Bloomberg News

RBS Seeks to Block $100 Million Highland Suit on Failed CDO

January 24, 2012

(Updates with RBS trader in seventh paragraph.)

Jan. 24 (Bloomberg) -- Royal Bank of Scotland Group Plc asked a U.K. judge to block a $100 million lawsuit filed by Highland Capital Management LP in Texas that accuses the lender of fraud and unjust enrichment over a failed collateralized-debt obligation.

“What we have here are English proceedings” that have been running “for nearly three years,” John Nicholls, the attorney for the lender majority-owned by the British government, said in a London court today. The bank wants the court to block Highland from suing in Texas.

The hedge-fund firm claims that at the height of the credit market freeze that resulted from the bankruptcy of Lehman Brothers Holdings Inc., RBS used an accounting provision to terminate the Highland CDO and seize its underlying loans, according to court papers related to the Texas claim. In November 2008, Edinburgh-based RBS held a “sham auction” to ensure it could get the loans at “bargain basement prices” and make a profit, the fund claimed.

Highland Capital has been sued by UBS AG, a Houston municipal-pension fund and rap artist Jay-Z over debt deals that went bad. The Dallas-based firm, founded by James Dondero and Mark Okada in 1993, manages about $23 billion in assets, chiefly in credit markets.

“This went right to the top of RBS,” Highland’s lawyer Stephen Auld said at a pretrial hearing in London on Jan. 11.

‘Take Advantage’

Nicholls told the court RBS “was perfectly entitled to take advantage” of the accounting provision that allowed it to reclassify the loans during the financial crisis. The move yielded a windfall of 1.2 billion pounds ($1.9 billion) between July and September 2008, although only about 9 million pounds came from the Highland deal, Nicholls said.

Stewart Booth, the former global head of credit trading at RBS, who left in 2009, was called as a witness. He denied there was a direct link between the termination of the CDO and the subsequent reclassification of the loans using the so-called IAS 39 accounting measure.

“We had the opportunity to reclassify assets, including warehoused assets, onto the banking book,” he said. IAS 39 allowed banks to reclassify trading assets, which had lost value during the crisis, as long-term investments so they appeared more valuable.

A U.K. judge ordered Highland to pay RBS 19 million pounds in December 2010 over the CDO’s collapse. RBS said the value of the assets it seized didn’t cover the loan it made to Highland to buy them.

Judge Michael Burton, who is overseeing the London trial, earlier ruled the bank’s termination of the deal was lawful because “the autumn 2008 financial crash ended any chance of public interest in such securities,” he said in his judgment.

--Editors: Christopher Scinta, Peter Chapman

To contact the reporter on this story: Kit Chellel in London at

To contact the editor responsible for this story: Anthony Aarons at

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