The Treasury asked the Serious Fraud Office yesterday to look at possible criminal activity in the downfall of Equitable Life in the light of findings it has seen in the not-yet-published Penrose report.
"The SFO is now studying the report to identify if there is sufficient grounds for a full investigation," an SFO spokesman said after Ruth Kelly, the financial secretary to the Treasury, handed over parts of the 818-page report to the UK's leading prosecutor of financial fraud. She said she wants the SFO to "consider a number of issues" it raises.
Should the SFO decide to investigate fully, the spotlight is likely to fall on former directors of the company. The Financial Services Authority is looking into the actions of Chris Headdon, former chief executive of the society, in connection with a £700m reinsurance treaty that was key to avoiding collapse of the society.
A secret letter written by Mr Headdon putting a cap on how much could be claimed from this reinsurance treaty was uncovered in 2001, and had not been disclosed to regulators. The FSA said those inquiries were still ongoing.
The SFO may also have been asked to consider whether former management knowingly enticed customers to invest in Equitable with promises that it could not afford to meet.
The new board of Equitable Life is in the midst of suing its former directors and auditors. The former directors, including Alan Nash, Chris Headdon and Roy Ranson, are facing a £3.2bn claim. Ernst & Young, former auditor of Equitable, is being sued for £2.6bn. "But in the legal investigations the current board has undertaken, it has found no evidence of fraud that could lead to a sustainable case," a spokesman for Equitable said.
The dramatic involvement of the SFO comes on the brink of the publication of the Penrose report. Lord Penrose has been investigating the events that led up to the society's financial difficulties since August 2001. His investigation has been beset by delays, but had been expected in February.
Ms Kelly repeated that it was her intention to publish the Penrose report in full as soon as possible. But some believe yesterday's move was a stalling tactic by the Treasury to avoid heavy criticism of its own actions in the affair. "This does come across as a smokescreen. It resets the agenda on to fraud and the former management, rather than Government failings. Parts of the report are now bound not to be published for some time," an industry source said.
The Treasury received the Penrose report on 23 December. It and the Department of Trade and Industry are believed to be exposed for failing to spot the dwindling reserves at the society over a number of years.
MPs demanded yesterday that the SFO look at the matter with urgency. Andrew Tyrie, the Conservative MP and member of the Treasury Select Committee, said: "Regardless of whether there has been fraud, the Government should provide compensation if Lord Penrose finds that regulators have failed policyholders and annuitants."
Vincent Cable MP, Liberal Democrat economic spokesman, said news that the SFO is involved would give hope to 800,000 Equitable policyholders. "This now greatly raises the stakes. Until now the common assumption has been that Equitable Life's problems were as a result of financial mismanagement and regulatory incompetence. If the SFO finds otherwise, Equitable policyholders should be entitled to compensation," he said.
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