Deloitte and FRC fire opening salvoes in MG Rover tribunal

AN EPIC BATTLE has erupted between the profession’s watchdog and Deloitte over the Big Four firm’s role in advising the owners of MG Rover in 2000 over two transactions.

Deloitte and the FRC have fired off their opening salvoes in a tribunal hearing examining advice Deloitte provided to a quartet of businessmen who led the purchase of MG Rover from BMW prior to its collapse.

Deloitte and corporate finance partner Maghsoud Einollahi gave corporate finance advice to the four businessmen, known as the Phoenix Four, as well as working with the car maker as its auditor. The FRC’s disciplinary arm alleges that Deloitte and Einollahi failed to adequately consider the public interest and to mitigate risks of conflicts.

Where it all began

BMW sold MG Rover Group Limited (MGRG) in May 2000 to Techtronic for £10 with BMW additionally providing a £427m dowry, essentially a long term interest free loan. BMW also paid £75m in lieu of providing warranties. The Phoenix Four – John Towers, Nick Stephenson, John Edwards and Peter Beale – each owned and invested £60,000 in Techtronic.

In public the Phoenix Four made statements that their stewardship of the group would be for the public good. Later Phoenix Venture Holdings, the consortium formed by the four businessmen, acquired all the shares of Techtronic which ultimately became the parent company of MGRG.

Additionally, although BMW did not charge interest on its loan to Techtronic (now Phoenix Venture Holdings) MG Rover was charged interest by Phoenix and a dividend of £9.8m was declared payable to Phoenix.

MG Rover entered administration on 8 April 2005 with estimated losses of nearly £1bn and about 6,500 staff redundancies, however, during the start of the tribunal the FRC claimed this figure could be higher.

Platinum Aircraft

The FRC’s tribunal is centred on two particular transactions, Project Platinum and Project Aircraft. The FRC argues that in both transactions the Phoenix Four were given an opportunity to make money for themselves at the expense of MG Rover.

Project Platinum related to the purchase of BMW’s loan book or amounts due to MG Rover under existing finance contracts from customers who had bought vehicles. BMW originally planned to sell the loan book directly to MG Rover – which had £41m in an account as collateral. The Phoenix Four instead bought the loan book and sought to keep the profits for themselves.

The Project Aircraft scheme was designed to generate returns on tax losses incurred by MG Rover, which could be offset against profits made elsewhere in the company. The Phoenix Four used the tax losses from MG Rover for their own company in which MG Rover had no interest.

Arguments

First and foremost on the two organisations’ agenda is the length of time it has taken for the dispute to be brought to Tribunal. Next month, it will be eight years since the car manufacturer collapsed. The Deloitte & Touche partnership no longer exists and Einollahi has now retired.

The Executive Counsel representing the FRC gave a brief outline of the timeline. The inspectors’ enquiry was published in September 2009, there was also a forensic report conducted by Grant Thornton, the Executive Counsel filed a draft complaint in September 2010; this was answered by Deloitte and Einollahi in March 2011. The Executive Counsel then reviewed the allegations which were again filed in January 2012.

The FRC complaint is that Deloitte and corporate finance partner Einollahi failed to inform the directors of MG Rover there were conflicts of interest issues in the Platinum and Aircraft deals and it was the responsibility of the directors to seek independent corporate finance advice.

The watchdog has accused Deloitte and Einollahi of failing to consider the public interest and make clear they didn’t represent MG Rover but only the Phoneix four when advising on the two transactions – among other accusations.

Deloitte hit back against the public interest accusation claiming that it is the duty of an accountant acting as a corporate finance or tax adviser to act in the best interests of his or her client. Also it was “repeatedly made clear in meetings to the MG Rover directors they would need independent advice”.

“Separate teams of lawyers were duly instructed, Eversheds took on the responsibility for advising MGRG [MG Rover}, including the propriety of the transaction,” Deloitte’s opening statement said.

“Deloitte were told that Eversheds would take on this responsibility.”

The firm also claims that MG Rover’s company secretary Ms Ruston, who refused to give evidence at the Tribunal, was “well informed” of the firm’s role and appears to have failed to pass that information onto the Rover directors, and that Eversheds’ solicitor Ms Lewis, who also declined to assist the Tribunal, was responsible for ensuring MG Rover directors received independent advice.

It was mentioned that Deloitte received fees of more than £8.9m for its work in the transaction, however, the firm argued it is not up to the FRC to set fee standards or to form an opinion on how much firms charge for services.

Deloitte claims that the Executive Counsel must show that no other “reasonable professional or firm would have acted” as they did in these two transactions.

The case continues and a decision on whether Deloitte and Einollahi will be reprimanded is expected at the end of the month.