Investec wins £6.3m bonus court battle against ex-structured product heads

The architects of Investec’s structured products business have failed in their attempt to sue the investment bank for £6.3m in disputed bonuses.

Former Investec head of equity derivatives Andrew Brogden and deputy head Robert Reid were headhunted from Abbey National to set up a structured products desk in 2007, tasked with the design and creation of the products.

Brogden’s base salary was £120,000 and he got a guaranteed £6.2m bonus as long as he did not quit in his first year. Reid’s first year guaranteed bonus was £3.2m.

In the second year, a bonus pool for the entire structured equity derivatives team was created, linked to 40 per cent of economic value added (EVA).

Thereafter the pool would be 30 per cent of the team’s EVA. 

In 2008-09 and 2009-10 – the variable bonus years – the bank and derivatives team disagreed on how much bonus was owed, however both times it was resolved amicably.

The following year, Investec believed the team should not get a bonus as it had lost money.

The derivatives desk disagreed, saying they were due a pool of £8m. Investec paid Brogden and Reid £150,000 and £100,000 respectively while reiterating that it believed the pair, and the team, were not due any bonus.

Brogden and Reid resigned soon after.

First entered in September 2012, the former derivatives desk heads sought damages through breach of contract through the High Court. Brogden sought £3.6m and Reid £2.7m.

Justice George Leggatt said while he was impressed by Brogden and Reid, and understood their sincere belief that they created a broadly profitable business for Investec and deserved a fair share of the profits, he did not accept their argument.

“It is clear that they have in the past been very successful in their line of business and I do not doubt that they will succeed again,” he explained.

However, while they felt they were treated unfairly by the bank, this is dependant on perspective, he added.

“Mr Brogden and Mr Reid believe that they developed a retail structured product business for Investec which, at least in a broad sense, generated economic value for the bank of which they should be given a share.

“If the lens is broadened further, I doubt there are many outside the world in which the claimants operate who would think that they were under-rewarded by Investec.

”The task of the court is not to adopt either of those perspectives but to judge what is fair simply in terms of adherence to contract.

Judged by that standard, I conclude that the claimants had no right to be paid any bonus for the 2010/2011 year and the claim therefore fails.”

Justice Leggatt says the litigation was “acrimonious” with both sides accusing the other of dishonesty and bad faith.

“The claimants’ pleaded case includes allegations that the Bank acted in bad faith and deliberately manipulated or adjusted the inputs to the EVA calculation in order to reduce the claimants’ bonuses,” he explained in court documents.

“For its part, the bank in its written opening submissions for the trial described the oral agreement alleged by the claimants as a dishonest fiction and accused them of making a ‘contrived and dishonest claim’.”

It was Investec’s second attempt at building such a desk, after an unsuccessful first attempt.

The dispute over performance of EVA for the derivatives team’s performance came from the internal interest charged on capital within the business and whether it should be set at the institutional rate the bank would borrow at.

Part of its profits came from the spread between the internal rate and the lower rate it offered structured product investors.

There was also elasticity on the provision needed for the “kick-out” function of the structured products.