABN AMRO on its books until the relevant
parts were transferred to the other two Consortium members. The break-up of ABN
AMRO was not completed until 2010.

16. The rights that RBS acquired included rights to the proceeds of the sale by ABN
AMRO of LaSalle to Bank of America. RBS was entitled to receive €10.9bn in cash.
05250-80298/8093941.1 9
17. RBS’s year end 2007 results were published on 28 February 2008.

18. On 14-16 March 2008 Bear Stearns, facing collapse, was rescued by the Federal
Reserve Bank of New York and purchased by JP Morgan.

19. The Rights Issue was announced on 22 April 2008, opened on 15 May 2008, and
closed on 6 June 2008.

20. Disruption in the financial markets intensified in August-September 2008. On 15

September 2008 Lehman Brothers filed for Chapter 11 bankruptcy protection.

21. In October 2008, RBS ceased to be able to fund itself and would have collapsed but
for exceptional public support. McKillop, Goodwin and Cameron resigned or left by
mutual consent. On 6 October 2008, Standard & Poor’s downgraded RBS’s
counterparty credit rating. On 7 October 2008 RBS sought and received ELA from
the Bank of England. On 13 October 2008, RBS launched a £20bn capital raising,
comprising a £15bn rights issue and £5bn issue of preference shares. Only 0.24%
of that rights issue was subscribed for by private investors. The remainder of the
capital raising had to be taken up by the UK Government, with the result that 58% of
RBS’s shares became publicly owned. By the close on 13 October 2008, RBS’s
share price had fallen to 65.7p per share.

22. On 19 January 2009, the UK Government announced its intention to convert its
£5bn preference shares into equity, taking public ownership to 70%. By close on 19
January 2009, RBS’s share price had fallen to 11.6p per share. On 26 February
2009, RBS reported a loss of £24.1bn, the largest in British corporate history.

23. On 3 November 2009, the UK Government announced a further immediate

investment of £25.5bn, with a further £8bn additional capital to be made available in
the future if required. This took the UK Government’s stake in RBS to 84% of its
issued share capital.

Legal framework

24. The legislation below is pleaded as in force at the material times.

Obligations in relation to the Prospectus

25. FSMA section 90 provided in material part (as it applied to a prospectus) that:

90.– Compensation for statements in ... prospectus

05250-80298/8093941.1 10
 (1) Any person responsible for [a prospectus] is liable to pay compensation to a
person who has-
(a) acquired [transferable] securities to which the [prospectus applies]; and
(b) suffered loss in respect of them as a result of –
(i) any untrue or misleading statement in the [prospectus]
(ii) the omission from the [prospectus] of any matter required to be included
by section [87A or 87G]

(2) Subsection (1) is subject to exemptions provided by Schedule 10.

(3) If [a prospectus is] required to include information about the absence of a

particular matter, the omission from the [prospectus] of that information is to be
treated as a statement in the [prospectus] that there is no such matter.

(4) Any person who fails to comply with section [87G] is liable to pay compensation
to any person who has-
(a) acquired securities of the kind in question; and
(b) suffered loss in respect of them as a result of the failure.

(5) Subsection (4) is subject to exemptions provided by Schedule 10.

...

(12) A person is not to be subject to civil liability solely on the basis of a summary in
a prospectus unless the summary is misleading, inaccurate or inconsistent when
read with the rest of the prospectus ...

26. The shares issued in the Rights Issue were transferable securities for the purposes
of FSMA section 90.

27. By Rule 5.5 of the Prospectus Rules, made under Section 73A of FSMA, the
persons responsible for the Prospectus for the purposes of Part VI of FSMA
included (i) RBS itself and (ii) its directors, including the Director Defendants. [The
Prospectus was published with the knowledge and consent of the Director
Defendants]1.

28. FSMA Section 87A provided in material part that:

87A Criteria for approval of prospectus by competent authority

(1) The competent authority may not approve a prospectus unless it is satisfied
that–
...
(b) the prospectus contains the necessary information, and
(c) all of the other requirements imposed by or in accordance with this Part or the
prospectus directive have been complied with (so far as those requirements apply to
a prospectus for the transferable securities in question).

05250-80298/8093941.1 11
 (2) The necessary information is the information necessary to enable investors to
make an informed assessment of–
(a) the assets and liabilities, financial position, profits and losses, and prospects of
the issuer of the transferable securities and of any guarantor; and
(b) the rights attaching to the transferable securities.

(3) The necessary information must be presented in a form which is comprehensible

and easy to analyse.
(4) The necessary information must be prepared having regard to the particular
nature of the transferable securities and their issuer.
(5) The prospectus must include a summary (unless the transferable securities in
question are ones in relation to which prospectus rules provide that a summary is
not required).
(6) The summary must, briefly and in non-technical language, convey the essential
characteristics of, and risks associated with, the issuer ... and the transferable
securities to which the prospectus relates.

29. In respect of FSMA section 87A(4), a key relevant feature of “the particular nature of
the transferable securities and their issuer” was that they were shares in a FTSE
100 company whose shareholding was widely distributed among institutional and
retail investors, issued as part of a rights issue. They were likely to be purchased by
a wide range of institutional and retail investors of varying degrees of sophistication,
many of whom would have little or no specialist knowledge of RBS’s position.

The Prospectus Regulation and Prospectus Rules

30. Further, pursuant to FSMA section 87A(1)(c), and under the Prospectus Rules
made by the FSA under section 73A of FSMA, the Prospectus was required to
comply with the requirements of the Prospectus Regulation which implemented the
Prospectus Directive.

31. The Prospectus Regulation and Prospectus Rules required that the Prospectus
comply with the following minimum disclosure requirements:

ANNEX I
Minimum Disclosure Requirements for the Share Registration Document
(schedule)

...

3. SELECTED FINANCIAL INFORMATION

3.1. Selected historical financial information regarding the issuer, presented for
each financial year for the period covered by the historical financial

05250-80298/8093941.1 12
 information, and any subsequent interim financial period, in the same
currency as the financial information.

The selected historical financial information must provide the key figures that
summarise the financial condition of the issuer.
...
4. RISK FACTORS
Prominent disclosure of risk factors that are specific to the issuer or its
industry in a section headed “Risk Factors”.

5. INFORMATION ABOUT THE ISSUER

5.2 Investments

5.2.1 A description (including the amount) of the issuer’s principal investments for
each financial year for the period covered by the historical financial
information up to the date of the registration document;

5.2.2 A description of the issuer’s principal investments that are in progress,

including the geographic distribution of these investments (home and
abroad) and the method of financing (internal or external);

5.2.3 Information concerning the issuer’s principal future investments on which its
management bodies have already made firm commitments.

6. BUSINESS OVERVIEW

6.1 Principal Activities

6.1.1 A description of, and key factors relating to, the nature of the issuer’s
operations and its principal activities, stating the main categories of products
sold and/or services performed for each financial year for the period covered
by the historical financial information; and

6.1.2 An indication of any significant new products and/or services that have been
introduced and, to the extent the development of new products or services
has been publicly disclosed, give the status of development.

6.2 Principal Markets

A description of the principal markets in which the issuer competes,

including a breakdown of total revenues by category of activity and
geographic market for each financial year for the period covered by the
historical financial information.

6.3 Where the information given pursuant to items 6.1 and 6.2 has been
influenced by exceptional factors, mention that fact.
05250-80298/8093941.1 13
 9. OPERATING AND FINANCIAL REVIEW

9.1 Financial Condition

To the extent not covered elsewhere in the registration document, provide a

description of the issuer’s financial condition, changes in financial condition
and results of operations for each year and interim period, for which
historical financial information is required, including the causes of material
changes from year to year in the financial information to the extent
necessary for an understanding of the issuer’s business as a whole.

9.2 Operating Results

9.2.1 Information regarding significant factors, including unusual or infrequent

events or new developments, materially affecting the issuer’s income from
operations, indicating the extent to which income was so affected

10. CAPITAL RESOURCES

10.1 Information concerning the issuer’s capital resources (both short and long
term);
...
10.3 Information on the borrowing requirements and funding structure of the
issuer;
...
10.5 Information regarding the anticipated sources of funds needed to fulfil
commitments referred to in items 5.2.3 and 8.1.

12. TREND INFORMATION

12.1 The most significant recent trends in production, sales and inventory, and
costs and selling prices since the end of the last financial year to the date of
the registration document.

12.2 Information on any known trends, uncertainties, demands, commitments or

events that are reasonably likely to have a material effect on the issuer’s
prospects for at least the current financial year.

20. FINANCIAL INFORMATION CONCERNING THE ISSUER’S ASSETS AND

LIABILITIES, FINANCIAL POSITION AND PROFITS AND LOSSES
...

20.9 Significant change in the issuer’s financial or trading position

A description of any significant change in the financial or trading position of

the group which has occurred since the end of the last financial period for
05250-80298/8093941.1 14
 which either audited financial information or interim financial information
have been published, or provide an appropriate negative statement.

22. MATERIAL CONTRACTS

A summary of each material contract, other than contracts entered into in the
ordinary course of business, to which the issuer or any member of the group
is a party, for the two years immediately preceding publication of the
registration document.
...

25. INFORMATION ON HOLDINGS

Information relating to the undertakings in which the issuer holds a

proportion of the capital likely to have a significant effect on the assessment
of its own assets and liabilities, financial position or profits and losses.

ANNEX III
Minimum Disclosure Requirements for the Share Securities Note (schedule)

2. RISK FACTORS

Prominent disclosure of risk factors that are material to the securities being
offered and/or admitted to trading in order to assess the market risk
associated with these securities in a section headed “Risk Factors”.

3. KEY INFORMATION

3.1 Working capital Statement

Statement by the issuer that, in its opinion, the working capital is sufficient
for the issuer’s present requirements or, if not, how it proposes to provide
the additional working capital needed.

3.2 Capitalization and indebtedness

A statement of capitalization and indebtedness (distinguishing between

guaranteed and unguaranteed, secured and unsecured indebtedness) as of
a date no earlier than 90 days prior to the date of the document.
Indebtedness also includes indirect and contingent indebtedness.
...
3.4 Reasons for the offer and use of proceeds

Reasons for the offer and, where applicable, the estimated net amount of the
proceeds broken into each principal intended use and presented by order of
priority of such uses. If the issuer is aware that the anticipated proceeds will
not be sufficient to fund all the proposed uses, state the amount and sources
05250-80298/8093941.1 15
 of other funds needed. Details must be given with regard to the use of the
proceeds, in particular when they are being used to acquire assets, other
than in the ordinary course of business, to finance announced acquisitions of
other business, or to discharge, reduce or retire indebtedness.

31A In its comments on RBS's draft prospectus dated 18 April 2008, the UKLA notified
RBS that it required RBS to comply fully with the Committee of European Securities
Regulators' ("CESR's") relevant recommendations. Provision of information on the
basis prescribed by CESR was necessary information. Further or alternatively, to
the extent that the Prospectus or the information contained in it did not comply with
CESR's recommendations, this was necessary information which RBS should have
disclosed. In particular, CESR set out that:

31A.1 In relation to working capital, an issuer should undertake appropriate

procedures to support a working capital statement. This would include
stress testing against "realistic worst case scenarios".

31A.2 In relation to capital resources and liquidity, an issuer should discuss its
capital resources and liquidity, including an analysis of the sources and
amounts of an issuer's cash flows and its treasury policies and objectives.

31A.3 If no "clean" working capital statement can be given, a prospectus should

explain how additional working capital will be provided.

31A.4 In relation to capitalisation and indebtedness, an issuer's capitalisation and

indebtedness should be stated at a date no later than 90 days prior to the
date of a prospectus, distinguishing between indebtedness which is
guaranteed and unguaranteed, and secured and unsecured.

31A.5 Issuers should not assume that all investors are qualified investors.

31B. In considering what was necessary information for the purposes of the Prospectus,
and in particular given the nature of RBS's business and its credit market
exposures, RBS should have had regard to the Report of the Senior Supervisors
Group of the Bank for International Settlements ("the SSG Report") dated 11 April
2008. This report made recommendations for the enhancement of disclosure
practices among financial institutions, with particular reference to special purpose
entities (including conduits), CDOs, mortgage-backed securities and leveraged
finance exposures. Its purposes included identifying data which was particularly
useful to market participants in assessing the risk and returns associated with
investments in such financial institutions.

31C. The Prospectus contained (at p.92) a statement that:

1 Responsibility

05250-80298/8093941.1 16
 The Company and the Directors, whose names are set out on page 22 of this
document, accept responsibility for the information contained in this
document. To the best of the knowledge and belief of the Company and the
Directors (who have taken all reasonable care to ensure that such is the
case), the information contained in this document is in accordance with the
facts and does not omit anything likely to affect the import of such
information.

Obligations in respect of the provision of a supplementary prospectus

32. FSMA section 87G provided:

87G Supplementary Prospectus

(1) Subsection (2) applies if, during the relevant period, there arises or is noted a
significant new factor, material mistake or inaccuracy relating to the information
included in a prospectus approved by the competent authority.

(2) The person on whose application the prospectus was approved must, in
accordance with prospectus rules, submit a supplementary prospectus
containing details of the new factor, mistake or inaccuracy to the competent
authority for its approval.

(3) The relevant period begins when the prospectus is approved and ends—

(a) with the closure of the offer of the transferable securities to which the
prospectus relates; ...

(4) “Significant” means significant for the purposes of making an informed

assessment of the kind mentioned in section 87A(2).

(5) Any person responsible for the prospectus who is aware of any new factor,
mistake or inaccuracy which may require the submission of a supplementary
prospectus in accordance with subsection (2) must give notice of it to-

(a) the issuer of the transferable securities to which the prospectus relates; ...

(6) A supplementary prospectus must provide sufficient information to correct any

mistake or inaccuracy which gave rise to the need for it.

33. Rule 3.4.3 of the Prospectus Rules further required, in relation to a supplementary
prospectus, that:

Supplementary prospectus to be submitted as soon as practicable

05250-80298/8093941.1 17
 In the event that a requirement for a supplement is triggered, then as soon as
practicable after the new factor, mistake, or inaccuracy arises or is noted, a person
referred to in section 87G(2) of the Act must submit a supplementary prospectus
referred to in that section to the FSA for approval.

34. The person on whose application the Prospectus was approved, for the purposes of
section 87G(2) of FSMA, was RBS.

Statements and omissions

35. Misleading and untrue statements were made in the Prospectus, and there were
improper omissions from the Prospectus. In particular such misleading and untrue
statements and omissions were made in respect of (at least) the following subjects:

A. The purpose of the Rights Issue, and the use of its proceeds;

B. Capital;

C. Liquidity;

D. Credit market exposures (CMEs) and write-downs;

E. [not used]

F. Monoline, CPDC and financial guarantor exposures;

G. The use of VaR;

H. Asset sales;

I. Decline in operating profits;

J. The acquisition and performance of ABN AMRO; and

K. RBS’s ineffective risk management, and controls, management information

and reporting, management and governance.

35A. In the circumstances, the Prospectus did not fairly disclose the weaknesses in
RBS’s position, and gave an untrue and misleading impression of RBS’s position, in
breach of section 87A and 90 of FSMA. Particulars of the non-disclosures and of
individual misleading and untrue aspects of the Prospectus are set out below.

05250-80298/8093941.1 18
35B. Further, for matters which arose or were noted after the Prospectus Date, RBS was
obliged to disclose them by way of a supplementary prospectus, [and the Director
Defendants were obliged to give RBS notice of any new factor, mistake or
inaccuracy which may require the submission of a supplementary prospectus and of
which they were aware]1. No supplementary prospectus was issued.

35C. The Claimants reserve the right to add further particulars of non-disclosure or of
further untrue and misleading statements in due course (and/or failures to give
disclosure by way of a supplementary prospectus), and in particular will rely on any
further particulars of non-disclosure or of untrue and misleading statements from or
in the Prospectus (and/or failures to give disclosure by way of a supplementary
prospectus) that may be relied on by other claimants in this Group Litigation in due
course (save to the extent that the Claimants expressly indicate that they are not
relying on such pleas).

35D. The various defects in the Prospectus are set out in detail below. However, in
addition to those points and as a freestanding ground of complaint, the Claimants
contend that the overall tone of the Prospectus was misleading and painted too
positive a picture of RBS's position and prospects, in that:

35D.1: Its tone suggested that the Rights Issue was an entirely voluntary decision
which was at least as much about facilitating RBS in taking advantage of
business opportunities and moving towards a higher self-selected capital
target, when the truth (not disclosed in the Prospectus) was that:

35D.1.1 RBS was the least well capitalised of all its peers (though it did
not disclose its capital ratios in the Prospectus).

35D.1.2 The Rights Issue was principally about remedying a large

deficiency in RBS's capital ratios, which had deteriorated,
particularly in the wake of the ABN AMRO acquisition and
credit market losses arising in 2008.

35D.1.3 The purpose of the Rights Issue was restoring weak capital
ratios to meet market and regulatory expectations.

35D.1.4 The Rights Issue was essential if RBS was to comply with its
regulatory capital requirements.

35D.1.5 Achieving RBS's target capital ranges was predicated on the

cumulative effect of a number of subjective assumptions,
many of which were not made clear and which were optimistic
rather than prudent.

05250-80298/8093941.1 19
 35D.1.6 The Rights Issue was in large part a result of FSA pressure as
a result of falling capital ratios and a belief that RBS had
breached its ICG requirement.

35D.2 It stated that RBS was well-placed to access sources of funding, and
substantially downplayed the liquidity risks faced by RBS in the market
conditions at the time, which were extreme and imprudent and which
ultimately caused the failure of RBS. These risks arose in particular from:

35D.2.1 RBS's need to raise large amounts of funding in 2008 and to

refinance large amounts of funding in a worsening market
environment.

35D.2.2 RBS's dependence on short-term wholesale funding.

35D.2.3 RBS only being able to survive one day or less than one day if
it were locked out of the funding markets.

35D.2.4 RBS having no all currency Liquidity Buffer.

35D.2.5 RBS suffering from a serious deficiency in quality liquid assets

compared to its very short term funding gap.

35D.3 It suggested that RBS was taking a prudent and conservative approach to
its analysis of capital and liquidity, whereas in numerous respects RBS
was in fact making a series of judgments and assumptions which were
individually not prudent or conservative, and which collectively
represented an over-optimistic and/or aggressive approach:

35D.3.1 In relation to its liquidity and working capital position generally,

and in particular as to the availability of large amounts of
short-term funding and the liquidity of its various assets.

35D.3.2 As to the performance of appropriate "stress-testing" for its

working capital (liquidity) requirements and its ability to meet
its targets.

35D.3.3 As to the amounts of capital write-downs and the types of

assets to which these should be applied (as to which, see
Section D below).

35D.3.4 As to the absence of a need for loan loss provisions.

35D.3.5 As to future regulatory approvals for various models and

approaches which would bear on RBS’s capital requirements.

05250-80298/8093941.1 20
 35D.3.6 As to the prospects of raising additional capital according to its
capital plan, including by further issues of Tier 2 Capital, and
disposals.

35D.3.7 As to the prospects of making disposals of assets for full value

within a limited time period.

35D.4 It failed to disclose that RBS’s plans were far from prudent in that they
were dependent on the exercise of discretion from its regulators both:

35D.4.1 To continue existing indulgences.

35D.4.2 To grant several permissions for further departures from the

norms generally applicable to financial institutions.

35D.5 It presented the acquisition of ABN AMRO as generally a success, and

ABN AMRO’s financial position and prospects as sound, when in fact
there had been a significant downturn in its actual and expected
performance.

Section A – The purpose of the Rights Issue, and the use of its proceeds

36. The “Summary” in the Prospectus stated at pp. 7-8 (as did the “Chairman’s Letter” in
Part 1 at pp. 24-25) as follows:

1 Background to and reasons for the Rights Issue

On 22 April 2008, RBS announced a rights issue to raise proceeds of £12bn, net of
expenses, to increase its capital base. RBS also announced revised targets for its
capital ratios ...

RBS’s capital plan had assumed that it would maintain its Tier 1 capital ratio in the
range 7 per cent. to 8 per cent. and that it would rebuild its core Tier 1 capital ratio
towards 5 per cent. by 2010. At the time of its 2007 results announcement RBS
confirmed that it was operating within the parameters of this plan.

The balance of risks and opportunities inherent in this plan have been under
continual review. However, in the light of developments during March including the
severe and increasing deterioration in credit market conditions, the worsening
economic outlook and the increased likelihood that credit markets could remain
difficult for some time, the Board has concluded that it is now appropriate for RBS to
accelerate its plans to increase its capital ratios and to move to a higher target
range to reflect the generally weakened business environment.

Reflecting these factors, the Board has raised its target range for the Group’s Tier 1
capital ratio to 7.5 per cent. to 8.5 per cent. and has set a target for the core Tier 1

05250-80298/8093941.1 21
 capital ratio of in excess of 6 per cent. at 31 December 2008 on a proportional
consolidated basis.

Having identified these targets it was clear that, whilst acknowledging with regret the
demands this would place on Shareholders, the most appropriate way of reaching
them more quickly was through a rights issue. In considering the size of the Rights
Issue the Board, as well as having regard to the potential business performance,
made an assessment, based on current knowledge, of the likely quantum of write
downs in 2008 in respect of the deterioration in credit markets and the potential for
gains from full or partial disposals.
...
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.

Taking the above into account and having regard to the outlook for retained profits
and the impact of active balance sheet management, the Board has determined that
it is appropriate to raise £12bn through the Rights Issue, with the effect of achieving
a Tier 1 capital ratio in excess of 8 per cent., and a core Tier 1 capital ratio in
excess of 6 per cent. by year end on a proportional consolidated basis.

37. The “Risk Factors” identified included the following (at p. 16):

If the Company is unable to complete the Rights Issue, it may be required to

find alternative methods of increasing its core Tier 1 and Tier 1 capital ratios.

The purpose of the Rights Issue is to allow the Company to strengthen its capital
position and to achieve a core Tier 1 capital ratio in excess of 6 per cent. and a Tier
1 capital ratio in excess of 8 per cent. by the end of 2008 on a proportional
consolidated basis, which the Company believes are appropriate levels in light of
current market conditions. ...

38. The “Chairman’s Letter” further stated (at pp. 28, 31) that:

5 Capital
...

The aggregate of the estimated write-downs implied by RBS’s capital planning

estimates, totalling £5.9bn before tax, would have a negative effect on RBS’s Tier 1
ratio. This is expected to be more than offset by the Rights Issue to raise
approximately £12bn, net of expenses.
05250-80298/8093941.1 22
 The Board has raised its target range for the Group’s Tier 1 capital ratio to 7.5 per
cent. to 8.5 per cent. and has set a target for the core Tier 1 capital ratio of in
excess of 6 per cent. at 31 December 2008 on a proportional consolidated basis.
Previous guidance referred to 7 per cent. to 8 per cent. for the Tier 1 capital ratio,
with 25 per cent. to 30 per cent. preference share content, but with no target set for
the core Tier 1 capital ratio.

7 Current trading and prospects

...
Outlook
...
With reinforced capital ratios, the Group will be in a stronger position to navigate
through an economic environment that remains uncertain and well placed to take
advantage of the growth opportunities available to it.

39. RBS’s 2007 Accounts, incorporated by reference into the Prospectus by Part XIII (p.
137), stated:

The Group currently uses a target range for the tier 1 capital ratio of 7.0% to 8.0%
for its long-term capital planning with the aim of operating around the mid-point of
this range. This is in excess of minimum regulatory requirements. (p. 70)

40. In the Annual Results for the year ended 31 December 2007, published on 29
February 2008 at the same time as the 2007 Accounts (but not incorporated into the
Prospectus by reference), RBS had stated:

Capital

The Group’s Tier 1 capital ratio at 31 December was 7.3% and our total capital ratio
11.2%. We remain within our target ranges of 7%-8% for Tier 1 and 11% to 12% for
total capital. Our core Tier 1 ratio was 4.5% at year end. ...
Our reported capital ratios are expected to be similar to their Basel I equivalents (p.
10)

41. There was no suggestion in the Prospectus that the proceeds of the Rights Issue
would be used for any other purpose than increasing capital ratios or offsetting
capital write-downs. Nor was there any suggestion that the Rights Issue was
anything other than voluntary.

42. The true position, which was not disclosed, was as follows.

43. RBS’s previous capital plans, and plans to increase its capital ratios, had not been
complied with satisfactorily:

05250-80298/8093941.1 23
 43.1. RBS’s previous target core Tier 1 capital ratio had in fact been 5.25%. This
had been RBS’s target for some time.

43.2. On 31 December 2007 RBS’s core Tier 1 capital ratio was no higher than
4.0% (on a proportional consolidated Basel II basis), and was in fact
significantly lower (as set out at paragraph 43.6 below). This reduction in
the core Tier 1 capital ratio was greater than had been anticipated when
entering into the ABN AMRO acquisition. By 31 December 2007, RBS’s
core Tier 1 capital ratio was no higher than 4% on a proportional
consolidated basis applying Basel I methodology, considerably lower than
the average ratio for European financial institutions (approximately 6.5%).
RBS’s low core Tier 1 capital ratio as at 31 December 2007, and its ratio of
tangible equity to its total assets of no higher than 1.7%, reflected its highly
leveraged capital structure and overall under-capitalisation.

43.2A RBS’s position entering 2008 was in fact even worse, as the purported
position shown in RBS’s own figures as at 31 December 2007 had only
been achieved by manipulation of the position through a series of
measures which had no business purpose other than to reduce RWAs for
the 2007 year end (and indeed were envisaged as having a negative
impact on the business, including in some cases imposing actual costs).
Pending further disclosure, the Claimants identify the following examples:

43.2A.1 As at 15 October 2007, GBM was predicting that it would

“likely end the year well above where we were targeted”.

43.2A.2 By 17 October 2007 members of the GBM division were

already planning a “year-end” RWA management exercise
involving, inter alia, internal arbitrage transactions, “reverse
repos”, and buying European government bonds.

43.2A.3 On 7 November 2007 Conrad Almond of GBM emailed (inter

alia) Leith Robertson (Deputy Chief Executive of GBM),
Cameron and Chris Kyle (Chief Financial Officer, Global
Markets) describing a plan of various actions (with associated
costs) directed at achieving the year end RWA target for GBM.

43.2A.4 On 14 November 2007, in an email copied to (inter alia)

Cameron, Brian Crowe (GBM Chairman) and Robertson,
proposals were made to reassess deals forecast to happen
before the year end (predicted to increase RWAs by a further
£15bn), with a view to considering whether it was possible to
delay those deals to January 2008, or withdraw from them
altogether.

05250-80298/8093941.1 24
 43.2A.5 The Corporate Markets Team carried out SPM Credit Risk
Mitigation deals for the year end, reducing Basel I RWAs by
£17bn.

43.2A.6 On 24 November 2007, Robertson wrote to individuals in GBM

noting that circumstances were “making our year end RWA
target more difficult to achieve. In light of this, I ask you to
critically assess whether [deals planned to be closed before
the year end] can be deferred to 2008, and any stopped where
the return is marginal and the franchise impact will not be
severe.”

43.2A.7 On 27 November 2007 Craig Wood (Executive Assistant to

Whittaker) wrote to (inter alia) Rajan Kapoor (RBS Group
Chief Accountant) and John Cummins (Head of Group
Treasury) noting a need to be “ruthless” about items still under
discussion, and discussing proposed “capital relief trades”.

43.2A.8 On 30 November 2007 Kyle wrote to Cameron observing that

“balance management” transactions would cost GBM at least
£96m.

43.2B The effect of this programme was to artificially reduce RBS’s RWAs by
approximately 7% from £474bn on a Basel I basis and excluding ABN
AMRO at the end of November 2007, to £442bn on the same basis as at
31 December 2007. This difference amounted to approximately £1.9bn of
core Tier 1 capital at a target rate of 6% as used in the Prospectus. In
January 2008 RWAs increased again to £462bn on the same basis.

43.2C RBS had expected in 2007 that the implementation of the Basel II Regime
on 1 January 2008 would be at worst neutral as regards its capital. The
Group Chief Accountant estimated a net benefit on transition of £40.2bn to
RWAs (amounting to £2.4bn of core Tier 1 capital). However, in fact (and
taking into account the approach adopted in respect of ABN AMRO):

43.2C.1 The implementation of Basel II had increased RBS’s RWAs on

a proportionally consolidated basis as at 1 January 2008 from
approximately £490bn under Basel I to approximately £580bn
under Basel II (approximately 18%).

43.2C.2 RBS was not able to properly assess the position, but
according to the “Realistic” estimate of the Group Chief
Accountant dated 20 February 2008 there was (i) OTC waiver
of £23bn, (ii) CDS/FX rule changes amounting to £15bn, and
(iii) an addition of £36bn in relation to operational risk.

05250-80298/8093941.1 25
 43.2C.3 As set out below, ABN AMRO was required to assess its
RWAs at 130% of its Basel I figure.

43.2C.4 Together, those changes amounted to approximately £90bn of

RWAs on a proportionally consolidated basis and £125bn of
RWAs on a full consolidated basis, equivalent to £5.4bn and
£7.5bn of core Tier 1 capital respectively.

43.2C.5 The implementation of Basel II also required:

43.2C.5.1 An Expected Loss deduction of £884m to Tier 1

capital.

43.2C.5.2 Capital deductions in respect of securitisations and

material holdings amounting to £2.18bn of Tier 1
capital.

43.2C.5.3 Other 50:50 deductions to Tier 1 capital in the

amount of £401m.

43.3. RBS had fallen further below target by the time of the Prospectus and by
30 April 2008, when its core Tier 1 capital ratio was lower than 3.03% on
the same basis and on its own figures, and was in fact lower still as set out
at paragraph 43.6 below.

43.4. Although the stated previous Tier 1 capital ratio target range had been 7%-
8%, it was only on a Basel I basis that Tier 1 capital ratio could have been
7.0% or higher on 31 December 2007. On the face of the figures in the
2007 Accounts, RBS’s Tier 1 capital was 7.3% on a fully consolidated
Basel I basis. However, (a) Basel II came into force on 1 January 2008,
and (b) the fully consolidated basis overstated RBS’s capital during the
unbundling of ABN AMRO . On a proportional consolidated Basel I basis,
Tier 1 capital was no higher than 7.0% on 31 December 2007; and on a
proportional consolidated Basel II basis Tier 1 capital was no higher than
6.8%.

43.5. By 30 April 2008, the Tier 1 capital ratio had weakened further and was
lower than 5.21% on a proportional consolidated Basel II basis on RBS’s
own figures.

43.6. In these premises, a reasonable estimation of RBS’s capital position at the

time of the Rights Issue would have concluded that the core Tier 1 capital
ratio at the time of the Rights Issue on a proportionally consolidated basis
would be much lower than both the figures in the capital plan and Working
Capital Report, and than those disclosed in the 2007 Accounts. The

05250-80298/8093941.1 26
 precise figures will be a matter for expert evidence, but this conclusion is
derived as follows:

43.6.1. According to the capital plan, RBS’s core Tier 1 capital ratio in
April 2008 was 3.22% and its overall capital ratio was 9.18%
on a proportionally consolidated basis. On a fully consolidated
basis the figures were 3.56% and 9.02% respectively. These
were already significantly lower than the year-end 2007
figures.

43.6.2. At least the following adjustments would have to be made to

obtain reasonable figures:

i. A deduction from Tier 1 capital in respect of ABN AMRO

securitisations (see paragraph 43.2C.5 above and 47E.6.3
below) of £1.4bn.

ii. An addition to RWAs of £4.4bn to reverse out the

assumptions of additional model benefits in the April RWA
figures as regards approval for PD and EAD models (see
paragraph 57.9BA.3-4 below).

iii. Write-downs of £3.03bn taken forward from June 2008 (see

Section D4 below); plus a further £470m in respect of CDS
Hedging which was (but should not have been) used to
reduce the write-downs (see Section D6.10 below).

iv. Additional write-downs or impairments as set out in Section

D and F below.

v. A further increase in RWA figures to assume reasonable

RWA targets (see paragraph 57.9BB below).

vi. Deductions from overall capital in respect of ABN AMRO

capital instruments (see paragraph 47E.5A above).

43.6.3. [not used]

43.6.4. This list may not be exhaustive. In particular, the claimants will
plead further as to the assumptions behind the profits included
in the capital plan once further disclosure has been made.

44. The actual reasons for, and/or purposes of, the Rights Issue were or included:

05250-80298/8093941.1 27
 44.1. To attempt to repair what the Defendants knew to be a balance sheet in
poor condition with low capital levels (see further paragraphs 43 above
and 57 below), which were significantly lower than the Basel I ratios
disclosed as at 31 December 2007, and not merely to improve a capital
base not otherwise in difficulty.

44.2. To attempt to put back on track RBS’s attempts to increase its capital
ratios, which had been derailed (in particular by the acquisition of ABN
AMRO), not merely to “accelerate” those plans.

44.2A To deal with the recent rapid deterioration in RBS’s capital position, which
had made RBS’s capital plan unsustainable, going beyond the credit
market write-downs, and including also the problems with Basel II, AIRB
model treatments and the problems in relation to ABN AMRO (as well as
the other matters pleaded further at paragraph 57.4 below).

44.2B As part of this, to repair a new capital hole of over £6.1bn of core tier 1
capital (in addition to that created by credit market losses) in relation to its
Basel II transition, which had emerged or became crystallised in late
March 2008 as a result of (i) the withdrawal of ABN AMRO’s application to
the DNB for approval of its Basel II models and (ii) RBS’s failure to obtain
the FSA’s approval of its own models. These new difficulties of themselves
created a requirement for additional capital of at least £6.1bn, making
RBS’s stated goal to “accelerate its plans to increase its capital ratios and
to move to a higher target range” misleading and unachievable. The
prospectus disclosed neither the existence of the £6.1bn capital hole nor,
as described in the July 2008 GIA report, that its emergence was a
substantial and immediate cause of the rights issue. Specifically:

44.2B.1 In January 2008 RBS began to use new models for calculating
its RWAs under Basel II, even though these models had not
been approved by the FSA. On 16 March 2008 the FSA
determined that the new AIRB models (the PD model and the
EAD model) were not presently fit for purpose and could not
be used. RBS was then obliged to reverse out all RWA
adjustments it had made as a result of the introduction of the
new models in January 2008. This decision was confirmed
despite personal attempts by Whittaker, Ian Tyler (Group
Head of Capital, Group Treasury) and Goodwin to convince
the FSA to the contrary. This increased RWAs by some £51bn
and created a further deficiency in core Tier 1 capital of some
£3.1bn (assuming a target ratio of 6% as set out in the
Prospectus).
05250-80298/8093941.1 28
 44.2B.2. ABN AMRO’s failure to obtain approval from the DNB for its
Basel II waiver after withdrawal of its application to the DNB
on 23 March 2008 resulted in the FSA determining that RBS
must hold capital equal to 130% of Basel I RWAs. This
increased RWA figures by some £50bn and created a
deficiency in core Tier 1 capital of some £3.0bn (assuming a
target ratio of 6% as set out in the Prospectus).

44.3. To comply with the requirements of the FSA, which in April 2008 had
required that a rights issue be undertaken and required a written
commitment from RBS to that effect. (The FSA imposed this requirement
following the events set out in paragraphs 44.3A and 57.8 to 57.9 below.)
Further or alternatively, if the FSA had not required RBS to undertake a
Rights Issue, it had exerted substantial pressure on RBS to do so. In any
event, and irrespective of who first proposed the Rights Issue, (I) RBS’s
internal consideration and planning in respect of capital and a potential
rights issue, and RBS’s decision to undertake the Rights Issue and as to
the quantum thereof, were driven, at least in large part, by the regulatory
pressure from, and the requirements of, the FSA; (II) the decision to
undertake the Rights Issue was not RBS’s free choice, or not RBS’s
unpressured free choice; (III) It can be inferred that RBS realised that if it
did not propose a Rights Issue, the FSA would require RBS to do a rights
issue in any event. Accordingly, the Rights Issue was not voluntary.

44.3A In particular, from February 2008 onwards there was regular contact
between RBS and the FSA (both the Supervision Team and FSA senior
management), specifically to discuss the steps needed to improve RBS’s
capital position:

44.3A.1 In late 2007 and early 2008 the FSA began to increase its
focus on the capital position of RBS.

44.3A.2 From December 2007, RBS had been put on the FSA’s
Watchlist for capital risk. From February 2008, RBS had been
in discussions with the FSA on steps needed to improve its
regulatory capital.

44.3A.3 RBS met the FSA on 14 February 2008 to discuss RBS's

capital plan. At that date no Rights Issue was proposed, and
RBS regarded the raising of additional capital as the most
"severe/extreme" response to market conditions.
05250-80298/8093941.1 29
 44.3A.4 On 21 February 2008, the FSA asked RBS to rebuild its
internal core Tier 1 capital ratio to its internal target of 5.25%
by end-Q1 2009.

44.3A.5 Goodwin stated on 28 February 2008 (at the analysts’

conference following the announcement of RBS’s 2007
results) that RBS had no plans “for any inorganic capital
raisings or anything of the sort” and, in the 22 April 2008
presentation, McKillop confirmed that on 28 February 2008
RBS had “remain[ed] in the belief that organic rebuild was still
achievable”. The reference to “inorganic capital raisings” was
to rights issues and assets sales.

44.3A.5A On 16 March 2008 RBS was informed by the FSA that it had
to reverse out the whole of the benefit of the PD and EAD
models.

44.3A.6 An RBS board capital planning document issued to the Board

on 18 March 2008 still contemplated an end-March total
capital ratio of 10.57%, albeit on the false premise that the
benefit of the PD and EAD models could be taken.

44.3A.7 Nevertheless, on 19 March 2008, the RBS Board agreed to

put in place a plan to address the FSA’s request to raise its
core Tier 1 capital ratio. RBS had no means of doing this to a
level and within a time period acceptable to the FSA, other
than by a rights issue.

44.3A.8 [not used]

44.3A.9 On its own figures, RBS had either breached, or had come
very close to breaching, both at the Group level and at the
level of RBS plc (“Solo level”) its FSA ICG by the end of March
2008, and in late March/early April 2008, the FSA and RBS
were concerned about this. Its provisional figures indicated a
total capital ratio at Group level of 9.01% against an ICG of
9.03% and a total capital ratio at Solo level of 9.11% against
an ICG of 8.8%. On 3 April 2008 RBS notified FSA
Supervision that it was likely to have fallen below its ICG at
end-March 2008. See further paragraphs 57.8 and 57.9 below.

05250-80298/8093941.1 30
 44.3A.9A The “provisional figures” referred to in paragraph 44.3A.9 are
the figures RBS submitted to the FSA on 4 April 2008 for
March 2008 (i.e. the end of Q1 2008). Earlier figures, including
a spreadsheet dated 28 March 2008, forecast the capital ratio
at Solo level to be 8.41%, i.e. in breach of ICG. The capital
ratio at Solo level was only raised above ICG level (on RBS’s
figures) by, inter alia, increasing the level of double leveraging
which, as RBS understood and as Tyler wrote in an email to
Whittaker on 27 March 2008, raised “reputational risk with the
regulators” and a “risk that the rating agencies discover and
decide to downgrade RBSG plc”.

44.3A.10 There was a meeting between the FSA and RBS to discuss
the matters set out in the previous sub-paragraph on 7 April
2008.

44.3A.11 On 8 April 2008, the FSA Supervision Team sent a paper on

RBS’s capital position to the FSA’s CEO (Mr Sants) and
Chairman (Sir Callum McCarthy).

44.3A.11A At this point the FSA was actively considering whether RBS
continued to meet the FSA’s minimum requirements
(“Threshold Conditions”) for Adequate Resources and
Suitability.

44.3A.12 On 9 April 2008, Goodwin attended a meeting with Sants.

Sants informed Goodwin that the proposed steps to date were
insufficient to satisfy the FSA as regards the Threshold
Conditions, and that the FSA needed RBS to commit to a
rights issue to restore the capital position.

44.3A.12A As explained by Sants in his evidence to the FSA’s review,

Goodwin had initially refused a request from Sants that RBS
carry out a rights issue. The Claimants are not aware of
whether that refusal was earlier or whether it was at the
meeting of 9 April 2008. Ultimately in that meeting, Goodwin
suggested that the Board was to consider a proposed rights
issue of £5bn - £6bn. Sants responded that a written
commitment to a rights issue and to asset disposals would be
necessary. Goodwin agreed that RBS would provide a draft
letter to this effect.

05250-80298/8093941.1 31
 44.3A.12B At a meeting on 9 April 2008 attended by (inter alia) Whittaker
and McLean it was concluded that by reason of the FSA’s
“removal of concessions” (in conjunction with poor expected
outlook for the business and the delay in the completion of the
Antonveneta transaction) “capital raising becomes necessity”.

44.3A.12C At the same meeting it was also considered that the FSA was
“possibly likely” to restore model relief if RBS carried out a
rights issue. At the meeting with Mr Sants earlier in the day
Goodwin had requested that the FSA do so. It is to be inferred
that Mr Sants had indicated that he would look more
favourably on RBS’s applications for model approval if a rights
issue was carried out.

44.3A.13 By 10 April 2008 RBS’s capital position had further

deteriorated, and on its own figures its total capital ratio was
only 8.72%. The FSA was actively considering (albeit on
limited information) RBS’s credit market exposures and
concluded in a memorandum of the same date that the write-
downs “should perhaps be larger”.

44.3A.13A As recorded in an internal memorandum to the FSA’s

Executive Committee, by 12 April 2008 the FSA had received
a draft letter from RBS confirming its intention to carry out a
rights issue within 2 to 3 weeks, but not specifying the amount.
This was described as a “Mitigating Action” alongside RBS’s
active pursuit of asset disposals. The memorandum indicated
that the FSA and RBS continued to discuss the appropriate
size of the Rights Issue.

44.3A.13B It is therefore to be inferred that the FSA required that the

Rights Issue should be in an amount acceptable to the FSA,
which was to be higher than that originally proposed by
Goodwin.

44.3A.14 Thereafter, there was frequent contact between FSA and RBS
senior executives in relation to RBS’s capital position and the
need to improve it, building up to the announcement on 22
April 2008 of a £12bn rights issue. The FSA pushed RBS to
raise more capital than RBS had originally proposed. It was
agreed that work would be undertaken to produce a “roadmap”
of how these initiatives would impact the capital ratio position
and how a target of a 5% core Tier 1 capital ratio would be
05250-80298/8093941.1 32
 achieved within a timescale specified by the FSA. The
Prospectus was published on 30 April 2008, only three weeks
after the 9 April 2008 conclusion that a capital raising was a
necessity.

44.3B The importance to potential investors of understanding the reasons for the
Rights Issue and of being assured that the Rights Issue had not been
forced on RBS by the FSA, and RBS’s recognition that any statement to
the contrary would be very damaging to the Rights Issue, are shown by an
exchange on the analysts’ conference call on 22 April 2008, held to
announce and present the Rights Issue. On that conference call, despite
the events described in paragraph 44.3A, both McKillop and Goodwin
flatly (but untruthfully) denied that the Rights Issue was even requested,
let alone required, by the FSA:

44.3B.1 In response to a specific question (in fact the first question

asked) as to whether in any sense the FSA had pushed RBS
into the Rights Issue or demanded that it be undertaken,
RBS’s Chairman and Chief Executive replied as follows:
McKillop: “Ok let me say at the outset, this is purely the Board
of RBS decision we were not asked to raise capital by anyone
so we have to be very, very clear about that ... there was no
explicit request from anyone to strengthen our base.”

Goodwin: “I completely agree with that, no request to increase

the capital base.”

44.3B.2 Later in the presentation, in response to a specific question as

to what the FSA’s role had been in “encouraging or cajoling”
RBS to rebuild its capital, Goodwin replied:
“ … we discussed with our regulators our capital plans on
going forward so it’s fair to say the FSA are happy to see us
raising capital and encourage us in our plans to do so, but
they didn’t request us to do it.”

44.3B.3 McKillop was then asked whether there had been a notable
change in RBS’s dealings with FSA “in the last couple of
months or so”. He replied:
“There’s been a lot of running around in meetings as you
[have] probably seen on television but at industry level really
… more than anything else in so far as I’ve had contact with
the regulators that’s principally around industry issues over
that period.”

05250-80298/8093941.1 33
 44.4. To use a significant proportion of the Rights Issue proceeds immediately to
pay off short term and very short term funding liabilities, and to pay the
dividend of £2.3bn due to be paid on 23 May 2008. Further or alternatively,
if and to the extent that this was not the intention before 30 April 2008, it
became the intention during the Rights Issue Period.

44A. Even on RBS’s figures, a core Tier 1 capital ratio in excess of 6% could only be
achieved if there were asset sales in the region of £4bn in addition to the £12bn
received from the Rights Issue itself, and if RBS’s capital position did not otherwise
worsen. In terms of RBS’s capital plan, as contained (inter alia) in an excel
spreadsheet dated 21 April 2008 called “Snow Central
Case_21Apr_Scenario2v2d.xls”, RBS assumed that it would sell RBS Insurance
with a net core Tier 1 capital gain of £4bn (requiring sale at a price of circa £7bn).
RBS considered it only 25% likely that it could sell RBS Insurance (see section H
below) and, if it failed to do so, it could not meet the 6% target except by selling
assets yielding a net capital gain of at least 36 bps of core Tier 1 capital.

44A.1. £12bn of new capital was insufficient (by a substantial margin) to increase
RBS’s capital ratios to the levels referred to. There were no reasonable
grounds for stating that the effect of the proposed £12bn capital raising
would be to achieve a Tier 1 capital ratio in excess of 8% and a core Tier 1
capital ratio in excess of 6% by the year end on a proportional
consolidated basis. Rather than the £12bn “flow[ing] pretty much straight
through into an uplift in the capital ratios” (as Goodwin stated at the 22
April 2008 presentation and as the Prospectus implied), there was in fact a
high or alternatively a substantial risk of that sum being insufficient for that
purpose, especially when:

44A.1.1 The assumption of raising £4bn of capital gains through the

sale of RBS Insurance (or at all) was unreasonable or
imprudent. An alternative assumption of raising 36 bps
through asset sales would also have been unreasonable or
imprudent and was inconsistent with RBS’s own assessment
that the likelihood of each sale occurring was only 25% (see
section H). The only prudent assumption would be of minimal
asset sales (see Section H below). On that basis, about £4bn
of the Rights Issue proceeds would be absorbed simply by the
£4.3bn of write-downs disclosed in the Prospectus.

44A.1.1A Even if it had not been unreasonable or imprudent to assume

asset sales yielding around 36 bps, that would only have been
enough for RBS to meet the 6% core Tier capital target if each
and every other assumption in the capital plan had come true.
05250-80298/8093941.1 34
 That was an unreasonable and imprudent assumption and
such a capital plan would have been imprudent.

44A.1.2 Several billion pounds of the £12bn raised in the Rights Issue
should have been treated as already absorbed by write-downs
that were not recognised or disclosed in the Prospectus, and
should have been reported as such in the Prospectus: see
Section D below.

45. In the circumstances, the statements made in the Prospectus in respect of the
purpose of the Rights Issue and the use of its proceeds were untrue and/or
misleading, in breach by the Defendants of section 90(1)(b)(i) of FSMA. In
particular, in the light of the matters set out in paragraphs 43 to 44A above:

45.1. It was misleading to state that the “reasons for the rights issue” were to
“increase” RBS’s capital base, and to represent that the purpose of the
Rights Issue was to form part of a scheme intended to “accelerate its plans
to increase its capital ratios and to move to a higher target range”, and to
state that “Reflecting these factors, the Board has raised its target
range...”; and that the Board had made certain decisions “in the context of
its decision to increase capital levels”. These statements created the
impression that the purpose of the Rights Issue was to “increase” core Tier
1 and Tier 1 capital ratios from their 31 December 2007 Basel I ratios. In
fact the true reasons for the Rights Issue were as pleaded in paragraphs
44 and 44A above, namely that taking into account credit market
exposures and the transition to Basel II, even on RBS’s own figures a
large proportion of the proceeds would be required simply to recover the
position to the ratios stated in the 2007 Accounts. RBS was concerned to
counter a rapid deterioration in existing capital ratios occasioned by the
entry into the force of the Basel II regime and by specific adverse events,
not properly disclosed in the Prospectus.

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 or because it was necessary to meet requirements
imposed by the FSA, and not voluntarily or freely.

45.3. It was misleading to say that at the time of its presentation of the 2007
Accounts, RBS had “confirmed that it was operating within the parameters”
of its capital plans, and that RBS’s previous capital plans had remained on
track (an implication conveyed by those words, combined with the
05250-80298/8093941.1 35
 statement that what RBS was now doing was “accelerating” its plans to
raise its capital ratios), when in fact, as pleaded above: (a) RBS had not
been operating within its previous capital targets at year end 2007, neither
in relation to core Tier 1 capital, nor in relation to Tier 1 capital on a Basel
II proportional consolidated basis (alternatively, that it had ceased to do so
from the moment Basel II came into force on 1 January 2008); (b) RBS’s
capital plans had in fact been derailed, as pleaded above; and (c) RBS
was in fact unable to establish its capital position with any clarity or
certainty. See further below at paragraphs 57.9 and 57.9A.

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 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 under Basel II (on a
proportional consolidated basis) RBS’s Tier 1 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 5.21%. Basel II had in fact substantially decreased the ratios.

45.4A It was misleading to state that: “The Group’s Tier 1 capital ratio at 31
December was 7.3% and our total capital ratio 11.2%, within our target
ranges. At the time of the bid for ABN AMRO we indicated our intention to
rebuild our capital ratios. We remain committed to that goal and the
improved financial returns now expected on the acquisition will help to
accelerate delivery of the Group’s capital regeneration commitments.” (p.
11), without making clear that RBS had breached its capital targets, when
(A) even as at 28 February 2008 (the date of the 2007 Accounts) Basel II
was in force and under Basel II, RBS’s Tier 1 capital as at 31 December
2007 was below 7.0% on a proportional consolidated basis; (B) by April
2008 the Tier 1 capital ratio was significantly below 5.40% on a
proportional consolidated Basel II basis.

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 capital ratio
towards 5 per cent. by 2010”, given the existence of RBS’s 5.25% target
for core Tier 1 capital and the fact that neither the Non-Executive Directors
nor the FSA were comfortable with RBS only doing so by 2010.

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
target (see especially paragraph 36 and the quotation starting “As part of
05250-80298/8093941.1 36
 an ongoing exercise” through to the end of that quoted paragraph from p7
of the Prospectus, and the statement in the Prospectus at p28 that the
target core Tier 1 ratio in excess of 6% was based on a “conservative”
estimate of capital).

46. Further, the failure to disclose the true purposes of the Rights Issue and the true
intended uses of its proceeds, and/or the omission of the matters pleaded at
paragraph 43 to 44A above, and/or the inadequacy of the disclosure in the
Prospectus in those respects, was a breach by the Defendants of section 90(1)(b)(ii)
of FSMA, in circumstances where those matters were:

46.1. Necessary information in order to enable investors to make an informed

assessment of the financial position and prospects of RBS and the rights
attaching to the Rights Issue shares. Therefore matters which were
required to be included in the Prospectus pursuant to FSMA sections
87A(1)(b) and 87A(2); and/or

46.2. Matters which were required to be included in the Prospectus pursuant to

FSMA section 87A(1)(c) and Annex I, §§9.1, 10.1, 12.2, 20.9, and Annex
III, §3.4, of the Prospectus Regulation. The Claimants also rely on Annex I
§§3.1, 4, 10.3 and Annex III §2.

46.3. Specifically, the incomplete and misleading disclosure in the Prospectus of

the reasons for the offer, and failure to disclose its intentions for the use of
the proceeds, was inconsistent with Annex III, §3.4 of the Prospectus
Regulation. Where specific adverse events, such as those described in
paragraph 44.2 above, had caused a capital shortfall and it was intended
that the proceeds of the Rights Issue should be used to make good that
shortfall or otherwise ameliorate its consequences, the net amount of
proceeds to be applied to that intended use ought to have been disclosed.

47. Alternatively, if and to the extent that (contrary to the above) the matters referred to
at paragraphs 43 to 44A above were not matters that the Defendants were obliged
to disclose in the Prospectus, and if this was because they arose and/or were noted
after the Prospectus was approved:

47.1. They were matters which RBS was obliged to disclose by way of
supplementary prospectus as soon as practicable by virtue of section
87G(1) and (2) of FSMA and Rule 3.4.3 of the Prospectus Rules.

47.2. However, RBS failed to provide a supplementary prospectus giving

appropriate disclosure accordingly, and no such supplementary

05250-80298/8093941.1 37
 prospectus was provided at any time before the closure of the Rights Issue
Period on 6 June 2008.

47.3. In the circumstances, RBS was in breach of sections 87G(2) and 90(4) of
FSMA.

47.4. [Further, it is inferred that each of the Director Defendants must have been
aware before the Closing Date of all such matters (as a result of their
position as Directors and/or their senior positions within RBS). Each
Director Defendant was therefore under an obligation to notify RBS of
these matters, but it is inferred that they did not, since no supplementary
prospectus was prepared. Each Director Defendant is therefore in breach
of section 87G(5), and accordingly liable to pay compensation under
s.90(4) of FSMA.]1

Section B – Capital

47A. RBS’s capital position, and in particular its capital ratios, were a matter of intense
concern to investors and market analysts. Their enhancement was the main stated
purpose of the Rights Issue. It was essential to investors that the Prospectus should
present them fully and accurately.

47B. An important and widely used measure of the financial strength of a bank such as
RBS is its capital ratio. The capital ratio regime is (and was in 2008) intended to
determine a bank’s capacity to meet credit, operational and other risks, to ensure
that a bank maintains sufficient capital to withstand unexpected losses, and thus to
protect depositors and others trading with the bank.

47C. A bank’s Tier 1 capital ratio is (and was in 2008) a measure of a bank’s strength
commonly used in the financial markets by investors and analysts.

47D. By April 2008, most investors and analysts in the financial markets preferred (in part
because of the inclusion in the Tier 1 capital ratio calculation of certain categories of
financial instrument permitted by the Basel II capital adequacy regime) to base their
assessment of capital adequacy on core Tier 1 capital ratios rather than Tier 1
capital ratios generally. From early 2008, in part because of the transition between
Basel I and Basel II (which came into force on 1 January 2008), most banks
published figures on both a Basel I and Basel II basis. RBS only published figures
on a Basel I basis.

05250-80298/8093941.1 38
47E. As to RBS’s capital position, RBS had received lenient treatment from the FSA
and/or was the beneficiary of indulgences which were temporary and the
continuance of which it could not reasonably rely on. In particular, it was at the date
of the Prospectus the beneficiary of several waivers and/or approvals from the FSA,
and its plans were predicated on the continuation of these indulgences and on
further permissions being granted by the FSA and the regulators of RBS’s
subsidiaries:

47E.1 The FSA had rejected RBS’s ICAAP submission in September 2007 as
inadequate, principally because RBS had built its ICAAP around a 96%
confidence interval rather than the standard 99.9% confidence interval as
expected by the FSA and thus had adopted a more aggressive approach
than the FSA would permit. It had nevertheless permitted RBS to operate
on the basis of a so-called “interim” ICG, a temporary arrangement
intended to apply for no more than 6 months whilst the bank addressed
the FSA’s concerns. By April 2008 no ICAAP submission had been made
and as at the date of the Rights Issue RBS was still subject to an interim
ICG.

47E.2 Though the FSA had not mandated a specific confidence interval to be
used, the FSA’s reference point was a BBB credit rating and the
confidence level implied by that was 99.9%.The FSA had initially required
RBS to perform an assessment of its capital based on a confidence level
of 99.9%. This would have required RBS to hold capital of £7.1bn above
RBS’s Pillar 1 requirements which was an extra £3.1bn on top of what
RBS estimated in its original ICAAP submission. However, the FSA gave
special dispensation for a lower add-on of 10% of RBS’s Pillar 1
requirements, which required RBS to have £1.38bn less regulatory capital
than would have been required had the FSA applied its own guidance
consistently with industry standards.

47E.3 As set out at paragraph 57.7.A.2.2 below, the FSA, having previously
ruled that in respect of its transition to Basel II RBS should not take any of
the capital benefit of its PD and EAD models for the purposes of
calculating its credit risk, was at the date of the Rights Issue permitting it to
take 50% of the benefit of such models pursuant to a decision of the FSA’s
Executive Committee dated 15 April 2008. That decision had been made
only following RBS’s indication to the FSA that it intended to carry out a
Rights Issue and was contrary to the FSA’s previous stance. It was also
temporary only, and was to expire at the end of December 2008. The
benefit of that decision was to reduce RBS’s RWAs by £25.5bn, the
equivalent of over £1.5bn of core Tier 1 capital at a target ratio of 6%.

05250-80298/8093941.1 39
 47E.3A The FSA, through its Chief Executive Mr Sants, had indicated to Goodwin
in a telephone conversation on around 23 April 2008 that if the Rights
Issue went ahead, the FSA would permit RBS to add 20 basis points to its
core Tier 1 capital (equivalent to over £1.2bn of additional core Tier 1
capital at a target ratio of 6%). That proposal was not based on the
application of any regulatory or capital management principle, but was
simply intended to give RBS a boost to its overall position if the Rights
Issue went ahead. It was described within RBS simply as a “flex” benefit
and was included in RBS’s capital plan as a reduction to RWAs of
£20.5bn, notwithstanding the fact that there was no basis under the
regulatory regime for such a reduction.

47E.4 Further, RBS’s plans in the Prospectus were predicated on receiving

prompt future approval to take 100% of the benefit of the Master Grading
model.

47E.5 Significant back testing exceptions from August 2007 had raised
regulatory concerns about RBS’s Value at Risk (VaR) model. Although all
VaR models were revealed to have weaknesses, RBS’s model appears to
have given rise to more severe exceptions indicating specific rather than
generic understatement of market risk. These concerns led to a
remediation programme and in 2008 (at a point presently unknown to the
Claimants) the FSA required RBS to seek re-approval for its VaR model.
RBS assumed that it would get such approval without material change.

47E.5A As recorded at p.213 of the FSA Report, there were doubts about whether
certain significant capital instruments issued by ABN AMRO, and included
in RBS’s regulatory capital, could legitimately be treated as regulatory
capital. As at 23 April 2008 RBS had been told by the FSA that such
instruments were unlikely to be categorised as core Tier 1 or Tier 1.
However, RBS was continuing to treat such instruments as core Tier 1 or
Tier 1 capital pending a final decision from the FSA.

47E.6A At the date of the Rights Issue RBS was operating on the basis of an
approach that would allow RBS to treat ABN AMRO RWAs on a Basel I
basis (applying a 30% add-on). That approach was also temporary, but
RBS assumed that it would apply indefinitely.

47E.6 RBS also assumed that it would get approvals for:

47E.6.1 A PD model and an EAD model which together would reduce

RWAs by £51bn (equivalent to £3.1bn of core Tier 1 capital at
a target ratio of 6%).

05250-80298/8093941.1 40
 47E.6.2 An EPE model which would reduce RWAs by at least £8.5bn
(equivalent to £660m of core Tier 1 capital at a target ratio of
6%).

47E.6.3 ABN AMRO not to be required to make capital deductions in

respect of securitisations as specifically required by the DNB.
As at April 2008 deductions amounted to £1.4bn of capital.

47E.6.4 Movement of the Citizens Bank business by June 2008 to a

Standardised Approach which would reduce RWAs by
£1.03bn.

47E.6.5 Adoption of an AIRB model by RBS International by

September 2008, which would reduce RWAs by £2.5bn.

47F. It was imprudent and/or unreasonable to assume that these indulgences would
continue and that approvals and the corresponding RWA benefits would be
achieved, given:

47F.1 RBS’s history in (i) incorrectly estimating the effect of the change from
Basel I to Basel II (as set out at paragraph 43.2C above) and (ii) having its
models wholly or partially rejected by regulators.

47F.2 RBS’s own recognition (set out, for example, in Peters’ email to Tyler and
others, including Marc Dumbell of Deloitte of 21 April 2008), that it was
“subject to the mercy” of the FSA.

47F.3 The fact that in rejecting the models, the FSA had identified detailed
problems with the models which would require substantial further work.

47F.4 RBS’s own estimates set out in a memorandum of 20 February 2008 from
Tyler to Whittaker, Thomas and Kapoor that on a “worst case” it might
obtain only RWA savings of £13bn in respect of the PD model, the EAD
model and the EPE model combined.

47F.5 The fact that as at 15 April 2008, RBS was only asking for FSA approval of
80 to 85% of the proposed benefits.

47F.6 The fact that Whittaker had discussed with the FSA on or around 17 April
2008 and had been told that the likely figure for total RWA savings was
£20.5bn.

47F.7 The fact that at 16 May 2008, RBS was only asking for FSA approval for
69%, or more conservatively 61% of the proposed benefits.

47F.8 The fact that at 30 May 2008, RBS considered it likely that it would receive
only £7bn of the proposed benefit in respect of the EPE model.

05250-80298/8093941.1 41
 47F.9 The fact that there were errors in the PD model which, once corrected,
would negate £11bn of the potential RWA benefit.

47F.10 RBS had been told that the ABN AMRO capital instruments were unlikely
to count as core Tier 1 or Tier 1 capital.

48. The Prospectus statements quoted in paragraph 36 above are repeated in this
context.

49. The “Summary” further stated at p. 8:

2 Current Trading and Prospects

With reinforced capital ratios, the Group will be in a stronger position to navigate
through an economic environment that remains uncertain and well-placed to take
advantage of the growth opportunities available to it.

50. The “Risk Factors” identified, amongst others, the following Risks (at pp. 11, 16):

RBS’s business performance could be affected if its capital is not managed

effectively.

RBS’s capital is critical to its ability to operate its business, to grow organically and
to take advantage of strategic opportunities. RBS is required by regulators in the
United Kingdom, the United States and the Netherlands, and in other jurisdictions in
which it undertakes regulated activities, to maintain adequate capital. 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.

If the Company is unable to complete the Rights Issue, it may be required to

find alternative methods of increasing its core Tier 1 and Tier 1 capital ratios.

The purpose of the Rights Issue is to allow the Company to strengthen its capital
position and to achieve a core Tier 1 capital ratio in excess of 6 per cent. and a Tier
1 capital ratio in excess of 8 per cent. by the end of 2008 on a proportional
consolidated basis, which the Company believes are appropriate levels in light of
current market conditions. If the Company is unable to complete the Rights Issue, it
will need to assess its capital position and may be required to find alternative
methods for achieving requisite capital ratios. Such methods could include a

05250-80298/8093941.1 42
 reduction in dividends, a reduction in the rate of growth of risk-weighted assets,
disposal of certain businesses or increased issuance of Tier 1 securities. There can
be no assurance that any of these alternative methods would be successful in
increasing the Company’s capital ratios sufficiently or on the timescale currently
envisaged. If the Company is unable to increase its capital ratios sufficiently, its
credit ratings may drop, its cost of funding may increase and its share price may
decline.

51. The “Chairman’s Letter” stated (at p. 28 of the Prospectus):

5 Capital

Taking into account the estimated write-downs, the Rights Issue and retentions,
including conservative estimates in respect of other capital and strategic steps
outlined below, the Group’s capital ratios at 30 June 2008 and 31 December 2008
are expected to be approximately as set out below.
...
core Tier 1 Tier 1
(1) (1)
capital ratio capital ratio

Proportional consolidated basis

30 June 2008 > 5% >7.5%
31 December 2008 > 6% >8%
__________
Note:
(1) Prepared using Basel II methodology.

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 decrease in RBS’s Tier 1 capital ratio. However, risk-weighted assets are
expected to decline over the first half of 2008 due to management actions
(particularly in Global Banking & Markets, as discussed below), leading to a small
positive impact on Tier 1 capital under Basel II.

...

The aggregate of the estimated write-downs implied by RBS’s capital planning

estimates, totalling £5.9bn before tax, would have a negative effect on RBS’s Tier 1
ratio. This is expected to be more than offset by the Rights Issue to raise
approximately £12bn, net of expenses.

The Board has raised its target range for the Group’s Tier 1 capital ratio to 7.5 per
cent. to 8.5 per cent. and has set a target for the core Tier 1 capital ratio in excess
of 6 per cent. at 31 December 2008 on a proportional consolidated basis. Previous
guidance referred to 7 per cent. to 8 per cent. for the Tier 1 capital ratio, with 25 per
cent. to 30 per cent. preference share content, but with no target set for the core
Tier 1 capital ratio.

05250-80298/8093941.1 43
52. In Part IV, “Information on RBS”, the Prospectus stated (at p.63):

Overview

RBS is the holding company of one of the world’s largest banking and financial
services groups, with a market capitalisation of £44.4bn at the end of 2007. ... The
Group had total assets of £1,900.5bn and owners’ equity of £53bn at 31 December
2007. It had a total capital ratio of 11.2 per cent. and Tier 1 capital ratio of 7.3 per
cent. as at 31 December 2007 on a fully consolidated basis.

53. In Part V, “Overview of Business Performance and Operating and Financial Review
of RBS”, at pp. 72-73, it was stated:

4 Capital resources and liquidity management

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. The FSA uses RAR as a measure of capital
adequacy in the UK banking sector, comparing a bank’s capital resources with its
risk-weighted assets (the assets and off-balance sheet exposures are “weighted” to
reflect the inherent credit and other risks). By international agreement, the RAR
should be not less than 8 per cent. with a Tier 1 component of not less than 4 per
cent. As at 31 December 2007, the Group’s total RAR was 11.2 per cent. and the
Tier 1 RAR was 7.3 per cent. and both ratios were prepared using the Basel I
methodology.

Total capital resources principally comprise shareholders’ equity, minority interests

and subordinated liabilities less goodwill and intangible assets and other
supervisory deductions such as the Group’s investment in insurance companies. On
14 January 2008, ABN AMRO redeemed the €113m 7.50 per cent. subordinated
notes 2008. On 9 April 2008, RBS plc issued €2,000m 6.934 per cent subordinated
notes due 2018 and on 23 April 2008 issued €144.4m inflation linked floating rate
lower Tier 2 notes due 2023. In addition, changes in shareholders’ equity over the
same period reflect retained profits less dividends paid, changes in the fair values of
available-for-sale investments and cash flow hedges, and exchange differences on
translation of foreign operations.
...
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.

05250-80298/8093941.1 44
54. In Part XII, “Additional Information” (p. 134), it was stated that:

23 No Significant Change

23.1 Save as regards (i) the estimated write-downs in respect of credit market
exposures in 2008 used for RBS’s capital planning purposes described on
pages 24-25 of this document and (ii) the current trading and prospects of
the RBS Group described on pages 29-31 of Part I of this document, there
has been no significant change in the trading or financial position of the RBS
Group since 31 December 2007 (the date to which the latest audited
published financial information of the RBS Group was prepared.)

55. In the 2007 Accounts, it was stated in respect of conduits, in passages incorporated
by reference into the Prospectus (by p. 137 thereof):

55.1. At p. 83, further quoted at paragraph 64 below, that “[t]he conduits are
consolidated by the Group”:

55.2. At p. 184, that the assets of “Commercial paper conduits” were £32.6bn at
year end 2007.

56. In the 2007 Accounts, in statements incorporated by reference into the Prospectus
pursuant to p. 137 of the Prospectus, it had been stated (at p. 72):

Basel II

RBS has received agreement (called a ‘waiver’) from the UK Financial Services
Authority to adopt the Advanced Internal Ratings Based (AIRB) approach for
calculating capital requirements for the majority of the 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, the
most sophisticated available under the new Basel II framework

56A. The Prospectus presented RBS as having a clear and considered knowledge and
understanding of its capital position, including its capital ratios. This was implicit in
the references in the Prospectus to:

56A.1. RBS’s capital plan and the “parameters” of that plan (p.7);

56A.2. the “continual review” of the capital plan’s “balance of risks and
opportunities” (pp.7 and 24);

56A.3. the making of “prudent assumptions”, as the basis for detailed estimates of
RBS’s credit market exposures and write-downs (pp.7, 24 and 26);

05250-80298/8093941.1 45
 56A.4. the “careful management” of RBS’s capital (p.12); and

56A.5. RBS’s assessment of the amount of capital required to enable it to achieve

specific capital targets.

57. The statements made did not disclose, or did not adequately disclose, the following
features of RBS’s capital position:

57.1. At the date of the Rights Issue, RBS’s loss absorbing capital was
inadequate, and its capital ratios were critically low.

57.2. RBS’s capital ratios had fallen significantly and unexpectedly from the
Basel I ratios set out 31 December 2007 (see paragraph 43 above), which
were in themselves artificially high (as set out at paragraph 43.2A above).
Further, they had fallen more than was explicable by the estimated write-
downs on credit market exposures disclosed in the Prospectus.

57.3. On a proportional consolidated Basel II basis, even on RBS’s own figures

and without factoring in the understated write-downs pleaded in sections D
and F below, on 30 April 2008 RBS’s core Tier 1 capital ratio was lower
than 3.03% and its Tier 1 capital ratio was lower than 5.21%. The true
position was much worse.

57.3A The fall in RBS’s capital ratios had been caused in part by the shift from the
Basel I regime to the Basel II regime.

57.4. The fall in RBS’s capital ratios had been caused in part by an unplanned
and undisclosed increase in RWAs since December 2007 (as to the
causes of which, see paragraph 58.2.2 below). Indeed, there was
evidence of accelerating growth in RWAs in GBM. The fall in capital ratios
had also been caused inter alia by (a) the inability to complete planned
debt issuance; (b) delays in the disposal of Antonveneta (part of ABN
AMRO).

57.5. Both by, and since, 31 December 2007 RBS’s capital plans had been
derailed, and had not been complied with (see paragraph 43 above).

57.6. RBS had received lenient treatment from the FSA and/or was the
beneficiary of indulgences which were temporary.

57.6.1 – 57.6.6. [not used]

05250-80298/8093941.1 46
 57.6AA RBS’s true position was in fact substantially worse in that, as set out at
Section D below:

57.6AA.1 It should already have taken all of the write-downs disclosed in

the Prospectus.

57.6AA.2 It should have taken further write-downs and/or impairments in

respect of assets disclosed in the table on p.26 of the
Prospectus (the “CME Table”) and excluded from the CME
Table (see Sections D and F below).

57.6A RBS’s capital plan was dependent on its issuing a net £5.031bn of Tier 2
Capital instruments in 2008 (being £6.1bn in issuances with £1.069bn
repayments). This was not properly disclosed:

57.6A.1 The Prospectus failed to disclose that:

57.6A.1.1 The issuance of these instruments was a

fundamental part of RBS’s capital plan.

57.6A.1.2 There were real reasons to think that RBS might fall
short of its targets for issuances of Tier 2 Capital. In
particular RBS had planned to issue £2.3bn of Tier
2 Capital in March 2008, but had failed to do so due
to difficult market conditions.

57.6B RBS had planned to issue a further £1.2bn of Tier 2 Capital by the end of
June 2008. RBS was or should have been aware by the date of closure of
the Rights Issue that it would be unable to do so, or would be unable to do
so on reasonable commercial terms. This was a matter which it was
obliged to disclose in a Supplementary Prospectus, but failed to do so.

57.7. There were deficiencies in, and uncertainties as to, RBS’s capital models
and the calculated base of RBS’s regulatory capital:

57.7.1. Due to deficiencies in its capital models, ABN AMRO was not
permitted by the Dutch regulator, DNB, to move to an IRB
approach under Basel II; which meant that ABN AMRO and
RBS were required to hold significant additional capital on a
Basel I basis. Paragraph 44.2 above is repeated.

57.7.2. The FSA had also raised concerns about the Basel II AIRB
capital models to be used by RBS itself. Final approval had
been refused. Full approval had been declined and only partial
and temporary approval in April 2008 following the decision to
05250-80298/8093941.1 47
 carry out the Rights Issue. There was a clear risk that RBS
would no longer be able to obtain the full capital benefit of
using those models if approval was later declined by the FSA
or if only partial approval was achieved.

57.7.3. There remained uncertainty about the ABN AMRO capital

instruments referred to at paragraph 47E.5A above.

57.7A 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
full model approval from the FSA in respect of its EPE, PD and EAD
models. RBS was seeking approval to use these models to assess credit
risk and calculate the level of RWAs that it held for capital adequacy
purposes. The Prospectus also failed to disclose the risk associated with
this assumption. The Prospectus should have disclosed:

57.7A.1 That RBS had been granted an AIRB waiver on 14 November

2007, which had been published on the FSA website.

57.7A.2 That the FSA had decided:

57.7A.2.1 In March 2008, that RBS was not permitted to take

the benefit of its PD and EAD models at all when
calculating its RWAs, as set out in paragraph
44.2B.1 above.

57.7A.2.2 In April 2008, that RBS could take only partial

benefit of these models amounting to approximately
50% of the proposed total benefit.

57.7A.3 That the position as to whether and when RBS would be

entitled to claim 100% of the benefit of these models was
fundamentally uncertain. RBS and the FSA were continuing to
discuss serious concerns about the models, and the matter
had been referred to the FSA's Executive Committee before
the partial approval had been granted.

57.7A.4 That for the purposes of its capital plan, RBS assumed that it
would be able to take 100% of the benefit of these models,
even though the position was uncertain.

57.7A.5 The basis of that judgment, in order to allow investors to

assess the relevant risk factors.

05250-80298/8093941.1 48
 57.7A.6 The effect if RBS's assumption was wrong (as it turned out to
be) and it was unable to take the benefit of these models,
which would have been an increase of at least £51bn in
RWAs.

57.7A.7 That ABN AMRO was operating on a temporary basis where

its RWAs were assessed at 130% of its Basel I RWAs, and
that approval for this was open to withdrawal, and/or that at
some point ABN AMRO would be required to move onto a
proper Basel II calculation.

57.7B 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 its
capital position, and the risks associated with this:

57.7B.1 These approvals were for:

57.7B.1.2 An EPE model (as to which RBS assumed half the

benefit for the purpose of its capital plan).

57.7B.1.3 [not used]

57.7B.1.4 Movement of the Citizens Bank business to Basel

II.

57.7B.1.5 Adoption of an AIRB model by RBS International.

57.7B.1.6 ABN AMRO to cease to be required to make capital

deductions in respect of securitisations as
specifically required by the DNB.

57.7B.1.7 Treatment of certain ABN AMRO capital

instruments as core Tier 1 or Tier 1 capital.

57.7B.2 So that investors could assess for themselves the relevant risk
factors, the Prospectus should have disclosed:

57.7B.2.1 That RBS had made these various cumulative

assumptions about obtaining these approvals or
continuation of the existing position.

57.7B.2.2 The basis of those assumptions.

05250-80298/8093941.1 49
 57.7B.2.3 The effect on the capital plan if the outcome of each
assumption were not achieved.

57.7B.2.4 The risk factors, including as set out at paragraph

47F above.

57.7B.3 The Prospectus should have disclosed that if the FSA had
adopted the same approach as that adopted by the DNB for
ABN AMRO’s RWAs and had applied the DNB’s higher 12.5%
total capital ratio, RBS’s total capital shortfall would have
increased by £2.5bn.

57.7B.4 [not used]

57.8. From December 2007 RBS had been put on the FSA’s Watchlist for
capital risk and had been in discussions with the FSA as to the need for
increases in its regulatory capital. In those discussions the FSA had made
clear its view that RBS’s capital position was inadequate. Paragraphs 44.3
to 44.3A are repeated.

57.9 RBS had either breached, or come very close to breaching, (a) its FSA
ICG in March/April 2008, both at Group level and at Solo level, (b) its
“Internal Target Ratio” (ITR), which was an RBS internal policy threshold
of 0.5% above FSA ICG (breach of which was reportable to the FSA) at
Solo level, (c) ABN AMRO’s DNB ICG of 12.5%, and had breached (a) its
ITR at group level, and (b) the US Federal Reserve’s ‘well capitalised
status’ which required it to hold total capital of 10% and Tier 1 capital of
6%. Further as to this:
57.9.1 Paragraphs 44.3A.9 and 44.3A.9A above are repeated. The
figures submitted to the FSA on 4 April 2008 showed a Tier 1
ratio at group level of 5.92%.
57.9.2 Also on 4 April 2008, a spreadsheet sent by Tyler to Whittaker
shows total capital at group level to be 8.69% and Tier 1
capital to be 5.85%. The relationship between this document
and the numbers which were submitted to the FSA is unclear.
57.9.3 Consistently with the lower figures of 4 April 2008, a
spreadsheet of 9 April 2008 shows RBS’s total capital ratio at
group level to be 8.69% and Tier 1 capital to be 5.49% at the
beginning of April 2008. The equivalent figures for the
beginning of May were 9.8% and 6.4%.
57.9.4 A document issued to the Chairman’s Committee on 10 April
2014 noted that the reversal of model relief and the delay of

05250-80298/8093941.1 50
 the sale of Antonveneta had taken RBS’s “consolidated ratio
below our individual capital guidance from the FSA of 9.03%”.
A draft of the document put the figure at 8.72%. On 14 April
2008, the GALCO summary sheet recorded that the March
2008 ratios were “below the FSA ICG and also below the US
Fed “well capitalised” criteria”.
57.9.5 In an email dated 20 April 2008 Tyler wrote to Kapoor (who
forwarded it to Cummins) that “If we bring forward the write-
downs of £3.7bn to April it would reduce the projected total
capital ratio from 8.92% to 8.55% and total tier 1 from 5.58%
to 5.21%. In terms of individual entities it would undoubtedly
take ABN AMRO below its 12.5% and I expect it would take
RBS plc below its ICG.”
57.9.6 The Project Snow summary capital plan dated 21 April 2008
states that the total capital ratio for March and April 2008 at
group level is 9.02%, and that the Tier 1 ratio is 5.82% and
5.58% respectively. The March figures are described as
“actual ratios” in an email dated 21 April 2008 from Tyler to Mr
Fiorillo at Merrill Lynch.
57.9.7 A capital plan prepared by Merrill Lynch and dated 21 April
2008 shows the total capital ratio at group level to be 8.91%
and the Tier 1 ratio to be 5.82% at the end of Q1 2008.
57.9.8 Figures submitted to the FSA on 11 June 2008 demonstrate
that, at the end of April, RBS remained in breach of the “well
capitalised” requirements and in breach of its ITR. Total capital
was at 9.19% and Tier 1 at 5.82%. To circumvent its breach of
the “well capitalised” requirements, RBS asked the FSA for
permission (in June 2008) to deconsolidate Antonveneta
retrospectively, such as to boost its total (and Tier 1) capital
figures artificially.
57.9.9 At the time of the Rights Issue, RBS forecast that it would in
any event remain “critically close” to FSA ICG at end April
2008 and end May 2008.
57.9.10 The breach or near breach of ICG was indicative of
weaknesses in RBS’s capital planning. RBS had not
anticipated the problems with capital it experienced in early
2008. For example, RBS admitted in its email to the FSA of 4
April 2008 that they “were not quite so on top of Antonveneta
slipping into Q2”.

05250-80298/8093941.1 51
 57.9.11 Whatever the position on RBS’s own figures, in any event
RBS was in fact below ICG (at group, Solo and ABN AMRO
level), ITR (at group and Solo level) and the “well capitalised
status” in April 2008 in large part because of the matters
pleaded at sections D to F below.

57.9AA RBS plc’s (“RBS Solo”) capital position was under such severe strain that
a “moratorium” and a “complete stop” had been placed on transfers of
assets from ABN AMRO to RBS (see the email from Minter to Sutton
dated 19 March 2008 and the email from Tyler to O’Connor dated 19 April
2008). One consequence of this was that capital could not be transferred
from ABN AMRO to RBS because ABN AMRO had to hold 12.5% total
capital against its RWAs.

57.9A. RBS had been unable to establish its capital position with any clarity or
certainty.

57.9A.1. At a meeting between Goodwin and Sants on 9 April 2008,

RBS was required to establish definitively its capital position
as at end March 2008.

57.9A.2. RBS failed to establish its end-March 2008 capital position by

22 April 2008 or by the Prospectus Date or at any time during
the Rights Issue Period. RBS’s systems did not enable it to
provide that information.

57.9A.3. Specifically, balance sheet data was not available until three
weeks after the month end. This was a breach of RBS’s own
internal Group Capital Management Policy which required
monitoring of its capital base and RWA positions on a daily
basis. In addition, this meant that compliance with capital ratio
requirements could at best only be established on a
retrospective basis, undermining RBS’s ability to monitor
whether it was complying with Pillar 1 regulatory requirements
under Basel II as it was obliged to do by FSA Handbook rule
GENPRU 2.1.9R, and its ability to comply with the guidance at
GENPRU 2.1.10 that, although a firm does not necessarily
need to measure its precise capital position on a daily basis, it
must be able to demonstrate the adequacy of its capital
resources at any particular time if asked to do so by the FSA.
As stated in the FSA Report at p.89:

05250-80298/8093941.1 52
 “This was an especially serious failing for a firm which had
chosen to operate with limited capital headroom, giving it a
very low margin for error…”.

57.9B RBS’s capital projections at paragraph 26 of the Prospectus were based

on imprudent and/or unreasonable assumptions. In particular (but without
limitation) (I) the assumptions as to levels of capital benefits from asset
sales (see paragraph 44A above); (II) it was assumed that RBS, ABN
AMRO, RBS International and Citizens would receive the benefits of the
various models and regulatory treatments identified above and (III) it was
assumed that RBS’s various divisions would meet the RWA targets set for
them by Whittaker in his memorandum of 1 April 2008.

57.9BA As regards the assumption in respect of model benefits:

57.9BA.1 As set out by Mr Bird in his memo to the Senior Executive

Team dated 3 April 2008, circulated to the members of GBM
ALCO, the RWA targets included 100% model approval.

57.9BA.2 This was also recorded by Tyler in his “Key Assumptions”

document dated 18 April 2008 circulated to (inter alia)
Whittaker, Kapoor and Cummins.

57.9BA.3 While the Snow Central Case spreadsheet deducted £25.5bn

of benefits in respect of PD and EAD models, and £5.5bn in
respect of EPE models, it appears that in fact the targets
nevertheless assumed more than the purported £25.5bn PD
and EAD model benefit. In relation to UK Central Banking the
benefit assumed in RBS’s detailed figures was at least £4.4bn
more than purportedly assumed.

57.9BA.4 The Snow Central Case spreadsheet appears to show that the
targets assumed an EPE benefit of at least £3bn in GBM from
June 2008.

57.9BB As regards the assumption in relation to RWAs:

57.9BB.1 Whittaker’s targets were targets, and not projections. It was not
reasonable or prudent to assume that targets would
necessarily be met.

57.9BB.2 The targets for year end 2008 and June 2008 were lower than
the targets proposed for the Group Budget by the various
divisions. The initial proposed figures reflected what the

05250-80298/8093941.1 53
 responsible individuals within the various divisions regarded
as achievable targets.

57.9BB.3 Pending disclosure of the full breakdown of Whittaker’s targets

and of the 2008 Budget, the Claimants cannot plead as to the
comparison between the targets and the Budget.

57.9BB.4 Economic conditions in April 2008 made it likely that RWAs

would increase, having regard to (i) RBS’s existing lending
commitments, which were more likely to be drawn down and
(ii) increased probability of default amongst borrowers.

57.9BB.5 RBS had not consistently met its RWA targets and budgets in
the past. For example, as at the end of November 2007 GBM
was 13% over budget and RBS (excluding ABN AMRO) was
4% over budget. The 2007 year end target had only been met
through the artificial exercise described at paragraph 43.2A
above.

57.9BB.6 RBS considered that its RWA position was volatile and that it
had difficulty in monitoring its RWA position. The FSA shared
this view – in early May 2008 it communicated to RBS its
concern about the volatility in RBS’s RWA planning, which it
considered to be poor.

57.9BB.7 As set out in an email from Peters to Tyler, RBS’s view as at

18 March 2008 was that it had no robust divisional RWA
targets – it was dependent on run-rate estimates and
anecdotes.

57.9BB.8 RBS considered that meeting the targets was likely to have an
adverse impact on business units, as it limited the trading and
lending which they could do. This created a disincentive to
meet the targets.

57.9BB.10 This was particularly so because RBS had difficulties in

controlling its RWAs by reason of its incentive and
compensation system, which focused more heavily on
revenue and profit than on capital management, and because
of its failure to adopt (as it had resolved to do in 2005) a
matched-funds transfer pricing policy, meaning that individual
business units were not charged internally the full cost of
acquiring additional assets.

57.9BB.11 The targets included an assumption in respect of model

benefits which was imprudent and unreasonable.
05250-80298/8093941.1 54
 57.9C RBS was also exposed to other risks to capital of which it was aware and
about which it had concerns but which it did not disclose. In particular,
these included the risks of:

57.9C.1 The effect of a downturn in economic conditions, including

increased impairment losses and problems with deteriorating
credit quality. Stress-testing of RBS’s capital position against a
1990s-style recession showed a total impact to core Tier 1
capital of £8.8bn to £11.2bn, while a severe recession showed
an impact to capital which was much higher still.

57.9C.2 The need for a top-up of Fortis equity pursuant to the ABN
AMRO sale transaction, which would require the contribution
of core Tier 1 capital which would reduce the proportionately
consolidated ratio by approximately 10bps.

57.9C.3 Ongoing earnings challenges.

57.9C.4 Additional write-downs and/or impairments.

57.9C.5 The 2008 ICAAP scheduled for Q3 2008 was expected to

increase capital requirements.

57.10. The FSA had required or pressured RBS to pursue a rights issue to
increase its capital and had required a written commitment from RBS to
that effect. See further paragraphs 44.3 and 44.3A above.

57.11. In the premises, a reasonable forecast of RBS’s capital position at the end
of 2008 would have concluded that core Tier 1 ratio on a proportionally
consolidated basis would be no higher than 4.80% and on a fully
consolidated basis would be no higher than 5.10%. These figures are
derived as follows:

57.11.1. According to the capital plan, RBS’s core Tier 1 capital ratio in
December 2008 was projected to be 6.46% on a proportionally
consolidated basis, and 6.5% on a fully consolidated basis.

57.11.2. The following adjustments would have to be made to obtain

reasonable figures:

i. The adjustments set out at paragraph 43.6 above.

ii. An addition to RWAs of £3bn to reverse out the additional

assumed benefits in the RWA figures as regards approval for
EPE models (see paragraph 57.9BA.5 below).

05250-80298/8093941.1 55
 iii. A further addition to RWAs of £3.5bn to reverse out the
assumptions in respect of Citizens and RBS International.

iv. A deduction of 0.1% from core Tier 1 in respect of the Fortis

equity top up.

v. Reverse out the assumed benefits from sale of RBS

Insurance.

57.11.3. This results in the figures set out in paragraph 57.11 above.
The actual ratios were no higher than this because further
deductions have to be made but the Claimants are presently
unable to quantify these.

57B. The Prospectus was misleading and/or failed to include necessary information in
respect of RBS's capital position and capital plan in that:

57B.1 The Prospectus should have, but did not, set out in reasonable detail how
RBS proposed to move from its present position to meeting its target
capital ratios as at 31 December 2008 consisting of:

57B.1.1 The starting point, being the true 2007 year end capital
position (including on a Basel II basis), and the movements
over the intervening period to the Prospectus date (or as close
as possible thereto), including ratios for total capital, Tier 1
capital and core Tier 1 capital.

57B.1.2 The “building blocks” of additional capital or other capital

benefits (e.g. from anticipated regulatory approvals or
permissions, asset sales, and retained profits) intended to
increase those ratios.

57B.1.3 The anticipated current and future negative impacts to the

existing capital ratios (e.g. from anticipated write-downs, or
increases in RWAs).

57B.2 While it set out the existing and future target ranges for its Tier 1 and core
Tier 1 capital ratios, the Prospectus failed to disclose RBS’s then current
capital ratios for Tier 1, core Tier 1 and total capital. These ratios had
fallen materially from the levels at 31 December 2007 as disclosed in the
2007 Accounts. This decline was due to increased write-downs taken in
Q1 2008, an increase in RWAs, and the transition to Basel II. Although the
Prospectus acknowledged (at p.28) that the estimated write-downs for
2008 would have a “negative effect” on capital ratios it was not possible for
an investor to assess:

05250-80298/8093941.1 56
 57B.2.1 RBS’s existing capital ratios at the date of the Prospectus.

57.B.2.2 How much new capital RBS needed to be raised to reach its
targets for Tier 1 and core Tier 1 capital.

57.B.2.3 How much new capital RBS needed to be raised to maintain

compliance with its minimum regulatory requirements
(including its ICG) at the Total Capital level.

57B.3 Further, it contained a statement that there had been “no significant
change” in RBS’s position since the previous annual accounts, which was
untrue or misleading in respect of RBS’s capital ratios.

57B.4 Further, it was particularly important to state the true position in

circumstances where in the call with analysts on 28 February 2008 RBS
had stated that its Tier 1 and core Tier 1 capital ratios on a proportional
consolidated basis “began with” a 7 and 4 respectively, when in fact
capital ratios had deteriorated materially from those year end positions.

57B.5 It failed to set out as a coherent whole the various “building blocks” in
RBS’s capital plan to lift its ratios from the existing position towards the
new target capital levels. These building blocks were at least as follows:

57B.5.1 The Rights Issue.

57B.5.2 A proposed issuance of Tier 2 Capital instruments.

57B.5.3 The disposal of RBS Insurance at full value, creating a £4bn

gain on disposal and a further £3.5bn decrease in regulatory
capital deductions.

57B.5.3A Meeting Whittaker’s RWA targets.

57B.5.4 Obtaining approvals to take the benefit of its Basel II models,

allowing planned reductions in RWAs to occur.

57B.5.5 [not used]

57B.5.5A Continuation of temporary, discretionary and/or lenient

treatment by the FSA and other regulators in certain respects
as set out above.

57B.5.6 Retained profits.

57B.6 It should have set out these building blocks, which RBS had been advised
by Deloitte were all "key factors influencing the total capital ratio", along
with any other key items in the capital plan, for example in section 5 of the
Chairman’s Letter on p.28 of the Prospectus, showing the projected

05250-80298/8093941.1 57
 impact of each item. For example, if, as RBS itself considered was likely,
RBS failed to raise £4bn through asset sales, it could meet its 6% core tier
1 target only if it sold assets yielding 36 bps or more of capital gain (which
was in itself an unreasonable or imprudent assumption) and if every other
assumption in the capital plan came true (see paragraph 44A above).

57B.7 It failed to make clear that the various “building blocks” were cumulative
such that failure to raise as much capital as expected in some areas (or
greater asset write-downs) could be fatal to its attempt to reach the
planned targets.

57B.8 It failed fully to identify the risks in respect of these various building blocks
and capital generally as set out at paragraphs 57.6.A, 57.6.B, 57.7,
57.7.A, 57.7.B, 57.9B, 57.9C, 77-93, 94A to M and 95 to 116A.

57B.9 A capital plan that fully set out the key items on a prudent and
conservative basis would have shown that:

57B.9.1 Taking into account proper write-downs, the capital plan

began from a very low starting point.

57B.9.2 RBS had already fallen below its ICG or would do so unless it
was able to benefit from the use of its AIRB models. RBS’s
capital plan for the purposes of the Rights Issue did, in fact,
show that RBS (at group level) had fallen below ICG in March
2008 and was expected to be below ICG in April 2008 and the
Prospectus should have disclosed this. It would also have
shown that RBS Solo’s capital position was under such severe
strain that a moratorium had been placed on transfers of
assets from ABN AMRO to RBS inhibiting the transfer of
capital from ABN AMRO to RBS.

57B.9.3 RBS was reliant on lenient treatment and/or the continuation

of indulgences which were temporary from the FSA (and
would not have assumed that this treatment would continue).

57B.9.4 Achieving full model approvals was critical to RBS’s ability to

reach the target capital levels it set out in the Prospectus and
in fact the plans were predicated on receiving over 100% of
the benefit of the relevant models.

57B.9.5 No additional capital, or a lesser amount of additional capital

than that assumed in the Working Capital report, would be
achieved from model approvals, ABN AMRO Separation,
additional operating profit or Tier 2 Issuances.

05250-80298/8093941.1 58
 57B.9.6 Without the combined effect of the Rights Issue and the Tier 2
capital issuance, RBS would not have just been in breach of
its ICG, but would also have been in breach of the 8% Basel II
minimum.

57B.9.7 RBS could not achieve its target capital levels at all by the end
of 2008 on the basis of prudent and conservative
assumptions, or that it could only do so if all or most of the
“building blocks” relied upon came to fruition.

57B.10 It failed to explain that reaching the proposed targets was dependent on
the write-downs set out in the Prospectus being sufficient, and there being
no further write-downs or increase in RWAs in the intervening period.

57B.10A It failed to set out write-downs for the whole of 2008, as set out in Sections
D and F below.

57B.11 It failed to explain that while the Prospectus specified target capital ratios
for Tier 1 and core Tier 1 levels, RBS's ICG at the Total Capital level had
not been set permanently on the basis of an acceptable ICAAP
submission and might ultimately be in excess of the interim ratio and
RBS's target. In particular, the Prospectus failed to explain that the FSA
had rejected RBS's ICAAP submission in September 2007, and had set
RBS an interim ICG which required revision, and that such revision was
due soon after the Rights Issue. By the time of the Rights Issue, RBS had
started to work on its ICAAP submission and was expecting its revised
ICG to be higher than 9.03%, principally because RBS accepted that it
had to use a 99.9% confidence interval.

57C. An explanation of the overall nature of RBS’s interaction with the FSA in relation to
its capital requirements, in particular having regard to the matters set out at
paragraphs 47E to 47F and 57.7 to 57.9A above, was necessary information
having regard to the facts that:

57C.1 RBS’s relationship with its regulator was of substantial commercial

significance, given its precarious capital position and dependence on the
discretion of the FSA being exercised in its favour in various respects.

57C.2 The Prospectus stated (under the “Operational Risk” risk factor) (at p.14):

“Notwithstanding anything contained in this risk factor, it should not be

taken as implying that either the Company or the Group will be unable to
comply with its obligations as a company with securities admitted to the
Official List or as a supervised firm regulated by the FSA”.

57C.3 It also contained (at p.13) a risk factor to the effect that:

05250-80298/8093941.1 59
 “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”.

57D. RBS should have disclosed in the Prospectus:

57D.1 That the figures that fed into its capital plan were based on assumptions
that particular existing instances of discretionary and temporary and/or
lenient treatment would be continued and that further indulgences would
be granted. This was important, and was not a prudent approach, in that:

57D.1.1 The assumed treatment led to the under-reporting of risk.

57D.1.2 The FSA was concerned about the models adopted by RBS
and its aggressive approach to capital.

57D.1.3 It was unsafe to assume that the treatment would continue.

57D.2 The nature of the existing and assumed future treatment, so that investors
could:

57D.2.1 Assess for themselves the relevant risk factors, including the
possibility that such lenient treatment and permissions might
be withdrawn or not granted.

57D.2.2 Make a like-for-like comparison of RBS's figures and

statements with those of other financial institutions (since
other financial institutions would not, in general, have
benefited from the same treatment).

58. In the circumstances, the statements made in the Prospectus in respect of capital
were misleading, and included untrue statements, in breach by the Defendants of
section 90(1)(b)(i) of FSMA. In particular:

58.1. It was misleading to state that “It is RBS policy to maintain a strong capital
base” without clarifying that in fact, on a Basel II proportional consolidated
basis, its core Tier 1 capital was in fact extremely low and less than
3.03%.

58.2. It was misleading to state 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 decrease in
RBS’s Tier 1 capital ratio. However, risk-weighted assets are expected to
decline over the first half of 2008 due to management actions (particularly

05250-80298/8093941.1 60
 in Global Banking & Markets, as discussed below), leading to a small
positive impact on Tier 1 capital under Basel II”, since this gave the
impression that RWAs had not increased significantly, and that any
increase in RWAs was only due to definitional changes leading to a small
and static (one-off) recalculation of RWAs under Basel II (and that they
would not have increased under Basel I); and also gave the impression
that any decreases in Tier 1 capital were not significant; when in fact:

58.2.1. RWAs had significantly increased by April 2008 compared to

the position on 31 December 2007; Paragraphs 44.2 and 57.6
above are repeated;

58.2.1A. The transition from Basel I to Basel II had been partly reversed
and partly rejected, with the result that a substantial increase
in RWAs, and thus a huge new capital hole of over £6bn,
emerged very shortly before the Rights Issue was announced.
Paragraphs 44.2 and 57.6 above are repeated;

58.2.1B RBS had considered whether it could say in the Prospectus

that the impact was “small”, but concluded that it could not. It
should have explained the impact and stated that it was
significant.

58.2.2 [not used]

58.2.2A The rejection of ABN AMRO’s transfer to an AIRB approach

under Basel II, and the problems with the acceptance of RBS’s
AIRB models under Basel II, both of which had recently led to
large increases in RWAs as set out in paragraph 44.2B above,
meant that it was misleading to refer to the “transition” to
Basel II as if it had been completed without difficulty.

58.2.2. RBS’s Tier 1 capital ratios on a Basel II basis as of 1 January

2008 (which were less than 6.8% on a proportional
consolidated basis or 7.0% on a fully consolidated basis) were
in fact materially lower than the Basel I ratios reported as of 31
December 2007 in the 2007 Accounts (7.3%, fully
consolidated); and

58.2.3. RBS’s Tier 1 capital ratios on a Basel II basis as of 30 April

2008 were even lower still (lower than 5.21%, proportionately
consolidated), and well below the Basel I ratios reported in the
2007 Accounts.
05250-80298/8093941.1 61
 58.3. 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, without disclosing that RBS had breached, or had at least
come very close to breaching, ICG, and had in fact in March 2008
believed it had breached ICG, and had breached ITR and its internal
Group Capital Management Policy and the Federal Reserve’s “well-
capitalised” requirements. It was further untrue or misleading to state this
without disclosing that (i) RBS had lost control over its capital position, in
particular in circumstances where capital ratios had declined rapidly in an
unanticipated manner and RBS did not have adequate knowledge of its
up-to-date capital position, (ii) that it had difficulties in managing its RWAs,
(iii) that it had miscalculated the impact of Basel II on its RWAs and (iv)
that it failed to obtain various regulatory approvals relating to its capital
adequacy requirements.

58.4. 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 refine the methods
by which the calculation of risk weighted assets is made” (Prospectus p.
13), when in fact AIRB approval had been qualified and only partially,
temporarily and uncertainly reinstated in relation to RBS and AIRB
approval had been refused in relation to ABN AMRO (see paragraphs
57.7.1 and 57.7.2 above).

58.5. It was untrue to say that there had been “no significant change in the
trading or financial position of the RBS Group since 31 December 2007”,
other than those specifically identified in Part XII, §23.1. The decline in
capital ratios (which was not fully explained nor disclosed by the estimated
credit market write-downs described in the Prospectus), and the increase
in RWAs, and the other developing risks to and difficulties with RBS’s
capital position identified above, were significant changes in RBS’s
financial position.

58.6. It was untrue or misleading to state that the capital projections at p28 of
the Prospectus were based on “conservative estimates”. In fact, they

05250-80298/8093941.1 62
 were ambitious and based upon imprudent and/or unreasonable
assumptions.

59. Further, the failure to give adequate disclosure of the weaknesses in and risks to
RBS’s capital position and the difficulties RBS had experienced in relation to capital,
and/or the omission of the matters pleaded at paragraph 57 above, and/or the
inadequacy of disclosure in the Prospectus in those respects, was a breach by the
Defendants of section 90(1)(b)(ii) of FSMA, in circumstances where those matters
were:

59.1. Necessary information in order to enable investors to make an informed

assessment of the financial position and prospects of RBS and the rights
attaching to the Rights Issue shares; and therefore matters which were
required to be included in the Prospectus pursuant to FSMA sections
87A(1)(b) and 87A(2); and/or

59.2. Matters which were required to be included in the Prospectus pursuant to

FSMA section 87A(1)(c) and Annex I, §§3.1, 9.1, 10.1, 12.2, 20.9 and 25
of the Prospectus Regulation. The Claimants also rely on Annex I §§4 and
10.3 and Annex III §2.

60. Consequently the omission of those matters was a breach by the Defendants of
section 90(1)(b)(ii) of FSMA.

61. Alternatively, if and to the extent that (contrary to the above) the matters referred to
at paragraph 57 above were not matters that the Defendants were obliged to
disclose in the Prospectus, and if this was because they arose and/or were noted
after the Prospectus was approved:

61.1. They were matters which RBS was obliged to disclose by way of
supplementary prospectus as soon as practicable by virtue of section
87G(1) and (2) of FSMA and Rule 3.4.3 of the Prospectus Rules.

61.2. However, RBS failed to provide a supplementary prospectus giving

appropriate disclosure accordingly, and no such supplementary
prospectus was provided at any time before the closure of the Rights
Issue Period on 6 June 2008.

61.3. In the circumstances, RBS was in breach of sections 87G(2) and 90(4) of
FSMA.

61.4. [Further, it is inferred that each of the Director Defendants must have been
aware before the Closing Date of all such matters (as a result of their
05250-80298/8093941.1 63
 position as Directors and/or their senior positions within RBS, and in
particular given that at least Goodwin, Cameron and Whittaker were aware
that as at 30 May 2008 RBS considered it likely that it would receive only
£7bn of the proposed benefit in respect of the EPE model). Each Director
Defendant was therefore under an obligation to notify RBS of these
matters, but it is inferred that they did not, since no supplementary
prospectus was prepared. Each Director Defendant is therefore in breach
of section 87G(5), and accordingly liable to pay compensation under
s.90(4) of FSMA.]1

Section C – Liquidity

61A. By the Prospectus Date, bank liquidity was a major concern for banks and their
investors. Lack of liquidity had caused Northern Rock to need Bank of England
support in September 2007, and led to its nationalisation in February 2008. In
March 2008 Bear Stearns had collapsed following a loss of confidence and a
liquidity crisis. Both Northern Rock and Bear Stearns had been unable to gain
access to the wholesale short term funding market due to a collapse in market
confidence and both had insufficient liquidity to survive their crises. Global bank
liquidity problems had, by the Prospectus Date, caused central banks to inject
significant amounts of money into the market. The immediate causes of
RBS’sRBS's (alternatively RBS Group’s) failure in autumn 2008, a few months after
the Closing Date, included inadequate liquidity. It was essential that RBS Group
gave the investors a full and accurate picture of its liquidity in the Prospectus and by
a Supplementary Prospectus insofar as one was required.

61B. All references in this Section to “RBS” relate to RBS’s integrated liquidity group
which was all its businesses excluding ABN AMRO and, Citizens save where the
context requires and RBS Insurance unless otherwise indicated.

61C. On the basis of the disclosure received so far it is understood that the policy of RBS
(and not necessarily its practice) was at the time of the Prospectus:

61C.1 The formulation and implementation of RBS’s liquidity policy at Group level was the
responsibility of Group Treasury. The head of Group Treasury was John Cummins.
GBM was responsible for the execution of daily liquidity management under
oversight from Group Treasury.

61C.2 Group Treasury reported monthly on liquidity management to GALCO. Cameron

and Whittaker both sat on GALCO.

05250-80298/8093941.1 64
61C.3 GALCO reviewed Group Treasury’s liquidity management and reported monthly to
GEMC. Goodwin, Cameron, and Whittaker sat on GEMC and McKillop regularly
attended.

61C.4 The Board of RBS Group received monthly summary liquidity management reports.

61C.5 Changes to the Liquidity Policy were to be proposed by Group Treasury and
presented to GALCO for approval. An approval by GALCO was then reported to
GEMC.

61D.1 The Liquidity Policy which applied at the time of the Prospectus stated in section
2.1.2 that it would adhere to the following management principles:

“…b) the profile of cashflows from maturing liabilities and assets and
potential cashflows from contingent obligations is managed, for each major
currency and in aggregate, to contain the resultant maturity mismatch within
prudent risk limits;

c) A suitable diversified stock of highly liquid or marketable assets is

maintained, in line with both prudent management criteria and regulatory
requirements, which can be utilised quickly to offset any problems in access
to funding;

d) The periodic stress testing of the Group’s potential liquidity position under
RBS Group specific and extreme market conditions.”

61D.2 Section 3.9.3 of the Liquidity Policy stated:

“It is Group policy to manage its overall funding profile to:

a) contain reliance on short term wholesale funds to prudent levels, whilst

ensuring maintenance of appropriate access to key wholesale market
funding sources, and
b) on an overall portfolio basis, fund assets of each particular term with a
mixture of matched term funds and short term funds, reflecting prudently
both the cost of over-reliance on the former and the liquidity risk of over-
reliance on the latter.”

61D.3 Section 3.17.2 of the Liquidity Policy stated:

“The Group continues to develop its stress testing and sensitivity capabilities
to evaluate the likely liquidity of a range of stress scenarios. The scenarios
considered are under regular review to ensure that they remain relevant and,
where possible, reflect the actual experience of the market and bank specific
conditions…”

05250-80298/8093941.1 65
62. The “Risk Factors” identified in the Prospectus included the following Risks (at p.
13):

Liquidity risk is inherent in RBS’s operations

Liquidity risk is the risk that RBS will be unable to meet its obligations as they fall
due. This risk is inherent in banking operations and can be heightened by a number
of enterprise-specific factors such as an over-reliance on a particular source of
funding, changes in credit ratings or by market-wide phenomena such as market
dislocation and major disasters. RBS’s liquidity management focuses on
maintaining a diverse and appropriate funding strategy for its operations, in
controlling the mismatch of maturities and on carefully monitoring its undrawn
commitments and contingent liabilities. However, 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.
Furthermore, there is a risk that corporate and institutional counterparties with credit
exposures may look to consolidate their exposure to the enlarged Group. [emphasis
added]

63. In Part V, “Overview of Business Performance and Operating and Financial Review
of RBS”, it was stated that (at p. 73):

4 Capital resources and liquidity management

...
Liquidity management within RBS focusses 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.

Since 31 December 2007, RBS has met all of its liquidity policy metrics in a difficult
market environment with a reduction in term funding availability across the board. In
the six months prior to the date of this document, RBS has instituted a wide range of
asset and liability measures to enhance liquidity risk measures to meet the
challenges of the global credit crisis.

RBS remains well placed to access various wholesale funding sources from a wide
range of counterparties and markets.

05250-80298/8093941.1 66
 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. [emphasis added]

64. The 2007 Accounts had stated, in respect of wholesale funding (at pp. 80-83,
incorporated by reference into the Prospectus):

During 2007, the Group’s funding sources remained well diversified by counterparty,
instrument and maturity, both before and after the acquisition of ABN AMRO in
October 2007.

Including
ABN AMRO
2007
Sources of funding £m
...
Debt securities in issue up to one year
remaining maturity 155,742
Deposits by banks (excluding repos) 149,595
Short positions 73,501
Total 1,433,131

Short term wholesale funds (with up to one year residual maturity) are taken on an
uncollateralised basis from a wide range of counterparties and debt investors, with
the largest single depositor continuing to represent less than 1% of the Group’s total
funding. (p. 80)

... Excluding ABN AMRO, the level of funding from short term unsecured debt
issuance, bank deposits (excluding repos) and short positions has increased by
£62.0 billion (44%) to represent 23% of total funding at 31 December 2007.
Including ABN AMRO, such short-term wholesale borrowing has added £175.3
billion to that figure, to represent 26% of total funding in the enlarged balance sheet.
...

... Contingency funding plans are maintained to anticipate and respond to any
approaching or actual material deterioration in market conditions. The Group
remains confident that it can manage its liquidity requirements effectively under
such circumstances. (p. 81)

Including
ABN AMRO
2007
Net short-term wholesale market activity £m
…
By remaining maturity up to one month:
Deposits by banks (excluding repos) 112,181

05250-80298/8093941.1 67
 Less: loans and advances to banks (gross, excluding reverse repos) (25,609)
Debt securities in issue 66,289
Net wholesale liabilities due within one month 152,861

Net surplus of marketable assets over 84,563

wholesale liabilities due within one month

... Including ABN AMRO, the net surplus of marketable assets over net short-term
wholesale liabilities due within one month was £84.6 billion. (p. 82)

The Group also provides liquidity back-up facilities to its own conduits and has small
exposures to other selected conduits which take funding from the asset-backed
commercial paper (“ABCP”) market. The short-term contingent liquidity risk in
providing such backup facilities is mitigated by the spread of maturity dates of the
commercial paper taken by the conduits. Limits sanctioned for such facilities totalled
approximately £64 billion at 31 December 2007, of which £16 billion related to the
RBS conduits and £48 billion to ABN AMRO conduits. The RBS conduits are multi-
seller ABCP conduits rated at A1 or A1+/P1 levels. During the difficult market
conditions since August 2007 the conduits were generally able to continue to issue
rated CP albeit at generally shorter maturities and higher price levels than
previously. There was an increased shortage of market liquidity, particularly in
November and December, for longer dated issuance (i.e. over one month) as the
year end approached. ... The majority of the ABN AMRO conduits are also rated A1
or A1+/P1 and they experienced similar trading conditions to the RBS conduits
although they saw two small conduits draw liquidity. ABN AMRO Bank and ABN
AMRO Corp act as dealers to the programmes and have held generally non
material CP on inventory. The conduits are consolidated by the Group. (p. 83)

64A. The 2007 Accounts stated that there was a surplus of £85bn of “marketable assets”
over wholesale liabilities falling due within 1 month (p.190) when including ABN
AMRO. The surplus was stated to be £63bn excluding ABN AMRO (p.82).

65. In Part XII, “Additional Information”, of the Prospectus (p. 134) it was stated (“The
Working Capital Statement”) that:

22 Working capital

The Company is of the opinion that, after taking into account existing available bank
and other facilities and the net proceeds of the Rights Issue, the Group has
sufficient working capital for its present requirements, that is, for at least the next 12
months from the date of this document.

66. In addition, paragraph 54 above is repeated.

05250-80298/8093941.1 68
66A. The statements in the Prospectus identified above collectively amounted to a
statement and/or gave the impression that RBS’s liquidity risk management was
prudent and liquidity risk was managed within prudent limits.

66B. In Q1 2008 and/or at the time of the Prospectus prudent liquidity risk management
and/or management within prudent limits for a bank such as RBS required:

66B.1 Monthly sensitivity analysis of RBS having no access to the wholesale

funding markets and all wholesale funding outflowing on contractual
maturity (“the Lockout Scenario”). The duration of time which a bank would
survive in the Lockout Scenario is referred to as “the Survival Horizon”.
This analysis should have been reported to GALCO, GEMC and the Board
of RBS Group on a monthly basis.

66B.2 Maintenance of a Survival Horizon of 3 months. This means managing

liquidity risk so that for the 3 months looking forward RBS would have
sufficient contingency funding plans in place so that it could raise cash
against its assets and meet its maturing obligations as they fell due in a
Lockout Scenario.

66B.3 Maintenance of an all currency liquidity buffer of sufficient quality liquid

assets (meaning assets eligible for pledging with central banks within 5
working days) (“QLA”) and other assets that could be turned into cash
within 25 working days to be held centrally by Group Treasury
(independently of GBM) and maintained for use in a liquidity crisis (“the
Liquidity Buffer”).

66B.3.1 The size of the Liquidity Buffer should have covered a

sufficient period to ensure that the remaining contingency
funding plans could be carried out and the Survival Horizon of
3 months achieved.

66B.3.2 For RBS to achieve a 3 month Survival Horizon it required a

minimum Liquidity Buffer to cover the short term funding gap,
or a minimum of 25 working days. On 24 April 2008
approximately £97bn in QLA and other assets was required in
order to achieve a 25 working day Liquidity Buffer.

66B.4 Maintenance of a minimum 100% ratio of QLA to funding requirements

overnight and over the very short term (over the first 5 working days). This
metric should have been reported monthly to GALCO and GEMC.

05250-80298/8093941.1 69
 66B.5 Maintenance of the Short Term Market Reliance ("STMR") Ratios (as
defined below) out of the red zone, as also defined below, and monthly
reports to GALCO of these ratios.

66B.6 Maintenance of all currency mismatch ratio limits within operational limits.

66B.7 Monthly reporting to GALCO of the liquidity metrics set out in paragraph
66B and any breach thereof as it occurs.

66B.8 A system of Funds Transfer Pricing (as defined below) which applied
prudent liquidity term premia to manage the balance sheet of RBS.

66B.9 The funding plan of RBS to be subject to forward looking (over the course
of 12 months) stress tests for the Lockout Scenario and against a 3 month
Survival Horizon, to be updated on a monthly basis.

66B.10 The liquidity risk appetite, meaning the length of the Survival Horizon and
the size of the Liquidity Buffer, to be defined by Group Treasury, approved
by GALCO and the Group Board of RBS.

67. The statements in the Prospectus did not disclose, or alternatively did not
adequately disclose, the following features of RBS’s liquidity position:

67.1. RBS’s very short term funding gap (meaning over the next 5 working days)
was imprudently large compared to its QLA, and volatile, as set out below,
and as at the Prospectus Date, had significantly increased since 31
December 2007. In particular:

67.1.1. RBS’s very short term funding gap on 29 April 2008, was
around £88bn, having increased from around £79bn at the
2007 year end (a £9bn increase).

67.1.2. RBS’s overnight funding requirement was approximately

£68bn on 29 April 2008 (an increase of approximately £13bn
from around £55bn on 27 December 2007), and was 78% of
its very short term funding gap (having been around 69% of its
very short term wholesale funding gap in December 2007).

67.1.3. On 14 February 2008 (17.06) Graham Niblock, Head of Short

Term Markets in GBM sent an email to Cummins which stated
“Short dated funding raised by GM MM area is still around
£140bln, compared to £90bln in the first half of 2007. This is

05250-80298/8093941.1 70
 still uncomfortably high and leaves us with very little inward
surplus capacity from our regular depositors”.

67.1.3A The minutes of the GALCO meeting held on 12 May 2008

recorded that GBM had "agreed to: reduce unsecured
wholesale funding (across RBS and ABN AMRO) by £40bn by
the end of June 2008 a further £90bn by the end of December
2008.”

67.1.4. In the minutes for GALCO for 9 June 2008 “GALCo noted the
paper which showed the Group’s increased reliance as a
result of the ABN AMRO acquisition with the result that it now
has a greater reliance on the short-term markets than many of
its peers”.

67.1.5. At the Prospectus Date RBS’s reliance upon very short term
funding was imprudent because it did not maintain a prudent
level of QLA sufficient to cover 5 working days of contractual
outflows.

67.1.5.1. On 24 April 2008 RBS’s QLA represented only

44% of the overnight funding requirement and
only 29% of the very short term wholesale funding
requirement. Prudent liquidity limits required both
ratios to be 100% (as set out above).

67.1.5.2. On 24 April 2008 RBS only had approximately

£27.3bn of QLA which was insufficient to enable
RBS to survive 1 day in a Lockout Scenario. This
level of liquidity risk was highly imprudent and
should have been disclosed in the Prospectus.

67.2. RBS’s short term funding gap (meaning over the next 25 working days)
was volatile and had increased significantly between 27 December 2007
and 29 April 2008 from £113bn to £131bn (£18bn increase).

67.2.1. RBS’s reliance on short term wholesale funding had increased

in the years up to the Rights Issue to approximately £281bn at
the Prospectus Date and was volatile. Volatility increased
liquidity stress because it required RBS to manage substantial
swings in the size of the short term wholesale funding. The
reliance on volatile short term funding made RBS very
05250-80298/8093941.1 71
 sensitive to (i) the risk of wholesale funding outflowing on
maturity if there was a loss of confidence in RBS Group and
(ii) the risk of it being unable to refinance or rollover its funding
when required on contractual maturity due to dislocation of the
financial markets and/or concern about the creditworthiness of
RBS Group.

67.2.2. By the end of 2007, RBS was dependent on an imprudently

high level of short-term wholesale funding. Phil Leverick of
Group Treasury (then Head of Balance Sheet Management)
stated in an email dated 22 November 2007 at 18.21 to
Whittaker “we also prudently need to reduce our reliance on
short-term market borrowing”.

67.2.3. By April 2008 (as reported to GALCO in September 2008)

RBS’s gross reliance upon short term wholesale funding
(including repos) had reached approximately 63% of its
funding requirement whereas GALCO had, in December 2007,
forecasted this figure to be around 58%. This was in breach of
the limit in section 3.11.3.b) of the Liquidity Policy as set out
below.

67.2A. RBS was therefore in a highly vulnerable liquidity position. This had been
raised with RBS by the FSA in autumn 2007, the FSA challenging RBS’s
senior management to demonstrate that RBS had considered and
discussed the risks of its funding strategy, and again in November 2007,
and RBS’s liquidity position worsened between then and the Rights Issue,
with the FSA indicating that RBS was an outlier when compared to its
peers at the time.

67.2B. By April 2008 RBS Group was close to the market’s capacity to lend to
RBS (including ABN AMRO) across regions and markets that RBS Group
operated in. “Market capacity” means the risk appetite for wholesale
counterparties to lend to RBS and ABN AMRO combined (the integration
of ABN had caused a reduction in market capacity to RBS combined with
ABN AMRO as opposed to when each was a separate entity). The
maximum exposure that a wholesale counterparty was willing to incur was
ordinarily communicated to banks and it is inferred that this was true for
RBS. Pending clarification from RBS no further particulars are possible as
to the market capacity to lend to RBS (including ABN AMRO). The merger
was anticipated by the Working Capital Report to lead to a reduction of
£40bn in credit lines thereby reducing RBS’s (alternatively RBS Group's)

05250-80298/8093941.1 72
 funding capacity and increasing its risk of reliance upon short term
wholesale funding.

67.2C. RBSRBS (alternatively RBS Group) had planned on or before 10 March

2008 to reduce its unsecured funding requirements by selling £40bn of
assets by April 2008 (as shown by the GALCO paper noted at the meeting
of GALCO on 10 March 2008) but had failed to do so by April 2008 and by
the Closing Date. In order to sell the majority of RBS’s (alternatively RBS
Group's) assets in the required timeframe, RBS (alternatively RBS Group)
would have had to recognise significant losses, which it was not prepared
to do.

67.2D. The funding position of RBS was exacerbated by its failure to manage its
balance sheet so as to reduce its funding requirements. The total assets of
GBM grew from £1.214 trillion in December 2007 to £1.452 trillion by
March 2008 (£878bn and £923bn for assets excluding derivatives) as
shown by the 12 May 2008 GALCO pack. This growth was
notwithstanding the de-risking strategy, the purpose of which was to shrink
rather than grow the balance sheet.

67.3. The merger of ABN AMRO with RBS had (i) caused market counterparties
to reduce lending limits to the combined entity; and (ii) by virtue of the
acquisition of the large trading balance sheet of the parts of ABN AMRO
acquired by RBS, had increased RBS’s liquidity coverage needs. ABN
AMRO was heavily funded by short term wholesale funding (for ABN
AMRO referred to as “volatile funding”) which was approximately €294bn
by April 2008. Further:

67.3.1. The merger led to the transfer of assets from ABN AMRO to
RBS and necessitated a reduction in the balance sheet of
RBS and ABN AMRO because the increased short term
funding requirement would have created an extreme liquidity
risk.

67.3.2. The minutes of the GALCO meeting held on 14 April 2008

recorded that “An overall reduction of £200bn in GBM balance
sheet and funding requirements across RBS and ABN AMRO
is necessary to support migration of assets and to reduce
reliance upon short-term wholesale funding”.

67.3.3. RBS Treasury recorded on 24 April 2008 “There is a need to

reduce the un-collateralised funding requirement of GBM by

05250-80298/8093941.1 73
 approximately £200bn in order to allow the transfer of assets
from ABN AMRO to RBS”.

67.3.4. This planned funding reduction by the end of 2008 was

necessary because of the liquidity strain generated by the
migration of ABN AMRO to RBS’s balance sheet and was not
disclosed in the Prospectus (or, alternatively, by way of a
supplementary prospectus) and should have been.

67.3.5. There was no reasonable prospect at the time of the

Prospectus that RBS Group would achieve the required
reduction in RBS's and ABN AMRO's unsecured funding
requirements in 2008 without suffering losses, which it was not
willing to do.

67.3.6. Cummins informed Group Internal Audit on 21 May 2008 that

“JC noted that he has been in discussion with Jonny Cameron
and Brian Crowe around the need for GBM to reduce its
unsecured borrowing from the Market, due to the ABN
takeover…He noted that although BC and JANC had agreed
to reduce this amount by £45bn in H1, there had been no
progress…JC believes that senior executives within GBM are
‘in denial’ about the Group being unable to borrow more
unsecured funding from the markets because this has never
been a concern in the past. As a result, he believes that the
GBM balance sheet is likely to remain ‘non-responsive’ and
that GBM was fuelled by “the heroin of unsecured funding”.

67.3.7. In fact, neither the £200bn nor the £40bn reduction was
achieved by the time RBS failed in October 2008.

67.3A. The £85bn (including ABN AMRO) surplus of “marketable assets” over
wholesale liabilities falling due within 1 month disclosed in the 2007
Accounts included £328bn of debt securities and listed shares.

67.3A.1. Almost 30% of these assets consisted of ABSs and CDOs

with a carrying value of £100bn and net exposure of £86bn as
at the end of 2007 (per the 2008 Accounts, p.123).
Approximately £12bn of these ABSs was rated below AAA.

67.3A.2. By the Prospectus Date and/or the Closing Date, the market
for ABSs and CDOs had dried up, so that the market value of
these purportedly “marketable assets” was very small.
05250-80298/8093941.1 74
 67.3A.3. It is also likely that a significant part of the remainder of the
£328bn of debt securities and listed shares had also become
very unmarketable, as senior unsecured bank bonds and
notes had become very illiquid during the first half of 2008.

67.3A.4. Pending clarification from RBS as to the exact composition

and liquidity of the £328bn portfolio of debt securities and
listed shares, the Claimants cannot presently estimate with
accuracy the extent to which there was any surplus of
marketable assets over wholesale liabilities falling due within
1 month as at the Prospectus Date and/or the Closing Date.

67.3A.5 However, by March 2008 the statement in the 2007 Accounts

that RBS (excluding ABN AMRO) had £63bn of marketable
assets over wholesale liabilities falling due within 1 month was
not true or was misleading.

67.3A.6 In March 2008 Group Treasury calculated that there was a

£81bn funding shortfall compared to marketable assets, rather
than a surplus. That was a variance of £144bn compared to
the "Net surplus of marketable assets over wholesale liabilities
due within one month" figure reported in the 2007 Accounts.
£101bn of the variance was due to non-bank wholesale
deposits which were not taken into account in the 2007
Accounts. It was misleading not to include non-bank
wholesale deposits in the analysis of RBS’s short term
wholesale liquidity position.

67.4. RBS Group was exposed to substantial undisclosed liquidity commitments

to conduits, including third party conduits. Although RBS Group had
disclosed (as of year end 2007) that it was exposed to approximately
£64bn of liquidity commitments (at p. 83 of the 2007 Accounts,
incorporated by reference into the Prospectus), in fact as of 31 December
2007 its exposure was at least £69.974bn including third party conduits
and credit enhancement provided to conduit programs. The 2008
Accounts further stated that as at the 2007 year end the amount of drawn
liquidity facilities was £3.8bn.

67.5. RBS’sRBS Group’s exposures to conduits were already imposing

significant liquidity burdens on RBS Group:

05250-80298/8093941.1 75
 67.5.1. By 15 April 2008, North Sea, a conduit sponsored by ABN
AMRO for which ABN AMRO (and thus RBS Group) was
obliged to provide liquidity support, had ceased to be able to
fund itself on the market, and had drawn around £5.3bn of
liquidity from RBS Group. Further, RBS Group had commenced
the process of closing down North Sea.

67.5.2. By April 2008 at least around £10bn of RBS’s and ABN

AMRO's liquidity commitments to conduits were drawn and
outstanding.

67.5.2A. The conduits represented a significant indirect source of

exposure to troubled assets of the sort that were included in
RBS’sRBS Group’s reporting where the assets were directly
held.

67.5A. The assets to which RBS Group was exposed by its involvement in
conduits included CDOs. By the 2007 year end (and by the Prospectus
and/or Closing Dates) the exposure to CDOs by this means was
substantial, although the 2008 Accounts (p. 142) made reference only to
£2.1bn of CDO exposure via conduits. However, RBS'sRBS Group's true
exposure to CDOs via conduits, including exposure by third party conduits,
was significantly higher.

67.6. Further, RBS Group had a substantial contingent liquidity exposure arising
out of the sale of leveraged super senior CDO tranches by ABN AMRO to
certain Canadian conduits (such as Skeena). Under restructuring
agreements reached in 2007 in relation to the liabilities of those Canadian
conduits, including and following the Montreal Accord, ABN AMRO
together with other banks had agreed to provide substantial committed
liquidity facilities to the Canadian conduits. However, this liquidity
exposure of ABN AMRO was not disclosed. The Claimants note the points
at paragraph 182 of the Defence. Pending clarification, the Claimants
allege that insofar as RBS Group had a substantial contingent liquidity
exposure arising out of the sale of leveraged super senior CDO tranches
by ABN AMRO to certain Canadian conduits (such as Skeena) any such
liquidity exposure of ABN AMRO was not disclosed.

67.6A. In an analysts’ conference on 6 December 2007, Goodwin stated that all

the funding for RBS and ABN AMRO conduit facilities was externally
provided and that less than 0.5% of ABN AMRO’s assets in its conduits
related to US sub-prime assets. Both these statements were untrue. ABN

05250-80298/8093941.1 76
 AMRO was already funding about €4.9bn of ABCP. Over 2% of ABN
AMRO’s conduit assets consisted of North Sea’s subprime ABSs.

67.7. In April 2007, ABN AMRO contracted to sell LaSalle (by sale of ABN
AMRO’s holding company ABN AMRO North America Holding Company)
to Bank of America, preventing RBS from acquiring LaSalle, and thereby
undermining a primary reason for the acquisition of ABN AMRO. The sale
completed in October 2007. Payment of the €10.9bn cash due to be
repatriated to RBS following the sale of ABN AMRO’s LaSalle business
unit, which had at the time of the ABN AMRO acquisition and of the 2007
Accounts been expected to be paid within three months of October 2007,
allowing repayment of the majority or a large portion of the €12.3bn of
short-term wholesale debt used to fund the acquisition, had been delayed
(eventually, it was never received by RBS itself and was instead absorbed
into the losses of ABN AMRO in the Netherlands). This required RBS to
extend the period of its funding of this portion of the ABN AMRO
transaction (which had been principally financed by short term debt). This
meant that at the Prospectus Date RBS was funding the ABN AMRO
transaction by £8.6bn more short-term wholesale funding than it had
expected.

67.8. Although from November 2007 RBS had sought to decrease its reliance
on short term and very short term funding, and to increase the maturity of
its wholesale borrowing generally, it had not been able to do so as set out
above. Further as term debt matured it was generally rolling over into short
term funding thereby increasing RBS’s reliance upon short term funding.

67.9. As part of its efforts to satisfy its wholesale funding requirement, RBS
Group had been compelled to obtain liquidity assistance from central
banks:

67.9.1. RBS Group had obtained liquidity assistance from the Bank of
England under the Special Liquidity Scheme (“SLS”), which
had opened on 21 April 2008 and its borrowing under
European Central Bank facilities was approximately €11bn in
Q1 2008. RBS Group intended to draw a total of £15bn from
both sources of funding. Pending clarification the exact
amount of this funding is not currently known.

67.9.2. Since January 2008, RBS Group had accessed funding from
liquidity facilities extended by the Federal Reserve Bank of
New York, in particular under its TSLF and TAF facilities. On
22 April 2008, on the announcement of the Rights Issue,
05250-80298/8093941.1 77
 RBS’sRBS Group’s outstanding funding from Federal Reserve
facilities was US$11.9bn. Over the period 22 April to 6 June
2008, RBS Group's funding under these facilities averaged
US$8.4bn. In addition, RBS Group intended to draw further on
this source of funding. During the Rights Issue Period,
RBS’sRBS Group’s borrowing under these facilities averaged
around US$8.4bn.

67.9.3. The use of these aforesaid facilities by RBS Group was not
disclosed to potential investors.

67.9A.The US Federal Reserve, European Central Bank and Bank of England

borrowing ought to have been disclosed in the Prospectus or in a
supplementary prospectus, especially when, given deteriorating market
conditions, RBS’sRBS Group’s reliance on these facilities was likely to
increase.

67.10. Overall RBS’s wholesale funding position was vulnerable, and not managed
within prudent limits as set out above and the pressure on RBS’s wholesale
funding position was significant and growing.

67.11. RBS was in breach of its liquidity metrics. In particular, so far as the
Claimants are aware:

67.11.1. [not used]

67.11.2. [not used].

67.11.3. [not used].

67.11.4. [not used].

67.11.5. RBS breached its operational limits which had been set by
GALCO in respect of (i) all currency 1 to 8 day mismatch ratio,
(ii) USD 1 to 8 day mismatch ratio, (iii) Euro 1 to 8 day
mismatch ratio, (iv) all currency 1 day to 1 month mismatch
ratio as set out in Schedule 5. These breaches occurred over a
sustained period of time, showed RBS had no effective funding
contingency for an operational limit breach and that it was
unable to manage prudently liquidity risk.

67.11.6. The Liquidity Policy set the following guidelines for a

management action trigger in section 3.11.3:
05250-80298/8093941.1 78
 Metric Green Amber Red
Funding requirement <115% 115-125% >125%
Gross short term <55% 55-60% >60%
market reliance
including repos
Gross short term <50% 50-55% >55%
market reliance
excluding repos

The calculation of gross short term market reliance including

repos and excluding repos (“the STMR Ratios”) was to be
performed by Group Treasury on a weekly basis and reported
to GALCO on a monthly basis pursuant to section 3.1.6 and
Appendix B, section B.4.1.c) & d) of the Liquidity Policy.
However, STMR Ratios were not calculated by Group Treasury
and/or were not reported to GALCO between January and
August 2008. The persistent failure to report STMR Ratios was
a very serious failure in prudent liquidity management as it
meant RBS did not know between January and August 2008
what its STMR Ratios were, and was not, therefore, in a
position to make prudent representations in the Prospectus
without such data.

67.11.7. In fact, the STMR Ratios were in the red zone for at least
January to May 2008 as shown by the GALCO report of
September 2008. That demonstrated consistently imprudent
management of liquidity limits and liquidity risk.

67.11.8. The persistent failure of Group Treasury to calculate the STMR

Ratios and report them monthly to GALCO was a serious
breach of section 3.11.3 and Appendix B section B.4.1c) & d) of
the Liquidity Policy and demonstrates that RBS managed
liquidity risk in ignorance of (i) STMR Ratios between January
2008 and May 2008 and (ii) the fact the STMR Ratios were in
truth in the red zone. That was highly imprudent.

67.11.9. Had Group Treasury reported red zone STMR Ratios this
would have led to management action in the form of
investigation by the Liquidity Managers Forum, reporting to
GALCO and reporting to GEMC pursuant to Appendix B of the
Liquidity Policy.

05250-80298/8093941.1 79
 67.12. Analysis performed by Group Treasury and/or GALCO showed that RBS’s
liquidity risk was extreme. In particular:

67.12.1. On or before 14 January 2008 GALCO received a “Funding

and Liquidity Draft Paper for Discussion” (“the Funding and
Liquidity Paper”) created by Group Treasury which stated (p6)
that for 13 December 2007 “on a contractual measure for
wholesale cashflows the current survival horizon is only circa 1
week if markets close to new/rollover uncollateralised
borrowing”.

67.12.2. The Funding and Liquidity Paper also stated (p. 6) “FSA
CP07/7 proposals require stress testing of extreme market
conditions and substantial increases in high quality liquidity
holdings and/or wholesale liabilities maturities to lengthen
survival horizon & increase cover for undrawn commitments”. It
reported approximately £37bn of QLA and stated (p 8) under
“Conclusions”:
“The Group currently holds insufficient asset liquidity to cover its
growing liability side & contingent liquidity risks

 Prevailing market conditions have increased that

imbalance. Unlikely to return to pre-August 07 “normality”.
 Regulatory perspective requires additional liquidity to
cover extreme market stress.”

67.12.3. On or before 14 January 2008 Group Treasury provided

GALCO with comments on the FSA’s discussion paper DP07/7
and commented on page 3:

“Having clearly articulated risk appetite for the stresses

identified against which the contingency plans can be judged.
Implications for RBS: In the accompanying paper [the Funding
and Liquidity Paper], Group Treasury are recommending an
increase in the Group’s liquidity portfolio and in its term funding,
as the perceived level of liquidity risk, especially post ABN, is in
excess of that which we believe to be prudent.”

67.12.4. On 14 January 2008 GALCO decided in light of the Funding

and Liquidity Paper to approve the following measures (“the
Liquidity Measures”):

05250-80298/8093941.1 80
 67.12.4.1. Grow retail/commercial deposits.

67.12.4.2. Broaden market counterparty/debt investor base.

67.12.4.3. Increase uncollateralised term debt.

67.12.4.4. Undertake actions to improve liquidity of loan

assets.

67.12.4.5. For Group Treasury to develop a proposal to build

a centrally held liquid asset portfolio for
consideration by GALCO.

67.12.5. On 31 January 2008 David Johnston of Group Treasury sent

an email to Cummins and other members of Group Treasury
which reported the views of Tom Nicol, the departing deputy
head of foreign exchange at RBS, on liquidity:

“…these may inform the paper going to February GALCO:-

 RBS would appear to have completely lost sight of the

“survivability” mandate on managing liquidity.
 The pursuit of profits appears to have numbed management
to the risk being run.
 Management need a large dose of realism- outside parties
would not find a one-week survival horizon at all credible.
 3 month survivability would be the ideal; 4-6 weeks should
be a good operating model;
 Paying £1bn costs for a £100bn liquidity buffer would not
seem unreasonable for a bank withour earning power and
the desire to survive a few years more;
 Think of it as insurance – versus the black swan – what
price for control of one destiny?”

67.12.6. On 7 March 2008 Group Treasury produced a paper entitled

“Liquidity and Funding – liquidity risk appetite” (“the Risk
Appetite Paper”). It stated at slide 3:

“●The Group’s liquidity risk appetite can be defined by way of a

liquidity duration baseline.

05250-80298/8093941.1 81
  We are currently just over 1 week – the FSA have noted
that this makes us an outlier having a lower duration than
our peers.
 In addition, stress testing a bank specific event, in the
current market conditions leaves all banks susceptible to
even the slightest market rumour (whether true or not).
 We conclude RBS needs to extend its liquidity horizon…
 A one month duration would represent the appropriate
balance…”

67.12.7. On 10 March 2008 Strategic Portfolio Management reported to

GALCO on Group Treasury’s recommendation that RBS adopt
a “liquidity risk appetite” of 1 month without access to the
wholesale markets commenting that the FSA has indicated that
RBS’s liquidity position was an outlier in its peer group. That
recommendation would have required RBS to fill a gap of
£80bn between contractual net outflows and marketable assets
due within 1 month. It could not be (and was not) adopted by
GALCO because RBS was unable to reduce in the short term
of 1-3 months its funding requirements and unable to create the
necessary Liquidity Buffer.

67.12.8. At the meeting of GALCO on 10 March 2008 no decision was

taken as to the recommendations in the Risk Appetite Paper.

67.12.9. On 10 April 2008 Group Treasury carried out a sensitivity test

and (i) established that RBS’s Survival Horizon was only 1 day
and (ii) reported that RBS had £43.2bn of QLA.

67.12.10. On 10 April 2008 Group Treasury prepared a paper entitled

“Liquidity policy, metrics and reporting” (“the Liquidity Policy
Paper”) for GALCO approval which stated (p 1):

“Analysis of RBS’s liquidity position indicates that a survival

period of only 1-day if there were a RBS name-crisis (as
recently occurred for HBOS) and RBS was locked-out of the
wholesale markets…
We therefore need to improve the Group’s liquidity position as a
matter of urgency with specific reference to the survival horizon
based upon the above extreme stress test event…
…The recommendation is to have a minimum of 30 days.”

67.12.11. At the meeting of GALCO on 14 April 2008:

05250-80298/8093941.1 82
 67.12.11.1. The Liquidity Policy Paper was “withdrawn” and
no reason was provided by GALCO.

67.12.11.2. GALCO engaged in no further analysis of the Risk

Appetite Paper.

67.12.12. On or around 29 April 2008 Group Treasury produced a paper

entitled “Structural Liquidity Policy Review and Balance Sheet
Management” (“the Liquidity Policy Review”) which
recommended and sought the approval from GALCO of a 25
weekday Survival Horizon.

67.12.13. On or around 7 May 2008 Group Treasury produced a report

which stated in section 6.2 “No access to wholesale markets:
Our current measure indicates that we have cover for less than
1 day.” and that RBS had £29.3bn of QLA as at 3 April 2008.
This information was reported to GALCO on or around 12 May
2008. Pending further clarification is it unclear whether this
information was reported to GEMC.

67.12.14. On or around 7 May 2008 Group Treasury also established that

as at 1 May 2008 approximately £10bn of assets could not be
considered QLA thereby reducing the value of QLA to £27.8bn;
taking RBS’s Survival Horizon to less than 1 day. This revised
assessment ought to have been applied by RBS throughout Q1
2008 when assessing its QLA but had not been. It is inferred
that all earlier assessments of QLA in Q1 2008 were overstated
by approximately £10bn. Group Treasury also established that
as at 1 May 2008 RBS required an additional £31bn of QLA to
achieve a Survival Horizon of 1 week.

67.12.15. On 12 May 2008 GALCO held a meeting and considered the

Liquidity Policy Review:

67.12.15.1. The comments on the pack for this meeting

included at section 6.2 “No access to wholesale
markets: Our current measure indicates that we
have cover for less than 1 day. £30bn marketable
asset buffer required to potentially extend survival
horizon to 1 week…”.
05250-80298/8093941.1 83
 67.12.15.2. The minutes recorded that: “GALCo discussed at
length the need to build a portfolio of liquid assets
sufficient to cover the Group’s net wholesale
outflow of funds for a period of up to 25
weekdays…

GALCo supported the need to survive for at least

five weekdays as an initial target and was
supportive of a paper being submitted to GEMC to
establish an initial liquidity portfolio of £30bn”.

Pending clarification it is understood that a

decision by GALCO to “support” a proposal was
not a decision by GALCO to approve the proposal.

67.12.16. In the premises RBS knew at the Prospectus Date and/or

before the Closing Date but did not disclose that:

67.12.16.1. Its Survival Horizon had worsened from 1 week in

December 2007 to 1 day or less than a day; a
significant worsening of what had been previously
reported and an extreme risk.

67.12.16.2. Group Treasury had recommended a 25 weekday

Liquidity Buffer and, therefore, at least a 25 day
Survival Horizon. At all times in 2008 before the
Prospectus Date RBS was unable to achieve
either the recommended Survival Horizon or
Liquidity Buffer.

67.12.16.3. GALCO had “supported” a 1 week Survival

Horizon. RBS knew from at least 10 April 2008
that it was in breach of this Survival Horizon and
knew that it was managing liquidity without any
policy requirement to survive any specific Survival
Horizon.

67.12.16.4. GALCO had “supported” the creation of a Liquidity

Buffer of £30bn and RBS knew that it was
managing liquidity without any policy requirement
for an all currency Liquidity Buffer of any specified
value. Moreover, RBS did not plan to introduce a

05250-80298/8093941.1 84
 policy requirement for an all currency Liquidity
Buffer of any specified value.

67.12.16.5. The Liquidity Policy metrics and limits and the

Group Liquidity Contingency Funding Plan were
out of date and did not set prudent limits and
controls for RBS as set out below.

67.12.16.6. RBS’s liquidity risk management was in crisis in

Q1 2008 and RBS was in the process of urgently
reviewing and improving its liquidity policy and
operations to address the extreme risk it was
facing.

67.12.17. From the disclosure produced so far it is inferred that RBS had
no clearly defined liquidity risk appetite. None of GALCO,
GEMC or the Board of RBS Group decided or approved a
specific liquidity risk appetite for RBS which applied at the time
of the Prospectus. This was a very serious failure in liquidity
risk management.

67.13. The Liquidity Policy was out of date and did not prudently take account of the
change in market conditions and RBS’s risk exposure since December 2006.
In particular:

67.13.1. The Liquidity Policy had been drawn up when RBS’s business
had a “core predominance of sterling assets and liabilities in
the balance sheet of the RBS Integrated Liquidity Group”
(section 3.4.5 of the Liquidity Policy). This was not true by the
end of 2007 and at the time of the Prospectus. Moreover, the
sterling stock regime only applied to sterling assets which were
a minority of RBS’s balance sheet (36% according to the 2007
Accounts (p.82)) and entirely failed to apply to the majority of
RBS’s wholesale assets.

67.13.2. The Liquidity Policy did not require RBS to achieve a Survival
Horizon of any specified length nor an all currency Liquidity
Buffer of any specified value. A prudent policy would have
required a 3 month Survival Horizon and an all currency
Liquidity Buffer sufficient for that objective.

67.13.3. RBS’s Group Liquidity Contingency Funding Plan had not been
updated since 11 December 2006 or had been updated
05250-80298/8093941.1 85
 inadequately and failed to require (i) a Survival Horizon to be
maintained by RBS, (ii) an all currency Liquidity Buffer and (iii)
a monthly sensitivity analysis of a Lockout Scenario. By no later
than January 2008 prudent management of RBS’s liquidity
would have ensured an up to date contingency plan which (i)
specified a 3 month Survival Horizon, (ii) required an all
currency Liquidity Buffer sufficient for a 3 month Survival
Horizon and (iii) carried out monthly forward looking sensitivity
analysis of the Lockout Scenario.

67.13.4. In contrast at the time of the Prospectus, Citizens managed its

liquidity using a 1 year Survival Horizon and ABN AMRO
adopted a 25 weekday Liquidity Buffer.

67.14. RBS was severely constrained in its ability to create a centralised pool
(controlled by Group Treasury) of QLA because:

67.14.1. The current pool of liquid assets was managed by GBM and
they were not managed specifically for liquidity purposes. Had
GBM acted prudently and generated prudent levels of liquid
assets, that would have necessitated a reduction in the balance
sheet (and likely the recognition of a significant loss) for GBM
but GBM had no incentive to do so. Further particulars cannot
be given pending clarification from RBS as to the composition
and valuation of RBS's portfolio of marketable assets.

67.14.2. There was limited market appetite for term funding at the time.

67.14.3. Using short term funding would have defeated the purpose of
creating a Liquidity Buffer.

67.15. RBS did not have an up to date system of funds transfer pricing (“FTP”)
and/or it failed to apply realistic premia.

67.15.1. GBM set its own premia in February 2008 but was in a position
of conflict in doing so and failed to set premia that sufficiently
restricted its use of short term wholesale funding to manage the
balance sheet within sustainable limits.

67.15.2. GALCO approved revised premia on 18 March 2008. Even if

they had acted to restrict further growth in the balance sheet
going forward they came too late to control the growth which
had already occurred in the months before.
05250-80298/8093941.1 86
 67.15.3. As a consequence RBS did not have prudent controls on the
growth of its balance sheet and the consequent liquidity
pressures. The absence of an up to date FTP was a breach of
section 3.15. of the Liquidity Policy which provided:

“1. It is Group policy that its business units should seek to

recognise in their asset and liability pricing the associated costs
of maintaining appropriate operational and structural liquidity in
line with the foregoing.
2. Operational liquidity costs incurred centrally within the
treasury activities of RBS plc and NWB plc are hence
recharged to business units on a pro rata basis commensurate
with each business unit’s impact on the Group’s net short-term
outflows and liquidity stock requirement.
3. A framework for the measurement of structural term liquidity
costs, and the reflection of those costs in the pricing of term
assets and liabilities, is also in place for the Group.”

67.16. By the time of the Prospectus RBS had not achieved any of the Liquidity
Measures to a material degree and its liquidity risk had not been improved
by these Liquidity Measures because many were long term processes.

67.17. The Prospectus gave the impression that RBS had a prudent and up to
date liquidity management policy, including contingency funding, when this
was untrue and/or misleading.

67A. The Working Capital Statement set out in paragraph 65 above was untrue and/or
misleading:

67A.1 RBS Group was obliged to provide a working capital statement by

reference to its ability to meet liabilities when they fell due over the next 12
months. That ability was measured by RBS’sRBS Group’s liquidity risk
over the next 12 months. Instead, RBS Group adopted regulatory capital
as “the key measure” of working capital (page 11 of the Working Capital
Report) and failed sufficiently to consider liquidity.

67A.2 RBS Group could not truthfully make the Working Capital Statement
without the qualification that RBS Group separately had not engaged in a
prudent analysis of RBS’s liquidity risk for the 12 months following the
Prospectus Date.

05250-80298/8093941.1 87
 67A.3 The Working Capital Statement failed to disclose that during the period of
time between the Prospectus Date and the Closing Date RBS was in an
extreme risk position and would not survive if it suffered a Lockout
Scenario of more than 1 day.

67A.4 Had RBS engaged in a prudent analysis and/or an analysis applying the
management principles set out in section 2.1.2 of the Liquidity Policy it
would have not been able to provide truthfully the Working Capital
Statement because at the time of the Prospectus:

67A.4.1 RBS’s Survival Horizon was 1 day or less than 1 day.

67A.4.2 RBS had no set all currency Liquidity Buffer (a Liquidity Buffer
of £30bn was required for a five weekday Survival Horizon).

67A.4.3 The cash proceeds from the anticipated Rights Issue were
insufficient to achieve a 5 weekday Survival Horizon let alone
for a 3 month Survival Horizon.

67A.4.4 The funding plan relied upon at page 33 of the Working

Capital Report (“the Funding Plan”) was unreliable and
inaccurate because:

67A.4.4.1 It was based upon data and forecasts from

December 2007. It was not based upon the actual
data and forecasts from March 2008. In breach of
section 3.10 of the Liquidity Policy (which required
quarterly reforecasting) an updated Funding Plan
should have been provided in April 2008 and used
for the Working Capital Statement.

67A.4.4.2 It was significantly deficient because it did not take

account of a pipeline of £61bn in GBM assets
arising in Q1 2008 which had not been forecast in
the Funding Plan but was known to RBS in
December 2007.

67A.4.4.3 It assumed (i) that Ulster Bank would successfully

securitise £12bn of assets in 2009 but such an
assumption was untenable by April 2008, (ii) that
RBS could refinance a relatively short duration
medium term note book of £23bn over 1-2 years but
that was untenable in April 2008.

67A.4.4.4 It is unclear whether the Funding Plan took account

of the required £200bn reduction in RBS’sRBS

05250-80298/8093941.1 88
 Group’s unsecured funding requirements. If it
assumed the £200bn reduction would take place in
2008 that was unrealistic as set out above.

67A.5 It was not clear and unambiguous as to whether RBS Group had sufficient
working capital for the next 12 months irrespective of the Rights Issue.
Instead the statement was ambiguous as to whether RBS Group had
sufficient working capital to survive the next 12 months if the Rights Issue
did not go ahead.

67A.6 The Board failed to discuss, review and approve what was the reasonable
worst case scenario of liquidity risk for the purposes of making the
Working Capital Statement. In particular, the Board failed to satisfy itself
that the Working Capital Report was based upon the reasonable worst
case scenario of liquidity risk.

67B. [not used].

67B.1 [not used].

67B.2 [not used].

67B(1) A prudent analysis and/or an analysis applying the management principles set out
in section 2.1.2.d), and 3.17.2 of the Liquidity Policy required monthly analysis of
the Lockout Scenario and a 3 month Survival Horizon forecasted over the 12 month
period and which were also reasonable worst case scenarios.

67C. The Working Capital Report was defective in that it:

67C.1 Had adopted the concept of regulatory capital (i.e. having sufficient capital
to meet the ICG requirements imposed by the FSA) as a proxy for working
capital whereby inadequate analysis of liquidity risk was performed. This
was inappropriate and imprudent:

67C.1.1 The fact that a bank has sufficient regulatory capital does not
evidence that it has sufficient working capital.

67C.1.2 “Working capital” is defined by CESR as “an issuer’s ability to

access cash and other available liquid resources in order to
meet its liabilities as they fall due”.

67C.1.3 Regulatory capital requirements are not set by reference to the

dates on which a bank’s liabilities fall due, and assets included

05250-80298/8093941.1 89
 within regulatory capital include assets which are not cash and
which may not be liquid.

67C.2 Accordingly, failed to take due account of the liquidity difficulties and risks
faced by RBS that are set out at paragraphs 67 to 70.

67C.3 Was based on “stress testing” which was inadequate and imprudent in
that:

67C.3.1 It failed to review “reasonable worst case scenarios” for RBS

(alternatively RBS Group) as required by CESR guidance.

67C.3.2 [not used]

67C.3.3 It tested retrospectively how RBS’s cash flow would be

affected over 1 week or 1 month if the wholesale markets
dried up so that there was a 60% reduction in availability of
funding. It should have:

67C.3.3.1 Tested prospectively (meaning it should have

forecast results over the 12 month period to which
the Working Capital Statement applied) and
assuming disruption in the wholesale markets over
a longer period of up to 3 months, as there was a
reasonable possibility at the time that certain
markets could be disrupted for a longer period than
1 month. Such stress testing ought to have been
performed in compliance with sections 2.2d) and
3.17.2 of the Liquidity Policy.

67C.3.3.2 Tested on a more severe scenario, specifically on

an inability to access wholesale funding i.e. the
Lockout Scenario.

67C.3.4 This was particularly inadequate having regard to market

conditions as at April 2008, the failure of Northern Rock, the
failure of Bear Stearns and RBS’s own conclusion that certain
assets (such as the AFS Assets) retained value for regulatory
capital purposes under Basel I but were not liquid. Prudent
financial institutions and regulators would have tested on the
hypothesis of having to operate for at least 3 months in the
Lockout Scenario. Worst case scenarios included dependence
on internal resources and government liquidity facilities.

67C.3.5 The stress testing stopped at February 2008, for which month
it concluded that RBS would just have sufficient liquidity to

05250-80298/8093941.1 90
 survive on the limited hypothesis which formed the basis of the
stress tests. It did not go on:

67C.3.5.1 To perform the stress testing on actual figures for

March 2008 or April 2008.

67C.3.5.2 To perform stress testing on projected figures for

the whole of the period to which the working capital
statement applied.

67C.3.6 Had RBS forecasted stress testing on a forward looking basis it

would have found that RBS could not achieve a 3 month
Survival Horizon throughout the next 12 months.

67C.4 RBS failed to "stress test" or perform sensitivity analysis in other regards,
for example:

67C.4.1 The marketability of RBS’s over £300bn of “marketable debt

securities” (as described in the 2007 Accounts), in particular
as regards the size of the “haircut” required before such
assets could be eligible for Central Bank lending facilities, or
sold or pledged as collateral with commercial counterparties.

67C.4.2 [not used].

67C.5 Was explicitly based on what Deloitte described as “[p]rojections which

have been prepared and considered by the Directors after due and careful
enquiry”. These included:

67C.5.1 The various capital projections contained in the Prospectus,

which were flawed and were based on various subjective
assumptions, the robustness of which was not tested by
Deloitte as set out in Section B above.

67C.5.2 [not used].

67C.6 Took no account of the fact that the FSA had regarded RBS’s ICAAP
submission as of insufficient quality to set an ICG for RBS, and had set
only an interim ICG for a 6 month period which had expired by the date of
the Prospectus and which was due for revision soon after the Rights
Issue, meaning that:

67C.6.1 The ICG was subject to change on submission of an adequate

ICAAP.

67C.6.2 The existing ICG might have been different had the correct
information been provided to the FSA and had RBS been less

05250-80298/8093941.1 91
 aggressive in its approach to ICAAP by using a 99.9%
confidence interval.

67D. Accordingly the Working Capital Statement should not have been made. Further,
the matters set out at paragraphs 67 and 67C above, and 67F below, constituted
necessary information in relation to RBS's (alternatively RBS Group's) liquidity risks
which rendered the Working Capital Statement untrue or misleading. Further or
alternatively, these were also matters which were relevant to the basis on which
additional working capital would be provided, and therefore recommended by CESR
to be disclosed.

67E. Further or alternatively, in the light of market conditions by the closure of the Rights
Issue RBS should have performed prudent stress testing as described in paragraph
67C.3 above for the months of March, April and May, using actual figures. Such
testing would have led RBS’sRBS Group’s board to form the view that the Working
Capital Statement was not accurate and/or needed to be qualified as set out above.
This was a matter which it was obliged to disclose in a Supplementary Prospectus,
but failed to do so.

67F. Further, the Prospectus failed to disclose that RBS’s liquidity position was
particularly vulnerable in that:

67F.1 Although RBS’s reliance on wholesale market funding (i.e. term and short-
term secured funding and money market deposits) was less than half of its
overall funding requirement (approximately £500bn out of £1.3 trillion), it
was important because any new funding (either to replace existing but
maturing funding, or to cover further requirements) would need to be
raised predominantly in this way. It would not have been appropriate or
realistic for RBS to assume material increases in customer deposits over a
short time frame.

67F.2 For example the Working Capital Report envisaged a requirement for
£500bn of non-structured or wholesale market funding.

67F.3 RBS had significant refinancing needs:

67F.3.1 It needed to re-finance £156bn of term debt securities during

2008 in a worsening market and in circumstances in which it
had become increasingly challenging to raise funds other than
for short tenors. This presented a clear risk to the Funding
Plan.

67F.3.2 Its unsecured funding of 3 months' or lower maturity had

increased from £163bn at December 2007 to £176bn by 24
April 2008. This was likely to increase further, given the lack of
available term funding. The reduction in the maturity of
05250-80298/8093941.1 92
 unsecured funding, in particular wholesale deposits, posed
increasing liquidity risks because a larger amount of liabilities
would have to be continually rolled over in an already stressed
market environment. This situation placed RBS in an
extremely vulnerable position to any perceived deterioration in
its creditworthiness and that should have been disclosed in the
Prospectus.

67F.4 [not used].

67F.5 RBS was vulnerable to defections from wholesale depositors, which

constituted £146bn of its unsecured funding as at 17 April 2008 according
to the Working Capital Report. This was a volatile source of funding. Of its
20 largest depositors (which accounted for over £30bn), 11 had at some
point during the preceding year had no deposit with RBS at all.

67F.6 The Working Capital Report estimated in March 2008 that RBS's
(including ABN AMRO) capacity in the open market was to raise only an
additional £29bn of funds by the end of 2008. This demonstrated how
close RBS (including ABN AMRO) was to the market capacity for funding.

67F.7 RBS had an extreme risk position as regards its reliance upon short term
funding without any prudent all currency Liquidity Buffer so that were
RBS’s access to the wholesale funding markets to cease for more than 1
day RBS would be cashflow insolvent.

67F.8 The Working Capital Report did not recognise the 1 day or less than 1 day
Survival Horizon of RBS and made no plans to improve RBS’s Survival
Horizon.

67G. The matters set out at paragraphs 67B to 67F above constituted a failure by RBS
(alternatively RBS Group) to comply with CESR’s recommendations to make
adequate disclosure in relation to its capital resources and liquidity.

67I. RBS (alternatively RBS Group) further failed to comply with CESR's
recommendations in that it failed to state its capitalisation and indebtedness
(including but not limited to its capital ratios) at a date within 90 days of the
Prospectus Date.

67J. Between 31 December 2007 and the Prospectus Date there had been a significant
change in the financial position of RBS insofar as liquidity was concerned because:

67J.1 RBS’s Survival Horizon reported by Group Treasury moved from 1 week to
1 day or less than 1 day.

67J.2 QLA fell from £37bn to approximately £27.3bn. RBS’s very short term
wholesale funding gap on 29 April 2008, before the Rights Issue was
05250-80298/8093941.1 93
 announced, was around £88bn, having increased from around £79bn at
the 2007 year end (a £9bn increase).

67J.3 The STMR Ratios had moved into the red zone from January 2008 and
continued in that zone until at least May 2008.

67J.4 RBS (alternatively RBS Group) had decided to reduce its unsecured
funding requirements by at least £130bn during 2008 in order to
accommodate the funding pressures of the merger with ABN AMRO but
this was not realistically achievable in 2008 without recognising significant
losses for GBM which GBM was not prepared to do.

67J.5 The Funding Plan had been undermined by an estimated overshoot of

£61bn of pipeline assets by GBM in Q1 2008.

67J.6 Cummins sent an email on 13 April 2008 timed at 11.28 which

commented upon the draft Prospectus (page 73 of the Prospectus) and
said in respect of the section concerning liquidity “The penultimate
paragraph states ‘there has been no material change in this position in
2008. this is not correct and should be deleted”.

68. In the circumstances, the statements made in the Prospectus in this regard and in
respect of liquidity generally were misleading, and included untrue statements, in
breach of section 90(1)(b)(i) of FSMA. In particular:

68.1. It was misleading to state that RBS’s liquidity management policies were
focussed on containing “the level of reliance on short term wholesale
sources of funds” without disclosing that (i) the current levels were above
prudent levels, (ii) RBS could not survive for more than 1 day at best if it
ceased to have access to wholesale funding markets, (iii) RBS
(alternatively RBS Group) had failed to achieve a planned £40bn reduction
in funding, (iv) Group Treasury had required a £200bn reduction in funding
in 2008 but there was no real likelihood of that being achieved without
recognising significant losses and (v) RBS’s level of QLA had deteriorated
between December 2007 and the Prospectus Date.

68.2. It was misleading to state that RBS’s liquidity management and controls
were “within prudent limits”. In fact (i) they were outside prudent limits, (ii)
RBS’s liquidity was extremely dependent on short term wholesale funds,
(iii) RBS had persistently exceeded its operational limits for all currency
mismatch limits, (iv) RBS’sRBS Group’s STMR Ratios were in the red
zone for at least January to May 2008, (ivv) RBS (alternatively RBS
Group) needed to reduce its unsecured funding requirements by at least
£130bn in 2008 but was unlikely to do so thereby intensifying liquidity
pressure, (vvi) RBS’s Survival Horizon was 1 day or less than 1 day, (vivii)
05250-80298/8093941.1 94
 RBS had no policy to maintain a Survival Horizon nor to maintain an all
currency Liquidity Buffer and (viiviii) RBS had no plan to improve its
Survival Horizon.

68.3. It was misleading to state by incorporation by reference to the 2007

Accounts that “RBS remains well placed to access wholesale funding
sources from a wide range of counterparties” without update or correction
in the Prospectus, and that “The Group’s funding sources remained well
diversified by counterparty, instrument and maturity” without disclosing that
(a) RBS had been unsuccessful, since November 2007, in increasing the
maturity of its wholesale borrowing; (b) the STMR Ratios including repos
had increased from approximately 58% in December 2007 to
approximately 63% by April 2008; (c) it has been compelled to rely upon
funding from un-disclosed participation in emergency central bank funding;
and (d) RBS needed to fill a funding gap of £80bn between contractual net
outflows and marketable assets due within 1 month.

68.3A It was untrue or misleading to say that “RBS had met all of its liquidity
policy metrics” when in fact the operational limits, the STMR Ratios, the
objectives and the reporting terms of the Group Liquidity Policy had been
breached as set out above (or if not breached, only because they had
been diluted to the point of being meaningless). RBS was ignorant of
STMR Ratios for all months in 2008 leading up to the Closing Date.

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.

68.4. It was untrue to say that there had been “no significant change in the
trading or financial position of the RBS Group since 31 December 2007”,
other than those changes specifically identified in Part XII, §23.1, of the
Prospectus (as quoted at paragraph 54 above). The deterioration in RBS’s
liquidity position between 31 December 2007 and April 2008 and/or the
matters pleaded above were significant changes in its financial condition.

68.4A. There was no prudent basis for RBS to conclude that it had sufficient
working capital for the 12 month period from the Prospectus Date. By way
of further particulars hereof, see paragraphs 67A to 67I above.

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
05250-80298/8093941.1 95
 and RBS’s contingent liquidity exposure to conduits (see paragraphs 67.4
to 67.6 and 67.6A above), or what had in fact happened in relation to
North Sea (see paragraph 67.5.1 above).

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.

68.7. It was untrue or misleading to state “Contingency funding plans are

maintained” when (i) RBS had no policy requirement for a Survival Horizon
of any specified duration, (ii) RBS had no policy requirement for any all
currency specified Liquidity Buffer, (iii) RBS had failed to act on the
recommendation of its Group Treasurer that a 1 month Survival Horizon
should be maintained, (iv) the Group Liquidity Contingency Funding Plan
had not been updated since 2006 and was seriously inadequate for coping
with market conditions in Q1 2008.

68.8. The Prospectus gave the impression that liquidity management by RBS
was prudent. That was untrue or misleading for all the reasons set out
above.

69. Further, the failure to disclose the weaknesses, vulnerability, extreme risk and
dangers of RBS’s liquidity position, and/or the omission of the matters pleaded at
paragraph 67 above, and/or the inadequacy of the disclosure in the Prospectus in
those respects, was a breach of section 90(1)(b)(ii) of FSMA, in circumstances
where those matters were:

69.1. Necessary information in order to enable investors to make an informed

assessment of the financial position and prospects of RBS and the rights
attaching to the Rights Issue shares; and therefore matters which were
required to be included in the Prospectus pursuant to FSMA sections
87A(1)(b) and 87A(2); and/or

69.2. Matters which were required to be included in the Prospectus pursuant to

FSMA section 87A(1)(c) and, Annex I, §§3.1, 5.2.3, 9.1, 9.2.1, 10.3, 12.2,
20.9 and 25 of the Prospectus Regulation, and Annex III, §3.2 of the
Prospectus Regulation. The Claimants also rely on Annex I §§4, 10.1 and
22 and Annex III §2.

70. Further or alternatively, in respect of section 87G of FSMA:

70.1. If and to the extent that (contrary to the above) the matters referred to at
paragraph 67 above were not matters that the Defendants were obliged to
05250-80298/8093941.1 96
 disclose in the Prospectus, and if this was because they arose and/or
were noted after the Prospectus was approved, they were matters which
RBS was obliged to disclose by way of supplementary prospectus as soon
as practicable by virtue of section 87G(1) and (2) of FSMA and Rule 3.4.3
of the Prospectus Rules.

70.2. In addition, the very short term funding gap increased after the publication
of the Prospectus from approximately £88bn on 29 April 2008 to £96bn on
5 June 2008 due to its volatility. This was symptomatic of RBS’s inability
to control its funding requirement following and its failure to implement its
planned balance sheet reductions. These matters were significant new
factors within section 87G(1) of FSMA, which also should have been
disclosed by supplementary prospectus, as soon as practicable, and in
any event by late May 2008 and/or before the closure of the Rights Issue.

70.3. However, RBS failed to provide a supplementary prospectus giving

appropriate disclosure accordingly, and no such Supplementary
Prospectus was provided at any time before the closure of the Rights
Issue Period on 6 June 2008.

70.4. In the circumstances, RBS was in breach of sections 87G(2) and 90(4) of
FSMA.

70.5. [Further, it is inferred that each of the Director Defendants must have been
aware before the Closing Date of all such matters (as a result of their
position as Directors and/or their senior positions within RBS, and given in
particular Whittaker and Cameron’s knowledge as members of GALCO).
Each Director Defendant was therefore under an obligation to notify RBS
of these matters, but it is inferred that they did not, since no
supplementary prospectus was prepared. Each Director Defendant is
therefore in breach of section 87G(5), and accordingly liable to pay
compensation under s.90(4) of FSMA.]1

Section D: Credit market exposures (CMEs) and write-downs

D1 Introduction

[Explanatory Note: The subject-matter of Section D (extent of CMEs) and Section E

(estimated write-downs of CMEs) has now been merged. The new Section D covers both
subjects. There is now no Section E.]

70A. From 2003 onwards, RBS was, through GBM and its subsidiaries (most notably
Greenwich Capital Markets Inc and RBS Citizens Financial Group Inc in the US), a
05250-80298/8093941.1 97
 leading participant in the market for ABSs and other structured credit instruments.
RBS structured, distributed and traded ABSs, including securities backed by US
sub-prime and Alt-A residential mortgages and other such assets.

70B. RBS’s activities included: repackaging mortgage-backed and other securities into
CDOs and CLOs for sale to investors; purchasing, holding and trading ABSs,
including CDOs and CLOs, and sub-prime and other secured and unsecured debt;
and hedging the exposures resulting from these activities with monoline insurers,
CDPCs and others by CDSs and other means.

70C. From at the latest mid-2007 until the Closing Date, the US housing and sub-prime
mortgage markets, in which assets underlying RBS’s ABSs originated, were in
crisis. Many large sub-prime lending organisations reported severe losses as a
result of the deterioration in the US housing market and increasing sub-prime
delinquencies, with a number of sub-prime lenders filing for bankruptcy, declaring
significant losses and/or putting themselves up for sale. On 7 November 2007 in an
email circulated widely within and outside RBS and reported on by the financial
press, RBS’s chief credit strategist, Bob Janjuah, expressed the view that the credit
crisis would see $250 to $500 billion of losses and that firms would have to revalue
(Level 3) assets which they currently value using “mark-to-make believe”.
Contemporaneous reports state Janjuah’s view to have been expressed in a “note”
written by him.

70D. The acquisition of ABN AMRO considerably increased RBS’s exposures to assets
of this kind, at a point at which it was obvious that structured credit and other trading
activities were causing significant losses to those exposed to those markets. ABN
AMRO had in fact only entered the structured CDO market in early 2007, later than
other banks, with the result that the quality of assets underlying its CDO positions
was particularly weak.

71. At point 3 of the “Chairman’s Letter” (p. 26 of the Prospectus), RBS stated (with
column numbers added to the table for convenience):

3 Credit market exposures

For capital planning purposes RBS has used the values detailed below as the basis for its
estimates of write-downs in 2008 in respect of the credit market exposures set out in the
table below. These estimates are based on what the Board considers to be prudent
assumptions reflecting the further sharp deterioration in market conditions and outlook in
credit markets at this point. The capital effect of these estimated write-downs is £4.3bn net of
tax (£5.9bn before tax).

Fair value gains on own liabilities are estimated to be £0.6bn and are not included in the
estimated capital effect.
05250-80298/8093941.1 98
 The estimated write-downs before tax which have been used for RBS’s capital planning
purposes, are as follows:

[1] [2] [3] [4] [5] [6]

Net exposure Current Estimated
at estimated write-
31 December Average net Average downs
(1) (2)
£ millions 2007 Price % exposure Price % before
(3)
tax

ABS CDOs
High grade CDOs 2,581 84 1,608 52 (990)
Mezzanine CDOs 1,253 70 361 20 (902)

Monoline 2,547 n/a 3,174 n/a (1,752)

(4)
exposures

US residential
mortgages
(5)
Subprime 1,292 72 600 38 (405)
Alt-A 2,233 83 1,007 50 (666)
Other non-agency 794 94 660 82 (100)

US commercial 1,809 97 1,397 83 (201)

mortgages

Leveraged loans
Funded and 14,506 96 12,354 88 (1,250)
(6)
unfunded

CLOs 1,386 93 1,214 87 (106)

CDS hedging 470

Total net of CDS (5,902)

hedging

_________
Notes:
(1) Net of hedges and write-downs.
(2) Current exposure net of hedges and estimated write-downs.
(3) Estimated write-downs before tax in 2008.
(4) Monoline exposures relate to credit protection purchased on credit assets, including CDOs. As
the value of the instruments underlying the hedges has fallen, the mark-to-market value of the
hedges, and hence of the Group’s exposure, has increased. A credit valuation adjustment of
£1,752m has been estimated reflecting the monolines’ weakening credit profile. Further
information relating to exposures to monolines is set out below.
(5) Includes investment grade, non-investment grade and residuals.
(6) Funded exposures at 31 December 2007 were £8,698m.

71(1). The Prospectus contained further statements with regard to the “estimated” write-
downs, as follows:

71(1).1 In the Summary (p.7) and point 1 of the Chairman’s Letter (p.24) (under
Background to and reasons for the Rights Issue):

05250-80298/8093941.1 99
 In considering the size of the Rights Issue the Board, as well as having
regard to the potential business performance, made an assessment, based
on current knowledge, of the likely quantum of write-downs in 2008 in
respect of the deterioration in credit markets and the potential for gains
from full or partial disposals.

71(1).2 In point 5 of the Chairman’s Letter (p.28), it was stated (under Capital):

Taking into account the estimated write-downs, the Rights Issue and
retentions, including conservative estimates in respect of other capital and
strategic steps outlined below, the Group’s capital ratios at 30 June 2008
and 31 December 2008 are expected to be approximately as set out below.

…..

The aggregate of the estimated write-downs implied by RBS’s capital

planning estimates, totalling £5.9bn before tax, would have a negative
impact on RBS’s Tier 1 ratio. This is expected to be more than offset by the
Rights Issue to raise approximately £12bn, net of expenses.

71(1).3 In Part XII (Additional Information) point 23 (No significant change) it was
stated (p.134):

71(1).3.1 As to RBS:

Save as regards (i) the estimated write-downs in respect of credit

market exposures in 2008 used for RBS’s capital planning purposes
described on pages 24-25 of Part I of this document and (ii) the
current trading and prospects of the RBS Group described on pages
29-31 of Part I of this document, there has been no significant change
in the trading or financial position of the RBS Group since 31
December 2007...

71(1).3.2 As to ABN AMRO:

Save as regards (i) the ongoing restructuring and integration of ABN

AMRO described on page 31 of Part I of this document and pages 63-
65 of Part IV of this document, (ii) the estimated write-downs in
respect of certain credit market exposures of approximately £2.3bn
(which amount is included within the RBS Group’s write-downs
estimated for capital planning purposes as described on pages 24-25
of Part I of this document) and (iii) the adverse effect of current market
conditions as described on pages 29 and 31 of Part I of this document
on certain of ABN AMRO’s businesses, there has been no significant

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 change in the financial or trading position of ABN AMRO since 31
December 2007 …
This statement (“the “no significant change” statement”) was an important
compulsory part of the Prospectus: by Prospectus Regulation Annex 1
paragraph 20.9 RBS was obliged to describe all significant changes since
the last accounts or include a suitable negative statement.

71(1).4 On p.18 (under Risk Factors):

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 ….

71(2). As to the CME Table itself:

71(2).1 The CME Table (in particular the 6th column) purported to contain RBS’s
estimates of total year-to-date and future write-downs in respect of the
listed exposures over the whole of 2008 (that is, for the full financial year
from 1 January to 31 December 2008). It quantified those write-downs at
£5.9bn gross of tax.

71(2).2 The 4th column of the CME Table (Current estimated net exposure)
presented “current” values of the listed exposures, but only on the
assumed (i.e. hypothetical) basis “for capital planning purposes” that the

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 estimated losses which would result in the estimated write-downs for the
whole of 2008 had been suffered by the Prospectus Date.

71(2).3 The CME Table, and the valuations and estimates contained in it,
purported to be based on RBS’s consideration and assessment, by a
prudent (according to pp. 24 and 26) and reasonably careful (according to
p. 18) method, of the credit market outlook for the whole of 2008 (that RBS
correctly anticipated was continuing to deteriorate), and thus the prospect
of losses over the remaining 8 and a bit months of 2008 in addition to those
already suffered.

71A. For capital planning purposes, the Prospectus estimated that a £5.9bn write-down
(£4.3bn net of tax) would be required in 2008 in respect of the disclosed credit
market exposures (p.26). These estimates purported to be based on “prudent
assumptions”. The Prospectus treated almost the whole of the £4.3bn write-down as
offset, or likely to be offset, by £4bn of asset disposals.

71B. The CME Table was set out under the heading ‘Credit market exposures’. There
was no other general explanation of the credit market exposures or estimated write-
downs or other changes in value of RBS’s credit market exposures in the
Prospectus than that provided by the CME Table. The reasonable investor would
have understood the CME 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 a large amount of credit market exposures from the CME
Table and not disclosing the nature and significance of the exclusions. See further
sections D5 and D7 below.

72. In the financial markets at the time of the Rights Issue, the extent of certain credit
market exposures was extremely sensitive and of high interest to investors. The
exposures of the greatest sensitivity were CDOs; CLOs; US RMBS (in particular
sub-prime and Alt-A risks); CMBS (both US and European); leveraged loans; and
also insurance from monoline insurers, and credit protection purchased from
CDPCs. Information about those exposures and others exposed to the same or
similar credit markets was necessary for a fair assessment of RBS’s financial
position.

72A. [not used]

72B. For compliance with FSMA s.87A(2), RBS was obliged to disclose the information
necessary to enable investors to make an informed assessment of RBS’s assets
and liabilities, financial position, profits and losses and prospects as they were at the
Prospectus Date. That information included the present value of its credit market
exposures (including any changes in AFS reserves), and of other assets to the
05250-80298/8093941.1 102
 extent that there had been any significant change in their value since last reported,
any related impact on RBS’s profits and losses, capital position and prospects, any
significant changes in any of those respects since 31 December 2007, and the
impact of potential future losses.

72BB. Further, CESR’s recommendations stated (at para 96) that "Where the financial
data in a prospectus is not extracted from the issuer’s audited financial statements,
the data should be clearly identified in the prospectus as such together with the
definitions of the terminology used and the basis of preparation adopted. In addition,
a clear indication should be given as to which figures relate to historical, forecast,
estimated or pro forma information, as appropriate with reference made to where
the basis of presentation can be found.”

72C. As further described below, in the Prospectus RBS purported to disclose (in the
CME Table) certain credit market exposures and their estimated write-downs for the
whole of 2008 and current asset values if such losses were assumed to have
occurred. That information, its truth and reliability, were fundamental to the Rights
Issue and its integrity: the size of the Rights Issue and its impact on the prospects of
achieving increased capital ratios within stated timescales were based on the
estimates presented in the CME Table.

72D. The Claimants are still attempting to understand and to extract relevant information
from RBS’s disclosed documents, which do not contain any clear, comprehensive or
authoritative presentation of: RBS’s exposures (while relevant ledgers and other
detailed books and records have not yet been disclosed at all), CVA and impairment
calculations, underlying exposure inventory lists, details of hedges and
reclassifications applied, the basis on which many of the write-downs (especially
those described at the time as additional to the write-downs to March 2008) had
been calculated or determined to be unnecessary, the basis for exclusion of certain
asset classes or exposures from the CME Table, and other information not provided
in the CME RFI responses. As a matter of general context:

72D.1 The H1 2008 Interim Results to June 2008 showed total exposures of
£96.2bn (up from £82.2bn at the end of 2007) to RMBS, CMBS,
CDOs/CLOs, and other ABS.

72D.2 Of this total, £46.8bn was “held for trading” (“HFT”) (see below) and
£15.8bn was rated below AAA.

72D.3 Far less than a quarter of even those HFT exposures was covered by the
CME Table.

72E. However, and in summary:

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 72E.1 RBS did not disclose in the Prospectus the enormous credit market losses
and write-downs already suffered in 2008. It instead misrepresented most
of those losses as “prudent” “forward-looking” “estimates” for the whole of
2008 “for capital planning purposes”. Those losses, and related valuations,
were evident to RBS at least from the due diligence undertaken for the
purpose of the Rights Issue and from the parallel “de-risking” exercise
described below. RBS thereby failed adequately or accurately to disclose
to investors its current financial position, and the extent of its decline in the
3½ months since 31 December 2007.

72E.2 RBS did not in fact make or even attempt any estimate, or carry out any
analysis, of potential losses and write-downs over the whole of 2008, let
alone on a prudent or conservative basis.

72E.3 As purported estimates of write-downs over the whole of 2008 (i.e. all
losses that would affect capital planning), the figures given in the CME
Table were not based on prudent assumptions, and were in fact entirely
imprudent. That is both because they were estimates of present losses,
and because even RBS recognised by the Prospectus Date that the whole
amount of the “estimated” write-downs would be “taken” by RBS by 30
June 2008, as they in fact were.

72E.4 There were excluded from the CME Table a large volume of credit market
exposures even within the listed asset classes, and their applicable write-
downs or changes in fair value.

72E.5 Relevant asset classes, exposures and their write-downs and changes in
value were excluded from the CME Table altogether.

72E.6 Even as a record of the present values of the exposures included in the
CME Table, the figures were overstated and the write-downs to the
Prospectus Date understated.

72E.7 All or most of the above failings also led to underestimation in the capital
plan of write-downs, CVAs, impairments or other losses due to change in
value, and therefore to misstatement in the Prospectus of the achievable
capital ratios. They also meant that the “no significant change” statement
in the Prospectus was substantially untrue and/or misleading.

73. The misstatements in the Prospectus, and omissions from it, with regard to
particular classes of sensitive exposures are addressed below, as follows:

Exposures included in the CME Table

73.1 CDOs: Section D6.1, paragraphs 74(1) to 74(10).3.

05250-80298/8093941.1 104
 73.2 Other CDOs: Section D6.2, paragraphs 74.1 to 74.2.

73.3 CLOs: Section D6.3, paragraphs 74.3 to 74.3C.

73.4 US Commercial Mortgages and CMBS: Section D6.4, paragraphs 74.4 to

74.4E and Section D7.6, paragraphs 74TT to 74VV

73.5 US Residential Mortgages: Section D6.5, paragraphs 74.5 to 74.5A(2).

73.6 Leveraged Loans: Section D6.6, paragraphs 74.6 to 74.6C.

73.7 CDS Hedging: Section D6.10, paragraphs 74G to 74K.

73.8 Monolines: Section F, paragraphs 82C to 89A.

Exposures omitted from the Prospectus

73.9 Other Counterparties: Section D6.7, paragraphs 74.7 to 74.7A

73.10 Loan Loss Provisions: Section D6.0, paragraphs 74A to 74F

73.11 Citizens SBO: Section D7.1, paragraphs 74M to 74V.

73.12 North Sea Conduit: Section D7.2, paragraphs 74W to 74CC.

73.13 Structured Real Estate Capital: Section D7.3, paragraphs 74DD to 74JJ.

73.14 White Knight: Section D7.4, paragraphs 74LL to 74PP.

73.15 European ABS, RMBS, CMBS and Mortgage-covered bonds: D7.5,

paragraphs 74QQ to 74SS.

73.16 European Commercial Mortgages: Section D7.7, paragraphs 74WW to

74XX.

73.17 Flow Credit: Section D7.8, paragraphs 74AAA to 74CCC.

73.18 Structured Credit: Section D7.9, paragraphs 74DDD to 74HHH.

73.19 Other ABS: Section D7.10, paragraph 74III

73.20 CDPCs and other financial guarantors: Section F, paragraphs 90 to 91

73.21 Negative Basis and Intermediation Trades; Section F, paragraphs 91A to

91C

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D2 RBS’s de-risking exercise

73A. In March 2008, Goodwin and Whittaker appointed Crowe to implement a major ‘de-
risking’ exercise, involving the discontinuation of business, its transfer to a new
Strategic Assets Unit in RBS London (“SAU”), and its early disposal of assets
regarded as especially risky and/or vulnerable to continuing losses. It was planned
that by this means:

73A.1 RBS’s balance sheet would be shrunk by £200bn.

73A.2 RBS’s RWAs would be shrunk by £36bn to £244bn by June 2008.

73A.3 Unsecured funding would be reduced by £40bn by the end of April 2008,
including by sales of or reductions of exposures to leveraged finance
positions, monolines and CDPCs.

73B. As part of this de-risking exercise, between about 7 and 17 April 2008 an RBS team
overseen by Crowe carried out a detailed assessment of the market values of credit
market exposures targeted for reduction, and the losses which would be incurred on
the disposal of those assets. The personnel closely involved in producing the de-
risking estimates included Riccardo Rebonato (Head of Market Risk, GBM), Peter
Nielsen (Global Head of Rates, Local Markets, Currencies and Commodities), Bruce
Bennett (Head of Global Pricing Unit, GBM), Symon Drake-Brockman (Global Head
of Credit Markets, Head of GBM Americas), Bruce Jin (Head of Market Risk, RBS
Greenwich Capital Markets), Alexis Tobin (Executive Officer, GBM), Kyle, Jaime
Aparicio (of GBM), Thomas Herrmann (a member of Crowe’s Executive Office), and
Brett Bishop (of GBM). Crowe conducted daily meetings to discuss and progress
this initiative.

73C. The valuation of exposures targeted for reduction came to be based on two
“scenarios” for the price that could be achieved on an immediate orderly sale of the
assets (that is, their fair value at the date of valuation):

73C.1 “Scenario 1”, also called the “central” case or “Case 1”.

73C.2 “Future potential”, said to be the result of “more conservative assumptions”

and also called “Scenario 2”, and sometimes “worst” case or “p&l
surprise”.

73D. The results of the valuation exercise, and the de-risking proposals, were reported in
tables, with accompanying commentary, headed “Managing the Balance Sheet –
Asset de-risk Strategy and Estimated Impact on P+L and RWA” (“the De-Risking

05250-80298/8093941.1 106
 Tables”). These followed or were accompanied by reports and spreadsheets,
including those entitled ‘Estimate of Risk-Reduction Cost’, ‘GBM & ABN-AMRO P&L
Analysis’, and ‘Derisking the GBM Balance Sheet’.

73E. As at 15 April 2008 the De-Risking Tables reported actual and expected write-
downs or impairments on the exposures targeted for reduction as follows:

73E.1 March YTD Markdown Actual: £1.802bn, or £2.166bn excluding the credit
for fair value gains on own credit;

73E.2 expected future P&L impact Scenario 1: an additional £5.365bn;

73E.3 expected future P&L impact Future Potential: an additional £2.201bn (in
addition to the impact of Scenario 1).

These figures totalled £9.368bn of write-downs, or £9.632bn if the credit for fair
value gains on own credit was excluded (as it was in the CME Table). Excluding the
‘Future Potential’ figures, these figures totalled £7.167bn, or £7.531bn without fair
value gains on own credit. This was some £3.8bn more than the write-downs
included in the CME Table.

73F. On 15 April 2008 Crowe sent the De-Risking Tables to Goodwin and Whittaker,
copied to Cameron, Peter Nathanial (Group Chief Risk Officer) and Robertson, with
a covering Memo summarising its contents. The Memo included the following
(emphasis added):

“I attach a summary of the proposals regarding de-risking the MTM balance

sheet of RBS and ABN AMRO. There is an expected cost under scenario 1
of about £5.4bn, which after tax has an impact on Core Tier 1 capital of
£3.8bn. It is expected that this would reduce RWAs by approx £20bn, which
creates £1bn of Core Tier 1 capital to offset against the £3.8bn above. This
assumes that GBM is able to achieve its BAU targets for RWAs which only
looks possible if the modelling benefits are agreed by the FSA. There is an
additional potential pre-tax P/L impact of £2.2bn on top of the £5.4bn if more
conservative assumptions are made.

Presentation and Disclosure – it is possible to allocate many of the items

under both flow credit and structured credit to the other reported lines in order
to maintain disclosure at this level, and it is also possible to amend the

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 numbers between Scenario 1 and potential future impact to deliver our
appropriate picture to investors.

Conclusion

Scenario 1 requires a net capital raise of £3.8bn, but also leaves another
£2.2bn pre-tax P/L potential future impact which may arise in the future
months.”

73G. The reference to delivering “our appropriate picture to investors” by “amend[ing] the
numbers between Scenario 1 and potential future impact” concerned presentation
and disclosure in the Prospectus. Specifically:

73G.1 Crowe was recognising the relevance of the de-risking valuations to the
values and markdowns to be presented to investors in the Rights Issue.

73G.2 Indeed (and by way of example) on 16 April 2008 Tobin, a primary author
of the CME Table, sent Herrmann an email with regard to the developing
Comparison table (essentially a draft of the CME Table, described below),
as follows:

“The additional writedowns column has been amended to £3.95bn from

£4.345bn.

Changes made (which also need to be reflected in your spreadsheet)

Flow Credit -65m (transfer amount out of Case 1 to future scenario)

Monoline +315m

Leveraged +205m

Structured Credit -330m (transfer amount out of Case 1 to future scenario)

Conduits -100m

Merchant Banking -60m (Delete from schedule)”

73H. As described further below (in Sections D6 and D7, by reference to specific asset
classes and their presentation in or omission from the CME Table), the de-risking
valuations informed, or should have informed, presentation and disclosure of credit

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 market exposures in the Prospectus; and/or evidenced unjustifiable exclusions of
assets and related losses from the CME Table. Specifically:

73H.1 A prudent or reasonably careful approach to valuation of credit market

exposures and estimation of related losses at the date of the Prospectus
would (and should) have adopted as a minimum the estimated (‘Scenario
1’) losses detailed in the De-Risking Table. Those losses totalled
£7.531bn: see paragraph 73E above.

73H.2 The de-risking exercise involved evaluation of losses on the intended

(actual) early disposal of the assets under consideration in an orderly
fashion (and not by a fire sale), after transfer to the SAU. If, as was the
case, the assets were or might well be sold (or their value otherwise
realised), then these de-risking losses, including ‘Scenario 2’ or ‘Future
Potential’ losses, were necessarily to be included in any prudent estimate
of future losses, whatever their accounting categorisation (whether as
HFT, “available for sale” (“AFS”) or “loans and receivables” (“L&R”)).
These losses totalled £9.732bn: see paragraph 73E.3. This is only a
minimum requirement: a prudent estimate of 2008 losses would also take
into account future market deterioration.

73H.3 Further, the statement in the Prospectus that “Certain structured credit
activities had been discontinued and problematic US sub-prime 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”
(Prospectus p. 29) was misleading and an insufficient disclosure of a
significant change and necessary information, in circumstances in which
tens of billions of pounds of assets (i.e. far more than the amount
disclosed in the CME Table) were being transferred to the SAU with a view
to sale at a loss and/or costly hedging, and two-thirds of the write-downs
stated in the CME Table were solely attributable to those transferred
assets.

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D3 RBS’s plans to transfer assets from ABN AMRO and Citizens to RBS

73I. Further, and separately from the de-risking initiative, as part of the consolidation of
ABN AMRO and Citizens into RBS and in order to obtain regulatory capital benefits
available under RBS’s Basel II regime that were not available under ABN AMRO’s
Basel I regime, by the Prospectus Date (and at the latest by the Closing Date) RBS
had formulated plans to transfer a large portion of ABN AMRO’s assets to RBS
during 2008.

73J. The assets to be transferred included North Sea, the structured real estate capital
portfolio, the ABN AMRO US Mortgage Book, the ABN AMRO leveraged loans, and
the Citizens SBO loan portfolio. RBS planned to transfer these imminently. Their
transfer was only delayed until after the Rights Issue proceeds were received so as
to avoid breaching capital limits.

73K. Whatever the accounting classification of such assets, any transfer would have to
be made at fair value and would crystallise a loss to the selling entity’s profit and
loss account (“P&L”). Any prudent and reasonably careful estimate of 2008 losses
for capital planning purposes was bound to allow for the realised or unrealised
losses to RBS on AFS assets, and impairments on L&R assets, that would be
recognised on such fair value transfers.

D4 The misrepresentation of the figures in the CME Table as estimated future

write-downs

73L. As part of their own due diligence in respect of the Rights Issue, between about 10
and 17 April 2008 Goldman Sachs and Merrill Lynch undertook a review and
valuation of certain of RBS’s assets and exposures, including within categories later
specified in the CME Table, with a view to disclosure in the Prospectus of the
current value (taking account of write-downs to date) of RBS’s exposures. As stated
by Andy Chisholm (of Goldman Sachs) at a meeting with Crowe, Nathanial and Kyle
(and others) on 11 April 2008 (emphasis added), “disclosure of the current position
in relation to the value and mark of portfolios would be required at the time of any
capital raising.”

73M. On 16 April 2008 Goldman Sachs presented a preliminary draft of a “Summary

Asset Portfolio and Marks” (“the Goldman Sachs Summary”). The Goldman Sachs
Summary, and its supporting tables, contained:

73M.1 a summary of Goldman Sachs’ understanding of RBS’s own marks and

write-downs in respect of the specified categories of exposures as
recorded or (if not yet recorded) intended to be recorded in RBS’s books
as at 31 March 2008; and
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 73M.2 Goldman Sachs’ assessment of the present (i.e. as at 16 April 2008) value
of RBS’s exposures in those categories and the present write-downs to be
applied to them, and a summary of the differences between those
assessments and RBS’s own 31 March 2008 marks and write-downs.

73N. The Goldman Sachs Summary, supported by the accompanying tables, reported the
following:

73N.1 RBS’s actual or intended 31 March 2008 write-downs of the exposures

since 31 December 2007, totalling £1.799bn.

73N.2 Goldman Sachs’ assessment that as at 16 April 2008 there were

additional write-downs since 31 December 2007 to be applied of between
£2.71bn and £3.443bn, meaning that (taking account of both RBS’s 31
March 2008 write-downs and the additional write-downs) the current fair
value of the specified exposures was between £4.509bn and £5.243bn
less than the value recorded in RBS’s books as at 31 December 2007.
(The write-downs all related to HFT exposures, so that on any view it was
appropriate to book a loss in that range to RBS’s P&L at that date.)

73O. From about 14 April 2008 onwards RBS itself prepared, circulated and discussed
internally, its own assessments of the (then) present values of the specified
exposures and of the applicable write-downs since 31 December 2007. Those
assessments were presented in the form of tables (“Comparison tables”) headed
“RBS Global Markets – Comparison of March 2008 to Year End 2007” and then
“RBS Group – Comparison of Movements in Exposures between Year End and April
2008”, and were essentially drafts of the CME Table.

73P. Version 14 of the Comparison tables Format C (circulated at 8.04 pm on 17 April

2008) contained RBS’s assessment of “Total write-downs 2008” (i.e. to date) of
£5.902bn. This is the figure that would later appear as the amount of total write-
downs in the CME Table in the Prospectus, albeit then presented as “estimated
write-downs” for the whole of 2008 (and with some slight component differences
from version 14).

73Q. On 17 April 2008 (at 8.40 pm) a meeting between RBS, Goldman Sachs and Merrill
Lynch took place to discuss the valuation of RBS’s exposures and the write-downs
to be applied. A version of the Comparison tables (likely to have been version 13,
showing “total write-downs 2008” as £5.941bn) was presented to the meeting by
Kyle. The minutes of the meeting record (emphasis added):

05250-80298/8093941.1 111
 Mr Kyle opened the meeting with thanks for attendance and distributed a
schedule detailing the GBM mark downs for year to date ….

Mr Kyle stated that, at the total level, RBS’s mark downs for the period
year end to date was expected to be £3.771bn. This is in addition to the
£1.85bn estimated at the end of March (now restated as £1.569bn after
adjustments). Goldman Sachs confirmed that their independent valuation
was £3.739bn. Merrill Lynch and Goldman Sachs both agreed the RBS
number was reasonable at total level.

73R. Also on 17 April 2008 Kapoor, or members of his staff, prepared a draft paper on
RBS’s credit market exposures to be issued in Whittaker’s name to the RBS Group
Audit Committee. The draft paper set out current valuations, their effect on RBS’s
2008 earnings and the basis on which they had been determined. The draft paper
used for current valuations the figures from version 13 of the Comparison tables,
thus showing £5.941bn as total “current” write-downs in 2008 (i.e. to date). The draft
paper was sent by Kapoor to Whittaker for his review that evening.

73S. On 18 April 2008 (by his 7.44pm email) Tobin circulated within RBS a draft of
‘Global Markets 2008 Exposures and Write-Downs’, showing current total write-
downs of £6.372bn (before CDS hedging). On 19 April 2008 Tobin continued to
circulate versions of the Comparison tables (versions 15 and 16) showing current
total write-downs, now described as “Estimated Capital Effect”, of £5.902bn (net of
CDS hedging).

73T. Also on 18 April 2008, a final version of the Group Chief Accountant’s paper was
finalised and circulated to the Group Audit Committee in Whittaker’s name. The
Group Audit Committee met on 19 April 2008. Whittaker presented the credit market
exposure valuations in the terms appearing in the final version of the Group Chief
Accountant’s paper. The paper (in final form) made no reference to actual write-
downs or losses other than the write-downs recognised in RBS’s results for Q1
2008, now said to total an increased figure of £2.601bn; nor did Whittaker’s
presentation. The paper now referred only to “potential additional write-downs” of
£3.771bn, said to have been estimated “for capital planning purposes” and “in the
context of estimating the appropriate size of the Group’s capital raising”.

73U. Nonetheless, other material presented to the Group Audit Committee meeting on 19
April 2008 showed the true position as to the date to which the figures applied. At
that meeting Whittaker also “tabled” a paper containing a comparison of RBS’s
marks and write-downs with those of peer banks. The paper contained a
comparison between RBS’s marks as at April 2008 and peer banks’ present marks
and write-downs in the listed asset classes. RBS’s marks labelled in this table “April

05250-80298/8093941.1 112
 2008” marks (which match those which would later appear in the Prospectus as
estimates for the whole of 2008) were presented by Whittaker, and (it is inferred)
treated by those at the meeting, as present valuations of the exposures.

73V. During the same period (14 April 2008 onwards) Crowe finalised his team’s “de-
risking” proposals (see Section D2 above), presenting the proposals to Goodwin
and Whittaker (copied to Cameron, Nathanial and Robertson) on 15 April 2008: see
paragraph 73F above.

73W. On 20 or 21 April 2008 a draft announcement of the Rights Issue for issue on 22
April 2008 was circulated, including to Steve Almond (the partner at Deloitte with
overall conduct of Rights Issue matters for RBS). The draft included the following
statements:

Estimated capital effect of £4.3 billion net of tax (£5.9 billion before tax)
from write-downs in respect of credit market exposures in 2008…

…The Board has estimated that the effect on capital of write-downs in

respect of credit market exposures could be £4.3 billion net of tax (£5.9
billion before tax) in 2008. These estimates are based on prudent
assumptions reflecting the further sharp deterioration in market conditions
and outlook in credit markets at this point.

…For capital planning purposes [RBS] has used the values detailed below
as the basis for its estimates of write-downs in respect of credit market
exposures in 2008.

There followed a draft of the CME Table as it would appear in the Prospectus,
although without footnotes 3 (“Estimated write-downs before tax in 2008”) and 4
(concerning monoline exposures).

73X. Almond responded with revisions and comments. He deleted the words “in 2008”
and “and outlook in credit markets at this point”. He commented (emphasis added):

“in 2008” implies there will be nothing more in next 8 months. This is the
hope but cannot be controlled. The write downs reflect assumed exit
prices in current markets – not provisions for rest of the year.

Reference to “outlook” again implies write downs are forward looking. Not
allowed under accounting rules and not what has been done.

05250-80298/8093941.1 113
 Almond repeated these comments in an email to Fraser Allan (of Merrill Lynch) and
copied to Topley and Walton of Deloitte and Kapoor on 21 April 2008, and
forwarded the email to Whittaker and Kapoor.

73Y. Almond was stating that the draft CME Table disclosed current losses and write-
downs and had been prepared on that basis.

73Z. Almond’s comments and proposed revisions were disregarded. Later on 21 April
2008 he sent an email, widely circulated (including to Whittaker and Kapoor), stating
(emphasis added):

… my comments that applied to the previous 2 drafts have not been acted
upon so I assume [RBS] is happy to run the risk that the write downs are
interpreted by readers as including provisions for what may happen
through to the end of 2008, notwithstanding this is not what has been
done and, of course, is not allowed under the accounting rules.

73AA. Later on 21 April 2008 (in fact at 12.43 am that night) Julien Petit (Executive
Director at Goldman Sachs) sent an email to Tom Shropshire (a partner at
Linklaters), who had questioned Almond’s comment (emphasis added):

We at Goldman Sachs still believe that this is a problem and have told that to
Iain [Allan of RBS] through Todd [Leland of Goldman Sachs]. We find it
misleading to say estimated write-downs before tax in 2008 as there
may be further write downs in 2008. What the company has done is what
we would call “current estimates of additional write downs.”

73BB. An email exchange then took place between Shropshire and Petit (emphasis
added):

73BB.1 At 12.45 am Shropshire wrote: “Then I expect you to take that up with the
company and resolve the issue before publication. If you have further
issues of this nature, I suggest you give the relevant person a call. If the
release goes out in the morning, I shall assume all has been resolved to
your satisfaction.”

73BB.2 At 12.47 am Petit replied: “Todd has told Iain about that as per my email.
You cannot assume that it has been resolved as the client did not
want to take our comment. So it is the client[‘s] responsibility not to take
this comment.”

05250-80298/8093941.1 114
73CC. Despite the fact that the marks and write-downs had been calculated as present
day fair valuations as at mid-April 2008:

73CC.1 Both the 22 April 2008 Announcement and Trading Update, and the
Prospectus itself, presented the write-downs as estimates for the whole of
2008.

73CC.2 RBS decided not to ‘take’ (that is, recognise in its books) about 55% of the
write-downs identified in the CME Table before the Prospectus Date (30
April 2008), and indeed to defer over a third until June 2008, after the
Rights Issue had closed and RBS had received its proceeds. This is
evident (for example) from:

73CC.2.1 the memo dated 25 April 2008 (“the Kyle Memo”) sent by Kyle
to Crowe, Cameron, Hourican, Kapoor and Whittaker,
proposing such a course and then acted on by RBS; and

73CC.2.2 RBS’s internal capital plan, which assumed the taking of write-
downs of £4.3bn (£3bn net of tax) in April to June 2008
according to the plan in the Kyle Memo.

73CC.3 RBS nonetheless recognised (as shown by the Kyle Memo) that credit
market losses of an additional £598m would be taken in April 2008 and an
additional £267m in May 2008, and that all the additional write-downs
(totalling £3.771bn) would have to be ‘taken’ and booked by 30 June 2008
at the latest. That of itself meant that the estimated write-downs could not
be truthfully described as estimates for 2008 as a whole.

73DD. As shown by the following, RBS acted in this way so as to avoid disclosing in the
Prospectus that, assuming the accuracy of the marks and write-downs recognised
in the 2007 Accounts, by mid-April 2008 RBS had already suffered additional losses
of at least £5.9bn, and to avoid further damage to RBS’s capital ratios and breach
of RBS’s ICG (see paragraph 57.9 above) and the need to disclose as much in the
Prospectus (emphasis added):

73DD.1 In an email sent on 17 April 2008 by Dumbell (of Deloitte) to Almond and
others within Deloitte, forwarding versions of the then capital plan, it was
stated:

Thinking on full w’down is apparently £6bn pre-tax, additional hit to capital

expected of £3.2bn, timing expected in Q2 and would like to take post cash

05250-80298/8093941.1 115
 coming in from rights issue so don’t blow ratios out of the water (so
currently plugged in model for June).

73DD.2 In an email sent on 18 April 2008 (8.21 am) Almond stated:

… clearly timing of writedowns is an issue – if they happen before rights

issue then total capital is down to 8.59%.

73DD.3 In an email sent later the same day (10.18 am) Almond stated:

[RBS] is a bit confused on this [the booking of “additional write-downs”] at

present – probably because sponsors want them to quantify further hits in
the announcement but they have not got capacity to take them now. I
have told Guy that they have to deal in FV language and if they think these
are FVs as of today, then they have to book them. He cannot talk about
provisions and he cannot say “we anticipate booking £x during the second
qtr”.

73DD.4 In an email sent on 20 April 2008 by Tyler to Kapoor, it was stated:

If we bring forward the write downs of £3.7bn to April it would reduce the
projected total capital ratio from 8.92% to 8.55% and total Tier 1 from
5.58% to 5.21%.

In terms of individual entities it would undoubtedly (take) ABN AMRO

below its 12.5% and I expect it would take RBS below its ICG.

73DD.5 In an email dated 23 April 2008 from Herrmann to Tobin, reporting matters
discussed at a meeting with Crowe and Kyle, it was stated:

Discussion took place between Brian, John Hourican and Chris about the
timing of write-downs in ABN and RBS. This talks about all the P+L impact
items we had identified as part of the Snow project [i.e. the Rights Issue].
Timetable would need to be worked out which is very much dependent
on the availability of capital through the rights issue and other events
such as the sale of Anto[n]veneta.

73DD.6 In a draft of the Working Capital Report dated 23 April 2008, Deloitte
stated:

05250-80298/8093941.1 116
 “If the estimated incremental write down on £4.3bn (41bps Total Capital
impact) needed to be booked in full prior to both the rights issue and the
sale of Antonveneta, the Group would fall below the Group’s ICG” (p.6)

“At 30 April 2008, total capital falls below 9.0% if projected credit write
downs are taken in full” (p.20)

73DD.7 In the Working Capital Report as issued (30 April 2008), Deloitte reported
(p.6):

The key capital constraint for the Group is to maintain its regulatory capital
above the Individual Capital Guidance set by the FSA for RBSG (9.0%
Total capital, 4.5% Tier 1) and more fundamentally the CRD minimum of
8% Total and 4.0% Tier 1 capital.

…..

The Group was only marginally above its Total Capital requirement at 31
March 2008. This will be repaired by the proceeds of the £12bn rights
issue, which is forecast to be received in June.

During April and May 2008, the forecasts suggest that the Total Capital
ratio will remain critically close to the FSA’s regulatory minimum guidance.
The Capital Plan forecasts a Total Capital ratio of 9.02% as at 30 April
2008 rising to 10.25% by the end of May. The key sensitivities putting
pressure on the ratios are potential further credit write downs and
additional growth in RWAs.

The capital plan forecasts estimated incremental write downs of £4.3bn (-

41bps Total Capital impact) in June 2008 based on current estimates of
future valuations. Actual events may result in additional write downs prior
to the disposal of Antonveneta expected by the end of May (+114bps
benefit), or the receipt of funds from the rights issue in June (+163bps
benefit).

On the basis of these figures, the taking of the write-downs in April 2008
would have resulted in RBS’s Total Capital ratio falling to 8.61% as at 30
April 2008, well below its ICG. That outcome was only avoided by treating
the write-downs as “current estimates of future valuations”. The statement
in the draft Working Capital Report (that “At 30 April 2008, total capital falls
below 9.0% if projected credit write downs are taken in full”) had been
deleted.
05250-80298/8093941.1 117
 73DD.8 In an email sent on 29 April 2008 by Michele Schnaier (of GBM) to
Robertson, it was stated:

£5.9bn write-downs were announced along with the rights issue. To date
only about £2.7bn of this has been reflected in the combined daily p&l …
Practically speaking we don’t have enough Tier 1 capital in the
combined group to post the full write down, and are dependant on
getting proceeds from the sale of Antonveneta on 25 May and the rights
issue on 11 June.

73DDD. There is no discretion as to whether to mark HFT and AFS assets to fair value.
Nonetheless, the deliberate deferral of write-downs described in paragraph 73CC
and 73DD above, and the presentation of what were known to be current values as
estimates for the whole of 2008, were part of a series of episodes of manipulative
marking and asset valuation, undertaken by senior management for the purpose of
avoiding disclosure of RBS’s deteriorating financial condition, damage to RBS’s
capital ratios, and adverse market reaction, and exemplified by the following:

73DDD.1 the manipulation of the marks applied to CDOs by use of the LSD
model and management-imposed buffer (while disregarding actual IPV
input): see paragraphs 74(1)-(4) below;

73DDD.2 the adoption of the unjustifiable monoline threshold approach (against

the wishes of Deloitte and Ernst & Young), and the delay until June
2008 in its abandonment: see paragraphs 85B-D below;

73DDD.3 the reclassification of unsellable leveraged loans that were intended for
syndication, sell down or securitisation as L&R assets to avoid write-
downs: see paragraphs 74.6A-74.6A.4B below;

73DDD.4 the booking of a £110m sub-prime markdown for Q1 2008, followed by its
reversal because of the decision not to disclose Q1 2008 write-downs in
the Prospectus (or 22 April 2008 Trading Update): see the 29-30 May
2008 email exchange (subject: GBMNA Apr 2008 YS WD Analysis
280508) between Tobin, Carol Mathis (Managing Director and Chief
Financial Officer, North America) and Stanzione; and

73DDD.5 the deferral of the £135m booking for Clear Channel from March to April
2008, recorded in a GBM Memo dated 9 April 2008: see paragraph
74.6A.3 below.

73EE. As shown by the matters described above in this Section D4:

05250-80298/8093941.1 118
 73EE.1 The figures for “current estimated net exposures” (as listed in the 4th
column of the CME Table) represented RBS’s determination of current fair
values for those exposures, not hypothetical or assumed values. The
description of these exposures was therefore untrue and misleading.

73EE.2 The £5.902bn of “estimated write-downs” represented losses and write-

downs already suffered (that is, only 3½ months into 2008), which write-
downs should have been booked by the Prospectus Date. Further even
RBS recognised internally but did not disclose that:

73EE.2.1 45% of the write-downs in the CME Table (£2.6bn) had

already been booked in Q1 2008, and all the CLO and Alt-A
write-downs had been booked by the Prospectus Date (see
paragraphs 74.6A.6 and 74.5DD below, respectively);

73EE.2.2 the full amount would have to be and would be “taken” (that is,
recorded in RBS’s books) by 30 June 2008 at the latest: see
paragraph 73CC above;

73EE.2.3 in the case of monolines, the only post-Prospectus Date write-

down anticipated in the calculation of the figure in the CME
Table was that resulting from the abandonment of the
unjustifiable threshold valuation methodology: see paragraphs
85C to 85E below.

Accordingly, the description of “current estimates”, of “forward-looking

information” and “forecasts [of] estimated incremental write-downs” (see
paragraphs 71(1).4 and 73DD.7 above) was untrue and misleading. There
had been no looking forward.

73EE.3 As purported estimates of write-downs over the whole of 2008, the figures
stated in the 6th column of the CME Table were entirely imprudent, and the
statement that they were based on prudent assumptions was untrue and/or
misleading. That is because:

73EE.3.1 The figures took no account of potential future losses after

April 2008. It was not reasonable or prudent to assume that
future losses would not be suffered, and there was every
likelihood that future losses would be severe. The Prospectus
itself correctly referred to the likely “continuing” “further”
“increasing” “worsening” “sharp” market deterioration (pp 7, 8,
24, 26).

05250-80298/8093941.1 119
 73EE.3.2 There was no process of estimation, analysis, forecasting or
stress-testing of potential losses over the whole of 2008, let
alone one conducted with reasonable care or on the basis of
prudent assumptions or properly documented or verified.
Instead, senior management (led by Crowe in particular)
identified rough figures for additional write-downs, intended to
produce broadly defensible current valuations: see for
example Crowe’s 19 April 2008 (10:25am) email to Cameron.
RBS then presented those rough figures as estimates for the
whole of 2008.

73EE.4 The “taking” of the write-downs was engineered by RBS to take place after
the Prospectus Date and (as to the bulk of the write-downs) after the
Closing Date: see paragraphs 73CC and 77DD above. RBS did so:

73EE.4.1 to avoid revealing its current, actual, losses and write-downs in

the Prospectus (and in the 22 April 2008 Trading Update);

73EE.4.2 to avoid an immediate further fall in its capital ratios, and a

likely breach of its ICG; and

73EE.4.3 to avoid “taking” the bulk of write-downs before receipt of the

Rights Issue proceeds.

73EE.5 There had been significant changes in the trading and financial position of
RBS and ABN AMRO since 31 December 2007 other than in respect of the
matters referred to at p.134 of the Prospectus, because:

73EE.5.1 RBS had already suffered actual credit market losses and
write-downs totalling at least £5.902bn since 31 December
2007.

73EE.5.2 RBS had already taken £2.601bn of write-downs to the end of

Q1 2008.

73EE.5.3 It had become increasingly likely that additional severe losses

would be suffered during the remainder of 2008.

73EE.6 As follows from all the above, there was no reasonable basis for key
estimates and assumptions on which the Rights Issue, and the assessment
of its size (that is, the amount of capital required to achieve targeted

05250-80298/8093941.1 120
 increases in capital ratios by 31 December 2008 and to enable RBS to
survive in “the generally weakened business environment”), were founded.

73FF. In the circumstances, in breach by the Defendants of FSMA section 90(1)(b)(i), the
statements made in the Prospectus were untrue and/or misleading in the respects
stated in paragraph 73EE above.

73GG.Further, the failure to disclose in the Prospectus:

73GG.1 that RBS’s actual, current, credit market losses at the Prospectus Date
were at least £5.902bn;

73GG.2 that RBS had already recognised credit market losses of £2.601bn in Q1
2008 (i.e. as at 31 March 2008);

73GG.3 that additional credit market losses of at least £598m would be recognised
for April 2008, and of £267m for May 2008;

73GG.4 that RBS unqualifiedly assumed that total additional write-downs of some
£3.771bn would be taken by 30 June 2008; or

73GG.5 any of the matters stated in paragraph 73EE above;

was a breach by the Defendants of FSMA section 90(1)(b)(ii), in circumstances in

which those matters were necessary information within the meaning of FSMA
s.87A(2), and matters which were required to be included in the Prospectus
pursuant to FSMA s.87A(1)(c) and the Prospectus Rules.

73HH. Further or alternatively, in respect of FSMA section 87G:

73HH.1 As shown by RBS’s Group Results Report on April 2008, dated 20 May
2008, credit market write-downs in April 2008 were internally reported as
£1.810bn (that is, far greater than the £598m allowed for in the Kyle
Memo).

73HH.2 As shown by RBS’s Group Results Report on May 2008, dated 16 June
2008, credit market write-downs in May 2008 were internally reported as
£783m (again far greater than the £267m allowed for in the Kyle Memo).

73HH.3 Accordingly, by the Closing Date RBS’s losses for the year to date were
nearing or had exceeded the estimate for the whole of 2008 stated in the

05250-80298/8093941.1 121
 Prospectus. Even if RBS was correct to recognise such credit market
losses only in those months, and/or the matters referred to in paragraph
73EE above were not matters which the Defendants were obliged to
disclose in the Prospectus, RBS was obliged to disclose such matters by
way of a supplementary prospectus, and to inform investors of its
necessarily revised plans, targets and intentions, but did none of those
things.

73HH.4 RBS was thereby in breach of FSMA sections 87G(2) and 90(4). [Further,
it is inferred that each of the Director Defendants must have been aware
before the Closing Date of all such matters (as a result of their position as
Directors and/or their senior positions within RBS). In particular, each of
the Director Defendants was aware of the matters set out in paragraph
73HH.1 no later than 29 May 2008 when RBS’s Group Results Report for
April 2008 was circulated to the Group Board. Each Director Defendant
was therefore under an obligation to notify RBS of these matters, but it is
inferred that they did not, since no supplementary prospectus was
prepared. Each Director Defendant is therefore in breach of section
87G(5), and accordingly liable to pay compensation under s.90(4) of
FSMA.]1

73II. As shown by RBS’s Group Results Report on June 2008, and by RBS’s half year
interim results, credit market write-downs in June 2008 were in fact reported as
£1.303bn, and as £5.925bn for the year to date.

D5 AFS and L&R assets

73JJ. Credit market exposures can be categorised as HFT, AFS or L&R. As to this
categorisation:

73JJ.1 HFT and AFS assets must be marked to fair value daily or at a similar
interval.

73JJ.2 Whereas all changes in fair value of HFT assets must be immediately
recognised in the P&L account, changes in value of AFS (at least in the
case of credit market exposures) and L&R assets are only recognised in the
P&L when a permanent impairment takes place or the asset is sold
(including by a transfer within RBS). Otherwise, the changes in fair value of
AFS assets are booked to reserves as unrealised losses although still
reported in statutory accounts. This does not affect the need and obligation
(under IAS 39) to mark AFS assets to fair value rigorously and regularly.

05250-80298/8093941.1 122
 73JJ.3 Classifying an asset as AFS or L&R does not reduce or alter the asset’s
exposure to market or other risks.

73KK. RBS held huge amounts of credit market exposures on an AFS and L&R basis. In
early 2008, GBM held over £15bn of debt securities on an AFS basis, and ABN-R
held over £30bn of asset-backed exposures on an AFS basis.

73LL. As to the effect of losses of value of such assets on RBS’s financial position and
prospects at the Prospectus Date:

73LL.1 Recognition of losses in the P&L would result in an equivalent (pound for
pound) depletion of capital (including core Tier 1 capital).

73LL.2 All losses of value were liable to affect RBS’s financial position and
prospects, whatever the accounting classification of the assets in question
and whether or not the losses were immediately realised in the P&L
(thereby affecting the calculation of RBS’s capital), and were required for
an informed assessment of the matters stated in FSMA s.87A.

73LL.3 The fact that the assets in question were categorised as AFS or L&R for
accounting purposes, and had not yet been treated as permanently
impaired, was not a good reason for excluding them from the Prospectus
or disregarding losses of value on such assets in presenting RBS’s
financial position, especially when such assets were exposed to the
deteriorating credit markets described in the Prospectus and AFS assets
had to be fair valued. As Tobin observed in an email dated 19 March
2008, categorising an exposure as AFS “doesn’t eliminate bad news it
simply delays it.” Categorisation as AFS or L&R was an especially poor
reason for excluding assets, when – by way of exploiting the “potential
loophole” to which Tobin referred in the same email – they had been
reclassified from an HFT basis because their value was likely to
deteriorate: see further paragraph 74.6A below.

73LL.4 Indeed, AFS and L&R assets presented a greater risk of sudden P&L
losses than HFT assets, because they were liable to accumulate a large
unrealised loss which would be suddenly realised when the asset was sold
or impaired.

73LL.5 Disclosure of such exposures and losses, including of AFS and L&R
assets, was all the more necessary in circumstances in which:

05250-80298/8093941.1 123
 73LL.5.1 RBS was purporting to take a “prudent” and “conservative”
approach to estimating the value of its credit market
exposures.

73LL.5.2 The market for RBS’s credit market exposures was continuing
to deteriorate, without sign of recovery.

73LL.5.3 RBS was purporting to estimate its credit market losses over
the whole of 2008, during which time it was certain or highly
likely (and at least prudent to assume) that losses on AFS and
L&R assets would be realised in the P&L.

73LL.5.4 Many of the AFS and L&R assets were to be or might be

transferred from ABN AMRO or Citizens to RBS (including to
the SAU) during 2008 (see Sections D2 and D3 above), which
would trigger recognition of the change in fair value in the
selling entity’s P&L.

73LL.5.5 Many of the AFS and L&R assets were to be or might be sold
during 2008 under the de-risking process or otherwise (see
Section D2 above), which would trigger recognition of the
change in fair value in RBS’s P&L. In any event, prudence
required an assumption that devalued assets which were
discontinued business and/or transferred to the SAU for de-
risking in a deteriorating market would not recover their value
and/or would be permanently impaired during 2008.

73LL.5.6 RBS had disclosed its AFS assets and unrealised changes in
value at pages 121-122 and 159-160 of the 2007 Accounts;
and made the no significant change statement in the
Prospectus, which was untrue or misleading given the
changes in value of the AFS assets since the end of 2007.

73MM RBS decided not to disclose AFS and L&R assets that it now says it did not expect
to be impaired during 2008. Further, as described by reference to specific asset
classes below:

73MM.1 AFS and L&R assets (and in some cases, HFT assets) and their
associated historic (since the end of 2007) and future losses of value were
wrongly omitted from the Prospectus. It presently appears to the Claimants
that they were also omitted from the capital plan.

05250-80298/8093941.1 124
 73MM.2 Such AFS and L&R assets as were included (some of ABN AMRO’s
leveraged loan exposures) had insufficient impairments included in the
CME Table and capital plan.

73MM.3 On RBS’s own case the AFS reserves fell by some £900m during the first
half of 2008 alone, although the prudent estimate for 2008 is much higher.
The historic and predicted future losses of value represented significant,
but undisclosed, changes in RBS’s financial position since 31 December
2007.

D6 The categories of exposure set out in the CME Table

73NN When disclosing CMEs for the purposes of the Rights Issue, and preparing to do so,
RBS did not:

73NN.1 systematically or comprehensively extract from its books and records

and/or all of its various desks and divisions up to date figures for all its
credit market exposures and hedges, despite the availability of
standard templates enabling RBS to do so (such as the H21A
templates used for the 2008 Interim Accounts);

73NN.2 take steps to ensure that all marks, CVA reserves, impairments, and
other adjustments for fair value were up to date; or to identify all
significant changes to RBS’s financial position since 31 December
2007; or

73NN.3 make any systematic attempt to consider or identify what changes in

value should be disclosed to investors.

73OO Instead, RBS selected certain categories of credit market exposure for provision to
the sponsors and presentation in the Prospectus. The process and basis for that
selection are presently unclear. As far as the Claimants are aware, no document
exists recording any process by which asset categories were or would be selected;
nor is there any evident record of relevant criteria for selection or of active
deliberation over a collated menu of exposures, by reference to such criteria or
otherwise. Whatever the reasons for exclusion (whether a failure of process or
otherwise), huge categories of credit market exposure were omitted from or
understated in the CME Table and the Prospectus, all as detailed in sections D6-D7
and F below.

73PP Further:

73PP.1 No IPV process was applied to the estimated write-downs for 2008
published in the CME Table.

05250-80298/8093941.1 125
 73PP.2 Deloitte, RBS’s auditors, were not engaged to and did not review or
approve the figures in the CME Table.

74. With respect to the types of exposure and their losses that were identified in the
CME Table (CDOs, CLOs, US residential mortgages, US commercial mortgages,
leveraged loan exposures and monolines):

74.a Sub-categories of exposures falling within those categories were omitted

from the CME Table, or their totals understated, so that the CME Table failed
to include the whole relevant population of those exposures.

74.b As a result:

74.b.1 the total values of the exposures listed in the CME Table and the total
applicable write-downs were understated;

74.b.2 the Prospectus was untrue or misleading (including by the no

significant change statement), and omitted necessary information.

74.c The tables to sections D6.1 to D6.10 and F set out in Appendix 1 show the
Claimants’ current estimates of:

74.c.1 the extent of the omissions and understatements from the relevant
populations of exposures;

74.c.2 the applicable (but omitted) write-downs for the omitted populations of
exposures, calculated on the basis stated in paragraph 74.d below.

These estimates (along with the prudent offset for CDS hedging) are
summarised in the table at the foot of this paragraph, and the true
populations and prudent estimates for 2008 will be the subject of expert
evidence.

74.d The Claimants’ estimates of omitted write-downs are calculated on the basis
that the percentage marks used in the CME Table to calculate the “estimated
write-downs before tax in 2008” were prudent, with those RBS marks applied
to similar exposures omitted from the CME Table.

74.e In fact, the marks used in the CME Table to calculate the “estimated write-
downs” were not prudent (and therefore the figures for current estimated net
exposures were not prudent either): see sections D2 (especially paragraph
73H), D4 (especially paragraph 73EE), D6 (especially paragraphs 74(7).4,
74.5A, 74.5CC-EE, 74.6A.3, 74.6A.6, 74.6B.2, 74I.8-9) and F (especially
paragraphs 85F.4.2-3, 89AA, 89AB.1, 89A). The correct and/or prudent
estimated marks or write-downs for 2008 for each category of exposure will
be the subject of expert evidence; but were too high (as marks) or too low (as
write-downs).
05250-80298/8093941.1 126
 Section Exposure Omitted or understated
prudent estimated write-downs
for 2008

D6.1 & 6.2 CDOs At least £2.356bn

D6.3 CLOs At least TBC
D6.4 and D7.6 US commercial At least £0.418bn
Mortgages
D6.5 Sub-prime At least £1.034bn
Alt-A At least £2.378bn
Other non-agency At least £0.676bn
D6.6 Leveraged loans At least £0.864bn
F Monolines At least £5.865bn
D6.10 Overstatement of £0.470bn
effect of CDS
Hedging
Total At least £14.450bn

D6.1 CDOs
The LSD Model and Historic Marking

74(1). In autumn 2007, RBS chose not to mark super senior tranches of ABS CDOs
(“SS CDOs”) to market prices, and rejected the “most plausible methodologies”
(as described by Rebonato in an email of 14 August 2007), because to mark
using those methodologies would cause RBS losses and reduce bonuses.
Instead, it adopted on 19 November 2007 the Loss Severity of Default cash-flow
model (“the LSD model”) and continued to employ it thereafter, marking “to
model” (in the limited sense set out below) rather than marking to market until
after the Closing Date.

74(2). The LSD model was deficient and imprudent as a tool for valuing SS CDOs:

74(2).1 It did not assess the market value of the asset - the price that could
be obtained on a sale - instead purporting to identify the ‘fundamental
value’ of the asset without taking account of or calibrating to
observable market prices. The LSD model therefore did not produce
a fair value.

74(2).1A There was at all times sufficient market information to mark to

market. Thus RBS continued, while using the LSD model, to mark its
open SS CDOs and to use market prices on the CDOs or underlying
collateral sourced from external dealers to mark those of its SS
CDOs that were monoline-insured.

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 74(2).2 The LSD model was at the time of its adoption not approved by the
appropriate independent internal bank functions, such as the GBM
Modelled Product Review Committee. As set out below, it had been
expressly disapproved by ABN AMRO Product Control.

74(2).3 The LSD model was, to RBS’s knowledge, inherently unsuitable for
valuing ABS CDOs. In particular, in November 2007 ABN AMRO’s
Product Control department wrote a report, forwarded on 20
November 2007 to Steve Kinsella, Head of Product Control at ABN
AMRO, stating “The LSD model can only deal with RMBSs. Both
CMBSs and ABS CDO cannot be analysed using this tool”. The
same point was made in Kyle’s February 2008 papers: see
paragraph 74(2).5.4 below.

74(2).4 The LSD model was inherently incapable of itself generating fair
values for the SS CDOs exposures. Instead, recognising that the
LSD model used alone significantly over-valued the super senior
exposures, RBS added a sizeable discretionary “buffer” (not dictated
by the model itself) to the output of the LSD model so as to give a
valuation figure. The buffer was applied on an ad hoc basis; it was
not constant (either in absolute or percentage terms) over time.

74(2).5 The LSD model plus buffer method enabled RBS and its senior
management to set marks as they desired, and to override both the
market prices and RBS’s Independent Price Verification (“IPV”)
processes as the measure of fair value. For example:

74(2).5.1 For November 2007, as the minutes of the meeting of the

Senior Management Valuation Control Committee record,
“the approach” was to “mark-to-model (LSD)… [and a]
valuation adjustment will then be taken to adjust to a price
of 70.” There was no meaningful governance,
documentation, guidance framework or independent
review of the decisions as to the buffer size and therefore
the mark.

74(2).5.2 In Deloitte’s February 2008 paper summarising their audit

of the 2007 Accounts figures on SS CDOs, Deloitte
observed that the key element of the valuation was the
“very significant buffer” fixed by RBS London and that
therefore the LSD model was not “the key element” in the
valuation process.

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 74(2).5.3 Deloitte concluded when auditing the 2007 Accounts that
the valuation of the SS CDO positions needed to be
reduced by £200m to reflect fair value.

74(2).5.4 On 1 February 2008 Kyle produced a memo entitled

‘FY2007 Close Out Issues – Marking of CDO Super
Senior Sub Prime Positions’ addressed to Whittaker,
Crowe, Cameron, Robertson and Hourican which
explained that “The marks on the holdings were arrived at
after running the underlying portfolio through the in-house
LSD model which factored in parameters such as House
Price Appreciation, delinquencies and defaults. An
additional adjustment was taken for model uncertainties …
The purpose of the additional valuation adjustment taken
was to factor in other market information such as peer
marks, and to factor in an assessment of the Net Asset
Value of the portfolios.” and “While our model inputs
reflect our best estimate of losses, it places us significantly
adrift of our peers.” He also advised that: “The accounting
requirements are clear. … In the absence of [observable
prices] a valuation technique can be used to assess Fair
Value (FV). FV in this context does not mean fundamental
worth; it means an approximation to a value at which a
willing buyer and seller could contract.” He went on to
observe “This means that RBS will appear as an outlier on
all comparative measures if we conclude that the LSD
model remains the best measure of establishing FV. See
also Kyle’s ‘Super Senior CDOs – Accounting
Requirements & Valuation’ paper.

74(2).5.5 On 10 April 2008, Cameron said in a telephone call (it is

believed with Drake-Brockman) that RBS was “in a mood
to take some pretty severe marks” without abandoning the
LSD model and so he wanted to know how to adjust
house price assumptions to “fiddle with the model to get
us to the answer we want to get to”.

74(2).5.6 On 29 May 2008, Deloitte’s review of ABN AMRO’s Q1

recorded how the Q1 valuation of SS CDOs had taken
place: “the valuation produced by this model at Q1 2008
was 94 (97 at 31 December 2007). The outputs from the
model were then subject to review by RBSG management
in order to determine whether they reflect levels at which a
willing buyer and willing seller would transact. As a result
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 RBSG management reduced the valuation to 70, creating
a buffer of 24”.

74(2).6 The model was known by RBS to overvalue the SS CDO exposures
dramatically. Thus:

74(2).6.1 The model was the subject of serious concern on the part
of Ernst & Young when auditing ABN AMRO’s 2007
accounts. They noted that the LSD model dictated a level
of write-downs across RBS’s entire SS CDO portfolio that
was lower than ABN AMRO had already booked on only
its SS CDO exposures in November 2007. They queried
whether the model was internally approved and whether
its inputs were subject to the IPV process.

74(2).6.2 On 1 February 2008 Kyle circulated a memo explaining

that the LSD model valued the SS CDOs by $1.54bn more
than the ABX index, which in his view was “the best
observable indicator of fair value” and should be adopted
in place of the LSD model.

74(2).6.3 In Kyle’s 20 February 2008 paper for the Group Audit

Committee ‘Super Senior CDOS – Accounting
Requirements & Valuation’ he explained that the LSD
model had given prices from 14% to 38% higher than the
net asset values derived from underlying ABS prices.

74(2).6.4 On 20 February 2008, a document entitled ‘Peer Group

Sub-Prime Disclosures’ was circulated to the Group Audit
Committee and showed it that RBS’s marks were
dramatically higher for SS CDOs than those of its peers.

74(2).6.5 In early March 2008 David Green (Product Control, ABN

AMRO) produced a valuation of ABN AMRO SS CDO
exposures for the purpose of a potential transfer of those
exposures to RBS London. The valuation showed that the
SS CDOs were $1bn overvalued. ABN AMRO
nevertheless did not re-mark the exposures to this price
and the transfer was aborted.

74(2).6.6 On about 17 March 2008 Dherminder Kainth (Deputy

Head of QuaRC, Risk Analytics) produced a long draft
QuaRC report on the LSD model. It identified numerous
shortcomings in the model including that: (a) its data was
fixed as at 10 October 2007 and not updated; (b) it could

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 not be calibrated to or predict market prices; (c) it used
insufficient data from the crisis and was overly weighted to
data from a more benign credit environment prior to the
crisis; (d) it used unrealistic assumptions as to prepayment
speeds, timing of defaults and delinquencies, loss
severities given default, and HPA (house price
appreciation); (e) it was not the latest version of the LSD
model; and (f) it resulted in significant overmarking.

74(2).6.7 When Kainth was asked what the results of the LSD
model would be if historical data was updated, and loan
performance (not OFHEO data) and more prudent
assumptions (including a mild recession) were used
(following the call referred to in paragraph 74(2).5.5
above), he stated on 13 April 2008 that within three years
all CDO positions would be “100% written off”. These
assumptions were not adopted.

74(2).6.8 As part of the “de-risking” initiative, and as shown by the

De-risking Tables sent to Goodwin and Whittaker on 15
April 2008 (see paragraph 73E above), Crowe and his
team valued the SS CDOs at amounts far below the LSD
model (plus buffer) marks. Thus the total impact of mark-
downs since 31 December 2007 on the value of the SS
CDO exposures was estimated to be £2.234bn under
Scenario 1, and £2.757bn under Scenario 2 (including
Future Potential). As Crowe stated in his 15 April 2008
Memo (see paragraph 73E above), “Future Potential”
“allow(ed) for further markdowns on the basis that the
market continues to deteriorate, and any hedging or sales
activity is not able to mitigate this further decline due to the
lack of liquidity in the market” – that being the basis on
which any prudent estimate of write-downs in 2008 should
have been carried out.

74(2).6.9 On 29 May 2008, Deloitte reported that RBS had

overvalued ABN AMRO’s SS CDOs as at Q1 2008 by
$126m.

74(3). Victor Hong resigned from his position as Managing Director and Head of Fixed
IPV at RBS Greenwich on 9 November 2007, having only been appointed on 28
September 2007, because he was not allowed properly to perform his IPV role,
by which he should have independently verified fair value marking of CDOs and
other credit market exposures. In particular:

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 74(3).1 He was told by Jin, Ian Gaskell (former Managing Director, Head of
Front Office Risk, Europe and Asia), Lauren Rieder (former Head of
Fixed Income IPV), Mathis and Joe Walsh (then Managing Director
and Head of Mortgage and Asset-Backed Origination, Finance and
Trading, RBS Greenwich Capital) that write-downs would not be
authorised.

74(3).2 He was told by Jin that he should sign off the September 2007
monthly IPV report for RBS Greenwich even though the IPV report
incorrectly stated that a lack of liquidity and market transparency was
preventing IPV of SS CDO positions and overstated the value of RBS
Greenwich’s SS CDOs. Jin told Hong, “don’t worry, just sign off, if
you get caught we’ll protect you”. Jin knew that RBS Greenwich’s
ABS CDO positions were over-valued, and that correct valuations
would result in write-downs which would not be permitted.

74(3).3 He was told by his predecessor as Head of Fixed Income IPV,

Rieder, that no mark downs of the RBS Greenwich SS CDO
positions would happen before the 31 December 2007 year end as
they would not be approved: she used words to the effect that he
should not make his disagreement with the marks known or press for
lower valuations because it would mess up “the bonuses”. Therefore
Hong should find a way to “get comfortable” with signing off the
monthly IPV report for September 2007 for RBS Greenwich.

74(3).4 When he refused to sign off on the September 2007 IPV report,
Rieder did so, although she was no longer part of the IPV function.
The September 2007 IPV report contained a note in relation to
structured credit markets IPV (which it is inferred was added or
approved by Rieder) “Note – results do not cover the independent
price verification of ABS CDO 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”. This note was wrong (as Rieder
and others knew): Hong had performed IPV using market information
and net asset value analysis and communicated the same to Rieder,
Jin, Gaskell and Mathis among others, but the variances between
trader marks and independent valuations researched by Hong had
been ignored.

74(3).5 In his resignation letter, Hong stated that it would be intolerable for
him to continue in his role “based upon persistent discrepancies
between trader marks and analytical fair-market values”.

74(4). Similarly:

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 74(4).1 On 5 October 2007 Frederick Matera (Head of Structured Credit
Trading at RBS Greenwich) e-mailed Jin stating that they needed to
re-examine their marks in light of significant write-downs at other
institutions.

74(4).2 On 12 October 2007 Matera replied to an email from Hong, agreeing

that “downgrades are very significant and will affect valuations”.

74(4).3 Matera resigned from RBS Greenwich on 9 November 2007, the

same day as Hong.

The SS CDO Marks in the Prospectus

74(5). For the above reasons, as RBS knew by April 2008, SS CDO exposures were
and had for a long time (including in late 2007) been dramatically over-marked;
their marking had not been at fair value; and RBS could not credibly maintain its
use of the LSD model and the historic over-marking to which it had led. Thus:

74(5).0 In January 2008, Deloitte produced a note for Jin highlighting that the
underlying ABS collateral for the TABS trade, and RBS’s own
valuation shared with its counterparty on the Knollwood trade for
collateral call purposes, both showed that the LSD model-led pricing
was much too high.

74(5).1 Prior to the end of March 2008 valuations, nearly £4bn of HFT SS
CDOs had not been marked down at all since the end of 2007 (and
remained at 90% for RBS high grade, 70% for RBS mezzanine, and
80% for ABN AMRO high grade).

74(5).1A By 8 April 2008 Kyle had agreed with Deloitte fair value marks for the
SS CDOs at the end of Q1 as 80% for RBS high grade, 60% for ABN
AMRO high grade, and 45% for RBS mezzanine. These marks were
then overruled by Cameron and/or Crowe on 9 April 2008, who
imposed higher marks of 85% for RBS high grade, 70% for ABN
AMRO high grade, and 55% for RBS mezzanine, reducing the March
2008 write-down by about £400m. The higher marks were imposed
because Cameron and/or Crowe were unhappy with the total level of
write-down that would otherwise have to be taken in March 2008,
and (it is inferred) wished to reduce or defer some of that additional
write-down.

74(5).2 In early April 2008, RBS told the FSA and sponsors that it was
intending to mark the SS CDOs at the end of Q1 to 85% for high
grade and 55% for mezzanine.

05250-80298/8093941.1 133
 74(5).3 The FSA’s view on 10 April 2008 was that the appropriate current
marks were 70-80% for RBS high grade, and 30-40% for RBS
mezzanine.

74(5).4 On 15 and 16 April 2008 Goldman Sachs proposed current market

valuations for April 2008 of 54-58% for RBS high grade, and 35-40%
for ABN AMRO high grade and RBS mezzanine, which would have
entailed 2008 write-downs to mid-April 2008 from the December
2007 prices of £1.986bn to £2.217bn.

74(5).5 During the same period, as part of the de-risking exercise Crowe and
his team assessed 2008 SS CDO markdowns at £2.757bn on the
Scenario 2 (“more conservative”) basis.

74(5).6 On 24 April 2008, Deloitte told Kyle that its view of the marks at the
end of Q1 2008 were 58-67% for RBS high grade, 36-52% for ABN
AMRO high grade, and 21-36% for RBS mezzanine.

74(5).7 Throughout this period RBS had ample market data enabling it to
mark-to-market (and so was obliged by IFRS to do so), and showing
that the fair value marks on a mark-to-market basis were lower than
the marks it had taken on the SS CDOs. The Claimants rely on
RBS’s marking of its closed CDOs by reference to external dealer
marks, and the marking RBS agreed in relation to the posting of
collateral with counterparties (such as in January 2008 in relation to
the Knollwood trade with Morgan Stanley- see paragraph 74(2).1A
above), as demonstrating the availability and use by RBS of such
market data.

74(6). In the Prospectus RBS presented marks of 70% for RBS high grade and 40% for
ABN AMRO high grade (averaged to 52%), 20% for RBS mezzanine, and write-
downs of £1.892bn. It did this after a meeting on 17 April 2008 at which
(according to RBS’s note of the meeting) RBS told Goldman Sachs that these
were the current values that would be disclosed in the Prospectus, and Goldman
Sachs agreed that those figures were broadly consistent with Goldman Sachs’
estimates of current value. Those marks were established by estimating the
market value at the end of March 2008 (in particular, the ABS collateral NAV
figures as at that date), and were far below those produced by the LSD model.

74(7). The Prospectus presented those write-downs as estimates for the whole of 2008,
said to reflect recent and continuing market deterioration and to be assessed on
the basis of prudent assumptions. In fact those estimated write-downs:

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 74(7).1 represented current (purported) losses, only some 3½ months into
2008;

74(7).2 totalled some £867m less than RBS’s own, allegedly prudent,
Scenario 2 valuation;

74(7).3 reflected historic gross over-marking, by use of a deficient model,

and did not reflect (or not only reflect) recent and continuing market
deterioration; and

74(7).4 were themselves imprudently low, and the marks for high grade ABN
AMRO and RBS exposures imprudently high. Even as an estimate of
value as at the Prospectus Date, the RBS high grade SS CDOs
should have been marked at no more than 42% (rather than 70%),
and the ABN AMRO high grade SS CDOs at no more than 23%
(rather than 40%), leading to an understatement of the write-down of
£657m. The Claimants rely on the marks applied by RBS to its own
closed high grade ABN AMRO and RBS SS CDO exposures.

74(8). Despite RBS’s recognition of the deficiencies of the LSD model, and its
abandonment of the LSD model for the purpose of the CME Table, RBS then
used the LSD model to justify its decision not to book any post-Q1 2008 SS
CDO markdowns until June 2008, after the Rights Issue proceeds were to be
received. As shown by the Kyle Memo (see paragraph 73CC.2.1 above), RBS
proposed not to recognise SS CDO losses known to total at least £1.376bn until
June 2008, on the footing that use of the LSD model plus “buffer (held) constant
to March levels” would not show such losses.

74(9). By the end of May 2008, the ABS collateral NAV figures on which the
Prospectus estimated write-downs had been based had fallen significantly.
Further, before the Closing Date RBS booked write-downs of £449m for April
2008 (£982m year to date) and £175m for May 2008 (£1.158bn year to date).

74(9A). The Prospectus omitted or understated the ABS CDO exposures in the respects
stated in the table in Appendix 1 at page 266 to 267 (and see further paragraph
74.c-d above).

74(9B) The following closed HFT US CDOs were wrongly omitted from the ‘Gross open
exposure’ figure on page 27 of the Prospectus: Menton I, Menton IV,
Havenrock, Knollwood 2006-2, and NICE, all held by RBS London; and Iona,
held by ABN AMRO. These had a total notional value at the end of 2007 of
around £5bn.
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74(10). For the above reasons:

74(10).1 All the SS CDO figures in the CME Table (including the 2007
figures) were untrue and/or misleading.

74(10).2 The failure to disclose the true figures, the existing write-downs to
the Prospectus Date, the deficiencies and impropriety of the LSD
model plus buffer approach that had been adopted, and the plan set
out in the Kyle memo was a breach by the Defendants of FSMA
section 90(1)(b)(ii).

74(10).3 Further or alternatively, the decrease during the Rights Issue Period
in the value of the SS CDOs, and in particular the ABS Collateral
NAV index used as part of the valuation, and the additional
£2.593bn of write-downs booked during the Rights Issue Period,
was a breach of FSMA sections 87G(2) and 90(4). [Further, it is
inferred that each of the Director Defendants must have been
aware before the Closing Date of all such matters (as a result of
their position as Directors and/or their senior positions within RBS).
In particular, each of the Director Defendants was aware that RBS
had booked £1.810bn of write-downs in April 2008 no later than 29
May 2008, that is, far greater than the amount allowed for in the
Kyle Memo). Further, Whittaker was aware no later than 22 May
2008 that the SEC was conducting an investigation into, among
other things, the basis of the LSD model, and it is inferred that
Whittaker would have informed the other Director Defendants, given
the importance and potential impact of such an investigation. Each
Director Defendant was therefore under an obligation to notify RBS
of these matters, but it is inferred that they did not, since no
supplementary prospectus was prepared. Each Director Defendant
is therefore in breach of section 87G(5), and accordingly liable to
pay compensation under s.90(4) of FSMA.]1

D6.2 Other CDOs

74.1 As at 31 December 2007 and the Prospectus Date RBS held a class of
CDOs later described (in the 2008 Accounts) as “Other CDOs”. These had
been purchased from third parties (i.e. unlike high grade and mezzanine
CDOs structured by RBS). They were, or are likely to have been, CDOs of
ABS, and therefore highly relevant to investors seeking to understand and
assess RBS’s financial position and prospects. It appears from p. 131 of
the 2008 Accounts that, on 31 December 2007, RBS’s net CDO exposure
was at least £3.834bn of SS CDOs, and £1.596bn of Other CDOs. The
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 £1.596bn of Other CDOs was not disclosed by the Prospectus. It can be
inferred that similar, and in any event large, amounts of such Other CDOs
were a current net exposure as of April 2008, and RBS told the FSA on 10
April 2008 that they had £487m of exposure to junior CDOs of ABS
marked between 15 and 70.

74.1A See further Sections D5, D7.5 and D7.6 as to European CMBSs and those
classified by RBS as AFS Assets.

74.2 Further or alternatively, it appears that as of 31 December 2007, RBS was

exposed to approximately £4.6bn in respect of CDOs through the holdings
of conduits, including North Sea and Amstel. It is unclear whether that
exposure included the £1.596bn of Other CDOs recorded at p. 131 of the
2008 Accounts. It can be inferred that these exposures were similar, and
in any event large, as of April 2008, but they were not disclosed.

74.2A. [not used]

D6.3 CLOs

74.3 On 31 December 2007, as recorded at p. 131 of the 2008 Accounts,

RBS’s net CLO exposure was £2.042bn. It can be inferred that similar,
and in any event large, amounts of CLOs were a current net exposure as
of April 2008.

74.3A. The reasonable interpretation of the reference to “CLOs” in context (the

background to which includes that the 2007 Accounts described
apparently the same category as “Collateralised loan obligation
exposures” at page 43) was that this entry in the CME Table was a
reference to CLOs (i.e. securitised bonds). Accordingly, the Prospectus
represented that net CLO exposure at 31 December 2007 was £1.386bn.
The Prospectus therefore understated CLO exposures by at least £656m
as of 31 December 2007, and it can be inferred that it understated them by
a similar amount as of April 2008. RBS also omitted to disclose loans
warehoused for collateralisation: see further section D6.6 below.

74.3AA. Residual CLO exposures were designated for de-risking and transferred to
the SAU from early April 2008.

74.3B. According to the Defence, the Prospectus did not intend to make any
disclosure of RBS's exposure to CLOs, and instead the £1.386bn
exposure labelled "CLOs" in the CME Table was not an exposure to
CLOs, but in fact was intended to refer to an exposure to warehoused
leveraged loans.
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 74.3C. (formerly 81E) The Prospectus should have dealt with CLO exposures in
the following ways and was untrue and misleading by not doing so:

74.3C.1 Rather than giving the misleading impression that it had

disclosed its CLO exposures by including an item labelled
"CLOs" but in fact referring to leveraged loans that were
warehoused for securitisation (although not included under the
different label “leveraged loans” either), RBS should have, but
failed to, disclose that it had decided to exclude from the
Prospectus all CLO exposures.

74.3C.2 CLO assets were similar in nature to those included in the

CME Table. They were still “credit market exposures”.

74.3C.3 Some or all of the CLOs and their estimated write-downs

should have been included in the CME Table. There were
substantial concerns about CLOs at the time.

74.3C.3A RBS should have stated that leveraged loans warehoused for
securitisation were included in the “CLOs” heading and not the
“leveraged loans” heading.

74.3C.4 Alternatively, the Prospectus omitted necessary information in

that it should have disclosed:

74.3C.4.1 That the CLOs had been omitted on the basis of a

judgement that the underlying assets were not
considered to be at increased risk.

74.3C.4.2 The basis of that judgement, so that investors could

assess for themselves the relevant risk factors. In
particular, it should have explained the basis on
which RBS considered that the underlying assets
were not considered to be at increased risk in
circumstances where there was substantial concern
about CLOs at the time.

74.3C.4.3 What it meant by “CLOs”.

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D6.4 US Commercial Mortgages

74.4 The CME Table disclosed net exposure to “US commercial mortgages” of
£1.809bn as of 31 December 2007 and £1.397bn on a “current” basis.
RBS told the FSA in early April 2008 that it had £1.65bn US commercial
mortgage whole loans.

74.4A. [not used]

74.4B. Contrary to the Defendants’ plea in paragraph 213 of the Defence (dated
14 November 2015), the reference to “US commercial mortgages” meant
and was intended by RBS to be to both mortgages sourced for future
securitisation and CMBS. The £1.809bn December 2007 figure set out in
paragraph 74.4 above comprised £1.661bn of US commercial whole loans
and £148m of US CMBS.

74.4C However, the label was ambiguous and clarification of what was intended
by the term was necessary information.

74.4D US whole commercial loans are addressed in this section, European

whole loans are addressed in sections D7.3 (Structured Real Estate
Capital) and D7.7 (European commercial mortgages), and CMBS are
addressed in section D7.6 below.

74.4E. RBS had significant exposure to commercial real estate whole loans other
than through CMBS, which exposure was increased by the acquisition of
ABN AMRO, largely through loans intended for securitisation but never
securitised (because the market for such securitisations collapsed). The
2007 Accounts reported exposure at the end of 2007 of around £89bn of
direct commercial real estate loans with a further £6bn through derivatives
and other exposures.

74.4E.1. The Prospectus omitted to report this exposure and

associated write-downs, except by the incorporation by
reference of the 2007 Accounts and by the £1.397bn exposure
(which included CMBS) disclosed in the CME Table.

74.4E.2. The 2007 Accounts omitted the detail necessary to assess

RBS’s financial position, failing to break the loans down by
region, property type, overdue or non-performing status, and
loan-to-value ratio. In the circumstances the Prospectus’s
disclosure in this regard was inadequate.

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D6.5 US Residential Mortgages

74.5 RBS’s (and other banks’) exposure to US sub-prime and Alt-A RMBS was
one of the main concerns of regulators and investors in the months before
the Rights Issue, given the central importance of these structured products
to global financial difficulties.

Sub-prime

74.5AA The Prospectus omitted or understated the sub-prime exposures in the

respects stated in the table in Appendix 1 at page 268 (and see further
paragraph 74.c-d above).

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 74.5A Further, the average price of RBS’s sub-prime exposures, that is the
“mark” used in the Prospectus to calculate the total value of those
exposures, was 38% of nominal value. That is inconsistent with:

74.5A.1 publicly available sources of residential mortgage pricing, in

particular the Markit ABX.HE index, a benchmark for the
performance of sub-prime RMBS; and

74.5A.2 the pricing of equivalent ABN AMRO securities, because

between about November 2007 and June 2008, RBS’s high
grade CDO positions were marked up to 30% higher than their
ABN AMRO equivalents (FSA Report pages 147-148, Graph
2.15).

Alt-A

74.5BB The Prospectus omitted or understated the Alt-A exposures in the

respects stated in the table in Appendix 1 at pages 269 to 270 (and see
further paragraph 74.c-d above).

74.5CC The calculation of the estimated write-down for 2008 was based on a
mistaken inclusion of a figure of £231m rather than £392m for write-downs
up to the end of March 2008, which both omitted the £60m booked for
January and February 2008 and understated the March 2008 write-down
by £101m.

74.5DD Following the disposal on 18 April 2008 of $841m Alt-A to Fortress at an

immediate loss of $173m, by 30 April 2008 RBS booked a write-down of
£288m on Alt-As, resulting in an average price of 47%. This took total Alt-
A write-downs to the end of April 2008 to £680m (when added to the Q1
2008 write-downs of £392m), which was more than the figure estimated in
the CME Table as the write-down for the whole of 2008. Accordingly, it
was misleading and imprudent to present £666m and a price of 50% as an
estimated Alt-A write-down for the whole of 2008 to allow for continuing
deterioration in the credit markets, and a prudent estimate for 2008 would
have been far higher. At the Prospectus Date RBS knew what marks it
would be taking on, and as a result of, the Fortress sale in April 2008, and
by the Closing Date it knew what marks it had taken in April (and May)
2008. The total estimated write-down for 2008 should have been at least
£1.007bn (£392m for Q1, plus the £615m estimated in the 17 April 2008
De-Risking Table).

74.5EE The calculation of the estimated write-down omitted any write-down for
ABN AMRO’s £130m of Alt-As (which were included in the December

05250-80298/8093941.1 141
 2007 net exposure figure in column 2 of the CME Table), either because
they had not been written down from the end of 2007 up to the Prospectus
Date (in which case they should have been), or because they were
forgotten (in which case a mistake was made).

74.5FF The use of average marks for whole residential mortgage asset classes
such as Alt-A (as presented in the CME Table) was acknowledged even
within RBS to produce figures that were not meaningful, and were
potentially misleading: see the 17 April 2008 email exchange between Jin
and Simon Watts (a Finance Business Manager in the Global Markets
Executive Office).

74.5GG The Claimants reserve the right to plead further as to the 2007 net
exposure figure in the CME Table once some explanation of how it was
made up has been provided (as there is none in the CME RFI response).

Other non-agency

74.5GG The Prospectus omitted or understated the other non-agency exposures in

the respects stated in the table in Appendix 1 at page 271 (and see further
paragraph 74.c-d above).

74.5A(1) [not used]

74.5A(2) The Claimants reserve the right to plead further in relation to additional
RMBS exposures revealed by their analysis of RBS’s disclosure.

Citizens SBO (now at D7.1 below)

74.5B. [not used]

D6.6 Leveraged Loans

74.6 In the early months of 2008, investors became concerned as to banks’

exposure to leveraged loans. Information about that exposure was
necessary for a fair assessment of RBS’s financial position. The
Prospectus stated that RBS’s exposure to leveraged loans was
approximately £14.5 billion as at the end of 2007 (£12bn in RBS Solo and
£2.5bn in ABN AMRO) and approximately £12.4bn as at the Prospectus
Date. About half of these disclosed leverage loans were US and the other
half were UK and European.

74.6A Further:

05250-80298/8093941.1 142
 74.6A.1A When RBS underwrote leveraged loans it intended to retain
only a portion of those loans (“the hold portfolio”), and to sell
on the remainder by way of syndication or securitisation (“the
sell portfolio”). The size of the original hold portfolio would be
set out in the Approval Memorandum or other origination
documentation, and averaged about 10%.

74.6A.1B RBS Solo classified the hold portfolio as L&R, and those it
intended to sell as HFT. ABN AMRO classified all the
exposures as L&R, although it intended to sell most of them
(its original hold portfolio averaged about 6% and thus its sell
portfolio averaged about 94%), and accounted for them at
amortised cost rather than fair value. ABN AMRO holding its
sell portfolio L&R was improper and imprudent.

74.6A.1 The CME Table excluded leveraged loans in the RBS Solo
and ABN AMRO original hold portfolios, totalling over £9.7bn
at the end of 2007. At the present time RBS has been unable
to quantify those exposures (see CME RFI Appendix 3 row
30(c)).

74.6A.2 If RBS was unable to distribute loans it had intended to

distribute by a particular date, they became known as
‘overdue’. By early 2008 RBS held a large warehouse of
overdue sell portfolio leveraged loan exposures, which it
intended to but could not syndicate, at least without offering
significant discounts to par value. Indeed, at the Prospectus
Date 80% of RBS’s underwritten loans reported in its GBM
loan markets underwriting report were overdue, £3.5bn by
more than three months.

74.6A.3 In order to avoid continuing to mark these leveraged loans to

fair value in a difficult market, and to “protec[t] the profit and
loss account against significant write downs” (as RBS is
reported as telling UBS at a meeting on 20 April 2008), RBS
Solo moved over £7bn of its sell portfolio into its hold portfolio,
reclassifying these parts of the loan from HFT to L&R upon
their being drawn. For example, the hold portfolios for the
huge Bell Canada (also known as BCE) and Clear Channel
loans, were increased from their original 3% and 8%
respectively to 100% in March 2008, and this adjustment to
those two deals alone moved over £5bn of leveraged loans
out of HFT fair value accounting. Yet it remained throughout
this period and beyond RBS’s intention to sell these loans.

05250-80298/8093941.1 143
 These reclassified sell portfolio loans were included in the
leveraged loans figure stated in the CME Table, but no or no
proper allowance was made in the CME Table for estimated
write-downs that would have been required after March 2008 if
they had remained HFT exposures, and/or for actual write-
downs to date.

74.6A.4A Moreover, even prior to the reclassification in March 2008 and

since the end of 2007, RBS had not marked the sell portfolio
exposures to fair value, did not subject them to IPV in
February 2008, and deferred until April 2008 making a £135m
fair value write-down of the Clear Channel loan that was
required in February or March 2008, for no legitimate reason.

74.6A.4B All of the above meant that the CME Table entry for leveraged
loans was confusing and misleading, with various exposures
being accounted for in different ways, and none of this being
explained to the reader. In summary, of the £14.5bn 31
December 2007 net exposure figure in the CME Table
(column 2):

(i) About £2.5bn (in fact £2.464bn) was held by ABN AMRO,
classified L&R since before 2007. Although that exposure
had suffered a significant change in fair value, no write-
downs had been applied to it by the Prospectus Date or
were included in the column 6 £1.25bn estimated write-
down figure. £250m of the £1.25bn estimated write-down
figure consisted of what RBS says in its CME RFI was an
estimated post-March 2008 impairment, which would have
reduced the average price of that exposure from 100% to
90%.

(ii) Over £7bn of the £12bn balance was initially held HFT,
and at least £459m of the write-downs to the Prospectus
Date (included in the CME Table column 6 £1.25bn
estimated write-downs figure) related to this £7bn (write-
downs of £324m for BCE and £135m for Clear Channel).
They were then reclassified as L&R in the circumstances
described in paragraph 74.6A.3 above, and for this reason
(rather than because there was no estimated change in
fair value) the £1.25bn write-downs included no amount
for write-downs after March 2008.

(iii) The remaining balance of the £14.5bn (of up to £5bn) was

held HFT and marked and estimated to fair value, with up
05250-80298/8093941.1 144
 to £541m of the £1.25bn estimated write-down figure
relating to those assets.

(iv) The CME Table entirely excluded the additional £9.7bn

RBS Solo and ABN AMRO hold portfolio that was held
L&R from its origination. (The exclusion of RBS’s intended
long-term participation was explicitly identified in the later
RBS Interim Accounts 2008, page 9 of Appendix 2, but not
in the Prospectus or 2007 Accounts.)

74.6A.4 Further, the inclusion in the CME Table of £2.464bn of ABN

AMRO leveraged finance held on an L&R basis, and the
further L&R exposures recharacterised as such from the sell
portfolio as set out above, is inconsistent with the Defendants’
overall case that assets held L&R were irrelevant for the
Defendants’ capital planning purposes unless impaired, so
that there was no need to disclose changes in the fair value of
such assets. The inclusion of European leveraged loans is
also inconsistent with the Defendants’ overall case that
European exposures were not affected by the deterioration in
the credit markets.

74.6A.5 The CME Table also included a further £1.386bn (at the end of
2007) of leveraged loans warehoused for securitisation,
wrongly labelled ‘CLOs’.

74.6A.6 Despite the CLO warehoused leveraged loans being included

“due to (a) 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” (Amended Defence paragraph 210.2),
RBS had imprudently allowed for and disclosed no estimated
write-down for these loans from 1 April 2008 to the end of
2008; the whole of the £106m figure included in the CME
Table as estimated write-downs for 2008 was in fact historical
write-downs as at the end of Q1 2008.

74.6A.7 The £8.698bn funded exposure figure in footnote 6 to the CME

Table was not a book value and so was not directly
comparable with the £14.506bn total funded and unfunded
figure at 2007 (which was a book value).

05250-80298/8093941.1 145
 74.6AA The Prospectus omitted or understated the leveraged loan exposures in
the respects stated in the table in Appendix 1 at pages 272 to 273 (and
see further paragraph 74.c-d above).

74.6B Further:

74.6B.1 The CLO warehouses of leveraged loans were intended for

transfer to the SAU and de-risking from late March 2008.

74.6B.2 The HFT leveraged loans were over-marked as at the

Prospectus Date. The Claimants rely on RBS’s own figures for
the sale price achievable being lower than the marks applied,
and the impropriety of holding ABN AMRO’s sell portfolio on
an L&R basis (and so not marking it to fair value).

74.6B.3 It was planned by April 2008 that the ABN AMRO leveraged
loans would be transferred to RBS. As Hourican discussed
with Deloitte on around 21 April 2008 and Jamie Gatt of
Deloitte recorded in an email that day, “The market value of
these would seem to be considerably less than the current
carry value. John [Hourican] sent email to Chris Kyle on this,
as intention seems to migrate these to RBS at which point
ABN would crystallise a potentially significant loss.”

74.6C Accordingly, the Prospectus was untrue and/or misleading, because it:

74.6C.0 failed to disclose the true extent of RBS’s exposure to

leveraged loans, and suffered from the omissions,
understatements and wrongful inclusions shown in the table at
Appendix 1 pages 272 to 275.

74.6C.01 did not identify the narrow accounting basis on which certain
exposures had been selected for inclusion and others for
exclusion (see paragraph 74.6A above).

74.6C.1 included some but not other unimpaired L&R assets.

74.6C.2 labelled warehoused leveraged loans as ‘CLOs’.

74.6C.3 included L&R assets without saying so, this falsely suggesting
that the write-downs and average price figures related to the
whole net exposure figure when they in fact both only (or
largely) related to a smaller net HFT exposure figure;

and these matters were necessary information.

05250-80298/8093941.1 146
D6.7 Other Counterparties

74.7 The 2008 Accounts show an increase to the “Other Counterparties” CVA
charge of £1.5bn in 2008. A significant part of this increase (including the
£132m that was booked during H1 2008), is likely to have occurred by the
Prospectus Date and/or the Closing Date.

74.7A (formerly 80.4) Additional CVA should have been taken for Other
Counterparties and these exposures should have been disclosed. Until
June 2008 RBS imprudently assessed the CVA of its monoline exposures
on the basis of historical default probabilities and/or by reference only to
exposures above a certain “threshold”. If and to the extent that RBS used
the same methodology for CVA adjustments to other risky or credit-
sensitive counterparties (as – it appears – was acknowledged by Kyle to
the FSA in his interview of 29 October 2009), RBS’s approach was
similarly imprudent. As to RBS’s general use of imprudent threshold and
historic probabilities of default approaches to CVA adjustments, see
paragraphs 85B-D below.

D6.8 [not used]

74.7AA [not used]

D6.9 Loan Loss Provisions

74A. By April 2008 RBS’s loan losses must have materially exceeded and been
projected to exceed the levels of past losses. The 3+9 reforecast of 19
April 2008 showed that impairment losses for 2008, originally budgeted at
£2.274bn, were now forecast to be at least £2.728bn. Actual impairments
booked by the end of March 2008 totalled £656m (including £57m in
GBM).

74B. Less than four weeks after the Closing Date, RBS’s 30 June 2008 Interim
Results reported a loan impairment provision of £1.54bn (of which nearly
£300m was in GBM), substantially increased from provisions at 30 June
2007 and 31 December 2007 of £0.9bn and £1.2bn respectively. It is
inferred that this impairment had or should have been made by the
Closing Date, and should have been announced by a supplementary
prospectus.

74C. Further, market conditions meant that loan losses were likely to increase
at no less than the same rate for the remainder of 2008, signifying a likely
full year charge of at least some £3.35bn, an increase on the total 2007
charge of some £1.25bn.

05250-80298/8093941.1 147
 74D. Whatever capital plan RBS had as at the Prospectus Date, it did not
include a charge to profits for an increased loan loss provision. Given the
market conditions by April 2008, such a charge should have been made.

74E. No account was taken of an increased loan loss provision in determining

and presenting the capital projections in the Prospectus. This was a
material omission.

74F. (formerly 80.5) Additional write-downs should have been made for loan
losses. RBS’s 2008 Accounts show a loan loss charge to profits of
£6.4896bn (compared with a charge of £2.1bn in 2007). A material part of
this increase in loan loss charge must have been evident to RBS by the
Prospectus or alternatively Closing Dates.

D6.10 CDS Hedging

74G. The CDS Hedging credit offsets the total write-downs in the CME Table by
£470m. Without it, the estimated total write-downs in the CME Table would
have been £6.372bn.

74H. It was misleading to present this CDS hedging as offsetting the write-
downs in the CME Table, conveying that (i) the CDS hedging related to
identified CDS hedges in fact allocated to hedging the exposures identified
in the CME Table, (ii) the CDS hedging was an appropriate macro hedge
for the exposures in the CME Table in that as the CME Table exposures
fell in value the hedge would in all likelihood increase in value, (iii) the
figure of £470m was a prudent and reasonable estimate of the net amount
(after the costs of the hedging) by which the CDS hedging could be
expected to reduce the estimated write-downs before tax during the whole
of (i.e. by the end of) 2008. None of those things was true.

74I. In particular:

74I.1 The Defendants have not been able to identify the particular CDS
hedges that made up the alleged hedging.

74I.2 The relevant hedges had been taken out in relation to RBS Solo’s
non-trading corporate loan book (including European loans), i.e.
exposures that were not in, or even similar in nature to those in, the
CME Table.

74I.3 The alleged hedging value represents the difference between the
booked value of the hedged corporate loans (which were accrual
accounted in the banking book) and the booked value of the hedges
(which were fair value accounted). This was a mere accounting
accident—there was no difference in value between the fair value of

05250-80298/8093941.1 148
 the hedged corporate loans and the fair value of the hedges—and it
was therefore imprudent to treat the £470m figure as an indefinitely
available figure to be used to offset fair value changes in credit
market exposures.

74I.4 The £470m was (subject to the point in the previous sub-paragraph)
available to offset losses within GBM (just as any other profit or gain
in GBM was so available) but was in no way restricted or tied to the
particular exposures in the CME Table.

74I.5 In any case, the corporate loan book hedge was a poor hedge for
the exposures in the CME Table because the correlation of the
indices on which the CDSs comprising the hedging were based to
the assets in the CME Table was poor, i.e. a widening of credit
spreads in relation to the assets in the CME Table would not
necessarily lead to an increase in the value of the corporate loan
book CDS hedging.

74I.6 (formerly 74H) The CDS Hedging figure was not an estimate of the
CDS Hedging credit value for the whole of 2008 (or as at the end of
2008), but a snapshot of the fair value in March 2008. It was untrue
and/or misleading to present it as an estimate for 2008.

74I.7 Prudent estimates for 2008 would have excluded the figure
altogether, alternatively allowed for the potential reversal of fair
value CDS Hedging gains of at least £300m during 2008. That
figure appeared in the De-Risking Tables and other de-risking
reports. The Claimants will plead further to the current value of the
hedges once the Defendants have disclosed exactly what the
hedges were.

74I.8. (formerly 74J) By 16 April 2008, although the exposures in the CME
Table had dropped in value, the CDS Hedging fair value had also
dropped to £415m or £296m after running costs to date (confirming
the point at paragraph 74I.5 above), and by 30 April 2008 the CDS
Hedging fair value had dropped to £159m or £62m after running
costs. It then stayed at approximately this level until after the
Closing Date. Hence on 28 May 2008, a presentation to Cameron,
Crowe and Kyle entitled ‘GBM – 4 + 8 Forecast Review’ made clear
that “The majority of the £470m gain reported in the Capital
Planning exercise has unwound (in April month) as a consequence
of tightening spreads… For forecasting purposes it is assumed that
the £470m P&L gain is still valid.” This decrease in the fair value of
the CDS hedge by over £300m is a matter which RBS was obliged
to disclose by way of supplementary prospectus. [Further, it is
05250-80298/8093941.1 149
 inferred that each of the Director Defendants must have been
aware before the Closing Date of all such matters (as a result of
their position as Directors and/or their senior positions within RBS).
In particular, Cameron saw the relevant presentation no later than
23 May 2008, and it is inferred that the presentation was discussed
at a meeting with Whittaker during the following week. Each
Director Defendant was therefore under an obligation to notify RBS
of these matters, but it is inferred that they did not, since no
supplementary prospectus was prepared. Each Director Defendant
is therefore in breach of section 87G(5), and accordingly liable to
pay compensation under s.90(4) of FSMA.]1

74I.9 The figure of £470m was not the net amount booked to the P&L at
the end of March 2008 as a result of the mismatch between the fair
value of the hedges and the booked value of the hedged corporate
loans, because the cost (including premia) of the hedges to the end
of March 2008 had already been £100m, which reduced the P&L
effect of the hedge in the year to date. Any true and not misleading
presentation of the hedging would have to give the net P&L effect of
the hedge available since the end of 2007 (in this case £370m at
the end of March, and much less if updated to the Closing Date or
prudently estimated for the whole of 2008), and the figures in the
capital plan should also have allowed for these costs.

74J. [not used]

74K. Moreover, as part of the de-risking strategy and to deal with credit market
deterioration (and not simply as business as usual) RBS had embarked on
a costly programme of hedging. This hedging:

74K.1 was huge, including (for example)

74K.1.1 a £760m hedge taken out over the European

leveraged finance book, with a plan to increase
this to cover 50-75% of that book; and

74K.1.2 over £1.5bn of additional hedging to be taken out

against AMBAC and MBIA monolines at a cost of
around £450m over five years (on top of £730m
already held at a currently unknown cost). Over
£450m of this £1.5bn hedging was purchased
between the end of March 2008 and the Closing
Date, most of it before the Prospectus Date, at a
cost of around £135m over five years;

05250-80298/8093941.1 150
 74K.2 where effective, allowed RBS to exclude an exposure from the
Prospectus (on the basis that the CME Table was said to be
net of hedges) and exclude that exposure’s write-down,
impairment, CVA or other change in value;

74K.3 but was very costly, thus itself impacting profits and so core
and other capital ratios in the same way as write-downs.
Indeed, the hedging of (for example) monolines had the effect
of locking in the P&L cost of the CVA of the monoline at the
date of the hedge (paid as the premium for the hedge), albeit
that the cost was spread out through the life of the hedge;

74K.4 should therefore have been disclosed, along with the prudent
estimate of its P&L cost, and included in the capital plan. It is
believed and averred that these hedging costs were not
included in the capital plan.

D7 The categories of exposure omitted from the Prospectus

74L. The following exposures and associated actual and estimated write-downs, and
other changes in fair value, were wrongly omitted altogether from the Prospectus.

Section Exposure Prudent estimated

write-downs for
2008

D6.7 Other Not currently

Counterparties known
D6.9 Loan Loss At least £300m
Provisions
D7.1 Citizens SBO At least £600m
D7.2 North Sea At least £800m
conduit
D7.3 Structured real At least £500m
estate
D7.4 White Knight At least £800m
D7.5 European ABS, At least £949m
RMBS, CMBS
and mortgage-
covered bonds
D7.7 European At least £338m

05250-80298/8093941.1 151
 commercial
mortgages
D7.8 Flow credit At least £1.015bn
D7.9 Structured credit
At least £165m
D7.10 Other ABS Not currently
known
F CDPCs and other At least £175m
financial
guarantors

Total At least £5.642bn

D7.1 Citizens SBO

74M. (formerly 74.5B) The Prospectus failed to disclose RBS’s exposures to the “SBO”
(Serviced By Others) home mortgage equity portfolio, in particular those held by
Citizens. Those exposures were significant (at least about $7.8bn) and arose on a
particularly poorly performing discontinued US mortgage loan book with very high
loans-to-value (32% were over 100%), mainly 2nd lien. These should have been
disclosed together with the other credit market exposures to which (especially the
derivatives of US Residential Mortgages) they were very similar and with which they
shared the same underlying risks (namely US residential mortgage delinquencies
and house price depreciation). Their actual Q1 2008 impairments and proper
immediate impairment, alternatively expected 2008 else lifetime impairment, of
£600m-£1.15bn or loss on a sale of £2.5bn should also have been disclosed. The
estimated prudent figure is therefore at least £600m.

74N. Between the 2007 Accounts and the Prospectus Date:

74N.1 In early April 2008, as shown by an 8 April 2008 ‘Summary of Loan Loss
Forecasts of SBO Home Equity Purchased Pools’ presentation, RBS
estimated that the SBO book would lead to impairments of some $1.04bn
up to 2015, of which $360m would be in 2008 and another $288m in 2009.
RBS’s internal accounting policy allowing it to amortise the lifetime losses
over the lifetime is not admitted, but was imprudent and improper: the full
lifetime losses should have been taken as an immediate impairment and in
any event included in a prudent estimate of write-downs and disclosed in
the Prospectus.

74N.2 By mid-April 2008, the estimated 2008 and subsequent impairments for
the SBO book (recorded in the 19 April 2008 3+9 reforecast) were revised
upwards to $650m from the $300m figure budgeted at the start of the year,

05250-80298/8093941.1 152
 reflecting (it was said) “Higher charge-off’s driven by falling house prices
and higher delinquencies on loans with LTV greater than 100%”.

74N.3 An impairment of £112m was taken in Q1 2008. According to RBS

(paragraph 233A.2 of the Amended Defence, not admitted by the
Claimants), a total estimated impairment of £331m for 2008 was included
in the capital plan.

74N.4 Goldman Sachs’ estimate of current marks as at 15 April 2008 (referred to

above at paragraph 73M) contained an immediate markdown of £400-
600m for the SBO book. The 17 April 2008 draft of the CME Table
accordingly recorded a markdown of £500m for the SBO book. Later the
same day, reference to the SBO book and its related losses was removed
from the CME Table.

74N.5 In March or April 2008, as shown by Crowe’s 21 April 2008 memo to

Goodwin, RBS decided that the SBO book was discontinued business that
should be transferred to the SAU. Such a transfer would crystallise for
Citizens the whole loss on the portfolio.

74N.6 In any case, following the transfer to the SAU it was likely that the SBO
book would be sold. Any sale would also crystallise immediately for RBS
the whole loss on the portfolio. In an email to Whittaker dated 27 March
2008, John Fawcett (of GBM) described this as a “potentially massive
loss… a potential loss of as much as $5bn” (or £2.5bn, based on a market
price for a sale of 30-40%).

74O. By the Closing Date, as shown by the 9 May 2008 ‘Credit Risk Headlines’ briefing
and 8 May 2008 email from Kainth to Charles Buchan (Group Credit Risk), the
prediction for lifetime losses on the SBO book had been updated to $1.2-2.3bn (15-
29% of the $8bn portfolio). It is also inferred that the impairment for H1 2008 (said in
paragraph 233A.2 of the Amended Defence to be £164m) had been decided by this
date.

74P. (formerly 80.4A) Additional write-downs should have been made, and disclosed, in
respect of the SBO portfolio. By the time of the Prospectus reasonably anticipated
losses on those exposures were already significant. By July 2008, the predicted
losses on those exposures exceeded £772m.

74Q. The matters set out in paragraphs 74M to 74P would inevitably give rise to a loss to
RBS’s P&L of between £600m and £2.5bn ($5bn) in 2008, alternatively in 2008 and
2009. If this 2008 loss on the SBO US residential mortgage book had been
disclosed in the CME Table it would have increased the disclosed US Residential
Mortgages estimated write-down by 50-200%.

05250-80298/8093941.1 153
74R. The SBO exposures, their unrealised and realised change in fair value to the date of
the Prospectus, and their expected P&L loss and change in fair value for the rest of
2008:

74R.1 was necessary information within the meaning of FSMA s.87A(2), which
should have been disclosed in the Prospectus;

74R.2 represented a significant change from RBS’s 31 December 2007 financial

position, so that the “no significant change” statement was untrue and/or
misleading;

74R.3 meant that the US Residential Mortgages figures in the CME Table were
untrue and/or misleading;

74R.4 were matters which any prudent capital planning estimate would have
taken into account.

74S. Alternatively, and as updated to the Closing Date, they were matters which RBS
was obliged to disclose by way of supplementary prospectus. [Further, it is inferred
that each of the Director Defendants must have been aware before the Closing
Date of all such matters (as a result of their position as Directors and/or their senior
positions within RBS). Additionally, the ‘Credit Risk Headlines’ document referred
to in paragraph 74O above was a briefing for McKillop which he must have seen,
and it is to be inferred that the other Director Defendants would have seen it given
that unlike McKillop the other Director Defendants were executive directors. Each
Director Defendant was therefore under an obligation to notify RBS of these
matters, but it is inferred that they did not, since no supplementary prospectus was
prepared. Each Director Defendant is therefore in breach of section 87G(5), and
accordingly liable to pay compensation under s.90(4) of FSMA.]1

74T. The Citizens credit portfolio was referred to on p30 of the Prospectus, as follows:

“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”.

74U. This brief statement without figures did not amount to sufficient disclosure for the
purpose of FSMA s.87A or 87G of the size of the SBO portfolio or the scale of the
impairments that it was known would be recorded as a result of it.

74V. The Claimants reserve the right to plead further as to the SBO exposures, the
imprudence of the capital plan and the untruth of the statements relating to it when
the Defendants have disclosed documents showing what impairments for the SBO
exposures were included in the capital plan and under which years.

05250-80298/8093941.1 154
D7.2 The North Sea Conduit

74W. North Sea was a securities arbitrage conduit which held mortgage-backed
securities, monoline wrapped securities, SS CDO assets and a small proportion of
other assets. It was exposed to the same deteriorating credit markets as the
exposures in the CME Table. The Prospectus did not disclose ABN AMRO’s
exposure to North Sea, or that it would lead to a realised or unrealised loss of some
£800m during 2008.

74X Between the 2007 Accounts and the Prospectus Date:

74X.1 The AMBAC monoline, to which North Sea was exposed through its large
holding of monoline-wrapped securities, was downgraded on 18 January
2008 by Fitch. North Sea faced increasing difficulties in funding itself in
January 2008. On 23 January 2008 approval was given by RBS to exceed
its $2bn purchasing limit for North Sea-issued commercial paper (which
North Sea was unable to sell to third parties) by a further $1bn. By the end
of March 2008 North Sea was unable to attract funding.

74X.2 Assessments in March and April 2008 identified that the fair value of North
Sea had decreased in the year to date by some €400m.

74X.3 In March or April 2008 RBS decided that the North Sea exposure was
discontinued business that would be transferred to the SAU as a “bad
bank” (per Crowe’s email on 12 April 2008) asset and liquidated by the
end of June 2008. North Sea was held on an AFS basis but such a
transfer would crystallise any change in value as a P&L loss in ABN
AMRO, and any sale to a third party would crystallise such a change in
value as a P&L loss in RBS. Given the size of the P&L loss that would
result at ABN AMRO, it was planned that this transfer not take place
before the Rights Issue proceeds were received in June 2008.

74X.4 Drafts of the De-Risking Tables included a markdown of £800m in

Scenario 1 for North Sea exposures.

74Y. By the Closing Date RBS knew that there were indicators of impairment, and a likely
substantial impairment. Discussions in May 2008 referred to a likely immediate
impairment of $341m. An impairment of €108.1m was accordingly booked in June
2008, after the Closing Date.

74Z The North Sea exposures, their realised or unrealised loss to the Prospectus Date,
and their expected realised or unrealised loss for the rest of 2008:

74Z.1 was necessary information within the meaning of FSMA s.87A(2), which
should have been disclosed in the Prospectus;

05250-80298/8093941.1 155
 74Z.2 represented a significant change from RBS’s 31 December 2007 financial
position, so that the “no significant change” statement was untrue and/or
misleading; and

74Z.3 were matters which any prudent capital planning estimate would have
taken into account.

74AA. Alternatively, and as updated to the Closing Date, they were matters which RBS
was obliged to disclose by way of supplementary prospectus. [Further, it is inferred
that each of the Director Defendants must have been aware before the Closing
Date of all such matters (as a result of their position as Directors and/or their senior
positions within RBS). In particular, Cameron was aware no later than 28 May 2008
that the sale of North Sea had or would crystallised a c.£800m loss, and it is
inferred that he would have informed the other Director Defendants given the
importance of the matter. Each Director Defendant was therefore under an
obligation to notify RBS of these matters, but it is inferred that they did not, since no
supplementary prospectus was prepared. Each Director Defendant is therefore in
breach of section 87G(5), and accordingly liable to pay compensation under s.90(4)
of FSMA].1

74BB. The North Sea risks were transferred from ABN AMRO to RBS, slightly later than
planned, in July 2008 at an unrealised loss to RBS of some £830m (€1.035bn),
including the impairment already taken and referred to above at paragraph 74Y.

74CC. The Claimants reserve the right to plead further as to North Sea, the imprudence of
the capital plan and the untruth of the statements relating to it when the Defendants
have disclosed documents showing what impairments for the North Sea book were
included in the capital plan and under which years.

D7.3 Structured Real Estate Capital

74DD. ABN AMRO’s structured real estate capital (“SREC”) book consisted of
approximately €11bn of commercial real estate loans warehoused for securitisation
and held L&R, CMBS bonds and Italian non-performing loans. It was exposed to the
same deteriorating credit markets as the exposures in the CME Table. The
Prospectus did not disclose ABN AMRO’s exposure to SREC, or a prudent
estimated write-down for 2008 of at least £500m.

74EE. Between the 2007 Accounts and the Prospectus Date:

74EE.1 It was decided in January 2008 to sell down some €2bn of the portfolio in
the early months of 2008. This plan was aborted in about April 2008
because the market values were significantly below the book values and
sales would lead to an RBS P&L loss.

05250-80298/8093941.1 156
 74EE.2 In March or April 2008 RBS decided that the SREC exposure was
discontinued business and that a large portion would be transferred to
RBS. SREC was held on an L&R basis, but such a transfer would
crystallise any change in value as a P&L loss in ABN AMRO, and any sale
to a third party would crystallise such a change in value as a P&L loss in
RBS.

74FF. Before the Closing Date RBS decided to effect the transfer of the €5bn of the
portfolio held in ABN AMRO London to RBS in June 2008. Given the size of the
P&L loss in ABN AMRO that would result (expected by that time to be €350-400m),
the transfer was planned to take place after the Rights Issue proceeds were
received in June 2008.

74GG.RBS’s SREC exposures, their unrealised and realised change in fair value to the
date of the Prospectus, and their expected P&L loss and change in fair value for the
rest of 2008:

74GG.1 was necessary information within the meaning of FSMA s.87A(2), which
should have been disclosed in the Prospectus;

74GG.2 represented a significant change from RBS’s 31 December 2007 financial

position, so that the “no significant change” statement was untrue and/or
misleading; and

74GG.3 were matters of which any prudent capital planning estimate would have
taken account.

74HH. Alternatively, and as updated to the Closing Date, they were matters which RBS
was obliged to disclose by way of supplementary prospectus. [Further, it is inferred
that each of the Director Defendants must have been aware before the Closing
Date of all such matters (as a result of their position as Directors and/or their senior
positions within RBS). Each Director Defendant was therefore under an obligation
to notify RBS of these matters, but it is inferred that they did not, since no
supplementary prospectus was prepared. Each Director Defendant is therefore in
breach of section 87G(5), and accordingly liable to pay compensation under s.90(4)
of FSMA].1

74II. The majority of the ABN AMRO London SREC exposures were transferred from
ABN AMRO to RBS in June 2008 at an unrealised loss to RBS of about £345m
(€431m).

74JJ. The Claimants reserve the right to plead further as to the SREC exposures, the
imprudence of the capital plan and the untruth of the statements relating to it when
the Defendants have disclosed documents showing what impairments for the SREC
book were included in the capital plan and under which years.

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D7.4 White Knight

74LL. The Prospectus did not disclose potential exposures of €13.1bn (CAN$20.675bn) to
White Knight, or the losses that had been incurred in relation to it. Nor did it set out
any estimate of additional CVA or other types of loss that may have been estimated
in relation to it for 2008, which ought to have been at least £800m. White Knight
was a CDPC that had been set up in December 2007 to restructure swap trades
and a liquidity facility by which ABN AMRO was exposed to Skeena, following calls
on liquidity by Skeena and the Montreal Accord standstill agreement for Canadian
conduits in the summer of 2007. At the time of the Rights Issue, ABN AMRO had a
CDS exposure to White Knight, referencing super senior CDOs, and held within
RBS on the ABN AMRO credit exotics desk.

74MM. ABN AMRO’s valuation of White Knight for its 2007 financial statements was a
matter of concern to its auditors, who disapproved of ABN AMRO’s approach. Such
disapproval was not remedied and this led to the reporting of an unadjusted item by
the auditors. Between the end of 2007 and the Prospectus Date:

74MM.1 The White Knight CVA increased by some €245m (£200m) to €293m from
31 December 2007 to the end of Q1 2008, mostly in March 2008. In
addition, there were losses of some €42m in Q1 2008, due in part to an
unhedged FX exposure on the CVA.

74MM.2 ABN AMRO valued White Knight with a CDO-squared valuation approach
but making a false and imprudent assumption that total losses on the
underlying super senior CDOs (which could go up to CAN$20.675bn)
would not exceed CAN$2.51bn. As Bennett explained in an email to
Kinsella on 4 March 2008, the “most correct” approach—without the
artificial assumption—“would undoubtedly lead to a P&L loss at this point
in time” and so the assumption was introduced to “remove P&L noise” (i.e.
avoid having to take a large CVA). If the correct approach had been taken,
the CVA would have been over €1bn (or £800m).

74MM.3 ABN AMRO also held CAN$50m of White Knight floating-rate notes which
were valueless and should have been impaired to zero.

74MM.4 Drafts of the De-Risking Tables included a markdown of £700-800m for

White Knight exposures. White Knight also appeared in drafts of the CME
Table.

74MM.5 RBS planned to transfer the White Knight exposures from ABN AMRO to
RBS during 2008.

74NN. The White Knight exposures, their actual CVA at the date of the Prospectus, and
the CVA and impairments that would have been determined if a prudent approach

05250-80298/8093941.1 158
 had been taken, and their expected P&L loss and/or change in fair value for the rest
of 2008:

74NN.1 was necessary information within the meaning of FSMA s.87A(2), which
should have been disclosed in the Prospectus;

74NN.2 represented significant changes from RBS’s 31 December 2007 financial

position, so that the “no significant change” statement was untrue and/or
misleading; and

74NN.3 were matters of which any prudent capital planning estimate would have
taken account.

74OO.On RBS’s own case (which is not admitted), there was a £168m CVA for White
Knight in the first half of 2008. The White Knight risks were transferred from ABN
AMRO to RBS, as planned, in November 2008 at a loss to ABN AMRO of £366m.
The total CVA for White Knight in 2008 was around £600m (29% of the exposure).

74PP. The Claimants reserve the right to plead further as to White Knight, including in
relation to the imprudence of the capital plan and the untruth of the statements
relating to it, when the Defendants have disclosed documents showing what
impairments or other types of loss for the White Knight exposures were included in
the capital plan and under which years.

D7.5 European ABS, RMBS, CMBS, and Mortgage-covered bonds

74QQ.(largely formerly 81C) The Prospectus excluded from the CME Table all ABSs
based on underlying assets of European origin (“European ABSs”). These included
over £23.4bn of European RMBS (including £7.8bn mortgage-covered bonds) and
£4.4bn of UK RMBS (these are the 2007 figures according to the 2008 Accounts), of
which about half were categorised HFT and about half AFS. These included in the
Topaz, Uropa, Britannia and Landmark (largely failed) deals over £400m of UK
RMBS (especially Alt-A) and whole loans. The Prospectus did not make any
statement explaining this. It should have included prudent estimated write-downs for
2008 of at least £450m for European RMBS and £499m for European CMBS, and
dealt with such ABSs in the following way:

74QQ.1 It should not have excluded them from the CME Table and the Prospectus
more generally on a blanket basis merely because of their origin. An
assessment of the likely credit risk in respect of such securities should
have been carried out based on all the characteristics of the particular
securities in question.

74QQ.2 The European ABSs should have been disclosed in the Prospectus. There
were substantial concerns about European as well as US assets in the

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 markets at the time. European leveraged loans and, it is currently
believed, European loans warehoused for securitisation, were disclosed in
the CME Table.

74QQ.3 Alternatively, the Prospectus omitted necessary information in that it

should have disclosed:

74QQ.3.1 that the European ABSs had been omitted on a blanket basis,
pursuant to a judgement that no write-downs were likely in
respect of any European assets;

74QQ.3.2 the basis of that judgement, so that investors could assess for
themselves the relevant risk factors.

74RR. Prior to the Prospectus Date:

74RR.1 Part of the European RMBS holdings (previously marked at £5.577bn)

was written down by £185m to a price of 94% in Q1 2008. As far as the
Claimants are presently aware, only part of this write-down was included in
the 3+9 forecast and so the capital plan.

74RR.2 In mid-April 2008, a further £265m additional write-down to a price of 90-

91% was estimated in the De-risking Tables and included in drafts of the
CME Table, giving a total of £450m up to April 2008 for European RMBS.

74RR.3 Part of the European CMBS holdings (previously marked at £8.8bn) was
written down by £139m to a price of 97% in Q1 2008. As far as the
Claimants are presently aware, this was not included in the 3+9 forecast
and so the capital plan.

74RR.4 In mid-April 2008, a further £360m additional write-down to a price of 93%

was estimated in the De-Risking Tables for European CMBS and included
in drafts of the CME Table, giving a total of £499m up to April 2008.

74SS. The extent and value of the European ABSs, and their applicable actual and
prudent estimated write-downs or changes in value, were necessary information
within the meaning of FSMA s.87A(2); and their loss of value represented a
significant change from RBS’s 31 December 2007 financial position. It is currently
estimated that the prudent estimated write-down for 2008 was at least £450m for
European RMBS and £499m for European CMBS.

D7.6 CMBS

74TT. (in part formerly 74.4) RBS has stated that as at 31 December 2007, it had CMBS
exposures of at least £3.284bn (carrying value) or at least £2.128bn (net) for US
05250-80298/8093941.1 160
 CMBS, and around £2.1bn (carrying value) of European CMBS. Its interim accounts
reported £6.567bn CMBS as at the end of June 2008, of which £3.87bn was HFT.
The 2008 Interim Results also reported that £1.756bn of the CMBS was rated below
AAA or was unrated, and over half of the CMBS originated in the US. It can be
inferred that RBS’s CMBS holdings as of April 2008 were similar, although it is
noted that RBS told the FSA on 10 April 2008 that it had £1bn of CMBS, mostly
European, with half rated A or lower and a quarter rated BB and below, and with a
total average mark of 98%. Only £148m of the “US Commercial Mortgages” figure
disclosed in the Prospectus comprised CMBS (see paragraph 74.4A above), and no
other CMBS were disclosed in the Prospectus.

74UU. (formerly 74.4D) The 2007 Accounts also made no disclosure of off-balance sheet
CMBS exposures assumed by liquidity commitments to conduits, special purpose
entities or derivatives. Further, commercial real estate prices fell further during the
Rights Issue Period. RBS ought to have issued a supplementary prospectus
accurately setting out the CMBS and other commercial loan exposures and
estimated write-downs.

74UU(1). The Prospectus omitted or understated the CMBS exposures in the respects
stated in the table in Appendix 1 at pages 274 to 275 (and see further paragraph
74.c-d above).

74VV. (largely formerly 81F) The Prospectus should have dealt with CMBS exposures in
the following ways:

74VV.1 It should have disclosed the CMBS exposures and prudent estimated
write-downs or changes in value for them. This was necessary information
within the meaning of FSMA s.87A(2), and the changes in value
represented a significant change from RBS’s 31 December 2007 financial
position.

74VV.2 Alternatively, it should have disclosed that RBS had decided to exclude
from the Prospectus most CMBS exposures.

74VV.3 These assets were similar in nature to those included in the CME Table.
They were still “credit market exposures”. There were substantial concerns
about CMBS at the time in the light of problems in the global real estate
markets.

74VV.4 The prudent estimated write-down for 2008 is currently estimated to be at

least that assumed by the FSA as being required to the end of Q1 2008, a
markdown of 7% from 98%, which would give a prudent estimated write-
down on the whole CMBS book of over £400m.
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 74VV.5 Alternatively, the Prospectus omitted necessary information in that it
should have disclosed:

74VV.5.1 That most of the CMBS had been omitted on the basis: of a
judgment that European CMBSs would not require material
write-downs in 2008; and/or because the US CMBS were
almost all either held on an AFS basis, or were AAA rated, US
government agency issued or guaranteed, and it was
therefore not anticipated that material write-downs would be
required in 2008.

74VV.5.2 In relation to the CMBS held on an AFS basis, the matters

referred to at Section D5 above.

74VV.5.3 In respect of the European CMBS, the matters referred to at

paragraph 74TT to 74VV.4 above.

74VV.5.4 In relation to the US non-AFS CMBS, the basis of the

judgement that no material write-downs would be required, so
that investors could assess for themselves the relevant risk
factors. In particular, it should have explained the basis on
which RBS considered that no material write-downs would be
required, given the state of the mortgage markets.

D7.7 European Commercial Mortgages

74WW. RBS had exposures to some £7bn of European commercial mortgages at the
end of 2007, calculated by deducting the £1.8bn US commercial mortgages 2007
figure in the CME Table from the £8.8bn commercial mortgages figure in the 2007
Accounts. This consisted of £4.3bn in ABN AMRO’s SREC book marked at 100%
(see further above section D7.3), and £2.8bn of RBS European commercial
mortgages marked at 98%, at least the latter of which were held HFT. None of this
(which was necessary information within the meaning of FSMA s.87A(2)), or the
significant change in exposure between year end 2007 and the Prospectus and
Closing Dates, were disclosed in the Prospectus.

74XX. The 16 April 2008 CME Table draft included for this £8.8bn of exposures a write-
down to the end of Q1 2008 of £139m to a price of 97%, and additional write-downs
to the Prospectus Date of £400m to a price of 93%. As this £539m write-down
includes the US commercial mortgages write-down of £201m in the CME Table, it is
currently estimated that the prudent estimated write-down for 2008 for European
commercial mortgages was at least £338m.

05250-80298/8093941.1 162
D7.8 Flow Credit

74AAA.The ‘flow credit’ or ‘credit flow’ books (as labelled by RBS at the relevant time)
appear to have contained over £15bn of largely HFT liquid or supposedly liquid
exposures. It is believed to have included European and US RMBS, CLOs and
CMBS, ABS positions and a corporate portfolio. It is not believed that any of these
were included in the disclosures in the Prospectus. They should have been
included, along with estimated (including actual) total write-downs for 2008 currently
estimated at £1.015bn. This was necessary information within the meaning of
FSMA s.87A(2), and/or represented a significant change from RBS’s 31 December
2007 financial position.

74BBB.Prior to the Prospectus Date:

74BBB.1 A £70m write-down was taken in Q1 2008 alternatively April 2008.

74BBB.2 On 9 April 2008, it was noted in a de-risking paper that “Flow Credit IPV
results show that the business has been overmarked at month end since
end-Aug 2007, by up to ~£35m, mainly on illiquid bond positions” and
“Preliminary March IPV results suggest a ~£40m overmark across the
Flow Credit business”.

74BBB.3 The De-Risking Tables estimated a further £650m to £1.015bn of write-

downs.

74BBB.4 Drafts of the CME Table included a £65m write-down for flow credit until it
was removed in the circumstances described in paragraph 73G.2 above.

74BBB.5 The flow credit book had been allocated to the de-risking exercise and a
planned selling down of flow credit exposures (especially CLOs, and low
grade RMBS and CMBS, ABS, and corporate exposures) was taking place
to reduce total exposures from £17bn to £10bn in Q2 2008, with some of
the portfolios (including principal strategies) to be discontinued altogether.

74CCC. Between the Prospectus and Closing Dates:

74CCC.1 On 7 May 2008, an expected write-down of £270m was recorded,

although this had apparently not been included in the 3+9 forecast and
therefore the capital plan. (On RBS’s own case (which is not admitted),
there was a £197m write-down to flow credit in the first half of 2008.)

74CCC.2 It was planned that ABN AMRO subprime RMBS in the flow credit book
would be transferred to RBS London. It was transferred in June 2008 with
a year to date write-down of £66m.

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D7.9 Structured Credit

74DDD. The ‘structured credit’ books (as labelled by RBS at the relevant time) appear to
have contained various categories of exposures including RBS and ABN AMRO’s
‘exotic credit’ correlation books and tranched ABS, other US and European ABS,
residual CLO paper, a structured loan warehouse, and RBS’s exposures to
Havenrock.

74EEE. The correlation books totalled some €2.18bn (mainly held at ABN AMRO),
including exposures to SS CDOs.

74FFF. The tranched ABS (“TABS”) exposures were mainly to US sub-prime RMBS and
totalled over $1.5bn. Before the Prospectus Date, alternatively the Closing Date, it
was proposed that they be moved to the SAU as part of the de-risking exercise.

74GGG. The De-Risking Tables and supporting reports allowed for write-downs of £125m
for the ABN AMRO correlation book, and £40m for the TABS book. Drafts of the
CME Table included write-downs for these exposures (within the category
‘structured credit’) which were removed in the circumstances described in
paragraph 73G.2 above.

74HHH. It is currently estimated that the prudent estimated write-down for 2008 is at least
the £165m included in the De-Risking Tables. On RBS’s own case (which is not
admitted), there was a £168m write-down to flow credit in the first half of 2008.
This was necessary information within the meaning of FSMA s.87A(2), and/or
represented a significant change from RBS’s 31 December 2007 financial position.

D7.10 Other ABS

74III. At the end of 2007 RBS had net exposure to £9.313bn of other asset-backed
securities (i.e. not RMBS, CMBS, CDOs or CLOs). £1.295bn was HFT US
exposure, £1.584bn was AFS or other US exposure, £2.183bn was HFT non-US
exposure, and £4.251bn was AFS or other non-US exposure. Given the
deterioration in the markets for securitised products, and their similarities to the ABS
disclosed in the CME Table, RBS should have disclosed these exposures and
prudently estimated the significant change in their value during 2008, this being
necessary information and the failure to do so falsifying the ‘no significant change
statement’.

D8 Misstatements and omissions

75A In certain cases, in the Defence, RBS has contended that certain exposures were
not recorded in the Prospectus due to the adoption of accounting conventions (such
as “Available for Sale” accounting) or other technical reasons. It is denied that such
grounds were good grounds not to make disclosure of the full exposures. In any

05250-80298/8093941.1 164
 event, however, RBS should have at least made disclosure of the use of such
selective accounting treatment and the grounds on which such exposures were not
being recorded. See further Section D5, D6.6 and D6.8 above.

75 In the circumstances described in Sections D6 and D7 above and paragraph 81A

below, the statements made in the Prospectus as to the extent of credit market
exposures and their estimated write-downs for 2008 were untrue and misleading, in
breach by the Defendants of section 90(1)(b)(i) of FSMA. The Prospectus clearly
represented that the full extent of such exposures was as recorded, but in fact the
extent of those exposures was significantly understated (and/or materially similar
exposures were not recorded), as was the amount of prudent estimated write-
downs or other losses for 2008. Further, as set out in Section D7 above, whole
categories of exposure and their prudent estimated losses for 2008 were omitted.
Moreover, the no significant change statement was also false given the undisclosed
increases since December 2007 in the exposures, and the write-downs or
decreases in their value during the same period.

76 Further, the omission of the true extent of these exposures, their losses to date in
2008 and what estimated losses could prudently be estimated in 2008, and/or the
inadequacy of the disclosure in the Prospectus in those respects, was a breach of
section 90(1)(b)(ii) of FSMA by the Defendants, in circumstances where the true
extent of those exposures was:

76.1 Necessary information in order to enable investors to make an informed

assessment of the financial position and prospects of RBS and the rights
attaching to the Rights Issue shares; and was therefore a matter which
was required to be included in the Prospectus pursuant to FSMA sections
87A(1)(b) and 87A(2); and/or

76.2 A matter which was required to be included in the Prospectus pursuant to

FSMA section 87A(1)(c), and Annex I, §§3.1, 5.2, 6.1.1, and 25. The
Claimants also rely on Annex I, §§4, 9.1, 9.2.1, 10.1, 10.3, 12.1, 12.2 and
20.9 and Annex III, §§2 and 3.4.

76A. [not used]

77-81 [not used]. [Where retained, these paragraphs from former Section E have been
renumbered and repositioned in Section D, and labelled accordingly]

77A (formerly 82A) Further or alternatively, the Prospectus omitted necessary

information in that (contrary to the guidance in the SSG Report) it did not make the
following disclosure which, given the nature of RBS's business, its capital and
liquidity position, and its credit market exposures, was necessary information:

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 77A.1 In respect of all of its credit market exposures where there were underlying
mortgages, details of the assumptions used to predict the expected cash
flows of the underlying mortgages, or other relevant valuation sensitivities.

77A.2 A breakdown of its CDO, CLO, subprime and Alt-A exposure by category
of underlying collateral along with the corresponding gross and net (post-
insurance) exposure for each category.

77A.3 A breakdown of RBS's monoline exposure by category of collateral and

monoline credit rating.

77A.4 A breakdown of any credit valuation adjustment by category of collateral

and monoline credit rating.

77A.5 A breakdown of RBS's CMBS and Leveraged Finance exposure by

industry and by geography.

77B (formerly 82B) Further or alternatively, to the extent that the matters addressed in
paragraphs 73 to 74HHH, 75A to 77A above and 81A below arose or became
evident after the date of the Prospectus they should have been disclosed in a
supplementary prospectus, but were not, in breach of section 87G(2) and 90(4) of
FSMA.

77C. [Further, it is inferred that each of the Director Defendants must have been aware
before the Closing Date of all such matters (as a result of their position as Directors
and/or their senior positions within RBS). Each Director Defendant was therefore
under an obligation to notify RBS of these matters, but it is inferred that they did not,
since no supplementary prospectus was prepared. Each Director Defendant is
therefore in breach of section 87G(5), and accordingly liable to pay compensation
under s.90(4) of FSMA.]1

77-81 [not used]. [Where retained, these paragraphs from former Section E have been
renumbered and repositioned in Section D, and labelled accordingly]

81A. Further, the CME Table appeared in a section headed "Credit Market Exposures".
This section was misleading and/or omitted necessary information:

81A.1 It would have appeared to an investor reading the Prospectus that (in
particular, in the absence of a proper capital plan) this was a complete
analysis of RBS’s Credit Market Exposures in respect of those classes of
asset which were potentially vulnerable to the deterioration in the credit
markets at the time.

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 81A.1.1 The Prospectus (at p.7) described the Board has having
“made an assessment, based on current knowledge, of the
likely quantum of write-downs in 2008 in respect of the
deterioration in credit markets”.

81A.1.2 The Prospectus (at p.24) described these estimates as being

made on the basis of “prudent assumptions”.

81A.2 The Prospectus was misleading in that in fact the CME Table did not
include such a complete analysis, but dealt with only selected credit
market exposures, and the Prospectus did not identify that it had been
limited in this way.

81A.3 The Prospectus omitted necessary information in that the CME Table
should have included all classes of asset which were potentially vulnerable
to the deterioration in the credit markets at the time, whether subject to
write-downs or not.

81A.4 Alternatively, if certain classes of asset which were potentially vulnerable

to the deterioration in the credit markets at the time were to be omitted
from the Prospectus because in the opinion of the Directors, exposure to
vulnerable asset classes was not expected to result in any capital effect
(e.g. because of the way in which they were accounted for), then the
Prospectus omitted necessary information in that it should have disclosed:

81A.4.1 That these classes of asset had been omitted on the basis of a
judgment that no write-downs were necessary.

81A.4.2 The basis of that judgment (e.g. details of delinquencies), so

that investors could assess for themselves the relevant risk
factors.

81A.5 RBS failed to explain that the exposures in the CME Table set out
“exposures to certain categories of asset from a risk perspective"
(Paragraph 93 of the Response) and that this classification had been
relied on by RBS to reclassify certain CDOs as CMBS (Paragraph 93 of
the Response) and to use "index hedges and other general hedges"
(Paragraph 96 of the Response) to reduce the level of exposures stated in
the CME Table, and this rendered the CME Table misleading.

05250-80298/8093941.1 167
81B. to 82B [not used] [Where retained, these paragraphs from former Section E have
been renumbered and repositioned in section D, and labelled accordingly]

Section E – [not used]

Section F – Monoline, CDPC and financial guarantor exposures

82C. CVA is a credit valuation adjustment calculated daily on the basis of the exposure to
the counterparty, the credit spread of the counterparty, and the loss-given-default of
the exposure, to adjust the value of the protection offered by the monoline for its
credit risk. Increases in the CVA represent a charge to profits and accordingly a
depletion in capital.

83. Paragraphs 71 and 72 above are repeated.

83A. At p. 12 of the Prospectus:

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.

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.

84. At p. 27 of the Prospectus, RBS also stated:

The following table sets out certain information in relation to RBS’s exposures to monoline insurers by counterparty
credit quality.

Current Estimates

Monoline Notional Fair value Gross Credit Hedge Net

exposures of exposure valuation exposure
by underlying adjustments
counterparty asset (pre-tax)
credit
(1)
quality
£ billions

AAA/AA 19.8 15.6 4.2 (1.1) (0.4) 2.7

05250-80298/8093941.1 168
 A / BBB 2.6 2.2 0.4 (0.3) 0.2

Non- 2.6 1.0 1.6 (1.3) 0.3

investment
grade

Total 25.0 18.8 6.2 (2.7) (0.4) 3.2

Credit 0.9
valuation
adjustments
taken in
2007

Estimated (1.8)
credit
valuation
adjustments
before tax in
2008

The following table sets out certain information in relation to RBS’s exposures to monoline insurers by collateral
type.

Monoline Notional Fair value of % Split Underlying Mark to market

exposures underlying underlying asset value as
by asset asset value % of notional
collateral
(1)
type
£ billions

RMBS and 6.1 2.5 13% 41% 3.6

CDO of
RMBS

Other ABS 4.5 4.1 22% 91% 0.3

CMBS 3.7 2.6 14% 70% 1.0

Non ABS 10.8 9.6 51% 88% 1.2

(incl CLOs)

Total 25.0 18.8 100% 75% 6.2

85. The 2007 Accounts (p43) had disclosed £2.5bn of net direct exposure to “financial
guarantors”, apparently including (according to the ABN AMRO Annual Report pp
26 and 138) €1.026bn of ABN AMRO exposures to monolines (although the term
was not used) plus a €969m exposure to CDPCs. This entry in the 2007 Accounts
was misleading as the disclosed figure only covered RBS’s exposure to monolines
and not financial guarantors more generally, and it remained misleading after the
Prospectus, which did not explain the true position or set out any exposures to
CDPCs or other non-monoline financial guarantors.

05250-80298/8093941.1 169
Monoline insurers

85A. Monoline insurers provided financial guarantees to banks of the timely payment of
cash flows on debt instruments or to otherwise enhance the credit quality of their
debt instruments. RBS used monoline insurers to hedge the risk retained on the
senior or super-senior tranches of ABSs and CDOs. RBS’s exposure to monoline
insurers significantly increased with its acquisition of ABN AMRO, becoming the
largest exposure of all UK banks.

85B. RBS’s approach to valuation of exposures was as follows:

85B.1 To the extent that an underlying asset was insured by the monoline, that
asset was not disclosed in the 2007 (and 2008) Accounts or CME Table or
Prospectus.

85B.2 Instead, RBS valued its exposure to the monoline that insured the
underlying asset. RBS calculated the monoline’s ‘gross exposure’, which
was the amount by which the insured asset’s fair value had deteriorated
below its book or notional value, i.e. the amount of the write-down RBS
would have to take if uninsured.

85B.3 A CVA of the monoline protection was then calculated on that exposure.

85B.4 Until late 2007, RBS used historic default probabilities to assess the CVA
of its monoline exposures. However, from early 2008 until a change of
practice effected in June 2008 RBS applied a CDS-spread methodology
for calculating the CVA—a much more accurate measure of monoline
credit risk—but only to the amount of the monoline exposure that was
above a ‘threshold’ of RBS’s own risk appetite. For the amount below that
threshold, it either assessed no CVA or alternatively (which amounts to
broadly the same thing) used the historic default probabilities measure.

85C. As to the threshold approach to valuing the CVA for monolines:

85C.1 It was inherently imprudent. It deliberately disapplied almost all evaluation

of credit risk to a part of the exposure to the monoline, systematically
reducing the CVA applied to the monolines below the prudent figure. That
was unjustifiable, at any rate with distressed counterparties (as most
monolines were by early 2008).

85C.2 The threshold approach was known by RBS to be imprudent and not
justifiable. In particular:

05250-80298/8093941.1 170
 85C.2.1 On 16 February 2008, Kyle reported that Deloitte’s view was
that, applying IAS, the threshold approach should be
abandoned, and Kyle concluded that “it is difficult to argue that
the approach suggested by D&T is unreasonable”.

85C.2.2 On 21 February 2008 Petri Hofste (Executive VP at ABN

AMRO Group Finance) complained to Hourican that the
January CVA increase recorded in line with ABN AMRO
accounting and pricing policies and “with the pricing guidance
available in IFRS” had been reversed, contradicting an
agreement that policies and methodologies in ABN AMRO
would only be changed after a proper review, discussion and
agreement. The email was forwarded to Kapoor. The reversal
to the CVA increase recorded for ABN AMRO for January had
been made on Goodwin’s instruction to Hourican.

85C.2.3 Kyle reported to Crowe, Cameron and Robertson by an email

on 15 March 2008 that “D + T [Deloitte] do not concur that our
policy is compliant with the FV requirements of IFRS… Given
the size of the combined exposure this may affect their
willingness to sign off RBS's monthly profits for capital
purposes… I will escalate this issue to Guy [Whittaker] on
Monday”.

85C.2.4 RBS’s internal April capital forecast dating from 2 April 2008
noted “We are under pressure from Deloittes to revise the
policy regarding the threshold which would significantly
increase the required writedown”.

85D. Accordingly, RBS planned to abandon the threshold methodology and told Goldman
Sachs, UBS and Merrill Lynch it would be abandoning it, and then did abandon it:

85D.1 The de-risking powerpoint of 17 April 2008 proposed removing the

threshold for all monolines excluding MBIA and AMBAC, and then for
those two if they were downgraded.

85D.1A RBS told Goldman Sachs and Merrill Lynch on 17 April 2008 that RBS’s
thresholds had been removed.

85D.2 On 19 April 2008, UBS (co-bookrunner) was told “CVA charge—have

changed methodology—charge applied to full exposure rather than
exposure above limit”.

05250-80298/8093941.1 171
 85D.3 In the Kyle Memo (see paragraph 71CC.2 above), Kyle said that “for
capital planning purposes we made two broad assumptions… CVA with
zero threshold”.

85D.4 In a memo dated 6 June 2008, Kyle proposed that the threshold be
abandoned for the May 2008 results, and that this abandonment
“represents a significant improvement on the existing methodology” that
was “anticipated as part of the Trading Statement”. This proposal was
carried out.

85E At pp. 26-27 of the Prospectus, RBS had (without the threshold method) estimated
for all of 2008 a CVA of £1.752bn on monoline exposures (in addition to £0.9bn,
more precisely £0.862bn according to the 2008 Accounts, which had been realised
at the year end 2007). However, for the reasons set out above, these write-downs
were merely a quantification of the fair value CVA in April 2008, alternatively of the
fair value CVA in April 2008 but assuming a planned and inevitable improvement in
methodology had already taken place. They did not adequately estimate or allow for
future deterioration (i) in the monolines’ credit rating and/or CDS spreads or (ii) in
the values of the underlying assets. As Tobin explained in an email of 8 May 2008,
“The £850m [estimated post March 2008 write-down included in the CME Table] is
there to cover removal of threshold and other specific provisions”. Kyle’s memo of 6
June 2008 referred to at paragraph 85D.4 above pointed out that the proposed
removal of the threshold would take the monoline write-downs to date (i.e. to the
end of May 2008) to £1.689bn, out of the total figure of £1.752bn estimated in the
CME Table for the whole of 2008.

85E(1). The Prospectus omitted or understated the monoline exposures in the

respects stated in the table in Appendix 1 at page 276 (and see further paragraph
74.c-d above).

85F. RBS disclosed exposures underlying its direct exposure to monolines of £25bn of
RMBS, CDOs of RMBS, other ABS, CMBS, and non-ABS (including CLOs), on p.27
of the Prospectus, at a value of £18.8bn. As to these exposures:

85F.1 Their valuation directly affected the gross exposure of the monolines, and
therefore the amount of the monolines CVA.

85F.2 There was no breakdown of the valuation between CDOs and RMBSs, and
between CDO tranches or type of RMBS (for example, whether sub-prime or
Alt-A), or of how they had been marked. Although the entirety of these
insured exposures was similar in size to the entirety of the uninsured
exposures in the CME Table, the Prospectus provided insufficient information

05250-80298/8093941.1 172
 to enable investors to understand what marking levels had been applied to
these insured exposures and whether they were justified. That was
necessary information.

85F.3 It was prudent to estimate the decrease in fair value of the underlying
exposures for 2008, and this would have been of at least a similar order to
the decrease in fair value of the uninsured assets included in the CME Table.

85F.4 However, in contrast, RBS valued its insured CDOs and other insured
exposures significantly higher than its uninsured CDOs and other underlying
exposures:

85F.4.1 Month-old data that had not been subjected to IPV was used to
mark the closed CDOs.

85F.4.2 RBS failed consistently to re-mark the closed SS CDOs to

correspond to the open CDOs. The Pascal and Cairn closed
mezzanine CDOs were marked at 85% and 80% respectively but
should have been marked down to 20%, to match the level at which
the open mezzanine CDOs were marked, and to which the Millerton
closed mezzanine had been re-marked at Stephen Lyons’ behest in
April 2008. This would have led to an increase in the net monoline
exposure of around £349m after booking an increased CVA of
around £177m.

85F.4.3 There was similar overmarking in relation to the other underlying

exposures.

85G. As to Havenrock:

85G.1 Havenrock was a structured investment vehicle, the exposure to which

was held within RBS’s ‘credit exotics’ book within the ‘structured credit’
unit. RBS had CDS protection from Havenrock against a $4bn portfolio of
RMBS and CDOs of ABSs which had been put to RBS in late 2007 after a
conduit became unable to fund itself. Havenrock in turn insured the first
$1bn with IKB Industriebank AG and IKB International SA and the next
$3bn with AMBAC UK. RBS’s main risk on this exposure was the credit
risk of AMBAC UK in relation to the $3bn exposure (Havenrock having no
assets of its own).

85G.2 Before the Prospectus Date, alternatively the Closing Date, it was decided
to transfer RBS’s interest in Havenrock assets to the SAU.

05250-80298/8093941.1 173
 85G.3 Given the counterparty risk of AMBAC UK and the documentation issues
which raised questions about RBS’s recourse to AMBAC US, and
indicated that the credit risk associated with AMBAC UK was different to
the credit risk associated with AMBAC US, by the Prospectus Date the
appropriate CVA on Havenrock should have been larger. RBS’s internal
CVA for AMBAC, even ignoring the documentation issues, was 34% in
June 2008. If the probability of AMBAC US not paying when called on to
do so by AMBAC UK had been correctly allowed for, the CVA on
Havenrock would have been over £750m.

85G.4 As a result of an error, the Prospectus failed to include a $417m increase

at 4 April 2008 in RBS’s CVA on AMBAC, mainly due to Havenrock. This
was reported in late April 2008 to Crowe and Hallett. It should have been
but was not corrected by way of a supplementary prospectus.

85H RBS failed to disclose ABN AMRO’s £70m (AUS$150m) direct exposure to
monoline CIFG (via an intermediation trade with CIFG’s SPV ‘Mogador’) in relation
to the Lane Cove Tunnel deal and the applicable CVA. As reported in an ABN
AMRO Event Report dated 1 July 2008, RBS had failed to record this exposure in
the relevant monoline exposure report or to include its CVA in the Monoline CVA
calculation, and its CVA had been under-marked by some US$20 million (at
US$3.5m, when the CVA based on market implied CIFG spreads would be
US$34.6m). Further:

85H.1 CIFG was downgraded by Fitch to A- negative outlook on 31 March 2008

and requested that its rating be withdrawn from Fitch on 1 April 2008.

85H.2 CIFG was downgraded by Moody’s to Ba2 on 20 May 2008, and by Fitch
to CCC on 30 May 2008.

85H.3 On 2 June 2008, Mogador was downgraded to CCC by Fitch.

85H.4 A prudent estimated CVA for 2008 on this exposure (including CVA
charge from the start of 2008, and any pre-2008 CVA mistakenly not
booked to RBS’s P&L) would have been at least £40m (including €19.7m
booked in July 2008 upon discovery of the mismarking of the CVA).

86. As to indirect exposures:

86.1 At March 2008, RBS had by its own contemporaneous figures £7.11bn
($14bn) of indirect exposure to monolines, of which £6.1bn ($12bn) was in
ABN AMRO. This indirect exposure included £3.7bn ($7.4bn) of exposure
to AMBAC and £846m ($1.7bn) to MBIA. $4bn arose from exposure to
Windmill.

05250-80298/8093941.1 174
 86.1A RBS had a further £238m ($476m, or AUS$512m) of indirect exposures to
MBIA and others (especially FSA, XL and FGIC) in an Australian portfolio
that had existed since before the Prospectus Date, but was only
discovered in July 2008 (and so had been wrongly omitted from the
indirect exposure figures referred to above). Much or most of the indirect
exposure consisted of wrapped bonds.

86.2 By the Prospectus Date alternatively the Closing Date RBS planned to
move the Windmill, Tulip and Amsterdam conduits from ABN AMRO to
RBS.

86.2A Although RBS reported the indirect exposures internally and to ratings
agencies alongside its direct exposures (for example to Fitch in late April
2008), it entirely omitted them from the Prospectus. The indirect
exposures should have all been disclosed, alternatively those with
underlying assets exposed to the same credit markets as the exposures in
the CME Table should have been disclosed.

86.3 Imprudently, RBS marked the vast majority of the monoline-wrapped

securities at par and without any write-down, fair value adjustment or
impairment, and imprudently included in the capital plan no write-down for
the exposures to the monolines irrespective of the credit quality of the
monoline. In fact, the Prospectus should have disclosed a write-down of
the indirect monoline exposures since the end of 2007 of over £1bn, and a
prudent estimate for an additional deterioration in the remainder 2008 of
significantly more than £1bn.

86.4 These indirect exposures and any change in them since the end of 2007
were necessary information for an assessment of RBS’s financial position
and prospects and matters of significant change. Further the Prospectus
and 2007 Accounts and, it is believed, the capital plan, did not include any
CVA for such exposures. A prudent capital plan would have estimated
such a CVA.

Monoline Information and concentration

86A. The Prospectus (p.27) purported to break down the monoline exposures by
counterparty credit quality, and proceeded to separate the exposures into AAA/AA
rated, A/BBB rated, and non-investment grade insurers. This created a misleading
and incomplete, and therefore untrue, picture of monoline exposures and the
monoline insurers’ counterparty credit quality; by the Prospectus Date the credit
rating ceased to provide a reliable indicator of the counterparty credit quality of
05250-80298/8093941.1 175
 monoline insurers, as investors recognised widely varying CDS spreads for
identically rated monoline insurers. If RBS had given information about its exposure
to each monoline insurer rather than by reference to unreliable credit ratings, it
would have:

86A.1 shown how concentrated RBS’s exposures were;

86A.2. revealed RBS’s exposure to individual monolines to be in a particularly

parlous state; and

86A.3. enabled an assessment of the exposures by reference to the

widening CDS spreads for each monoline insurer.

87. The statements in the Prospectus in respect of monoline insurers failed to disclose,
or did not adequately disclose, the extent of the exposure to, the necessary write-
downs in respect of, and/or the nature and seriousness of the risks to which RBS
was exposed in respect of monolines, and specifically in respect of AMBAC. In
particular, they failed to disclose that:

87.1. RBS’s monoline exposure was heavily concentrated, as a high proportion,

some $2.85bn, of RBS’s AAA direct monoline exposure was to AMBAC.
Including indirect exposure, RBS had more than $10bn exposure to
AMBAC (see paragraph 86.1 above). RBS was significantly exposed to
other weaker monoline insurers such as ACA ($2.4bn of direct exposure),
BluePoint Re ($227m of direct exposure) and FGIC ($474m of direct
exposure). RBS had frozen all credit limits towards monolines since Q4
2007.

87.2. Further, RBS’s concentration of exposure with AMBAC was (a) correlated
with its exposure to CDOs since it appears that RBS’s monoline insurance
with AMBAC was insurance of CDOs/CLOs; and (b) exposure to one of
the AAA monolines that was perceived to be higher risk by many
investors. In April 2008, AMBAC’s CDS spread was (on average) around
4% compared to (on average) around 2% for other AAA rated monoline
insurers such as Financial Security Assurance. By 4 June 2008 (prior to
the Closing Date), AMBAC had a CDS spread of 10.6% and by 10 June
2008 it had a CDS spread of 18.4%.

87.3. RBS had sought to hedge its exposure to AMBAC in early 2008, but had
only been able to hedge around $0.5bn of its exposures, which totalled
$2.5bn in February 2008. RBS was in breach of its internal exposure limit
to AMBAC by over $1bn on a mark to market basis. RBS participated in a
capital injection into AMBAC in early 2008 in order to delay AMBAC being
downgraded.
05250-80298/8093941.1 176
 87.4. Concentration risk for monolines and other counterparties was an
important aspect of their risk. RBS itself monitored such concentration risk
(including single-name concentration) in its Risk Management Monthly
Reports, and stress-tested it in its ICAAP submissions. In its 15 April 2008
answers to ‘Credit Questions’ asked by Goldman Sachs pursuant to their
due diligence on the Prospectus, RBS’s biggest single name
concentrations of corporate counterparties included the following three
monolines:

87.4.1. Ranked 1st: AMBAC, with an exposure limit of £2.6bn for RBS
plus £3.5bn for ABN AMRO giving a total exposure of over
£6bn, and a Loss Given Default (“LGD”) of £2.965bn.
87.4.2. Ranked 5th: MBIA Inc with a combined exposure limit of £2.7bn
and an LGD of £1.285bn.
87.4.3. Ranked 13th: ACA with a combined exposure limit of £1.4bn
and an LGD of £711m.

88. These matters were not adequately disclosed by the disclosure of a £1.1bn CVA on
a total notional exposure to AAA/AA monolines of £19.8bn.

89. As to the evolution of the ratings and credit-worthiness of the monoline insurers prior
to the Prospectus Date:

89.1. FGIC was downgraded by Standard & Poors to BB on 28 March 2008, and
by Moody’s to Baa3 negative watch on 31 March 2008.
89.2. Bennett noted on around 28 March 2008 that all but one monoline (XL) had
breached stress limits.
89.3. MBIA was downgraded by Fitch to AA on 4 April 2008.
89.4. Crowe’s view, stated in his 16 April 2008 GIA interview, was that all but two
monolines would “go bust” during 2008.
89.5. AMBAC’s poor results were announced on 23 April 2008.

89AA. [not used]

89AB. In the premises:

89AB.1 A prudent estimate for a 2008 CVA for monolines at the Prospectus Date
alternatively the Closing Date would have allowed for a much greater CVA
than was included in the CME Table, including because: (i) it would have
valued the underlying assets insured by monolines lower than RBS did
and/or allowed for the deterioration in their value, (ii) it would have
included all the monoline exposures, including indirect exposures; and (iii)
05250-80298/8093941.1 177
 it would have allowed for deterioration in the credit ratings and/or CDS
spreads of the monolines; and (iv) it would have used a more realistic
recovery rate of 25% rather than the 40% used in RBS’s calculations.

89A. Further, the 2008 Accounts record that the CVA write-down for monoline insurers
increased from £3.2bn at the Prospectus Date to a total of £6bn by the end of 2008.
From April to June 2008, the average CDS spreads on RBS’s exposure to monoline
insurers increased from around 9% to around 19%. MBIA announced poor Q1
results on 12 May 2008. On 4 June 2008, Moody’s put AMBAC and MBIA on review
with further downgrade being the most likely outcome. S&P downgraded MBIA,
AMBAC, XL and CIFG on 5 June 2008. It is inferred that the true monoline insurers’
CVA had increased between the Prospectus Date and the Closing Date by a sum
currently estimated at over £1bn, and that a prudent estimate for monoline insurers’
CVA for the whole of 2008 of over £3bn.

CDPCs and other financial guarantors

90. The Prospectus did not disclose RBS’s large exposure to CDPCs (which had also
not been disclosed in the 2007 Accounts):

90.1. According to the 2008 Accounts, the notional amount of protected assets
in respect of which protection had been bought from CPDCs at the year
end 2007 was £20.6bn (p. 137). That exposure was principally in respect
of tranched credit derivatives, which represented a significant credit risk at
the time of the Rights Issue. Of this £20.6bn: £10.5bn arose under White
Knight (see section D7.4 above), and £10.1bn arose under CDPCs other
than White Knight and is addressed here.

90.2. It can be inferred that as of 30 April 2008, the notional amount of

protection was similar or larger, and that the gross exposure (namely the
notional amount less the market value of the protected assets) was large.
At year end 2008, the notional amount was £25.2bn and the gross
exposure was £4.776bn (p. 137 of the 2008 Accounts).

90.3. Almost all RBS’s exposure to CDPCs came with its acquisition of ABN
AMRO.

90.4. The Defendants’ CVA approach applied to monolines at the Prospectus

Date appears to have been the application of a generic spread curve,
giving a CVA to 30 June 2008 of £23m on a fair value movement of
£375m (excluding White Knight). Had a prudent approach been used the
CVA for CDPCs (excluding White Knight) would have been up to £175m to
the end of June 2008 (taking for present purposes the method adopted by
05250-80298/8093941.1 178
 RBS at the end of 2008). The Prospectus should have disclosed these
exposures and an estimated CVA for 2008 of at least this sum.

90A The Prospectus also did not disclose RBS’s exposure to other (non-monoline non-
CDPC) financial guarantors. All exposure to financial guarantors was necessary
information. The heading in the 2007 Accounts and 2008 Interim Accounts was
“Financial Guarantors” not monoline insurers. These included but were not limited
to:

90A.1 RBS’s exposure to AIG Financial Products, including over £220m (£288m
by the Closing Date) insuring RMBS and the Iona, Bernoulli and other
CDOs. The AIG exposure was included in RBS’s own internal weekly
monoline reports and similar documents from at least mid-April 2008 and
CDS protection was purchased against it. RBS imprudently used historic
default probabilities to calculate its CVA on AIG Financial Products rather
than measuring it by reference to CDS spreads as it did with monoline
exposures (see paragraph 85.4B above), and should have applied and
disclosed a CVA or change in value of over £20m to the Prospectus Date,
and further as an estimate for 2008.

90A.2 RBS’s AUS$369m exposure to Dexia Bank Belgium SA, which formed part
of the temporarily mislaid Australian portfolio referred to above at
paragraph 86.1A. This had a CVA of around $8m at the Prospectus Date
and around $16m by the Closing Date.

91. Further, at the time of the Rights Issue, RBS should have recognised a significant
additional CVA in respect of CDPC exposure; alternatively, RBS would or should
have been aware that this was likely to be required given that (a) as of 1 January
2008, RBS had recognised only £44m CVA in respect of CDPCs with a gross
exposure of £863m (p. 137 of the 2008 Accounts); (b) on RBS’s own case a CVA of
£157m had been recognised by 30 April 2008; (c) by the year end 2008, RBS
recognised £1.3bn CVA for CDPCs (p. 137 of the 2008 Accounts), of which around
half related to White Knight (d) by the Prospectus Date the CVA for non-White
Knight CDPCs was around £50m; and (e) spreads for tranches of synthetic CDOs at
the beginning of 2008 were well above the levels seen at the end of 2007. The
Prospectus should have recorded an additional CVA, or disclosed the fact that such
additional CVA was likely to be required. As to the valuation of the underlying
exposures, paragraph 85F above is repeated mutatis mutandis.

Negative Basis and Intermediation Trades

91A. By negative basis trades, RBS bought debt instruments and then insured them via
credit protection with monolines, CDPCs or other counterparties. The amount of

05250-80298/8093941.1 179
 negative basis trades held by RBS is not currently known, but by the end of May
2008 was at least £13.4bn. Further, RBS also conducted intermediation trades with
monolines, CDPCs or other counterparties. The amount of intermediation trades
held by RBS is not currently known but by the end of May 2008 was in the region of
£5bn.

91B. No negative basis trades and intermediation trades with counterparties other than
monolines were disclosed in the Prospectus.

91C. Most or all of the negative basis trades and intermediation trades were transferred
to the SAU in April alternatively May 2008 as discontinued business for de-risking.
The De-Risking Tables estimate a P&L impact of £800m for negative basis trades
(a funding cost).

Breaches of FSMA section 90

92. In the circumstances, the statements made in the Prospectus in respect of

monolines, in respect of CDPCs and CVA, and in respect of negative basis and
intermediation trades 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, CVA, negative
basis and intermediation trades. In addition, by reason of the matters pleaded
above, it was misleading and/or untrue to state at p. 134 of the Prospectus that
there was "no significant change in the trading or financial position of the RBS
Group since 31 December 2007”, other than those changes specifically identified in
Part XII, §23.1, of the Prospectus.

93. Further, the failure to give adequate disclosure in respect of RBS’s exposures
towards, and likely write-downs in respect of monolines and CDPCs, or in respect of
CVA or in respect of negative basis or intermediation trades; and/or the omission of
the matters pleaded at paragraphs 87, 89 AB and 90, 91 and 91A above, and/or the
inadequacy of the disclosure in the Prospectus in those respects, was a breach by
the Defendants of section 90(1)(b)(ii) of FSMA, in circumstances where those
matters were:

93.1. Necessary information in order to enable investors to make an informed

assessment of the financial position and prospects of RBS and the rights
attaching to the Rights Issue shares; and was therefore a matter which
was required to be included in the Prospectus pursuant to FSMA sections
87A(1)(b) and 87A(2); and/or

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 93.2. Matters which were required to be included in the Prospectus pursuant to
FSMA section 87A(1)(c), and Annex I, §§3.1, 5.2, 9.1, 9.2, 12.1, 12.2,
20.9, and 22. The Claimants also rely on Annex I, §§4, 10.1 and 10.3 and
Annex III, §§2 and 3.4.

94. Alternatively, if and to the extent that (contrary to the above) the matters referred to
at paragraphs 85G.4, 87, 89A, 89AB, 90, 91 and 91A above were not matters that
the Defendants were obliged to disclose in the Prospectus, and if this was because
they arose and/or were noted after the Prospectus was approved:

94.1. They were matters which RBS was obliged to disclose by way of
supplementary prospectus as soon as practicable by virtue of section
87G(1) and (2) of FSMA and Rule 3.4.3 of the Prospectus Rules.

94.2. However, RBS failed to provide a supplementary prospectus giving

appropriate disclosure accordingly, and no such supplementary
prospectus was provided at any time before the closure of the Rights
Issue Period on 6 June 2008.

94.3. In the circumstances, RBS was in breach of sections 87G(2) and 90(4) of
FSMA.

94.4 [Further, it is inferred that each of the Director Defendants must have been
aware before the Closing Date of all such matters (as a result of their
position as Directors and/or their senior positions within RBS). Each
Director Defendant was therefore under an obligation to notify RBS of
these matters, but it is inferred that they did not, since no supplementary
prospectus was prepared. Each Director Defendant is therefore in breach
of section 87G(5), and accordingly liable to pay compensation under
s.90(4) of FSMA.]1

Section G – Market Risk and the use of VaR

RBS’s approach to VaR

94A. RBS’s assessment of its credit market exposures, and of its market risk generally,
was heavily dependent upon the use of a VaR model. RBS relied on its VaR model
as a tool for measuring and managing the market risk of assets held in its trading
book; and as an input into the calculation of the amount of capital it was required to
hold in respect of market risk.

94AA. In the 2007 Accounts, RBS stated at pp. 83-84, after a summary of its market risks:

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 “Strategy and process

GEMC approves the Group’s trading book market risk appetite, expressed
in value-at-risk (VaR) and stress testing limits. These limits are delegated
to individual trading businesses within the Group. The Board, GEMC and
GRC review monthly reports, which provide summary information on VaR,
trading positions and stress tests.

The market risk function is independent of the Group’s trading businesses

and is responsible for:

- effective application and compliance with the Group’s Market Risk

Policy Statement (MRPS), aligning the market risk taken by the Group
with the risk limits set by GEMC;

- identification, measurement, monitoring, analysis and reporting of the

market risk generated by the various businesses; and

- determination of appropriate policies and methodologies to measure

and control market risk.
Market risk measurement methodology

The Group uses a number of approaches to measure market risk in its

trading and treasury portfolios. These approaches include:

(i) VaR

VaR is a technique that produces estimates of the potential negative

change in the market value of a portfolio over a specified time horizon at
given confidence intervals. For internal risk management purposes, the
Group’s VaR assumes a time horizon of one trading day and a confidence
level of 95%. The Group also calculates VaR at a confidence level of 99%
and a time horizon of ten trading days for the purposes of calculating
trading book market risk capital.

The Group uses historical simulation models in computing VaR… The

Group typically uses the previous 500 trading days of market data…”

94AB. The 2007 Accounts then set out at p. 84 the 2007 average, end of 2007, and 2007
range “VaR for the Group’s trading portfolios” including and excluding ABN AMRO.
The total Group VaR including ABN AMRO at the end of 2007 was given as
£45.7m, or £39.7m excluding ABN AMRO. (This compared with RBS’s announced
Group VaR of £16.7m at the end of H1 2007 and £15.6m at the end of 2006
excluding ABN AMRO.) The 2007 Accounts then continued at p. 85:

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 “Backtesting

The Group undertakes a programme of daily backtesting… 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 experienced three
backtesting exceptions at the consolidated Group level during 2007.

Market risk controls

All divisions which incur market risk in the course of their business are
required to comply with the requirements of the Group’s MRPS. Upon
notification of a limit breach, the appropriate body must take either of the
following actions:

- instructions can be given to reduce positions so as to bring the Group

within the agreed limits, or

- a temporary increase in the limit (for instance, in order to allow orderly

unwinding of positions) can be granted, or
- a permanent increase in the limit can be granted.”

94AC. There was nothing in the Prospectus updating or qualifying this description of the
use of VaR or otherwise describing any changes or planned changes to RBS’s
approach to the measurement, management and monitoring of market risk.

Backtesting exceptions and inadequacies of the VaR model

94B. As set out above, in the 2007 Accounts RBS explained that for the purpose of
calculating market risk and associated regulatory capital, its trading book was
subject to a VaR approach and that backtesting exceptions were monitored. The
greater the number of backtesting exceptions above four in the previous 250 days,
the greater the ‘plus factor’ factored into the regulatory capital calculation and
therefore the greater the regulatory capital required. If the number of backtesting
exceptions in a 250 day period reached ten, this might trigger a full VaR model
review by the FSA, with very serious attendant consequences. The consequences
might include the revocation of the waiver of the standard market risk capital rules in
favour of RBS’s VaR model for some or all of the assets and the replacement of
VaR with a ratings-based or other market risk approach, with a requirement to hold
a potentially much greater amount of capital against market risk.

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94C. At the Prospectus Date, RBS knew that the VaR model had severe limitations as a
measure of market risk during the global financial crisis in which RBS and other
banks found themselves. This is because:

94C.1. The VaR model would only produce a reliable measure of risk when there
was sufficient liquidity to enable the instruments in question to be sold
within the holding period assumed in RBS’s VaR computation.

94C.2. Drake-Brockman had expressed concerns about the effectiveness of VaR

model to Cameron and Crowe on 24 March 2008.

94C.3. The VaR model used historical data which related to periods of low market
volatility and greater liquidity in the relevant instruments.

94C.4. By April 2008 the output of the VaR model had in fact been shown to be
unreliable. From August 2007, backtesting of the VaR model, by
comparing actual profit or loss realised in trading activity to the VaR
estimate, showed significant exceptions. For example:

94C.4.1. While only one backtesting exception is expected every 100

trading days (as RBS itself explained on p. 85 of the 2007
Accounts), or 2.5 every 250 trading days, by 22 April 2008 the
number of backtesting exceptions at RBS Group level in the
previous 250 days had risen to six, including one on 18 April
2008 due to a sale of an Alt-A portfolio to Fortress at a loss.
On 30 April 2008 there was a seventh backtesting exception,
due to month end mark downs in Alt-A and sub-prime
exposures.

94C.4.2. At sub-Group level, NatWest had five backtesting exceptions

by 18 April 2008 (all of them occurring since the end of 2007),
and a further two during the Rights Issue Period, despite its
market risks principally consisting of core UK banking
exposures to GBP interest rates and derivatives that were on
the whole standard/vanilla. This was significant and should
and would not have occurred if the VaR model had been fit for
its purpose. RBS knew this but failed to investigate or to
identify and cure the failings in its model. Hence Philippos
Papadopoulos (a member of the Group Finance, Group Risk
Management, Portfolio Management and Model Validation
teams at ABN AMRO) emailed Hans Den Boer (Head of
Market Risk, GBM – Western Europe), Chris Plant (GBM
Finance, Regulatory Advisory) and Rebonato on 20 May 2008

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 querying the backtesting exceptions and pointing out that this
called the whole VaR methodology into question.

94C.5. As liquidity in the ABS market declined from at least Q4 2007 onwards, the
availability of reliable market data was reduced, which meant that the VaR
model could not properly capture the market risk of such products. RBS
relied on this to justify the movement of SS CDOs out of VaR (as set out at
paragraph 94G and following below), but did not move the other assets
exposed to these risks out of VaR nor apply a market risk capital add-on in
relation to them.

94D. The inadequacy of the output of the VaR model was also evident to RBS at the
Prospectus Date from the fact that at the Prospectus Date the market risk capital
charge for RBS’s over £550bn of trading assets was only about £1.4bn, (less than
0.3%) with no Pillar 2 additional capital for the market risk of the trading book.

94E. Given the number and frequency of the backtesting exceptions described in
paragraph 94C.4, and given that if ten exceptions were reached RBS would be
subject to model review and a likely additional capital charge:

94E.1. The explanation of backtesting and the number of exceptions to date in

the 2007 Accounts (repeated by incorporation in the Prospectus), and the
no significant change statement in the Prospectus, were untrue or
misleading.

94E.2. The number and frequency of Group and NatWest backtesting exceptions
by the Prospectus Date were necessary information within the meaning of
FSMA s.87A(2) and so their omission was a breach of FSMA s.90.

94E.3. The additional Group backtesting exception and two NatWest backtesting
exceptions during the Rights Issue Period, taking the total number at
consolidated Group level to seven, was information RBS was obliged to
disclose by way of supplementary prospectus as soon as practicable by
virtue of s.87G(1) and (2) of FSMA and Rule 3.4.3 of the Prospectus
Rules.

VaR limits and limit breaches

94F. As to the VaR limits:

94F.1. The VaR model employed historical data from the last 500 trading days
(approximately two years). This meant that from the start of the global
financial crisis that began in mid-2007 the historical data against which
VaR was tested increasingly included data from the period of market
volatility in which RBS found itself, and decreasingly data from the less
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 volatile earlier time before the financial crisis. In such circumstances, as
historical data was updated a higher VaR would be generated. RBS’s VaR
waiver from the FSA required that the historical data be updated monthly.

94F.2. By the Prospectus Date, RBS had breached its Group VaR limit: in
January 2008 twice, alternatively once (the evidence remains unclear);
twice in February 2008; and a further time on 2 April 2008. A limit breach
was very serious.

94F.3. RBS did not properly implement the monthly updating of the historical
data: it missed at least one of its monthly updates altogether in Q1 2008
(and appears to have missed others during 2007), and deliberately
delayed, alternatively failed promptly, to implement other updates
(including at least the updates of the November 2007, December 2007
and January 2008 historical data) in order to avoid limit breaches.

94F.4. Accordingly:

94F.4.1. There had been significant changes to the matters of VaR limits,
limit breaches, and the use of historical data set out in the 2007
Accounts (and repeated by incorporation in the Prospectus),
rendering the no significant change statement in the Prospectus,
and the repetition (by incorporation) of the 2007 Accounts without
qualification, untrue or misleading.

94F.4.2. The limit breaches and manipulation of historical data updates were
necessary information within the meaning of FSMA s.87A(2) and so
its omission was a breach of FSMA s.90.

94F.4.3. To the extent that the limit breaches or historical data update
manipulation continued during the Rights Issue Period (which is
currently unclear to the Claimants), that was information RBS was
obliged to disclose by way of supplementary prospectus as soon as
practicable by virtue of s.87G(1) and (2) of FSMA and Rule 3.4.3 of
the Prospectus Rules.

SS CDOs and market risk

94G. In November 2007, losses on SS CDOs caused a breach of the Group and GBM
North America VaR limits.

94GA. As a result, in December 2007, in a move approved by Kyle and Kapoor some
£5.8bn of mezzanine and high grade SS CDOs: (i) were moved out of RBS’s VaR
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 limits and ceased to be subjected to any VaR limit-setting; and (ii) for regulatory
capital purposes these assets were moved outside the VaR regime altogether, into
what RBS called its regulatory banking book, and to a credit ratings-based
approach. Further: (iii) these assets were moved out of all market risk management
including stress testing from at least 27 February 2008, following a breach of the
RBS Group stress limit. These steps were taken despite the facts that these assets:

94GA.1. continued directly to expose RBS to market risks which were likely
(through their fair valuation and sale) to impact directly upon RBS’s P&L;

94GA.2. remained trading assets accounted for on an HFT basis; and

94GA.3. were intended to be sold (making such a transfer to the banking book an
apparent breach of RBS’s own Trading Book Policy).

94GB. Further:
94GB.1. The VaR for these SS CDOs was by Spring 2008 far greater than the VaR
for the whole remainder of the RBS Group’s assets. Thus, at the
Prospectus Date, these SS CDOs had a 95% VaR of around £105m and,
by the Closing Date, they had a 95% VaR of around £204m, as against (at
the latter date) a total RBS Group 95% trading VaR excluding the SS
CDOs of around £42m to £46m.

94GB.2. If these assets had been left in the VaR trading book calculation, RBS
would have suffered numerous backtesting exceptions and limit breaches
(the Group VaR limit at this time was £50m on a 95% VaR basis) and so in
all likelihood would have been subjected to a model review. The removal
of the SS CDOs had the effect of reducing the number of backtesting
exceptions suffered, and so avoiding or delaying the model review that
would follow reaching or exceeding ten exceptions.

94GB.3. Although the removal of these SS CDOs reduced the amount of assets
subject to VaR (such that the Greenwich GCFP trading VaR reduced
instantly from £33.1m to £6.9m), and although it was noted in RBS (by
James Hamilton (Head of Market Risk, Europe) in an email of 15
November 2007 to Jin and others) that “Senior management will expect
that as a starting point VAR limits should at least be reduced by an
amount that compensates for the carve-out of the super-seniors”, the VaR
limit was not reduced. In effect, this failure to reduce the VaR limit when
these assets (with their huge VaR) were removed amounted to a
significant increase of the VaR limit for those assets remaining in VaR.

05250-80298/8093941.1 187
 94GB.4. No alternative market risk monitoring or market risk limit-setting was
implemented in relation to the SS CDOs to replace the VaR approach
which RBS had determined to be inadequate.

94GB.5. By the Prospectus Date, alternatively the Closing Date, the SS CDOs had
been included in the de-risking initiative and transferred, or were planned
to be transferred, to the SAU as discontinued business with an intention
that they be sold, liquidated or unwound.

94GB.6. The Prospectus (including the 2007 Accounts incorporated by reference)

said nothing about this transfer out of VaR.

94GC.Accordingly, the explanation of VaR, market risk, the VaR figures, and the VaR
limits set out in the 2007 Accounts (and repeated by incorporation in the Prospectus
without qualification) and the no significant change statement in the Prospectus,
were untrue or misleading:

94GC.1. The VaR regime and its limits were no longer applied to this large category
of trading assets as that regime had been determined to be inadequate
and inappropriate for them, but there was no market risk monitoring or
limit-setting applied in its place to these most-market-risky of assets.

94GC.2. These SS CDOs had been removed from VaR without any reduction in the
limit, therefore in effect increasing the limit outside the processes identified
on p. 84 of the 2007 Accounts.

94GC.3. This removal without explanation therefore rendered the limits and number
of backtesting exceptions referred to in the 2007 Accounts and previous
Accounts (when the SS CDOs were subject to or contributed to them)
misleading.

94GC.4. By the VaR measure, which was still monitored by RBS, the market risk of
these SS CDOs had dramatically increased, from a 95% VaR of £17m at
the end of 2007 to over £204m at the Closing Date.

In any event, these matters were necessary information within the meaning of
FSMA s.87A(2) and so their omission was a breach of FSMA s.90; and the
increases to these VaR amounts and the market risk of the SS CDOs during the
Rights Issue Period was information RBS was obliged to disclose by way of
supplementary prospectus as soon as practicable by virtue of s.87G(1) and (2) of
FSMA and Rule 3.4.3 of the Prospectus Rules.

05250-80298/8093941.1 188
94GD.As to the credit ratings-based approach applied to the regulatory capital for SS
CDOs from December 2007 onwards:

94GD.1. Under Basel II, this meant that the risk-weighting for such exposures could
rise to up to 1250% of the exposure amount.

94GD.2. Following the downgrade of a number of the assets underlying the SS

CDOs in and after January 2008, the required risk-weighting for most of
the SS CDOs did indeed rise to 1250% of their value, leading to RWAs for
SS CDOs rising from less than $2bn in late 2007 to some $24.4bn by the
Prospectus Date.

94GD.3 The same increase in the multiplier to 1250% of exposure size in order to
compute RWAs was or should have been expected for those few SS
CDOs which still had a lower multiplier (which would lead to an increase in
RWAs of around $7bn) given: (i) they were all marked to the same price in
the CME Table; (ii) the CDOs all had a similar underlying asset structure
and quality; (iii) rating agencies were downgrading hundreds of bonds a
month so it would probably have been only a matter of weeks before the
remaining underlying mortgages were downgraded; and (iv) the rapidly
deteriorating US mortgage market conditions meant that all CDOs based
on mezzanine sub-prime mortgages were likely to fall below investment
grade some time in 2008.

94GE. Accordingly, the capital assumptions made by RBS were imprudent and/or
unreasonable: (i) if and to the extent that RBS’s capital projections failed to allow for
the over $24.4bn (around £12bn) of RWAs for the SS CDOs referred to in
paragraph 94GD above, which would have required approximately £700m of core
Tier 1 capital at a target rate of 6% else reduced the core Tier 1 capital ratio by
approximately 0.12%; and (ii) because those capital projections failed to allow for
the additional $7bn (around £3.5bn) of RWAs for the SS CDOs referred to in
paragraph 94GD above, which required approximately £200m of core Tier 1 capital
at a target rate of 6% else reduced the core Tier 1 capital ratio by approximately
0.035%.

Other credit market exposures

94GF. As set out at section D2 above (RBS’s de-risking exercise), from March 2008 RBS
planned and then executed the discontinuation of large volumes of credit market
business and its move to the SAU for sale or other management.

94GG.RBS planned for all assets moved to the SAU to be taken out of VaR, moved to the
regulatory banking book and, as far as the Claimants are currently able to discern,
subjected to a credit ratings-based approach to regulatory capital, although their
05250-80298/8093941.1 189
 accounting treatment would remain unchanged. This would be consistent with the
treatment of the SS CDOs, which had also been moved to the SAU by May 2008
apparently because the Trading Book Policy no longer justified their retention in the
trading book or in VaR. It is currently unclear what market risk or credit ratings-
based approach was applied to these SAU assets but:

94GG.1 There had been significant changes to RBS’s market risk management
from the position set out in the 2007 Accounts (and repeated by
incorporation into the Prospectus), in that these trading assets were not or
would shortly not be subject to a market risk regime (of limits and
backtesting exceptions), rendering the no significant change statement in
the Prospectus, and the repetition (by incorporation) of the 2007 Accounts
without qualification, untrue or misleading.

94GG.2 The capital plan should have allowed for increased RWAs as a result of
the application of the credit ratings-based approach following the planned
move during 2008 of these exposures to the SAU. The Claimants will
plead further as to the amount that should have been allowed for in the
capital plan and so what would have been prudent capital ratio figures in
the Prospectus following further disclosure or explanation from the
Defendants as to the figures behind their capital plan.

Likely additional capital charges

94GH.In March and April 2008 updates in the historical data used in the VaR model
significantly increased VaR, and there were further backtesting exceptions as set
out above. RBS was correctly concerned about VaR limit breaches and anticipated
shortly hitting ten backtesting exceptions and so triggering a full model review (as
Kyle noted in an email to Crowe, Cameron and others on 23 April 2008 at 7.17am).
Accordingly, in late April 2008 it sought a meeting with the FSA to start to discuss
what needed to be done and that meeting was held on 2 May 2008.

94GI. For this reason, and because of the inadequacies in the model set out at
paragraphs 94C to D above, from at the latest 23 April 2008 RBS:

94GI.1 was (partly as a result of the matters in 94GH) expecting, alternatively

worried by the serious possibility, that the FSA would very quickly require
RBS to hold a large amount of extra market risk capital for trading assets,
as was recorded in emails between Rebonato, Crowe, Cameron,
Nathanial and others, and recorded as a key risk in the 28 May 2008 4+8
forecast; and

94GI.2 was therefore preparing, during May 2008 and onwards, approaches for
additional capital charges that could be discussed with the FSA.
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 94GI.3 Further, on 5 June 2008, the FSA wrote to RBS to request an ICAAP
submission reviewing RBS’s interim ICG, which followed discussions at
the start of May 2008 in which the FSA had made it clear that an ICAAP
review was imminent.

94GJ. RBS should have but, it is currently understood and averred, did not make
allowance in its capital plan for the likely or possible additional market risk capital
and/or Pillar 2 capital that would be required, including during or following a model
review. The Claimants’ best estimate at present is that this would have increased
RWAs by (in the region of) £4bn, which required approximately £250m of core Tier
1 capital at a target rate of 6% else reduced the core Tier 1 capital ratio by
approximately 0.04%. Accordingly, RBS’s capital assumptions and capital
projections were imprudent and/or unreasonable, and the likely or possible need for
such additional capital was necessary information within the meaning of FSMA
s.87A(2) and so its omission was a breach of FSMA s.90. Further, the
developments during the Rights Issue Period were information RBS was obliged to
disclose by way of supplementary prospectus as soon as practicable by virtue of
s.87G(1) and (2) of FSMA and Rule 3.4.3 of the Prospectus Rules.

94GK. [Further, it is inferred that each of the Director Defendants must have been aware
before the Closing Date of all such matters (as a result of (i) their position as
Directors and/or their senior positions within RBS, and in particular that (ii) at least
Whittaker and Cameron were actually aware of the matters pleaded in paragraph
94GI.1 and 94GI.2 above before the Closing Date). Each Director Defendant was
therefore under an obligation to notify RBS of these matters, but it is inferred that
they did not, since no supplementary prospectus was prepared. Each Director
Defendant is therefore in breach of FSMA s.87G(5), and accordingly liable to pay
compensation under s.90(4) FSMA.]1

Section H - Asset sales

94H. Given the post-tax figure of £4.3bn of disclosed write-downs, it was necessary for
RBS to identify £4bn of new capital, in addition to the £12bn from the Rights Issue,
in order to achieve its target 6% core Tier 1 capital ratio and in order that a third of
the £12bn raised would not be immediately swallowed up by the write-downs.

94I. The Prospectus therefore presented the £4.3bn of disclosed write-downs as likely to
be almost completely offset by the end of 2008 by £4bn of proposed asset
disposals, including “RBS Insurance and other smaller assets”, and that “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” although “RBS
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 is determined to achieve full and fair value in respect of any such disposals“ (pp.7
and 24).

94IA In fact, as the Working Capital Report (pages 26, 47) makes clear, the assumption
in the capital plan was that RBS Insurance would be sold yielding a capital gain of
£4bn (requiring a sale at a price of circa £7bn).

94J. It was imprudent for RBS’s capital plan to assume that RBS Insurance could be sold
in 2008 for circa £7bn yielding a £4bn gain. In fact:

94J.1. Just as the Prospectus as a whole, and the capital plan which it presented,
had been put together in a very short time period (on and after 9 April
2008), so too had the plan (such as it was by that date) to raise £4bn by
asset sales.

94J.2. Taking into account the timescales typically involved in large-scale asset
disposals, the minimal progress that had been made on such sales before
the Prospectus Date, and the prevailing market conditions, an assumption
of £4bn of asset sales within 8 months was unreasonable and/or
imprudent.

94K. Specifically:

94K.1. Although considered before, the plan to sell RBS Insurance had only been
seriously considered at some point in March 2008 (as McKillop stated at
the 22 April 2008 conference call).

94K.2. RBS itself considered it unlikely that RBS Insurance could be sold in 2008.
In particular:

94K.2.1. RBS’s “Group Capital Options – Summary Project Pipeline”

document put the likelihood of a sale of RBS Insurance at
25%.
94K.2.2. For example, on 14 April 2008 at 13:36 Morrison emailed
Tyler, copying Osborne and Monaghan, a version of the
“Group Capital Options – Summary Project Pipeline”
document which recorded that the probability of selling
“Xenon” and “Hopper” (collectively, RBS Insurance) was 25%.
Though this document also noted that “all data is subject to
ongoing review” this version appears to be the final version of
the pipeline before the Prospectus Date.

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 94K.2.3. Just before the Closing Date, on 3 June 2008, Tyler wrote to
Huggett, copying Harding and Peters, that he considered the
sale of RBS Insurance to be the “least likely” M&A activity to
occur in the second half of 2008.

94K.3. As regards potential Buyers:

94K.3.1. On 12 and 13 April 2008, Allianz (“Apple”) conducted due

diligence on RBS Insurance. However, on 15 April 2008,
Allianz told RBS that it would not make an offer.
94K.3.2. Despite having identified a long list of (what RBS and its
advisers hoped to be) potential buyers of RBS Insurance, RBS
received only two non-binding, highly conditional and
contingent offers on 28 May 2008. It received a further such
non-binding offer on 4 June 2008. The consideration offered in
these non-binding offers was by a large margin too small to
achieve a capital gain of £4bn as RBS had assumed in its
capital plan (see below).

94K.4. By the Closing Date, there had been little interest in RBS Insurance at the
valuation sought by RBS. RBS had to extend the bid deadline, without
effect (RBS extended the bid deadline by allowing Allianz to put a bid in
after 28 May 2008). By then, (and in light of the matters set out in
paragraphs 94K.3 above and 94M below), it was even clearer that the
£4bn target for gains from the sale of RBS Insurance and/or (in light the
matters set out at paragraph 94MA below) asset sales generally was
unreasonable and/or imprudent.

94L. The statements in the Prospectus set out in paragraph 94I above were therefore
misleading. Further and in any event, the Prospectus ought to have disclosed the
matters stated above in paragraphs 94IA, 94J and 94K, and/or included a fair
assessment of the prospect of selling RBS Insurance at the level and within the
period stated, in particular the fact that RBS itself considered that the likelihood of
selling RBS Insurance was 25%; or those matters ought to have been included in a
supplementary prospectus, in particular that RBS had received only three non-
binding, highly contingent and conditional offers for far less than it had assumed in
its capital plan. They were material omissions. [Further, it is inferred that each of the
Director Defendants must have been aware before the Closing Date of all such
matters (as a result of their position as Directors and/or their senior positions within
RBS). In particular, (i) at least Whittaker received the non-binding, highly
conditional and contingent offers referred to in paragraph 94K.3.2 above on the
days they were sent, and it is to be inferred that the other Director Defendants must

05250-80298/8093941.1 193
 have received them as well given their importance; (ii) on 30 May 2008 both
Goodwin’s and Whittaker’s assistants and Cameron received a broker report
highlighting doubts about the prospects of achieving asset sales (in particular of
RBS Insurance). Each Director Defendant was therefore under an obligation to
notify RBS of these matters, but it is inferred that they did not, since no
supplementary prospectus was prepared. Each Director Defendant is therefore in
breach of section 87G(5), and accordingly liable to pay compensation under s.90(4)
of FSMA.]1

94M. Further, even if there was a real prospect of selling RBS Insurance by September
2008 (as was assumed in the capital plan) or by 31 December 2008:

94M.1. there was no reasonable basis for concluding that it would raise £4bn in
capital gains;

94M.2. it was very unlikely that “full and fair value” could be achieved;

meaning that the statements in the Prospectus set out in paragraph 94I above were
misleading.

94.M.3. Alternatively, even if there was a reasonable basis for concluding that it
would be able to sell RBS Insurance for circa £7bn yielding a capital gain
of £4bn and/or that “full and fair value” could be achieved at the
Prospectus Date, that had changed before the Closing Date and RBS
should have disclosed this, and the matters in sub-paragraphs 94M.1 and
94.M.2 above in a supplementary prospectus. [Further, it is inferred that
each of the Director Defendants must have been aware before the Closing
Date of all such matters for the same reasons as set out in paragraph 94L
above. Each Director Defendant was therefore under an obligation to
notify RBS of these matters, but it is inferred that they did not, since no
supplementary prospectus was prepared. Each Director Defendant is
therefore in breach of section 87G(5), and accordingly liable to pay
compensation under s.90(4) of FSMA.]1 In particular:
94.M.3.1 Throughout April, May and early June 2008, RBS internally
revised downwards its projection of how much it could raise
through the sale of RBS Insurance. On 14 May 2008, RBS
revised its estimate of the capital gain down to £3.36bn and on
5 June 2008 it revised it down to £2.37bn.
94.M.3.2 On 28 May and on 4 June 2008, RBS received (a total of)
three non-binding, highly conditional and contingent offers for
RBS Insurance for far less than RBS had assumed in its
capital plan. In particular, the highest offer was for a

05250-80298/8093941.1 194
 consideration of £5.95bn leading to a capital gain (and core
tier 1 improvement) of about £2.3bn.
94MA:Though the assumption in RBS’s capital plan was that the entire assumed capital
gain of £4bn would come from the sale of RBS Insurance, RBS was, at the time of
the Rights Issue, also considering the sale of other assets. In particular, RBS was
considering the sale of its stake in Tesco Personal Finance (“Opal”), the sale of
ABN AMRO Australia (“Ash”), the contribution of Global Merchant Services into a
joint venture (“Ship”), the sale of NIG (“Cage”) and the sale of Mentor (“Milan”). The
largest of these were Opal and Ship. However:
94MA.1. RBS itself considered the likelihood of selling each one of these assets to
be very low, namely 25%, as demonstrated by the Group Capital Options
– Project Pipeline document dated 14 April 2008.
94MA.2. Even taken together, the sale of these assets (excluding RBS Insurance)
could not have raised £4bn in capital gains. If RBS sold RBS Insurance,
but for a consideration yielding less than £4bn in capital gains, RBS would
have had to sell further assets. In circumstances where the likelihood of
each one asset being sold was 25% on RBS’s own view, the likelihood of
selling more than one was even less.
94MA.3. If RBS could not sell RBS Insurance at all in 2008, it could not raise £4bn
of capital gains through asset sales.
94MA.4. To achieve its target core tier 1 ratio of 6% at the end of 2008, RBS would
have to raise at least 36 Core Tier 1 basis points of capital (based on the
figures in the document referred to in paragraph 94MA.1 above) through
asset sales, assuming all other assumptions in the capital plan came true.
To achieve this without the sale of RBS Insurance, RBS would have had
to complete Opal, Ship and Ash. The likelihood of this in RBS’s own view
was 25%*25%*25% which is 1.6%.
94MB The statements in the Prospectus set out in paragraph 94I above were therefore
misleading. Further and in any event, the Prospectus ought to have disclosed the
matters set out in paragraph 94MA above, and/or included a fair assessment of the
prospect of raising through asset sales (a) £4bn and (b) sufficient capital to meet
RBS’s core Tier 1 target of 6% by the end of 2008 (assuming (as should have been
stated expressly) that all other matters in the capital plan came true).

Section I – Decline in Operating Profits

94N. In addition to the statements that there had been “no significant change in the
trading or financial position of the RBS Group since 31 December 2007”, and that
there had been “no significant change in the financial or trading position of ABN

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 AMRO since 31 December 2007”, other than those specifically identified in Part XII,
§23.1 and §23.2, the Prospectus stated, at p. 29: “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. ... Overall, the Group’s underlying results, excluding write-downs,
have remained satisfactory. ...”

94O. However, in fact there had been a significant decline in RBS’s financial performance
over and above the write-downs. In particular, there had been a significant decline
in actual and projected operating profit compared to budget, which was not
disclosed:

94O.1 On RBS’s own figures (as so far provided), even excluding all the write-downs
described in the Prospectus, actual operating profit for the first 3 months of 2008
was £2.282bn, 9% down against a budget of £2.506bn.

94O.2 Had RBS taken the proper write-downs and/or impairments for the matters set out
in section D and F by the Prospectus Date, as it should have done, operating profit
by the Prospectus Date would have been reduced by at least a further £5.53bn. The
statement that the underlying results remained good excluded write-downs, but the
Prospectus presented the £5.9bn write-downs only as likely write-downs for the
whole of 2008 – thus implying that many or all of them had not been taken (and did
not need to be taken) by the Prospectus Date. A reader of the Prospectus would
therefore not have inferred that profit was or should properly have been reduced by
as much as £5.53bn or more as a result of write-downs or impairments by the
Prospectus Date.

94O.3 Had RBS impaired the goodwill it held on its books in respect of ABN AMRO as set
out in section J below, actual operating profit by the Prospectus Date would have
been reduced by a further substantial sum (the actual impairment taken later in
2008 was £7.7bn).

94O.4 On RBS’s own figures in the 3+9 Reforecast of 19 April 2008, predicted underlying
operating profit for 2008 was stated to be £10.395bn, compared to £11.572bn
budgeted for at the beginning of the year. Thus expected underlying operating profit
had fallen by over 10%. Total operating profit (after adjusting for credit market write-
downs and other one-offs) was predicted in the 3+9 Reforecast to be at £8,941bn.
The part of that forecast relating to GBM was unreasonably and imprudently
optimistic in that:

05250-80298/8093941.1 196
 94O.4.1 Even taking account of the write-downs provided for separately in the
capital plan, it did not take into account the additional write-downs in
relation to credit market exposures as set out in Sections D and F.

94.O.4.2 It did not take full account of the costs of the proposed “balance sheet
reduction” exercise within GBM. In particular:

94.O.4.2.1 GBM’s RWA target for June 2008 assumed that a reduction
of £25bn of RWAs would be achieved as a result of Specific
Balance Sheet Initiatives.

94.O.4.2.2 RBS’s estimate of the costs of some (but not all) of these
measures in a document dated 10 April 2008 (the 10 April
Document) (RBS079886) was £465m in 2008.

94.O.4.2.3 The profit forecast in the 3+9 Reforecast is overstated

because it takes no account of the costs associated with 4
of the 12 balance sheet measures which RBS itself
identified as (potentially) having a cost, but which costs it
had not quantified in the 10 April Document. Further:

94O.4.2.3.1 Of these 4 measures:

94O.4.2.3.1.1 RBS’s estimated impact of 3 of the 4

measures, namely “Intl Sov Debt Prop”,
“Credit Flow B/S”, and “Local Mids Credit
Flow”, was £156m (see the 12 May
Document at RBS725006). The 3+9
Reforecast did not take this into account
and was therefore overstated by this
amount.

94O.4.2.3.1.2 In respect of the remaining 1 measure,

namely “SREC”, the 3+9 Reforecast was
overstated because it did not take into
account the impact of this measure, but
neither the 10 April nor the 12 May
Document provide an estimate of the
quantum of such cost/impact, which is a
matter for further disclosure and expert
evidence.

05250-80298/8093941.1 197
 94O.4.2.3.2 As to the remaining 8 of the 12 balance sheet
measures which RBS itself identified as
(potentially) having a cost, but which costs it had
not quantified in the 10 April Document, namely
“US Auto Conduits”, “Other Conduits”, “Fund
Derivatives”, SovRisk”, “IG Loans/Regions”, “Alt-
A”, “CDO Super Snr” and “Monolines”, the
Claimants do not at present allege that the 3+9
Reforecast was overstated because it took no
account of the impact of these measures.
However, the Claimants reserve the right to
amend this pleading should other documents
come to light which suggest that the impact of any
of these measures was in fact not de minimis and
was in fact omitted from the 3+9 Reforecast.

94O.4.3 It anticipated a substantial recovery of GBM’s business in the rest of 2008

This was imprudently and unreasonably overoptimistic having regard to
the poor performance of those businesses in Q1 (in particular, in March),
the then prevailing market conditions and the market outlook:

(a) As regards revenue, RBS imprudently and unreasonably

adopted the income forecast contained in the 1+11 Reforecast
for GBM (finalised on 11 March 2008), with minor adjustments,
rather than re-forecasting according to conditions at the time.

(b) The 3+9 Reforecast predicted an additional reduction in

revenue of just £700m. The underperformance in March alone
accounted for a reduction of approximately £700m in income
from the 1+11 Reforecast, meaning that that in the 3+9
Reforecast no material adjustment was made to the total
forecast income for the rest of the year.

(c) RBS decided to make no further adjustment despite the very

poor performance in March, and despite the state of the credit
markets (as to which RBS contends there was a “step change”
after the 1+11 Reforecast had been finalised).

(d) The minor adjustments to the 1+11 Reforecast were to equities

and executive and support income – thus no additional
reduction in income in the Credit Markets business was
projected. The 3+9 Reforecast continued to assume a recovery
from £342m in Q1 to £571m in Q2 and £556m in Q3 and Q4,
05250-80298/8093941.1 198
 and improved performance in equities (98% when comparing
Q1 to Q4), FI and PM (83% when comparing Q1 to Q4), M&A
(55% when comparing Q1 to Q4), and Executive & Support
(103% when comparing Q1 to Q4) in circumstances where
RBS was (on its own case) forecasting substantial future write-
downs, which indicated that adverse market conditions would
continue.

(e) The forecast for costs (excluding bonuses) was revised

downwards by 29% from £4.910bn in the 1+11 Reforecast to
£3.502bn in the 3+9 Reforecast. A small part of this difference
may be accounted for by the exclusion of Transaction Banking
from the 3+9 Reforecast, but there was no reasonable basis for
this change in forecast.

(f) Even the 1+11 Reforecast had been regarded as overoptimistic

by Cameron and Whittaker.

(g) Documents produced for the Senior Executive Team Offsite

and circulated on 15 April 2008 suggest that RBS considered
that meeting the 3+9 Reforecast was (at best) “a stretch” and
the that “the picture seems to be £300m lower in revenue” than
that in 3+9 Reforecast.

94O.5 The forecast was also unreasonably and imprudently optimistic in that it did not
take into account goodwill as set out in paragraph 94O.3 above.

94OO.It was not true to say that the performance of “many” of RBS’s businesses had
remained good. According to the March 2008 Results Report only one of the
smaller businesses, Global Transaction Services, was performing materially ahead
of its 2008 budget (4%). Even before credit market write-downs, the largest division
(GBM) was 9% behind budget, and of the 9 businesses listed in the Report, 6 were
behind budget. After write-downs, performance was even worse. Thus at the very
most one-third of RBS’s businesses could be said to have good performance. As
regards the performance of the two-thirds or more of RBS’s businesses that were
not included in the “many” businesses referred to at p.29 of the Prospectus and
were behind budget, that poor performance should have been disclosed.

94P. In the circumstances, the statements in the Prospectus in respect of operating

performance, and in particular those pleaded at paragraph 94N above, were
misleading in breach of sections 87A and 90 of FSMA.

05250-80298/8093941.1 199
94Q. Further, the failure to disclose the decline in RBS’s financial performance including
the matters pleaded at paragraph 94O and 94OO above was a breach by the
Defendants of sections 87A and 90 of FSMA, in circumstances where those matters
were:

94.Q1. Necessary information in order to enable investors to make an informed

assessment of the financial position and prospects of RBS and the rights
attaching to the Rights Issue shares; and was therefore a matter which
was required to be included in the Prospectus pursuant to FSMA sections
87A(1)(b) and 87A(2); and/or

94Q.2 Matters which were required to be included in the Prospectus pursuant to

FSMA section 87A(1)(c), and the Prospectus Regulation.

94R. RBS has disclosed self-contradictory data as regards operating performance as at

the Closing Date and does not appear to have a disclosed a 5+7 reforecast. Pending
such disclosure, the Claimants reserve their position in relation to a supplementary
prospectus.

Section J – The acquisition and performance of ABN AMRO

95-97. [not used]

98. The “Chairman’s Letter” stated (at pp. 29-31):

7 Current trading and prospects

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 write downs, have remained satisfactory.

RBS divisions

Global Markets

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,

05250-80298/8093941.1 200
 but lower business volumes in credit markets and equities, with
corresponding reductions in costs. Credit impairments have remained low.

Global Banking & Markets has made a good start on exploiting the potential
of ABN AMRO, with a significant number of deals already recorded as a
result of combining the product expertise and customer franchises of the two
businesses.
...

Certain structured credit activities have been discontinued and problematic

US sub-prime 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. Global Banking & Markets remains focused on effective
management of its capital and has accelerated other balance sheet
management actions.

...

Outlook

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. However, other areas of Global Banking & Markets, and
most of the Group’s other businesses, are making good progress, taking
advantage of the opportunities that have become available in this changed
environment ...

99. [not used]

100. In Part XII, “Additional Information” (p. 134), it was stated that:

23 No significant change

...
23.2 Save as regards (i) the ongoing restructuring and integration of ABN
AMRO described on page 31 of Part I of this document and pages 63-
65 of Part IV of this document, (ii) the estimated write-downs in
respect of certain credit market exposures of approximately £2.3bn
(which amount is included within the RBS Group’s write-downs
estimated for capital planning purposes as described on pages 24-25
of Part I of this document) and (iii) the adverse effect of current market
conditions as described on pages 29 and 31 of Part I of this document
on certain of ABN AMRO’s businesses, there has been no significant

05250-80298/8093941.1 201
 change in the financial or trading position of ABN AMRO since 31
December 2007 (the date to which the latest audited published
financial information of ABN AMRO was prepared).

101. The 2007 Accounts, in statements incorporated into the Prospectus by reference (at
p.137 of the Prospectus), had painted a positive picture of the success of the ABN
AMRO transaction, and in particular had stated:

ABN AMRO

ABN AMRO is a major international banking group with a leading position in

international payments and a strong investment banking franchise ...

2007 key highlights:>Transaction banking income rose 7% ... >GBM and

ABN AMRO’s capabilities will make us a top five bank in products including
Global Securitisation, International Bonds and International Cash
Management.
(p. 7)

Acquisition of ABN AMRO

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 ...(p. 8)

The acquisition of ABN AMRO gives us the ability to accelerate our existing
strategies for growth outside the UK, particularly in rapidly expanding
markets, while adding complementary capabilities and customer franchises
to our portfolio of businesses. (p. 12)

Since we completed the acquisition of ABN AMRO in October our confidence

in the opportunities it offers the Group has deepened. It brings many
excellent people, strong franchises and products, and extends our presence
in the world’s fastest growing markets, as well as further diversifying our
income streams. We expect to secure greater cost savings and revenue
benefits than originally anticipated.

While credit market activities reflected the prevailing market conditions,

equities, rates and financial institutions performed well. Transaction banking

05250-80298/8093941.1 202
 maintained good momentum, reflecting strong growth in cash management
balances and significant expansion in trade finance. International retail
banking businesses performed well over the whole of 2007. (p. 21)

102. [not used]

103. Finally, the 2007 Accounts (in a passage that was also incorporated by reference
into the Prospectus) had stated with reference to the goodwill in ABN AMRO:

Impairment review

The Group’s goodwill acquired in business combinations is reviewed

annually at 30 September for impairment by comparing the recoverable
amount of each cash generating unit (CGU) to which goodwill has been
allocated with its carrying value.

The Group recognised goodwill of ￡23.3 billion following the preliminary

allocation of fair values since acquiring ABN AMRO on 17 October 2007
(Note 35). 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. (p. 163)

104. The statements in the Prospectus did not disclose, or did not adequately disclose,
important problems with respect to the ABN AMRO acquisition. Instead, the
statements made in the Prospectus (and in the 2007 Accounts, incorporated by
reference into the Prospectus) about the ABN AMRO acquisition and its progress
were specifically intended to reassure potential investors, in the face of extensive
negative comment on the acquisition by market analysts and in the media.

105. The success or otherwise of the ABN AMRO acquisition was of major importance to
investors’ assessment of RBS at that time.

105A. RBS publicly promoted the financial benefits of the ABN AMRO acquisition. For
example:

105A.1. [not used]

105A.2. In an analysts’ conference on 28 February 2008 (on RBS’s 2007 results),

Goodwin stated:

“I think the main news is that with our view of all of the businesses, the
positive view we have of the ABN businesses has been confirmed.”
05250-80298/8093941.1 203
 105A.3. At the RBS Annual General Meeting on 23 April 2008, McKillop stated:

“Over the last six months we have been able to confirm our positive view
of the ABN AMRO businesses we have secured. … the financial returns
are now expected to be even more attractive than we had thought when
we were first considering this transaction.”

105B. It was evident to RBS by the Prospectus Date that:

105B.1.The ABN AMRO acquisition had seriously weakened RBS’s core capital
position.

105B.1.1 This was amplified by RBS’s recognition as at 31 December

2007 of £23.9bn of goodwill on the acquisition of ABN AMRO
(of which £6.3bn was attributable to RBS’s own share of the
ABN AMRO business), because RBS was obliged to deduct
the goodwill recognised on the acquisition from its capital
resources, thus depleting RBS’s capital position still further.

105B.1.2 In early 2008, ABN AMRO and DNB had agreed that ABN
AMRO would withdraw its application to move to the Basel II
capital regime and continue to report capital on the basis of
Basel I, although it was required to maintain 30% more capital
than Basel I required, placing additional strain on RBS’s
capital resources and contributing to its fall below its ICG (see
paragraph 57.9 above). See further paragraph 44.2B above.

105B.1.3 RBS’s decision to finance the acquisition with debt rather than
equity had reduced RBS’s already low capital ratio still further,
leaving less room for unexpected changes in circumstances.

105B.2. The use of debt to finance the acquisition also increased RBS’s reliance
on short-term wholesale funding and thus RBS’s overall vulnerability. Of
the €22.6bn of cash consideration paid by RBS, €12.3bn was borrowed
with a term of one year or less. The decision to finance such a major
acquisition with debt, of which the majority was short-term, represented a
highly risky strategy: see further paragraphs 67.1.4, 67.2 and 67.2A
above.

105B.3. The acquisition had greatly increased RBS’s exposure to risky assets. The
impact on RBS’s credit market and exposure losses was all the greater
because of the poorer quality of ABN AMRO’s assets, resulting from ABN
AMRO having entered the market later than its peers.
05250-80298/8093941.1 204
 105B.4. The acquisition exacerbated existing liquidity pressure on RBS. For
example, RBS’s exposure to own-sponsored ABCP conduits more than
quadrupled in terms of committed liquidity facilities by 31 December 2007,
resulting in a corresponding increase in RBS’s off balance sheet liquidity
risk and a significant drain on RBS’s liquidity. This exposure increased
from the start of 2008 to the Prospectus and Closing Dates, especially in
relation to North Sea, which gave rise to a £5.3bn short-term funding
requirement (see paragraph 67.5.1 above), and in relation to the Canadian
conduits (see paragraph 67.6 above).

105B.5. The presentation of the acquisition and its impact had the effect of
obscuring the underlying position of RBS from investors and of obscuring
the overall exposures of ABN AMRO, RBS and the other entities in the
consortium from investors.

105B.6. The recognition of the consortium partners’ substantial minority interests in

RBS’s capital resources had the effect of overstating the amount of capital
available to the combination of RBS and that part of ABN AMRO which
RBS was to retain to absorb losses through the combined entity.

105B.7. The decision that RBS should be the leader of the consortium,
consolidating the whole of ABN AMRO on to its balance sheet before the
transfer of assets to the other consortium partners, introduced
vulnerabilities and uncertainties, with potential to affect market confidence.

105C. By April 2008 it was or should have been evident to RBS that the decision to
acquire ABN AMRO had been a serious mistake; and that the acquisition had
already had, and would continue to have, a strongly negative effect on RBS’s
financial position and prospects.

105D. The ABN AMRO acquisition was a gamble at the time it took place. By the
Prospectus Date the acquisition should have been regarded by RBS as a gamble
which had failed or was very likely to fail.

105E. In July 2008 the GIA Report reported that RBS executive management had
underestimated the operational and integration risks that arose from the ABN
AMRO acquisition. This must have been evident by the Closing Date at the latest.
Specifically, by that date, ABN AMRO’s disastrous trading and financial position, as
detailed in paragraphs 105F-105M below, was evident to RBS. For present
purposes and by way of example, the ABN AMRO section of the July GIA Report
stated that:

05250-80298/8093941.1 205
 105E.1. [not used]

105E.2. ABN AMRO’s ‘Risk Management lacked systems that reported credit risk
and market risk on an integrated basis from the various source systems,
reducing the ability of management to take a holistic view of the risks in
the portfolio. Due to system limitations for some structured positions,
counterparty credit exposure was calculated manually. However under
ABN AMRO’s counterparty credit methodology there was no requirement
to update the original manual exposure calculations’ (pp.11, 12).

105E.3. Special projects ‘Hercules’ and ‘Shield’ were needed to enhance the
integrity of ABN AMRO’s financial reporting (p.4).

105E.4. Credit trading desks only integrated with RBS after the Prospectus Date,
prior to which risks were managed separately (p.4).

105E.5. ‘The Credit Exotics desk had not developed prior to trading, an exit
strategy or hedging strategy for CDO structures in the event of
deterioration in the credit markets’ and so ‘when the markets did
deteriorate, the only course open to ABN AMRO was to wait and watch’
(p.10).

105E.6. Approximately 50% of ABN AMRO Product Control staff were contractors
as ABN AMRO has not been able to recruit permanent employees. RBS
started seconding people to Product Control relatively late and initially only
in senior positions’ (p.12).

105E.7. After the acquisition of ABN AMRO there was ‘no documented
communication of any changes to business plans and strategies to the
trading desk and support functions’ (p.11).

105E.8. After the acquisition of ABN AMRO ‘there was no oversight from RBS of
trading activity at a desk level for the CDO desks until April 2008, to
ensure that trading strategies were consistent with RBS’s trading strategy
and limits’ (p.11).

105E.9. When valuation was transferred to RBS in November 2007, ABN AMRO
traders refused to sign-off their daily P&L because ‘they could not identify
how their prices had been derived’ (p.13).

105E.10. The ABN AMRO compensation culture was that ‘the trading desk
incentives and bonus schemes focused primarily on revenue targets
without reference to the economic cost to achieve the revenues’ (p.13).

105E.11 The same July GIA Report also noted (p.15) an exodus of key staff from
ABN AMRO including Mitch Janowski, Head of Credit Exotics Trading
(resigned 8 April 2008), Richard Whittle, Head of Credit Alternatives
05250-80298/8093941.1 206
 Trading (commenced sabbatical 21 April 2008), Charles Longden, Head of
Credit Trading (resigned 25 April 2008) and Arne Groes, Head of Financial
Markets Trading (resigned 30 April 2008).

The Trading and Financial Position of ABN AMRO

105F. In Q4 2007 RBS’s own share of the ABN AMRO business excluding the
consortium’s shared assets (“ABN-R”) generated:

105F.1 operating income of €395m, a 74% decline on Q3;

105F.2 an operating loss before impairments and tax of €1.267bn, a 1,211%

decline in performance on Q3; and

105F.3 a net operating loss after impairments and before tax from continuing
operations of €1.444bn, a 3,576% decline on Q3.

105G. From the start of 2008 to the Prospectus Date, the performance of ABN-R was far
worse than had been budgeted for or forecast previously, and far worse than the
comparable results of GBM, or the previous year’s results of ABN-R.

105H. In particular, between the date of the 2007 Accounts and the Prospectus Date the
Q1 2008 results for ABN-R were finalised, and in any event known to RBS. They:

105H.1 showed that ABN-R had a pre-tax operating loss after impairments of
€1.332bn, which result was €1.793bn (i.e. about £1.4bn at a GBP/EUR
exchange rate of 0.79) below budget. Excluding write-downs and other
normalisations adjustments, there was a pre-tax operating loss of €21m,
which result was €482m below budget. Hourican described these results
to Whittaker and identified to him “the continuing underperformance of the
core wholesale banking business”;

105H.2 included €1.187bn of write-downs on credit assets, showing that ABN-R

had a higher proportion of credit market write-downs than GBM. Moreover,
some €400m of those Q1 2008 write-downs (relating to White Knight,
CDPCs and correlation) were not included in the CME Table or disclosed
elsewhere in the Prospectus;

105H.3 were worse (relative to size, and even excluding write-downs and other
normalisations adjustments) than those for GBM; and

105H.4 led to a breach of the DNB ICG-equivalent of 12.5%.

105I. As at December 2007 ABN AMRO had budgeted that in 2008 ABN-R would achieve
an operating profit of €1.862bn, or €1.481bn after impairments. By mid-April 2008

05250-80298/8093941.1 207
 that had changed. At 18 April 2008 the ABN-R full year reforecast estimated an
operating loss of €2.019bn or €2.419bn after impairments. Thus in the space of the
quarter preceding the Prospectus, the expectations of ABN-R’s operating result for
2008 had worsened by €3.881bn before impairments (or £3.07bn at a GBP/EUR
exchange rate of 0.79), from a profitable business to a severely loss-making one.

105J. Even this expected operating result was overstated:

105J.1 It depended upon ABN-R achieving 65% of its budgeted income in Q2, Q3
and Q4 2008. This was imprudently optimistic, given that the actual
income for Q1 was around 53% of budget.

105J.2 It failed to take account of the intended transfers from ABN-R to RBS Solo
of North Sea, the SREC portfolio, White Knight, the US mortgage book,
and the leveraged loan portfolios at expected (as at the Prospectus Date
alternatively the Closing Date) losses to ABN-R of over £1.5bn. (See
further paragraphs 73J, 74BB, 74II, 74OO, 74CCC.2, and 74.6B.3 above).
Not only were these known about and planned at the date of the
Prospectus, but some of them were deliberately delayed until after the
Rights Issue funds had been received to avoid DNB ICG breaches.

105J.3 Accordingly, the prudent and reasonable forecast operating loss for ABN-
R for 2008 was in the region of approximately €5bn.

105K. This dramatic downturn in the actual and expected performance of ABN-R was not
disclosed, quantified or explained in the Prospectus. RBS was warned by Deloitte,
including by emails to Kapoor at 8.16am on 25 April 2008 and 2.50pm on 26 April
2008, that the Prospectus did not accurately address ABN-R’s performance, but
disregarded the warnings.

105L. By the Closing Date, the April and May 2008 results had been finalised. They
showed further underperformance in ABN-R. By the end of May 2008, ABN-R was
adverse to budget €795m before impairments and approximately €819m after
impairments, both figures before taxes and excluding write-downs and other
normalisations adjustments.

105M. Accordingly:

105M.1 The statement (see paragraph 98 above) that (after write-downs) in

general the business performance remained satisfactory, was untrue
and/or misleading.

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 105M.2 The statement (see paragraph 98 above) that credit market and equity
business areas had suffered a reduction in volumes with corresponding
reduction in costs was misleading in the absence of disclosure of the fact
that ABN-R’s business was in fact loss-making.

105M.3 The incorporated statement (at p.21 of the 2007 Accounts: see paragraph
101 above) that confidence in the opportunities offered by ABN AMRO to
the RBS Group had deepened was untrue and/or misleading.

105M.4 The ABN AMRO no significant change statement (quoted above at

paragraph 100) was untrue and/or misleading. The severe deterioration in
ABN-R’s financial and trading position was a significant change.

105M.5 The true nature and extent of ABN AMRO’s write-downs was in fact worse
than presented in ABN AMRO’s budgets and forecasts in April 2008.
Section D above is repeated.

105M.6 The deterioration in ABN-R’s financial and trading position was also
necessary information to enable investors to make an informed
assessment of the financial position and prospects of RBS and the rights
attaching to the Rights Issue shares.

105M.7 The further deterioration in ABN-R’s financial and trading position in the
period to the Closing Date was a matter which RBS was obliged to
disclose by way of supplementary prospectus.

105N. Further, if (which is not clear from the documents presently disclosed) the capital
plan did not take account of the latest (18 April 2008) reforecast of ABN-R, the
statements as to capital ratio targets, and their prudence and achievability, were
untrue and/or misleading.

Goodwill

106. On purchasing ABN AMRO, RBS recognised goodwill of £23.3bn (which figure was
subsequently revised to £23.9bn, after the Closing Date) of which approximately
£6.3bn (€9.0bn at the then current exchange rates) corresponded to the parts of the
business to be acquired by RBS (p. 163 of the 2007 Accounts and p. 221 of the
2008 Accounts respectively).

106A. In the Prospectus, RBS continued to ascribe the same value to the goodwill element
of RBS’s share of the ABN AMRO acquisition.

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106B. In the context of the value of ABN AMRO’s goodwill the no significant change
statement in the Prospectus meant, and the Prospectus was to be taken as
representing, that:

106B.1 ABN AMRO’s goodwill continued to be unimpaired; and/or

106B.2 there were no indicators of impairment or matters requiring an impairment

review and/or likely to lead to the value of ABN AMRO’s goodwill being
significantly written down.

107. Eventually, in the 2008 Accounts, RBS was compelled to acknowledge a write-down
of approximately £14.2bn on the carrying value of its share of the assets acquired
from ABN AMRO, including a £7.7bn write-down in respect of the goodwill on those
assets (see p. 38 of the 2008 Accounts) (€7.9bn at then current exchange rates),
and therefore wrote down all but €1.1bn of the goodwill on its share of ABN AMRO
(see pp. 7-8 of the 2008 Accounts).

108. IAS 36 (pursuant to paragraphs 8, 12, 88 and 90 therein) requires an impairment

review of an asset, including of goodwill in a business, and requires an asset,
including goodwill in a business to be treated as impaired, if:

108.1. there are observable indications that the asset’s value has declined during
the period significantly more than would be expected as a result of the
passage of time or normal use;

108.2. significant changes with an adverse effect on an entity have taken place,
in the market, economic or legal environment in which the entity operates;

108.3. the carrying amount of the net assets of the entity is more than its market
capitalisation; or

108.4. evidence is available from internal reporting that indicates that the
economic performance of the asset is, or will be, worse than expected.

108A. Further, it was RBS’s accounting policy to test for impairments to goodwill “annually
or more frequently if events or changes in circumstances indicate that it might be
impaired.” (2007 Accounts, p.138) and this policy was affirmed and incorporated by
reference in the Prospectus (p.137).

109. Between the 31 December 2007 and the Prospectus Date, RBS had not tested for
indications of impairment or conducted any or any proper impairment review of ABN
AMRO. Further, no such tests were performed during the Rights Issue Period.

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 109.1 [not used]

109.2 [not used]

109.3 Goodwin stated on the 22 April 2008 conference call when asked why
there was no impairment:

“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… six months in, I would hesitate
to say whether we are in the middle or the beginning of the end a serious
global financial crisis; there are many things that look less good than it did
a little while ago, and look less good that it will in the forthcoming, in the
future.”

If and to the extent that this reflected the true reason for not conducting an
impairment test or impairing ABN AMRO’s goodwill, it was not a legitimate
reason.

110. If RBS had tested for indicators of impairment by the Prospectus Date or in the
period to the Closing Date, it would have found them. All the triggers for an
impairment review that were present in June 2008 and led to such a review then
were also present at the Prospectus Date and the Closing Date. In particular:

110.1. First, the market value of RBS’s share in ABN AMRO had significantly
declined by the Prospectus Date and the Closing Date. Investment bank
shares had significantly declined. As McKillop said in the presentation on
22 April 2008: “we purchased ABN at a point when bank valuations were
way higher than they are today”.

110.2. Second, there had been significant changes in the market environment
(which in turn had significantly affected the value of RBS’s share of ABN
AMRO). In particular:

110.2.1. Conditions in the financial markets had significantly worsened

in the first quarter of 2008, leading RBS’s GBM division to
experience serious losses in March 2008. As stated by
McKillop to the Treasury Select Committee on 10 February
2009, “no sooner had we acquired ABN AMRO than the world
changed dramatically”. The Prospectus itself drew attention to
“the severe and increasing deterioration in credit market
conditions” and to “the increased likelihood that credit markets
could remain difficult for some time” (pp. 7 and 24). The
05250-80298/8093941.1 211
 overall economic outlook, generally and for RBS, had
worsened during the last months of 2007 and the first months
of 2008. Such a deterioration in the outlook was referred to by
Goodwin and McKillop in the presentation on 22 April 2008,
and in the Prospectus at p. 24.

110.2.2. In March 2008 the financial markets had experienced the

collapse of Carlyle Capital Corporation and the near collapse
and rescue of Bear Stearns. Northern Rock had failed in the
months preceding the Prospectus.

110.2.3. Other investment banks comparable to the ABN AMRO

businesses acquired by RBS, such as UBS, Citibank and
Bank of America, had taken large write-downs on credit
market exposures in their 2007 Annual Results, which were far
larger than the write-downs that RBS had taken in its 2007
Accounts.

110.3. Third, RBS’s net assets had exceeded its market capitalisation from 1
January 2008 and potentially earlier.

110.4. Fourth, there was evidence available from internal reporting that indicated
that ABN AMRO was impaired. In particular, it was apparent that the
economic performance of the investment banking assets of ABN AMRO
was or would be far worse than had previously been expected, in part but
not only due to the credit market losses that had been booked up to the
Prospectus and Closing Dates. Paragraphs 105F-105M above are
repeated.

110.5. Internal reporting indicated that the forecasts for ABN AMRO’s cash flows
had fallen, and market and economic deterioration had plainly adversely
affected ABN AMRO and its realisable value. Further, there had been an
increase in long-term interest rates and RBS’s (and so ABN AMRO’s) cost
of capital. ABN AMRO was, through its ABS holdings, heavily exposed to
(and derived much of its cash flows from) the credit markets. These
markets had seriously deteriorated during the first half of 2008 up to the
Closing Date and were likely to remain difficult for some time. According to
the Prospectus (page 134), £2.3bn of the £5.9bn estimated write-downs in
the Prospectus related to ABN AMRO.

110.6. RBS had been monitoring the impact of the deterioration in the markets on
its own business, and had revised its capital plan and fundamentally
rebased its capital ratios. All these steps, and the Rights Issue itself, ought
05250-80298/8093941.1 212
 to have involved the development of new business plans and
management forecasts, and showed the extent of the market and other
changes; all requiring an impairment test and, if appropriate, an
impairment of goodwill.

110.7. Fifth, the 2007 Accounts stated:

“Goodwill
... Goodwill is not amortised but is tested for impairment annually or
more frequently if events or changes in circumstances indicate that it
might be impaired.

For the purpose of impairment testing, goodwill acquired in a business

combination is allocated to each of the Group’s cash generating units
or groups of cash-generating units expected to benefit from the
combination” (p.138)

“Impairment review
The Group’s goodwill acquired in business combinations is reviewed
annually at 30 September for impairment by comparing the
recoverable amount of each cash generating unit (CGU) to which
goodwill has been allocated with its carrying value.

...The recoverable amounts for all CGUs, except for Citizens were
based on fair value less costs to sell. Fair value was based upon a
price-earnings methodology using current earnings for each unit.
Approximate price earnings multiples, validated against independent
analyst information were applied to each CGU. The multiples used for
both 2007 and 2006 were in the range 9.5 – 13.0 times earnings after
charging manufacturing costs.” (p.163).

The quotation in paragraph 103 above is repeated.

111. If a full impairment review had been conducted, it would have found that ABN
AMRO’s goodwill had been materially impaired and needed to be written down. An
(adequate) impairment review of the goodwill associated with ABN AMRO on or
before the Prospectus Date, alternatively the Closing Date:

111.1. would have been conducted for RBS’s share in ABN AMRO as a separate
cash-generating unit (as occurred in the December 2007 impairment
review);

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 111.2. would have shown that RBS’s share in ABN AMRO clearly failed both the
fair value less costs to sell and the value-in-use tests;

111.3. would have written down goodwill by a large proportion of the £7.7bn
write-down of goodwill eventually taken at year end 2008 (over and above
the asset write-downs of £2.3bn which were recognised in the
Prospectus);

111.4. would, as a result of the above, have had an impact on profits and future
dividends, been a relevant indicator to investors that the future profitability
of ABN AMRO was not as anticipated, indicated that RBS had overpaid for
ABN AMRO, and 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;

111.5. would have made it impossible to give the positive assurances in the
Prospectus about the merits of the purchase of ABN AMRO.

112. In the circumstances, RBS should have disclosed in the Prospectus, but did not
disclose, that:

112.1. ABN AMRO’s goodwill had been materially impaired, and needed to be
written down significantly. This was necessary information in that it was
necessary to enable investors to make an informed assessment of the
financial position and prospects of RBS, and this was so whether or not
accounting rules or practices required an impairment review to be
conducted at or before the time of the Rights Issue.

112.2. There had accordingly been a significant change in the financial position of
ABN AMRO.

112.3. On a reasonable interpretation of accounting rules, RBS was required to

but had not conducted an impairment review, and should have but had not
written down goodwill accordingly.

Overvaluation of, or overpayment for, ABN AMRO businesses

113. Further or alternatively, RBS did not disclose that by the Prospectus Date
(alternatively in any event by the Closing Date), it was reasonably apparent on the
information available to RBS that:

113.1. The ABN AMRO businesses which RBS had acquired were materially
overvalued within RBS’s books; that their value had declined since the

05250-80298/8093941.1 214
 acquisition; and the associated goodwill was going to need to be written
down significantly. In particular, there were serious problems with the ABN
AMRO credit trading business including in particular (I) ABN AMRO’s
credit markets trading book lacked proper risk management controls; (II)
ABN AMRO’s CDO assets were of poor quality; (III) there were problems
with the valuation of ABN AMRO exposures which had led RBS to set up
“Project Hercules” in March 2008; (IV) “Project Shield” had been set up to
investigate ABN AMRO’s financial reporting. (V) [not used] (VI) [not used]
Further, paragraph 105E above is repeated.

113.2. RBS had acquired ABN AMRO on the basis of very limited due diligence
confined to information relating to LaSalle and two lever arch files and one
CD reviewed by RBS over a period of a week (27 April to 3 May 2007); no
substantial due diligence was conducted after 3 May 2007, although the
acquisition was not completed until over 7 months later; as the FSA
Report later stated (p.39): “RBS’s decision to proceed with (the)
acquisition was made on the basis of due diligence which was inadequate
in scope and depth given the nature and scale of the acquisition and the
major risks involved”, creating a significant risk of overvaluation of, or
overpayment for, the acquired parts of ABN AMRO at the moment of
acquisition. The limited due diligence compounded RBS’s inability to
provide the FSA with complete, accurate or timely data on the impact of
the acquisition, including as to its capital position. For the avoidance of
doubt this paragraph should not be taken to allege that RBS ought to have
performed any different due diligence and does not challenge the
adequacy of the due diligence performed.

113.3. By the Prospectus Date, alternatively the Closing Date, it was clear to RBS
that it had overpaid for ABN AMRO:

113.3.1. RBS’s offer for its share in ABN AMRO which included LaSalle
at the time in May 2007 was €27.2bn. By the time of the public
offer in July 2007, LaSalle was to be sold to Bank of America
for €11.2bn, which due to foreign exchange movements was
approximately €10.5bn at completion, leaving RBS making a
net payment on completion in October 2007 of €15.9bn
(allowing for the decrease in the value of RBS’s share element
of its consideration between May and October 2007).

113.3.2. The value of the RBS-acquired parts of ABN AMRO (i.e.

excluding LaSalle), was in fact substantially less than €15.9bn,
and RBS itself had determined and justified its purchase price
on the basis of a valuation of under €13bn for this part of ABN
AMRO (and a valuation of LaSalle of almost €15bn).
05250-80298/8093941.1 215
 113.3.3. Moreover, between May 2007 and the date of completion
there was a general deterioration in the value of banks. The
price/earnings multiples in the period 3 May 2007 to 10
October 2007 of relevant quoted European banks decreased
from 11.1 to around 9.7, and for relevant quoted European
wholesale banks decreased from 12.6 to 9.5, and for relevant
quoted investment banks decreased from 10.7 to 9.7.

Breaches of FSMA section 90

114. In the circumstances, the statements made in the Prospectus in respect of ABN
AMRO were misleading, in breach by the Defendants of section 90(1)(b)(i) of FSMA.
In particular:

114.1. It was misleading to say that RBS “may not realise the benefits of the
acquisition”, without further explanation, when it was already reasonably
apparent to RBS that ABN-R’s trading and financial position had
deteriorated in the respects stated in paragraphs 105F-105M above and
that the goodwill of ABN AMRO needed to be written down to a significant
extent.

114.2. It was misleading to imply, by not recording any write-down of goodwill or

disclosing ABN-R’s disastrous trading and financial position, and stating
that there had been no significant change since the 2007 Accounts and
repeating the statement in the 2007 Accounts that “Subsequent events
have not significantly affected the assumptions and estimates supporting
the consortium’s investment decision”, that no such write-down was
necessary, when in fact a significant write-down should have been taken.

114.3. It was misleading to paint a generally positive picture of ABN AMRO, with
a particular focus on the integration of ABN AMRO, without mentioning
that it was reasonably apparent that the ABN AMRO businesses which
RBS had acquired were materially overvalued within RBS’s books; and its
value had declined since the acquisition.

114.4. [not used]

114.5. The 2007 Accounts had not been prepared in accordance with IFRS (as
the Prospectus stated they had at pp. 9 and 18).

114.6. The value given for ABN AMRO’s goodwill was untrue and misleading,
because it was impaired and in need of an impairment test and write-
down.

05250-80298/8093941.1 216
 114.7. Given the matters stated in paragraphs 105B to 105L, 106B, 110 to 113
and in Section D above, the no significant change statement was untrue
and misleading.

114.8. Paragraph 105N above is repeated.

115. Further, the failure to give fair disclosure of the problems with ABN-R’s trading and
financial position, the overvaluation of ABN AMRO and its decline in value, the need
to write down ABN AMRO goodwill, and/or the omission of the matters pleaded at
paragraphs 105B to 105L and 110 to 113 above, and/or the inadequacy of the
disclosure in the Prospectus in those respects, was a breach by the Defendants of
section 90(1)(b)(ii) of FSMA, in circumstances where those matters were:

115.1. Necessary information in order to enable investors to make an informed

assessment of the financial position and prospects of RBS and the rights
attaching to the Rights Issue shares; and was therefore a matter which
was required to be included in the Prospectus pursuant to FSMA sections
87A(1)(b) and 87A(2); and/or

115.2. Matters which were required to be included in the Prospectus pursuant to

FSMA section 87A(1)(c), and Annex I, §5.2, 6.1.1, 9.2, 12.2 and 25. The
Claimants also rely on Annex I §§3.1, 4, 9.1, 10.1, 10.3, 20.9 and 22 and
Annex III §§2 and 3.4.

116. Alternatively, if and to the extent that (contrary to the above) the matters referred to
at paragraphs 105B to 105L and 110 to 113 above were not matters that the
Defendants were obliged to disclose in the Prospectus, and if this was because they
arose and/or were noted after the Prospectus was approved:

116.1. They were matters which RBS was obliged to disclose by way of
supplementary prospectus as soon as practicable by virtue of section
87G(1) and (2) of FSMA and Rule 3.4.3 of the Prospectus Rules.

116.2. However, RBS failed to provide a supplementary prospectus giving

appropriate disclosure accordingly, and no such supplementary
prospectus was provided at any time before the closure of the Rights
Issue Period on 6 June 2008.

116.3. In the circumstances, RBS was in breach of sections 87G(2) and 90(4) of
FSMA.

116.4. [Further, it is inferred that each of the Director Defendants must have been
aware before the Closing Date of all such matters (as a result of their
05250-80298/8093941.1 217
 position as Directors and/or their senior positions within RBS). Each
Director Defendant was therefore under an obligation to notify RBS of
these matters, but it is inferred that they did not, since no supplementary
prospectus was prepared. Each Director Defendant is therefore in breach
of section 87G(5), and accordingly liable to pay compensation under
s.90(4) of FSMA.]1

116A. Any impairment would also: (i) have made the positive content and tone of the
Prospectus impossible to sustain; and (ii) have led in all likelihood to the departure
of RBS’s senior management (who had led RBS into the acquisition just a few
months previously and so publicly promoted its benefits). In those circumstances,
and for these reasons without more, the Rights Issue would not have proceeded.

Section K – RBS’s ineffective risk management and controls, management

information and reporting, management and governance

117. Paragraphs 51, 63, 64, and 98 above are repeated.

118. The “Chairman’s Letter” stated (at pp. 28-29):

6 Board and Management

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
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.
….”

119. [Not used]

119A. The Prospectus also contained the following statements with regard to RBS’s
systems and controls for the management of risk:

05250-80298/8093941.1 218
 119A.1. RBS “has implemented risk management methods to mitigate … market
risks” and “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” (p.11). Further (p.30):

“RBS Divisions
Global Markets
…Global Banking & Markets remains focussed on effective management of its
capital and has accelerated other balance sheet management actions.”

119A.2. RBS’s estimates of credit market exposures were based on “prudent

assumptions” (pp.7, 24 and 26).

119A.3. RBS had sought to maintain a “prudent relationship between the capital
base and the underlying risks of the business”, and controlled liquidity
risks “within prudent limits” (pp. 72-73).

119A.4 “Since 31 December 2007, RBS has met all of its liquidity policy metrics in
a difficult market environment with a reduction in term funding availability
across the board. In the six months prior to the date of this document RBS
has instituted a wide series of asset and liability measures to enhance
liquidity risk measures to meet the challenges of the global credit crisis.

RBS remains well placed to access various wholesale funding sources

from a wide range of counter parties and markets” (p.73).

119A.5 “The audit committee is responsible for:

● reviewing the RBS Group’s system of internal controls; and

● monitoring the RBS Group’s processes for internal audit, risk

management and external audit” (p. 119).

119B. RBS’s 2007 Accounts contained the following statements, which were incorporated
by reference into the Prospectus (p.66):

119B.1 “The Group has implemented risk management methods to mitigate and
control [interest rate, foreign exchange and bond and equity price risks]
and other market risks to which the Group is exposed.” (p.32)

119B.2 “The Group Board of directors sets the overall risk appetite and
philosophy; the risk and capital framework underpins delivery of the
Board’s strategy.” (p.70)

05250-80298/8093941.1 219
 119B.3 “Group Executive Management Committee (“GEMC”), an executive
committee, ensures that implementation of strategy and operations are in
line with the agreed risk appetite.” (p.70)

119B.4 “Group Risk Committee (“GRC”) recommends and approves limits,

processes and policies that ensure the effective management of all
material non-balance sheet risks across the Group.” (p.70)

119B.5 “Group Asset and Liability Committee (“GALCO”) is responsible for

identifying, managing and controlling the Group balance sheet risks.
These risks are managed by setting limits and controls for capital
adequacy, funding and liquidity, intra-group exposures, and non-trading
interest rate, equity and foreign currency risk.” (p.70)

119B.6 “Risk appetite is measured as the maximum level of retained risk the
Group will accept to deliver its business objectives. Risk appetite is
generally defined through both quantitative and qualitative techniques
including stress testing, risk concentration, value-at-risk and risk
underwriting criteria, ensuring that appropriate principles, policies and
procedures are in place and applied.” (p.70)

119B.7 “These risk and capital management processes performed well throughout
2007, and continued working through the market disruption seen since
August 2007.” (p.71)

119B.8 “Independence underpins the approach to risk management, which is

reinforced throughout the Group by appropriate reporting lines.” (p.71)

119B.9 “Credit risk is managed to achieve sustainable and superior risk-reward

performance whilst maintaining exposures within acceptable risk appetite
parameters. This is achieved through the combination of governance,
policies, systems and controls, underpinned by sound commercial
judgement as described below.

o Decision makers: credit authority is granted to independent persons or

committees with the appropriate experience, seniority and commercial
judgement. Credit authority is not extended to relationship managers.
Specialist internal credit risk departments independently oversee the
credit process and make credit decisions or recommendations to the
appropriate credit committee.

o Models: credit models are used to measure and assess risk decisions
and to aid on-going monitoring. Measures, such as Probability of
Default, Exposure at Default, Loss Given Default (see below) and
Expected Loss are calculated using duly authorised models. All credit
models are subject to independent review prior to implementation and
existing models are reviewed on at least an annual basis.

05250-80298/8093941.1 220
 …

o Risk systems and data quality: systems are well organised to produce
timely, accurate and complete inputs for risk reporting and to
administer key credit processes.

o Stress testing: stress testing forms an integral part of portfolio

analysis, providing a measure of potential vulnerability to exceptional
but plausible economic and geopolitical events which assists
management in the identification of risk not otherwise apparent in
more benign circumstances. Stress testing informs risk appetite
decisions.

o Credit stewardship: customer transaction monitoring and management

is a continuous process, ensuring performance is satisfactory and that
documentation, security and valuations are complete and up to date.
(p. 72)

119B.10 “The market risk function is independent of the Group’s trading businesses
and is responsible for:

o effective application and compliance with the Group’s Market Risk

Policy Statement (MRPS), aligning the market risk taken by the Group
with the risk limits set by GEMC;

o identification, measurement, monitoring, analysis and reporting of the

market risk generated by the various businesses; and

o determination of appropriate policies and methodologies to measure

and control market risk.” (p.84)

119B.11 “Two measures that are reported both to Citizens ALCO and the Board are
… Economic Value of Equity (“EVE”) sensitivity to a series of parallel
movements in interest rates.” (p.86)

119B.12 “The company is committed to high standards of corporate governance,

business integrity and professionalism in all its activities.” (p. 99)

119B.13 “Throughout the year ended 31 December 2007, the company has
complied with all of the provisions of the revised Combined Code issued
by the Financial Reporting Council in June 2006 (the “Code”)…” (p.99)

05250-80298/8093941.1 221
 119B.14 “The Chairman leads the Board and ensures the effective engagement
and contribution of all non-executive and executive directors … All
directors participate in discussing strategy, performance, and the financial
and risk management of the company. Meetings of the Board are
structured to allow open discussion … The directors were supplied with
comprehensive papers in advance of each Board meeting covering the
Group’s principal business activities.” (p.99)

119B.15 “The non-executive directors combine broad business and commercial

experience with independent and objective judgment. The balance
between non-executive and executive directors enables the Board to
provide clear and effective leadership and maintain the highest standards
of integrity across the company’s business activities.” (p.100)

119B.16 “All directors receive accurate, timely and clear information on all relevant
matters … In addition, all directors are able, if necessary, to obtain
independent professional advice at the company’s expense.” (p.100)

119B.17 “Each new director receives a formal induction on joining the Board,
including visits to the Group’s major businesses and meetings with
directors and senior management. The induction is tailored to the
director’s specific requirements. Directors are advised of appropriate
training and professional development opportunities and undertake the
training and professional development they consider necessary in
assisting them to carry out their duties as a director.” (p.100)

119B.18 “The Board of directors is responsible for the Group’s system of internal
control that is designed to facilitate effective and efficient operations and to
ensure the quality of internal and external reporting and compliance with
applicable laws and regulations. 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.”
(p.102)

119B.19 “The Board has established a process for the identification, evaluation
and management of the significant risks faced by the Group, which
operated throughout the year ended 31 December 2007 and to 27
February 2008, the date the directors approved the Report and Accounts.
This process is regularly reviewed by the Board and meets the
requirements of the guidance ‘Internal Control: Revised Guidance for
Directors on the Combined Code’ issued by the Financial Reporting
Council in October 2005.” (p.102)

05250-80298/8093941.1 222
 119B.20 “The effectiveness of the Group’s internal control system is reviewed
regularly by the Board and the Audit Committee. Executive management
committees or boards of directors in each of the Group’s businesses
receive regular reports on significant risks facing their business and how
they are being controlled. In addition, the Group Board receives monthly
risk management reporting. Additional details of the Group’s approach to
risk management are given in the ‘Risk management’ section of the
‘Business review’ on pages 70 to 90. The Audit Committee also receives
regular reports from RBS Risk Management and Group Internal Audit.”
(p.102)

119B.21 “Management has excluded from its assessment the internal control over
financial reporting of ABN AMRO Holdings N.V. ….

Based on its assessment, management has concluded that, as of 31

December 2007, the Group’s internal control over financial reporting is
effective.” (p.102)

119B.22 “Stress test exposures are discussed with senior management and are
reported to GRC, GEMC and the Board. Breaches in the Group’s market
risk stress testing limit are reported to GRC, GEMC and the Board.” (p.85)

119B.23 “Internal reporting and oversight of risk assets is principally differentiated

by credit ratings. Internal ratings are used to assess the credit quality of
borrowers.” (p.74)

119B.24 “Liquidity management within the Group focuses on overall balance sheet
structure and the control, within prudent limits, of risk arising from the
mismatch of maturities across the balance sheet and from exposure from
undrawn commitments and other contingent obligations.” (p.80)

119B.25 “Customer accounts comprise a well-diversified and stable source of funds

from a wide range of retail, corporate and nonbank institutional
customers.” (p.80)

119B.26 “The structure of the Group’s balance sheet is managed to maintain

substantial diversification, to minimise concentration across its various
deposit sources, and to limit the reliance on total short-term wholesale
sources of funds (gross and net of repos) within prudent levels.” (p80)

119B.27 “The degree of maturity mismatch within the overall long-term structure of
the Group’s assets and liabilities is managed within internal policy
guidelines, to ensure that term asset commitments may be funded on an
economic basis over their life.” (p.81)

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 119B.28 “The Group experienced three backtesting exceptions at the consolidated
Group level during 2007.” (p.85)

120. The overall impression conveyed by the Prospectus (and the parts of previous
Annual Reports and Accounts incorporated therein) was that RBS had competent
and effective management, including in GBM, with the necessary skills, effective risk
controls which were working well, and effective management information and
governance. It purported to record, without qualification or doubt, the current
position in respect of RBS’s businesses and assets.

120A. The statements pleaded at paragraphs 118-119B above, and the impression
pleaded at paragraph 120 above were untrue, alternatively misleading, because:

120A.1 RBS’s risk management and controls were ineffective and not working well
as set out in paragraphs 120C-120L and 124B-124C below;

120A.2 RBS’s management information and reporting was ineffective as set out in
paragraphs 120M-120O below;

120A.3 The ability and skill of senior individuals was individually and collectively
deficient as set out in paragraphs 120P-120Q below; and

120A.4 RBS’s governance was ineffective as set out in paragraphs 120R-120AA

below.

120A.5 RBS’s risk management in relation to LIBOR and wash trades was
ineffective as set out in paragraphs 120AB – 120AH below.

The Claimants will also rely in each case on the detailed averments in paragraph
120BB.

120B. In this Section K:

120B.1 Standards of suitability, adequacy and effectiveness will be set out in

expert evidence and not in detail here.

120B.2 The findings and materials produced by the GIA as a part of the Project
Snow Review are matters of which RBS and the Director Defendants
either were aware or ought to have been aware as at the Prospectus Date,
alternatively by the Closing Date, had RBS risk management systems
been functioning effectively.

120B.3 It is alleged that management and risk management cannot be effective

without adequate and effective management information and reporting as
further described below.

120B.4 The allegations of ineffectiveness/inadequacy are as at the time of the

Rights Issue unless otherwise indicated. Earlier failures are relevant where
05250-80298/8093941.1 224
 they evidence a risk control, information, management or governance
weakness which had not been addressed by the time of the Rights Issue.

120B.5 “Senior Management” means Group level management (including heads

of divisions/functions and committees/sub-committees) and/or the Board
(including its sub-committees) (as the context requires).

(i) Ineffective risk management & controls

120C. As set out further below, RBS’s risk management and controls were ineffective and
were not working well. These were not mere technical failings. As a result of the
matters set out in this Section K (as well as the rest of these Amended
Consolidated Particulars of Claim):

120C.1 The slow integration of ABN AMRO risk management into RBS meant that
the ABN AMRO risk controls were not quickly improved, so that ABN
AMRO continued to suffer from operational and financial difficulties, many
of which resulted from its expansion into structured credit at a time when
other institutions were pulling back;

120C.2 Significant risk concentrations were allowed to persist particularly in

relation to commercial property loans and leveraged loans; and

120C.3 The Board and other Senior Management failed to react adequately to the
financial crisis, or learn lessons from the significant market volatility or the
failure of other significant institutions during 2007 and 2008.

(a) Failure to set risk appetite and philosophy

120D. Effective risk management and controls required the Board to determine and
regularly review the overall risk appetite and philosophy of RBS. This meant
determining for each financial year the maximum level of retained risk acceptable to
RBS to deliver its business objectives (the risk appetite), together with the rationale
behind this level of risk and the principles governing RBS’s approach to risk-taking
(the risk philosophy). The risk appetite should then have been implemented by
Senior Management through the setting of risk limits, with appropriate explanation
as to how these were expected to achieve the required risk appetite, and reviewed
monthly outcomes through reports such as the Risk Management Monthly Reports
(“RMMRs”).

120DA. At the time of the Prospectus RBS did not have a risk philosophy. The Board of
RBS had failed to determine what principles governed RBS’s approach to risk-
taking and the rationale for its chosen risk appetite. Without a risk philosophy, no
effective risk appetite could be set by RBS and implemented by Senior
Management, and no effective monitoring of whether the risk appetite was
achieving its purpose was possible. This was a significant failure in governance.

05250-80298/8093941.1 225
120E. More specifically, as at the Prospectus Date (and as at the Closing Date) the Board
had not determined the risk appetite, alternatively an effective risk appetite, for RBS
(for the avoidance of doubt including ABN AMRO) in 2007 nor in 2008 because it
had not considered the following matters in relation to potential risk outcomes that
were acceptable to the Board based on reasonable worst case scenarios of
macroeconomic stresses:

120E.1 Group-wide economic capital, capital ratio volatility and earnings volatility.

120E.2 The external credit rating of RBS.

120E.3 The Group-wide VaR limit, together with a mechanical 10-day historical
stress test limit that had been set in respect of market risk only.

120E.3.1 [Not used]

120E.3.2 In fact, RBS did not treat the VaR and 10-day stress limits as
hard constraints which could not be exceeded without (i)
conscious consideration of the impact of such an adjustment on
the Bank’s risk appetite and (ii) approval by the Board. There
were at least four breaches of the Group VaR limit between
November 2007 and April 2008, but instead of insisting that
RBS adjust its positions to reduce risk, GEMC simply increased
the limit either permanently or temporarily to accommodate the
excess. See further paragraph 120J.2 below.

120E.4 Whether the predominant overall limit set by the Board in respect of credit
risk, which was the Correlated Exposure Loss Test (“CELT”), was a
sufficiently comprehensive measure for 70% of RBS’s risk usage, given
that:

120E.4.1 CELT was a stress test comparing single risk factors, not a
macroeconomic stress test.

120E.4.2 CELT did not capture the major concentrations of risk.

120E.4.3 CELT was excessively theoretical and was not an effective tool
to be used by the businesses to mitigate risks.

120E.4.4 The Board was not provided with any regular report on
exposure against the CELT limit.

120E.4.5 An effective credit risk appetite limit would have been a set of
measures that balanced risk and return (such return on risk-
adjusted capital) against various concentrations in the portfolio
on a country, product and/or industry categorisation.
05250-80298/8093941.1 226
 120E.5 The liquidity Survival Horizon as explained in Section C, or the conditions
under which RBS might need to rely on extraordinary central bank liquidity
support.

120E.6 Aggregated risk appetite metrics which included ABN AMRO despite ABN
AMRO’s risk profile being of a similar magnitude to RBS’s and in some
areas being much higher. There was a stated intention to incorporate ABN
AMRO into the Group wide risk appetite but this process was not complete
at the time of the Rights Issue.

120F. The above led to a failure by Senior Management to risk manage the business of
RBS in line with a Board-determined risk appetite. Instead, RBS’s executive was
able to manage RBS by determining risk appetite as they saw fit and without Board
imposed constraints on aggregate risk exposure. In particular, this failure allowed
divisions of RBS, particularly GBM, to grow the balance sheet without any effective
linkage to a proper risk appetite set by the Board.

120G. The issue of a failure to set an effective risk appetite was raised by Sir Steven
Robson but not addressed by the Board, although it should have been remedied as
a matter of urgency. The GIA meeting notes for 10 June 2008 record Sir Steven
Robson (a non-executive director of RBS) as stating “Almost every year Sir Steve
has asked for a description of risk appetite for the past 6 years…Risk appetite –
currently this is just an empty box with nothing in it”.

(b) The Board’s failure to review and monitor the risk exposure and risk
strategy

120H. The Board systematically failed to review and monitor effectively the risk exposure
and risk strategy of RBS:

120H.1 The Board’s culture was one focussed upon revenue to the exclusion of
adequate consideration of risk exposure.

120H.2 The Board’s review and discussion of risk issues was superficial and
inadequate.

120H.3 The Board and its committees failed to consider risk strategy adequately.
There was no committee of the Board which reviewed substantively the
risk management of RBS and which provided substantive advice as to risk
appetite and strategy.

120H.4 In the Board's December 2007 self-assessment, 40% of Board members

disagreed or neither agreed nor disagreed with the statement “The
amount and level of Board review of risk is appropriate for the Group, and
ensures that the Group has a robust and effective system of risk
management and internal control”. 46% of Board members disagreed or

05250-80298/8093941.1 227
 neither agreed nor disagreed with the statement “The Board spends
sufficient time considering and monitoring the development of the balance
sheet and capital planning and management”.

(c) Management of capital risk weighting calculations was ineffective

120I. RBS’s management of capital risk weighting calculations was ineffective:

120I.1 RBS’s Risk and Finance functions did not manage the development and
implementation of its Basel II models effectively. The result was
considerable uncertainty about the total RWA figures which were to be
applied in calculating RBS’s capital ratios, as set out in Sections A and B
above.

120I.2 RBS failed properly to apply comprehensive Group-wide Basel II stress

testing of severe but plausible scenarios, as the FSA required. Although
stress testing was carried out, Senior Management and the Board did not
discuss and challenge the scenarios, methodology, assumptions and
outputs of these stress tests as was required by the Basel II regime.

120I.3 In March-April 2008, RBS had been uncertain whether it had breached
FSA ICG. See further paragraphs 57.9, 57.9AA and 57.9A above.

120I.4 As part of the Basel II requirements, RBS was required to use its risk-
weighted asset calculation models as an integral part of its risk
management processes. Although risk-weighted asset calculation models
were used, Senior Management and the Board did not discuss and
challenge the methodology, assumptions and outputs of these models as
was required by the Basel II regime.

120I.5 ABN AMRO was unable to obtain a successful Basel II waiver from its
regulator the DNB, therefore a temporary approach based on Basel I
calculations was adopted. RBS’s own credit model development was not
accepted by the FSA during 2008. Paragraphs 44.2B.1, 44.2B.2 and
47E.6.3 are repeated. Work on ABN AMRO’s Basel II models remained
problematic and did not progress well in 2008.

(d) Management of market risk was ineffective

120J. RBS’s management of market risk was ineffective:

120J.1 Section G above is repeated.

05250-80298/8093941.1 228
 120J.2 VaR was supplemented by a 10-day historical stress test, which was also
subject to a Board-level limit. The Board was never provided with an
explanation of how this measure would operate effectively. Paragraph
120O.8 is repeated.

120J.3 The credit market write-downs which had occurred in Q1 2008 were so
significant and surprising that the Board decided on or around 23 April
2008 to launch a full investigation (the “Project Snow Review”), the terms
of reference for which were finalised on or before 2 May 2008, and which
led to the production of the GIA Reports. The Prospectus ought to have
disclosed this major and ongoing review into the management, risk
management and governance questions arising from the write-downs and
the reasons for it. The Terms of Reference of the Project Snow Review
are relied upon as evidence of the concerns held by RBS regarding
management, risk management and controls of its credit market business
as at 2 May 2008 (at the latest).

120J.4 GEMC and its sub-committee GRC failed to analyse the trading book
balance sheet effectively. Trading book exposures were not analysed
closely because they were short-term holdings. In the case of structured
credit exposures these were purchased only with reference to external
credit ratings rather than an internal analysis. As some market positions
became highly illiquid effective risk management required a more
fundamental credit risk assessment. Neither GEMC nor GRC ensured that
this took place.

120J.5 ABN AMRO’s credit trading risk management was deficient; paragraphs
105E.4, 105E.9 and 113.1 above are repeated.

120J.6 Crowe’s view (expressed in a GIA interview on 9 July 2008) was that
GEMC did not understand GBM’s business and so it was not effectively
discussed by GEMC.

(e) Management of credit risk was ineffective

120K. RBS’s management of credit risk was ineffective:

120K.1 RBS's Credit Risk Appetite Policy dated 3 January 2007 had been
approved by GRC in December 2006 and had not been amended to
reflect the market conditions and risk which applied as at the time of the
Rights Issue.

120K.2 RBS used two types of stress tests affecting credit exposures: a macro-
economic stress test and CELT. The former was presented to the Board
annually but only targeted capital adequacy. GRC stress tested credit risk
using CELT which was an inadequate stress test and paragraph 120E.4 is
repeated.
05250-80298/8093941.1 229
 120K.3 Several significant credit risk models were not accepted by the FSA in
respect of Basel II usage, and Group Risk Management (“GRM”) reported
in May 2008 that the FSA had concerns about the Group’s independent
validation of certain divisional credit models.

120K.4 The wrong credit approval process was followed in relation to a number of
products, including (i) monoline insurance (including negative basis
trades), (ii) the Citizens SBO portfolio, (iii) SS CDOs (both on Greenwich
and London’s books), (iv) ABN AMRO’s transactions pursuant to the
“White Knight” structure, and (v) leveraged loans. That led to trades being
approved by bodies which applied less intensive scrutiny to the trades
than was appropriate, or would have been applied by the bodies which
should have given approval.

120K.5 RBS did not have an appropriately robust country risk framework,
notwithstanding GIA’s conclusion in April 2007 that the systems for
identifying, monitoring and reconciling country risk exposures were not fit
for purpose.

120K.6 GRM failed to identify and escalate RBS’s serious breaches of monoline
limits to the Board or GEMC.

120K.7 Credit risk assessment for monolines was inappropriate both (i) at the
point the exposure was taken on and also (ii) subsequently. Paragraphs
85A – 89A are repeated.

(f) Management of balance sheet and liquidity risk was ineffective

120L. RBS’s management of balance sheet and liquidity risk was ineffective:

120L.1 RBS had no up-to-date Group Liquidity Policy.

120L.2 GALCO, the committee of GEMC responsible for liquidity risk

management, failed to set and implement a liquidity Survival Horizon for
RBS excluding ABN AMRO.

120L.3 GALCO failed to establish an all currency liquidity buffer necessary to

achieve a liquidity Survival Horizon.

120L.4 GALCO failed to escalate to GEMC and the Board the extreme liquidity
risk to which RBS (excluding ABN AMRO) was exposed from Q1 2008 (as
set out in Section C above).

120L.5 Group Treasury was not given a structural role in respect of Senior
Management budgeting and management of the balance sheet.

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 120L.6 RBS did not have sufficient consolidated stress tests in place that linked
the impacts of credit and market risk with liquidity.

120L.7 Reporting the Economic Value of Equity (“EVE”) limit for Citizens was
suspended for six months between March and September 2008.

120L.8 The Board failed to discuss, review and approve what was the reasonable
worst case scenario of liquidity risk for the purposes of making the
Working Capital Statement.

(ii) Management information and reporting

120M. As set out in more detail below, RBS did not provide accurate, relevant and up to
date management information and risk exposure information to Senior Management
(including the Board). In December 2007, 40% of Board members either disagreed
or neither agreed nor disagreed with the statement “The Board receives appropriate
and timely information of the right length and quality”.

120N. First, RBS’s internal financial reporting was inadequate and ineffective:

120N.1 RBS’s financial reporting in relation to its own capital and capital adequacy
was inaccurate and unreliable. Capital ratio information was inaccurate
and unreliable; paragraphs 45.3(c), 57.9A.2 and 57.9A.3 above are
repeated. Further, its reporting of RWAs was inaccurate; paragraph 43.2A
above is repeated.

120N.2 Market pricing was late and unreliable:

120N.2.1 The LSD Model used to price CDOs was inaccurate and not
independently validated until at least May 2008 despite being
used for the end-year valuations in the 2007 Accounts.
Paragraph 74(2) is repeated. This did not comply with the
FSA’s requirement that a model used for such a purpose
should be independently validated.

120N.2.2 The market price of trading book assets should have been
priced to market on a daily basis. Those marks should have
been checked pursuant to the IPV process, by individual
checkers who were independent of the trading desks. That IPV
process should have taken place at least monthly, and in most
cases daily. However, the process was often slow and controls
were weak, particularly at RBS Greenwich:

120N.2.2.1 Problems with the IPV process at RBS Greenwich

experienced by Hong are set out at paragraphs
74(3) and 73(4) above. On 9 November 2007,

05250-80298/8093941.1 231
 Hong resigned from his post as a managing director
of RBS Greenwich, because, although IPV was
being performed at RBS Greenwich, Walsh, who
had overall responsibility for the fixed income
trading front office at RBS Greenwich, refused to
authorise the write downs that would have been
needed to correct the variances to trader marks that
had been identified by the IPV function. No Senior
Management action was taken following his
resignation to strengthen the independence of the
IPV process.

120N.2.2.2 In March 2008 it was discovered that no price

update had taken place, and no IPV had been
performed since January on the portfolio underlying
the “TABS 2006-6” super senior CDO. As a result,
the prices had to be changed very substantially,
including in one case devaluing a bond by 15-20%,
revealing a loss of between £45m and £60m. The
IPV process had failed to pick up these
discrepancies. In the light of this discovery, it was
or should have been apparent that there were
serious systemic weaknesses relating to the IPV
process.

120N.2.3 Problems with CDO models were not restricted to the LSD
model. In October 2008, the Modelled Products Review
Committee reported that correcting the Corporate CDO model
to enable it to calibrate properly to market prices remained a top
priority given that the valuation of Corporate CDO positions was
a material ABN AMRO integration issue.

120N.2.4 When Drake-Brockman took over as Head of GBM Americas in

March 2008, he reported that the ABN AMRO traders were not
producing daily profit and loss accounts and that they were
refusing to sign off on their trading books and profit and loss
accounts. He also reported serious problems with ABN
AMRO’s IPV processes, in part due to inexperienced staff
having to deal with complex positions and many manual
workarounds.

120N.3 Balance sheet reporting was late and out of date; paragraph 57.9A.3
above is repeated.

120N.4 Reporting in relation to ABN AMRO was late and unreliable:

05250-80298/8093941.1 232
 120N.4.1 RBS did not have consolidated risk exposure figures for the
Group including ABN AMRO until February 2008 and these
were not reported to Group level management until two months
later.

120N.4.2 The GIA meeting report of 10 June 2008 records that Tyler
stated “Information systems especially at ABN are very poor.”
GIA also noted in the Project Snow Review that ABN AMRO
did not have a single general ledger system that would have
enabled proper analysis of its exposures and highlighted further
problems with its risk systems.

120N.4.3 Integration of ABN AMRO’s risk limits with RBS’s did not take
place for several months after the acquisition. For example, a
combined VaR which included ABN AMRO was only
implemented in April 2008, six months after ABN AMRO had
been acquired. This lack of integration meant that
concentrations of risk persisted much longer than they should
have, since management did not take prompt action to reduce
RBS’s overall exposures to more prudent levels.

120N.4.4 Operational risk issues for ABN AMRO were not included in
reporting to Senior Management for six months.

120N.4.5 The Board’s ‘2008 Risk and Capital Assessment’ in December

2007 had excluded ABN AMRO from the analysis because
data of sufficient quality on a comparable basis was not yet
available.

120N.5 Credit management information was late and/or unreliable.

120N.5.1 RBS’s systems were old and difficult to adapt to new business
needs or use to extract aggregated information, and GBM’s
core credit risk system (called “Sabre”) was nearing the end of
its life and so not fit for purpose without major enhancement,
which in any case could only prolong its life for a further 18 to
24 months.

120N.5.2 The risk infrastructure had not addressed concerns highlighted

by Group Risk and Audit, which included (i) risk methodologies
not being consistent with Group policy, (ii) a manual excess
management process and (iii) over 20,000 manual data
overwrites per month (a number which was growing).

120N.5.3 GBM’s risk systems were particularly poor given the risks it was
undertaking. GBM should have had fit-for-purpose risk

05250-80298/8093941.1 233
 systems, as promised by GBM management to the Board when
the structured credit business was expanded in 2006.

120N.5.4 Counterparty credit risk had no single customer view of client

exposure, limited concentration risk reporting and a
misalignment of positions between the Risk and Collateral
Management departments.

120N.6 RBS permitted dummy trades to be recorded on the live general ledger.
As a result, the statutory FSA report on liquid assets was incorrect by £43
billion for three months between September and November 2007.

120N.7 RBS’s automated systems generated daily financial data (including its
profit/loss). However, the data required an enormous number of manual
amendments in order to be accurate, so that the true P&L figures for each
day were not reported until sometime after the end of the month. In April
2008 Nathanial complained to Whittaker about the difficulty of running a
daily backtesting process for VaR with so many P&L overwrites, often
caused by deficiencies in the IPV process in RBS Greenwich and ABN
AMRO.

120O. Second, RBS’s risk management information and reporting were inadequate and
ineffective.

120O.1 There was inadequate and ineffective reporting of the risk profile of RBS
(meaning what risks affected RBS, how those risks were assessed and
controlled and how those risks compared to the risk appetite of RBS) to
Senior Management (including the Board).

120O.2 The structure of RBS was that risk management information was
aggregated and produced by GRM which was headed by the Group Chief
Risk Officer, Nathanial. GRM produced risk management reports for
Senior Management (including the Board). The regular reporting tool of
GRM was the RMMR which was prepared to assist Senior Management
(including the Board) in understanding the risk profile of RBS and in
making decisions. The RMMRs were provided to GEMC, the Board, GRC
and GAC, and were intended to enable each to discharge their respective
risk management and control functions. Every month the reports provided
to the four committees were substantially identical, except that GAC did
not meet monthly so only received a report relevant to the month in which
it met.

120O.3 The RMMRs were systematically inadequate:

120O.3.1 They were backward looking only and they failed to project and
advise upon existing and anticipated risks, or recommend
actions.
05250-80298/8093941.1 234
 120O.3.2 In the period leading up to the Rights Issue they were compiled
using data that was out of date by two months.

120O.3.3 They did not contain risk metrics for RBS and ABN AMRO
combined until the report in April 2008. Until then Senior
Management (including the Board) had no visibility of the
aggregate concentration of risk exposure and positions.

120O.3.4 Their presentation of information was poor and failed to

communicate in clear graphics/diagrams and words the risk
profile of RBS.

120O.3.5 The reports systematically failed to identify the most important

metric(s) for Senior Management (including the Board) when
considering a particular risk area and failed to explain the
financial risk in play.

120O.3.6 Further, the RMMRs did not disclose the fact that Citizens had
unilaterally ceased reporting the EVE metric, when it was
apparent that a limit would be breached, and GALCO had
approved this suspension only retrospectively.

120O.3.7 They did not report the current liquidity Survival Horizon
benchmarked against RBS’s risk appetite.

120O.3.8 They did not report on the Specialised Lending Services and
Strategic Assets Unit (“SAU”) divisions of RBS. Even though
these divisions held some of the riskiest and most illiquid
assets in RBS, their risk data and metrics were excluded from
RMMRs and were not reported to Senior Management
(including the Board).

120O.3.8.1 Specialised Lending Services was the work-out

area for the Group, covering some £9bn of
assets and 4,300 high risk cases as at the end of
April 2008. The obvious risks inherent in its
operations included recovery risk (the risk that
RBS would not receive repayment), and
reputational risk (if RBS forced defaulting
companies into liquidation).

120O.3.8.2 SAU was the so called ‘bad bank’ unit of RBS

that housed the loss-making super-senior CDOs
and other structured credit exposures from RBS
and ABN AMRO that were no longer part of the
strategic businesses and would be sold if
conditions allowed. It was announced in the

05250-80298/8093941.1 235
 Prospectus that the SAU had been formed but it
was not announced that no operational
processes had been put in place to report on its
risk or performance or make decisions in a timely
manner. By 31 May 2008 it contained assets
notionally worth £43.9 billion, but risk reporting to
the Board in respect of the SAU did not begin
until October 2008.

120O.3.9 They failed to report and comment upon major market

events/conditions which significantly impacted upon RBS’s risk
profile.

120O.3.10 They did not present a coherent set of Group-wide limits and
exposure monitored against them. There was no presentation
in the RMMR of the VaR usage at the end of 2007, even
though that information was declared in the 2007 Annual
Report.

120O.4 The Board did not receive adequate economic and market condition
reports which ought to have considered the impact upon RBS’s risk profile
in light of market conditions.

120O.5 Notwithstanding that a substantial number of the Board members

expressed a lack of confidence in risk management information in the
December 2007 self-review (set out in paragraph 120H.4 above) this
problem was not remedied by the time of the Rights Issue.

120O.6 More generally, issues raised at GALCO were not properly reported to the
Board either by the RMMR or otherwise. Paragraph 66B.1 is repeated.

120O.7 In the premises the Board and Senior Management did not receive regular
risk management and control reporting which enabled a non-risk
management expert to understand:

120O.7.1 The level and seriousness of risk facing RBS.

120O.7.2 How the risks to which RBS was exposed compared to the risk
appetite which had been expressed by the Board and put into
policies by the rest of the Senior Management.

120O.7.3 How the risks to which RBS was exposed were being
controlled.

120O.8 VaR and 10-day market risk stress test exposure were never explained in
detail to the Board, neither in regular risk management reports nor in a

05250-80298/8093941.1 236
 separate training session. As a result the Board was not aware of the
components of VaR that caused the movements in this risk measure nor
were they able to challenge changes to the values or set an appropriate
limit for the bank.

120O.9 The risk reports GRC provided to GEMC were not fit for purpose as they
did not enable GEMC to understand and assess the most serious risks
facing the Group:

120O.9.1 The reports were very short and typically one page of A4 long.

120O.9.2 They presented only the decisions of GRC without

recommendation or explanation.

120O.9.3 They did not contain clear descriptions of serious risks facing
the Group.

120O.9.4 They did not report upon major risk issues such as stress
testing and credit models.

120O.10 As a consequence of the inadequate risk management reporting the Board

did not understand the most significant risks across the Group and could
not review the effectiveness of their control. Consequently they were
unable to anticipate, mitigate and prevent losses.

(iii) Deficiency in the ability & skill of senior individuals

120P. The Board did not possess the ability and skills to manage effectively the business
of RBS in the challenging conditions of Q1 2008.

120P.1 There was a general lack of education and/or training and/or

understanding of Board members in respect of:

120P.1.1 Risk management and controls which undermined their ability

to review RBS’s risk management and controls.

120P.1.2 Structured credit markets.

120P.1.3 Liquidity.

120P.2 RBS had no effective system or programme of Board education/training.

120P.3 GAC, the Board’s risk and controls focussed committee, lacked adequate
risk management expertise or understanding:

05250-80298/8093941.1 237
 120P.3.1 The chairman of GAC, Mr Archie Hunter, had no investment
banking expertise and no prior professional role in risk
management and control.

120P.3.2 No member of GAC held expertise in investment banking risk

management and controls except Mr Colin Buchan (a non-
executive director of RBS), who did not have expertise in
relation to the risk management of structured credit exposures.

120P.3.3 Had GAC collectively possessed such ability and skills it would
not have failed in its function as set out in paragraph 120Z
below.

120Q. Group divisions and functions were not led by individuals who possessed the ability
and skills to manage the division of RBS in the challenging conditions of Q1 2008:

120Q.1 Cameron was not sufficiently competent and did not have the necessary
skills to lead GBM (despite this being a “significant influence function”
within the meaning of s.59 of the Financial Services and Markets Act 2000
which required him to exercise due skill, care and diligence in managing
the business for which he was responsible):

120Q.1.1 Cameron did not have adequate expertise in structured credit

markets and market risk to lead GBM.

120Q.1.2 An RBS internal memorandum of 2 June 2006 recorded that

Cameron “would not be a candidate for running major FM
[Financial markets] business at a competitor, particularly in
relation to the management of market risk.”

120Q.1.3 In an interview with the FSA quoted in the FSA Report at p.387,
Cameron admitted that even in May 2007 he did not
adequately understand CDOs.

120Q.1.4 According to an email from Mr Joe MacHale (a non-executive

director of RBS) to McKillop dated 5 May 2008, “the non-
executive directors have no confidence in Johnny Cameron
staying on as Head of Global Markets.” In a GIA interview on
30 June 2008, MacHale indicated that it was already a
“planned board action” that Cameron would “go within next
year”.

120Q.1.5 As he explained in a personal letter to Goodwin on 27 March

2008, Cameron was not aware of his own role and
responsibilities as Chairman of GBM, nor was he aware of what
role RBS thought he was playing.

05250-80298/8093941.1 238
 120Q.1.6 He resigned from RBS in October 2008.

120Q.1.7 After his resignation, the FSA placed Cameron under

investigation. In May 2010 the FSA reached a settlement with
Cameron under which he agreed that he would not perform any
significant influence function, or undertake any further full-time
employment, in the financial services industry.

120Q.1.8 The limited abilities and skills of Cameron weakened the

Board’s management of structured credit risks since Cameron
did not bring to the Board’s attention critical risks which he
should have appreciated and escalated. In particular, the 2006
plans for the expansion of the structured credit business
displayed a failure of understanding of proper risk
management.

120Q.1.9 Additionally or alternatively, to the extent that it is said that

Cameron’s lack of skills and competence was offset by the
presence of Crowe, his deputy, it ought to have been disclosed
that Crowe had been transferred to ABN AMRO in October
2007, and would only return to GBM in May 2008. According to
the FSA Report (Section 3, paragraph 62), that transfer created
a “gap in traded markets experience in GBM”.

120Q.2 Whittaker was Chairman of GRC but lacked the risk management skill and
understanding to lead GRC effectively, or to be the conduit through which
the concerns of GRM and GRC were brought to the Board:

120Q.2.1 He had not previously held a senior risk management position.

120Q.2.2 He failed to lead GRC effectively.

120Q.2.3 He failed to escalate to the Board significant risk management

problems which were reported to him.

120Q.3 Mr Lawrence Fish (a Board Member and former CEO of Citizens) was
believed by other Directors (including at least Goodwin and MacHale) to
have misled the Board in relation to the Citizens SBO portfolio. Despite
this, Fish was not suspended or otherwise disciplined, and it does not
appear that the matter was reported to Compliance for an investigation.
This was itself a serious breach of risk management, given that a question
had been raised about his honesty.

(iv) Governance was ineffective

120R. As set out further below, RBS’s governance did not function effectively.

05250-80298/8093941.1 239
120S. The terms of reference of important management bodies were defective:

120S.1 The Board’s terms of reference did not require it to set and review the risk
appetite of the Board.

120S.2 GAC’s terms of reference did not require it to advise the Board as to
RBS’s risk appetite and strategy.

120SA. The Board failed to determine a risk philosophy and failed to determine a risk
appetite or effective risk appetite as set out in 120DA 120E and 120L.8 above
respectively.

120T. GRM did not report to the Board independently of Senior Management:

120T.1 GRM reported to Group Finance and Group Finance reported to the Group
Chief Executive Officer.

120T.2 In practice, both Whittaker and Goodwin had editorial control of

Nathanial’s risk reporting to the Board, GEMC and GAC.

120U. The Board and/or Senior Management suffered from the following structural or
cultural weaknesses:

120U.1 A focus on achieving revenue whereby profit implications of exposures,

losses and impairments were more important than the consideration of the
risk management and control implications.

120U.2 There was general complacency as to risk management and controls and
an assumption that notwithstanding market conditions it was ‘business as
usual’ (meaning that there was no need for a re-assessment of risk profile
and strategy).

120U.3 Decision making was dominated by Goodwin; there was a lack of

challenge and independent review by the rest of the Board.

120U.4 The Board typically met the evening before a Board meeting and
discussed and agreed agenda items over an un-minuted dinner. The use
of ad hoc and hurried Board meetings and oral rather than written briefings
was prevalent.

120V. GRC often referred in its meetings and agendas to its having a role in setting risk
appetite, but in fact its mandate was, according to the High Level Controls Report
of 2007, to “provide appropriate input to the risk appetite-setting process” for the
Group Board and GEMC, and to formulate policies and procedures to “be
considered and approved in the context of the Group's risk appetite”. It was
deficient in carrying out that mandate because:
05250-80298/8093941.1 240
 120V.1 GRC was a sub-committee of GEMC yet GEMC members rarely attended;
in his role as chairman in 2007 and 2008, Whittaker was present at fewer
than a quarter of GRC meetings.

120V.2 GRC did not fulfil its mandate as detailed in the High Level Controls
Report of 2007 and had no formal methodology for setting risk appetite
independently of the Board or GEMC, and the papers presented to it
adopted no consistent or consolidated approach to risk appetite.

120V.3 The process for GRC’s role in setting risk appetite was never discussed at
Board or GEMC.

120V.4 The risk appetite was proposed by business lines rather than being
independently set.

120V.5 Decisions made by GRC were sporadically communicated to GEMC via a

one page report from Whittaker, but this information was never passed to
the Board.

120W. The policy-setting and review process lacked coherence and consistency. In
March 2008 there were over 600 policies in RBS a majority of which were difficult
to locate, and compliance with the policies was not systematically monitored.
Policies should have been reviewed at least annually, but in the 18 month period
from February 2007 to October 2008, fewer than 20 of those 600 policies were
reviewed by GRC.

120X. As to the SAU:

120X.1 It was headed by Nathanial (the Group Chief Risk Officer), which put him
in an operational position. That meant that there was no independent
oversight of his role and he was given a role outside of his stated job
description.

120X.2 Together with Specialised Lending Services, it operated outside of Senior

Management review and the Group level policies applicable for risk
management, as noted in paragraph 120O.3.8 above.

120X.3 It had inadequate staffing, it lacked detailed policies, procedures, limits,

or authorisations, and it was temporarily exempt from Sarbanes-Oxley
control testing.

120Y. As set out in paragraph 120Q.1.5 above, Cameron was not aware of his own role
and responsibilities as Chairman of GBM, nor was he aware of what role RBS
thought he was playing. This was an obvious failure of governance.

05250-80298/8093941.1 241
120Z. The GAC did not review adequately or effectively the system or effectiveness of
internal controls and risk management of the Group, or its processes for risk
management:

120Z.1 GAC did not apply substantive criteria or standards to assess

effectiveness of the risk management and control in the Group.

120Z.2 GAC failed to analyse the RMMRs in a systematic and critical way (which
were flawed and ineffective as set out above in paragraph 120O.3).

120Z.3 GAC failed to challenge the inadequacy of annual risk reporting by GRM.

120Z.4 GAC was hindered in its reviews by the late provision of information and
the lack of information from Senior Management. In response to the
December 2007 self-review statement “The Committee receives
appropriate and timely information of the right length and quality” 60% of
GAC members either disagreed or were neutral.

120Z.5 GAC approved the annual Risk and Control Assessment dated February
2008 without any independent assessment of the integrity of the
supporting paper produced by GRM which was wholly inadequate.

120Z.6 GAC failed to engage in an effective analysis of impairment of goodwill

associated with ABN AMRO.

120AA.GIA failed to assess the effectiveness of RBS’s risk management and controls
adequately. Had GIA adequately performed its function as set out in the High
Level Controls Report of 2007 it would have identified the risk management and
control failures set out in this Section K. Further:

120AA.1 The conclusions GIA reached in the Project Snow Review ought to
have been reached through an effectively functioning GIA process in
2007 and Q1 2008.

120AA.2 GIA failed in the reports that it provided to GAC to evaluate effectively
the risk management processes of RBS and identify the failures set
out in this Section K.

120AA.3 GIA’s department in Citizens Financial Group failed to review and

identify that inadequate risk management of the consumer finance
division was ongoing in 2006 and 2007 (which permitted the growth in
the Citizens SBO portfolio).

120AA.4 GIA failed to report that GAC was not functioning properly as set out
above.

Risk Management failings in relation to LIBOR and wash trades

05250-80298/8093941.1 242
120AB. Further (and for the avoidance of doubt the following allegations are made,
and their intended effect confined to what they show about RBS’s risk
management):

120AB.1. In February 2013, RBS was fined £87.5m by the FSA, $325m by the
US Commodity Futures Trading Commission and $150m by the US
Department of Justice for manipulating LIBOR over a period of some
6 years (until March 2012), failing to have adequate risk management
systems and controls in place in relation to its LIBOR submissions
process, and other associated regulatory breaches.

120AB.2. It was found by the FSA (and recorded in the FSA’s Final Notice dated
6 February 2013), that the LIBOR manipulation had been facilitated by
serious failures in RBS’s systems and controls both before and after
the Rights Issue Closing Date, in particular:

120AB.2.1 the failure to identify and manage the risks of inappropriate

LIBOR submissions (as detailed in paragraphs 75-77 of the
FSA Final Notice);

120AB.2.2 the absence of any submissions-related systems and controls

until March 2011 (paragraphs 78-99 of the FSA Final Notice);

120AB.2.3 inadequate transaction monitoring systems and controls in

relation to wash trades (paragraphs 100-101 of the FSA Final
Notice); and

120AB.2.4 failures of management oversight of the LIBOR submitting

process (paragraph 102 of the FSA Final Notice).

120AB.3. Notwithstanding the fines referred to above, and the detailed findings
made by RBS’s regulator, by their Amended Defence (in particular
Schedule 3), the Defendants denied or did not admit certain of those
findings as at or at any time before the Closing Date.

120AB.4 In the interests of proportionality, economy and efficient use of Court

time, the Claimants further confine their allegations of risk
management failings in relation to LIBOR and wash trades as follows.

120AC. In relation to LIBOR submissions, there was a real risk that RBS’s LIBOR
submitters would take into account inappropriate factors, such as (i) RBS’s
P&L (on derivative or money market trades), or (ii) RBS’s desire not to be
05250-80298/8093941.1 243
 perceived as a greater credit risk than other contributor banks (and therefore
a pressure to understate its LIBOR submissions), and thereby manipulate or
attempt to manipulate LIBOR in such a way as potentially to give rise to
significant regulatory fines, costs relating to regulatory investigations and
proceedings, civil claims for compensation and reputational damage arising
from regulatory criticism and sanction.

120AD. In support of the allegation that such real risks existed, and that RBS were
aware or ought reasonably to have been aware of those risks, the Claimants
rely on the following:

120AD.1 There was an obvious conflict of interest inherent in money market or

derivative traders influencing or making LIBOR submissions when the
profitability of their trades were wholly or partially dependent on
movements in LIBOR, and the profitability of the trades affected the
amount of their personal bonuses; and an obvious risk of improper
considerations of profit and bonus affecting LIBOR submissions. That
risk existed in any bank in which traders were involved in the setting of
LIBOR.

120AD.2 The admissions made in paragraph 9 of Schedule 3 to the Amended

Defence, as to the potential effect of LIBOR on profit and bonuses and
the possibility of improper considerations influencing LIBOR
submissions.

120AD.3 During 2008 the British Bankers Association conducted a review of the
LIBOR submissions process, alerting RBS at several points during the
review (including, as admitted in paragraph 371.1 of the Amended
Defence, before the Closing Date) to concerns within the banking
community with respect to how LIBOR was being set.

120AD.4 On 16 April 2008 the Wall Street Journal published an article reporting
doubts about the reliability and credibility of LIBOR, suggesting that
banks had been suppressing their submissions to avoid signalling to
investors that they were experiencing difficulties, and reporting on a
report by the Bank for International Settlements that “banks might have
an incentive to provide false rates to profit from derivatives
transactions”.

120AD.5 Panel banks, including RBS, received communications from the British
Bankers Association, including on 17 April and 2 May 2008, which
referred to concerns raised with the British Bankers Association about

05250-80298/8093941.1 244
 the accuracy of LIBOR submissions and which made it clear that such
behaviour was unacceptable.

120AD.6 On 25 April 2008 Cameron attended a meeting at the Bank of England

with the BBA and other banks, at which the Bank of England expressed
concern about Banks’ approach to LIBOR submissions. On 30 April
2008 Cameron circulated a note of the meeting to Mary McCallum
(Goodwin’s executive assistant), Whittaker, Cummins, Nielsen and
Niblock.

120AD.7 On 28 May 2008 Cameron reported to Cummins and Niblock by email

that he had received a call from Paul Tucker, the then Deputy Governor
of the Bank of England, in which concerns were expressed that the BBA
might appear too complacent about the problem of LIBOR fixing.
Cummins replied to Cameron, referring to a primary area of concern as
being USD LIBOR setting in London and the view that the rates did not
reflect reality.

120AD.8 On the same day, Cummins sent an email to Cameron and Crowe with
a draft email to Paul Tucker, which recorded that the BBA had asked
the banks to “consider the possibility of some sort of sanction if a panel
member were to set a rate at one level but is then seen to be posting
different levels in the general market … This last idea would be difficult
to enforce but could produce enough moral persuasion on participating
banks to be more realistic.”

120AE. There was also a real and obvious risk of the occurrence of wash trades (i.e.
trades which were immediately cancelled out by other trades, carried out for
the sole purpose of generating brokerage fees), including to reward brokers
for assistance in manipulating LIBOR. The occurrence of at least 30 such
trades between September 2008 and August 2009 is recorded in paragraphs
63 to 67 and 100 of the FSA Final Notice, and is not (as the Claimants
understand paragraph 17 of Schedule 3 to the Amended Defence) disputed
as fact by the Defendants.

120AF. The risks identified at 120AC to 120AE above were not appropriately
identified, controlled or reported:

120AF.1 Until March 2011, RBS had no guidance, policies or training in place
in relation to:

120AF.1.1 The submission of LIBOR generally.

05250-80298/8093941.1 245
 120AF.1.2 The matters which LIBOR submitters should or should
not take into account.

120AF.1.3 Which individuals should or should not be permitted to

make LIBOR submissions on behalf of RBS (i.e. whether
derivative traders and/or junior staff who were in a
position of conflict were permitted to make submissions).

120AF.1.4 Communications between derivative traders and/or

money market traders and the LIBOR submitter
regarding the LIBOR submission.

120AF.2 Neither GRM, nor any other Risk Management function, nor
GIA, nor any relevant Compliance function (i) appreciated or
addressed the obvious conflicts of interest described above; or
(ii) investigated or controlled the LIBOR submissions so as to
ensure that inappropriate considerations were not being taken
into account; or (iii) ensured that there were line managers with
clear supervisory responsibility over LIBOR submission who
were performing that function.

120AF.3 It is inferred from paragraph 17.2 of Schedule 3 to the Amended

Defence that RBS had no monitoring system in place to
monitor, and did not monitor, transactions for “wash trades” in
interest rate derivatives traded over the counter. Accordingly,
RBS failed to monitor or control its transactions adequately to
detect and/or prevent wash trades.

120AF.4 GIA failed to check routinely that the safeguards and processes
set out in paragraph 120AF.1-3 had been put in place.

120AG. The well-known misconduct committed by a number of RBS employees in

relation to LIBOR was not identified and stopped until effective risk
controls were put into place. As a result RBS suffered substantial
reputational and financial losses arising from LIBOR related regulatory
investigations, criticism and sanction (i.e. at least the fines referred to in
paragraph 120AB.1 above).

120AH. Accordingly, for these further reasons, RBS’s risk controls were
inadequate and ineffective, and statements to contrary effect in the
Prospectus were untrue or misleading (in particular, those set out in
paragraphs 119B.4, 119B.6, 119B.7, 119B.8, 119B.12, 119B.18, 119B.19,
119B.20 and the overall impression set out in paragraph 120 above).

05250-80298/8093941.1 246
The specific statements in the Prospectus

120BB.The following specific statements in the Prospectus were untrue and/or misleading:

120BB.1 (at paragraph 118 above) The Board of RBS had “taken the
opportunity to stand back and look at the management and
governance of the business and how effectively it is functioning”,
because that suggested that a specific and comprehensive review had
taken place other than in the ordinary course of business, whereas no
such review had occurred.

120BB.2 (at paragraph 118 above) RBS had strengthened the control
environment with Global Banking & Markets, because the only
relevant change to the control environment of which the Claimants are
aware was the secondment of David Coleman, the Group Chief Credit
Officer at RBS, to be chief risk officer of ABN AMRO. This did not
strengthen (alternatively did not materially strengthen) the control
environment within GBM.

120BB.3 (at paragraph 118 above) Problematic US sub-prime assets were now
managed by a dedicated work-out unit with a view to minimising risk
and reducing positions, because the transfer to that unit (the SAU)
would, if anything, increase the risk associated with those assets,
since SAU was in fact a siloed unit which suffered from major
governance failings identified at paragraphs 120O.3.8 and 120X
above.

120BB.4 (at paragraphs 119A.1 and 119A.3 above) RBS “has implemented risk
management methods to mitigate … market risks” and “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 that GBM “remained
focussed on effective management of its capital and it has accelerated
other balance sheet management actions” or that RBS had sought to
maintain a “prudent relationship between the capital base and the
underlying risks of the business” since as set out in paragraph 120J
above, RBS had not implemented effective risk management methods
to mitigate market risks, did not allocate capital in a disciplined
fashion, (because RWAs provided the basis for forecasting capital
adequacy but the targets were derived from organic revenue growth
and were not based on a prudent relationship with the underlying risks
of the business) and did not manage its balance sheet or capital
carefully as set out further in Sections A-C above.

120BB.5 (at paragraph 119A.2 above) RBS’s estimates of credit exposures

were based on prudent assumptions, because RBS’s estimates of
credit exposures were imprudent, and based on flawed management

05250-80298/8093941.1 247
 information and risk management. Paragraph 120K and Section D
above are repeated.

120BB.6 The statements quoted in paragraphs 119A.3 and 119A.4 regarding

liquidity, for the reasons set out in Section C and paragraph 120L
above.

120BB.7 The statements quoted in paragraph 119A.5 above, since GAC had
not effectively reviewed RBS’s systems of internal controls, and was
not effectively monitoring RBS’s processes for internal audit and risk
management. Paragraph 120Z above is repeated.

120BB.8 (at paragraph 119B.1) RBS had implemented risk management

methods to mitigate and control market risks, since those methods
were not operating well or effectively. Paragraph 120J above is
repeated.

120BB.9 (at paragraph 119B.2) The Group Board of directors sets the overall
risk appetite and philosophy, since the Board had not set any,
alternatively any effective risk appetite. Paragraphs 120D-120G
above are repeated.

120BB.10 (at paragraph 119B.3) GEMC ensures that implementation of strategy

and operations are in line with the agreed risk appetite, since no risk
appetite (alternatively no proper risk appetite) had been agreed.
Paragraphs 120D-G, 120J.4 and 120J.6 above are repeated.
Additionally, GEMC did not discuss any of the risk topics raised at
GRC, and the minutes only record that the RMMRs were “noted”, and
even then only on four occasions between July 2007 and the
Prospectus Date. GEMC did not ensure that the implementation of
strategy and operations were in line with the agreed risk appetite.

120BB.11 (at paragraph 119B.4) GRC recommends and approves limits,

processes and policies that ensure the effective management of all
material non-balance sheet risks across the Group, since (i) all
material non-balance sheet risks were not effectively managed (as set
out further above), (ii) GRC failed to review more than a fraction of
RBS’s policies (paragraph 120W above is repeated), (iii) GRC was
otherwise ineffective as set out in paragraph 120V above.

120BB.12 (at paragraph 119B.5) GALCO was responsible for identifying,

managing and controlling the Group balance sheet risks, or that these
risks are managed by setting limits and controls for capital adequacy,
funding and liquidity, intra-group exposures and non-trading interest
rate, equity and foreign currency risks, since (i) GALCO failed to
identify and report to the Board RBS’s extremely risky liquidity

05250-80298/8093941.1 248
 position, (ii) capital and liquidity risks were not managed or controlled
effectively. Section C and paragraph 120L above are repeated.

120BB.13 (at paragraph 119B.6) Risk appetite is generally defined through

quantitative and qualitative techniques including stress testing, risk
concentration, value-at-risk and risk underwriting criteria, ensuring that
appropriate principles, policies and procedures are in place and
applied, since appropriate principles policies and procedures were not
in place and applied, as set out above throughout this Section K.

120BB.14 (at paragraph 119B.7) RBS’s risk and capital management processes
performed well throughout 2007 and continued working through the
market disruption seen since August 2007, since as set out
throughout this Section K, RBS’s risk and capital management
processes did not perform well.

120BB.15 (at paragraph 119B.8) Independence underpins the approach to risk

management, which is reinforced throughout the Group by appropriate
reporting lines, since risk management was not independent as set
out in paragraphs 120N.2, 120T, 120V, 120X, and 120Z.5 above.

120BB.16 (at paragraph 119B.9) statements regarding credit risk since:

120BB.16.1 Credit risk appetite was not adequately set by the Board.
Paragraph 120E.4 is repeated.

120BB.16.2 Credit risk was not managed to achieve sustainable and

superior risk-reward performance whilst maintaining
exposures within acceptable risk appetite parameters,
because there was no disciplined analysis of the financial
risks inherent in RBS’s businesses and the annual budgetary
review was purely focussed on opportunity, revenue and
cost. Paragraphs 120D-120H are repeated.

120BB.16.3 The systems used at RBS, especially GBM, were not ‘well
organised’ and did not provide ‘timely, accurate and
complete inputs’ as they had multiple manual workarounds,
as set out above throughout this Section K.

120BB.16.4 Credit risk assessment for monolines was inappropriate at the

time the exposure was taken on and subsequently.
Paragraphs 120K.6 and 120K.7 are repeated.

120BB.16.5 Customer transaction monitoring and management was not a

continuous process, ensuring that performance was
satisfactory and documents, security and valuations were up

05250-80298/8093941.1 249
 to date, since valuations were out of date. Paragraph
120N.2.2 is repeated.

120BB.16.6 The bullet beginning “Decision makers”, since the SAU had
no independent oversight, and the proper credit processes
had been bypassed in relation to the matters set out in
paragraph 120O.3.8 above.

120BB.16.7 The bullet beginning “Models”, since between January and

March 2008 RBS had used amended credit models where
the FSA had not authorised the changes, and the LSD model
was not reviewed in a timely manner.

120BB.16.8 The bullet beginning “Stress testing”, since such stress

testing as was done did not assist management in the
identification of risk not apparent in more benign
circumstances, since minimal analysis was done in this
respect. Additionally such stress testing did not inform
decisions as to risk appetite. Paragraphs 120E.3, 120E.4,
120J.2, 120K.2, 120L.6, 120O.9.4, and 120O.10 are
repeated.

120BB.17 (at paragraph 119B.10) The market risk function was independent of
RBS’s trading businesses, or that it identified, measured, monitored,
analysed or reported on the market risk generated by the various
businesses, or that it determined appropriate policies and
methodologies to measure and control market risk, since (i) it was not
effectively independent (paragraphs 120N.2, 120T, 120V, 120X and
120Z.5 are repeated), and (ii) it failed to determine or apply
appropriate policies or methodologies to measure and control market
risk. Paragraph 120J is repeated.

120BB.18 (at paragraph 119B.11) The EVE measure was reported to Citizens
ALCO and the Board, since the measure had been suspended in
March 2008, and GALCO had approved that only retrospectively.
Paragraphs 120L.7 and 120O.3.6 above are repeated.

120BB.19 (at paragraph 119B.12) RBS was committed to high standards of

corporate governance, business integrity and professionalism in all its
activities, since its corporate governance was ineffective as set out in
paragraphs 120P-120AA above (and was in any event not of a high
standard).

120BB.20 (at paragraph 119B.13) RBS had complied with all provisions of the
revised Combined Code, since the Board did not ensure internal
controls were effective and the Board’s annual assessment did not

05250-80298/8093941.1 250
 consider the nature and extent of significant risks since the last
assessment, or RBS’s ability to respond thereto.

120BB.21 (at paragraph 119B.14) The Chairman ensures the effective

engagement and contribution of all directors, that all directors
participate in discussing strategy, performance and the financial and
risk management of the company, or that meetings are structured to
allow open discussion because of the matters set out in paragraphs
120D - 120H and 120U above.

120BB.22 (at paragraph 119B.14) Directors were supplied with comprehensive

papers in advance of each Board meeting covering the Group’s
principal business activities, since the management information
provided to the Board was inadequate. Paragraphs 120M-120O
above are repeated.

120BB.23 (at paragraph 119B.15) Non-executive directors combine broad

business and commercial experience with independent and effective
judgment, or that the balance between executive and non-executive
directors enables the Board to provide clear and effective leadership
and maintain the highest standards of integrity, because of the
matters set out in paragraphs 120P-120Q and 120U above.

120BB.24 (at paragraph 119B.16) All directors receive accurate, timely and clear
information on all relevant matters, because of the matters set out
above at paragraphs 120M-120O.

120BB.25 (at paragraph 119B.17) Directors are advised of appropriate training

and professional development opportunities and undertake the
training and professional development they consider necessary in
assisting them to carry out their duties as a director, since in fact the
Board as a whole did not have an adequate understanding of the
matters as set out in paragraph 120P above, and there was no system
or programme of Board education or training. Further, at least Mr
William Friedrich (a non-executive director) cannot have undertaken
the training and professional development he himself considered
necessary.

120BB.26 (at paragraph 119B.18) The Board is responsible for RBS’s system of
internal control that is designed to facilitate effective and efficient
operations and ensure the quality of internal and external reporting
and compliance with applicable laws and regulations, which was
designed to provide reasonable assurance against the risk of material
misstatement, fraud or losses, since RBS’s system of internal control
was flawed and did not provide reasonable assurance against the risk
of material misstatement, fraud or losses, as set out throughout this
Section K.

05250-80298/8093941.1 251
 120BB.27 The statements at paragraph 119B.18 and 119B.19 because the
Board did not follow any process to provide reasonable assurance
against the risk of material misstatement, and the process for the
identification, evaluation and management of significant risks facing
RBS was ineffective as set out above in this Section K.

120BB.28 The statements at paragraph 119B.20 because (i) the Board did not
effectively review the effectiveness of RBS’s internal control system,
(which was ineffective) as set out above, (ii) neither the Board nor
executive management committees received effective risk reporting
as set out in paragraph 120O above, (iii) the GAC did not receive
regular or effective risk reporting from the GRM function (paragraph
120Z above is repeated).

120BB.29 The statements at paragraph 119B.21, since its internal control over
financial reporting was not effective as set out in paragraphs 120M-
120N.

120BB.30 (at paragraph 119B.22) Stress test exposures are discussed with
senior management and reported to GRC, GEMC and the Board. In
fact, the stress tests were reviewed by the Board only once a year,
were not Basel II compliant, were not coordinated across risk and
market stress tests resulted in limit changes without any Board
discussion of the same. Paragraphs 120E.3, 120E.4, 120J.2, 120K.2,
120L.6, 120O.9.4, and 120O.8 are repeated.

120BB.31 The statements at paragraph 119B.23, since significant credit assets

on the trading book such as SS CDOs were not differentiated by credit
ratings.

120BB.32 The statements at paragraph 119B.24, since liquidity limits were not
“prudent”, and the balance sheet was not managed or controlled by
reference to liquidity concerns or constraints as set out in Section C
above.

120BB.33 The statement at paragraph 119B.25, since corporate deposits were

predominantly short-term and so could not be described as ‘stable’.
Section C above is repeated.

120BB.34 The statement at paragraph 119B.26, since RBS’s reliance on

wholesale sources of funds was not managed within prudent levels.
Section C above is repeated.

120BB.35 The statement at paragraph 119B.27, since there was no proper funds
transfer pricing system in place with term premium guidelines, so it
could not be ensured that term asset commitments may be funded on

05250-80298/8093941.1 252
 an economic basis over their life. Paragraphs 57.9BB.10 and 67.15
above are repeated.

120BB.36 (paragraph 119B.28) That there had been three VaR backtesting
exceptions during 2007, but that by the Prospectus Date there had
been eight in the previous 250 trading days, which was a material
increase not disclosed in the Prospectus, which threatened RBS’s
regulatory approval. Further, RBS plc (as a separate legal entity) had
had four backtesting exceptions since August. Section G above is
repeated.

121-124A. [Not used]

Risk Management failings in relation to LIBOR [now 120AB-120AH above]

124B. [not used]

124C. [not used]

Conclusions

125. In the premises, the statements made in the Prospectus pleaded above and/or the
impression pleaded at paragraph 120 above were untrue and/or misleading, in
breach of section 90(1)(b)(i) of FSMA.

126. Further, the failure to give adequate disclosure in respect of the deficiencies in
RBS’s inadequate and ineffective management, risk controls and management
information systems, and lack of knowledge of its own financial position, and/or the
omission of the matters pleaded at paragraphs 120A to 120BB above, and/or the
inadequacy of RBS’s disclosure in those respects, was a breach of section
90(1)(b)(ii) of FSMA, in circumstances where those matters were:

126.1. Necessary information in order to enable investors to make an informed

assessment of the financial position and prospects of RBS and the rights
attaching to the Rights Issue shares; and was therefore a matter which
was required to be included in the Prospectus pursuant to FSMA sections
87A(1)(b) and 87A(2); and/or

126.2. Matters which were required to be included in the Prospectus pursuant to

FSMA section 87A(1)(c), and Annex I, §§6.1.1 and 12.2. The Claimants
also rely on Annex I §3.1 and Annex III §2.

05250-80298/8093941.1 253
127. Alternatively, if and to the extent that (contrary to the above) the matters referred to
at paragraphs 120A to 120BB above were not matters that the Defendants were
obliged to disclose in the Prospectus, and if this was because they arose and/or
were noted after the Prospectus was approved:

127.1. They were matters which RBS was obliged to disclose by way of
supplementary prospectus as soon as practicable by virtue of section
87G(1) and (2) of FSMA and Rule 3.4.3 of the Prospectus Rules.

127.2. However, RBS failed to provide a supplementary prospectus giving

appropriate disclosure accordingly, and no such supplementary
prospectus was provided at any time before the closure of the Rights
Issue Period on 6 June 2008.

127.3. In the circumstances, RBS was in breach of sections 87G(2) and 90(4) of
FSMA.

[127AA. Further, it is inferred that each of the Director Defendants must have been aware
before the Closing Date of all such matters (as a result of their position as Directors
and/or their senior positions within RBS, and given their knowledge of the Project
Snow Review, the terms of reference for which appear to have been signed shortly
after the Prospectus Date). Each Director Defendant was therefore under an
obligation to notify RBS of these matters, but it is inferred that they did not, since no
supplementary prospectus was prepared. Each Director Defendant is therefore in
breach of section 87G(5), and accordingly liable to pay compensation under s.90(4)
of FSMA.]1

[Claimants who acquired Rights Issue shares through nominees

127A. Certain of the Claimants acquired Rights Issue shares through nominees. The
nominees acquired Rights Issue shares on bare trust for such Claimants. Such
Claimants claim in their own right as persons who acquired Rights Issue shares.

127B. In addition, in the vast majority of such cases where Claimants acquired through
nominees, the relevant nominees are also Claimants herein and claim in their own
right and/or on behalf of the shareholders or beneficiaries who acquired Rights
Issue shares through them. In those cases, the Claimants include both the
nominees and the shareholders who acquired Rights Issue shares through them.
(For the avoidance of doubt, in other cases the Claimants include only the
nominees and not the shareholders or beneficiaries; in such cases, the respective
nominee claimant claims on behalf of the shareholders or beneficiaries in its
representative capacity pursuant to CPR 19.7A and in its own right).

05250-80298/8093941.1 254
127C Further, in other cases where Claimants acquired through nominees, the relevant
nominees have assigned to the respective shareholders or beneficiaries their rights
in respect of the acquisition of Rights Issue shares. Particulars of the assignees are
set out in Schedule 4 to the Claim Form in Action HC14F01973, Schedule 2 and
paragraph 11 of the brief details of claim to the claim forms in HC14F01992 and
HC14F02112, Schedule 3 to the claim form in Action HCF02264; and Schedule 3 to
the claim form in Action HC14F02246.

127D. In a number of cases, the relevant nominees have refused to claim on behalf of the
respective Claimants. In such cases the respective Claimants (in addition to their
claims in their own right), also claim against the Defendants on the basis that they
are beneficially entitled in equity to enforce against the Defendants the rights of
their nominees in respect of the Rights Issue shares and/or to compel the nominees
to enforce such rights against the Defendants and/or to enforce their own beneficial
rights in respect the acquisition of the Rights Issue shares and/or claim a derivative
claim in respect of their nominees’ rights in respect of the Rights Issue shares.]1

127E [Certain of the SL Claimants and QE Claimants [and LK Claimants]7 are trustees
who acquired rights issue shares on behalf of beneficiaries. Such trustees are
entitled to and do claim compensation and/or damages in their capacity as trustees
pursuant to CPR 19.7A on behalf of the trust fund and their beneficiaries.]6

Causation and loss

127F The SL Claimants and QE Claimants plead particulars of causation and quantum
herein. The BB Claimants plead particulars of causation and quantum in a separate
document entitled Consolidated Particulars of Causation and Quantum.

128. [not used]

129. The Claimants [acquired Rights Issue shares, and/or]1 suffered and/or are entitled
to recover loss in respect of them, as a result of the untrue and misleading
statements in, and/or the improper omissions from, the Prospectus, and/or as a
result of the failures to produce an appropriate supplementary prospectus, and/or as
a result of the collective or cumulative effect of all or some of the breaches of, or
wrongs under, sections 87A, 87G, and 90 of FSMA pleaded above. [Further and
additionally, certain of the Claimants are persons who claim in respect of and/or
under the rights of other persons who acquired Rights Issue Shares.]1

129A. The untruths, misleading statements and material omissions in the Prospectus, and
the failure to issue a supplementary prospectus disclosing the required information,
artificially inflated the issue price of the shares (to 200p), the price at which the
rump shares were sold (230p), and the market price of the shares against which
these prices were compared by those considering the Rights Issue.
05250-80298/8093941.1 255
129B. If the Prospectus had not been untrue and misleading in the respects set out above,
and had included the information that was materially omitted as set out above, or if
a supplementary prospectus disclosing the required information had been issued,
the Rights Issue could not, and would not, have proceeded on the terms it did or at
all, for at least the following reasons:

129B.0 It would have been evident to potential investors that RBS was not taking a
prudent and conservative approach to its analysis of capital and liquidity,
but rather that in numerous respects RBS was in fact making a series of
judgments and assumptions which were individually not prudent or
conservative, and which collectively represented an over-optimistic and/or
aggressive approach.

129B.1.It would have been evident to potential investors that the target of a core
Tier 1 capital ratio in excess of 6% by year end 2008 was unachievable or
there was a significant chance it would not be achieved, destroying or
making illusory the fundamental aim and basis of the Rights Issue.

129B1.A It would have been evident to potential investors that there was a
significant chance that the target of a Tier 1 Capital Ratio of at least 8%
would not be achieved, and/or that RBS Total Capital Ratio would fall
short of what was planned and/or that RBS might breach its ICG during
the course of 2008.

129B.2.It would have been apparent to potential investors that the £12bn to be
raised by the Rights Issue would largely go towards paying off existing
losses, write-downs and impairments rather than increasing the capital
position and capital ratios and that the true purposes of the Rights Issue
were as set out in paragraph 35B.1 above, not those in fact described in
the Prospectus.

129B.2A It would have been apparent to potential investors that RBS's actual and
potential credit market exposures were far greater than those disclosed in
the write-downs table.

129B.3.It would have been apparent to potential investors that RBS was not
properly able to give the Working Capital Statement, and/or that it was in a
very vulnerable position as regards its liquidity and could only say that it
had sufficient working capital by reason of a number of optimistic
assumptions.

05250-80298/8093941.1 256
 129B.4.An impairment charge against the ABN AMRO goodwill would have
seriously damaged market confidence in RBS and the support for its then
senior management, and substantially undermined RBS’s optimistic
presentation of the outcome of the ABN AMRO acquisition, itself the single
biggest event in RBS’s recent history.

129B.5.The shortcomings in RBS’s management, systems and controls would have

been apparent to investors.

129B.6.The Rights Issue would not have been welcomed or supported by investors,
analysts, counterparties or credit rating agencies and would have been
wholly unattractive to existing and potential investors in RBS’s shares.

129C. If the Rights Issue had proceeded, it would not have been supported by investors,
because of the adverse market reaction which would have followed.

129D. [As it was, the SL Claimants acquired the number of shares at the prices set out in
Schedule 3, when those shares were in fact worthless or at best worth a fraction of
the price paid (currently estimated to be in the region of 20 pence to 30 pence per
share).] 2 [The QE Claimants acquired the number of shares at the prices set out in
Schedule 4.] 3

129E. [Each Claimant has suffered loss and damage and is entitled under FSMA s.90 to
be compensated for all losses suffered as a result of their acquisition of the shares.]
6

[PARTICULARS OF LOSS]6

[The Claimants claim the price paid (£2 or £2.30 per share) less a certain figure
(“the Deduction”) depending upon the applicable measure of loss. Different
measures of loss are set out in the following sub-paragraphs.]6 [(a small number
of the LK claimants who purchased shares after the rights issue in the market
paid prices other than £2.00 or £2.30 per share.)]7

[The SL claimants rely on the measures in the following order: The Date of
Acquisition Measure, else the Date of Discovery Measure, else the Actual Sale
Measure, else Another Measure.]2

[The QE claimants rely on the measures in the following order: The Date of
Discovery Measure, the Date of Acquisition Measure, Another Measure.]3

[For each measure of loss set out below, the Deduction is as follows:

05250-80298/8093941.1 257
 The Date of Acquisition Measure

(a) The true value of the shares at the date of acquisition, which is a
matter for expert evidence at trial but is currently estimated at between
20 pence and 30 pence per share although may in fact prove to be
zero.

The Date of Discovery Measure

(b) (i) The market price of the shares at the close of trading on 19 January
2009 (being 11.6p per share) being the date on which full information
as to the true position of RBS became generally available and after
which any retention of the shares can be deemed to be an
independent decision of the shareholder (“the Discovery Date”),
alternative such other date as the Court shall determine was the
Discovery Date.

(ii) Alternatively, their value at the Discovery Date plus any diminution
in value between the acquisition date and the Discovery Date which
the Court shall determine is due to separate and independent cause or
risk which is unrelated to the respects in which the Prospectus was
untrue, misleading or omitted necessary information (or should have
been disclosed in a Supplementary Prospectus).

(iii) Alternatively, in respect of shares sold before the Discovery Date,

the price for which the shares were sold.

(iv) Alternatively, in respect of shares sold before the Discovery Date,

the price for which the shares were sold plus any diminution in value
between the acquisition date and the date of sale which the Court shall
determine is due to separate and independent cause or risk which is
unrelated to the respects in which the Prospectus was untrue,
misleading or omitted necessary information (or should have been
disclosed in a Supplementary Prospectus).

The Actual Sale Measure

(c) The amount actually received on re-sale of the shares, save insofar as
the Rights Issue shares have not been sold in which case their actual
value at the date of assessment of quantum or such other date as the
Court considers appropriate.

Another Measure

05250-80298/8093941.1 258
 (d) Such measure of loss as the Court shall find is applicable to a claim,
the measure of loss under FSMA s.90 currently being free from binding
authority.

129F. The Claimants reserve the right to also seek recovery of the transactional costs of
the acquisition and disposal of the shares, which are minimal in comparison with the
losses set out above.]6

The Defendants’ liability

130. In the circumstances:

130.1 All and each of the Defendants committed the breaches of FSMA sections
87A and 90(1) pleaded above. [The SL, LK, MdR and QE Claimants make
this allegation against RBS only] 6, 8

130.2 All and each of the Defendants committed the breaches of FSMA section
87G and 90(4) pleaded above. [The SL, LK, MdR and QE Claimants make
this allegation against RBS only] 6, 8

130.3 All and each of the Defendants are liable to compensate the Claimants for
their losses and/or the losses in respect of which the Claimants are
entitled to claim, and/or pay damages for those losses, under section 90 of
FSMA. [The SL, LK, MdR and QE Claimants make this allegation against
RBS only] 6, 8

131. Further, the Claimants claim interest on the compensation or damages due to them,
under section 35A of the Senior Courts Act 1981.

AND THE CLAIMANTS CLAIM:

(1) Declarations that the Defendants committed the breaches of FSMA, or some of
them, pleaded above. [The SL, LK, MdR and QE Claimants only seek remedies
against RBS] 6,8

(2) Compensation and/or damages under section 90 of FSMA.

(3) The aforesaid interest thereon.

(4) All necessary inquiries and accounts.

(5) Further or other relief.

05250-80298/8093941.1 259
 PHILIP MARSHALL QC ANDREW ONSLOW QC

THOMAS RAPHAEL ADAM KRAMER

LUKE PEARCE SCOTT RALSTON

RICHARD SNOWDEN QC

ALEX BARDEN

JONATHAN NASH QC ANDREW ONSLOW QC

PETER DE VERNEUIL SMITH ADAM KRAMER

IAN HIGGINS SCOTT RALSTON

LAURENCE RABINOWITZ QC

ALEX BARDEN

MAX SCHLOTE

05250-80298/8093941.1 260
 _______________________________________________________________

Statement of Truth

The members of the Litigation Steering Committee of the SG Action Group (referred to
above as the “BB Group”) believe that the facts stated in these Amended Consolidated
Particulars of Claim are true. I am duly authorised by the members of the Litigation
Steering Committee to sign this statement.

Name ……………………………...

Position held ……………………...

Signed …………………………….

Dated ……………………………..

05250-80298/8093941.1 261
___________________________________________________________________

Statement of Truth

The SL Group believes that the facts stated in these Amended Consolidated Particulars of
Claim are true. I am duly authorised by the SL Group to sign this statement.

Name ……………………………...

Position held ……………………...

Signed …………………………….

Dated ……………………………..

05250-80298/8093941.1 262
Statement of Truth

The members of the QE Group believe that the facts stated in these Amended
Consolidated Particulars of Claim are true. I am duly authorised by the members of the QE
Group to sign this statement.

Name ……………………………...

Position held ……………………...

Signed …………………………….

Dated ……………………………..

05250-80298/8093941.1 263
Statement of Adoption

The LK Claimants adopt the allegations in these Amended Consolidated Particulars of

Claim in the respects indicated above. Pursuant to the Court’s order dated 3 July 2014, the
LK Claimants are not required to sign statements of truth in respect of these Amended
Consolidated Particulars of Claim.

Name ……………………………...

Position held ……………………...

Signed …………………………….

Dated ……………………………..

05250-80298/8093941.1 264
Statement of Truth

The members of the MdR Group believe that the facts stated in these Amended
Consolidated Particulars of Claim are true. I am duly authorised by the members of the
MdR Group to sign this statement.

Name ……………………………...

Position held ……………………...

Signed …………………………….

Dated ……………………………..

05250-80298/8093941.1 265
 APPENDIX 1
Table of population omissions and understatements (see paragraph 74 above)

In these tables:

1. In the fourth column ‘Omission or Understatement’ an exclusion of the identified

exposures has been identified as an omission if none of the exposures described in the
second and third cells of the row was included in the CME Table, and an understatement
if such exposures were included but understated.

2. The sixth column ‘Current estimated net exposure’ is calculated in the same particular
way as that column in the CME Table, i.e. net of hedges and of the estimated write-downs
for 2008 in the seventh column. It follows that if and to the extent that the Court finds that
the estimated write-downs for 2008 were understated by a lower amount than that set out
here in the seventh column, the understatement of the current estimated net exposure
figure in the sixth column will be greater.

3. The seventh column ‘Estimated write-downs before tax’ also includes changes in value of
AFS and L&R assets that were not write-downs or impairments but which should
nevertheless have been disclosed in the Prospectus (see paragraph 73MM above).

05250-80298/8093941.1 266
CDOs (paragraph 74(9A))

CDO Exposure RBS division Omission or Understatement Understatements of Notes

Net exposure Current estimated Estimated write-
at 31 December net exposure downs before tax
2007
(CME Table (CME Table
(CME Table column 4) column 6)
column 2)
1 Total rate of return RBS Greenwich Understatement (i.e. this type of £328m £113m £284m
swaps exposure was included in the CME
Table, but the amounts were
understated)
2 Debt securities RBS Greenwich Omission At least £197m At least £53m At least £133m
identified in the 2007
Comparatives
3 Orchid 144A III CDO RBS Greenwich Omission £65m £20m £28m
A-1
4 Securities identified in RBS London Omission At least £257m £200m At least £57m The exposure had risen by
the 2007 the Prospectus Date from
Comparatives the 2007 figure
5 Cohen, Harding and ABN AMRO Understatement £236m £118m £118m This derives from an
Brushfield exposures understatement of the
notional values
6 Debt securities ABN AMRO Omission £395m £197m £197m
identified in the 2007
Comparatives
7 US AFS & Most ABN AMRO Omission £1.391bn £1.113bn £278m
Designated Fair in the North Sea
Value exposures conduit
8 Non-US (mostly Most RBS London Omission £889m £711m £178m
European) HFT
exposures
9 Non-US (mostly Most ABN AMRO Omission £784m £627m £157m
European) AFS & including in the
DFV exposures North Sea conduit
10 Secondary CDO Unknown Omission £224m The Claimants The Claimants
trading cannot estimate a cannot estimate a

05250-80298/8093941.1 267
 figure at this time. figure at this time.
11 Synthetic corporate RBS London and Omission £2.59bn The Claimants The Claimants
CDOs ABN AMRO cannot estimate a cannot estimate a
figure at this time. figure at this time.
12 Non-super senior Unknown Omission £1.596bn £670m £926m See section D6.2
CDO tranches
Totals At least At least £3.822bn £2.356bn
£8.952bn

05250-80298/8093941.1 268
US Residential Mortgages

Sub-prime (paragraph 74.5.AA)

Sub-prime RBS division Omission or Understatements of

Exposure Understatement
Net exposure at Current Estimated write-
31 December estimated net downs before tax
2007 exposure
(CME Table
(CME Table (CME Table column 6)
column 2) column 4)

1. Purchased for RBS Omission £97m £37m £60m

securitisation Greenwich

2. Subsequently RBS Omission At least £459m At least £242m At least £217m

reclassified Greenwich
exposures

3. Flow Credit book RBS London Understatement £32m £21m £19m

4. Exotic Credit book RBS London Omission £817m £431m £386m

5. The SAU book RBS London Omission At least £171m At least £65m At least £106m

6. ABN AMRO US ABN AMRO Understatement At least £364m £176m £158m

HFT

7. Non-US HFT Mainly ABN Omission £567m £511m At least £56m

exposures AMRO

8. Non-US AFS and Mainly North Omission £162m £130m £32m

other non-HFT Sea
exposures

Totals At least £2.669bn At least £1.613bn At least £1.034bn

05250-80298/8093941.1 269
Alt-A (paragraph 74.5BB)

Alt-A Exposure RBS division Omission or Understatements of Notes

Understatement
Net exposure at Current estimated Estimated write-
31 December net exposure downs before
2007 tax
(CME Table
(CME Table column 4) (CME Table
column 2) column 6)

1. Alt-A NIMS, RBS Partial omission £215m £130m At least £85m

residuals and whole Greenwich
loans

2. ROW NOT USED

3. Alt-As held for £83m £50m £33m

securitisation

4. US AFS exposures Citizens Omission £600m-£1.15bn £300m - £815m £600m See further section D7.1.

5. US AFS exposures North Sea Omission £96m £61m £35m

6. UK and rest of world RBS London Omission £869m £523m £346m

HFT exposures

7. UK and rest of world ABN AMRO Omission £639m £385m £254m

AFS exposures

8. Warehoused Alt-As Omission £1.445bn £870m £575m

9. Thornburg RBS Omission £20m £0m £450m

Greenwich

Totals Between at least Between at least At least £2.378bn

£3.967bn and £2.319bn and

05250-80298/8093941.1 270
 £4.517bn £2.834bn

05250-80298/8093941.1 271
Other non-agency (paragraph 74.5GG)

Other non-agency RBS division Omission or Understatements of Notes

Exposure Understatement
Net exposure at Current estimated Estimated write-
31 December net exposure downs before
2007 tax
(CME Table
(CME Table column 4) (CME Table
column 2) column 6)

1. RBS Greenwich RBS Understatement At least £55m £48m £7m

Greenwich

2. Credit Flow desk RBS London Omission £4m £49m £7m

exposures

3. Other non-agency RBS New Omission £532m £464m £68m

York money
markets desk

4. ‘Other ABS’ RBS New Omission Up to £454m Up to £396m Up to £58m It is not currently clear how
York much of this is Other non-
agency exposure

5. US AFS exposures Majority in Omission £1.360bn £1.186bn £174m

Citizens

6. UK and rest of world Omission £12.248bn £12.008bn £240m

HFT exposures

7. UK and rest of world Omission £9.043bn £8.863bn £180m

AFS and DFV
exposures

Totals Between Between Between

£23.242bn and £22.618bn and £676m and
£23.696bn £23.014bn £734m

05250-80298/8093941.1 272
Leveraged Loans (paragraph 74.6AA)

Leveraged Loans RBS division Omission or Understatements of Notes

Exposure Understatement
Net exposure at Current estimated Estimated write-
31 December net exposure downs before
2007 tax
(CME Table
(CME Table column 4) (CME Table
column 2) column 6)

1. LyondellBasell ABN AMRO Understatement £1.11bn £1.01bn £104m Only the £724m (book
value) element of the
LyondellBasell loan was
included. RBS was
marketing and intended to
sell the whole exposure.

2. The ‘hold portfolio’ Omission Estimated £9.75bn The Claimants The Claimants These leveraged loans
alternatively £7bn cannot estimate a cannot estimate should have been disclosed
figure at this time. a figure at this or an explanation given as
time. to their exclusion

3. Hedge Wrongful inclusion1 0 £760m £760m This was a macro-hedge

that should not have been
netted off against the
leveraged loan exposures or
their write-downs.
Alternatively, it should have
been netted off at a lower
figure as an estimate for
2008, and its significant
downward movement by the
Closing Date should have
been disclosed.

4. Leveraged loans GBM Omission At least £1.8bn Prudent estimated write-down for 2008 Includes Global Credit
intended for trading to be a matter for expert evidence. Trading secondary trading,

1
This offsets the exposure and write-down figures. Accordingly, the criticism is not that it was omitted but that it was included.

05250-80298/8093941.1 273
 and later put into the CLOs, leveraged finance,
Asset Protection and Short Term Markets
Scheme and Finance secondary
traded loans.

5. Loans intended for ABN AMRO Omission £1.598bn Prudent estimated write-down for 2008
syndication to be a matter for expert evidence.

Total: Between at least At least £1.770bn At least £864m

£11.508bn and
£14.258bn

Leveraged loans labelled ‘CLOs’ in the CME Table

6. US leveraged loans Greenwich Omission £7m Prudent estimated write-down for 2008
labelled ‘CLOs’ in to be a matter for expert evidence
the CME Table

7. Warehouse sub- £7.5m Prudent estimated write-down for 2008

participation to a to be a matter for expert evidence
Euro Seat Pagine
Term B Loan

Total: £14.5m TBC TBC

05250-80298/8093941.1 274
CMBS (paragraph 74UU(1))

CMBS Exposure RBS division Omission or Understatements of Notes

Understatement
Net exposure at Current estimated Estimated write-
31 December net exposure downs before
2007 tax
(CME Table
(CME Table column 4) (CME Table
column 2) column 6)

1. US CMBS RBS Understatement £1.121bn £634m £107m Due to improperly using 2

Greenwich January 2008 rather than
31 December 2007 figures
(RBS000920 sheet
<prev>), and improperly
applying general hedges to
net off exposures. Until
details of the hedges have
been disclosed, the
Claimants cannot say to
what extent it was
appropriate to apply the
hedge to reduce the write-
downs figure.

2. US CMBS RBS Omission £1.293bn £865m £146m

guaranteed by Greenwich
Ginnie Mae

3. US CMBS RBS London Omission £96m £82m £14m

4. Non-US HFT RBS London Omission £978m £880m £98m

CMBS (mainly UK and ABN
and Europe) AMRO

5. US AFS Citizens Omission £414m £393m £21m

6. Non-US AFS, L&R RBS London Omission £1.225bn £1.188bn £37m

and DFV and ABN

05250-80298/8093941.1 275
 AMRO

Totals £5.127bn £4.054bn £423m

05250-80298/8093941.1 276
Monolines (paragraph 85E(1))

Monoline Exposure RBS division Omission or Understatements of Notes

Understatement
Net exposure at Current estimated Estimated write-
31 December net exposure downs before
2007 tax
(CME Table
(CME Table column 4) (CME Table
column 2) column 6)

1. Indirect exposures All Omission £7.3bn £5.3bn Over £2bn See further paragraph 86.

2. MBIA Omission £0 £25m ($49m) £50m ($99m) This omission (arising

through failure of controls)
was discovered before the
Closing Date and should
have been corrected by
supplementary prospectus.

3. AMBAC UK RBS Solo Omission £0 £104m At least £750m See paragraph 85G.
exposure re:
Havenrock

4. CIFG intermediation ABN AMRO Omission £70m (AUS$150m) Up to £30m At least £40m See further paragraph 85H.
trade re: Lane Cove
Tunnel deal

5. Sompo Japan RBS GBM Omission £150m ($300m) £125m £25m

exposure in relation
to junior SS CDO
tranche of Mainsail

6. General All Understatement Unknown £5.9bn £3bn Overmarking of underlying

exposures. See further
paragraph 85F.4.

Totals At least £7.520bn Between At least £5.865

£11.454bn and
£11.484bn

05250-80298/8093941.1 277
 SCHEDULE 1
Dramatis Personae

Abel/Tasman Abel Funding Pty/Tasman Funding Inc, an ABN AMRO

sponsored conduit

ABN AMRO ABN AMRO Holding N.V., a Dutch investment bank

acquired by the Consortium

Almond Steve Almond, the partner at Deloitte with overall

conduct of Rights Issue matters for RBS

AMBAC AMBAC Financial Group, Inc. and its subsidiaries, a

monoline insurer

Amstel Amstel Funding Corp, an ABN AMRO sponsored

conduit

Amsterdam Amsterdam Funding Corp, an ABN AMRO sponsored

conduit

Aparicio Jaime Aparicio, GBM

Bank of America Bank of America Corporation, a US bank

Bank of England The UK central bank

Barclays Barclays plc

Bear Stearns The Bear Stearns Companies Inc.

Bennett Bruce Bennett, Head of Global Pricing Unit, GBM

Bishop Brett Bishop, GBM

Cameron John Alistair Nigel Cameron, Chief Executive of GBM

from 2001. He resigned from RBS on 13 October 2008.
(The Third Defendant)

Citigroup Citigroup Inc, a US bank

Crowe Brian Crowe, GBM Chairman

the Consortium Fortis, RBS, and Santander, who together acquired ABN
AMRO in October 2007

Cummins John Cummins, Head of Group Treasury

Director Defendants The First to Fourth Defendants (Goodwin, McKillop,

05250-80298/8093941.1 278
 Cameron and Whittaker)

DNB De Nederlandsche Bank, the Netherlands banking

regulator (the supervising authority of ABN AMRO)

Drake-Brockman Global Head of Credit Markets, Head of GBM Americas

Dumbell Marc Dumbell, Deloitte

Federal Reserve Bank The New York regional Federal Reserve Bank which
of New York forms part of the US Federal Reserve System

Fish Lawrence Fish, a Board Member and the Chairman of

Citizens

Fortis Fortis N.V and Fortis S.A. NV, a Belgian bank

FSA UK Financial Services Authority (at that point the

banking regulator responsible for regulating RBS)

GBM RBS’s Global Banking and Markets Division

Gaskell Ian Gaskell, former Managing Director, Head of Front

Office Risk, Europe and Asia

George Street Finance George Street Finance Limited, a RBS sponsored

conduit

Goodwin Frederick Anderson Goodwin, then Sir Frederick,

(The First Defendant) Chief Executive Officer of RBS from 2001. His
resignation was announced on 11 October 2008. He was
replaced by Stephen Hester on 21 November 2008.

Grand Grand Funding Corp/Grand Funding Corp II, an ABN

AMRO sponsored conduit

Hallett Richard Hallett, UK & Europe Chief Financial Officer,

RBS GBM

Herrmann Thomas Herrmann, member of Crowe’s Executive Office

Hofste Petri Hofste, Executive Vice President at ABN AMRO

Group Finance

Hong Victor Hong, Managing Director and Head of Fixed

Income Independent Price Verification RBS Greenwich

Hourican John Hourican, Former Head of Leverage Finance, UK,

Europe and Asia and CFO, ABN AMRO

Janjuah Bob Janjuah, RBS’s Chief Credit Strategist

05250-80298/8093941.1 279
Jin Bruce Jin, Head of Market Risk RBS Greenwich Capital
Markets

Johnston David Johnston, Senior Manager, Group Treasury

JP Morgan JP Morgan Chase & Co.

Kapoor Rajan Kapoor, RBS Group Chief Accountant

Kainth Dherminder Kainth, Deputy Head of QuaRC, Risk

Analytics

Kyle Chris Kyle, Chief Financial Officer, Global Markets

LaSalle A US bank owned by ABN AMRO

Lehman Brothers Lehman Brothers Holdings Inc.

Leverick Phil Leverick, Head of Balance Sheet Management,

Group Treasury

MacHale Joe MacHale, a non-executive director of RBS

Matera Frederick Matera, Head of Structured Credit Trading at

RBS Greenwich

Mathis Carol Mathis, Managing Director and Chief Financial

Officer, North America

McKillop Sir Thomas Fulton Wilson McKillop, Chairman of RBS

from 2006. His resignation was announced on 13
(The Second Defendant)
October 2008 and he ceased to be Chairman on 3
February 2009.

Nathanial Peter Nathanial, Group Chief Risk Officer

Natwest National Westminster Bank Plc

Niblock Graham Niblock, Head of Short Term Markets

Nicol Tom Nicol, departing Deputy Head of Foreign Exchange

at RBS

Nielsen Peter Nielsen, Global Head of Rates, Local Markets,

Currencies and Commodities

NightWatch NightWatch Funding LLC, an ABN AMRO sponsored

conduit

North Sea North Sea Funding Corp., an ABN AMRO sponsored

conduit

05250-80298/8093941.1 280
Orchid Orchid Funding Corp., an ABN AMRO sponsored
conduit

Peters Chris Peters, Manager, Capital Management, Group

Treasury

RFS Holdings N.V. A subsidiary of RBS, which served as the investment

vehicle for the Consortium

RBS Royal Bank of Scotland Group plc, parent company of

the RBS group. Except where otherwise stated or where
(The Fifth Defendant)
the context requires, “RBS” refers to RBS and the
subsidiaries making up the RBS group at the time of the
Rights Issue.

Rebonato Riccardo Rebonato, Head of Market Risk, GBM

Rieder Lauren Rieder, Head of Fixed Income Independent Price

Verification RBS Greenwich

Robertson Leith Robertson, Deputy Chief Executive of GBM

Santander Banco Santander S.A., a Spanish bank

Skeena Skeena Capital Trust, a Canadian conduit

Standard & Poor’s Standard & Poor’s, a financial research, analysis and
credit ratings agency

TAGS Thames Asset Global Securitization No 1 Inc, a RBS

sponsored conduit

Thomas David Thomas, Group Head of Risk Infrastructure and

Analytics

Tobin Alexis Tobin, Executive Officer, GBM

Tulip Tulip Euro Funding Corp, an ABN AMRO sponsored

conduit

Tyler Ian Tyler, Group Head of Capital, Group Treasury

UBS UBS AG, a Swiss bank

UKLA UK Listing Authority (at the time, the FSA)

Walsh Joe Walsh, Managing Director and Head of Mortgage

and Asset-Backed Origination, Finance and Trading,
RBS Greenwich Capital

Whittaker Guy Robert Whittaker, Group Finance Director of RBS

from 2006. He resigned from RBS on 5 May 2009.

05250-80298/8093941.1 281
(The Fourth Defendant)

Windmill Windmill Funding Corp, an ABN AMRO sponsored

conduit

Wood Craig Wood, Executive Assistant to Guy Whittaker

05250-80298/8093941.1 282
 SCHEDULE 2
Glossary & Abbreviations

RBS’s Annual Report and Accounts for the year ended

2007 Accounts
31 December 2007.

RBS’s Annual Report and Accounts for the year ended

2008 Accounts
31 December 2008.

2008 Interim Results RBS’s Interim Results as at 30 June 2008.

Asset-backed Commercial Paper. In the context of

conduits, an ABCP conduit will “issue short-term
commercial paper (CP) backed by a pool of assets. In
order to ensure it can pay the CP as it falls due, the
conduit has liquidity facilities provided by a bank or
ABCP (conduit)
banks, as well as credit enhancement. Where the bank
originates the loans/assets purchased by the conduit,
the conduit is referred to as an ‘own-asset’ conduit;
otherwise the assets are purchased from a third party”
(p. 437 of the FSA Report).

RBS’s own share of the ABN AMRO business excluding

ABN-R
the consortium’s shared assets

ABS/ABSs Asset-backed security/Asset-backed securities.

AFS Assets Assets classified as "available for sale" in RBS's books.

Advanced Internal Ratings Based approach.

AIRB The most sophisticated level of the IRB approach to
calculating RWAs under Basel II. See IRB below.

Alternative A-paper Mortgage. “A type of US mortgage

that is considered a greater risk than A-paper, or
(‘prime’), but less than sub-prime, the category with
Alt-A greatest risk. Alt-A interest rates, which are determined
by credit risk, therefore tend to be between those of
prime and sub-prime” (p. 437 of the FSA report). See by
contrast Sub-prime below.

A short-hand used to refer to the Basel Capital Accord

(International Convergence of Capital Measurement and
Basel I Capital Standards) issued in July 1988 and amended in
the period November 1991 to April 1998. The Accord
relates to minimum capital requirements which central
banks would impose upon the banking industry in their

05250-80298/8093941.1 283
 respective jurisdictions (see the definition of capital
below).

In June 2004, the Basel Committee on Banking

Supervision (which is a sub-committee of the Bank for
International Settlements, an organisation consisting of
central banks) issued “International Convergence of
Capital Measurement and Capital Standards – A
Revised Framework”, which came to be known as
“Basel II”. Basel II was subsequently amended, and a
consolidated version issued on 4 July 2006.
Basel II
Basel II was intended to strengthen banks’ risk
management practices and improve the sensitivity of
banks’ capital adequacy requirements to market and
operational risk, market-based discipline and regulatory
mandates.
RBS implemented the Basel II methodology on 1
January 2008.

“A bank’s capital comprises equity and certain other

instruments that absorb losses ahead of claims by
depositors and other creditors. Regulators require banks
capital to hold minimum amounts of capital relative to their (risk-
weighted) assets” (p. 439 of the FSA Report). The term
“loss-absorbing capital” has the same meaning in this
context.

The capital ratio of a bank is a measure of the adequacy

of a bank’s capital to cover potential losses on assets. It
is the ratio of a bank’s qualifying regulatory capital to its
risk-weighted assets (RWAs).
Different capital ratios (see Core Tier 1 capital ratio
and Tier 1 capital ratio) may be calculated by changing
the definition of “qualifying capital”; risk-weighted
capital ratios assets remain the same regardless of which capital ratio
is being calculated. Both Core Tier 1 and Tier 1 capital
ratios require the deduction of goodwill and other
intangibles from qualifying capital before dividing by risk-
weighted assets (RWAs) to provide the capital ratio.
The minimum capital ratios which RBS was required to
maintain at all material times after 1 January 2008 are
set out in Basel II.

Collateralised Debt Obligations, meaning “A type of

structured Asset Backed Security whose performance,
CDOs value and payments are dependent on a portfolio of
referenced underlying securitised assets. Assets are
typically corporate loans and bonds, but can include
Mortgage-backed Securities, Residential Mortgage-

05250-80298/8093941.1 284
 backed Securities or any other type of Asset-Backed
Securities” (taken from p. 439 of the FSA Report).

Credit Derivative Product Companies, which operated by

CDPCs providing credit default swaps to protect lenders against
the risk of default by borrowers.

CDSs Credit default swaps

CELT Correlated Exposure Loss Test

CESR The Committee of European Securities Regulators.

Collateralised Loan Obligations, a financial instrument

CLOs similar to a CDO, but where the securitised assets are
loans.

closed exposure Monoline-insured, or otherwise protected by a financial

guarantor. This is the sense in which RBS is understood
to have used the term at the relevant times.

Closing Date 6 June 2008, the date of closing of the Rights Issue

Commercial Mortgage Backed Securities, meaning

CMBS securities which are backed by mortgages granted over
commercial real estate.

The Defendants’ Response to Request for Further

CME RFI Information made on 14 August 2015 in relation to the
CME Table.

A short-hand reference for the purposes of these

Particulars of Claim to an asset-backed conduit, which
are legal entities established by banks or large
conduit
corporations for the purpose of acquiring portfolios of
assets which, in turn, are financed through the issuance
of ABCP backed by the assets held by the conduit.

The qualifying assets for core Tier 1 capital are common

core Tier 1 capital
equity and a bank’s retained earnings.

A bank’s core Tier 1 capital ratio is calculated by dividing

core Tier 1 capital ratio its qualifying core Tier 1 capital by its risk-weighted
assets (RWAs).

Credit Valuation Adjustment, which is a fair value

CVA adjustment to the valuation of an asset portfolio to take
account of the risk of counterparty default.

De-Risking Tables Tables, with accompanying commentary, headed

“Managing the Balance Sheet – Asset de-risk Strategy

05250-80298/8093941.1 285
 and Estimated Impact on P+L and RWA”

Emergency liquidity assistance provided by the Bank of

England as “lender of last resort”, which was used as a
ELA means of preventing “a loss of confidence spreading
through the financial system as a whole” (p. 441 of the
FSA Report).

EVE Economic Value of Equity

European ABSs ABSs based on underlying assets of European origin

Report of the FSA, “The Failure of the Royal Bank of

FSA Report
Scotland” published December 2011.

A list maintained by the FSA listing those firms which

pose the greatest risk to fulfilment of the FSA’s statutory
objectives (including market confidence, financial
FSA Watchlist stability, consumer protection and the reduction of
financial crime). Whilst a regulated firm was informed if it
had been placed on the Watchlist, that information was
not publicly disclosed by the FSA.

FSMA Financial Services and Markets Act 2000.

A short-hand for the FTSE 100 Index, which is a list of

FTSE 100 the 100 companies with the highest market capitalisation
which are listed on the London Stock Exchange.

In contrast to proportional consolidated, fully

consolidated in the context of RBS’s capital ratios
indicates that those capital ratios would be calculated/
Fully consolidated
estimated taking account of the entirety of the assets of
the acquired ABN AMRO businesses, including the
minority interests of Fortis and Banco Santander.

The funding plan relied upon at page 33 of the Working

Funding Plan
Capital Report

GAC Group Audit Committee

GALCO Group Asset & Liability Management Committee

GEMC Group Executive Management Committee

GIA Group Internal Audit

The July 2008 draft and December 2008 final RBS

GIA Report
Group Internal Audit ‘Project Snow Review’ Reports.

Goodwill Goodwill represents the value of a business in excess of

05250-80298/8093941.1 286
 its separately identifiable net assets. Goodwill is an
intangible asset and may be generated internally or
acquired externally. Only externally generated goodwill
may be recognized as an asset in the financial
statements of a business (see IAS 38.11).

GRC Group Risk Committee

GRM Group Risk Management

HFT Held for trading

IAS International Accounting Standards.

ICAAP Internal Capital Adequacy Assessment Process

FSA’s Internal Capital Guidance, which was issued by

the FSA and should have been used to determine the
ICG amount and quality of capital resources which the FSA
considers that a firm needs to hold (see p. 441 of the
FSA Report).

The Internal Ratings Based approach (“IRB”) under

Basel II allowed banks to calculate and assess their own
RWAs and the resulting regulatory capital that they were
required to hold to account for that exposure, rather than
using external assessors or being bound by risk
weightings for particular assets applied by their
supervising authority.
IRB As part of this, the Advanced Internal Ratings Based
approach (“AIRB”) allows banks to internally assess
more aspects of their risk, known as “risk components”.
Both IRB and AIRB could only be employed by banks
with the approval of their supervising authority. For UK
banks that supervising authority was the FSA before,
during and after the Rights Issue Period. For
Netherlands Banks, the supervising authority was DNB.

IPV Independent Price Verification

L&R Loans and receivables

A loan for the purposes of leveraged finance. The FSA

Report provides a definition of “Leveraged finance”,
which is adopted for the purposes of these Particulars of
Claim: “Funding a company or business unit with more
leveraged loans
debt than would be considered normal for that company
or industry implying that the funding is of greater risk,
and therefore more costly, than normal borrowing.” (p.
441 of the FSA Report).

05250-80298/8093941.1 287
LGD Loss Given Default

LIBOR London Interbank Offered Rate

“Liquidity refers to a business’s ability to repay its debts

and obligations as they fall due through its ability to
liquidity
convert its assets to cash easily and at a minimum loss
of value” (p. 442 of the FSA Report).

QLA and other assets that could be turned into cash

Liquidity Buffer within 25 working days to be held centrally by Group
Treasury and maintained for use in a liquidity crisis.

The RBS Group Statement of Liquidity Policy dated 11

Liquidity Policy
December 2006

LSD model Loss Severity of Default cash-flow model

Equals the “value” of the equity of a publicly traded

Market capitalisation company, by multiplying the share price by the issued
share capital (including preferred shares).

Insurers whose business is the provision of insurance

that guarantees the timely repayment of cash flows on
Monoline insurers debt instruments (e.g. bonds), in effect transferring the
risk of default from the bond holder to the insurance
company (see p. 442 of the FSA Report).

The Montreal Accord was an agreement reached on 16

Montreal Accord
August 2007 by which a group of issuers, investors and
banks (including ABN AMRO) agreed a moratorium of
claims against a number of Canadian conduits pending
negotiations on the restructuring of the conduits’
liabilities and agreed to provide a credit facility of
C$14bn in respect of possible margin calls under
leveraged super senior CDO tranches purchased by
those conduits.

Not monoline-insured, or otherwise protected by a

open exposure financial guarantor. This is the sense in which RBS is
understood to have used the term at the relevant times.

P&L Profit and loss account

Pillar 1 is the first of three pillars applied under the Basel

II regime (see above). It relates to the minimum capital
which a bank is required to hold to cover its credit and
Pillar 1 market risk. Pillar 1 prescribes the mechanism by which
banks are expected to identify qualifying regulatory
capital, and to apply the appropriate risk weighting to
their assets to calculate their risk-weighted assets

05250-80298/8093941.1 288
 (RWAs), for the purposes of assessing their capital
ratios and the amount of capital which the bank must
hold to protect itself against unexpected market changes
and credit risk in those assets.

Project Snow is the review carried out by Group

Project Snow
Internal Audit in 2008 following the Rights Issue.

Proportional consolidated is an accounting term used

by RBS in the calculation and presentation of its
estimated capital ratios. It indicates that RBS has
consolidated only its percentage share of the acquired
ABN AMRO business, so as to exclude the minority
interests of Fortis and Banco Santander, for the
purposes of calculating RBS’s own (estimated) capital
Proportional ratios. Excluding minority interests would apply to both
consolidated the calculation of (core) Tier 1 capital and to RWAs.
This was explained in RBS’s Annual Report and
Accounts for the year ending 31 December 2010 (at p.
127): “In addition to the fully consolidated basis
monitored by the FSA for regulatory purposes, the
Group also monitors its regulatory capital resources on a
proportional consolidation basis reflecting only those
businesses of RBS N.V. that are retained by RBS”.

The prospectus for the Rights Issue issued on 30 April

Prospectus
2008.

Prospectus Date 30 April 2008, the date of issue of the Prospectus

Directive 2003/71/EC of the European Parliament and of

Prospectus Directive
the Council.

Commission Regulation (EC) 809/2004 of 29 April 2004

implementing the Prospectus Directive as regards
Prospectus Regulation information contained in prospectuses as well as the
format, incorporation by reference and publication of
such prospectuses and dissemination of advertisements.

The Prospectus Rules made by the FSA (acting in its

Prospectus Rules capacity as the UK Listing Authority (UKLA) under
Section 73A of FSMA).

Assets eligible for pledging with central banks within 5

QLA
working days

RBS Solo RBS plc

The Defendants’ Response to Request for Further

The Response
Information made on 3 March 2014

05250-80298/8093941.1 289
 The rights issue announced by RBS on 22 April 2008
Rights Issue
and which opened on 15 May 2008.

Rights Issue Period 15 May 2008 to 6 June 2008.

Rights Issue Price 200p per share.

Residential Mortgage Backed Securities, meaning

RMBS securities which are backed by mortgages granted over
residential real estate.

RMMRs Risk Management Monthly Reports

Risk-Weighted Assets. For the purpose of calculating

capital ratios, a bank’s assets are allocated a risk-
weighting, depending upon their riskiness. For example,
cash – as an asset which carries no risk – will have a
risk weighting of 0%.Those items which are now shown
on a bank’s balance sheet are first converted to balance
RWAs sheet equivalents, and allocated a risk-weighting
following that conversion.
Basel II introduced a new set of risk-weighting
percentages, which takes into account both asset type
and other factors, including credit ratings, to determine
the risk-weighting of a particular asset.

SAU Strategic Assets Unit

Home equity loans and lines that RBS had acquired

SBO from other originators and that were serviced by others
(i.e. by either the originators or a third party servicer).

A securities arbitrage conduit “seeks to benefit from the

difference between short-term funding costs and long-
term asset returns” (p. 437 of the FSA Report). The
Securities arbitrage conduit does so by purchasing highly-rated securities
conduit (typically structured finance assets such as CDOs), and
the bank sponsors the conduit with the aim of extracting
the positive differential between the yield from those
highly-rated securities and the funding cost of the ABCP.

Short term funding Funding liabilities with up to 30 business days’ maturity

liabilities (as defined in the FSA Report at p. 96, footnote 133).

This means that the assets which the conduit uses to

“back” the short-term ABCP are purchased by the
Single seller asset
conduit from its sponsoring bank/institution alone. In
conduit
contrast, a multi-seller asset conduit will have a pool of
assets purchased from multiple originators.

05250-80298/8093941.1 290
 The Special Liquidity Scheme introduced by the Bank of
England on 21 April 2008, which was intended 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
SLS Treasury Bills for up to three years. The Scheme was
designed to finance part of the overhang of illiquid
assets on banks’ balance sheets by exchanging them
temporarily for more easily tradable assets. The
drawdown period for the SLS closed on 30 January
2009” (p. 445 of the FSA Report).

Solo level Level of RBS plc

SS CDOs Super senior CDOs

A report of the Senior Supervisors Group of the Bank for

International Settlements which was entitled “Leading
SSG Report
Practice for Selected Disclosures” and which was
published on 11 April 2008.

STMR Short Term Market Reliance

Sub-prime mortgage. “Loan to a sub-prime borrower,

typically having a weaker credit history that includes
Sub-prime payment delinquency, court judgment or bankruptcy.
These loans generally carry higher interest rates and
pre-payment penalties” (FSA Report, p. 446).

The duration of time which a bank would survive in the

Survival Horizon
Lockout Scenario.

TABs Tranched ABS

Term Auction Facility. This program was introduced by

the Federal Reserve Bank of New York in December
2007, and involved the Federal Reserve auctioning
TAF
collateralised loans with terms of 28 days to depository
institutions, against which those institutions would
pledge collateral.

A conduit where the underlying portfolio of assets are

third party conduit entirely purchased from third parties, and does not
contain any assets of the sponsoring bank.

A bank’s Tier 1 capital ratio is calculated by dividing its

Tier 1 capital ratio
qualifying Tier 1 capital (which comprises common
equity and a bank’s retained earnings – which are
known as core Tier 1 capital – and preferred stock and
disclosed reserves (meaning reserves where there is
flexibility to suspend scheduled payments to conserve

05250-80298/8093941.1 291
 capital and where that funding source is not capable of
withdrawal by the lender in the event of losses)) by its
risk-weighted assets (RWAs).

Trading Book Policy RBS’s Trading Book Policy Statement

Term Securities Lending Facility. This program was

introduced by the Federal Reserve Bank of New York in
March 2008, and closed in January 2010. Under the
TSLF program, the Federal Reserve offered Treasury
TSLF
general collateral on 28-day terms to the Federal
Reserve’s designated primary dealers. In exchange,
those primary dealers pledged program-eligible
collateral.

VaR Value at risk

very short term funding Funding liabilities with up to five business days’ maturity
liabilities (see the FSA Report at p. 94, fn 125, p. 99, fn 152).

A wholesale funding gap arises where a bank lends

wholesale funding gap /
more than it has in deposits and needs to fund this
wholesale funding
difference by borrowing from the wholesale money
requirement
markets.

The Working Capital the ‘Project snow working capital report dated 30 April
Report 2008’ produced by Deloitte

05250-80298/8093941.1 292
 [Schedule 3:

The Share Acquisitions By The SL Claimants]2

SL Claimant Number Of Price

Shares Paid
Purchased

Trustees Of The Mineworkers Pension Scheme Limited 1,306,033 £2

Coal Staff Superannuation Scheme Trustees Limited 1,950,596 £2

Electricity Pensions Trustee Limited 2,699,217 £2

Electricity Pensions Trustee Limited 520,000 £2.30

MNOPF Trustees Limited 672,269 £2

ARCA SGR S.P.A 1,163,049 £2

Deka International S.A 4,923 £2

Deka Investment Gmbh 2,035,671 £2

Voya Global Advantage & Premium Opportunity Fund 124,890 £2

Voya Global Equity Dividend and Premium Opportunity Fund 2,167,847 £2

Voya Investors Trust (The Registrant) on behalf of the VY 458,333 £2

Templeton Global Growth Portfolio a Series of the Registrant

Voya Mutual Funds (the “Registrant”) on behalf of its series, 6,082,417 £2

Voya International Value Equity Fund by way of transfer of
assets from ING Mayflower Trust (The Registrant) on behalf
of the ING International Value Fund, a Series of the
Registrant

Voya Mutual Funds (The Registrant) On Behalf Of The Voya 628,794 £2

Global Opportunities Fund, ING Index Plus International
Equity Fund, Voya Global Equity Dividend Fund, ING
International Value Opportunity Fund, and the ING
International Equity Dividend Fund, each a Series of the
Registrant

Voya Partners Inc. (The Registrant) on behalf of the VY 2,268,201 £2

Templeton Foreign Equity Portfolio and the VY Oppenheimer

05250-80298/8093941.1 293
Global Portfolio, each a Series of the Registrant

Voya Variable Portfolios, Inc. (The Registrant) on behalf of £2

the Voya Global Value Advantage Portfolio, and the Voya
International Index Portfolio, each a Series of the Registrant 554,075

International Fund Management S.A. 880,000 £2

John Hancock Variable Insurance Trust on behalf of its funds 2,853,134 £2

2A32 JHVIT International Equity Index Trust B, 2A34 JHVIT
International Equity Trust A, 2C35 JHVIT Global Trust, 2C64
JHVIT International Value Trust, 2CIG JHVIT Disciplined
Divers Trust, and (6719) JHVIT Overseas Equity Trust
merged into 2C64 JHVIT International Value Trust

John Hancock Funds II on behalf of its funds 2CZ8 JHF II 2,301,754 £2

International Value Fund, and 2DBG JHF II International
Equity Index

Susquehanna International Group Limited 16,453,691 £2

Susquehanna Ireland Ltd 20,000,000 £2

Swisscanto Fondsleitung AG 3,046,217 £2

Teachers' Retirement System of the State Of Illinois 5,235,922 £2

Austin Fire Fighters Relief & Retirement Fund 53,227 £2

Avalon Holdings Inc 223,511 £2

Bayerninvest Kapitalverwaltungsgesellschaft Mbh 468,288 £2

BP Pension Trustees Limited as trustee of the BP Pension 18,726,906 £2

Fund

Caisse De Dépôt et Placement Du Québec 4,472,752 £2

Canada Pension Plan Investment Board 10,630,804 £2

Chrysler Group LLC CBA Benefit Trust 230,242 £2

Chrysler Group LLC Master Retirement Trust 1,106,786 £2

Cumbria County Council as administering authority for the 470,752 £2

Cumbria Local Government Pension Scheme

Glasgow City Council a Local Authority constituted under The 5,395,898 £2

Local Government Etc (Scotland) Act 1994 as the

05250-80298/8093941.1 294
Administrators of the Strathclyde Pension Fund

Graphic Communications Conference of the International 33,141 £2

Brotherhood of Teamsters National Pension Fund

Houston Municipal Employees Pension System 164,520 £2

Inter-Local Pension Fund of the Graphic Communications 196,502 £2

Conference of the International Brotherhood of Teamsters

Waverton Investment Management Limited 1,524,629 £2

Kames Capital plc as agent for Scottish Equitable Plc. 22,451,570 £2

Kames Capital plc as agent for Kames Capital ICVC 465,500 £2

MFS Meridian Funds on behalf of European Value Fund 150,000 £2

MFS Series Trust X on behalf of MFS International Value 825,206 £2

Fund

MFS Series Trust Xv on behalf of MFS Diversified Target 4,889 £2

Return Fund

MFS Variable Insurance Trust II on behalf of MFS 236,055 £2

International Value Portfolio

Municipal Employees' Retirement System of Michigan 378,318 £2

Northern Ireland Local Government Officers’ Superannuation 249,208 £2

Committee

Northwestern Mutual Series Fund, Inc on behalf of the 1,110,193 £2

International Equity Portfolio

Ontario Pension Board in its capacity as the administrator of 877,180 £2

the Public Service Pension Plan and administrator and
manager of the Public Service Pension Fund, and not as
Crown Agent

Orange County Employees’ Retirement System 401,160 £2

Premier Ltd 39,778 £2

Rathbone Investment Management Limited 8,721,337 £2

Royal Borough of Kensington & Chelsea Pension Fund 596,525 £2

San Mateo County Employees' Retirement Association 285,547 £2

05250-80298/8093941.1 295
Stichting Pensioenfonds ABP, through Algemene Pensioen 81,100 £2
Groep N.V.

Stichting Pensioenfonds ABP, through Algemene Pensioen 40,000,000 £2.30

Groep N.V.

The Mayor And Burgesses of the Royal Borough Of Kingston 432,718 £2

Upon Thames (as Scheme Employer of the Royal Borough of
Kingston Upon Thames Pension Fund)

The Public School Teachers' Pension and Retirement Fund 225,507 £2

of Chicago

Alameda County Employees’ Retirement Association 640,965 £2

BAA Pension Trust Company Limited as the trustee of the 990,628 £2

BAA Pension Scheme

California Public Employees' Retirement System (Calpers) 10,791,082 £2

Doddington Global Fund, LLC 280,622 £2

Dundee City Council as administering authority for Tayside 809,350 £2

Pension Fund

Internationale Kapitalanlagegesellschaft Mbh 867,250 £2

John Deere Pension Trust 560,234 £2

Overstone Fund plc on behalf of its sub-fund Overstone 142,693 £2

European Equity Fund

Overstone Fund plc on behalf of its sub-fund Overstone 4,544,261 £2

Global Equity Fund

Overstone Fund plc on behalf of its sub-fund Overstone 21,388 £2

Global Ex US Equity Fund

Rexam Pension Trustees Limited 228,372 £2

Richard King Mellon Foundation 140,256 £2

Sampension KP Livsforsikring a/s 868,260 £2

Sjunde AP –fonden 1,056,894 £2

State Universities Retirement System of Illinois 372,711 £2

Stichting Bedrijfspensioenfonds voor de Landbouw 1,294,698 £2

05250-80298/8093941.1 296
Stichting bedrijfstakpensioenfonds voor het Schoonmaak- en 165,138 £2
Glazenwassersbedrijf

Stichting Pensioenfonds voor de Tandtechniek 58,533 £2

Stichting Pensioenfonds Wonen 134,135 £2

Susan Forster, Jonathan Dunn, Keith Libetta, Michelle 439,252 £2

Singleton, Leonie Sharp, John Gray, Carol Wendy Ann
Sewell, and Bronwyn McKenna in their capacity as Trustees
for the UNISON Staff Pension Scheme

Susan Forster, Jonathan Dunn, Keith Libetta, Michelle 73,535 £2.30

Singleton, Leonie Sharp, John Gray, Carol Wendy Ann
Sewell, and Bronwyn McKenna in their capacity as Trustees
for the UNISON Staff Pension Scheme

Syntrus Achmea Europa Pool (formerly known as Interpolis 183,098 £2

Europa Pool), represented by its Manager, Syntrus Achmea
Vermogensbeheer B.V.

The American National Red Cross 108,257 £2

The Council of the London Borough of Ealing as the 632,916 £2

administering authority for the London Borough of Ealing
Pension Fund as constituted under the Local Government
Pension Scheme

Union Asset Management Holding AG 468,528 £2

British Airways Pension Trustees Ltd on behalf of the Airways 1,416,934 £2

Pension Scheme

British Airways Pension Trustees Ltd on behalf of the New 6,750,689 £2

Airways Pension Scheme

Devon County Council acting as the administering authority 416,665 £2

of the Devon Pension Fund

Illinois Municipal Retirement Fund 1,189,045 £2

Jaguar Land Rover Pension Trustees Limited 285,081 £2

Lancashire County Council as administering authority of 1,283,933 £2

Lancashire County Pension Fund

Mondrian All Countries World Ex-US Equity Fund, L.P. 411,653 £2

05250-80298/8093941.1 297
Mondrian Focused International Equity Fund, L.P. 49,509 £2

Mondrian International Equity Fund, L.P. 3,774,095 £2

North Yorkshire County Council as administering authority for 1,957,961 £2

the North Yorkshire Pension Fund

Nuclear Electric Insurance Limited 531,607 £2

Oklahoma Public Employees Retirement System 490,076 £2

R. K. Mellon International Fund 62,854 £2

STATE STREET BANK & TRUST COMPANY IN ITS 170,743 £2

CAPACITY AS TRUSTEE OF THE Retirement System of
The American National Red Cross

Sir George Russell, Anthony Brierley, Ralph Stockwell, 531,7282 £2

Doveport Trustees (No.1) Limited in their capacity as
Trustees for the Anne Clay Personal Trust

Sir George Russell, Anthony Brierley, Ralph Stockwell,

Doveport Trustees (No.1) Limited in their capacity as
Trustees for the Jeremy Clay Personal Trust

Sir George Russell, Anthony Brierley, Ralph Stockwell,

Christopher Bliss, Parkdove Limited, Snowport Limited as
Trustees for the Jordan Charitable Foundation

Sir George Russell, Anthony Brierley, Ralph Stockwell,

Doveport Trustees (No.3) Limited in their capacity as
Trustees for the Lucilla Stephenson Discretionary Trust

Sir George Russell, Anthony Brierley, Ralph Stockwell,

Doveport Trustees (No.3) Limited in their capacity as
Trustees for the Lucilla Stephenson Personal Trust

Sir George Russell, Anthony Brierley, Ralph Stockwell,

Doveport Trustees (No.2) Limited in their capacity as
Trustees for the Peter Clay Discretionary Trust

Sir George Russell, Anthony Brierley, Ralph Stockwell,

Doveport Trustees (No.2) Limited in their capacity as
Trustees for the Peter Clay Personal Trust

2 The shares of these Claimants were block traded

05250-80298/8093941.1 298
South Yorkshire Pensions Authority as administering 4,152,255 £2
authority for the South Yorkshire Pension Fund

Western Pennsylvania Teamsters and Employers Pension 155,915 £2

Fund

Wolverhampton City Council as the administering authority 7,196,052 £2

for West Midlands Pension Fund

Aberdeen Asset Management Life and Pensions Limited on 2,570,944 £2

behalf of Aberdeen Life UK Opportunities Fund and
Aberdeen Life UK Equity Fund

Aberdeen Global S.I.C.A.V. on behalf of Aberdeen Global - 228,550 £2

UK Equity Fund

Aberdeen Investment Funds ICVC on behalf of Aberdeen UK 3,741,830 £2

Opportunities Fund, Aberdeen Multi-Asset Fund, Aberdeen
UK Equity Fund, Aberdeen UK Equity Income Fund,
Aberdeen Responsible UK Equity Fund, Aberdeen Managed
Distribution Fund and GIPSI (merged into Aberdeen Multi-
Asset Fund on 10/10/08)

AGIPI ACTIONS SICAV 760,444 £2

Air Canada Pension Master Trust Fund 2,393,266 £2

Anglo & Overseas plc (in liquidation) 261,250 £2

AXA Distribution Investment ICVC for its sub-fund the AXA 125,277 £2
Defensive Distribution Fund (formerly AXA Cautious
Managed Fund, a sub-fund of AXA UK Investment Company
ICVC which merged into the AXA Defensive Distribution
Fund)

AXA Distribution Investment ICVC for its sub-fund the AXA 534,722 £2
Ethical Distribution Fund (formerly the AXA Ethical Fund, a
sub-fund of AXA UK Investment Company ICVC which
merged into the AXA Ethical Distribution Fund)

AXA Distribution Investment ICVC for its sub-fund the new 611,111 £2
AXA Distribution Fund (formerly the AXA Distribution Fund, a
sub-fund of AXA UK Investment Company ICVC which
merged into the new AXA Distribution Fund)

AXA Investment Managers Paris SA on behalf of AXA 832,791 £2

Optimal Income (FCP)

05250-80298/8093941.1 299
AXA World Funds SICAV for and on behalf of its sub-fund 355,663 £2
Framlington Europe (formerly Framlington Europe Dividend
which merged into Framlington Europe)

AXA World Funds SICAV for and on behalf of its sub-fund 2,085,655 £2
Optimal Income (formerly Framlington Optimal Income)

BlackRock Asset Management Canada Limited, as trustee 566,967 £2

for the BlackRock CDN MSCI EAFE Equity Index Fund

BlackRock Asset Management Deutschland AG on behalf of 81,801 £2

iShares Dow Jones Global Titans 50 UCITS ETF (DE)

BlackRock Asset Management Deutschland AG on behalf of 420,875 £2

iShares FTSE 100 UCITS ETF (DE)

BlackRock Asset Management Deutschland AG on behalf of 523,478 £2

iShares STOXX Europe 50 UCITS ETF (DE)

BlackRock Asset Management Deutschland AG on behalf of 494,722 £2

iShares STOXX Europe 600 UCITS ETF (DE)

BlackRock Asset Management Deutschland AG on behalf of 32,864 £2

iShares STOXX Europe Large 200 UCITS ETF (DE)

BlackRock Global Funds for European Fund 697,505 £2

BlackRock Global Funds for Global Allocation Fund (formerly 7,455 £2

known as Conservative Allocation Fund (Euro))

BlackRock Global Funds for United Kingdom Fund 639,194 £2

BlackRock Institutional Pooled Funds plc on behalf of 87,817 £2

BlackRock European Enhanced Index - Ethical Fund

BlackRock Institutional Pooled Funds plc on behalf of 311,790 £2

BlackRock Global Enhanced Index Fund

BlackRock Institutional Trust Company, National Association 4,802,833 £2

(formerly Barclays Global Investors, National Association), as
Trustee for the EAFE Equity Index Fund

BlackRock Institutional Trust Company, National Association 1,791,455 £2

(formerly Barclays Global Investors, National Association), as
Trustee for the EAFE Equity Value Index Fund

BlackRock Institutional Trust Company, National Association 354,164 £2

(formerly Barclays Global Investors, National Association), as

05250-80298/8093941.1 300
Trustee for the EAFE Sudan Free Equity Index Fund

BlackRock Institutional Trust Company, National Association 74,097 £2

(formerly Barclays Global Investors, National Association), as
Trustee for the Global Market Neutral Fund B, formerly the
Global Equity Long-Short Fund B

BlackRock Institutional Trust Company, National Association 451,822 £2

(formerly Barclays Global Investors, National Association), as
Trustee for the International Equity Index Plus Fund

BlackRock Institutional Trust Company, National Association 141,100 £2

(formerly Barclays Global Investors, National Association), as
Trustee for the International Equity Index Plus Fund B

BlackRock Institutional Trust Company, National Association 21,403,200 £2

(formerly Barclays Global Investors, National Association), as
Trustee for the MSCI Equity Index Fund - United Kingdom

BlackRock Life Limited (formerly known as Barclays Life 522,252 £2

Pension Management Limited) for Active UK Equity Fund

BlackRock Life Limited (formerly known as Barclays Life 4,596,698 £2

Pension Management Limited) for Aquila Life Multinational
Local UK Ex Multinationals Equity Index Fund

BlackRock Life Limited (formerly known as Barclays Life 61,468,083 £2

Pension Management Limited) for Aquila Life UK Equity
Index Fund

BlackRock Life Limited (formerly known as Barclays Life 14,727,144 £2

Pension Management Limited) for Aquila Life UK 350 ex
Investment Trust Equity Index Fund

BlackRock Life Limited (formerly known as Barclays Life 1,720,406 £2

Pension Management Limited) for Ascent Life UK Equity
Fund

BlackRock Life Limited (formerly known as Barclays Life 83,653 £2

Pension Management Limited) for DC UK Equity Optimum
Fund

BlackRock Life Limited (formerly known as Barclays Life 1,279,832 £2

Pension Management Limited) for DC UK Growth Fund

BlackRock Life Limited (formerly known as Barclays Life 219,773 £2

Pension Management Limited) for Logica UK Equity Fund

05250-80298/8093941.1 301
BlackRock Life Limited (formerly known as Barclays Life 33,833 £2
Pension Management Limited) for Managed Portfolio Fund

BlackRock Quantitative Partners, LP for Enhanced Europe 207,532 £2

Series

BlackRock Quantitative Partners, LP for Enhanced Global 49,072 £2

Series

BNY Mellon Trust & Depositary (UK) Limited as Trustee for 247,069 £2
Armed Forces Common Investment Fund

BNY Mellon Trust & Depositary (UK) Limited as Trustee for 160,400 £2.30
Armed Forces Common Investment Fund

BNY Mellon Trust & Depositary (UK) Limited as Trustee for 17,202 £2
Charifaith Common Investment Fund

BNY Mellon Trust & Depositary (UK) Limited as Trustee for 629,170 £2
Charishare Common Investment Fund

BNY Mellon Trust & Depositary (UK) Limited as Trustee for 390,500 £2.30
Charishare Common Investment Fund

BNY Mellon Trust & Depositary (UK) Limited as Trustee for 138,421 £2
Charishare Restricted Common Investment Fund

BNY Mellon Trust & Depositary (UK) Limited as Trustee for 85,500 £2.30
Charishare Restricted Common Investment Fund

BNY Mellon Trust & Depositary (UK) Limited as Trustee for 2,581,461 £2
ChariTrak Common Investment Fund

BNY Mellon Trust & Depositary (UK) Limited in its capacity as 24,625 £2
the transferee of the rights and assets of The Royal Bank of
Scotland Plc as Trustee for BlackRock Active Managed
Portfolio Fund

BNY Mellon Trust & Depositary (UK) Limited in its capacity as 132,533 £2
the transferee of the rights and assets of The Royal Bank of
Scotland Plc as Trustee for BlackRock Balanced Growth
Portfolio Fund

BNY Mellon Trust & Depositary (UK) Limited in its capacity as 153,061 £2
the transferee of the rights and assets of The Royal Bank of
Scotland Plc as Trustee for BlackRock Collective Investment

05250-80298/8093941.1 302
Funds (on behalf of the unit holders in BlackRock Balanced
Managed Fund)

BNY Mellon Trust & Depositary (UK) Limited in its capacity as 6,728,482 £2
the transferee of the rights and assets of The Royal Bank of
Scotland Plc as Trustee for BlackRock Collective Investment
Funds (on behalf of the unit holders in BlackRock UK Equity
Tracker Fund)

BNY Mellon Trust & Depositary (UK) Limited in its capacity as 928,548 £2
the transferee of the rights and assets of The Royal Bank of
Scotland Plc as Trustee for BlackRock Institutional Equity
Funds: UK Specialist Fund

BNY Mellon Trust & Depositary (UK) Limited in its capacity as 438,741 £2
the transferee of the rights and assets of The Royal Bank of
Scotland Plc as Trustee for BlackRock UK Equity Fund

BNY Mellon Trust & Depositary (UK) Limited in its capacity as 1,877,834 £2
the transferee of the rights and assets of The Royal Bank of
Scotland Plc as Trustee for BlackRock UK Income Fund

BNY Mellon Trust & Depositary (UK) Limited in its capacity as 3,361,111 £2
the transferee of the rights and assets of The Royal Bank of
Scotland Plc as Trustee for BlackRock UK Special Situations
Fund

BNY Mellon Trust & Depositary (UK) Limited in its capacity as 124,333 £2
the transferee of the rights and assets of The Royal Bank of
Scotland Plc as Trustee for BlackRock UK Specialist Fund

BT Pension Scheme Trustees Limited as trustee of the BT 702,215 £2

Pension Scheme

CAAPS Trustee Limited in its capacity as the sole trustee of 3,590,380 £2

the Civil Aviation Authority Pension Scheme

California State Teachers’ Retirement System 8,478,516 £2

Centea Fund NV on behalf of Centea Fund World Select 15,993 £2

Colonial First State Investments Limited as the Responsible 86,777 £2

Entity for Commonwealth Fixed Interest Fund 11

Colonial First State Investments Limited as the Responsible 113,876 £2

05250-80298/8093941.1 303
Entity for Commonwealth Global Shares Fund 1

Colonial First State Investments Limited as the Responsible 21,168 £2

Entity Commonwealth Global Shares Fund 7

Colonial First State Investments Limited as the Responsible 397,339 £2

Entity Commonwealth Specialist Fund 11

Colorado Public Employees' Retirement Association 1,085,671 £2

Cornwall Council acting in its capacity as Administering 435,749 £2

Authority of the Cornwall Council Pension Fund

Creditincome Limited 122,222 £2

DFA Investment Dimensions Group Inc on behalf of CSTG&E 11,615 £2

International Social Core Equity Portfolio

DFA Investment Dimensions Group Inc on behalf of 1,123,924 £2

International Core Equity Portfolio

DFA Investment Dimensions Group Inc on behalf of 14,152 £2

International Sustainability Core 1 Portfolio

DFA Investment Dimensions Group Inc on behalf of Large 884,644 £2

Cap International Portfolio

DFA Investment Dimensions Group Inc on behalf of T.A. 3,207 £2

World ex U.S Core Equity Portfolio

Dimensional Funds ICVC on behalf of United Kingdom Core 853,201 £2

Equity Fund

Dimensional Funds ICVC on behalf of United Kingdom Value 943,478 £2

Fund

Dimensional Funds plc on behalf of European Value Fund 192,181 £2

Dunedin Income Growth Investment Trust PLC 1,934,166 £2

Edinburgh Partners Opportunities Fund plc for Edinburgh 3,736,391 £2

05250-80298/8093941.1 304
Partners Global Opportunities Fund

Edinburgh Partners Opportunities Fund plc for Edinburgh 244,444 £2

Partners UK Opportunities Fund

Employees’ Retirement System of Rhode Island 810,661 £2

Forsta AP-fonden 3,130,236 £2

Hartz Capital Investments, LLC 122,833 £2

HSBC Bank Plc in its capacity as trustee of the SSgA UK 633,972 £2

Equity Tracker Fund

HSBC Bank Plc in its capacity as trustee of the SSGA UK 362,005 £2

Equity Tracker Fund, as transferee of the assets of the SSGA
UK Equity Index Fund (formerly known as the SSgA UK
Equity Enhanced Fund)

HSBC Bank Plc solely in its capacity as Trustee of the AXA 971,055 £2
General Trust

Robert William Torrance, Peter Wallin, Christine Kennedy, 1,100,000 £2

Brian Duffin and Richard Miles in their capacity as the
Trustees for the National Farmers Union Mutual Insurance
Society Limited Retirement Benefit Scheme

iShares II plc on behalf of iShares MSCI Europe UCITS ETF 41,597 £2

(Inc)

iShares II plc on behalf of iShares STOXX Europe 50 UCITS 1,613,673 £2

ETF

iShares (DE) I Investmentaktiengesellschaft mit 1,035,810 £2

Teilgesellschaftsvermögen on behalf of iShares STOXX
Europe 600 Banks UCITS ETF (DE)

iShares plc on behalf of iShares FTSE 100 UCITS ETF (Inc) 7,344,439 £2

iShares plc on behalf of iShares FTSEurofirst 100 UCITS 148,502 £2

ETF

iShares plc on behalf of iShares MSCI World UCITS ETF 344,399 £2

(Inc)

05250-80298/8093941.1 305
iShares plc on behalf of iShares UK Dividend UCITS ETF 1,316,695 £2

iShares Trust on behalf of iShares Europe ETF 1,727,690 £2

iShares Trust on behalf of iShares Global Financials ETF 335,688 £2

iShares Trust on behalf of iShares MSCI ACWI ETF 5,852 £2

iShares Trust on behalf of iShares MSCI ACWI ex U.S. ETF 8,178 £2

iShares Trust on behalf of iShares MSCI EAFE ETF 21,067,942 £2

iShares Trust on behalf of iShares MSCI EAFE Value ETF 979,121 £2

iShares Trust on behalf of iShares MSCI Kokusai ETF 4,666 £2

iShares Trust on behalf of iShares MSCI United Kingdom 2,203,227 £2

ETF

John Lewis Partnership Pensions Trust in its capacity as the 88,130 £2

assignee of the rights and assets of the John Lewis
Partnership Pensions Trust Limited in its capacity as trustee
of the John Lewis Partnership Trust for Pensions

J.P. Morgan Bank (Ireland) plc as Trustee for BlackRock 48,915 £2

Index Selection Fund - BlackRock Diversified Asset
Allocation Sub-Fund

J.P. Morgan Bank (Ireland) plc as Trustee for BlackRock 2,615,966 £2

Index Selection Fund - BlackRock UK Index Sub-Fund

KBC Eco Fund NV on behalf of Eco Fund World 35,247 £2

KBC Equity Fund NV on behalf of Equity Fund Buyback 1,444,675 £2

Europe, Equity Fund Europe, Equity Fund Finance, Equity
Fund Quant Europe, Equity Fund Strategic Finance, Equity
Fund Strategic Satellites and KBC Equity Fund – Top 30

KBC Index Fund NV on behalf of Index Fund Europe and 97,880 £2

Index Fund World

KBC Institutional Fund NV on behalf of KBC Institutional 294,024 £2

Fund Euro Satellite Equity, KBC Institutional Fund European
Equity, KBC Institutional Fund Global SRI Defensive 1 and
KBC Institutional Fund SRI World Equity

KBC Multi Track NV on behalf of KBC Multi Track - High Div. 10,537 £2
Netherlands

05250-80298/8093941.1 306
Kent County Council as the Administering Authority for the 2,200,000 £2
Kent County Council Superannuation Fund

Lincoln Variable Insurance Products Trust, on behalf of LVIP 1,333,101 £2

Mondrian International Value Fund

Lincoln Variable Insurance Products Trust, on behalf of LVIP 1,230 £2

SSgA Developed International 150 Fund

Lincoln Variable Insurance Products Trust, on behalf of LVIP 9,375 £2

SSgA International Index Fund

Lincoln Variable Insurance Products Trust, on behalf of LVIP 138,906 £2

Templeton Growth RPM Fund

London Borough of Camden as the administering authority of 925,230 £2

the London Borough of Camden Pension Fund

London Borough of Hounslow as administering authority of 312,277 £2

the London Borough of Hounslow Pension Fund

Louisiana State Employees' Retirement System 624,893 £2

Managed Pension Funds Limited in relation to the UK Active 946,968 £2

Equity Sub-Fund

Managed Pension Funds Limited in relation to the UK 5,937,328 £2

Enhanced Equity Sub-Fund

Managed Pension Funds Limited in relation to the UK Equity 25,422,295 £2

Index Sub-Fund

Managed Pension Funds Limited in relation to the World UK 626,319 £2

Equity Index Sub-Fund

Murray Income Trust PLC 2,236,055 £2

New York City Employees’ Retirement System 2,165,543 £2

New York City Fire Department Pension Fund 243,402 £2

New York City Police Pension Fund 1,256,909 £2

North Carolina Department of State Treasurer on behalf of 2,458,818 £2

the North Carolina Retirement Systems

Northern Funds (the "Trust") on behalf of the Northern Global 12,544 £2

Sustainability Index Fund, a series of the Trust

05250-80298/8093941.1 307
Northern Funds (the "Trust") on behalf of the Northern 851,221 £2
International Equity Index Fund (and the Northern
Institutional Funds International Equity Index Portfolio, which
merged into the Northern International Equity Index Fund), a
series of the Trust

Northern Trust Fiduciary Services (Ireland) Limited in its 105,728 £2

capacity as trustee of Northern Trust UCITS Managed Funds
- The NTMF Foreign Equity Fund (for Qualified Institutional
Investors)

Northern Trust Fiduciary Services (Ireland) Limited in its 1,607,627 £2

capacity as trustee of Northern Trust Unit Trust

Northern Trust Investment Funds plc 332,566 £2

Northern Trust Investments, Inc. in its capacity as Trustee of 631,652 £2

the Northern Trust Collective All Country World Index (ACWI)
ex-US Fund – Lending

Northern Trust Investments, Inc. in its capacity as Trustee of 2,958,466 £2

the Northern Trust Collective Daily United Kingdom Index
Fund – Lending

Northern Trust Investments, Inc. in its capacity as Trustee of 363,731 £2

the Northern Trust Collective Ex-Japan Ex-EMU Fund – Non-
Lending

Northern Trust Investments, Inc. in its capacity as Trustee of 162,364 £2

the Northern Trust Common All Country World Index (ACWI)
ex-US Fund – Lending

Northern Trust Investments, Inc. in its capacity as Trustee of 216,696 £2

the Northern Trust Common EAFE Index Fund – Lending

Plato Institutional Index Fund NV on behalf of Plato 92,986 £2

Institutional Index Fund European Equity

Railways Pension Trustee Company Limited as trustee of the 4,004,763 £2

Railways Pension Scheme, the British Railways
Superannuation Fund, the British Transport Police Force
Superannuation Fund, and the BR (1974) Fund

San Diego City Employees’ Retirement System 483,033 £2

05250-80298/8093941.1 308
Aberdeen Investment Funds ICVC for its sub-fund the 290,876 £2
Aberdeen UK Equity Income Fund (by way of transfer of
assets by merger with Aberdeen UK Equity Dividend Fund)

SDPR Index Shares Funds (the “Trust”) on behalf of SPDR 78,666 £2

MSCI ACWI ex-US ETF (CWI), a series of the Trust

SDPR Index Shares Funds (the “Trust”) on behalf of SPDR 156,913 £2

STOXX® Europe 50 ETF (FEU), a series of the Trust

SDPR Index Shares Funds (the “Trust”) on behalf of SPDR 47,865 £2

S&P International Dividend ETF (DWX), a series of the Trust

SDPR Index Shares Funds (the “Trust”) on behalf of SPDR 6,827 £2

S&P World ex-US ETF (GWL), a series of the Trust

Shires Income PLC 550,000 £2

Sivek NV on behalf of Sivek Global High, Sivek Global 31,180 £2

Medium and Sivek Global Low

SPDR ETFS S.I.C.A.V. in relation to SPDR MSCI Europe 326,681 £2

Financials UCITS ETF

SPDR ETFS S.I.C.A.V. in relation to SPDR MSCI Europe 581,555 £2

UCITS ETF

SSgA Europe Alpha Equity Fund I S.I.C.A.V. 841,364 £2

SSGA MSCI EAFE Index Fund by State Street Trust 364,889 £2

Company Canada, acting solely in its capacity as trustee of
the Fund

SSGA United Kingdom Index Fund by State Street Trust 385,374 £2

Company Canada, acting solely in its capacity as trustee of
the Fund

Staffordshire County Council as administering authority of the 1,931,859 £2

Staffordshire Pension Fund

Stanhope Pension Trust Limited as trustee for The GEC 274,506 £2

1972 Plan

STATE OF WISCONSIN INVESTMENT BOARD, acting for 3,663,941 £2

and on behalf of CORE RETIREMENT INVESTMENT
TRUST created by Section 40.04(3), Wisconsin Statutes

05250-80298/8093941.1 309
STATE OF WISCONSIN INVESTMENT BOARD, acting for 711,434 £2
and on behalf of VARIABLE RETIREMENT INVESTMENT
TRUST created by Section 40.04(3), Wisconsin Statutes

State Street Bank and Trust Company as trustee of the 1,342,381 £2

Citigroup PMI Global Ex-U.S. Index Plus Securities Lending
Fund (also known as the World Ex-U.S. Index Plus Securities
Lending Fund)

State Street Bank and Trust Company as trustee of the EAFE 86,599 £2
Index Plus Securities Lending Common Trust Fund

State Street Bank and Trust Company as trustee of the EAFE 500,647 £2
Index Plus Securities Lending Fund

State Street Bank and Trust Company as trustee of the Long- 13,672 £2
Short Market Neutral European Equity Common Trust Fund

State Street Bank and Trust Company as trustee of the SSgA 5,800,737 £2
Daily MSCI Europe Index Non-Lending Fund

State Street Bank and Trust Company as trustee of the SSgA 438,011 £2
Europe Alpha Non-Lending QP Common Trust Fund

State Street Bank and Trust Company as trustee of the SSgA 1,519,637 £2
Europe Index Plus Non-Lending Common Trust Fund

State Street Bank and Trust Company as trustee of the SSgA 1,199,998 £2
International Alpha Securities Lending Fund

State Street Bank and Trust Company as trustee of the SSgA 29,057 £2
International Markets Non-Lending Fund

State Street Bank and Trust Company as trustee of the SSgA 86,202 £2
MSCI ACWI Ex USA IMI Screened Non-Lending Common
Trust Fund

State Street Bank and Trust Company as trustee of the SSgA 359,277 £2
MSCI EAFE Financials Index Non-Lending Fund

State Street Bank and Trust Company as trustee of the SSgA 4,103,307 £2

05250-80298/8093941.1 310
MSCI UK Index Non-Lending Fund

State Street Bank and Trust Company as trustee of the SSgA 5,178,211 £2
MSCI UK Index Non-Lending QP Common Trust Fund

State Street Bank and Trust Company as trustee of the SSgA 705,762 £2
World Index Plus Securities Lending Common Trust Fund

State Street Bank and Trust Company as trustee of the 243,272 £2

United Kingdom Primary Market Index Securities Lending
Fund

State Street Custodial Services (Ireland) Limited in its 23,220 £2

capacity as trustee of the State Street Global Advisors
Exempt Unit Trust in relation to SSgA EUT Active All Equity
Fund

State Street Custodial Services (Ireland) Limited in its 54,243 £2

capacity as trustee of the State Street Global Advisors
Exempt Unit Trust in relation to SSgA EUT Active
International Equity Fund

State Street Custodial Services (Ireland) Limited in its 2,116 £2

capacity as trustee of the State Street Global Advisors
Exempt Unit Trust in relation to SSgA EUT Euro Managed
Fund

State Street Custodial Services (Ireland) Limited in its 459,895 £2

capacity as trustee of the State Street Global Advisors
Exempt Unit Trust in relation to SSgA EUT Pensions
Managed Fund

State Street Custodial Services (Ireland) Limited in its 140,674 £2

capacity as trustee of the State Street Global Advisors
Exempt Unit Trust in relation to SSgA EUT Enhanced 4 Good
Fund

State Street Custodial Services (Ireland) Limited in its 1,077,567 £2

capacity as trustee of the State Street Global Advisors
Exempt Unit Trust in relation to SSgA EUT UK Equity Index
Fund – Gross

State Street Custodial Services (Ireland) Limited in its 43,285 £2

capacity as trustee of the State Street Global Advisors Gross
Roll Up Unit Trust in relation to SSgA GRU World ex Euro

05250-80298/8093941.1 311
Index Equity Fund

State Street Global Advisors France S.A. on behalf of SSgA 1,584,894 £2

Enhanced Umbrella in relation to SSgA Europe Enhanced
Equity Fund

State Street Global Advisors France S.A. on behalf of SSgA 76,934 £2

Europe SRI Alpha Equity Fund I

State Street Global Advisors Index Funds S.I.C.A.V. in 289,055 £2

relation to SSgA Europe Index Equity Fund

State Street Global Advisors Index Funds S.I.C.A.V. in 133,816 £2

relation to SSgA Financials Index Equity Fund

State Street Global Advisors Index Funds S.I.C.A.V. in 281,994 £2

relation to SSgA UK Index Equity Fund

State Street Global Advisors Index Funds S.I.C.A.V. in 427,149 £2

relation to SSgA World Index Equity Fund

State Street Global Advisors Australia Services Ltd as the 658,090 £2

Responsible Entity for SSgA Global Index Plus Trust

Stichting Bewaarbedrijf BlackRock as trustee for BlackRock 125,198 £2

Aandelenfonds SP Europa (Equity Europe) Fund

Tameside Metropolitan Borough Council, as administering 14,751,365 £2

authority for Greater Manchester Pension Fund

Taylor Wimpey Pension Trustees Limited in its capacity as 798,810 £2

transferee of the rights and assets of George Wimpey
Pension Trustees Limited and Law Debenture (No.3
Scheme) Pension Trust Corporation in their capacity as
trustees of The George Wimpey Staff Pension Scheme

Taylor Wimpey Pension Trustees Limited in its capacity as 293,058 £2

transferee of the rights and assets of Team Nominees
Limited in its capacity as trustee of Taylor Woodrow Group
Pension and Life Assurance Fund

05250-80298/8093941.1 312
Teachers’ Retirement System of the City of New York 1,721,267 £2

Tesco Pensions Trustees Limited (as Trustees of the Tesco 729,296 £2

PLC Pension Scheme)

TfL Trustee Company Limited (in its capacity as trustee of the 4,657,949 £2
TfL Pension Fund)

The Board of Trustees of the Equity-League Pension & 116,360 £2

Health Trust Funds

The Comptroller of the State of New York as Trustee of the 5,759,363 £2

New York State Common Retirement Fund

The Council of the Borough of South Tyneside acting in its 229,288 £2

capacity as the administering authority of the Tyne and Wear
Pension Fund

The Mayor and Burgesses of London Borough of Barking and 349,471 £2

Dagenham as administrators for the London Borough of
Barking and Dagenham Pension Fund

The National Farmers Union Mutual Insurance Society 6,538,888 £2

Limited for the General Fund

The National Farmers Union Mutual Insurance Society 17,746 £2

Limited for the Homebonus Plan Bonus Fund

The National Farmers Union Mutual Insurance Society 5,500,000 £2

Limited for the Life Fund

The National Farmers Union Mutual Insurance Society 1,197,778 £2

Limited for the Unit Linked Life Funds

The National Farmers Union Mutual Insurance Society 1,466,667 £2

Limited for the Unit Linked Pension Funds

The New York City Deferred Compensation Plan 292,030 £2

The NFU Mutual OEIC for the UK Growth Fund 794,444 £2

The NFU Staff Pension Trust Company Limited in its capacity 109,070 £2
as trustee of The NFU Staff Pension Scheme

The Royal Blind Asylum & School, Edinburgh 86,777 £2

The Royal Blind Asylum & School, Edinburgh as Trustees of 163,777 £2

05250-80298/8093941.1 313
 The Scottish National Institution for the War Blinded (also
known as Scottish National Institution for the War Blinded)

Vanguard Fiduciary Trust Company, as Trustee of Vanguard 490,662 £2

European Stock Index Trust

Vanguard Horizon Funds (the Trust) on behalf of its 234,316 £2

Vanguard Global Equity Fund series

Vanguard International Equity Index Funds (the Trust) on 24,915,378 £2

behalf of its Vanguard European Stock Index Fund series
and on behalf of its Vanguard FTSE All-World ex-US Index
Fund series

Vanguard Investment Series plc, on behalf of its Vanguard 3,533,783 £2

European Stock Index Fund series and on behalf of its
Vanguard Global Stock Index Fund series

Vanguard STAR Funds (the Trust) on behalf of its Vanguard 1,749,606 £2

Developed Markets Index Fund series

Vanguard Trustees’ Equity Fund (the Trust) on behalf of its 2,541,608 £2

Vanguard International Value Fund series

Washington State Investment Board 2,253,952 £2

Wellcome Trust Limited as trustee of the Wellcome Trust 2,229,665 £2

Wirral Council as the Administering Authority for the 1,741,666 £2

Merseyside Pension Fund

Total number of Shares bought before the Closing Date 616,508,429 £2

Total number of Shares bought in the placement of the 41,229,935 £2.30

Rights Issue rump

Total number of Shares 657,738,364

05250-80298/8093941.1 314
 [SCHEDULE 4 – The QE Claimants]3

No Name of Claimant Registered Office / Number of Rights

Business Address Issue Shares Acquired
at £2.00

1. Legal and General One Coleman Street 30,201,573

Assurance Society London EC2R 5AA
Limited

2. Legal & General Pensions One Coleman Street 1,245,591

Limited London EC2R 5AA

3. Legal and General One Coleman Street 247,440,530

Assurance (Pensions London EC2R 5AA
Management) Limited

4. Standard Life Assurance Standard Life House 138,761,178

Limited 30 Lothian Road
Edinburgh EH1 2DH

5. Standard Life Investment 1 George Street SLIC acquired a total of

Company (an open ended 10,349,967 shares.
Edinburgh EH2 2LL
investment company with SLIC acquired these
variable capital) (“SLIC”) shares on behalf of the
following sub-funds in
the following amounts:

(1) UK Ethical Fund:

533,977
(2) UK Equity High
Alpha Fund: 414,351
(3) Global Equity
Unconstrained Fund:
247,161
(4) Global Advantage
Fund: 1,685,739
(5) UK Equity Growth
Fund: 1,990,536

05250-80298/8093941.1 315
No Name of Claimant Registered Office / Number of Rights
Business Address Issue Shares Acquired
at £2.00
(6) UK Equity High
Income Fund: 5,270,403
(7) Global Equity
Income Fund (formerly
Managed Fund):
207,800

6. Standard Life Investment 1 George Street SLIC II acquired

Company II (an open 229,324 shares on
Edinburgh EH2 2LL
ended investment behalf of Standard Life
company with variable Investments UK Equity
capital) (“SLIC II”) Income Unconstrained
Fund

7. John Francis Hylands, Standard Life House 1,802,277

Alan Stephen Acheson, 30 Lothian Road
Brian Alexander Barbour,
George Emmerson, John Edinburgh EH1 2DH
Easton Gill, Maxwell Colin
Ledlie, Peter James
Raistrick and Gordon
Teasdale, acting in their
capacity as Trustees of
the Standard Life Staff
Pension Scheme

8. Citibank Europe PLC, UK 25 Canada Square Total: 17,663,191

Branch (“Citibank”), as Canary Wharf
Trustee of:
London E14 5LB In particular:

9. (1) Standard Life UK 11,427,416 shares

Equity General Trust were acquired on
behalf of Standard
Life UK Equity
General Trust

(2) Standard Life Global 725,051 shares

were acquired on

05250-80298/8093941.1 316
No Name of Claimant Registered Office / Number of Rights
Business Address Issue Shares Acquired
at £2.00
Equity Trust behalf of Standard
Life Global Equity
Trust

(3) Standard Life Multi- 5,510,724 shares were

Asset Trust acquired on behalf of
Standard Life Multi-
Asset Trust

10. The following Legal & 50 Bank Street Total: 18,413,493

General unit trusts, each Canary Wharf
acting through their
Trustee, Northern Trust London
Global Services Limited: E14 5NT
In particular:

(1) Legal & General UK 15,086,126 shares were

Index Trust acquired on behalf of
Legal & General UK
Index Trust

(2) Legal & General UK 436,346 shares were

100 Index Trust acquired on behalf of
Legal & General UK 100
Index Trust. A further
169,436 shares were
acquired on behalf of
Legal & General
(Alliance & Leicester)
UK 100 Index Tracker
Fund, which was
merged into the Legal &
General UK 100 Index
Trust pursuant to a
scheme of arrangement
on 28 May 2010 and
wound up on 28 July
2011. Accordingly,

05250-80298/8093941.1 317
No Name of Claimant Registered Office / Number of Rights
Business Address Issue Shares Acquired
at £2.00
Legal & General UK 100
Index Trust advances a
claim for losses arising
out of the purchase of a
total of 605,782 shares
in these proceedings

(3) Legal & General 1,213,933 shares were

Ethical Trust acquired on behalf of
Legal & General Ethical
Trust

(4) Legal & General 793,349 shares were

(Alliance & Leicester) acquired on behalf of
Capital Growth Fund Legal & General
(Alliance & Leicester)
Capital Growth Fund

(5) CAF UK Equitrack 714,303 shares were

Fund acquired on behalf of
CAF UK Equitrack Fund

11. The Prudential Assurance Laurence Pountney Hill 85,303,578

Company Limited London EC4R 0HH

12. Prudential Pensions Laurence Pountney Hill 4,468,829

Limited London EC4R 0HH

13. Prudential International Montague House 248,031

Assurance PLC Adelaide Road
Dublin 2

05250-80298/8093941.1 318
No Name of Claimant Registered Office / Number of Rights
Business Address Issue Shares Acquired
at £2.00

14. M&G Investment Funds Fairbairn Business 35,366 shares were

(1) (an open ended Centre originally acquired on
investment company with behalf of Prudential
Laurence Pountney Hill
variable capital) International Growth
(“M&GIF1”) London EC4R 0HH Unit Trust. On 14
October 2011 this unit
trust was merged into
the M&G Global Growth
Fund, an M&GIF1 sub-
fund, pursuant to a
scheme of arrangement

15. M&G Investment Funds Fairbairn Business 4,391,492 shares were

(2) (an open ended
investment company with
Laurence Pountney Hill
variable capital)
(“M&GIF2”) London EC4R 0HH
Centre originally acquired on
behalf of Prudential UK
Index Tracker and
Prudential UK Growth
unit trusts. On 17
February 2012 and 14
October 2011
respectively, these unit
trusts were merged into
the M&G Index Tracker
and M&G UK Growth
Funds, which are both
M&GIF2 sub-funds,
pursuant to separate
schemes of
arrangement. In
addition, M&GIF2
acquired 1,338,098
shares on behalf of
M&G Index Tracker
Fund. Accordingly,
M&GIF2 advances a
claim for losses arising
out of the purchase of a
total of 5,729,590
shares in these

05250-80298/8093941.1 319
No Name of Claimant Registered Office / Number of Rights
Business Address Issue Shares Acquired
at £2.00
proceedings

16. M&G Investment Funds Fairbairn Business 423,531 shares were

(3) (an open ended Centre acquired on behalf of
investment company with Prudential Equity
Laurence Pountney Hill
variable capital) Income unit trust. On 14
(“M&GIF3”) London EC4R 0HH October 2011, this unit
trust was merged into
the M&G Dividend
Fund, an M&GIF3 sub-
fund, pursuant to a
scheme of arrangement

17. M&G Investment Funds Fairbairn Business 95,979 shares were

(4) (an open ended Centre acquired on behalf of
investment company with Prudential (Ex SA)
Laurence Pountney Hill
variable capital) Global Balanced unit
(“M&GIF4”) London EC4R 0HH trust. On 17 June 2011,
this unit trust was
merged into M&G
Episode Growth fund,
an M&GIF4 sub-fund,
pursuant to a scheme of
arrangement

18. M&G Investment Funds Fairbairn Business 322,513 shares were

(11) (an open ended Centre acquired on behalf of
investment company with Prudential Distribution
Laurence Pountney Hill
variable capital) unit trust. On 14
(“M&GIF11”) London EC4R 0HH October 2011, this unit
trust was merged into
M&G Episode Income
Fund, an M&GIF11 sub-
fund, pursuant to a
scheme of arrangement

19. M&G Investment Funds Fairbairn Business 314,374 shares were

(12) (an open ended Centre acquired on behalf of
investment company with Prudential Global
Laurence Pountney Hill
variable capital) Growth unit trust. On 17

05250-80298/8093941.1 320
No Name of Claimant Registered Office / Number of Rights
Business Address Issue Shares Acquired
at £2.00
(“M&GIF12”) London EC4R 0HH February 2012, this unit
trust was merged into
the M&G International
Specialist Equity fund,
an M&GIF12 sub-fund,
pursuant to a scheme of
arrangement

20. Aviva Investors Pensions 1 Poultry 165,824

Limited London EC2R 8EJ

21. Aviva Life & Pensions One Park Place 1,030,850

Ireland Limited Hatch Street
Dublin 2

22. Aviva Life & Pensions UK 2 Rougier Street 32,872,376

Limited York YO90 1UU

23. Aviva Reinsurance Canon’s Court 97,979

Limited 22 Victoria Street
Hamilton
HM12 Bermuda

24. Aviva Staff Pension St Helen's 4,589,563

Trustee Limited 1 Undershaft
London EC3P 3DQ

25. CGNU Life Assurance 2 Rougier Street 9,346,984

Limited York YO90 1UU

26. Commercial Union Life St Helen's 10,114,121

Assurance Company 1 Undershaft
Limited
London EC3P 3DQ

05250-80298/8093941.1 321
No Name of Claimant Registered Office / Number of Rights
Business Address Issue Shares Acquired
at £2.00

27. Aviva Investors Managed 1 Poultry AIMF acquired 12,598

Funds ICVC (an open shares on behalf of
London EC2R 8EJ
ended investment Diversified Strategy
company with variable Fund, an AIMF sub-fund
capital) (“AIMF”)

28. Aviva Investors 1 Poultry AIIF claims for a total of

Investment Funds ICVC 3,131,780 shares in
London EC2R 8EJ
(an open ended these proceedings.
investment company with These shares were
variable capital) (“AIIF”) acquired on behalf of its
following sub-funds in
the following amounts:

(1) Aviva Investors UK

Equity Income Fund:
921,614
(2) Aviva Investors UK
Index Tracking Fund:
1,892,736
(3) Aviva Investors
Stakeholder Savings
Fund (closed on 8 May
2009): 25,128
(3) Aviva Investors
Distribution Fund:
50,543
(4) Aviva Investors Blue
Chip Tracking Fund
(merged on 7 February
2014 into the Aviva
Investors UK Index
Tracking Fund, another
AIIF sub-fund, pursuant
to a scheme of
arrangement): 241,759

05250-80298/8093941.1 322
No Name of Claimant Registered Office / Number of Rights
Business Address Issue Shares Acquired
at £2.00

29. Aviva Investors Portfolio 1 Poultry AIPF claims for 147,211

Funds ICVC (an open shares in these
London EC2R 8EJ
ended investment proceedings on behalf
company with variable of the Aviva Investors
capital) (“AIPF”) Balanced Managed
Fund (an AIIF sub-fund
that was merged on 7
February 2014 into
Aviva Investors Multi-
Asset Fund III, an AIPF
sub-fund, pursuant to a
scheme of
arrangement)

30. Aviva Investors Funds 1 Poultry AIF acquired a total of

ICVC (an open ended 586,666 shares. AIF
London EC2R 8EJ
investment company with acquired these shares
variable capital) (“AIF”) on behalf of its following
sub-funds in the
following amounts:
(1) The Global Balanced
Income Fund: 429,611

(2) The Global Cautious

Income Fund: 143,000
(3) The Global Return
Fund (closed on 25 July
2012): 14,055

31. Universities Royal Liver Building 40,285,885

Superannuation Scheme Liverpool L3 1PY
Limited

Total QE Group Shares 665,430,752

05250-80298/8093941.1 323
 SCHEDULE 5

All Currency 1 to 8 day mismatch ratio with a 3% operational limit

Date of breach Ratio

26.3.08 3.09%

27.3.08 3.53%

2.4.08 3.12%

3.4.08 3.19%

USD 1 to 8 day mismatch ratio with a 3% operational limit

Date of breach Ratio

3.4.08 3.08%

9.4.08 3.42%

23.4.08 4.47%

30.4.08 4.87%

1.5.08 5.42%

7.5.08 3.95%

5.6.08 3.27%

12.6.08 3.13%

18.6.08 3.18%

Euro 1 to 8 day mismatch ratio with a 3% operational limit

Date of breach Ratio

27.2.08 3.04%

05250-80298/8093941.1 324
 5.3.08 3.11%

6.3.08 3.55%

All Currency 1 day to 1 month mismatch ratio with a 7% operational limit until 30
April 2008 when the limit was changed to 12%

Date of breach Ratio

5.3.08 7.74%

6.3.08 7.72%

12.3.08 8.00%

13.3.08 8.24%

18.3.08 7.46%

19.3.08 8.76%

26.3.08 8.61%

27.3.08 8.66%

2.4.08 8.56%

3.4.08 8.31%

9.4.08 8.41%

10.4.08 8.05%

16.4.08 8.76%

17.4.08 8.72%

23.4.08 8.02%

24.4.08 7.48%

30.4.08 13.32%

1.5.08 13.43%

6.5.08 13.32%

7.5.08 13.86%

05250-80298/8093941.1 325
 13.5.08 14.33%

14.5.08 12.24%

05250-80298/8093941.1 326