Rangers have nothing to worry about

Rangers’ previous board, and its new owner, made much of the expert legal opinion they have received assuring them that they would win their appeal against the £24m underpayment, £12m interest, and £18m penalty assessments from HMRC.  For almost a year, Alastair Johnston deflected and denied, but beginning on 1 April of this year, he began to signal that things were less certain for Rangers.  Once Craig Whyte had secured funding for his takeover (from sources unknown), Johnston and other directors began to sound the alarm about the consequences of Rangers’ new owner being unable to pay these bills.  Craig Whyte’s retort, and only comment on the tax case, was to dismiss the possibility of losing the case based upon the legal advice received.

In a previous blog post, we discussed the source of Rangers’ original legal advice on Employee Benefit Trusts (EBTs), Paul Baxendale-Walker.  We showed that Mr. Baxendale-Walker is a colourful character who runs one of Britain’s largest pornography production firms.  More relevant is the fact that Baxendale-Walker has been struck off by The Law Society of England and Wales: he lost his ability to practice law related to malpractice involving a company that used one of Baxendale-Walker’s EBTs to loot its own pension fund.  (Baxendale-Walker gave a character reference to a bank for a “person” who did not in fact exist).

Mr. Baxendale-Walker is an ebullient chap and not someone to take such a professional insult lying down.  When you have one of the greatest legal minds in history, it would surely be a waste of your genius to allow lesser mortals to deprive the world of your brilliance.  So Baxendale-Walker launched his counter offensive.  He took The Law Society, Deloitte & Touche (the accounting firm), and several individuals who were involved in the case against him to court.  The outcome can be found here: http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWHC/QB/2011/998.html&query=Taylor&method=boolean

The link above provides more details than most would care to read, but the short version is that his claims were dismissed as being without foundation.  For those with an hour to spare, the link is worth a read.  It is like a plot from a bad spy novel.  The number of judges who seem to find that Baxendale-Walker’s statements lack credibility is quite remarkable.  In the face of rules that prevent lawyers from paying commissions to those to find clients for his EBT schemes, Paul Baxendale-Walker appears to have just formed a company that was held in trust, but acting on his behalf, to get around the restrictions.  The courts looked through this device and saw it for what it was: a sham.  Most bizarrely, Baxendale-Walker took to pretexting.  He pretended to be an HMRC investigator in emails and phone conversations with those who were ‘persecuting’ him to try to get them to make damaging admissions.  (According to the court papers, pretending to be a representative of HMRC is possibly a crime in itself).  A sound recording expert witness gave testimony that at least one of the conversations taped by Baxendale-Walker had been deliberately altered.  However, the important bit is the outcome.  Eight of the nine defendants sought to get a dismissal.  On reviewing the evidence in the case, The Honourable Mr Justice Supperstone found in their favour and dismissed the case against them on a number of grounds, but principally “The claims against each of these Defendants should be struck out on the basis that they have no real prospect of success”.

Rangers have never specified who is giving them this advice; that there is no risk of having to pay anything on the tax assessments.  While Baxendale-Walker’s co-author on a book on EBTs, Rangers’ own counsel in the current tribunal process, Andrew Thornhill QC is also known to be gregarious character never afflicted with self-doubt, Baxendale-Walker admitted last year (in an interview with Phil MacGiolla Bhain) that he had recently completed some work for Rangers.  (I hope that this was general consulting work and that he was not giving legal advice, as he is not authorised to do so).  It is just an educated guess, but I suspect that Baxendale-Walker will prove to be the “expert legal opinion” on which Rangers are using as the tissue behind which they can hide their admissions of the risks the club really faces.

Anyone taking the time to read the court papers in the Baxendale-Walker case will gain a detailed insight into precarious legal status of EBTs, the findings against those who have been blatantly misusing them, and the value to place on expressions of confidence from Paul Baxendale-Walker on a favourable outcome.

The deceptive Craig Whyte

“Deceptive”:  adjective   Giving an appearance or impression different from the true one; misleading.

Whyte has released a statement on the official Rangers website dismissing the calls for “vigilance” from outgoing directors as just sour grapes from men replaced for resisting change.  His statement includes the following:

“I believe most Rangers supporters understand that, as a result of the takeover, the Club’s debt to the Lloyds Banking Group has been cleared and I have repeatedly stated to the Board my intentions to invest in the team.”

This statement is nothing short of a clear attempt to mislead Rangers supporters.  It is a craftily worded statement (Hay McKerron must be exhausted) that amounts to an attempt to deceive his paying customers.  Craig Whyte does not say that Rangers FC’s debt has been reduced.  He did not say this because he cannot say this.  He cannot say this because it is not true.  As this blog has stated several times, the debt that Rangers owed Lloyds banking Group was purchased by Whyte’s Wavetower company (as it was then named) in a transaction that did not involve Rangers.  The purchase of MIH’s shares in Rangers FC by Whyte’s firm for a single pound was a separate transaction.  So Rangers do not owe Lloyds this money any more, but they owe the same amount to someone else: Whyte’s company.

Prove me wrong, Mr. Whyte.  Make a fool of me.  Discredit this blog by revealing the structure of Rangers’ debt today.  It is a plc and it does have 26,000 other shareholders who have a right to know the amount of indebtedness of the company they co-own with you.

The truth is that Rangers’ debt is about £28m (including negative working capital).  The takeover did not change Rangers debt, but Whyte is trying to imply otherwise.  Whyte is shaping up to make Sir David Murray look like a model of transparency and straight-talking.

Rangers supporters and journalists should note what Whyte did not mention.  Whyte ignored the “circular” that he is alleged to have promised to the Independent Board Committee (a sub-committee of the old Rangers board that reviewed the takeover proposal).  Alastair Johnston says that this was originally promised to be released on 16 May, but is now scheduled for 6 June.  This “circular” is supposed to reveal the how Whyte plans to fund Rangers going forward (the £25m investment promised).  Perhaps Whyte is just practicing ‘dignified silence’ on this subject?  Perhaps this is simply a subject that he does not want to discuss publicly in advance of a result in the tax case?

Whyte of the long knives

The news that Alastair Johnston and Paul Murray have been removed from the Rangers’ board, swiftly followed by reports that Martin Bain and Donald McIntyre have been suspended pending an inquiry into financial irregularities, is somehow still stunning despite its predictability.  What makes these events remarkable is the lack of decorum.  Whyte was always going to form his own board.  In fact, I have been surprised that he has waited this long.  (Some have suggested some legal i-dotting and t-crossing was required before Whyte could act).  However, following most takeovers, the changing of the guard usually proceeds without much of a fuss or fanfare.  The rules for how to remove board members varies from company to company, but the mechanics for a new owner to place his own directors on the board should be straightforward.  When you own 85% of the company, you can have the directors of your choice.  (Dave King’s board seat may be guaranteed by previous contracts related to his original investment).  It is the style of this “night of the long knives” that marks a stunning departure for Rangers (or at least a leap back to pre-David Murray times).

This blog has nodded and winked at the extent of wrong-doing by prominent members of the Rangers board.  I know for a fact that the actions of some board members would shock even those who has been following the financial fate of Rangers FC closely.  At some point this was always going to explode.   However, there are more questions than answers about Whyte’s motivations in acting now and in this manner.

Has Whyte had a sudden epiphany after getting access to the ‘real’ behind the scenes information? Contrary to popular myth ‘due diligence’ does not guarantee that a potential buyer gets access to all of the information he requests.  The seller always has the right to simply withhold any data of his choice.  The only obligation of the seller is to not tell outright lies about the prospects for the firm.

Alternatively, is this just a stage-managed event to portray the previous board as the villains who will be responsible for any failure to deliver on promises leaked to the media during the long takeover process?

Are Martin Bain and Donald McIntyre under investigation for EBT-related activities or is this a separate issue altogether?  I can say that the EBT-related activities of board members was not some rogue action secretly executed by one or two individuals.  To a fault, board members over-communicated what they were doing.  If today’s news is EBT-related, then I would be ready to declare these dramatic moves as a smokescreen to distract from other actions.  Every Rangers FC board member since 2001 will have been aware of the EBT.  I know of five who definitely had detailed involvement in its operation.  Two of these directors remain on the board.

We cannot ignore the fact that as executive directors, Bain and McIntyre will be on significant salaries and will likely have some job security through multi-year contracts.  Such contracts can only be terminated for ’cause’.  Such cause has to be very serious for terminations to be upheld, but if a case can be made that shows the executive to be untrustworthy, the terminations will stick.  This could all just simply be a pretext to fire two highly paid people without having to pay them for the remainder of their contracts.

The refusal of Alastair Johnston and Paul Murray to resign is a further sign of their deep misgivings about the new Rangers ownership.  That Johnston broke with the standard cover story about ‘confidence’ over the tax case to express concerns that Whyte had shown no proof of having the funds to pay such a bill would have made his removal inevitable.  That Paul Murray broke ranks to try to organise an alternative financing program to thwart Whyte’s advances will also have marked his cards.  However, this is just standard corporate politics and normally defeated directors in a hostile takeover fall on their swords. This is inevitable when 85% of the shares are held by one shareholder.  That both Johnston and Murray have tried to make as big of a splash on their departures as possible can be interpreted as a warning.  I am bound by a promise of confidentiality to a source of information, but I know that Johnston and Murray would have solid reasons (not tax case related) to want to send a warning to the Rangers support at-large.

It will be interesting to see how willing and/or able these four directors will be to speak to the media (old and new).  Even if gag-agreements are in place leaks happen in the normal course of events.  The challenge will be for the Scottish media to publish their comments.  Most Scottish media outlets will want to continue dining on the easy meals of succulent lamb fed from Ibrox.  Journalists whose salaries depend on getting their quota of transfer exclusives and interviews with players will fear retribution for printing anything not approved by the new politburo.  However, I suspect that Hay McKerron will be busier than they ever imagined in the coming weeks.

The Waiting Game

Another Scottish season has drawn to a close with Rangers FC taking the lion’s share of the spoils.  With the possibility of qualification for the UEFA Champions’ League and profits for the 3rd year running, it will have been a great financial year for the Ibrox club.  That 85% of the shares of such a business should be sold for just a touch more than a millionth of a penny each should not be forgotten. We are left to choose between the image of Sir David Murray as a benevolent team-player who made “yet another” generous gift to the club he loves or a man so gripped by fear for the consequences of his reckless illegality that he would give the club away to get off stage.  We are all free to make our own choice as to which we think is more likely.  However, those poor souls naive enough to believe that Murray bailed-out to help Rangers fly, at a price of £1 for control of Scotland’s “second-greatest institution” and at a time of strong profits, need to ask themselves: “Why did no one else want to buy Rangers’ shares at such a price?”

As an aside, let us also dispel the myth of David Murray as Rangers’ benefactor.  Of the £165m that Rangers lost under his stewardship, not a single net penny was contributed by Murray himself.  In fact, when we look at the net balance of related-party transactions between Rangers and Murray’s other companies, businesses from which he took personal cash dividends, it is clear that Murray removed cash from Rangers FC.  However, as much as it pains me to say it (as it is what he wants) Murray is yesterday’s man and no longer a moving part in the on-going saga of Rangers FC and their illegal tax schemes.  Given the loyalty of the Scottish media to Murray, he is unlikely to ever be blamed for anything that follows.

Next, let us just re-cap what we know to be the facts of this situation:

• Rangers are now owned by Craig Whyte’s newly formed “The Rangers FC Group Limited” (formerly Wavetower)
• Whyte’s company paid £1 for 85% of Rangers’ shares
• This same company purchased the debt owed by Rangers to Lloyds Banking Group
• Rangers’ debt has not changed as a result of this transaction
• The sale to Whyte’s venture has no direct effect the tax case
• I am still waiting for confirmation that the First Tier Tribunal completed on time

In a previous post, I covered Whyte’s “reluctance” to be questioned on either the tax case or the source of his funding. Until we know who has lent Whyte (a man of little legally traceable wealth) the £18m to purchase the debt from Lloyds, it is difficult to understand what the motivations of this transaction really are. Why has Whyte rushed in where other angels feared to tread? We will look at a few possible scenarios later this week.

However, before we look at these permutations, I would like to mention the rumour that was circulating this weekend: that Rangers have had a third offer to settle the tax bill rejected by HMRC. This time the offer is apparently for £23m.  I know nothing about this.  It is possibly true, but I have not heard anything either way.  (Previous offers of £4m and £10m have been rejected in the last year.  These offers were made by Rangers and were rejected by HMRC).  While this rumour is possibly true, a £23m settlement cost on top of the cost of acquiring the bank debt for £18m would put the cost of owning Rangers well beyond any financial logic. With a total invested capital of £41m and a minimum required return of approx. 9%, Rangers FC would have to be capable to returning an average of about £3.7m per year to its owners, and that is before a single additional penny is invested in the playing squad. If this rumour is true, it would rule out the idea that Whyte is a rational financial investor. We would have to look at other motivations for owning this football club.

It would not be unusual for new owners to seek to settle long-running tax disputes with HMRC.  If history is a guide, HMRC’s attitude has been to be flexible to new owners on interest and (even more so) on penalty payments where there is a willingness to pay the core tax bill in full.  Where a settlement offer requires time to pay, flexibility on historical interest would be harder to obtain, and interest would continue to accrue.   If the new owner was someone with a normal history with HMRC it would be easier to imagine that concessions might be made.  However, the new owner is Craig Whyte. (At least he is the public face of the new owner).  Craig Whyte is a name attached to numerous bulging files in the cabinets of HMRC (and possibly other government departments).   A frontman with a famously chequered past?  It would be surprising if HMRC would see any approach for a settlement as a chance to turn over a new leaf.

In coming posts, we will look at a matrix of motivations and outcomes for Whyte and the tax case.  Despite the efforts of his PR henchmen [google the following phrase: “A self-made businessman (he started an accountancy course but failed to complete it”)], the core facts of this situation have not changed.  The Scottish media remain a mixture of spineless cowards and craven paid-off lackies.  The tax case remains a threat to the existence of Rangers FC.  Until we know more about who has funded Whyte and what he expects to achieve, Rangers FC will remain an enigma wrapped in a riddle.

The Tribunal: Is it actually finished?

I have been operating under the assumption that the First Tier Tribunal dealing with determining the illegality of Rangers’ tax strategy for the last decade had finished on schedule on Friday the 6th of May.  However, I have yet to actually find any confirmation of this.

My sources of information for this issue and I had previously agreed, and are maintaining, a ‘zero contact’ policy  until the tribunal returns a result.  So my access to the case will be limited until then.   However, other lines of enquiry have also drawn a blank.  Rangers FC will not be interested in keeping their supporters informed on an issue of such negligible risk.  Additionally, I doubt that they will want to put this subject back on the radar for a news cycle by commenting.  Some journalists I am talking with have also been unable to confirm that the First Tier Tribunal finished on schedule.

“Absence of evidence is not evidence of absence”.  So it might be complete, but I just wanted to correct any impression I had given that it was.

In the event that it is not complete, the inquest will doubtless begin in the vacuum with all of us who follow this subject reading the entrails of the beast to divine meaning where none may exist.  If you want to believe that Rangers will not face an unpayable bill, this would be a sign that HMRC’s case cannot be that good.  If you want this to be the execution order for the club that started in Flesher’s Haugh in 1872, you would see further delay as an indicator of the vast mountains of evidence against Rangers.  In truth a further delay would probably signal neither.

In a case involving £48m of transactions from Rangers FC (and a further £2m from MIH) and an average “loan” transaction of £50,000, there would be at least 1,000 transactions that would have to be dissected in detail for the judges.  This would involve tracking the disbursement of funds to an employee from the EBT.  Each payment must have a corresponding loan request (with multiple extension documents).  HMRC will be trying to match loan requests to player contracts: either on a one-to-one correspondence or where aggregate amounts due to players match aggregate amounts paid through the EBT + legally paid emoluments (salary and contractual bonus).  Any other documents relating to these payments that may exist would also be presented.  In summary, it is quite an onerous task given the amount of money and the number of transactions involved.

If Andrew Thornton QC is under instruction to slow things down, it would be a trivial task to do so.  Questioning the admissibility of each piece of paper or verification of the authenticity and data integrity of the information on each sheet of paper could really slow progress down.  Even if not deliberately trying to slow the process, but just doing his job to try to limit the damage by getting anything he can excluded would also have a retarding effect on progress.

If the submission of evidence and cross-examination was not completed last Friday, it could mean a further six months until the tribunal can reconvene.  At this stage, no one wants an answer to this saga one way or the other more than I do.  I sincerely hope that the tribunal is moving towards a finding right now.  However, it suddenly struck me that I have no independent basis for believing that it is.  I just wanted to keep you all up to date and as well informed as I can.