RBS Loses London Bid to Block $100 Million U.S. CDO Lawsuit

Royal Bank of Scotland Group Plc lost its bid to block Highland Capital Management LP from suing it in Texas for fraud and unjust enrichment in the collapse of a collateralized-debt obligation, a London judge ruled.

Highland is seeking $100 million from RBS over the 2008 termination of its CDO and the seizure of underlying assets, which happened at the height of the debt crisis following the bankruptcy of Lehman Brothers Holdings Inc.

While Judge Michael Burton ruled in 2010 that RBS’s decision to terminate the deal was lawful because “the autumn 2008 financial crash ended any chance of public interest in such securities,” he refused to grant an injunction stopping the Texas proceedings.

In saying that Highland, based in Dallas, could continue to pursue RBS in Texas, Burton criticized RBS and one of its key witnesses, Sam Griffiths, for “improper conduct” during the proceedings. Griffiths, a managing director at the bank, “lied” about the transfer of loans from RBS’s trading book to its banking book, Burton said in a written judgment.

Griffiths didn’t respond to an e-mail or phone call to his office seeking comment.

“While the judge did not award an injunction, he found that RBS had a strong case to advance to the Texas court for the dismissal of Highland’s claims,” RBS said in an e-mailed statement.

Highland spokesman Stefan Prelog declined to comment.

‘Sham Auction’

Highland claims Edinburgh-based RBS held a “sham auction” to ensure it could get the loans at “bargain basement prices” and make a profit, according to court papers in the Texas suit. The firm, founded by James Dondero and Mark Okada in 1993, manages about $23 billion in assets, chiefly in credit markets.

During the London trial, witnesses including RBS’ former head of credit trading Stewart Booth told how the lender in 2008 used an accounting provision to reclassify loans and yield a windfall of about 1.2 billion pounds.

Judge Burton said the so-called IAS/39 accounting move “and the opportunity for massive profit resulting from it was a crucial event for RBS.” In his judgment, he cited an e-mail sent by Griffiths to a colleague at the time saying: “Awesome ... we are making the bank rich.”

The judge also today dismissed Highland’s application to overturn the 2010 decision. He awarded RBS 19 million pounds in that decision because the assets seized from Highland didn’t cover the bank’s loan to purchase them.

“The judge confirmed today he was correct in 2010 to decide that Highland owes RBS approximately 21 million euros,” RBS said in the statement.

To contact the reporter on this story: Kit Chellel in London at cchellel@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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