The Fraud Board

The Fraud Board

Commentary on current cases, news stories and legal developments in international business crime and regulation

McGuireWoods’ London Government, Regulatory and Criminal Investigations Group
Enforcement, FCA enforcement, Financial Conduct Authority, Fraud, Serious Fraud Office, Uncategorized

FCA Enforcement Performance: Part 2 – The Forex Effect

Only a couple of weeks ago I was commenting on a NERA report that had found that in the period between April 2012 and October 2014 the FCA had imposed fines of over £1bn, in sharp contrast to the preceding decade during which a paltry £320m had been levied.

Now, on 12 November 2014, the FCA has set another UK record: in one day it has exceeded the previous 30 month record, by fining 5 banks, Citibank, HSBC, JPMorgan Chase, RBS and UBS for gross and persistent misconduct in their Forex trading rooms more than £200m each, totaling £1,114,918,000.  Other banks, including Lloyds and Barclays, have yet to reach a settlement of the FCA claims, and therefore the final tally is likely to exceed £1.5bn.  While this pales into insignificance compared with the $56.5bn penalties imposed by US regulators, it marks a step change in attitude.  

Citibank, JPMC and UBS have also faced huge fines from their home regulators, including the CFTC and Finma.  Other regulators, including the infamous Department of Financial Services and the EU, are carving out their own settlements, and there is much more pain to come.

The FCA’s current slice of the action is, nevertheless, sizeable, and since the fines go to the Exchequer, the Chancellor may be thinking that the recent surprise £1.7bn levy from Brussels is not looking quite so problematic, but that ignoble thought apart, what is the point of such massive fines?

Fines imposed by the financial regulator on firms are designed to punish, to deter, and to express public outrage.  The size of the fines perhaps reflects a need to punish more harshly than before, because it is clear that the banks were not deterred from continuing the kind of bad behavior they had indulged in over Libor.  Knowing that such misconduct had been uncovered and was in the process of being punished, some major banks continued with Forex mismanagement for many months, only finally stopping in October 2013. 

The concept of punishing a business is slightly artificial, and the problem with imposing a fine is that those who feel the effects may include the shareholders and the employees, who are innocent of wrong-doing.  As it happens, the banks’ share prices were not greatly affected by the news of the fines, but the impact may be longer term, perpetuating the losses made since the global financial crisis and leading to further shareholder pain.  Shareholders can, of course, seek to ensure that the firm is deterred from misbehaving again by exerting pressure on the Board, and in any event are not, according to some, to be much pitied as they enjoyed the profits of the boom years during which so much misconduct boosted profits. 

The public may feel that some sort of justice has been done, although they will also want to ask, as happened in the Libor investigations, whether the individuals within the banks who cooked up the deception are going to be called to account.  Many headlines since the fines were imposed quote politicians and others calling for prison for the wrong-doers, and they are asking why management did not step in.  And if so, how far up the executive ladder are the guilty parties going to be found?  

The traders who developed stratagem to fix the market in their favour can be relatively easily identified, and therefore prosecuted (although that process is unlikely to be simple in spite of the childish bragging in on-line banter already uncovered by investigators).  But did their line managers know about this, and who at board level was responsible for ensuring that the traders were behaving honestly and ethically?  What was the tone at the top?  Did senior management, in the wake of the Libor scandals, take the time to check out conduct in similar markets? The Serious Fraud Office is already looking at all this, and while considering whether criminal charges should be brought in relation to Forex in much the same way as charges have been brought for Libor rate fixing, they will be carefully considering line responsibility.

The timing of the publication of the Final Notices consequent on the settlements reached with the banks is interesting.  This has been achieved with commendable speed, given the significant hurdles that FCA Enforcement will have had to get over.  Some have complained that the FCA must have cut corners and wrapped up the deals ‘on the hoof’, but by any standards, this is an impressive performance.  It may, of course, be the case that the banks, still reeling from Libor, just wanted to get the bad news out of the way at the earliest opportunity, and to move on, and were therefore eager to settle.  It may also be that the investigation teams will have learned lessons from Libor that enabled them to proceed more efficiently. In addition, the banks themselves were forced to undertake much of the investigating work, thus reducing the FCA’s burden.  But as Tracey McDermott, FCA Director of Enforcement pointed out, even with the bank’s help it took her team 45 man years to get the case to this stage, and the outcome is surely one the FCA can be hugely proud of.

One subject on which there may have been discussion is the extent to which the final results of the Enforcement investigations into the failings by the banks could be published in advance of any criminal action.  There must have been a risk that the SFO would insist that any such publication might prejudice a criminal trial.  However, since no criminal proceedings are yet before the courts, it could be argued that there was nothing to prevent publication. While, therefore, the FCA will be as keen as anyone to ensure that there is no possible prejudice to any criminal process, the regulator will have wanted to perform its duties to the market, and get its message across, at the earliest opportunity.  The FCA is very keen to show that it has got a grip on banking misconduct, and that the UK banking market is moving on from the mistakes of the past.  Any delay in publishing a Final Notice diminishes the impact of the publication, and any possible prejudice to a trial that is unlikely to take place for some years was rightly ignored. 

So, a very good day for the FCA, but, of course, not the end of the Forex saga.  There will be more FCA fines against firms, and individuals are likely to face regulatory action. This will now be relatively straightforward.  A more difficult challenge will face the SFO, and it is likely to be some time before the fraud prosecutor can reach any conclusions about criminal charges, and much longer before any cases get to trial.  The Libor trials are due to get under way in 2015, and will probably still be going (in the absence of guilty pleas) in 2016.  It might well be 2017 before Forex hits the courts.




FCA enforcement, FSA enforcement, Market Abuse, SEC enforcement

Law Enforcement Bliss: The SEC As Policeman, Judge and Jury

New York’s Southern District Court Judge Jed Rakoff is always worth listening to.  He expresses trenchant views about the rule of law elegantly and politely.  He is fearlessly independent. Prosecutors in the US, who are normally prone to swagger just a bit, probably find his comments and rulings rather irritating.

In a speech to the Practicing Law Institute on 5 November the Judge directed a passing swipe at the Security and Exchange Commission’s in-house administrative court, complaining that increasing enforcement powers granted by Congress have led to the SEC bringing more and more cases before this court.  Rakoff is concerned that this policy risks hindering the development of the law, because ‘it would not be good for the impartial development of the law in an area of immense practical importance’ without providing the opportunity for evidence and law to be tested by ‘impartial jurists’.

The Judge makes the point that the SEC’s record of success in front of its own administrative court is 100%, whereas it has suffered a number of defeats in recent insider dealing jury trials.  Any prosecutor will acknowledge that although he or she might give their right hand to win every case, such a high success rate is unhealthy.  It suggests either that they are only taking on the low hanging fruit, or that their system is artificially skewed against the defendant.

In the UK, the Financial Conduct Authority and its predecessor, the Financial Services  Authority, have had a similar internal ‘court’ since 2000, the Regulatory Decisions Committee.  The RDC receives proposals from Enforcement, with supporting evidence, which seek to impose penalties on individuals and firms which are alleged to have breached regulations.  The matters before the RDC can range from a defaulting IFA, resulting in a £50,000 fine and prohibition, to a Libor settlement with UBS of £160m. In regulatory cases, the Committee decides whether to issue a Warning Notice, and then hears representations from both sides before deciding whether to issue Decision and Final Notices.  Many cases settle and the Final Notice is an agreed document.  Those who want to contest a Final Notice published after a contested hearing can appeal to the Upper Tribunal, where the appeal will be heard by a Judge.  The members of the RDC are employees of the FCA, but are, in my experience, strongly independent – some within the FCA would say, too independent!  The Committee’s existence has been challenged over the years, not least by the Regulator itself, and consideration was given to abolishing it when the FCA was set up in 2013.  However, no better system for arbitrating and disposing of the majority of regulatory cases could be found, and the work of the RDC continues.

Some, but by no means all, of the cases that come before the RDC might amount to criminal offences as well as regulatory breaches.  The most obvious example of this is insider dealing/market abuse, but there are other borderline cases where, for example, an allegation of lack of integrity – a breach of Principle 1 of the FCA Principles for Business – might equally be viewed as dishonesty.

Because insider dealing is both a regulatory (section 118 Financial Services Act 2000) and a criminal (section 52 Criminal Justice Act 1993) offence, a decision by the FCA to litigate a case in front of the RDC is one which most people accused of such activity in the UK will usually welcome.  The prospect of a criminal conviction and a prison sentence (maximum 7 years) is removed.  The worst that can happen – and it is bad enough – is a fine, disgorgement of profit, and, if the individual concerned is an approved person in the financial services regime, a prohibition from being involved in financial services for a fixed or indefinite period.  If an individual wants to face criminal charges, and chance his luck in front of a jury, he can probably engineer that result simply by being obstructive and uncooperative, but no one has so far chosen this option.

In a market abuse case in 2012, David Einhorn, President of a US hedge fund, Greenlight Capital, was fined £3.5m, with Greenlight being fined a similar amount, in connection with the sale of its holding in Punch Taverns.  Although Einhorn hotly denied that he had done anything wrong, he decided not to challenge the RDC’s decision.  In that case, which involved questions of wall-crossing, it might be said that there were some unresolved issues at the conclusion of the case.  The RDC, in effect, exonerated Einhorn of deliberate misconduct, finding only that he ought to have known that what he did was wrong.

In another recent and high profile case, Ian Hannam, who had been Chairman of Capital Markets at J P Morgan Cazenove, challenged a decision by the RDC that he had committed market abuse.  He appealed to the Upper Tribunal which, in May this year, upheld the RDC’s decision.  The ruling runs to 130 pages, and no one reading it will think that it has in any way restricted ‘the impartial development’ of financial services law.  To the contrary, the ruling clarifies the law in a number of important respects.  The fact that a jury was not faced with the legal and factual complexities, leading to guilty or not guilty verdicts which are entirely unexplained, does not strike one as a disservice to justice.

There is, however, a problem which mirrors a theme which Judge Rakoff has frequently articulated.  Libor was originally treated as an administrative breach, with Barclays being fined by both the FSA and the SEC in June 2012. This sparked a public outcry – why was no one being prosecuted in the criminal courts for such outrageous misconduct?  A cosy settlement with the firm, with no senior person being brought to account, came nowhere near slaking the public thirst for revenge.  There was a hasty reassessment of the position, prompting the Serious Fraud Office to open an investigation, which has now led to 13 individuals being charged with criminal offences, and awaiting jury trial in 2015.  One individual has pleaded guilty.

At the same time, the FCA is being asked questions about its failure to take action, either regulatory or criminal, against senior bankers in the wake of the global financial crisis.  Recent legislation and public criticism are ramping up the pressure to take criminal proceedings against unethical banking practices.  The fact that such cases, whether criminal or regulatory, are immensely difficult to investigate and prosecute does not deter those who are baying for blood.

Interestingly, however, when such cases do come to court, the results, like the SEC’s criminal insider dealing trials, are mixed.  Juries, when they hear the facts in court, as opposed to the newspaper headlines and the posturing of politicians, do not always convict.  On the 3 November 2014 a jury in a federal court in Fort Launderdale took just two hours to bring in not guilty verdicts against a senior UBS executive, Raoul Weil, in connection with off-shore tax havens sheltering the wealth of 20,000 US citizens.  No doubt the US Internal Revenue Service, which prosecuted Weil, would have welcomed the opportunity to try the case in its own administrative court.

Civil fraud jurisdiction, Corruption, Fraud, Serious Fraud Office

Civil fraud damages claims begin in the UK following a corruption prosecution by the SFO and the DOJ against Innospec and others

In a recent decision of Mr Justice Flaux in the case Jalal Bezee Mejel Al-Gaood & Partner v Innospec Limited and Others, the Claimants sued for damages which they claimed arose as a result of the Defendants having bribed the Iraqi Ministry of Oil (“MOO”) to purchase their chemical products, TEL.  The claim for damages was for losses which the Claimants alleged they have suffered as a consequence of the unlawful means conspiracy on the basis that, but for the bribery and corruption, the MOO would have started to purchase the chemical additives distributed in Iraq by the Claimants, MMT.  The loss claimed, as quantified by the Claimants’ quantum expert, was US $26,572,603.

Reliance was placed by the Claimants on the fact that the Second Defendant and others had been charged by the United States Department of Justice and had pleaded guilty to criminal offences principally under the Foreign Corrupt Practices Act 1977 in relation to bribery and corruption in Iraqi and Indonesia.  In addition, civil proceedings were brought by the United States Securities and Exchange Commission against the Second Defendant and certain others as well as criminal proceedings pursued in England by the Serious Fraud Office against the First Defendant and certain others in relation to which various Defendants either pleaded guilty or were found guilty after a jury trial. We have blogged previously on the long running Innospec case including here for example.

In his 78 page judgment Mr Justice Flaux said that by the end of the trial it was common ground between the parties that in order for the claim to succeed the Claimants had to establish three matters on a balance of probabilities:

  1. That there had been a decision by the MOO in October or November 2003 to replace the Defendant’s chemical product TEL with the Claimants’ chemical product MMT and to continue using TEL only until stocks were exhausted;
  2. That that decision was not implemented because the promise of bribes by a Mr Naaman procured the MOO to enter into the 2004 agreement and that prevented sales of MMT and;
  3. That, but for the promise of bribes, the decision would have been implemented and the MOO would have replaced TEL with MMT from early 2004 onwards so that the “counterfactual scenario on which the claim is based would have occurred…”.

After a four week trial, Mr Justice Flaux decided that the Claimants case was not made out on the facts and also failed on grounds of causation.  There was much technical evidence about the use of the various chemical products and their test results.  Mr Justice Flaux said

“Overall, although there clearly was criminal wrongdoing by Innospec and Dr Turner and, as is accepted on their behalf, their conduct was reprehensible, that wrongdoing did not prevent sales of MMT and was not causative of any loss.  ….there is no suggestion that MOO officials were bribed to place those orders: they were placed because the MOO needed TEL and, at least until refining equipment was replaced, the strategic decision within the MOO was to carry on using TEL, at least at Baiji and Basra…in the circumstances, the Claimants have failed to establish that the wrongdoing alleged against Innospec caused them loss and the claim fails on that basis as well…”

Although not strictly necessary, the judge went on explain that in relation to the claim for quantum, there were considerable risks and problems with the Claimants’ claim for loss because the Claimants themselves had engaged in corrupt practices in making payments to the government of Iraq and that, as a distributor, if their supplier, Ethyl, had discovered this earlier than they actually did discover it, they may have terminated the distributorship agreement at an earlier date and this would create additional uncertainty in relation to their loss calculation.  The last few pages of Mr Justice Flaux’s judgment are very interesting from the perspective of understanding the difficulties of valuing such claims when there are a number of variables and hypotheticals to take into consideration.  However, the considerations made by Mr Justice Flaux are all far too detailed to summarise in a blog post, but nonetheless they are interesting to practitioners who have a spare couple of hours to digest his very carefully reasoned judgment.

Nevertheless, this case demonstrates that the English court will seriously entertain civil damages claims which arise out of corruption prosecutions, even though in this particular case the claims failed.

Civil damages claims similar to this case already take place in the United States (indeed there was at least one in the US of which TheFraudBoard is aware which related to the same set of prosecutions), so we should expect a body of civil jurisprudence related to corruption investigations to grow steadily over the next few years in England, as the Serious Fraud Office begins to prosecute companies and individuals more frequently for corruption offences, both under the Bribery Act 2010 and the laws which predate this Act, which still cover offences occurring prior to 1st July 2011.


Financial Conduct Authority Enforcement Performance

NERA Economic Consulting has recently published an analysis of the penalties imposed by the UK financial regulator since April 2012[1].  The startling headline is that the level of fines in the 18 months since April 2012 is over £1bn, whereas in the previous decade fines totaled less than £320m.  What is the reason behind this massive increase?  Has the FCA (which took over from the FSA in April 2013) just got tougher, or has it been easier to impose fines because the ‘accused’ have been major firms and High Street banks with long pockets and a propensity to settle, and because the issues under consideration since 2012, mainly the benchmark cases of Libor and Forex, have provided ample excuse for large fines?  In addition, has the even higher level of fines imposed in the US for similar misconduct prompted an escalation in both tariff and expectation?

It is tempting to see the high level of fines against firms set out in the NERA report as representing relatively easy pickings.  This is not to say that the investigations into Libor and Forex have been anything other than massively complex, or that fixing the level of penalty is easy, but there is an element of the domino effect – as soon as Barclays settled with the SEC and the FSA in June 2012, it was inevitable that the other major banks, and related financial businesses, who participated in Libor rate fixing would soon follow suit.  One may anticipate the same if it emerges, as expected, that there has been serious misconduct in the Forex market.

It is also tempting to see all this against a backdrop of the fall-out from the global financial crisis.  Regulatory action against the banks for their failings leading up to October 2008 was relatively limited, and there has been a public thirst for some level of revenge.  The delayed response to PPI mis-selling, other mis-selling cases, the ‘London Whale’, and the benchmark fines, have given the regulator something to crow about, at a time when its response to the crisis in general, and to the RBS and HBOS failures in 2008 in particular, is under attack.

Another interesting headline is that, by contrast, the numbers and levels of fines against approved individuals have fallen ‘sharply’.  Is this because the FCA has found it easier to pursue firms which will, as stated above, seek to settle, both to take advantage of the discount, and to get the problem off the balance sheet?  And because individuals will tend to tough it out, and rarely settle?  The answer to these questions is a qualified ‘yes’, the qualification being that, as the NERA report makes clear, the fact of criminal proceedings for Libor misconduct, and other cases, has caused delays in finalizing regulatory cases against individuals.  Final notices against individuals cannot generally be published until related criminal proceedings have concluded.  There is therefore something of a log jam of penalties against individuals.

Nevertheless, the numbers and levels of fines against senior individuals for regulatory misconduct outside the benchmark arena remain relatively low.  This is partly because it has proved very difficult to pin the blame for large failings on specific members of the boards of financial firms, and partly, as stated, because individuals tend to contest allegations, often with a degree of success.  The regulator is, however, seeking to take more enforcement action against individuals, and has emphasised this ambition.  It has sought to reinforce its position by introducing ‘attestations’ and the senior persons’ regime, as well as new criminal offences such as section 36 Financial Services (Banking Reform) Act 2013 – reckless banking – which should make it easier to prove misconduct against individuals.  It will nevertheless be interesting to see whether these new powers will prove to be effective.

Over the next 18 months we may expect to see the levels of fines against firms remain high.  It is also likely that enforcement action against individuals will result in significant fines during this period, and that penalty levels will exceed those in recent years.  Both results will in large part be due to the benchmark cases, and therein lies a challenge for the FCA: there has been much comment about the extent to which the Libor and Forex cases have taken up Enforcement resources, to the possible detriment of other types of enquiry.  It is difficult to know whether this is true, and it will no doubt be hotly denied by FCA management, but the numbers to watch in the next year or so will be those that do not relate to benchmarks.

At the same time, the NERA report rightly stresses the extent to which the FCA views its consumer protection objective as a core value, and it is likely that statistics relating to this area of endeavour, in particular, for example, early intervention into the mis-selling of products, investigating Pay-Day loan providers, and restrictions on financial promotions, while not necessarily producing large penalties, will demonstrate that the FCA has teeth.








[1] ‘Trends in Regulatory Enforcement in Uk Financial Markets. 2014/15 Mid-Year Report, by Robert Patton.  Published 20 October 2014.


Civil fraud jurisdiction

English Court grants worldwide freezing order in support of London arbitration where assets are outside the UK

A recent decision by the Commercial Court in the case of U&M Mining Zambia Limited v Konkola Copper Mines Plc [2014] All ER (D) 136 in which the Claimant’s application to continue a worldwide freezing order over the assets of the Respondent, Konkola, was granted, is significant for those conducting international arbitrations in London.

Worldwide freezing orders are, of course, normally granted on an ex parte basis in order to prevent the dissipation of assets by a defendant/respondent.  The defendant then has the opportunity to try to set it aside on a number of grounds.  The noteworthy ground which we consider in this blog post is that the Court considers it “just and convenient” to allow the freezing order to continue.

What is unusual about this case is that the Court upheld the freezing order even though there are no assets in the UK.  The Court held that where the seat of the arbitration is London, it would ordinarily be appropriate for the Court to issue orders in support of the arbitration, although there may be reasons why it is not appropriate from time to time, even though the seat of the arbitration is in England. So a worldwide freezing order will not necessarily be granted in every similar case.

In addition the Court decided that:

  • The fact that enforcement of the arbitral award would take place in Zambia was not sufficient to make it inappropriate for the Court to grant a worldwide freezing order;
  •  Even if the Zambian Court could also grant a freezing order, this would not make it inappropriate for the English Court to do so.

It is therefore possible for two courts to be appropriate forums in which to bring an application for a worldwide freezing order – in the case of London, because it was the seat of the arbitration, and in the case of Zambia because of the residency of the respondent, Konkola.

This decision should further encourage the choice of London as the seat of the arbitration in international contracts, where assets are not actually located in the UK.

Enforcement, Serious Fraud Office

SFO Bashing, Chapter 49.

No one could accuse the Serious Fraud Office of living a charmed life.  It is regularly accused of stupidity and inefficiency by a hostile press, and not infrequently the government weighs in with destabilising tactics, either by slashing its paltry budget, or by planning to redesign the counter fraud landscape.

A report this week in the Financial Times suggested that the Home Secretary is revisiting plans to dismantle the SFO, either by rolling it into the National Crime Agency, or by some other merger of fraud investigators.  These plans first surfaced in about 2010, at a time when proposals for the NCA were being fleshed out.  The NCA, which took over from the Serious Organised Crime Agency last year, has a division devoted to economic crime – the Economic Crime Command.  In its current form the ECC has more of a coordinating and prioritising function than an investigating capacity.  For example, it scans the fraud horizon, assesses which type of fraudulent activity most needs to be addressed, and works with fraud investigators to put together a team to tackle the problem.  It focuses on intelligence, seeking to create an intelligence ‘hub of hubs’ drawing on the various separate hubs which both public authorities and private enterprise maintain.  A core aim is to work with the private sector to prevent fraud, and to identify ‘key nominals’ and ‘facilitators’ who operate in the world of economic crime.

One of the guiding principles of the NCA, and the ECC, is to identify and attack organised crime groups (OCGs).  The ECC recently estimated that of the 7500 identified OCGs in the UK, about 1350 operate in the fraud sphere.  Whether this emphasis on OCGs in relation to fraud assists in the prevention and detection of fraud in general is a moot point.  It may well be argued that boiler rooms, for example, and other forms of investment scams, are closely linked to organised crime. Applying investigative techniques that assist in breaking up OCGs may usefully underpin such fraud investigations.  However, City fraud of the kind that the SFO is currently tackling is not organised crime, and trying to treat it as such will not add value to any investigation.

It is of course possible that if there were to be a merger between the ECC and the SFO, a separate specialist ‘City fraud’ unit would be set up to concentrate on City malpractice like Libor and Forex rate rigging, and that this unit would not be fixated on OCG issues.  However, that would surely be an uncomfortable fit.  One wonders whether the complications of such a merger would be worth the trouble.  Either it would entail simply shifting the SFO’s investigators and support staff over to the ECC, in which case it is difficult to see what the point of the merger would be, or it would involve a wholesale rethinking of fraud investigation structures.  Either way this would involve a major change from the SFO model, in that prosecutors and investigators would no longer be working alongside each other in unified teams.

There are alternatives to the ECC option.  All serious City fraud (including possibly that currently prosecuted by the Financial Conduct Authority and the Competition and Markets Authority) could be delegated to the City of London Police, with the CPS prosecuting the cases.  This would also involve a separating prosecutors and investigators. At the same time it runs the risk of losing some complex specialist knowledge and back-up.

Perhaps Mrs May’s reputed plans will have the benefit of stirring up a useful debate.  Nearly thirty years on, can it be said that the Roskill model, as adapted by the Criminal Justice Act 1987, has worked?  Should we start again?  What other options are there for tackling serious fraud?  However, they could also have the effect, as other commentators, including former Solicitor General, Edward Garnier, have stated, of providing a very unwelcome distraction at a time when the SFO needs as much support and stability as it can get.





Corruption, Enforcement, Self-reporting

The Serious Fraud Office bribery charges against Alstom

“From this autumn, we will start to see cases adopted by us, under our recalibrated focus on top tier work, coming to trial…we have much in the pipeline.” 

David Green CB QC, Director of the SFO, addressing the Cambridge Symposium on Economic Crime on 2 September 2014

One such case is the SFO’s bribery case, being brought on pre-Bribery Act era law, against a subsidiary of the French headquartered engineering company, Alstom.

This month formal charges have been placed against Alstom, in which it has been accused by the Serious Fraud Office of paying bribes to officials in various countries totalling more than €6 million in order to win contracts for the provision of transport in India, Tunisia and Poland.

The charges have been laid against Alstom’s UK arm, Alstom Network UK, who face six counts of corruption and conspiracy, which include allegations that the company hid payments using consultancy agreements.

According to a report in the Financial Times, the SFO alleges that Alstom bribed officials or agents of the Delhi Metro Rail Corporation by paying nearly 20 million Rupees to a company called Indo European Ventures in 2001 and another €3 million to another company, Global King Technology in 2002.  The SFO claims that the payments were made “as inducements or rewards for showing favour to the Alstom Group in relation to the award or performance of a contract”.

On a side note following initial reports in Indian media which suggested that both the Indian Government and the Delhi Metro Rail Corporation knew nothing of the charges, the Indian Government is reported to now be approaching the SFO for relevant details concerning the case.

The SFO further alleges that in Poland Alstom paid €824,000 to officials in 2001 in exchange for selling 62 trams to Tramwaje Wasrszawskie, and disguising the bribes as payments that formed part of the consultancy agreements with Fagax Engineering and Kavan.

Prosecutors allege a similar conspiracy in Tunisia where Alstom apparently paid €2.4 million to government officials in order to secure a contract to provide 30 trams and infrastructure work in Tunis, by paying an entity called Construction et Gestion NEVCO.

The current proceedings only involve charges against Alstom Network UK, but the SFO has written to a number of former employees including foreign nationals to inform them that it intends to charge them with corruption offences over the next year.

The SFO has, we are told, been investigating Alstom for five years, which itself emerged from another investigation started by the Swiss Office of the Attorney General in October 2007.

The Swiss AG’s probe concluded in late 2011 with Alstom having to pay a penalty of CHF 38,500,000 for “corporate negligence”. Alstom is also reportedly being investigated in other countries including the United States and India.

While the recent sentencing of Bruce Hall, the former CEO of ALBA, and the Innospec 4 should earn the SFO reprieve from the ‘lack of activity’ critics, there is still some way to go to hush those who voice disapproval over the, arguably unavoidable, length of time which it takes to conclude investigations and bring prosecutions.

Even if the protracted nature of regulatory invesitgations is a fact of life one cannot ignore the impact that they can have on an entire company, especially when conducted all or in part in the public domain.

This fact must also affect companies considering whether to self-report a potential issue, which the SFO encourages, when to do so they have to embrace the prospect of a long and uncertain road to resolution, a 24 hour news-cycle, and the accompanying taint that can be cast over an entire business regardless of the remoteness of the potential issue in the organisation.

In Alstom’s case for all those unconnected with the alleged conduct (the Swiss probe for example considered contracts going back to 1990), they are nonetheless linked with the effect and outcome of the investigation and prosecution. For management, employees, shareholders, business partners as well as potential recruits and sources of business, close to a decade is a long time for such a cloud to be hanging overhead.

As a company responsible for around 96,000 employees globally, and currently experiencing other commercial struggles, they have no doubt been keen for some time to resolve the matter appropriately and move on with the business of business.

 We will return further to this story as it develops.


Enforcement, FCA enforcement, FSA enforcement, Insider Trading, Market Abuse, SEC enforcement, Sentencing

Going Inside for Insider Trading

It is always assumed that sentences in the US for any crime are significantly higher than they are in the UK, but nowhere is this more starkly exemplified than in white collar crime.  The recent sentence of 9 years in prison for Mathew Martoma for insider trading is the latest proof of the truth of this assumption.  Previous long sentences for this offence included 12 years in 2011 for Matthew Kluger, and 11 years in 2012 for Raj Rajaratnam in the notorious Galleon case.  Both Kluger, a corporate lawyer, and Rajaratnam, a hedge fund owner, were senior professionals who, like Martoma, were deemed to have been insiders in possession of explosive unpublished information, which they deliberately used to their own advantage.

The UK record over the last few years in insider dealing cases has been good, but the longest sentence any individual has received is the 4 years handed out to James Sanders of Blue Index in 2012.  It should be pointed out that the maximum sentence under section 52 Criminal Justice Act 1993 is 7 years, and also that the sums involved in the cases brought by the Financial Services Authority have been small by comparison with the US blockbusters, rarely exceeding £1m, and in most cases much less.  In Operation Tabernula, the FSA’s (now FCA) largest insider dealing investigation, the profits made by the two defendants who have so far pleaded guilty were £245,000 and £500,000.  Martoma’s actions in arranging for hedge fund SAC Capital, where he worked as a portfolio manager, to sell its entire position in drugs company Wyeth and Elan just ahead of bad news about a new counter-Alzheimer’s product, are said to have made a profit of $275m for SAC, and a bonus for him of $9.3m. His sentence included the disgorgement of his bonus and the loss of a house in Florida.  In addition, he will never work again in the financial services sector – or in any other professional capacity – in his lifetime. Preet Bharara, the US attorney responsible for the SAC convictions, and for about 80 other successful insider dealing convictions, had demanded that the sentence should be 15-20 years, but the judge rejected this claim as excessive.

As for SAC, it settled its differences with the SEC last November, paying a fine of $1.2bn.  Eight SAC employees were charged during an investigation that lasted several years.  Six pleaded guilty.  Martoma’s case, involving events in 2008, marks an end to the proceedings.  But one person who was not indicted was SAC’s owner, Steven A Cohen, in spite of the assertion by Bharara that “insider trading at SAC was substantial, pervasive and on a scale without precedent in the history of hedge funds”.  Cohen strongly denies this claim, and Bharara, in spite of pressurising Martoma to give evidence against his former boss, failed to get evidence to indict him.  SAC Capital continues to do business, albeit with some restrictions. Cohen is still at its helm.

The focus by the FSA since 2007 on insider dealing, and the successful prosecutions brought against more than 20 individuals, as well as civil market abuse cases, appear to have had an impact on market conduct.  Two civil market abuse cases in particular, against US hedge fund owner David Einhorn, who was fined £7.2m in 2012 in connection with trading in Punch Taverns stock ahead of a funding announcement, and Ian Hannam, a senior investment banker at J P Morgan Cazenove, who the Upper Tribunal found guilty of two counts of market abuse in 2014, have spooked the market. A Market Cleanliness report published by the FCA in 2013 stated that after remaining stable for the four years to 2009, the level of abnormal pre-announcement price movements declined to 21.2% in 2010, 19.8% in 2011 and to 14.9% in 2012. This is the lowest level since 2003. The fall took place in a year of weak takeover activity and against a backdrop of the Regulator’s ‘continuing focus on market abuse and enforcement activity in this area’.  Whether the US experience is the same is not known, but one might expect that the tough sentencing of senior market professionals will have had an impact.

Corruption, Deferred prosecution, Fraud

Welcome to The Fraud Board, a new blog site for UK fraud and related regulatory issues

Welcome to the new McGuireWoods London LLP fraud blog: The Fraud Board, which has taken over from our highly rated Bribery Library site.  There are various reasons for the change, but the main rationale is that while the subject of Bribery remains very important in the economic crime landscape, and will continue to feature strongly in our blogs, other fraud and regulatory issues are increasing in significance.

The Serious Fraud Office is investigating a number of Bribery cases, some of them involving the Bribery Act 2010.  All fraud lawyers and other professionals, including ourselves, are watching this space on behalf of clients, to see how the SFO will deploy the new provisions in the Act, in particular sections 6 and 7.  How far will they go to prosecute corporations under the failure to prevent offence?  How will the defences play out in practice?  What level of detail will it be necessary to deploy to disprove an assertion that a corporation’s systems and controls were inadequate?  How will the section 9 Guidelines work?  How will the SFO use the new powers to negotiate Deferred Prosecution Agreements?  What is the future of internal investigations after the SFO Director’s recent criticism of practices adopted during investigations, in particular relating to privilege?

Meanwhile, other economic crime issues have been grabbing the headlines.  The Attorney General, speaking at last week’s Cambridge International Economic Crime Symposium, restated the Government’s intention of introducing legislation to prosecute firms for failing to prevent fraud offences generally, and therefore we may expect to see large fines deployed against businesses for allowing economic crime to flourish.  This follows calls by the Director of the SFO for such an offence to be created, and is seen as a response to the allegations made in the Libor and Forex investigations, which will make it easier to take action against firms, at the same time as being an attempt to raise ethical standards.  However, given that there has been a similar offence in relation to money laundering (now regulation 45 of the Money Laundering Regulations 2007) since 1993 which has never been used, it will be interesting to see how the ‘failing to prevent’ offences work out in practice.

Other new initiatives include a reinvigorated push to take senior management to task for their part in corporate wrong-doing and failures.  Section 36 of the Financial Services (Banking Reform) Act 2013 is one sign of the impact that the work of the Treasury Select Committee is having in this area.  Whether the attempt to criminalise reckless banking will work out in practice is open to question, but there can be no doubting that the gloves are off.

Working equally hard to make management accountable is the Financial Conduct Authority, with the Senior Persons Regime and other measures such as attestations designed to ensure that there is clear liability at board level for all aspects of financial firms’ activities.  This will be given added impetus by the outcome of the enquiry into the FSA’s handling of the failure of HBOS between 2008 and 2012.  The FCA has promised to be more aggressive in pursuing regulatory offences generally, intervening early to prevent mis-selling of financial products, and generally working hard to protect consumers.  How will this work out in practice?  Firms may well continue to be relatively content to settle their disputes with the regulator, but individuals are likely to continue to tough it out.

Civil fraud actions occupy an equally important space in the economic crime landscape, either in conjunction with prosecutions, or as an alternative where law enforcement does not have the resources or the capability to take action.  Seeking redress for the victims of fraud, whether the wrong-doing is committed by financial institutions or criminal gangs or computer hackers, through litigation enables lawyers to take control of the process on behalf of their clients and to pursue remedies in increasingly imaginative ways.

The Fraud Board will examine all these issues, and others, bringing the experience of Vivian Robinson QC, David Kirk and Adam Greaves, and their supporting team both in McGuireWoods London LLP and across the firm’s US offices, to bear on the topics that matter.

Corruption, Enforcement, Fraud, Self-reporting

The Director of the SFO criticises corporations which commission internal investigations before self-reporting

Following an article published in Legal Week in August authored by Ben Morgan, the joint head of bribery and corruption at the SFO entitled “Coming Clean – the argument for cooperating with the SFO on corporate crime”, we commented on this in a blog dated 18 August 2014 setting out some of the issues which corporate clients have to consider when deciding whether or not to self-report possible criminal issues to the SFO.  We offered the view that: 

  • the SFO’s position as stated by Mr Morgan had perhaps been oversimplified; 
  • that a number of corporations and their lawyers were struggling with these issues and debating them privately with the SFO; and 
  • that the issues would benefit from a public debate. 

We concluded that blog by saying that these issues, when considered in depth, and if aired publicly, may reinforce the SFO’s arguments for self-reporting, rather than undermine them, so a public debate should be beneficial all round in order to dispel corporate anxieties and misunderstandings. 

On 27 August 2014 The Times newspaper published an article in its business section “Fraud Office attacks fraud crime reports” in which the director of the SFO, David Green CB QC, was quoted as saying that he is “against businesses commissioning their own reports into allegations of serious misbehaviour that often “cleared” the subject of any illicit activity”.  He complained that the SFO was often handed privately paid for investigations by expensive external lawyers that contained an “inherent conflict”…  The report itself may tend to minimise the problem one way or another.  Later claims of legal privilege on witness statements taken by the external lawyers can be questionable.  And, of course, the crime scene can be churned up by the investigation.  The SFO will never take such a report at face value and will drill down into its evidence and conclusions”. 

There is no suggestion in The Times article that Mr Green is currently pushing for a change in the law in order to address his stated concerns. 

The Times article then goes on to cite a couple of apparent examples, one in the United States and one in the United Kingdom, of large professional service firms having produced reports following internal investigations which, the article intends the reader to infer, were not entirely candid in their conclusions, or had adopted too narrow a remit at the onset.  We make no comment on the fairness or accuracy of these cited examples. 

The article concludes that although more than 100 SFO staff are working full time on SFO investigations into LIBOR rigging and foreign exchange market (“FOREX”) manipulation, Mr Green warned that “…it was likely that the SFO was a long way from getting to the bottom of much of the criminality in the City…”  The size of the white collar criminal legal sector servicing the City of London suggests there is a lot more work out there that the SFO could be doing…” 

While one has some initial sympathy for the Director’s comments, when considered in further detail, a number of other issues come to mind: 

  • Encouraging corporations not to hire external solicitors to advise them on whether they have potential criminal issues within the company could lead to:
  • Corporations inadvertently (or otherwise) covering up their own wrong doings, having not had the benefit of objective, experienced external advice; 
  • Alternatively, because most corporations do not employ in-house lawyers with white collar defence experience, corporations failing to recognise at all that conduct within the organisation was criminal or should be reported to the SFO; 
  • And/or, in the absence of objective external advice, corporations (or at least individuals within the corporations) will themselves “contaminate the crime scene” (to use the Director’s phrase) and/or to destroy evidence such as deleting electronic data or destroying hard copy documents.  The external advisers would not be able to watch and ensure evidence is properly preserved. 
  • Many corporations would not even recognise or accept that self-reporting to the SFO was something that they should even consider, let alone act upon. 
  • Experience tells us (by which I mean white collar lawyers generally) that self-reporting by corporation is almost always done on the strong advice of reputable external law firms rather than from a corporation’s innate desire to “come clean” and confess to an investigating/prosecuting agency.  Corporations are already fearful that by self-reporting they will bring a huge amount of adverse publicity and incur significant costs, and therefore by discouraging corporations from taking external legal advice, we think that corporations are far less likely to self-report, not having any guidance as to the potential outcome, rather than more likely.  People (including legal persons) are far more likely to bury their head in the sand if they do not receive expert advice. 
  • Further, it should be remembered that the SFO’s nominal budget has been reduced drastically under the current coalition government, due to cutbacks in all government departments.  Although this has been addressed/reversed to some degree by so-called “blockbuster funding” from the Treasury in relation to specific investigations, the SFO is still seriously underfunded.  The current practice of corporations carrying out extensive internal investigations and handing over their report to the SFO is actually helping the SFO because a lot of the leg-work has been done by the company itself and this is very costly work.  Of course, every corporation accepts that the SFO will want to drill down further into the evidence later.  The suggestion that the SFO itself has the resources to undertake dozens (or perhaps a great deal more) of the initial investigations itself is unlikely to ever be supported by government funding as the SFO’s annual budget would need to double or treble.  The current system offloads huge costs on to the corporations. 
  • Further, given the slow pace of the SFO’s current investigations, which may take several years before charges are laid against any defendants and even longer before they conclude with a trial, this will make the process of justice even slower not faster, which is bad for justice and bad for business. See for example an article in the Financial Times of 28th August 2014 entitled “Regulatory Revenge Risks Scaring Investors Away”.
  • Although The Times article of 27 August 2014 cites a couple of examples where reports carried out by external advisers are thought to be flawed (in fact the American example is the only one of which there seems to be explicit criticism that the professional services firm is alleged to have “toned down some of its criticism”), no credit has been given by the article or by the SFO for the (probably) scores of cases of self-reporting that go on every year to the SFO that has been conducted in a perfectly acceptable and honest manner.  Perhaps there should be more clarity (albeit anonymised) of these statistics? 
  • Even if the SFO were much better funded, and let’s say its budget were trebled, that would still not be justification for saying that corporations should not able to take legal advice on activities that have been conducted within the organisation or by the organisation with third parties.  It remains a fundamental principle of our constitution that people and legal entities should be able to take legal advice and that that legal advice should remain legally privileged i.e. confidential to the client, unless the client waives his right to privilege.  If you had a client who had/may have committed some other type of crime, you would not send him off to the police to make a confession on their own, would you?  You would want to understand your client’s own story first. 

The engagement of external lawyers by corporations is still the safest and best option as those external law firms not only have their own firm’s professional brand reputation to protect in giving full honest and fair reports, but the lawyers who form those organisations all owe personal duties to the court not to mislead it. Their report would have been prepared in the knowledge that, if disclosed to the SFO as part of a self-reporting procedure, it could end up being scrutinised by the court.  

Whilst there is a “crime scene” it is mostly consisting of paper and electronic documents, and witness evidence, and not the forensic DNA evidence seen on television dramas.  “Contamination” will therefore be different, but the deletion or alteration of documents mostly itself leaves an evidential trail, so it is not clear whether there is really a serious problem here.  We would have been interested to have seen some examples cited in The Times article as to Mr Green’s specific concerns.  Further discussion is required, publicly, if this suggestion is to be considered seriously. 

Perhaps the Director’s real gripe concerns an inequality of arms i.e. that large corporations are usually much better funded than the SFO itself.  That may be true, but that is a question for the government to address in terms of how serious it is in pursuing serious economic crime in the UK.  Removing corporation’s rights to take external legal advice on any perceived problems within the corporation would be throwing the baby out with the bath water.  The Government should perhaps allow the SFO to keep more of the money it recovers through civil settlements, criminal fines levied by the Court as a result of the SFO’s prosecutions and monies disgorged by defendants under the Proceeds of Crime Act.