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CANNING or CANNED In its multi-billion pound dispute with Equitable Life, Ernst & Young’s hopes rest with Clare Canning, Barlow Lyde & Gilbert’s new head of commercial litigation. LB asks the £2.6bn question: can she save the auditors? ANTHONY NOTARAS
‘LET’S FACE IT, AUDITORS AREN’T exactly everybody’s cuddly best friends,’ confesses Clare Canning, pouring herself a second cup of coffee. As far as understatements go, this one’s straight from the top drawer. The number-crunchers are definitely going through a bit of a lean patch on the popularity front. The Enron-fuelled demise of Arthur Andersen certainly hasn’t helped, and since then most of the Big Four accountancy firms have been threatened with a string of potentially ruinous professional negligence claims. Despite the serious consequences these claims could have for the auditing profession – and the corporate world as a whole – schadenfreude rather than sympathy has been the overwhelming reaction from most quarters. ‘Nobody is falling over themselves to think fondly of them,’ adds Canning, Barlow Lyde & Gilbert’s new head of commercial litigation. She’s the exception – currently the best friend auditors anywhere could have. Ernst & Young is aware of this. When its UK partnership found itself facing a £2.6bn negligence claim from the beleaguered assurance society, Equitable Life, Canning was already marked out to lead the defence. The action is the largest of its kind to be issued on these shores; should it succeed, Ernst & Young UK will almost certainly follow Arthur Andersen up to the big, double-sided ledger in the sky. The fact that the suit covers the period before Ernst & Young converted to LLP status means that, should they lose, the firm’s partners will
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> find themselves personally liable for the costs. If ever a safe pair of hands was needed to defend such a claim, it is now.
DEFENDING ERNST & YOUNG: WHO’S WHO
Play it cool It is a fresh, wintry morning when Legal Business meets Canning at BLG’s Beaufort House headquarters out at the City’s limits. At the sharp end of four years advising Ernst & Young on the ramifications of the Equitable Life saga, and five months away from the trial’s start in April 2005, these are hectic, preparatory times for Canning and her 16-lawyer team. By rights she should be grouchy, curt and impatient – especially with journalists, many of whom have been unsympathetic to Ernst & Young’s 418 UK partners when covering the case. However, she is a beacon of calmness and good humour. Elegant and eloquent in equal manner, Canning takes a considered and analytical view of the coverage the case has so far received. Rather than criticise, she attempts to understand the negative coverage. Such measured sympathy is perhaps unsurprising considering she is a trained psychotherapist. But more of that later. ‘One of the problems with the case is that once you try to understand it, it is actually very complicated,’ she says. ‘If you are talking about soundbites or headlines, it is very difficult to encapsulate what is going on. It is difficult for journalists to quite understand the dynamics.’ With your correspondent suitably chastened, she carries on: ‘Post-Enron, the atmosphere has changed. So that adds a frisson to the reporting. If you think about the emotions behind the policyholder lobby, nobody is really interested in the merit. ‘What is important to bear in mind,’ she continues, ‘is that although the case makes
MATTHEW LAWSON BLG partners David Arthur, Neil Jamieson, Matthew Lawson and Simon Willis are all working with Clare Canning on the defence. Mark Hapgood QC of Brick Court Chambers will be their frontman when the trial starts in April.
MARK HAPGOOD QC
a lot of noise because of the emotions involved, it is not the first time. The Big Four are often slapped with potentially life-threatening claims.’ If anyone should know that, it’s Canning. Before becoming BLG’s head of commercial litigation in May, she headed up the firm’s market-leading Big Four practice. And since being seconded to Ernst & Young for two years in the mid-1990s, she
has established an extremely strong working relationship with the auditors. At 42, Canning’s relative youth belies a wealth of experience: she made partner at 30 and since then has successfully defended several equally high-profile matters. Most notably, she acted for Ernst & Young in 1995 when NRG failed in its £380m claim against the auditors, and then for PwC against Elton John towards the end of the 1990s. With such a track record, it is no surprise that Ernst & Young instructed Canning again.
EQUITABLE LIFE ASSURANCE SOCIETY V ERNST & YOUNG: TIMELINE TO TRIAL DECEMBER 2000 The initial instruction came from Ernst & Young in December 2000, not long after its client, Equitable Life, Britain’s oldest mutual assurance society, was forced by the House of Lords to pay its policyholders guaranteed annuity payments that it could no longer afford. Left with a £1.5bn black hole
in its accounts, Equitable Life had hoped to be bought out, possibly by the Prudential, but when this fell through the assurance society was forced to close to new business. Ernst & Young had an inkling it might be held to account for its role as auditor, which is why it instructed Canning and Barlow Lyde & Gilbert at such an early date.
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APRIL 2002 In April 2002, Equitable Life’s new board of directors, headed by chairman and former Macfarlanes senior partner Vanni Treves, and advised by Herbert Smith, finally presented the firm with a £2.6bn damages claim for negligence on its audit for the financial years 1997, 1998 and 1999. The suit
included a loss of sale claim and a bonus claim. Parallel High Court claims were also launched against Equitable Life’s former executive and non-executive directors.
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Political and misconceived In discussing the case, it is clear that Canning cares deeply about the plight of Ernst & Young and the auditing profession as a whole. This is more than just a high-profile instruction from a lucrative client. ‘I don’t see why auditors should be treated differently from other professionals,’ she says. ‘If you look at a case like Equitable, the idea that every conceivable loss should ultimately be picked up by the auditor is absolute nonsense. I mean, why would you want to be an auditor? It’s mad. The last thing we want is public auditing if they all decide to pack it in. ‘There is a belief that if you put a big enough number on it and you scare the target, one way or another you’ll get hold of their insurance funds,’ she adds. ‘I think there is a belief that the Big Four will run scared, and actually you just have to look at the evidence to see that they don’t.’ As for the actual merits of her client’s case, Canning is equally forthright. She insists that the allegations of wrongdoing against Ernst & Young are unfounded. ‘The central allegation is that for 1997, 1998 and 1999, the provisions in the accounts for guaranteed annuities were wrong,’ she says. ‘We say that they weren’t. Pretty basic stuff. ‘Even if you assume negligence for the purposes of the argument, this case doesn’t work. I don’t know any lawyer out there who doesn’t see the fundamental difficulties with Equitable’s case, not to put too fine a point on it.’ Canning has assembled a crack team to defend the claim: Simon Willis, Matthew Lawson, Neil Jamieson and David Arthur are the key BLG partners (although Arthur is set to retire next year). Mark Hapgood QC of Brick Court Chambers is lead counsel.
FEBRUARY 2003 Ernst & Young successfully struck out the £2.6bn claim at first instance, only for it to be reinstated by the Court of Appeal in July 2003.
The team remains extremely confident about its chances. As Hapgood points out: ‘If you feel you are right, it makes life a lot easier. Ernst & Young are very confident of winning the case and I’m quite sure they will have a long and successful future.’
including lead partner Charles Plant, refused to comment. But with Plant and Iain Milligan QC of 20 Essex Street on side, the stage has been set for what will surely be a classic legal dust-up. A spokesman for Equitable Life sums up: ‘We have a strong case and we will pursue it in the interests of the policyholders.’ Another source at Equitable Life added: ‘Last year Ernst & Young tried to get the case struck out and failed. We’ll fight the case in the court, not in the media.’
‘The idea that every conceivable loss should ultimately be picked up by the auditor is absolute nonsense.’ Clare Canning Hapgood is not backwards in coming forwards when it comes to assessing the case. ‘Our team feels that the society is slightly burying its head in the sand,’ he says. ‘Whatever Ernst & Young said, the [former Equitable Life] directors wouldn’t have changed their course. To my mind this is one of the weakest big claims ever brought and I think it will fall flat on its face. It is a highly political action. The directors who took over wanted to be seen to be doing something. It is a misconceived action.’ Equitable Life and its lawyers, Herbert Smith,
SEPTEMBER 2004 The accounting profession’s joint disciplinary scheme announces that Ernst & Young will have to face charges relating to its audit of Equitable Life. Ernst & Young fails to strike out Equitable Life’s expert witness.
Hapgood QC and Canning go back a long way, having acted together on both the NRG case and the PwC/Elton John dispute. Few people know her better than he does, and he is unsurprisingly effusive in his praise for her. ‘Her temperament for big cases is excellent,’ he enthuses. When LB meets her, she is remarkably unfazed by the prospect of leading one of the most high-profile disputes to hit the courts for some time. This goes some way to confirming her colleague Simon Willis’ view that ‘she is extremely unflappable and relaxed’, although he hastens to add that she is equally ‘tough and uncompromising when it comes to litigation. She is anything but a soft touch’. Elton John’s former manager, John Reid, who met Canning when he was PwC’s star witness in the Elton John trial, is in no doubt about her personal qualities. ‘She was a bit imposing when I first met her,’ he recounts. ‘She is a very clear thinker and, when she needs to be, quite aggressive. She also had the stamina to run a long case.’
APRIL 2005 Trial set to start. The judge has not yet been chosen, but Langley J, who covered the preliminary hearings, is a safe bet for the job. It is likely to run for six months, possibly longer. By the end of the trial and the joint disciplinary scheme hearings, E&Y’s legal fees could be more than £8m.
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Reid and Canning have since become extremely close friends, regularly holidaying together – Italy earlier this year and Sydney this Christmas. Before the trial, Reid had been fired as Elton John’s manager, to be replaced by Frank Presland (Eversheds’ former senior partner, no less). At the time he was understandably reticent to find himself immersed in such a high-profile trial. ‘Because of my long relationship with Elton John, to the outside world it looked as though he had sued me, which he hadn’t,’ says Reid. ‘I didn’t really want to be a part of that for as long as it took, as it was all a bit messy breaking that relationship up, but [Clare] kind of steadied me. ‘It was such a long, drawn-out process and I really just wanted to be rid of it. Clare kept me on course.’ Canning’s success in the past is unquestioned. Julian Randall, overall head of BLG’s litigation department (who also keeps an eye on the insurance and reinsurance side of things), thinks this may be down to her fresh approach, which differs from that of her male peers. ‘I watch in bemusement,’ he admits. ‘Clare comes slightly from the leftfield, and it seems to work. There are modes of behaviour that competitive males have, and she cuts through that.’ If her methods are unorthodox, BLG doesn’t care. This was recognised when she was appointed head of commercial litigation, where her remit will be to spread the gospel that BLG is much more than simply an
‘There is a belief that the Big Four will run scared, and actually you just have to look at the evidence to see that they don’t.’ Clare Canning insurance litigation firm, a perception that Canning and many of her colleagues find particularly grating. ‘A lot of this has to do with history,’ says Randall. ‘What we’ve realised is that we have an extraordinarily low profile in commercial litigation, when we do the same as others really. We’re missing a trick, so we felt that someone with Clare’s sort of energy would add to our brand.’ Energy is indeed something that Canning has in spades. Not content with heading Ernst & Young’s defence team against Equitable Life, she also moonlights as a psychotherapist. Having started training in 1993 (a year after she was made up to partner) she qualified two years ago and now takes Fridays off from practising the law to see her patients in her Clapham home. ‘Clare’s set-up is unusual, in that it isn’t for childcare, but for something outside the law,’ says
CANNING ON CANNING Age: 42 Birthday: Valentine’s Day Lives and practises pyschotherapy in: Clapham Favourite book: La Porte Étroite, André Gide Favourite movie:The Go-Between Favourite Elton John song: Sorry Seems to be the Hardest Word Top holiday: Thailand Favourite restaurant: Nobu Fictional character you relate to most closely? Elizabeth Bennet, Pride and Prejudice
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BLG senior partner Richard Dedman of her four-day week. ‘It’s not common, but Clare’s not common either. One tries to accommodate partners. If it didn’t work then she wouldn’t do it, but she makes it work.’ Juggling the two careers is certainly an admirable feat. ‘The idea of doing both is that I get a great mix,’ Canning says. ‘Maybe I would have changed what I did completely had I not found a way to do something a bit different. ‘Also, if you are a heavyweight litigator, you need to keep a bit of a check on yourself. You are constantly going into battle on other people’s behalf, and it is easy to say that I am going to be very aggressive as my main mode in life. ‘Psychotherapy enables me to have something that requires me to be really different. For me it is a great balance.’ While Canning talks openly about it now, her dual life as an analyst was something that she previously kept under her hat. ‘I thought, “people will think I’m bonkers”. They probably think that anyway!’ she jokes, displaying her lack of self-importance – a rare trait among lawyers. For those who have worked with her or instructed her in the past, it is this and her sense of humour that really make her stand out. Hapgood fondly remembers a moment during the Elton John trial, when Canning promised him £5 for every time he could fit an Elton John song into his summation. In the end he forgot, but she still gave him a fiver for unwittingly getting in the song Man. Alas, the Equitable Life trial will probably be less fertile ground for Canning and Hapgood to shoehorn in any more of the Rocket Man’s showstoppers, but the Ernst & Young partners won’t mind. Victory is all they need to prevent a Big Four, that was a Big Five, becoming a Big Three. If she fails, the psychotherapy queue could end up running round the block in Clapham. LB firstname.lastname@example.org