The Co-op Bank is considering suing the investment bank JP Morgan Cazenove and its former auditor KPMG for their role in blessing the lender’s disastrous 2009 merger with the Britannia building society. JP Morgan Cazenove advised on the merger, which ultimately blew a vast hole in the balance sheet of the Manchester-based Co-op Bank, and KPMG performed due diligence.
The Independent understands that the Co-op Bank has also not ruled out suing the former head of Britannia Neville Richardson and the former Co-op Group boss Peter Marks, who were both instrumental in the merger. “It’s a fiduciary duty [for the board] to pursue these things,” one source close to the bank said.
Sir Christopher Kelly’s landmark report into the debacle yesterday noted that KMPG’s analysis of Britannia’s commercial loan portfolio identified “no substantial arrears or impairment” and found the acquired society’s assets to be “high quality”. In fact, the loans turned out to be, in the words of the report, “toxic”.
Sir Christopher also reported that JP Morgan Cazenove had described the commercial logic of the merger as “compelling”. Furthermore, the investment bank apparently vouched for the thoroughness of KPMG’s audit, telling the Co-op Bank board that the due diligence on the Britannia deal had “exceeded that normally undertaken for listed companies”.
The Kelly report, which was commissioned jointly by the Co-op Bank and its former parent company the Co-op Group last July, said it was “not easy to understand” how JP Morgan Cazenove came to this view, adding that the investment bank had done no detailed review of KMPG’s due diligence itself.
The report was also highly critical of Mr Marks, who stepped down as chief executive of the Co-op Group last year. It says his lack of banking experience and his commitment to the Britannia merger made for a “dangerous combination”. The report also says there was “overwhelming” evidence that the Co-op was in a poor state when Mr Richardson stepped down as chief executive of the merged organisation in 2011.
The decision on whether to take legal action against KPMG and JP Morgan Cazenove will depend on the conclusions of various other official investigations into the merger and no decision is expected to be taken within the next six months.
Earlier this year the Financial Reporting Council launched an inquiry into KPMG’s audits of Co-op Bank statements.
Sources close to the Co-op Bank last night also said the decision on whether to sue Mr Marks and Mr Richardson will depend on the costs of legal action and the likely scale of any compensation. In a statement yesterday in response to the Kelly report the Co-op Bank board said it would “consider what action it should take, after taking appropriate professional advice”.
The Co-op Bank yesterday dropped KPMG as its auditor, ending a 40-year relationship. A spokesman for the accountancy firm said last night: “If any legal action is undertaken, we will defend our work robustly.”