Bank wakes up from its five-year nightmare: Gail Counsell recalls the investigations and abortive court case that led to publication of yesterday's report

PUBLICATION of the second report into the Blue Arrow scandal marks the end of a five-year nightmare for National Westminster Bank.

In August 1987 County NatWest, the bank's merchant banking subsidiary, underwrote a record pounds 837m rights issue by Tony Berry's fast-growing Blue Arrow employment agency. The money was needed to fund the purchase of Manpower, a much larger American company.

In an effort to conceal the fact that the issue had flopped - only 38 per cent of the rights were taken up - County and Blue Arrow's brokers, UBS Phillips & Drew, concealed their own holdings of shares in the company and claimed a 48.9 per cent take-up.

The resulting scandal led the Department of Trade and Industry to appoint inspectors to investigate the affair and the subsequent prosecution of three companies and seven individuals by the Serious Fraud Office.

The resulting case, which ran for more than a year and cost pounds 35m, was widely held to be a disaster for the SFO. First the jury was instructed to acquit two individuals and the three companies involved, then the conviction of four other individuals - one had been acquitted - was overturned on appeal. As a result a planned second case against four further defendants was dropped.

During the trial claims were made that National Westminster directors, especially Tom Frost, then chief executive of the bank, had distorted information and concealed it from the original DTI inspectors.

At NatWest's request the DTI appointed the original inspectors together with Victor Temple, a senior prosecuting counsel at the Old Bailey.

Their report, published yesterday, completely exonerates Mr Frost, although it does criticise the standard of the internal investigation carried out by the bank. Its principal conclusions are:

Senior officers of National Westminster Bank did not deliberately withhold from the CNW inspectors relevant information and documentation.

There is no substance in other allegations of dishonesty and impropriety by senior officers of National Westminster Bank.

There was no conspiracy by senior National Westminster officers to conceal relevant information and documentation from the inspectors or from the court.

There is no substance in the allegation that National Westminster and the Bank of England were parties to a conspiracy to mislead the DTI . . . At no stage did the Bank of England obstruct or impede the DTI's investigations.

The outcome of the internal investigations conducted by National Westminster Bank in early 1988 into the Blue Arrow transaction was highly unsatisfactory. However, the report, submitted to the DTI in May 1988, was the product of inefficiency and inexperience. It was not the product of dishonesty.

The involvement of National Westminster Bank Group in the Blue Arrow affair was a disaster. It led to the resignation of senior officers and cost the group more than pounds 123m.