Market Abuse and Insider Dealing 9781526509109, 9781526509130, 9781526509123

Citation preview

Market Abuse and Insider Dealing

ii

Market Abuse and Insider Dealing 4th Edition Professor Barry Rider OBE Professorial Fellow, Centre of Development Studies, University of Cambridge Professor Kern Alexander Chair for Banking and Financial Market Law, University of Zurich Director of Studies, Queens’ College, University of Cambridge Former Specialist Adviser, Parliamentary Joint Select Committee on the Financial Services Act 2012 Stuart Bazley Visiting Professor in Financial Regulation and Compliance Law, BPP University Law School, London Head of Platform Group Compliance, Transact Jeffrey Bryant Barrister and Specialist Prosecutor CPS Proceeds of Crime

BLOOMSBURY PROFESSIONAL Bloomsbury Publishing Plc 50 Bedford Square, London WC1B 3DP, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc © Bloomsbury Professional 2022 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. Any views expressed in this book are those of the authors and not of the CPS. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2022. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN:  HB: 978 1 52650 910 9 ePDF: 978 1 52650 912 3 ePub: 978 1 52650 911 6 Typeset by Compuscript Ltd, Shannon

To find out more about our authors and books visit www.bloomsburyprofessional.com. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters

About the Authors

Professor Barry Rider has taught financial and related areas of the law in the University of Cambridge since 1976. He is currently a Professorial Fellow in the Centre of Development Studies. He has held many senior academic appointments including Director of the Institute of Advanced Legal Studies, University of London. He currently holds a chair in comparative law at Renmin University, China, a chair in commercial law at the University of the Free State, South Africa and a chair in financial law at BPP University. He has held and continues to hold a number of visiting professorships and senior fellowships around the world. He holds doctorates from the University of Cambridge, University of London, University of the Free State and Penn State University (Dickinson Law School) in the USA. Professor Rider has also served as an international civil servant and was for many years head of a special intelligence and mutual legal assistance unit in an inter-governmental organisation. He has served on secondment and as a consultant with many international organisations including the IMF, World Bank, Asian Development Bank, Islamic Financial Services Board, Commonwealth, EU, various UN agencies and numerous national agencies. He has also served as Special Advisor to the Trade and Industry Select Committee of the House of Commons. He has practiced law in the City of London and is a Master of the Bench of the Honourable Society of the Inner Temple. He is the author of many books and other publications on financial law, corporate law and economic crime. He was made an Officer of the British Empire for his services to the prevention and control of economic crime by Her Majesty the Queen in 2014. Professor Kern Alexander, Director of Studies, Queens’ College, University of Cambridge and Full Professor of Banking and Financial Market Law at the University of Zurich. He teaches the Principles of Financial Regulation course at the University of Cambridge. He was the Specialist Adviser to the Parliamentary Joint Select Committee on the Financial Services Act 2012 and was a Member of the European Parliament’s Expert Panel on Financial Services (2009–2014). He advised the Serious Fraud Office in its investigations and prosecutions of the rigging of the London Inter-Bank Offered Rate (Libor) (2013–2019). He has authored commissioned reports for the United Nations and the G20 on international banking regulation and environmental sustainability. He has given oral and written evidence on many occasions to the House of Commons Treasury Committee and to the House of Lords Committee on Economic Affairs on UK and EU financial regulation and economic sanctions. His evidence is cited extensively in these Parliamentary reports.

v

About the Authors Stuart Bazley is Head of Platform Group Compliance at Transact and a Visiting Professor in Financial Regulation and Compliance Law at BPP University Law School. Stuart has over 35 years’ experience working in the financial services industry, including senior roles as an in-house lawyer, General Counsel, Head of Compliance and Money Laundering Reporting Officer. He has also lectured on the law relating to financial regulation and compliance since 1998. Jeffrey Bryant is a barrister who started his career over 20 years ago at Furnival Chambers, where he subsequently took tenancy. Since 2007, Jeffrey has been an employed barrister in the Crown Prosecution Service, where he is a Specialist Prosecutor and Crown Advocate dealing with proceeds of crime work. Jeffrey has been the CPS Proceeds of Crime lawyer in four Supreme Court cases including the leading case of R v Waya [2013] 1 AC 294, has dealt with restraint cases where the alleged benefit was over £1bn, and regularly brings restraint proceedings at the request of numerous foreign governments. Jeffrey is the Principal Editor of the leading book on proceeds of crime, Mitchell, Taylor and Talbot on Confiscation and the Proceeds of Crime and also won a Chief Constable’s Commendation in 2019 for his work relating to the UK’s first Bitcoin seizure in which more than £1m of cryptocurrency was recovered in 2017. Jeffrey is a visiting lecturer on the LL.M. course at BPP University where he teaches on the financial crime and transnational criminal justice modules.

vi

Preface

Since the publication of the last edition of this book concern about and interest in fraud and financial misconduct has dramatically increased – at least in the UK. No matter how much time Parliament gives to the consideration and framing of new legislation and how many ministers voice their concerns, fraud and abuse seem to increase exponentially. Of course, the various measures adopted during the Covid-19 pandemic no doubt provided additional opportunities for the dishonest, but the problem does seem to go deeper. Britain has recently been described1 as the ‘fraud capital of the world’ and the City of London as the world’s leading money laundering centre. At the time of writing, the Prime Minister has been forced to step down as leader of his political party as a result of numerous resignations in his cabinet in part because of a concern about lack of integrity at the heart of government. Notwithstanding media and political hype, it would seem that there are some very real deficiencies in the way we support and further integrity in many areas of national life in modern Britain. The City of London and its financial markets have long been concerned about allegations of abuse and a lack of integrity. It is widely recognised that a perception of dishonesty and self-dealing within the financial sector undermines public confidence in its fairness. It is largely on this basis that we seek to discourage insider dealing in the UK. Since early in our history, the law has – to some degree – been concerned to promote confidence in the integrity of our markets and transactions taking place on them. Of course, whether using the markets and those who operate within them for laundering suspect wealth let alone hiding the funds used by terrorists, contributes to a sense of unfairness, may be debated – albeit such conduct is clearly inimical to the public good. On the other hand, does it really assist our society to brand certain types of conduct potentially criminal and while being seen to do little to bring suspected perpetrators to justice? While we do, rightly in the view of the present authors, consider insider dealing to be a serious crime – in many cases, it is reported that in the last five years the agency charged with policing our laws, has only found two cases – in circumstances where the public with some justification, suspects far greater levels of abuse and misconduct. Are we not in danger of simply transferring concerns as to confidence in the integrity of our markets to the legal system itself? What is clear is that insider abuse cannot be sensibly considered in isolation. Integrity as does fairness involves a raft of considerations and factors and to strain out some inevitably gives only a partial and possibly misleading 1

T Kelly, M Dilworth and V Bischoff, “Britain is £ 3 bn Fraud Capital of the World,” 27 June 2022, Daily Mail.

vii

Preface picture as to what is taking place and what has occurred. Consequently, in this book, we consider the abuse of inside information across a broad spectrum and recognise that the role of the criminal law is but one facet. The pace of development in the law, its administration and interpretation, in both the criminal and civil dimensions, together with perhaps the even more significant inter-related realms of regulation and compliance, is today such that there never can be a final word on an issue, or for that matter an entirely topical analysis. Nonetheless, we have done our best and where the relevant law is particularly dynamic, we have attempted to predict at least its trajectory. The law, in seeking to address the taking advantage of asymmetric access to information has developed in both a prohibitive and remedial manner and is both complex and multi-layered. While the criminal law is mostly found in statute, the law relating to market abuse operates in what is to English jurisprudence a relatively new world between criminal law and the civil law. The specific laws and regulatory provisions also function within the context of the general law and other structures of regulation ranging from the Code on Takeovers and Mergers to in-firm compliance systems. The range of potential legal and regulatory responses to even a simple case of insider dealing is both complex and often uncertain. It is not unlikely that, for example, there will be issues related to the proceeds of the abuse. Therefore, we are not merely concerned with the relevant objectionable transaction, but possibly the law relating to money laundering and confiscation. A serious and very real responsibility has been cast on financial intermediaries and professional advisers to assist in the maintenance of integrity in the markets. They are expected to police their own staff and customers. In the real world, authorised persons, those who manage them and those who are engaged in compliance, are more likely to find themselves subject to legal and regulatory sanctions than those who actually engage in the abuse of inside information or for that matter in other profitable crimes. The obligations that anti-money laundering laws, anti-insider dealing regulations and increasingly anti-corruption laws impose on those who handle other people’s financial transactions to conduct due diligence and operate effective controls to discourage and expose such activity are onerous and well policed. Therefore, the control of insider dealing and related abuses is a very real and topical concern for all those who operate in the financial sector. In this new edition we expand our discussion of these issues and give particular emphasis to the role and responsibilities of compliance. Given the inter-relationship of financial markets, the laws and systems of one jurisdiction cannot be considered in isolation. Those engaged in objectionable or even merely facilitative activities may well be subject to the reach of other regulatory and legal systems. Most significantly in practical terms is the long-arm reach of US securities law and, in particular, the concern of the US Securities and Exchange Commission (SEC) to protect the integrity of its own national markets. Indeed, the SEC has been criticised for failing to prevent and adequately enforce insider trading laws. The enactment of the Insider Trading Act of 2021, however, strengthens the legal basis for the SEC to bring enforcement actions against insider trading. It remains to be seen whether this legislation will encourage US authorities to adopt a more robust enforcement stance. Therefore, this edition, as did its predecessors, attempts where relevant to address the legal and regulatory issues that may arise when other jurisdictions, and in particular the US, seek to assert their authority. We have also given rather more attention in our discussion to the issues thrown up by the UK’s exit from the Single Financial Market and the EU. viii

Preface Since the publication of the third edition of this work in February 2016, there have been very many developments in the relevant substantive law through legislation and decisions of the courts. Indeed, the civil law in particular retains a degree of vitality which almost defies analysis. The world of compliance is also ever changing both in substance and best practice. Consequently, the changes in the text and in particular our references are too numerous to highlight here. The dynamic nature of so many aspects of this work leaves us, as authors, able to simply commend our discussion as of May 2022. The authors have attempted to draw upon their unique combination of expertise and practical experience in presenting in a clear and constructive manner an admittedly complex and dramatic body of law and regulation. Given the topicality and fast moving nature of our subject matter, we have sought the advice of many involved in the day-to-day administration of the relevant law and in particular compliance systems. It would be invidious to name particular individuals who have been of such assistance, but their advice and support has always been much appreciated and valued, albeit not always followed! We are particularly grateful for the support and advice that we have received from our publisher Mr Andy Hill and his colleagues, whose advice we have been scrupulous in following. Professor Barry Rider OBE Professor Kern Alexander Professor Stuart Bazley Mr Jeffrey Bryant July 2022

ix

x

Contents

About the Authors Preface Table of Cases Table of Statutes Table of Statutory instruments

v vii xvii xlvii lvii

Chapter 1  The nature of insider dealing and market abuse Insider dealing in perspective What is insider dealing?

1 1 5

Chapter 2  Insider dealing: the civil law 27 A wrong to the market or the company? 27 Conflicts of interest 29 Secret profits 31 Loss to the insider’s company 35 A narrow obligation 37 Benefiting another – a breach of duty? 43 Shadow directors and others 55 The position of investors 57 Illegality and public policy 61 Remedies62 Chapter 3  The main offences of insider dealing – dealing on the basis of inside information 69 The law before 1980 69 The offence of insider dealing 74 Insiders76 Encouraging insider dealing 96 Disclosure of inside information 97 Territorial scope of offences relating to encouragement and disclosure 98 Tippee liability 99 Secondary persons and tippee liability 100 The FSMA 2000 and tippee liability 102 Defences to allegations of insider dealing 103 Chapter 4  The market abuse regime 115 Introduction115 The UK market abuse regime 117 The prescribed markets 118 Qualifying investments 119 Related investments 119 Prescribed markets, qualifying investments and the Jabre case 120 The duty to the market 121 What constitutes market abuse 122 Manipulating devices 123 Insider and inside information 124 xi

Contents Information that is ‘precise’ and has an ‘effect’ on price 126 Behaviour127 The Code of Market Conduct (MAR) 127 The MAR specifying behaviour 128 Behaviour which does not amount to market abuse 129 Safe harbours 130 Regulatory enforcement and sanctions 133 Private enforcement 134 Regulatory policy and the Market Abuse Directive 135 Conclusion135 Chapter 5  FSMA criminal offences of market manipulation 137 Introduction137 Manipulation138 UK criminal offences for misleading statements and practices 138 Market distortion and market manipulation 141 Abusive squeezes 142 FCA prosecution 143 Analysis and conclusion 145 Chapter 6  Fraud and financial crime 147 Introduction147 The creation of false markets 154 The common law 154 The fair price 157 Conspiracy157 Enforcing the bargain 160 Fraud (by representation or conduct) 162 Requisite state of mind – mens rea 164 Proof of dishonesty and fraudulent intention 166 Misrepresentation by words or conduct 167 Silence168 Concealment170 Criminal Breach of Trust (CBT) 171 Misappropriation (including theft) 174 Requisite state of mind – mens rea 175 Handling178 False statements and manipulation 179 High pressure selling 179 Fraudulent trading and insolvency related offences 180 Reckless management of banks 186 Blackmail and extortion 187 Computer-related crime 189 Corruption190 False reporting 194 Forgery and the reliability of documentation 196 Acts preparatory to fraud 199 Perjury and false declarations 201 Civil fraud 203 Disclosure orders and freezing orders 210 Disqualification procedures 214

xii

Contents Offences by bodies corporate 217 Conclusion220 Chapter 7  Anti-money laundering and proceeds of crime 221 The corporate and financial dimension 221 Money laundering in context 224 Proceeds of crime 227 2017 Money Laundering Regulations – civil penalties 244 Money laundering liability in the civil law 246 Naughty knowledge and mens rea 249 Compliance250 Confiscation255 Terrorist finance 262 Chapter 8  Conflicts of interest A fundamental rule Directors and their duty of loyalty Multiple appointments Modification of duties Other fiduciaries Contracting out Informed consent A case at last! Conflicts compliance and the regulatory environment

269 269 270 273 274 278 281 283 285 287

Chapter 9  Issuer disclosure and liability 297 Disclosure and the issuer 297 Disclosure obligations 297 Disclosure and inside information 298 Delayed disclosure 301 Selective disclosure 303 Managerial disclosures 303 Safe harbours 303 Issuer disclosure and third-party lists 304 Issuer and senior officer liability 304 Professional disclosure requirements 305 Professionals and confidentiality 306 FCA favours enhanced disclosure 306 Disclosure of sustainability risks 307 Issuer’s disclosure decision tree 308 Takeovers309 General principles 309 The Takeover Panel’s powers 309 The FCA’s role 309 Market abuse 310 Actual or potential offerors 311 Chapter 10  Information gathering 313 Introduction313 General reporting and the obligation to cooperate 314 The FCA’s statutory information gathering 324

xiii

Contents Chapter 11 Investigations 331 Introduction331 Investigations and transparency 332 Powers of investigation 334 Confidentiality343 Sanctions for failing to comply with an investigation 343 Criteria for enforcement action 344 Case selection by the FCA 344 Chapter 12  Enforcement issues 347 Introduction347 Sanctions for market abuse 348 Principles-based enforcement 351 Statements and penalties 363 Enforcement and the impact on positions of influence, trading and business permissions 371 Applications to the court 373 Chapter 13  Compliance procedures and systems 377 Introduction377 Compliance and authorised persons 381 Authorisation, governance, senior management and compliance 382 Governance and the need for policy, process, and procedure 384 The compliance function and regulatory characteristics 387 Authorised firms’ obligation to maintain records 394 Compliance and conflicts management, and information barriers 396 Personal account dealing rules 399 Chapter 14  Personal liability of senior managers and compliance officers Personal responsibility The role of the law The duty of fidelity Contract and tort Accessory liability in equity Personal criminal liability Criminal proceedings Sentencing policy Regulatory liability, personal accountability – senior managers, certified persons and code staff Chapter 15  Control liability Responsibility and control Vicarious liability in the criminal law Vicarious liability in the law of tort Vicarious responsibility in restitution Directors’ knowledge Financial services regulation and control liability Control liability and authorisation Senior management function holders and controlled functions

xiv

403 403 404 406 408 414 419 420 422 426 437 437 439 441 443 446 447 450 451

Contents Chapter 16  The impact of other laws: domestic and overseas 457 Introduction457 EU Market Abuse Regulation (EU MAR) 458 EU MAR and market manipulation 460 Buybacks and price stabilisation 461 EU MAR and cross-border cooperation in investigations and enforcement 462 Extra-territorial application of US securities laws, foreign issuers and anti-fraud provisions 464 IOSCO and UK efforts at international cooperation 473 Conclusion476 Index479

xv

xvi

Table of Cases

7722656 Canada Inc (formerly Swift Trade Inc) v Financial Services Authority [2013] EWCA Civ 1662, [2014] Lloyd’s Rep FC 207����������������������������������������������������������������������������������������   4.16; 12.46 A A Bank v A Ltd (Serious Fraud Office Interested Party) (The Times, 18 July 2000)����������������������������������������������������������������������������  2.36 A-G v Blake [1997] Ch 84, [1996] 3 WLR 741, [1996] 3 All ER 903; revs’d [1998] Ch 439, [1998] 2 WLR 805, [1998] 1 All ER 833; aff’d [2001] 1 AC 268, [2000] 3 WLR 625, [2000] 4 All ER 385�����������������������������������������������   2.14, 2.42, 2.60 A-G v Guardian Newspapers Ltd (No 2); A-G v Observer Ltd [1990] 1 AC 109, [1988] 3 WLR 776, [1988] 3 All ER 545������������������������  3.56 A-G for Hong Kong v Chiuk-Wah (Pat) [1971] AC 835, [1971] 2 WLR 1381, [1971] 2 All ER 1460�������������������������������������������������������������  6.97 A-G for Hong Kong v Reid [1994] 1 AC 324, [1993] 3 WLR 1143, [1994] 1 All ER 1���������������������������������������   2.10, 2.27, 2.29, 2.33, 2.59, 2.61; 6.48; 7.5, 7.45, 7.47; 8.10; 14.5 A-G for Hong Kong v Wai Yu-Tsang [1992] 1 AC 269, [1991] 3 WLR 1006, [1991] 4 All ER 664�������������������������������������������������  6.105 A-G’s Reference (No 1 of 1975)[1975] QB 773, [1975] 3 WLR 11, [1975] 61 Cr App R 118�������������������������������������������������������������  3.25 A-G’s Reference (No 1 of 1980) [1981] 1 WLR 34, [1981] 1 All ER 366, (1981) 72 Cr App R 60����������������������������������������������������������  6.94 A-G’s Reference (No 1 of 1988), Re [1989] 2 WLR 195, [1989] 1 All ER 321, [1989] BCLC 193��������������������������������������������������   2.51; 3.6, 3.81 A-G’s Reference (No 1of 1995) [1996] 1 WLR 970, [1996] 4 All ER 21, [1996] 5 Bank LR 173�����������������������������������������������������������  14.25 A-G’s Reference (No 1 of 2004), Re [2004] EWCA Crim 1025, [2004] 1 WLR 2111, [2005] 4 All ER 457 (Note)�������������������������������   6.67, 6.73 A-G’s Reference (No 3 of 2003)[2004] EWCA Crim 868, [2005] QB 73, [2004] 2 Cr App R 23����������������������������������������������������������������������  6.56 AIB Group (UK) plc v Mark Redler & Co Solicitors [2014] UKSC 58, [2015] AC 1503, [2014] 3 WLR 1367����������������������������������������  2.14 AMT Coffee Ltd, Re [2019] EWHC 46 (Ch), [2019] 1 WLUK 274, [2020] 2 BCLC 50����������������������������������������������������������������������������������������  2.22 Aberdeen Rly v Blaikie (1854) 2 Eq Rep 1281, 17 D (HL) 20������������������������������  8.3 Adams v R [1995] 1 WLR 52, [1995] BCC 376, [1995] 2 BCLC 17����������������������������������������������������������������������   6.19; 7.6; 15.14 Aerostar Maintenance International v Wilson [2010] EWHC 2032 (Ch)�����������������������������������������������������������������������   6.19; 6.19; 14.8 Affiliated Ute Citizens v US 406 US 128 (1972)���������������������������������������������������  6.1

xvii

Table of Cases Agip (Africa) Ltd v Jackson [1991] Ch 547, [1991] 3 WLR 116, [1992] 4 All ER 451 ���������������������������������������������������������������   2.34, 2.61; 6.120; 7.48, 7.52; 14.5, 14.14 Ahmad v Her Majesty’s Advocate [2009] HCJAC 60���������������������������������   7.15, 7.22 Ahuja Investmets Ltd v Victorgame Ltd [2021] EWHC 2382 (Ch), [2021] 8 WLUK 184����������������������������������������������������������������������������������  6.116 Akcine Bendove Bankas Snoras (in bankruptcy) v Antonov [2013] EWHC 131 (Comm), [2013] 2 WLUK 49�������������������������������������  6.113 Alfadda v Fenn 935 F 2d 475 (2nd Cir, 1991)����������������������������������������������������  16.31 Allen v Flood [1898] AC 1, [1897] 12 WLUK 56��������������������������������������������������  8.9 Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, [1900] 2 WLUK 84����������������������������������������������������������������������������������������������������  8.9 Allen v Hyatt (1914) 30 TLR 444����������������������������������������������������������������   2.15, 2.21 Alliance Bank JSC v Aquanta Corpn [2011] EWHC 3281 (Comm), [2012] 1 Lloyd’s Rep 181, (2012) 109 (4) LSG 19������������������������������������  15.16 Allianz Global Investors GmbH v RSA Insurance Ltd (formerly RSA Insurance Group plc) [2021] EWHC 2950 (Ch), [2021] 11 WLUK 48�����  6.118 Al Nehayan v Kent [2018] EWHC 333 (Com), [2018] 2 WLUK 528, [2018] 1 CLC 216 ����������������������������������������������������������������������   2.18, 2.22; 14.4 Alpine Investments BV v Minister van Financien (Case C-384/93) [1995] All ER (EC) 543, [1995] ECR I-1141, [1995] 2 BCLC 214�������������  6.60 Alpstream v PK Airfinance [2013] EWHC 2370 (Comm), [2014] 1 All ER (Comm) 441, [2013] 7 WLUK 1049�������������������������������  6.115 Alstom SA, Re 406 F Supp 2d 346 (2005)���������������������������������������������������������  16.22 Al Zayat, Re [2008] EW Misc 3 (CCC)���������������������������������������������������������������  7.51 Amalgamated Metal Trading Ltd v City of London Police Financial Investigation Unit [2003] EWHC 703 (Comm), [2003] 1 WLR 2711, [2003] 4 All ER 1225��������������������������������������������������������������������������   7.4; 14.17 Anglo-African Merchants Ltd v Bayley [1970] 1 QB 311, [1969] 2 WLR 686, [1969] 1 All ER 421�����������������������������������������������������������������  8.13 Angus v UK Border Agency [2011] EWHC 461 (Admin), [2011] Lloyd’s Rep FC 329�������������������������������������������������������������������������������������  7.15 Crossley (Anthony) v Volkswagen Aktiengesellschaft [2019] EWHC 3444 (QB), [2021] 12 WLUK 333������������������������������������������������  6.116 Antonio Gramsci Shipping Coron v Stepanovs [2011] EWHC 333 (Comm), [2012] 1 All ER (Comm) 293, [2011] 1 Lloyd’s Rep 647����������  15.16 Anton Piller KG v Manufacturing Processes Ltd [1976] Ch 55, [1976] 2 WLR 162, [1976] 1 All ER 779���������������������������������������������������  6.127 Antuzis v DJ Houghton Catching Services Ltd [2019] EWHC 843 (QB), [2019] Bus LR 1532, [2019] 4 WLUK 95, [2019] IRLR 629, [2019] LLR 441��������������������������������������������������������������������������������������������  2.15 Armagas Ltd v Mundogas SA (The Ocean Frost) [1986] AC 717, [1986] 2 WLR 1063, [1986] 2 All ER 385�������������������������������������������������  15.11 Armitage v Nurse [1998] Ch 241, [1997] 3 WLR 1046, [1997] 2 All ER 705�������������������������������������������������������������������������������������������������  2.10 Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), [2013] Ch 156, [2012] 3 All ER 425�������������   2.61; 6.48; 14.14 Arnold v Britton [2015] UKSC 36, [2015] AC 1619, [2015] 2 WLR 1593, [2016] 1 All ER 1, [2015] 6 WLUK 320, [2015] HLR 31, [2015] 2 P & CR 14, [2015] L & TR 25, [2015] CILL 3689�����������������������  8.16 Arthur Lipper Corpn v SEC 547 F 2d 171 (2nd Cir, 1976); cert denied 434 US 1009 (1978)�����������������������������������������������������������������������������������  16.25 Associated British Ports v Transport & General Workers Union [1989] 1 WLR 939, [1989] 3 All ER 822, [1989] 7 WLUK 356, [1989] ICR 557, [1989] IRLR 399, (1989) 133 SJ 1200������������������������������  14.9 Astra Zeneca UK Ltd v Albermarle International Corpn [2011] EWHC 1574 (Comm), [2011] 6 WLUK 473, [2011] 2 CLC 252, [2012] Bus LR D1����������������������������������������������������������������������������������������  8.16 Attwood v Merryweather (1867–68) LR 5 Eq 464 (Note)�����������������������������������  8.10

xviii

Table of Cases Australian Securities & Investments Commission v Citigroup Gobal Markets Australia Pty Ltd [2007] FCA 963���������������������������������������������������������������  8.21 Autonomy Corpn Ltd v Lynch (HC-2015-001324)����������������������������������������������  6.25 B BCE Inc v 1976 Debentureholders [2008] 3 SCR 560, 2008 SCC 69�����������������  2.15 BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112, [2019] 2 All ER 784, [2019] 2 All ER (Comm) 13�������������������������������������������������������������������������  2.15 BV Nederlandse Industrie van Fiprodukten v Rembrandt Enterprises Inc [2019] EWCA Civ 596, [2020] QB 551, [2019] 3 WLR 1113�������������������  6.116 Bailey v Angove’s Pty Ltd see D & D Wines International Ltd (in liquidation), Re Bairstow v Queen’s Moat Houses plc [2001] EWCA Civ 712, [2002] BCC 91, [2001] 2 BCLC 531�����������������������������������������������������������  2.57 Baldwin (Timothy) & WRT Investments Ltd v Financial Services Authority (2006) FSMT Case 028��������������������������������������������������������������  12.15 Balfron Trustees Ltd v Petersen [2001] IRLR 758, [2002] Lloyd’s Rep PN 1, [2002] WTLR 157��������������������������������������������������������������������������������������  15.12 Banca Nazionale del Lavoro SPA v Playboy Club [2018] UKSC 43, [2018] 1 WLR 4041, [2019] 2 All ER 479���������������������������������������������������  14.8 Bankia SA v Union Mutua Asistencial de Seguros (UMAS) (Case C-910/19) [2021] Bus LR 1008, [2021] 6 WLUK 43 �������������������������  6.2 Bank of Ireland v Jaffery [2012] EWHC 1377 (Ch)���������������������������������������������  14.6 Bank Mellat v HM Treasury [2019] EWCA Civ 449, [2019] 3 WLUK 252������  6.121 Bank Mellat v Kazmi [1989] QB 541, [1989] 2 WLR 613, [1989] 1 All ER 925�����������������������������������������������������������������������������������������������  6.125 Bank of Cyprus UK Ltd v Menelaou [2015] UKSC 66, [2016] AC 176, [2015] 3 WLR 1334��������������������������������������������������������������������������������������  2.61 Bank of New Zealand v New Zealand Guardian Trust Ltd [1999] 1 NZLR 664���������� 2.14 Bank of Scotland v A Ltd [2001] EWCA Civ 52, [2001] 1 WLR 751, [2001] 3 All ER 58���������������������������������������������������������������������������������   7.4; 8.7, 8.13; 14.17 Bank St Petersburg PJSC v Archangelsky [2020] EWCA Civ 408, [2020] 4 WLR 55, [2021] 1 All ER 119�������������������������������������������������������  2.54 Banque Financiere de la Cite SA (formerly Banque Keyser Ullmann SA) v Westgate Insurance Co (formerly Hodge General & Mercantile Co Ltd) [1991] 2 AC 249, [1990] 3 WLR 364, [1990] 2 All ER 947������������������������  8.16 Banque Keyser Ullman v Skandia (UK) Insurance Co [1990] 1 QB 665, [1989] 3 WLR 25, [1989] 2 All ER 952�����������������������������������������������������  6.116 Barclay Pharmaceuticals Ltd v Waynham LP [2012] EWHC 306 (Comm), [2012] 2 WLUK 794, (2012) 109 (26) LSG 19��������������������������������������������  6.19 Barclays Bank v Quincecare Ltd [1992] 4 All ER 363, [1988] 2 WLUK 252, [1988] 1 FTLR 507 �����������������������������������������������������������������������������   8.9; 14.11 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, [1968] 3 WLR 1097, [1968] 3 All ER 651���������������������������������������������������������������  8.15 Barclays Bank plc v Various Claimants [2020] UKSC 13, [2020] AC 973, [2020] 2 WLR 960 ���������������������������������������������������������������������������������������  15.8 Barlow Clowes International Ltd (in liquidation) v Eurotrust International Ltd [2005] UKPC 37, [2006] 1 WLR 1476, [2006] 1 All ER 333����������������������  6.29 Barnes v Addy (1873–74) LR 9 Ch App 244, (1874) 22 WR 505, (1984) 43 LJ Ch 513������������������������������������������������������������������������������������������������  2.31 Barry v Croskey (1861) 2 John & H 1, 70 ER 945�����������������������������������������������  6.23 Basic v Levinson 485 US 224 (1988)���������������������������������������������������������������������  6.1 Bates v Post Office Ltd (No 3: Common Issues) [2019] EWHC 606 (QB), [2019] 3 WLUK 260��������������������������������������������������������������������������   2.18; 6.33; 8.10; 14.4 Bayer AG v Winter [1986] 1 WLR 497, [1986] 1 All ER 733, [1986] FSR 323������������������������������������������������������������������������������������������  6.129

xix

Table of Cases Beans Group v MyUniDays [2019] EWHC 320 (Comm), [2019] 2 WLUK 310������� 14.9 Becker v Lloyds TSB Bank plc [2013] EWHC 3000 (Ch)�����������������������������������  7.26 Bedford v Bagshaw (1859) 4 Hurl & N 538, 157 ER 951������������������������������������  6.22 Bell v Lever Bros Ltd [1932] AC 161��������������������������������������������������������   2.15, 2.17; 6.40; 8.7; 14.6 Bell Pottinger Private Ltd, Re [2021] EWHC 672 (Ch), [2022] 1 All ER (Comm) 815, [2021] Bus LR 776��������������������������������������������������������������  6.131 Belmont Finance Corpn Ltd v Williams Furniture Ltd [1979] Ch 250, [1978] 3 WLR 712, [1979] 1 All ER 118������������������������������������������   2.34; 15.14 Berg Sons & Co Ltd v Mervyn Hampton Adams [1992] 6 WLUK 307, [1992] BCC 661, [2002] Lloyds Rep PN 41����������������������������������������������  15.14 Bersch v Drexel Firestone Inc 519 F 2d 974 (2nd Cir, 1975)������������������   16.22, 16.30 Bhullar v Bhullar [2003] EWCA Civ 424, [2003] BCC 711, [2003] 2 BCLC 241���������������������������������������������������������������������������������   2.8; 8.2 Bigelow v Oglesby 303 III App 27 36, 23 NE 2d 382 (1939)������������������������������  6.16 Bilta (UK) Ltd (in liquidation) v Nazir [2015] UKSC 23, [2016] AC 1, [2015] 2 WLR 1168����������������������������������������������������������������������������������������  2.8 Bilta (UK) Ltd (in liquidation) v Nazir (No 2) [2013] EWCA Civ 968, [2014] Ch 52, [2013] 3 WLR 1167���������������������������������������������������   2.37; 15.14 Bishop of Leeds v Dixon, Coles & Gill (a firm); Dixon Coles & Gill (a firm) v Baines [2021] EWCA Civ 1097, [2022] Ch 195, [2022] 2 WLR 16�������������������������������������������������������������������������������   15.4, 15.16 Blackley v National Mutual Life Insurance of Australiasia Ltd [1972] NZLR 1038�������������������������������������������������������������������������������������  15.15 Blackpool Football Club Ltd v DSN [2021] EWCA Civ 1352, [2021] 9 WLUK 85�����������������������������������������������������������������������������   2.39; 15.8 Blisset v Daniel (1853) 10 Hare 493, 68 ER 1022, [1853] 7 WLUK 115������������  2.17 Boardman v Phipps [1967] 2 AC 46, [1966] 3 WLR 1009, [1966] 3 All ER 721 �������������������������������������������������������������������   2.29; 7.47; 8.8, 8.10, 8.13, 8.17 Bolkiah (Prince Jefri) v KPMG [1999] 2 AC 222, [1999] 2 WLR 215, [1999] 1 All ER 517 ��������������������������������������������������������������������������   8.14, 8.18, 8.21, 8.41 Boscawen v Bajwa [1996] 1 WLR 328, [1995] 4 All ER 769, [1995] 4 WLUK 157������������������������������������������������������������������������������������������������  2.61 Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 Ch D 339�����������������������  14.5 Boston Trust Co Ltd v Szerelmey Ltd [2020] EWHC 1352 (Ch), [2021] 1 All ER (Comm) 1111, [2020] Bus LR 1647����������������������������������  2.11 Bourassa v Desrochers 938 F 2d 1056 (9th Cir, 1991)���������������������������������������  16.36 Bowen v Hall (1881) 6 QBD 333�������������������������������������������������������������������������  14.7 Bowman v Fels (Bar Council Intervening) [2005] EWCA Civ 226, [2005] 1 WLR 3083, [2005] 4 All ER 609�����������������������������������������   7.14, 7.18, 7.24; 14.18 Bowman v Secular Society Ltd [1917] AC 406������������������������������������������������������  7.2 Boyse (International) Ltd v NatWest Markets plc [2021] EWHC 1387 (Ch), [2021] 5 WLUK 328����������������������������������������������������������������������������������  6.118 Brandeaux Advisers (UK) Ltd v Chadwick [2010] EWHC 3241 (QB), [2010] IRLR 224������������������������������������������������������������������������������������������  1.39 Bray v Ford [1986] AC 44�������������������������������������������������������������������������������   2.4; 8.1 Brazil v Durrant International Corpn [2015] UKPC 35, [2016] AC 297, [2015] 3 WLR 599����������������������������������������������������������������������������������������  2.61 Breen v Williams (1996) 186 CLR 71������������������������������������������������������������������  8.21 Breeze v Chief Constable of Norfolk [2018] EWHC 485 (QB), [2018] 3 WLUK 365, [2018] 2 BCLC 638��������������������������������������������������������������  2.16 Briess v Woolley [1954] AC 333, [1954] 2 WLR 832, [1954] 1 All ER 909����������������������������������������������������������������������������������������   2.15, 2.21 Brietenfeld UK Ltd v Harrison [2015] EWHC 399 (Ch), [2015] 2 WLUK 653, [2015] 2 BCLC 275����������������������������������������������������������������  8.2 Briggs v Gunner (unreported, 16 January 1979)�����������������������������������������   8.13, 8.15

xx

Table of Cases Brinks Ltd v Abu-Saleh [1999] CLC 133�������������������������������������������������������������  2.34 Bristol & West Building Society v Mothew (t/a Stapley & Co) [1998] Ch 1, [1997] 2 WLR 436, [1996] 4 All ER 698������������������������   2.4, 2.56; 6.44; 8.15 British Airways Board v Taylor [1976] 1 WLR 13, [1976] 1 All ER 65, [1976] 1 Lloyd’s Rep 167�����������������������������������������������������������������������������  6.35 British Motor Trade Association v Salvadori [1949] Ch 556, [1949] 1 All ER 208, 65 TLR 44������������������������������������������������������������������������������  14.9 Broad Idea International Ltd v Convoy Collateral Ltd (Convoy Collateral Ltd v Cho Kwai Chee (BVI) [2021] UKPC 24, [2022] 2 WLR 703, [2022] 1 All ER 289�����������������������������������������������������������������������������������������������  6.121 Brophy v Cities Servces Co 31 Del Ch 241 (1941)����������������������������������������������  14.4 Brunninghausen v Glavanics (1999) 32 ACSR 294���������������������������������������������  2.21 Bryant v Law Society [2007] EWHC 3043 (Admin), [2009] 1 WLR 163, [2007] 12 WLUK 667����������������������������������������������������������������������������������  6.29 Brydges v Branfill (1842) 12 Sim 369, 59 ER 1174�������������������������������������������  15.12 Bulitude v Law Society [2004] EWCA Civ 1853, [2004] 12 WLUK 537, (2005) 102 (9) LSG 29���������������������������������������������������������������������������������  6.29 Burford Capital Ltd v London Stock Exchange Group plc [2020] EWHC 1183 (Comm), [2021] 2 All ER 377, [2021] 1 All ER (Comm) 1231�����������������������������������������������������������������������   1.47; 4.41 Burnden Holdings (UK) Ltd v Fielding [2018] UKSC 14, [2018] AC 857, [2018] 2 WLR 885����������������������������������������������������������������������������������������  2.12 Burnden Holdings (UK) Ltd (in liquidation) v Fielding [2019] EWHC 1566 (Ch), [2019] Bus LR 2878, [2019] 6 WLUK 288������������������  2.12 Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch), [2021] 5 WLUK 419������������������������������������������������������������������������������������   2.2, 2.8; 8.4 Burns v Financial Conduct Authority [2017] EWCA Civ 2140, [2018] 1 WLR 4161, [2017] 12 WLUK 613������������������������������   3.108; 6.29; 8.7 Butte Mining plc v Smith 76 F 3d 287 (9th Cir, 1996)���������������������������������������  16.21 Byers v Chen [2021] UKPC 4, [2021] 2 WLUK 314, [2021] BCC 462��������������  2.15 Byers v Saudi National Bank [2022] EWCA Civ 43, [2022] 4 WLR 22, [2022] 1 WLUK 289��������������������������������������������������������������������������   2.34, 2.55, 2.59; 14.13 C C v S (Money Laundering: Discovery of Documents) (Practice Note) [1999] 1 WLR 1551, [1999] 2 All ER 343, [1999] Lloyd’s Rep Bank 26����������������������������������������������������������������������������������������   7.4; 14.17 C & E Comrs v Barclays Bank plc (2006) 3 WML 1�����������������������������������������  6.125 C & E Comrs v Barclays Bank plc [2006] UKHL 28, [2007] 1 AC 181, [2006] 3 WLR 1��������������������������������������������������������������������������������������������  14.8 CJ & LK Perks Partnership v Natwest Markets plc (formerly The Royal Bank of Scotland plc) [2022] EWHC 726 (Comm), [2022] 3 WLUK 434����������������������������������������������������������������������������������������������  6.118 CMOC Sales & Marketing Ltd v Persons Unknown [2018] EWHC 2230 (Comm), [2018] 7 WLUK 651, [2019] Lloyd’s Rep FC 62�����������������������  6.121 CMS Dolphin Ltd v Simonet [2002] BCC 600, [2001] 2 BCLC 704, [2001] Emp LR 895 ��������������������������������������������������������������������   2.8, 2.24, 2.26, 2.43; 8.3, 8.6 Campbell v Mirror Group Newspapers Ltd [2004] UKHL 22, [2004] 2 AC 457, [2004] 2 WLR 1232�������������������������������������������������������  14.10 Canadian Aero Services v O’Malley (1973) 40 DLR (3d) 371����������   2.26, 2.42; 6.44 Canada Trust Co v Stolzenberg (The Times, 10 November 1997)���������������������  6.128 Canadian Aero Services v O’Malley (1973) 40 DLR (3s) 371�����������������������������  2.24 Canadian Land Reclaiming & Colonizing Co, Re (1880) 14 Ch D 660���������������  2.41 Cantrell v Allied Irish Banks [2019] IECA 217��������������������������������������������������  6.115

xxi

Table of Cases Caparo Industries plc v Dickman [1990] 2 AC 605, [1990] 2 WLR 358, [1990] 1 All ER 568 ����������������������������������������������������������������   2.45; 14.8, 14.12 Cargill Inc v Hardin 452 F 2d 1154 (8th Cir, 1971)������������������������������������   5.2; 16.32 Carpenter v US 484 UK 19 (1987)�����������������������������������������������������������������������  6.48 Carrimjee v Financial Conduct Authority [2015] UKUT 79 (TCC), [2015] 3 WLUK 102, [2015] Lloyd’s Rep FC 256������������������������������������  14.61 Cathay Pacific Airways Ltd v Lufthansa Technik AG [2020] EWHC 1789 (Ch), [2020] 7 WLUK 149�����������������������������������������������������  2.22 Catholic Child Welfare Society v Institute of the Brothers of the Christian Schools [2012] UKSC 56, [2013] 2 AC 1, [2012] 3 WLR 1319����������������������������������������������������������������������������������������   15.8, 15.9 Cattle Breeders Farm (PyT) Ltd v Veldman 1974 (1) SA 1169��������������������������  6.140 Chan v Zacharia (1984) 154 CLR 178������������������������������������������������������������������  8.21 Charitable Corpn v Sutton (1742) 2 Atk 400, 26 ER 642, [1742] 8 WLUK 13��������������������������������������������������������������������������������������������������  2.12 Charles B Lawrence & Associates v Intercommercial Bank Ltd (Trinidad & Tobago) [2021] UKPC 30, [2021] 11 WLUK 291, [2022] PNLR 7������������������������������������������������������������������������������������   2.45; 14.8 Charterhouse Capital Ltd, Re [2014] EWHC 1410 (Ch), [2014] 5 WLUK 263������������������������������������������������������������������������������������������������  2.15 Chase Manhattan Equities v Goodman [1991] BCC 308, [1991] BCLC 897��������������������������������������������������������������������������   2.53; 3.22, 3.65; 6.21 Chez Nico (Restaurants) Ltd, Re [1991] BCC 736, [1992] BCLC 192�����������������������������������������������������������������������������������   2.19, 2.21; 6.44 Chiarella v US 445 US 222 (1980)�����������������������������������������������������   1.9; 2.22; 16.19 Children’s Investment Fund Foundation (UK) v A-G [2020] UKSC 33, [2022] AC 155, [2020] 3 WLR 461����������������������������������������������������������������  8.9 Christine DeJong Medicine Professional Corpn v DBDC Spadina Ltd 2019 SCC 30, [2019] 2 SCR 530�����������������������������������������������������������������  2.37 City Index Ltd (t/a FinSpreads) v Balducci [2011] EWHC 2562 (Ch), [2011] 10 WLUK 151, [2012] 1 BCLC 317�������������������������������������������������  3.19 Clark v Urquhart, Stracey v Urquhart [1930] AC 28, (1929) 34 Ll L Rep 359������������������������������������������������������������������������������������������  6.117 Clarke Boyce v Mouat [1994] 1 AC 428, [1993] 3 WLR 1021, [1993] 4 All ER 268 ��������������������������������������������������������������������������   2.28; 8.15, 8.16, 8.17 Clarkson Co Ltd v Zhelka (1967) 64 DLR (2d) 457������������������������������������������  6.140 Clough v Bond (1838) 3 My & C 490, 40 ER 1016���������������������������������������������  7.45 Coca-Cola Co v Gilbey [1995] 4 All ER 711, (1995) 145 NLJ 1688�����������������  6.128 Coleman v Myers [1977] 2 NZLR 225�����������������������������������������������   2.14, 2.20; 6.44 Colt Industries v Sarlie (No 2) [1966] 1 WLR 1287, [1966] 3 All ER 85, [1966] 2 Lloyd’s Rep 163���������������������������������������������������������������������������  11.18 Company (No 005136), Re [1987] 1 WLUK 724, [1987] BCLC 82�������������������  2.21 Concept Oil Services Ltd v En-Gin Group LLP [2013] EWHC 1897 (Comm)��������������������������������������������������������������������������   6.19; 14.8 Concut Pty Ltd v Worrell [2000] HCA 64������������������������������������������������������������  2.42 Consolidated Gold Fields plc v Minorco SA 871 F 2d 252 (2d Cir, 1989)�������  16.22, 16.23 Continental Grain (Australia) Pty Ltd v Pacific Oilseeds Inc 592 F 2d 409 (8th Cir, 1979)��������������������������������������������������������������������������������������������  16.24 Cook v Deeks [1916] 1 AC 554������������������������������������������������������������������   2.24, 2.26; 7.47; 8.10 Coppen v Moore (No 2) [1898] 2 QB 306������������������������������������������������������������  15.4 Cramaso LLP v Ogilvie-Grant; Cramaso LLP vEarl of Seafield; Cramaso LLP v Viscount Reidhaven’s Trustees [2014] UKSC 9, [2014] AC 1093, [2014] 2 WLR 317����������������������������������������������������������  6.115 Credit Agricole Corpn & Investment Bank v Papadimitriou [2015] UKPC 13, [2015] 1 WLR 4265, [2015] 2 All ER 974��������������������   14.14; 15.13

xxii

Table of Cases Credit Lyonnais Bank Nederland NV (now Generale Bank Nederland NV) v Export Credits Guarantee Department [2000] 1 AC 486, [1999] 2 WLR 540, [1999] 1 All ER 929�����������������������������������������������������������������  15.9 Crofter Hand-Woven Harris Tweed Co Ltd v Veitch [1942] AC 435, [1942] 1 All ER 142, 1942 SC (HL) 1���������������������������������������������������������  6.19 Crossley (Anthony) v Volkswagen Aktiengesellschaft [2019] EWHC 3444 (QB), [2021] 12 WLUK 333������������������������������������������������  6.116 Crown Dilmun v Sutton [2004] EWHC 52 (Ch), [2004] 1 BCLC 468, [2004] WTLR 497����������������������������������������������������������������������������������������  14.6 Crown Prosecution Service v Aquila Advisory Ltd [2021] UKSC 49, [2021] 1 WLR 5666, [2022] 2 All ER 864����������������������������������   2.8, 2.12, 2.27, 2.37; 15.8 Crown Prosecution Service v Mattu [2009] EWCA Crim 1483, [2010] Crim LR 229�������������������������������������������������������������������������������������������������  7.15 Crowson Fabrics Ltd v Rider [2007] EWHC 2942 (Ch), [2008] IRLR 288, [2008] FSR 17����������������������������������������������������������������������������  14.5 Cruddas v Calvert (No 2) [2015] EWCA Civ 171, [2015] 3 WLUK 462, [2015] EMLR 16����������������������������������������������������������������  6.119 Cundy v Lindsay (1878) 3 App Cas 59, [1874–80] All ER Rep 1148, (1878) 42 JP 483�������������������������������������������������������������������������������������������  6.48 Cunliffe-Owen v Teather & Greenwood [1967] 1 WLR 1421, [1967] 3 All ER 561, (1967) 111 SJ 866������������������������������������������������������������������  8.19 Customer Systems plc v Ranson [2012] EWCA Civ 841, [2012] IRLR 769, (2012) 156 (26) SJLB 31���������������������������������������������������   2.42; 14.5 D D & D Wines International Ltd (in liquidation), Re [2016] UKSC 47, [2016] 1 WLR 3179, [2017] 1 All ER 773���������������������������������������������������  2.31 D & J Constructions Pty Ltd v Head (t/a Clayton Utz) (1987) 9 NSWLR 118����������� 8.21 DC Thomson & Co Ltd v Deakin [1952] Ch 646, [1952] 2 All ER 361, [1952] 2 TLR 105������������������������������������������������������������������������������   14.9, 14.12 DPP v ICR Haulage Ltd [1944] KB 551, [1944] 1 All ER 691, (1945) 30 Cr App R 31���������������������������������������������������������������������������������  15.6 DPP v Patterson [2017] EWHC 2820 (Admin), [2017] 11 WLUK 46, [2018] 1 Cr App R 28�����������������������������������������������������������������������������������  6.29 DPP v Welham [1961] AC 103, [1960] 2 WLR 669, [1960] 1 All ER 805��������  6.105 DPP’s Reference (No 5 of 2019), Re [2020] NICA 1�������������������������������������������  6.44 Daly v The Sydney Stock Exchange Ltd (1986) 160 CLR 371����������������������������  8.15 Daniels v Daniels [1978] Ch 406, [1978] 2 WLR 73, [1978] 2 All ER 89�����������������������������������������������������������������������������������������   2.11, 2.24; 7.52; 8.9, 8.10 Daraydan Holdings Ltd v Solland International Ltd [2004] EWHC 622 (Ch), [2005] Ch 119, [2004] 3 WLR 1106�������������������������������������������������������������  8.10 Dare v Crown Prosecution Service [2012] EWHC 2074 (Admin), (2013) 177 JP 37, [2012] Lloyd’s Rep FC 718���������������������������������������������  7.17 Dargamo Holdings Ltd v Avonwick Holdings Ltd [2021] EWCA Civ 1149, [2022] 1 All ER (Comm) 1244, [2021] 7 WLUK 437���������������������������������  6.53 Davidson & Tatham v FSA (11 October 2006)�����������������������������������������������������  11.3 Dawson Internatonal plc v Coats Paton plc (No 1) 1988 SLT 854, 1988 SCLR 371, [1988] 4 BCC 305������������������������������������������������������������  2.19 Dellow’s Will Trusts, Re [1964] 1 WLR 451, [1964] 1 All ER 771, [1964] 2 WLUK 14������������������������������������������������������������������������������������  6.115 Dept of Economic Development v Arthur Anderson & Co 683 F Supp 1463 (SDNY, 1988)���������������������������������������������������������������������������������������������  16.36 Dering v Earl Winchelsea (1787) 1 Cox Eq Cas 318, 29 ER 1184, [1787] 2 WLUK 20������������������������������������������������������������������������������������  6.120 Derry v Peek (1889) 14 App Cas 337, (1889) 5 TLR 625����������������������������������  6.116 Des Brisay v Goldfield Corpn 549 F 2d 133 (9th Cir, 1977)������������������������������  16.22

xxiii

Table of Cases Diamond v Oreamuno (1969) 248 NE 2d 910 (NY, 1969)�������������������   2.13; 8.8; 14.4 Diamantides v JP Morgan Chase Bank [2005] EWCA Civ 1612, [2005] 12 WLUK 667����������������������������������������������������������������������������������  8.13 Digicel (St Lucia) Ltd v Cable & Wireless plc [2010] EWHC 774 (Ch), [2010] 4 WLUK 146������������������������������������������������������������������������������������  6.19 Diplock’s Estate, Re; Ministry of Health v Simpson [1948] Ch 465, [1948] 2 All ER 318, [1948] 7 WLUK 33����������������������������������������������������  2.61 Director General of Fair Trading v Pioneer Concrete (UK) Ltd [1995] 1 AC 456, [1994] 3 WLR 1249, [1995] 1 All ER 135���������������   2.37, 2.38; 15.4, 15.5, 15.6, 15.11 Director of Assets Recovery Agency v Green [2005] EWHC 3168 (Admin), [2005] 12 WLUK 565�������������������������������������������������������������������  7.15 Director of Assets Recovery Agency v Szepietowski [2007] EWCA Civ 766, [2008] Lloyd’s Rep FC 10������������������������������������������������  7.15 Dirks v SEC 463 UK 646 (1983)��������������������������������������������������������   1.9; 3.49; 16.19 Doe (John) v UNOCAL Corpn 110 F Supp 2 1294 (CD Cal, 2000)������������������  16.35 Dollars & Sense Finance Ltd v Nathan [2008] NZSC 20�����������������������������������  15.11 Dominus R v Johannem Huggins, Arm (1730) 2 Str 883, 93 ER 915������������������  15.4 Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158, [1969] 2 WLR 673, [1969] 2 All ER 119������������������������������������������������������������������������������������  6.117 Dubai Aluminium Ltd v Salaam [2002] UKHL 48, [2003] 2 AC 366, [2002] 3 WLR 1913 ���������������������������������������������������������������������������   2.31; 14.4; 15.10, 15.12 Dunford & Elliot Ltd v Johnson & Firth Brown Ltd [1977] 1 Lloyd’s Rep 505, [1978] FSR 143, (1977) 121 SJ 53���������������������   2.18, 2.30, 2.60; 8.13 Dunlop v Maison Talbot (1904) 20 TLR 579�����������������������������������������������������  6.119 E EUI Ltd v UK Vodaphone Ltd [2021] EWCA Civ 1771, [2021] 11 WLUK 334��������������������������������������������������������������������������������������������  6.128 Eaton v Caulfield [2011] EWHC 173 (Ch), [2011] BCC 386������������������������������  14.4 Ebrahimi v Westbourne Galleries [1973] AC 360, [1972] 2 WLR 1289, [1972] 2 All ER 492�������������������������������������������������������������������������������������  2.22 Edgington v Fitzmaurice (1885) 29 Ch D 459���������������������������������������������   6.33, 6.35 Ehrentreu v IG Index Ltd (rev 1) [2018] EWCA Civ 79, [2018] 1 WLUK 519, [2018] LLR 261�����������������������������������������������������������   2.51; 6.33 El-Ajou v Dollar Land Holdings plc (No 1) [1994] 2 All ER 685, [1994] BCC 143, [1994] 1 BCLC 464��������������������������������������   2.31, 2.37, 2.38; 6.120; 15.7, 15.13, 15.14, 15.15 Elite Property Holdings Ltd v Barclays Bank plc [2019] EWCA Civ 204, [2019] 2 WLUK 286�������������������������������������������������������������������������   6.19, 6.115 Erlanger v New Sombrero Phosphate Co [1878] 3 App Cas 1218, [1878] 7 WLUK 90��������������������������������������������������������������������������������������  1.22 Estera Trust Ltd v Singh [2018] EWHC 1715 (Ch), [2018] 7 WLUK 97, [2019] 1 BCLC 171��������������������������������������������������������������������������������������  2.22 Eurasian Natural Resources Corpn Ltd v Qaiygeldin [2021] EWHC 462 (Ch), [2021] 3 WLUK 91������������������������������������������������������������������������������������  14.10 Euro-Diam Ltd v Bathurst [1990] 1 QB 1, [1988] 2 WLR 517, [1988] 2 All ER 23���������������������������������������������������������������������������������������  2.53 Europe & Overseas Community Traders SA v Banque Paribas London 147 F 3d 118 (2nd Cir. 1998)���������������������������������������������������������������������  16.22 F FC Jones & Sons (a firm), Trustees of the Property of v Jones [1997] Ch 159, [1997] 1 WLR 51, [1996] 3 WLR 703�������������������������������������������  2.61

xxiv

Table of Cases FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250, [2014] 3 WR 535��������������������   2.8, 2.12, 2.27, 2.31, 2.32, 2.33, 2.56; 8.1, 8.7, 8.10; 14.9, 14.13 Facia Footwear Ltd (in administration) v Hinchcliffe [1998] 1 BCLC 218��������������������������������������������������������������������������������������������������  14.4 Fairford Water Ski Club Ltd v Cohoon [2021] EWCA Civ 143, [2021] 2 All ER (Comm) 1085, [2021] 2 WLUK 95�������������������������������������  2.8 Fattal v Walbrook Trustees (Jersey) Ltd [2010] EWHC 2767 (Ch), [2010] 11 WLUK 98, [2012] Bus LR D7�������������������������������������������������������  2.6 Faulkner v Vollin Holdings Ltd [2021] EWHC 787 (Ch), [2021] 3 WLUK 557������������������������������������������������������������������������������������������������  2.22 Fayed, ex p see R v Panel on Take-overs & Mergers, ex p Al-Fayed Fayers Legal Services & Taylor v Howard Day (unreported, 11 April 2001)������  2.33 Federal Republic of Nigeria v JP Morgan Chase see JP Morgan Chase Bank NA v Federal Republic of Nigeria [2019] EWCA Civ 1641 Federal Republic of Nigeria v JP Morgan Chase [2022] EWHC 1447 (Comm), [2022] 6 WLUK 121��������������������������������������������������������������������  6.76, 6.115; 14.11 Ferguson v Paterson [1900] AC 271, (1900) 2 F (HL) 37, (1900) 7 SLT 472�����������������������������������������������������������������������������������������������������  8.21 Ferris v Polycast Technology Corpn 180 Conn 199 (1980)����������������������������������  14.4 Fetch ai Ltd v Persons Unknown Category A [2021] EWHC 2254 (Comm), [2021] 7 WLUK 601, 24 ITELR 566���������������������������������������������������������  6.127 Fidenas AG v Compagnie Internationale Pour L’informatique CII Honeywell Bull SA 606 F 2d 5 (2nd Cir, 1979)�����������������������������������������������������������  16.25 Financial Conduct Authority v Da Vinci Invest Ltd [2015] EWHC 2401 (Ch), [2015] Lloyd’s Rep FC 540�������������������������������   3.107; 4.19; 5.16; 12.57 Financial Conduct Authority v Grout [2018] EWCA Civ 71, [2018] 1 WLUK 520����������������������������������������������������������������������������������������������  12.33 Financial Conduct Authority v Macris [2015] EWCA Civ 490, [2015] Bus LR 1141, [2015] Lloyd’s Rep FC 445�������������������������������������������������  12.33 Financial Conduct Authority v Pardip Saini (unreported, April 2015)�������������������  3.7 Financial Services Authority v Barnett Alexander (unreported, 2011)�������   12.49, 12.61 Financial Services Authority v Amro International SA see R (on the application of Amro International SA) v Financial Services Authority Financial Services Authority v Anderson [2010] EWHC 308 (Ch), [2010] 2 WLUK 617����������������������������������������������������������������������������������  6.113 Finers v Miro [1991] 1 WLR 35, [1991] 1 AlL ER 182, (1990) 140 NLJ 1387���������������������������������������������������������������������������   7.4; 14.14, 14.16 First City Monument plc v Zumax Nigeria Ltd [2019] EWCA Civ 294, [2019] 3 WLUK 13, [2019] WTLR 511�������������������������������������������������������  2.36 First Subsea Ltd (formerly BSW Ltd) v Balltec Ltd [2014] EWHC 866 (Ch), [2014] 3 WLUK 711����������������������������������������������������������  8.7 Fletcher v Chief Constable of Leicestershire [2013] EWHC 3357 (Admin), [2014] Lloyd’s Rep FC 60����������������������������������������������������������������������������  7.15 Foglia v Family Officer Ltd [2021] EWHC 650 (Comm), [2021] 3 WLUK 362����������������������������������������������������������������������������������������������  6.115 Fons Hf (in liquidation) v Corporal Ltd [2014] EWCA Civ 304, [2015] 1 BCLC 320��������������������������������������������������������������������������������������  3.19 Forse v Secarma Ltd [2019] EWCA Civ 215, [2019] 2 WLUK 566, [2019] IRLR 587������������������������������������������������������������������������������������������  6.19 Fort Gilkicker Ltd, Re [2013] EWHC 348 (Ch), [2013] Ch 551, [2013] 3 WLR 164����������������������������������������������������������������������������������������  2.10 Foskett v McKeown [2001] 1 AC 102, [2000] 2 WLR 1299, [2000] 3 All ER 97���������������������������������������������������������������������������������������  2.61 Foss v Harbottle (1843) 2 Hare 461, 67 ER 189������������������������   2.10, 2.27; 8.10; 14.4

xxv

Table of Cases Framlington Group plc v Anderson [1995] BCC 611, [1995] 1 BCLC 475���������������������������������������������������������������������������������������������   8.2, 8.6 Frank Houlgate Investment Co Ltd v Biggart Baillie LLP [2014] CSIH 79, [2015] SC 187, 2014 SLT 1001����������������������������������������������������  7.48 Frederick v Positive Solutions (Financial Services) Ltd [2018] EWCA Civ 431, [2018] 3 WLUK 275���������������������������������������������������������  2.39 Fuseon Ltd v Senior Court Costs Office, The Lord Chancellor [2019] EWHC 126 (Admin), [2020] 1 WLUK 213, [2020] Costs LR 251�����������  6.144 G Gadsen v Bennetto (1913) 9 DLR 719 (Man)������������������������������������������������������  2.15 Geddis (Jason) v Financial Services Authority [2011] UKUT 344 (TCC)���������  12.38 Geltl (Markus) v Daimler AG (Case C-19/11) [2012] 3 CMLR 32, [2012] Lloyd’s Rep FC 635����������������������������������������������������������������������������  9.4 Gemma Ltd (in liquidation) v Davies [2008] EWHC 546 (Ch), [2008] 3 WLUK 377, [2008] BCC 812��������������������������������������������������������  2.41 General Foods Corpn v Brannon 170 F 2d 220, 234 (7th Cir, 1948)����������   5.2; 16.32 General Medical Council v Krishnan [2017] EWHC 2892 (Admin), [2017] 11 WLUK 464, [2018] ACD 9����������������������������������������������������������  6.29 Gerald Cooper Chemicals Ltd, Re [1978] Ch 262, [1978] 2 WLR 866, [1978] 2 All ER 49���������������������������������������������������������������������������������������  6.65 Gething v Killner [1972] 1 WLR 337, [1972] 1 All ER 1166, [1971] 11 WLUK 38����������������������������������������������������������������������������   2.15, 2.21 Gilford Motor Co Ltd v Horne (1933) Ch 935�������������������������������������������������������  7.2 Gillett v Peppercorne (1840) 3 Beav 78, 49 ER 31�������������������������������������   6.21; 8.19 Glandon Pty Ltd v Strata Consolidated Pty Ltd (1993) 11 ACSR 543�����������������  2.20 Glossop Cartons & Print Ltd v Contact (Print & Packaging) Ltd [2021] EWCA Civ 639, [2021] 1 WLR 4297, [2022] 1 All ER (Comm) 799�������  6.117 Gluckstein v Barnes [1900] AC 240, [1900] 4 WLUK 8�������������������������������������  1.22 Godwin Warren Control Systems plc, Re [1992] BCC 557, [1993] BCLC 80�����������������������������������������������������������������������������������������  6.134 Gogitidze v Georgia [2015] ECHR 475������������������������������������������������������������������  7.5 Goose v Wilson Sandford & Co (No 2) [2001] 1 Lloyd’s Rep PN 189����������������  2.32 Grayson & Barnham v United Kingdom (Application 19955/05) (2009) 48 EHRR 30, [2008] Lloyd’s Rep FC 574, [2009] Crim LR 200�����  7.81 Green v Charterhouse Group of Canada Ltd (1976) 12 OR (2d) 280������������������  3.39 Grimaldi v Chamelon Mining NL (No 2) [2012] FCAFC 6���������������������������������  2.61 Grongaard & Bank, Criminal Proceedings against (Case C-384/02) [2006] ECR I-9939, [2006] 1 CMLR 30, [2006] IRLR 214������������������������  3.72 Group Josi Re Co SA v Walbrook Insurance Co Ltd [1996] 1 WLR 1152, [1996] 1 All ER 791, [1996] 1 Lloyd’s Rep 345����������������������������������������  15.14 Grove Park Properties Ltd v Royal Bank of Scotland plc [2018] EWHC 3521 (Comm), [2018] 12 WLUK 309���������������������������������������������  2.54 Grupo Torras SA v Al-Sabah (No 5) [1999] CLC 1469���������������������������������������  2.34 Guinness plc v Saunders [1990] 2 AC 663, [1990] 2 WLR 324, [1990] 1 All ER 652�������������������������������������������������������������������������������������  2.13 Gulf Oil (Great Britain) Ltd v Page [1987] Ch 327, [1987] 3 WLR 166, [1987] 3 All ER 14���������������������������������������������������������������������������������������  6.19 Gwembe Valley Development Co Ltd (in receivership) v Koshy (account of profits: limitations) [2003] EWCA Civ 1048, [2004] 1 BCLC 131, [2004] WTLR 97�������������������������������������������������   2.6, 2.14 H HLC Environmental Products Ltd (in liquidation), Re [2013] EWHC 2876 (Ch), [2014] BCC 337������������������������������������������������������������  14.4 HMRC v Holland [2010] UKSC 51, [2010] 1 WLR 2793, [2011] 1 All ER 430���������������������������������������������������������������������������������������   2.12, 2.13, 2.15, 2.41

xxvi

Table of Cases Hajiyeva v National Crime Agency [2020] EWCA Civ 108, [2020] 1 WLR 3209, [2020] 4 All ER 147���������������������������������������������������������������  6.55 Halcyon House Ltd v Baines [2014] EWHC 2216 (QB)����������������������������������������  8.2 Hall v Libertarian Investments Ltd [2013] HKCFA 93����������������������������������������  2.55 Hamlyn v John Houston & Co [1903] 1 KB 81��������������������������������������������������  15.12 Hampshire Land Co (No 2), Re [1896] 2 Ch 743�����������������������������������������������  15.14 Hanco ATM Systems Ltd v Cashbox ATM Systems Ltd [2007] EWHC 1599 (Ch)�����������������������������������������������������������������������������������������  14.6 Hannam v Financial Conduct Authority [2014] UKUT 233 (TCC), [2014] Lloyd’s Rep FC 704 ���������������������������������������������   3.8, 3.18, 3.26, 3.107; 4.21; 9.4, 9.6; 12.20 Harper v Crenshaw 82 F 2d 845 (DC Cir, 1936)��������������������������������������������������  6.16 Harris v Microfusion 2003-2 LLP [2016] EWCA Civ 1212, [2016] 12 WLUK 132, [2017] CP Rep 15������������������������������������������������������   2.10, 2.11 Heinl v Jyske Bank (Gibraltar) Ltd [1999] Lloyd’s Rep Bank 511, (1999) 96 (34) LSG 33���������������������������������������������������������������������������������  2.36 Hellespont Arden, The see Red Sea Tankers Ltd v Papachristidis Helmet Integrated Systems Ltd v Tunnard [2006] EWCA Civ 1735, [2007] IRLR 126, [2007] FSR 16�������������������������������������������������������   2.42; 14.5 Henderson v Dorset Healthcare University NHS Foundation Trust [2020] UKSC 43, [2021] AC 563, [2020] 3 WLR 1124������������������������������  2.55 Heron International Ltd v Lord Grade [1983] BCLC 244, [1982] Com LR 108����������������������������������������������������������������������������������������   2.19; 6.44 High Comr for Pakistan in the United Kingdom v Prince Mukkuram Jah [2016] EWHC 1465 (Ch), [2016] 6 WLUK 486, [2016] WTLR 1763��������  2.31 Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch 169, [1946] 1 All ER 350���������������������������������������������������������������������������������������  8.7 Hlumisa Investment Holdings (RF) Ltd v Kirknis [2020] ZASCA 83�����������������  2.16 Hogan v DPP [2007] EWHC 978 (Admin), [2007] 1 WLR 2944, (2008) 172 JP 57�������������������������������������������������������������������������������������������  7.20 Hoodless v Financial Services Authority [2003] UKFSMT FSM007������������������  6.29 Hornal v Neuberger Products Ltd [1957] 1 QB 247, [1956] 3 WLR 1034, [1956] 3 All ER 970�����������������������������������������������������������������������������������  6.115 Hospital Products Ltd v US Surgucal Corpn (984) 156 CLR 41��������������������������  8.21 Hotel Portfolio II UK Ltd (in liquidation) v Ruhan [2022] EWHC 383 (Comm), [2022] 2 WLUK 307�������������������������������������������������  2.41 Huckerby v Elliott [1970] 1 All ER 189 (1969) 113 SJ 1001�����������������������������  14.25 Hunter v Chief Constable of the West Midlands Police [1982] AC 529, [1981] 3 WLR 906, [1981] 3 All ER 727���������������������������������������������������  14.45 Hurstanger Ltd v Wilson [2007] EWCA Civ 299, [2007] 1 WLR 2351, [2007] 4 All ER 1118��������������������������������������������������������������������������������������  2.9 Hussein v Chong Fook Kam [1970] AC 942, [1970] 2 WLR 441, [1969] 3 All ER 1626�����������������������������������������������������������������������������������  7.52 Hutton v Warren, Clerk (1836) 1 M & W 466, 150 ER 517���������������������������������  8.19 Hydrodam (Corby) Ltd (in liquidation), Re [1994] BCC 161, [1994] 2 BCLC 180����� 2.41 I IIT v Cornfield 619 F 2d 909 (2nd Cir, 1980)�����������������������������������������������������  16.25 IIT v Vencap Ltd 519 F 2d 1001 (2nd Cir, 1975)������������������������������������   16.21, 16.23 Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2009] 10 WLUK 433, [2010] BCC 420������������������������������������������������������  2.11 Imageview Management Ltd v Jack [2009] EWCA Civ 63���������������������������������  8.17 Indata Equipment Supplies Ltd v ACL Ltd [1998] 1 BCLC 412, [1998] FSR 248, (1997) 141 SJLB 216��������������������������������������������������������  2.30 India v Taylor [1955] AC 491, [1955] 2 WLR 303, [1955] 1 All ER 292������������  2.27 Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443, [1972] 2 All ER 162, (1972) 116 SJ 255����������������������������������������������   2.8, 2.42, 2.43; 8.7; 14.5

xxvii

Table of Cases Innovisions Ltd v Chan, Singchuk & Charles (1992) 1 HKLR 71; aff’d (1992) 1 HKLR 255��������������������������������������������������������������������������������������  2.53 In Plus Group Ltd v Pyke [2002] EWCA Civ 370, [2003] BCC 332, [2002] 2 BCLC 201 �����������������������������������������������������������������������������   2.13; 8.1, 8.2, 8.7 Inter Expert LLC v Townley [2018] EWCA Civ 2068, [2018] 9 WLUK 258������������������������������������������������������������������������������   2.15, 2.18; 6.37 International Credit & Investment Co (Overseas) Ltd v Adham (Appointment of Receiver) [1998] BCC 134���������������������������������������������  6.129 Ipourgos Ikonomikon v Georgakis [2007] All ER (EC) 1106������������������������������  1.46 Island Export Finance Ltd v Umunna [1986] BCLC 460���������������������������������������  8.6 Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, [2004] BCC 994, [2005] 2 BCLC 91�������������������������������������������������������������   2.10; 6.40; 14.5, 14.6 Itoba Ltd v Lep Group plc 54 3d 118 (2nd Cir, 1995)����������������������������������������  16.21 Ivey v Genting Casinos (UK) Ltd (t/a Crockfords Club) [2016] EWCA Civ 1093, [2017] 1 WLR 679, [2016] 11 WLUK 100�������   2.36; 3.11; 6.29 J J Evans & Sons (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078, [1976] 2 All ER 930, [1976] 2 Lloyd’s Rep 165�������������������  14.7 JD Wetherspoon plc v Van de Berg [2009] EWHC 639, [2009] 16 EG 138 (CS)��������������������������������������������������������������������������������������������  2.32 JP Morgan Chase Bank NA v Federal Republic of Nigeria [2019] EWCA Civ 1641, [2019] 10 WLUK 86, [2019] 2 CLC 559���������������   8.9; 14.11 JSC BTA Bank v Ablyazov [2009] EWCA Civ 1124, [2010] 1 WLR 976, [2010] CP Rep 8�������������������������������������������������������������������������������������������  7.11 JSC BTA Bank v Ablyazov [2013] EWHC 150�������������������������������������������������  6.115 JSC BTA Bank v Ablyazov [2015] UKSC 64, [2015] 1 WLR 4754, [2016] 1 All ER 608�����������������������������������������������������������������������������������  6.128 JSC BTA Bank v Ablyazov [2018] UKSC 10������������������������������������������������������  6.19 JSC BTA Bank v Khrapunov [2018] UKSC 19, [2020] AC 727, [2018] 2 WLR 1125������������������������������������������������������������������   6.17, 6.19, 6.127 JSC Mezhduparodniy Promyschlenniy Bank v Pugachev [2015] EWCA Civ 139, [2016] 1 WLR 160, [2015] 2 All ER (Comm) 816���������  6.128 Jabre (Philippe) & the FSA (decision on market Abuse) (Financial Services & Markets Tribunal, 10 July 2006)����������������������   4.13, 4.15 Jafari-Fini v Skillglass Ltd (in administration) [2007] EWCA Civ 261�������������  15.13 Jamaican Bar Association v A-G of Jamaica [2017] JMFC Full 02�������������������  14.18 Jameel v Wall Street Journal Europe SPRL [2006] UKHL 44, [2007] 1 AC 359, [2006] 3 WLR 642����������������������������������������������������������������������  2.13 Jennings v Forestry Commission [2008] EWCA Civ 581, 2008 ICR 988�����������  15.9 Jetivia SA v Bilta see Bilta (UK) Ltd (in liquidation) v Nazir Joel v Morison (1834) 6 Car & P 501, 172 ER 1338������������������������������������������  15.10 Joffe v R (2012) 82 NSWLR 510�����������������������������������������������������������������������  3.107 John Crowther Group plc v Carpets International plc [1990] BCLC 460������������  2.21 Johnson v Gore Wood & Co [2002] 2 AC 1, [2001] 2 WLR 72, [2001] 1 All ER 481�������������������������������������������������������������������������������������������������  2.16 Jones v Canavan [1972] 2 NSWLR 236���������������������������������������������������������������  8.15 Jones v Lipman [1962] 1 WLR 832, [1962] 1 All ER 442, (1962) 106 SJ 531�������������������������������������������������������������������������������������������   6.140; 7.2 Jones v University of Warwick [2003] EWCA Civ 151, [2003] 1 WLR 954, [2003] 3 All ER 760 ��������������������������������������������������������������  6.114 K K Ltd v National Westminster Bank plc [2006] EWCA Civ 1039, [2007] Bus LR 26, [2007] 1 WLR 311�����������������������������������������������   7.17, 7.52, 7.56, 7.57 Karz Corpn v TH Canty & Co Inc 168 Conn 201 (1975)�������������������������������������  14.4

xxviii

Table of Cases Kaufman v Campeau Corpn 744 F Supp 808 (SD Ohio, 1990)�������������������������  16.31 Kelly v Cooper [1993] AC 205, [1992] 3 WLR 936, [1994] 1 BCLC 395����������������������������������������������������������������������������������   2.5, 2.28; 8.18 Kensington International Ltd v Republic of Congo [2007] EWCA Civ 1128, [2008] 1 WLR 1144, [2008] 1 AllER (Comm) 934�������������������������������������  7.17 Kerrigan v Elevate Credit International Ltd (t/a Sunny) [2020] EWHC 2169 (Comm), [2020] 8 WLUK 186, [2020] CTLC 161����������������  4.41 Khoshokhou v Cooper [2014] EWHC 1087 (Ch), [2014] 4 WLUK 375�������������  2.22 Killen v Horseworld Ltd [2011] EWHC 1600 (QB)�����������������������������������������������  8.6 King v Stiefel [2021] EWHC 1045 (Comm), [2022] 1 All ER (Comm) 990, [2021] 4 WLUK 259 ���������������������������������������������������������������������������������  6.115 Kuwait Asia Bank v National Mutual Life Nominees Ltd [1991] 1 AC 187, [1990] 3 WLR 297, [1990] BCLC 868��������������������������������������������������������  2.19 Kuwait Oil Tanker Co SAK v Al Bader [2000] 2 All ER (Comm) 271, [2000] 5 WLUK 519, (2000) 97 (23) LSG 44����������������������������������������������  6.19 L LBI EHF v Raiffeisen Bank International AG [2018] EWCA Civ 719, [2018] 4 WLUK 84, [2018] 2 BCLC 506��������������������������������������������������  6.117 LRH Services Ltd (in liquidation) v Trey [2018] EWHC 600 (Ch), [2018] 3 WLUK 506������������������������������������������������������������������������������������  2.12 Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392, [1899] 6 WLUK 90��������������������������������������������������������������������������������������  1.22 Landon v Beiorly (1849) 10 LTOS 505����������������������������������������������������������������  6.15 Lands Allotment Co, Re [1894] 1 Ch 616������������������������������������������������������������  2.14 Larranaga Arando v Spain (Application No 73911/16)��������������������������������������  6.114 Laser Trust v CFL Finance Ltd; Gertner, Re [2021] EWHC 1404 (Ch), [2021] 5 WLUK 369, [2021] BPUR 1260�������������������������������������������������  6.144 Law v Law [1905] 1 Ch 140, [1904] 12 WLUK 15���������������������������������������������  2.18 Law Society v Sephton & Co [2004] EWCA Civ 1627, [2005] QB 1013, [2005] 3 WLR 212 �������������������������������������������������������������������������������������  6.117 Leasco Data Processing Equipment v Maxwell 468 F 2d 1326 (2nd Cir, 1972)�������������������������������������������������������������������������������������������  16.22 Lee Ting Sang v Cheung Chi-Keung [1990] 2 AC 374, [1990] 2 WLR 1173, [1990] ICR 409���������������������������������������������������������������������������������������������  15.9 Lee v Futurist Developments Ltd (formerly Skelhorne Developments Ltd) [2010] EWHC 2764 (Ch), [2011] 1 BCLC 653���������������������������������������������  8.1 Lee (David) & Co (Lincoln) Ltd v Coward Chance (a firm) [1991] Ch 259, [1990] 3 WLR 1278, [1991] 1 All ER 668���������������������������������������������������  8.15 Leeds City Council v Barclays Bank plc [2021] EWHC 363 (Comm), [2021] QB 1027, [2021] 2 WLR 1180�����������������������������������������������   6.58, 6.116 Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705��������������������������������������������������������������������������������������������������������  2.40; 15.6, 15.13 Les Ambassadeurs Club Ltd v Yu [2021] EWCA Civ 1310, [2022] 4 WLR 1, [2022] 2 All ER 443�������������������������������������������������������������������  6.121 Lewis v Averay (No 1) [1972] 1 QB 198, [1971] 3 WLR 603, [1971] 3 All ER 907�������������������������������������������������������������������������������������������������  6.48 Lifeplan Australia Friendly Society Ltd v Ancient Order of Forresters in Victoria Friendly Society Ltd [2018] HCA 43�����������������������������������������  2.61 Lifestyle Equities CV v Ahmed [2021] EWCA Civ 675, [2021] Bus LR 1020, [2021] 5 WLUK 55���������������������������������������������   2.15, 2.56; 14.4 Limpus v London General Omnibus Co (1862) 1 Hurl & C 526, 158 ER 993�������������������������������������������������������������������������������������������������  15.11 Lindgren v L & P Estates Co Ltd [1968] Ch 572, [1968] 2 WLR 562, [1968] 1 All ER 917�������������������������������������������������������������������������������������  2.15 Linear Investments Ltd v Financial Conduct Authority [2019] UKUT 115 (TCC), [2019] 4 WLUK 177���������������������������������������������������  12.48

xxix

Table of Cases Lipkin Gorman v Kapnale Ltd [1989] 1 WLR 1340, [1992] 4 All ER 409, [1988] 10 WLUK 128; revs’d [1991] 2 AC 548, [1991] 3 WLR 1, [1992] 4 All ER 512��������������������������������������������������������������������������   2.61; 14.11 Lister v Stubbs (1890) LR 45 Ch D 1������������������������������������������������   2.26, 2.27, 2.59; 14.13; 15.10 Lloyd v Grace, Smith & Co [1912] AC 716�������������������������������������������������������  15.11 London & Mashonaland Exploration Co v New Mashonaland Exploration Co [1891] WN 165���������������������������������������������������������������������  8.7 London County Freehold & Leasehold Properties Ltd v Berkeley Property & Investment Co [1936] 2 All ER 1039���������������������������������������������������������  15.14 Longley v PPB Entertainment Ltd [2022] EWHC 977 (QB), [2022] 4 WLUK 298����������������������������������������������������������������������������������������������  6.116 Lonrho plc v Fayed (No 1) [1992] 1 AC 448, [1991] 3 WLR 188, [1991] 3 All ER 303����������������������������������������������������������������������������   6.19; 14.8 Lonrho plc v Fayed (No 5) [1993] 1 WLR 1489, [1994] 1 All ER 188, [1993] 7 WLUK 252������������������������������������������������������������������������������������  2.13 Lonrho Ltd v Shell Petroleum Ltd (No 2) [1982] AC 173, [1981] 3 WLR 33, [1981] 2 All ER 456�������������������������������������������������������������������  6.19 Looe Fish Ltd, Re [1993] BCC 348, [1993] BCLC 1160�����������������������������������  6.135 Lumley v Gye (1853) 2 El & Bl 216, 118 ER 749��������������������������������������   14.7, 14.9 Lynall v IRC [1971] AC 680, [1971] 3 WLR 759, [1971] 3 All ER 914�����������  6.117 M MCG Inc v Great Western SA 544 F Supp 815 (SDNY, 1982)��������������������������  16.26 MDW Holdings Ltd v Norvill [2021] EWHC 1135 (Ch), [2021] 5 WLUK 8�����  6.40 McBride v Christie’s Australia Pty [2014] NSWC 1729��������������������������������������  6.37 McKillen v Misland (Cyprus) Investments Ltd [2012] EWHC 2343 (Ch)������������  2.9 Mackie (Thorold) v HM Advocate 1994 JC 132, 1995 SLT 110, 1994 SCCR 277��������������������������������������������������������������������������������������������  3.37 Maddeford v Austwick (1828) 1 Sim 89, 57 ER 512, [1826] 11 WLUK 89��������  2.18 Madhaven v Public Prosecutor (Singapore) [2012] SGCA 49�����������������������������  3.45 Madoff Securities International Ltd (in liquidation) v Raven [2013] EWHC 3147 (Comm), [2014] Lloyd’s Rep FC 95������������������������������   2.33, 2.34 Maidment v Attwood; Annacott Holdings Ltd, Re [2012] EWCA Civ 998, [2013] Bus LR 753, [2013] BCC 98��������������������������������������������������������������  2.9 Maidstone Building Supplies, Re [1971] 1 WLR 1085, [1971] 3 All ER 363, (1971) 115 SJ 464�����������������������������������������������������������������������������������������  6.65 Malik v Bank of Commerce & Credit International [1998] AC 20, [1997] 3 WLR 95, [1997] IRLR 462���������������������������������������������������   14.4, 14.5 Malins v Solicitors Regulation Authority [2017] EWHC 835 (Admin), [2017] 4 WLR 85, [2017] 4 WLUK 315������������������������������������������������������  6.29 Manchester Building Society v Grant Thornton LLP [2021] UKSC 20, [2022] AC 893, [2021] 3 WLR 81��������������������������   2.45; 8.13; 14.12 Man Nutzfahrzeuge AG v Freightliner Ltd [2005] EWHC 2347 (Comm)����������������������������������������������������������������������   15.12, 15.13 Mareva Compania Naviera SA v International Bulkcarriers SA (The Mareva) [1980] 1 All ER 213, [1975] 2 Lloyd’s Rep 509, [1980] 2 MLJ 71�����������������������������������������������������������������������������������������  6.121 Marex Financial Ltd v Sevilleia [2020] UKSC 31, [2021] AC 39, [2020] 3 WLR 255, [2020] BCC 783����������������������������������������������������   2.16; 8.9 Marme Inversiones 2007 SL v Natwest Markets plc [2019] EWHC 366 (Comm), [2019] 2 WLUK 338�����������������������������������������������������������   6.33, 6.36, 6.115, 6.116 Massey v Financial Services Authority [2011] UKUT 49 (TCC), [2011] Lloyd’s Rep FC 459 �������������������������������������������������������������������   9.5, 9.6; 12.55; 14.43 Meade v Haringey LBC [1979] 1 WLR 637, [1979] 2 All ER 1016, [1979] ICR 494���������������������������������������������������������������������������������������������  14.9

xxx

Table of Cases Meadows v Khan [2021] UKSC 21, [2022] AC 852, [2021] 3 WLR 147������������������������������������������������������������������������������������������   2.45; 8.13 Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2017] EWHC 1815 (Comm), [2018] 1 WLR 314, [2017] 7 WLUK 459�����������������������������������������������������������������������������������������   2.9, 2.19 Mendelssohn v Normand Ltd [1970] 1 QB 177, [1969] 3 WLR 139, [1969] 2 All ER 1215���������������������������������������������������������������������������������  15.11 Menni (Nasserdine) v HM Advocate [2013] HCJAC 158, 2014 SCL 191, 2014 GWD 1-10�������������������������������������������������������������������������������������������  7.99 Meretz Investments NV v ACP Ltd [2007] EWCA Civ 1303, [2008] Ch 244, [2008] 2 WLR 904��������������������������������������������������������������������������  15.7 Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, [1995] 3 WLR 413, [1995] 3 All ER 918��������������   2.37; 15.4, 15.5, 15.13 Mersey Docks & Harbour Board v Coggins & Griffiths (Liverpool) Ltd [1947] AC 1, [1946] 2 All ER 345, (1946) 79 Ll L Rep 569�����������������������  15.9 Metall und Rogstoff AG v Donaldson Lufkin & Jenrette Inc [1990] 1 QB 391, [1989] 3 WLR 563, [1989] 3 All ER 14�������������������������������������  14.9 Michael v IE & D Hurford Ltd (t/a Rainbow) [2021] EWHC 2318 (QB), [2021] 8 WLUK 117�����������������������������������������������������������������������������������  6.115 Michael Fielding Wold v Trinity Logistics USA Inc [2018] EWCA Civ 2765, [2019] 1 WLR 3997, [2018] 12 WLUK 130������������������������������������������������  14.9 Mills v Mills (1938) 60 CLR 150�������������������������������������������������������������������������  2.19 Ministry of Health v Simpson [1951] AC 251, [1950] 2 All ER 1137, 66 TLR (Pt 2) 1015���������������������������������������������������������������������������������������  2.61 Mitsui & Co Ltd v Nexen Petroleum (UK) Ltd [2005] EWHC 625 (Ch), [2005] 3 All ER 511, [2005] 4 WLUK 739������������������������������������������������  6.128 Mohamud v Wm Morrison Supermarkets plc [2016] UKSC 11, [2016] AC 677, [2016] 2 WLR 821������������������������������������������������������������  15.10 Montagu’s Settlement Trusts, Re [1987] Ch 264, [1987] 2 WLR 1192, [1992] 4 All ER 308�����������������������������������������������������������������������������������  14.14 Moore v I Bressler Ltd [1944] 2 All ER 515��������������������������������������������������������  15.6 Mormels v Girofinance SA 544 F Supp 815 (SDNY, 1982)�������������������������������  16.26 Morris v CW Martin & Sons Ltd [1966] 1 QB 716, [1965] 3 WLR 276, [1965] 2 All ER 725�����������������������������������������������������������������������������������  15.11 Morris-Garner v One Step (Support) [2018] UKSC 20, [2019] AC 649, [2018] 2 WLR 1353 �����������������������������������������������������������������������������������  6.118 Morrison v National Australia Bank 561 US 247, 130 S Ct 2869 (2010)���������  16.18, 16.21, 16.27 Motorola Credit Corpn v Uzan (No 2) [2003] EWCA 752, [2004] 1 WLR 113, [2003] CP Rep 56�������������������������������������������������������������������  6.123 Mott MacDonald Ltd v Trant Engineering Ltd [2021] EWHC 754 (TCC), [2021] 3 WLUK 544, [2021] BLR 440��������������������������������������������������������  8.16 Moulin Global Eyecare Trading v Comr of Inland Revenue [2014] HKFCA 22��������������������������������������������������������������������������������������  15.12 Movitex Ltd v Bulfield [1986] 2 BCC 99403, [1988] BCLC 104��������������������������  8.8 Mozambique v Credit Suisse International [2021] EWCA Civ 329, [2022] 1 All ER (Comm) 235, [2021] 3 WLUK 182�����������������������������������  6.91 Muhammed Asif v Adil Iqbal Ditta & Noreen Riaz [2021] EWCA Crim 1091, [2022] 11 WLR 285, [2021] 7 WLUK 693������������������������������������������������  6.144 Multi-Installations Ltd v Varsani [2008] EWHC 657 (Ch)����������������������������������  2.14 Murad v Al-Saraj [2005] EWCA Civ 959, [2005] 7 WLUK 945, [2005] WTLR 1573 ���������������������������������������������������������������������   2.8, 2.13, 2.56 Muschinski v Dodds (1985) 160 CLR 583�����������������������������������������������������������  2.27 Mustad v Dosen [1964] 1 WLR 109 (Note), [1963] 3 All ER 416, [1963] RPC 41����������������������������������������������������������������������������������������������  3.56

xxxi

Table of Cases N N v Royal Bank of Scotland plc [2019] EWHC 1770 (Comm), [2020] 2 All ER (Comm) 111, [2019] 7 WLUK 203���������������������������   8.10; 14.9 NCA v Barker [2020] EWHC 822 (Admin), [2020] 4 WLUK 113, [2020] Lloyd’s Rep FC 240 �������������������������������������������������������������������������  6.55 National Crime Agency v Hajiyeva see Hajiyeva v National Crime Agency Nanus Asia Co Inc v Standard Chartered Bank [1990] 1 HKLR 396��������������������������������������������������������������������������������   2.8, 2.10, 2.27, 2.32; 3.57 National Crime Agency v N [2017] EWCA Civ 253, [2017] 1 WLR 3938, [2017] 4 WLUK 201������������������������������������������������������������������������������������  7.61 National Crime Agency v Robb [2014] EWHC 4384 (Ch), [2015] Ch 520, [2015] 3 WLR 23 �����������������������������������������������������������������������������������������  2.31 National Grid Electricity Transmission plc v McKenzie [2009] EWHC 1817 (Ch)�����������������������������������������������������������������������������������������  2.42 Natwest Markets plc v Bilta (UK) Ltd (in liquidation) [2021] EWCA Civ 680, [2021] 5 WLUK 66�������������������������������������������������   2.34, 2.36; 15.8, 15.9, 15.10 Neary v Dean of Westminster [1999] IRLR 288��������������������������������������������������  14.5 Nelson v Rye [1996] 1 WLR 1378, [1996] 2 All ER 186, [1996] EMLR 37�������  2.28 Newell-Austin v SRA [2017] EWHC 411 (Admin), [2017] 3 WLUK 114, [2017] Med LR 194 �������������������������������������������������������������������������������������  6.29 New Zealand Netherlands Society “Oranje” v Kuys [1996] 1 WLR 1126, [1973] 2 All ER 1222, [1974] RPC 272�������������������������������������   2.13, 2.28; 8.17 Nigeria v JP Morgan Chase Bank NA [2019] EWHC 347 (Comm), [2019] 2 WLUK 300, [2019] 1 CLC 207���������������������������������������������������  14.11 Nisshin Shipipng Co Ltd v Cleaves & Co Ltd [2003] EWHC 2602 (Comm), [2004] 1 All ER (Comm) 481, [2004] 1 Lloyd’s Rep 38����������������������������  14.12 Norris v Government of the USA [2007] EWHC 71 (Admin), [2008] UKHL 16�����������������������������������������������������������������������������������������������   6.17; 7.6 Norris v United States [2008] UKHL 16, [2008] 1 AC 920, [2008] 2 WLR 673���������������������������������������������������������������������������������������������������  6.17 North & South Trust Co v Berkeley [1971] 1 WLR 470, [1971] 1 All ER 980, [1970] 2 Lloyd’s Rep 467������������������������������������   8.13, 8.17, 8.19 North South Finance Corpn v Al-Turki 100 F 3d 1046 (2nd Cir, 1996)������������  16.35 North West Transportation Co v Beatty (1887) 12 App Cas 589�����������������   2.27; 8.10 Norwich Pharmacal Co v C & E Comrs [1974] AC 133, [1973] 3 WLR 164, [1973] 2 All ER 943�����������������������������������������������������������������������������������  6.128 Novoship (UK) Ltd v Mikhaylyuk; Novoship (UK) Ltd v Nikitin [2014] EWCA Civ 908, [2015] QB 499, [2015] 2 WLR 526 �����������������������   2.24, 2.32 Novoship (UK) Ltd v Nikitin see Novoship (UK) Ltd v Mikhaylyuk O OBG Ltd v Allan [2007] UKHL 1, [2008] 1 AC 1, [2007] 2 WLR 920������������������������������������������������������������������������������������������   14.8, 14.9 Observer & Guardian v UK (Application 13585/88) (1992) 14 EHRR 153��������  3.56 O’Driscoll v Merrill Lynch, Pierce, Fenner & Smith Inc Fed Sec L Rep 99 (SDNY, 1983)���������������������������������������������������������������������������������������������  16.23 O’Driscoll v Secretary of State for the Home Department [2002] EWHC 2477 (QB), [2003] ACD 35�������������������������������������������������������������  7.98 Okpabi v Royal Dutch Shell plc & Shell Petroleum Developent Co of Nigeria Ltd [2021] UKSC 3, [2021] 1 WLR 1294, [2021] 3 All ER 191���������������������������������������������������������������������������������������  8.7 Otkritie International Investment Management Ltd v Urumov [2014] EWHC 191 (Comm), [2014] 2 WLUK 286�����������������������������������������������  6.115 One Money Mail Ltd v RIA Financial Services [2015] EWCA Civ 1084, [2015] 10 WLUK 796 ���������������������������������������������������������������������������������  14.9

xxxii

Table of Cases Oracle Derivative Litigation, Re 867 A 2d 904 (Del Ch, 2004)���������������������������  14.4 Overseas-Chinese Banking Corpn Ltd v ING Bank NV [2019] EWHC 676 (Comm), [2019] 3 WLUK 433�������������������������������������������������������������������  6.118 Oxford v Moss (1978) 68 Cr App R 183, [1979] Crim LR 119���������   1.18; 2.29; 6.48 P PJSC Commercial Bank Privatbank v Kolomoisky [2018] EWHC 1910 (Ch), [2018] 7 WLUK 508����������������������������������������������������������������������������������  6.128 PK Airfinance Sarl v Alpstream AG [2015] EWCA Civ 1318, [2015] 12 WLUK 712, [2016] 1 CLC 135���������������������������������������������������������������  14.9 PMLL v Person(s) Unknown; R v Person(s) Unknown [2018] EWHC 838 (QB), [2018] 4 WLUK 217, [2018] Info TLR 87�������������������  6.121 Paisley v Freeman (1789) 3 TR 51���������������������������������������������������������������������  6.116 Palmer Birch (a partnership) v Lloyd [2018] EWHC 2316 (TCC), [2018] 4 WLR 164, [2018] 9 WLUK 274����������������������������������������������������  6.19 Pantone 485 Ltd, Re; Miller v Bain (Director’s Breach of Duty) [2002] 1 BCLC 266��������������������������������������������������������������������������������������  2.23 Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400, [1998] 7 WLUK 420, (1998) 95 (35) LSG 36�����������������������������������   2.31; 6.118 Parker v Financial Services Authority (2006) FSMIT Case 37��������������������������  12.47 Parker v McKenna (1874–75) LR 10 Ch App 96���������������������������������������������������  8.3 Parmar v Barclays Bank plc [2018] EWHC 1027 (Ch), [2018] 5 WLUK 301������������������������������������������������������������������������������������������������  4.41 Parr v Keystone Healthcare Ltd [2019] EWCA Civ 1246, [2019] 4 WLR 99, [2019] 7 WLUK 223�������������������������������������������������   2.8, 2.13, 2.14, 2.15; 6.40 Parvizi v Barclays Bank plc (unreported, 1 May 2014)�������������������������������   7.52, 7.61 Patel v Mirza [2016] UKSC 42, [2017] AC 467, [2016] 3 WLR 399�������   2.54; 6.120 Patrick & Lyon Ltd, Re [1933] Ch 786�����������������������������������������������������������������  6.69 Paulet v United Kingdom (Application 6219/08) (2015) 61 EHRR 39, [2014] Lloyd’s Rep FC 484, 37 BHRC 695�������������������������������������������������  7.83 Paycheck Services 3 Ltd, Re see HMRC v Holland Peek v Gurney (1871–72) LR 13 Eq 79����������������������������������������������������������������  6.23 People’s Department Stores Inc (Trustees of) v Wise [2004] 3 SCR 461������������  2.18 Percival v Wright [1902] 2 Ch 421�������������������������������������������������������   2.19, 2.20; 3.3 Peskin v Anderson [2001] BCC 874, [2001] 1 BCLC 372�������������������������   2.15, 2.19, 2.21, 2.22; 6.44 Philip v Barclays Bank UK plc [2021] EWHC 10 (Comm), [2021] Bus LR 451, [2021] 1 WLUK 126�������������������������������������������������������������  14.11 Phillips v Brooks Ltd [1919] 2 KB 243����������������������������������������������������������������  6.48 Phillips v United Kingdom (Application 41087/98) [2001] Crim LR 817, 11 BHRC 280�����������������������������������������������������������������������������������������������  7.77 Phosphate Sewage Co Ltd v Molleson (Res Judicata) (1879) 4 App Cas 801, (1879) 6 R (HL) 113�����������������������������������������������������������������������������������  14.45 Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827, [1980] 2 WLR 283, [1980] 1 All ER 556�����������������������������������������������������������������  8.16 Pirelli General Cable Works Ltd v Oscar Faber & Partners [1983] 2 AC 1, [1983] 2 WLR 6, [1983] 1 All ER 65����������������������������������������������  8.16 Platt v Platt [1999] 2 BCLC 745���������������������������������������������������������������������������  2.21 Pleshakov v Sky Stream Corpn [2021] UKPC 15, [2021] 6 WLUK 159�������������  2.16 Plessey Co v General Electric Co 628 F Supp 477 (D Del, 1986)���������������������  16.36 Poche, Re (1984) 6 DLR 40����������������������������������������������������������������������������������  8.21 Polly Peck International (No 2), Re [1998] 3 All ER 812, [1998] 5 WLUK 85, [1998] 2 BCLC 185����������������������������������������������������������������  2.31 Polonskiy v Alexander Dobrovinsky & Partners LLP [2016] EWHC 1114 (Ch), [2016] 5 WLUK 637����������������������������������������������������  6.113 Popely v Popely [2019] EWHC 1507 (Ch), [2019] 6 WLUK 184, [2019] BCC 1089�����������������������������������������������������������������������������������������  2.41

xxxiii

Table of Cases Potamianos v Prescott; Sprintroom Ltd, Re [2019] EWCA Civ 932, [2019] 6 WLUK 42, [2019] BCC 1031��������������������������������������������������������  2.10 Pottage (John) v Financial Services Authority [2012] FS/2010/33��������������������  15.18 Powell v Thompson [1991] 1 NZLR 597�������������������������������������������������������������  2.27 Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415, [2013] 3 WLR 1 ��������������������������������������������������������������������   2.24; 6.120, 6.140; 7.2, 7.73; 15.16 Pretorius v Natal South Sea Investment Trust Ltd 1965 (3) SA 410 (W) 418������������ 2.44 Primekings v King; Kings Solutions Group Ltd, Re [2021] EWCA Civ 1943, [2022] Bus LR 184, [2021] 12 WLUK 227�������������������������������������������������  2.22 Princess of Reuss v Bos (1871–72) LR 5 HL 176, [1871] 5 WLUK 69�����������������  7.2 Proform Sports Management Ltd v Proactive Sports Management Ltd [2006] EWHC 2903 (Ch), [2007] 1 All ER 542, [2007] 1 All ER (Comm) 356�������������������������������������������������������������������������������������������������  15.7 Property Alliance Group v Royal Bank of Scotland [2018] EWCA Civ 355, [2018] 1 WLR 3529, [2018] 2 All ER (Comm) 695����������������������������������  6.115 Prudential Assurance Co v Newman Industries Ltd (No 2) [1982] Ch 204, [1982] 2 WLR 31, [1982] 1 All ER 354������������������������������������������������   2.16; 8.9 Psimenos v EF Hutton & Co 722 F 2d 1041 (2nd Cir, 1983)�����������������������������  16.21 Public Prosecutor v Choudhury [1980] 1 MLJ 76������������������������������������������������  3.39 R R v Abdel-Malek & Choucair (unreported, May 2019)�����������������������������   3.26, 3.107 R v Absolom (The Times, 14 September 1983)����������������������������������������������������  6.48 R v Adams see Adams v R R v Afolabi (Aminat Adedoyin) [2009] EWCA Crim 2879, [2010] Lloyd’s Rep FC 314����������������������������������������������������������������������������   7.50, 7.52 R v Ahmad (Shakeel) [2014] UKSC 36, [2015] AC 299, [2014] 3 WLR 23��������������������������������������������������������������������������������   7.75, 7.83, 7.85, 7.88 R v Adomako [1994] UKHL 6������������������������������������������������������������������������������  6.76 R v Allen [2012] EWHC 1712 (Admin), [2012] 1 WLR 3419, [2012] 6 WLUK 482������������������������������������������������������������������������������������  6.37 R v Allpress (Sylvia) [2009] EWCA Crim 8, [2009] 2 Cr App Rep (S) 58, [2009] Lloyd’s Rep FC 242��������������������������������������������������������������������������  7.75 R v Amir (Abida Shaheen); R v Akhtar (Urfan) [2011] EWCA Crim 146, [2011] 4 All ER 417, [2011] 1 Cr App R 37�������������������������������������������������  7.17 R v Ammann, Weckwerth & Mang (unreported, 24 May 2012)��������������������������  3.67 R v Andrewes (Jon) [2020] EWCA Crim 1055, [2020] 8 WLUK 56, [2020] Lloyd’s Rep FC 557��������������������������������������������������������������������������  7.83 R v Anwoir (Ilham) [2008] EWCA Crim 1354, [2009] 1 WLR 980, [2008] 4 All ER 582�������������������������������������������������������������������������������������  7.15 R v Aspinall (Joseph) (1876) 1 QBD 730; aff’d (1876) 2 QBD 48��������������������  6.109 R v Atkinson [2004] EWCA Crim 3223���������������������������������������������������������������  6.29 R v Ayres (David Edward) [1984] AC 447, [1984] 2 WLR 257, [1984] 1 All ER 619�������������������������������������������������������������������������������������  6.17 R v B [2018] EWCA Crim 73, [2018] 1 WLUK 553�������������������������������������������  6.29 R v Barton (David) [2020] EWCA Crim 575, [2021] QB 685, [2020] 3 WLR 1333�����������������������������������������������������������������������������   6.19, 6.29 R v Bateman (Percy) (1925) 19 Cr App R 8���������������������������������������������������������  6.76 R v Beazley (Rosemary) [2013] EWCA Crim 567, [2013] 1 WLR 3331������������  7.85 R v Benjafield (Karl Robert) (Confiscation Order); R v Rezvi (Syed) [2002] UKHL 2, [2003] 1 AC 1099, [2002] 2 WLR 235�����������������������������  7.77 R v Bewick (Ernest Arthur) [2007] EWCA Crim 3297, [2008] 2 Cr App R (S) 31���������������������������������������������������������������������������������������  14.45 R v Box (Linda Mary) [2018] EWCA Crim 542, [2018] 4 WLR 134, [2018] 3 WLUK 367������������������������������������������������������������������������������������  7.80 R v Boyle (Edward Beall); R v Merchant (James) [1914] 3 KB 339, (1914) 10 Cr App R 180 ������������������������������������������������������������������������������  6.81

xxxiv

Table of Cases R v Boyle Transport (Northern Ireland) Ltd [2016] EWCA Crim 19, [2016] 4 WLR 63, [ 2016] 2 WLUK 702�����������������������������������������������������  7.86 R v Briggs-Price (Robert William) [2009] UKHL 19, [2009] 1 AC 1026, [2009] 2 WLR 1101��������������������������������������������������������������������������������������  7.79 R v Butt (unreported, 17 March 2004)������������������������������������������������������������������  3.19 R v Butt (Asif Nazir) [2006] EWCA Crim 137, [2006] 2 Cr App R (S) 44��������  3.11, 3.107; 14.36 R v Calvert (Malcolm) (unreported, 16 February 2010)�������������������   3.27, 3.65; 12.42 R v Clark (Trevor) [1998] 2 Cr App R 137, [1998] 2 Cr App R (S) 95, [1998] Crim LR 227 �����������������������������������������������������������������������   3.107; 14.36 R v Clark (unrerpoted, 20 June 2016)�������������������������������������������������������������������  3.19 R v Clear (Thomas Walter) [1968] 1 QB 670, [1968] 2 WLR 122, [1968] 1 All ER 74���������������������������������������������������������������������������������������������������  6.81 R v Cooke (Anthony Martin) [1986] AC 909, [1986] 3 WLR 327, [1986] 2 All ER 985�������������������������������������������������������������������������������������������������  6.17 R v Cornelius (Benjamin Jason) [2012] EWCA Crim 500, [2012] Lloyd’s Rep FC 435, [2012] PNLR 23���������������������������������������������������������  6.29 R v Cox (Rodney James); R v Jenkins (Peter Rhys) (1979) 1 Cr App R (S) 190���������������������������������������������������������������������������������������  6.81 R v Craig [2007] EWCA Crim 2913, [2008] Lloyd’s Rep FC 358����������������������  7.15 R v Cross (John Morris) [1990] BCC 237, [1991] BCLC 125, (1990) 91 Cr App R 115 ����������������������������������������������������������������������   2.1; 3.86, 3.88, 3.91 R v Curtis (No 3) [2016] NSWC 866�����������������������������������������������������������������  3.107 R v D [2019] EWCA Crim 209, [2019] 2 WLUK 510, [2019] 2 Cr App R 15�����������������������������������������������������������������������������������������������  6.40 R v Da Silva (Hilda Gondwe) [2006] EWCA Crim 1654, [2007] 1 WLR 303, [2006] 4 All ER 900�����������������������������������������������������������������  7.52 R v Davenport (Edward) [2015] EWCA Crim 1731, [2016] 1 WLR 1400, [2016] 1 Cr App R (S) 41�����������������������������������������������������������������������������  7.89 R v Deary (Claire) (1993) 14 Cr App R (S) 648, [1993] Crim LR 318��������������  14.45 R v De Berenger (1814) 3 M & S 67, 105 ER 536��������������������������������������   6.12, 6.13 R v Derby (Stafford Roy) (1990–91) 12 Cr App R (S) 502��������������������������������  14.45 R v Dickinson (unreported, 1982)��������������������������������������������������������������������������  2.1 R v Dodgson (unreported, June 2016)������������������������������������������������������������������  3.19 R v Doubleday (William Donald) (1964) 49 Cr App R 62�����������������������������������  6.75 R v Evans (No 2) [2015] EWHC 263 (QB), [2015] 1 WLR 3595, [2015] 2 WLUK 441������������������������������������������������������������������������������������  6.46 R v F [2007] EWCA Crim 243, [2007] QB 960, [2007] 3 WLR 164������������������  7.94 R v Fazal (Mohammed Yassen) [2009] EWCA Crim 1697, [2010] 1 WLR 694, [2010] 1 Cr App R 6����������������������������������������������������������������  7.15 R v Fields see R v Ahmad (Shakeel) R v Fisher (unreported, 14 April 1988)�����������������������������������������������������������������  3.81 R v Forsyth (Elizabeth) [1997] 2 Cr App R 299, [1997] Crim LR 581����������������  7.51 R v Fulton & Wood [2017] EWCA Crim 308, [2018] 4 WLR 25, [2017] 3 WLUK 285������������������������������������������������������������������������������������  7.15 R v Fysh (No 4) [2012] NSWSC 1587���������������������������������������������������������������  3.107 R v GH [2015] UKSC 24, [2015] 1 WLR 2126, [2015] 4 All ER 274��������������������������������������������������������������������������������   7.8, 7.14, 7.15, 7.17, 7.22, 7.96 R v Gabriel [2007] 1 WLR 2722��������������������������������������������������������������������������  7.13 R v Geary (Michael) [2010] EWCA Crim 1925, [2011] 1 WLR 1634, [2011] 2 All ER 198��������������������������������������������������������������������������������������  7.17 R v Ghosh (Deb Baran) [1982] QB 1053, [1982] 3 WLR 110, (1982) 75 Cr App R 154�������������������������������������������������������������������������������������������  6.29 R v Gilbert (Stephanie Rae) [2012] EWCA Crim 2392, [2013] Lloyd’s Rep FC 109�������������������������������������������������������������������������������������  6.30 R v Gillies (Ryan) [2011] EWCA Crim 2140, [2011] Lloyd’s Rep FC 606���������  7.17 R v Goldshield Group plc see Norris v United States

xxxv

Table of Cases R v Gooding (Financial Times, 2 March 1990)����������������������������������������������������  3.91 R v Goodman (unreported, 1 May 1992)��������������������������������������������������������������  3.22 R v Goodman (Ivor Michael) [1993] 2 All ER 789, [1992] BCC 625, (1993) 97 Cr App R 210�����������������������������������������������������������������������������  14.41 R v Goodman (Ivor Michael) [1993] 2 All ER 789, [1992] 6 WLUK 215, [1994] 1 BCLC 349������������������������������������������������������������������������������������  6.132 R v Gray (David John) [1995] 2 Cr App R 100, [1995] Crim LR 45, (1994) 91 (39) LSG 38���������������������������������������������������������������������������������  3.65 R v Greaves (Claude Clifford) [2010] EWCA Crim 709, [2011] 1 Cr App R (S) 8, [2010] Lloyd’s Rep FC 423�������������������������������������������  14.40 R v Gul (Mohammed) [2012] EWCA Crim 280, [2012] 1 WLR 3432, [2012] 3 All ER 83���������������������������������������������������������������������������������������  7.94 R v Hayes [2015] EWCA Crim 1944, [2015] 12 WLUK 719, [2018] 1 Cr App R 10 ��������������������������������������������������������������������������������������   6.2, 6.11, 6.12, 6.29 R v Hayes (Tom Alexander) [2015] EWCA Crim 1944, [2015] 12 WLUK 719, [2018] 1 Cr App R 10������������������������������������������������   3.7; 14.31 R v Heera (Amit) [2010] EWCA Crim 1779��������������������������������������������������������  7.20 R v Hipwell, Bhoyeul & Shepherd (unreported, 7 December 2005)��������������������  3.57 R v Hall (1985) 81 Cr App Rep 260���������������������������������������������������������������������  7.51 R v Haque (Mohammed) [2019] EWCA Crim 1028, [2020] 1 WLR 2239, [2019] 5 WLUK 642 �������������������������������������������������������������  7.17 R v Harris (1986) 84 Cr App Rep 75��������������������������������������������������������������������  7.52 R v Hartman [2010] NSWSC 1422��������������������������������������������������������������������  3.107 R v Harvey (Jack Frederick) [2013] EWCA Crim 1104, [2014] 1 WLR 124, [2014] 1 Cr App R (S) 46��������������������������������������������������������  7.83 R v Hollinshead (Peter Gordon) [1985] AC 975, [1985] 3 WLR 159, [1985] 2 All ER 769�����������������������������������������������������������������������������������  6.103 R v Holyoak, Hill & Morl (Financial Times, 28 October 1989)��������������������������  3.77 R v Hussain (Hussan) [2014] EWCA Crim 2344, [2015] Lloyd’s Rep FC 102, [2015] HLR 8�������������������������������������������������������������  7.85 R v Innospec Ltd (unreported, 26 March 2010)���������������������������������������������������  6.91 R v Institute of Chartered Accountants in England & Wales, ex p Brindle [1993] 12 WLUK 290, [1994] BCC 297 ���������������������������������������������������  6.113 R v Islam [2009] 1 AC 706�����������������������������������������������������������������������������������  7.74 R v JGE Commercials Ltd [2015] EWCA Crim 1048������������������������������������������  7.86 R v Jawad (Mohid) [2013] EWCA Crim 644, [2013] 1 WLR 3861, [2014] 1 Cr App R (S) 16�����������������������������������������������������������������������������  7.89 R v Jeevarajah (Alfred) [2012] EWCA Crim 1299����������������������������������������������  6.30 R v Johnson (Beverley) (formerly Farmer) [2016] EWCA Crim 10, [2016] 4 WLR 57, [2016] 2 WLUK 75��������������������������������������������������������  7.80 R v Joseph (Richard) (unreported, 30 January 2013)���������������������������   3.7, 3.27, 3.66 R v K [2007] EWCA Crim 491, [2007] 1 WLR 2262, [2008] STC 1270������������  7.13 R v Kakkad (Freshkumar) [2015] EWCA Crim 385, [2015] 1 WLR 4162, [2015] Crim LR 642�������������������������������������������������������������������������������������  7.83 R v Kausar (Rahlia) [2009] EWCA Crim 2242, [2010] Lloyd’s Rep FC 353������  7.20 R v Kenny (Mark) [2013] EWCA Crim 1, [2013] QB 896, [2013] 3 WLR 59����  7.30 R v King (Scott) [2014] EWCA Crim 621, [2014] 2 Cr App R (S) 54, [2014] Lliyd’s Rep FC 423���������������������������������������������������������������������������  7.85 R v Kneeshaw (Michael Brian) [1975] QB 57, [1974] 2 WLR 432, (1974) 58 Cr App R 439 ����������������������������������������������������������������������������  14.45 R v Linegar (Scott Anthony) [2009] EWCA Crim 648��������������������������������������  14.40 R v Littlewood (unreported, 10 January 2011)��������������������������������������������   3.10, 3.81 R v Loizou (Lisa) [2005] EWCA Crim 1579, [2005] 2 Cr App R 37, [2005] Crim LR 885�������������������������������������������������������������������������������������  7.15 R v Lyttleton (FCA, 2016)����������������������������������������������������������������������������������  3.107 R v MK; R v AS [2009] EWCA Crim 952�����������������������������������������������������������  7.15 R v McDowell (Christopher James); R v Singh (Harjit Sarana) [2015] EWCA Crim 173, [2015] 2 Cr App R (S) 14, [2015] Crim LR 623������������  7.86

xxxvi

Table of Cases R v McQuoid & Melbourne (unreported, 9 March 2009)�������������������   1.47; 3.8, 3.11, 3.27, 3.31, 3.107, 3.108; 6.1; 14.8, 14.36, 14.37, 14.38, 14.39 R v May (Raymond George) [2008] UKHL 28, [2008] 1 AC 1028, [2008] 2 WLR 1131�����������������������������������������������������������������������������   7.72, 7.75 R v Middleton (John) [2008] EWCA Crim 233, [2008] 1 WLUK 613����������������  7.15 R v Misra (Amit); R v Srivastava (Rajeev) [2004] EWCA Crim 2375, [2005] 1 Cr App R 21, [2005] Crim LR 324������������������������������������������������  6.76 R v Mo (Ho Ling) [2013] NICA 49����������������������������������������������������������������������  7.15 R v Mohal & Birk (unreported, January 2017)�����������������������������������   3.26, 3.37, 3.71 R v Montilla (Steven William) [2004] UKHL 50, [2004] 1 WLR 3141, [2005] 1 All ER 113��������������������������������������������������������������������������������������  7.17 R v Morrison (Peter Edwin) [2019] EWCA Crim 351, [2019] 4 All ER 181, [2019] 3 WLUK 124 �����������������������������������������������������������������������������������  7.80 R v Moss (Pamela Jane) [2013] EWCA Crim 1554, [2013] 6 WLUK 270����������  6.44 R v Moys (Robert) (1984) 79 Cr App Rep 72, [1984] Crim LR 494, (1984) 128 SJ 54�������������������������������������������������������������������������������������������  7.51 R v Mustafa (unreported, 5 March 2012)������������������������������������������   3.19, 3.62, 3.66, 3.81, 3.88, 3.93, 3.96 R v Mustafa (Ai) [2013] EWCA Crim 133���������������������������������������������������������  3.107 R v Nawaz (Mohammed) [2010] EWCA Crim 819���������������������������������������������  7.20 R v Neuberg (Karen) [2016] EWCA Crim 1927, [2017] 4 WLR 58, [2016] 12 WLUK 409����������������������������������������������������������������������������������  7.86 R v Ogden (Neil) [2016] EWCA Crim 6, [2017] 1 WLR 1224, [2016] 1 WLUK 480���������������������������������������������������������������������������������������   7.13, 7.15 R v Ondhia (Chandaicant Valbhiji) [1998] 2 Cr App R 150, [1998] Crim LR 339�������������������������������������������������������������������������������������������������  6.98 R v Pabon (Alex Julian) [2018] EWCA Crim 420, [2018] 3 WLUK 279, [2018] Lloyd’s Rep FC 258��������������������������������������������������������������������������  6.29 R v Pace (Martin Edward); R v Rogers (Simon Peter) [2014] EWCA Crim 186, [2014] 1 WLR 2867, [2014] 1 Cr App R 34�������������������  7.13 R v Palmer (Keith Anthony) [2016] EWCA Crim 1049, [2017] 4 WLR 15, [2016] 7 WLUK 788������������������������������������������������������������������  7.86 R v Panel on Take-overs & Mergers, ex p Al-Fayed [1992] 4 WLUK 46, [1992] BCC 524, [1992] BCLC 938����������������������������������������������������������  6.113 R v Parsons (Martin) [2014] EWCA Crim 2115���������������������������������������������������  7.85 R v Pennock (Angela) [2014] EWCA Crim 598, [2014] 2 WLUK 64, [2014] 2 Cr App R 10�����������������������������������������������������������������������������������  6.42 R v Rai (Thomas) [1999] 10 WLUK 925, [2000] 1 Cr App R 242, (2000) 164 JP 121�����������������������������������������������������������������������������������������  6.37 R v Razoq (Adil) [2012] EWCA Crim 674, [2012] 2 WLUK 831�����������������������  6.40 R v Registrar of Joint Stock Companies, ex p More [1931] 2 KB 197������������������  7.2 R v Rigby, Bailey & Rowley (unreported, 2 May 2002)�����������������������������   5.14; 7.74 R v Rimmington (Anthony) [2005] UKHL 63, [2006] 1 AC 459, [2005] 3 WLR 982����������������������������������������������������������������������������������������  6.17 R v Rollins (Neil) [2010] UKSC 39, [2010] 1 WLR 1922, [2010] 4 All ER 880 ���������������������������������������������������������������������������������   1.8; 3.7, 3.27; 7.2; 14.39, 14.40 R v Rollins (Neil) (unreported, 15 November 2010)�������������������������������������   2.1; 3.27 R v Rose; Crown Prosecution Service (Nottinghamshire) v Rose [2008] EWCA Crim 239, [2008] 1 WLR 2113, [2008] 3 All ER 315���������������������  7.15 R v Rozeik (Rifaat Younan) [1996] 1 WLR 159, [1996] 3 All ER 281, [1996] 1 BCLC 380 ����������������������������������������������������������������������������   2.37, 2.40 R v Sadique (Omar) [2011] EWCA Crim 2872, [2012] 1 WLR 1700, [2012] 2 All ER 793�����������������������������������������������������������������������������������  6.107 R v Saik (Abdulrahman) [2006] UKHL 18, [2007] 1 AC 18, [2006] 2 WLR 993������������������������������������������������������������������������������������������   7.13, 7.17

xxxvii

Table of Cases R v Sale (Peter John) [2013] EWCA Crim 1306, [2014] 1 WLR 663, [2014] 1 Cr App R (S) 60����������������������������������������������������   7.2, 7.73, 7.85, 7.86 R v Sanders (unreported, 20 June 2012)��������������������������������������������   3.14, 3.19, 3.27, 3.44, 3.65, 3.66, 3.70; 6.132 R v Saunders (Gabrielle Yinka) [2012] EWCA Crim 1380, [2012] 6 WLUK 609, [2012] 2 Cr App R 26����������������������������������������������������������  6.33 R v Secretary of State for Health and Social Care [2022] EWHC 46 (TCC), [2022] PTSR 644, [2022] 1 WLUK 41��������������������������������������������������������  6.36 R v Sharma (Vijay) (unreported, 2009)��������������������������������������������������������������  15.22 R v Sidhu (Rupinder) (unreported, 28 November 2011)�����������������������������   3.45, 3.78 R v Skansen Interior Ltd (SIL) (unreported, 21 February 2018)������   6.89, 6.91, 6.132 R v Smallman (Michael) [2010] EWCA Crim 548����������������������������������������������  7.13 R v Smith (Albert Arthur) (1977) 64 Cr App Rep 217�����������������������������������������  7.52 R v Smith, Spearman and Payne [2003] EWCA Crim 2893����������������������   3.7, 3.107; 14.37, 14.38 R v Staines (Lorelie Marion); R v Morrissey (Ian Patrick) [1997] 2 Cr App R 426, [1997] Crim LR 825, (1997) 94 (21) LSG 32�����������   3.6, 3.32, 3.39, 3.96 R v Stephens (1865–66) LR 1 QB 702�����������������������������������������������������������������  15.4 R v Taylor [(George Charles) [2011] EWCA Crim 728, [2011] 1 WLR 1809, [2011] Bus LR 1011�������������������������������������������������������������������������������������  6.67 R v Thomas (Niki Winston) [2014] EWCA Crim 1958���������������������������������������  7.13 R v Toor (Pritpal Singh) (1987) 85 Cr App Rep 116, [1987] Crim LR 122���������  7.52 R v Tree (Mark) [2008] EWCA Crim 261������������������������������������������������������������  7.13 R v Turner (Ruth Louise) [2013] EWCA Crim 1206, [2013] 3 WLUK 310��������  6.44 R v Valuievs (Juris) [2014] EWCA Crim 2888, [2015] QB 745, [2015] 3 WLR 109������������������������������������������������������������������������������������������   6.43, 6.46 R v Waya (Terry) [2012] UKSC 51, [2013] 1 AC 294, [2012] 3 WLR 1188 �����������������������������������������������������������������������������   7.64, 7.67, 7.82, 7.83, 7.84, 7.85 R v West (Leanne Sarah) [2019] EWCA Crim 2028, [2019] 11 WLUK 499�������  6.44 R v White (Anthony Alan) [2014] EWCA Crim 714, [2014] 4 WLUK 547, [2014] 2 Cr App R 14�����������������������������������������������������������������������������������  6.40 R v Whittington (Mark) [2009] EWCA Crim 1641, [2010] 1 Cr App R (S) 83, [2010] Crim LR 65���������������������������������������������������������������������������������������  7.79 R v William (Venus Rose) [2013] EWCA Crim 1262, [2013] 7 WLUK 540, [2015] Lloyd’s Rep FC 704��������������������������������������������������������������������������  7.13 R v Williams (Jean Jacques) [1980] 6 WLUK 317, [1980] Crim LR 589������������  6.40 R v Williams (Mark) [2007] EWCA Crim 1768���������������������������������������������������  7.77 R v Williams (Jean Jacques) [1980] Crim LR 589�����������������������������������������������  6.40 R v Y & ZSB [2012] EWCA Crim 2437, [2013] 1 WLR 2014, [2013] 2 All ER 121�������������������������������������������������������������������������������������������������  7.15 R v Yip (Albert) [2010] EWCA Crim 1381����������������������������������������������������������  7.13 R & C Comrs v IGE USA Investments Ltd [2020] EWHC 1716 (Ch), [2021] Bus LR 424, [2020] 12 WLUK 449�����������������������������������������������  14.10 R & C Comrs v Total Network SL [2008] UKHL 19, [2008] 1 AC 1174, [2008] 2 WLR 711�������������������������������������������������������������������������������   6.19; 14.8 RBG Resources plc v Rastogi [2002] EWHC 2782�������������������������������������������  6.124 R (on the application of Amro International SA) v Financial Services Authority [2010] EWCA Civ 123, [2010] 3 All ER 723, [2010] Bus LR 1541������������������������������������������������������������������������������������   10.20; 11.18 R (on the application of Bavi) v Snaresbrook Crown Court [2013] EWHC 4015 (Admin), [2014] ACD 52��������������������������������������������������������  7.15 R (on the application of British Bankers’ Association) v Financial Services Authority [2011] EWHC 999 (Admin), [2011] Bus LR 1531, [2011] ACD 71������������������������������������������������������������������������������������   6.25; 8.27 R (on the application of Canada Inc) v Financial Services Authority [2011] EWHC 2766 (Admin)���������������������������������������������������������������������  12.28

xxxviii

Table of Cases R (on the application of Corner House Research) v Director of the Serious Fraud Office [2008] UKHL 60, [2009] 1 AC 756, [2008] 4 All ER 927�����  6.84 R (on the application of Coverdale) v Hastings Magistrates Court [2014] EWHC 2348 (Admin), [2014] RVR 322���������������������������������������������   7.97, 7.99 R (on the application of Financial Conduct Authority) v Abdel-Malik [2020] EWCA Crim 1730, [2020] 12 WLUK 251�������������������������������������  3.107 R (on the application of the Financial Services Authority) v MM, AR & AK [2010] EWCA Crim 1151�����������������������������������������������������������������������������  3.81 R (on the application of Griffin) v Richmond Magistrates Court [2008] EWHC 84 (Admin), [2008] 1 WLR 1525, [2008] 3 All ER 274�����������������  6.67 R (on the application of Griggs) v Financial Services Authority [2008] EWHC 2587 (Admin), [2009] ACD 28������������������������������������������������������  11.34 R (on the application of Grout) v Financial Conduct Authority [2015] EWHC 596 (Admin)�����������������������������������������������������������������������������������  11.32 R (on the application of Malik) v Manchester Crown Court [2008] EWHC 1362 (Admin), [2008] 4 All ER 403, [2008] EMLR 19����������������  7.102 R (on the application of Maughan) v Oxfordshire Senior Coroner [2020] UKSC 46, [2021] AC 454, [2020] 3 WLR 1298����������������������������������������  6.115 R (on the application of Uberoi) v City of Westminster Magistrates Court [2008] EWHC 3191 (Admin), [2009] 1 WLR 1905, [2009] Bus LR 1544��������������������������������������������������������������������������������   3.7, 3.27, 3.45, 3.65; 14.28 R (on the application of Virgin Media Ltd) v Zinga; R v Zinga (Munaf Ahmed) [2014] EWCA Crim 52, [2014] 1 WLR 2228, [2014] 3 All ER 90�������������������������������������������������������������������������������������  6.144 R (on the application of Wilford (Christopher)) v Financial Services Authority; R (on the application of C) v Financial Services Authority [2013] EWCA Civ 677�������������������������������������������������������������  12.15, 12.24, 12.25 R (on the application of Wilkinson) v DPP [2006] EWHC 3012 (Admin)����������  7.15 Racing Partnership Ltd v Sports Information Services Ltd [2020] EWCA Civ 1300, [2021] Ch 233, [2021] 2 WLR 469���������������������������������  6.19 Raiffeisen Zentralbank Osterrich v Royal Bank of Scotland [2010] EWHC 1392 (Comm), [2011] 1 Lloyd’s Rep 123, [2010] 6 WLUK 199���������������  6.161 Ras Al Khaimah Investment Authority v Azima [2021] EWCA Civ 349, [2021] 3 WLUK 193 ����������������������������������������������������������������������   6.114, 6.121 Ras Al Khaimah Investment Authority v Bestfort Development [2017] EWCA Civ 1014, [2018] 1 WLR 1099, [2017] 7 WLUK 431, [2017] CP Rep 40���������������������������������������������������������������������������������������  6.121 Reading v A-G [1948] 2 KB 268, [1948] 2 All ER 27, [1949] LJR 280�����   2.42; 14.5 Real Estate Opportunities Ltd v Aberdeen Managers Jersey Ltd [2007] EWCA Civ 197, [2007] 2 All ER 791, [2008] 2 BCLC 116����������������������  15.15 Recovery Partners GB Ltd v Rukhardze [2018] EWHC 2918 (Comm), [2019] Bus LR 1166, [2018] 11 WLUK 15��������������������������������������������������  6.19 Red Sea Tankers Ltd v Papachristidis (The Hellespont Arden) [1997] 2 Lloyd’s Rep 547, [1997] 4 WLUK 451�����������������������������������������������������  6.76 Rees v Comr for Police of the Metropolis [2018] EWCA Civ 1587, [2018] 7 WLUK 87������������������������������������������������������������������������������������  6.119 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, [1942] 1 All ER 378�����   2.8, 2.13, 2.24; 6.46; 8.1, 8.10 Reingold v Deloitte Haskins & Sells 599 F Supp 1241 (SDNY, 1984)��������������  16.36 Relfo Ltd (in liquidation) v Varsani [2014] EWCA Civ 360, [2014] 3 WLUK 850, [2015] 1 BCLC 14����������������������������������������������������������������  2.61 Rhodes v Macalister (1923) 29 Com Cas 19��������������������������������������������������������  8.17 Ridgely v Keene134 AD 647, 119 NYS 451 (2nd Dept, 1875)����������������������������  6.20 Ross River Ltd v Waveley Commercial Ltd [2013] EWCA Civ 910, [2014] 1 BCLC 545����������������������������������������������������������������������������������������  2.8 Rowling v Takaro Properties Ltd [1988] AC 473, [1988] 2 WLR 418, [1988] 1 All ER 163�����������������������������������������������������������������������������������  14.12

xxxix

Table of Cases Royal Bank of Scotland v JP SPC 4 [2022] UKPC 18, [2022] 5 WLUK 568����  14.11 Royal Brunei Airlines Sdn Bhd v Philip Tan Kok Ming [1995] 2 AC 378, [1995] 3 WLR 64, [1995] 3 AllER 97�����������������������������������������   2.6, 2.32, 2.35, 2.36; 6.29, 6.120; 7.48 Rubery v Grant (1871–72) LR 13 Eq 443������������������������������������������������������������  6.11 Russell v Cartwright [2020] EWHC 41 (Ch), [2020] 1 WLUK 95�������������   2.22; 6.22 Ryan v Triguboff [1976] 1 NSWLR 588��������������������������������������������������������������  3.38 S SCF Finance Co v Masri (No 1) [1985] 1 WLR 876, [1985] 2 All ER 747, [1985] 2 Lloyd’s Rep 206���������������������������������������������������������������������������  6.122 SD v (1) Persons Unknown & (2) Huobi Global Ltd [2022] EWHC 280 (QB) ���������������������������������������������������������������������������������������  6.121 SSF Realisations Ltd (in liquidation) v Loch Fyne Oysters Ltd [2020] EWHC 3521 (Ch), [2020] 12 WLUK 405, [2021] BCC 354�����������  2.12 Saab v Dangate Consulting Ltd [2019] EWHC 1558 (Comm), [2019] 6 WLUK 321, [2019] Lloyd’s Rep FC 542��������������������������������������  14.6 Safetynet Security Ltd v Coppage (unreported, 15 August 2012); aff’d [2013] EWCA Civ 1176, [2013] IRLR 970���������������������������������������������������  8.6 Safeway Stores Ltd v Twigger [2010] EWCA Civ 1472, [2011] 2 All ER 841, [2011] Bus LR 1629�����������������������������������������������������������������������������������  15.14 Said v Butt [1920] 3 KB 497������������������������������������������������������������������������������  14.12 Salaman v Warner [1891] 1 QB 734, (1891) 7 TLR 484��������������������������������������  6.23 Salomon v Salomon & Co Ltd [1897] AC 22�������������������������������������������   6.140; 7.73; 8.7; 15.16 Sanderson & Levi v British Westralian Mine & Share Corpn (1898) 43 SJ 45������������������������������������������������������������������������������������   6.15, 6.16 Sandhu v Chief Constable of the West Midlands Police [2019] EWHC 3316 (Admin), [2019] 11 WLUK 530, [2020] ACD 25������������������  7.15 Sarwar v Her Majesty’s Advocate [2011] HCJAC 13���������������������������������   7.18, 7.50 Satnam Investments Ltd v Dunlop Heyward [1999] 3 All ER 652, [1999] 1 BCLC 385, [1999] FSR 722����������������������������������������������������������  2.32 Saunders v United Kingdom [1997] BCC 872, [1998] 1 BCLC 362, (1997) 23 EHRR 313����������������������������������������������������������������������������������  11.29 Scerri v Financial Services Authority [2010] UKUT (Penalty Decision) Fin/2009/0016��������������������������������������������������������������������������������������������  12.46 Scheder & Co v Walton & Hemingway (1910) 27 TLR 89����������������������������������  8.16 Schoenbaum v Firstbrook405 F 2d 200 (2nd Cir, 1968); cert denied 395 US 906 (1969)�������������������������������������������������������������������������������������  16.22 Scott v Brown, Doering, McNab & Co [1892] QB 724����������������������   6.1, 6.14, 6.16, 6.20, 6.24 Scott (Anthony Peter) v Metropolitan Police Comr [1975] AC 819, [1974] 3 WLR 741, [1974] 3 All ER 1032����������������������������������������   6.19, 6.105 Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324, [1958] 3 WLR 404, [1958] 3 All ER 66���������������������������������������������������������  8.7 Seaboard Offshore Ltd v Secretary of State for Transport [1994] 1 WLR 541, [1994] 2 All ER 99, [1994] 1 Lloyd’s Rep 589�����������������������  15.6 Seager v Copydex (No 2) [1969] 1 WLR 809, [1969] 2 All ER 718, [1969] FSR 261��������������������������������������������������������������������������������������������  2.60 Seagull Manufacturing Co Ltd (in liquidation) (No 2), Re [1994] Ch 91, [1994] 2 WLR 453, [1994] 1 BCLC 273���������������������������������������������������  6.131 Secretariat Consulting PTE Ltd v A Company [2021] EWCA Civ 6, [2021] 4 WLR 20, [2021] 4 All ER 348������������������������������������������������   2.2; 6.44 Secretary of State for Business, Energy & Industrial Strategy v Selby [2021] EWHC 3261 (Ch), [2021] 12 WLUK 123, [2022] BCC 418�����������  2.37 Secretary of State for Health v Servier Laboratories Ltd [2021] UKSC 24, [2021] 3 WLR 370, [2022] 1 All ER 1���������������������������������������������������������  14.9

xl

Table of Cases Secretary of State for Trade & Industry v Bairstow [2003] EWCA Civ 321, [2004] Ch 1, [2003] 3 WLR 841����������������������������������������������������������������  6.114 Secretary of State for Trade & Industry v Tjolle [1989] BCC 282, [1998] 1 BCLC 333, (1997) 94 (24) LSG 31�����������������������������������������������������������  2.41 Securities & Exhange Commission v Berger 322 F 3d 187, 193 (2nd Cir, 2003)��������������������������������������������������������������������������������   16.21, 16.22 Securities & Exhange Commission v Chenery Corpn (1943) 318 US 80��������������  2.2 Securities & Exhange Commission v Galleon Management LP 683 F Supp 2d 316 (SDNY, 2010)���������������������������������������������������������������������  16.19 Securities & Exhange Commission v Kasser 548 F 2d 109 (3rd Cir, 1977); cert denied 431 US 938 (1977)������������������������������������������������������������������  16.25 Securities & Exhange Commission v MacDonald 699 F 2d 47 (1st Cir, 1983)�����������������������������������������������������������������������������������������������  3.49 Securities & Exhange Commission v Obus (2012) 693 F 3d 276��������������������������  1.9 Securities & Exhange Commission v Stephen Sui-Kuan Wang & Fred Lee 88 Civ 4461 1988 (US DC, SDNY)����������������������������������������������  2.27 Securities & Exhange Commission v Texas Gulf Sulfur Co 401 F 2d 833, 848 (2nd Cir. 1968)�����������������������������������������������������������������������������   3.26, 3.49 Securitites and Futures Commission v Young Bik Fung [2018] HKFCA 45�������  3.67 Selangor United Rubber Estates v Craddock (No 3) [1968] 1 WLR 1555, [1968] 2 AlL ER 1073, [1968] 2 Lloyd’s Rep 289������������������������������   2.31; 7.48 Serious Fraud Office v Barclays plc [2018] EWHC 3055 (QB), [2018] 11 WLUK 873, [2020] 1 Cr App R 28�����������������������������������������������   2.38; 3.10; 15.6, 15.7 Serious Organised Crime Agency v Galle [2011] UKSC 49, [2011] 1 WLR 2760, [2012] 2 All ER 1�����������������������������������������������������������������  6.114 Sevenoaks Stationers (Retail) Ltd, Re [1991] Ch 164, [1990] 3 WLR 1165, [1991] 3 All ER 578�����������������������������������������������������������������������������������  14.41 Shah v HSBC Private Bank (UK) Ltd [2010] EWCA Civ 31, [2010] 3 All ER 477, [2011] 1 All ER (Comm) 67�������������������������������   7.52, 7.59, 7.60, 7.61; 14.10, 14.17, 14.18 Shalson v Russo [2003] EWHC 1637 (Ch), [2005] Ch 281, [2005] 2 WLR 1213�������������������������������������������������������������������������������������������������  2.61 Sharp v Blank [2019] EWHC 3096 (Ch), [2019] 11 WLUK 243������������������������  2.15 Sheldrake v DPP [2004] UKHL 43, [2005] 1 AC 264, [2004] 3 WLR 976������������������������������������������������������������������������������������������   3.88; 6.67 Shevlin, Re (FSA Final Notice, 2008)��������������������������������������������������������������������  4.9 Short v Treasury Commissioners [1948] AC 534, [1948] 2 All ER 509, 64 TLR 400�������������������������������������������������������������������������������������������������  6.140 Sinclair Investments (UK) Ltd v Versailles Trading Finance (in administration) [2011] EWCA Civ 347, [2012] Ch 453, [2011] 3 WLR 1153�������������������������������������������������������������������   2.31, 2.33, 2.59; 8.7; 14.13 Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50, [2020] AC 1189, [2019] 3 WLR 997����������������������������������   2.8, 2.37, 2.54; 14.11 Sinocore International Co Ltd v RBRG Trading (UK) Ltd [2017] EWHC 251 (Comm), [2018] 1 All ER (Comm) 576, [2017] 1 Lloyd’s Rep 375��������������������������������������������������������������������������������������  6.120 Skatteforvaltningen (Danish Customs & Tax Divisions) v Solo Capital Partners LLP (in administration) [2022] EWCA Civ 234, [2022] 2 All ER 563, [2022] STC 497���������������������������������������������������������������������  2.27 Smith v Chadwick (1884) 9 App Cas 187, [1884] 2 WLUK 63�������������������������  6.116 Smith v Croft (No 2) [1988] Ch 114, [1987] 3 WLR 405, [1987] 3 All ER 909��������������������������������������������������������������������������������������������������  8.9 Smith v Hancock [1894] 2 Ch 377�������������������������������������������������������������������������  7.2

xli

Table of Cases Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd; Smith New Court Securities Ltd v Citibank NA [1994] 1 WLR 1271, [1994] 4 All ER 225, [1994] 2 BCLC 212���������������������������������������  6.116, 6.117 Smithton Ltd (formerly Hobart Capital Markets Ltd) v Naggar [2014] EWCA Civ 939, [2015] 1 WLR 189, [2014] 7 WLUK 419�������������������������  2.41 Solicitors (a firm), Re [1997] Ch 1, [1996] 3 WLR 16, [1965] 3 All ER 482������  8.14 Solicitors (a firm), Re [1992] QB 959, [1992] 2 WLR 809, [1992] 1 All ER 353�������������������������������������������������������������������������������������������������  8.14 Spector Photo Group NV v Commissie voor het Bank-, Financie-en Assurantiewezen (CBFA) (Case C-45/08) [2010] Bus LR 1416, [2009] ECR 1-12073, [2009] 12 WLUK 730�������������������������������������������������  3.8 Squirrel Ltd v National Westminster Bank plc [2005] EWHC 664 (Ch), [2006] 1 WLR 637, [2005] 2 All ER 784�������������������������������������������   7.17, 7.52, 7.55, 7.57 Staines v United Kingdom (unreported, 16 May 2000)��������������������������������������  11.29 Standard Chartered Bank v Pakistan National Shipping Corpn (No 2) [2002] UKHL 43, [2003] 1 AC 959, [2002] 3 WLR 1547���������������������������  15.9 Stanford International Bank Ltd (in liquidation) v HSBC Bank plc [2020] EWHC 2232 (Ch), [2020] 7 WLUK 611����������������������������������������������������  14.11 Stein v Blake (No 2) [1998] 1 All ER 724, [1998] BCC 316, [1998] 1 BCLC 573�����������������������������������������������������������������������������������������   2.15, 2.22 Stobart Group Ltd v Tinker [2019] EWHC 258 (Comm), [2019] 2 WLUK 235������������������������������������������������������������������������������������������������  6.19 Stoffel & Co v Grondona [2018] EWCA Civ 2031, [2018] 9 WLUK 153, [2018] PNLR 36; aff’d [2020] UKSC 42, [2021] AC 540, [2020] 3 WLR 1156��������������������������������������������������������������������������������������   2.54; 14.11 Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009] UKHL 39, [2009] 1 AC 1391, [2009] 3 WLR 455�������������������������������������  15.14 Stovin v Wise [1996] AC 923, [1996] 3 WLR 388, [1996] 3 All ER 801������������  14.8 Stromer v R [2012] NSWCCA 261��������������������������������������������������������������������  3.107 Strong v Repide 213 US 419 (1909)���������������������������������������������������������������������  2.22 Stupple v Royal Insurance Co [1971] 1 QB 50, [1970] 3 WLR 217, [1970] 3 All ER 230�����������������������������������������������������������������������������������  6.114 Sumitomo Bank Ltd v Kartika Ratna Thahir [1993] 1 SLR 735��������������������������  2.27 Summers v Fairclough Homes Ltd [2012] UKSC 26, [2012] 1 WLR 2004, [2012] 4 All ER 317�����������������������������������������������������������������������������������  6.114 Supasave Retail v Coward Chance (a firm) see Lee (David) & Co (Lincoln) Ltd v Coward Chance (a firm) Supply of Ready Mixed Concrete (No 2), Re see Director General of Fair Trading v Pioneer Concrete (UK) Ltd Swift Trade Inc v Financial Services Authority see 7722656 Canada Inc (formerly Swift Trade Inc) v Financial Services Authority Swindle v Harrison [1997] 4 All ER 705, [1997] PNLR 641, [1997] NPC 50����������������������������������������������������������������������������   2.56, 2.57, 2.58 Systems Building Services Group Ltd (in liquidation), Re [2020] EWHC 54 (Ch), [2020] 2 All ER (Comm) 565, [2020] 1 WLUK 114��������  2.43 T TMO Renewables Ltd (in liquidation) v Yeo [2021] EWHC 2033 (Ch), [2021] 7 WLUK 399��������������������������������������������������������������������������������������  2.8 TPT Patrol Pty Ltd as trustees for Amies Superannuation Fund v Myer Holdings Ltd [2019] FCA 1747����������������������������������������������������������  3.37 TR Technology Investment Trust plc, Re (1988) 4 BCC 244, [1988] BCLC 256, [1988] PCC 462�������������������������������������������������������������  1.35 TSB Private Bank International SA v Chabra [1992] 1 WLR 231, [1992] 2 All ER 245�����������������������������������������������������������������������������������  6.122 Takhar v Gracefield Developments Ltd [2019] UKSC 13, [2020] AC 450, [2019] 2 WLR 984 �����������������������������������������������������������   6.115, 6.120

xlii

Table of Cases Takhar v Gracefield Developments Ltd [2020] EWHC 2791 (Ch), [2020] 10 WLUK 282����������������������������������������������������������������������������������  2.54 Tamari v Bache & Co (Lebanon) SAL 547 F Supp 309 (ND III, 1982); order aff’d 730 F 2d 1103 (7th Cir. 1984); cert denied 469 US 871 (1984)���������������������������������������������������������������������������������������������������������  16.34 Tamimi v Khodari [2009] EWCA Civ 1109, [2009] 10 WLUK 205, [2009] CTLC 288�����������������������������������������������������������������������������������������  8.13 Target Holdings v Redfern [1996] AC 421, [1995] 3 WLR 352, [1995] 3 All ER 785 ������������������������������������������������������������������   2.14, 2.55; 7.45 Tayeb (Com & Hosni) v HSBC Bank plc [2004] EWHC 1529 (Comm), [2004] 4 All ER 1024, [2004] 2 All ER (Comm) 880�������������������������   7.4; 14.17 Taylor v Taylor [1970] 1 WLR 1148, [1970] 2 All ER 609, [1970] 4 WLUK 98������������������������������������������������������������������������������������  6.114 Tesco Stores Ltd v Pook [2003] EWHC 823 (Ch), [2004] IRLR 618������������������������������������������������������������������������������������   2.10; 14.5, 14.6 Tesco Supermarkets Ltd v Nattrass [1972] AC 153, [1971] 2 WLR 1166, [1971] 2 All ER 127 ���������������������������������������������������������������������������   2.38; 15.6 Test Claimants in the Franked Investment Income Group Litigation v HMRC [2020] UKSC 47, [2022] AC 1, [2020] 3 WLR 1369�������������������  6.118 Thomson v Informatic Software Ltd (2021) EAT 2020-000463-00���������������������  6.91 Thompson v Havelock (1880) 1 Camp 527, 170 ER 1045�����������������������������������  2.42 Three Rivers District Council v Bank of England [2001] UKHL 16, [2003] 2 AC 1, [2001] 2 All ER 513����������������������������������������������������������  6.115 Three Rivers District Council v Bank of England (No 3) [2003] 2 AC 1, [2000] 2 WLR 1220, [2000] 3 All ER 1�������������������������������������������������������  6.56 Times Travel (UK) Ltd v Pakistan International Airways Corpn [2021] UKSC 40, [2021] 3 WLR 727, [2022] 2 All ER 815���������������   6.19; 14.8 Tinsley v Milligan [1994] 1 AC 340, [1993] 3 WLR 126, [1993] 3 All ER 65���������������������������������������������������������������������������������������������������  2.54 Titan Steel Wheels Ltd v Royal Bank of Scotland plc [2010] EWHC 211 (Comm), [2010] 2 Lloyd’s Rep 92, [2010] 2 WLUK 338������������������������������������������������������������������������������������������������  4.41 Torquay Hotel Co Ltd v Cousins [1969] 2 Ch 106, [1969] 2 WLR 289, [1969] 1 All ER 522�������������������������������������������������������������������������������������  14.9 Total Network SL v HMRC [2008] UKHL 19, [2008] 1 AC 1174, [2008] 2 WLR 711����������������������������������������������������������������������������������������  6.19 Towers v Premier Waste Management Ltd [2011] EWCA Civ 923, [2012] BCC 72, [2012] 1 BCLC 67�������������������������������������������������������������  8.17 Treacy v DPP [1971] AC 537, [1971] 2 WLR 112, [1971] 1 All ER 110������������  6.80 Tuke v Hood [2022] EWCA Civ 23, [2022] 2 WLR 983, [2022] 1 WLUK 99������������������������������������������������������������������������������������������������  6.117 Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164, [2002] 2 All ER 377�������������������������������������������������������������������������������   2.36; 6.29; 7.48 U UBS AG (London Branch) v Kommunale Wasserwerke Leipzig GmbH [2014] EWHC 3615 (Comm), [2014] 11 WLUK 46����������������������������������  15.12 UBS AG (London Branch) v Kommunale Wasserwerke Leipzig GmbH [2017] EWCA Civ 1567, [2017] 2 Lloyd’s Rep 621, [2017] 10 WLUK 360����������������������������������������������������������������������������������������������  2.37 US v Brown 5 F Supp 81 (SDNY, 1933)��������������������������������������������������������������  6.24 US v Carpenter 791 F 2d 1024 (end Cir, 1986)����������������������������������������������������  3.57 US v Milwaukee Refrigerator Transit Co 142 F (1906) 247������������������������������  6.140 US v Newman (2nd Cir, 2015), 773 F 3d 438 (2nd Cir, 2014)��������������������������  16.19 US v O’Hagan 117 S Ct 2199 (1997)������������������������������������������������������������   1.9; 6.48 US v O’Hagan 521 US 642 (1997)���������������������������������������������������������������������  16.19 US v Sarao [2016] Lloyds Rep FC 339����������������������������������������������������������������  6.33 US v Vilar 729 F 3d 62 (2nd Cir, 2013)��������������������������������������������������   16.21, 16.27, 16.28, 16.29

xliii

Table of Cases US v Winans 612 F Supp (1985) 827�������������������������������������������������������������������  3.57 UTB LLC v Sheffield United Ltd [2019] EWHC 2322 (Ch), [2019] 9 WLUK 144������������������������������������������������������������������������������������������������  2.18 Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638, [2006] FSR 17, [2007] WTLR 835 �����������������������������������������������������������������������   2.24, 2.41; 8.6 United Arab Emirates v Allen [2012] EWHC 1712 (Admin), [2012] 1 WLR 3419, [2012] 6 WLUK 482��������������������������������������������������������������  6.33 United Pan-Europe Communications NV v Deutsche Bank AG [2000] 2 BCLC 461���������������������������������������������������������������������������������   2.8, 2.13, 2.27, 2.28, 2.29, 2.30, 2.56 University of Nottingham v Fishel [2000] ICR 1462, [2001] IRLR 471, [2001] RPC 22�������������������������������������������������������������������������������������   2.42; 14.5 Uxbridge Permanent Benefit Society v Pickard [1939] 2 KB 248, [1939] 2 All ER 344�����������������������������������������������������������������������������������  15.11 V VTB Capital plc v Nutritek International Corpn [2013] UKSC 5, [2013] 2 AC 337, [2013] 2 WLR 398�������������������������������������   2.24; 6.140; 15.16 Vadanta Resources plc v Lungowe [2019] UKSC 20, [2020] AC 1045, [2019] 2 WLR 1051����������������������������������������������������������������������������������������  8.7 Valid Nielson Holdings A/S v Baldorino [2019] EWHC 1926 (Comm), [2019] 7 WLUK 306 ����������������������������������������������������������������   2.15, 2.18, 2.19, 2.21, 2.55; 6.19, 6.117 Van Shaack Holdings Ltd v Van Schaak 867 P 2d 892 Col 1994�������������������������  2.22 Verrier v DPP [1967] 2 AC 195, [1966] 3 WLR 924, [1966] 3 All ER 568���������  6.19 Vestergaard Frandsen S/A (now called MVF3 APS) v Bestnet Europe Ltd [2013] UKSC 31, [2013] 1 WLR 1556, [2013] 4 All ER 781����������������������  3.56 Visser (Michael) & Fagbulu (Oluwole) v Financial Services Authority [2011] Lloyd’s Rep FC 551 ������������������������������������������������������������   12.46, 12.47 Vivendi SA v Richards [2013] EWHC 3006 (Ch), [2013] BCC 771, [2013] Bus LR D63��������������������������������������������������������������������������������������  2.41 Voros v Hungary [2012] EWHC 518 (Admin), [2012] 3 WLUK 320�����������������  6.33 W WM Morrison Supermarkets plc v Various Claimants [2018] EWCA Civ 2339, [2019] QB 772, [2019] 2 WLR 99���������������������������������������������������������������  2.37 WM Morrison Supermarkets plc v Various Claimants [2020] UKSC 12, [2020] AC 989, [2020] 2 WLR 941������������������������������������������������������������  15.10 Waddell v Blockley (1879) 4 QBD 678��������������������������������������������������������������  6.117 Wallersteiner v Moir (No 1) [1974] 1 WLR 991, [1974] 3 All ER 217, [1974] 5 WLUK 90������������������������������������������������������������������������������������  6.140 Wallersteiner v Moir (No 2) [1975] QB 373, [1975] 2 WLR 389, [1975] 1 All ER 849�����������������������������������������������������������������������������������������������  15.16 Walsh v United Kingdom (Application No 43384/05)���������������������������������������  6.114 Warman International Ltd v Dwyer (1995) 128 ALR 201, [1995] HCA 12���������  2.28 Wellesely Partners LLP v Withers LLP [2015] EWCA Civ 1146, [2016] Ch 529, [2016] 2 WLR 1351����������������������������������������������������������  6.117 Westdeutsche Landesbank Girozentrale v London Borough of Islington [1996] AC 669, [1996] 2 WLR 802, [1996] 2 All ER 948���������   2.25, 2.31, 2.61 Westpak Banking Corpn v The Bell Group Ltd (in liquidation) (No 3) [2012] WASCA 157��������������������������������������������������������������������������������������  2.23 Westshield Ld, Re [2019] EWHC 115 (Ch), [2019] Bus LR 1351, [2019] 2 WLUK 226 �������������������������������������������������������������������   2.22; 3.13; 8.7 Wiese v UK Border Agency [2012] EWHC 2549 (Admin), [2012] Lloyd’s Rep FC 681, [2012] ACD 92�����������������������������������������������������������  7.15

xliv

Table of Cases Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189, [2014] 2 WLR 355����������������������������������������������������������������������������������������  2.31 Williams v Solicitors Regulation Authority [2017] EWHC 1478 (Admin), [2017] 6 WLUK 422������������������������������������������������������������������������������������  6.29 Windsor & Hare v Crown Prosecution Service [2011] EWCA Crim 143, [2011] 1 WLR 1519, [2011] 2 Cr App R 7���������������������������������������������������  7.51 Winkworth v Edward Baron Development Co Ltd [1986] 1 WLR 1512, [1987] 1 All ER 114, [1987] BCLC 193���������������������������������������������   2.23; 6.44 Winterflood Securities v Financial Services Authority [2010] EWCA Civ 423, [2010] Bus LR 1622, [2010 BCC 718��������������������������������������������������������  13.37 Woolfson v Strathclyde RC 1978 SC (HL) 90, 1978 SLT 159, [1978] 2 WLUK 113����������������������������������������������������������������������������������������������  6.140 Y Yam Seng Pte Ltd v International Trade Corpn Ltd [2013] EWHC 111 (QB), [2013] 1 All ER (Comm) 1321, [2013] 1 Lloyd’s Rep 526�����������������   2.18; 6.33 Yaseen v Secretary of State for the Home Department [2020] EWCA Civ 157, [2020] 1 WLR 1359, [2020] 2 WLUK 165�����������������������  6.29 Young v Robinson Rhodes (a firm) [1999] 3 All ER 524, [1999] Lloyd’s Rep PN 641�������������������������������������������������������������������������������������  8.15 Yukong Line Ltd v Rendsburg Investments Corpn of Liberia [1998] 1 WLR 294, [1998] 4 All ER 82, [1998] 1 Lloyd’s Rep 322�����������������������  2.41 Yung Kee Holdings Ltd, Re [2014] 2 HKLRD 313����������������������������������������������  2.22 Z Zoelsch v Arthur Anderson & Co 824 F 2d 27 (DC Cir, 1987)��������������������������  16.22 Zurich Insurance Co plc v Hayward [2016] UKSC 48, [2017] AC 142, [2016] 3 WLR 637��������������������������������������������������������������������������������������  6.116

xlv

xlvi

Table of Statutes

Anti-terrorism, Crime and Security Act 2001�������������������  7.10 Sch 1������������������������������������������  7.114 Banking Act 1987�������������������������  14.25 Bribery Act 2010������������������   6.84; 14.26 s 1���������������������������������������   6.89, 6.90 s 1(2), (3)�������������������������������������  6.89 s 2���������������������������������������   6.85, 6.90 s 3������������������������������������������������  6.89 s 3(6)����������������������������������   6.86, 6.89 s 4������������������������������������������������  6.87 s 4(2)�������������������������������������������  6.87 s 5������������������������������������������������  6.89 s 6������������������������������   6.88, 6.89, 6.90 s 6(5), (7)�������������������������������������  6.88 s 7��������������������������������������   3.10; 6.89; 15.2, 15.3, 15.6 s 8, 9��������������������������������������������  6.89 s 12����������������������������������������������  6.89 s 12(5)�����������������������������������������  6.89 s 14����������������������������������������������  6.90 Civil Evidence Act 1968 s 11�����������������������������������   6.114; 14.3 s 11(1)���������������������������������������  6.114 s 11(2)(a), (b)����������������������������  6.114 s 13��������������������������������������������  6.114 Civil Jurisdiction and Judgments Act 1982 s 25��������������������������������������������  6.123 Companies Act 1929�������������������������  8.3 Companies Act 1948����������������   1.35; 2.1 Companies Act 1980 s 68–73������������������������������������������  3.4 Pt V (ss 74–90)����������������������������  1.44 Companies Act 1985�������������������������  3.4 Pt VI (ss 198–220)����������������������  1.35 Companies Act 2006��������   2.9, 2.26; 3.3; 8.1, 8.5, 8.11 s 127(3)���������������������������������������  14.4 Pt 10 (ss 154–259)����������������������  2.11 Pt 10 Ch 2 (ss 170–181)����������������  2.2 s 170(2)���������������������������������������  2.43 s 170(2)(a)�������������������������������������  2.1 s 170(4)�����������������������������������������  2.2 s 170(5), (6)���������������������������������  2.41 s 171��������������������������������������������  1.37

Companies Act 2006 – contd s 172�����������������������������������   2.13; 14.4 s 172(1)���������������������������������������  1.37 s 172(1)(e)�����������������������������������  14.4 s 172(1)(f)�����������������������������������  2.15 s 172(3)���������������������������������������  2.23 s 175��������������������������������   2.8; 8.7, 8.8 s 175(1)�����������������������������������������  8.2 s 175(2)�����������������������������������������  8.6 s 175(3)����������������������������������   8.2, 8.9 s 175(4)�����������������������������������������  8.6 s 175(6)�����������������������������������������  8.9 s 175(7)�����������������������������������������  8.2 s 176����������������������������������������������  2.8 s 176(4)�����������������������������������������  8.6 s 177���������������������������������������   2.8; 8.4 s 177(1)�����������������������������������������  8.3 s 177(6)(a), (b)������������������������������  8.3 s 178(1), (2)�����������������������������������  8.4 s 180����������������������������������������������  8.4 s 180(1)�����������������������������������������  8.4 s 180(4)(b)�������������������������������������  8.8 s 182���������������������������������������   2.8; 8.3 s 183����������������������������������������������  8.3 s 187��������������������������������������������  2.41 Pt 10 Ch 4 (ss 188–226)����������������  2.8 s 188, 189��������������������������������������  8.5 s 190–197��������������������������������������  8.5 s 205, 206������������������������������������  8.12 s 213����������������������������������������������  8.5 Pt 10 Ch 5 (ss 227–230)����������������  8.5 s 232��������������������������������������������  8.12 s 232(1), (4)�����������������������������������  8.8 s 233, 234������������������������������������  8.12 s 239��������������������������������������������  8.10 s 239(4)�����������������������������������������  8.9 s 251��������������������������������������������  2.41 s 252–254�������������������������������   8.5, 8.9 Pt 11 Ch 1 (ss 260–264)��������������  2.11 s 260(5)���������������������������������������  2.11 s 265(7)���������������������������������������  2.11 s 386(2)���������������������������������������  6.93 s 387(1)���������������������������������������  6.93 s 388(2)���������������������������������������  6.93 s 418(5)���������������������������������������  6.92 s 499(1)(b)�����������������������������������  6.92

xlvii

Table of Statutes Companies Act 2006 – contd s 501(1)���������������������������������������  6.92 Pt 18 (ss 658–737)����������������������  1.37 s 790C(2), (3)������������������������������  1.35 Pt 22 (ss 791–828)����������������������  1.35 s 993���������������������������������   6.64; 14.26 s 1112(1)������������������������������������� 6.111 s 1157������������������������������������������  8.11 s 1266������������������������������������������  1.35 Sch 1A�����������������������������������������  1.35 para 24(5)��������������������������������  1.43 Company Directors’ Disqualification Act 1986����������������������   6.75, 6.130 s 2�����������������������������������   6.132; 14.41 s 3����������������������������������������������  6.132 s 4����������������������������������������������  6.133 s 5, 5A���������������������������������������  6.132 s 6���������������������������������������������  6.130, 6.134, 6.135 s 8, 8ZA, 8ZD���������������������������  6.134 s 10��������������������������������������������  6.136 s 11, 13, 15, 15A�����������������������  6.137 Sch 1 Pt 1 (paras 1–5A)������������������  6.135 Company Securities (Insider Dealing) Act 1985������   3.4, 3.5, 3.6, 3.28, 3.50, 3.54, 3.81, 3.85, 3.101 s 1(3), (4)�������������������������������������  3.81 s 1(7)�������������������������������������������  3.73 s 3(d)�����������������������������������������  3.101 s 8������������������������������������������������  3.81 s 8(3)�������������������������������������������  2.53 s 10(b)��������������������������������   3.45, 3.54 Computer Misuse Act 1990������������  6.82 s 1������������������������������������������������  6.82 s 2���������������������������������������   6.82, 6.83 s 3, 3A�����������������������������������������  6.82 Consumer Credit Act 2006 s 140A�����������������������������������������  8.16 Contracts (Rights of Third Parties) Act 1999����������������������   14.7, 14.12 Coroners and Justice Act 2009 s 113(2)���������������������������������������  10.8 s 122������������������������������������������  14.33 Corporate Insolvency and Governance Act 2020�������������  6.72 Corporate Manslaughter and Corporate Homicide Act 2007���������������������������������  15.6 Crime and Courts Act 2013 Sch 17������������������������������������������  6.91 Criminal Attempts Act 1981 s 1����������������������������������������������  6.106 s 1(4)(b)�������������������������������������  6.103 Criminal Finances Act 2017�����������������������   6.55; 7.10, 7.106, 7.114 Pt 3 (ss 44–52)�������������������   15.2, 15.6

Criminal Finances Act 2017 – contd s 45�������������������������������������   3.10; 15.2 s 46����������������������������������������������  15.2 Criminal Justice Act 1993�����   3.14, 3.18, 3.26, 3.27, 3.28, 3.30, 3.31, 3.36, 3.37, 3.51, 3.52, 3.55, 3.66, 3.67, 3.75, 3.77, 3.78, 3.81, 3.82, 3.85, 3.87, 3.97, 3.101; 6.103, 6.144; 8.23; 11.9 Pt V (ss 52–64)�������������   3.7, 3.8, 3.25, 3.27, 3.45, 3.67; 4.2, 4.42; 5.4; 6.76; 9.28; 11.11; 13.16; 14.28; 15.6 s 52�����������������������������   1.44; 2.53; 3.8, 3.9, 3.17, 3.78; 14.24 s 52(1)����������������   3.8, 3.18, 3.67, 3.73 s 52(1)(c)�������������������������������������  3.95 s 52(2)�������������������������������������������  3.8 s 52(2)(a)�������������������������������������  3.68 s 52(2)(b)����������   3.71, 3.72, 3.73, 3.95 s 52(3)�����������������������   3.14, 3.70, 3.96 s 53����������������������������������������������  3.86 s 53(1)�����������������������������������������  3.89 s 53(1)(a)����������������������������   3.90, 3.95 s 53(1)(b)�������������������������������������  3.92 s 53(1)(c)������������������   3.21, 3.24, 3.88, 3.93, 3.101 s 53(2)�����������������������������������������  3.95 s 53(2)(a)–(c)������������������������������  3.95 s 53(3)�����������������������������������������  3.96 s 53(3)(a)�������������������������������������  3.88 s 53(3)(b)�������������������������������������  3.96 s 53(4), (5)�����������������������������������  3.97 s 54����������������������������������������������  3.19 s 55����������������������������������������������  3.73 s 55(1)(b)����������������������������   3.22, 3.73 s 55(2)�����������������������������������������  3.90 s 55(3)�����������������������������������������  3.90 s 55(3)(b)�������������������������������������  3.18 s 55(4), (5)�����������������������������������  3.22 s 56������������������������������������   3.28, 3.43, 3.45, 3.78 s 56(1)�����������������������������������������  3.45 s 56(2)�����������������������������������������  3.18 s 57�������������������������������������   3.12, 3.13 s 57(2)�����������������������������������������  3.79 s 57(2)(a)�������������������������������������  3.77 s 57(2)(a)(ii)��������������   3.13, 3.36, 3.72 s 57(2)(b)���������������������������   3.13, 3.72, 3.75, 3.80 s 58����������������������������������������������  3.45 s 58(1)�����������������������������������������  3.58 s 58(2)�����������������������   3.46, 3.47, 3.58 s 58(2)(a)�������������������������������������  3.51 s 58(2)(b)�������������������������������������  3.53 s 58(2)(c)�������������������������������������  3.54

xlviii

Table of Statutes Criminal Justice Act 1993 – contd s 58(2)(d)�������������������������������������  3.55 s 58(3)��������������������������������   3.47, 3.58 s 58(3)(a)�������������������������������������  3.58 s 58(3)(b)�������������������������������������  3.59 s 58(3)(c)�������������������������������������  3.60 s 58(3)(d)�������������������������������������  3.61 s 58(3)(e)�������������������������������������  3.62 s 59����������������������������������������������  3.15 s 59(1)(a)����������������������������   3.14, 3.70 s 59(3)(a), (b)������������������������������  3.14 s 59(4)�����������������������������������������  3.14 s 60(4)�����������������������������������������  3.34 s 61������������������������������������   3.7, 3.107; 14.28, 14.35 s 62(1)�����������������������������������������  3.66 s 62(2)��������������������������������   2.53; 3.74 s 63(1)��������������������������������   3.17, 3.97 s 63(2)�����������������������������������������  3.17 Sch 1���������������������������������   3.97, 3.105 para 1�������������������������������������  3.101 para 1(1)����������������������������������  3.99 para 1(2)������������   3.98, 3.100, 3.102 para 1(3)�����������������������   3.98, 3.102 para 4�������������������������������������  3.103 para 5�������������������������������������  3.106 para 5(1)��������������������������������  3.105 Sch 2��������������������������������������������  3.19 Criminal Law Act 1967 s 5������������������������������������������������  6.81 Criminal Law Act 1977 s 1������������������������������   3.7; 6.19, 6.104 s 1(1)�����������������������������������������  14.31 s 1(2)�����������������������������������������  6.104 s 5(2)�������������������������������������������  6.19 Data Protection Act 1998 s 1����������������������������������������������  7.108 Debtors Act 1869 s 13����������������������������������������������  6.73 Defamation Act 1952 s 3(1)�����������������������������������������  6.119 Defamation Act 2013 s 1(2)�������������������������������������������  2.13 Domestic Violence, Crime and Victims Act 2004 s 5(1)�������������������������������������������  15.1 Economic Crime (Transparency and Enforcement) Act 2022������  6.2 Pt 3 (ss 54–66)����������������������������  15.2 Enterprise and Regulatory Reform Act 2013�������������������������������  6.108 European Union (Withdrawal) Act 2018������������������������   13.1; 16.4 Financial Services Act 1986��������������  3.4 s 47������������������������������������������������  5.3 s 47(1)�����������������������������   5.2, 5.3; 6.9 s 47(2)�������������������������������   3.105; 5.2; 6.10, 6.11, 6.59 s 48(7)���������������������������������������  3.105

Financial Services Act 1986 – contd s 56�������������������������������������   6.60, 6.61 s 62, 62A�������������������������������������  6.25 s 173–178��������������������������������������  3.4 s 200������������������������������������������  6.109 Financial Services Act 2012����   4.1; 5.10, 5.13; 6.1, 6.6, 6.10, 6.24, 6.57, 6.62, 6.76, 6.109; 8.23, 8.25, 8.30; 11.1, 11.9, 11.11; 12.38; 13.8; 14.1; 15.1 s 1B, 1D����������������������������������������  7.2 s 2(2)�����������������������������������������  12.38 s 23��������������������������������������������  12.34 s 36, 37��������������������������������������  15.21 s 56��������������������������������������������  6.138 Pt 7 (ss 89–95)������������������   3.105; 5.3, 5.13, 5.18; 6.9; 8.30; 11.11; 13.16 s 89���������������������������������   3.3; 5.2, 5.5, 5.10, 5.17, 5.18; 6.36, 6.58, 6.143; 14.24 s 89(1)�������������������������������������������  5.5 s 89(2)�����������������������������������������  8.39 s 89(3)(a)�������������������������������������  4.35 s 89(3)(b)�����������������������������������  13.41 s 90��������������������������������������   5.2, 5.10, 5.17, 5.18; 6.59; 14.24 s 90(1)�����������������������������������������  8.39 s 90(3), (4)�������������������������������������  5.5 s 90(9)(b)�������������������������������������  4.35 s 91���������������������������������   5.2, 5.5, 5.6, 5.17, 5.18; 6.17; 14.24 s 91(1)����������������������������������   5.6; 8.39 s 91(2)(d)���������������������������������������  5.6 s 91(3)���������������������������������������  13.41 s 91(3)(a)–(c)��������������������������������  5.6 s 91(9)(b)(ii)������������������������������  13.41 s 92����������������������������������������������  5.16 s 92(1)(b)���������������������������������������  4.2 Sch 10A���������������������������������������  6.24 Financial Services Act 2021�������������  4.2, 4.5; 5.16; 7.16; 16.4 s 14.2 s 2�����������������������������������������   4.2; 9.13 s 3–29��������������������������������������������  4.2 s 30������������������������������������������������  4.2 s 30(3)(b)�������������������������������������  9.13 s 31�������������������������������������   3.107; 4.2 s 32������������������������������������������������  4.2 s 32(2)�����������������������������������������  7.16 s 33–36������������������������������������������  4.2

xlix

Table of Statutes Financial Services and Markets Act 2000����������������   1.30, 1.35; 3.7, 3.10, 3.26, 3.27, 3.28, 3.29, 3.30, 3.36, 3.45, 3.85, 3.106, 3.108; 4.1, 4.2, 4.3, 4.7, 4.9, 4.25, 4.27, 4.31; 5.1, 5.13; 6.1, 6.2; 8.22; 9.28; 10.5, 10.29; 11.1, 11.2, 11.9, 11.20; 12.1; 14.17, 14.25; 15.17, 15.21; 16.43, 16.44 s 1B(1)�������������������������������������������  6.6 s 1B(3)�����������������������   6.6; 11.5; 12.39 s 1B(5)�������������������������������������������  6.6 s 1B(6)�����������������������������������������  11.3 s 1C(c)�������������������������������������������  6.7 s 1D���������������������������������������������  10.4 s 1D(1), (2)���������������������������   6.7; 10.4 s 1H�������������������������������������������  13.15 s 1H(3)������������������������   6.6, 6.58; 10.4 s 1H(3)(d)��������������������������������������  6.6 s 1H(4)�������������������������������   6.6; 13.15 s 2(2)����������������������������������   6.3; 12.38 s 3������������������������������������������������  12.6 s 3B��������������������������������������   6.6; 14.1 s 3B(1)(a)������������������������������������  11.3 s 3B(1)(b)������������������������������������  14.1 s 3B(1)(h)������������������������������������  11.3 s 4, 5��������������������������������������������  12.6 s 6������������������������������������������������  12.6 s 6(1)���������������������������������������������  6.3 s 6(3)�����������������������������   6.3, 6.6, 6.58 s 6(4)��������������������������������������   6.3, 6.6 s 8(4)�������������������������������������������  9.13 s 21����������������������������������������������  6.61 s 22����������������������������������������������  3.98 s 25, 30����������������������������������������  6.61 s 31����������������������������������������������  13.1 s 33��������������������������������������������  12.54 s 38(1)(a), (h)������������������������������  11.3 Pt IV (ss 40–55)�����������������������  12.53, 12.54; 16.47 s 42��������������������������������������������  16.48 s 53����������������������������������������������  13.8 s 55B(3)���������������������������������������  8.25 Pt V (ss 56–71A)�����������   14.47, 14.48; 15.27, 15.30 s 56���������������������������������   15.27, 15.29 s 56(1), (2)���������������������������������  12.55 s 56(10)�������������������������������������  14.52 s 59����������������������   14.47, 14.48; 15.28 s 59(1)���������������������������������������  14.48 s 59(3)(a), (b)����������������������������  14.48 s 59(6A), (6B)�����������������������������  6.78 s 59ZA�����������������������������������������  12.5 s 59ZA(2)����������������������������������  14.48 s 60����������������������   12.55; 14.48, 14.50

Financial Services and Markets Act 2000 – contd s 60A�����������������������������������������  14.50 s 61���������������������������������   14.48, 14.50 s 61(1)���������������������������������������  14.50 s 62��������������������������������������������  14.48 s 62(2)���������������������������������������  14.50 s 63���������������������������������   12.54; 14.48 s 63A�����������������������������������������  15.29 s 63B–63ZE������������������������������  14.48 s 63E������������������������������������������  14.51 s 64���������������������������������   14.48, 14.51 s 64A��������������������   12.5, 12.54; 15.30, 15.31, 15.33 s 66������������������������   12.4; 14.47; 15.30 s 66(1)���������������������������������������  15.30 s 66(2A)������������������������������������  12.55 s 66(3)���������������������������������������  15.32 s 66A�����������������������������������������  14.52 s 66A(2)������������������������������������  15.30 s 66A(3)(b)��������������������������������  15.30 s 67(1)–(3)���������������������������������  12.17 s 67(4), (7)���������������������������������  12.24 s 71��������������������������������������������  6.138 Pt VI (ss 72–103)������������������   1.4; 9.1, 9.2, 9.7; 10.29 s 73A���������������������������������������������  9.7 s 89���������������������������������������   4.2, 4.42 s 89A–89G����������������������������������  1.35 s 90������������������������������   4.2, 4.42; 6.58 s 90ZA, 90A��������������������������������  6.62 s 90A��������������������������������   6.25, 6.118 s 91��������������������������������������   4.2, 4.42; 6.58, 6.139 s 96A���������������������������������������������  9.2 Pt VII (ss 103A–117)������������������  4.22 Pt VIII (ss 118–131A)�������   8.23, 8.30; 11.2; 12.8 s 118��������������������   4.2, 4.5, 4.13, 4.20, 4.22, 4.25; 13.16 s 118(1)���������������������������������������  4.24 s 118(1)(a)��������������������������   4.14, 4.20 s 118(1)(c)�����������������������������������  4.30 s 118(2)��������������������   4.11, 4.17, 4.20, 4.43; 9.28; 10.7 s 118(2)(a)–(c)�������������   4.1, 4.17, 4.20 s 118(3)��������������������   4.11, 4.17, 4.20, 4.21, 4.43; 9.28 s 118(4)��������������������   4.11, 4.17, 4.20, 4.43; 9.28 s 118(5)����������������������   4.8, 4.11, 4.17, 4.19, 4.20, 4.43 s 118(6)�����������������������������   4.11, 4.17, 4.20, 4.43 s 118(7)��������������������   3.29; 4.11, 4.17, 4.20, 4.43; 12.63 s 118(8)������������������   3.105; 4.11, 4.17, 4.20, 4.43 s 118A�����������������������   4.17, 4.20, 4.25

l

Table of Statutes Financial Services and Markets Act 2000 – contd s 118A(1)(a)��������������������������������  4.17 s 118A(3)���������������������������������������  4.9 s 118B�����������������������������������������  4.20 s 118B(c)�������������������������������������  4.20 s 118C����������������������������������   4.22; 9.3 s 118C(5)�������������������������������������  4.23 s 118C(6)������������������������������   4.23; 9.5 s 119�������������������������������������   4.2, 4.27 s 120, 121��������������������������������������  4.2 s 122����������������������������   4.2, 4.24, 4.27 s 122(1)������������������������������   4.31, 4.32 s 122(2)���������������������������������������  4.31 s 123���������������������������   4.2, 4.13, 4.18; 9.28; 11.28; 12.4, 12.16, 12.34, 12.53 s 123(1)(b)�����������������������������������  12.4 s 123(2)�����������������   12.4; 13.15; 14.29 s 123(3)��������������������������   12.38; 14.29 s 123A, 123B�������������������   12.4, 12.53 s 124������������������������������������������  12.47 s 124(1)���������������������������������������  4.40 s 126������������������������������������������  12.16 s 126(1)��������������������������   12.16, 12.17 s 126(3)�������������������������������������  12.17 s 127������������������������������������������  12.24 s 127(1), (4)�������������������������������  12.24 s 129������������������������   4.19; 9.28; 12.61 s 130(2)���������������������������������������  4.24 s 130(3)�����������������������������������������  4.3 s 130A(1)��������������������������������������  4.7 s 131������������������������������������������  12.38 s 131A�����������������������������������������  7.53 s 133������������������������������������������  12.34 s 133(5)�������������������������������������  12.34 s 133(9)�������������������������������������  12.24 s 137P����������������������   8.22, 8.39; 13.38 s 137P(2)�����������������������������������  13.40 Pt X (ss 138–164)����������������������  16.44 s 138D�����������������������   4.41; 6.25; 8.39 s 139�������������������������������   16.45, 16.48 s 139(6)�������������������������������������  16.46 s 140, 141����������������������������������  16.45 s 144(1), (3)�������������������������������  3.105 s 146����������������������������������������������  6.3 s 150�����������������������������������   5.13; 6.24 s 157����������������������������������������������  9.9 s 161–163����������������������������������  11.27 s 164�������������������������������   11.27; 16.48 Pt XI (ss 165–177)�������������  11.1, 11.7, 11.13; 14.25 s 165�������������������   10.19, 10.20, 10.21, 10.27; 11.15, 11.16, 11.27 s 165(1)��������������������������   10.20, 10.21 s 165(2)�������������������������������������  10.20 s 165(3)��������������������������   10.20, 10.21 s 165(4)�������������������������������������  10.21

Financial Services and Markets Act 2000 – contd s 165(7)�������������������������������������  10.19 s 165(9), (10)�����������������������������  10.20 s 166���������������������   10.2, 10.22, 10.23, 10.24, 10.25, 10.26, 10.28; 11.27 s 166(1)��������������������������   10.23, 10.24 s 166(2)���������������   10.23, 10.24, 10.28 s 166(3)��������������������������   10.23, 10.24 s 166(3)(b)���������������������������������  10.28 s 166(4)���������������   10.23, 10.25, 10.26 s 166(7)�������������������������������������  10.28 s 166A���������������������������������������  10.22 s 167������������������������  11.8, 11.9, 11.10, 11.11, 11.12, 11.22, 11.25, 11.27 s 167(1)�������������������������������������  11.10 s 167(1)(a)–(d)��������������������������  11.10 s 168������������������������  11.8, 11.9, 11.11, 11.12, 11.22, 11.25, 11.27 s 168(1)���������������������������  11.23, 11.25 s 168(2)�����������������������������  11.9, 11.23 s 168(2)(a), (d)��������������������������� 11.11 s 168(3)�������������������������������������  11.17 s 168(4)��������������������������  11.11, 11.23, 11.25, 11.27 s 168(4)(c), (i)���������������������������� 11.11 s 168(9)�������������������������������������  11.23 s 169����������������������  11.8, 11.13, 11.15, 11.17, 11.18, 11.19, 11.27 s 169(1)���������������������������  11.15, 11.18 s 169(1)(a)���������������������������������  11.16 s 169(2)�������������������������������������  11.17 s 169(4)���������������������������  11.17, 11.18 s 169A�������������������������������  11.8. 11.13 s 170���������������������������������  11.8, 11.10, 11.21, 11.27, 11.28 s 170(2)���������������������������  11.18, 11.22 s 170(3)(b)���������������������������������  11.23 s 170(5)���������������������������������������  11.8 s 170(7), (8)�������������������������������  11.24 s 170(9)�������������������������������������  11.22 s 171����������������������  11.8, 11.10, 11.17, 11.21, 11.27, 11.28; 14.29 s 171(1), (1A)����������������������������  11.25 s 171(2)��������������������������   10.20; 11.26 s 171(3)�������������������������������������  11.25 s 172����������������������  11.8, 11.10, 11.17, 11.21, 11.27, 11.28 s 172(1)�������������������������������������  11.25 s 172(3)�������������������������������������  11.27 s 173���������������������������������  11.8, 11.21, 11.27, 11.28 s 173(1)–(4)�������������������������������  11.27 s 174��������������������������������  11.21, 11.28

li

Table of Statutes Financial Services and Markets Act 2000 – contd s 174(2)���������������   11.28, 11.29; 14.29 s 174(3A)����������������������������������  14.29 s 175������������������������������������������  11.21 s 176��������������������������������  11.21, 11.37 s 177��������������������   10.20; 11.28, 11.37 s 177(2)�������������������������������������  11.37 s 177(3), (4)��������������������   11.37; 14.29 s 177(6)�������������������������������������  11.37 Pt XII (ss 178–192)��������   15.25; 16.47 s 178(1)�������������������������������������  15.22 s 181(2)_�����������������������������������  15.25 s 182������������������������������������������  15.25 s 191�������������������������������   6.139; 15.22 s 206A���������������������������������������  12.55 s 208������������������������������������������  12.24 s 208(3), (4)�������������������������������  12.24 s 305(1)�������������������������������������  16.46 s 306(1)�������������������������������������  16.46 s 333(1)�����������������������������������������  7.5 s 348(1)�������������������������������������  11.36 s 348(2)�������������������������������������  11.36 s 349, 352����������������������������������  11.36 s 354A���������������������������������������  11.13 s 354A(4)����������������������������������  11.13 s 367��������������������������������������������  6.62 s 381����������������������������������   9.28; 12.4, 12.57, 12.61 s 381(1)�������������������������������������  12.57 s 381(1)(b)����������������������   12.26, 12.57 s 381(2)�������������������������������������  12.57 s 381(3), (4)�������������������������������  12.58 s 382�����������������������������������   5.13; 12.4 s 383�����������������������   9.28; 12.4, 12.60, 12.61, 12.62, 12.64 s 383(2)(a), (b)��������������������������  12.60 s 383(4), (5), (10)����������������������  12.60 s 384�����������������������   9.28; 12.4, 12.42, 12.62, 12.63, 12.64 s 384(2)����������������������������   12.4, 12.63 s 384(3)�������������������������������������  12.63 s 385������������������������������������������  12.17 s 386������������������������������������������  12.24 s 386(1)�������������������������������������  12.24 s 387������������������������������������������  12.17 s 387(2)�������������������������������������  12.18 s 387(3)�������������������������������������  12.19 s 388�������������������������������   12.24, 12.25 s 388(1)(b)���������������������������������  12.24 s 389������������������������������������������  12.29 s 389(1), (3)�������������������������������  12.30 s 390������������������������������������������  12.35 s 390(2)��������������������������   12.35, 12.36 s 390(3)–(8), (10)����������������������  12.36 s 391(1)(c)���������������������������������  12.16 s 391(1ZB)��������������������������������  12.16 s 391(4)�������������������������   12.26, 12.28, 12.36, 12.37

Financial Services and Markets Act 2000 – contd s 391(6)�������������������������   12.16, 12.26, 12.36, 12.37 s 391(7)�������������������������������������  12.37 s 393������������������������������   11.32; 12.31, 12.32, 12.33 s 393(1)–(3)�������������������������������  12.31 s 393(7)��������������������������   12.24, 12.31 s 393(9), (11)�����������������������������  12.32 s 393(12)�����������������������������������  12.31 s 394������������������������������������������  12.31 s 394(1), (3)�������������������������������  12.23 s 395�������������������������������   12.12, 12.13 s 395(2)(a)���������������������������������  12.12 s 395(2)(a)(i), (ii)������������������������  11.3 s 397������������������������   3.3; 4.2; 5.2, 5.3, 5.5, 5.7, 5.10, 5.15; 6.9, 6.36 s 397(1)��������������������������   4.2; 5.3, 5.5, 5.16, 5.18 s 397(1)(b), (c)������������������������������  5.3 s 397(2)���������������������������������   4.2; 5.4, 5.16, 5.18 s 397(3)��������������������������   4.2; 5.3, 5.4, 5.16, 5.18; 6.59 s 398��������������������   6.109; 15.21, 15.22 s 399������������������������������������������  6.109 s 400��������������������   6.143; 14.25; 15.21 s 402��������������������������������������������  5.16 s 402(1)�����������������������������������������  3.7 Sch 6��������������������������������   8.25; 12.54; 13.8; 15.23 para 1A(2)�����������������������������  13.10 para 2C����������������������������������  15.25 para 2C(2)�����������������������������  15.25 para 2D����������������������������������  13.10 para 2D(4)�������   13.10; 15.23, 15.24 para 2E����������������   8.25; 13.9; 15.23 para 3B����������������������������������  15.25 para 3D, 4E, 5E�����������������������  8.25 Financial Services (Banking Reform) Act 2013�������������������  6.25 s 36�������������������������������������   6.76; 14.2 s 36(4)�����������������������������������������  6.78 s 37(7)–(10)���������������������������������  6.78 Forgery and Counterfeiting Act 1981 s 1������������������������������������������������  6.97 s 2������������������������������������������������  6.99 s 3, 4������������������������������������������  6.100 s 5(1), (3), (4)����������������������������  6.101 s 9(1)�������������������������������������������  6.97 s 10(1), (3), (4)����������������������������  6.98 Fraud Act 2006�������������   6.19, 6.28, 6.42, 6.45, 6.48, 6.49, 6.56, 6.64, 6.104, 6.105; 10.5; 14.26 s 1������������������������������   3.7; 6.28, 6.105 s 2������������������������������������������������  6.28

lii

Table of Statutes Fraud Act 2006 – contd s 3���������������������������������������   6.28, 6.40 s 4������������������������������������������������  6.28 s 6���������������������������������������������   6.108 s 7, 8������������������������������������������  6.108 s 12��������������������������������������������  6.143 Human Rights Act 1998������������������  3.88 Insolvency Act 1986 s 89(1), (4)�����������������������������������  6.66 s 206�����������������������������������   6.67, 6.69 s 207��������������������������������������������  6.67 s 208��������������������������������������������  6.68 s 208(2)���������������������������������������  6.68 s 210��������������������������������������������  6.74 s 210(1)���������������������������������������  6.68 s 211�����������������������������������   6.68, 6.74 s 211(1)���������������������������������������  6.68 s 212��������������������������������������������  6.71 s 213���������������������������������   6.69, 6.136 s 214����������������������������������   6.69, 6.70, 6.72, 6.136 s 214(4)���������������������������������������  6.70 s 246ZB���������������������������������������  6.74 s 352��������������������������������������������  6.73 s 353–356������������������������������������  6.74 s 357(1), (3)���������������������������������  6.73 s 358��������������������������������������������  6.74 s 360��������������������������������������������  6.75 s 362(1)���������������������������������������  6.75 Judicial Review and Courts Act 2022�������������������������������  3.107 s 13, 22��������������������������������������  14.32 Limitation Act 1980 s 2(1)(a)���������������������������������������  15.4 s 21����������������������������������������������  2.12 s 32��������������������������������������������  6.118 Limited Liability Partnership Act 2000���������������������������������  14.4 Magistrates’ Courts Act 1980 s 17A�����������������������������������������  14.31 s 19–23��������������������������������������  14.33 Misrepresentation Act 1967 s 2(1)�������������������������������  6.115, 6.118 s 3������������������������������������������������  8.16 Official Secrets Act 1989��������������  6.112 Partnership Act 1890 s 10����������������������������������������������  14.4 Perjury Act 1911 s 5, 7������������������������������������������  6.110 Police and Justice Act 2006������������  6.82 Policing and Crime Act 2017 s 146��������������������������������������������  15.2 Powers of Criminal Courts (Sentencing) Act 2000������������  2.57 s 130�����������������������������������   2.57; 14.3 s 131–134������������������������������������  14.3 s 148��������������������������������������������  2.57 Prevention of Corruption Act 1906 s 1(1)�������������������������������������������  6.95

Prevention of Fraud (Investments) Act 1939��������������������������   6.9, 6.60 Prevention of Fraud (Investments) Act 1958�����������������������������������  6.9 s 13����������������������������������������������  6.36 Private Security Industry Act 2001���������������������������������  7.86 Proceeds of Crime Act 2002�����   7.2, 7.5, 7.8, 7.10, 7.14, 7.54, 7.55, 7.56, 7.59, 7.83; 14.15, 14.26 Pt 2 (ss 6–91)������������������������������  7.65 s 6(1), (3)�������������������������������������  7.67 s 6(4)�������������������������������������������  7.68 s 6(5)�������������������������   7.67, 7.82, 7.83 s 7������������������������������������������������  7.81 s 7(2) ������������������������������������������  7.81 s 9������������������������������������������������  7.80 s 10����������������������������������������������  7.77 s 10(6)�����������������������������������������  7.77 s 10(8)�����������������������������������������  7.78 s 11����������������������������������������������  7.91 s 13(2)��������������������������������   7.89, 7.90 s 13(3)(a)�������������������������������������  7.89 s 13(4)–(6)�����������������������������������  7.89 s 13A�������������������������������������������  7.91 s 14����������������������������������������������  7.87 s 15(3)���������������������������������������  14.42 a 15(4)���������������������������������������  14.44 s 19–25����������������������������������������  7.91 s 40����������������������������������������������  7.92 s 41����������������������������������������������  7.92 s 41(1)�����������������������������������������  7.92 s 42–47����������������������������������������  7.92 s 54–57����������������������������������������  7.91 s 75����������������������������������������������  7.69 s 75(4), (5), (7)����������������������������  7.72 s 76(2)�����������������������������������������  7.76 s 76(3)�����������������������������������������  7.71 s 77, 78����������������������������������������  7.80 s 80����������������������������������������������  7.74 s 82����������������������������������������������  7.80 s 83����������������������������������������������  7.92 s 84����������������������������������������������  7.80 Pt 5 (ss 240–316)�����������������   7.5, 7.48 Pt 7 (ss 327–340)������������������������  7.11 s 327�������������������������   7.11, 7.12, 7.13, 7.15, 7.35, 7.52, 7.69, 7.96; 14.23 s 327(1)���������������������������������������  7.15 s 327(2B)�������������������������������������  7.12 s 327(2C)�������������������������������������  7.16 s 328���������������������������   3.7; 7.12, 7.16, 7.17, 7.18, 7.20, 7.22, 7.35, 7.52, 7.69, 7.96; 14.18, 14.23 s 328(1)������������������������������   7.17, 7.55 s 328(3), (4)���������������������������������  7.12

liii

Table of Statutes Proceeds of Crime Act 2002 – contd s 329������������������   3.7; 7.11, 7.12, 7.16, 7.20, 7.35, 7.52, 7.96; 14.23 s 329(2A), (2B)���������������������������  7.12 s 329(3)���������������������������������������  7.20 s 330�������������������������   7.22, 7.25, 7.29, 7.31, 7.52, 7.105; 9.17; 14.6, 14.18, 14.23 s 330(2)���������������������������������������  7.22 s 330(9A), (14)����������������������������  7.24 s 330D(3), (4)������������������������������  7.26 s 331�������������������������   7.25, 7.29, 7.52; 14.19, 14.23 s 332����������������������   7.25; 14.19, 14.23 s 333����������������������   7.60; 14.20, 14.23 s 333(1)���������������������������������������  7.59 s 333A����������������������   7.26, 7.27, 7.28, 7.29, 7.30, 7.105 s 333B��������������������������������   7.27, 7.29 s 333C��������������������������������   7.28, 7.29 s 333D�����������������������������������������  7.29 s 333D(3), (4)������������������������������  7.26 s 333E������������������������������������������  7.29 s 334����������������������   7.35, 7.103; 14.23 s 335�����������������������������������   7.18, 7.60 s 336��������������������������������������������  7.25 s 336A��������������������������������   7.18, 7.29 s 336B–336D������������������������������  7.18 s 337����������������������������������   7.31, 7.34, 7.105; 14.22 s 338�������������������������   7.12, 7.18, 7.32, 7.33, 7.34 s 338(4)�������������������������������������  14.22 s 338ZC���������������������������������������  7.29 s 339��������������������������������������������  7.18 s 339(1A)������������������������������������  7.35 s 339A�����������������������������������������  7.16 s 339ZA���������������������������������������  7.34 s 339ZB���������������������������������������  7.29 s 339ZC���������������������������������������  7.29 s 339ZC(3)–(5)����������������������������  7.29 s 339ZD���������������������������������������  7.29 s 339ZD(2), (3)���������������������������  7.29 s 339ZE–339ZK��������������������������  7.29 s 340(2)���������������������������������������  7.14 s 340(3)���������������������������������������  7.13 s 340(4)���������������������������������������  7.14 s 340(5), (6)���������������������������������  7.13 s 340(13)�������������������������������������  7.18 s 340(14)�������������������������������������  7.16 s 342������������������������   7.30, 7.60; 14.21 Sch 2��������������������������������������������  7.69 Sch 9���������������������������������   7.21; 14.19 Prosecution of Offences Act 1985 s 6����������������������������������������������  6.144 Public Interest Disclosure Act 1998���������������������������������  10.8

Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021�����������  6.134 Road Traffic Act 1988 s 2A���������������������������������������������  6.76 Senior Courts Act 1981 s 37��������������������������������������������  6.121 s 50����������������������������������������������  2.55 Sentencing Act 2020 s 55, 133–135����������������������������  14.45 s 224������������������������������������������  14.32 Serious Crime Act 2007�����   6.103, 6.107 s 4, 5��������������������������������������������  6.83 Pt 2 (ss 44–67)�������������������   3.73; 6.82 s 44��������������������������������������������  6.107 s 45�����������������������������������   1.45; 6.107 s 46��������������������������������������������  6.107 s 50��������������������������������������������  6.107 Serious Crime Act 2015�����������������  7.10, 7.91, 7.92 s 1������������������������������������������������  7.88 s 10����������������������������������������������  7.91 s 11����������������������������������������������  7.92 Pt 2 (ss 41–44)����������������������������  6.82 s 45����������������������������������������������  1.43 Sch 4 para 19�������������������������������������  7.83 Serious Organised Crime and Police Act 2005����������������������  7.12 s 71, 72����������������������������������������  10.8 s 106��������������������������������������������  7.24 Small Business, Enterprise and Employment Act 2015����������������������   2.41; 6.137 s 110������������������������������������������  6.130 Supreme Court Act 1981 see Senior Courts Act 1981 Terrorism Act 2000������������������������  7.10, 7.94; 14.26 s 1������������������������������������������������  7.94 s 1(4)(d)���������������������������������������  7.94 s 1(5)�������������������������������������������  7.94 s 11–13����������������������������������������  7.95 s 14����������������������������������������������  7.96 s 14(2)(b)�������������������������������������  7.96 s 15�����������������������   7.97, 7.102, 7.103, 7.104, 7.11 s 15(1)–(3)�������������������������  7.97, 7.111 s 16�����������������������   6.108; 7.98, 7.102, 7.103, 7.104, 7.111 s 17�����������������������   7.99, 7.102, 7.103, 7.104, 7.111 s 17A�������������������������������  7.100, 7.111 s 18��������������������������������   7.101, 7.102, 7.103, 7.104, 7.111 s 19�����������������������������������   7.91, 7.102 s 19(7)���������������������������������������  7.102 s 20�����������������������������������   7.91, 7.103 s 21������������������������   7.91, 7.103, 7.106

liv

Table of Statutes Terrorism Act 2000 – contd s 21A, 21B��������������������������������  7.105 s 21C, 21CA–21CF�������������������  7.106 s 21D�����������������������������   7.105, 7.107, 7.108, 7.109, 7.110 s 21E��������������������   7.107, 7.108, 7.110 s 21F�������������������������������   7.108, 7.110 s 21G������������������������������   7.109, 7.110 s 21H�����������������������������������������  7.110 s 21ZA–21ZC����������������������������  7.104 s 22����������������������������������������������  7.91 s 22B–22E���������������������������������  7.106 s 23�������������������������  7.91, 7.111, 7.113 s 23A�������������������������������  7.112, 7.113 s 24, 25����������������������������������������  7.91 Theft Act 1968��������������   6.30, 6.49, 6.81 s 1������������������������������������������������  6.47 s 2������������������������������������������������  6.29 s 2(1)�������������������������������������������  6.49 s 4������������������������������������������������  6.51 s 5������������������������������������������������  6.52 s 5(2)�������������������������������������������  6.30 s 5(3)�������������������������������������������  6.52 s 5(4)�������������������������������������������  6.53 s 6������������������������������������������������  6.50 s 13����������������������������������������������  6.82 s 17����������������������������������������������  6.95 s 17(1), (2)�����������������������������������  6.94 s 18(1)�����������������������������������������  6.95 s 19��������������������������������������������  14.26 s 20��������������������������������������������  6.102 s 21����������������������������������������������  6.80 s 22���������������������������������������������  6.57; 7.6, 7.50 s 25��������������������������������������������  6.108 Tribunals, Courts and Enforcement Act 2007 s 3, 127, 133������������������������������  12.34 Unfair Contract Terms Act 1977���������������������������������  8.16

AUSTRALIA Corporations Act 2001 s 912A, 1042D, 1043A, 1043F�����  8.21 HONG KONG Prevention of Bribery Ordinance (Cap 201) s 10(a)������������������������������������������  6.54 UNITED STATES Dodd Frank Wall Street Reform and Consumer Protection Act 2010���������������������   8.12; 15.36; 16.18, 16.29 s 954������������������������������������������  15.36 Federal Deposit Insurance Corporation Improvement Act 1991�������������������������������  15.36 Insider Trading Sanctions Act 1984�������������������������������  16.20 Insider Trading Prohibition Act 2021�������������������������������  16.20 s 16(A)(a), (b)���������������������������  16.20 s 16(A)(c)(1)(D)������������������������  16.20 s 16(A)(c)(2)�����������������������������  16.20 Rackateer Influenced Corrupt Organizations Act 1970��������  16.35 Sarbanes-Oxley Act 2002�������������  16.31 Securities Exchange Act 1934�����  16.18, 16.29 s 9(a)������������������������������������������  16.32 s 10b�������������������������������   16.19, 16.27 s 10b–5�������������������������������   6.1; 16.19 s 10b–52������������������������������������  16.19 s 27��������������������������������������������  16.19 United States Code Title 18 USC s 1001������������������������������������������  6.39

lv

lvi

Table of Statutory Instruments

Civil Procedure Rules 1998, SI 1998/3132 r 32.1�����������������������������������������  6.114 Companies Act 2006 (Commencement No 1 Transitional Provisions and Savings) Order 2006, SI 2006/3428 Sch 3��������������������������������������������  1.35 Financial Services Act 2021 (Commencement No 3) Regulations 2021, SI 2021/1173�������������������������  3.107 Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001, SI 2001/2188������������������������  11.36 Financial Services and Markets Act 2000 (Market Abuse) Regulations 2005, SI 2005/381 reg 10(2)����������������������������������������  4.7 Financial Services and Markets Act 2000 (Prescribed Markets and Qualifying Investments) Order 2001, SI 2001/996����������  4.7 art 4�����������������������������������������������  4.7 Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001, SI 2001/2256��������������������������  6.25 Financial Services and Markets Act 2000 (Rights to Action) Regulations 2001, SI 2001/2256 reg 3��������������������������������������������  4.41 Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, SI 2001/544 Sch 2 Pt 3A���������������������������������������  8.31 Financial Services and Markets Act 2000 (Threshold Conditions) Order 2013, SI 2013/555�����������������   12.54; 13.8

Insider Dealing (Securities and Regulated Markets) (Amendment) Order 2000, SI 2000/1923��������������������������  3.19 Insider Dealing (Securities and Regulated Markets) (Amendment) Order 2002, SI 2002/1874��������������������������  3.19 Insider Dealing (Securities and Regulated Markets) Order 1994, SI 1994/187��������  3.19 art 10�������������������������������������������  3.67 Market Abuse (Amendment) EU Exit Regulations 2019, SI 2019/310�����������������   3.105; 16.4 Money Laundering and Terrorist Financing (Amendment) Regulations 2019, SI 2019/1511���������������������������  7.10 Money Laundering Regulations 2007, SI 2007/2157����������������   7.10, 7.29, 7.36, 7.109; 14.26 Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, SI 2017/692�������������������   7.36, 7.41 Pt 1 (regs 1–7)�����������������������������  7.37 Pt 2 (regs 8–26)���������������������������  7.37 reg 8��������������������������������������������  7.37 reg 8(3)����������������������������������������  7.37 reg 10–14A����������������������������������  7.37 reg 15������������������������������������������  7.37 reg 18–25������������������������������������  7.38 reg 26(1), (4), (5), (10)����������������  7.38 Pt 3 (regs 27–38)�������������������������  7.37 reg 27–30, 30A����������������������������  7.38 reg 31(1)��������������������������������������  7.38 reg 33(1), (4)–(6)������������������������  7.38 reg 34, 35, 37������������������������������  7.38 reg 38(3)��������������������������������������  7.38 Pt 4 (regs 39–41)�������������������������  7.37 reg 39(2), (40������������������������������  7.38 reg 40(1), (5)–(7)������������������������  7.38 reg 41������������������������������������������  7.38

lvii

Table of Statutory Instruments Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, SI 2017/692 – contd Pt 5 (regs 42–56ZB)��������������������  7.37 reg 43, 44������������������������������������  7.38 reg 45(2), (9), (10A)–(10I)����������  7.38 reg 45B����������������������������������������  7.38 reg 45G(1), (3)����������������������������  7.38 Pt 6 (regs 46–60B)����������������������  7.37 reg 56(1), (5)�������������������������������  7.38 reg 57(1), (4)�������������������������������  7.38 reg 60A����������������������������������������  7.38 reg 64(2)��������������������������������������  7.38 Pt 8 (regs 65–74C)����������������������  7.37 reg 66������������������������������������������  7.38 reg 69(2)��������������������������������������  7.38 reg 70(7)��������������������������������������  7.38 reg 74A–74C�������������������������������  7.38 Pt 9 (regs 75–92)�������������������������  7.37 reg 75������������������������������������������  7.38 Pt 9 Ch 2 (regs 76–85)����������������  7.40 reg 76������������������������   7.41, 7.42, 7.44 reg 77���������������������������������   7.43, 7.44 reg 78, 79������������������������������������  7.44 reg 86(1)��������������������������������������  7.38 reg 77(2), (6)�������������������������������  7.38 reg 78(2), (5)�������������������������������  7.38 reg 84(1)��������������������������������������  7.38 reg 86(2)��������������������������������������  7.39 reg 86(3)�����������������������������   7.39, 7.40 reg 86(4)��������������������������������������  7.40 reg 87, 88, 91, 92������������������������  7.39 Pt 10 (regs 93–100)���������������������  7.37 Pt 11 (regs 101–110)�������������������  7.37 Sch 6 para 2(a)–(f)����������������������������  7.38 para 3(a)–(f)����������������������������  7.38 para 4(a)–(g)����������������������������  7.38

Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, SI 2017/692 – contd Sch 6 – contd para 5(a)(i)–(vii)����������������������  7.38 para 5(b)����������������������������������  7.38 para 6���������������������������������������  7.38 para 7(a)–(j)����������������������������  7.38 para 8(a)–(c)����������������������������  7.38 para 9(a)–(d)����������������������������  7.38 para 9A������������������������������������  7.38 para 10(a)–(c)��������������������������  7.38 para 11�������������������������������������  7.38 para 12(a)–(e)��������������������������  7.38 para 13�������������������������������������  7.38 Proceeds of Crime Act 2002 (External Requests and Orders) Order 2005, SI 2005/3181����������������������������  7.6 Public Bodies (Merger of the Director of Public Prosecutions and the Director of Revenue and Customs Prosecutions) Order 2014, SI 2014/834����������  7.6 Register of People with Significant Control Regulations 2016, SI 2016/339�������������������   1.35, 1.43 Terrorism (United Nations Measures) Order 2001, SI 2001/3365�����������������   7.10, 7.94 Traded Securities (Disclosure) Regulations 1994, SI 1994/188����������������������������  3.51 Transfer of Tribunal Functions Order 2010, SI 2010/22��������  12.34 Unfair Terms in Consumer Contracts Regulations 1999, SI 1999/2083��������������������������  8.16

lviii

Chapter 1

The nature of insider dealing and market abuse

INSIDER DEALING IN PERSPECTIVE 1.1 The commonly held view is that insider dealing is a problem of the twentieth century and, more specifically, the last quarter of that century. It is certainly the case that, over the last 40 years, there has been considerable interest in the topic in many countries. The media and, in particular, the press regularly carry stories of those in positions of trust taking advantage of pricesensitive information to further their own interests. Most jurisdictions have enacted legislation specifically to deal with the problem of directors and officers of companies taking advantage of information that they receive by virtue of their privileged positions by dealing in their company’s securities. Indeed, an increasing number of countries seek to discourage the ‘misuse’ of material information almost no matter in what circumstances it was obtained. In a work such as this it is not feasible or particularly useful to attempt to analyse in the depth required for any practical purpose the laws and regulations of even the more significant financial markets around the world.1 On the other hand it may be helpful to identify the constituent elements in what is generally considered to be objectionable and worthy of legal and often criminal liability.2 Insider dealing is not, of course, confined to those holding office in a company and many regulatory systems impose prohibitions on anyone who acquires such information with knowledge that it is from a privileged source. On the other 1

2

Attempts have been made to do this, see, for example, B Rider and H Ffrench, The Regulation of Insider Trading (Macmillan 1979) and S Bainbridge and W Warren, Research Handbook on Insider Trading (Edward Elgar 2014) – although most have focussed on the US and Europe, see, for example: K Hopt und M Will, Europaisches Insiderrecht (Ferdinand Enke 1973); B Bergmans, Inside Information and Securities Trading (Springer Netherlands 1991); E Gaillard (ed), The Laws of Europe, the USA and Japan, Insider Trading (Kluwer 1992), and many more. However, with the pace of development and expectation that all countries should address this issue, such an exercise has become almost impossible and in practical terms of limited utility. Of course, internationalisation of the financial markets and industry necessitates knowledge and compliance with the laws, regulations and practices wherever there might be jurisdiction, see, for example, J Austin, Insider Trading and Market Manipulation; Investigation and Prosecutions Across Borders (Edward Elgar 2017). The IMF attempted to do this in 1996, but the project was abandoned given the complexity of the issues and the fact that a degree of standardisation had been achieved as a result of EU legislation and initiatives by bodies such as the International Organisation of Securities Commissions (IOSCO).

1

1.1  The nature of insider dealing and market abuse hand, despite the amount of law that has been created, there is considerable scepticism as to whether it does provide sufficient protection for investors and the markets, and more fundamentally, whether the exercise is worth it and proportionate. 1.2 In fact, the problem of insiders abusing information that they obtain by virtue of the special relationship that they have with their company is not a new one. It is possible to find references to insiders taking advantage of their privileged position to dump over-valued securities on the market in official reports as early as the seventeenth century.3 Furthermore, the taking advantage of privileged information or, at least, information that the other party could not obtain, is as old as human nature. While history may not record examples of the abuse of such information on securities markets, there are countless examples from many countries of people profiting in one way or another from such information. Indeed, in many cultures, no opprobrium necessarily attached to such conduct and in some it would have been regarded inopportune, if not ungracious, not to have utilised the advantage in question. It is still the case that very few jurisdictions seek to impose constraints, let alone legal prohibitions, on the use of privileged knowledge in dealings other than in securities. 1.3 While most systems of law do, to some degree, protect the confidentiality of information in specific circumstances, they do not necessarily interfere in transactions with third parties who have been disadvantaged by the use of information obtained in breach of a duty of confidentiality. Few legal systems go anywhere near imposing an obligation on someone in possession of superior information to disclose this to another contracting party. Even when that other party could not have obtained the same information with the greatest diligence, in most jurisdictions there will be no duty to disclose or warn him. To require equality of information in such circumstances would undermine any incentive that a person would otherwise have to conduct research or acquire material information. Regarding decisions relating to the disposal of property and the conduct of commerce, it is necessary to have the best information that is available and therefore the acquisition of superior information should not be discouraged, let alone penalised.4

3

4

See, for example: B Rider, C Abrams and M Ashe, Guide to Financial Services Regulation (3rd edn) (CCH 1997), at Ch 1; B Rider and H Ffrench, The Regulation of Insider Trading (Macmillan 1979); G Gilligan, Regulating the Financial Services Sector (Kluwer 1999), Ch 4. There are instances of what might be described as insider dealing in the collapse of the South Sea Company in the early eighteenth century, see, for example: J Narron and D Skeie, Crisis Chronicles; The South Sea Bubble of 1720, 8 November 2013, Liberty Street Economics; J Hoppit, ‘The Myths of the South Sea Bubble’ (2002) 12 Transactions of the Royal Historical Society 144; M Balen, A Very English Deceit, The South Sea Bubble and the World’s First Great Financial Scandal (Harper Collins 2002) particularly at p 32 et seq in regard to the Sword Blade Company; LCB Gower, ‘A South Sea Heresy’ (1952) 68 Law Quarterly Review 214. See also J Gleeson, The Moneymaker (Bantam Press 1999). Distortion of information is another matter. It is debatable the extent to which early legal systems expected fair disclosure absent an intention not to mislead. It is probable that such obligations that existed only related to defects which were not discoverable through reasonable care and were known to the seller. See, for example, in regard to Islamic law, B Rider, ‘Legal aspects of Islamic asset securitization’ in Strategies for the Development of Islamic Capital Markets (IFSB 2011), Ch 3 at 94, and B Rider, ‘Corporate governance for institutions offering Islamic financial services’ in C Nethercott and D Eisenberg (eds), Islamic Finance, Law and Practice, (2nd edn) (Oxford University Press 2020), Ch 5 at p 121. See also J Anderson, Insider Trading, Law, Ethics and Reform (Cambridge University Press 2018), at p 143 et seq.

2

The nature of insider dealing and market abuse  1.5 1.4 Why should we, therefore, be concerned when such transactions occur in regard to intangible property and, in particular, in securities of public companies? Of course, the development of corporate enterprise has necessitated that we look at our ordinary laws and their application to new areas. While it is convenient for us to attribute a legal personality to the corporation for a variety of sensible and important reasons, this legal fiction inevitably gives rise to implications for those who deal with, or are involved in, the enterprise. For example, the corporation is interposed between the shareholders and the enterprise’s property. In the vast majority of legal systems, shareholders do not own the company’s property. It is only the company as a separate legal person that owns its assets. The shareholders’ property is confined to their ‘share’ in the enterprise. The value of this ‘share’ will depend on many things, albeit most significantly, the value of the enterprise’s assets and the productivity of their use. The important thing to note, however, is that we are not dealing with absolutes and value in this context will be determined by what another is willing to pay or exchange for the share in question. When we consider the value of other securities such as bonds and derivatives, the relationship with quantifiable and assessable property becomes even more remote. It is clear, therefore, that, in determining the value of securities, knowledge of events that are likely to affect the decision of others as to whether to acquire or dispose of ownership and upon what terms, plays a much greater role than in regard to many other forms of wealth. It is also clear that there will be persons who, by virtue of their position in or in relation to the enterprise, will be in a very privileged position in obtaining and assessing price-relevant information. Thus, quite early on in the development of the common law, obligations were cast upon those responsible for issuing new securities and, in particular, shares, to ensure fair and adequate disclosure of all material information relating to the enterprise and not to take advantage of their privileged position. In most jurisdictions today, such obligations have been placed on a statutory footing.5 1.5 Where insiders deal in the market in the securities of the issuer with which they enjoy this privileged access to its information, it is not difficult to see why many consider they should be held to similar responsibilities. While the situation is not quite the same as when the issuer itself offers securities of unknown value to the market, in the perception of those in the market, the dissimilarity is not fundamental. Those in a position of stewardship over the company’s enterprise are taking advantage of their position to derive profit that is taken at the expense of those in the market. Given the conceptual and practical difficulties in fitting this sort of conduct within the scope of traditional civil or criminal causes of action, it is hardly surprising that most countries have enacted legislation specifically prohibiting those in possession of inside information from taking advantage of it. Indeed, in most systems, the prohibitions extend somewhat further than to those who would ordinarily be considered to occupy positions of trust within a company. While the unfairness of such misconduct more than justifies the intervention of the law to discourage abuse, it does not necessarily justify the development of remedies for those who happen to transact with an insider.6 Obviously, in practical if not legal 5 6

See, for example, the Financial Services and Markets Act 2000, Pt VI and see Chapter 9 below. For further discussion on this, see: B Rider ‘Insider Trading – A Crime of our times?’, Current Legal Problems, Current Developments in Banking and Finance Laws (D Kingsford Smith (ed)) 1989; B Rider ‘The Control of Insider Trading – Smoke and Mirrors!’ (1999) 1 International and Comparative Corporate Law Journal 271 and B Rider ‘Civilising the

3

1.5  The nature of insider dealing and market abuse terms, there are considerable differences between the matching of parties to a particular transaction, on or off the market. 1.6 In the result, the regulation of insider dealing has and will no doubt continue to throw up a host of issues that would not ordinarily be encountered in the control of other anti-social conduct. The sophistication of the financial environment within which the law and regulatory mechanisms operate, compounds the practical and legal difficulties confronting those seeking to administer and apply the law. While the control of insider abuse has much in common with the prevention and interdiction of money laundering and even corruption, the crafting of legislation and the development of supporting regulatory mechanisms involve issues of peculiar complexity and sensitivity. Despite these problems, the efficacy of anti-insider dealing regulation has, in many countries, become almost a litmus test for the efficiency and competence of the wider regulatory structure overseeing the markets and the conduct of business in the financial sector. 1.7 Consequently, in practical and political terms, the control of insider abuse is a significant issue. While the various philosophical justifications for regulation may be argued about, it is the case that in many countries it is now recognised that the presence of such laws is required if investor confidence in the integrity of the markets is to be preserved and promoted. From perhaps a somewhat cynical perspective, it matters little if such empirical evidence as there is, is equivocal as to the extent of the problem of insider dealing and the harm it occasions. If enough people think it occurs and for whatever reason – including jealousy – consider this is unfair,7 confidence in the reputation and therefore the efficiency of the market will be eroded. Consequently, those who are responsible for the protection of the markets have a responsibility to act. Whether this is through the medium of the criminal law or some other mechanism, it is in the public’s interest that it be seen that insider dealing is not condoned. 1.8 While there are many circumstances in which the abuse of confidential price sensitive information might occur in this discussion, we will focus exclusively on such conduct in the context of dealings in securities.8 Of course, misconduct and especially dishonest activity does not occur in a vacuum and in the majority of cases there will be other factors and considerations, particularly for those responsible for maintaining the integrity of the financial markets. For example, in cases where a profit is made through the illegal abuse of inside information the offence of money laundering might well be relevant. Indeed, the English courts have recognised that when enforcing the substantive law

7 8

Law – The use of Civil and Administrative Proceedings to enforce Financial Services Law’ (1995) 3 Journal of Financial Crime 11. See also in regard to the corporate perspective, M Petrin, Regulatory Analysis in Corporate Law’ (2016) 79 Modern Law Review 537 Fairness in the sense of consistent observance of rules appears to be hard-wired into human behaviour. See, for example, ‘How five-year-olds enforce fair play’, The Times, 28 December 2021. The use of inside information is not confined to dealings in securities, but can be utilised in many ways including dealing in commodities and rights relating to such. For example, there has been concern about the extent to which manipulative and possibly even insider dealing has occurred in the market in crypto-currencies. See, for example, ‘Pumpers, dumpers and digital gold’, The Times, 23 February 2021 and see the Chairman of the FCA’s concerns, B Martin, ‘Regulator seeks more powers to curb crypto’, The Times, 7 September 2021, in regard to a speech at the 38th Cambridge International Symposium on Economic Crime, Jesus College, Cambridge, 5–12 September 2021.

4

The nature of insider dealing and market abuse  1.9 relating to insider dealing, it makes good sense to allow the prosecutor to also proceed on charges of money laundering, notwithstanding they might otherwise have a limited statutory mandate to pursue criminal offences.9 In fact, given the complexity of establishing liability for insider dealing there is a tendency in some jurisdictions and in particular the USA, to prefer anti-money laundering charges to the predicate offence. In so far that insider abuse is likely to be motivated, at least in part, by greed, it makes sense to consider the relevant law relating to the interdiction of criminal property. There might well also be issues of fraud and especially criminal breach of trust in cases of insider abuse. Furthermore, in both providing remedies and also in some instances reinforcing enforcement the civil law may well be relevant. Consequently, in considering how the law addresses insider dealing it is necessary to analyse rather more than the specific criminal offence. Before the enactment of specific offences relating to insider dealing in most countries there were, and of course remain, laws that to some degree can be utilised to inhibit and penalise insider abuse.10 When considering potential liability for this type of misconduct it is important that these other issues are not ignored. Therefore, in this discussion we do attempt to throw our analysis across a range of offences and legal issues that may, to a greater or lesser degree, be pertinent to determining liability for the abuse of inside information. It must also be remembered that the substantive law does not stand alone in combating insider abuse. Historically, particularly in the UK in addressing the threat of insider dealing reliance was placed on self-regulatory procedures.11 Many of these devices have been reinforced by regulation and comprehensive systems of compliance developed. As in the case of anti-money laundering law a very misleading picture of how the law relating to insider dealing works and is enforced would be presented without considering the important role of compliance and related regulation.

WHAT IS INSIDER DEALING? Who are insiders? 1.9 The classic example that is often given of insider dealing is where a director of a company learns in a board meeting that his company’s profit forecasts are about to be revised to a significant extent and then goes onto the stock market and trades on the basis of this information before it is made publicly available. In such circumstances, he has clearly taken advantage of his position and the information that came to him by virtue of his seat on the board. He has abused his fiduciary position and acted with disloyalty to his company. In such circumstances the American courts developed what is 9 See R v Rollins [2010] UKSC 39. 10 See for a comprehensive discussion of the earlier law in the UK: B Rider and H Ffrench, The Regulation of Insider Trading (Macmillan 1979); J Davies, ‘From gentlemanly expectations to regulatory principles: a history of insider dealing in the UK’ (2015) 36 The Company Lawyer 132 continued 163, for the US; J Anderson, Insider Trading, Law, Ethics and Reform (Cambridge University Press 2018), Ch 1. 11 See above at note 6 and B Rider (ed), The Regulation of the British Securities Industry (Oyez 1979), Chs 1 to 5 and B Rider and E Hew, ‘The regulation of corporation and securities laws in Britain – the beginning of the real debate’ (1977) 19 Mal L R 144. For a discussion of the regulation of insider abuse in the UK prior to legislation, see B Rider, The Regulation of Insider Trading – a comparative analysis, PhD dissertation, University of London, 1977, (2 vols).

5

1.9  The nature of insider dealing and market abuse often referred to as the classical theory of liability predicated on the betrayal of essentially a fiduciary relationship or obligation of fidelity. However, for a variety of reasons the classic example is the tip of the iceberg and this classical theory has its limitations. For example, it would also be generally regarded as falling within the notion of insider dealing if the director persuaded another person to deal in the securities of his company or disclosed the information to a third person knowing that he would be likely so to deal or otherwise misuse the information. The abuse of the information by others not in a recognised fiduciary relationship might be just as worthy of condemnation and therefore the American courts, encouraged by the US Securities and Exchange Commission, developed a broader theory which encompasses both the errant director and in certain cases others.12 This approach focuses on the misappropriation of information that belongs to another or which was entrusted to the recipient for a specific and proper purpose.13 While the considerable jurisprudence in the USA results in a somewhat more complex picture than presented here,14 it has served to give us a working notion of who it might be appropriate to consider as being within the concept of insider. 1.10 It is accepted that this notion of insider dealing would extend to the misuse of confidential information to avoid a loss as well as to make a profit. It matters not whether the director takes advantage of the information to buy more securities in his company in the expectation that their price will rise on publication of the information or whether he sells securities in the fear that the market price will decline. It should, however, be noted that the law might not always offer a remedy or sanction in the latter case. It requires a degree of sophistication that is not always found in the law, to regard a loss avoided as a profit, which should be rendered accountable to the company.15 1.11 It is not, of course, only company directors that will in the ordinary course of their duties acquire price-sensitive information. Indeed, it is probably more likely that in most companies there are many other insiders who will come into possession of such information rather more regularly than the directors. Having regard to the obvious relationship that a director has to his company, it remains to be seen whether such persons would be rash enough to risk exposure to public criticism by engaging in insider dealing. Furthermore, it cannot be taken for granted that most company directors would be willing to risk their position and the financial and other benefits that arise as a result of their office by engaging in abusive deals.

12

The pace of developments in the US law at both Federal and state levels should not be underestimated. In a letter to the present author (B Rider) from Professor Louis Loss of Harvard University and former General Counsel to the SEC in October 1973, he observed that asking him to describe developments in the American law relating to insider trading was akin to asking a physicist to describe developments in physics over the last fifty years. See also W Painter, Federal Regulation of Insider Trading (Michie 1968). 13 See T Cichos, ‘The misappropriation theory of insider trading; Its past, present and future’ (1995) 18 Seattle University Law Review 389 and SR Salbu, ‘The misappropriation theory of insider trading: A legal, economic and ethical analysis’ (1992) 15 Harvard Journal of Law and Public Policy 223. 14 See Dirks v SEC (1983) 463 US 646; Chiarella v US (1980) 445 US 222; US v O’Hagan (1997) 117 S Ct 2199; SEC v Obus (2012) 693 F.3d 276, and generally, W Wang and M Steinberg, Insider Trading (3rd edn) (Oxford University Press 2010); L Loss, J Seligman and T Paredes, Securities Regulation (Wolters Kluwer 2021); and also, J Seligman, T Paredes and L Loss, Fundamentals of Securities Regulation (7th edn) (Wolters Kluwer 2018). 15 See discussion at 2.13 et seq.

6

The nature of insider dealing and market abuse  1.13 1.12 The notion of insider dealing is broad enough to encompass all those who, by virtue of their position in the company or who, by their business or professional relationship with the company, are likely to have access to privileged information. For the sake of convenience, it is perhaps useful to describe such persons as primary insiders. They are all subject to the common denominator of enjoying a special relationship with the company that gives them access to the price-sensitive information in question. Indeed, in US jurisprudence, they have often been referred to as ‘access insiders’. Debate has taken place as to whether those who obtain such information in breach of their duties attaching to the relationship in question should be regarded as primary insiders. For example, is it appropriate to regard an office cleaner, who, while having access to a company’s premises by virtue of her employment directly or indirectly with the company, obtains price-sensitive information by rummaging in the rubbish bins, as a primary insider? Although it is arguable that all those who abuse price-sensitive information should be sanctioned, for the sake of convenience in drafting rules and laws, most jurisdictions distinguish between those who obtain such information in the proper and lawful exercise of the duties attaching to the relationship that they have with the relevant company and those who do so essentially outside the scope of those responsibilities. In practice, it is usual to throw the net rather wider and regard primary insiders as insiders, not only of the company with whom they are in this relationship, but also issuers that are closely related to it and to other issuers, such as a potential offeree company. Consequently, it will be considered to be insider dealing when a director of a company, having learnt that his company intends to make an attractive takeover offer for the shares of another company, acquires shares in that other company before the offer is announced.

Secondary insiders 1.13 It is also considered to be insider dealing when a person, while not in an access relationship to the issuer, acquires the relevant information in circumstances where he knows that it is unpublished price-sensitive information and comes from an insider source and then deals or encourages another to deal. Thus, although the office cleaner in the example referred to above might not be considered to be a primary insider, her abuse of the information obtained from what she appreciates is an ‘inside source’, would generally be considered to amount to insider trading.16 In some cases, it will even be considered 16

From 9 January to 13 February 2019, ITV presented a TV series called Cleaning Up in which a group of office cleaners used inside information obtained while working to trade on the markets, see The Sunday Telegraph, 6 January 2019. The Financial Services Agency referred to this (and the use of machines to facilitate insider abuse and manipulation) by way of warning, see B Martin, The Times, 14 February 2019. The US Securities and Exchange Commission has investigated similar situations and there are instances where cleaners and other support workers have been suborned to assist in obtaining confidential information. There are also examples of criminal groups placing people in institutions to facilitate the gathering of information and subverting compliance procedures, for example, Sir Callum McCarthy, then chairman of the FSA, stated ‘There is increasing evidence that organised criminal groups are placing their own people in financial services firms …’ reported by P Hosking and S Tendler, ‘Warning over mafia gangs infiltrating British banks’, The Times, 16 November 2005. Similar concerns were expressed in regard to law firms, see R Mendick, ‘Police probe City firm’s links to organised crime’, (1998) 12 (48) The Lawyer, 24 November, and see Organised Crime, Minutes of Evidence and Memoranda, Home Affairs Committee, House of Commons, Session 1994-95, 16 November 1994. Partly as a result of such concerns, the European Commission conducted a study into the threat,

7

1.13  The nature of insider dealing and market abuse objectionable for this tippee or secondary insider to pass the information on to yet another person in circumstances where they know or should appreciate that the information is likely to be misused.

Inside source 1.14 The law and, indeed, morality in most societies, therefore necessitates proof of a relationship between the source of the information and the person who is to be accused of insider dealing. The price-sensitive information must be obtained by virtue of this relationship. It is the relationship that taints it and renders improper its use for personal benefit. Of course, the notion of relationship is stretched far beyond what the law would normally consider to be relationships of a fiduciary quality or, for that matter, necessarily giving rise to a duty of confidentiality. The extent to which it is necessary to establish that the relevant information is obtained by virtue of the privileged access that the relationship gives to the person concerned is a matter for debate. Logically, if the information can be shown to have been obtained from some other and outside source, then its use by a person who is clearly in a special relationship with the company should not be considered to be insider dealing. However, in most systems of law, there will be a ‘presumption’ that if a primary insider is in possession of price-sensitive information in regard to the securities of the issuer with which he has an access relationship, then the ‘inside information’ was obtained pursuant to this relationship.

Inside information 1.15 Information is a very vague and ill-defined concept in many legal systems. However, in the context of insider dealing, it is generally not necessary to refine a definition that does more than indicate that it possesses a quality sufficient to influence the decision of the person who has access to it to deal in particular securities. In other words, the information that the person accused of insider dealing has in his possession must be such as would influence his decision to buy or sell. In the UK, as in most legal systems, it is enough if the information would influence the mind of a person who would be likely to deal in the relevant securities. Thus, materiality is objective and is determined by reference to the particular class or group of investors that would ordinarily be likely to deal in the securities in question. This gives the test of materiality sufficient flexibility to accommodate narrow and highly specialised markets. The more specific and precise the information is, the more likely it is that it will influence the mind of a reasonable person. 1.16 Some systems of regulation seek to define materiality not so much in terms of the impact on the individual investor, but on the market. Obviously, the more significant the impact that the information once disclosed is likely to have on the price of the securities the more influential it will be on the mind of

Principal Investigator C Nakajima, and Consultant, B Rider and P Rutledge, Insider Fraud in the Retail Banking Sector (European Commission 2009). See also note 54 below. The use of companies to perpetrate frauds and hide behind is commonplace, see in regard to recent initiatives by the National Crime Agency (NCA) and National Economic Crime Centre (NECC) in regard to company formation agents, J Hurley, ‘Agents facing crackdown over organised crime links’, The Times, 4 February 2021. See also at 6.140.

8

The nature of insider dealing and market abuse  1.19 an investor. On the other hand, tests that focus on whether the information is likely to affect the decision of an investor encompass not only the relevance of price, but also other market factors. Generally speaking, it is enough to establish materiality of information that it would be a factor in taking a decision; it need not be the determinant or an especially significant factor. 1.17 The information must be inside information. In other words, it must have a quality which ties it to the issuer in whose securities the dealing takes place. We have already discussed this issue in terms of the relationship that the person accused of insider dealing must have, directly or indirectly, with the source of the information. Obviously, relevance will be bound up with materiality in most conceivable cases. The information need not be generated within, by or for the benefit of the issuer in whose securities the dealing takes place. For example, it would be objectionable for a director of a company which intends to make an attractive takeover offer for the securities of another company to deal in the securities of that other company on the basis of this knowledge. The information in such a case may be regarded as being inside information obtained through his insider nexus with his company, but its relevance is to the market in that other issuer’s securities. 1.18 While the information involved in most cases of insider abuse will be confidential or at least obtained in a relationship that might be expected to give rise to obligations of confidentiality, it is not always that the information will be such that could be protected as ‘confidential’ information. There will be cases where the information is too tentative to be protected as proprietary information, but which would still meet the test of materiality. It is also the case that there will be situations when the information is not confidential to a particular person or entity. In the result, it is clear that inside information is not always confidential information. As we have seen in the United States, the courts have fashioned the so-called ‘misappropriation theory’ to justify liability for insider dealing.17 This approach sanctions the ‘misappropriation’ of information that belongs to another person. Dealing on the basis of such information will constitute a misappropriation, as will improperly disclosing it to another in circumstances where that other utilises it. The notion that information belongs to another person who will often obtain the same by the inside source is a difficult one for many legal systems. For example, while many legal systems are prepared to protect confidential information as if it were a form of property, not all by any means consider information capable of being a species of property.18 1.19 Inside information has sometimes been described as ‘privileged’ information. In the legal sense, privileged information is a concept even narrower than that of confidential information. Consequently, it is preferable to contemplate the notion of privilege, as referring to the circumstances in which it is acquired, rather than the information itself. Where a person in a special relationship or an access relationship acquires information by virtue of his position, then his access may be described as having been made possible in privileged circumstances. To describe, however, inside information as being privileged information in the traditionally accepted legal sense of the word is misleading.

17 18

See above at notes 13 and 14. See, for example, Oxford v Moss (1978) 68 Cr App R 183, in which it was held information was not property for the purpose of the law of theft, discussed at 6.48.

9

1.20  The nature of insider dealing and market abuse 1.20 The information to be inside information must not be in the public domain. We discuss disclosure and related issues in Chapter 9. Obviously, the value of the information to the person who deals upon it is that it is not publicly available. While it is not necessary for the information to be secret in the sense of being confidential, as we have seen, it must not be accessible to those who could ordinarily be expected to deal in the relevant securities. Many regulatory systems provide that the information should, at the time of its misuse, be unpublished. Much will therefore depend upon what publication means in this context. At one end of the spectrum, if information has been released into the public domain through a press announcement or a regulatory disclosure, then it ceases to be inside information. On the other hand, what if the company is prepared to make the information available only to analysts or other market professionals, possibly on a selective basis? The nature of the market and the sophistication of the financial environment within which the disclosure takes place will inevitably bear upon the question whether the information has been sufficiently published or not. 1.21 It is the case, however, that in most jurisdictions including the UK, provided that the information is freely available to those who would be likely to deal in the relevant securities, there is adequate public disclosure. It has been argued that the fact that the information is publicly available does not entitle those who had pre-publication knowledge to deal before there is an opportunity for the information to be adequately disseminated and even ‘digested’. In the USA, for example, it would be objectionable for insiders to trade immediately on the back of a disclosure abusing their privilege of preknowledge. Of course, developments in technology and in particular the ability to invoke computer-assisted trading has somewhat complicated these issues. In the days when it was possible to monitor the ‘crowding’ of particular dealers in physical markets and where communication was not instantaneous, it was perhaps easier to justify the need and then enforce rules neutralising or at least mitigating pre-knowledge of a disclosure.19 1.22 Traditionally, the price to be paid for the privilege of limited liability is disclosure of sufficient information to enable reasonable decisions to be made by those who invest in the enterprise, lend it money or trade with it.20 Similar

19 Advantage obtained by virtue of proximity can, of course, manifest itself even with state-of-the art technology, see note 65. Superior means of obtaining information which is observable or freely available, while sometimes considered ‘unfair’ should not be penalised. Indeed, this was a debate that Cicero evidently had, see W Miller, Cicero, De Officiis (Harvard University Press 1913), at p 321. Indeed, referring to Nathan Rothschild, Count Gallatin records, ‘they say Monsieur Rothschild has mounted couriers from Brussels to Ostend and a fast clipper ready to sail the moment something decisive one way or the other …’ occurs in the battle of Waterloo, A Great Peacemaker: The Diary of James Gallatin (Charles Scribner’s Sons 1914), at p 76. On receiving information indicating a victory over Napoleon, Nathan attempted to inform Lord Liverpool, the Prime Minister. He was rebuffed that he has retired for the night and the following morning evidently Lord Liverpool was disinclined to believe him given contrary intelligence. Nathan then purchased government stock making a significant profit, see generally D Wilson, Rothschild, A Story of Wealth and Power (Mandarin 1994). 20 See generally: P Davies, S Worthington and C Hare, Gower: Principles of Modern Company Law (11th edn) (Sweet & Maxwell 2021) for a detailed discussion of the historical perspective, and see early editions by LCB Gower; C Villiers, Corporate Reporting and Company Law (Cambridge Studies in Corporate Law, Cambridge University Press 2006); and LCB Gower, ‘Some contrasts between British and American Company Law’, 69 (1956) Harvard Law Review.

10

The nature of insider dealing and market abuse  1.23 obligations arise in regard to the founding of a company and its promotion.21 The more members of the public are involved in funding the enterprise, the greater the burden of disclosure. The efficacy of the legal mechanisms for achieving effective disclosure have been questioned.22 For example, there are those who consider the substantive requirements for disclosure reflect rather more the preconceptions of lawyers, particularly in regard to what might be described as integrity related issues relating to the promoters and directors, than the sort of information that would be useful for investors and their advisers in determining whether the company’s securities are a good investment or not.23 It has also been questioned whether the tendency in many jurisdictions to simplify financial disclosure so that ordinary investors might better understand it, is helpful to the markets. ‘Dumbing down’ disclosure in this manner makes it more difficult for professionals to advise investors and might encourage some to seek information that is not publicly available. Consequently, there is a question as to the utility in many investment contexts of the traditional disclosure regime ordained by company law.24 Greater significance, at least in the context of addressing insider abuse, should, it is argued, be addressed to mechanisms mandating and facilitating the disclosure of material items of information in a narrative form on a timely basis.25

The transaction 1.23 Insider dealing requires that the person in possession of the information does something partly, at least, in reliance on the information in question. It is not necessary that he does something that he would not have done had he not possessed the information. This would require a much too high standard of materiality and introduce difficult issues of causation. On the other hand, it is generally accepted that for insider dealing to occur the person concerned must enter into a transaction himself, procure or encourage another to enter into a

21

22

23 24

25

See in regard to the obligations of promoters, who in many respects are arch-insiders, the common law which requires full and frank disclosure. See also: Erlanger v New Sombrero Phosphate Co [1878] 3 App Cas 1218, especially Lord Cairns at 1236; Lagunas Nitrate Co v Lagunas Syndicate [1899] 2Ch 392; and disclosure to cronies was and is insufficient, see Lord Halsbury in Glukstein v Barnes [1900] AC 240 at 247. See also 8.3 in regard to directors. See in particular, H Kripke, The SEC Corporate Disclosure: Regulation in search of a purpose (Law and Business 1979); E Stamp and C Marley, Accounting Principles and the City Code (Butterworths 1970); J Friedland, Reforming the Law and Structure of the International Financial System (Praeger 2004). See in particular, Homer Kripke, above at note 22. It is also important that the information that is disclosed is reliable and accurate, see L Clarence Smith, ‘Nearly a third of bank audits substandard, warns regulator’, The Times, 24 July 2021, referring to a review by the Financial Reporting Council, ‘of 103 large company audits by Britain’s seven biggest accounting firms, which found that almost one in three was substandard’. The chaos caused by the Covid-19 pandemic resulted in the FCA suspending the publication of listed companies’ annual results, see M Costello, ‘Reporting ban triggers fears of market closure’, The Times, 23 March 2020, and D Walsh, ‘City regulator defends stand on reports’, The Times, 24 March 2020. The FCA expressed concern that difficulties caused by the pandemic might result in inaccurate reporting thus misleading the markets. Similar concerns have been expressed in regard to the disclosure of tentative and or unconfirmed information. However, there was also fears that this might lead to a great risk of insider trading. See at Chapter 9. The importance of timely disclosure in the context of addressing the risk of insider abuse has long been recognised, see, for example, B Rider, The Unacceptable Insider (Legal Research Foundation 1987).

11

1.23  The nature of insider dealing and market abuse transaction or disclose the information to another in circumstances where that other is likely to abuse the information. Merely desisting from trading would not, in most people’s perception, amount to insider dealing. If a transaction has already been initiated, failing to complete it might well be sufficient. 1.24 The buying or selling need not necessarily relate to securities of the company with which the person concerned is in an access relationship. We have already referred to the fact that many systems of regulation would sanction the use of information pertaining to a transaction or arrangement between the insider’s own company and another corporate issuer. It is also the case that dealing in the securities of related companies on the basis of relevant unpublished information would also be considered insider dealing. Dealings in securities other than equity securities that are price-affected by the information would be considered to be insider dealing in the UK and most other jurisdictions. Thus, acquiring options to acquire or dispose of underlying securities would be objectionable, as would dealing in other types of derivative securities. The question is simply whether the decision to deal in the relevant securities is influenced by the information that the person concerned has acquired and is using improperly. 1.25 The term ‘insider dealing’ is wide enough to encompass deals on or off an organised securities market. While a number of legal systems have effectively confined the operation of their legal rules to transactions that occur on an organised securities exchange or on or through an organised over-thecounter market, the elements of the abuse are the same whether the transaction is on a market or in a private direct transaction. One of the reasons why jurisdictions have confined the operation of their laws to public markets is the idea that the wrong indicated by insider dealing is one against the market as a whole. It amounts, in the perception of some, to a ‘fraud against the market’ – it saps confidence in the integrity and fairness of the market. Consequently, some have made available only their criminal justice system to sanction this essentially public wrong or, rather, crime. Off-market transactions are left to the ordinary law which governs the commercial dealings of private persons. While there are arguments based on market integrity which might justify such a distinction, and while there may be justifications for distinguishing market and off-market insider transactions in regard to the remedies that are made available and in regard to enforcement, it is submitted that the nature of the abuse and its elements are the same. Therefore, it is appropriate to regard insider dealing as taking place on organised markets as well as in private and even face-to-face transactions.

Unauthorised disclosures 1.26 It has already been pointed out that most systems of insider dealing regulation would regard disclosing inside information to another person, without the appropriate authority, in circumstances where that other person is likely to abuse the information, as a form of insider dealing. Merely disclosing information even if there is an expectation that the recipient will himself deal, is not ‘dealing’ in any real sense of the word. While it is possible and common place to attribute the transactions of an agent to the principal and therefore the deals of the agent to the deals of the ‘insider’, it is less easy to describe procuring or encouraging the dealing of another as insider dealing. Nonetheless, the term insider dealing is often employed in such an expansive manner, as it is in the UK. 12

The nature of insider dealing and market abuse  1.29 1.27 Where a person, without authority, discloses unpublished and material information in the knowledge that the recipient might well utilise the information for dealing, then it is at least arguable that the person should be held responsible for what is indirectly the exploitation of the information in question. In the UK, as in most systems of law that regard such unauthorised disclosures as tantamount to insider dealing, it matters not whether the recipient actually engages in transactions which would themselves be considered insider dealing. For example, while the informant might be culpable, the recipient who deals on the basis of the information may not be aware that the information emanates from an inside source. A failure to appreciate the status of the information might well in any case bring into issue its materiality. 1.28 Such conduct will, however, only be considered objectionable when the primary insider discloses the relevant information without proper authority. It is not always easy to decide if a particular disclosure is legitimate or not. As a general rule, if the disclosure is made with the actual or implied authority of the person concerned to make or authorise disclosure, then it will not be objectionable. There may be cases where, while the relevant officer of the company has authority to disclose information, he does so not for a proper purpose, but perhaps to facilitate improper transactions on the part of another. In most systems of law, agents have authority only to engage in actions that are properly motivated. Therefore, a disclosure that is motivated by improper considerations, such as a desire to promote a false market, would not be legitimate and justifiable even when a primary insider has no authority to disclose information. It may well be on the facts appropriate and legitimate for him to do so, for example, ‘blowing the whistle’ on misconduct. Provided that such is done for a purpose that would be considered proper and is not dishonest, it is hard to see that such conduct could be described as fostering insider abuse. The line between what is acceptable and what is not is not always clear. Difficulties have arisen in the case of selective disclosures to analysts and private briefings, as we shall see.

The inside nexus 1.29 While over the last four or so decades most jurisdictions have enacted laws specifically prohibiting insider dealing and penalising infractions of the law, outside the US and one or two other jurisdictions, such as the UK, France, Singapore and Australia prosecutions have been rare and have only occasionally resulted in convictions. The reasons why so few cases of insider abuse end up in a conviction are many and varied. However, it is not uncommon to find that the specific offences that have been created to address the problem of insider abuse require the prosecution to prove, to the high standard of the criminal law, a set of facts which in practice renders many cases incapable of successful prosecution. For example, the initial offence of insider dealing in the UK required the prosecution to establish no fewer than 12 separate facts.26 Proof of the requisite state of mind, or mens rea, was particularly onerous. The record for successful prosecutions for fraud and economic crime involving complex factual situations and sophisticated business activity is not impressive

26

See B Rider, Insider Trading (Jordans, 1983), Ch 1; TM Ashe, Insider Trading (Company Communications Centre 1980); M Ashe and L Counsell, Insider Trading – the Tangled Web (Format Publishing 1990).

13

1.29  The nature of insider dealing and market abuse in the vast majority of legal systems. On the other hand, there is the perception that insider dealing does occur at a sufficiently significant level in many markets to be a matter of concern to those who are charged with promoting and maintaining their integrity. It is also the case that in many jurisdictions – including the UK – the efficacy or otherwise of the regulators’ ability to deal efficiently and seemingly effectively with cases of insider abuse had become almost an acid test of their competence and ability to protect investors. Faced with this challenge it is perhaps not surprising that attempts have been made to simplify the essential elements for establishing the ‘offence’ of insider dealing. 1.30 A number of institutions, including the International Monetary Fund, have embarked on programmes to develop a more useable model of regulation, but it is the European Commission that has achieved most, at least in terms of statutory material. The European Commission initially attempted to do this through its company law harmonisation programme and then later as part of its initiative to ensure equivalence of protection and the creation of a level ‘playing field’ in the financial services industry. In doing so there has been – apart from in the United States – a tendency to move away from the need for an essentially fiduciary nexus and to base the prohibition on what might be described as ‘fraud on the market’ concepts. In doing so, the emphasis has been placed, at least as far as the law is concerned, on the misuse of privileged information from the standpoint of those in the market and not from the position of the company. Although the initial European directive27 which seeks to co-ordinate anti-insider dealing laws within the EU is very much orientated to the market and ensuring the integrity of dealings in a market context, it still adheres in part to the more traditional notion that insider dealing signifies the involvement of persons who would be considered by virtue of their positions to be corporate insiders, namely directors, officers and substantial shareholders, albeit these primary insiders need not have this relationship with the issuer of the securities to which the abuse relates. Thus, in the context of this particular Directive we are still in the realm of company law and traditional issues of governance, although conceptually somewhat on the periphery. Of course, the Market Abuse Directive28 is a rather different creature and reflects a much wider and more market-orientated approach in line with the development of the law in the UK after the Financial Services and Markets Act 2000. 1.31 Although, as we have indicated, there is a tendency, in at least some jurisdictions, to fasten upon the unfair use of all information that is not adequately disseminated, at this point in time, the notion of insider dealing involves three basic elements. First, the existence of information which is not publicly available, or at least is not available to those who would be likely to deal in the securities to which it relates, but, if it were, it would be likely to influence their decision to deal and upon what terms. In other words, there must be material, non-public information. Secondly, those in possession of

27 28

Directive 89/592/EC (1989) OJ L334/30. See the Financial Services Act 2021; Market Abuse Regulation (596/2014/EU) rescinding Council Directive 2003/6/EC (2003) OJ L96/16; Directive 2003/124 (2003) OJ L339/70 and Directive 2004/72/EC (2004) L 162/70. See generally on the background to this, R Alexander, Insider Dealing and Money Laundering in the EU: Law and Regulation (Ashgate 2007), and generally Chapters 4 and 5 below. On earlier discussion of insider abuse within the EEC, as it then was, see B Rider and HL Ffrench, The Regulation of Insider Trading (Macmillan 1979), 263 et seq.

14

The nature of insider dealing and market abuse  1.33 the information must be aware that it emanates, directly or indirectly, from an inside source. Thirdly, they must then deal in the securities that would be affected by the information. It is also usually thought to be insider dealing when the possessor of the information encourages another to deal or improperly discloses the information to another in circumstances where it is likely that that other person will deal or encourage another to deal.

How far should we cast the net? 1.32 We have looked at what might be described as the constituent elements of what is ordinarily conjured up by the term ‘insider dealing’. Before proceeding with our discussion, it would be useful to explore the various arguments as to who should be regarded as an insider. We have already looked at the traditional categories and raised the distinction between primary or access insiders and those who obtain the relevant information through such a person and are thus more appropriately described as secondary insiders. However, even in relation to this simplistic distinction, there are issues which would be useful to discuss in the wider context of who may properly and appropriately be considered to be an insider and thereby subjected to additional obligations. It is also important to remember that, under the laws of most jurisdictions, the determination of who and who is not to be considered an insider has serious implications for those dealing with them and, in particular, receiving and utilising information from them. A person who deals with an insider is dealing with an inside source and, consequently, any communication from that insider will be from an inside source subjecting that person to the obligations of being an insider himself.

Access insiders 1.33 The classic notion of insider dealing, as we have already indicated, involves a person closely associated with an issuer, taking advantage of material unpublished information that has come into his possession by virtue of his relationship to the company. While there are no doubt instances of persons in an access relationship to an issuer engaging in such conduct, as we have already indicated, it must surely be unlikely that corporate insiders would be prepared to risk their position and employment by engaging in such egregious conduct. Consequently, most of the cases that have come to light involving primary insiders acting in such an unsophisticated and blatant manner have involved individuals whose conduct may fairly be described as an aberration, possibly motivated by exceptional pressures or financial needs. In fact, in a high proportion of cases, the amounts of money involved have also been relatively small. Most corporate insiders would not in the ordinary course of events be able to raise very significant amounts of money to risk on insider trading within the requisite time frame. Those insiders who are prepared to violate the trust reposed in them and engage in a more systematic abuse of their position would tend to utilise nominees, sell or even barter the information in question. Obviously, the more sophisticated the attempts are to evade detection, the less likely it is that the insider will be identified or rendered amenable to sanctions. In those jurisdictions that have developed regimes for the control of insider abuse, in the case of primary insiders, it is on the whole only the relatively ‘innocent’ and foolish – perhaps arrogant who get caught. Indeed, this was very much the experience of the City Panel on Takeovers and Mergers which 15

1.33  The nature of insider dealing and market abuse was the primary ‘agency’ concerned with ‘policing’ insider abuse in the UK prior to the enactment of specific anti-insider dealing laws.29

Those in the market 1.34 Professor Henry Manne suggested in 1966, in his controversial book Insider Dealing and the Stock Market,30 that primary insiders would, because of the risks that they face, be far more likely to exchange items of inside information rather than trade on it themselves. While this was thought somewhat fanciful, there are examples of insiders indulging in this activity or selling information.31 Obviously, the more disassociated the eventual dealing is from the relationship through which the information was obtained, the more difficult it is for action to be taken against the insider who has betrayed his fiduciary obligations. Indeed, the relevant information is effectively laundered in the same manner as criminal property, often using very similar devices. In countries where anti-insider dealing regulation is developed, a significant proportion of cases involve dealing on unpublished price-sensitive information by financial intermediaries. Such persons are often in a much better position to evaluate the impact of information and exploit it, as compared with the ordinary corporate executive. They, perhaps with the support of insider dealing pools, are also able to organise exploitation to maximum effect through the use of derivatives and other trading devices. The relevant information in many of these cases is either obtained from a primary insider or relates to the financial activity of the issuer in question. 1.35 There has been debate as to the extent to which ‘market information’, as opposed to information that is generated from within the company, can properly be regarded as inside information. For example, the decision of a substantial shareholder to liquidate his holding, while not inside information in the conventional sense of the word could well be highly price-sensitive. While it would generally be thought inappropriate to stigmatise the actual transaction by the substantial shareholder as objectionable, as he is possessed of nothing more than the knowledge of his own intentions, those who are privy to this might be thought to be in a rather different situation. It should be noted, however, that many systems impose disclosure obligations, primarily to the market, when a transaction would have implications for the control of a company. This is justified on much wider considerations than the abuse of what might be considered privileged information. The then Department of Trade stated ‘a company, its members and the public at large should be entitled to be informed promptly of the acquisition of a significant holding in its voting shares … in order that existing members and those dealing with the company may protect their interests and that the conduct of the affairs of the company is not prejudiced by uncertainty over those who may be in a position

29 30 31

See B Rider, ‘The role of the City Panel on Take-overs and Mergers in the Regulation of Insider Trading in Britain’ (1978) 20 Mal L R 315 and B Rider and H Ffrench, The Regulation of Insider Trading (Macmillan 1979) at p 160 et seq. (Free Press 1966). Insider dealing rings through which inside information was exchanged were identified by investigators after the Great Wall Street Crash. There was also evidence of similar activity in regard to the charges brought against Ivan Boesky; see IF Boesky, Merger Mania, Arbitrage; Wall Street’s Best Kept Money-Making Secret (Bodley Head 1985).

16

The nature of insider dealing and market abuse  1.36 to influence or control the company’.32 Consequently, the Companies Act 1948, as amended, imposed a statutory obligation on substantial shareholders to disclose and report their own holdings and those associated with them.33 However, in the UK, as we shall see in our discussion on market abuse, such obligations are now imposed primarily through the listing agreement and the rules promulgated by the Financial Conduct Authority (FCA). This obligation has been transferred as a result of the intervention of EU legislation34 from corporate law to the regulatory system established under the Financial Service and Markets Act 2000.35 Furthermore, since 2016 most companies are under a statutory duty to maintain public registers of people, including corporate persons, with significant control or influence over the company.36 Furthermore, in addition to the disclosure of shareholdings above a certain level, most developed regulatory systems impose obligations on individuals and companies, once certain thresholds have been crossed, to announce their intentions and or make a public offer.37 There are also provisions for the mandatory aggregation and disclosure of shareholdings in cases where persons act in concert to ‘warehouse’ securities if the aggregated holding exceeds the requisite ‘disclosure threshold’.38 1.36 There are a number of important considerations, however, that need to be addressed if the regulatory net is thrown over market information that does not have some additional quality to it, other than being merely material and non-public. Mention has already been made of the important role that analysts and other intermediaries play in the financial services industry. It is important that what are widely considered to be quite proper and even beneficial operations in the market are not undermined. The position of market makers is particularly sensitive. In many markets, certain professionals will be charged with a responsibility to provide a market, either way, in a selection of securities. This facilitates liquidity and stability and assists in the maintenance of an orderly market. It is the case, however, that such dealers will, because of their specialised relationship with the issuers in whose securities they make a market, come into possession, or themselves generate, information of a pricesensitive nature. Having said this, however, it is also important to note that

32

33

34 35

36

37 38

See Disclosure of Interests in Shares (1980) and 1.42 below and generally P Davies, S Worthington and C Hare, Gower: Principles of Modern Company Law (11th edn) (Sweet & Maxwell 2021) at 27-011 and generally AJ Boyle et al, Boyle and Birds’ Company Law (10th edn) (Jordans 2019). See the Companies Act 1985, Pt VI which extended and re-enacted these provisions. Note in particular the powers that companies have to investigate the beneficial ownership of their shares and who are interested in them (see Re Technology Investment Trust plc [1988] BCLC 256) in Part 22 of Companies Act 2006 replacing the relevant provisions in the 1985 Act. See the Market Abuse Regulation 596/2014/EU (2014) OJ L 173/1; Directive 88/627/EC (1988) OJ L348/62 and Directive 2001/34/EC (2001) OJ L184/1. See section 1266 of the Companies Act 2006 introducing new Financial Services and Markets Act 2000, ss 89A–89G and the Companies Act 2006 (Commencement No 1 Transitional Provisions and Savings) Order 2006, SI 2006/3428, Sch 3 and Implementation of the Transparency Directive and Investment Entities Listing Review, FSA CP06/4 March 2006, Ch 3 and Implementation of the Transparency Directive, FSA PS06/11, October 2006, Ch 3. See the Companies Act 2006, s 790C(2) and (3) and Sch 1A and the Register of People with Significant Control Regulations 2016, SI 2016/339, and see Statutory Guidance on the meaning of ‘significant influence or control’ over companies in the context of the Register of People with Significant Control, Department for Business, Energy and Industrial Strategy, June 2017. See General Principle 10 and Rule 2.2 of the Takeover Code. See Chapter 9.

17

1.36  The nature of insider dealing and market abuse market makers, given their obligation to remain in the market, albeit within certain limits and be willing to trade, are particularly exposed to insider dealing and manipulative practices on the part of others. Consequently, market makers in many countries have often been at the forefront of those calling for stricter control of insider dealing. Generally speaking, the beneficial role performed by such market professionals is recognised in law by effectively exempting what they do in the ordinary and proper course of business as a market maker.

The corporate issuer 1.37 Discussion has also taken place in several jurisdictions as to whether the issuer can be sensibly regarded as an insider of itself. There is no objection, under the laws of most countries, to a company being considered an insider and to legal liability attaching to the corporation in the ordinary way. What has been said in regard to the intention of a person to act in a certain manner applies as much to a company as it would to an individual. However, where the issuer intends to act in a manner which would affect the price of its own securities or for that matter a related company’s, there is an increasingly widely held view that it is properly cast in the role of an insider. Of course, the circumstances in which a company can deal in its own capital are regulated, and in many countries it is illegal for a company to deal its own securities or give any third person financial assistance to do so.39 However, in certain circumstances, companies may be able to repurchase and cancel stock or redeem preference shares. Where this is permitted, the issuer would be bound to ensure that the holders of these securities are in no way prejudiced by the existence of unpublished information which might affect the value of the securities to be acquired or redeemed. Consequently, the company would have to make a full and fair disclosure. In such circumstances, the directors of the company would also have a duty to ensure that whatever is done by the company is done in its best interests.40

‘Scalpers’ and ‘gun jumpers’ 1.38 From a conceptual standpoint, a somewhat related issue is that of ‘scalping’. In its simplest form, ‘scalping’ involves a journalist or analyst trading in securities that he has written up or, for that matter, expressed reservations about, in an article or report prior to its publication. Depending upon the circumstances, there is little doubt that comments of a favourable or negative character can have a profound and predictable impact on the price of securities. The problem is that the information upon which the journalist trades has no insider nexus with the relevant issuer. It may well amount to nothing more or less than the fruits of his or her work and reflections, based upon widely available and verifiable facts. The role of the financial press and analysts in ‘mining’ and assembling significant ‘new’ information or simply

39 40

See generally Part 18 of the Companies Act 2006 and generally Chapter 9. Section 172(1) of the Companies Act 2006, provides that ‘a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole …’ although in doing so he should have regard to the interests of employees and certain other parties. A director must also act within their powers and for the purposes for which their powers are given, see section 171.

18

The nature of insider dealing and market abuse  1.40 rendering complex published information intelligible41 is of considerable importance – particularly in less sophisticated markets.42 On the other hand, using advance knowledge that the article is likely to have an impact on the market to make a profit or, for that matter, avoid a loss, is objectionable.43 It has the character of betting on a certainty which is compounded by an abuse of position. Where the dealing is by an individual other than the person who wrote it, then it is often relatively easy to construct an argument that would bring that person within the reach of the ordinary theories of insider liability. It is where the journalist or analyst himself trades that the real difficulty arises. 1.39 While most systems of regulation would consider this unethical, few actually attempt to impose specific legal sanctions. In the United States, the ‘misappropriation theory’ has been used with considerable effect to impose liability on anyone who uses, without proper authority, ‘inside’ information that belongs to another. Consequently, if the article has been prepared by the journalist in the course of his employment or under commission, then it is arguable that the information can only be used for his employer’s purposes. If he seeks to take personal advantage of it by trading prior to publication, he would be guilty of insider dealing. Of course, in many jurisdictions and in particular common law legal systems, it is probable that the ordinary law would impose liability on an employee who sought to profit in such a manner.44 1.40 In the present context, the term ‘gun jumping’ is often applied to the same sort of conduct as ‘scalping’. However, it is wider in the sense that it involves those, other than the person or persons responsible for the creation of the information or opportunity, seeking to take advantage of it before it is published. It might also be applied to those who deal immediately on publication of the information before others have had an opportunity to assess it properly.45 Those who are privy to unpublished price-sensitive information and then, without authority, seek to exploit it, may well fall within the purview of anti-insider dealing laws. Under the European directive on insider trading, provided that the person seeking to exploit the information is aware that the source of the information is classified as a primary insider, even though they may have no relationship with the issuer of the securities in question, an offence would be committed. As we have already pointed out, the directive

41 42 43

44 45

As we have noted, there are those who have questioned the efficacy and relevance of traditional financial statement-based disclosure as a tool for sensible decision making, see above at note 22. See, for example, B Rider et al, in Strategies for the development of Islamic Capital Markets (Islamic Financial Services Board 2011), Ch 3. See the City Press case (28 June 1973) referred to in B Rider, Insider Trading (Jordans 1983) at 3.26. See ‘The ugly face of journalism’, Evening Standard, 13 August 1973. In this case the Council of the Stock Exchange and the Press Council did not consider a newspaper has a portfolio in which it invested before publication in securities it recommended was a problem. The newspaper claimed that this showed it had confidence in its recommendations. On the same day as publication of the recommendation, the City Press also carried an article stating that ‘something was afoot’ in regard to the company and later that day a public offer was made for that company. The Stock Exchange after an investigation considered that the acquisition of 1,200 shares by the newspaper was ‘wholly undesirable’ and ‘did not accord with generally accepted journalistic practice’. The Press Council agreed and stated it was unacceptable for journalists to use inside information obtained as a journalist. The view was also expressed that acquisition of shares in the linked portfolio should only take place at the time or after publication. The City Press discontinued this practice, see Press Council release No 14075/814 (R)1974. See, for example, Brandeaux Advisers (UK) Ltd v Chadwick [2010] IRLR 244. See discussion above at 1.21.

19

1.40  The nature of insider dealing and market abuse creates a class of primary insiders, members of which may or may not happen to be in an access relationship to the company in question. Where, however, the information is not obtained from a person who happens to be a director, officer or substantial shareholder of any company, the issue of liability is rather more problematical. Where the dealing takes place after the information has been disclosed, then, very few jurisdictions require those with advance knowledge to hold back for a period to allow dissemination, let alone digestion. 1.41 While ‘jumping the gun’ may be considered to be unfair, it must also be remembered, as we have emphasised, that analysts do play an important role in refining information and thereby improving the quality of investment decisions. The costs of providing this service to the market needs to be met and it is important not to place those who develop such information at a competitive disadvantage in reaping the benefits of their own work. Perhaps the appropriate dividing line between what is acceptable use by the originators of such information and what is not, is the distinction between utilising the work product itself, as opposed to seeking to benefit from its market impact, once it becomes known.

Shareholders 1.42 Primary insiders are those who have a clear and defined relationship with the company to which the inside information ‘belongs’ or, in the case of those jurisdictions that have followed the European directives, any company. Although, as we have seen, it can be misleading to describe this relationship as always resembling a fiduciary or confidential relationship, in the majority of cases, those in an access relationship to the relevant information will be subject to legal obligations similar to those of a fiduciary or an agent. Many jurisdictions, however, include in the class of primary insiders substantial shareholders and, in some cases, all shareholders. In the vast majority of legal systems, the relationship between a shareholder and his company and with other investors is purely contractual and does not involve obligations of a fiduciary or confidential character. 1.43 In the laws of many countries, shareholders have no right in law to special or privileged access to corporate information. Indeed, in many cases they have no right even to inspect the books of the company. Creditors, other than pursuant to special contractual arrangements that may be made, have both in law and practice even less access to the company. It is appreciated, however, that some shareholders, by virtue of the size or relevance of their holdings, may well have an influence on the management of the issuer and thereby, in some respects, be in the same position as an ‘access insider’. In such cases, it may be appropriate simply to consider them to be potentially secondary insiders. Having said this, however, there is a tendency, which is not particularly logical to expand the category of ‘presumed insider’ to encompass those shareholders with a substantial interest in a class of equity or to, at least in Europe, all shareholders. We will also see that it has long been considered desirable for those whose shareholdings give a degree of control over the enterprise should be identifiable, particularly in regard to companies that take money from the public. In the UK the transparency of controllers has been extended to those who have significant influence.46 46

See the Register of People with Significant Control Regulations 2016, SI 2016/339 and the Department for Business, Energy and Industrial Strategy, ‘Statutory Guidance on the

20

The nature of insider dealing and market abuse  1.45

Public officials 1.44 The Nanking Nationalist Government in 1935 enacted a law making it a criminal offence for an official to trade in securities on the basis of information that they had learnt in the course of their official duties.47 Government officials, including ministers, inevitably have access to price-sensitive information concerning companies and, of course, public securities and the economy. There have been examples of alleged abuse in many countries,48 including allegations and suspicions in the UK. Some have been regarded rather more akin to corruption and self-dealing than insider dealing. Nonetheless, taking advantage of such information through trading in price-affected securities has much in common with insider dealing and is properly treated much in the same way. Most countries do have laws which could be invoked to penalise such misconduct, albeit relatively few as insider dealing.49 Whether there is intrinsically any difference in the nature of the misconduct in cases where an official misuses information he or she has obtained in the course of their official duties or has had access to – properly or otherwise and where the information is essentially pre-knowledge of their own decision, such as to grant a license or privilege – is doubtful. Of course, in the case of officials it is arguable that there are wider issues of public trust and confidence in the integrity of government. A similar issue has arisen in at least one Commonwealth country in regard to a senior judge appreciating that his judgment would have a significant impact on the price of a company’s shares, traded before publication of his decision. The situation in regard to judges and for that matter arbitrators, should be the same as for public officials, although few legal systems do in fact have provisions addressing this. Those working in regulatory bodies, particularly those concerned with the financial markets, are often subject to special anti-insider dealing provisions and considering the potential for abuse there have been exceedingly few cases.50

Criminals 1.45 History records many attempts to manipulate the price of commodities on markets and there are examples of early laws seeking to criminalise and

47

48

49 50

meaning of “significant influence or control” over companies in the context of the register of people with significant control’ (2017) issued under the Companies Act 2006, Sch 1A, para 24(5). The Revised Stock Exchange Law 1935, article 41. See also the Stock Exchange Law 1914 of the Beiyang Government and article 10; Revised Directive, Rules of Service for Government Officials 1933. See generally, Ye Zhen, Integrity of China’s Securities Markets: the Regulation of Insider Dealing in China in a Comparative Context, PhD dissertation, University of Cambridge, December 2013. See, for example: D Charter, ‘FBI raids top senator in insider dealing inquiry’, The Times, 15 May 2020; and in regard to dealings by officials in the US Federal Reserve, see C Jones, ‘Powell may pay the price for trading scandal’, The Times, 11 October 2021; C Jones, ‘Fed crackdown on trading by officials’, The Times, October 2021. See the Companies Act 1980, Pt V, s 69, which extended the offences of insider dealing to Crown servants; see generally, B Rider, Insider Trading (Jordans 1983) at 1.8. As to the current law, see Chapter 3. However, two members of the London Stock Exchange’s Corporate Announcements office were successfully prosecuted for insider dealing under the Criminal Justice Act 1993, s 52, see The Daily Telegraph, 14 December 2000 and ‘DTI probes Exchange insiders’, Sunday Business, 19 July 1998. There have been other examples elsewhere including into the misuse of information relating to takeovers by officials of the regulatory authorities in Hong Kong. Criticism has been made of leaks of sensitive information and negligent disclosures, see, for example, A Nachlappan, ‘MPs rebuke Treasury for budget leaks’, The Times, 27 January 2022.

21

1.45  The nature of insider dealing and market abuse regulate such activity.51 There is also evidence that organised criminals considered this to be an attractive and relatively low-risk criminal enterprise. In regard to the securities markets, particularly in the USA, criminal organisations soon realised there were real opportunities to profit through a host of activities ranging from the high pressure selling of over-valued securities to boiler room operations, to circulating false and misleading information, sometimes referred to as ‘spoofing’, with the intention of influencing the price of stocks and shares on the market. As we shall see one of the earliest cases in the UK relating to manipulation involved just such conduct.52 Where transactions are undertaken in a manipulation, then it could be argued that in so far as those involved appreciate that the relevant information that has been circulated is false and the market is thereby being artificially influenced, they are in effect trading on the basis of unpublished price-sensitive information. However, the extent to which professional criminals and, in particular, organised criminals have engaged in the abuse of price sensitive information as opposed to manipulative and fraudulent activity is an issue of some controversy. There are cases in the USA, Australia, Hong Kong and Japan where it is clear that organised crime has deliberately set about obtaining price sensitive information and then used it either by dealing itself or by selling it to others.53 Price-sensitive information has been obtained by illicit listening devices, bribery, extortion and penetration. While there has been relatively little discussion of such risks in the UK, there have been cases where criminals have attempted and occasionally succeeded in exploiting unpublished price sensitive information.54 We will see when we discuss the substantive offences of insider dealing that in certain circumstances 51

52 53 54

See, for example: R Blackmore, Government and Merchant Finance in Anglo-Gascon Trade, 1300–1500 (Palgrave Macmillan 2020); B Anderson and A Lathan (eds), The Market in History (Croom Helm 1986) at p 108 et seq; ‘Black Death fortune hunters’, BBC History, July 2021; and B Rider, C Abrams and A Ashe, Guide to Financial Services Regulation (3rd edn) (CCH 1997), Ch 1 and see Chapter 6, below at note 27. See 6.12 below. See also comment at note 16 above. See generally, K Hinterseer, Criminal Finance (Kluwer 2000); B Rider, ‘The enterprise of crime’ in B Rider and TM Ashe (eds), Money Laundering Control (Sweet and Maxwell 1996) republishing B Rider, ‘Organised Crime in the UK’ Memorandum 15, Organised Crime, Minutes of Evidence and Memoranda, Home Affairs Committee, House of Commons (HMSO) 16 November 1994. Note, in particular, the comments of Sir Callum McCarthy, then chairman of the FSA, ‘there is increasing evidence that organised crime groups are placing their own people in financial service firms so they can increase their knowledge of firms’ systems and controls and thus learn to circumvent them …’ and P Hosking and S Tendler, ‘Warning over mafia gangs infiltrating British banks’, The Times, 16 November 2005. Similar concerns have been expressed in regard to infiltration of law and other professional firms, see R Mendick, ‘Police probe City firms’ links to organised crime’, 12(46) The Lawyer, 24 November 1998. This has long been recognised as an issue in the USA, see J Kim, ‘Experts: USA being infiltrated’, USA Today, 24 August 1999. Partly as a result of such concerns the European Commission conducted a review in 12 European countries of inter alia criminal penetration of the financial system, see C Nakajima (ed), P Rutledge and B Rider (principal consultants), Insider Fraud in the Retail Banking Sector (European Commission 2009). See also B Rider and A Shipman, ‘Organised Crime International’ (1987) in World Security and Defence Reference Book, (Cornhill, revised 1990); B Rider ‘Wages of sin – Taking the profit out of crime – A British perspective’ (1995) 13 Dickinson Journal of International Law 391, B Rider, ‘The Crusade against Money Laundering – Time to think’ (1999) 1 European Journal of Law Reform 501 and B Rider ‘Cyber Organised Crime – the impact of technology on organised crime’ (2001) 8 Journal of Financial Crime 332. The government has increasingly become concerned about the level and sophistication of organised crime in the UK and made it an offence to participate in the activities of an organised crime group under section 45 of the Serious Crime Act 2015. See also: Serious Organised Crime Study (Home Office 2018); Understanding Organised Crime (2nd edn) (Home Office Research Report 103 2016); Home Office Research Priorities

22

The nature of insider dealing and market abuse  1.46 the receipt and misuse of inside information, in circumstances where it is appreciated that the information is from an inside source, would constitute a criminal offence. The market abuse provisions which are discussed in Chapters 4 and 5 are potentially more relevant. Such activity rarely, however, occurs in isolation, and therefore it may well be that other offences under the general law will also be relevant.55 While considerable steps have been taken in recent years in identifying the risks presented by organised crime and in responding to it,56 to some criminals’ insider dealing must appear as a potentially high reward and relatively low risk enterprise. 1.46 A related issue to that of organised criminals seeking to obtain and then exploit price sensitive information is the possibility that those who know that something very adverse to a company is about to occur deal in its securities or those of a related issuer in anticipation of the impact of this event on the price of the securities in question.57 There have been cases where it is suspected that criminals have done this and the issue has arisen in regard to terrorist acts. For example, it was entirely predictable that the markets would be adversely impacted by the outrages on 9/11 and especially the price of insurance companies’ securities would be adversely affected. The investigations that took place in several jurisdictions found no compelling evidence that the terrorists or those associated with them had traded in advance of the outrages.58 Nonetheless, some in the intelligence community remain suspicious, particularly in regard to subsequent attacks given that attention had been drawn in the media and elsewhere to the potential. While such conduct is abhorrent, it is highly questionable whether in most cases antiinsider dealing laws are relevant. This takes us back to the question whether one’s own intentions can be considered a form of inside information. Those privy, involved or, indeed, instrumental to a company’s intention to make an offer for the shares of another company, are properly regarded as insiders. In some systems a distinction is made, however, between this and the situation where the information is nothing more than the intention of an individual. Such issues may well involve other considerations such as ‘warehousing’ shares in a target company prior to the public announcement of an offer.59 While looked at from the perspective of the market the logic in distinguishing between the intentions of a corporate person and an individual may be questioned, there is

2018/19 – 2020/21 (Home Office and Serious and Organised Crime 2018), Home Office Research Report 105 (Home Office 2018). Of course, much of the concern identified by the NCA (see National Strategic Assessment of Serious and Organised Crime (NCA 2020)) relates to money laundering and the indirect impact of traditional organised crime activities. See generally, B Rider (ed), Organised Crime – Research Agenda (Edward Elgar 2022). 55 See Chapters 6 and 7. 56 See generally A Leong, The Disruption of International Organised Crime (Ashgate 2007) and D Masciandaro (ed), Global Financial Crime (Ashgate 2004) and B Rider (ed), International Financial Crime (Edward Elgar 2015), generally. 57 In Ipourgos Ikonomikon v Georgakis the European Court of Justice considered that a large shareholder and certain directors of a Greek company has taken advantage of inside information when they agreed to engage in a series of market transactions to boost the value of their company’s securities. See European Court of Justice (3rd Chamber), 10 May 2007 and [2007] All ER (EC) 1106 and [2007] 3 CMLR 4. 58 Sir Howard Davies, chairman of the Financial Services Authority in evidence to the Treasury Select Committee admitted that certain short selling transactions prior to the attacks ‘looked a little odd’ but considered there were plausible reasons. Having said that, he disclosed that there had been an increase in reports to the National Criminal Intelligence Service (NCIS), The Times, 17 October 2001. 59 See Chapter 9.

23

1.46  The nature of insider dealing and market abuse an understandable reluctance to expand the notion of inside information to a point where the operation of the markets might be prejudiced. 1.47 The extent to which insiders manipulate markets by influencing the disclosure and content of information or through other actions is of real concern in some, particularly, evolving markets. For an insider even operating a pool and dealing in rights and derivatives, to influence the price of a relevant security in most markets would require significant resources. Manipulating disclosure mechanisms may be a greater risk. Of course, as we shall see,60 there are in almost every jurisdiction laws penalising such conduct and detection is almost inevitable. A related issue arises where a person who has sold short circulates information of a negative character with the intention that the price of the relevant security will be reduced. Where the person responsible knows that the information is false or is reckless indifferent, then this is most likely to fall within the scope of laws relating to fraud and manipulation. A problem arises, however, when it is believed that the information is true albeit negative and will serve to correct the market. In such circumstances the disclosures even if resulting in a substantial profit to the short-seller will not necessarily be objectionable.61 However, it is important to keep firmly in mind the nature of the abuse that anti-insider dealing laws are designed to address, which is after all relatively specific. While we might increasingly consider insider abuse to be fraud or at least analogous to fraud,62 there are real problems in attempting to stretch the traditional offences related to misuse information too far – a problem that the American courts have faced in determining proper and proportionate limitations in their law.63

Technology 1.48 Over the years there has been discussion as to the extent to which developments in technology impact on the issues we are discussing. Computerassisted trading systems do unquestionably facilitate in a highly efficient and speedy manner transactions across markets and time zones perhaps integrated with other facilities relating to currency arbitrage, in a way that even a decade ago it would have been hard to imagine. The ability to disseminate, disassociate and dissemble information has greatly increased. Indeed, the use of disposable and without the expenditure of considerable resources, untraceable communications devices to transmit information, perhaps encrypted, has proved to be a reality in cases of insider abuse. Robotic apps and services, increasingly assisted by AI, can generate not only helpful and highly efficient portfolio management, but also obscure trading patterns and even, as has been argued in the face of 60

Technology, and in particular social media, has greatly facilitated the ability of communities of investors, often amateur day traders, to operate with cohesion and target specific securities – with staggering implications such as the GameStop saga; see, for example, ‘How minnows sank the Wall Street Sharks’, Daily Mail, 29 January 2021 and ‘Watchdog bares teeth at novice traders’, The Times, 30 January 2021. 61 See, for example, Burford Capital Ltd v London Stock Exchange plc [2020] EWHC 1183 Comm. See on this, G Durston, ‘Muddying the waters; when does short selling become market manipulation?’ (2021) 28 Journal of Financial Crime 981. 62 See R v McQuoid and Melbourne (unreported), Southwark Crown Court, 9–27 March 2009. 63 Professor Louis Loss, the great US securities lawyer and former General Counsel to the Securities and Exchange Commission (SEC), once described Rule 10b5 as simply ‘thou shall not sin’. See generally, L Loss, J Seligman, and T Paredes, Fundamentals of Securities Regulation (7th edn) (Wolters Kluwer 2018) and L Loss, J Seligman and T Paredes, Securities Regulation (Wolters Kluwer 2021).

24

The nature of insider dealing and market abuse  1.49 allegations of insider dealing in the US and Canada, provide justification for trading patterns ‘divorced’ from the relevant inside information. The ability to share – internationally and instantaneously – not only information, but also dealing instructions and much more, has changed the very character of the markets. The role of chat rooms – many well below the radar or for that matter reach of the regulators – in regard to the dissemination of information is a further complicating factor.64 The impact of high-frequency computer-assisted trading65 to take advantage of asymmetrical access to information, published and otherwise, provides a potential for exploitation beyond the imagination of those who framed our laws. The ability to synthesis and analyse information from highly diverse – possibly open sources – and create an informational mosaic that provides hitherto unseen opportunities, is an increasing resource particularly for institutional traders and in particular hedge funds. Given the potential imbalance in access, use and, indeed, even understanding of these resources the difficult question of relative fairness between investors and the reality of a level playing field, which influences the importance we attach to anti-insider dealing initiatives and laws, is a difficult issue. 1.49 We have already noted the potential for organised criminals and even terrorists to engage in insider abuse particularly having regard to its possible profitability and relatively low risks of interdiction and meaningful punishment. However, the extent to which those engaged in cyber crime have attempted to engage in insider dealing is largely unknown, although seen by some as a real risk. There have been cases where criminal groups attempting to extort money have penetrated security systems and threatened to disrupt business or compromise information. This activity has had a significant impact on the price of relevant securities and there is a strong suspicion that not only has this fuelled essentially manipulative conduct, but also the misuse of information for trading. There have also been instances in the USA and Japan where criminals have attempted to attack computer systems for market surveillance and recording transactional data. There are also many examples of traders going to extreme lengths – usually within the law – to obtain market information in advance of others. For example, the Times reported in December 2019 that a number of hedge funds ‘have installed microwave transmitters on towers across the country to get market information split seconds before official price moves. The Times added that while not illegal ‘it has been compared with insider dealing because it is a way of trading on information that others do not have’.66 64 65 66

See 3.44 et seq. See, for example, C Flood, ‘High-frequency trading is “growing cancer”’, The Financial Times, 14 April 2014. See also M Mainelli and S Mills, The Future of UK Fraud – Challenging High Volume, Automated Crime (Long Finance, June 2022). The Times, 19 December 2019. Advance access to market information can give rise to the same concerns as insider dealing. For example, The Times reported that the Bank of England’s ‘audio systems had been hijacked, allowing hedge funds to listen in to press conferences before they were officially broadcast. The service gave the funds up to eight seconds’ head start on rivals who were watching the official video feed. Allowing them to trade before prices moved.’ Some openly boasted of making plenty of money from this – ‘they said that the five to eight second advantage they gained was a “lifetime” in the currency markets’, The Times, 20 December 2019. It also appears that traders might have planted questions for the Governor of the Bank of England to answer which would have allowed them to ‘plan transactions in advance … (and) then execute the trades depending on the answers … before the price had moved’, The Times, 21 December 2019. The Times added ‘the advantage of a planted question would have been to enhance by the eight second head start they had over rivals through the hijacked audio line’. Of course, ‘beating the tape’ was until developments in technology a serious issue in the USA – particularly given the domestic time zones.

25

26

Chapter 2

Insider dealing: the civil law

A WRONG TO THE MARKET OR THE COMPANY? 2.1 In Chapter 1 we have discussed the reasons why insider dealing is considered wrongful and should therefore be discouraged. However, much of the discussion and analysis of the practice has focused on the relationship of the insider to the company with which he has an insider status. The very name of the concept – insider dealing – imports a relationship of proximity and privilege. Consequently, the early law in many jurisdictions fastened on those in a close relationship with or to companies. Thus, misuse by insiders of privileged information has been regarded by many commentators as involving primarily issues of company law. Indeed, in many countries it is discussed almost as part and parcel of the law relating to directors’ duties.1 Of course, today we recognise that the problem of insider dealing is a much wider one than directors taking advantage of information that comes into their possession while discharging the duties of their office. In fact, such empirical research as has been undertaken clearly indicates other than in the most underdeveloped markets that abuse of inside information is not by such persons. They are too exposed and have rather too much to lose.2 Having said that, there are many examples of insiders manipulating corporate events to their own advantage.

1

2

In most jurisdictions there are statutory obligations on directors to report to their company their and their close associates’ dealings in the securities of that company, and in many instances, related companies. This obligation is seen primarily as an inhibition to insider abuse. Of course, a director who is prepared to abuse inside information might not be scrupulous in complying with such a reporting obligation, which is often poorly policed. Nonetheless, as a result of the recommendation of the Company Law Amendment Committee under Lord Cohen (1945, Cmd 6659, para 86) the Companies Act 1948 imposed a reporting obligation on directors, which after the recommendations of the Company Law Committee under Lord Jenkins (1962, Cmnd 1749) was amended by the Companies Act 1967; see B Rider, Insider Trading (Jordans 1983), Ch 4. There were also obligations to report, in the case of listed companies, to the Stock Exchange and also under other self-regulatory regimes, including the City Code on Takeovers and Mergers. The Market Abuse Directive 2003/6/EC replaced the statutory provisions. In the case of issuers admitted to regulated markets, directors were required to report their own and associates’ dealings under rules promulgated by the Financial Services Authority. Article 19 of the Market Abuse Regulation 596/2014/EU and the Financial Services Act 2021, are now the relevant provisions, see Chapter 9. On the other hand, it is the case that a significant proportion of criminal prosecutions have been brought against directors. See, for example, R v Dickinson, an unreported decision discussed in (1982) 2 Company Lawyer 185; R v John Morris Cross [1990] 91 Cr App R 115; R v Rollins (unreported), Southwark Crown Court, 16 to 26 November 2020.

27

2.1  Insider dealing: the civil law In those markets where there is a high incidence of owner control over the management of issuers, what takes places can often involve the misuse of unpublished price-sensitive information, albeit it often appears rather more as a matter of manipulation or self-dealing rather than insider dealing. 2.2 As our attempts to regulate the abuse of privileged information have become more sophisticated, we recognise more clearly that the abuse of inside information is not merely damaging to the relationship of stewardship that insiders will often be in. It has serious and wide implications for the market as a whole and in particular for the confidence and trust that other investors have in the fairness and proper operation of the relevant market. Consequently, regulatory regimes today tend to concentrate more on the damage that the abuse of unpublished price-sensitive information may have on the market. It is partly for this reason that in the UK resort has been made to the criminal law. While in Chapter 3 we will see that a comprehensive system of control has been developed within the criminal law to address insider dealing, this has been significantly expanded by the market abuse provisions administered by the Financial Conduct Authority. This we address in some detail in Chapter 4. It is important to appreciate that the law on market abuse emphasises the relationship of insider dealing to manipulation and moves away from the requirement that the relevant opportunity for abuse derives from a privileged relationship. The common law and in particular the civil law still, however, have a very important role to play. Apart from the indirect impact of the specific offences of insider dealing on the civil law, largely as a result of the doctrine of illegality, the law relating to insider abuse has no real impact on the underlying common law. Indeed, failure to appreciate this in regard to the impact of fiduciary duties has occasioned difficulties and uncertainties.3 It should also be noted that in the context of the partial codification of directors duties in Chapter 2 of the Companies Act 2006, it is provided in section 170(4) ‘the general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties’.4 Thus, the traditional common law remains of considerable significance in our present discussion. It should also be remembered that the perimeters of fiduciary law are themselves not always certain5 and as Frankfurter J in See, for example: B Rider ‘The Fiduciary and the Frying Pan’ (1978) Conveyancer 114; B Rider (ed), The Regulation of the British Securities Industry (Oyez 1979), Ch 5; C Nakajima and E Sheffield, Conflicts of Interest and Chinese Walls (Butterworths 2002); and in particular, the Law Commission, Fiduciary Duties and Regulatory Rules: A Consultation Paper (1992) No 124. 4 In Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch) in regard to section 170(2)(a) which makes it clear that as in the case of the common law the duty to avoid conflicts of interest continues after a person ceases to be a director in relation to the exploitation of property, information and opportunities that they become aware of while they held the office of a director or were a de facto director; however, the court did not think that this liability was conditioned as it was (arguably) under the common law in the circumstances as to how there was a cessation of office. On the other hand, the widening of liability might be measured by the court’s view that this continuing liability only applied to maturing business opportunities, again possibly at variance with the common law. 5 See P Birks, ‘The Content of Fiduciary Obligation’ (2002) 16 TLI 34 and see A Stafford and S Reading, Fiduciary Duties, Directors and Employees (2nd edn) (Jordan Publishing 2015) for a comprehensive discussion of the role of equity in this context and generally R Pearce, J Stevens and W Barr, The Law of Trusts and Equitable Obligations (5th edn) (Oxford University Press 2010). In Secretariat Consulting PTE Ltd & Ors v A Company [2021] EWCA Civ 6 the Court of Appeal construed a contractual provision widely in regard to avoidance of conflicts of interest but nonetheless held that there was no fiduciary duty of loyalty. 3

28

Insider dealing: the civil law  2.4 SEC v Chenery Corporation6 observed: ‘to say that a man is a fiduciary only begins the analysis; it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge these obligations? And what are the consequences of his deviation from duty?’

CONFLICTS OF INTEREST 2.3 Directors and, in many countries, officers of corporations are properly regarded as ‘stewards’ of the corporate enterprise or at least the company. It is a matter for debate in each legal system as to the extent it might also be appropriate to encompass within such a concept, others, such as controlling or even substantial shareholders, employees and other agents of the enterprise. Suffice it to say that most systems of law, given the onerous responsibilities of stewardship, sensibly confine the notion to those who really are in a proper relationship of trust and confidence to the company. 2.4 The notion of stewardship is ancient and has changed little over time. Lord Chancellor Herschell, in the leading English case of Bray v Ford7 emphasised that it is an inflexible rule that the courts will not permit a person in a fiduciary relationship to place himself in a position where his own interests conflict with those he is bound to serve. Nor is he to be permitted to derive an unauthorised benefit – a ‘secret profit’ – from his position of trust. He must be loyal to his principal. Of course, with all such simple rules, their application in practice is anything but simple. For example, there is still debate as to whether Lord Herschell intended to require those in a fiduciary position to eschew all conflicts of interest and duty no matter how insubstantial or theoretical. Nor is it certain whether the rule that a fiduciary should not benefit – without express authority – from his position is a separate rule or stems from the primary obligation to avoid all conflicts of interest. It is also uncertain as to how far it is appropriate to apply these rules to the situation where a fiduciary is in a conflict of duties to different principals, as opposed to merely his self-interest. A broad approach could create serious problems for those in several fiduciary relationships. Also, there is the real problem of financial intermediaries who engage in activities which might well produce conflicts between their different customers.8 While Chinese Walls and similar devices may inhibit the flow of actual information from one function within the bank to another, they do not address the essential conflict of duty that the bank has placed itself in.

6 7

8

(1943) 318 US 80 at 85. [1896] AC 44. See also the classic statement of fiduciary responsibility predicated on loyalty of Millett LJ in Bristol & West Building Society v Mothew [1998] Ch 1 at 1, ‘The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr. Finn pointed out in his classic work Fiduciary Obligations (1977), p 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.’ See Chapter 8.

29

2.5  Insider dealing: the civil law 2.5 While it is certain that those in a position of stewardship or a fiduciary relationship must not subordinate without a clear mandate, the interests of the person for whom they act or serve to their own, it is unclear how conflicting duties might be resolved. For example, before the criminalisation of insider dealing in the UK it had been questioned would a trustee be under a duty to use inside information that he learnt by virtue of some other relationship for the benefit of the trust? It might be less easy for him to excuse himself when the information in his possession indicates that the trust will suffer a serious loss unless he takes action. Indeed, it has been said that a stockbroker may be under a duty to ensure that privileged information that he possesses does not work to the disadvantage of his client.9 To what extent it could be argued that a broker may come under a duty to search out such information or act upon information of a positive quality which results in profits rather than the avoidance of an otherwise certain loss is rather more debatable. These issues are addressed in rather more detail in Chapter 8. 2.6 While the trust is a creature of the common law, other systems of law impose obligations on individuals not too dissimilar to those under discussion. For example, in civil law jurisdictions, agents and those operating under mandate might well be held to duties of good faith and care which would give rise to issues not unrelated to those discussed above.10 The misuse of privileged information and opportunity would also be condemned by Islamic law.11 In most common law jurisdictions, it is generally thought that liability under the fiduciary law is, in large measure, strict. Thus, if a person in a fiduciary position does take an unauthorised benefit from his position, then he should be held accountable whatever his state of mind.12 While such a draconian approach might be appropriate in the case of trustees in the strict sense, there are many situations involving those in a fiduciary or analogous position where the courts have considered that proof of lack of probity is a material factor.13 2.7 In the business and financial world, those in a fiduciary position will, it seems, be allowed to enter into situations where there is a possible and even, on occasion, real conflict of duties, provided they act with integrity. On the other hand, where there is a conflict between a duty to another and the self-interest of a fiduciary, the courts will be far more prepared to examine what has in fact taken place. Self-interest has been considered to be almost presumptive of abuse. The greater the degree of self-interest or benefit, the stronger will be the inference of corruption. On the other hand, it must be recognised that even in the case of conflict of duties, an intermediary will often

9

10 11

12 13

See G Cooper and B Cridlan, The Law of Procedure of the Stock Exchange (Butterworths 1971), at p 104. But see the comment of Lord Browne-Wilkinson in Kelly v Cooper [1993] AC 205, ‘stockbrokers … cannot be contractually bound to disclose to their private clients inside information disclosed to the brokers in confidence by a company for which they also act’. See C Nakajima, Conflicts of Interest and Duty (Kluwer 1999). See B Rider and C Nakajima at Chapter 18 in S Archer and R Karim (eds) Islamic Finance (Wiley 2007) and in particular, B Rider, ‘Corporate Governance for Institutions Offering Islamic Financial Services’ in C Nethercott and D Eisenberg (eds), Islamic Finance, Law and Practice (2nd edn) (Oxford University Press 2020). It is not necessary to show or allege a dishonest breach of trust, as in Farral v Walbrook Trustees (Jersey) Ltd [2010] EWHC 2767 Ch. See, for example, Royal Brunei Airlines Sdn Bhd v Philip Tan Kok Ming [1995] 2 AC 378 and Gwembe Valley Development Co Ltd v Koshy [2003] EWCA Civ 1048.

30

Insider dealing: the civil law  2.8 expect to receive a benefit, be it in terms of commission or simply the retention of a business relationship. Consequently, it will rarely be the case that there is absolutely no element of self-interest in the equation.

SECRET PROFITS 2.8 Let us turn to a rule that is perhaps even more clear in its articulation than the ‘no conflict rule’. Those in a fiduciary relationship, will be accountable for any ‘secret profit’ that comes to them in that relationship.14 In other words, any calculable benefit that comes into their possession that has not been expressly approved or permitted by the principal must be handed over to the principal.15 This is an important rule of stewardship and is a core principle in any system of good governance. It strikes at the very root of self-dealing.16 Furthermore, it is one of the few rules that can be applied to directors and certain other corporate fiduciaries who have taken advantage of inside information.17 Indeed, section 175 of the Companies Act 2006 specifically provides that ‘a director … must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company’ and ‘this applies in particular to the exploitation of any … information … and it is immaterial whether the company could take advantage of the … information or not …’.18 Section 176 of the Companies Act recognises the duty on directors not to accept benefits from third parties that might reasonably be regarded as 14

It is important to appreciate that this is a strict obligation based on loyalty ‘and if the conduct complained of falls within the scope of that fiduciary duty … (there) … is no justification for any further requirement that the profit shall have been obtained by the fiduciary “by virtue of his position”. Such a condition suggests an element of causation which neither principle nor the authorities require. Likewise, it is not in doubt that the object of the equitable remedies of an account or the imposition of a constructive trust is to ensure that the defaulting fiduciary does not retain the profit; it is not to compensate the beneficiary for any loss’, per Morritt J in United Pan-Europe Communications NV v Deutsche Bank AG [2000] 2 BCLC 461 and see Parr v Keystone Healthcare Ltd [2019] EWCA Civ 1246. However, the fiduciary is liable to account ‘only for profits which he has made within the scope and ambit of the duty which conflicts or may conflict with his personal interest’, per Jonathan Parker LJ, Murad v Al Saraj [2005] EWCA Civ 959 and Arden LJ noted that the law was not entirely satisfactory in this respect, but emphasised that ‘equity imposes stringent liability on a fiduciary as a deterrent – pour encourager les autres’. In CMS Doplhin Ltd v Simonet [2001] 2 BCLC 704 Lawrence Collins J stated that there needs to be ‘some reasonable relationship between the breach of duty and the profits for which the fiduciary is accountable’. The obligation to discharge duties for a proper purpose might also have relevance, see TMO Renewables Ltd (in liq) v Yeo [2021] EWHC 2033 (Ch). 15 See Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378, Ross River Ltd v Waveley Commercial Ltd [2013] EWCA Civ 910 and FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45; Industrial Development Consultants Ltd v Cooley [1972] 2 All ER 162 and Bhullar v Bhullar [2003] 2 BCLC 241. 16 See, for example, Arden LJ in Murad v All Saraj [2005] EWCA Civ 959 ‘the fact that the fiduciary can show that the party would not have made a loss is, on the authority of the Regal case, an irrelevant consideration so far as an account of profits is concerned. Likewise, it follows … from the Regal case that it is no defence for a fiduciary to say that he would have made the profit even if there had been no breach of fiduciary duty.’ It is also clear that a director who makes a secret profit cannot attribute his knowledge to his company and rely on a defence of illegality, even where the company was involved in the misconduct, see CPS v Aquila Advisory Ltd [2021] UKSC 49 and Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] UKSC 50 and Jetivia SA v Bilta [2015] UKSC 23. 17 See, for example, Nanus Asia Co Inc v Standard Chartered Bank [1990] 1 HKLR 396. 18 This duty may well continue after a director ceases to hold office if the information was received by him while he was a director, see Burnell v Trans-Tag Systems Ltd [2021] EWHC 1457 (Ch).

31

2.8  Insider dealing: the civil law likely to give rise to a conflict of interest. Sections 177 and 182 also impose a duty to disclose interests in a proposed or existing transaction with a director’s company.19 Chapter 4 of Part 10 of the Act contains additional and somewhat stricter rules in regard to substantial property transactions between a director and his company and certain other sensitive arrangements. There are civil, and in certain cases criminal, implications for noncompliance. 2.9 The justification for the common law imposing such strict obligations on those who accept positions where the trust of others is reposed in them is essentially pragmatic. The legal system cannot be expected to detect and monitor every transaction and therefore strict and pragmatic rules are required for the ordering of all dealings between the fiduciary and his principal and with third parties on matters in which the principal has a legitimate interest.20 The rule, therefore, requires all remuneration and benefits to be disclosed21 and agreed and, therefore, strikes at self-dealing, abuse of position and the diversion of opportunities that in good conscience should have gone to the principal. The rule against taking unauthorised profits works reasonably well in the context of principal and agent, but when applied to the position of fiduciaries whose relationship is with a company, it gives rise to a number of difficulties. As the company is a separate legal person, this fiduciary obligation is owed directly to the company and to no other person. The statutory provisions in the Companies Act 2006 do not change this. Consequently, if a director uses information that he obtains as a director to deal in the securities of another company, his liability to account for his profit is to his own company and not to the issuer in whose securities he has traded. When the insider remains involved in the management of the company, there are serious practical and occasionally legal difficulties in bringing him to account. It is his company that has the right to sue for breach of the duty of good faith and the more specific duties, such as those set out in the Companies Act.22 In practice, this will mean that the action is to be commenced by his colleagues on the board or in senior management. The possibilities for minority shareholders to intervene and bring an action on behalf of their company are, in reality, limited.23 19 Fiduciary duties have always been considered strict. In regard, however, to statutory compliance it is arguable that the courts will now take a more practical and measured approach at least to technical conflicts where there is no self-dealing, see Fairford Water Ski Club v Cohoon & Ors [2021] EWCA Civ 143. 20 See Arden LJ above at note 16. 21 The Court of Appeal in Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2017] EWHC 1815 accepting that a broker owed a fiduciary duty to investors pragmatically, considered that the obligation to disclose commissions had been satisfactorily discharged because the ‘experienced investors’ were aware that commission was being paid by a third party, although they did not know the amount. See also the reluctance of the Court of Appeal to find a ‘secret’ commission had been paid because this was tantamount to fraud: Hurstanger Ltd v Wilson [2007] 1 WLR 2351. It is debatable how far this practical approach to what has generally been regarded as a strict obligation of full disclosure, goes. Nonetheless, judges have always been a little uncomfortable about a determination of ‘constructive fraud’ being a gateway to equitable relief, see, for example, the comments of F Pollock in (1915) 31 Law Quarterly Review 93. 22 Section 178(2) specifically provides ‘the duties in those sections … are … enforceable in the same way as any other fiduciary duty owed to a company by its directors’ and see A J Boyle, Minority Shareholders’ Remedies (Cambridge University Press 2002), E Boros, Minority Shareholders’ Remedies (Oxford University Press 1995), and in particular, V Joffe et al, Minority Shareholders, Law, Practice and Procedure (6th edn) (Oxford University Press 2018) and P Davies, S Worthington and C Hare, Principles of Modern Company Law (11th edn) (Sweet & Maxwell 2021), Ch 15. 23 Note however, in certain circumstances it may well be that such conduct amounts to unfair prejudice to the minority shareholders, see section 994 of the Companies Act 2006 and

32

Insider dealing: the civil law  2.11 2.10 The law relating to the circumstances in which minority shareholders may maintain an action on behalf of their company, a derivative action, in the face of opposition from the management and majority shareholders has, over the years, attracted a great deal of comment and discussion.24 While the courts have been prepared to assist shareholders to bring derivative actions based on the company’s cause of action against persons who have seemingly engaged in fraud and misappropriation of the company’s property, there has been uncertainty as to what amounts to fraud and what can be regarded as corporate property. For example, some of the cases involving allegations of equitable fraud include misconduct, such as the taking of a secret profit, in circumstances where there is no dishonesty in the common law sense.25 The courts have, in deciding whether the alleged misconduct is such as to justify permitting minority shareholders to proceed, at possibly considerable expense to all concerned, referred to indications of lack of good faith on the part of those responsible for the wrongdoing. Thus, attempts to hide what has occurred or frustrate the company itself proceeding, possibly by the wrongdoers or those associated with such using their votes as shareholders in general meeting, have been weighed in the balance by judges. The abuse of inside information presents real issues viewed purely from the standpoint of company law in this context. If the information can be considered, as it has in some instances, as belonging to the company, then it is possible a court will consider its misuse a misuse of corporate property.26 Purely in the context of insider dealing there is little authority in point.27 While It is probable that the courts would consider the taking advantage of such information as rather more akin to the taking of a secret profit, the courts might well be more imaginative where it is necessary to invoke tracing and impose constructive trust liability.28 2.11 The circumstances in which a minority shareholder may assert a derivative action have been clarified, at least to some degree, in Part 11, Chapter 1 of the Companies Act 2006 which provides an exclusive regime for derivative actions.29 Other causes of action, including personal actions, remain outside the statutory regime. A derivative action can only be commenced for

24 25

26 27 28 29

Maidment v Attwood [2012] EWCA Civ 998, but see also the restrictions indicated by Richards J in McKillen v Misland (Cyprus) Investments Ltd [2012] EWCH 2343 (Ch). Allegations of breach of a fiduciary duty by a minority shareholder petitioner will not necessarily rule out access to section 944, Potamianos v Prescott [2019] EWCA Civ 932. This is the so-called rule in Foss v Harbottle (1843) 2 Hare 461. See P Davies et al, above note 22, 571 et seq. See Armitage v Nurse [1998] Ch 241 at 252. Millett LJ stated that equitable fraud included ‘breach of fiduciary duty, undue influence, abuse of confidence, unconscionable bargains and fraud in powers’. See also for an early discussion of this B Rider, ‘Amiable Lunatics and the Rule in Foss v Harbottle’ (1978) Cambridge Law Journal 270. In Item Softwear (UK) Ltd v Fassihi [2005] 2 BCLC 91, it was held that a director is under a duty derived from his obligation of loyalty to disclose to his company his own wrongdoing even if it does not amount to fraudulent misconduct and see also Tesco Stores Ltd v Pook [2004] IRLR 618. Note, however, in so far as the issue is of relevance (such as in the case of limited liability partnerships – see Re Fort Gilkicker Ltd [2013] EWHC 348 (Ch)), the Court of Appeal has made it clear that actual fraud is required or self-dealing: Harris v Microfusion 2003-2 LLP & Ors [2016] EWCA Civ 1212. The dishonest failure to do this might well render the law of fraud relevant. See 6.36 below. See 2.29 and 14.13 et seq below. See Nanus Asia Co Inc v Standard Chartered Bank [1990] 1 HKLR 396 and 2.32 below. But see Attorney General for Hong Kong v Reid [1994] 1 AC 324 discussed at 2.27 and 2.33 below. See generally, J Birds et al, Boyle and Birds’ Company Law (10th edn) (Jordan 2019), Ch 18, P Davies et al, above at note 22 and at 2.10 above.

33

2.11  Insider dealing: the civil law a proposed or actual act or omission involving an allegation of negligence, default, breach of duty – including those imposed by Part 10 of the Companies Act 2006 and/or breach of trust by a director or a shadow director.30 The breach of duty must relate to the company – the cause of action must be ‘vested in the company’. While the cause of action arises from a proposed or actual act or omission involving one of the wrongs set out, a derivative action can be initiated in regard to a cause of action against the director and or a third party. Consequently, those who have dishonestly assisted a director in breach of his fiduciary duties might be pursued in this way.31 Furthermore, it is not necessary to allege, as it was in the common law derivative action, that the director in breaching his duties to the company was self-interested or benefited.32 Indeed, while the new statutory provisions go as far as the pre-existing case law, now that a default is an acceptable basis for a derivative claim even breaches of statutory duty resulting in harm to the company, such as the imposition of a fine, can be pursued. This clearly has implications in regard to obligations particularly relating to reporting and disclosure, which are shared between the company and directors. As in the case of the common law action the right to bring a claim under these provisions is limited to members of the company.33 While there is no limit on the amount of shares that a member requires to commence an action, this may well be a factor in the court exercising its discretion to permit the claim to continue and on what terms. The position of a minority shareholder is arguably made easier as a result of increased clarity and the endorsement in statute, or what might be considered the more robust approach to wrongdoer influence.34 The practical hurdles before getting before a judge and much of the financial burden, however, remain. The Law Commission35 observed in regard to the its proposals for a statutory regime ‘we do not accept that the proposals will make significant changes to the availability of the action. In some respects, the availability may be slightly wider, in others it might be slightly narrower. But in all cases the new procedure will be subject to tight judicial control.’ In many respects the ability to bring issues of concern to the attention of a judge is beneficial the more so that today much of the artificiality and even sophistry in pleading is unnecessary.36

30

Former directors and shadow directors are for the purposes of these provisions considered directors, see sections 260(5) and 265(7). 31 See Iesini v Westrip Holdings Ltd [2009] EWHC (Ch) 2526. While the statutory derivative action is only available for breaches of duty by a director or directors, the defendants are not limited to directors and the action might not even include a director, where it is brought against, for example, those who have assisted a director in breach of his duties. 32 As in the case of Daniels v Daniels [1978] Ch 406 and see B Rider, ‘Amiable lunatics and the Rule on Foss v Harbottle’, 37 Cambridge Law Journal (1978) 270. 33 A shareholder with merely a beneficial interest in shares may exceptionally be allowed to proceed, see Boston Trust Co Ltd v Szerelmey Ltd [2020] EWHC 1352 Ch. A shareholder may also proceed on a cause of action that arose before he became a shareholder. On the other hand, the applicant must be a shareholder and it is not sufficient that the cause arose while they were a shareholder, if at the time of the application, they have ceased to have this status. 34 The pre-2006 law confining common law derivative actions to the so-called ‘fraud on the minority’ exception within the rule in Foss v Harbottle (1843) 2 Hare 461 still applies to limited liability partnerships. In Harris v Microfusion 2003-2 LLP & Ors [2016] EWCA Civ 1212 the Court of Appeal emphasised that for this exception to be available in the case of a limited liability partnership (LLP) it is necessary to establish actual fraud or that the wrongdoers in control have improperly benefited themselves at the expense of the LLP. 35 Shareholder Remedies, Law Commission (1997) Cm 3769 para 6.13. 36 See above at note 29.

34

Insider dealing: the civil law  2.13 2.12 Historically, directors, or those in a position which today we would consider to be that of a director, were under the deeds of settlement establishing the unincorporated ‘company’ and were trustees in the proper sense of the word.37 The courts faced with the practical need to accord to those responsible for the running of the business discretion and a degree of flexibility increasingly took a relaxed view as to the enforcement against them of the onerous and generally strict obligations associated with trusteeship. With incorporation of business associations and the development of companies such as we would recognise today, the courts considered that directors were in a fiduciary relationship with their companies much in the manner of agents. However, in regard to the company’s property and in some cases property in which the company has a reasonable expectation of acquiring, they step into a rather stricter legal dimension and became trustees.38 For this and many other reasons,39 it is important to determine what is and what is not capable of being regarded as property belonging to a company. In the case of insider dealing this involves deciding whether information can be considered such property, and if so, in what circumstances.40 The determination as to whether there has been a breach of trust or not, can also have important implication, as can an allegation of fraud, for the period limitation.

LOSS TO THE INSIDER’S COMPANY 2.13 While the cases indicate that liability to account for a ‘secret profit’ arises notwithstanding there is no quantifiable loss to the principal,41 the See, for example, Charitable Corporation v Sutton (1742) 2 Atk 400 and see LS Sealy, ‘The director as trustee’, 26 Cambridge Law Journal (1967) 83. 38 See, for example, Burnden v Fielding [2018] UKSC 14. Lord Briggs stated that directors are ‘fiduciary stewards’ of the company’s property and ‘directors are to be treated as being in possession of the trust property from the outset’. This case provided important clarification on the law relating to section 21 of the Limitation Act 1980 where directors misappropriate company property by taking it into their own hands or that of another company under their control, there will be no limitation period – directors who have misappropriate property ‘are to be regarded for all purposes in connected to (limitation) as trustees. This is because they are entrusted with the stewardship of the company’s property and owe fiduciary duties to the company in respect of that stewardship’. 39 If directors improperly distribute or appropriate the company’s assets then the courts are prepared to consider them as trustees and require them to replace the assets in question notwithstanding they have not received them or benefited in any way: LRH Services Ltd (in liq) v Trew [2018] EWHC 600 (Ch), and see Lord Hope in Re Paycheck Services 3 Ltd [2010] 1 WLR 2793. Zacaroli J in Burnden Holdings (UK) Ltd (in liq) v Fielding [2019] EWHC 1566 (Ch) stated ‘… directors, although not trustees, were to be treated as if they are trustees in relation to the company’s funds’, albeit he introduced the need for the directors to know the facts constituting the payment as an unlawful dividend – ‘then they would be liable as if for a breach of trust irrespective of whether they knew that the dividend was unlawful’. In SSF Realisations Ltd (in liq) v Loch Fyne Oysters Ltd [2020] EWHC 3521 Zacaroli J made it clear the liability in cases of excessive and unlawful distributions was properly limited to the excess over the amount which could have been lawfully paid out. In CPS v Aquila Advisory Ltd [2021] UKSC the Supreme Court held that secret profits made by a director were held on constructive trust for the company – following FHR European Ventures LLP v Mankarious [2015] AC 250 – notwithstanding its participation in the wrongdoing, and therefore were not subject to confiscation proceedings against the directors. 40 See 1.18 above and 6.48 in regard to the criminal law. 41 In United Pan-Europe Communications NV v Deutsche Bank AG [2000] 2 BCLC 461, the Court of Appeal emphasised ‘… it is not in doubt that the object of the equitable remedies of an account on the imposition of a constructive trust is to ensure that the defaulting fiduciary does not retain the profit; it is not to compensate the beneficiary for any loss’ per Morritt LJ. 37

35

2.13  Insider dealing: the civil law possible ‘injustice’ of such a strict rule has been questioned.42 While it is necessary to sanction breaches of good faith and the company to whom the insider owes his fiduciary duty not to make secret profits is better placed than most to enforce this obligation, it is often difficult to identify any specific loss. Even in those jurisdictions in which issuers are allowed to trade in their own securities in certain circumstances, it is hard to show that an insider’s misuse of inside information has occasioned quantifiable loss to the company. The company may contend that its confidence in the fair dealing of its agent has been undermined. It might also be argued that if it becomes known that a particular company’s directors engage in insider dealing, the reputation of the company for integrity will diminish. It will be seen as an ‘insider’s company’.43 This may have implications for its business, financial and employment relations.44 While there is little, if any, empirical evidence to support this, anecdotal evidence abounds. On the other hand, in many developing markets, even quite significant enterprises are manifestly insiders’ companies. It is often said that it is the very fact that their promoters remain in control which indicates to the market that the company is a good investment opportunity. Whether it is thought to be a good or bad thing for promoters to remain in control of their companies, it is hardly appropriate that this be determined by laws designed to inhibit insider dealing. It might be argued that companies that allow their insiders to speculate on the basis of their inside information are permitting their management to, at best, waste time or, at worst, subordinate management to the ends of short-term market speculation. There is also a real danger that management will manipulate or at least influence the timing of corporate disclosures to facilitate their own trading. It is perhaps more sensible simply to recognise that corporate issuers do have a proper and real interest in the market for their shares and consequently allegations of abuse in this market are of concern to them. Where dealing takes place in shares other than those issued

Reference might also be made to Guinness plc v Saunders [1990] 2 AC 663, New Zealand Netherlands Society ‘Oranje’ v Kuys [1973] 2 All ER 1222, and Lord Hope’s dicta in Re Paycheck Services [2010] 1 WLR 2793 emphasising a director’s liability to account was restitutionary and not compensatory. In Parr v Keystone Healthcare Ltd [2019] EWCA Civ 1246, Lewison LJ emphasised that the liability was neither to compensate or provide restitution, it was to deprive a fiduciary of benefits they should not have taken, quoting Lord Russell in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 and Jonathan Parker LJ in Murad v Al Saraj [2005] EWCA Civ 959. 42 See, for example, G Jones, ‘Unjust Enrichment and the Fiduciary’s Duty of Loyalty’ (1968) 84 Law Quarterly Review 472. 43 In Diamond v Oreaumuno (1969) 248 NE 2d 910 (NY, 1969) the Court of Appeals of New York accepted that if a company acquired such a reputation, it might well damage its ability to raise on good terms additional capital. While there are indications that English courts are prepared to expect directors to protect the reputation of their companies – almost as a corporate asset like goodwill – the courts have not been prepared to accept that such damage is sufficient in the tort of unlawful means conspiracy, see, for example, Dillon LJ in Lonrho plc v Fayed (No 5) [1993] 1 WLR 1489 at 1496, remarking that ‘airy-fairy general reputation in the business or commercial community’ even leading to a decline in share value was not sufficient damage for this tort. Of course, companies can maintain an action in appropriate circumstances for defamation, see Jameel v Wall Street Journal [2007] 1 AC 359, but only where the corporate claimant can show financial loss resulting from the alleged defamatory statement, Defamation Act 2013, s 1(2). 44 The new statutory obligation on directors under section 172 of the Companies Act 2006 to in good faith promote the success of the company may have relevance in this context. It is also generally recognised that directors have a responsibility to promote and protect the reputation of their company and some have argued that reputation should be protected as any other corporate asset see above at note 38, and see, for example, In Plus Group Ltd v Pyke [2002] EWCA Civ 370.

36

Insider dealing: the civil law  2.15 by the insider’s corporation, it may be more convincing to argue that the insider is competing with his own company in the relevant market. However, in most cases, the impact that insider dealing is likely to have in such circumstances, even accounting for the use of derivatives trading, is hardly likely to result in calculable loss. 2.14 While it is probable that an insider who is in a fiduciary position and makes a profit through using inside information may be accountable to his principal, it is not clear whether a fiduciary could be required to account to his principal for ‘negative profits’, that is, where he uses his privileged position to avoid a loss that he would otherwise have sustained. For example, could a director be held to account for ‘profit’ that he makes through avoiding a loss by selling out his shareholding on the basis of unpublished, price-sensitive information that he has obtained by virtue of his fiduciary position? Although there is no English authority directly on the point and the courts have been reluctant to allow what are essentially compensatory claims for breach of a mere fiduciary duty,45 it is obviously desirable that someone who abuses his position by avoiding a more or less certain loss should be held accountable to the same extent as one who has benefited by making a profit.46 The Court of Appeal, with which the House of Lords agreed, in A-G v Blake,47 while hesitating to award damages for a breach of what might in other circumstances have been regarded as a fiduciary relationship, held that, in exceptional circumstances, the court has power to award a ‘restitution’ measure of damages for breach of contract even if, according to ordinary principles, there would be no basis for a claim to compensation.48 Where there is a viable claim based upon something other than the fiduciary taking advantage of his privileged position to avoid a loss, such as in Coleman v Myers,49 since the fusion of the administration of law and equity, damages may be awarded for breach of a fiduciary obligation, at least where there is a parallel claim for negligence. We explore the issue of remedies in rather more detail below.

A NARROW OBLIGATION 2.15 When we contemplate the duty that a corporate fiduciary owes to his company not to take advantage of his position or, for that matter, information that comes to him by virtue of his privileged position, we must recognise the narrowness of the relationship within which this duty operates. Directors and other corporate fiduciaries owe their duties to the company and, as the company has a separate legal personality, only to that entity. They do not, as 45

46 47 48

49

See, however, the comments of Mummery LJ in Gwembe Valley Development Company Ltd v Koshy [2003] EWCA Civ 1048 indicate that at least some judges may be prepared to be a little more imaginative. See also in this regard Multi-Installations Ltd v Varsani [2008] EWHC 657 (Ch). See in particular, Parr v Keystone Heathcare Ltd [2019] EWCA Civ 1246. [1998] 1 All ER 833; affirmed [2000] 4 All ER 385. See also the statement of Lord Reed in Re Lands Allotment Co [1894] 1 Ch 616 cited with approval in AIB Group (UK) plc v Redler [2014] UKSC 58 and Target Holdings v Redfern [1996] AC 421. There is, however, little support for the award of compensation where there is no loss as such but mere infidelity. See Tipping J’s comments in Bank of New Zealand v New Zealand Guardian Trust Ltd [1999] 1 NZLR 664 cited with approval by the Supreme Court in AIB, in regard inter alia to the availability of equitable compensation for a breach of the duty of loyalty resulting in loss. [1977] 2 NZLR 225 and see 2.20 below.

37

2.15  Insider dealing: the civil law fiduciaries, owe duties to other, albeit related, enterprises,50 shareholders,51 creditors,52 employees or anyone else. Of course, if they step into another legal relationship,53 they might well find themselves owing duties directly to such persons as well as to their company. For example, as we shall see, there have been cases54 where a director has stepped into a special relationship with one or more of the shareholders and by virtue of this has been held liable for taking advantage of privileged information in his dealings with them. Such cases, outside the United States, are, however, exceptional.55 It is important to remember that, while as a matter of good governance, directors are required to have regard to the interests of different constituencies, as a matter of law their duties are owed to and are enforceable by their company. Thus, while members of the board both collectively and individually must act in what they consider to be the best interests of the company and in doing this they should consider the interests of all those ‘represented’ in the enterprise, their duties of stewardship are owed to the company. 2.16 Consequently, the shareholders,56 individually or collectively as the providers of capital, have no right to sue on a claim based on an infraction of a duty owed to the company. The company’s property is not theirs and it has been decided that even conduct on the part of directors which damages the share price does not give individual shareholders or even the general body of shareholders the standing to sue.57 The claim is that of the company’s for the

50

51

52

53 54

55

56 57

See Harman LJ in Lindgren v L & P Estates Co Ltd [1968] Ch 572 at 595 in regard to parent companies and Lord Atkin in Bell v Lever Bros [1932] AC 161 at 229 concerning subsidiary companies. Of course, it is possible for a director of one company to become a de jure or de facto a director of another; see, for example, the discussion in Commissioners of HM Revenue and Customs v Holland [2010] UKSC 51. It has been argued that in situations where a takeover offer is in contemplation, directors have a duty of candour to shareholders and it is arguable that the obligations imposed by the City Code on Takeovers and Mergers could strengthen such a contention, see Gething v Killlner [1972] 1 WLR 337, but the established view is that if directors do offer advice, then it must be honest and careful and not discriminate between shareholders, see Re Charterhouse Capital Ltd [2014] EWHC comments of Asplin J.1410 affirmed [2015] EWCA Civ 536 and Sharp v Blank [2019] EWHC 3078 (Ch). The courts have been prepared to find that directors can owe duties to creditors ‘when the directors know or should know that the company is or is likely to become insolvent’ per Richards LJ in BTI 2014 LLC v Sequana SA & Ors [2019] EWCA Civ 112 and Byers v Chen (aka Ningning) [2021] UKPC 4. For example, a shareholders agreement as in Parr v Keystone Heathcare Ltd [2019] EWCA Civ 1246. See, for example: Inter Expert LLC v Townley [2018] EWCA Civ 2068 as well as Allen v Hyatt (1914) 30 TLR 444; Briess v Woolley [1954] AC 333 and, in particular, Peskin v Anderson [2001] 1 BCLC 372; Sharp v Blank [2015] EWHC 3220 Ch; Stein v Blake (No 2) [1998] 1 All ER 724 at 727 and 729 (per Millett LJ); Antuzis & Ors v DJ Houghton Catching Services Ltd [2019] EWHC 843 (QB) and Gadsden v Bennetto (1913) 9 DLR 719 (Man). In regard to joint and several liability of a director with his company, see Lifestyle Equities CV v Ahmed [2021] EWCA Civ 675. See Jacobs J in Vald Nielsen Holding A/S v Baldorino [2019] EWHC 1926 (Comm). However, in owing their duties to the company it should not be forgotten that they do owe a duty to treat shareholders fairly – at least between classes thereof, BCE Inc v 1976 Debentureholders [2008] 3 SCR 560. Section 172(1)(f) of the Companies Act 2006 provides that directors in discharging their duties need to act fairly as between members of the company. See on the issue of beneficial ownership of shares, Pleshakov v Sky Stream [2021] UKPC 15. Marex Financial Ltd v Sevilleja [2020] UKSC 31 and Prudential Assurance Co v Newman Industries Ltd (No 2) [1982] Ch 204. The so-called ‘no reflective loss’ rule which precludes shareholders claiming that as a result of an actionable loss to the company the value of their shares has been diminished and it is only the company that can sue, is a rule of, and confined

38

Insider dealing: the civil law  2.18 misconduct in question. To allow the issuer to sue and also give shareholders a right of action to recover for the diminution in the value of their investment might result in them recovering twice over for essentially the same wrong, as although a share does not represent a divisible part of the corporate assets, its value is tied, or at least should be, to the aggregated value of the enterprise, including all those assets belonging to the company. While there are examples in a number of countries where shareholders have successfully pursued directors and other corporate insiders for essentially insider dealing, their suit has been firmly based on breach of a relationship other than to the company. In all cases, liability has been based on the breach of a special relationship that has come into existence because of the special facts of the case. In other words, the insiders have come into another external relationship with the shareholders which has given the shareholders a legitimate expectation of fair dealing. 2.17 There are other reasons58 why individual shareholders have not been permitted to pursue insiders with whom they happen to deal on the market. Although an insider taking advantage of unpublished, price-sensitive information in circumstances where the other party did not have or could not have had access to it may be characterised as ‘unfair’, the courts have, in most jurisdictions, appeared reluctant to recognise a cause of action. Their caution is based on a concern not to disrupt the proper operation of bargaining in the markets. While equality of access to information may be desirable, it is rarely, if ever, attainable. The law has long recognised that disparities or imbalances in information, let alone the ability to interpret or apply the information, cannot justify intervention in a bargain that has been completed without fraud.59 2.18 The mere failure to reveal information60 even when it is appreciated that the other party does not have that information or could not obtain it with the exercise of reasonable diligence, does not give rise, in the ordinary course of events, to a duty to disclose or refrain from dealing. It matters not how significant or material that information might be to the decision of the other to deal and upon what terms.61 The notion of caveat emptor reflects more than a laissez faire approach to the market. It is based on a host of considerations that have developed over time and which are at the very heart of how we do business. The law does, of course, make exceptions. Perhaps, apart from statutory intervention and contractual stipulation,62 the most significant is to, company law and not as wide as suggested by Lord Millett in Johnson v Gore Wood & Co [2002] 2 AC 1. See also Breeze v Chief Constable of Norfolk [2018] EWHC 485 and Hlumisa Investment Holdings (RF) Ltd v Kirkinis [2020] ZASCA 83, Supreme Court of Appeal, RSA. 58 Nugee J reviewed the policy issues in Sharp v Blank [2015] EWHC 3220 (Ch). 59 Bell v Lever Bros [1932] AC 161, see also at 6.36. 60 It should also be remembered that it is possible in many cases that the information in question will be confidential and therefore should not be disclosed. Directors are under a duty of confidentiality to their company and ‘they must maintain the confidentiality of information they acquire by virtue of their position’: Peoples Department Stores Inc (Trustees of) v Wise [2004] 3 SCR 461 and Dunford and Elliot Ltd v Johnson and Firth Brown Ltd (1977) 1 Lloyd’s Rep 505; and B Rider, ‘Abuse of Inside Information’ (1977) 127 New Law Journal 825. 61 Vald. Nielsen Holdings A/S v Baldorino [2019] EWHC 1926 (Comm). 62 However, in the case of relational contracts where there is a long-term commercial relationship requiring a high degree of trust and co-operation, such as joint ventures, distribution agreements and franchises, the courts have been prepared to imply a contractual duty of good faith, see, for example, Yam Seng Pte Ltd v International Trade Corp [2013] EWHC 111 (QB) and Sheikh Tahnoon Bin Saeed Bin Shakboot Al Nehayan v Ioannis Kent [2018] EWHC 333 (Com). In Alan Bates v Post Office [2019] EWHC 606 (QB) the court

39

2.18  Insider dealing: the civil law where there exists a pre-existing relationship between the parties in which there is an expectation on the part of at least one of the parties of fair dealing.63 2.19 Where a fiduciary relationship can be found, it is probable that the obligation of fair dealing will import a duty of full disclosure.64 Where such a relationship exists between an insider and the person with whom he is dealing, it is likely that the law will provide a remedy. However, the fiduciary obligation must generally arise from a pre-existing fiduciary relationship65 as it is far less clear that such obligations can arise, other than in the most exceptional circumstances, by virtue of the transaction in question. While it is possible that directors may be in a contractual relationship with shareholders by virtue of their shareholding, this is not a fiduciary relationship so as to give rise to the fiduciary obligation of fair dealing.66 A director who deals with someone who becomes a shareholder by virtue of that very transaction is in no pre-existing relationship, whether contractual or otherwise.67 The traditional attitude of English law, and for that matter all common law jurisdictions, is that a director owes his fiduciary duties to his company which is a separate legal person. He does not owe duties directly, or for that matter even indirectly, to the shareholders who also have no legal interest in the company’s property.68 The rule established by Swinfen-Eady J in Percival v Wright69 that directors do

63 64

65

66 67 68

69

held that in relational contracts an implied term of good faith was appropriate and this went further than simply requiring honesty. The test was whether what had been done or not done would be regarded as commercially unacceptable by reasonable and honest people. This obligation in relational contracts arises, it would seem, on the basis of this decision, as a matter of law. Other cases, question this and indicate that the implication of such a term is a question of fact, which is the preferred approach, see UTB LLC v Sheffield United Ltd [2019] EWHC 2322 (Ch). Of course, in partnerships it has long been accepted that there is a mutual duty of utmost good faith between partners, see, for example, Blisset v Daniel (1853) 10 Hare 493 and in regard to the disclosure of information Maddeford v Austwick (1828) 1 Sim 89 and Law v Law [1905] 1 Ch 140. See 2.22 and note 79 below. Directors who make statements on behalf of their company may be personally liable for pre-contractual fraudulent misrepresentation in the law of deceit, see Inter Export LLC v Townley [2018] EWCA Civ 2068. But this may be qualified, see, for example, Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd [2017] EWHC 1815 and it is not in all cases that those in a fiduciary relationship will be considered to have a duty of care. Indeed, it has been argued and to some degree accepted by the courts that obligations relating to care are not essentially fiduciary in nature. See P Millett, ‘Equity’s Place in the Law of Commerce’ (1998) 14 Law Quarterly Review 214. In Valid Nielsen A/S v Balldorino, above at note 61, Jacobs J stated ‘the mere fact that a director is purchasing shares from a shareholder is not in itself sufficient to give rise to a fiduciary duty … as far as English law is concerned, even in a situation where a director is purchasing shares from a shareholder, the existence of a fiduciary duty depends upon the existence of special circumstances: see Re Chez Nico (Restaurants) Ltd [1992] BCLLC 192 at 208 (Browne-Willkinson VC).’ See above at note 61. See above at note 61. In Heron International Ltd v Lord Grade [1983] BCLC 244 the Court of Appeal considered that directors of a target company in a takeover may, on the facts, owe duties of a fiduciary nature to the shareholders. The finding of such a duty was, however, exceptional – see Dawson International plc v Coats Paton plc [1988] 4 BCC 305.The Australian High Court has also held that directors are also under a duty to act fairly between different classes of shareholders in the exercise of their powers as directors, see Mills v Mills (1938) 60 CLR 150. [1902] 2 Ch 421 and see also Lord Lowry in Kuwait Asia Bank v National Mutual Life Nominees Ltd [1990] BCLC 868 at 888. In Peskin v Anderson [2001] 1 BCLC 372 Mummery LJ observed, referring to Percival v Wright, that ‘the apparently unqualified width of the ruling has, over the course of the last century, been subjected to increasing judicial,

40

Insider dealing: the civil law  2.21 not owe duties as directors to members of their company either individually or collectively has been criticised, particularly in the context of insider dealing, but it remains a cornerstone of company law. 2.20 On the other hand, whilst the courts are not generally receptive to arguments that they should discover new fiduciary relationships, they are prepared to reconsider the factual circumstances in which duties can arise and in particular take account of changes in social and perhaps moral views. Thus, the High Court of New South Wales in Glandon Pty Ltd v Strata Consolidated Pty Ltd70 expressed the view that as attitudes to insider dealing had changed since 1902, a court faced with the issue today might not be as unwilling as Swinfen-Eady J was to discover a fiduciary obligation. In practice, what the New South Wales court was alluding to was a long-established approach, namely the recognition that in special and exceptional circumstances the facts of a particular case might well persuade the court that an unusual fiduciary relationship arises on the particular facts of the case. Although there are a number of examples of the courts being prepared to find that, for example, directors have stepped outside their normal corporate relationship into a special relationship with their shareholders, or for that matter third parties, perhaps the most dramatic illustration is Coleman v Myers.71 Although, at first instance, Mahon J was prepared to hold that Percival v Wright was simply per incuriam and should not be followed in New Zealand, the Court of Appeal, while taking the view that Swinfen-Eady J had been correct on the facts before him, held there were circumstances which could, and did in the present case, justify the court in finding that a relationship of fair dealing, involving both a duty of good faith disclosure and also one of care, arose as a legitimate expectation on the particular facts. In this case, the closely held nature of the company, the exceptional materiality of the information in question, the dishonesty of the insiders and the fact that the relevant shareholders had, over a long period, come to rely upon their probity, all served to justify the implication of a fiduciary obligation of fair dealing. 2.21 The approach of the New Zealand Court of Appeal was in line with earlier English decisions72 and has been followed by the Court of Appeal of New South Wales in Brunninghausen v Glavanics.73 The circumstances in which an English court would be prepared to find a specific duty of disclosure to an existing shareholder, let alone a person buying into the company for the first time, are not entirely clear. It is probable that the insider would have to be

academic and professional critical comment; but few would doubt that, as a general rule, it is important for the well-being of a company (and of the wider commercial community) that directors are not overexposed to the risk of multiple legal actions by dissenting minority shareholders …’. Jacob J reviewing the authorities concluded the same in Vald Nielson Holdings A/S v Baldorino [2019] EWHC 1926 (Comm). 70 (1993) 11 ACSR 543. 71 [1977] 2 NZLR 225 and see B Rider, ‘Percival v Wright – per incuriam’ (1977) 40 Modern Law Review 471 and B Rider, ‘A Special Relationship on the Special Facts’ (1978) 41 Modern Law Review 585. 72 See Allen v Hyatt (1914) 30 TLR 444 PC and Briess v Woolley [1954] AC 333. In exceptional circumstances the courts have found specific duties that directors may owe to shareholders directly as directors, for example, in the allotment of shares directors must act for a proper purpose, Re a Company [1987] BCLC 82 and John Crowther Group plc v Carpets International plc [1990] BCLC 460 and the unusual case of Gething v Kilner [1972] 1 WLR 337 where at 341, Brightman J said that directors were under a duty not to mislead shareholders. 73 (1999) 32 ACSR 294.

41

2.21  Insider dealing: the civil law in possession of highly relevant and material information which the other party could not have obtained even with the exercise of diligence. Furthermore, the situation must, it would seem, be such as to raise on the part of the person dealing with the insider a reasonable expectation of fair dealing.74 The comment of Newberger J in Peskin v Anderson75 seeking to summarise the English law after Brunninghausen may well go too far.76 The learned judge observed: ‘I am satisfied, both as a matter of principle and in light of the state of the authorities [including Brunninghausen], that Percival v Wright is good law in the sense that a director of a company has no general fiduciary duty to shareholders. However, I am also satisfied that, in appropriate and specific circumstances, a director can be under a fiduciary duty to a shareholder … So far as the authorities to which I have referred on this issue are concerned, the decisions … in which a duty was held to arise were cases where a director with special knowledge was buying the shares … for his own benefit from shareholders, where the director had special knowledge which he had obtained in his capacity as a director of the company, and which he did not impart to the shareholders, and where the special knowledge meant that he knew that he was paying a low price.’ 2.22 For a special relationship to develop giving rise to an obligation of fair dealing, it is most likely that the parties will be engaged in direct and personal negotiations. In the Court of Appeal in the Peskin case, it was emphasised that ‘these duties may arise in special circumstances which replicate the salient features of well established categories of fiduciary relationships … those duties are, in general, attracted by and attached to a person who undertakes, or who, depending on all the circumstances, is treated as having assumed, responsibility to act on behalf of, or for the benefit of, another person’.77 Even in those states in the United States that have developed the so-called ‘special facts’ doctrine,78 remedies, are in practical terms, confined to non-market transactions. It is also likely that in most cases the company will be closely held. Indeed, there are cases where the company resembles a partnership in which the courts have been prepared to view the relationship between shareholders and directors as See for a similar approach Re Chez Nico (Restaurants) Ltd [1992] BCLC 192; In Re A Company [1986] BCLC 382 and Platt v Platt [1999] 2 BCLC 745, but note the reservations of the Court of Appeal [2001] 1 BCLC 698. 75 [2000] 2 BCLC 1 at 14. 76 See Peskin v Anderson [2001] 1 BCLC 372 and in particular Mummery LJ at 378 and 383. The Court of Appeal emphasised that the special circumstances must be such as to create essentially a ‘fiduciary duty’ of disclosure. Mere inequality of information cannot create a fiduciary relationship justifying fair dealing and disclosure. See also Platt v Platt [2001] 1 BCLC 698. In Vald Neilsen Holdings A/S v Baldorino [2019] EWHC 1926 (Comm) Jacobs J while noting that the Court of Appeal in Peskin did not disapprove of the decision in Brunninghausen – it ‘is perhaps at the outer limit of cases where an English court might be prepared to say that the circumstances replicated the salient features of the well established categories of fiduciary relationships.’ 77 Per Mummery LJ (2001) 1 BCLC 372 at 397. See also Stein v Blake (No 2) [1998] 1 All ER 724 at 729. 78 See Strong v Repide 213 US 419 (1909). Before the Court of Appeal in the Philippines interesting English cases were cited as support for a special facts doctrine (41 Phil 947), see B Rider and HL Ffrench, Insider Trading (Macmillan 1979), p 363 and B Rider, ‘The Regulation of Insider Trading in the Republic of The Philippines’ (1977) 19 Malaya Law Review 355. The special facts doctrine has been confused with the so-called minority rule which recognises a fiduciary duty of disclosure between directors and shareholders, see Van Shaack Holdings Ltd v Van Schaack, 867 P.2d 892 Col. 1994 and the US Supreme Court has observed that the Court in Repide did little to avoid confusion, Chiarella v US 445 US 222 (1980). 74

42

Insider dealing: the civil law  2.24 analogous to that of partners79 bound by obligations of mutual good faith.80 However, as was pointed out by the Court of Appeal in Hong Kong81 the description of these cases as involving ‘quasi-partnerships’ can be misleading and ‘should not be allowed to subvert the underlying question; whether a petitioner can pinpoint matters giving rise to an equitable consideration which makes it unfair for those conducting the affairs of the company to rely upon their strict legal powers.’ 2.23 It is not, however, just shareholders who might feel that they should be able to bring insiders to account either for their breach of ‘duty’ to the enterprise or as counterparties to an objectionable transaction. Those who invest in corporate bonds, who are not shareholders in the sense of being members of the company, may consider that they have been disadvantaged by an insider utilising privileged information in a trade with them on the market. Trading in bonds and other financial paper may be just as attractive to an insider as more conventional dealing in corporate shares and options. In most jurisdictions, the duties, if any, that the board, let alone individual directors of a company, may owe to creditors is even more under-developed than in regard to the position of directors to shareholders.82 There is little chance of an insider who trades in debt securities, on the basis of privileged information, being liable to any counterparty unless exceptional circumstances give rise to a special relationship along the lines we have discussed.

BENEFITING ANOTHER – A BREACH OF DUTY? 2.24 We must also remember in our present discussion that the remedies available for a breach of the fiduciary’s duty of loyalty are rather limited. 79

80

81

82

For example, Ebrahimi v Westbourne Galleries [1973] AC 360, Re AMT Coffee Ltd [2019] EWHC 46 Ch and Re Westshield Ltd [2019] EWHC 115. See generally, also B Rider, ‘Partnership Law and its Impact on Domestic Companies’ (1979) Cambridge Law Journal 148. See also in regard to relational contracts above at note 62 and cases there cited. However, in Russell v Cartwright [2020] EWHC 41 (Ch) the court was not prepared to hold that four director/shareholders who established a company for a joint venture had come into a fiduciary relationship with each other. The court observed that notwithstanding the relevant contractual arrangements were ‘relational’, that of itself was not sufficient to import a duty of good faith. In Al Nehayan v Kent [2018] EWHC 333 (Comm) the court was prepared to find an implied duty of good faith in an oral joint venture. Whether such an obligation is to be found will depend, as in other areas of contractual construction, on the assumed intentions of the parties at the relevant time, see Cathay Pacific Airways Ltd v Lufthansa Technik AG [2020] EWHC 1789 (Ch). In cases of express provision, see Faulkner v Vollin Holdings Ltd [2021] EWHC 787 (Ch). Re Yung Kee Holdings Ltd [2014] 2 HKLRD 313 at 107. Most of the cases asserting such considerations are brought by petition under section 994 of the Companies Act 2006. The courts will consider if the arrangements in question have properly given rise to expectations of fair dealing which if departed from amount to a breach of good faith, see, for example, HH Judge David Cooke in Khoshkhou v Cooper [2014] EWHC 1087 (Ch) and Primekings v King [2021] EWCA Civ 1943. It is unlikely that only some members of a company can be described as being in a quasi-partnership, see Fancourt J in Estera Trust Ltd v Singh [2018] EWHC 1715. Section 172(3) of the Companies Act 2006 imposes on directors an obligation to consider, in good faith among others and in the context of what is best for the company, the interests of creditors. While there is authority for the proposition that directors are under an obligation to consider the best interests of creditors as an insolvency approaches (Winkworth v Edward Baron Development Co Ltd [1987] BCLC 193 at 197), the better view is that this is owed to the company and probably not the creditors generally let alone to individuals, Re Pantone 485 Ltd [ 2002] 1 BCLC 266 at 285 and Westpac Banking Corporation v The Bell Group Ltd (in liq) (No 3) [2012] WASCA 157.

43

2.24  Insider dealing: the civil law Where the fiduciary allows another to benefit in place of himself the law has been less robust. What if a director passes on to another the relevant inside information in the expectation that the other person will use it for dealing? The person who uses the inside information, in many legal systems, will not be liable to the insider’s company as he is not in a fiduciary relationship. The position of the insider who passes on the relevant information is also problematical.83 As the profit is not his, can it be said that he has taken advantage of his position? If the person to whom he has given the information and who has profited through its use can be regarded as his agent or alter ego, the position may be different.84 However, the courts have been reluctant to attribute the profit made by, for example, a wife85 or a company associated with the insider to the director.86 Provided the profit is that of a separate person who is not acting on behalf of the director, then it seems that the fiduciary law is powerless. In no small measure, this may well be due to the difficulty that the law has in finding a suitable remedy. There is no profit in the hands of the fiduciary that the company can call to account.87 In some respects this raises similar issues as to where a person in a fiduciary situation utilises inside information to avoid a loss rather than make a gain. We have seen that while the law is becoming rather more realistic and is prepared to consider ordering equitable compensation where there is a loss, it is very debatable if in such cases the courts would accept that the beneficiary of the fiduciary obligation has in fact sustained a loss. If the information in question can be considered as a species of property, then the analysis, as we shall see, might be rather different. It might also be arguable, as it has in the US, that to the extent that, for example, the company’s reputation has been harmed there is a loss that can be properly assessed. 2.25 Judges have understandably been reluctant to stand by and see insiders facilitate the looting of their companies by others with whom there is often a fair suspicion that they are in cahoots. A series of relatively recent decisions has underlined the significance of the constructive trust as a means of reaching out and imposing an obligation to make restitution on those who receive the benefits of a breach of trust or who knowingly facilitate the breach. Whilst the principles are by no means new, the way in which the judges have applied them has often been dynamic. Consequently, it has not

Note, for example, the position of the chairman in Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378. 84 The courts have, on occasion, been prepared to look through companies and nominees that have been used to conceal fraud and misconduct. See VTB Capital plc v Nutritek International Corp [2013] 2 WLR 398, and in particular, Prest v Petrodel Resources Ltd [2013] UKSC 34 discussed at 6.140 and 15.13 below. 85 See Daniels v Daniels [1978] Ch 406. In the case of Ryan Willmott (FCA, 26 June 2015), the defendant had opened an account in the name of his girlfriend, who he did not inform, and traded in her name. The FCA’s Acting Director of Enforcement stated, ‘this case shows that using others to try to cover up a breach of trust does not prevent detection’. Of course, it does significantly make detection more difficult. In this case the defendant pleaded guilty to the offence of insider dealing. 86 See Ultraframe (UK) Ltd v Fielding [2005] EWHC 66 rejecting the view of Lawrence Collins J in CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704 who considered Cook v Deeks [1916] 1 AC 554 and Canadian Aero Services v O’Malley (1973) 40 DLR (3s) 371 as authority for the proposition that both the wrongdoer and the company which benefits are liable. 87 Note, however, that a person who receives the benefits of a breach of fiduciary duty or dishonestly assists in such a breach might well be liable as if they were a constructive trustee. See generally, 2.59 below. In asserting a claim for profits against a dishonest assister the question of loss is irrelevant, Novoship(UK) Ltd v Nikitin & Ors [2014] EWCA Civ 908. 83

44

Insider dealing: the civil law  2.26 always been clear, or some might contend, consistent. As Lord Goff remarked in Westdeutsche Landesbank Girozentrale v London Borough of Islington,88 ‘ever since the law of restitution began … to be studied in depth, the role of equitable proprietary claims … has been found to be a matter of great difficulty’. He referred to the desire of restitution lawyers to mould the law relating in particular to constructive trusts into an effective remedy for unjust enrichment and the caution of traditional equity lawyers to see that ‘the trust concept should not be distorted’. Indeed, while concerned to see that there is proper justice on the facts of each case, he emphasised that ‘it is not the function of your Lordships’ house to rewrite the agenda for the law of restitution, nor even to identify the role of equitable proprietary claims in that part of the law’. Notwithstanding this judicial reticence in a series of cases the courts have been prepared to fashion a more or less effective remedy against those who inter-meddle in and/or assist breaches of trust. Consequently, there is now the prospect of restitution against those who, appreciating the facts that amount to a breach of trust, knowingly participate in it or facilitate the laundering of its proceeds, in circumstances where an ordinary person would consider what they have done, or perhaps not done, to be dishonest. The liability in such cases is not that of a constructive trustee in the conventional sense of the word – their liability is as an accomplice and the monetary liability that they are exposed to is to make restoration as if they were a constructive trustee. Having said that, it is interesting that Lord Browne-Wilkinson in the Westdeutsche case observed that the distinction between the concept of remedial constructive trusts, as developed in US law and the traditional and conservative approach of the English law, remains – despite judicial ingenuity and the judges dislike of crooks. He pointed out that the essentially institutional constructive trust under English law arises by operation of law and that it is for the court merely to recognise and give effect to it and it is not open to the judge simply to impose such a device to afford a remedy which would not otherwise exist.89 2.26 The view has been expressed that this area of the law is of little practical significance in addressing insider dealing as before a trust can be found, it is necessary to identify property which can in the contemplation of the law, be considered viable as trust property. The distinction between a person who has merely the obligations of a fiduciary and one who is under the more onerous and strict obligations of a trustee has traditionally been that the trustee holds property on behalf of another. While this nice distinction has been questioned, at least on the basis that the obligations and their performance may be much the same if not actually indistinguishable – particularly in the commercial world, there has been a significant difference of opinion between commercial and restitution lawyers. In Lister v Stubbs,90 the Court of Appeal established the rule that a bribe, in so far as such involved only a personal obligation to account, could not be the basis of a tracing claim and was not susceptible to being regarded as trust property. Of course, there has always been a substantial grey area in company law in regard to what the textbooks refer to as the ‘corporate opportunity’ cases. In one or two Commonwealth cases, the courts have seemingly regarded the benefit of a contract which in

88 89 90

[1996] 2 All ER 948 at 969. See in regard to the civil aspects of money laundering 7.45 et seq. See generally, A Burrow, The Law of Restitution (3rd edn) (Oxford University Press 2010). (1890) 45 Ch D 1. See discussion at 2.27 below.

45

2.26  Insider dealing: the civil law fairness should have gone to a company,91 but which has been wrongfully diverted to another person, as a form of corporate property. As we have seen, this discussion has had a role in deciding whether a minority shareholder might be able to bring a derivative action and will weigh with the judges in sanctioning such an action under the statutory procedures in the Companies Act 2006. Where there has been a misappropriation of corporate property the majority of shareholders cannot approve or ratify such conduct in the face of opposition from the minority. 2.27 In A-G for Hong Kong v Reid,92 the Privy Council, on an appeal from New Zealand, following the approach of the Court of Appeal of Singapore in Sumitomo Bank Ltd v Kartika Ratna Thahir,93 opined that the rule in Lister v Stubbs was inappropriate in the modern world. The robust attitude of the Board of the Privy Council may be justified given the extremely serious allegations of misconduct on the part of the defendant and as we have noted where there is clear evidence of dishonesty judges can be more easily persuaded to be imaginative. In this case the Privy Council considered that on the basis that equity looks as done that which should be done, there was a sufficient basis in law for tracing into the proceeds of a bribe. Furthermore, their Lordships’ comments and particularly those of Lord Templeman were wide enough to include the proceeds of a ‘secret profit’. If the proceeds of, for example, insider trading can be traced and justify the imposition of a constructive trust, the law in this area would be radically changed. For example, it would mean, as was in effect held by the High Court of Hong Kong in Nanus Asia Inc v Standard Chartered Bank,94 that the proceeds of insider dealing could be traced into the hands of a recipient who took otherwise than as a bona fide purchaser without notice. It would also follow that accomplice liability could be imposed on those who facilitated the insider dealing, provided they had the requisite degree of knowledge and were, objectively speaking, dishonest.95 91 92 93 94

95

Cook v Deeks [1916] 1 AC 554; Canadian Aero Service Ltd v O’Malley (1974) 40 DLR (3d) 371; and see CMS Dolphin Ltd v Simonet [2001] 2 BCLC 74. [1994] 1 AC 498. [1993] 1 SLR 735. [1990] HKLR 396. In this case the Hong Kong court declined to enforce or assist in the enforcement of the orders obtained by the US Securities and Exchange Commission (see Securities and Exchange Commission v Stephen Sui-Kuan Wang and Fred Lee, 88 Civ 4461, US District Court, Southern District of New York, Owen J, Order 11 August 1988) to freeze the proceeds of the alleged insider abuse on the basis that Hong Kong would not enforce the penal or other public law of a foreign state (see rule 3(1) of Dicey, Morris and Collins on the Conflict of Laws (15th edn) (Sweet & Maxwell 2018) as the misconduct in question would be considered then in Hong Kong as a criminal offence. However, on this issue see Skatteforvaltningen v Solo Capital Partners LLP [2022] EWCA Civ 234, where the Court of Appeal distinguished between the enforcement of a foreign state’s revenue laws (see Government of India v Taylor [1955] AC 491) and a claim for restitution in regard to funds paid by the Danish government as a result of a fraud. It is arguable that the common law would not permit the directors, even by ordinary resolution, to misappropriate the company’s property and therefore the minority might well have the right to bring a derivative action under rule in Foss v Harbottle see above at 2.10 and 2.11. However, the law as to what could be ratified by the shareholders in general meeting was unclear, see, for example, Cook v Deeks [1916] 1 AC 554 (PC) compared with North Western Transportation Co Ltd v Beatty (1887) LR 12 App Cas 589 (PC), and see B Rider, ‘Amiable Lunatics and the Rule in Foss v Harbottle’ (1978) 37 Cambridge Law Journal 270. Independent authorisation of a conflict is now possible under section 175 of the Companies Act 2006, see generally P Davies et al, Gower Principles of Modern Company Law (11th edn) (Sweet & Maxwell 2021), at 10-096 and in regard to shareholder ratification see 13-005 et seq. Although Part 11 of the Companies Act 2006 creates a statutory derivative action which supersedes the common law claim and therefore the exceptions in the rule in

46

Insider dealing: the civil law  2.28 While it was assumed that the observations of, in particular, Lord Templeman, in all probability were not necessarily intended to be applied broadly to all breaches of fiduciary duty resulting in unjust enrichment, recent cases, now endorsed by the Supreme Court,96 have shown that some judges are willing to throw the net very widely. In United Pan Europe Communications NV v Deutsche Bank AG,97 the Court of Appeal had no difficulty in applying such reasoning to the misuse of confidential information obtained within a duty of loyalty and imposing a constructive trust on shares bought by the bank. With respect, however, in Reid, their Lordships clearly did not have these wider issues in mind when they showed so much determination in ensuring that the unsavoury Warwick Reid should not be allowed to magic his ill-gotten gains, as Lord Templeman remarked, ‘to some Shangri-La which hides bribes and other corrupt moneys in numbered bank accounts’. Indeed, this is one of the real problems in this area of the law. As we have already noted the judges, once they sniff fraud and abuse, are prepared to go some way in ensuring that the crook’s ill-gotten gains are taken away from him and are not always too concerned with traditional jurisprudence. In looking at some of the decisions, particularly those relating to directors’ duties, it is important to remember that it is probable the end has justified the means and a search for all prevailing and entirely rational principles of restitution may well be a search in vain. 2.28 Notwithstanding important developments,98 it is still the law that not all breaches of fiduciary duty are capable of giving rise to a constructive trust like relationship. In Nelson v Rye,99 Laddie J followed Sir Peter Millett’s view expressed extra-judicially in his influential article ‘Bribes and Secret Commissions’ published in the Restitution Law Review.100 Sir Peter took the view that a constructive trust is appropriate when an agent receives property himself in circumstances where it should have gone to his principal. This is a principle which has long been recognised in the company law cases. The Australian High Court in Warman International Ltd v Dwyer101 also threw

96

97 98 99 100 101

Foss v Harbottle are no longer pertinent to the availability of a derivative claim, this analysis is still pertinent to the legality of what has occurred and the availability of remedies. Such considerations might also influence a judge in permitting a statutory derivative action to proceed and do have implications for third party liability. See FHR European Ventures LLP v Cedar Capital Partners LPC [2014] UKSC 45. The Supreme Court held that bribes and secret commissions received by a fiduciary were to be considered as being held for the principal on a constrictive trust and this rule ‘… applies to all benefits received by an agent in breach of his fiduciary duty to his principal and is explained on the basis that an agent ought to account in specie to his principal for any benefit he has obtained from his agency in breach of his fiduciary duty, as the benefit should be treated as the property of the principal … it is justified on the basis that equity does not permit an agent to rely on his own wrong to justify retaining the benefit: in effect, he must accept, that, as he received the benefit as a result of his agency, he acquired it for his principal’, per Lord Neuberger at 30. The Supreme Court rejected the notion that this could be considered a remedial constructive trust of the sort recognised in, for example, New Zealand and Australia, see Powell v Thompson [1991] 1NZLR 597 and Muschinski v Dodds (1985) 160 CLR 583 and see at 106. In CPS v Aquila Advisory Ltd [2021] UKSC 49 the Supreme Court considered after the decision in FHR European Ventures LLP that secret profits in the hands of directors were held on a constructive trust for their company and the company’s claim to such could not be undermined by attempting to attribute their misconduct to the company. [2000] 2 BCLC 461. See above at 2.27 et seq and 14.13 below. See also in regard to money laundering 7.45 et seq. [1996] 2 All ER 186. (1993) RLR 7. (1995) 128 ALR 201.

47

2.28  Insider dealing: the civil law some light on this issue by distinguishing situations where a fiduciary benefits by use of his principal’s property or an opportunity coming to him by virtue of acting for his principal – where a constructive trust might be appropriate and other cases where he is merely guilty of a breach of his duty of loyalty. In the latter case, while there may well be an obligation to account for all or part of the ‘secret profit’, the more exacting relationship of a trustee may well be inappropriate particularly vis à vis the rights of third parties. However, the Court of Appeal in United Pan Europe NV took the view that a constructive trust might be an appropriate remedy to deprive a fiduciary of his ill-gotten gains when ‘the conduct complained of falls within the scope of the fiduciary duty’ to exhibit loyalty and it need not be shown that the profit resulted ‘by virtue of his position’. Furthermore, the Court of Appeal did not accept that a constructive trust ‘will only be granted where the applicant can trace into the property over which it is sought’. The remedy would depend upon the circumstances.102 Furthermore, in this context, it must also be remembered that the Privy Council has also shown a greater degree of flexibility in dealing with that old inflexible rule that a fiduciary should not place himself in a position where his interest and duties conflict.103 Disclosure with assent and contractual delimitation of the scope of duties and expectations may well render what would otherwise be a conflict of interest, nothing objectionable to the law.104 2.29 As we have already mentioned there is debate as to whether inside information can be considered to be a form of property, thereby more easily and traditionally invoking the law relating to constructive trust and all this might entail. The law is unclear as to in which circumstances the courts will protect information of a confidential nature in a manner which is analogous to property. The Divisional Court has decided that confidential information is not property for the purposes of the law of theft in England.105 Whether such a view adequately takes account of the civil law and can in any case stand after the view expressed by the Privy Council in Reid106 remains seriously open to doubt. In Reid, Lord Templeman certainly regarded the majority of their Lordships in Boardman v Phipps107 as imposing a constructive trust on the defendants on the basis that they had misused confidential information. In United Pan Europe NV,108 the Court of Appeal had no difficulty in considering a proprietary remedy, namely a constructive trust, might well be an appropriate remedy to impose on shares purchased by a fiduciary who had used confidential information. Indeed, as we have seen, Morritt LJ did not think it an issue whether the applicant could trace into the relevant property; what was at stake was depriving a fiduciary who had stepped into a conflict of interest of its ‘secret profit’.

102 United Pan-Europe Communications NV v Deutsche Bank AG [2000] 2 BCLC 461. 103 New Zealand Netherlands Society ‘Oranje’ v Kuys [1973] 2 All ER 1222. 104 See Kelly v Cooper [1993] AC 205 and Clarke Boyce v Mouat [1994] 1 AC 428 discussed at 8.17. 105 Oxford v Moss (1978) 68 Cr App R 183. See at notes 1.18 and 6.48. Another issue in regard to the English law of theft is the need to establish that the defendant has an intention to ‘permanently deprive’ the owner of the information of its use or value. See 6.49 and subsequent discussion. This is highly problematic in the ordinary case of insider dealing. Of course, this is not to say that the circumstances of a misappropriation of confidential information might not involve the commission of other offences. 106 [1994] 1 All ER 1. 107 [1967] 2 AC 46. 108 [2000] 2 BCLC 461.

48

Insider dealing: the civil law  2.31 2.30 Whilst it might well be appropriate to protect confidential information as if it were a form of property in certain circumstances,109 it would be pushing the boat out far too far to contend that most inside information is properly regarded as property for the law of trusts. It must also be remembered that considerable care needs to be taken in setting the limits for the use of information – including other people’s, in any society – there will be significant issues of public policy. In many instances, inside information may not have the qualities often associated with confidential information. On the other hand, as the Court of Appeal in United Pan Europe NV appears to have accepted, it would be somewhat illogical if the courts allowed one to trace the proceeds of a ‘secret profit’ obtained in breach of the general obligation of loyalty and yet did not allow such protection for the misuse of the actual information which gave rise to the profit in the first place. Perhaps the answer is to separate the issues of tracing into the proceeds of a profit made in breach of a fiduciary duty and the imposition of a constructive trust as an appropriate remedy to deprive a fiduciary of his illicit profit. Notwithstanding the uncertainty whether the principles relevant to the law relating to constructive trusts and the tracing remedy can be applied to all ‘secret profits’ and the misuse of information, it is useful to refer to a series of relatively new cases which impose liability on those who receive the benefits or assist in the laundering of the proceeds of a breach of fiduciary duty. 2.31 The ‘flood’ of cases seeking to impose civil liability on those which might broadly be described as ‘fiduciary facilitators’ or accessories are based on a principle of law set out by Ungoed-Thomas J in Selangor United Rubber Estates v Craddock.110 In this case, the learned judge referred to an established principle of equity that where a person knowingly participates in another’s breach of trust, he will be regarded as standing in the same place as the trustee. While there has been much discussion in the books and cases as to the exact nature of this liability and whether it is properly considered a constructive trust relationship,111 suffice it to say in this context there would appear to be only two problems in fashioning this rule to become a most effective weapon against insider abuse. 109 See Dunford and Elliot Ltd v Johnson and Firth Brown Ltd [1977] 1 Lloyds Rep 505; Indata Equipment Supplies Ltd v ACL Ltd [1998] 1 BCLC 412 and A-G v Blake [1997] Ch 84. 110 [1968] 1 WLR 1555. Note also the classic formulation by Lord Selborne in Barnes v Addy (1874) LR 9 Ch App 244, ‘… strangers are not to be made constructive trustees merely because they act as agents of trustees … unless (they) receive and become chargeable with some part of the trust property or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees’. Note, however, the law has moved on and now focuses on the dishonesty of the accessory: Williams v Central Bank of Nigeria [2014] UKSC 10. See generally, P Davies, Accessory Liability (Hart Publishing 2015). 111 In Williams v Central Bank of Nigeria [2014] UKSC 10 Lord Sumption pointed out that the basis of liability is not the willing or accidental assumption of the status of a trustee, but the fact that a person’s participation in the unlawful misapplication of a trust asset or property over which there are fiduciary obligations. It is this which renders the accountable as if they were constructive trustees, albeit they are not. He observed this form of liability ‘comprises persons who never assumed and never intended to assume the status of a trustee … but have exposed themselves to equitable remedies by virtue of their participation in the unlawful misapplication of trust assets. Either they have dishonestly assisted in a misapplication of the funds by a trustee, or they have received trust assets knowing that the transfer to them was a breach of trust. In either case they may be required by equity to account as if they were trustees or fiduciaries, although they are not … The intervention of equity in such cases does not reflect any pre-existing obligation but comes about solely because of the misapplication of the assets. It is purely remedial.’ See also Millett LJ in Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400 at 413 and Lord Neuberger in Dubai

49

2.32  Insider dealing: the civil law 2.32 The first is simply what sort of misconduct on the part of a fiduciary will be sufficient to bring the principle into play? Most of the cases have involved either a conventional trust relationship or at least something so close as to make little practical difference. It would seem, however, that the property diverted or misappropriated by the trustee must be capable of sustaining a proprietary or tracing claim.112 This point arose in Nanus Asia Co Inc v Standard Chartered Bank.113 In this case, the Hong Kong court was required to determine whether Standard Chartered was in a position analogous to that of a constructive trustee with regard to profits from insider dealing in the United States made by a Taiwanese citizen who, with an employee of Morgan Stanley, had misappropriated price-sensitive information from Morgan Stanley and then traded on it on the New York Stock Exchange. There was no problem with establishing the bank’s state of knowledge as it had already been joined in civil enforcement proceedings in New York. 2.33 The Hong Kong High Court held that proceeds of the abuse of inside information were ‘held’ by Standard Chartered on trust for the US authorities and various other claimants in the United States. At the time, some thought this decision, although welcome, went somewhat further than the English law, as it was considered unlikely that the misuse of confidential information, let alone mere inside information, was capable of sustaining a trust relationship, which was then thought to be a prerequisite for a viable tracing claim in equity. With the rather more robust approach of the Privy Council in Attorney General of Hong Kong v Reid114 now approved by the Supreme Court,115 it is probable that an English court would today take much the same approach as the learned judge in Hong Kong – a welcome development of the law.116 It is also worth pointing out that the courts have been prepared to take a very broad view as to what types of assistance may properly justify liability as an accessory.

112

113 114 115 116

Aluminium Co Ltd v Salam [2002] UKHL 48 and in particular FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45. It is not appropriate to refer to this form of accessory liability as involving a constructive trust, see Re Polly Peck International (No 2) [1998] 3 All ER 812, and in particular, Lord Neuberger in FHR European Ventures LLP, contra The High Commissioner for Pakistan v Prince Mukkuram Jah [2016] EWHC 1465 which described the remedy as ‘a remedial constructive trust in cases of ancillary relief.’ Of course, in cases of unconscionable retention of property a constructive trust is appropriate, see Bailey v Angove’s Pty Ltd [2016] UKSC 47 and Sinclair Investment Holdings SA v Versailles Trade Finance Ltd [2005] EWCA Civ 722. In cases where there is unconscionable retention of property after recission for fraud, Millett J in El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 at 734 considered that the property was held on a resulting trust, although Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669 thought that a constructive trust was appropriate a view favoured in National Crime Agency v Robb [2015] Ch 520. In Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, Lord Nicolls at 392 cast the potential liability of the accessory sufficiently widely to catch assisting in ‘a breach of trust or fiduciary obligation’. A proprietary element was required for accessory liability by Nourse LJ in Satnam Investments Ltd v Dunlop Heyward [1999] 1 BCLC 385 at 404, but this view has been criticised and doubted, see Goose v Wilson Sandford & Co (No 2) [2001] 1 Lloyd’s Rep PN 189 and JD Wetherspoon plc v Van de Berg [2009] EWHC 639 and is probably no longer tenable, Novoship (UK) Ltd v Mikhaylyuk [2014] EWCA Civ 908 and not the availability of tracing in FHR European Ventures LLP v Cedar Capital Partners LCC [2014] UKSC 45, in any case. [1990] HKLR 396. Attorney General for Hong Kong v Reid [1994] 1 AC 324. See FHR European Ventures LLP v Cedar Capital Partners LCC [2014] UKSC 45, contra Sinclair Investment (UK) Ltd v Versailles Trading Finance [2011] EWCA Civ 347 and at 14.12. See B.Rider, ‘A Simple approach to justice!’ (2014) 21 Journal of Financial Crime 379.

50

Insider dealing: the civil law  2.34 Clearly assisting in hiding the proceeds of a breach of fiduciary duty will suffice, but so will giving support and even advice.117 2.34 There has been also considerable discussion as to the requisite state of knowledge for liability. In cases involving the knowing receipt of property transferred in breach of a fiduciary obligation where the recipient asserts that he has received the property in question beneficially, he will nonetheless be liable if he knew that the property is traceable to a breach of fiduciary duty so as to render it unconscionable for him to retain it against the claims of others.118 The cases have indicated two basic standards, one requiring subjective knowledge and the other a rather more objective or a constructive standard. It was thought that the distinction could be justified in terms of whether the third party who facilitates the breach of trust comes into possession of the relevant property or simply facilitates its control or retention by another. In the first case, a more objective standard was considered appropriate and knowledge of facts which would put a reasonable man on notice that something dishonest was afoot would be sufficient to justify liability akin to that of a trustee. On the other hand, where the participation of the third party does not extend to possession of the property, it was thought that the requisite degree of scienter should be if not actual knowledge something approaching it. In the view of recent cases, it would seem that the question of knowledge is rather more bound up with the remedy that is sought rather than any pre-existing relationship or obligation. Where the third party does not come into possession of the trust property or its proceeds, then it is difficult to conceive of him as a constructive trustee or, for that matter, as having any status which would involve a proprietary nexus and today the term accessory is preferred. The liability of such a person for participating in the breach of trust will be personal and today is justified by his dishonesty and not necessarily as in the older law on his participation in a pre-existing dishonest design.119 In Agip (Africa) Ltd v Jackson,120 the Court

117 See, for example, Madoff Securities International Ltd (in liq) v Raven [2013] EWHC 3147 and even turning a blind eye to the fraud of a colleague or superior might be sufficient, see Fayers Legal Services & Taylor v Howard Day ChD (unreported) 11 April 2001 and discussed in this context in A. Stafford and S. Ritchie, Fiduciary Duties (2nd edn) (Jordan Publishing 2014) at p 343. 118 In Byers v Saudi National Bank [2022] EWCA Civ 43, the Court of Appeal emphasised that in claims based on knowing receipt, obtaining knowledge of the claimant’s rights after receipt might well justify the court considering that further retention is unconscionable. A knowing receipt claims arises at that point in time. Newey LJ underlined, however, the importance of the claimant having, at that time, a continuing proprietary interest in the subject matter of the claim. 119 See, for example, Lord Selborne at note 110 and Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250. Whether the defendant need have knowledge of the trust or fiduciary obligation has been questioned. For example, in Agip (Africa) Ltd v Jackson [1990] Ch 265 at 295, Millett LJ held ‘a man who consciously assists another by making arrangements which he knows are calculated to conceal what is happening from a third party takes the risk that they are part of a fraud practised on that party’. In Madoff Securities International Ltd v Raven [2007] EWHC 3147, Popplewell J considered ‘a dishonest participant in a transaction takes the risk that it turns out to be a breach of trust or fiduciary duty. It is not necessary for the assistant to know, or even suspect, that the transaction is a breach of trust, or the facts which make it a breach of trust, or even what a trust means; it is sufficient if he knows or suspects that the transaction is such to render his participation dishonest’. See also Grupo Torras SA v Al-Sabah [1999] CLC 1469, at 1665 per Mance J. On the other hand, Rimmer J in Brinks Ltd v Abu-Saleh [1999] CLC 133 took the view that the defendant must be shown to have had knowledge of the facts which gave rise to the fiduciary obligation in the first place. 120 [1991] Ch 547.

51

2.34  Insider dealing: the civil law of Appeal found no difficulty in regarding a chartered accountant who had facilitated laundering the proceeds of a fraud by incorporating companies and opening bank accounts in the names of these companies liable as if he were a constructive trustee and thereby holding him personally liable to restore the funds in question. In such cases, the liability is personal to the defendant and does not involve a propriety liability. In this case, the court found that the person concerned had acted dishonestly. He knew of facts which in the circumstances made him suspicious, but he then deliberately refrained from making the enquiries which an honest man would have made and which would easily have uncovered the fraud. Although the cases do indicate varying qualities of knowledge, it would seem the better view today is that before a third party can be held liable as a facilitator, the court will have to be shown that he knew the facts or deliberately turned a blind eye and then acted with a lack of probity.121 2.35 In Royal Brunei Airlines Sdn Bhd v Philip Tan Kok Ming122 the Privy Council handed down an opinion which does bring some clarity to this area of the law. The Privy Council emphasised that the liability of a person who assists or procures a breach of trust, but does not himself actually receive the property in question, is based on his dishonesty. It is a personal liability that arises from his dishonest assistance in another’s breach of duty.123 The Privy Council considered it matters not whether the trustee in breach of his fiduciary obligations has himself been dishonest. Furthermore, the probity of the facilitator is to be judged by reference to the honesty of others. The test is whether he had acted in a way otherwise than an honest man would have in the circumstances. This would invariably involve conscious impropriety on the part of the facilitator, rather than mere negligence, let alone simple inadvertence. However, a person might well be considered to be acting dishonestly for the purpose of imposing liability where he recklessly disregarded the rights of others. The Privy Council underlined that in determining whether a facilitator had acted dishonestly, his actual knowledge at the relevant time had to be considered by the court and this was a subjective issue. What might have been known by a reasonable man in the position of the facilitator might be probative, but was not conclusive. Furthermore, the personal and professional attributes of the facilitator must also be considered in determining what he did and for what reason. 2.36 The issue was further discussed in Heinl v Jyske Bank (Gibraltar) Ltd.124 In this case, the judges used, as the basis of their reasoning, the judgment of Lord Nicholls in Brunei and concluded that it was not enough that on the whole of the information available to him he ought, as a reasonable man, to have inferred that there was a substantial probability that the funds originated from the bank in question, but that the inference had, indeed, been drawn. This clearly supports the idea that a high level of suspicion will be needed to incur liability in these cases. Another relatively recent case bearing on the issue of liability in these circumstances is A Bank v A Ltd (Serious Fraud Office Interested Party).125 This again saw the probability of liability of those who negligently 121 See Natwest Markets plc v Bilta (UK) Ltd [2021] EWCA Civ 680. 122 [1995] 2 AC 378. 123 Lord Nicholls considered that a person who had no reason to suppose that they were dealing with a trustee or other fiduciary acting in breach of his obligations should not be held accountable: [1995] 2 AC 378 at 387. 124 [1999] 34 LS Gaz R 33. 125 (2000) The Times, 18 July.

52

Insider dealing: the civil law  2.37 participate in money laundering reduced as the court held that banks126 did not become constructive trustees merely because they entertained suspicions as to the provenance of money deposited with them. The level of dishonesty needed for dishonest assistance was not satisfied by a general suspicion; there needed to be substantial suspicion pertaining to the specific transaction with which they were involved for liability to be incurred. In Twinsectra v Yardley127 the House of Lords endorsed the trend away from the imposition of liability on the basis of an essentially objective determination. Instead, referring to Lord Nicholls in Brunei, their Lordships adopted what Lord Hoffmann described as a combined test, having both a subjective and an objective element. First, it must be shown that the defendant acted in a manner in which reasonably honest people would not have. Secondly, it must be shown that the defendant actually appreciated that this conduct would be considered dishonest by other people. The Supreme Court in Ivey v Genting Casinos (UK) Ltd128 emphasised that the fact-finding tribunal was required to determine, firstly, that the defendant’s actual state of knowledge or belief as to the facts, and then secondly, whether in the light of that state of mind, the defendants conduct or omission was honest or dishonest, applying the objective standards of ordinary reasonable and decent people.129 In the case of dishonest assistance based on turning a blind-eye, the Court of Appeal in Natwest Markets plc v Bilta (UK) Ltd130 considered applying the Supreme Court’s test in Ivey; knowledge includes blind-eye knowledge. In determining the defendant’s belief as to the facts, the Court of Appeal thought this might include suspicion which falls short of blind-eye knowledge. For liability for dishonest assistance, it is not sufficient that the court considers that the defendant merely suspected something to be the case, or for that matter he negligently refrains from making further inquiries. The Court of Appeal emphasised that a person’s state of mind is a question of fact and suspicions involving all degrees of probability might well contribute to it, forming the overall picture to which the second limb of the Ivey test should be applied to determine objectively whether this was dishonest. 2.37 There are situations where, to establish the requisite state of mind for liability under the civil and criminal law, it will be necessary to attribute knowledge from one person to another.131 Where companies are involved, as has already been pointed out, this involves a number of issues and it is generally thought that the state of the law is unsatisfactory.132 In R v Rozeik,133 the Court of Appeal, referring to the earlier case of El-Ajou v Dollar Land Holdings plc,134 accepted that whether a company is fixed with the knowledge acquired by an employee or officer will depend on the circumstances and it is necessary to identify whether the individual in question has the requisite status and authority in relation to the particular act or omission. Therefore, it does

126 On the position of banks as trustees, see First City Monument plc v Zumax Nigeria Ltd [2019] EWCA Civ 294. 127 [2002] 2 All ER 377. 128 [2017] UKSC 67. 129 See 6.29. 130 See above note 121. 131 See at 15.13 et seq below. 132 See generally, Corporate Criminal Liability – an options paper, Law Commission, June 2021 and The Law Commission and E Ferran, ‘Corporate Attribution and the Directing Mind and Will’, 127 Law Quarterly Review (2011) 239. See also Corporate Criminal Responsibility, Australian Law Reform Committee, April 2019 and at 15.5 et seq below. 133 [1996] 1 BCLC 380. 134 [1994] 2 All ER 685.

53

2.37  Insider dealing: the civil law not follow that information in the possession of even a relatively senior official will be attributed to the company if that employee is not empowered to act in relation to the transaction in question.135 Lady Hale in Singularis Holdings Ltd (in official liquidation) v Daiwa Capital Markets Europe Ltd136 in expressing the view of the Supreme Court emphasised that while a company had to act through the medium of real human beings the acts of those persons are only to be treated as the acts and intentions of the company in specific circumstances, such as where the constitution of the company so provides, or where the ordinary rules of agency and vicarious liability137 apply. Lady Hale referring to another decision of the Supreme Court, Bilta (UK) Ltd (in liquidation) v Nazir138 held that where a company had been the victim of its directors’ fraud this wrongdoing could not be attributed to the company so as to defeat a claim by the company or liquidator against them. However, it is important to note that Lady Hale underlined the importance of considering the context and purpose for which the attribution is pertinent. In this case, to attribute the knowledge of a trusted agent to the claimant would have denuded the banks obligations to protect its customer against fraud under the so-called Quincecare duty, which we discuss at 14.11. As Lady Hale observed, to allow this would be a ‘surprising result if Daiwa … could escape liability by placing reliance on the existence of the fraud that was itself a pre-condition for its liability’. It remains, therefore, to be seen whether such a robust approach would be appropriate in other circumstances. On the other hand, the judgement does confirm the hesitance of the English courts to follow the approach of the House of Lords in Re Supply of Ready Mixed Concrete (No 2),139 where an employee who acted for the company within the scope of his employment, even if against the express instructions of his employer, exposed the company to liability on the basis that he was the company for the purpose of the transaction in question. A similar view was expressed by the Privy Council in Meridian Global Funds Management Asia Ltd v Securities Commission.140 2.38 As the decision of their Lordships in Ready Mixed Concrete clearly shows, a company may be liable to third parties or be guilty of the commission of an offence even though the relevant employee was acting dishonestly and/ or in breach of his contract of service or even against the interests of the company. In that case, the House of Lords accepted that the management had gone to considerable lengths to ensure compliance with their instructions, but once a transaction had been entered into by an employee who had the power to deliver on behalf of the company, such considerations went merely to the issue of mitigation. Whilst the Privy Council recognised in Meridian Global Funds Management that it is a matter of interpretation as to whether a 135 See, for example, the refusal of the Supreme Court of Canada to do this in the context of a knowing assistance claim, Christine DeJong Medicine Professional Corpn v DBDC Spadina Ltd 2019 SCC 30. In regard to other duties owed by a director, see BEIS v Selby [2021] EWHC 3261 (Ch). 136 [2019] UKSC 50 and see CPS v Aquila Advisory Ltd [2021] UKSC 49. 137 See WM Morrison Supermarkets plc v Various Claimants [2018] EWCA Civ 2339. 138 [2015] UKSC 23 in which Lord Neuberger stated ‘where a company has been the victim of wrongdoing by its directors … then the wrongdoing, or knowledge, of the directors cannot be attributed to the company as a defence to a claim brought against the directors by the company for the loss suffered by the company as a result of the wrongdoing …’ and see also UBS AG v Kommunale Wasserwerlr Leipzig [2017] EWCA Civ 1567. This rule applies even where the company has suffered no loss, other than breach of the duty of loyalty owed to it, see CPS v Aquila Advisory Ltd [2021] UKSC 499. 139 [1995] 1 AC 456. 140 [1995] 2 AC 500 and see at 15.6 below.

54

Insider dealing: the civil law  2.41 particular statute seeks to ‘fashion a special rule of attribution for the particular substantive rule’, both the Privy Council and the House of Lords were quite prepared to adopt this notion of ‘merger’ of minds in the case of restrictive trade practices law and securities regulation, given the discerned public policy in avoiding a result which might defeat the purpose of the legislature. Judges in subsequent cases, however, have been reluctant to go as far, particularly in the criminal law141 and have preferred the somewhat stricter test of attribution of knowledge and culpability set out in Tesco Supermarkets Ltd v Nattrass.142 In, for example, SFO v Barclays plc, Davis LJ preferred the restrictive test of Lord Reid in Tesco, that for attribution the person must be ‘have full discretion to act independently of instructions’ in relation to the relevant corporate function and not in this regard responsible to the board of directors.143 Consequently, it seems probable that the ‘merger’ approach will at best be confined to essentially regulatory matters.144 2.39 Where the employee in question is perpetrating a fraud against his employer, then it is obviously inappropriate to take his knowledge of the fraud as being that of the victim company. This much is clear from Re A-G’s Reference (No 2 of 1982).145 In such situations, the employee cannot be both a party to the deception and represent the company for the purpose of it being deceived. It is also the case that if the agent or employee perpetrates a fraud in the course of a clearly independent activity, even if he uses a facility such as an online portal to which he only has access to in his capacity as an agent, the courts will be reluctant to find vicarious responsibility.146 2.40 When the company is the victim, the person or persons who may be taken to represent its state of mind may well differ from those whose state of mind will be attributed to the company in cases where it is the company that is charged with an offence. In Rozeik, the Court of Appeal thought that in this latter situation such persons are more likely to represent what Viscount Haldane called ‘the directing mind and will of the corporation’.147

SHADOW DIRECTORS AND OTHERS 2.41 In our discussion of the civil law we have focused on those who are in what is generally recognised to be a fiduciary relationship with the relevant principal or company. The courts have long been prepared to hold persons 141 Davis LJ in the SFO v Barclays plc [2018] EWHC 3055 rejected the SFO’s reliance on El Ajou v Dolllar Land Holdings plc [1994] 2 All ER 685 adding ‘the position in tort and or contract by no means necessarily corresponds with the position of attribution of liability in the criminal law’. See also the comments of Jay J at first instance. 142 [1972] AC 153. 143 Various other tests were also proposed in Tesco Supermarkets Ltd v Nattrass. For example, Viscount Dilhorne stated that if the relevant individual was responsible to another person in the company, then he could not be considered the directing mind. Lord Diplock preferred to look at the allocation of responsibility in the company’s constitutional documents. For further discussion, see 15.5 below. 144 There are those who still argue for a wider application, see, for example, B Rider in Labour’s Policy Review: Tackling Serious Fraud and White Collar Crime, labour.org.uk (2018). 145 [1984] 2 All ER 216. See also generally Cheong-Ann Png, Corporate Liability (Kluwer 2001). 146 See Frederick v Positive Solutions (Financial Services) Ltd [2018] EWCA Civ 431, Blackpool Football Club Ltd v DSN [2021] EWCA Civ 1352. and see 15.4 below. 147 See Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705.

55

2.41  Insider dealing: the civil law who are de facto directors albeit they have not been properly appointed to the same obligations as a duly appointed director,148 and the Companies Act provides that fiduciary duties owed by a registered director are applicable to de facto directors. Persons in accordance with whose instructions the directors are accustomed to act notwithstanding that they may not be formally appointed as directors, are known as ‘shadow directors’.149 As originally drafted Section 170(5) of the Companies Act 2006 provided that ‘the general duties apply to shadow directors where, and to the extent that, the corresponding common law rules or equitable principles apply’. In Ultraframe (UK) Ltd v Fielding,150 Lewison J held that shadow directors who were not formally appointed as director or who were not de facto directors, did not generally owe fiduciary duties to the company whose directors they have influence over. The Court took this view as, unlike directors, de jure or de facto, they had not assumed a fiduciary obligation to the company. While in many respects an unfortunate decision, other cases also emphasised the distinction between de facto directors, who are directors in all but name, and shadow directors who do not claim or purport to act as directors – indeed, they ‘lurk in the shadows, sheltering behind others who (they) claim are the only directors of the company to the exclusion of’ themselves.151 However, in Vivendi SA v Richards152 Newey J departed from the view of Lewison J in Ultraframe and considered that shadow directors would to some degree owe fiduciary duties to their company. The Small Business, Enterprise and Employment Act 2015 has now repealed and inserted a new section 170(5) which provides ‘the general duties apply to a shadow director of a company where and to the extent that they are capable of so applying’. This amendment therefore implies that in most circumstances the general duties owed by a director to the company as a director, will be applicable to shadow directors.153 In so far as the general duties are fiduciary in nature, it is therefore arguable that shadow directors step into a fiduciary relationship with the company. It is also the case that the Companies Act 2006 does impose certain statutory duties on shadow directors, for example, in regard to the disclosure of interests in existing transactions under section 187. 2.42 The position of officers and senior employees of companies, who are not de facto directors, is also not entirely certain. In English law while it is 148 In Smithton v Naggar [2014] EWCA Civ 939, Arden LJ said that the liability as a de facto director flows from his assumption of responsibility as a director. Therefore, if there was not an invalid appointment it was necessary to examine the corporate governance system and see whether he was engaged in acts which are ‘directoral’ in nature. See also HMRC v Holland [2010] 1 WLR 2793; Re Paycheck Services 3 Ltd [2010] UKSC 51; Gemma Ltd v Davies [2008] 546; Secretary of State for Trade and Industry v Tjolle [1998] 1 BCLC 333; Popely v Popely [2019] EWHC 1507 (Ch) and Re Canadian Land Reclaiming and Colonzing Co (1880) 14 Ch D 660. In regard to the use of secret nominees for the commission of fraud, see Hotel Portfolio 11 UK Ltd v Andrew Ruhan and Anthony Stevens [2022] EWHC 383 (Comm). 149 Section 251 of the Companies Act 2006. 150 [2005] EWHC 1638. 151 See In Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180, but see also Yukong Line Ltd v Rendsburg Investments Corporation of Liberia [1998] 1 WLR 294. 152 [2013] EWHC 3006. 153 It is possible that this might have serious implications for members of Shari’a boards in companies offering Shari’a-compliant financial services and products. See generally on this, B Rider, Chapter 5 in C Nethercott and D Eisenberg (eds), Islamic Finance, Law and Practice (2nd edn) (Oxford University Press 2018) and B Rider, Chapter 3 in Strategies for the Development of Islamic Capital Markets (Islamic Financial Services Board 2011), and B Rider, Chapter 5 in The Changing Landscape of Islamic Finance (Islamic Financial Services Board 2010).

56

Insider dealing: the civil law  2.44 clear that the duty of fidelity that an employee owes to his or her employer is not a fiduciary duty as such,154 fiduciary obligations can arise, directly or indirectly, by virtue of contract and from the special facts of a case.155 It is probable that the misuse of price-sensitive information acquired by virtue of such employment would justify liability based on breach of the contract of employment.156 In Canadian Aero Services Ltd v O’Malley the Canadian Supreme Court considered that the general duties of directors applied to officers of the company and senior employees ‘who are authorised to act on the company’s behalf and in particular to those acting in a senior management capacity’.157 In the majority of cases abuse of inside information would be considered gross misconduct justifying dismissal of an employee. 2.43 Finally, it is clear that fiduciary obligations are finite. Generally speaking, they start in the case of a director on appointment and terminate on relinquishing office. However, there are exceptions and these are preserved by section 170(2) of the Companies Act 2006. Directors’ duties also survive the appointment of a liquidator. While their powers may cease, their fiduciary obligations endure while they remain directors.158 Generally speaking, where the opportunity to profit has arisen while in a fiduciary relationship, the obligation of fair dealing applies to the subsequent drawing down of the relevant benefit.159

THE POSITION OF INVESTORS 2.44 Investors who subscribe directly or indirectly through an issuing house to a new issue of securities may suffer a loss if the securities in question are sold at a price in excess of their ‘real’ worth. While this is not really insider dealing in the conventional sense, the issuer and its agents are in a privileged position in that they are aware that the securities are worth less than the market thinks. In many jurisdictions, the law has long recognised that such conduct is highly damaging to the market. Indeed, a special commission appointed by the House of Commons in 1697160 described such practices, when compounded by insiders dumping their shares on the market, as undermining the ‘trade and wealth’ of the country. Consequently, in cases of the new issue of securities,

154 155 156

157 158

159 160

Customer Systems plc v Ranson [2013] EWCA Civ 841 and see also Concut Pty Ltd v Worrell [2000] HCA 64. See generally Helmet Integrated Systems Ltd v Tunnard [2007] IRLR 126, Customer Systems plc v Ranson [2013] EWCA Civ 841 and in particular Elias J. in University of Nottingham v Fishel [2000] ICR 1462. See Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 and see the Attorney General v Blake [1998] Ch 439 in regard to the duty of loyalty that an employee has to his employer. Employees that receive brides are considered to have breached a fiduciary obligation or at least something analogous thereto, see Thompson v Havelock (1880) 1 Camp 527, Reading v The King [1948] 2 KB 268 and National Grid Electricity Transmissions plc v McKenzie [2009] EWHC 1817. (1973) 40 DLR (3d) 371. See Re Systems Building Services Group Ltd [2020] EWHC 54 (Ch). Judge Barber emphasised the statutory fiduciary obligations of a director applied to a person in the position of a director and do not depend upon a person exercising the powers of, or acting as, a director. See CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704 and Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443. Commission Appointed to Inquire into the Trade of England, House of Commons Journals, 20 November 1697.

57

2.44  Insider dealing: the civil law most legal systems, as we have seen, impose strict disclosure obligations on those involved in promoting the issue. Consequently, a failure to disclose material information would be unlawful and result in civil and possibly criminal liability. Of course, if those privy to the relevant information, seek to use it in their own dealings, then this would be insider dealing. The justification for imposing onerous disclosure obligations on a company at the time it issues securities to the public is that all the facts pertaining to the nature and extent of the investment risk are exclusively in the possession of the issuer and its insiders. It has also been argued in South Africa161 that the sale of over-priced securities in such circumstances is akin in legal terms to selling chattels that have latent defects. 2.45 On the other hand, the courts have been concerned to limit the scope and extent of the issuer’s liability. Consequently, in most jurisdictions, there is a reluctance to afford market purchasers’ and sellers’ actionable claims against those whose action might influence the price of securities already in the market. Thus, it will often only be those who have transacted directly with the relevant issuer that will be able to sue. Those who deal in the market with other parties will have no right to complain. By the same token, it has been held that auditors only owe their duty of care to the company for which they are appointed to act. They do not owe a duty in the ordinary course of events to those investors in the market who may well be influenced in their investment decisions by what the auditors say in their reports.162 Although often expressed in terms of principle, the court’s decision in such cases is clearly based on policy considerations. The need to consider the proportionality as to the possible extent of liability, when compared with the wrong in question, is recognised in other areas of the law. For example, in the United States, Congress enacted legislation limiting the exposure that insiders dealing on the market might have to contemporaneous market traders. 2.46 In the case of investors who are already in the market, the question as to whether they suffer loss or not from insider abuse is more problematic. They are not, as in the case of those who subscribe for securities in a new issue, left with over-priced securities that the market has had no opportunity to evaluate. In most organised markets, the matching of parties is essentially random and in the case of an active and relatively deep market there will be willing sellers or purchasers at whatever the market price happens to be. In the majority of situations, this price will be wholly uninfluenced by the insider’s conduct. Consequently, the mere failure of an insider to ‘share’ his information with whoever happens to end up as his counterparty, cannot really be said to have misled that person into dealing at that price or with the insider on the terms he has. Therefore, the insider’s failure to disclose has not in any real way caused that particular individual to deal on the terms he has. Thus, in market transactions, the elements that are usually required for a viable civil action are either absent or can only be found as fictions. 161 Pretorius v Natal South Sea Investment Trust Ltd 1965 (3) SA 410 (W) 418, discussed in B Rider and HL Ffrench, ‘The Regulation of Insider Trading in South Africa’ (1977) 94 South African Law Journal 94. 162 See, for example, Caparo Industries plc v Dickman [1990] 2 AC 605. However, note the approach of the Board of the Privy Council in Charles B Lawrence & Associates v Intercommercial Bank Ltd (Trinidad and Tobago) [2021] UKPC 30, where it was emphasised that the appropriate test for determining the scope of a duty of care is to consider for what purpose the information is being given and therefore the risk being guarded against, arguably refining or at least further explaining and applying Manchester Building Society v Grant Thornton [2021] UKSC 20. See also Meadows v Khan [2021] UKSC 21.

58

Insider dealing: the civil law  2.49 2.47 On most markets, the securities that are traded represent capital that was contributed to the relevant company in the past. Therefore, it is not unlikely that modern investors operating on the market will be primarily concerned with current valuations and returns rather than the longer-term fortunes of the enterprise. Consequently, a relatively high proportion of trading on the markets will be dictated by the current price. With the advent of computer assisted trading programs and the development of related and derivative markets, trading will be far more responsive to price fluctuations. Therefore, it is argued that the only ‘real’ price is that currently on offer and there is no way in which an investor can logically complain that he has been harmed by the existence of information outside the market. It has also been said that it is only those investors who trade in the time lapse between the insider’s transaction and the disclosure of the relevant information who have any real complaint. Longer term investors who remain in the security in question will reap the rewards or suffer the consequences of the information when it does come to the market, regardless of the insider’s conduct. While derivatives may have the effect of gearing gains or losses, essentially the same considerations apply. If we cannot attribute price movements to the action of the insider, then it is difficult to claim that, whatever way the price moves, it is caused by, or is the fault of, insider dealing. 2.48 While the above discussion has centred on dealings in equity securities or rights derived from or related to equity securities, we need to consider whether loss arises when insider dealing occurs in dealings in debt securities. Those holding debt securities may be regarded as standing in the position of creditors to the relevant issuer. In most cases, this will be a somewhat indirect relationship. The attitude of holders of debt securities to the activities of management will be influenced by the extent to which the relevant borrowings are secured. A significant difference between an equity and a debt security is that the latter is likely to have a relatively determined life expectancy. Of course, given the complexity of structuring corporate finance today, this may be a distinction without a difference. However, in the case of securities with fixed maturity or, for that matter, any pre-determined right or obligation, their very sensitivity to time renders them a more attractive instrument for certain forms of insider manipulation. 2.49 The attitude of those who provide capital to a company to the conduct of management will be influenced by many other factors. The emphasis that has been placed around the world on the benefits of good governance and ethical management has no doubt had some effect on the way in which management operates and their conduct is assessed. Small investors may well be annoyed that those in positions of trust have abused inside information, but in most legal systems there is little they can do about it. In the vast majority of jurisdictions, even if they were contemporaneous traders, the chances of their being able to frame and pursue any claim for compensation or rescission are remote. Larger institutional investors may be in a rather different position. An institutional investor may not have the same degree of flexibility that a smaller private investor has. For example, an institutional investor with a significant holding in a particular company may find that it is almost ‘locked in’. This may result not only from the size of its holding, but also from the knowledge that it acquires by virtue of its position. Although most systems of regulation tend to focus attention on protecting the weak rather than assisting the strong to ensure better treatment for all, institutional investors have been encouraged to take more interest in the proper management of the issuers in which they invest. Some, in 59

2.49  Insider dealing: the civil law furtherance of their own policies of good governance and ethical investment, have been prepared to stand up to those suspected of committing abuses. It must always be remembered that institutional investors are not spending their own money in pursuing those that they suspect of bad management practices and abuse. Therefore, it is necessary for institutional investors to consider the balance carefully between the costs and benefits of such a course of action. 2.50 While it is difficult to demonstrate the sort of loss resulting from insider dealing that legal systems would normally be willing to compensate, where the insider does more than trade on the basis of the information or encourages another to do so, the position may be very difficult. If the insider engages in acts of fraud or manipulation, then his actions may well result in quantifiable losses for which most systems of law would provide remedies. As has been pointed out, there must be some justification for allowing the investor to transfer the loss that has resulted in the movement of the market price on to the insider. In virtually every legal system, this can only be done if it can be established that the investor’s loss was in some way caused by the insider’s actions or default. 2.51 Much of what has been said with regard to the position of those who happen to be matched as the counterparty to an insider transaction is on the basis that the dealing takes place on a market. In the case of most developed markets, the dealing will be indirect, impersonal and anonymous. Consequently, as we have noted, the matching of counterparties will be essentially random. Where, however, the transactions take place in circumstances where the parties are known to each other and there is therefore an opportunity for negotiation, it is possible that the legal position may be somewhat different. For example, in direct and personal transactions, it is rather more likely that a court might be persuaded that the conduct of the insider amounts to a misrepresentation. Of course, in such cases, it is still necessary to impose on the insider an obligation to disclose so as to convert his failure to speak into a misrepresentation. Nonetheless, where the parties are contracting with each other directly, it is easier for a court to find an implied undertaking of fair disclosure than in the context of market transactions. Having said that, however, except in rather special circumstances, there is little, if any, jurisprudential authority directly on the point. On the other hand, it is no doubt true that a judge may well be rather more sympathetic to a plaintiff who has been disadvantaged in dealings with an insider who has acted in a manner that most people would have no difficulty in regarding as dishonest.163 While it has been argued that the courts might be more sympathetic to vulnerable investors and be minded to find justification in implying contractual terms, again there is little in the way of authority outside relational contracts which would not generally arise in an investment situation.164 2.52 It is hard to find in the law or, for that matter, the institutional structures of modern enterprise, a concern for inhibiting insider abuse, other than on the basis that it undermines the time-honoured notion of stewardship. While it is true that investors and other ‘stakeholders’ may deplore and feel personally aggrieved by the abuse of inside information, in the vast majority of jurisdictions, the law has not recognised this by imposing any duty on insiders 163 See, for example, Lord Lane CJ in Re A-G’s Reference (No 1 of 1988) [1989] BCLC 193. 164 See at note 62 et seq above. In Ehrentreu v IG Index Ltd (Rev1) [2018] EWCA Civ 79 the Court of Appeal was loath to find on the part of a broker – without very clear provision – a term in a contract that a sophisticated and experienced investor was owed a duty to prevent him harming himself financially.

60

Insider dealing: the civil law  2.54 that could be enforced, otherwise than through the company. However, as we have seen, even this cause of action is based not so much on logic, but the notion that those who are placed in positions of trust should not be allowed to abuse them.

ILLEGALITY AND PUBLIC POLICY 2.53 It is provided in section 63(2) of the Criminal Justice Act 1993 that ‘no contract shall be void or unenforceable by reason only’ that it violates section 52 which, as we shall see, renders the misuse of inside information a criminal offence.165 The intention behind the enactment of this provision was to exclude the operation of the common law doctrine of illegality and the prospect of attempts to unravel transactions in the market. As a general rule, where the performance of a contract involves the commission of a crime or other act that is regarded as contrary to public policy, the law will consider the contract void and unenforceable.166 It is important to note that section 63(2) does not seek to prevent an innocent party seeking to challenge the validity of a transaction on some other basis than illegality, such as misrepresentation.167 It may also be possible for an innocent party dealing with an insider to argue that an objectionable transaction should be considered void on the wider basis that insider dealing is against public policy. The subsection only refers to the transaction being impugned as a result of the specific offence. It is probable that without section 63(2) the courts would have no difficulty in striking down a contract which resulted from a criminal misuse of information. This is clear from the judgment of Knox J in Chase Manhattan Equities v Goodman.168 In this case Knox J, while accepting that the almost identical provision to section 63(2) in the earlier statute169 rules out the civil consequences that might otherwise arise from the commission of an insider dealing offence, refused to make available the powers of the court to enforce a transaction which was still incomplete, on the basis that to do so would be tantamount to ordering the enforcement of an objectionable transaction. The court considered that the misuse of inside information was against public policy whether it amounted to a crime or not and therefore a transaction so tainted would not, in the discretion of the court, be enforced. 2.54 In Patel v Mirza170 the Supreme Court reconsidered the basis for the illegality defence set out by the House of Lords in Tinsley v Milligan.171 The basis of the defence is that ‘no court will lend its aid to a man who founds his cause upon an immoral or an illegal act’. In overruling the reliance test propounded by the House of Lords, Lord Toulson made it clear that the rationale of this defence was the public interest in refusing to enforce claims in circumstances where such would be inimical to the integrity of the legal system. It was not simply an issue of a claimant basing their claim on something 165 166 167 168

See Chapter 3. See generally Euro-Diam Ltd v Bathurst [1988] 2 All ER 23 and particularly Kerr LJ at 28. See Chapter 6. [1991] BCLC 897. However, in the Hong Kong case of Innovisions Ltd v Chan Singchuk, Charles and Others (1992) 1 HKLR 71 affirmed (1992) 1 HKLR 255, Kaplan J did not consider insider dealing would ‘shock the ordinary citizen or affect the public conscience’. Nazareth JA in the Court of Appeal strongly disagreed with Kaplan J and his colleagues. 169 Company Securities (Insider Dealing) Act 1985, s 8(3). 170 [1994] 1 AC 340. 171 [2016] UKSC 42.

61

2.54  Insider dealing: the civil law contrary to public policy. The Supreme Court set out three considerations: firstly, to identify the underlying purpose of the prohibition that is being questioned in the claim and to assess whether enforcement of the claim would harm that purpose; secondly, to evaluate the impact of denying the claim on any other public interest; and thirdly, whether denying the claim would be proportionate in all the circumstances.172 A very different, albeit conceptually related issue, it has been argued is equity’s clean hands doctrine. Although as with all the maxims of equity there are numerous exceptions, as a very general proposition those who seek equitable intervention must come to the court with ‘clean hands’. In other words, equity might in weighing the merits decline to assist on the basis that the petitioner has been materially at fault in regard to the matter or has acted in bad faith. The application of these rules is always fact-specific.173

REMEDIES 2.55 It is important to recognise that the issue as to whether a cause of action exists is a different, albeit in practice related issue to whether an appropriate remedy is available. The courts do not like to find themselves in a situation where they are powerless to provide a remedy which will give effect to their determination as to the merits of a matter. In many ways the common law has developed around the existence of remedies and perhaps historically the courts have not focused as much as they might have on the issue of rights as opposed to remedies. As we have seen in so far as damages are a common law remedy, there has been debate as to there being something similar available for a breach of fiduciary duty. Of course, in many cases the breach of a fiduciary obligation will not stand alone and there may well be causes of action in tort and or contract.174 While the award of damages is not traditionally a remedy of the Courts of Equity,175 Chancery Courts were prepared to make financial orders.176 For example, as we have seen, a fiduciary who makes a secret profit or receives a bribe can be ordered to account for this and hand it over to his principal.177 This liability is based not on unconscionability or bad faith as the conduct amounting to a breach of fiduciary obligation, such as that of 172 See in particular, Stoffel & Co v Grondona [2020] UKSC 42 and Henderson v Dorset Heathcare University NHS Foundation Trust [2020] UKSC 43; and for illustrations in the application of this test to fraud, Grove Park Properties Ltd v The Royal Bank of Scotland [2018] EWHC 3521 (Comm); bribery, Bank St Petersberg PJSC v Archangelsky [2020] EWCA Civ 408; and misappropriation of property, Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2019] EWHC 301 Ch. On competing issues of public policy, see Balber Kaur Takhar v Gracefield Developments Ltd [2020] EWHC 2791. 173 As was held in considering whether a director in breach of his duties as a director could seek redress utilising an unfair prejudice petition under sections 994 to 996 of the Companies Act 2006, Potamianos v Prescott [2019] EWCA Civ 932. 174 See, for example, Vald. Nielsen Holding A/S v Balldorino [2019] EWHC 1926 (Comm). 175 For example, Lord Browne-Wilkinson in Target Holdings Ltd v Redferns [1996] AC 421, observed ‘Courts of Equity did not award damages but, acting in personam, ordered the defaulting trustee to restore the trust estate …’. 176 ‘Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach’, per Lord Browne-Wilkinson in Target Holdings Ltd, above at note 175. 177 It is important to recognise, however, that ordering an account is not as such a remedy but the enforcement of an obligation cast upon trustees and fiduciaries, see Lord Millett in Hall v Libertarian Investments Ltd [2013] HKCFA 93 and see Newey LJ in Byers v Saudi National Bank [2022] EWCA Civ 43 in regard to knowing receipt.

62

Insider dealing: the civil law  2.56 loyalty, is sufficient.178 In appropriate cases, interest will be ordered or an account surcharged, and in cases of fraud this interest might be compounded. In cases where a profit is not in the hands of a defaulting fiduciary it may be possible for the court to order the forfeiture of, for example, commission that might otherwise be payable. It is also possible in some situations to put the parties on terms. In other words, condition the award of an equitable remedy such as specific performance or rescission, by the undertaking of one party to make financial contribution to another. Section 50 of the Supreme Court Act 1981 provides that the English courts may award damages in addition to or in substitution for, an injunction or specific performance. It should be noted that it is only in regard to such a provision, that it is appropriate to speak in terms of equitable damages as opposed to equitable compensation. Equity is also able in certain cases to impose trusts, and in effect charges, on money and other property and demand that such be delivered up to those entitled to it.179 Consequently, it has never been the case that equity is powerless in providing financial compensation. 2.56 In many common law countries, the merger of the common law and equitable jurisdictions, at least in the making of orders to facilitate the administration of justice, has led to cases in which it is unclear whether an award of damages is being made by the judge wearing his common law or equitable hat. Many jurisdictions in effect allow their courts to award what passes for damages in cases of breach of fiduciary duty. In some cases, this is pursuant to statutory provisions. It has been said, for example, by the Court of Appeal of New Zealand, that there is no difference in the rules of remoteness in the award of damages or compensation for breaches of, for instance, the common law duty of care or the fiduciaries’ obligation to exercise care and prudence.180 This is not the case in every jurisdiction and the availability of a financial order in cases of a breach of fiduciary duty – standing on its own – cannot be taken for granted.181 Equitable compensation will be available in limited circumstances in the English courts.182 We have already discussed the commitment of courts to ensure that defaulting fiduciaries do not retain any benefit in breach of their duty of loyalty.183 Furthermore, the judges have emphasised that this liability 178 See Lifestyle Equities CV v Ahmed [2021] EWCA Civ 675. While a case involving intellectual property, the Court of Appeal reviewing the authorities clarified the law in regard to an account of profits generally for breach of fiduciary duties. In particular, the Court of Appeal held that ‘the liability to account for profits is a liability to account for profits that the person liable has actually derived from the wrongful conduct which has made them liable in the first place.’ 179 See generally, P Davies and G Virgo, Equity and Trusts (3rd edn) (Oxford University Press 2019), Part V111. 180 See at 2.15 et seq above and see B Rider, ‘A Special Relationship on the Special Facts’ (1978) 41 Modern Law Review 585. 181 The Court of Appeal while emphasising that ordering an account of profits was discretionary, it would only be denied if there was a breach of fiduciary duty in exceptional circumstances, see Lifestyle Equities v Ahmed [2021] EWCA Civ 675. 182 See, for example, Lord Toulson in AIB Group(UK) plc v Mark Redler & Co [2014] UKSC 58, ‘I agree with the view of Professor David Hayton in “Unique Rules for the Unique Institution, The Trust”, in Degeling and Edelman (eds) Equity in Commercial Law (2005) at p 279, that in circumstances such as those in Target Holdings the extent of equitable compensation should be the same as if damages for breach of contract were sought at common law That is not because there should be a departure in such cases from the basic equitable principles applicable to breach of trust …’. 183 See, for example, FHR European ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45 and Arden LLJ in Murad v Al Saraj [2005] EWCA Civ 595. In Bristol and West Building Society v Mothew [1998] Ch 1 Millett LJ emphasised this relief was ‘primarily restitutionary or restorative rather than compensatory.’

63

2.56  Insider dealing: the civil law does not depend on any principle of causation.184 In cases where there is no profit in the hands of the fiduciary the position is more complex and uncertain. Although the judges have made it clear that the accounting remedy ‘is not to compensate the beneficiary for any loss’ and ‘accordingly comparison with the remedy in damages is unhelpful’,185 this situation has been contrasted with a claim for equitable compensation not based on disgorgement.186 For example, Mummery LJ stated in Swindle v Harrison187 ‘although equitable compensation, whether awarded in lieu of rescission or specific restitution or whether simply awarded as monetary compensation, is not damages, it is still necessary for the (claimant) to show that the loss suffered has been caused by the relevant breach of fiduciary duty. Liability is not unlimited. There is no equitable by-pass of the need to establish causation.’ 2.57 The law of restitution has developed significantly over the last 30 years.188 It might be claimed with some accuracy that until the 1980s, the law of restitution was a best a rag bag of specific remedies, mostly of an equitable nature, that could be used only in very specific circumstances. While other common law jurisdictions and, in particular Australia and New Zealand forged ahead, the English courts showed rather more caution. We have already noted that there is, at least traditionally, no claim for damages in equity, albeit there is a reasonably expansive and perhaps ever-expanding jurisdiction to award compensation. Where there is a trust and a misapplication of funds, whether capital or income, the beneficiary has an election to simply take over the investment into which the money has been placed or reject it. The trustee in breach is required to make good any depreciation in the value of the trust as a result of his breach and he can be charged interest and surcharged. Where there is no trust, those to whom the fiduciary obligation is owed may seek equitable compensation. In English law it seems that the principles behind the court’s discretion to award equitable compensation, in terms of causation, remoteness and measure are the same as in damages claims.189 The object of any award is to place the trust or beneficiaries in the position, at the day of trial, they would have been in had the breach of duty not occurred. While this approach appears to be correct where the relevant breach of duty is essentially a common law duty, such as the duty to act with diligence or care, it has been authoritatively doubted whether it is appropriate where what is in issue is the breach of a purely fiduciary obligation. In such cases the obligation to make restoration occurs at the time of breach and the common law approach to causation is irrelevant. To hold otherwise would be to undermine the special obligations of a fiduciary. Where the beneficiary rejects a misapplication of funds, what has happened after the breach is irrelevant. The fiduciary is under an obligation to make good the trust or fund as it was at the time of breach. This approach was taken in a case of equitable fraud and the directors or a company had to make full restoration to the company and could not simply pay over the difference between the value of the unlawful dividend and the value of a lawful dividend that they could and would have in fact paid.190 In this case the Court of Appeal

184 See United Pan-Europe Communications NV v Deutsche Bank AG [2000] 2 BCLC 461. 185 Morritt LJ in United Pan-Europe Communications NV v Deutsche Bank AG [2000] 2 BCLC 461. 186 See, for example, Jonathan Parker LJ in Murad v Al Saraj [2005] EWCA Civ 959. 187 [1997] 4 All ER 705 at 733. 188 See generally, P Birks, Unjust Enrichment (2nd edn) (Oxford University Press 2005). 189 See Lord Browne-Wilkinson in Target Holdings Ltd v Redferns [1996] AC 421. 190 Bairstow v Queen’s Moat Houses plc [2001] 2 BCLC 531.

64

Insider dealing: the civil law  2.59 emphasised that they were stewards and had acted dishonestly. In another case involving an allegation of fraud in equity, the court held that the defendant ‘is liable to restore the plaintiff to the situation he was in when the defendant did him wrong’ much in the same way as the courts treat common law fraud.191 2.58 It is open to debate whether the basis for awarding equitable compensation is the breach of fiduciary duty, the obligation of stewardship, or the loss that is occasioned as a result of the wrongdoing. It is interesting that in the Swindle v Harrison case Mummery LJ stated ‘in considering the extent of liability for breach of fiduciary duty it is not always necessary to consider all the matters which may be relevant in determining’ a claim based on negligence. ‘Forseeability and remoteness of damage are, in general, irrelevant to restitution remedies for breach of trust or breach of fiduciary duty. The liability is to make good the loss suffered by the beneficiary of the duty.’192 However, he added, as we have seen, that it is necessary to consider the issue of causation. 2.59 One of the most important equitable remedies is the imposition of a constructive trust on property or money. We have already considered the circumstances where this might be relevant in the context of insider abuse. In so far as the imposition of a trust establishes a proprietary relationship between the relevant funds and those entitled, which can have significance in cases of insolvency, it is questionable whether at least in English law it is appropriate to regard the constrictive trusts as remedial. Until very recently largely as a result of the desire on the part of judges to be cautious in relation to third party rights, we have noted the significance of establishing a proprietary nexus. Where there is a misappropriation or wrongful disposal of trust property, the property in which the money is invested may be subjected to the original trust or the beneficiaries may reject this and petition the court for equitable compensation. If they take the property, there may still be a claim for any shortfall. Fiduciaries as we have seen may also be liable for secret profits and other unauthorised benefits that they have received by virtue of their fiduciary position. In such cases it is said that the imposition of a trust on those benefits is a constructive trust. It is a new trust, whereas in the case of a misapplication, equity reaches out and brings the property that now represents the diverted funds as the original trust. Until relatively recently, it was not clear what benefits obtained by virtue of a fiduciary relationship, could be subject to a constructive trust or traced. As we have seen, the decisions appeared to distinguish between secret profits tainted because of lack of authority and the potential for conflicts of interest and the receipt of a bribe.193 In the case of a bribe there was merely a personal obligation to account. The Privy Council in Attorney General for Hong Kong v Reid disapproved of such a distinction and considered that applying one of the maxims of equity – equity looks as done that which should be done – a constructive trust could be recognised in regard to properties purchased with the proceeds of a bribe.194 The reasoning adopted by the Privy Council was considered in depth and rejected by the Court of Appeal in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd195 and the sharp distinction between proprietary and personal liability ordained in the earlier Court of Appeal

191 192 193 194 195

Swindle v Harrison [1997] 4 All ER 705. [1997] 4 All ER 705. See at 2.24 above. [1994] 1 AC 324. [2011] EWCA Civ 347.

65

2.59  Insider dealing: the civil law decision in Lister & Co v Stubbs196 reaffirmed. However, within a very short space of time the Supreme Court adopted if not the reasoning in the Reid case, its result and held that unauthorised profits and bribes held by a fiduciary will be held in constructive trust.197 2.60 We have referred to the personal obligation of a fiduciary to account for secret profits and, indeed, any benefit that he receives in breach of his duty of loyalty to his principal. We have already seen that calling a fiduciary to account and demanding the disgorgement of profits that he has made by virtue of his fiduciary status, in no way depends upon establishing loss to the principal. It is enough that he has violated his fiduciary obligation. We have also seen in our discussion of the possible use of this restitution remedy in cases of insider abuse that it only applies to profits and not the avoidance of losses. It is also probably limited to benefits that arise, directly or at least traceably, in the hands of the fiduciary himself. While an account for profits is properly an equitable device, recent cases have indicated that a similar liability may be invoked in common law actions. In AttorneyGeneral v Blake, a former British spy profited from the publication of a book in breach of among other things his contract of employment with the British Government. The House of Lords recognised that there existed a power to call the defendant to account for his profits, as the Government ‘had a legitimate interest in preventing the defendant’s profit- making activity and, hence, in depriving him of his profit’.198 While the boundaries of this remedy are unclear, it is necessary to show that the normal action for contractual damages would not be adequate or fair. It should also be noted that the English courts have allowed the award of damages and in many cases an accounting of profits where there has been a misuse of confidential information and particularly intellectual property rights.199 Of course, it would rarely be the case that the sort of information that is relevant in cases of insider abuse would be protected in this way.200 2.61 An important issue in many cases of fraud is whether the courts will permit tracing.201 Rimmer J in Shalson v Russo202 explained this ‘as the process by which a claimant seeks to show that an interest he had in an asset has become represented by an interest in a different asset’. Tracing is a process and

196 (1890) 45 Ch D 1. 197 [2014] UKSC 45. However, note that in claims based on knowing receipt of property subject to a trust, the claimant must be able to show that there is a remaining proprietary interest in the relevant property at the time the defendant acquires sufficient information to render the retention of the property unsconscionable, see Byers v Saudi National Bank [2022] EWCA Civ 43. 198 [2001] 1 AC 268. 199 See Seager v Copydex (No 2) [1969] 1 WLR 809. 200 But see Dunford and Elliot Ltd v Johnson & Firth Brown Ltd [1977] 1 Lloyd’s Rep 505. 201 The tracing process is most developed in equity, given the reluctance of the common law to offer other than personal remedies sounding in damages. However, it is possible in limited circumstances to trade property into other property and money at law, see Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 in regard to the action for money had and received. There is also the action in conversion. It might also be possible to trace at common law into profits, see FC Jones & Sons v Jones [1997] Ch 159. The ability of equity to trace into mixed funds and to impose a much wider range of orders renders it far more effective, see Millett J. in Agip (Africa) Ltd v Jackson [1990] Ch 265 and note the importance of subrogation, see Bank of Cyprus UK Ltd v Menelaou [2015] UKSC 66. 202 [2003] EWHC 1637.

66

Insider dealing: the civil law  2.62 not a remedy as such.203 The ability to assert equitable beneficial ownership over property derived from that which has been misappropriated in breach of a fiduciary duty, against all save a bona fide purchaser of the property for value, without notice, is of considerable practical utility. However, it is important to recognise that the process of tracing might be just as important in a personal claim as it is in a claim based on the assertion of a proprietary interest. The range of property that can be traced is wide and extends to money and shares which have been stolen, on the basis that a constructive trust is imposed on the fraudulent recipient or thief.204 The fiduciary nexis is crucial, but the process has been applied to bribes and secret profits.205 We have already debated the extent to which information may in certain circumstances be treated, at least in Chancery, as a species of property.206 There are limits, however, on equity’s ability to trace, such as when the property ceases to be ascertainable or where it would be inequitable to allow the assertion of a proprietary right.207 Nonetheless, where a proprietary claim cannot be asserted208 it may still be feasible to assert a personal claim.209 2.62 We have also referred, in the context of liability for misrepresentation, to the remedy of rescission. While this may be asserted independently of the court, it is usual to obtain an order of rescission. Generally speaking, it may be asserted in cases of equitable fraud, including where a fiduciary has made an unauthorised profit from his fiduciary position. Where there is a breach of fiduciary duty then any resulting transaction will be voidable in law. By asserting a right to rescind, the parties are placed back in the position they were before the misconduct or misrepresentation. There are, as we have seen, many other orders that can be obtained from the courts requiring restitution of property, whether these be in the form of decrees for specific performance or an injunction. It must not be forgotten that there are also powers in the criminal courts to order the return of property and restitution.210 203 See Millett LLJ in Boscawen v Bajwa [1995] 4 All ER 769 at 776, ‘it is the process by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received … can properly be regarded as representing his property.’ Lord Millett on more than one occasion emphasised his view that ‘this branch of the law is concerned with vindicating rights of property and not with reserving unjust enrichment’, see Foskett v McKeown [2001] 1 AC 102, but there remains considerable debate within the academy on this point, see, for example, A Burrows, ‘Proprietary Restitution; Unmasking Unjust Enrichment’ (2001) 117 Law Quarterly Review 412, and in particular, P Birks, Unjust Enrichment (2nd edn) (Oxford University Press 2005). 204 See Lord Browne-Wilkinson in Westdeuthsche Llandesbank Girozentrale v Islington London Borough Council [1996] 2 All ER 961 at 998, Lord Templeman in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 at 565, Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch) and Relfo Ltd v Varsani [2014] EWCA Civ 360. 205 See Brazil v Durrant International Corporation [2016] AC 297 and Attorney General for Hong Kong v Reid [1994] 1 All ER 1. 206 See LLAC Minerals Ltd v International Corona Resources Ltd (1989) 61 DLLR (4th) 14. 207 See Re Diplock [1948] Ch 465. 208 While the award of all equitable orders is discretionary, it seems that the English courts have not taken the flexibility of, for example, the Australian courts, see Lifeplan Australia Friendly Society Ltd v Ancient Order of Forresters in Victoria Friendly Society Ltd [2018] HCA 43 and Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6. 209 Ministry of Health v Simpson [1951] AC 251. In regard to civil liability for money laundering, see 7.45 et seq. 210 See generally the Powers of Criminal Courts (Sentencing) Act 2000. Section 148 empowers the courts to order a convicted person to restore certain property and, possibly of more relevance; section 130 enables the court to order the payment of compensation for ‘… loss or damage resulting from the offence’ or any other offence taken into consideration. The courts in cases of fraud have been encouraged to use this power.

67

68

Chapter 3

The main offences of insider dealing – dealing on the basis of inside information

THE LAW BEFORE 1980 3.1 In the UK insider dealing can be relatively simply defined as trading on organised securities markets by persons in possession of material non-public information. While in practice insider dealing can take many forms the misuse of privileged information in the context of take-overs and mergers during the 1970s and 1980s convinced most people that legislation was needed to curb it.1 Of course, taking advantage of information that you obtain in privileged circumstances is nothing new and there has been considerable debate over the years as to whether this is sufficiently wrongful so as to justify rendering it a criminal offence.2 We do not, however, propose to discuss here whether in fact insider dealing causes harm or the policy reasons for policing it.3 1

2

3

See generally, G Gilligan, Regulating the Financial Services Sector (Kluwer 1999), Ch 4; J Davies, ‘From gentlemanly expectations to regulatory principles: a history of insider dealing in the UK’ (2015) 36 The Company Lawyer 132, continued at 163. See also B Rider, ‘The role of the City panel on Take-overs and Mergers on the regulation of insider trading in Britain’ (1978) 20 Mal. L.R. 315 and generally B Rider and HL Ffrench, The Regulation of Insider Trading (Macmillan 1979), and B Rider ‘Policing the city – combating fraud and other abuses in the corporate securities industry’ (1988) 41 Current Legal Problems 47. See, for example, B Rider and HL Ffrench, ‘Should Insider Trading be regulated – Some initial considerations’ (1978) 95 South African Law Journal 79; B Rider, ‘The Control of Insider Trading – Smoke and Mirrors’ (2000) 7 Journal of Financial Crime 227 and S Clark, Insider Dealing Law and Practice (Oxford University Press 2013), Ch 1. See J Anderson, Insider Trading, Law, Ethics and Reform (Cambridge University Press 2018); H McVea, ‘What’s wrong with insider trading?’ (1995) 15 Legal Studies 390; L Semaan, M Freeman and M Adams, ‘Is Insider Trading a Necessary Evil for Efficient Markets? An International Comparative Analysis’ (1999) 17 Company and Securities Law Journal 220; K Kendal, ‘The Need to Prohibit Insider Trading’ (2008) 25 Law in Context 106; J. Moore, ‘What is Really Unethical About Insider Trading?’ (1990) 9 Journal of Business Ethics 171. See also generally, Chapter 1. We have already alluded to the discussion as to whether insider dealing actually causes any harm to the markets and the relative lack of convincing empirical evidence: H Manne, Insider Trading and the Stock Market (Free Press 1966) and H Manne, ‘In defence of Insider Trading’ (1966) 44 Harvard Business Review 113; H Manne, ‘Insider Trading: Hayek, Virtual Markets, and the Dog that did not bark’ (2005) 31 Journal of Corporation Law 167 and R Schotland, ‘Unsafe at any price: A reply to Manne, insider trading and the stock market’ (1967) 53 Virginia Law Review 1425. See also A Keown and J Pinkerton, ‘Merger announcements and insider trading

69

3.1  The main offences of insider dealing The reality is that anti-insider dealing laws are here to stay and debate on exactly what they should be about or are in fact designed to achieve is at best academic. Notwithstanding the widely held view that insider dealing is still a very real issue for the markets and given all the concerns as to the ability of the traditional criminal justice to secure convictions, there is no appetite in government for a radical re-evaluation of the current law. Indeed, at the international level and certainly within the European Union, insider dealing has been demonised to such an extent that it is often regarded as one of the more serious forms of economically motivated crime. Perhaps because it invokes notions of unfairness in the markets which capitalism has hitherto proved unable to reconcile with progress. Insider dealing becomes the very noticeable wart on the face of capitalism to misquote Prime Minister Edward Heath and one that brings the sanctity of the market into issue. 3.2 The general criminal law has long sought to protect the integrity of public markets.4 Indeed, there were very early common law offences which criminalised attempts to interfere with the proper operation of the markets. In the eighteenth century, Parliament and the City of London introduced a number of measures aimed at promoting the integrity of intermediaries and those engaged in stock-jobbing.5 While the effectiveness of many of these initiatives may be questioned, there has always been a realisation that manipulative and fraudulent conduct has far more serious and greater implications for the markets, than the direct harm that it causes to individual investors. The protection and advancement of confidence in the integrity, fairness and efficiency of the markets, particularly the financial markets, has long been accepted as a serious matter. As we have already indicated, however, the use of information obtained in privileged circumstances has not always been considered objectionable, let alone unfair. 3.3 Until 1980, the restrictions on insider dealing in the UK were extremely limited. There was no specific legislation other than the requirements in the Companies Acts for directors, members of their families and substantial shareholders to report dealings in the shares of their companies. While these disclosure obligations were justified on a number of grounds, a significant one was that this would discourage the abuse of inside information. Whether reporting such transactions does in fact discourage abuse is open to debate. In any case, these provisions were poorly policed. Mention has been made elsewhere of the argument that the dishonest concealment of material information might constitute an offence under what was then section 13 of the Prevention of Fraud (Investments) Act 1958.6 We have also seen that the

4 5 6

activity; and empirical investigation’ (1981) 36 The Journal of Finance 855; M Fishman and K Hagety, ‘Insider Trading and the Efficiency of Stock Prices’ (1992) 23 Rand Journal of Economics 1; L Meulbroek, ‘An empirical analysis of illegal Insider Trading’ (1992) 47 The Journal of Finance 1661; B Cornell and E Sirri, ‘The reaction of investors and stock prices to insider trading’ (1992) 47 The Journal of Finance 1031; D Givoy and D Palmon, ‘Insider trading and the exploitation of inside information: Some empirical evidence’ (1985) Journal of Business 69; E Szockyi and G Geis, ‘Insider Trading: Patterns and analysis’ (2002) 30 Journal of Criminal Justice 273 and H Seyhun, ‘The effectiveness of the insider-trading sanctions’ (1992) 35 The Journal of Law and Economics 149. See generally, S Bainbridge (ed), Research Handbook on Insider Trading (Edward Elgar 2013). See BAK Rider and M Ashe, Insider Crime – the New Law (Jordan Publishing 1993), at p 20. Reference should also be made to Chapter 6. See 6.9 below. Now section 89 of the Financial Services Act 2012, repealing section 397 of the FSMA; see Chapter 6.

70

The main offences of insider dealing  3.4 common law provided no real possibility for those who dealt with those who abused inside information to seek recovery in the civil courts.7 The use of inside information, absent some affirmative obligation to disclose it, did not and probably in most cases still does not give rise to a cause of action in the civil law. The most significant element of regulation was that provided by a range of self-regulatory and professional bodies in the City of London. For example, the City Panel on Takeovers and Mergers8 and the London Stock Exchange9 had adopted rules and guidelines that restricted insider dealing and the ‘tipping’ of inside information in the early 1970s.10 However, there was considerable scepticism as to how effective they were in practice.11 The self-regulatory bodies in the City of London increasingly recognised that for effective enforcement, particularly where there was an international element in the transaction, statutory powers were required. Consequently, by 1980, many in the City recognised the need for insider dealing to be made a specific criminal offence.12 3.4 After two unsuccessful legislative attempts to outlaw insider dealing in the 1970s,13 in 1980 Parliament amended the Companies Act to make insider dealing a criminal offence.14 These provisions were consolidated in 1985 when the Companies Act was revised. The insider dealing provisions of the Companies Act 1985 became known as the Company Securities (Insider Dealing) Act 1985.15 There were further amendments the following year in the Financial Services Act 1986 that were intended primarily to strengthen the government’s enforcement powers.16

See, for example, Percival v Wright [1902] 2 Ch 421 and at 2.20 et seq above. City Code on Takeovers and Mergers, Rule 4.1. LSE, Model Code for Securities Transactions by Directors of Listed Companies, in Annex 1 to Listing Rule 9. 10 For a detailed discussion see B Rider, Insider Trading (Jordan Publishing 1980), Ch 3. 11 See B Rider, C Abrams and TM Ashe, Financial Services (CCH/Butterworths 1996), Chs 1, 2 and 3; B Rider and C Nakajima (eds); The British Financial Services Reporter (3 vols) (Sweet & Maxwell 1998), Chs 1 and 2; B Rider (ed), The Regulation of the British Securities Industry (Oyez 1979) particularly D Sugarman, Ch 4; B Rider, ‘Self-regulation: The British approach to policing conduct in the securities business with particular reference to the role of the City Panel on Take-overs and Mergers in the regulation of insider trading’ (1978) 1 Journal of Comparative Corporate Law and Securities Regulation 319 (also published as an occasional paper by the City Panel on Takeovers and Mergers/Bank of England); B Rider and E Hew, ‘The structure of regulation and supervision in the field of corporation and securities laws in Britain’ (1977) Revue de la Banque 83; B Rider and E Hew, ‘The Regulation of corporation and securities laws in Britain – The beginning of the real debate’ (1977) 19 Mal Law Rev 144; B Rider, ‘The British Council for the Securities Industry’ (1978) Revue de la Banque 303; B Rider, ‘Policing the International Financial Markets’ and ‘Policing Insider Dealing: The International Perspective’ in BT Tan, The Regulation of Financial and Capital Markets (Singapore Academy of Law 1991). 12 See generally B Rider and HL Ffrench, The Regulation of Insider Trading (Macmillan 1979) and B Rider and E Hew, ‘The Regulation of corporation and securities laws in Britain – The beginning of the real debate’ (1977) 19 Mal LR 144. 13 In 1973, the Conservative Government published a Companies Bill that would have outlawed insider trading, but it failed when the government was defeated in the February 1974 General Election. The Companies Bill that was proposed by the Labour government in 1978 suffered a similar fate after that Government was defeated in the May 1979 General Election. See generally B Rider and HL Ffrench, The Regulation of Insider Trading (Macmillan 1979) and B Rider, Insider Trading (Jordan Publishing 1980). 14 Companies Act 1980, ss 68–73. 15 Company Securities (Insider Dealing) Act 1985 (hereinafter the ‘Insider Dealing Act’). 16 Financial Services Act 1986, ss 173–178. 7 8 9

71

3.5  The main offences of insider dealing 3.5 The Insider Dealing Act 1985 prohibited persons who had access to material non-public information by virtue of their position with a company (including directors, officers, employees and various kinds of agents of the company) from trading in the securities of the company while in possession of such information. These insiders were also prohibited from making selective disclosure of such information to others (‘tipping’) and it prohibited their tippees from trading on the basis of such inside information. The Act also prohibited persons in possession of non-public information about a proposed takeover of a company from trading in that company’s stock. 3.6 The Insider Dealing Act 1985 provided for only criminal liability and its prohibitions applied only to individuals who acted while knowingly in possession of inside information. Although the Insider Dealing Act was an important step in outlawing the practice of insider dealing, the scope and impact of the British legislation was rather narrow.17 In fact, despite the fact that insider dealing had been an offence since 1980, there were no convictions under the Act’s provisions until the late 1980s. The general view was that the law was not effective. 3.7 In the following sections we will analyse the legislation that makes insider dealing a criminal offence. This is now found in Part V of the Criminal Justice Act 1993. The Financial Services and Markets Act 2000 (FSMA) imposes criminal and civil liability for market abuse which includes activity which would also fall within the scope of the Criminal Justice Act. The market abuse regime is discussed in Chapter 4. Over the years responsibility for investigating and prosecuting crimes involving insider trading has proved to be something of a ‘hot potato’. In the early years the Department of Trade and Industry did attempt to prosecute a small number of cases with mixed results. For a time this power was held by the Treasury, which distinguished itself no better. The Crown Prosecution Service has often been left holding the file and has done its best. The Serious Fraud Office (SFO) has been reluctant to take cases of insider trading and for a number of years dismissed such offences as being of a ‘technical and regulatory’ nature. As with the police, attitudes have changed. The SFO and in particular the City of London Police, which is the lead police force in the UK for economic crime, have both realised, albeit belatedly, the impact that allegations of insider abuse can have on the reputation of the City of London and its financial markets.18 With the realisation that ‘real’ criminals may engage in the deliberate gathering and exploitation of price-sensitive information, even the National Crime Agency’s Economic Crime Command has exhibited some interest.19 However, given the Financial

17

18

19

It can be argued that the courts as Lord Bingham LCJ pointed out in R v Staines and Morrisey [1997] 2 Cr App R 426 have been willing to interpret the relevant law purposively bearing in mind the mischief that the Insider Dealing Act was intended to address. See also AG’s Ref (No 1 of 1988) [1989] 2 WLR 729 discussed by G Durston and M Zaidi, The Little Book of Insider Dealing – An Essential Guide to the Law (Waterside Press 2018) at p 71. Having said that, there are relatively few appellate decisions and a seeming reluctance to take points of substantive law. The SFO has pursued a small number of cases, see in particular R v Richard Spearman and others involving allegations that an insider dealing ring used information supplied from Norman Payne a proof reader in the print setting room of a printers who handled sensitive material, see The Guardian, 7 January 2004 and 5 June 2004 and The Evening Standard, 12 April 2012. The National Crime Agency (NCA) has also taken on and assisted in several investigations, see in particular Operation Tabernula a joint operation of the FCA and NCA, ‘Insider dealers sentenced in Operation Tabernula trial’, FCA press release, 12 May 2016 and M Dogson,

72

The main offences of insider dealing  3.7 Conduct Authority’s (FCA) exclusive responsibility for policing the market abuse regime it is sensible that the FCA is now the lead prosecutor for cases under Part V of the Criminal Justice Act.20 Furthermore, as we have seen the FCA has authority to also pursue related offences such as money laundering and has been relatively successful in obtaining confiscation orders.21 The FCA’s predecessor, the Financial Services Authority (FSA) was criticised among other things for what was perceived, perhaps unfairly, as a rather laid back attitude to policing insider dealing and other rules relating to integrity. The FCA’s initial Director of Enforcement and Financial Crime promised that there would be a much more robust approach to the investigation and prosecution of such cases. She stated in late 2012 at a conference ‘our current work to tackle insider dealing is a world away from where it was five years ago. Since 2009 we have seen 21 convictions, confiscation orders totalling more than £ 2.2 million, prison sentences up to forty months … This tough approach will continue’,22 and on the whole it has.23 It should also be remembered that serious cases of insider abuse will often involve other criminal conduct and

20

21

22

23

‘Watching the insiders: the FCA’s fight against illicit traders in the City’, The Financial Times, 19 May 20016, On the other hand, there have been concerns that the very large amounts of money involved in pursuing these serious cases have had only limited results in terms of the number of people actually convicted. It has also been questioned whether convictions can have much of a deterrent effect given the amount of time it takes to get before the courts. Section 402(1) of the FSMA provides that the FCA is authorised to institute proceedings for an offence under Part V of the CJA. Section 61 of the CJA provides that proceedings for an offence in England and Wales can only be instituted with the consent of the Secretary of State, the Director of Public Prosecutions, in Northern Ireland, the DPP for Northern Ireland and in Scotland the Scots Law Officers. The courts have held that the FCA has concurrent authority to prosecute and does not need to seek authorisation as this is covered by FSMA, s 402(1), see R (on the application of Matthew Uberoi and Neel Uberoi) v City of Westminster Magistrates Court [2008] EWHC 3191 (Admin). See R v Rollins [2010] UKSC 39 and note the order for £3.9 million against Walid Choucair, see ‘Insider dealing conviction upheld by the Court of Appeal’, FCA press release, 16 December 2020. For a review of recent sentences and orders, see S Clarke, Insider Dealing, Law and Practice (2nd edn) (Oxford University Press 2020) at p 172. The FCA has also had success in pursuing defendants who have failed to comply with confiscation orders, see FCA v Pardip Saini (unreported), Southwark Crown Court, April 2015. T McDermott (Acting Chairperson of the FCA 2015 to 2016), conference speech, 15 November 2012. Lord Thomas LCJ, rejecting the appeal of Tom Hayes in regard to convictions on eight counts of conspiracy to defraud relating to the rigging of the LIBOR rate, emphasised (as did the trial judge Cooke J at Southwark Crown Court) the importance of sending out a message to those in the financial sector, and in particular banking, that failures of integrity will not be tolerated and deterrent sentences will be passed. In the present case, despite the defendant returning to the UK voluntarily and pleading guilty, he was initially sentenced to 14 years imprisonment. This was reduced on appeal to 11 years on account of his age (36), his non-managerial position in the relevant banks and his mild Asperger ’s condition (R v Hayes, Court of Appeal, 21 December 2015). At least in terms of the rhetoric. Between 2012 and 2016, the FSA secured 20 convictions for insider trading. However, from 2018 to 2022, only two convictions were obtained and prosecutions fell to an average of one and a half years, see A Ellson, ‘Only two insider traders caught by City watchdog in half a decade, The Times, 13 June 2022. See also B Chapman, ‘FCA; City watchdog secures just 12 insider trading convictions in five years, The Independent, 19 January 2018. See also A Ellson, ‘City readers getting away with abuse of markets – insider deals by white collar criminals ignored’, The Times, 19 January 2018, which reports that half the investigations that are initiated by the FCA are dropped, in part it is suggested due to lack of investigative resources. The FCA in a statement reported in The Times, 13 June 2022, emphasised that given the importance of data analysis, the number of investigators was misleading and that in recent times it places much more emphasis on prevention. On the analysis of suspicious price movements and the FCA’s abnormal volume ratio, see A Haynes, ‘Market Abuse Developments’ (2020) 14 Company Lawyer at 119.

73

3.7  The main offences of insider dealing more general offences, which we address in Chapter 6. Proceeds of crime and anti-money laundering law might also be relevant and reference should also be made to Chapter 7.24

THE OFFENCE OF INSIDER DEALING The Criminal Justice Act 1993, Pt V 3.8 The Criminal Justice Act 1993 (CJA 1993), Part V came into force on 1 March 1994. It, apart from drawing on the experience of earlier legislation, seeks to implement the European Insider Dealing Directive.25 The primary objective of which is to protect the integrity of the financial markets and thus promote confidence on the part of those who use them, that ‘the use of information to provide an advantage to an insider and … an insider providing information to a third party …’ is prevented.26 Part V of the Act provides for the offence of insider dealing. This seeks to prohibit individuals from engaging in three classes of conduct in particular circumstances. First, the Act prohibits dealing in price-affected securities on the basis of inside information.27 Secondly, it prohibits the encouragement of another person to deal in price-affected securities on the basis of insider information and, thirdly, it prohibits knowing disclosure of insider information to another.28 To prove an offence under section 52, it is necessary to demonstrate two elements: (a) the status of the person charged as an insider and (b) the type of information in its possession to be inside information. 3.9 ‘(1)

Section 52 provides: An individual who has information as an insider is guilty of insider dealing if, in the circumstances mentioned in subsection (3), he

24 Note that the FCA is competent to pursue other offences related to insider dealing. For example, it can also prosecute money laundering under sections 327 and 328 of the Proceeds of Crime Act, see R v Rollins [2010] UKSC 39 and see Chapter 8. In addition to offences related to money laundering there are offences in the Fraud Act 2006 which might be relevant and there is the possibility of a charge of conspiracy under section 1 of the Criminal Law Act 1977, as were laid in R v Richard Joseph (unreported), Southwark Crown Court, 30 January to 11 March 2013 and FSA/PN/023/ 203. 25 Council Directive 89/592/EEC, 13 November 1989. This Directive provides for minimum standards for harmonisation and was the product of prolonged discussion and negotiation within the Community. European regulation was first seriously considered in the Segre Report, The Development of a European Capital Market, Report of a Group of Experts, EEC Commission, November 1966. Reference might also be made to the recommendation of the Commission, The European Code of conduct for transactions in transferable securities, 25 July 1977, OJ L212/37. For a discussion of the Segre Report and the Code, see generally B Rider and HL Ffrench, The Regulation of Insider Trading (Macmillan 1979), B Rider (ed), The Regulation of the British Securities Industry (Oyez 1979) particularly R Pennington, Ch 8 and K Hopt and Eddy Wymeersch, European Insider Dealing (Butterworths 1991). For a comprehensive discussion of the implementation of the directive, see R Alexander, Insider Dealing and Money Laundering in the EU: Law and Regulation (Ashgate 2007). For context, albeit dated, see E Ferran, Building an EU Securities Market (Cambridge University Press 2004). 26 See Warren J in Hannam v FCA [2014] UCUT 0233 (TCC) referring in particular to the Market Abuse Directive and the comments of the Court of Appeal in R v McQuoid [2009] EWCA Crim 1301. See also Spector Photo Group NV v Commissie voor het Bank [2009] ECR 1-12073. 27 CJA 1993, Pt V, s 52(1). See in particular 4.15 below. 28 CJA 1993, Pt V, s 52(1) and (2).

74

The main offences of insider dealing  3.10

(2)

(3)

deals in securities that are price- affected securities in relation to the information. An individual who has information as an insider is also guilty of insider dealing if – (a) he encourages another person to deal in securities that are (whether or not that other knows it) price-affected securities in relation to the information, knowing or having reasonable cause to believe that the dealing would take place in the circumstances mentioned in subsection (3); or (b) he discloses information, otherwise than in the proper performance of the functions of his employment, office or profession, to another person. The circumstances referred to above are that the acquisition or disposal in question occurs on a regulated market, or that the person dealing relies on a professional intermediary or is himself acting as a professional intermediary.’

3.10 Criminal liability for each offence may only attach to an individual because the term ‘individual’ is defined to exclude corporations and other entities such as public authorities. This is a significant point of difference with the civil offence of market abuse under the FSMA, as we shall see29 The definition of individual does cover, however, unincorporated partnerships or firms comprising a collection of individuals. Moreover, it should be noted that a company could be liable for insider dealing by committing the secondary offence of encouraging another person to deal.30 In theory, it might also be

29

30

There has been discussion as to whether the criminal offences should be extended to cover companies as in the case of the civil offences in the market abuse regime. This was recommended by The Fair and Efficient Market Review (2015), Bank of England, HM Treasury and the Financial Conduct Authority, para 21. Given the legal and practical difficulties of successfully prosecuting companies (see, for example, SFO v Barclays plc [2018] EWHC 3055 (QB), which we consider at 2.37 and 15.6, despite arguments based on reinforcing corporate cultures and responsibility (see, for example, C Wells, Corporations and Criminal Responsibility (Oxford University Press 1993)) the law has been left as it is. There is probably more mileage in the proposal to create an offence rather like in section 7 of the Bribery Act 2010 imposing corporate responsibility for failing to prevent the crime of insider dealing by individuals. This approach was followed in section 45 of the Criminal Finances Act 2017 in regard to failure to prevent facilitation of tax evasion. Indeed, the Attorney-General (Mr Jeremy Wright QC MP), in a speech at the Cambridge International Symposium on Economic Crime, September 2018, announced that the government was considering adopting this approach to failing to prevent economic crime, see M Goodwin, M Sloane and A Riese, ‘Is it now inevitable corporates will face new “failure to prevent economic crime” offences’, Red Lion Chambers, 11 April 2019. While there is some support within government for creating such an offence, the corporate interest and therefore perhaps responsibility is rather less in the majority of cases of insider dealing than in the bribery cases. Of course, as was accepted from the start, companies can only act through individuals who are subject to the offences. Furthermore, in most cases that have been developed to a point where prosecution is viable, the level of involvement in the company’s operations would not normally be such as to justify attribution of knowledge to it (see, for example, R Littlewood (unreported), Southwark Crown Court 10 January 2011, FSA/PN/062/2011. However, many common law jurisdictions and a good many others do provide for corporate criminal liability, see, for example, in regard to Australia, J Overland, Corporate Liability for Insider Trading (Routledge 1919). See also generally, B Fisse and J Braithwaite, ‘The allocation of responsibility for corporate crime: individualism, collectivism and accountability’ (1988) 11 Sydney Law Review 468. See an analysis of the encouragement offence at 3.68 below, and at 3.25 below in regard to secondary offences.

75

3.10  The main offences of insider dealing included in a conspiracy charge, although the practical advantages in doing so might not be compelling.31 3.11 While insider dealing has been described as a species of fraud,32 it is not necessary to show that the defendant has acted with any dishonesty. Arden LJ in Ivey v Genting Casino UK Ltd33 observed ‘Parliament has made insider dealing a criminal offence. The offence may be constituted where a person deals in securities on the basis of unpublished price sensitive information … there is no requirement for dishonesty.’ Indeed, as was made clear in R v Asif Nazir Butt34 it makes no difference that the defendant, in this case accused of conspiracy to engage in insider dealing, thought that what he was doing was legal. Of course, as we shall see it must be proved that the defendant was aware of the factual situation.

INSIDERS 3.12 To commit the offence of insider dealing, an individual must have information ‘as an insider’, which is defined in the CJA 1993, section 57: ‘(1) (2)

… a person has information as an insider if and only if – (a) it is, and he knows that it is, inside information, and (b) he has it, and knows that he has it, from an inside source. For the purposes of subsection (1), a person has information from an inside source if and only if – (a) he has it through (i) being a director, employee or shareholder of an issuer of securities; or (ii) having access to the information by virtue of his employment, office or profession; or (b) the direct or indirect source of his information is a person within paragraph (a)’.

3.13 The CJA 1993, section 57 creates a distinction between a primary insider (a person who has direct knowledge of inside information) and a secondary insider (a person who learns inside information from an inside source).35 The primary insider obtains inside information through being a director,36 31

32 33 34 35 36

There are tactical investigative and other advantages in throwing the net over a company and possibly aiming for the negotiation of a Deferred Prosecution Agreement, albeit these have tended to make it in practical terms, more difficult to successfully prosecute individuals even if they have been ‘hung out to dry’ by their companies, see below at 6.91. The Court of Appeal in R v McQuoid [2009] EWCA Crim 1301 stated ‘we … emphasise that this kind of conduct does not merely contravene regulatory mechanisms … when done deliberately, insider dealing is a species if fraud; it is cheating’. [2016] EWCA Civ 1093. In regard to the ‘civil offence’ of insider dealing, see 4.20 et seq below. [2006] 2 Cr App.R 44. The Court of Appeal and the judge at first instance doubted whether the defendant genuinely believed he had found a loophole in the law and it was accepted he had acted dishonestly. In regard to the ‘civil offence of market abuse, see 4.20 et seq below. This terminology was first adopted in B Rider, Insider Dealing (Jordan Publishing 1983). See also B Rider and HL Ffrench, The Regulation of Insider Trading (Macmillan 1979). Shadow directors discussed at 2.41 et seq, are probably included, but would in any case clearly fall within sections 57(2)(a)(ii) or 57(2)(b). In Re Westshield Ltd [2019] EWHC 115 Judge Eyre QC rejected the petitioner’s contention that directors were entitled to ‘full access to all the affairs of the company.’ The court accepted that ‘a director … is entitled to the information necessary to enable him or her properly to undertake the duties of a director’

76

The main offences of insider dealing  3.16 employee or shareholder37 of an issuer38 of securities or any person who has information because of his employment, profession or office. A secondary insider obtains inside information either directly or indirectly from a primary insider. For example, section 57 would impose liability on brokers or analysts as secondary insiders if they act on ‘market intelligence’ that comes from a primary insider.39 3.14 The insider dealing offence can only be committed if the acquisition or disposal of securities occurs on a regulated market or if the person dealing relied on a professional intermediary or is himself a professional intermediary.40 The CJA 1993 defines ‘professional intermediary’ as a person who carries on a business of acquiring or disposing of securities (whether as principal or agent) or a business of acting as an intermediary between persons taking part in any dealing in securities, or who hold himself out as willing to do so.41 Individuals employed by such a person to carry out these activities are also defined as ‘professional intermediaries’. The definition of professional intermediary does not include a person whose activities are merely incidental to other activities or if those activities are only conducted occasionally.42 3.15 The CJA 1993, section 59 defines professional intermediary as follows: ‘(1)

(2)

… a professional intermediary is a person – (a) who carries on a business consisting of an activity mentioned in subsection (2) and who holds himself out to the public or any section of the public (including a section of the public constituted by persons such as himself) as willing to engage in any such business; or (b) who is employed by a person falling within paragraph (a) to carry out any such activity. The activities referred to in subsection (1) are – (a) acquiring or disposing of securities (whether as principal or agent); or (b) acting as an intermediary between persons taking part in any dealing in securities’.

3.16 Under this definition, a person will rely on a professional intermediary only if the professional intermediary either acquires or disposes of securities

37

38 39 40

41 42

while ‘the board is entitled to full information about every aspect of a company’s affairs.’ Indeed, a director is not properly performing his duties it might be appropriate to restrict his access to information. Notwithstanding the fact that shareholders in English law have no preferential access as shareholders to company information, see our discussion at 1.42 and 2.44, they are included to be in compliance with Article 2(1) of the EU Insider Dealing Directive 89/592/EEC, 13 November 1989. Note any issuer not necessarily the company in whose securities the trading takes place. See the discussion of ‘tippee’ liability at 3.75 et seq below. CJA 1993, s 52(3). The dealing will be caught therefore if a professional intermediary is involved even though the securities are not traded on a regulated market (see R v Sanders (unreported), Southwark Crown Court, 20 June 2012, where Simon J. ruled it is sufficient ‘if the prosecution can show that the person dealing relied on a professional intermediary, it does not matter whether or not the dealing occurred on a regulated market’). It is only dealings outside a regulated market that do not involve in any way a professional intermediary that fall outside the offences. CJA 1993, s 59(1)(a). CJA 1993, s 59(3)(a)–(b). See S Clarke, Insider Dealing, Law and Practice (2nd edn) (Oxford University Press 2020) for a discussion of the factual situations at p 108 et seq.

77

3.16  The main offences of insider dealing (whether as principal or agent) in relation to the dealing or acts as intermediary between persons taking part in the dealing.43 If deals in securities do occur on a regulated market (that is an investment exchange), the insider dealing offence will be relevant unless the transaction is truly a private deal off the market without the intervention of a market professional. This section therefore confines the scope of the offence to organised markets and where professional intermediaries are involved reflecting the concern to protect confidence in the operation of markets rather than address private direct transactions.44 3.17 The offence of insider dealing cannot apply to anything done by an individual acting on behalf of a public sector body in pursuit of the government’s economic policies such as, for example, managing monetary policy through the adjustment of exchange rates, interest rates or the public debt or foreign exchange reserves.45 The purpose of these exclusions is to permit government policymakers to have sufficient discretion to manage the economy in the public interest. However, these exclusions would not apply to the government’s sale of shares in a privatisation. Nor would they cover the private transactions of officials. We have already noted that section 63(2) also provides that no contract shall be void or unenforceable by reason only that an offence may have been committed under section 52.46

The elements of the dealing offence 3.18 The two essential requirements for the dealing offence are that (a) an individual must have information as an insider, and (b) the insider must deal in securities that are price-affected securities in relation to the information.47 Securities are price-affected securities for the purposes of this offence if the information if made public would be likely to have a significant effect on the price of the securities. Therefore, there must be a causal link between the relevant information and its likely impact on the price of the securities in which the insider deals or encourages another person to deal. By the same token, price-sensitive information in relation to securities must be such as to have similar impact.48 Accordingly, if an insider has inside information, he must not deal in the securities to which that information relates. The CJA 1993 adopts a broad definition of ‘dealing in securities’ to cover any acquisition or disposal of a security, including an agreement to acquire or dispose of a security and the entering into a contract which creates the security or the bringing to an end of such a contract.49 Moreover, such acquisitions or disposals are within the definition irrespective of whether they are made by an individual as principal or as agent.

43 44 45 46 47 48 49

CJA 1993, s 59(4). ‘The purpose of the legislation is to ensure confidence in the market in the broadest sense. So only transactions in securities that are market related are to be caught.’ HC Deb, Standing Committee A & B, Official Report, Session 1992–93, vol 11, col 166. CJA 1993, s 63(1). See discussion at 2.53 et seq. CJA 1993, s 52(1). CJA 1993, s 56(2). See generally Hannam v Financial Conduct Authority [2014] UKUT 0233 (TCC). CJA 1993, s 55(3)(b).

78

The main offences of insider dealing  3.21 3.19 Section 54 provides that the securities covered by the anti-insider dealing offences are those included within the list in Schedule 2 of the Act and which satisfy the conditions set out in the relevant statutory instruments.50 This approach was designed to avoid catching all shares including those of private companies. The securities referred to in the list include shares, debt securities,51 warrants, options, depository receipts, futures and contracts for differences. They also include gilts and local authority stock (even of foreign public bodies) and their derivatives. The list conforms to the EC Directive on Insider Dealing52 so that not only corporate securities and instruments based on such securities are included, but also that other contractual rights in other futures and derivatives markets are covered. While spread bets are not specifically included in Schedule 2 the better view is that they are also covered.53 The Treasury, has effectively implemented the requirement of the Directive to restrict the offence to securities that are ‘officially listed in a State within the European Economic Area, or admitted to dealing on, or have its price quoted on or under the rules of, a regulated market’.54 3.20 The relevant time at which to consider whether or not an offence has been committed would appear to be at the time of agreement to acquire or dispose the security in question. At that time, if the individual had inside information about these securities, he will have committed an offence. However, if he received inside information only after making the agreement, he will probably not have violated the provision if he completes the deal and actually acquires or disposes of the securities. On the other hand, if the individual had the inside information at the time when he agreed to acquire or dispose of the security, it would seem that he will still have committed an offence, even if he does not complete the bargain. 3.21 The acquisition or disposal may be made by an individual acting either as principal or agent. Accordingly, if an agent has inside information, he will be within the scope of the offence if he deals in the relevant securities even though, in a direct sense, he will not gain from the transaction. This has special relevance to a trader who is engaged in a transaction as agent, to benefit his principal. The fact that the individual deals as agent and not

50 51 52 53

54

Insider Dealing (Securities and Regulated Markets) Order 1994 (SI 1994/187). See generally Fons Hf v Corporal Ltd [2014] EWCA Civ 304. Council Directive 89/552/EEC, Article 1(2). R v Butt and others (unreported), Southwark Crown Court, 17 March 2004 and see also Spreadex v Battu [2005] EWCA Civ 855 and City Index Ltd v Balducci [2011] EWHC 2562 (Ch). There have been several prosecutions involving spread bets and the argument that they are not included has not been persisted with, see, for example R v Sanders (unreported), Southwark Crown Court, 20 June 2012 and R v Mustafa (unreported), Southwark Crown Court, 5 to 23 July and 27 July 2012 or taken, R v Clark (unreported), Southwark Crown Court, 20 June 2016 and R v Dodgson (unreported), Southwark Crown Court, June 2016 and see S Clarke, Insider Dealing, Law and Practice (2nd edn) (Oxford University Press 2020) at p 119. Council Directive 89/552/EEC, Article 4. Section 60 defines a regulated market as any market, however operated, that is identified as a regulated market by the Treasury. The Insider Dealing (Securities and Regulated Markets) Order 1994, SI 1994/187, as amended by the Insider dealing (Securities and Regulated Markets) (Amendment) Orders (SI 2000/1923 and SI 2002/1874) provides that a regulated market is any market which is established under the rules of an investment exchange specified in Sch 2. This list is now quite out of date and contains several anomalies. For example, NASDAQ is included in the Schedule although the NYSE is not. Of course, with multiple listings and cross quotation this does not result in the lacunae that might be thought. See also R v Sanders and others (unreported), Southwark Crown Court, 20 June 2012 and FSA/PN/060 2012 and FSA/PN/ 067 2012.

79

3.21  The main offences of insider dealing principal is irrelevant. However, where the agent deals on an execution basis only, such an approach hardly seems justified and is unfair to the principal who gave the instruction if the agent then feels inhibited from processing the order. Fortunately, it appears that a defence in this situation would allow the agent to act on instructions notwithstanding that, incidentally, he has inside information.55 3.22 A person is also regarded as dealing in securities if he procures, directly or indirectly, an acquisition or disposal of the securities by another person.56 Such procurement may occur in a number of ways, including where the person who actually acquires or disposes of the security is acting as an agent, nominee or at the direction of another in relation to the acquisition or disposal of a security.57 This aspect of the definition of ‘dealing in securities’ is designed to cover transactions through an agent or nominee where the principal has relied on inside information without purchasing or selling the securities himself. We have already noted that only the most optimistic and naïve director would today risk dealing directly himself on inside information. For example, in R v Goodman58 the company’s chairman, aware that the company was about to announce a significant loss, gave his substantial shareholding to his girlfriend to off load. The court had no difficulty in holding that he has procured her disposal. Transactions are also covered that are undertaken at the direction of a sole shareholder who uses its influence over a company to deal in its shares.59 3.23 The broad scope of the procurement prohibition was recognised in debates in the House of Commons Standing Committee during passage of the Criminal Justice Bill in which the phrase ‘a person who is acting at his direction’ may likely result in liability for a principal who has inside information, but whose investment portfolio is handled by someone else on a discretionary basis. For example, this might occur in the case of a fund manager who had the authority to deal in a discretionary manner in securities to which his principal’s insider information relates, thus resulting in liability for the principal, despite the principal’s lack of knowledge of the specific transaction. 3.24 The government’s Economic Secretary responded by stating that whilst it was possible for a person who had transferred its holdings of a portfolio to an investment manager to be exposed to liability as a procurer, ‘it may well be that’60 a person who gives a general direction to another to manage its affairs would not be considered to have directed and, therefore, to have procured dealings in securities which were undertaken by the person with responsibility for managing the fund. Moreover, the minister stated that in cases where there were circumstances to suggest that a person had procured a transaction, the holder of the shares would have a statutory defence if the holder had not genuinely influenced the dealing.61 55 56 57 58 59 60 61

CJA 1993, s 53(1)(c). CJA 1993, s 55(1)(b). CJA 1993, s 55(4). In section 55(5) it is made clear that subsection (4) is not exhaustive as to the circumstances in which one person may be regarded as procuring an acquisition or disposal of securities by another. (unreported), but see The Financial Times 1 May 1991 and 16 June 1992 and refer to Chase Manhattan Equities Ltd v Goodman [1991] BCLC 897 discussed at 2.53 et seq above. See HC Deb, Standing Committee B, Official Report, 10 June 1993, vol 11, col 171 per the Economic Secretary. See HC Deb, Standing Committee B, Official Report, 10 June 1993, vol 11, col 171 and 172 (per Mr Peter Ainsworth MP). See the CJA 1993, s 53(1)(c).

80

The main offences of insider dealing  3.26 3.25 We have already emphasised that Part V needs to be considered in the context of the general criminal law. For example, while the offence of primary insider dealing does not extend to companies as the statute refers to individuals rather than persons, there is nothing to stop a charge alleging liability as a secondary offender. In the case of R v Neel and Matthew Uberoi62 the Crown Court accepted that on the facts it was appropriate to charge the accused for aiding and abetting the dealing of his father rather than allege procurement. The accused had imparted the relevant information to his father who then dealt with the accused’s complete knowledge and agreement, albeit no evidence was put before the court that the accused had benefited personally. Judge Testar had no difficulty considering that the accused was liable as a joint principal in this joint enterprise. He rejected the argument that section 55(4) determined the way in which a person could deal referring to section 54(5) which makes it clear that the circumstances set out in subsection (4) are not exhaustive. Furthermore, he accepted the prosecution’s view that section 55(4) was meant to catch those who procured another to deal in circumstances where that other person was not aware that they were engaged in insider dealing. In cases where they were, then it was appropriate to charge a joint enterprise and impose liability as an accessory. Of course, this does not mean that the accused on the facts of this case could not have been just as well charged with procuring the fact that his father was complicit would not have been a defence.63

The characteristics of insider information 3.26 Each of the three offences provided for in the CJA 1993 and the FSMA require that insider information be an essential element of the offence.64 It must also be the case that in many situations the information will have a dynamic quality and develop and perhaps wane.65 Whether it can legally constitute inside information needs to be determined at the time of the alleged offence and therefore this analysis is very time-specific.66 Commentators have acknowledged, however, that, notwithstanding the statutory definition, inside information is a difficult legal concept to define in practice. For example, at any one time, a substantial amount of information will be generated within a company and be available to its directors, employees and advisors. Much of this information will be confidential and may have some impact on share prices. Generally, insider dealing law should not be concerned with this type of information, but rather it should focus on information that is essentially

62 (unreported), Southwark Crown Court, 28 October to 6 November 2009 and see FSA/PN/149/ 2009 and 10 December 2009, FSA/PN/170/2009. 63 Attorney-General’s Reference (No 1 of 1975) [1975] 61 Cr App R 118 where the Court of Appeal emphasised that it could be appropriate to charge procurement ‘even though there is no sort of conspiracy between the two’. 64 For example, see R Coren and Greenwood, The Financial Times, 24 January 1990 – the prosecution was dropped (under the old law) as it could not be shown that the defendant was in possession of inside information at the relevant time. 65 As we have seen in our discussion in Chapter 1, the significance of the relevant information, judged at the pertinent time, can be the same whether it be true or false. The information does not need to be true or what it imports come to fruition. See, for example, in a proceeding under the FSMA, Hannam v Financial Conduct Authority [2014] UKUT 0233. 66 See, for example, R v Abdel-Malek and Choucair (unreported), Southwark Crown Court, May 2019. Of course, what transpires either side of the relevant conduct might well be a good basis for inference, such as in R v Mohal and Birk (unreported), Southwark Crown Court, January 2017.

81

3.26  The main offences of insider dealing extraordinary in nature and which is reasonably certain to have a substantial impact on the market price of securities.67 Indeed, during debate over the original UK insider dealing law, ministers acknowledged that the kind of knowledge they were concerned with was that of dramatic events and major occurrences that would transform a company’s prospects.68 Over the years it has often been emphasised that the purpose of the law is certainly not to discourage those in an insider relationship with a company from investing in that company. If they act properly then their relationship as an investor is entirely acceptable.69 3.27 The CJA 1993 and the FSMA both assess the quality of information to determine whether it is inside information by use of criteria that seek to ascertain whether or not information has a ‘significant effect’ on the market price of the security. It is important to remember that in real cases there are likely to be more than one item of information and the prosecution must establish, beyond a reasonable doubt, that each item of information that it seeks to rely on to prove guilt meets all the criteria.70 In many cases and certainly most of those in which action has been taken under the market abuse regime in the FSMA the information has been relatively sensational and related to takeovers or other major corporate events.71 Indeed, it is these cases that are often the easiest to detect as the very event when it takes place, operates as a red flag to those interested in market surveillance. Interestingly, however, in the case of prosecutions under Part V other types of information have often been the basis for the allegations. For example, in R v McQuoid and Melbourne72 the inside information was serious negative trading results and in R v Neel and Matthew Uberoi73 the prosecution was based on very positive results from test drillings by an exploration company. 3.28 The CJA 1993 defines inside information by reference to four characteristics as provided in the CJA 1993, section 56: ‘(1) … inside information means information which – (a) relates to particular securities or to a particular issuer of securities or to particular issuers of securities and not to securities generally or to issuers of securities generally; (b) is specific or precise; (c) has not been made public; and

See 1.15 et seq above, and for a traditionally good example, see SEC v Texas Gulf Sulfur Co 401 F 2d 833, 848 (2nd Cir, 1968). 68 Parliamentary Debates, House of Commons, Standing Committee A (debates on the Company Bill), 6 December 1979, col 394. 69 See, for example, Herbert Smith Freehills, A Practical Guide to the UK Listing Regime (3rd edn) (ICSA 2015), Ch 5 in regard to the Model Code. 70 In R v Sanders (unreported), Southwark Crown Court, 20 June 2012, before Simon J – one charge was not proceeded with as the prosecution accepted this was not achievable. 71 See in regard to the handling and disclosure of such information Chapters 5, 8 and 9 in Herbert Smith Freehills, A Practical Guide to the UK Listing Regime (3rd edn) (ICSA 2015). 72 (unreported), Southwark Crown Court, 9 to 17 March 2009 and FSA/PN/042 2009 see also R v Neil Rollins (unreported), Southwark Crown Court, 16 to 26 November 2010 and FSA/ PN/168 2010. 73 (unreported), Southwark Crown Court, 28 October to 6 November 2009 and FSA/PN/149 2009. In others it has been take-over related, see, for example, R v Malcolm Calvert (unreported), Southwark Crown Court, 16 February to 11 March 2010 and FSA/PN/041 2010 and R v Mustafa and others (unreported), Southwark Crown Court, 5 March to 23 July 2012 and FSA/PN/080 2012 and R v Richard Joseph (unreported), Southwark Crown Court, 30 January to 11 March 2013 and FSA/PN/023 2013. 67

82

The main offences of insider dealing  3.31

(2)

(3)

(d) if it were made public would be likely to have a significant effect on the price of any securities. … securities are “price-affected securities” in relation to inside information, and inside information is “price-sensitive information” in relation to securities, if and only if the information would, if made public, be likely to have a significant effect on the price of the securities’.74 For the purposes of this section ‘price’ includes value.

The FSMA has also adopted this meaning of the term ‘inside information’. 3.29 The characteristics and elements of inside information are such that they should cover information which relates to a specific sector as well as to a specific security, while excluding general information. General information has been defined, for example, under the FSMA, as information which can be obtained by research or analysis conducted by or on behalf of users of a market.75 3.30 The approach of the CJA 1993 and the FSMA conforms with that of the European Directive on Insider Dealing76 and even seems to accomplish the objective of promoting an efficient market through the timely disclosure of information more effectively than the Directive, which has been criticised on the grounds of obscurity.

Particular securities and particular issuers of securities 3.31 The first of these four characteristics as set out in the CJA 1993 makes clear that information which relates to a specific sector is included, as well as that which relates to a specific security. Accordingly, information may still be inside information, although it has nothing specifically to do with a particular company or its shares, but rather relates to the industry in which that company operates.77 Similarly, inside information relating to an issuer will include information which comes directly from the issuer. Thus, for example, information about a substantial increase or reduction in profits of a company,78 which clearly has its source within the organisation, will certainly be information which relates to an issuer. The information, however, referred to in the CJA 1993 also includes information that arises from a source outside of the issuer. This may occur in a takeover bid where the proposal to acquire the company’s shares emanates from the bidder. It would also include information relating to impending actions by others which are likely to have a significant market impact.79 Similarly, information relating to securities may be internal, 74 CJA 1993, s 56. Under the Company Securities (Insider Dealing) Act 1985, inside information was referred to as ‘unpublished price-sensitive information’ that contained the following elements: • the information was not generally to be known to those persons accustomed or likely to deal in the company’s securities; • the information should be likely to affect the price of the securities; and • the information was such that it would be reasonable to expect a primary insider not to disclose it, except in the proper performance of its functions. 75 FSMA, s 118(7). 76 Council Directive 89/592/EC, Article1(1). 77 See BAK Rider and M Ashe, Insider Crime (Jordan Publishing 1993) at p 30 et seq. 78 See, for example, R v McQuoid and Mebourne (unreported), Southwark Crown Court, March 2009, see note 72 above. 79 See discussion at 1.35 et seq.

83

3.31  The main offences of insider dealing such as dividends, but may be external, such as a decision by the company to be listed on the Stock Exchange. 3.32 There are situations, however, when the question will not be so straightforward regarding when information relates to a particular security or particular issuer80 or issuers. Although it is clear that the definition does not include information which relates to securities generally or to issuers generally, there is much information which, although not of that general quality, is not related to a particular security, but may, nonetheless, have a significant effect on its price if disclosed to the public. 3.33 If, for example, an employee of Microsoft has, in the course of her employment, gained knowledge that Microsoft is about to submit a bid for the shares of another publicly-held company, this information is likely to be advantageous if she were to purchase shares in the other company. Undoubtedly, the information has its most direct relationship with Microsoft and, because the employee has the information as an insider (and assuming it to be pricesensitive, negatively, in relation to Microsoft’s shares) she should not deal in Microsoft’s shares by selling them before the news becomes generally available with the likely result that their price will drop. Similarly, the information may also have been considered to relate to the target company. It would be curious, if not illogical, if the employee, having obtained the information as an insider, had committed an offence by selling the shares in Microsoft, but not have committed an offence by purchasing shares in the target company. In both cases, the employee was acting on the same information obtained as an insider and in both cases that information would have a significant effect on the prices of each share. Yet, it is arguable that the information did not relate to the target company, rather it only related to Microsoft. It would seem, however, that such a result would offend common sense. 3.34 The CJA 1993, section 60(4) provides clarification on this issue by stating: ‘For the purposes of this Part, information shall be treated as relating to an issuer of securities which is a company not only where it is about the company but also where it may affect the company’s business prospects.’ This provision appears to apply to the above example by ensuring that the information relates not only to Microsoft, but also to the target company, because it will affect the target company’s prospects, that is Microsoft’s proposed purchase of the shares will likely enhance the value of the target company’s shares. 3.35 The statutory provision was criticised as being too broad because of its inclusion of the term ‘business prospects’ in the definition of insider dealing. The statute’s inclusion of the term ‘business prospects’ was defended by the Earl of Caithness on behalf of the government in debate in the House of Lords when he said: ‘It is included because the government believes that it is essential our insider dealing legislation catches as inside information, information which, while

80

For example, under the old law, Lord Bingham LCJ accepted that information relating to an intended takeover bid might still be sufficient for liability, in that case given its detail, as while the intended target had not been disclosed it was relatively easy to deduce, R v Staines and Morrisey [1997] 2 Cr App R 426.

84

The main offences of insider dealing  3.37 not relating directly to a company, would nonetheless be likely to have a significant effect on the price of its shares. An example of information in this category might be important regulatory decisions and information about a company’s major customer or supplier’.81 3.36 It is generally accepted that the CJA 1993 adopts a broad-based approach to the definition of inside information, together with an expanded approach to who is an insider,82 but the exclusion from the definition of information which relates to securities generally, or to issuers of securities generally, appears to mean that, for example, confidential information of a particular government economic policy which will impact on the market generally is outside the definition of inside information. In this regard, the CJA 1993 appears to be less strict than the European Directive on Insider Dealing, Article 1(1), which places no such restriction and specifically includes such general news. The Directive, therefore, has a broad scope, as compared to the narrower approach of the CJA 1993. The FSMA seeks to address this discrepancy by adopting an approach that includes information that affects the market generally, but which may have a specific effect on the issuers of specific securities.

‘Specific’ or ‘precise’ 3.37 Inside information must also be characterised by the terms ‘specific’ or ‘precise’. The CJA 1993 includes the word ‘specific’ because the word ‘precise’, by itself, may not have covered, for example, information that there will be a huge dividend increase if the quantum of that increase is not indicated. In Australia directors were exonerated from an allegation that they had violated the stock exchanges’ timely disclosure policy when they failed to make an announcement that the company was facing significant losses, when the actual amounts had yet to be assessed. The inspectors appointed to inquire into this took the view that a premature statement might, with the benefit of hindsight, have appeared, if wrong, manipulative.83 Of course, this is a somewhat different issue than whether the information might have been considered inside information.84 Information is precise when it is exact.85 The word ‘specific’ is intended to ensure that information that, for example, involves a large drop in a company’s earnings would be considered inside information, while mere rumour and untargeted information cannot.86

81 82 83

84 85 86

Parliamentary Debates, House of Lords, 3 December 1992, col 1501 (The Earl of Caithness). CJA 1993, s 57(2)(a)(ii). Mr PD Connolly QC in his Report into the affairs of Queensland Syndication Management Pty Ltd and Ors (1974), see B Rider and HL Ffrench, The Regulation of Insider Trading (Macmillan 1979) and B Rider, Insider Trading (Jordan Publishing 1980). See also in this regard Thorold Mackie v HM Advocate 1994 JC 132, 1995 SLT 110. The importance of timely disclosure in correcting an earlier forecast was emphasised by the Australian Federal Court in TPT Patrol Pty Ltd as trustees for Amies Superannuation Fund v Myer Holdings Ltd [2019] FCA 1747. See generally in regard to the position today in the UK, Herbert Smith Freehills, A Practical Guide to the UK Listing Regime (3rd edn) (ICSA 2015) at Ch 8. Such as, for instance, the planned timing of a take-over announcement, see R v Mohal and Birk (unreported), The Old Bailey, January 2017. In regard to the civil offence of market abuse, see 4.25 et seq below. Parliamentary Debates, House of Lords, 3 December 1992, col 1501 (per The Earl of Caithness).

85

3.38  The main offences of insider dealing 3.38 Moreover, the use of the word ‘specific’ may eliminate more than mere rumour and untargeted information. An Australian case held that the phrase ‘specific information’ meant not merely that the information was precisely definable, but that its entire content can be precisely and ‘unequivocally expressed and discerned’.87 The court concluded that specific information had to be specific in itself and not based on a process of deduction.88 On this approach, a company that was prepared to purchase a large amount of shares from several persons would not be considered specific in relation to a similar purchase from one person. Although this view may be attractive, it is often inferences drawn from facts which affect market price and, theoretically, if the facts are not made public, the insider who has them also needs to be restrained from trading on inferences made from those facts as we have indicated above. 3.39 Whatever the correct approach for inferences, information may still be specific even though, as information, it has a vague quality.89 Thus, information concerning a company’s financial problems has been held to be specific by the courts in Singapore.90 Moreover, information as to the possibility of a takeover may be regarded as specific information91 and will likely rank as precise, given that it is more than a mere rumour. In cases of secondary insider abuse regard must be had to the facts and in particular the sophistication and knowledge of those involved.92 The House of Commons Standing Committee that was considering the Criminal Justice Bill provided some examples of what the words ‘specific’ and ‘precise’ would cover. Example 1 3.40 As the chairman of a company and an analyst walked into a car park, they saw the chairman’s battered BMW. The analyst said to the chairman, ‘Isn’t it time you got a new car?’ The chairman replied that he would not buy a new car that year. 3.41 The Economic Secretary considered that these circumstances would lead neither to specific nor precise information in relation to the company, given that there could be many reasons for the statement, including the fact that the chairman may have been experiencing personal financial troubles.93 87 Ryan v Triguboff [1976] 1 NSWLR 588 at 596 per Lee J. 88 Ryan v Triguboff at 597. 89 See R v Staines and Morrissey [1997] 2 Cr App E 426 under the earlier provisions. 90 Public Prosecutor v Choudhury [1980] 1 MLJ 76 at 78. 91 See above at note 78 and Green v Charterhouse Group of Canada Ltd (1976) 12 OR (2d) 280. The Ontario Court of Appeal held such information to be specific even though it may not have been worthy of credence or not have been of sufficient weight to justify any positive action by the board. 92 See in particular R v Staines and Morrissey [1997] 2 Cr App R 426 in which it was considered information that was imparted during a guessing game was nonetheless sufficiently precise as it was relatively easy for those involved to put two and two together. Lord Bingham LCJ stated ‘The most obvious case of insider dealing plainly occurs where a connected person tells a friend that he is advising a client who is prepared to make a bid for the share capital of named Company B. But there will doubtless occur less obvious cases where a connected person supplies a friend with information which enables the friend to identify Company B. It all depends upon what is said and to whom. Material which may be meaningless to a hearer ignorant of the operation of the securities market may be of great significance to a sophisticated city analyst.’ 93 HC Deb, Standing Committee B, Official Report, 10 June 1993, vol 11, col 171.

86

The main offences of insider dealing  3.45 Example 2 3.42 In contrast, if the chairman had remarked that ‘Our results will be much better than the market expects or knows’ it would not be precise information because there was no disclosure of the company’s results, but it would likely be specific information because the chairman would have disclosed information about the company’s result, whilst making it clear that the information was not public.94 3.43 Some commentators have also noted that the section 56 of the CJA 1993’s requirement that information be specific or precise was drafted more broadly than EC Directive 89/592, which required in Article 1 that the information be of ‘a precise nature’ only.95 3.44 While there have in practice been relatively few problems in the case of primary insider abuse problems have arisen in meeting the criteria on cases of secondary insider dealing. In cases where the information is transmitted through another, complicit or otherwise, then in the nature of things it is likely that it will suffer some distortion. In many ways this is simply a manifestation of the old parlour game ‘Chinese Whispers’. It is also the case that the more information is relayed down a line of communication, possibly involving a number of individuals it becomes rather more difficult for the prosecution to establish the insider nexus.96

‘Made public’ 3.45 Perhaps the most important criteria that must be met before information will be considered inside information is that it has not been made public. Indeed, this goes to the very heart of the matter and is set out in section 56. This section provides that it has to be established97 by the prosecution that the information has not been made public.98 This is a relatively rare example in the criminal justice system of the prosecution having to prove a negative.99 94 95 96

97 98

99

See the comments of the Economic Secretary, HC Deb, Standing Committee B, Official Report, 10 June 1993, vol 11, col 175. See the discussion in J Fisher and J Bewsey, The Law of Investor Protection (2nd edn) (Sweet & Maxwell 2003) at p 291 and generally R Alexander, Insider Dealing and Money Laundering in the EU: Law and Regulation (Ashgate 2007). Compliance systems which record certain communications and conversations may prove to be invaluable as they would have done in R v Sanders and others (unreported), Southwark Crown Court, 20 June 2012 and FSA/PN/060/ 2012 and FSA/PN/067/ 2012 if the defendants had not decided to plead guilty. Of course, there may well be legal and in particular privacy related issues in recording conversations outside a compliance system. While actual knowledge needs to be proved, it will often be done so on the basis of circumstantial evidence, see, for example, R v Rupinder Sidu (unreported), Southwark Crown Court, 28 November to 15 December 2011. In a prosecution under Part V expert evidence will often play an important part for both the defence and prosecution. Having said that, it has not always proved particularly easy to identify the requisite expertise. In the early days of anti-insider dealing regulation, it was not uncommon for the prosecution to experience considerable difficulty in persuading competent experts to testify on acceptable City practice. There appeared to be a perception that to do so was letting the ‘side’ down. For a good discussion of the responsibilities of the prosecutor in regard to discharging the burden of showing the information in question has not been made public, see S Clark, Insider Dealing, Law and Practice (2nd edn) (Oxford University Press 2020) at p 92 et seq. See also Madhavan v Public Prosecutor (Singapore) [2012] SGCA 49. The original drafts of the Criminal Justice Bill that were introduced in the House of Lords provided no guidance for defining what was meant by the phrase ‘made public’. See B Rider

87

3.45  The main offences of insider dealing In many cases that have come before the courts and have been the basis of FCA proceedings under the market abuse provisions in the FSMA, the defence has contended that in fact the relevant information has all or in part been in the public domain before the trading that is complained of took place. It is clear, however, that it is not sufficient for the defence to assert merely that there is general information in the market or speculative rumours,100 or even some in the market have made what appear to be recommendations,101 as section 56(1) needs to be considered as a whole and all the criteria met. 3.46 Under the CJA 1993, section 58(2) inside information is made public or is to be treated as made public in the following circumstances: •• •• •• ••

if the information is published in accordance with the rules of a regulated market for the purpose of informing investors and their professional advisors; if the information is contained in records which, by virtue of any enactment, are given to inspection by the public; if the information can be readily acquired by those likely to deal in any securities to which the information relates or of an issuer to which the information relates; or if the information is derived from information which has been made public.

3.47 In addition, CJA 1993, section 58(3) provides five circumstances when information may be treated as having been made public and it is important to note that these are not exhaustive.102 These are where information: •• •• •• •• ••

can only be acquired by persons exercising diligence or expertise; is communicated to a section of the public and not to the public at large; can only be acquired by observation; is only communicated on payment of a fee; or is only published outside the UK.103

3.48 The above definitions state that information may be treated as public, even though further efforts have to be made to obtain the information. This accords with the broad scope of the definition of ‘made public’ in European Directive 89/592, which provides that information derived from publicly available data cannot be regarded as inside information and any transaction executed on the basis of such information would not constitute insider dealing under the broad definition of the Directive.

100

101 102 103

and M Ashe, Insider Crime (Jordan Publishing 1993) at p 34. The earlier law provided that the information should ‘not be generally known to those persons who are accustomed or would be likely to deal in those securities (Company Securities (insider Dealing) Act 1985, s 10(b)). The Government (Mr Anthony Nelson MP) in introducing Part V emphasised that s 58 is intended ‘to bring a good deal more clarity and a good deal more understanding on the part of those who will have to operate within the law …’ (HC Deb, Session 1992-93, Standing Committee B, 10 June 1993, col 182). Indeed, the government claimed that it was this issue upon which it had received the most comment and expressions of concern. However, there may well come a point in time when the circulation of rumours effectively amounts to adequate dissemination, see, for example, the difficulties experience in Operation Tabernula faced by the prosecution referred to in S Clarke, Insider Dealing, Law and Practice (2nd edn) (Oxford University Press 2020) at p 82. See, for example, R v Neel and Matthew Uberoi (unreported), Southwark Crown Court, 28 October to 6 November 2009. CJA 1993, s 58(2). CJA 1993, s 58(3).

88

The main offences of insider dealing  3.51 Information published according to the rules of a regulated market 3.49 Publication of information will not necessarily deprive insiders of their advantages because markets often take time to absorb information. There prior knowledge allows them to steal a march on the rest of the market by trading the instant the information becomes public. We have referred to this in our preliminary discussion of what may be properly considered to be insider dealing.104 It is generally accepted in the vast majority of financial markets that prices do not adjust immediately upon the release of material information. There needs to be a period for digestion. Accordingly, US securities law recognises this market reality by imposing liability on insiders for transactions undertaken before the market has assimilated the information.105 Indeed, there are US cases which suggest that even proximity to the market may create unfair advantage. However, it is also true in the USA that the authorities have declined to set out clear guidelines and have relied instead on the judges to do justice on the facts of each case.106 3.50 With computer assisted trading systems the potential for reaping the benefits through almost instantaneous dealing are so much greater. Prior to the enactment of the present law, the Company Securities (Insider Dealing) Act 1985 would arguably have prohibited insiders from immediately dealing on insider information after announcement until prices had adjusted to the information. Insiders were therefore strongly advised if not actually required to wait for the market to assimilate the information. The European Directive on Insider Dealing has also been given this interpretation.107 However, considering how notoriously difficult it is to assess at what point in time a market has fully digested information there was an unfortunate degree of uncertainty.108 3.51 Section 58(2)(a) of the CJA 1993 clarifies the procedure for insiders to know when they can trade on information just released to the market. It adopts a procedure for notifying information to the Stock Exchange109 104 See at 1.10 et seq above. 105 SEC v Texas Gulf Sulfur Co 401 F 2d 833 (2nd Cir, 1968); and SEC v MacDonald 699F 2d 47 (1st Cir, 1983). 106 In Dirks v SEC 463 US 646 (1983) Blackmun J. stated ‘the SEC has been less than helpful in its view of the nature of disclosure necessary to satisfy the disclose or refrain duty. The Commission tells persons with inside information that they cannot trade on that information unless they disclose; it refuses, however, to tell them how to disclose. This seems to be a less than sensible policy …’. On the relevant US law see W Wang and M Steinberg, Insider Trading (3rd edn) (Oxford University Press 2010), Ch 4. 107 See Klaus J Hopt, ‘The European Insider Dealing Directive’ (1990) 27 CMLR 51. The recital to the Directive states that investors should be ‘placed on equal footing’. 108 There was also a concern to reduce the scope for essentially economic argument on the efficiency of markets. According to the market efficiency theory it is possible to determine the strength of markets and sectors of markets by virtue of their ability to draw in and discount in the price of traded securities various types of information. In a highly efficient or strongly efficient market there should be no significant items of information, inside or otherwise, that have not already at a moment in time, been fully discounted in the actual price of a security. In such an ideal market there is no room for asymmetrical information and therefore what might be described as inside information has no value. Of course, in reality no such perfect market exists, although it is true that technology, albeit a two-edged sword, has made a contribution both to efficiency and the exploitation of asymmetrical information balances. See generally W Wang and M Steinberg, Insider Trading (3rd edn) (Oxford University Press 2010), Ch 2. 109 See generally Chapter 9 and The Listing Rules, Chapter 9 and Herbert Smith Freehills, A Practical Guide to the UK Listing Regime (3rd edn) (ICSA 2015), Chs 4 and 9, and the Traded Securities (Disclosure) Regulations 1994 (SI 1994/188) giving effect to Article 7 of the European Directive 89/592 [1989] OJ L334/30. This is a complex area of practice and

89

3.51  The main offences of insider dealing that contains the following requirements: (a) the information which issuers wish to release to the public must be delivered in the form of an announcement to the Company Announcements Office; (b) the Stock Exchange then arranges for the prompt publication of announcements through its Regulatory News Service; and (c) at this point, for example, there could be an announcement on that the information will be ‘made public’ for the purposes of the CJA 1993. 3.52 We address the obligations on companies to make proper and timely disclosures in Chapter 9. The FCA Listing Rules provide that no information may be released to a third party before such information is released to the Company Announcements Office. If announcements are made outside the operational hours of the Regulatory News Service, however, the information must be given to two or more UK national newspapers and to two news services to ensure adequate coverage. This information must also be lodged with the Company Announcements Office no later than it is given to the other parties. In these circumstances, the information would appear to have been made public on publication of the newspapers. The CJA 1993 definition of ‘made public’ provides the advantage of clarity because it avoids the uncertainty of waiting for the market to absorb the news by providing a clearer set of standards as to the time when insiders may deal. Information contained in public records 3.53 By virtue of section 58(2)(b) information will be regarded as being made public if it is contained on records which, by virtue of any enactment, are open to inspection by the public. This covers registers set up under the statute, such as companies’ or patents’ registers or in publications such as the Official Gazette.110 Information readily acquired by people ‘likely to deal’ in securities 3.54 Information will be considered ‘public’ when it can readily be acquired by those likely to deal in any securities to which or to whose issuer the information relates (1).111 The phrase ‘likely to deal’ in securities is a term of art having its origin in the Company Securities (Insider Dealing) Act 1985, which defined it as ‘unpublished price-sensitive information’ (2).112 Although it could be argued that the phrase only embraces the market professionals who deal in securities, such as market makers who are clearly ‘likely to deal’, it is also possible that it refers to the market in the shares itself. If information can readily be acquired by the market, that information is already likely to have made its price impact and is, therefore, not properly to be regarded as inside information. Thus, it is treated as having been ‘made public’.

is one where the law relating to insider dealing, market abuse and transparency particularly in regard to companies with securities traded on recognised investment exchanges overlap. In particular note the impact of the European Union Market Abuse Regulation 592/2014/ EU which takes effect in July 2016 and introduces new rules and guidance in particular in relation to the delaying of disclosure and insider lists. The Regulation is directly applicable and does not require implementation in English law. 110 HC Deb, Standing Committee B, Official Report, 10 June 1993, vol 11, col 184 (per the Economic Secretary). The Minister pointed out that this would not cover for example, material in obscure public documents that are not governed by statute. 111 CJA 1993, s 58(2)(c). 112 Company Securities (Insider Dealing) Act 1985, s 10(b) and see above.

90

The main offences of insider dealing  3.57 Information derived from information made public 3.55 Information is considered ‘public’ if it originates from information which has been ‘made public’.113 As we have noted it is in the public interest that information is sifted and analysed by professional experts to facilitate good investment decisions by others. Of course, problems may well arise when not all the facts let alone inferences upon which a report is written are publicly available. The CJA 1993 addresses the problem posed by an analyst who has knowledge of the company and industry and who can put together seemingly inconsequential data with public information into a mosaic which reveals material non-public information. Whenever managers, advisors and analysts meet in non-public places, there will be a risk that the analysts will take away knowledge of material information which is not publicly available. This should not be a violation of UK law so long as the mosaic, which contains inside information, is derived from information which has been made public. 3.56 It is not entirely clear what information that is ‘readily available’ actually means. As in regard to the other tests it will be a question of fact. Information that is only available through subscription may qualify, but much will depend on how available the service actually is and its cost. It has been questioned whether publication in an obscure newssheet would be acceptable. This has been an issue in certain other jurisdictions, particularly where there is a diversity of languages.114 Obviously developments in technology and the internet have rendered even quite obscure publications reasonably readily available. Consequently, perhaps today the test is rather more relaxed than when it was initially provided in the legislation. This is certainly the view of many professional analysts and journalists. It is also arguable that the fact that the information may belong to another person who might consider it to be confidential, would not stop a court considering that it is in fact readily available to the public.115 3.57 It might also be appropriate here to consider two other issues to which reference has been made in Chapter 1. Firstly, it is the situation when a person has knowledge that an analyst is about to recommend a particular security but does not have access to the detail of the analyst’s report. Is this inside information? In such cases the pre-knowledge relates to likely market impact. In the USA the courts have generally accepted that there should be liability, provided that the information is material and it is appreciated that it is improperly obtained or used.116 In the UK knowledge that a company is going to act in a certain way in regard to securities should be sufficient basis

113 114 115

116

CJA 1993, s 58(2)(d). See, for example, the discussion in B Rider, ‘The regulation of Insider trading in the Republic of South Africa’ (1977) 94 South African Law Journal 437. Information may cease to be confidential if it is disclosed by its owner, Mustad & Sons v Dosen [1964] 1 WLR 109 or by a third person, although in such cases there may be a financial claim, see Attorney General v Guardian Newspapers Ltd (No 2) [1990] 1 AC 109, but note the caution of Lord Neuberger in regard to the conscience of those who receive information and then use it in Vestergaard Frandsen A/S and others v Bestnet Europe Ltd [2013] UKSC 31. In The Observer and Guardian v UK, Application No 13585/88, 26 November 1991 the availability of material overseas prevented the UK Government obtaining an injunction to prevent its publication in the UK. See generally W Wang and M Steinberg, Insider Trading (3rd edn) (Oxford University Press 2010) and see in particular US v Winans 612 F Supp (1985) 827 and US v Carpenter 791 F 2d 1024 (end Cir 1986) and from the perspective of the Hong Kong courts Nanus Asia Co Inc v Standard Chartered Bank [1990] 1 HKLR 396.

91

3.57  The main offences of insider dealing for liability, provided the information meets the criteria that we have discussed. A related issue involves journalists who, having written on a particular event that is price-sensitive in relation to particular security or who like an analyst write up a security or issuer, trade prior to the article’s publication. Again, we have discussed this in the context of insider dealing.117 It is probable that under Part V journalists could not be considered to have possession of inside information justifying a conviction for insider dealing.118 However, this would not mean that they might not be liable in the civil law and for other offences. If a journalist in writing his article or in the conduct of his research receives inside information the matter would be very different. Information obtained as a result of diligence and expertise 3.58 So far our discussion of the circumstances where information that otherwise satisfies the criteria for being considered inside information, becomes public, are mandatory in the sense that if the court finds that the circumstances fall within the provisions, the information will lose its liability. Section 58(3) sets out, as we have seen, five situations in which the court may but does not have to regard the information as being publicly available. It has been noted that the statement in section 58(1) that the list of circumstances are not exhaustive seemingly applies to both following subsections. However, in the case of those discussed above under section 58(2) this would seem to be in practical terms meaningless. Under section 58(3)(a) a court may regard information as sufficiently publicly available if it can be acquired only by persons exercising diligence or expertise. This allows the court to protect the highly diligent and resourceful analyst or investor, which is in the interests of the market. It also addresses the problem of highly specialised, esoteric and obscure publications and sources of information. It is important to remember that each case will be judged on its facts. Information communicated to only a section of the public 3.59 Section 58(3)(b) provides that the court may consider information to be public even if it is communicated to only a section of the public and not the general public. It is thought that this was included to allow the court discretion where the information is, for example, only available through an expensive or restricted service. Again, it is going to be a question of fact. Of course, given that the court has discretion – issues of fairness and public policy will no doubt play a role. Observed information 3.60 The third situation in which the court may consider that information is sufficiently in the public domain is when it can be acquired by observation.119 117 See 1.38 and at note 43 above and for an example of this, see the City Press case discussed in B Rider, Insider Trading (Jordan Publishing 1980) at p 121 et seq and for an early discussion of the issues B Rider and HL Ffrench, The Regulation of Insider Trading (Macmillan 1979), Ch 6. 118 See R v Hipwell, Bhoyeul and Shepherd (unreported), Southwark Crown Court 7 December 2005 involving charges for conspiracy to commit an offence under what today would be Part 7 of the Financial Services Act 2012. Of course, bodies such as the Panel on Takeovers and Mergers and various professional bodies have long taken a dim view of such practices. 119 CJA 1993, s 58(3)(c).

92

The main offences of insider dealing  3.61 The example given in the debate introducing this legislation is not particularly helpful or for that matter sensible. It was suggested that one could observe that a factory was working overtime if smoke was billowing from its factory chimneys at night time! On another occasion a minister referred to insiders looking affluent – again not particularly helpful as neither inference would be sufficiently specific and precise. The City panel on Take-overs and Mergers has had cases involving alleged violations of its rules on the misuse of privileged information involving site visits to businesses where it has been observed the employees appear to be exceptionally busy.120 It has also been suggested that information observed from a document that was intended to be confidential but has been publicly exhibited might also fall within this test. An example of this might be the case of the senior police officer being photographed entering Downing Street to meet the Prime Minister holding highly classified papers. When enlarged the front page was easily readable and was widely carried in the media.121 Although on the facts such a case might be better dealt with under one of the other statutory tests, it might be in not dissimilar circumstances possible to claim that the relevant information was clearly observable. Perhaps a better view is that the knowledge should be obtainable by mere observation and not require the intervention of others. A better example, might therefore be seeing a serious fire in the main plant of a company.122 Information that is available for a price 3.61 Section 58(3)(d) makes it clear that information that is communicated only on the payment of a fee may nonetheless still be considered sufficiently public. Of course, this also relates to the publication of information through services and in publications which are only available on subscription or for a specific charge. Where the cost of acquiring the information is very significant or disproportionate then it may well be that the court will consider that the relevant information is not public. An interesting point is that for this provision to be relevant the information should conform to the criteria for inside information. Therefore, the provision would seemingly apply to circumstances where a person with what is inside information is making it available to others for a fee. Indeed, it has long been though that one of the most insidious types of insider abuse is where inside information is obtained, possibly in unlawful circumstances, and then retailed or exchanged.123 There is some evidence of this occurring in the UK, France124 and the USA, but to a much greater extent

120 See B Rider, ‘Self-regulation: The British approach to policing conduct in the securities business with particular reference to the role of the City Panel on Take-overs and Mergers in the regulation of insider trading’ (1978) 1 Journal of Comparative Corporate Law and Securities Regulation 319. Without additional information the Panel in most cases involving mere observation, while emphasising the need for caution in giving privileged and possibly unfair access, did not consider that Rule 30 had been violated. 121 Mr Bob Quick, then head of counter-terrorism in the Metropolitan Police, The Guardian 9 April 2009. A similar incident occurred in regard to the Secretary of State for International development, Mr Andrew Mitchell MP, The Guardian 30 August 2011. 122 See S Clark, Insider Dealing, Law and Practice (Oxford University Press 2013) at p 77. 123 See B Rider and TM Ashe (eds) Money Laundering Control (Sweet and Maxwell 1996) at Ch 3. See also Report on Organised Crime in the U.K., Home Affairs Committee, House of Commons (1993 and 1994). 124 B Rider and HL Ffrench, ‘The Regulation of Insider Trading in Corporate Securities in France’ (1977) 26 International and Comparative Law Quarterly 619.

93

3.61  The main offences of insider dealing in places such as Hong Kong125 and particularly Japan.126 Of course, deeming the information not inside information for those who acquire it on payment of a fee, would not prevent a prosecution of the informer. To avoid liability as a tippee the court would need to be persuaded by the recipient that the information was not offered to only a very limited number of individuals. Information that has been published outside the UK 3.62 Section 58(3)(e) provides that information that is published only outside the UK may still be considered to be publicly available for the purposes of Part V. This provision is mean to address the issue that we have already raised about publications that are available predominantly outside the UK. Obviously, much will depend upon the nature of the publication and how likely it is to be picked up internationally. With the development of the internet and specialised search engines, giving the court a discretion is not unreasonable. In practice attempting to show what information might have been available on the internet, had one searched competently, several years after the relevant event is not an easy task and is one which will often involve the use of expert witnesses.127 3.63 Finally, it is worth again emphasising that these tests are not exhaustive and it is open to the court to rule that information has become public albeit none of the above tests are satisfied. Having said that, it is difficult to imagine a scenario which could not be justified under one of the relevant subsections.

Price sensitivity 3.64 The final aspect of the definition of ‘insider information’ is the price sensitivity of the information. The test is that if the information were made public, it would be likely to have a significant effect on the securities. This is the most essential feature of the statutory definition of inside information. This criterion, rather than the issue of how qualitative the information actually is, is what really matters and which, ultimately, will be the determining factor when a jury considers whether information is inside information. While there is little debate as to the utility of a market impact test, there has been some degree of controversy primarily in the USA and particularly in the academy, as to whether given the nature of the misconduct any degree of impact should be considered to be an unfair and therefore potentially unlawful advantage. It is further contended that today with the ability to engage in high volume computer assisted trading, miniscule price impacts can result in vast fortunes being made. Certainly, recent investigations in the USA would tend to support the view that this does occur. Having said that, the approach in the UK and the rest of Europe has traditionally been to focus on significant and major events which clearly have noticeable market impact. This was made clear in 125 B Rider, ‘The Regulation of Insider Trading in Hong Kong’ (1975) 17 Mal Law Review 310, continued 18 Mal Law Review 157. 126 See B Rider and TM Ashe (eds) Money Laundering Control (Sweet and Maxwell 1996) at Ch 11 (C Nakajima) and B Rider and HL Ffrench, The Regulation of Insider Trading (Macmillan 1979). 127 See, for example, R v Mustafa and others (unreported), Southwark Crown Court, 5 March to 23 July 2012. In this case the expert witness was able to assist the court with the sources that may have been available at the relevant time. In practice given the nature of the cases that come to trial this is not the hurdle that it might at first seem for the prosecution.

94

The main offences of insider dealing  3.67 the Parliamentary debates on the bill that became Part V and is reflected in the history of the European Directive. While in theory the ability of market surveillance systems is far greater today, the reality is that technology has also developed to serve those who wish to obscure their activities and hide their identities. 3.65 Price sensitivity can only be determined at the moment of the deal when, by definition, the information is not known to the public and can have no impact on the price. Indeed, the information that the insider uses may subsequently not have any significant impact on the market. For example, in R v Sanders and others, the anticipated take-over did not in fact materialise.128 Nonetheless at the time that the transactions took place the information would have impacted on the price of the shares had it been known. In cases where the insider has dealt close to the time when the information was made public, the courts may rely on evidence that measures price sensitivity by the effect of the information on the market.129 It is, however, a decision of fact for the jury and this is to be made to the best evidence available and this may be that of expert witnesses.130 3.66 Because the CJA 1993 provides no further guidance, the UK courts in considering the evidence have set it against what a reasonable investor would have done. In other Commonwealth jurisdictions judges have adopted a reasonable investor test and held that information will be price-sensitive if it is information which would influence the ordinary reasonable investor to buy or sell the security in question. In R v Sanders and others131 Simon J seemingly accepted the expert view of the prosecution that if a movement of about 10 per cent in the price of a security could be reasonably anticipated then it would be significant. While the defence did not challenge this and a similar approach appears to have been accepted in subsequent cases, it would be dangerous to assume that this is a hard and fast rule. The courts have also accepted the proposition that it is necessary to show that the movement in price is not accounted for by normal market movements, in other words it has to be exceptional.132

Territorial scope of the offence 3.67 The territorial scope of the offence of insider dealing is clearly set out in section 62(1) of the Act. It provides that an individual is not guilty of an offence under section 52(1) unless he is in the UK at the time he is alleged to have done any act constituting or forming part of the alleged dealing or the 128 (unreported), Southwark Crown Court, 20 June 2012 and see FSA/PN/060 2012. 129 Chase Manhattan Equities Ltd v Goodman [1991] BCLC 897 at 931 (per Knox J). 130 See, for example, R v Neel and Matthew Uberoi (unreported), Southwark Crown Court, 28 October to 6 November 2009; R v Calvert (unreported), Southwark Crown Court, 16 February to 11 March 2010 and R v Gray (1995) 2 Cr App R 100. S Clarke, Insider Dealing, Law and Practice (2nd edn) (Oxford University Press 2020) at p 99 refers to testimony of an expert witness in several prosecutions proposing a test based on a movement in the price of a security which in his opinion ‘is not accounted for by normal market movement’. Seeming this test was not challenged by the defence. 131 R v Sanders and others (unreported), Southwark Crown Court, 20 June 2012 and FSA/ PN/060/ 2012 and FSA/PN/067/ 2012. 132 See, for example, the prosecution evidence in R v Mustafa and others (unreported), Southwark Crown Court, 5 March to 23 July 2012, FSA/PN/080/ 2012 and R v Richard Joseph (unreported), Southwark Crown Court, 30 January to 11 March 2013, FSA/PN/023/ 203.

95

3.67  The main offences of insider dealing dealing took place on a regulated market or the professional intermediary was within the UK at the time of the alleged dealing. As we have seen regulated markets are those designated as such by statutory instrument.133 This territorial limitation cannot be avoided by alleging that an individual who is not at the time of the dealing in the UK, and did not trade on a UK regulated market or with or through a UK based professional intermediary, is in a joint enterprise with someone who does meet the territorial qualifications.134 It is important to note as has been pointed out elsewhere purely private deals, even involving securities covered by the CJA 1993, fall outside the scope of the offence. By contrast, the FSMA market abuse regime covers both transactions by regulated persons and dealing by private persons off regulated exchanges.

ENCOURAGING INSIDER DEALING 3.68 As we have seen there are many practical reasons why primary insiders might choose not to abuse the relevant information themselves. The English law in accordance with the European Directive throws the net of criminal liability over situations where the primary insider encourages another to deal or actually discloses the privileged information to another person. It should be noted that in both cases the statute uses the word person135 and therefore the individual who is a primary insider will commit an offence if he encourages a company to deal or discloses, without proper authority, inside information to a company or individual. Section 52(2)(a) provides that an individual is guilty of insider dealing if he encourages another person to deal in securities that are, whether or not that other person knows, price-affected securities in relation to the relevant information. The individual encouraging the other to deal must know or have reasonable grounds to believe that the dealing would take place on a regulated market or through or with a professional intermediary. Of course, if that person is himself a professional intermediary this is sufficient for the offence. 3.69 It is not a requirement of the offence for the individual who has the information as an insider to pass this information to the other person, nor is it necessary that the other person should know that the securities he or it is encouraged to buy, are price-affected securities. The offence covers the classic situation where a tip is given by an insider to another, for example, ‘sell as many shares of XYC plc as you can before tomorrow’s profit report’. Obviously, this could also include a number of other situations. 3.70 If the insider knows or has reasonable cause to believe that the other person will deal on a regulated market or through a professional intermediary, 133 As we have seen regulated markets in the UK for the purposes of Part V are those which are those markets established under the rules of the regulated markets set out in art 10 of the Insider Dealing (Securities and Regulated Markets) Order 1994, as amended by further orders in 2000 and 2002. The names of some of the markets have changed and there have also been mergers and de-recognitions; consequently, the list is not out of date and needs amendment, see S Clarke, Insider Dealing, Law and Practice (2nd edn) (Oxford University Press 2020), Ch 10. It is uncertain whether these ‘new’ markets are UK Regulated Markets for the purposes of art 10. This is perhaps something that will be resolved in the context of the post-Brexit arrangements. The most important regulated market is the London Stock Exchange Ltd, but effectively all organised formal markets in the UK are included. 134 R v Ammann, Weckwerth and Mang (unreported), Southwark Crown Court, 24 May 2012, but see the Hong Kong case of The Securities and Futures Commission v Young Bik Fung [2018] HKCFA 45. 135 See the Interpretation Act 1978 (Sch 1).

96

The main offences of insider dealing  3.72 the offence will be committed even if, in fact, the other person does not undertake a transaction. In practice, however, it is probable that a transaction will have taken place as otherwise it may be extremely difficult to identify the crime.136 A defence is available where no dealing was expected or anticipated.137 It is also important to appreciate, as we have seen, that if deals in securities do not occur on a recognised investment exchange, they will only be within the insider dealing legislation if the person dealing relies on a professional intermediary or is himself a professional intermediary. A person will rely on a professional intermediary only if the professional intermediary either acquires or disposes of securities (whether as principal or agent) in relation to the dealing or acts as intermediary between persons taking part in the dealing.138

DISCLOSURE OF INSIDE INFORMATION 3.71 A primary insider will, as we have pointed out, also be guilty of insider dealing if he discloses the relevant information to another person, including a company, without proper authority. Section 52(2)(b) provides that an individual who has information, as an insider, is guilty of the offence of insider dealing if he discloses the relevant information, otherwise than in the proper performance of the functions of his employment, office or profession to another person. The Take-over Panel has over the years had many cases where information has been disclosed or tips given that are not necessarily motivated by any direct financial interest on the part of the informant. In one case highly price-sensitive information was disclosed to friends and relatives at a wedding party by way of an excuse for the late arrival of the insider. In another case information was disclosed to a girlfriend to impress her. In another investigation colleagues were given tips again for the primary purpose of impressing them. Under section 52(2)(b) for the offence to be proven it does not have to be shown that the primary insider had any particular reason let alone motive for disclosing the information.139 Indeed, in contradistinction to the encouragement offence he does not have to know or have reason to believe that any dealing, let alone on a regulated market or with a professional intermediary, is likely to take place. The offence is complete on disclosure.140 It follows that the recipient need not be shown to have either understood it or acted upon it. 3.72 Part V is silent as to what ‘otherwise than in the proper performance of the functions of his employment, office or profession’ means. In some respects, this is similar to section 57(2)(a)(ii) which defines insiders as inter alia those who have access to the relevant information ‘by virtue’ of employment, office or profession. Debate has taken place in regard to this subsection in the context

136 See, for example, R v Sanders and others (unreported), Southwark Crown Court 20 June 2012, where the defendant pleaded guilty to encouraging clients and fellow professional traders to deal in a certain security, while in possession of inside information. 137 CJA 1993, s 52(3). 138 CJA 1993, s 59(1)(a). 139 See, for example, in R v Mohal and Birk, Old Bailey, January 2017, Mohal pleaded guilty to inadvertently disclosing the relevant inside information to his neighbour Birk. There was no suggestion that Mohal had benefited or expected to benefit by this. 140 Given the width of this offence and also the civil offence under section 118(3) of FSMA of improper disclosure, it is perhaps surprising that there have not been more cases, see Andrew Osborne, Final Notice 12 February 2012.

97

3.72  The main offences of insider dealing of an employee acquiring the information in breach of their duties as an employee – for example, obtaining access to a colleague’s office or computer without proper authority. It has been argued that it is the opportunity to obtain access to the information that is critical and if this is in fact given to an individual by virtue of his employment, it matters not that in the circumstances he may be in breach of his employment contract.141 Of course, in practice this is not a major problem as he will in any case be aware that he is taking the information from an inside source and will therefore be a secondary insider. Determining in the case of section 57(2)(b) what is meant by the proper performance of his functions has possibly more significant implications as it could well determine guilt. What of a senior broker who discloses information to a colleague, in accordance with what he and perhaps even his compliance officer considers to actually be the proper function of his position? What about a lawyer who, with the benefit of hindsight, told the client too much detail? While this is essentially a question of fact, there is room for argument as a matter of law as to what is and is not the proper performance of an obligation.142 3.73 Debate has also centred on exactly what needs to be disclosed to justify criminal liability. The former law had the offences of counselling and procuring which perhaps more clearly addressed the situation where an insider simply tips someone else that a particular security would be a good buy.143 In such cases today a charge of encouraging would be appropriate and it is important to remember that these offences operate within the general criminal law.144 It should also be emphasised that the definition of dealing in section 55 also catches procurement as we have seen. Section 55(1)(b) provides that a person deals on securities if he procures, directly or indirectly, an acquisition or disposal of the securities by any other person. For liability under section 52(2)(b) the insider must disclose ‘the information’ and therefore what is imparted must count as inside information under the various criteria that we have discussed above. Consequently, the prosecution will need to establish that exactly what was disclosed would be sufficient to charge the insider with dealing under section 52(1) if in fact he had dealt rather than tipped.

TERRITORIAL SCOPE OF OFFENCES RELATING TO ENCOURAGEMENT AND DISCLOSURE 3.74 Under section 62(2) of the Act an individual is not guilty of the offence of encouraging another to deal or of disclosing inside information to 141 See 1.13 et seq above. 142 In Grongaard and Bang the European Court interpreted Article 3(a) of the European Directive upon which section 52(2)(b) is based. The ECJ considered that the requirement that the information be disclosed in the ‘normal course of the exercise of his employment, profession or duties’ should be strictly construed. The disclosure would only be acceptable if it was directly pursuant to the discharge of a specific obligation arising by virtue of employment or a professional duty and this was to be determined by the relevant domestic law. The ECJ referred to the objective of the Directive in promoting investor confidence and therefore thought that a narrow interpretation of this exception was justified, C-384/02 Grongaard and Bang [2006] ECR I-9939, [2006] IRLR 214. 143 See Company Securities (Insider Dealing) Act 1985, s 1(7) discussed in B Rider, C Abrams and E Ferran, Guide to the Financial Services Act 1986 (2nd edn) (CCH 1987), Ch 7. 144 See generally Serious Crime Act 2007, Pt 2 in regard to the offences of encouraging and assisting crime and D Ormerod and R Fortson, ‘Serious Crime Act 2007; the Part 2 Offences’ (2009) Crim LR 389.

98

The main offences of insider dealing  3.77 another person unless he was within the UK at the time when it is alleged he made the disclosure or encouraged the dealing, or the alleged recipient of the information or encouragement was in the UK at that time.

TIPPEE LIABILITY 3.75 The third type of insider liability145 created by the CJA 1993 and expanded upon and applied in the market abuse regime of the FSMA is tippee liability.146 Tippee liability arises when a person who has information, not as an insider, obtains such information, either directly or indirectly, from a person who falls within one of the other two categories of insider, namely, directors, employees or shareholders of issuers or those who have access to inside information, by virtue of their employment, office or profession. 3.76 The essential elements of tippee liability are that the tippee must know that the information is inside information and that such information is derived from an inside source.147 In many cases, tippees and sub-tippees will not know that information is inside information. Indeed, the classic tip will involve a statement such as, for example, ‘sell XYZ plc’ or ‘buy ABC plc’. Under these circumstances, no inside information will have been conveyed because, although the individual who gave the tip will have committed the offence of encouragement, the tippee will not have obtained the ‘information as an insider’ (even though the tippee knows the tip came from an inside source) and would, therefore, appear to be outside the scope of the provision’s coverage. 3.77 The CJA 1993 significantly expanded the scope of the criminal law in defining ‘insider’ to include primary and secondary insiders, such as tippees who did not have a connection with the company whose securities were traded. Primary insiders, as we have seen, are those individuals who have inside information through being a director, employee or shareholder of an issuer of securities or by having access to the information by virtue of their employment, office or profession.148 The latter category of primary insider could include an individual who obtains inside information and thereby becomes a primary insider by virtue of his or her employment, office or profession, without necessarily having any direct professional, fiduciary or contractual connection with the company whose securities were traded.149 The category of persons having access to inside information by virtue of their employment, office or profession is potentially large and includes professional advisers such as

145 CJA 1993, s 57(2)(b). 146 In fact, when the word ‘tippee’ was included in the Criminal Justice Bill in 1992, it drew strong opposition from their Lordships and the word was eventually withdrawn before the Bill was approved in the House of Lords; see Parliamentary Debates, House of Lords, 19 November 1992, cols 756–767 and 3 December 1992, col 1496. See the discussion in B Rider and M Ashe, Insider Crime (Jordan Publishing 1993) at p 46. 147 He does not need to appreciate it has been communicated to him or he has received it illegally as, for example, in the USA, see for an interesting example, K Scannel, ‘Golfer ‘vindicated’ in insider trade case’, The Financial Times, 20 May 2016. 148 CJA 1993, s 57(2)(a). 149 See, for example, R v Holyoak, Hill and Morl, The Financial Times, 28 October 1989 where the defendants (who were in fact acquitted) were employees of a firm of accountants which was acting for one of the parties in a takeover negotiation.

99

3.77  The main offences of insider dealing lawyers, merchant bankers, accountants, public relations specialists and the like. Whilst it would not be unreasonable to expect such persons to assume the responsibilities of insider status on a temporary basis, the section’s language is wide enough to cover many others performing rather more peripheral services to an issuer. These examples of temporary insiders might be office cleaners, temporary secretarial staff, postmen and couriers who have access to inside information by virtue of their employment. Although these groups would certainly have the opportunity to acquire inside information by engaging in the activities of their employment, it is questionable, as we have seen, whether the scope of insider liability should be cast so widely.

SECONDARY PERSONS AND TIPPEE LIABILITY 3.78 The CJA 1993 defines a person as having information as an insider if, and only if, the person subjectively knows that it is inside information and possesses such information, and subjectively – in other words actually knows that he has it, from an inside source.150 As we have seen before a person can be convicted of the offence of insider dealing, the prosecution must prove beyond all reasonable doubt that the individual concerned was fully aware that the information was ‘inside information’ as defined under the CJA 1993, section 56 and that the individual received the information from an inside source. It is proving these elements to the criminal standard of proof that has render insider dealing cases one of the most difficult types of economic crime to obtain convictions.151 3.79 The CJA 1993, section 57(2) provides the legal basis for tippee liability as a criminal offence. It describes the ways in which tippee liability may arise as follows: ‘(2)

For the purposes of subsection (1), a person has information from an inside source if and only if – (a) he has it through – (i) being a director, employee or shareholder of an issuer of securities; or (ii) having access to the information by virtue of his employment, office or profession; or (b) the direct or indirect source of his information is a person within paragraph (a).’

3.80 The CJA 1993, section 57(2)(b) thus creates tippee liability or secondary liability for someone who receives inside information directly or indirectly through as opposed from, a director, employee, shareholder or other insider of an issuer. Secondary insiders are essentially persons who know that the ‘direct or indirect source’ of that information is a primary insider. Some uncertainty exists as to whether the recipient must know the exact identity of the source and the circumstances under which the disclosure occurred or

150 The better view is that in a prosecution under section 52 the prosecution must establish actual knowledge and reckless indifference or wilful blindness will not be sufficient. The European Directive in Article 2(1) refers to liability being predicated on ‘full knowledge of the facts’. 151 In some cases, it will be necessary to rely on circumstantial evidence, see for a good example of this, R v Rupinder Sidhu (unreported), Southwark Crown Court, 28 November to 15 December 2011 and FSA/PN/114/ 2011.

100

The main offences of insider dealing  3.82 must merely be aware that the disclosure came from a primary source. This has implications where for example, information is obtained from a listening device or is simply overheard, where the recipient is fully aware that the source is privileged, but does not know the specific identity of the person making the statement. The better view is that in such circumstances the test would be satisfied. It is not necessary to show that the secondary insider actively sought the information or that the primary insider discloses the information in an unlawful manner. 3.81 A person can only be charged with the offence of being a secondary insider or tippee, if it can be proved that the person was aware that the source of the information was one of these primary insiders or someone who had access to non-public, price-sensitive information.152 If the informant and the recipient are both charged and the prosecution claims that the information was provided by the particular informant, it is not necessary for the prosecution to establish that no one other than the informant could have provided the information to the secondary insider. It is enough that the prosecution establishes a case that the informant did in fact provide the information.153 It is not necessary to prove that the secondary insider did anything to obtain the relevant information as we shall see. Before the CJA 1993, the Company Securities (Insider Dealing) Act 1985, sections 1(3), (4) and 8 made it a criminal offence, subject to exceptions and conditions, where ‘an individual has information which he knowingly obtained (directly or indirectly) from’ a person connected with a company and then deals on the Stock Exchange in the shares of that company knowing that the information is confidential and unpublished price-sensitive information in relation to those shares. The CJA 1993 differs from the Company Securities (Insider Dealing) Act 1985 by eliminating the requirement of a connection between the insider and the issuer. Moreover, the CJA 1993 makes it clear that tippee liability may arise even if the recipient of the information received it passively and did not attempt actively to obtain it.154 3.82 The wider scope of liability is based on a philosophy that seeks to penalise the exploitation of informational advantages that arise from insider access. Discussion has taken place as to whether a journalist or analyst who deals before the release of his own recommendations will be guilty of insider dealing. As we have seen some commentators, however, argue that such dealing is not an offence under the CJA 1993 because a precondition for liability requires the relevant information to be from an inside source. For example, a director or employee may obtain inside information from an inside source if the information was received by virtue of the director’s or employee’s position with the issuer. Based on this analysis, information created by an employee would not be regarded as information to which 152 See, for example, R v Littlewood and others (unreported), Southwark Crown Court, 10 January 2011 and 2 February 2011 and FSA/PN062/ 2011 and R v Mustafa and others (unreported), Southwark Crown Court, 5 March to 23 July 2012 and FSAQ/PN/080 2012 which both involved the disclosure of information to family and friends who became secondary insiders. 153 See R (on the application of the Financial Services Authority) v MM, AR and AK [2010] EWCA Crim 1151. 154 See Re A-G’s Reference (No 1 of 1988) [1989] AC 971 at 973–77 and 986, where the House of Lords held that the defendant, who had been given unsought, unpublished, price-sensitive information, had ‘obtained’ that information within the meaning of the Company Securities (Insider Dealing) Act 1985, s 1(3) on the basis that the term ‘obtained’ in section 1(3) meant no more than ‘received’ and thereby had a wider meaning than ‘acquired by purpose and effort’. See also R v Fisher (unreported), Southwark Crown Court 14 April 1988.

101

3.82  The main offences of insider dealing the employee had access by virtue of employment. Thus, having access to information would appear to require that the information in question exists independently of the person seeking to obtain it or to access it. The recommendations of a journalist or analyst would not therefore be inside information in so far as that individual is concerned because he is not allowed to access his own information. If this is not so, then a person who dealt in the market prior to his making further and substantial acquisitions or disposals might be guilty. It is hard to see how one’s own intentions can be considered ‘inside information’ in this context. 3.83 It should be emphasised that under UK law the establishment of tippee liability does not necessarily depend on the liability of the individual who tips. For example, if, in the course of negotiations, inside information is passed bona fide to another person and the recipient then deals on the basis of that information, the tippee who dealt will be likely to have committed an offence, even though the tipper passed the information in a lawful manner. Thus, for example, if a partner of a large law firm that is advising a corporation on a takeover overhears inside information during negotiations, the lawyer will possess that information as an insider if he knows it is inside information and knows that the information is derived from an inside source. Similarly, an individual who knowingly becomes aware of inside information and knows it to be from an inside source, but who is not an insider (by virtue of employment, office or profession), will incur tippee liability as well. 3.84 Where the information has passed through several hands it may have lost some of the qualities that made it inside information such as its precision and specificity, with the result that it may be difficult to establish that the tippee has inside information. Aside from proving the tippee’s state of knowledge, it may be difficult to prove that the information is in fact inside information because at this stage it may have lost much of its accuracy and novelty. Moreover, even if the information, after passing through several hands, still retains these qualities it may be difficult to show that the sub-tippee knew that the inside information was from an inside source.

THE FSMA 2000 AND TIPPEE LIABILITY 3.85 The CJA 1993 extended the scope of tippee liability so that, unlike the Company Securities (Insider Dealing) Act 1985, the inside source need have no connection with the issuer whose securities are involved. This extension of tippee liability is also reflected under the civil liability regime for market abuse under the FSMA. While this is discussed in more detail in Chapter 4 it is convenient to note here that the FSMA civil liability for market abuse covers insider trading and applies to any person whose behaviour is based on inside information. Under the FSMA market abuse regime, the FSA may impose civil sanctions on any person or firm who engages in market abuse through insider trading. The FSMA makes no distinction between primary and secondary insiders, nor requires the alleged insider to be linked directly or indirectly to the company whose securities are traded. Thus, under both the CJA 1993 and the FSMA, where the person disclosing the information has access to it through their employment, it is not necessary to show that the person was in a position (by virtue of employment, office or profession) which might reasonably be expected to give him access to such inside information as under the old law. 102

The main offences of insider dealing  3.89

DEFENCES TO ALLEGATIONS OF INSIDER DEALING Introduction 3.86 The best defence to a charge of insider dealing is simply that one of the elements of the offence that needs to be established by the prosecution is not proved beyond a reasonable doubt. However, given the complexity of the subject area, the legislation provides a number of specific defences. These defences will succeed only if, after the prosecution has proved all the ingredients of the offence, the defendant proves on a balance of probabilities that the offence was not committed.155

General defences to insider dealing under the CJA 1993 3.87 It is for the prosecution to make out its case by proving the constituent elements of the offences that we have discussed above. Of course, if the defence is able to introduce a significant doubt and the prosecution is not able to rebut it, then the defendant will be entitled to an acquittal. At the end of the day, the judge or jury must be satisfied that the prosecution has proved all that is required to establish the offence beyond a reasonable doubt. The Act, however, goes further on introducing a number of statutory defences, which must be raised and established by the defence. The prosecution need only address them if raised by the defence. 3.88 It is clear from the wording of the various defences provided in Part V that the defence has a legal burden of proof and not merely an evidential one.156 In other words it is not enough for the defence to simply adduce some evidence. It is necessary for it to achieve the civil burden of proof – namely satisfying the court to a balance of probabilities as to all aspects of the defence.157 3.89 Section 53(1) sets out three general defences to a charge of insider dealing. An individual will not be guilty if he shows that he did not at the time expect the dealing to result in a profit attributable to the fact that the information in question was price-sensitive information in relation to the relevant securities. He will also have a defence if he can show that at the time he believed on reasonable grounds that the information had been disclosed widely enough to ensure that none of those taking part in the dealing would be

155 CJA 1993, s 53. See also R v Cross [1991] BCLC 125, upholding the general principle that the burden is on the accused to raise a statutory defence. In regard to the civil offence of market abuse, see 4.30 et seq below. 156 See R v Cross [1990] 91 Crim App R 115. It is the better view that the reverse burden of proof in regard to s 53 (including Sch 1) is compatible with Article 6(2) of the European Convention on Human Rights and the Human Rights Act 1998, see Sheldrake v DPP [2005] 1 AC 264. As a general proposition if the legal burden is properly cast on the defence, it will only require proof to the civil standard. The Government in justified this at the time of the introduction of the bill that became Part V on the basis that the facts that could establish one of the statutory defences were peculiarly within the knowledge of the accused, see generally B Rider and TM Ashe, Insider Crime – The New Law (Jordan Publishing 1993). 157 See R v Mustafa and others (unreported), Southwark Crown Court, 5 March to 23 July 2012 and FSA/PN/080/ 2012; note the direction of Judge Pegden that once the prosecution established beyond a reasonable doubt the elements of the offence, here the unauthorised disclosure of inside information, it was for the defence to prove to a balance of probabilities the constituent elements of the statutory defences that they raised, namely s 53(3)(a) and (1)(c) discussed below.

103

3.89  The main offences of insider dealing prejudiced by not having the information. Finally, if he can show that he would have done what he did even if he had not had the information then he will also be entitled to an acquittal. Let us examine these three defences which need to be raised specifically by the defence in a little more detail. 3.90 Under section 53(1)(a) if the defence can show that at the time of the transaction the defendant did not expect to make a profit or avoid a loss from the inside information then he is entitled to a defence. Indeed, section 53(6) makes it clear that this also extends to not expecting to make a loss as well. It should be emphasised that the offence is committed at the time the agreement is made and not on completion of the transaction and it must be remembered that dealing is defined in sections 55(2) and 55(3) to agreeing to acquire or dispose a security. Consequently, the defence would be available where the defendant has agreed to acquire a security, even though the transaction was not consummated. Provided it could be shown that there was no expectation of making by dealing, at the time of the agreement the defendant would be entitled to an acquittal. Prosecutions will probably be rare where completion has not taken place. While the subsection does not require the defendant to show that his expectation was reasonable, the less reasonable that in fact it is the greater will be his task in persuading the jury or judge that in fact he did have such a belief. 3.91 It is hard to imagine the circumstances where a defendant could establish that he had absolutely no expectation of making a profit or avoiding a loss attributable to the price sensitivity of the information. Sarah Clark in Insider Dealing, Law and Practice158 refers to one possible example, namely the case of R v Gooding.159 In this case the accused claimed that at the time he purchased shares in a company that he knew to be in takeover negotiations he genuinely believed that they would not succeed. 3.92 The second defence in section 53(1)(b) is that the defendant on reasonable grounds thought that the information had been sufficiently widely disseminated so that no one would be prejudiced. It should be noted that this is a lesser threshold than providing that it was publicly available and therefore not inside information. This defence could be raised when two or more parties are in contact with each other and although they are in possession of inside information that information cannot be disclosed. The defendant essentially has to prove that there is a level playing field and no unfairness. The Government in introducing this provision, which it was acknowledged would have very restricted relevance, thought that it could be useful in underwriting transactions where both parties know or are aware of the information. We discuss the disclosure of price-sensitive information in Chapter 9, and in particular at 9.3. 3.93 The CJA 1993, section 53(1)(c) also provides defences to the dealing offence where the defendant can show that he would have acted in the same way without the inside information. In such a case, after the prosecution has proved all the ingredients of the offence, the defendant must show that, on a balance of probabilities, his possession of the inside information did not affect his decision to deal or encourage another to deal. The policy rationale

158 (2nd edn) (Oxford University Press 2020), at p 143. In R v Cross [1990] 1 Cr App R 115 under the earlier provision it was accepted that this defence was arguable on the basis that the defendant had been under a reasonable misapprehension that he was required by law or under his terms of appointment to sell his shareholding. 159 See The Financial Times, 2 March 1990.

104

The main offences of insider dealing  3.96 seems to be that an individual who is planning either to deal or to encourage someone else to deal should not be inhibited from doing so because they then acquire inside information. It would follow that a defence is available for an individual who has come into possession of inside information after making a decision to deal. A defence may also be available in circumstances where an investor who possesses inside information was forced to sell because of economic circumstances. For example, economic compulsion may provide a defence for a person who was forced to sell in the face of no other readily realisable property.160 It is not necessary for the defendant to show that the relevant information had been completely absent from his mind. It is sufficient that he can prove to the satisfaction of the jury that it is more likely than not there was a predetermined plan to buy or sell at that point in time.161 3.94 Moreover, it would be more difficult to prove that possession of the inside information had had no relevance to a decision to deal, in the absence of any economic pressure to sell. An important factor for maintaining a defence will be the timing of the deal, unless the defendant can show that the timing of the deal was not related to the inside information. For example, a defence may be available for a trustee who, whilst possessing inside information about securities, dealt in them on the basis of independent advice and for the benefit of the trust. 3.95 Section 53(2) with much the same wording provides for defences in regard to the offence of encouraging another person to deal in price affected securities. Section 53(2)(a) mirrors section 53(1)(a) and provides a defence if the person charged with encouraging can show that at the time he did not expect the dealing to result in a profit or avoidance of a loss in regard to the inside information. Section 53(2)(b) reflects section 52(2)(b) by providing a defence if the encourager can show that on reasonable grounds that he believed that the information had been sufficiently disclosed not to prejudice anyone. There is a slight difference in the wording in that the defence will also be available if he believes that at the time the person he seeks to encourage to deal, the information will be disclosed widely enough to ensure that none of those taking part in the dealing would be prejudiced by not having the information. This might apply, for example, to information which is in the course of coming out or has been time embargoed. Section 53(2)(c) is exactly the same as section 52(1)(c). 3.96 Section 53(3) addresses the offence of disclosing inside information. Under section 53(3)(a) no individual will be guilty of this offence if he shows that he did not at the time expect any person, because of the disclosure, to deal in securities in the circumstances set out in section 52(3). By virtue of section 53(3)(b) he will also be entitled to a defence if he can show that although he had an expectation at that time, he did not expect the dealing to result in a profit or avoidance of a loss attributable to the fact that the information was price-sensitive in relation to the securities. Section 53(3)(a) is straightforward and reflects the similar defences that we have already discussed. Section 53(3)(b) is perhaps of more interest. We have already mentioned that there are cases that have come to light where inside information has been disclosed for purely

160 See B Rider and TM Ashe, Insider Dealing, (Jordan Publishing 1993) at p 54. 161 See R v Mustafa (unreported), Southwark Crown Court, 5 March to 23 July and 27 July 2012 discussed by S Clarke, Insider Dealing, Law and Practice (2nd edn) (Oxford University Press 2020) at p 145.

105

3.96  The main offences of insider dealing social and domestic reasons. For example, the uncle who was late for his niece’s wedding because he had been kept in the office or the chap who wanted to impress his girlfriend with how important he is.162 Again it is not necessary for the expectation that the information would not be abused to be reasonable. It is necessary for the defence to prove, however, that the accused did in fact believe that the information would not be used for dealing.163 As we have noted the more unreasonable this belief is the more difficult it will be for the court to convince a jury or judge. However, even unauthorised disclosures of inside information might be exonerated in circumstances in which the insider knows that the recipients are highly honest and professional people who are unlikely to break the law.

Special defences under the CJA 1993 3.97 The CJA 1993 provides three special defences to the dealing and encouragement offences. These defences may be described generally as ‘market defences’. Two of these defences are specific, covering market makers and those involved in price stabilisation. The third defence relates to what has become known as ‘market information’. The defences are authorised under section 53(4) of the Act and are set out in Schedule 1 to the Act. The Treasury under section 53(5) is empowered to amend the Schedule in this regard.164

Market related defences 3.98 Market makers are recognised under the rules of a regulated market or an approved organisation165 as performing an essential market function, buying or selling securities to assist in ensuring adequate liquidity in the market. Market makers are ordinarily required to comply with the rules of the regulated market or an approved organisation and to be willing to acquire or dispose of securities according to these rules.166 Given the nature of their responsibilities and business they might well find themselves in possession of price-sensitive information. 3.99 Paragraph 1(1) provides that a market maker may raise a defence where he can show that he acted in good faith in the course of his business, or in his employment, as a market maker. It is important to note that in the

162 See, for example, the facts of R v Staines and Morrisey [1997] 2 Cr App R 426 where information was disclosed over drinks during a social evening with friends. 163 See R v Mustafa and others (unreported), Southwark Crown Court, 5 March, 23 and 27 July 2012 and FSA/PN/080 2012, 164 There is in fact an additional defence, to which reference has already been made under s 63(1) which provides that the offences do not apply to anything done by an individual acting on behalf of a public sector body in pursuit of monetary policies or polices with respect to exchange rates or the management of public debt or foreign exchange reserves. As has also been pointed out this defence would not be available if the public servant is not acting on behalf of a public sector body. Indeed, some of the earliest cases of insider abuse that came to light involved senior officials and even ministers taking advantage of their inside knowledge in regard to public securities, see B Rider and HL Ffrench, The Regulation of Insider Trading (Macmillan 1979) Ch 1. In regard to the civil offence of market abuse, see 4.32 et seq and 9.12 below. 165 An approved organisation is under para 1(3) of Sch 1, an international securities selfregulating organisation approved by the Treasury under section 22 of the FSMA as amended. 166 CJA 1993, Sch 1, para 1(2).

106

The main offences of insider dealing  3.102 original Criminal Justice Bill this defence would have applied to any employee of a market maker. This was later amended so that the defence would only apply to an employee of a market maker who was engaged in market making activity.167 It is not clear whether this defence is available to a market maker who, after becoming aware of inside information by continues to deal in the securities in question. In such circumstances, obvious difficulties would arise for a market maker who, for example, was employed by a corporate broker with responsibility for dealings in a particular share and who would arouse suspicions amongst traders if he suddenly withdraws from the market. In this situation, the dealing offence would appear to cover the market maker who stayed in the market and dealt. On the other hand, it has been argued that in such circumstances provided it can be shown that they are still acting in the course of their business as a market maker and that they have acted in good faith, they should be entitled to protection.168 3.100 Paragraph 1(2) of Schedule 1 sets out the defence and provides that an individual is not guilty of the dealing or encouraging offences if he can show that the information which he had as an insider was market information and it was reasonable for an individual in his position to have acted as he did despite having that information as an insider at that time. In determining whether it was reasonable, the Schedule requires three issues to be taken into account. First, the content of the information; secondly, the circumstances in which the market maker first had the information and in what capacity and finally, the capacity in which he now acts. 3.101 The market maker’s defence in the CJA 1993, Schedule 1, paragraph 1 is arguably narrower than the equivalent defence that had been available under the Company Securities (Insider Dealing) Act 1985. The counterpart provision of the 1985 Act prohibited the market maker from dealing whilst in the possession of inside information if the inside information on which the market maker dealt had been obtained by the market maker in the course of its business and was of a type for which it was reasonable for the market maker to have obtained in the ordinary course of that business.169 The CJA 1993 sought to do away with these requirements in order to impose liability on a broader basis, but does provide a defence in the CJA 1993, section 53(1)(c) for a market maker who was wrongly exposed to inside information and continues to deal. Section 53(1)(c) provides, as we have seen, an individual is not guilty if he can show that he would have done what he did even though he had possession of inside information. 3.102 In this context it is also important to note the defence provided in paragraph 1(3) of the Schedule which is to some extent based on the old law and which facilitates the completion of acquisitions or disposals. It is provided that an individual will not be guilty of the offences of dealing or encouraging if he shows that he acted in connection with an acquisition or disposal which was under consideration or negotiation, or in the course of a series of such transactions and that what he did was with a view to facilitating the accomplishment of the transaction or series of transactions. Furthermore, he must also show that the information which he had as an insider was market

167 HC Deb, Standing Committee B, Official Report, 15 June 1993, vol 11, col 216. 168 See S Clarke, Insider Dealing, Law and Practice (2nd edn) (Oxford University Press 2020) at p 148. 169 Company Securities (Insider Dealing) Act 1985, s 3(d).

107

3.102  The main offences of insider dealing information arising directly out of his involvement in the acquisition or disposal or series of such transactions. This defence overlaps with that in paragraph 1(2) but is specifically although not exclusively aimed at potential take-over bidders who wish to acquire a foothold in the securities of another company. 3.103 What may be considered to be market information is set out in paragraph 4 of Schedule 1. Here it is provided that it will involve one or more of the following facts: the actual or contemplated disposal or acquisition of securities; that securities are not going to be acquired or disposed of or have not in fact been traded; the number, price, including price range of such securities and the identity of the persons involved. 3.104 It is necessary for the individual seeking to make out this defence that notwithstanding his insider status he acted in good faith and that it was reasonable for him to have acted in the way that he did. Good faith is essentially a subjective test, whereas reasonableness is objective. Much will depend upon the market maker being able to show that he acted in compliance with the market rules and good practice. 3.105 The buy-back and price stabilisation defences are available for an individual who deals in securities, or encourages another to deal in securities on the basis of inside information, if the individual can show that the dealings were in conformity with the price stabilisation rules or those of the European Commission’s Regulation.170 Stabilising the price of securities in the context of new issues is seen as entirely acceptable in terms of market stability. The price stabilisation rules are enforced by the FCA.171 The purpose of these rules is to permit a manager of an issuance of securities to enter the market (usually by purchasing shares) in order to stabilise or maintain the market price of those securities. A defence is available for price stabilisation if such activity is carried out in conformity with the rules. For example, the FCA’s price stabilisation rules, adopted pursuant to the FSMA, section 144(1) and (3), contain safe harbour provisions to the effect that behaviour conforming to those rules will not amount to market abuse.172 These safe harbour provisions for price stabilising activity are available to any person, whether that person is a firm or not, who can show one of the following: they acted in conformity with the price stabilisation rules for the purposes of the CJA 1993, Schedule 1, paragraph 5(1), their conduct conformed with the price stabilising rules for the purposes of Part 7 Financial Services Act 2012 (misleading statements and practices) or their behaviour conforms with the rules in accordance with the FSMA, section 118(8) (market abuse).173 3.106 The price stabilising safe harbours would cover any person concerned with an offer of securities for cash. For instance, there is no legal restriction on 170 CJA 1993, Sch 1, para 5 and Commission Regulation (EC) No 2273/2003, 22 December 2003 implementing Directive 2003/6/EC, and see the Market Abuse (Amendment) (EU Exit) Regulations 2019, SI 2019/310 continuing the availability of these defences after Brexit. 171 See Price Stabilisation Rules, MAR 2, FCA Handbook. These rules were originally adopted by the Securities and Investments Board in 1990 and, under the Financial Services Act 1986, s 48(7), conformity with these rules provided a defence against the offence of market manipulation under the Financial Services Act 1986, s 47(2). 172 MAR 1.7.2. Other FSA rules containing provisions to the effect that behaviour conforming to that rule does not amount to market abuse will be discussed below and include the rules relating to Chinese Walls, certain parts of the Listing Rules in MAR 1, Annex 1G and rule 15.1(b) of the Listing Rules. 173 See the FCA Handbook, Chapter 2, Price Stabilising Rules, MAR 2.1.2(1)(a)–(c).

108

The main offences of insider dealing  3.107 the appointment of stabilising managers to whom the FSMA price stabilising rules would apply. The main focus, however, is on lead managers when they are considering or undertaking an offer of securities for cash. These safe harbours could also apply to agents appointed by lead managers.174 The safe harbours would cover both initial public offers and public offers of additional securities, along with securities already in issue.175 The FSA observes that an offer is likely to be public in character where it is made in a prospectus.176

Penalties and enforcement 3.107 While the effectiveness of normative177 and educative impact of statutory prohibition may be debated, the imposition of penalties has a role to play in terms of justice and deterrence. We have, of course, touched upon this elsewhere in our discussion. Section 61 of the CJA 1993 provides that on summary conviction an individual shall be liable to a fine not exceeding that statutory maximum178 and/or imprisonment for up to one year.179 In the case, however, of conviction on indictment, the penalty is an unlimited fine and/or up to 10 years’ imprisonment.180 In many cases, the insider abuse will also involve other offences181 including, in particular, money laundering where the relevant legislation provides for a maximum penalty of 14 years’ imprisonment. A joint report of HM Treasury, the Bank of England and the FCA published in June 2015182 recommended that the maximum penalty for conviction on indictment

174 MAR 2.1.2(2). 175 MAR 2.1.3(R). 176 Other offers may be regarded as public when they are made to a section of the public, such as distributions and placements that are not essentially private (see MAR 2.1.4), but the requirement that there must be a public announcement means that some offers for sale of securities, for example by means of block trade, would not be covered. 177 Notwithstanding the very poor record of successful convictions under the previous law, the Minister stated in the debate on the Bill which contained the present provisions, ‘despite the relatively small number of convictions secured since 1980, I do not accept that our existing insider dealing legislation is a failure. Rather it has played an important part in changing attitudes to the improper use of insider information, with the effect that insider dealing is universally accepted as being wrong, which it was not when it was made illegal in 1980’, HC deb, Session 1992-93, Standing Committee B, col 206. Of course, there are many who would think that the Minister’s comments are somewhat generous as to the achievements of the earlier law! See, for example, J Ames, ‘Insider dealing has gone on unpunished, lawyers claim’, The Times, 22 January 2018; V Heaney, ‘The War Against Insider Trading 2.0’, The Financial Times, 21 October 2013; B Rider ‘The Control of Insider Trading – Smoke and Mirrors!’ (1999) 1 International and Comparative Corporate Law Journal 271 and B Rider, ‘Insider Trading – A Crime of Our Times?’ in D Kingsford-Smith, Current Developments in Banking and Finance, Current Legal Problems (Stevens 1989). 178 The statutory maximum fine on a summary conviction is now unlimited for offences committed after 13 March 2015. Before this date the maximum fine for each offence was £5,000, Criminal Procedure Rules and Practice Direction 2020, 5 October 2020, Ministry of Justice. 179 See the Judicial Review and Courts Act 2022. 180 The Financial Services Act 2021 (Commencement No 3) Regulations 2021, SI 2021/1173. The Regulations specified that section 31 of the Financial Services Act 2021 would come into force 1 November 2021. Section 31 amends section 61 of the CJA 1993 and section 92 of the Financial Services Act 2012 to increase the maximum sentence for conviction on indictment for insider dealing offences from seven to 10 years. 181 Where the convicted insider has made a profit from his crime, this will constitute criminal property and his continued control over it will amount of the offence of money laundering, see Chapter 7. It is also possible that other offences will have been committed in the conduct of the insider dealing offence, see Chapter 6. 182 Fair and Efficient Markets Review Final Report.

109

3.107  The main offences of insider dealing for insider dealing should be reset at 10 years’ imprisonment to bring it more in line with other offences relating to economically motivated crime.183 For many years after the criminalisation of insider dealing the courts appeared reluctant to recognise the seriousness of the offences, and consequently, there were very few custodial sentences – indeed, as we have noted there were very few convictions. Once the CJA 1993 had ‘bedded down’184 the courts have become rather more willing to recognise the deterrence of imprisonment.185 Considering the problems facing those responsible for enforcing the law, by the time a case gets to conviction, the courts have tended to recognise that it is likely to be serious matter probably deserving a custodial sentence. The Court of Appeal has recognised that where the insider dealing has been carefully planned and executed,186 albeit not be professionals187 in the financial sector, imprisonment was more than justified.188 Hughes J pointed out that had the accused been professionals, then the sentence would have been longer. In R v Asif Nazir Butt189 one of the main players was in a senior position at a bank and received a sentence of five years’ imprisonment. Hughes J in R v Smith, Spearman and Payne referred to insider dealing corrupting the market, and we have already seen that the Court of Appeal in R v McQuoid190 had no hesitation in considering insider dealing as a species of fraud justifying the imposition of terms of imprisonment comparable to those in cases of fraud and breach of trust.191 In a number of cases the courts have accepted that the accused is a person of hitherto good character. While this may properly be taken in mitigation, the Court of Appeal in McQuoid pointed out that it is 183 The government has reserved its position on this recommendation, see Fair and Efficient Markets Review Implementation Report – Report to the Chancellor of the Exchequer, the Governor of the Bank of England and the Chairman of the FCA, July 2016. 184 ‘There has been for some years now a good deal of publicity about the process of insider trading. It has been well-known for many years that it is conduct which is a serious criminal offence’ per Hughes J. in R v Smith, Spearman and Payne [2003] EWCA Crim 2893. 185 In R v Lyttleton, Goymer J observed ‘anyone who commits the crime of insider dealing should expect to go to prison immediately. Regrettably, there must be an element of deterrence in this type of case’, see FCA press release, 21 December 2016 and see also FCA press release, 2 November 2016. For example, in the case of Richard Joseph, see A Spence, ‘Insider deals end in four years’ jail for broker Richard Joseph’, The Times 12 March 2013; Ryan Wilmott, H Wilson, ‘Former Logica manager jailed for insider trading’, The Times, 28 March 2015; J Rifat and M Costelllo, ‘Exotic holidays, luxury cars – and now jail for insider plot’, The Times, 20 March 2015; D Clarke and H Willson ‘Tears of insider trader jailed for two years’, The Times, 14 June 2016; F Abdel-Malek and B Martin, ‘Former UBS officer Fabiana Abdel-Malek jailed over “venal” insider trades’, The Times, 28 June 2019. 186 For example, in Operation Tabernula the insider dealing ring made over £7.4 million utilising 120 (identified) trading accounts, over 600 digital devices including many ‘burner’ pay-as-you-go mobile phones, see ‘£7.4m insider dealing ring used burner phones and code names, court hears’, 14 January 2016. Judge Pegden QC in this case characterised the defendants’ conduct as ‘persistent, prolonged, deliberate, dishonest behaviour.’ Of course, perceptions and thus characterisation varies significantly from one country to another, but in the USA in a not too dissimilar case a judge described such a well planned and executed enterprise as organised crime. 187 Such as Asif Butt who had been a vice-president responsible for compliance at Credit Suisse First Boston, see C Merrell, ‘Ex CFSB executive convicted of insider dealing’, The Times, 2 December 2004; in R v Abdel-Mallik [2020] EWCA Crim 1730, the defendant was also a senior compliance officer and described by Judge Korner as ‘an efficient and accomplished poacher’, for example, Malcolm Calvert a partner at Cazenove. 188 See R v Smith, Spearman and Payne [2003] EWCA Crim 2893. 189 [2006] EWCA Crim 137. 190 [2009] EWCA Crim 1301. 191 See R v Clark [1998] Cr App R (S) 95 setting out guidance in cases of fraud. In McQuoid the Court of Appeal set out the considerations that should be taken into account in cases of insider abuse. See Chapter 12.

110

The main offences of insider dealing  3.108 just such person who are trusted with access to price-sensitive information.192 Consequently, in almost all cases where confidence and trust has been breached the accused will have been at least seeming a person worthy of such trust. Where trust has been violated as part of a plan, possibly by organised criminals, then certainly other considerations must be taken into account.193 While there have been cases in other jurisdictions where organised criminals have engaged in insider dealing – in one form or another and there have been suspicions in the UK – most cases involve conventional insiders taking advantage of their position and the opportunities it presents. The judges clearly recognise the damage that insider dealing, notwithstanding the absence in the vast majority of cases an identifiable individual victim as in, for example, a case of fraud or criminal breach of trust, to confidence in the operation of the markets. The law must protect the public interest in maintaining the public’s confidence in the integrity of the financial system and markets.194 In this regard it is worth repeating the observation of Leverson LJ in R v Ai Mustafa,195 ‘the integrity of the markets and the integrity of the City of London is of prime importance, and this kind of offending not merely breaches it, but strikes at the confidence of the public and of investors in the whole system which operates in such a market. This is crime and significant crime. It deserves a marked sentence …’. Having said that, no one has been sentenced to anything approaching the statutory maximum. It is, of course, important to remember that imprisonment, even with the generous system of release in the UK, is but one factor in deterring and punishing criminals. There are many other factors and tools. In a good many cases there will be a confiscation order,196 fine and hefty costs to pay.197 3.108 We consider enforcement of the civil offence of insider dealing in Chapter 4. Questions have arisen as to the interplay between the two systems of regulation.198 It has been argued that less egregious cases are better dealt with 192 ‘Those who involve themselves in insider dealing are criminals; no more and no less. The principles of confidentiality and trust, which are essential to the operations of the commercial world, are betrayed by insider dealing and public confidence in the integrity of the system which is essential to its proper function is undermined …’, R v McQuoid [2009] EWCA Crim 137. Similarly, Sir John Kay in The Kay Review of UK Equity Markets, Final Report, July 2012, stated ‘Insider trading of price sensitive information in breach of fiduciary duty is a serious crime and perpetrators should suffer severe penalties. Effective regulation of insider trading has an important roll to play in ensuring confidence in the markets.’ The importance of confidentiality was also emphasised by the Upper Tribunal in Hannam v FCA [2014] UKUT 0233 (TCC), on the fiduciary issues, see generally Chapter 2. On the importance of protecting the markets in terms of information, see FCA v Da Vinci [2015] EWHC 2401 Ch. 193 See comments at 1.45 et seq. 194 This is recognised internationally, see, for example, recent cases in Australia, R v Curtis (No 3) [2016] NSWSC 866; Joffe v R (2012) 82 NSWLR 510; Stromer v R [ 2012] NSWCCA 261: R v Hartman [2010] NSWSC 1422 and R v Fysh (No 4) [2012] NSWSC 1587 where McCallum J stated ‘public trust in a fair and transparent market can only be served by immunising the market from the prospect of any trading by people on the inside who have the unfair advantage of knowing something the market cannot know.’ 195 [2013] EWCA Crim 133. 196 For example, in R v Abdel-Malik and Choucair [2020] EWCA Crim 1730, the FCA obtained a confiscation order for £3.9 million, FCA press release, 22 January 2021 and in the case against Richard Joseph the order for £3.9 million exceeded his profit in regard to the offence for which he was convicted. 197 See Chapter 4 and S Clarke, Insider Dealing, Law and Practice (2nd edn) (Oxford University Press 2020) at 12.21 where there is a table of sentences from 2009 to 2019. 198 See, for example, R v McQuoid [2009] EWCA Crim 137. Controversy has also arisen in regard to suspicions of a willingness, at least in the past, within the FCA to engage in a degree of negotiation with those suspected or abuse, see, for example, L Saigoll and P Mathurin, ‘Plea deals strategy to beat inside trading’, The Financial Times, 23 April 2007.

111

3.108  The main offences of insider dealing by proceedings under the FSMA than through the criminal justice system.199 However, the demarcation lines between civil and criminal are not always so clear or practical.200 It is the case that now that enforcement decisions and proceedings, at least in regard to insider dealing, are generally in the hands of one agency – the FCA – a more efficient, efficacious and consistent approach is possible. It must also be remembered that the FCA might well initiate regulatory action in addition and in support of criminal proceedings.201 Assessing how effective all this is in controlling the threats posed by the abuse of inside information is highly problematic, simply because there are so many unknowns. From 2013 to 2019 the FCA imposed fines for the civil offence of insider dealing on only three occasions. In the same period, it prosecuted for the criminal offence in nine cases securing the conviction of 12 individuals. While the FCA and others have warned that during the Covid-19 pandemic the risks of insider abuse have probably increased,202 some would argue significantly, enforcement and particularly the role of compliance procedures, has faced even greater challenges. While the disproportion between the number of suspicious activity reports in regard to the anti-money laundering regime and any discernable legal action let alone intervention203 is far less in cases of 199 The FCA Handbook, EG 12.1.2 The Enforcement Guide states that the FCA’s general policy ‘is to pursue through the criminal justice system all those cases where criminal prosecution is appropriate’. EG12.3.1 states that in cases of market abuse and insider dealing the principles set out in the Code for Crown Prosecutors, CPS (2018) should be considered in determining whether to use the civil or criminal law. It is provided in section 4.6 of this Code that ‘prosecutors must be satisfied that there is sufficient evidence to provide a realistic prospect of conviction against each suspect on each charge.’ EG 12.3 2 provides when deciding on which path to follow the factors that should be considered include culpability, seriousness of the offence, the size of the profits made or loss avoided, the impact on individuals and the financial markets and the extent that the suspect in question has voluntarily co-operated with the FCA. In Burns v FCA [2017] EWCA Civ 2140 the Court of Appeal emphasised the more serious the allegations made by the FCA the more cogent must be the evidence. The FCA is entitled to proceed with any allegation which has ‘a real prospect of success and lies within the scope of the facts and matters considered by the Regulatory Decisions Committee.’ However, the Court of Appeal added ‘It is inherent in that proposition that the FCA must have a proper basis for making any allegation and, in so far as the FCA intends to advance an allegation of a particularly serious nature, such as an intention to solicit a corrupt payment, then the strength and quality of the evidence available in support of it must be such that there is a real prospect that it will be established … If the RDC has rejected an allegation of a particularly serious nature then the FCA should consider with care whether it has a proper basis for advancing it all over again … Where as here, the allegation is of a particularly serious nature, the FCA must well know that it will require evidence of commensurate cogency to make it good. It should consider with great care whether it is appropriate to advance such an allegation, and particularly so in circumstances where it has been considered and rejected by the RDC.’ See also Chapter 12. 200 See B Rider ‘Civilising the Law – The use of civil and administrative proceedings to enforce financial services law’ (1995) 3 Journal of Financial Crime 11. In regard to private enforcement, see 4.41 below. 201 See, for example, the banning of Paul Milsom from engaging in any regulated activity for seven years after he pleased guilty to 28 separate incidents of insider dealing manifesting what Judge Pegden QC characterised as a ‘betrayal of the principles of confidentiality and trust, principles which are essential to the operations of the commercial world’, FT Adviser, 28 April 2020. 202 See Speech, J Hoggett, Director of Market Oversight, FCA, 12 October 2020, FCA, see also B Martin, ‘Market abuse warning over traders working from home’, The Times, 28 May 2020 referring to concerns expressed by the FCA. 203 See H Warrell, ‘Police urged to crack down on business crime’, The Times, 23 July 2014. Of course, it is important to appreciate that the contribution of such reports and disclosures in fighting organised crime and terrorism is primarily facilitative of disruption a strategy which has limited utility in the ordinary case of insider dealing, see B Rider, ‘Financial Regulation and Supervision after 11th September 2001’ (2003) 10 Journal of Financial Crime 336.

112

The main offences of insider dealing  3.108 insider dealing tip-offs and reports received by the FCA,204 it is not impressive. We have already noted that the obvious fact that the investigative resources of the FCA are limited and in the allocation of resources generally across our concern to police misconduct, the financial sector is not well resourced,205 albeit government and others emphasis its importance.206

204

See G Traurig, ‘FCA receives thousands of insider dealing tip-offs from financial services firms: few investigations opened’, https://www.gtlaw.com/en/insights/2019/3. 205 See A Ellson, ‘City traders getting away with market abuse of markets – insider deals by white-collar criminals ignored’, The Times, 19 January 2018, where, for example, it is reported that ‘last year the equivalent of 63 full-time staff … worked on insider trading investigations, while almost 4,000 staff investigated benefit fraud at the welfare department (DHSS).’ On the other hand, it is estimated that Operation Tabernula, which has been considered to be relatively successful, cost in excess of £14 million to investigate and prosecute. The FCA obtained confiscation orders against those convicted totalling £1.69 million – see ‘FCA secures confiscation orders totalling £1.69 million against convicted insider dealers’, FCA press release, 11 May 2018. The FCA commented in regard to two of the ring (Dodgson and Hind) that the ‘lengthy terms of imprisonment, not profits are the real result’ – one received a four and a half year sentence, the other three and a half years. 206 An estimate of the total fines and other financial penalties imposed by the FCA in civil enforcement cases for insider dealing is minimal compared with the amount it manages to impose for other violations. For example, in 2019 total fines exceeded £390 million. Having said that, in most of the civil and criminal cases, through one mechanism or another the ‘convicted’ insider has been deprived of the benefit of his abuse – see, for example, ‘Ex-Deutsche Bank broker told to pay £1 million over insider dealing’, The Guardian, 11 May 2018. Insider dealing cases that have come to light have generally not justified the imposition of financial penalties on institutions. In many, the failures of compliance have not been such as to deserve significant fines. Money laundering is a different matter. In 2020, the financial penalties imposed by regulators in the US and UK for money laundering related violations on authorised persons amounted to just under £2 billion, see ‘Dirty cash crackdown hurts banks’, The Times, 23 August 2021.

113

114

Chapter 4

The market abuse regime

INTRODUCTION 4.1 The market abuse provisions of the Financial Services and Markets Act 2000 (FSMA) were designed to preserve the criminal and regulatory aspects of the previous market misconduct regime, but were also intended to address weaknesses in the enforcement of the civil regulatory framework and criminal law by creating a civil offence of market abuse.1 The market abuse regime applies to all persons, whether or not authorised or approved under the FSMA. The market abuse offence attracts civil liability that can take the form of unlimited fines or public censure by the Financial Conduct Authority or a court order for restitution to compensate investors who have suffered losses as a result of market abuse. The regime was designed to curb the misuse of information in prescribed financial markets and to combat market operators who sought to manipulate and distort those markets. The overriding policy objective was to ensure that participants in regulated markets were using and disseminating information that related to qualified investments in a way that did not undermine market confidence or the integrity and good governance of those markets.2 4.2 The FSMA contained a market abuse regime creating a civil offence for market abuse and enhanced criminal penalties for insider dealing and three criminal offences for misleading statements and practices.3 In respect of the criminal offence of insider dealing, the market abuse regime supplemented, 1

2

3

The market abuse regime became effective on 1 December 2001. Before the UK adopted secondary legislation implementing the EU Market Abuse Directive in 2005, section 118(2) (a)–(c) of FSMA contained the three main categories of market abuse defined as: (1) misuse of information; (2) creating false or misleading impressions; and (3) market distortion. These three types of behaviour constituted market abuse if they satisfied a regular user test and were related to qualified investments that were traded on a UK-prescribed exchange or market. The International Organisation of Securities Commissions (IOSCO) recognises market abuse and insider dealing to be a threat to the integrity and good governance of financial markets and can, in certain circumstances, undermine systemic stability in those markets. Accordingly, IOSCO has adopted international standards for the regulation of securities markets that contain recommended prohibitions on market abuse and insider dealing. IOSCO, ‘Objectives and Principles of Securities Regulation’ (IOSCO 2010), paras 33–38 (p 12), see www.iosco.org/library/pubdocs/pdf/IOSCOPD323.pdf. FSMA, ss 118–123 (‘Penalties for Market Abuse’), s 402 (authorising the FSA to bring insider dealing prosecutions which may result in a fine or seven years of imprisonment under Part V of the Criminal Justice Act of 1993).

115

4.2  The market abuse regime rather than superseded, the existing provisions of the criminal law of insider dealing (Criminal Justice Act 1993, Pt V) and created criminal offences for misleading statements and misleading practices intended to manipulate prescribed financial markets.4 In 2012, Parliament enacted the Financial Services Act 2012 which broadened the scope of the market abuse regime by replacing section 397 with three separate offences, namely: ‘Misleading statement’ (section 89), ‘Misleading impressions’ (section 90) and ‘Misleading statements and acts in relation to benchmarks’ (section 91).5 The Financial Services Act 2012 also, among other things, eliminated the Financial Services Authority (FSA) and replaced it with the Financial Conduct Authority (FCA), which is responsible for regulating market conduct.6 In contrast to the criminal offence of insider dealing, the scope of the market abuse offence is much broader, prohibiting not only the misuse of privileged (‘inside’) information by company insiders, but also ‘behaviour’ by persons who create false or misleading impressions, or distort the demand and supply, of qualifying investments on prescribed markets. The Financial Services Act 2021 (FSA 2021) adjusts the UK’s financial services regulatory framework after Brexit. The FSA 2021 contains provisions relating to the prudential regulation of credit institutions and investment firms (sections 1 to 7), the authorisation and regulation of Benchmarks (sections 8 to 21), access to financial services markets (sections 22 to 27), variation or cancellation of permission to carry on regulated activity (section 28), rules about level of care provided by authorised persons (section 29), insider dealing and money laundering (sections 30 to 34), debt respite schemes (section 35), and support for savers (section 36). The FSA 2021 (section 31) increases maximum sentences to 10 years for insider dealing and market manipulation and other financial services offences set out in section 92(1)(b) of the Financial Services Act 2012. 4.3 The FCA (formerly the FSA) is under a statutory obligation to issue a Code of Market Conduct (MAR) giving guidance to those determining whether or not behaviour amounts to market abuse.7 The FSMA empowers the FCA to punish both regulated and unregulated market participants whose market conduct falls below acceptable standards as defined by a reasonable user of the market.8 Significantly, the market abuse offence expands the prohibition on market misconduct regarding the misuse of legally privileged and market sensitive information belonging to issuers of listed securities to include behaviour that could undermine confidence on prescribed markets covering transactions in a wider range of qualifying investments. The market abuse offence was designed to enhance market confidence and investor protection by prohibiting any person – not just insiders who owed a duty to corporate issuers not to benefit from the use of inside information – from misusing information (ie legally privileged information), or creating false or misleading impressions 4 5 6 7 8

See FSMA, s 397(1)–(3) creating three criminal offences for misleading statements and practices. See FSMA, ss 89, 90, 91 (as amended). The Financial Services Act 2012 also created the Prudential Regulation Authority responsible for regulating banks, certain investment firms, and insurance firms. Section 119. The MAR was issued by the FSA in 2001 and has since been amended to take account of the implementation of the EU Market Abuse Directive. Sections 119 and 122 authorise the FCA to carry out a primary role in implementing and enforcing the regime. The reasonable investor standard derives from the regular user test, which was set forth in the amended FSMA, s 130(3). The regular user test required that for market abuse liability to attach the behaviour in question had to be regarded by a regular user of the market as falling below an acceptable standard.

116

The market abuse regime  4.5 in the market, or distorting the market concerning qualified investments traded on prescribed markets or exchanges. By defining the offence in broad terms, the regulatory authority could police the market for behaviour that was not only abusive to particular issuers, but also undermined confidence in the market as a whole.9

THE UK MARKET ABUSE REGIME 4.4 The FSMA market abuse regime prohibits or restricts trading on the basis of inside information, creating false or misleading impressions, or taking positions that would distort the demand or supply of qualifying investments on regulated markets. It creates a civil (administrative) offence for market abuse that applies to a broad array of qualifying investments that are traded on regulated markets (ie exchanges) or on multilateral trading facilities (MTFs) or organised trading facilities (OTFs) and to financial instruments (ie derivatives) which are traded off exchange (OTC derivatives) but derive their value from investments traded on regulated markets (including MTFs and OTFs). It also creates a separate offence of requiring or encouraging acts defined as market abuse. 4.5 Under the FSMA, as amended by the FSA 2021, market abuse is defined in section 118 as ‘behaviour (whether by one person alone or by two or more persons jointly or in concert) which: (a) occurs in relation to a qualifying investment traded or admitted to trading on a prescribed market or in respect of which a request for admission to trading on such a market has been made, and (b) falls within any one or more of the types of behaviour’, as set out in the following subsections: ‘(2) (3) (4)

(6) (7)

9

an insider who deals, or attempts to deal, in a qualifying investment or related investment on the basis of inside information relating to the qualifying investment; or an insider who discloses inside information to another person other than in the proper course of his employment, profession or duties; or behaviour which consists of effecting, or participating in effecting, transactions or orders to trade (other than in conformity with accepted market practices) which give a false or misleading impression as to the supply of, or demand for, or as to the price or value of, one or more qualifying investments or related investments, or to secure the price of one or more of such investments at an abnormal or artificial level; or … behaviour which consists of effecting, or participating in effecting, transactions or orders to trade which employ fictitious devices or any other form of deception or contrivance; or disseminating information by any means which gives, or is likely to give, a false or misleading impression as to a qualifying investment or related investment by a person who knew or could reasonably be expected to have known that the information was false or misleading.’

See discussion in B Rider, K Alexander and L Linklater, Market Abuse and Insider Dealing (Butterworths 2002), pp 73–74.

117

4.5  The market abuse regime These definitions of market abuse are aligned with the definitions of market abuse under the EU Market Abuse Regulation 596/2014/EU, which came into effect in 2016.10

THE PRESCRIBED MARKETS 4.6 The market abuse offence is triggered when behaviour occurs in relation to qualifying investments or related investments that are traded on a prescribed market. The essential elements of the offence can be broken down into four categories: (1) what are the prescribed markets; (2) which investments are qualifying; (3) what are related investments; and (4) when does behaviour occur in relation to these investments. 4.7 The UK Treasury has the authority to prescribe markets to which the market abuse regime will apply.11 The FSMA provides no limit on how many markets which the Treasury can prescribe. Generally, the Treasury has prescribed all markets that are listed under the rules of a UK recognised investment exchange. According to article 4 of the Financial Services and Markets Act 2000 (Prescribed Markets and Qualifying Investments) Order 2001 (the 2001 Order),12 the UK-prescribed markets were initially the following exchanges: COREDEAL, the London Stock Exchange, the International Petroleum Exchange, Jiway, the London Metal Exchange, OM London Exchange, Euronext-LIFFE, Virt-x, and EDX London. HM Treasury amends the list when the FCA recognises (or revokes the recognition) of other investment exchanges or regulated markets.13 As of January 2022, the following UK recognised investment exchanges or regulated markets are: ICE Futures Limited, BATS Trading Limited, CME Europe Limited, ICAP Securities & Derivatives Exchange Limited, The London International Financial Futures and Options Exchange (LIFFE). 4.8 Section 118(5) provides that ‘[b]ehaviour’ may attract liability under the market abuse regime if: ‘it occurs – (a) (b)

in the United Kingdom; or in relation to qualifying investments traded on a market to which this section applies which is situated in the United Kingdom or which is accessible electronically in the United Kingdom.’

The test for a prescribed market is that it may either be located within the UK or be accessible electronically from within the UK. This potentially creates extraterritorial jurisdiction because it applies to behaviour whether in the UK or abroad in respect of financial instruments traded on prescribed markets based in the UK. A market therefore does not necessarily need to be situated in the UK; it merely has to be accessible electronically in the UK.

10 11

12 13

See 16.4. FSMA, s 130A(1). The Treasury has prescribed markets and specified qualifying investments by the Financial Services and Markets Act 2000 (Prescribed Markets and Qualifying Investments) Order 2001, SI 2001/996 (as amended by the Financial Services and Markets Act 2000 (Market Abuse) Regulations, SI 2005/381, reg 10(2)). SI 2001/996. SI 2001/996 (as amended).

118

The market abuse regime  4.11

QUALIFYING INVESTMENTS 4.9 The market abuse offence may only apply to behaviour that occurs in relation to qualifying investments admitted to trading on a prescribed market and/or related investments to such qualifying investments.14 HM Treasury is also authorised by FSMA to prescribe which investments are qualifying in relation to the prescribed markets. In doing so, the Treasury has referenced a broad number of financial instruments, including: •• •• •• •• •• •• •• •• •• ••

company shares and securities equivalent to company shares; bonds and other forms of securitised debt; any other securities giving right to acquire shares or bonds; derivatives on commodities; units in collective investment undertakings; money market instruments; financial futures contracts; forward interest rate agreements; options; and interest rate, currency/equity swaps.

4.10 The market abuse offence covers all investments for which the prescribed UK recognised investment exchanges (RIEs) are the primary traded markets (ie domestic listed securities and on exchange derivatives, and also investments only incidentally traded on these exchanges (for example, on the London Stock Exchange’s international equity or fixed income markets)). In addition, it applies to conduct relating to derivatives on those ‘qualifying investments’ (for example, OTC derivatives on securities), and applies to conduct relating to instruments that underlie exchange traded derivatives or structured notes or warrants. These financial instruments are what the FCA calls ‘relevant products’.

RELATED INVESTMENTS 4.11 As discussed in 4.5, the market abuse offence includes insider dealing and the improper disclosure of insider information in respect of qualifying investments,15 or related investments on a prescribed market.16 The breadth of the term ‘related investments’17 should be emphasised: it could be any financial instrument admitted to trading (or where a request for admission to trading has been made) on a regulated market situated or operating in the UK. It applies to all transactions concerning those instruments, whether undertaken on regulated markets or elsewhere (eg, spreadbets).18 The term’s broad reach can

14

15 16 17 18

FSMA, s 118A(3). For example, contracts for difference (CFDs) are covered by the market abuse regime. In re Shevlin, the then FSA imposed a penalty of £85,000 on John Shevlin for trades he made in CFDs that referenced the share price of Body Shop International plc, a company whose ordinary share capital was traded at the relevant time on the London Stock Exchange. Shevlin’s trades were made on the basis of inside information which he had obtained while an employee at the Body Shop. FSA Final Notice, John Shevlin (1 July 2008). FSMA, s 118(2)–(8) (as amended). Section 118(2). Section 118(3). Insider dealing law also applies to financial instruments not admitted to trading on a regulated market, but whose value depends on a security traded on a regulated market. Similarly, the EU Market Abuse Regulation applies the market abuse offence, including insider dealing,

119

4.11  The market abuse regime be demonstrated by the following. Regarding misuse of information, it would not be necessary to show any nexus with the UK at all, other than the behaviour that relates to a UK traded investment in the broad sense described above. Compliance with local standards in another jurisdiction will not necessarily be a defence in a civil enforcement action for market abuse or to a criminal prosecution for misleading market conduct. 4.12 In addition, the term ‘related investments’ also has a potential application to behaviour which is less directly connected or indirectly related to the qualifying investments on the relevant prescribed market. Essentially, behaviour is covered which directly involves or affects the investments themselves.

PRESCRIBED MARKETS, QUALIFYING INVESTMENTS AND THE JABRE CASE 4.13 The FSA enforcement action against the hedge fund manager Phillipe Jabre and his employer GLG partners raised an important issue regarding the scope of the term ‘qualifying investments’. In the Jabre case,19 Jabre had entered into agreements to short sell the stock of the Japanese bank Sumitomo Mitsui Financial Group (SMFG) a few days after receiving price-sensitive information about the bank from a Goldman Sachs salesman. Jabre argued that his conduct in short selling SMFG stock was not, as a matter of law, market abuse contrary to section 118 because his trades in SMFG shares occurred on the Tokyo Stock Exchange and therefore were not qualifying investments on a prescribed market. He argued that it would violate the ‘territoriality’ principle for a market abuse penalty to be imposed in the exercise of the FSA’s power under section 123. The FSA found, however, that Mr Jabre’s behaviour did occur in relation to qualifying investments (SMFG shares) that were traded on a prescribed market. SMFG’s shares were qualifying investments of a corporate body (SMFG) and, crucially, those shares were quoted at the relevant time on the London Stock Exchange’s SEAQ International Trading System, which was a market to which section 118 applied.20 Jabre contended that the actual shares he shorted were not traded by him on the London market, but rather on the Tokyo market, and that the term ‘qualifying investments’ applied only to the shares actually traded, and not to all the shares of the same kind. Moreover, he argued that the purpose of section 118 (prior to the Market Abuse Directive) was to regulate conduct in relation to UK markets, and not in respect of markets outside the UK which were not prescribed by the UK Treasury; to all investments traded in multi-lateral trading facilities (MTFs) and organised trading facilities (OTFs) and to all financial instruments (ie, OTC derivatives) referencing these investments. See Chapter 16. 19 See Philippe Jabre and the Financial Services Authority (Decision on Market Abuse), The Financial Services and Markets Tribunal (10 July 2006), hearing on appeal by Mr Jabre of the Financial Service Authority’s Decision Notice to Philippe Jabre and to GLG Partners (28 February 2006). 20 The Tribunal observed that SEAQ International (the Stock Exchange Automatic Quotation System for International equity market securities) is a quote-driven trading service in which securities traded on SEAQ International required at least two market makers registered with the London Stock Exchange and that two-way prices must be displayed on the LSE system for the security in question. SEAQ International was a prescribed market because of its link with the LSE and SMFG’s shares, which were listed on the LSE system through SEAQ, were qualifying investments.

120

The market abuse regime  4.16 and that his conduct on the Tokyo market had no effect on the shares listed on the London market and therefore could not constitute market abuse simply because the shares in question were listed on both markets. 4.14 The Tribunal rejected this argument by reasoning that the statutory phrase ‘traded on a market to which this section applies’ in subsection (1)(a) does not mean that the actual shares traded were the same shares that were subject to the abusive behaviour. The Tribunal held that behaviour constituting market abuse ‘does not require the identification of any particular shares as being the qualifying investments to which the behaviour relates’. Indeed, the Tribunal reasoned that, if Jabre’s argument were accepted, it would be nearly impossible for a regulator in market abuse cases involving, for example, disclosing inside information or disseminating false rumours, to identify any particular share or group of shares which were the subject of wrongful behaviour. Moreover, Jabre’s assertion that his conduct on the Tokyo market did not have an effect on the London market was inapposite because the real issue was whether Jabre’s behaviour on the Tokyo market could be reasonably expected to undermine confidence in the shares traded on the London market. The Tribunal held that Jabre’s insider dealing by shorting the shares of the Japanese bank, wherever it occurred, had the effect of destroying confidence in the global market for the bank’s securities and therefore constituted market abuse with respect to qualifying investments on UK prescribed markets.

THE DUTY TO THE MARKET 4.15 The Jabre case also highlights the duty that market participants have to the market to maintain transparency and overall market confidence. An important aspect of the market abuse offence was that, unlike the criminal offence of insider dealing, it established a duty to the market for anyone whose conduct – whether on or off market – was defined as being market abuse. This meant that it was not necessary for prosecutors to prove that the defendant breached a duty to an investor or to the company or firm whose financial instruments were being traded. It was sufficient for the regulator to show on a balance of probabilities that the behaviour in question in respect of qualifying investments had impacted the market itself by undermining investor confidence and the integrity of the market as perceived by reasonable investors in the market. In imposing liability, however, the FCA may still under certain circumstances need to show that the state of mind of the alleged abuser was relevant for committing the offence.21 4.16 Market abuse is therefore defined as behaviour which occurs in relation to qualifying investments admitted to trading on a prescribed market, or in respect of which a request for admission to trading has been made. It also applies to qualifying investments and to investments that are related to qualifying investments.22 These related investments can be traded on exchanges 21 22

Although the FCA is primarily concerned with the impact on the market, the purpose of the behaviour will be relevant for determining how a reasonable investor should act under certain circumstances. See Section 1.2.5 of the MAR. It is worth noting that recently the UK Court of Appeal held that effecting an order to trade in such investments as CFDs, which would not fall under the definition of ‘qualifying investments’ pursuant to Order 2001/996, may nonetheless be regarded as market abuse even when the orders are effected through intermediaries, see 7722656 Canada Inc (formerly Swift Trade Inc) v Financial Services Authority [2013] EWCA Civ 1662.

121

4.16  The market abuse regime that are not prescribed UK exchanges. For instance, related investments could be traded on prescribed exchanges or off exchange in other European Economic Area (EEA) jurisdictions, or on or off exchange outside the EEA, if they relate to qualifying investments on a UK prescribed market. Although relevant in some circumstances, the state of mind of the market abuser is not necessarily relevant for a successful prosecution of the civil offence.

WHAT CONSTITUTES MARKET ABUSE 4.17 The statutory framework creating the market abuse offence is very broad, covering ‘behaviour’ that is both on market and off market, including trading activity and disseminating false or misleading information. Section 118(2)–(8) of the FSMA covers several categories of market abuse: (1) (2) (3) (4) (5) (6) (7)

insider dealing; or improper disclosure of inside information;23 or misuse of relevant information where the behaviour falls below the standard of behaviour reasonably expected by a reasonable user of the market or a person in the position of the alleged abuser;24 or manipulating transactions in the relevant market unless for legitimate reasons25 and in conformity to accepted market practices on the relevant market; or manipulating devices;26 or information dissemination that gives or is likely to give a false or misleading impression;27 or misleading behaviour or distortion of the market where the behaviour falls below the standard of behaviour reasonably expected by a reasonable user of the market or an alleged abuser;

unless such behaviour: ••

conforms with a rule which expressly provides that behaviour which conforms with the rule will not amount to market abuse.

The definitions of market abuse set out in section 118(2)–(8) provide specific descriptions of prohibited or restricted behaviour.28 This includes ‘behaviour’, ‘where an insider deals, or attempts to deal, in a qualifying investment or related investment on the basis of inside information relating to the investment 23

24 25

26 27 28

See Section 1.4.2 of the MAR: The following behaviours are, in the opinion of the FCA, market abuse (improper disclosure): (1) disclosure of inside information by the director of an issuer to another in a social context; and (2) selective briefing of analysts by directors of issuers or others who are persons discharging managerial responsibilities. This refers to subsection (4) which ceased to have effect as of 31 December 2014. See Section 1.6.6 of the MAR: In the opinion of the FCA, the following factors are to be taken into account when considering whether behaviour is for ‘legitimate reasons’, and there are indications that it is: (1) if the transaction is pursuant to a prior legal or regulatory obligation owed to a third party; (2) if the transaction is executed in a way which takes into account the need for the market or auction platform as a whole to operate fairly and efficiently; (3) the extent to which the transaction generally opens a new position, so creating an exposure to market risk, rather than closes out a position and so removes market risk; and (4) if the transaction complied with the rules of the relevant prescribed markets or prescribed auction platform about how transactions are to be executed in a proper way (for example, rules on reporting and executing cross-transactions). See MAR sections 1.7.2 and 1.7.3. See MAR sections 1.6.2 and 1.6.9 of the MAR. FSMA, s 118(2)–(8).

122

The market abuse regime  4.19 in question.’ By virtue of section 118A, behaviour is taken into account only if it occurs ‘in the United Kingdom’29 or is taken outside the UK with respect to a qualifying investment (or related investment) on a prescribed UK market. As discussed in 4.14, this provides potential extraterritorial jurisdiction for the FCA to enforce their market abuse legislation against parties who engage in behaviour outside their territory that amounts to market abuse if it relates to qualifying investments on UK prescribed markets. 4.18 In addition, section 123 contains a separate civil offence of requiring or encouraging another to commit market abuse if the act in question would have amounted to market abuse if committed by the requirer or encourager.30 It states in relevant part that the requirement or encouragement offence can be committed if ‘by taking or refraining from taking any action, a person has required or encouraged another person or persons to engage in behaviour which if the person themselves engaged in such behaviour would amount to market abuse’. In considering whether to bring an action for this offence or the market abuse more generally, the FCA will take account of factors such as acceptable market practices and level of knowledge and skill of the person concerned.

MANIPULATING DEVICES 4.19 The FCA has demonstrated that it will prosecute firms and individuals involved in using manipulating devices that create false or misleading impressions of qualified investments. In 2011, the FCA brought an enforcement action31 obtaining an interim injunction against Da Vinci Invest Ltd, Mineworld LtD, Mr Szabolcs Banya, Mr Gyorgy Szabolcs Brad and Mr Tamas Pornye restraining them from committing market abuse in relation to 186 UK-listed shares and freezing the assets of the mentioned companies.32 The FCA’s action was based on the grounds that the defendants were alleged to have committed market manipulation of a type known as ‘layering’. This involved the entering and trading of orders relating to shares traded on the electronic trading platform of the London Stock Exchange and multi-lateral trading facilities which gave, or were likely to give, a false or misleading impression as to ‘the supply of, or demand for, or as to the price of, shares listed on the LSE, contrary to section 118(5) of FSMA’. The FCA gave evidence of violation of section 118(5) of the FSMA and imposed penalties in the following amounts: Da Vinci Invest Ltd £1.46 million; Mineworld £5 million; Mr Banya and Mr Pornye £410,000; and Mr Brad £290,000.33 The case was also of interest because the High Court decided on 12 August 2015 that the FCA had the right to impose permanent injunctions under section 381 of the FSMA and penalties under section 129 of the FSMA (totalling £7,570,000) against the defendants. The court observed that ‘[t]his is the first case in which, in addition to seeking an injunction under section 381, the FCA has invited the court to impose a penalty for market abuse under section 129: such penalties are more usually imposed by the FCA itself,

29 30 31 32 33

FSMA, s 118A(1)(a). FSMA, s 123. [2015] EWHC 2401 (Ch), [2015] WLR(D) 475. See [2011] EWHC 2674 (Ch). The defendants were granted the right to apply for permission to appeal, a hearing is to be fixed to determine the terms of the final injunction. See http://www.fca.org.uk/news/ fca-secures-high-court-judgment-awarding-injunction-and-over-7-million-in-penalties.

123

4.19  The market abuse regime subject to review by the Upper Tribunal (Tax and Chancery Chamber)’. The case shows that the FCA will use not only regulatory proceedings to impose fines on defendants for using manipulating devices under section 118(5) but also use the High Court to restrain assets and impose further penalties for such violations.

INSIDER AND INSIDE INFORMATION 4.20 Insiders can be categorised as primary or secondary. Section 118B defines insiders as any person who has inside information, amongst other things, ‘as a result of having access to the information through the exercise of his employment, profession or duties’.34 Insiders whilst in possession of inside information have a duty not to trade on the basis of inside information nor to leak such information to third parties. A primary insider is an individual who possesses inside information because of his/her position within a firm or professional responsibility for advising a firm. The scope of personal liability for primary insiders is broad as there is no requirement that they have ‘full knowledge of the facts’ concerning the inside information in order for criminal or civil liability to be imposed. This requirement recognises the market reality that primary insiders may have access to insider information on a daily basis and are aware of the confidential nature of the information they receive. Secondary insiders are those to whom primary insiders leak inside information or who come into possession of inside information from a source they have reason to believe is an inside source. Secondary insiders are subject to an ‘information connection’ requirement as part of the definition of secondary insider. According to this definition, a secondary insider would be any person, other than a primary insider, ‘who with full knowledge of the facts possesses inside information’.35 They would be subject to the same prohibitions on trading, disclosing and procuring as primary insiders.36 4.21 Regarding the prosecution of insiders for leaking inside information to third parties, the FCA in 2012 fined Ian Charles Hannam (at that time Chairman of Capital Markets at JPMorgan and Global Co-Head of UK Capital Markets at JPMorgan Cazenove) £450,000 for violating section 118(3) of the FSMA because he leaked inside information through two emails to a third party foreign government official.37 Mr Hannam argued that the information was

34

35 36 37

FSMA, s 118B(c). Insiders who acquire inside information in relation to their professional and employment duties were subject to FSA enforcements in the cases of Richard Ralph (FSA Notice, 12 Nov 2008/Ralph) and Filip Boyen (FSA Notice, 12 Nov 2008/Boyen). In the action against Mr Ralph, the UK’s former Ambassador to Belgium, it was proved that, at the relevant time, Mr Ralph was the executive chairman of AIM-listed, Monterrico Metals plc (Monterrico) when he asked Mr Boyen to buy £30,000 worth of shares on his behalf. At the time, it was public information that the company was in takeover talks, but Mr Ralph also knew that a takeover had been agreed in principle at a premium price that substantially exceeded the then share price. Mr Ralph was involved in the takeover discussion and knew he was not allowed to deal in the company’s shares while the material information on the takeover had not been disclosed. He nevertheless directed his broker to execute trades on his behalf before the material information was disclosed. He agreed a fine with the FSA of £117,691.41, and Mr Boyen agreed a fine of £81,982.95. Articles 2, 3 and section A of the Annex. Article 2. See FCA Final Notice 2014 Ian Charles Hannam, RF ICH01012, see https://www.fca.org. uk/your-fca/documents/final-notices/2014/ian-charles-hannam.

124

The market abuse regime  4.23 not inside information and, alternatively, if it was, he was acting legitimately according to his employment and professional duties.38 In May 2014, the Upper Tribunal upheld the FCA’s decision imposing liability for market abuse and the fine because Mr Hannam had in fact leaked inside information by sending two emails to an unauthorised third party. Even though both the FCA and the Tribunal acknowledged that Mr Hannam did not act deliberately or recklessly and that no profit was generated consequently to the disclosure, it was claimed that because of his senior position and experience he could not ignore the ‘inside’ nature of the disclosed information. Hence, he should have taken the necessary measures to keep it confidential.39 4.22 The term insiders also applies to any person who has inside information as a result of his membership of the administrative, management, or supervisory bodies of an issuer of qualifying investments, or as a result of his holding in the capital of an issuer of qualifying investments, or as a result of his criminal activities, or obtained by other means and which he knows, or could reasonably expect to know, is inside information.40 In this respect, the MAR sets out the factors as indicators of whether a person is an insider: (1) if a normal and reasonable person in the position of the person who has inside information would know or should have known that the person from whom he received it is an insider; and (2) if a normal and reasonable person in the position of the person who has inside information would know or should have known that it is inside information.41 4.23 Section 118C defines ‘inside information’ for the purposes of Part VII of the Act as the following: ‘(2) In relation to qualifying investments, or related investments … inside information is information of a precise nature which – (a) is not generally available;42 (b) relates, directly or indirectly, to one or more issuers of the qualifying investments or to one or more of the qualifying investments; and (c) would if generally available, be likely to have a significant effect on the price of the qualifying investments or on the price of the related investments …’ See FCA Final Notice 2014 Ian Charles Hannam, RF ICH01012, see https://www.fca.org. uk/your-fca/documents/final-notices/2014/ian-charles-hannam. 39 Ian Charles Hannam v The Financial Conduct Authority [2014] UKUT 0233 (TCC). 40 See FCA Final Notice 30 March 2015/Carver, see https://www.fca.org.uk/your-fca/ documents/final-notices/2015/kenneth-george-carver. In the action against Kenneth George Carver, the FCA gave evidence of violation of section 118(2) of the FSMA. Mr Carver had purchased 62,000 shares in Logica plc based on inside information obtained from a family friend Ryan Willmott, employed by Logica plc. The information was concerned with a possible takeover of Logica by CGI Inc. On 31 May 2012, CGI Inc made public its intention to acquire Logica at a significant premium. Because of the announcement, the share price increased by 59.8 per cent. Mr Carver promptly sold all his shares and made a profit of £24.206.70. According to the FCA, ‘Carver knew that there was a risk of market abuse and traded anyway. He used his own funds to place a trade on Willmott’s behalf and knew that Willmott had a financial incentive to persuade him to trade’. Consequently, the FCA imposed on Mr Carver a financial penalty of £35,212. Ryan Wilmott faced prosecution before the Crown Court and was finally sentenced to a 10-month custodial sentence for insider dealing, see FCA Press Release, https://www.fca.org.uk/news/ ryan-willmott-sentenced-to-imprisonment-for-insider-dealing. 41 See Section 1.2.8 of the MAR. 42 Section 1.2.12 of the MAR specifies the factors which should be taken into account to determine whether or not information is generally available and are indications that it is 38

125

4.23  The market abuse regime This broad definition of ‘inside information’ derives from the definition of inside information as ‘precise, not been made public, relates directly or indirectly to issuers, and if made public, would have a significant effect on price of qualifying investments (ie financial instruments actually issued by issuer)’. Information is regarded as generally available to users of the market if it can be ‘obtained by research or analysis conducted’ by or on their behalf. Furthermore, by way of referring to the definition of section 118, the MAR lists additional behaviour which amounts to insider dealing. This includes: (1) dealing on the basis of inside information which is not trading information; (2) front running/pre-positioning – that is, a transaction for a person’s own benefit, on the basis of and ahead of an order (including an order relating to a bid) which he is to carry out with or for another (in respect of which information concerning the order is inside information), which takes advantage of the anticipated impact of the order on the market or auction clearing price; (3) in the context of a takeover, an offeror or potential offeror entering into a transaction in a qualifying investment, on the basis of inside information concerning the proposed bid, that provides merely an economic exposure to movements in the price of the target company’s shares (for example, a spread bet on the target company’s share price); and (4) in the context of a takeover, a person who acts for the offeror or potential offeror dealing for his own benefit in a qualifying investment or related investments on the basis of information concerning the proposed bid which is inside information.43

INFORMATION THAT IS ‘PRECISE’ AND HAS AN ‘EFFECT’ ON PRICE 4.24

Section 118C(5) defines information to be precise if it:

‘(a) (b)

indicates circumstances that exist or may be reasonably expected to come into existence or an event that has occurred or may be reasonably expected to occur, and is specific enough to enable a conclusion to be drawn as to the possible effect on the price of those qualifying investments or related investments.’

Section 118C(6) defines information as likely to have an effect on price if the ‘[i]nformation would be likely to have a significant effect on price if and only if it is information of a kind which a reasonable investor would be likely to use as part of the basis of his investment decisions’. Nonetheless, the MAR provides that consideration should be given to the following factors to determine whether or not a person’s behaviour is deemed to be on the basis of inside information: ‘(1) if the decision to deal or attempt to deal was made

43

(or not) ‘inside information: (1) whether the information has been disclosed to a prescribed market or a prescribed auction platform through a regulatory information service or RIS or otherwise in accordance with the rules of that market; (2) whether the information is contained in records which are open to inspection by the public; (3) whether the information is otherwise generally available, including through the Internet, or some other publication (including if it is only available on payment of a fee), or is derived from information which has been made public; (4) whether the information can be obtained by observation by members of the public without infringing rights or obligations of privacy, property or confidentiality; and (5) the extent to which the information can be obtained by analysing or developing other information which is generally available. See Section 1.3.2 of the MAR.

126

The market abuse regime  4.26 before the person possessed the relevant inside information; or (2) if the person concerned is dealing to satisfy a legal or regulatory obligation which came into being before he possessed the relevant inside information; or (3) if a person is an organisation, if none of the individuals in possession of the inside information: (a) had any involvement in the decision to deal; or (b) behaved in such a way as to influence, directly or indirectly, the decision to engage in the dealing; or (c) had any contact with those who were involved in the decision to engage in the dealing whereby the information could have been transmitted.’ According to the FCA, such factors should be regarded as indications that the ‘person’s behaviour’ is not ‘inside information’.44

BEHAVIOUR 4.25 The term ‘behaviour’ has been interpreted broadly by the FCA to include action and inaction,45 and the MAR states the following factors shall be taken into account in determining whether inaction amounts to behaviour that is market abuse: (1) (2)

if the person concerned has failed to discharge a legal or regulatory obligation (for example to make a particular disclosure) by refraining from acting; or if the person concerned has created a reasonable expectation of him acting in a particular manner, as a result of his representations (by word or conduct), circumstances which give rise to a duty or obligation to inform those to whom he made the representations that they have ceased to be correct, and he has not done so.46

Moreover, behaviour can be undertaken by one person acting alone or two or more persons acting jointly or in concert.47 Unlike the criminal offence of insider dealing which applies only to natural persons, the market abuse regime defines a person as not only an individual or natural person, but also as a business entity or non-profit organisation. The offence of market abuse therefore can be committed by a single person or any combination of natural and legal persons acting jointly or in concert.

THE CODE OF MARKET CONDUCT (MAR) 4.26 Essential to determining whether behaviour amounts to market abuse is the MAR issued by the FCA.48 The Code has guided market participants in identifying practices which do or do not amount to market abuse. The Code has played an important role in determining what conduct is acceptable.49 The MAR is helpful to persons who: (1) want to avoid engaging in market abuse

44 45 46 47 48 49

See Section 1.3.3 of the MAR. See also FCA Final Notice to Steve Harrison (8 September 2008) at p 3. FSMA, s 130(3). Code, MAR 1.2.6 (1) and (2). FSMA, s 118(1). The provisions of the MAR can be accessed at: http://fshandbook.info/FS/html/handbook/ MAR/1. Section 122(2) provides that the code ‘may be relied on so far as it indicates whether or not that behaviour should be taken to amount to market abuse’.

127

4.26  The market abuse regime or to avoid requiring or encouraging another to do so; or (2) want to determine whether they are required by to report a transaction to the FCA as a suspicious one.50 The FSMA recognised that the adoption of the Code was necessary given the breadth of the statutory definition of market abuse. 4.27 The Code provides guidance on what the statutory provisions of the market abuse regime mean and on the FCA’s views regarding what behaviour or conduct is acceptable. For authorised firms, the Code has been praised for adding greater transparency in determining what does and does not amount to market abuse and therefore has clarified compliance objectives and promoted legal certainty.51 4.28 The main provisions of the FSMA governing the Code provide as follows: ‘119. – (1)

(2)

The Authority must prepare and issue a code containing such provisions as the Authority considers will give appropriate guidance to those determining whether or not behaviour amounts to market abuse. The code may among other things specify – (a) descriptions of behaviour that, in the opinion of the Authority, amount to market abuse; (b) descriptions of behaviour that, in the opinion of the Authority, do not amount to market abuse; (c) factors that, in the opinion of the Authority, are to be taken into account in determining whether or not behaviour amounts to market abuse; (d) descriptions of behaviour that are accepted market practices in relation to one or more specified markets; (e) descriptions of behaviour that are not accepted market practices in relation to one or more specified markets.

and ‘122. – (1)

(2)

If a person behaves in a way which is described (in the code in force under section 119 at the time of the behaviour) as behaviour that, in the Authority’s opinion, does not amount to market abuse that behaviour of his is to be taken, for the purposes of this Act, as not amounting to market abuse. Otherwise, the code in force under section 119 at the time when particular behaviour occurs may be relied on so far as it indicates whether or not that behaviour should be taken to amount to market abuse.’

THE MAR SPECIFYING BEHAVIOUR 4.29 The MAR may specify behaviours which, in the FCA’s view, amounts to market abuse and the related penalties; or which, in its view, does not 50 51

See Section 11.2 of the MAR. See Freshfields Bruckhaus and Deringer, Financial Services Investigations and Enforcement (Tottel 2005), p 622.

128

The market abuse regime  4.31 amount to market abuse. It may also specify factors which should be taken into account in determining whether, in the FCA’s view, behaviour should amount to market abuse; and it may specify behaviour which is accepted market practice in relation to one or more specified markets, and which is not accepted market practice. The MAR’s provisions are neither conclusive nor exhaustive.52 However, the Code is commonly regarded by market participants as a quasi-rule book.

BEHAVIOUR WHICH DOES NOT AMOUNT TO MARKET ABUSE 4.30 Section 118(1)(c) states that where behaviour does amount to market abuse, it will not give rise to a penalty or remedy if the person accused of market abuse believed on reasonable grounds that its behaviour did not amount to market abuse; or it took all reasonable precautions and exercised all due diligence to avoid committing market abuse. The FCA applied this reasonable person test in the Harrison case involving a portfolio manager who was given inside information about the refinancing plans of a company whose shares he later bought before the information became public.53 The FCA acknowledged that Mr Harrison, a fund manager with Moore Credit Fund, did not realise that he was given inside information at the time, but that he should have realised it was inside information, and because he profited from it, he was required to provide restitution of £44,000 which included his employer’s profits from the transaction, to cover the FCA’s enforcement costs and he was suspended as a fund manager for one year. The case shows the importance of investors taking reasonable care to recognise inside information when they see it and not to misuse it. It was the first FCA market abuse case involving fund managers in the credit markets and is applicable to hedge fund managers who are often provided legitimately with inside information in the course of their business. The FCA expects fund managers in receipt of such information to observe high standards of conduct and not to profit from their privileged access to inside information. 4.31 The MAR is intended to provide more clarity to the definition of market abuse and greater flexibility in applying that definition to changing market conditions and thus serves as a source of regulatory innovation. Nevertheless, under the FSMA, the MAR has a limited role in determining whether market abuse has occurred. The only legal certainty it provides is its description of behaviour as not amounting to market abuse.54 In contrast, the MAR only plays an evidentiary role in determining whether or not behaviour amounts to market abuse.55 52

53 54 55

See Section 1.1.6 of the MAR: ‘The Code does not exhaustively describe all types of behaviour that may or may not amount to market abuse. In particular, the descriptions of behaviour which, in the opinion of the FCA, amount to market abuse should be read in the light of: (1) the elements specified by the Act as making up the relevant type of market abuse; and (2) any relevant descriptions of behaviour which, in the opinion of the FCA, do not amount to market abuse. Likewise, the Code does not exhaustively describe all the factors to be taken into account in determining whether behaviour amounts to market abuse. If factors are described, they are not to be taken as conclusive indications, unless specified as such, and the absence of a factor mentioned does not, of itself, amount to a contrary indication’. FSA Final Notice (8 September 2008), FSA/PIN/101/2008. FSMA, s 122(1). FSMA, s 122(2).

129

4.31  The market abuse regime In both situations, the MAR provides an important set of definitions and guidelines for behaviour that does not amount to market abuse, but its evidential factors that suggest that certain behaviour could constitute market abuse are subordinate to the statutory definition of market abuse.

SAFE HARBOURS 4.32 Section 122(1) provides that if a person behaves in a way that is determined by the MAR not to be market abuse, then the person cannot be taken to have committed market abuse. For example, if a person’s behaviour conforms to the safe harbour conditions described in the MAR, the behaviour in question would not amount to market abuse. Accordingly, the FCA has provided the following safe harbours in the MAR.

Share buy-backs 4.33 This is the buying back of shares from a corporation to reduce the number of shares on the market. It is carried out in the interest of investors to improve shareholder dividends or strengthen the demand for an issuer’s equity capital. By allowing corporate management to decide whether to buy-back shares while in possession of relevant information that has not been disclosed to the market, an important exception to the market abuse regime is created that is justified on the economic rationale that management should not have unnecessary regulatory restrictions on their efforts to maintain or enhance the value of shares held by investors. Share buy-back plans are nevertheless heavily regulated to prevent issuers from using these programmes to engage in abuse through buying back shares before the relevant disclosure to the market is made with a potential impact on the price of the shares. 4.34 Pre-Brexit, the safe harbour was limited to share buy-back programmes and had restrictions upon the price and volume allowed. For example, not more than 10 per cent of the subscribed share capital could be repurchased; and a maximum of 25 per cent of the average daily volume could be purchased, but such repurchases were not permitted at a price higher than the value at which shareholders initially bought the shares. Post-Brexit, these safe harbour rules derived from Article 5 of the EU Market Abuse Regulation have not been onboarded.56 Industry representatives have expressed the concern that the scope for permitted buy-backs in the safe harbour is too limited, particularly in relation to price and volume restrictions, and many believe the safe harbour should be expanded to include debt repurchases and sales of own shares. The FCA will likely take account of these concerns in devising price stabilisation safe harbour rules in the post-Brexit environment. 4.35 The final safe harbour involves an exemption if behaviour complies with accepted market practices, as established by certain designated overseas

56

MAR 1 Annex 1 Provisions of the Buy-back and Stabilisation Regulation relating to buy-back programmes (deleted), https://www.handbook.fca.org.uk/handbook/MAR/1/?view=chapter.

130

The market abuse regime  4.36 regulatory authorities (excluding EU and EEA member state jurisdictions).57 For example MAR 2.5.1 provides that ‘(1) A person who in any place outside the United Kingdom acts or engages in conduct: (a) for the purposes of stabilising the price of investments; (b) in conformity’ with the disclosure provisions of the UK market abuse rules; ‘and (c) in relation to an offer which is governed by the law of a country (or a state or territory in a country) so specified; is to be treated for the purposes of section 89(3)(a) and section 90(9)(b) of the Financial Services Act 2012 as acting or engaging in conduct for that purpose and in conformity with the price stabilising rules. (2) In relation to the United States of America, the specified provisions are: (a) Regulation M made by the Securities and Exchange Commission (17 CFR 242, # 100-105). (3) In relation to Japan, the specified provisions are (a) The Securities and Exchange Law of Japan, (Law No 25, April 13 1948), Article 159, paragraphs 3 and 4; (b) Cabinet Orders for the Enforcement of the Securities and Exchange Law of Japan (Cabinet Order 321, September 30, 1965), Articles 20 to 26; (c) Ministerial Ordinance concerning the Registration of Stabilisation Trading (Ordinance of the Ministry of Finance No 43, June 14, 1971); (d) Ministerial Ordinance concerning rules and otherwise governing the soundness of securities companies (Ordinance of the Ministry of Finance, No 60, November 5, 1965), Article 2. (4) In relation to Hong Kong, the specified provisions are: (a) The Securities and Futures (Price Stabilizing) Rules, Cap. 571 W made by the Hong Kong Securities and Futures Commission. (5) The provisions in (2), (3) and (4) are specified as they have effect from time to time, so long as this paragraph has effect.’ As mentioned, the safe harbour provisions of the EU Market Abuse Regulation as implemented by EU member states are not included in the exemption of behaviour in conformity with the accepted market practices of certain foreign jurisdictions, and neither is Switzerland’s definition of accepted market practices covered by the Code of Market Conduct’s foreign safe harbour rules. Over time, however, the FCA may expand or limit the number of jurisdictions eligible for the foreign jurisdiction accepted market practice safe harbour rules.

Price stabilisation 4.36 This is an important economic mechanism to maintain the price of securities during an initial public offering. Under the pre-Brexit MAR, this was subject to strict rules rather than forming part of a blanket exemption.58 57 58

The Price Stabilising Rules: overseas provisions, MAR 2.5.1. MAR 1 Annex 1 Provisions of the Buy-back and Stabilisation Regulation relating to buy-back programmes (deleted), https://www.handbook.fca.org.uk/handbook/MAR/1/?view=chapter.

131

4.36  The market abuse regime The rationale for strict controls on the use of price stabilisation measures is that when taken over an extended period of time they can be used as a form of market manipulation to increase or maintain share prices at an artificial level. As a result, stabilisation programmes were required to meet a number of conditions before safe harbour status could be granted. Post-Brexit, stabilisation may only occur during a certain period (normally 30 days) that has been disclosed to the market in advance. The FCA accepts adequate public disclosure (see 9.2–9.4) which can be made through a regulatory information service or otherwise in accordance with Part 6 rules (see 9.10–9.12); or equivalent disclosure can be made through a mechanism required by the relevant trading venue.59 For example, during an initial public offering, the period will begin when the security is traded on a regulated market and end no later than 30 days after allotment, while the price may not exceed the offering price. Good practice suggests that there should be adequate levels of disclosure, including disclosure of possible risk factors. Again, behaviour which conforms to the FCA’s stabilisation rules and safe harbours is not regarded as market abuse and is not subject to the insider dealing prohibitions set out in the Criminal Justice Act 1993.

Accepted market practice 4.37 The FCA is likely to follow its pre-Brexit approach regarding accepted market practice. Pre-Brexit, the FCA stated that: ‘1. An accepted market practice features in section 118 in the following ways: (1) (2)

it is an element in deciding what is inside information in the commodity markets; it provides a defence for market abuse (manipulating transactions).

2. The FCA will take the following non-exhaustive factors into account when assessing whether to accept a particular market practice: (1) (2)

(3) (4)

(5)

59

the level of transparency of the relevant market practice to the whole market; the need to safeguard the operation of market forces and the proper interplay of the forces of supply and demand (taking into account the impact of the relevant market practice against the main market parameters, such as the specific market conditions before carrying out the relevant market practice, the weighted average price of a single session or the daily closing price); the degree to which the relevant market practice has an impact on market liquidity and efficiency; the degree to which the relevant practice takes into account the trading mechanism of the relevant market and enables market participants to react properly and in a timely manner to the new market situation created by that practice; the risk inherent in the relevant practice for the integrity of, directly or indirectly, related markets, whether regulated or not, in the relevant financial instrument;

MAR 1 Annex 1.1.8.

132

The market abuse regime  4.40 (6)

(7)

the outcome of any investigation of the relevant market practice by any competent authority, in particular whether the relevant market practice breached rules or regulations designed to prevent market abuse, or codes of conduct; and the structural characteristics of the relevant market including whether it is regulated or not, the types of financial instruments traded and the type of market participants, including the extent of retail investors participation in the relevant market.’60

4.38 The FCA has not produced a definitive list, however, of accepted market practices – most probably because it wants to retain its discretion to approve a variety of covered practices. By not being too prescriptive with this requirement, the FCA leaves adequate room for market and regulatory innovation in how it addresses appropriate market practices. The discretion afforded to the FCA to approve acceptable market practices, though necessary to respond quickly to changing practices in financial markets, may create legal uncertainty in relation to innovative market practices, particularly regarding Fintech and cryptocurrencies, that might come under close regulatory scrutiny.

Implications for practitioners 4.39 The UK market abuse regime’s safe harbour rules have important consequences for practitioners. The cost and effort to revise risk management practices for firms has been significant. This is compounded by the fact that compliance practices were redesigned just after the first UK market abuse regime came into effect in 2001, which was a costly adjustment for many firms. Most of the additional costs of complying with the expanded coverage of the market abuse regime will be borne by the financial services and listed company sector, which will likely pass the costs on to consumers and investors. The consolidation of the MAR that occurred in recent years because of the UK’s implementation of stricter definitions and prohibitions under the EU Market Abuse Regulation has meant greater reliance on prescriptive requirements and less discretion for the regulator to craft rules that are more sensitive to market practice. This has arguably limited FCA efforts to develop safe harbours that reflect appropriate market practices in the UK financial markets. In the postBrexit environment, the FCA will have more flexibility unencumbered by the strictures of the EU Market Abuse Regulation to consider whether to modify existing safe harbours and acceptable market practices to address the specific challenges and risks in UK financial markets.

REGULATORY ENFORCEMENT AND SANCTIONS 4.40 The FSMA61 requires the FCA to issue a statement of its policy with respect to the imposition of penalties for market abuse and the amount of the penalty. The FCA’s policy regarding sanctions is contained in Chapter 6 of the Decision Procedures and Penalties (Manual).62 In deciding whether to exercise its enforcement power under section 123 regarding any particular

60 61 62

See Annex 2 of MAR. FSMA, s 124(1). See Chapter 10.

133

4.40  The market abuse regime behaviour, the FCA must have regard to this statement. The FCA will also take into account any relevant provisions of its Enforcement manual as they are in force at any particular time. The FCA can impose penalties, including fines and public censure, against a person who commits market abuse or against persons who require or encourage others to engage in behaviour which would have amounted to market abuse had it been engaged in by that first person.63 The FCA can also petition a court of law for remedies against those engaged in market abuse or those who encourage or require behaviour that amounts to market abuse by seeking injunctions to freeze the assets of the abuser or other third parties or petition the court for restitution and/or compensation.64

PRIVATE ENFORCEMENT 4.41 A private person who suffers a loss based on the contravention of a FCA rule can bring a private civil action for damages, subject to defences and other incidents applying to actions for breach of statutory duty (FSMA, section 138D). Investors usually rely on this claim in the context of allegedly unsuitable advice by an authorised adviser or where an investor was mis-sold a financial or investment product. The right of action set forth in the provision is limited in two ways. First, it only applies to private persons. Second, it only applies to the breach of certain FCA rules.65 A private person is any individual unless he suffers losses in the course of carrying on any regulated activity or any activity which would be a regulated activity or any person who is not an individual and does not suffer losses in the course of carrying on business of any kind.66 English courts have taken a restrictive view in their interpretation of the term ‘private person’, especially as it relates to corporations.67 In relation to the second limitation, the FCA has excluded an action for damages by a private person for a contravention of FCA Principles.68 Similarly, if a firm has taken reasonable steps to ensure compliance with the fair, clear and not misleading rule (COBS 4.2.1R) in relation to a particular communication or financial promotion, no right of private action exists.69 The private person must have suffered a loss as a result of the contravention of a FCA Rule. For the claim to succeed the usual requirements of causation apply. It has to be shown that the loss was caused both in fact and as a matter of law by the contravention of the FCA Rule.70 The Law Commission proposed, in a 2014 consultation paper, that the private right of action should be extended as a way to further deter bad behaviour in financial markets.71 The FCA has consulted on potential rules for a higher level of consumer protection in retail finance. As part of this, it has suggested the extension of the private right of action.72 The courts

63

FSMA, s 123; see FCA, Final Notice to Redcentric PLC, 26 June 2020 (censure for misleading). 64 See Chapter 12. 65 See FSMA, s 138D(3). 66 Financial Services and Markets Act 2000 (Rights to Action) Regulations 2001, SI 2001/2256, reg 3. 67 See Titan Steel Wheels Ltd v Royal Bank of Scotland plc [2010] EHWC 211 (Comm). 68 FCA Handbook PRIN 3.4.4R. 69 FCA Handbook COBS 4.2.6R. 70 Kerrigan v Elevate Credit International Ltd (t/s Sunny) [2020] EWHC 2169 (Comm) at 34. 71 The Law Commission, ‘Fiduciary Duties of Investment Intermediaries, A Consultation Paper’ (2014), The Law Commission Consultation Paper no 215, 14.65–14.70. 72 FCA, ‘A new Consumer Duty’ (May 2021), FCA Consultation Paper CP21/13 47-49.

134

The market abuse regime  4.43 have, however, in recent cases continued to take a narrow view on the private right of action. For example, in Ramesh Parmar & Anor v Barclays plc the court rejected a claim in relation to alleged misselling of interest rate hedging products by private persons.73

REGULATORY POLICY AND THE MARKET ABUSE DIRECTIVE 4.42 The FCA has sole responsibility for investigations and enforcement of suspected regulatory offences, such as market abuse. The creation of the FCA in 2013 – and its predecessor the FSA – was intended to increase certainty, accountability and transparency regarding which agency had responsibility for investigating and enforcing the civil or regulatory offence of market abuse. The FCA and several other UK government agencies, including the Serious Fraud Office, have responsibility for investigating and enforcing the criminal offences of misleading statements and impressions, and the manipulation of benchmarks under sections 89–91 of the FSMA and insider dealing under the Criminal Justice Act 1993 (Part V).74

CONCLUSION 4.43 The definitions of market abuse in section 118(2)–(8) are wideranging and cover generally three types of market misconduct: (1) misuse of information (insider dealing); (2) creating false or misleading impressions; and (3) market distortion including misleading statements or acts to manipulate or distort the supply and demand for a financial instrument. Post-Brexit, the UK’s substantive offences for market abuse are aligned with the definition of market abuse in the EU Market Abuse Regulation. Also, the FCA has continued strict enforcement of the market abuse regime and continues to take a broad interpretation of its application to foreign traders and markets where qualifying investments in UK prescribed markets are affected. In any case, it remains to be seen whether the UK’s strategy to make Brexit work for Britain will lead to lighter touch enforcement of the market abuse regime, particularly regarding internal controls at regulated UK institutions. These issues will be addressed in the Chapter 10 on information gathering and Chapter 12 on enforcement.

73 74

[2018] EWHC 1027 (Ch); see also Burford Capital Ltd v London Stock Exchange Group plc [2020] EWHC 1183 (Comm) for an assessment of whether the violation of the EU Market Abuse Regulation provides a private right of action, which was denied by the court. See 5.5–5.6 below.

135

136

Chapter 5

FSMA criminal offences of market manipulation

INTRODUCTION 5.1 An intrinsic characteristic of financial markets is that prices move in response to individual transactions and to supply and demand factors in the market. An efficient market for securities can often lead to volatile price movements that might reflect sharply changing investor preferences based on the dissemination of price-sensitive information. Volatile movements in securities prices might also reflect significant adjustments in demand and supply of the relevant assets. Nevertheless, more sinister motivations of market participants can create distortions from the regular patterns of demand and supply which can undermine the efficiency and integrity of the market. Some commentators would agree that a price is likely to be distorted when price movements deviate from the norms expected by a reasonable user of the market. This could potentially lead to some forms of legitimate behaviour attracting civil liability for market abuse because of the sudden movement of asset prices that respond to different information in the market. Indeed, Keynes noted that changing investor sentiments regarding their perception of average investor opinion in the market could suddenly change based on rational and irrational factors which could result in a liquidity shock to financial markets.1 UK regulators have recognised that distortion as a form of market abuse is very controversial. There was a concern that some types of legitimate behaviour would be restricted or prohibited by the market abuse regime. The civil and criminal law should acknowledge and make exception for market users who legitimately trade at times and in sizes most beneficial to them in maximising profit, but yet with a potentially volatile impact on the market. The criminal law of market distortion or manipulation accepts that where prices are trading outside of their normal range, this will not necessarily indicate that they are trading at a distorted or manipulated level. For the criminal law to impose liability, a person’s ‘purpose’ or ‘intent’ is particularly relevant to whether they are engaged in distortion or manipulation of the market. This chapter addresses the Financial Services and Markets Act 2000 (FSMA) criminal law of market manipulation and examines some of the challenges for the Financial Conduct Authority (FCA) in determining whether behaviour manipulates the market, given that market transactions inherently affect the price of the market. The chapter will also address the relevant provisions of the EU Market Abuse 1

JM Keynes, The General Theory of Employment, Interest, and Money (1936), Ch 12.

137

5.1  FSMA criminal offences of market manipulation Regulation that prohibit market manipulation of most financial instruments – both off exchange and in the over-the-counter OTC derivatives markets.

MANIPULATION 5.2 The term ‘manipulation’ in the context of financial markets has pervaded markets from the Dutch tulip bulb mania in the early seventeenth century to the collapse of the share prices of internet dotcom companies and Enron and WorldCom in the early 2000s. Some major jurisdictions, such as the United States, do not define ‘manipulate’ or ‘manipulation’.2 The US Securities and Exchange Commission has adopted rules, instead, that describe ‘manipulation’ by relating it to specific acts or activities that are then proscribed as ‘manipulation’ or ‘manipulative’. The term ‘manipulate’ or ‘manipulative’ is often described as involving ‘motive’ or ‘intent’ to punish a result that is socially undesirable. A strict interpretation of the term would lead one to deduce that many types of acts could be characterised as manipulation, including activities regularly engaged in by securities professionals and others, but not necessarily in contexts predetermined to be undesirable. A less than rigid standard may be used to define ‘manipulation’ as it could cover many activities in the marketplace that are not viewed as harmful or socially undesirable. Indeed, the concept of manipulation is a constantly evolving one that takes on a less than objective standard that is similar to the ‘he knows it when he sees it’ definition used by former US Supreme Court Justice Potter Stewart. For instance, the Seventh Circuit Court of Appeals adopted a definition of ‘manipulation’ as ‘the creation of an artificial price by planned action’.3 The Eighth Circuit utilises a definition that describes manipulation to occur when a price does not ‘reflect basic forces of supply and demand’,4 yet no agreement exists regarding the types of behaviour that would qualify as market manipulation. Some agreement has coalesced around certain conduct that can be termed as artificial factors that result in manipulation in financial markets, such as ‘corner’, ‘squeeze’, ‘domination and control’, ‘rumour manipulation’, ‘investor interest’ manipulation and even ‘price effect’ manipulation, but these criteria appear to be hard to define in practice as the US courts have been contradictory in the application of these terms to conduct that is allegedly manipulative. In contrast, UK policymakers have since 1986 defined market manipulation, first under the Financial Services Act 1986, section 47(1) and (2), and later under the FSMA, section 397. This chapter examines sections 89, 90 and 91 of the Financial Services Act 2012 (FSA 2012), which define the criminal offence of market manipulation, including section 91’s criminalisation of the manipulation of financial benchmarks, such as Libor. The chapter then discusses how the EU Market Abuse Regulation defines market manipulation as a form of market abuse that attracts civil liability.

UK CRIMINAL OFFENCES FOR MISLEADING STATEMENTS AND PRACTICES 5.3 As of 2012, some of the world’s largest banks came under regulatory scrutiny in the UK and USA because of their role in the London Interbank 2 3 4

The US Securities and Exchange Act 1934 does not define ‘manipulative’ or ‘manipulation’. General Foods Corpn v Brannon 170 F 2d 220, 234 (7th Cir, 1948). Cargill Inc v Hardin 452 F 2d 1154 at 1163 (8th Cir, 1971).

138

FSMA criminal offences of market manipulation  5.3 Offered Rate (LIBOR) scandal. Investigations revealed that, between 2008 and 2013, the banks manipulated the LIBOR rates to their own advantage. Investigations are still ongoing and the concerned financial institutions have been facing civil lawsuits and regulatory fines. In the UK, prior to the LIBOR scandal, conduct such as misleading statements and misleading practices were criminal offences under section 397 of the FSMA.5 The LIBOR facts led to the repeal of section 397 through Part VII of the Financial Services Act 2012, which came into force on 1 April 2013. To have a better understanding of the new provisions, it is desirable to revisit the old section 397 regime. Section 397 of the FSMA established two criminal offences. First, it created an offence of making false or misleading statements in relation to market activity.6 Misleading statements could be made in one of three ways: (1) making a misleading statement whilst knowing that it is false; (2) concealing facts about such statements with dishonest intent; or (3) recklessly making (dishonestly or otherwise) a misleading statement. In practice, to commit the offence, it was necessary that a person, whether dishonestly or recklessly, made the statement or concealed the facts with a view to inducing another person to enter into an investment agreement.7 In this context, evidence should be given that the person in question either acted dishonestly and was therefore fraudulent in making the particular statement or was reckless in doing so. On the other hand, in the case of recklessness, evidence should be given as to the fact that there was a high degree of negligence in the absence of fraud and dishonesty.8 Secondly, it punished the creation of false or misleading impressions in relation to the value of investments. In this respect, section 397(3) stated: ‘Any person who does any act or engages in any course of conduct which creates a false or misleading impression as to the market in or the price or value of any relevant investments is guilty of an offence if he does so for the purpose of creating that impression and of thereby inducing another person to acquire, dispose of, subscribe for or underwrite those investments or to refrain from doing so or to exercise, or refrain from exercising, any rights conferred by those investments.’ Significantly, individuals or firms could be liable of an offence under section 397 if they made false statements with the intention of inducing or preventing another person from entering into an agreement or exercising (or refraining from exercising) particular rights in relation to an agreement. In each of the two criminal offences, recklessness was sufficient mens rea – with the exception of section 397(1)(b) which required the accused to have acted 5

6

7 8

The statutory predecessor of the market manipulation provisions of section 397 is section 47 of the Financial Services Act 1986 (FSA 1986). Section 47(1) prohibited misleading statements, while section 47(2) prohibited misleading practices. Under the FSA 1986, the number of prosecutions for violations of section 47 was less than 10. The conviction rate was 50 per cent. The FSA has had little more success with section 397, while bringing few prosecutions. Section 397(1) stated that it applies to a person ‘who – (a) makes a statement, promise or forecast which he knows to be misleading, false or deceptive in a material particular; (b) dishonestly conceals any material facts whether in connection with a statement, promise or forecast made by him or otherwise; or (c) recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is misleading, false or deceptive in a material particular.’ Section 397(1)(c). Unlike previous criminal offences for insider dealing, the making of false and misleading statements may be committed either within or outside the market and applies to all natural persons including legal persons, such as companies, limited partnerships, limited liability partnerships, limited liability companies, or other business organisations. The aim of this particular offence was to prevent deliberate market manipulation by inducing investors to enter transactions based upon false statements.

139

5.3  FSMA criminal offences of market manipulation dishonestly in concealing material facts, involving recklessness as to whether it induced a person to enter into an investment agreement. 5.4 Unlike the actual knowledge standard for the insider dealing offence under Part V of the Criminal Justice Act 1993, recklessness is an objective test. The objective test of recklessness involves the following question: did the accused make the statement while recklessly disregarding the known risks? The making of reckless or grossly negligent statements which attracted criminal liability under section 397 could also be a concern for a person engaging in financial promotions, whether as an authorised or unauthorised person. Furthermore, it could be relevant to firms or individuals involved in making public statements during takeovers and in other circumstances governed by the FSMA regime. The old regime also set out proper defence mechanisms. Under both sections 397(2) and 397(3), the accused could assert that its conduct was in conformity with price stabilisation rules, or other acceptable market practices, such as control of information rules. These defences were similar to defences which could be asserted for committing the market abuse offence. Moreover, under section 397(3), the accused could assert the defence that it believed reasonably that its conduct would not create a false or misleading impression. This required active conduct to corroborate its belief that its conduct did not create false or misleading impressions, not simply subjective perceptions. 5.5 The two-offence framework of section 397 has been replaced by three separate offences in sections 89 (‘misleading statements’), 90 (‘misleading impressions’) and 91 (‘misleading statements etc in relation to benchmarks’) of the FSA 2012. As to the misleading statement offence, pursuant to section 89(1), this is to be identified in the conduct of a person who: (1) makes a statement which [the person] knows to be false or misleading in a material respect; (2) makes a statement which is false or misleading in a material respect, being reckless as to whether it is; or (3) dishonestly conceals any material facts whether in connection with a statement made by [the person] or otherwise. Such conduct concretises the offence in question where they influence a person’s decision as to the stipulation of an agreement or exercise of rights relating to investments. Even though there are some slight changes in wording, section 89 substantially replicates section 397(1).9 The same applies to section 90 on ‘misleading impressions’. However, section 90 strengthened the scope of the offence originally set out in section 397(3). Not only does it punish those who create impressions to induce another person to make investments or refrain from doing so, but it also outlaws impressions created with the view to making gain for oneself or causing loss to another person. In this respect, recklessness as to whether the impression is false or misleading, or awareness that the impression is likely to result in gain or loss, are the thresholds that section 90 sets out to create criminal liability.10 Both ‘misleading statements’ and ‘misleading impressions’ under sections 89 and 90 are subject to the same defences, as illustrated above. 5.6 In addition to misleading statements and misleading impressions, section 91 criminalises the offence of ‘misleading statements etc in relation to benchmarks’. Its provisions incorporate both the offences of false or 9

10

The only difference is that section 397 outlawed misleading promises and forecasts in addition to misleading statements. Both promises and forecasts are not included in section 89. Moreover, section 397 provided for reckless statements ‘dishonestly made or otherwise’. This wording has not been included either. See s 90(3)(4).

140

FSMA criminal offences of market manipulation  5.7 misleading statements and false or misleading impressions in relation to the setting of a ‘relevant benchmark’ (eg, Libor). The former offence is committed when three situations occur: (1) a false or misleading statement is made during the arrangements for the setting of a relevant benchmark; (2) the statement will influence the setting of the benchmark; (3) the person who makes the statement knows, or is reckless as to whether, this is false or misleading.11 On the other hand, the latter offence arises in relation to a misleading impression as to the price of any investment or interest rate of any transaction. Other than the awareness or recklessness as to whether the impression is false or misleading, section 91 also requires the intention to create a false or misleading impression and awareness that this may affect the setting of a relevant benchmark.12 From a jurisdictional perspective, the new offence does not change the scope of the previous section 397: misleading statements must be made in the UK or to a person in the UK; likewise, misleading impressions and the course of conduct must be respectively created or take place in the UK. Furthermore, like in the event of offences pursuant to sections 89 and 90, charges under section 91 are balanced through the possibility of defence. This includes, for instance, giving evidence that statements were made in compliance with price stabilising rules or for the purpose of stabilising the price of investments.13 Finally, pursuant to section 93(4), relevant benchmarks for the offence set out in section 91 were only those known as LIBOR. However, in light of the new scandal concerning the manipulation of the closing spot rate in foreign exchange (Forex) transactions and consequent criminal and regulatory investigations in the UK and elsewhere, calls have been made to widen the UK criminal regime for market abuse so as to include additional financial benchmarks. To this end, in June 2014, the UK government announced the Fair and Effective Market Review (the Review) jointly led by the HM Treasury, the Bank of England and the FCA.14 Following the recommendations issued by the authorities in their report, seven other benchmarks are now designated as ‘relevant benchmarks’ under section 91 of the Act.15 Consequently, in addition to LIBOR, the FCA’s enforcement powers under section 91 are now extended to other benchmarks the manipulation of which constitutes criminal offence.

MARKET DISTORTION AND MARKET MANIPULATION 5.7 If the behaviour engaged in interferes with the proper operation of market forces with the purpose of positioning prices at a distorted level, then such behaviour could attract criminal liability for market manipulation. The necessary mens rea may be shown even if the defendant had other objectives for entering into the transaction so long as the manipulative practice was the actuating purpose of the transaction, and that there was a real and not fanciful

11 12 13 14 15

See s 91(1). See s 91(2)(d). See s 91(3)(a), (b), (c). Fair and Effective Markets Review (FEMR), ‘Recommendations on Additional Financial Benchmarks to be Brought into UK Regulatory Scope’ (August 2014) Report to HM Treasury. See FEMR Final Report (June 2015), these include, in addition to LIBOR, Sterling Overnight Index Average (SONIA), Repurchase Overnight Index Average (RONIA), LBMA Gold Price, LBMA Silver Price, WM/Reuters London 4pm Closing Spot Rate, ICE Brent Index and ICE Swap Rate.

141

5.7  FSMA criminal offences of market manipulation likelihood that the behaviour in question will have such an effect, though the effect need not be more likely to occur than not. The ‘behaviour’ may, or may be likely to, give rise to more than one effect, including the manipulative behaviour in question. 5.8 A type of market distortion or manipulation can be caused by price positioning. For example, price positioning can occur if a person enters into a transaction or series of transactions with the purpose of positioning the price of a ‘qualifying investment’ or ‘relevant product’ at a distorted level. The positioning need not be the sole purpose for entering into the transaction or transactions, but must be an ‘actuating purpose’, defined as a purpose which motivates or incites a person to act. 5.9 In considering whether to bring a criminal action for market manipulation based on price positioning, the FCA will examine the legitimate commercial rationale and how the transaction could have been implemented in a proper way. Some of the factors that are taken into account in considering whether price positioning has taken place are much more detailed and can provide more certain guidance to market users, but there is a recognition that market practices evolve and the notion of what is acceptable market conduct can evolve to influence a determination by the regulatory authority of whether to bring an action.16

ABUSIVE SQUEEZES 5.10 Two particular types of market distortion identified by the Code of Market Conduct under the original market abuse regime were price positioning and abusive squeezes. These practices could also constitute market manipulation under section 397 and would not be prohibited by FSA 2012, sections 89 and 90. Although the statutory conditions governing the market manipulation offences do not specifically refer to distortions of supply and demand in market, the FCA could potentially bring a criminal action against those engaging in such behaviour. 5.11 An abusive squeeze is behaviour which could amount to both market abuse and market manipulation. For instance, the Code of Market Conduct defined an abusive squeeze as occurring when (Code at MAR 1.6.13) a person had a significant influence over the supply of or demand for, or delivery mechanisms for, a ‘qualifying investment’ or ‘relevant product’; and had a position (directly or indirectly) in an investment under which quantities of the ‘qualifying investment’ or ‘relevant product’ in question are deliverable. Abuse would occur if the person engaged in behaviour with the purpose of positioning at a distorted level the price at which others have to deliver, take delivery or defer delivery to satisfy their obligations (the purpose need not be the sole purpose for such conduct, but must be an actuating purpose). 5.12 Moreover, it should be emphasised that a significant influence over supply, for instance where there is market tightness, is not in itself abusive.17 Regulators and enforcement authorities might rely on several factors that will 16 17

Specific examples of price positioning that could potentially be market distortion or market manipulation were listed in the Code at MAR 1.6.12. See discussion of factors as it relates to market distortion for the civil offence of market abuse in MAR 1.6.14.

142

FSMA criminal offences of market manipulation  5.14 be taken into account when considering whether a person has engaged in an abusive squeeze. These factors include: the extent to which a person is willing to relax his control or other influence in order to help maintain an orderly market and the price at which he is willing to do so; and the extent to which the person’s activity causes or risks causing settlement default by other market users on a multilateral basis and not just a bilateral basis. The more widespread the risk of multilateral settlement default, the more likely that the market has been distorted.18

FCA PROSECUTION 5.13 FSMA subjects market manipulation and the offences relating to financial services to a civil and criminal penalties regime. In general, section 150 of the FSMA confers a private action right for certain breaches of the FSMA, such as the market abuse regime. With specific regard to the FCA’s powers, under section 380 of the FSMA, the FCA can apply to court for an injunction to restrain a breach of the relevant requirement (or against a person ‘knowingly concerned’ in a violation). Furthermore, section 382 authorises the FCA to apply to court for a restitution order against a person who has violated a ‘relevant requirement’ of the FSMA. The FCA may also seek a court order to require a defendant to disgorge profits or pay compensation to any party suffering losses arising from a breach of the FSMA, including for market abuse and market manipulation.19 5.14 From a criminal perspective, it is worth mentioning that the 2005 case R v Rigby, Bailey, and Rowley in which the former Financial Services Authority (FSA) enforced the market manipulation offence based on misleading statements made by the defendants.20 The facts of the case were as follows. On 2 May 2002, AIT directors Rigby & Bailey issued a statement via the Regulatory News Service that both turnover and profit were in line with expectations. The forecasted profit depended on revenue from three contracts worth £4.8 million. The announcement was rendered false because the contracts did not exist. Rigby and Bailey were found guilty by a jury in August 2005 of one count of recklessly making a statement, promise or forecast which was misleading, false or deceptive. Rigby was chairman & CEO of AIT and Bailey was AIT’s finance director. Rigby served a custodial sentence of three and a half years, while Bailey served a custodial sentence of two years. Defendant Rigby was convicted of one count of recklessly making a statement to the market, which was misleading, false or deceptive in a material particular; and Bailey was convicted of one count of recklessly making a statement, promise or forecast, which was false, misleading or deceptive in a material particular, and Rowley was convicted on all counts.21

18

The Code of Market Conduct gives a specific example of an abusive squeeze at MAR 1.6.18 to assist market users. It seems likely that the FCA will give specific examples of price positioning when giving guidance to market users. 19 Although a private right of action exists for those who suffered losses because of market abuse, no private right action exists for persons who have suffered losses as a result of market manipulation. 20 See FSA/PN/106/2005 (7 October 2005). 21 Ibid.

143

5.15  FSMA criminal offences of market manipulation 5.15 Nonetheless, the repeal of section 397, and its replacement by three separate offences, must be analysed in the context that the FSA, among other things, was tightly circumscribed under section 397 in its ability to bring criminal prosecutions against individuals involved in the manipulation of LIBOR. Such limitations in the power to prosecute were underlined during the regulatory debate over LIBOR. In evidence given to the House of Commons Treasury Committee, FCA officials stated that: ‘[the FCA] are not a general fraud prosecutor. We have specific powers to prosecute particular offences, and I am sure that you will be aware that we have spent quite a lot of time and energy on prosecuting both section 397 offences and indeed insider dealing offences in recent years. What we do not have is a remit to prosecute false accounting, conspiracy and soon in a general sense. We could prosecute it as ancillary to one of our main offences, so if there was a markets offence, you could throw in money laundering as well, but our investigative powers are limited to the offences that we have the ability to prosecute’.22 At the outbreak of the LIBOR scandal, the FSA, and later the FCA, did exercise their civil enforcement powers by imposing numerous fines on financial institutions and trading firms in relation to LIBOR, Forex and gold fixing cases.23 However, no individuals were held criminally liable by the FSA or FCA because both bodies believed that they did not have the power to prosecute in relation to the manipulation of benchmarks. Consequently, the new offences, in particular section 91, have been created against the backdrop of these jurisdictional limitations. Since the LIBOR scandal, the FCA has coordinated with the Serious Fraud Office and the National Crime Agency to properly address crimes in fixed income, currency and commodities markets.24 5.16 The FCA has become more active in recent years than the FSA was in previous years in vigorously investigating and prosecuting both civil market abuse actions and criminal insider dealing and market manipulation cases.25 The market manipulation offences set out under articles 89 and 90 of the FSA 2012, as amended by FSA 2021, do not modify the substantive offences set out in the previous regime under section 397(1)–(3), including the possibility 22 23

24

25

House of Common Treasury Committee, ‘Fixing LIBOR: Some Preliminary Findings’ (18 August 2012) Second Report of Session 2002-13 HC 481-I. For example, there were three relevant enforcement actions taken by the FCA against major investment banks: Barclays (£59.5m fines), UBS (£160m fines) and RBS (£89.5m fines), see FCA, ‘Enforcement Annual Performance Account 2012/13’, http://www.fca.org.uk/ static/documents/annual-report/fsa-enforcement-performance-account-2012-13.pdf. See www.fca.org.uk/static/documents/benchmark-fines.pdf; and see www.fca.org.uk/your-fca/ documents/final-notices/2014/mark-stevenson. There have been convictions in relation to the manipulation of EURIBOR. See Colin Bermingham and Carlo Palombo v Regina [2020] EWCA Crim 1662, Christian Bittar, Joerg Vogt, Philippe Moryoussef v The Financial Conduct Authority [2016] UKUT 0265 (TCC). There have also been conviction in relation to the manipulation of LIBOR. See Regina v Tom Alexander William Hayes [2015] EWCA Crim 1944, Jay Vijay Merchant and Jonathan Mathew v Regina [2017] EWCA Crim 60, and Regina v Alex Julian Pabon [2018] EWCA Crim 420. See for example FCA, Final Notice to Tejoori Limited, 13 December 2017 (failure to disclose inside information); FCA; Final Notice to Kevin Gorman, 12 December 2019 (failure to notify transaction); FCA, Final Notice to Corrado Abbattista, 15 December 2020 (placing misleading orders); Final Notice to Adrian Geoffrey Horn, 3 March 2021 (wash trading). See also The Financial Conduct Authority v Da Vinci Invest Limited and others [2015] EWHC 2401 (Ch) where the court imposed for the first time, penalties under the FSMA 2000.

144

FSMA criminal offences of market manipulation  5.19 that unlimited fines or imprisonment may be imposed. However, the FSA 2021 increased the maximum custodial sentence for insider dealing and market manipulation from seven to 10 years’ imprisonment following a trial on indictment.26

ANALYSIS AND CONCLUSION 5.17 Manipulation of the price of securities is a form of securities fraud that undermines the efficiency and integrity of financial markets. Today, market manipulation occurs across national borders through a variety of means, including the use of the internet to manipulate stock prices by, among other things, disseminating information that is false and negative about an issuer in an effort to drive down the price of its securities, or, alternatively, disseminating false information in order to drive a company’s share price higher. Since the LIBOR and Forex market scandals were exposed, UK authorities have brought more prosecutions of market manipulation as defined in sections 89–91 of the FSA 2012. Nevertheless, a number of obstacles, both legal and institutional, continue to challenge UK prosecutors; for instance, high evidentiary standards of proof and the complexity of bringing enforcement actions against whitecollar criminals, have made it difficult for UK authorities to show much success in this area. Indeed, relatively low levels of success in bringing financial fraud prosecutions against bankers and other white-collar defendants can be explained in part by inefficient use of resources and poor training and skills of UK enforcement authorities. Moreover, inadequate pre-trial criminal procedures and the limited use of effective negotiation mechanisms (eg, plea bargaining) have also undermined the effectiveness of UK enforcement authorities. 5.18 The FSMA supplemented the market abuse regime by creating a broad market manipulation criminal offence of making misleading statements, both dishonestly or recklessly, with a view to inducing a person to enter into an investment agreement.27 The market manipulation offence also included engaging in misleading conduct for purpose of inducing another to acquire investments.28 The FSMA criminal law regime for controlling market manipulation was regarded as inadequate in the wake of the LIBOR scandal but has since been replaced with the new framework in Part 7 of the FSA 2012, ss 89–91, which, in addition to misleading statements and impressions, sets out the new offence of misleading statements and acts in relation to benchmarks. Nevertheless, it remains to be seen whether the FSMA’s criminal law provisions for controlling market misconduct will adequately supplement the more proactive enforcement posture of the FCA in bringing regulatory enforcement actions for breaches of market abuse rules. 5.19 The FCA, however, has begun to investigate more market manipulation cases that could potentially lead to criminal prosecutions. The previous poor

26 27 28

See FSA 2012, s 92. The FCA’s authority to prosecute the criminal offences of insider dealing, misleading statements and market manipulation is provided in section 402. Civil and criminal sanctions could be imposed on those who violated section 397. FSMA, s 397(1) and (2). In June 2020, the FCA announced it had started prosecution against three former employees of Redcentric plc for making false or misleading statements. See https:// www.fca.org.uk/news/press-releases/fca-publicly-censures-redcentric-plc-market-abuse. Section 397(3).

145

5.19  FSMA criminal offences of market manipulation record of the FSA and other UK enforcement authorities in prosecuting criminal market manipulation has now changed since the FCA has begun to bring more criminal cases which could have also been brought as regulatory enforcement actions for market abuse.29 Even in civil enforcement actions, the FSA had little success in reaching substantial settlements and admissions of wrongdoing by firms acting in concert with sophisticated trading strategies that resulted in arguably unlawful market distortions.30 Other regulatory and enforcement complexities arise from the liberalisation and globalisation of financial markets and the associated cross-border dimension of market manipulation and the need to coordinate national investigations and enforcement actions with other national authorities, especially with European Economic Area states whose exchanges and regulated markets may impact UK markets and thus attract FCA attention. Finally, in light of the 2007–2008 financial crisis and the market distress associated with the Covid-19 lockdown, it can also be argued that securities market regulators need to adopt a broader view of what market manipulation or market abuse is. Indeed, the financial crisis teaches us that effective cross-border regulation in Europe and at the global level should address not only traditional sources of market manipulation, such as spreading false rumours and manipulative practices (eg, abusive squeezes) in the market, but also follow a global approach to monitoring the level of leverage and related positions in the UK and European financial markets which can be an indicator of abusive market practices that can result in illicit gains.

29

30

For example, under the pre-2012 FSMA, a number of FSA regulatory enforcement actions for market abuse could have been brought as criminal enforcement actions for making material misstatements or engaging in manipulative conduct. The FSA’s enforcement action against Royal Dutch/Shell Group for making knowingly false statements and other misrepresentations about its oil and gas reserves that had a significant impact on the group’s share prices, could also have been brought as a case of criminal misstatements to the market about Shell’s future prospects. FSA Final Notice to The Shell Transport and Trading Company and the Royal Dutch Petroleum Company NV, October 2005. The FSA investigation into the activities of certain fund managers and brokers operating in the split capital investment trust sector led to settlement that was inadequate to compensate most of the claims of investors who had invested in zero-dividend preference shares and other unit trusts and financial products that invested in these risky instruments. See FSA Release (24 December 2004), ‘FSA and firms announce details of Split Capital Investment Trust Settlement’, FSA/PN/114/2004.

146

Chapter 6

Fraud and financial crime

INTRODUCTION 6.1 While it has long been recognised that one of the most important justifications for regulating conduct in the financial markets and financial services industry is the protection of investors, there has been surprisingly little discussion as to what this really means. For example, should all investors, no matter how professional or sophisticated they are, be given the same level of protection, and what type or quality of risk should this cover? There has been a tendency in the more sophisticated and developed regulatory systems to move to a position where investors are treated much in the same way as consumers and thereby entitled the same sort of protection.1 In the context of our present discussion of insider dealing and market abuse, however, it is widely accepted that all investors should be protected from the risk of being defrauded. To the extent that we regard insider dealing and market abuse as a form of ‘fraud’,2 we can be reasonably confident that most would agree that it is reasonable for the law to intervene to protect investors. While some legal systems appear to be quite happy to regard those who abuse inside information as ‘defrauding’ at least the market, if not individual investors, in the UK, we have tended to adopt a rather different analysis. In English law, before we characterise something as ‘fraudulent’, we generally require some kind of representation made with knowledge that it is materially false, together with the intention that some identified person will rely upon it to their harm. We would normally describe such conduct as ‘dishonest’. While, as we have seen, in certain and generally exceptional circumstances, it is possible to regard an omission to disclose information as amounting to a form of representation, in the context of most instances of insider dealing, a failure to disclose the information in question will not be so regarded. When we consider the civil offences of market abuse, in some respects we are closer to the normal conception of fraud, but in others even further away. When the market abuse involves the commission of an act intended to create a false or misleading impression or where a statement is actually made with the same intention, we are in the realm of fraud. Where, however, there is merely a taking advantage of privileged information, it is 1 2

Note in particular the amendments introduced to the FSMA 2000 by the Financial Services Act 2012. The Court of Appeal, as we noted in the previous chapter, in R v McQuoid [2009] EWCA Crim 1301 stated ‘we … emphasise that this kind of conduct does not merely contravene regulatory mechanisms … when done deliberately, insider dealing is a species if fraud; it is cheating’.

147

6.1  Fraud and financial crime difficult to conceive this as fraud in any sense known under traditional English law.3 6.2 It is obviously the case that investors’ legitimate interests may be harmed by conduct which is not undertaken with the intention that it should cause harm or in circumstances where the person concerned appreciates that it could, but just does not care whether in fact it does or not. Indeed, it is probable that investors are more likely to be harmed by negligent rather than fraudulent conduct in most developed markets.4 While there are many laws and procedures designed to address this problem,5 this chapter focuses on what might be described as ‘sharp practice’ and not the competence of financial intermediaries. We are concerned here with what the Financial Services and Markets Act 2000 (FSMA) describes as ‘financial crime’.6 There has been considerable concern, over many years, as to whether the law and the various agencies that are required or rather expected to enforce it, have or for that matter can, adequately police ‘sharp practice’ in the financial sector. Despite the early development of laws and even the recognition that specialised enforcement machinery might be necessary,7 the general view is that the traditional criminal justice system has not delivered. The Fraud Trial Committee, sitting under Roskill LJ, observed in 1986: ‘the public no longer believes that the system … is capable of bringing the perpetrators of serious fraud expeditiously and effectively to book. The overwhelming weight of evidence laid before us suggests that the public is right’.8 3

4 5 6 7

8

But see the approach in the USA under Rule 10b-5 of the Securities Exchange Act 1934 in regard to fraud on the market, Affiliated Ute Citizens v US 406 US 128 (1972) and in Basic v Levinson 485 US 224 (1988) the US Supreme Court held ‘because most publicly available information is reflected in the market price, an investor’s reliance on any public material misrepresentations … may be presumed for the purposes of a Rule 10b-5 action …’. As we shall see in Scott v Brown, Doering, McNab & Co, AL Smith LJ observed in holding that an agreement to purchase shares in excess of their real value thereby creating a false market was a criminal conspiracy, ‘test it in this way. Suppose a purchaser induced to purchase shares … by means of the fictitious premium created by (the parties) solely for the purpose of inducing such purchaser and other to buy, could he or not have successfully sued either or both for a false and fraudulent misrepresentation? I say that he could’: [1892] 2 QB 724 at 734. Of course, the US law also employs other devices and arguments to justify liability, see generally W Wang and M Sreinberg, Insider Trading (3rd edn) (Oxford University Press 2010). JK Galbraith famously observed ‘I have never adhered to the view that Wall Street is uniquely evil, just as I have never found it possible to accept with complete confidence the alternative view … that it is uniquely wide’: The Great Crash 1929 (Penguin 1992) at p 27. See, for example, Bankia SA v Union Mutua Asistencial de Seguros (C 910/19) [2021] EU ECJ. See generally B Rider (ed), International Financial Crime (Edward Elgar 2015). See, for example, Report of the Royal Commission on the Stock Exchange (1878) Govt. Printer under Lord Penzance and see generally, B Rider, ‘Policing the City – combating fraud and other abuses in the corporate securities industry’ (1988) 41 Current Legal Problems 47 and B Rider, C Abrams and M Ashe, Guide to Financial Services Regulation (3rd edn) (CCH 1997), Chs 1 and 2. Report of the Fraud Trial Committee (HMSO 1986), para 1 and see T Kelly, M Dilworth and V Bischoff, ‘Britain is £3bn fraud capital of the world’, Daily Mail, 27 June 2022, reporting that only 1 in 1,000 reports of resulted in a person being charged, let alone convicted. Successive UK governments have come in for considerable criticism over the years for not providing sufficient resources for the adequate investigation and prosecution of serious economic crime, see generally B Rider (ed), Financial Crime – Research Agenda (Edward Elgar 2022) and in particular the comments of the Court of Appeal in R v Manning [1998] Crim LR 198; ‘Court of Appeal condemn Government’s failure on fraud’, The Times, 25 June 1998; and more recently, Economic Crime, 11th Report of the Treasury Select Committee, Session 2021–2022, 2 February 2022.

148

Fraud and financial crime  6.2 Notwithstanding the creation of the Serious Fraud Office (SFO),9 considerable amounts of new law, the establishment of the National Crime Agency and serious attempts to improve international co-operation,10 one suspects that the public still lack confidence in the ability of the criminal justice system to bring fraudsters ‘expeditiously and effectively to book’.11 9

10

11

The SFO has had a chequered career (see, for example, 6.91 in regard to its role in combating corruption). Mrs Theresa May, then Home Secretary in October 2014 declared her wish to see it merged with the NCA, see L Fortado and C Binham, ‘Guilty verdict validates SFO’s tough approach’, The Financial Times, 4 August 2015. Even in cases where the SFO has secured convictions, such as in the LIBOR manipulation (see R v Hayes [2015] EWCA Crim 1944), there has been criticism, see, for example, A Osborne, ‘Justice in Libor case leaves sour taste’, The Times, 3 February 2021, ‘ … dig a little deeper and it’s hard to escape the conclusion that Hayes was made Libor’s fall guy; a casualty of the SFO’s sprayshot approach to prosecutions … Britain’s illogical sentencing regime; and a prison regime that happily locks up white-collar criminals with murders and rapists.’ There has also been specific criticism in the conduct of certain prosecutions, for example, the quashing of the conviction of Ziad Akle, on the basis that the SFO had been responsible for ‘serious failures’ in disclosure to the defence. The Court of Appeal stated that this was ‘particularly regrettable, given that some of the documents had a clear potential to embarrass the SFO in their prosecution of this case’, Court of Appeal, 10 December 2021. The former chair of the Public Accounts Committee, Dame Margaret Hodge MP has, possibly unfairly, branded the SFO as ‘toothless’, see R Mason, The Guardian, 2 December 2021. It is the case that companies have much greater resources to defend themselves than the SFO. It has been estimated that defendant companies spend on average more than ten times what the SFO spends in prosecuting them, see E Siddons and S Lock, ‘Fraud Office outgunned by UK firms’, The Times, 15 November 2021, see also C Smyth, ‘Create single body to tackle plague of fraud’, The Times, 2 February 2022, referring to the recommendations of the Treasury Select Committee report on Economic Crime, above at note 8. Particular attention has been focused by the UK government, with others including the EU, on the problems presented by offshore financial centres and in particular those who have to some degree fostered secrecy, see, for example, D Thomas-James, Offshore Financial Centres and the Law (Routledge 2021). There has been considerable criticism of the efficacy of, in particular, police responses to reported cases of fraud and the inadequacies of the City of London Police’s reporting centre – Action Fraud – which is to be replaced by a new facility within the NCA, see ‘That’s just criminal; Police’s failed fraud helpline is scrapped’, The Daily Mail 30 July 2021. See also M Dilworth – reporting convictions for fraud in the UK slumped by 62 per cent since 2011. In 2019 of the estimated 3.7 million incidents of fraud, only one in five were pursued and overall only one in 700 resulted in a conviction, see The Daily Mail, 26 July 2021. See also M Dathan, ‘Fraud victims failed as police charge one criminal in 1000’, The Times, 13 October 2021. The National Fraud Reporting Centre – Action Fraud – came into a great deal of criticism and the government has announced plans to create a specialised function to sift through reports within the NCA, see P Morgan-Bently, ‘Fraud line scrapped after Times expose’, The Times, 29 July 2021. Of course, the issues are often presented, with some justification as access to and prioritisation of limited resources. See, for example, ‘Call to triple fraud investigators’, The Times, 28 June 2022. The government, at the time of writing, is consulting on proposals to include in the 2021/22 Finance Bill an economic crime levy for those within the Money Laundering Regulations, see Economic Crime (Anti-Money Laundering) Levy, Response to the Consultation, HM Treasury, 21 September 2021 and Economic Crime Plan, 2019-2022, HM Treasury and Home Office, 12 July 2019 as updated. Another serious issue, is that of police corruption, see, for example, ‘Met misconduct – Britain’s biggest police force has tolerated corruption and faces a crisis of confidence’, The Times, 23 March 2022. There has been increasing pressure within Parliament for an Economic Crime Bill to address the reputational damage to the financial sector of the City of London being considered ‘right at the heart of the world’s dirty money crisis’, per Dame Margaret Hodge MP, see l Clarence-Smith, ‘Stop being used for economic crime, demand MPs’, The Times, 12 November 2021. While it appeared that the government was relatively unenthusiastic, see, for example, the observations of Lord Falks QC, reported in The Guardian, 15 February 2022, the need to give effect to sanctions imposed after the invasion of the Ukraine resulted in the enactment of the Economic Crime (Transparency and Enforcement) Act 2022 to assist in the identification of foreign ownership of property and improve the operation of the law relating to unexplained wealth. It is debatable whether these long awaited provisions (see R Mason, ‘Government moves to require foreign

149

6.3  Fraud and financial crime 6.3 One of the driving forces behind the restructuring of the supervision of the financial sector and the FSMA was the concern to address financial crime and deal with it on a broader basis than the ordinary criminal justice system. Consequently, the FSMA, before the amendments in the wake of the financial crisis12 provided in section 2(2) that the reduction of financial crime was one of the four objectives that the then Financial Services Authority (FSA) should pursue in the discharge its various statutory and regulatory functions. This objective was ‘fleshed out’ in section 6, where it was made clear that the FSA was to be concerned with reducing the extent to which financial intermediaries can be ‘used for a purpose connected with financial crime’.13 Furthermore it was made clear that the FSA must have regard to ensuring that financial intermediaries are aware of the risks of being used in connection with financial crime and the importance of installing and adequately maintaining systems designed to prevent, detect and monitor the incidence of financial crime. The meaning of ‘financial crime’ was spelt out in section 6(3) as including any offence involving fraud or dishonesty, misconduct in, or misuse of information relating to, a financial market. It also included ‘handling the proceeds of crime’, whatever that crime may be. The notion of handling is wide enough to include laundering the proceeds of crime, and the FSA was given, and now the Financial Conduct Authority (FCA) retains, specific authority to promulgate rules on this by the FSMA, section 146. It should also be noted that section 6(4) made it clear that an ‘offence’ includes an act or omission which would be an offence if it had taken place in the UK, even if it actually occurred overseas. Given the financial regulator such statutory obligations was at the time novel not just in the UK but internationally. Until relatively recently the view was taken by many that it was not appropriate for supervisory organisations to get their hands’ dirty dealing with real criminals and crimes other than rather technical and regulatory offences. Indeed, many in regulatory bodies argued that to give them a specific role in fighting financial crime would undermine the relationship of confidence and candour that such bodies need to maintain with those whom they regulate and oversee. 6.4 The extent to which the FSA took its statutory mandate to facilitate the fight against financial crime at all seriously may be debated. Until the about 2009 there was little evidence that at senior levels within the FSA there was any great desire for the Authority to be seen as having any profile in this regard. At least one chairman of the FSA was prepared to say that financial crime was not

12 13

property owners to be identified’, The Times, 1 March 2022 – referring to Prime Minister David Cameron’s comments in 2013), will materially assist in the policing of fraud and money laundering, see E Lucas, ‘Britain has become addicted to dirty money’, The Times, 31 January 2022, not least as a result of limited expertise and resources in law enforcement, see C Pooley, ‘Londongrad curbs will need robust enforcement’, The Financial Times, 1 March 2022, and see above at note 8, the Treasury Select Committee’s concerns in its report on Economic Crime, 2 February 2022, and see in particular, The Cost of Complacency: Illicit finance and the war in Ukraine, Foreign Affairs Committee, 2nd Report of Session 2022–23, 14 June 2022. The government has been particularly critical of law firms and others who give professional assistance to those seeking to obscure their ownership, see R Mason, ‘Law firms aiding oligarchs may face penalties, No 10 suggests’, The Times, 1 March 2022, again this was an approach suggested by David Cameron, see also J Ames and B Ellery ‘UK Legal System has been corrupted by Klepocrats, says MPs’, The Times, 2 March 2022. See also B Rider, ‘Steps in the right direction’ (2021) 42 The Company Lawyer 377, concerning the tendency to lethargy in this area of the law. See generally N Ryder, The Financial Crisis and White Collar Crime – The Perfect Storm (Edward Elgar 2014) and J McGrath, Corporate and White Collar Crime in Ireland, A New Architecture of Regulatory Enforcement (Manchester University Press 2015). FSMA 2000, s 6(1) (unamended).

150

Fraud and financial crime  6.5 as far as he was concerned a priority area for the FSA. Very few specialists were recruited and retained and persons with no obvious experience in addressing issues related to financial crime were put in key positions of authority. Most inside and outside the law enforcement community considered that the FSA had little appetite and perhaps even less ability to address financial crime in any meaningful sense. The financial crisis associated with the sub-prime debacle and the systematic revelations of widespread abuse and misconduct in the financial sector convinced many, including the politicians, that the FSA had at least in terms of its enforcement and policing responsibilities been asleep. To be fair this indictment could just as easily be levelled at the US Securities Exchange Commission and many other custodians of the public’s trust in overseeing the financial sector.14 This is not the place to enter into a wider discussion of the restructuring of the supervisory regime in the UK and frankly, there are those who take the view, in substance not much has changed in regard to financial crime and misconduct. While there has been a constant flow of cases, both sides of the Atlantic, in which various financial regulators, including the FCA, have imposed very large financial penalties on financial institutions and the odd individual for an array of misconduct most relating to failures of compliance, relatively few have involved substantive criminality and prosecutions remain exceptional. 6.5 The FCA appears to be doing rather more than its ill-fated predecessor and there is evidence that it is acquiring the resources to be able to make a difference.15 The government and various other public bodies have re-emphasised the importance of addressing financial crime and restoring the reputation of the City of London which has been seriously damaged.16 The Economic Crime 14

15

16

It is reported that of some 81,631 reports of suspected fraud by businesses in London in 2013 to 2014 there were only nine successful convictions. Of some 103,000 suspected cases of business-related crime only 758 were considered solvable by the police, H Warrell, ‘Police urged to crack down on business crime’, The Financial Times, 23 July 2014. The UK police also fail to identify a suspect in three-quarters of property related crimes, R Ford, The Times, 18 July 2014, albeit the then Homes Secretary asserted ‘criminal gangs are running swathes of Britain’: R Ford, The Times, 12 June 2014. The situation has not improved, see F Hamilton, ‘Police letting down the victims of fraud’, The Times, 5 August 2021. Less than one in a 1,000 fraud suspects were charged in 2020–2021 and over 22,000 cases were abandoned after charging, see M Dathan, ‘Fraud soars but police abandon 22,000 cases’, The Times, 20 September 2021, and D Byers, ‘Fraud is putting national security at risk, says banks’, The Times, 23 September 2021. For example, on 21 October 2021, the FCA announced that it had fined Credit Suisse £147,190,200 for ‘serious financial crime due diligence failings.’ On appointment, the new CEO of the FCA, Mr Nikhil Rathi, emphasised that there was still considerable room for improvement in terms of protecting investors and enforcement, B Martin, ‘We must raise our game says City Regulator’, The Times, 16 July 2021. Prosecutorial and enforcement related decision-making has also been ‘streamlined’ – see B Martin, ‘Watchdog to accelerate prosecutions in shake-up’, The Times, 26 November 2021. But see also concerns that there have been too many ‘scandals’ – J Hurley, ‘Regulator must not be tainted by scandal’, The Times, 26 October 2021 and also A Osborne, Business Commentary and B Martin, ‘Financial Watchdog Chief to go’, in regard to Mr Charles Randall, the chairman of the FCA, The Times, 16 October 2021. There has also been serious criticism of the apparent delay in the FCA’s handling of allegations of money laundering against major financial institutions, in the case of the National Westminster, over five years, see B Martin, ‘Pressure grows on FCA over NatWest’, The Times, 21 October 2021. On the other hand, there is concern that after Brexit the financial services industry might be ‘encouraged’ to be more flexible and the government has emphasised the need to consider how restrictive regulation is in facilitating the City of London’s competition with other major financial centres, see, for example, K Griffiths, ‘Competition ruling could boost City’, The Times, 25 October. The Treasury Minister responsible for the City, Mr John Glen MP specifically addressed this issue at the Conservative Party Conference, October 2021, see L Clarance-Smith, Watchdogs told to boost City abroad’, The Times, 9 October 2021.

151

6.5  Fraud and financial crime Command of the National Crime Agency (NCA) which replaced the Serious Organised Crime Agency (for reasons not too dissimilar to those employed against the FCA), emphasised the importance of attacking economically relevant crime across a broad spectrum.17 While it has often proved difficult to convince conventional police forces of the importance of investigating and pursuing insider dealing, the NCA recognising the opportunities that this sort of crime offers organised criminal groups has been more prepared to devote resources to it, particularly in collaboration with the FCA.18 It is also the case that greater efforts are taking place to focus resources through the timely exchange of intelligence and better interface with compliance.19 Having said that, however, many within the criminal justice system today see the disruption of crime as the priority and traditional prosecutions are but one aspect of this.20 6.6 The Financial Services Act 2012, passed to address the weaknesses exposed during the financial crisis and restructure supervision over the financial sector, recasts the FCA’s statutory mandate to emphasise its responsibilities to protect investors and place them much in the position of consumers. Of particular Mr Glenn, however, did emphasise that it is important to maintain ‘high standards’, but the FCA needed to ‘smell the coffee’ and facilitate ‘the optimisation of competitive advantage for the UK.’ See also L Clarence-Smith, ‘Listing rules diluted to help City compete’, The Times, 3 December 2021 and ‘Financial regulators should promote British business, says Treasury’, The Times, 10 November 2021.Of course, as we have pointed out there is always a potential conflict in the role of a regulator responsible for policing misconduct and at the same time advancing and supporting the development of the financial services industry. The government is considering resetting the balance and there has been pressure from the City of London to require the regulators to have competitiveness as a formal statutory objective. Legislation is planned for mid 2022. The Treasury Select Committee has, however, strongly expressed the view that promoting competitiveness as a financial centre should not be a statutory objective, see Future of Financial Services Regulation, First Report of Session 2022–23, 13 June 2022. This must also be seen in the context of the FCA’s increased emphasis on taking a consumer protection stance, see FCA’s consultation papers, CP21/13 and 36. At the centre of the FCA’s proposals is a new Principle for businesses; ‘a firm must act to deliver good outcomes for retail customers.’ Within this overriding obligation for retail customers will be a duty to act in good faith, avoid foreseeable harm. When finalised and implemented these rules will bolster the existing obligation on firms in regard to ‘protecting’ customers from fraud and insider abuse. Note, however, the FCA has already decided that breach of this obligation will not give rise to a private cause of action, given access to the Financial Ombudsman Service. Whether this will encourage the finding of a fiduciary type obligation, as in the USA remains to be seen. Given that expectations play such a significant role in deciding whether a relationship has a fiduciary quality, the proposed rule may well, in time have this effect. 17 See also UK Government’s Economic Crime Plan, 2019 to 2022, Treasury and Home Office, which notes the importance of collaborating with the Financial Reporting Council in addressing the criminal market abuse regime. Although the plan mentions insiders it does so in the context of professional facilitators and money launders rather than in relation to insider trading. See also the CPS, Economic Crime Strategy, March 2021. Note also the creation of the National Economic Crime Centre (NECC) responsible for co-ordinating and tasking the UK’s response to economic crime. 18 See, for example, Operation Tabernula, see Chapter 3 note 186 and see also 1.45 note 53. For a discussion on the impact and threat of organised crime, see B Rider and M Ashe (eds), Money Laundering Control (Sweet & Maxwell 1996), Ch 3. 19 The NECC, is charged with responsibility for harnessing intelligence and capabilities from across the public and private sectors including the Joint Money Laundering Intelligence Taskforce (JMLIT). 20 B Rider, ‘Intelligent investigations: the use and misuse of intelligence – a personal perspective’ (2013) 20 Journal of Financial Crime 293. See also S Keene, Threat Finance, Disconnecting the Lifeline of Organised Crime and Terrorism (Gower 2012). See also B Rider (ed), International Financial Crime (Edward Elgar 2015). Note also the creation of a new and specific offence in s 45 of the Serious Crime Act 2015 of participating in the criminal activities of an organised crime group.

152

Fraud and financial crime  6.8 interest to us, however, is the recasting of the mandate to be concerned with financial crime. Under section 1B(1) of the amended FSMA, the FCA must as far as is reasonably possible advance one or more of its new operational objectives along with its strategic objectives. The FCA’s operational objectives are to promote consumer protection, integrity and competition (1).21 However, in discharging the first two of these it should have regard to the promotion of effective competition in the interests of consumers. Section 1B(5) provides that in discharging its general functions the FCA must have regard to the regulatory principles set out in section 3B22 and the importance of taking action intended to minimise the extent to which it is possible for a business carried on by an authorised person or recognised investment exchange ‘to be used for a purpose connected with financial crime’.23 Financial crime is now defined in section 1H(3) in almost identical words to was section 6(3) of FSMA,24 which we have already considered. The new provision, however, also specifically includes offences relating to the financing of terrorism.25 6.7 Section 1D(1) elaborates on the FCA’s integrity objective. It states that this is protecting and enhancing the integrity of the UK financial system. Subsection 2 goes on to explain that in this context integrity includes the following: (a) (b) (c) (d) (e)

its soundness, stability and resilience, its not being used for a purpose connected with financial crime, its not being affected by behaviour that amounts to market abuse, the orderly operation of the financial markets, and the transparency of the price formation process in those markets.

Although worded in a rather more convoluted manner this boils down to much the same as provided for in the original provisions. Of course, the promotion of integrity places a wider burden on the FCA to address malpractice, but in terms of addressing financial crime and preventing authorised persons becoming victims of or vehicles for fraud and abuse there is no real change. It is important to appreciate that these provisions do not require the FCA to do anything other than in the exercise and discharge of its powers to pursue the reduction of crime as an objective. They do not mandate the FSA to pursue financial crime outside its limited statutory remit. The only other amendment that is worth pointing out here is the specific obligation on the FCA to consider the needs that consumers may have for the timely provision of information and advice that is accurate and fit for purpose in section 1C(c). 6.8 In this chapter we address a variety of offences mostly related in one way or another with fraud which have some relevance to insider abuse and the circumstances in which the offence of insider dealing might occur.26 Of course, in a book of this nature we need to draw lines somewhere and 21 22

See s 1B(3). In addition to emphasising that ‘consumers should take responsibility for their decisions’ s 3B points out that ‘a burden or restriction which is imposed on a person, or on the carrying out of an activity, should be proportionate to the benefits, considered in general terms which are expected to result from the imposition of that burden or restriction.’ 23 See s 1B(5). 24 Section 1H(4) also makes it clear that this extends to any act or omission which would be an offence if it had taken place in the UK as did s 6(4) of the FSMA before the Financial Services Act 2012. 25 See s 1H(3)(d). 26 See generally B Rider (ed), International Financial Crime (Edward Elgar 2015) and A Arlidge, A Milne and P Springer, Arlidge and Parry on Fraud (4th edn) (Sweet & Maxwell 2014) and K Harrison and N Ryder, The Law Relating to Financial Crime in the United Kingdom (Ashgate 2013).

153

6.8  Fraud and financial crime we accept that these might appear arbitrary. In the US and increasingly in the UK the offences related to money laundering and proceeds of crime law are relevant in addressing insider dealing and the UK law is dealt with in the following chapter.

THE CREATION OF FALSE MARKETS 6.9 The early English law recognised that certain forms of conduct could undermine the efficient and fair operation of markets and there were common law offences, such as ‘forestalling, re-grating and cornering’, as early as the eleventh century.27 These were later superseded by statutory offences and today survive, to some degree, within the offence of conspiracy to defraud. While scandals were certainly not unknown in the financial markets, it was not until the early part of the last century that legislation was introduced specifically to outlaw certain frauds in the context of investments. The Prevention of Fraud (Investments) Act 1939, which was replaced and slightly amended by the Prevention of Fraud (Investments) Act 1958, made it a serious offence to induce an investment transaction by making a false statement, either dishonestly or recklessly, or by dishonestly concealing a material fact. This provision was more or less re-enacted in the Financial Services Act 1986, section 47(1) and with some useful redrafting as the FSMA, section 397. It has been further refined and is now in Part 7 of the Financial Services Act 2012 as section 89 which has been discussed in the previous chapter. A legislative history if ever there was one! 6.10 While few prosecutions were successfully brought under these provisions, until the Financial Services Act 1986, there was no attempt to address, through legislation, attempts to manipulate the market, other than through making false statements. Before the Financial Services Act 1986, section 47(2) – now section 90 of the Financial Services Act 2012 – creating a false market by conduct was left to the general criminal law and various self-regulatory provisions. Consequently, the statutory control of manipulative practices, as opposed to the inducement of transactions by fraudulent misrepresentation, is relatively new in the UK. It follows that English law does not have the wealth of experience in addressing the many problems that arise from attempting to curb and control the creation of false markets that, for example, US law has. We discuss the statutory provisions in Chapter 5.

THE COMMON LAW 6.11 The most significant area of law in England with regard to manipulation was, prior to the enactment of the Financial Services Act 1986, section 47(2), 27

See 1.2 note 3 and WS Holdsworth, A History of English Law (Little Brown 1922–1938), IV at 375, T Pluncknett, A Concise History of the Common Law (Liberty Fund 2010) and B Rider, C Abrams and M Ashe, Guide to Financial Services Regulation (3rd edn) (CCH 1997), Ch 1. The statutory offence under Edward 111 of forestalling became particularly important in the 1349 plague in England, for example, there were only 17 cases in the patent Rolls from 1325 to 1349, but 85 from 1350 to 1374. Parliament in 1362 described this ‘connivance of various men’ as harmful not just to the established markets but to the whole economy. See also B Anderson and A Latham (eds), The Market in History (Croom Helm 1986) and R Blackmore, Government and Merchant Finance in Anglo-Gascon Trade 1300-1500 (Palgrave Macmillan 2020).

154

Fraud and financial crime  6.12 the common law. The judiciary have rarely shown much sympathy for those involved in manipulating public markets. For example, in Rubery v Grant,28 Sir Robert Malins VC considered that to allege that a person was a member of a share rigging syndicate amounted to an allegation that they were dishonest. He added: ‘going into the market pretending to buy shares by a person whom you put forward to buy them, who is not really buying them, but only pretending to buy them, in order that they may be quoted in the public papers as bearing a premium, which premium is never paid, is one of the most dishonest practices to which men can possibly resort.’ The learned judge went on: ‘there is a class of people who think it is a legitimate mode of making money, but if they would only examine it for a moment they would see that a more abominable fraud, and one more difficult of detection, cannot be found.’29 6.12 Perhaps the first English case to be decided by the English courts, or at least reported, is that of R v De Berenger.30 This case involved one of the most audacious frauds ever perpetrated on a stock market. The UK had been at war with France for over two years and the price of British government stock was naturally depressed. The conspirators sought to raise the price of stock on the London Stock Exchange, enabling them to dump securities that they had already acquired, by spreading rumours that Napoleon had been killed and that peace was certain. The London Stock Exchange appointed a committee of inquiry which discovered the relevant facts. De Berenger and seven others were indicted of: ‘unlawfully contriving by false reports, rumours, acts and contrivances, to induce the subjects of the King to believe that a peace would soon be made … thereby to occasion without any just or true cause a great increase and rise of the public government funds and the government securities of the Kingdom … with a wicked intention thereby to injure and aggrieve all the subjects of the King who should, on 21 February, purchase or buy any part or parts, share or shares of and in said public government funds and other government securities’.31

28 29

30 31

(1871–1872) LR 13 Eq 443. The judges still take manipulation and dishonesty very seriously, see, for example, in R v Hayes [2015] EWCA Crim 1944 the Court of Appeal emphasised ‘this court must make it clear to all in the financial and other markets in the City of London that conduct of this type, involving fraudulent manipulation of the markets, will result in severe sentences of considerable length.’ (1814) 105 ER 536. (1814) 105 ER 536. Lord Thomas LCJ, rejecting the appeal of Tom Hayes in regard to convictions on eight counts of conspiracy to defraud relating to the rigging of the LIBOR rate, emphasised ‘this court must make it clear to all in the financial and other markets in the City of London that conduct of this type, involving fraudulent manipulation of the markets, will result in severe sentences of considerable length, which depending on the circumstances, may be significantly greater than the present total sentence’ of 11 years imprisonment: R v Hayes (Court of Appeal, 21 December 2015). The Court of Appeal had reduced Hayes’ term from 14 years because of his circumstances and the fact that he was in a relatively junior position. At trial Cooke J emphasised the importance of a deterrent sentence to send out a message on the fundamental importance of integrity to the financial sector. It should be noted, however, the five defendants accused of conspiring with Hayes were in fact acquitted by a jury, Southwark Crown Court, 27 January 2016.

155

6.12  Fraud and financial crime The defendants contended that seeking to raise the price of securities in the market was not of itself a crime and that there was no criminal conspiracy without some allegation that they had intended to cheat certain investors or cause harm to the government. Indeed, it was argued that it was in the government’s interest that the price of its securities should be kept high. 6.13 The court, however, had little sympathy for such arguments and held that it was not necessary for the Crown to allege, let alone prove, that anyone had in fact been misled and injured. Both the means used, along with the object of the enterprise, were unlawful. The public had the right to expect that the market had not been interfered with by wrongful means. Lord Ellenborough stated: ‘A public mischief is stated as the object of this conspiracy; the conspiracy is by false rumours to raise the price of the public funds and securities and the crime lies in the act of conspiracy and combination to effect that purpose and would have been complete although it had not been pursued to its consequences, or the parties had not been able to carry it into effect. The purpose itself is mischievous, it strikes at the price of a vendible commodity in the market and if it gives a fictitious price, by means of false rumours, it is a fraud levelled against all the public, for it is against all such as may possibly have anything to do with the funds on that particular day. The excuse is that it was impossible that they should have known, and if it were possible, the multitude would be an excuse in point of law. But the statement is wholly unnecessary, the conspiracy being complete independently of any persons being purchasers. I have no doubt it must be so considered in law according to the cases’. The decision in De Berenger does not address directly, however, the issue as to whether it is an indictable conspiracy to interfere with the proper operation of the markets, not through the circulation of false rumours and information, but by a course of dealing. Under the ordinary law, it is possible to make a statement by word or by conduct, so, as a matter of principle, manipulative conduct could be regarded as constituting a false and misleading representation. Nonetheless, in De Berenger, one of the learned judges said: ‘… the raising or lowering the price of the public funds is not per se a crime. A man may have occasion to sell out a large sum, which may have the effect of depressing the price of stocks, or may buy in a large sum, and thereby raise the price on a particular day, and yet he will be guilty of no offence. But if a number of persons conspire by false rumours to raise the funds on a particular day, that is an offence and the offence is, not in raising the funds simply, but in conspiring by false rumours to raise them on that particular day.’ 6.14 In a subsequent civil case involving an action for rescission against a stockbroker who had agreed to purchase shares on the Stock Exchange on behalf of the plaintiff for the sole purpose of creating trading on the market at a premium in order to create the impression that there was a thriving market and thereby induce other investors to purchase, in denying rescission, the court expressed the view that the relevant agreement amounted to a criminal conspiracy to defraud the public.32 The view was expressed by Lopes LJ that there is ‘no substantial distinction between false rumours and false and fictitious acts’. 32

Scott v Brown, Doering, McNab & Co [1892] 2 QB 724.

156

Fraud and financial crime  6.17

THE FAIR PRICE 6.15 On the other hand, it is also clear that not every concerted intervention into the market to hold a price will be considered manipulative. In Sanderson and Levi v British Westralian Mine and Share Corpn,33 a contract was enforced pursuant to which a jobber on the Stock Exchange had made a market at a fair price, while the defendant distributed a substantial block of shares. In the rather less authoritative decision in Landon v Beiorly,34 where a new trial was ordered,35 the court also denied rescission of an allotment on the basis that the pegging of share prices during the launch of the company was to prevent ‘undue depreciation below their actual worth’. 6.16 Thus, it is clear on the English authorities that there is a distinction between manipulation and what we describe today as stabilisation. It is not without interest, however, that the courts of other jurisdictions have not always been prepared to accept such a distinction. For example, in Harper v Crenshaw,36 the US Court of Appeals for the District of Columbia went further than the English Court of Appeal in Scott v Brown37 and held that an agreement to stabilise the price of shares, while a large block of shares was brought onto the market, was illegal and unenforceable. There was no evidence that the agreement sought to create a fictitious price for the securities in question or to raise the price higher than the real value of the relevant securities. In Bigelow v Oglesby,38 an Illinois appellate court declined to enforce a syndicate agreement among underwriters because it contained what was then a standard clause for stabilisation. The court distinguished the English case of Sanderson & Levi on the basis that in the present case the agreement was to stabilise the price of the relevant shares at a level which had not already been determined by the market itself.

CONSPIRACY 6.17 It is important to remember when considering these authorities that the law might not necessarily be the same in the case of a criminal and a civil conspiracy39 and different considerations apply as to whether the persons concerned are being prosecuted for a criminal offence, are seeking to enforce an agreement inter-party or are being sued before the civil courts by an innocent third party. Unfortunately, the judges, in categorising certain conduct as illegal, do not always observe these distinctions. It would seem that a conspiracy to influence the price of shares or other securities on a market by making false statements or by engaging in purposeful conduct, such as a series of transactions with the intention of misleading the market, will be a conspiracy at criminal law. Conspiracy to create a public mischief no longer exists, but the facts in the relevant cases could fall within the scope of conspiracy to defraud today.40 33 (1898) 43 Sol Jo 45. 34 (1849) 10 LTOS 505. 35 (1849) 13 LTOS 122. 36 82 F 2d 845 (DC Cir, 1936). 37 [1892] QB 724. 38 303 III App 27, 36, 23 NE 2d 382 (1939). 39 See JSC BTA Bank v Khrapunov [2018] UKSC 19. 40 It is, however, proper to enter a caution after the House of Lords decision in Norris v Government of the USA [2008] UKHL 16. Lord Bingham held that a cartel agreement does not amount to a conspiracy to defraud in the absence of some aggravating factor such as

157

6.17  Fraud and financial crime Generally speaking, however, it would be appropriate for the prosecution to allege a statutory conspiracy to breach sections 89 or 90 of the Financial Services Act 2012, which are discussed in the preceding chapter.41 6.18 Considerable discussion has taken place over the years as to the proper scope of conspiracy in the criminal law. The Law Commission’s working party published a consultation document in 197342 in which it concluded that the crime of conspiracy should be confined to an agreement to commit a specific offence. In other words, the mere agreement to engage in a course of conduct, no matter how malicious, should not of itself constitute a crime, unless the conduct in question was itself a specific offence. The Law Commission took the view, however, that there were situations covered by the crime of conspiracy to defraud which might not be susceptible to this approach.43 6.19 The Criminal Law Act 1977, section 1 enacted a statutory offence of conspiracy to replace the common law offence of conspiracy. This reflected the Law Commission’s view that the crime of conspiracy should be limited to circumstances where the object of the agreement is to commit an act which would itself be a substantive offence already known to the criminal law. However, the Criminal Law Act 1977, section 5(2) excepted the common law offence of conspiracy to defraud which remains outside section 1.44 Discussion has taken place as to whether conspiracy to defraud should remain an exception to the general rule. Although the Law Commission report Criminal Law: Conspiracy to Defraud45 took the view that the offence still had a role to play, this changed and the Law Commission and Home Office recommended that it should be abolished by the Fraud Act 2006. Nonetheless, the government considered that it might still be needed as a safety net particularly with the rapid development of cyber-related crime.46 Subsequently, the Ministry of Justice after reviewing the operation of the Fraud Act considers that the offence of conspiracy to defraud ‘… continues to be an effective and essential tool in ‘fraud, misrepresentation, violence, intimidation or inducement of breach of contract’ at paragraph 17. This decision was followed in R v Goldshield Group plc [2008] UKHL 16. Their Lordships were particularly concerned about extended the criminal law into uncertain areas and the arrangements that had hitherto not been considered to amount to a conspiracy and the impact of Article 7 of the European Convention on Human Rights. On the other hand, in R v Rimmington [2005] UKHL 63, Lord Roger stated ‘where Parliament has not abolished the relevant area of the common law when it enacts a statutory offence, it cannot be said that the Crown can never properly frame a common law charge to cover conduct which is covered by the statutory offence’. He added, ‘where nothing would have prevented the Crown from charging the defendant under the statute and where the sentence imposed would have been competent in proceedings under the statute, the defendant is not prejudiced by being prosecuted at common law and can have no legitimate complaint’. 41 Or in the case of misleading statements in regard to benchmarks, s 91 of the Financial Services Act 2012; see note 21 above. See R v Cooke [1986] AC 909 modifying the strict rule in R v Ayres [1984] AC 447 to the effect that a conspiracy to defraud could not be charged where a substantive offence could be made out. A count of conspiracy would not normally be appropriate in cases of insider dealing. The substantive offence should be the basis of the prosecution. 42 Working Paper 50, Inchoate Offences. 43 Working Paper 56, Conspiracy to Defraud. 44 See Scott v Metropolitan Police Commissioner [1975] AC 819 and in particular R v Barton and Booth [2020] EWCA Crim 575 ‘… there must be a dishonest agreement which includes unlawfulness, either as to the object of the agreement or the means by which it will be carried out. It is not necessary to prove an intent to deceive or an intent to cause economic or financial loss to the victim or victims, but instead either a proprietary right or interest of the potential victim must be injured (or potentially injured).’ 45 1994, HMSO. 46 Home Office, Regulatory Impact Assessment: Fraud Bill (2006).

158

Fraud and financial crime  6.19 combating fraud. This is particularly pertinent where there are various levels of criminal activity involved and the court would not otherwise be aware of the full extent of criminality involved.’47 This is illustrated in Adams v R.48 The Privy Council was of the opinion that an agreement to conceal transactions with regard to which there was a fiduciary duty of disclosure, so that those responsible might avoid being called to account for their unauthorised profits, amounted to an indictable conspiracy to defraud. Of course, as we have seen in Chapter 3, many cases of insider dealing are prosecuted as statutory conspiracies.49 In the civil law damage actually has to be caused to the claimant.50 The conspiracy unlike in the criminal law is not sufficient on its own to attract liability. Conspiring to harm another through unlawful means is a tort.51 In Vald Niellsen Holdings A/S v Baldorino52 Jacobs J set out the requirements for a claim for unlawful means conspiracy. These are a combination or understanding between two or more people;53 an intention to injure the claimant, albeit without the need for it to be the sole or predominant intention;54 unlawful acts or omissions55 carried out pursuant to the combination or understanding and loss to the claimant suffered as a consequence of those unlawful acts.56 In the case of a lawful means conspiracy the requirements are the same except instead of the deployment of unlawful acts or omissions, the predominant purpose of the combination or understanding must be to injure the claimant.57 If they act Ministry of Justice, Post-legislative Assessment of the Fraud Act 2006, Cm 8372 (2012) para 42. 48 [1995] 1 WLR 52. 49 Where there is an appropriate substantive offence, then generally speaking a charge of conspiracy should be avoided, Verrier v DPP [1967] 2 AC 195. 50 JSC BAT Bank v Ablyazov [2018] UKSC 10. Provided pecuniary loss is established damages are at large and are not necessarily tied to this amount of loss. In Baldorino, see below at note 52, Jacobs J considered that the issues of causation-inducement were the same on the facts for conspiracy involving a false representation and deceit. 51 In Elite Property Holdings Ltd v Barclays Bank plc [2019] EWCA Civ 204 the Court of Appeal emphasised the claimant must plead a claim for conspiracy with full particulars of all the elements required for the tort at the outset and not simply trust to additional facts turning up in disclosure. 52 [2019] EWHC 1926, see also Elite Property Holdings Ltd v Barclays Bank plc [2019] EWCA Civ 204 and Digicel (St Lucia) Ltd v Cable & Wireless plc [2010] EWHC 774 (Ch). 53 The person who is sued need not be the one who actually engaged in the unlawful means, Barclay Pharmaceuticals Ltd v Waypharm LP [2012] EWHC 306 (Comm). Note also that in appropriate circumstances where the corporate veil ‘had become largely shredded by a combination of’ the defendant’s ‘own actions and abnegation of his own director’s role …’ attempting to frustrate an allegation of combination will not be allowed, Palmer Birch (a partnership) v Lloyd [2018] EWHC 2316 (TCC). 54 Lonrho plc v Fayed [1992] 1 AC 448 explaining Lonrho Ltd v Shell Petroleum Ltd (No 2) [1982] AC 173. 55 While the defendant must be shown to have known the facts which make the means concerned unlawful, he need not appreciate the legal consequences, see Forse v Secarma Ltd [2019] EWCA Civ 215 and Stobart Group Ltd v Tinker [2019] EWHC 258 (Comm). Furthermore, the Court of Appeal in The Racing Partnership Ltd v Sports Information Services Ltd [2020] EWCA Civ 1300, by a majority, held that the defendant need not be shown to have known that their conduct was unlawful. 56 See Kuwait Oil Tanker v Al Bader [2000] 2 All ER (Comm) 271 at 108. 57 See Crofter Hand-Woven Harris Tweed Co Ltd v Veitch [1942] AC 435; Gulf Oil (Great Britain) Ltd v Page [1987] Ch 327 and Total Network SL v HMRC [2010] EWHC 2032 (Ch). In regard to lawful act economic duress, see Times Travel Ltd v Pakistan International Airways Corporation [2021] UKSC 40 where the Supreme Court accepted inter alia that the defendant’s threat or pressure must be illegitimate in the sense of being unconscionable, see discussion in Chapter 14 note 42. 47

159

6.19  Fraud and financial crime in their own self-interest or pursuant to a lawful interest then the combination or undertaking will not be actionable as this particular tort. It is not without interest that the House of Lords in Revenue and Customs Commissioners v Total Network SL58 considered that in an unlawful means conspiracy the unlawful means adopted encompasses not only actionable civil wrong but also crimes, even where there is no cause of action in the civil law if undertaken by a single person. Although their Lordships, with respect did not examine the issue in great detail, this is generally considered to be the law and therefore it is at least arguable that the insider dealing offences might well therefore be sufficient.59 It is tolerably clear that breach of a fiduciary duty would also be considered sufficiently unlawful.60

ENFORCING THE BARGAIN 6.20 The agreement between the parties to the conspiracy would generally be unenforceable before the civil courts as being contrary to public policy. Indeed, Sir Frederick Pollack61 referred to Scott v Brown62 in which an attempt was made to enforce such an agreement, describing it as reminiscent of the ‘well-known legal legend … of a highwayman coming into equity for an account against his partner’. Indeed, some US courts have taken this approach quite far and refused to enforce agreements involving the touting of shares, such as Ridgely v Keene.63 In England, the courts have certainly declined to allow a wrongdoer to enforce such a transaction against the other party when that party is innocent and where both parties are involved in the wrongdoing. The general rule is that the courts should remain aloof. Losses and profits remain where they fall. 6.21 As we have seen in a case involving insider dealing, Knox J, despite a statutory provision to the effect that breach of the then insider dealing law did not make the relevant contract void or voidable, declined to lend the court’s support to the enforcement of a partially completed transaction.64 It has long been the English law that an innocent party can seek rescission or cancellation of a fraudulent transaction and the courts will not be keen to allow formalities or technical arguments to stand in the victim’s path.65 It is rather less likely that the courts would be prepared to see such an agreement enforced rather than 58 59

[2008] 1 AC 1174. It does not seem, from the observations of Lord Walker in Total Network SL, above at note 55 that the absence of a statutory tort action is determinant in this context ([2008] 1 AC 1174 at 96), albeit this would mean that a civil action for unlawful means conspiracy might be viable notwithstanding the courts declining to find that Parliament intended that those damaged by a statutory offence could not maintain a statutory tort action. Lord Mance, in this case, also made the point that liability for conspiracy is a different issue than joint tortfeasance in situations where there is another cause of action, and see also JSC BRA Bank v Ablyazov [2018] UKSC 19. 60 See Recovery Partners GB Ltd v Rukhadze [2018] EWHC 2919 (Comm) and Aerostar Maintenance International Ltd v Wilson [2010] EWHC 2032 (Ch), although Morgan J linked this with a breach of contract. See also Concept Oil Services Ltd v EN-GIN Group LLP [2013] EWHC 1897 (Comm) in regard to breaches of insolvency law. Conspiring to bring about a repudiatory breach of contract is sufficient, Palmer Birch (a partnership) v Lloyd [2008] EWHC 2316. 61 In an article published in the Law Quarterly Review in 1893 (9 LQR 105). 62 [1892] 2 QB 724. 63 134 AD 647, 119 NYS 451 (2nd dept, 1875). 64 Chase Manhattan Equities Ltd v Goodman [1991] BCLC 897. 65 See Gillett v Peppercorne (1840) 3 Beav 78.

160

Fraud and financial crime  6.24 rescinded by an innocent party. This is particularly so when the purpose of the agreement is to achieve something which is contrary to the public interest. In such circumstances, an innocent party would generally have other remedies than those based on the relevant agreement. 6.22 It is unclear to what extent a ‘third party’ such as an investor in the market, who claims to have been harmed by the manipulation, can pursue those responsible in the civil courts for deceit. In Bedford v Bagshaw, Pollock CB, stated: ‘all persons buying shares upon the Stock Exchange must be considered as persons to whom it was contemplated the representations would be made … I am not prepared to lay down a general rule, that if a person makes a false representation, everyone to whom it is repeated and who acts upon it may sue him. But it is a different thing where a director of a company procures an artificial and false value to be given to shares which he professes to offer to the public’.66 6.23 The Chief Baron thought that where the person responsible contemplated that the plaintiff was ‘one of the persons’ to whom the representation could be made or ‘ought to have been aware he was injuring or might injure’, a cause of action might be found. Of course, in this case, the defendant had effectively procured a false value for stock by fraudulently securing a quotation and settling date. The plaintiff reasonably assumed that the sufficient shares had been taken up to justify the quotation. In Barry v Croskey,67 while agreeing with Pollock CB’s comments, Page Wood VC, referring to the contention that ‘every person, who in consequence of (the defendant’s) frauds on the Stock Exchange, was induced to purchase stock at an advanced price in reliance on the false rumour he had circulated, was entitled to maintain an action against (the defendant)’ questioned whether ‘such consequences’ would not be too remote to form grounds for action. In Peek v Gurney,68 Lord Chelmsford also thought it highly dubious that those who had made an assumption on the basis that, according to the rules and practices of the market, certain underlying facts must exist or have been represented to exist, had a viable complaint. In Salaman v Warner,69 a remedy was denied to a jobber who had acted on his ‘own judgment’ as to a presumed state of affairs, rather than on a direct representation to himself. Of course, these cases are primarily concerned with false representations made to the market authorities, which result in securities being traded at an inflated price. Where there is a direct representation, such as the issue of a false statement directly to the market, then it is not unlikely, at least in the case of fraud, that all those who can establish direct loss will be able to sue for the full extent of that loss. 6.24 The real problem in cases of manipulation, in particular by conduct, is whether it is possible to contend that the market price is itself a representation of, for example, compliance with all the rules and procedures which contribute to the availability of the market and, thus, price. Where a market has been manipulated and a ‘false price’ achieved, all those who come to the market or rely upon the market, at the relevant time, are harmed. In the leading US case

66 67 68 69

(1859) 4 H & N 538. (1861) 2 John & H 1. (1871) LR 13 Eq 79. (1891) 7 TLR 484, CA.

161

6.24  Fraud and financial crime of US v Brown,70 Woolsey J, at first instance, referring to some of the English decisions, observed: ‘when an outsider, a member of the public, reads the price quotations of a stock listed on an exchange, he is justified in supposing that the quoted price is an appraisal of the value of the stock due to a series of actual sales between various persons dealing at arm’s length in a free and open market on the exchange.’ In other words, the investor is entitled to assume that the price is a true reflection of the proper interaction of supply and demand. While similar sentiments can be found in cases such as Scott v Brown,71 it is questionable whether an English court would, on the basis of the common law, find liability to market participants for their loss. The twin hurdles of reliance and causation are likely to prove insurmountable. 6.25 To what extent it may be possible to base an action for manipulation on some other cause of action than fraud is debatable. The courts have not been particularly sympathetic to arguments that seek to invoke allegations of conspiracy. At the end of the day, for a civil claim based on this particular tort, it is necessary to show that the plaintiff’s legitimate interest has been harmed. In the context of our present discussion, this would be problematic to say the least. While it may well be appropriate to frame an action in the tort of negligence, the courts are notoriously reluctant to contemplate open-ended liability and in most cases that can reasonably be conceived of as manipulation, it is most unlikely the courts would find sufficient proximity between the wrongdoer and a person who simply comes into the market. The most likely civil claim for conduct that violates the FCA’s rules and, in particular, the market abuse provisions, is under the FSMA, section 138D.72 This creates a right of action73 for ‘private persons’ who suffer loss as a result of such a contravention of FCA and in certain circumstances the Prudential Regulatory Authority’s (PRA) rules by an authorised person. A plaintiff may recover simply by showing a breach of the rules which has resulted in him suffering loss. Of course, as with the earlier provisions in the Financial Services Act 1986, sections 62 and 62A, it has to be shown that the loss in question occurred as a result of the violation. This remains a major stumbling block. It is, however, important to remember that the cause of action under section 138D is in addition to any rights that may exist at common law.

FRAUD (BY REPRESENTATION OR CONDUCT) 6.26 The early common law recognised the importance of punishing conduct that involved fraud and also providing those harmed by it, with

70 71 72

5 F Supp 81 (SDNY, 1933). [1892] 2 QB 724. This provision replaces s 150 of the FSMA although as far as FCA rules are concerned there is no substantive change, See Financial Services Act 2012, Financial Services (Banking Reform) Act 2013 and the FSMA (Rights of Action) Regulations 2001, SI 2001/2256. See in particular 4.41 above. However, note the potential importance of a claim against the issuer and management under Schedule 10A (previously section 90A) of the FSMA, as amended, and in particular, Autonomy Corpn Ltd v Lynch (HC-2015-001324), 28 January 2022. 73 See R (British Bankers’ Association) v Financial Services Authority [2011] EWHC 999.

162

Fraud and financial crime  6.28 recompense. However, in common with many other legal systems the law has had difficulty in determining exactly what is fraud. In the context of the civil law one of the leading works on the subject (Kerr on the Law of Fraud and Mistake)74 states ‘It is not easy to give a definition of what constitutes fraud in the extensive signification in which the term is understood by the Civil Courts of Justice. The courts have always avoided hampering themselves by defining or laying down as a general proposition what shall be held to constitute fraud. Fraud is infinite in variety. The fertility of man’s invention in devising new schemes of fraud is so great, that the courts have always declined to define it … reserving to themselves the liberty to deal with it under whatever form it may present itself. Fraud, in the contemplation of a Civil Court of Justice, may be said to include properly all acts, omissions, and concealments which involve a breach of legal or equitable duty, trust or confidence, justly reposed, and are injurious to another, or by which an undue or unconscientious advantage is taken of another. All surprise, trick, cunning, dissembling and other unfair way that is used to cheat any one is considered fraud. Fraud in all cases implies a wilful act on the part of anyone, whereby another is sought to be deprived, by illegal or inequitable means, of what he is entitled to.’ 6.27 In the context of the criminal law there has been concern as to the fairness of such vagueness and in many countries attempts have been made to provide what passes for a definition. In reality most do little more than recite the ways in which the courts have identified something as fraudulent. Paradoxically, in Britain after much discussion and an extensive Fraud Review75 ordered by the Attorney General in July 2006, a new law was enacted which in many respects broadens the crime of ‘fraud’. Judge Alan Wilkie QC, then one of the Law Commissioners of England and Wales in referring to an earlier report by the English and Welsh Law Commission on Fraud, published in July 2002, stated that the objectives of a new law should be ‘to make the law of fraud clearer and simpler … (and) as a result all concerned whether jurors, police, victims, defendants or lawyers, will be better placed to understand who has committed a crime and who has not’.76 In so far as the new Fraud Act 2006 bases liability on the concept of ‘dishonesty’ it remains to be seen whether there is any greater certainty. 6.28 In the UK there is only one offence of fraud in this new Act.77 It may be committed in three broad ways under section 1. First, by a false representation.78 Secondly, by failing to disclose information in regard to which there is a legal duty to disclose79 and thirdly, by abuse of a position in which one is expected to safeguard, or not to act against, the financial interests of another person.80 The offence is committed if what is done is done dishonestly with a fraudulent intention. Thus, it is the state of mind that is the determinant factor in liability.

74 75 76 77 78 79 80

Denis Lane McDonnell and John George Monroe (7th edn) (Sweet & Maxwell 1952), at p 1. Reference should be made generally to S Farrell, N Yeo and G Ladenburtg, The Fraud Act 2006 (Oxford University Press 2007) and D Ormerod and D Williams, Smith’s Law of Theft (9th edn) (Oxford University Press 2007). See generally the Fraud Report No 276, Law Commission and Legislating the criminal Code: Fraud and Deception (Consultation paper No 155, 1999), Law Commission. See generally, D Ormerod, ‘The Fraud Act 2006: Criminalising Lying?’ [2007] Criminal Law Review 193. But see 5.3 above. Section 2. Section 3. Section 4.

163

6.29  Fraud and financial crime

REQUISITE STATE OF MIND – MENS REA 6.29 Dishonesty is a core and, indeed, protean concept, in fraud. Dishonesty is a question of fact, not law. Consequently, the instruction that a judge must give to the jury is of the utmost importance. Until recently, the appropriate instruction, according the Court of Appeal in R v Ghosh where the prosecution has proved that what the defendant did, was dishonest by the ordinary standards of reasonable and honest people, must the defendant have realised that what he was doing would be regarded as dishonest by those standards?81 Therefore this involved two stages, the first based on an objective criterion and the second a subjective criterion. The problem with this test, as the Supreme Court has pointed out, ‘the more warped the defendant’s standards of honesty are, the less likely it is that he will be convicted of dishonest behaviour.’82 In Ivey v Genting Casinos (UK) Ltd the Supreme Court considered the law should not excuse those who make a mistake about contemporary standards of honesty and it was the purpose of the criminal law to set acceptable standards of behaviour. This was a civil matter and therefore the observations of the Court are obiter dicta in regard to the criminal law. The civil courts have long abandoned if, indeed, they had accepted the test in Ghosh and operated an objective test.83 81 See R v Ghosh (1982) 75 Cr App R 154: ‘In determining whether the prosecution has proved that the defendant was acting dishonestly, a jury must first of all decide whether according to the ordinary standards of reasonable and honest people what was done was dishonest. If it was not dishonest by those standards, that is the end of the matter and the prosecution fails. Of it was dishonest by those standards, then the jury must consider whether the defendant himself must have realised that what he was doing was by those standards dishonest. In most cases, where the actions are obviously dishonest by ordinary standards, there will be no doubt about it. It will be obvious that the defendant himself knew that he was acting dishonestly, It is dishonest for a defendant to act in a way which he knows ordinary people consider to be dishonest, even if he asserts or genuinely believes that he is morally justified in acting as he did.’ See also R v Cornelius [2012] EWCA Crim 500, but also R v Atkinson [2004] EWCA Crim 3031. 82 Issues have arisen in regard to what has been described as honest entitlement. Of course, the more unreasonable the defendant’s perceptions, the less likely he is to be believed. However, in complex financial cases, there is anecdotal evidence that juries might have shared the defendants’ ‘naivity’. 83 In Royal Brunei Airlines Sdn Bhd v Philip Tan Kok Ming [1995] 2 AC 378 Lord Nicholls recognised three standards, firstly a subjective test where the defendant own standards of honesty are determinant, a wholly objective test and the preferred combined approach, where the determination of honesty is objective, but the defendant must appreciate that his conduct was dishonest according to those standards. See also Barlow Clowes International Ltd v Eurotrust International Ltd [ 2006] 1 All ER 333 where the Privy Council opined that ‘although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards a defendant’s mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards’, per Lord Hoffmann. See also Celtic Bioenergy Ltd v Knowles Ltd [2017] EWHC 472. In the case of liability as an accessory to a breach of trust, see Twinsecta v Yardley [2002] 2 AC 164 Lord Hutton applying the combined test of Lord Nicholls in Royal Brunei Airlines (above) recognising the seriousness of allegations of dishonesty (particularly against a professional person such as a solicitor) would not second guess the trial judge who found the defendant had not appreciated what he had done was dishonest. In Bryant v The Law Society [2009] 1 WLR 163, the Court of Appeal held ‘in our judgement, the decision of the Court of Appeal in Bulitude v The Law Society [2004] EWCA Civ 1853, stands as binding authority that the rest to be applied in the context of … (professional disciplinary proceedings) … is the Twinsectra test as it was widely understood before Barlow Clowes, that is a test that includes the separate subjective element. The fact that the Privy Council in Barlow Clowes has subsequently placed a different interpretation on Twinsectra for the purposes if the accessory liability principle does not alter the substance of the test accepted in Bulitude and does not call for any departure from the test.’ In such proceedings it now appears clear that the test advocated by Lord Hughes in Ivey is the appropriate one,

164

Fraud and financial crime  6.30 The Supreme Court considered that there can be no logical or principled basis for the meaning of dishonesty being different in civil and criminal courts. Lord Hughes, delivering the Supreme Court’s opinion said that the correct test is for the tribunal of fact – that is in the case of jury trial, the jury, or where a judge is sitting alone, the judge, to ascertain on the evidence the actual state of the defendant’s knowledge or belief as to the facts and once this is determined the question is whether the defendant’s conduct was dishonest according to the standards of ordinary decent people. There is no requirement, in the Supreme Court’s view, that the defendant appreciated what he had done or failed to do, by those standards, was dishonest. The Court of Appeal in R v Barton and Booth84 confirmed that the law as set out by the Supreme Court is now the appropriate test for dishonesty.85 It should, however, be remembered that the Law Commission and Parliament in fashioning the Fraud Act did so on the basis that the test in Ghosh was good law. Therefore, some have questioned whether there should be a specific statutory defence along the lines of section 2 in the Theft Act 1968, which, of course, has no application in cases of fraud. This protects those who consider they have a claim of right to act in the manner they have. The Law Commission specifically thought that a statutory defence was unnecessary because there would be the prospect of cover under the Ghosh test.86 6.30 The former offence in the Theft Act 1968 of obtaining by deception87 required the prosecution to establish causation, in other words, it had to be proved that the deception has caused the victim to part with his money or other property. This sometimes onerous requirement has been dispensed with by the Fraud Act. In addition to proving dishonesty, the prosecution for a conviction under the Act must establish that the accused had a fraudulent intent. It must be proved that in making the false representation, failing to disclose information, or abusing the position, the defendant intended to make a gain for himself or for another,88 or to cause loss to another, or expose another to a risk of loss. GMC v Krishnan [2017] EWHC 2892 (Admin). It should be noted, however, that in certain areas of the law such as professional disciplinary cases, a distinction remains between lack of integrity and dishonesty, see, for example Carr J in Williams v SAR [2017] EWHC 1478 (Admin) and Newell-Austin v SRA [2017] EWHC 411 (Admin) contra Mostyn J in Malins v SRA [2017] EWHC 835 (Admin) and in the context of the Immigration Rules, see Yaseen v Secretary of State for the Home Department, [2020] EWCA Civ 157. In regard to the issue of ‘fit and proper’, see Hoodless v Financial Services Authority [2003] UKFSMT FSM007, 19 and Burns v FCA [2017] EWCA Civ 2140. 84 [2020] EWCA 575. See also DPP v Patterson [2017] EWHC 2820 (Admin); R v B [2018] EWCA Crim 73; and R v Pabon [2018] Criminal Law Review 395. 85 ‘The undoubted reality is that in Ivey the Supreme Court altered the established common law approach to precedent in the criminal courts by stating that the test of dishonesty they identified, albeit strictly contained in obiter dicta, should be followed in preference to an otherwise binding authority of the Court of Appeal … we do not consider that it is for this court to conclude that it was beyond their powers to act in this way … In the result, the test for dishonesty in all criminal cases is that established in Ivey’, [2020] EWCA 575 para 102 and 105. There has been some concern as to whether on complex issues jurors will be able to perceive common standards of honesty, see, for example, G Virgo, ‘Case Comment: Cheating and Dishonesty’ (2018) 77 Cambridge Law Journal 18 and J Spencer, ‘Two cases on the law of theft: a concertina movement’ (2018) 8 Archbold Review 4. For example, in the context of complex financial activity, consider R v Hayes [2015] EWCA Crim 1944 discussed in this context by K Laird, [2018] Criminal Law Review 395 at 398. 86 See Law Commission Report No 276, Fraud (2002), para 7.66. 87 See A Smith, Property Offences (Sweet & Maxwell 1994), Ch 17 and E Griew, The Theft Acts 1968 and 1978 (6th edn) (Sweet & Maxwell 1990). 88 Circulating false information about a company in the expectation that the share price would fall resulting in loss to a particular shareholder would fall within this – notwithstanding the

165

6.30  Fraud and financial crime It is important to note that the offence is complete if what is done is done with the requisite intention, the fact that a gain or loss occurred or did not, is irrelevant.89 It is the defendant’s intention that is determinant. The Law Commission in its Report on Fraud (2002, paragraph 7.53) stated that ‘fraud is essentially an economic crime, and we do not think the new offence should extend to conduct which has no financial dimension’. Thus, gain or loss is stated in the Act only to apply to ‘money or other property’. However, gain or loss does extend to a temporary gain or loss. There is no need for the defendant to intend to achieve a permanent gain or loss. Property means property, whether real or personal, including things in action and other intangible property.90 While this is broad and for our purposes would certainly cover securities, it is important to remember that money or property must be involved in the gain or loss.

PROOF OF DISHONESTY AND FRAUDULENT INTENTION 6.31 Establishing dishonesty to the satisfaction of the court has been said to be one of the main stumbling blocks to securing more convictions. Indeed, simplifying and clarifying the test as to how dishonestly should be established in a criminal proceeding has been welcomed by prosecutors. Juries have been criticised for not having the expertise and understanding to properly comprehend and appreciate the facts that are placed before them and on occasion a similar complaint has been made about judges. The complexity of information and in particular documents placed before the court is often perceived to be a significant hurdle in achieving the level of appreciation upon which a sound determination of the facts can be made. While developments in IT have facilitated the handling and presentation of vast amounts of information, there is always the danger of a court being swamped in information. On the other hand, in common law jurisdictions it is often said that once the jury or judge ‘sniffs’ the stench of dishonesty, it is not difficult to find it. Determining what the defendant’s intention was, while often a relatively straightforward issue, as a person intends something if he acts with the purpose of causing that result. It is important to distinguish the question as to what the defendant’s intention was, from what his motive may have been. Generally speaking, motive is an irrelevant issue in the determination of criminal liability. While it may be of significance, for other reasons such as classification, profiling and detection, motive is generally no concern of the court until sentencing. 6.32 Intent may, however, not always be so simple. In many systems of law, the courts distinguish between direct and indirect or oblique intent. Direct intent is as we have set out, that is where the consequence is desired and the defendant seeks to bring it about, or, at least strives to. Indirect intent is where the defendant realises that the consequence is certain, or virtually certain, as person doing this has no interest in the relevant shares. Indeed, if the person concerned does this with the intent to cause loss to the relevant individual (or for that matter the company), then the offence is complete even if the market does not move. The Law Commission Report No 276, Fraud (2002), para 7.54 thought it would not be necessary to charge an attempt in such circumstances as the substantive offence would have been complete. 89 See R v Gilbert [2012] EWCA Crim 2392 and also R v Jeevarajah [2012] EWCA Crim 1299. In R v Gilbert, Evans J held that it is for the jury to decide on the proven facts whether there is a causative link between the intention of the defendant and the making of the false representation or other form of fraud. 90 Section 5(2).

166

Fraud and financial crime  6.33 a result of what he does or does not do, but he does not in any positive sense desire it, and yet proceeds. Oblique intention would normally be sufficient for a determination that the defendant has the required fraudulent intention. Thus, a result is intended when it is the defendant’s purpose to cause it, or though it is not the defendant’s purpose to cause it, the result is a virtually certain consequence of the act or omission, and he knows that it is a virtually certain consequence. It is necessary, however, to distinguish intention from recklessness. If the defendant foresees a consequence as likely or even possible as a result of his actions and yet proceeds, and in the result that consequence does in fact occur, the defendant can be said to have caused the result recklessly. It is important to note that even a very high degree of foresight as to a given consequence is not the same thing, in law, as an intention. Nevertheless, if the jury accept that the defendant was virtually certain that a specific result would occur and it did, it would not be unreasonable for the jury to conclude that the defendant did in fact intend it.

MISREPRESENTATION BY WORDS OR CONDUCT 6.33 The offence of fraud will be committed if the defendant, with the requisite mens rea, makes a false representation. The representation may be made by word or conduct, express or implied,91 in regard to any fact, including the state of mind of the person making the representation92 or another. It may also, unlike generally in the civil law be a representation as to the law. It will be a false representation if it is untrue or misleading and the person responsible for the representation knows that it so. The Fraud Act also provides that a representation may be regarded as made if it, or anything implying it, is submitted in any form to any system or device designed to receive, convey or respond to communications, with or without human intervention.93 It should be noted that under the new English law the offence is based on the making of a misrepresentation by the defendant and not the deception of the victim. The focus for liability is the conduct of the defendant and not the effect of that on the mind of the victim.94 91 In Marme Inversiones 2007 SL v Natwest Markets plc [2019] EWHC 360 Picken J emphasised that the test for implying a representation was not the same as that for implying a contractual term and was a question of fact. He required ‘clear words or clear conduct’ before a representation could be properly found. Courts are not willing to imply or find a term which would place onerous responsibilities on one of the parties, see Ehrentreu v IG Index Ltd (rev 1) [2018] EWCA Civ 79. See also Russell v Cartwright [2020] EWHC 41 (Ch) where the court declined to find a fiduciary relationship or imply a duty of good faith between director/ shareholders in a join venture. The courts, as we have noted have been more willing to do this in relational contracts, see Yam Seng Pte Ltd v International Trade Corpn Ltd [2013] EWHC 111 (QB) and Bates v Post Office Ltd [2019] EWHC 606 (QB) and in quasi-partnerships, see 2.22 et seq. 92 See, for example, Voros v Hungary [2012] EWHC 518 (admin). While the expression of an intention is not a fact, if at the time of expressing that intention the speaker had no such intention, that may be considered a fact, for as the Court of Appeal said in Edgington v Fitzmarice (1885) 299 Ch D 459, ‘… the state of a man’s mind is as much a fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man’s mind at a particular time is, but if it can be ascertained it is as much a fact as anything else’, per Bowen LJ Cotton LJ stated ‘I agree that it was a statement of intention, but it is nevertheless a statement of fact … that however hopeful the directors may have been of the ultimate success of the company … ought not to have been made.’ 93 See R v Saunders [2012] EWCA Crim 1380 and US v Sarao [2016] Lloyds Rep FC 339. 94 But see UAE v Allen [2012] EWHC 1712 (Admin).

167

6.34  Fraud and financial crime 6.34 This is important in the case of, for example, the unauthorised use of a payment card. It may well be that the merchant who takes the card, does not rely in any way on the implied representation of the person presenting the card for payment that he has authority to use it in that transaction, as the merchant will normally be reimbursed either way. Under the new provisions it is not necessary for the prosecution to allege, let alone prove, that the merchant was misled. It is enough that the defendant falsely represented that he had authority. By the same token, a merchant participating in a ‘sting’ operation, having been warned by the police, need not be deceived. It is enough that the defendant made the relevant false representation. 6.35 Returning to the issue of what is a representation, the English criminal law is based very much on the law of contract. A representation in the law of contract is a statement, by word or conduct, of material fact, made by one person to another during the negotiations leading up to contract, which was intended to be relied upon, and was in fact relied upon, but which was not intended to be a binding contractual term. Where that representation is false or misleading it is properly termed a misrepresentation. The state of a man’s mind is according to the law, as much a statement of fact as the state of a man’s digestion.95 It follows that a false statement as to one’s current intention is a misrepresentation of fact. By the same token an assertion of belief in the existence of certain facts, even the likelihood of future events, may be a misrepresentation of the fact that the person making the statement actually had, at that time, such a belief.

SILENCE 6.36 Attributing responsibility for mere silence is always a problem in the law. Generally speaking, there is no duty to disclose material facts and therefore mere silence cannot be considered to amount to a representation.96 There is no indication in the Fraud Act that the law has changed. Having said that, it has been argued that where an ordinary and honest person would consider it right to speak out, and such a person appreciating this, does not – then the very dishonesty of his conduct might justify liability. The problem with this argument is that there is still no representation as such. It is highly doubtful whether dishonesty can in itself create an obligation of disclosure. This issue has arisen in the context of whether a failure to disclose price-sensitive information might amount to a dishonest concealment within the scope of section 397 of FSMA (now section 89 of the Financial Services Act 2012), which is discussed in more detail in the previous chapter. In the context of the predecessor provision, section 13 of the Prevention of Fraud (Investments) Act 1958, prosecutions were considered but not initiated. In other jurisdictions, cases have been brought under similar provisions. The argument in Britain against proceeding was that it cannot be dishonest not to disclose information which you may well be under a duty to treat with confidence. However, this is debateable, and is in any case a question of fact for the jury.

95 96

Edgington v Fitzmaurice (1885) 29 Ch D 459 at 483 per Bowen LJ and British Airways Board v Taylor [1976] 1 All ER 65 at 68, per Lord Wilberforce. See Picken J in Marme Inversiones 2007 SL v Natwest Markets plc [209] EWHC 360. In certain circumstances there may be a duty arising by statute or the interplay of regulations with the common law of equal treatment, see, for example, albeit on a very different issue, O’Farrell J in R v Secretary of State for Health and Social Care [2022] EWHC 46 (TCC).

168

Fraud and financial crime  6.39 6.37 In the general law of contract, there are only three situations where silence may be regarded as being tantamount to a representation. First, where there is a half-truth. If only half the truth is told, and the result is misleading, then the civil law normally imposes on the person responsible for the halftruth an obligation to correct the false impression. Thus, a statement by a lawyer that he was not aware of any adverse provisions in a draft contract was held a misrepresentation, because he omitted to say that he had not examined it. Secondly, a representation that is true when made, but is later falsified by events or in some cases a change of intention, would normally require correction. This reflects the notion that a representation continues to operate as an inducement to contract until the contract is entered into.97 Thirdly, there is a special category of contracts of utmost good faith – uberrimae fide. In these exceptional circumstances the law, by tradition, imposes an obligation to affirmatively disclose all material facts relating to the contract.98 Fiduciaries are under duty in dealing with their principals and beneficiaries to act in good faith and this, while not entirely accurate, may be considered to be to all intents and purposes within the scope of the duty of uberrimae fide. However, in the case of fraud by persons in a fiduciary position, it would probably be better to resort to the provisions in the new statute imposing liability for fraudulently taking advantage of one’s special position. Indeed, it was partly because of the uncertainties as to the scope of the obligation to disclose in the course of fair dealing that justified the enactment of these specific provisions. Having said that, the dishonest failure to disclose information that should be disclosed, even on the basis of a fiduciary relationship, such as between a director and his company, may amount to a conspiracy to defraud. 6.38 For liability, the representation must be untrue or misleading. Under the English law it would seem that there might be liability in the criminal law for the making of an untrue statement, which the defendant does not know is untrue, but does appreciate might in the circumstances be misleading. Misleading means less than wholly true and capable of an interpretation to the detriment of the victim. In the case of the criminal law, where it is not necessary, at least in the UK, to consider whether it actually influenced the mind of the person to whom it was addressed, issues of reliance are irrelevant. Of course, where what is said is so ridiculous no reasonable person would rely upon it, the jury or court may find the defendant’s conduct does not fail to meet the standards of ordinary and honest people. Of course, this is all rather subjective. 6.39 As we have pointed out, the reformed criminal law in the UK in regard to fraud has a different emphasis than in many other jurisdictions. One point that is worthy of note is that the UK law does not require proof of materiality. This is an important issue in many provisions relating to false statement in other countries. A good example in the US Federal law is section 1001 of Title 18 USC. This makes it a criminal offence to falsify, conceal or cover up by any trick, scheme or device a material fact, the making of any materially false,

97 See Inter Export LLC v Jonathan Townley and Yaroslavna Lasytsya [2018] EWCA Civ 2068 It is also possible that the contract might require expressly or impliedly disclosure if circumstances change during performance, but this would be exceptional, see, for example, R v Allen [2012] EWHC 1712 (Admin). See for a broad approach McBride v Christie’s Australia Pty [2014] NSWC 1729. 98 There might well be an overlap between sections 2 and 3 where such a duty of disclosure exists, see R v Rai [2000] 1 Cr App R 242.

169

6.39  Fraud and financial crime fictitious, or fraudulent statement or representation or making or using any false writing or document knowing that it contains any materially false, fictitious, or fraudulent statement or entry. In determining whether a false statement or concealment is material the US courts examine whether the statement has a natural tendency to influence, or be capable of influencing, the decision of the other party. It is not necessary to prove that the victim was actually influenced let alone that the victim relied on it. The Supreme Court considers that the issue of materiality involves questions of both fact and law and should therefore be submitted to the jury.

CONCEALMENT 6.40 We have already noted that section 3 of the Fraud Act in the UK provides that the offence of fraud may be established if a person dishonestly fails to disclose to another person information which he is under a legal duty to disclose, intending thereby to make a gain for himself or another, or to cause loss to another or to expose another to a risk of loss. Consequently, if there is no duty to disclose recognised in law, the offence cannot be established.99 We have already seen that generally the law does not place an obligation on a person, even during the negotiation of a contract, to disclose information that he appreciates would be material to the other party’s decision. However, there are situations where by statute, contract, custom and fiduciary obligation a duty to disclose facts arises. For example, a contractual stipulation requiring the relevant disclosure would be sufficient.100 We have also seen that in certain circumstances there may be a duty to correct the misleading impression resulting from a half-truth or the falsification of a continuing representation. Where the person failing to disclose is not under a specific legal duty to disclose the relevant information, then it may still be possible to find liability, but based on the notion of an implied representation. For example, in one case a defendant who asked a bureau de change to exchange obsolete foreign currency for sterling was convicted on the basis that he impliedly represented that the relevant currency was still in circulation. He was under no legal obligation to inform the cashier, but by tending the money he made a representation.101 A particularly contentious issues is the extent to which a person is under an obligation to disclose to their employer, or in the case of a director to their company, their own wrongdoing.102 6.41 We have already raised the issue of whether a mere moral obligation to disclose information should be enough to provide a basis for liability. It is important to remember that legal rules do not operate in isolation of each other and there is an interaction between the civil and criminal law. Generally speaking, the civil law does not obligate persons to disclose information

99 See, for example, in R v D [2019] EWCA Crim 209 and R v White [2014] EWCA Crim 714. 100 See R v Razoq [2012] EWCA Crim 674. See in regard to relational contracts where there may be a continuing duty of good faith disclosure, cases cited at note 91 and at 2.18 note 62. Of course, there may be contractual obligations of disclosure, see for example discussion in MDN Holdings Ltd v Norvill [2021] EWHC 1135 (Ch). 101 R v Williams (Jean Jacques) [1980] Crim LR 589. 102 There is no general duty in the law of contract, see Bell v Lever Bros [1932] AC 161 in regard to employees. In Item Softwear (UK) Ltd v Fassihi [2004] BCC 994 the Court of Appeal thought that a director was under a fiduciary duty to disclose such to his company, and see also Parr v Keystone Healthcare Ltd [2019] EWCA Civ 1246.

170

Fraud and financial crime  6.43 simply because it would be the right thing to do. For example, the information might well have a proprietary value, which the owner would not wish to share. A duty to disclose information, simply because the other party is unaware of it or maybe could not have acquired it, would, for example, undermine the valuable role of research in the financial markets. Indeed, it was partly for this reason that the American courts somewhat pragmatically developed the so called ‘abstain or disclose’ rule in regard to price-sensitive information in the USA. It is not without interest, however, that the English Law Commission103 did recommend that the offence be wide enough to cover information of a kind that the defendant knows or is aware that the other party trusts him to disclose and that in the circumstances it would be reasonable for him to disclose it. The government rejected this as it considered to impose liability where there is not a pre-existing duty under the civil law would have far reaching implications for the general approach of caveat emptor. On the other hand, for liability under the Fraud Act it is not necessary for the prosecution to establish, as the Law Commission also suggested, that the defendant is aware that he is under a legal duty to disclose the information in question. Of course, if he did not, it may well be that he is not dishonest.

CRIMINAL BREACH OF TRUST (CBT) 6.42 Before the enactment of the Fraud Act it has been claimed that English law did not recognise the offence of criminal breach of trust. Interestingly, this is an important offence in combating financial and other misconduct in many other Commonwealth jurisdictions. In the various Criminal Codes drafted and implemented during Imperial rule, it is not without interest that specific provisions were included in regard to dishonest breach of trust. Of course, it is true that most situations covered by such laws, would have been offences in Britain, but almost certainly not all. The Fraud Act 2006 now specifically addresses this in section 4. A person will be guilty of fraud if he occupies a position in which he is expected to protect or safeguard, or at least not act against, the financial interest of another person and he dishonestly abuses that position, intending thereby to make a gain for himself or another, or to cause loss to another, or to expose another to a risk of loss. It is expressly provided that a person may be regarded as having abused his position even though his conduct consists of an omission rather than an affirmative act. The concept of abuse in this context was explained by the Court of Appeal in R v Pennock104 as involving some improper or incorrect us of a position ‘contrary to the expectation that arises because of that position’. 6.43 The real issue revolves around who can properly be said to occupy a position where he is expected to safeguard, or not act against, the financial interests of another. It is clear that the formulation is wider than those in a conventional trust relationship, or for that matter fiduciary relationship.105

103 The Fraud Report No 276, Law Commission, http://www.lacom.gov.uk/docs/lc276.pdf. 104 [2014] EWCA Crim 598. 105 See, for example, R v Valujevs [2014] EWCA Crim 2888. The Court of Appeal stated the prosecution had to ‘… demonstrate a breach of fiduciary duty, or a breach of an obligation that is akin to a fiduciary duty. This can conveniently be described, for instance, as a breach of trust or a breach of a privileged position in relation to the financial interests of another person’, at 43.

171

6.43  Fraud and financial crime The Court of Appeal has expressed the view that ‘it would be untenable to suggest that the expectation should be that of either the potential victim (the test would, in all likelihood be too low) or the defendant (the test is likely to be set too high).’ Therefore, it should be what a reasonable third person considering the situation from outside.106 The Court of Appeal in the case of a jury trial considered that before putting the factual issue to the jury the judge should first decide whether as a matter of law the position in which the defendant was in could potentially satisfy this test. 6.44 The circumstances in which a fiduciary duty of loyalty can arise are reasonably settled.107 The concept of fiduciary obligation, as we have seen in Chapter 2, was authoritatively set out by Millet LJ in Bristol and West Building Society v Mothew.108 The learned judge stated ‘a fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary …’. Therefore, company directors in their dealings with the company, partners in dealing with each other, an agent in dealing with his principal, a trustee in dealing with his beneficiary, a public official in regard to his office and a professional adviser in dealing with his client would all be included. It is also probable that an employee in his dealings with his employer would also be covered. While employees are not generally considered to be fiduciaries,109 they are within a duty of fidelity which has much in common with the obligations cast upon a fiduciary.110 An employee is ‘trusted’ by his employer not to make use of the employer’s property or premises for the employee’s benefit. It is important to note, however, that unlike an ordinary fiduciary relationship, the obligations, albeit different, flow both ways. As we have seen directors of a company owe fiduciary duties, arising by virtue of their office, only to the company and not its shareholders.111 Whether it could be argued that the shareholders have a reasonable expectation that directors will not act against their financial interests, such as by insider dealing, remains to be seen. It has been accepted that in the context of a takeover, directors are under a duty to shareholders to act honestly and shareholders therefore might well have a reasonable expectation that they, as directors, would not act contrary to the advice and information that they have given to the members.112 It is also clear that there are family, domestic and other personal relationships, even within a business context113 that might also give rise to such expectations and therefore be within the scope of the offence. It is probable that the criminal and civil law will not be entirely matched on such issues. 106 See R v Valujevs [2014] EWCA Crim 2888. 107 But see Secretariat Consulting PTE Ltd v A Company [2021] EWCA Civ 6. 108 (1998) Ch 1 at 118. 109 Employees who in senior management positions act on behalf of a company, may well be considered to owe fiduciary obligations much the same as the company’s directors, see Canadian Aero Services Ltd v O’Malley (1973) 40 DLR (3d) 771 and 381. 110 See R v Moss [2013] EWCA Crim 1554; R v Turner [2013] EWCA Crim 1206; R v West [2019] EWCA Crim 2028; and DPP’s Reference (No 5 of 2019) [2020] NICA 1. 111 See 2.15 et seq. 112 See Heron International Ltd v Lord Grade [1983] BCLC 244. The expectations of other ‘stakeholders’ such as employees and creditors are rather more problematic in this regard, see generally Winkworth v Edward Baron Development Co Ltd [1986] 1 WLR 1512. 113 See Peskin v Anderson [2001] 1 BCLC 372, Re Chez Nico (Restaurants) Ltd [1992] BCLC 192 and Platt v Platt [1999] 2 BCLC 745 and in particular Coleman v Myers [1977] 2 NZLR 225. See 2.19 et seq.

172

Fraud and financial crime  6.46 6.45 In the past there have been problems with imposing criminal liability for diverting so called corporate opportunities and the taking of secret profits. As we have seen, corporate opportunity is a contract or other advantageous arrangement that should in fairness have gone to a particular company, but which has been diverted by insiders, typically the directors, for their own personal benefit. The approach of the courts differs and may have rather more to do with the perceived integrity of what has occurred rather than any underlying jurisprudence. There are decisions which treat the opportunity as some kind of expectant property which in good conscience belongs to the company. Therefore, when directors divert it they are in effect stealing or at least misappropriating an asset that belongs to the company. Other courts have been reluctant to treat this as property and have simply sought to impose personal obligations based on conflict of interest on the relevant insiders. There are very few cases where it has ever been thought appropriate to consider a charge theft. Such conduct does, however, in most instances amount to a breach of trust. Directors are under an obligation to safeguard the financial interest of the company and the dishonest diversion or such opportunities would be an offence under the Fraud Act. 6.46 We have also seen in Chapter 2 that those in a fiduciary position are forbidden from making a ‘secret profit’. This is essentially a profit that arises in the course of the fiduciary obligation and which has not been specifically authorised or consented to by the person to whom the fiduciary obligation is owed. In most legal systems, the secret profit is owed much in the same way as a debt to the principal, but is not owned by him. In other words, the taking of a secret profit does not involve the misappropriation of another person’s property. Provided the taking of a secret profit is now dishonest, it may well amount to a criminal breach of trust.114 This is important as the law relating to the taking of secret profits is potentially onerous. For example, in Regal (Hastings) Ltd v Gulliver,115 Lord Russell of Killowen, stated ‘the rule of equity which insists on those, who by the use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of the profit having, in the stated circumstances, been made. The profiteer, however, honest and well intentioned, cannot escape the risk of being called to account’. It must be remembered in this case the issue was one of civil liability and not criminal liability. Nonetheless, it does indicate how wide the ‘duty’ not to profit from one’s position is.116

114 R v Evans (No 2) [2015] EWHC 263 (QB). 115 [1942] 1 All ER 378. 116 In R v Valujevs [2014] EWCA Crim 2888 the Court of Appeal cautioned about trying to apply section 4 too widely, for example, it should not be applied in ‘ … the general commercial area where individuals and businesses compete in markets of one kind or another … and are entitled to and expected to look after their own interests.’ Of course, as we have seen there are expectations of fair and proper dealing in the financial markets.

173

6.47  Fraud and financial crime

MISAPPROPRIATION (INCLUDING THEFT) The offence of theft 6.47 Theft in English law is rendered an offence under section 1 of the Theft Act 1968. This provides that a person is guilty of theft if he dishonestly appropriates property belonging to another with the intention of permanently depriving the other of it and it is immaterial whether the appropriation is made with a view to gain, or is made for the thief’s own benefit. There are those who have argued that a charge for theft would have been rather more appropriate in a number of cases of misconduct in the City than the way in which the authorities in fact proceeded. This contention is based on the view, that has some justification, that traditionally those responsible for the integrity of the markets and financial services industry have been reluctant, for a variety of reasons, to treat those whose engage in misconduct as ‘real criminals’. 6.48 There is a fundamental difference between the offences of theft and fraud, although in some situations there may be a potential overlap. In the case of fraud the victim is deceived into handing over property and therefore the notion of misappropriation is inappropriate. The victim thus, effectively ‘consents’ to the taking of the relevant opportunity or property. This ‘consent’ albeit based on a misapprehension will continue to operate in law until steps are taken to rescind the contract. However, there are cases which show that the effect of a fraud can be to induce a mistake which renders the contract void ab initio.117 Consequently, in such circumstances the law of theft may well be relevant. Having said that, the courts have become increasingly reluctant to accept that fraud operates other than within the law of misrepresentation.118 Of course, fraud involves rather more than the dishonest appropriation of property. Issues have arisen not so much as to the nature of an appropriation, but in regard to what is capable of being appropriated. In the context of corporate law, for example, we have already mentioned the issue as to whether an opportunity that should in good conscience have been delivered up to a company, can be regarded as a form of expectant property capable of belonging to the company. There is also an issue in regard to bribes and secret profits. Do they belong to the person who can assert a right to their recovery?119 The better view until relatively recently was that in such cases the law of theft was in all probability irrelevant. However, there have been important developments in the civil law.120 While the law remains complex, there are arguments that equity will, particularly in cases of dishonesty, be prepared to look as done that which should be done and regard the bribe or secret profit as having been surrendered, thereby justifying property based remedies.121 The issue as to whether confidential information can amount to property and therefore be capable of being misappropriated is also a potentially important issues. As we have seen in the USA, the courts have attempted to develop the law penalising the abuse of inside information largely on the basis of misappropriation. Those who acquire price-sensitive information in circumstances where they appreciate it ‘belongs’ to another are

117 Cundy v Lindsay (1878) 3 App Cas 459. 118 Phillips v Brooks Ltd [1919] 2 KB 243 and Lewis v Averay [1972] 1QB 198. 119 See AG for Hong Kong v Reid [1994] 1 All ER 1 discussed at 2.27. 120 See 2.59. 121 However, the availability of proprietary remedies or what appear to be such, does not necessarily or even logically create property, see, for example, Armstrong DLW GmbH v Winnington Networks Ltd [2012] 3 All ER 425.

174

Fraud and financial crime  6.50 not allowed to misappropriate it for their own or another person’s benefit.122 The English Courts have held that confidential information is not property for the purposes of the law of theft123 although in the civil law, it can be protected almost as if it is a form of property. It has been said in Britain ‘it is not too much to say that we live in a country where … the theft of the boardroom table is punished far more severely than the theft of the boardroom secret’.124 It is interesting that both the Law Commission and the government decided not to include trade secrets and confidential information as a species of property in the Fraud Act 2006.

REQUISITE STATE OF MIND – MENS REA 6.49 Theft requires proof of two mental elements, dishonesty and an intention to permanently deprive the person of possession of the relevant property. We have already discussed what dishonesty means in this context. However, the relevant statutes have gone further, by setting out circumstances in which as a matter of law a person does not act dishonestly for the purposes of the law of theft. For example, section 2(1) of the Theft Act 1968 provides that a person is not dishonest if he believes he has in law the right to deprive the other person of the property; where he believes that the other person would have consented to the appropriation if he had known of the appropriation and the circumstances, and, except where he is a trustee or personal representative, he acts in the belief that the true owner cannot be found by taking reasonable steps. The section does, however, make it clear in subsection (2) that a person can be found to be dishonest notwithstanding his willingness to pay for the property in question. Thus, generally speaking a genuine belief of right or consent, will exonerate a person from allegations of dishonesty. It is important to appreciate that in English law the belief of the accused need not be reasonable. However, the more unreasonable it is, the more difficult it will be for him to convince the jury that he had a genuine belief and was not therefore subjectively dishonest. If a jury does consider that the accused did in fact have a genuine belief in his right or the consent of another, as a matter of law – in England, this is an end of the matter. He is entitled to an acquittal and the issue of dishonesty will not be put to the jury. This is not the case in regard to a prosecution for fraud under the Fraud Act 2006. In the case of fraud, the Act does not include similar provisions as in the Theft Act and therefore, even if the jury consider that the accused did in fact genuinely believe he had a right, the issue of dishonesty is not resolved. It is in law possible for the jury to still find that he was dishonest for the purposes of the fraud law. In practice it is difficult to conceive of a situation where it would be reasonable for a jury to find dishonesty in such a case. 6.50 In theft cases, as we have noted, it must also be shown that the accused has the intention to permanently deprive the owner of the property in question.

122 See US v O’Hagan 117 S.Ct 2199 (1997) and Carpenter v US 484 US 19 (1987). 123 Oxford v Moss (1979) 68 Cr App R 183 and R v Absolom, The Times, 14 September 1983. See also The Law Commission, Paper No 150, Legislating the Criminal Code: Misuse of Trade Secrets (1997), para 3.26 where the Law Commission recommended against treating confidential information as a species of property. See also Your Response Ltd v Datateam Business Media Ltd [2015] QB 41. 124 Sir Edward Boyle MP, HC Debates, 13 December 1968, vol 775, col 806, and see 2.30.

175

6.50  Fraud and financial crime Merely taking a briefcase and examining its contents to see if there is anything worth stealing is not in English law theft. Under section 6 of the Theft Act it is provided ‘a person appropriating property belonging to another without meaning that other permanently to lose the thing itself is nevertheless to be regarded as having the intention of permanently depriving the other of it if his intention is to treat the thing as his own to dispose of regardless of the other’s rights; and borrowing or lending of it may amount to so treating it if … the borrowing or lending is for a period and in circumstances amounting to an outright taking or disposal’. It has long been held by the English courts that a person in possession or control of another person’s property who, dishonestly and for his own purpose, deals with the property in such a manner that he knows he is risking its loss, may be guilty of theft.

What can and cannot be stolen 6.51 While there are differences in the law from one country to another, generally speaking the law of theft is quite comprehensive in what is considered to be property. Section 4 of the Theft Act provides that property, for the purposes of theft, may include real and personal property, money and intangible property, such as the credit in a bank account. Thus, in one case the accused, a builder, dishonestly over-billed for work which he had undertaken. The owner of the house gave the accused a cheque for this amount which was paid in to his account. In paying this cheque into his account the accused was held to have dishonestly appropriated part of the credit standing in his customer’s bank account. 6.52 For a charge of theft the property must ‘belong to another’. Section 5 of the Theft Act provides that property is regarded as belonging to anyone having possession or control of it or having a proprietary right or interest in it. Thus, merely an equitable right in property will be sufficient. It should also be noted that the owner of property can be guilty of stealing his own property from someone with a lesser interest, such as a lien for an unpaid bill. There may be circumstances where full legal ownership passes to the accused, but nonetheless, for the purposes of theft the law deems the original owner as still entitled. For example, section 5(3) of the Act provides that ‘where a person receives property from or on account of another, and is under an obligation to that other to retain and deal with that property or its proceeds in a particular way, the property or proceeds shall be regarded, as against him, as belonging to the other’. This provision is, of course, particularly important when money is given to a person to pay certain expenses and is used for something else. Given the required state of mind, the crime of theft will have occurred. It is important, however, to note that the money or other property must be entrusted for a specific purpose. 6.53 As we have seen125 in cases where a person receives property by virtue of another’s mistake and is under an obligation in the civil law to make restoration in whole or in part, of the property or its proceeds, then to the extent of this obligation, the relevant property or proceeds will be regarded, in English law, as belonging to the person entitled to restoration.126 Thus a person

125 See 6.52 above and see Dargamo Holdings Ltd v Avonwick Holdings Ltd [2021] EWCA Civ 1149. 126 Section 5(4) of the Theft Act 1968.

176

Fraud and financial crime  6.55 who receives property or payment by mistake, at the point when they form the necessary state of mind – which is to dishonestly and permanently deprive the owner of the relevant amount, they are guilty of theft. Of course, this means that they must actually be aware of the mistake and that they are under a legal obligation to make restoration. If they had a genuine belief in their right to retain it, as we have seen, they would not be dishonest, as a matter of law.

Unjust enrichment 6.54 The common law has not been eager to base liability on the unjust acquisition of wealth in circumstances where a specific wrong has not been committed. Indeed, there are cases in the English courts which affirm that characterising something as unfair or even unjust does not of itself establish a cause of action or enable the court to intervene. Of course, where there is an obligation such as in a fiduciary relationship to act fairly, the situation is different. The imposition of criminal liability for the acquisition of unexplained wealth, while controversial, is not as radical as some would suggest. Britain imposed in many of its territories and dominions127 provisions relating to the acquisition of unexplained wealth, particularly in the case of public officials. These have been adopted in other jurisdictions and now the United Nations Convention against Corruption 2006 urges all countries to enact such laws. Article 20, provides: ‘Subject to its constitution and the fundamental principles of its legal system, each State Party shall consider adopting such legislative and other measures as may be necessary to establish as a criminal offence, when committed intentionally, illicit enrichment, that is a significant increase in the assets of a public official that he or she cannot reasonably explain in relation to his or her lawful income.’ 6.55 The Criminal Finances Act 2017 introduced a new investigative tool in the form of unexplained wealth orders.128 While it is still unclear as to how effective such orders are in dealing with particular organised criminals and acquisitive crime,129 at least in theory, they provide law enforcement agencies 127 A good example of the criminalisation of unexplained wealth is to be found in the Prevention of Bribery Ordinance (Cap 201) in Hong Kong. Section 10(a) provides that any person who is or has been a Crown Servant who maintains a standard of living above that which is commensurate with his present or past official emoluments or is in control of pecuniary resources or property disproportionate to his present or past official emoluments, shall be guilty of an offence, unless ‘he gives a satisfactory explanation to the court as to how he was able to maintain such a standard of living or how such pecuniary resources or property came under his control’. Furthermore, under subsection 2 of this section, where a court is satisfied in proceedings for an offence under the first subsection, that ‘having regard to the closeness of his relationship to the accused and to other circumstances, there is reason to believe that any person was holding pecuniary resources or property in trust for or otherwise on behalf of the accused or acquired such resources or property as a gift from the accused, such resources or property shall, in the absence of evidence to the contrary, be presumed to have been in the control of the accused’. 128 These orders were heralded as a new and important weapon against organised crime and in particular corruption on the part of politically exposed persons, see, for example, HC Debates, 19 March 2018, vol 638, col 28 and Criminal Finances Act – Unexplained Wealth Orders, IA No; HO0282, Home Office, 20 June 2017. 129 In April 2020, the NCA claimed that there were over 100 cases in the pipeline. However, only a trickle of cases, with only one or two resulting in recovery of suspect wealth. See Briefing Paper No CBP 9098, Unexplained Wealth Orders, House of Common Library, 8 January 2021, where it was said, ‘the relatively few number of UWOs issued so far,

177

6.55  Fraud and financial crime including the FCA with potentially powerful investigative powers, coupled with the prospect in the case of non-compliance confiscation of unexplained suspect wealth.130 While the UK government has not been prepared to seriously consider the enactment of specific offences related to unexplained wealth, this investigative procedure does go some way to allowing the authorities to identify and question those involved. Of course, tax laws can and do achieve much in this context and HM Revenue and Customs are also entitled to serve a notice under these provisions. 6.56 It is important to remember that many officials are in a position in which they are expected to safeguard or not to act against the financial interests of another person, including the public at large or the state. Consequently, many cases of abuse of office would be potentially an offence under the Fraud Act 2006. In cases where a public official, without reasonable excuse or justification, wilfully neglects to perform his public duty or wilfully misconducts himself, to the extent that he abuses the public’s trust in the office, he is guilty of the common law offence of misfeasance in public office.131 The collapse of the Bank of Credit and Commerce International (BCCI) led to allegations in Britain and elsewhere that the authorities and in particular the Bank of England had been ‘wilfully negligent’ in their duty to protect depositors. Suits were brought alleging that the Bank of England and certain officers were guilty of the tort of misfeasance.132 These actions failed in part because it could not be established that the Bank of England had acted with wilfulness in the breach of its duties.133 However, in the USA and certain other jurisdictions, this liability has become an important factor in the policing of misconduct, both in attributing responsibility and rather less commendably in inhibiting the authorities.

HANDLING 6.57 We discuss the law relating to handling stolen goods in Chapter 7 in the context of money laundering. However, the offence of handling in section 22 of the Theft Act 1968 is closely related to some of the offences that we discuss here. It is important to appreciate that handling or receiving stolen goods knowing or believing them to be stolen or dishonestly undertaking or assisting, or arranging to do so, in their retention, removal, disposal or realisation by or for the benefit of another person, includes money and securities. It is a serious and their “patchy” success, has caused concern that the measure is not enough to counter money laundering in the UK.’ See also Faulty Towers: Understanding the impact of overseas corruption on the London property market, Transparency International, March 2017 and press release, ‘UWO settlement should embolden law enforcement to expand use of powers’, Transparency International, 6 October 2020. See also J Fisher, ‘Unexplained wealth orders have not been a complete damp squid’, FT Adviser, 22 March 2021 and M Bentham, ‘Corrupt oligarchs escape as McMafia law left unused for 2 years’, Evening Standard 26 September 2021. 130 See NCA v Baker [2020] EWHC 822 (Admin) where the Lang J criticised the approach of the NCA and imposed a costs order against the NCA of £1.5 m, see ‘£1.5 m legal bill forces rethink over McMafia wealth orders’, The Times, 13 July 2020, and the guidance given by the Court of Appeal in NCA v Hajiyeva [2020] EWCA Civ 108. 131 Attorney General’s Reference (No 93 of 2003) (2004) 2 Cr App R 23. 132 Three Rivers District Council v Bank of England (No 3) [2003] 2 AC 1. 133 See Inquiry into the supervision of the Bank of Credit and Commerce International. Return to an Address of the House of Commons, 22 October 1992, HMSO, under the chairmanship of Bingham LJ.

178

Fraud and financial crime  6.60 offence carrying up to 14 years’ imprisonment. The offence covers not just stolen goods but also those obtained by fraud. While the thief or fraudster may be convicted of handling property, the relevant conduct must be distinct from the actual theft or fraud. It is also worth noting that the former FSA’s statutory mandate to concern itself with the reduction of financial crime, referred specifically to handling the proceeds of crime, rather than money laundering.134 The Financial Services Act 2012 has not changed this in regard to the FCA.135

FALSE STATEMENTS AND MANIPULATION 6.58 We have already discussed in Chapter 5 the offences in section 89 of the Financial Services Act 2012 relating to the inducement of investment transactions by false statements and the dishonest concealment of material facts. The law has long recognised that those responsible for promoting new issues of stock have a special responsibility to ensure that those who are likely to subscribe are given all the information that they need to make an informed decision. In addition to requiring full disclosure of material facts, there are statutory obligations on those responsible for promoting new issues and placing securities in the market to ensure that due care is exercised in complying with the relevant disclosure requirements. For example, under the FSMA, section 90,136 persons responsible for a false or misleading statement or omission in listing particulars will be liable to compensate any person who has acquired the securities in question for any loss that they have suffered unless it can be proved by them that they had reasonable grounds for believing what was said was not false or misleading. Indeed, under the FSMA, section 91, the FCA can impose financial penalties on the issuer or its directors if they were ‘knowingly concerned’ in the breach. 6.59 When discussing the common law’s stand against the deliberate creation of false markets, mention was made of the fact that, apart from some very ancient statutes relating to the integrity of markets, it was not until the enactment of the Financial Services Act 1986, section 47(2) that there were UK statutory provisions specifically designed to outlaw the manipulation of markets other than by the making of false statements. It is possible, of course, to make a representation by conduct, but in the context of the financial markets, seeking to establish a charge or claim on such a basis would in practice be exceedingly difficult, albeit not impossible. Section 47(2) was re-enacted as the FSMA, section 397(3) and is now section 90 of the Financial Services Act 2012 and is discussed in detail in Chapter 5.

HIGH PRESSURE SELLING 6.60 The high pressure selling of securities at a greater price than they are worth has long been identified as a major issue in investor protection. High pressure selling operations, sometimes referred to as ‘boiler room’ operations, are often associated with other fraudulent schemes and this form of crime has 134 See section 6(3) discussed at 6.3 above. 135 See section 1H(3). 136 But see also sections 90ZA and 90A. See Leeds City Council v Barclays Bank [2021] EWHC 363.

179

6.60  Fraud and financial crime attracted organised criminals. As early as 1936, the government established a committee under Sir Archibald Bodkin ‘to consider operations commonly known as share pushing and share hawking and similar activities’. The result of the committee’s recommendations was the enactment of the Prevention of Fraud (Investments) Act 1939 which, in addition to addressing fraudulent statements, as we have seen, regulated the selling practices of share dealers and the dissemination of investment related information and, in particular, advertisements. The Financial Services Act 1986, section 56 went somewhat further than this and in effect made it a ‘civil offence’ to make unsolicited calls to procure an investment agreement, to or from the UK, unless such were made in conformity with rules drawn up by the Securities and Investments Board. In Alpine Investments BV v Minister van Financien,137 the European Court accepted that while such rules curbing ‘cold calling’ were a restriction on a person’s freedom to offer cross-border services, they could be justified on the basis that a member state had the right to ensure the protection of investors and the integrity of its markets. 6.61 The Financial Services Act 1986, section 56 has been replaced by the FSMA, section 30. At the cornerstone of the new regulatory regime is the FSMA, section 21 which prohibits a person, in the course of business, communicating an invitation or inducement to engage in investment activity unless that person is an authorised person or the communication is approved by an authorised person. The rules promulgated by the FCA on financial promotion by authorised persons achieve more or less the same result as the earlier regime. If a person enters into ‘controlled agreement’ (that is one within the purview of section 21) as a result of an ‘unlawful communication’, then, subject to the discretion of the court, the customer is entitled to compensation for any loss or restitution of any moneys or property transferred and the agreement is unenforceable against him. Where the other party to the claimant is not the communicator, that person will be liable for any losses, subject to the discretion of the court. It must also be remembered that activity in breach of the prohibition in section 21, in addition to amounting to a criminal offence, will also bring into play the full enforcement powers of the FCA under the FSMA, section 25.

FRAUDULENT TRADING AND INSOLVENCY RELATED OFFENCES 6.62 It is sadly too often the case that a fraud will only be discovered once an insolvency occurs. While to some the insolvency provisions may appear to be ‘shutting the stable door after the horse has bolted’, they have an important role in attributing responsibility, tracing misappropriated funds and facilitating compensation and restitution. The procedures provided for by these laws also assist in attempting to resolve the conflicts which inevitably arise between various parties when there is not enough money to meet every obligation. Perhaps the most important in the control of fraud and sharp practice are those provisions which address misconduct on the part of those who manage insolvent enterprises and which enable the authorities to intervene. For example, under the UK’s FSMA, section 367 as amended by the Financial Services Act 2012, the FCA may petition the court for a winding up, not only 137 Case C-384/93: [1995] All ER (EC) 543.

180

Fraud and financial crime  6.65 of an authorised person, but also any unauthorised person who is engaged in activity in contravention of the general prohibition on conducting unauthorised investment business. Of course, these statutory provisions are in addition to those in the general law relating to companies and insolvency. 6.63 In most systems of law there will be a number of specific offences relating to malpractice and abuses before and during liquidation. Obviously, it is not possible here to give more than a brief indication of their nature. Frauds against creditors may be divided into three broad categories. Firstly, there are cases where debts are incurred, albeit there is no intention of making payment. Long firm frauds are a good example. Here crooks will form a company or create some other form of trading vehicle, establish some degree of credibility and then place orders on credit for goods for which they have no intention of paying. These will then be sold, often at a discount, and the criminals will abscond with the proceeds leaving the creditors to pursue a mere shell. The second situation is the fraudulent evasion of debts and obligations that have already been incurred. Here assets may be transferred and siphoned off to prevent creditors getting their hands on them. The third situation, involves the concealment of the true state of affairs and perhaps the resurrection of the insolvent company’s business in a ‘phoenix company’ to which the insolvent company’s undertaking has been transferred at an undervaluation – thereby leaving the creditors with a shell. Of course, in all three categories it is probable that numerous non-insolvency specific offences may be committed. 6.64 The Fraud Act 2006 creates a new offence which is of particular relevance. It provides that ‘a person is guilty of an offence if he is knowingly a party to the carrying on of a business’ otherwise than as a company with intent to defraud creditors or for any other fraudulent purpose. Section 993 of the Companies Act 2006, provides that whether or not a company has been or is in the course of being wound up, if any business of the company is carried on with an intent to defraud creditors of that company or creditors of any other person, or for any fraudulent purpose, ‘every person who is knowingly a party to the carrying on of the business in that manner commits an offence’. These two offences effectively catch all those who engage in fraudulent trading in the course of business. While fraudulent trading has a long history in the company laws of most countries, in Britain it became increasingly evident that there was widespread use of business forms other than companies engaging in bogus trading and long firm frauds. As we have seen, it is also not uncommon to discover that what appear to be companies are in fact phantoms – never having been properly incorporated. As the Law Commission observed (Law Commission No 277) ‘it is anomalous and illogical that fraudulent trading should be an offence where it is done through the medium of a … company, but not where the individual who is trading fraudulently does not do so through the medium of such a body’. 6.65 For these offences a single fraudulent transaction is sufficient, provided ‘it can properly be described as fraud on a creditor perpetrated in the course of carrying on business’.138 The notion of being ‘a party’ to the fraudulent trading has caused some difficulty in the courts. Some judges have indicated that at least in the case of companies the person must have a relatively senior position in ‘running the business’ whereas other courts have held that the term ‘must on its natural meaning indicate no more than ‘participates in’ 138 Templeman J in Re Cooper Chemical Ltd [1978] Ch 262.

181

6.65  Fraud and financial crime ‘takes part in’ or ‘concurs in’ and involve some positive steps of some nature in the carrying on of the company’s business in a fraudulent manner’.139 Indeed, it has been held that the person who it is claimed is ‘a party’ to the fraud might even be an outsider. The breadth and scope of these provisions should not be underestimated and in particular it should be noted that they are not, as are most of the provisions that we are about to discuss, relevant in or near an insolvency. 6.66 A convenient starting point in our analysis of the insolvency law is section 89(1) of the Insolvency Act 1986. This provides that a majority of the directors of a company can make a statutory declaration, affirming that after their inquiries, they are satisfied that the company is solvent. The company can then, within a year, be subject to a members winding up as a solvent company. However, section 89(4) provides that if a director made such a declaration without having reasonable grounds for his opinion, he is guilty of an offence. It is important to note that it need not be proved that he knew the situation, his negligence is sufficient for criminal liability and if, indeed, within five weeks of the making of the declaration or such reasonable time as set out in the declaration, the company’s debts are not discharged, it may be presumed that the directors did not have reasonable grounds for their opinion. 6.67 It is also provided in the Insolvency Act 1986, section 206 that a present or former officer of a company in liquidation who, within the previous year, conceals, fraudulently removes or pawns any of the company’s property or conceals or falsifies any records140 relating to the company’s property, will be deemed to have committed an offence. By the same token, an officer or former officer who is privy to any of these actions will also be deemed to have committed an offence. It should be noted that the term ‘officer’ includes shadow directors. Section 206 not only applies to things done prior to and in anticipation of a liquidation, but also to things done during a winding up. The defendant is entitled to a defence if he can establish that he had no intent to defraud, conceal information from the company or defeat the law. Section 207 provides when a company is being wound up, a person is deemed to have committed an offence if he, being at the time an officer of the company, has made or caused to be made any gift or transfer of, or charge on, or has caused or connived at the levying of any execution against, the company’s property, unless the transaction in question took place more than five years before the commencement of winding up or if he proves that, at the time of the conduct constituting the offence, he had no intent to defraud the company’s creditors. There has been debate as to whether the defendant has a legal burden of proof – that is to a balance of probabilities, or merely an evidential burden. In Attorney-General’s Reference (No 1 of 2004)141 the House of Lords considered that ‘it can be tempting to those involved in the management of a company or a bankrupt to conceal or dispose of … assets to the disadvantage of creditors. Furthermore, such concealment or disposal may be done by a person alone and in private: a failure to record or disclose an asset, or a disposal of stock at an under value or the making of a disposal for nil consideration, may be 139 Pennycuick VC, In Re Maidstone Building Supplies [1971] 1 WLR 1085. 140 Records in this context is to be widely construed and includes computer records see R v Taylor [2011] EWCA Crim 728. 141 [2004] 1 WLR 2111 and see R v Johstone [2003] UKHL 28, Sheldrake v DPP [2004] UKHL 43 and R (on the application of Griffin) v Richmond Magistrates Court [2008] EWHC 84 (Admin).

182

Fraud and financial crime  6.69 known only to those involved in the transaction. There will be no independent witnesses to the act in question. Whether there has been fraud will often be known only to the individual, or individuals who are alleged to have committed the fraud’. Given the considerable benefits of incorporation and the operation of the personal bankruptcy laws to debtors, the House of Lords considered it was not unreasonable that the defendant has the full legal burden of proof – which is, of course, even in criminal matters, the civil burden. 6.68 There are further offences that are worth considering. Section 211(1) provides that a past or present officer of a company that is being wound up, commits an offence if he makes any false representation or commits any other fraud for the purposes of obtaining the consent of the company’s creditors to an agreement concerning the company’s affairs. Furthermore, he is deemed to have committed such an offence, if prior to the winding up, he has made any false representation, or committed any other fraud, for this purpose. False representations require that the accused either knew the representation was false or that it might be. However, proof of dishonesty is not required. Under section 210(1) a past or present officer of a company that is being wound up, commits an offence if he makes a material omission in any statement relating to the company’s affairs. He will also be deemed to have committed this offence, as in the case of section 211, if the company is ordered to be wound up by the court or passes a resolution for voluntary winding up, and he has previously made any material omission in any such statement. The scope of this offence is unclear. It has been argued that it cannot extend to all omissions that are or could become material. The better view, is that only omissions which render what has been said misleading are caught. It should be noted, however, there is no way to establish that the omission is fraudulent or even deliberate. However, if the defendant can show that he has no intent to defraud, he is entitled to an acquittal. Another potentially useful provision is found in section 208. This states that a person will be guilty of an offence if a company is being wound up and, being a present or past officer of the company, he ‘does not to the best of his knowledge and belief fully and truly discover to the liquidator all the company’s property’ and how and to whom and for consideration and when the company disposed of any part of that property. Property that has been disposed of in the course of the company’s ordinary business is excluded from this obligation. Such a person also commits an offence if he does not deliver up to the liquidator all the company’s property and books and papers under his control. He is also obliged, ‘knowing or believing that a false debt has been proved’ by any person in the winding up to notify the liquidator. As in the case of the other offences, if the defendant proves that he had no intent to defraud he is not guilty. It is also an offence under section 208(2) if after the commencement of a winding up, any past or present officer ‘attempts to account for any part of the company’s property by fictitious losses or expense’. He is deemed to have committed this offence, if he is proved to have attempted to do this at any time within a year of the commencement of the winding up. 6.69 Perhaps one of the most important provisions is, however, the Insolvency Act 1986, section 213. This provides that if in the course of a winding up it appears that any business of the company has been carried on with the intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the court on the application of the liquidator, may declare that any person who was knowingly party to the carrying on of the business in the manner mentioned, is liable to make such contributions to the company’s assets as the court thinks proper. Given the requirement of 183

6.69  Fraud and financial crime intent to defraud, as in the case of a prosecution brought under the Insolvency Act 1986, section 206, and see Re Patrick and Lyon Ltd,142 it is necessary to prove ‘actual dishonesty, involving real moral blame’. Consequently, the provision is of limited use and proceedings for wrongful trading under the Insolvency Act 1986, section 214 are usually far more efficacious. 6.70 This section empowers the court to declare that a person who is or has been a director, of the company in certain circumstances, must make a contribution to the assets of the company as the court considers proper. The circumstances in which an order can be made are, that that company is in insolvent liquidation, and at some time before the commencement of the winding up, the relevant person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and that at that point in time, he was a director of the company. However, the court should not make an order if it is satisfied, that after those circumstances occurring, the relevant person ‘took every step with a view to minimising the potential loss to the company’s creditors, assuming that he knew that there was no reasonable prospect that the company would avoid insolvent liquidation, which he ought to have taken. In section 214(4) it is provided that the facts which a director ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those ‘which would be known or ascertained, or reached or taken, by a reasonably diligent person having both: (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has’. It should be noted section 214 applies with equal force to shadow directors. 6.71 In addition to these provisions, there are others facilitating investigation and recovery. For example, section 212 provides for summary proceedings in cases of misfeasance. Where, in a winding up, it appears that a person involved in the management or promotion of the company has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company, the court may, on the application of the liquidator or a creditor, examine the person concerned and make an order requiring restoration or contribution. 6.72 Our above discussion has focused on offences, primarily by those involved in the management, of a company that has become insolvent and is being wound up. Of course, it is important to remember that these offences operate in the context of the general criminal law and in particular the relevant corporate law.143 There may well be other proceedings. In our brief discussion 142 [1933] Ch 786. 143 Note the compensatory provisions relating to wrongful as opposed to fraudulent trading. Sections 214 246ZB of the Insolvency Act 1986 provide that on the application of a liquidator or administrator the court may declare that a director is liable to make such contribution to the company’s assets as it thinks proper provided before the company goes into liquidation or administration, the director ‘knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration.’ In this context likely means probable, see BTI 2014 LLC v Sequana SA14 [2019] EWCA Civ 122. See generally, P Davies et al, Gower: Principles of Modern Company Law (11th edn) (Sweet & Maxwell 2021), pt 10. Note the suspension of this regime under the Corporate Insolvency and Governance Act 2020 during the Covid-19 pandemic. However, the general duties of directors remain including possible liability to creditors, see Sequana above.

184

Fraud and financial crime  6.75 of insolvency related financial crimes it is desirable to also refer to crimes involving the bankruptcy of an individual. In practice those involved in insolvency proceedings might also be involved in personal proceedings for their own bankruptcy. 6.73 Generally speaking, the relevant crimes apply to an individual who has been declared a bankrupt. Such a person will under section 352 of the insolvency Act 1986 be entitled to a defence if he can establish, in most cases to a balance of probabilities, that he at the material time had no intent to defraud or conceal the state of his affairs. However, where the offence is worded so widely as to catch conduct that would not normally be dishonest, the courts have taken the view that the burden imposed on the defendant is only evidential. Let us now look at two substantive offences which illustrate this. Section 357(1) renders it a crime if the bankrupt makes or causes to be made, or has in the five years ending with the commencement of his bankruptcy made or caused to be made any gift, or transfer of, or any charge on, his property. Under section 357(3) he is guilty of an offence if he conceals or removes, or has at any time before the commencement of the bankruptcy concealed or removed, any part of his property after, or within two months before, the date on which a judgment or order for payment has been made against him. Given the breadth of these offences, it is not unreasonable that the defendant has only to introduce evidence that he had no intention to defraud.144 On the other hand, it is arguable that the defendant would have the full legal burden if he made the relevant dispositions after being declared a bankrupt and in regard to the offence under section 357(3) of concealing property after such a declaration. As in so many areas of the law, it is possible to find similar offences in other statutes. Section 13 of the Debtors Act 1869 makes it a criminal offence for any person with intent to defraud his creditors to make a gift or dispose or conceal his property. It should be noted that for this offence it is not necessary for the defendant to be bankrupt. 6.74 A declared bankrupt might also be charged with offences under section 354 if he conceals any debt that is due to or from him or any other property which he is required to deliver up to the receiver or trustee in bankruptcy. If he removes such property he also commits an offence. Furthermore, if he does any of these acts within a year before the petition for his bankruptcy, he commits an offence. Again, he is entitled to a defence if he proves he had no intent to defraud. Under section 358 a bankrupt who leaves or attempts or makes preparations to leave the jurisdiction with any property that he is required to hand over, commits an offence. The same is true in regard to such conduct within six months before the petition, but as in regard to the other offences, he has the defence that he had no intent to defraud. The falsification, alteration and hiding of records is rendered a specific offence under section 355. Section 356 mirrors the provisions in the case of officers of insolvent companies in sections 210 and 211 discussed above. There is also a similar duty under section 353, to disclose property to the receiver or trustee. 6.75 In the case of insolvent companies, the company will, at the end of the legal process, cease to exist. It may well be that proceedings will be initiated against the director of the company under the Company Directors Disqualification Act 1986 which has the effect of banning under criminal penalties former directors from being involved in the management of a 144 See Attorney-General’s Reference (No 1 of 2004) [2004] 1 WLR 2111.

185

6.75  Fraud and financial crime company. There are many other grounds for such an order than being involved in the affairs of an insolvent company. Section 11 of this Act, however, renders it an offence, without the leave of the court, for an un-discharged bankrupt to serve as a director or become directly or indirectly involved in the management of a company. Section 360 of the Insolvency Act renders it a crime for a declared bankrupt to engage in any business in a name other than that in which he has been adjudged bankrupt. Merely operating behind a sham company will not assist him. In R v Doubleday,145 the Court of Appeal thought that the offence was committed where the prosecution established that the accused was ‘in fact the proprietor of a business set up under another name’. The courts will, as we have seen in the misuse of companies, look at the reality of the situation. By section 360 an offence is also committed by a bankrupt if he obtains credit without disclosing his status. Finally, section 362(1) is of some interest in that it makes an offence for the bankrupt in the two years before the petition, to have ‘materially contributed to, or increased the extent of, his insolvency by gambling or by rash and hazardous speculation …’. In determining whether any speculation was rash ‘the financial position of the bankrupt at the time when he entered into’ the relevant activity ‘shall be taken into consideration.’

RECKLESS MANAGEMENT OF BANKS 6.76 With the caveat that we seek to address only in general terms offences other than those in Part V of the CJA 1993 in so far as they might be of relevance in a case of insider abuse, it would be remiss not to mention the new offence created to address the reckless management of banks and building societies. This offence was a direct result of the concern of many that the law was not adequate in addressing the conduct of some bank insiders before and during the financial chaos following the so called sub-prime crisis.146 The government’s implementation in large measure of the recommendations of the Parliamentary Commission on Banking Standards needs to be viewed in the context of its other initiatives to create a Senior Persons Regime replacing the Approved Persons Regime and the emphasis that is now placed on taking personal and individual responsibility particularly in regard to compliance.147 Section 36 of the Financial Services (Banking Reform) Act 2013 provides that a person commits an offence if when at a time that person is a senior manager in relation to a financial institution, he takes or agrees to take any decision or fails to take steps to prevent such a decision being taken, being aware at that time of a risk that implementation of the decision may cause a failure of the institution, and in fact that decision does cause the failure. However, it must also be proved that in the circumstances that person’s ‘conduct in relation to the taking of the decision falls far below what could reasonably be expected of a person’ in his position. It was the element of mens rea that proved to be the most controversial in the drafting of this provision. Obviously, it is necessary 145 (1964) 49 Cr App R 62. 146 See Changing Banking for Good, Report of the Parliamentary Commission on Banking Standards, First Report of Session 2013–14, June 2013 and The Government’s Response to the Parliamentary Commission on Banking Standards, July 2013 Cm 8661 and HM Treasury, Sanctions for the directors of failed banks, July 2012 and see in regard to the provisions introduced by the Financial Services Act 2012 to create the specific offences of making false statements or misleading submissions in connection with the determination of financial benchmarks, discussed in Chapter 5. 147 See Chapter 14.

186

Fraud and financial crime  6.79 for the prosecution to prove that the relevant person was guilty of rather more than mere negligence. On the other hand, the test is essentially objective it does not require the prosecution to show that he was conscious that his conduct or inaction in fact fell ‘far below’ that which can be reasonably expected of a person in his position. It is not necessary to show that there was any intention to benefit personally. While many commentators, particularly in the City of London consider that this offence requires proof of recklessness, the better view is that what the criminal law sometimes regards as gross negligence148 would be sufficient. It would not seem necessary to show recklessness in the sense that the person was aware of the relevant issues but nonetheless acted with indifference to what he appreciated was a likely consequence. Proof of this would be sufficient for establishing gross negligence. 6.77 Furthermore, it is important to note that the failure need not relate directly to the company of which the person is a senior manager, but to any financial institution within the group. The financial institutions to which this offence relates are essentially those that are allowed under the FSMA to accept deposits or those regulated by the PRA with permission to carry on the regulated activity of dealing in investments as principal. Consequently, the offence is primarily concerned with banking institutions. 6.78 Senior managers are defined in section 37(7) as being persons ‘under an arrangement entered into by the institution, or by a contractor of the institution, in relation to the carrying on by the institution of a regulated activity’ requiring that person to perform a senior management function spelt out in subsection (8). A senior management function is essentially what the FCA or PRA say it is.149 The failure of an institution is set out in subsections (9) and (10) and in broad terms means that it cannot pay its debts as they fall due. The offence is punishable under section 36(4) on indictment to a term of imprisonment of not more than seven years and or an unlimited fine. Prosecution can, however, only be commenced by the FCA, PRA, the Secretary of State or with the consent of the Director of Public Prosecutions.

BLACKMAIL AND EXTORTION 6.79 The FSA and the Serious Organised Crime Agency (SOCA) emphasised the risks facing those engaged in the financial services industry as a result of the activities of organised crime and other professional criminals. 148 See, for example, the similarly worded provision in the law of dangerous driving, Road Traffic Act 1988, s 2A and R v Bateman (1925) 19 Cr App R 8 and in relation to manslaughter, R v Akomako [1994] UKHL 6. In R v Misra and Srivastava [2005] 1 Cr App R 328 it was said that to qualify as falling well below the standard that would reasonably be expected the conduct must be reprehensible. In Federal Republic of Nigeria v JP Morgan Chase Bank [2022] EWHC 1447 (Comm), the court considered the meaning of gross negligence and applied The Hellespont Arden [1997] 2 Lloyd’s Rep 547, where the court opined ‘gross negligence is clearly intended to represent something more fundamental than failure to exercise proper skill and/or care constituting negligence … the concept of gross negligence (seems to me) capable of embracing not only conduct undertaken with actual appreciation of the risks involved, but also serious disregard of or indifference to an obvious risk.’ It does not require proof of dishonesty or bad faith and is determined objectively. It is submitted that a similar test would be appropriate in regard to s 36 of the Financial Services (Banking Reform) Act 2013. As we have seen in regard to prosecutions in related areas of the law, expert evidence is likely to play a significant role. 149 See FSMA, s 59(6A) in regard to the FCA and subs (6B) in regard to the PRA.

187

6.79  Fraud and financial crime The successor to SOCA has been equally vocal. We address the issues presented by the misuse of financial institutions and intermediaries for the laundering of the proceeds of crime in Chapter 7. However, in recent years evidence has come to light of criminals deliberately penetrating financial institutions not merely to facilitate the laundering of money, but to facilitate other crimes against the financial sector and others. Indeed, Sir Cullum McCarthy, the former Chairman of the FSA issued a warning to the financial services industry specifically about this threat in November 2005.150 Consequently, in the context of our discussion of the offences relating to the financial sector, it is necessary to consider extortion and blackmail. While such crimes are often motivated by greed, they have another and more sinister aspect. It is the preying on persons, making unjustified threats to them or their loved ones that gives these crimes a particularly unpleasant character. It is also the case that such crimes are often used by organised crime and in particular criminal groups who would not stop at extreme violence. 6.80 The crime of blackmail is set out in section 21 of the English Theft Act 1968. It provides that a person commits the crime ‘if with a view to gain for himself or another or with intent to cause loss to another, he makes any unwarranted demand with menaces.’ For the purposes of this offence ‘a demand with menaces is unwarranted unless the person making it does so in the belief: (a) that he has reasonable grounds for making the demand; and (b) that the use of the menaces is a proper means of reinforcing the demand’. The concept of gain or loss in this context is confined to money or property. A demand is made for the purposes of the offence when it is spoken or mailed. The better view, on the authorities, is that it need not be heard, understood or even received.151 The issue as to whether the demand is unwarranted or not is subjective, the accused does not have to be reasonable. On the other hand, if the way in which an accused has acted is not proper, then even a reasonable belief in his right to, for example, pursue a debt, is criminal. 6.81 The term menaces is not defined in the Act, but one judge has said that it involves conduct or a threat of conduct ‘of such a nature and extent that the mind of an ordinary person of normal stability and courage might be influenced or made apprehensive’.152 It is to be noted that a threat to reveal another person’s criminal activity, if made with a view to gain, can be sufficient for liability. The moral obligation to report crimes to the authorities should not be capable of being ‘bought off’ – indeed, in the UK, accepting payment, other than as compensation, for not reporting a crime is an offence under section 5 of the Criminal Law Act 1967. Thus, a threat to expose the crime or other wrongdoing of another unless payment is made would be a crime. But so would a threat to attack a company in a newspaper article to depress price of its shares153 or the threat to disclose sensitive commercial information154 or probably the threat to initiate civil proceedings.

150 See ‘warning over mafia gangs infiltrating British banks’, The Times, 16 November 2005. This led to the European Commission initiating a five-country study of this problem with the assistance of the City of London Police under its AGIS Programme. See also R Ford, ‘Criminal gangs are running swathes of Britain’, The Times, 12 June 2014. See 1.45 and 3.7. See also B Rider, Organised Crime – Research Agenda (Edward Elgar 2022). 151 Treacy v DPP [1971] AC 537. 152 R v Clear [1968] 1 QB 670. 153 R v Boyle and Merchant [1914] 3 KB 339. 154 R v Cox and Jenkins (1979) 1 Cr App R(S) 190.

188

Fraud and financial crime  6.83

COMPUTER-RELATED CRIME 6.82 In the modern world it is difficult to imagine a situation where a significant financial crime can be perpetrated without the use or misuse of a computer. While the advent of technology has greatly facilitated the commission of many forms of fraud and abuse, the essential crimes remain much the same. Computers are used to assist in the execution of crime. Of course, it may be that threats are made against the security and integrity of computer systems; however, this is in essence no different than crimes involving criminal damage against any other form of property. It should also be noted that under section 13 of the Theft Act there is a specific offence of dishonestly abstracting or diverting electricity, which may well be technically relevant. However, the more significant law is found in the Computer Misuse Act 1990 as amended by the Police and Justice Act 2006. This Act created three new and specific offences. Section 1 makes it an offence to access without authority computer material that is a programme or data; section 2 renders it an offence to access without authority a computer system with intent to commit or facilitate the commission of a serious crime; and section 3 provides that it is an offence to without authority modify computer material. While the computer and hardware might be adequately protected by the law relating to criminal damage, information is, as we have seen, not so easily protected. Section 3 seeks to address this, by providing that anyone who does any act which causes an unauthorised modification of the contents of a computer and has the requisite intention and knowledge, which includes recklessness, commits a crime. A modification is defined to include alteration or erasing any program or data on the computer. The requisite intention is an intention to impair the operation of any computer, to prevent or hinder access to any program or data, or impair the operation of any program or the reliability of any data. It is enough for the knowledge element that the accused knows that what he is doing is unauthorised. It is immaterial whether the alteration is merely temporary, the offence is still committed. The 1990 Act was amended in 2006 to make it clear that section 3 covers conduct designed to disrupt and deny computer related services. A new section 3A also, much in the same way as section 6 of the Fraud Act 2006, renders it a criminal offence to have or distribute ‘tools’ to be used for hacking computer networks. Part 2 of the Serious Crime Act 2015 further amends section 3 to criminalise unauthorised acts causing, or creating a risk of, serious damage. This offence is committed if a person does any knowingly unauthorised act in relation to a computer which causes serious damage of a material kind or the risk of such occurring and is reckless as to whether such damage is caused. 6.83 Of course, one of the serious problems in addressing computer crime is the fact that it may often be perpetrated from overseas. As we have seen under section 2 of the Computer Misuse Act 1990 in the UK it is a crime to cause a computer to perform a function with intent to secure unauthorised access to programs or data with the intention of committing or facilitating the commission of some other offence. An offence under section 1 which simply renders it an offence to access without authorisation may be committed abroad provided that there is a ‘significant link’ with the UK. Thus, if the defendant does what he does to secure access from abroad, if the computer is physically in the UK there would be an offence. However, in the case of section 2, it is enough that the offence that it is intended to facilitate is within the jurisdiction of the UK. Thus, both the defendant and the computer could be outside the UK provided crime that he intends to facilitate is in the UK.155 155 Note also the amendments introduced by the Serious Crime Act 2015 in regard to the territorial scope of the offences in sections 4 and 5.

189

6.84  Fraud and financial crime

CORRUPTION 6.84 In earlier editions of this work we have bemoaned the then state of English criminal law in regard to bribery and other corrupt practices.156 The UK law was considered deficient and failed to meet the various international obligations on the UK.157 The Law Commission and Home Office had for a number of years striven with varying degrees of enthusiasm to develop acceptable legislative proposals158 and there had been considerable criticism of the manner in which the British Government dealt with certain high profile cases.159 The Bribery Act 2010 is regarded as if not quite the ‘gold standard’ in anti-corruption legislation, pretty close to it. The various offences in the Act, which replace the old law160 are comprehensive and wide ranging. The heart of the offence of bribery is offering, promising or giving a financial or other advantage to another person where he intends the advantage to induce a person, whether this is the same person related to the advantage or another, to perform improperly a relevant function or activity or to reward him for so doing.161 It is also an offence where a person offers, promises or gives a financial or other advantage to another person and he knows or believes that the acceptance of that advantage would itself constitute the improper performance of the relevant function.162 In both cases it matters not whether the advantage is offered or given directly or through a third person, innocent or otherwise. 6.85 The offence of being bribed is set out in equal clarity in section 2 of the Act. A person will be guilty of this offence where he requests or agrees to receive, or accepts a financial or other advantage intending that in consequence, a relevant function or activity, should be improperly performed whether by himself or another.163 The offence is also made out where the request itself constitutes the improper performance of the relevant function.164 A person will also be guilty of taking a bribe if he requests, agrees to receive or accepts an advantage as a reward for the improper performance by himself or another.165 Indeed, the offence also catches a person who in anticipation of or in consequence of his request, agreement or acceptance of an advantage, 156 See generally B Rider (ed), Corruption: the enemy within (Kluwer 1997) and B Rider ‘Corruption the Sharp End of Governance’ in SA Ali (ed), Risky Business, Perspectives in Corporate Misconduct (Caribbean Law Publishing Company 2010), Ch 1. 157 See, for example, United Kingdom: Phase 2bis: Report on the Application of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and the 1997 Recommendation on Combating Bribery in International Business Transactions (2008) OECD. 158 See Legislating the Criminal Code: Corruption (1998) Law Com No 248; Joint Committee on the Draft Corruption Bill, Session 2002–2003, HL Paper 157, HC 705 (2003); The Government’s Reply to the Report of the Joint Committee on the Draft Corruption Bill, Session 2002–2003, HL Paper 157, HC 705 (2003) Cm 6086 and Reforming Bribery: A Consultation Paper (2007) Law Com Consultation Paper No 185 and Reforming Bribery (2008) The Law Commission Law Com No 313. 159 See R (on the application of Corner House Research) v Director of the Serious Fraud Office [2008] 4 All ER 927. 160 See B Rider, K Alexander, L Linklater and S Bazley, Market Abuse and Insider Dealing (2nd edn) (Tottel 2009), at 6.74 et seq. It should also be noted that the offence of criminal breach of trust under the Fraud Act 2006 might also be very relevant in some cases of bribery. See generally A Arlidge, A Milne and P Springer, Arlidge and Parry on Fraud (4th edn) (Sweet & Maxwell 2014). 161 See s 1(2) Case 1. 162 Section 1(3) Case 2. 163 Section 2 (2) Case 3. 164 Section 2(3) Case 4. 165 Section 2(3) Case 5.

190

Fraud and financial crime  6.88 a relevant function is improperly performed by him or another person at his request, asset or acquiescence.166 Again it does not matter whether for this offence, the advantage is to be received directly or through a third party or the benefit is for the person making the request or another.167 6.86 The functions or activity referred to in the offences must be of a public nature, or connected with a business, trade or profession, or performed in the course of a person’s employment, or be performed by or on behalf of a body of persons, whether incorporated or not, such as a partnership. In addition, one or more of the following conditions must also be satisfied. First, that the person performing the function is expected to perform it in good faith. Secondly, that it is expected to be performed impartially or thirdly, that a person performing the function or activity is in a position of trust by virtue of performing it. Obviously, many of the issues that we have already examined in the context of fiduciary obligations may well be relevant in this context.168 Section 3(6) makes it clear that a function or activity is still relevant even though it has no connection with the UK and is performed outside the UK. 6.87 For the purposes of the Act a function or activity is improperly performed if it is performed in breach of a relevant expectation or the failure to perform is a breach of such expectation.169 The expectation is tied to the conditions set out above and therefore relate to good faith, impartiality and the proper discharge of a fiduciary obligation. It is also made clear in section 4(2) that anything that a person does or omits to do arising from or in connection with that person’s past performance of a relevant function or activity is to be treated for the purposes of the Act as being done or omitted by that person in the performance of that function or activity. In regard to these provisions in sections 3 and 4 the test of what is expected is a test of what a reasonable person in the UK would expect in relation to the performance of the type of function or activity in question.170 Furthermore, in applying this test any local custom or practice is to be disregarded unless it is permitted or required by the written law, including case law, of the overseas country concerned. 6.88 Perhaps the offence that attracted most interest is that contained in section 6 of the Act which makes it a crime to bribe foreign officials anywhere. A person is guilty of an offence if in bribing a foreign official if his intention is to influence that individual in his capacity as a foreign public official and that he has the intention of obtaining or retaining business or an advantage in the conduct of business. In this context, business includes a trade or profession in line with the more general offences. Will not be an offence, however, if the person receiving the bribe in such circumstances is permitted or authorised to act in the way intended, by virtue of a relevant local written law.171 On the other hand, the notion of influencing the performance of an overseas official’s duty is wide enough to encompass not an act or omission in the discharge of his functions, but also any use of his position even if outside his actual authority. 166 Section 2(4) Case 6. 167 Except in case 3. Furthermore, in cases 4, 5 and 6, it does not matter whether the person making the request knows or believes that the performance of the function is improper and in case 6, where a person other than the person making the request is performing the function or activity, it does not matter whether that person knows or believes that the performance is improper: s 2(7) and (8). 168 See Chapter 2 and also Chapter 9. 169 Section 4. 170 Section 5. 171 See also section 6(7).

191

6.88  Fraud and financial crime Section 6(5) provides that a foreign public official includes any individual who holds a legislative, administrative or judicial position of any kind outside the UK and who exercises a public function for or on behalf of a foreign country or for any public agency or public enterprise of a foreign country or is an official or agent of a public international inter-governmental organisation. 6.89 Section 7 is of particular interest as it introduces into this area of law the notion of control liability, which has been developed with considerable effect in the USA. It provides that a relevant commercial organisation will be guilty of an offence if a person associated with it bribes another person in the circumstances set out in sections 1 and 6. Section 12(5) makes it clear that it does not matter whether the relevant acts or omissions took part in the UK or elsewhere.172 However, the prosecution must prove the individual did so intending to obtain or retain business for the commercial organisation or to obtain or retain an advantage in the conduct of its business.173 For the purposes of this provision, a relevant commercial organisation includes any company incorporated in the UK or one incorporated overseas which carried on business in the UK. The same also applies to partnerships. Although the government is under a duty to give guidance174 as to the meaning of being associated with the company or partnership, section 8 makes it clear that the test is whether the person performs services for or on behalf of the business, albeit the capacity in which he does so is irrelevant. Therefore, a person may be associated as an employee, agent or subsidiary of the relevant business. Where the test is met is to be determined by reference to all the relevant circumstances and not merely by the nature of the relationship. On the other hand, if the relevant person is an employee of the business, it is to be presumed, unless it is shown to the contrary, that he is associated in regard to the relevant activity. A specific defence is provided for businesses if they can prove that it had in place adequate procedures designed to prevent persons associated with it from engaging in the prohibited conduct.175 In other words, if the firm can show that it has taken steps through compliance and training to address the risk of corruption then it is entitled to a defence. Under section 9 a duty is placed on the government to publish guidance as to what might be considered by a court as adequate in this regard. In the Ministry of Justice’s Guidance176 six principles are propounded with the intention of assisting commercial organisations from avoiding or at least minimising the risk of bribery. First, the organisation should design and implement procedures to prevent bribery which are proportionate to the risk in relation to the business. Secondly, there must be commitment to preventing 172 See generally on the territorial application of the Act, section 12. 173 The individual responsible for the act of bribery and the recipient may, of course, be prosecuted for their offences, see R v Skansen Interior Ltd (SIL) (unreported), Southwark Crown Court, 21 February 2018, Judge Taylor sentencing on 23 April 2018. 174 See Ministry of Justice Bribery Act 2010; Guidance to help Commercial organisations prevent bribery (March 2011). 175 See R v Skansen Interior Ltd (SIL) (unreported), Southwark Crown Court, 21 February 2018. The fact that the company was very small was no justification for it having no antibribery procedures or training in place. Nor was it an excuse that the individual wrongdoer was so senior he would not have felt constrained by such procedures. 176 See Ministry of Justice Bribery Act 2010; Guidance to help Commercial organisations prevent bribery (March 2011) and see also the SFO’s Operational Handbook, Evaluating Compliance Programs, January 2020. There have been very few prosecutions under section 7 so almost no case law. For example, see A Gaudoin, Law Society Gazette, 6 May 2022, referring to WABGS Ltd, Tritec Systems Ltd and Electron Systems Ltd with fines of £500,000, £70,000 and £70,000, respectively, resulting from the convictions on guilty pleas of two individuals who bribed a third.

192

Fraud and financial crime  6.91 corruption by those at the top. Thirdly, there should be periodic and thorough risk assessments. Fourthly, the business is to engage in due diligence in regard to the assessment and control of risk related to those who are associated with it. Fifthly, the policies that the firm has must be properly embedded and understood by all concern and reinforced with appropriate training. Finally, there needs to be a continuing process of monitoring and review. The FCA has endorsed these principles and they reflect its own attitude to suitable compliance and accountability.177 6.90 Finally, section 14 provides that if an offence is committed by a company under sections 1, 2 and 6, a director, manager or the secretary, including a person who purports to act in such a capacity, may also be guilty of an offence if it can be shown that the crime was committed with their consent of connivance. 6.91 Although of wider relevance than combating corruption, it is appropriate to mention here the role of deferred prosecution agreements introduced under Schedule 17 of the Crime and Courts Act 2013. The SFO had attempted to develop such agreements (DPAs) without the benefit of statutory authority, and while to be commended for its ingenuity, found the courts hesitant.178 DPAs are available to the Crown Prosecution Service (CPS) and the SFO, but remain confined to corporate defendants. Under the approved procedure179 after a company is charged with a criminal offence and a judge approves the use of a DPA, the company is then invited to negotiate with the prosecutors for full co-operation in the investigation of the relevant offence and related matters. Companies are expected to identify wrongdoing by them and those for whom they have a responsibility.180 The CPS and SFO after such 177 See C Baksi, ‘Bribery Act raises firm’ standards’, The Times, 22 July 2021. 178 In R v Innospec Ltd (unreported), Southwark Crown Court, 26 March 2010. Lord Justice Thomas censured the SFO for failing to adhere to the rule of law. In his remarks on sentencing the learned judge stated ‘it is clear that the SFO cannot enter into an agreement under the laws of England with an offender as to the penalty in respect of the offence charged’. He emphasised that such deals had no effect and, indeed, in a subsequent case Bean J specifically rejected the recommendation of the SFO for a suspended sentence on the basis that the accused had co-operated fully and had done a ‘deal’ with the UK and US authorities. Thomas LJ considered that a traditional fine was the appropriate financial penalty and emphasised that there should be no difference, given the seriousness of the offence of corruption, between the UK and USA. In previous cases the SFO had settled a much smaller financial penalty than the millions imposed, albeit also by settlement, in the USA. Thomas LJ thought that ‘if the penalties in one state are lower than in another, businesses in the state with lower penalties will not be deterred so effectively from engaging in corruption in foreign states whilst businesses in states where the penalties are higher may complain that they are disadvantaged in foreign states’. He also noted the very considerable fines that were imposed for in cases involving allegations of wrongdoing under competition law and made the point that corruption could have an even more serious impact on trade and business. He was not impressed by the argument that the SFO and US has brokered their deal because they did not want to put the business out of business. In his opinion if the business was corrupt it should be sanctioned. Indeed, Thomas LJ stated that it was improper for the SFO to try and do deals with the American authorities. See C Nakajima, ‘Maybey may be the bridge we need’ (2012) 19 Journal of Financial Crime 124. 179 See Deferred Prosecution Agreements Code of Practice, Crime and Courts Act 2013, SFO and CPS, and SFO’s Operational Handbook, revised in regard to DPAs, 23 October 2020. 180 In R v Skansen Interior Ltd (SIL) (unreported), Southwark Crown Court, 21 February 2018, notwithstanding the company self-reported, the CPS decided to commence a prosecution and not seek a DPA. The reason is thought to be that the company had ceased to operate and could therefore not commit to improve its compliance. The director who paid the bribe and the recipient were both convicted as individuals. Of course, as in many instances of misconduct it is important to remember that dismissal is a powerful deterrent and punishment

193

6.91  Fraud and financial crime inquiries as appear necessary may then agree with the company various terms. These may include the payment of a financial penalty and compensation, co-operating in the investigation and prosecution of individuals and improving compliance and systems for monitoring. If the company is found deficient in honouring these undertakings the prosecution may be resumed. The Director of the SFO, Lisa Osofsky has observed that DPAs enable the SFO to punish ‘companies for their crimes’ and at the same require ‘measures which ensure that they will not flout the rule of law again’. The SFO’s Annual Report for 2020-2021 estimates that DPAs have resulted in financial penalties in excess of £1.6 billion. Of course, some would contest whether this procedure is a sufficient threat to those engaged in corporate misconduct given the rewards which can be reaped through corruption.181

FALSE REPORTING 6.92 It is of fundamental importance to the proper operation of so many aspects of the legal and regulatory systems that information is properly and accurately recorded and reported. Indeed, in recent years, some of the most dramatic financial scandals have involved misconduct in this process. Under the English law, directors of a company must prepare accounts for each financial year and also a directors’ report. The accounts must be audited and under section 499(1)(b) of the Companies Act 2006 an auditor can require various persons including the directors, officers and employees of the company to provide him with such information and explanations as he thinks necessary for the proper performance of his duties. Under section 501(1) of the Act a person who knowingly or recklessly makes an oral or written statement to an auditor that conveys or purports to convey information or explanations which the audit requires, or is entitled to require, and is misleading, false or deceptive in a material particular, commits an offence. It is also provided, much in line with the Sarbanes-Oxley provisions in the USA, that a director

for erring employees, see, for example, Thomson v Informatica Softwear Ltd (2021) Employment Appeal Tribunal, EA 2020-000463-00, where the employee was found to have been properly dismissed for gross misconduct in approving extravagant entertainment for a foreign official. 181 The financial penalties, disgorgement of profits (by way of confiscation) and compensation payments imposed on companies have been significant, such as in the cases of Amec Foster Wheeler Energy Ltd (2021) totalling £103 million and Petrofac Ltd (2021), £77 million. The SFO in particular has been willing to use its investigative powers to assist foreign investigations including in cases of civil asset recovery. The United Nationals Convention Against Corruption (2004) places considerable emphasis on the importance of states assisting each other particularly in regard to criminal and civil asset recovery. The use of the civil law and even arbitration has become a significant tool, see, for example, Republic of Mozambique v Credit Suisse International [2021] EWCA Civ 329. Of course, the penalties imposed in the UK may well be in addition to those imposed by other jurisdictions, such as in the case of Amec (above) the imposition of financial penalties pursuant to an agreement with the USA and Brazilian authorities of a further US$177 million. Spotlight on Corruption published a report in January 2022 in which it claimed the SFO was being ‘overstretched and outgunned’ by criminals and there was an urgent need to significantly upgrade and extend the resources of law enforcement in this area. This sentiment was powerfully echoed in Economic Crime, 11th Report of the Treasury Select Committee, Session 2021-2022, 2 February 2022. See J Ames, ‘SFO head faces questions over failings in bribery investigations’, The Times, 10 February 2022.The report of the charity Spotlight on Corruption pointed out that the cost of economic crime is estimated at 14.5 per cent of the UK’s GDP, while only an amount equal to 0.042 per cent is spent on law enforcement.

194

Fraud and financial crime  6.95 is required to state, in the directors’ report, that so far as he is aware, there is no information needed by the auditor of which the auditor is unaware and that he has taken all the steps that he ought to have taken to make himself aware of any information needed by the auditor and to establish that the auditor is aware of it. It is sufficient for this purpose that he has made such enquiries of his fellow directors and of the auditors, and taken such other steps, as are required by his duty to exercise reasonable care, skill and diligence. If such a report is approved and the statement turns out to be false, the director commits a crime under section 418(5). Furthermore, the offence is committed by every director who knew that the statement was false or was recklessly indifferent as to whether it was true or false, and failed to take reasonable steps to prevent the report being approved. This places an affirmative obligation on directors to ensure that auditors are placed in a position to discharge their own duties in verifying the information that the company is required to disclose to the shareholders and other stakeholders. It is not now possible for directors to hide behind a veil of ignorance. 6.93 Every company, under section 386(2) of the 2006 Act, is required to keep and maintain proper accounting records. In particular, they must be sufficient to show and explain the company’s transactions, be such as to disclose with reasonable accuracy, at any time, the company’s financial position and be such as to enable the directors to ensure that the accounts comply with the statutory requirements. Furthermore, detailed information to be included in the records is set out in other provisions of the Act. If the company fails to discharge its obligations in this regard, every officer of the company who is in default commits an offence under section 387(1). It is a defence for a director to show that he acted honestly and in the circumstances in which the company’s business was carried out his default was excusable. In like terms, there is a statutory obligation to ensure that such records are kept available in the UK for officers of the company to inspect by virtue of section 388(2). 6.94 These provisions do not stand alone. Section 17(1) of the Theft Act 1968 renders it an offence for any person, ‘dishonestly, with a view to gain for himself or another or with intent to cause loss to another to (a) destroy, deface, conceal or falsify any account or any record or document made or required for any accounting purpose; or (b) in furnishing information for any purpose produces or makes use of any account, or any such record or document as aforesaid, which to his knowledge is or may be misleading, false or deceptive in a material particular’. This offence covers documents ‘if it is made for some purpose other than an accounting purpose, but is required for an accounting purpose as a subsidiary consideration …’.182 If a document is required for an accounting purpose it matters not what it was created for. Furthermore, it should be noted that this is in no way confined to companies or established businesses, an individual may have accounting purposes. It is further provided in section 17(2) that for the purposes of the offence, ‘a person who makes or concurs in making in an account or other document an entry which is or may be misleading, false or deceptive in a material particular, or who omits or concurs in omitting a material particular from an account or other document, is to be treated as falsifying the account or document’. 6.95 Section 18(1) of the 1968 Act provides that where an offence under section 17 is committed by a company and ‘is proved to have been committed 182 Attorney-General’s Reference (No 1 1980) [1981] 1 WLR 34.

195

6.95  Fraud and financial crime with the consent or connivance of any director, manager, secretary or other officer’ of the company, or any person purporting so to be, that individual will also be guilty of the offence. It would seem from this that once knowledge is established, then passive acquiescence would be enough for liability. By section 19 ‘an officer of a body corporate or unincorporated association, or person purporting to act as such, with intent to deceive members or creditors of the body corporate or association about its affairs, publishes or concurs in publishing a written statement or account which to his knowledge is or may be misleading, false or deceptive in a material particular …’ commits an offence. This offence does not extend to oral statements. However, if, for example, a director orally made a false statement to the press which is then written up this would be sufficient. Section 1(1) of the Prevention of Corruption Act 1906 also includes a provision of interest. It provides that ‘if any person knowingly gives to any agent, or if any agent knowingly uses with intent to deceive his principal, a receipt, account, or other document in respect of which the principal is interested, and which contains any statement which is false or erroneous or defective in any material particular, and which to his knowledge is intended to mislead the principal’ is guilty of an offence. 6.96 There are many other provisions and procedures concerned with the integrity of disclosure and the reporting of information. In the case of companies that have their securities listed or registered for trading on an organised securities market, there will be many additional and specific reporting and disclosure obligations. We have already discussed the significance of these and in particular the obligation to make continuous and timely disclosure in the context of insider dealing. These obligations may give rise to liability at many levels within the legal system. The obligation to disclose will bring in fraud and possibly anti-manipulation laws. These may well result in criminal and civil liability. Those who are harmed by false and misleading information may also have a civil claim against those responsible, including the company. Those responsible for the false or misleading statements in the company may find that they are in breach of their duties to the company and be liable accordingly in the civil courts. In certain cases, in some jurisdictions, they might also be liable to anyone, including dealers in the market, who relied on this false information. The securities exchange upon which the relevant securities are listed or traded may also have grounds for complaint. In many countries the listing agreement is regarded as a contract and even where it is not, there are usually legal devices under which those responsible for the market can initiate injunctive and other actions against those responsible for each of the terms of listing and possibly misleading the market. It is also probable that the market regulator will also have powers to intervene and pursue those responsible. Finally in this regard, it is important to note that failure to disclose information as it should be, may well result in other problems for those in management. Insiders in such circumstances will generally not be able to deal.

FORGERY AND THE RELIABILITY OF DOCUMENTATION 6.97 The significance of documentation in the perpetration of so many financial crimes need not be laboured here, suffice it to say that in the commercial and financial sector documentation is vital and therefore a fraudster or money launderer will need to be able to manipulate and control the documents which establish his credibility and ability to operate. Section 1 of the Forgery and Counterfeiting Act 1981 provides ‘a person is guilty of forgery if he makes 196

Fraud and financial crime  6.99 a false instrument, with the intention that he or another shall use it to induce somebody to accept it as genuine, and by reason of so accepting it to do or not to do some act to his own or any other person’s prejudice’. In the context of this offence ‘instrument’ includes any document whether formal or informal in character, stamps and any disc, tape, sound track or other device on or in which information is recorded or stored by mechanical, electronic or other means. In Attorney-General of Hong Kong v Pat Chiuk-Wah183 the Privy Council stated that it includes ‘any document intended to have some effect, as evidence of, or in connection with, a transaction which is capable, or giving rise to legal rights and obligations …’. The notion behind forgery is that the instrument must not only tell a lie, but a lie about itself. The English Law Commission said, ‘the primary reason … for … the law of forgery is to penalise the making of documents which, because of the spurious air of authenticity given to them, are likely to lead to their acceptance as true statements of the facts related in them’ (Law Commission No 55). Section 9(1) sets out what is meant by a false instrument. Basically, an instrument will be false if it purports to be made in a form in which it was not in fact made, or in a form, or on terms that the person did not have authority to make, or has been altered, or made on a date or place or in other circumstances where it was not, or by a person who does not exist. Thus, the document may lie about itself in terms of the identity of the person making or authorising the statement, the circumstances of its making and the circumstances of any alteration. 6.98 It must be remembered that the wrongful conduct – the so-called actus reus of forgery – is the making of a false instrument. This includes making an instrument which is false when it is made, altering a genuine instrument to render it false and altering an instrument which is already false by making it false in some additional way. The maker of this false instrument must intend that he or another shall use it to induce someone to accept it as a genuine instrument and that the person so accepting it by reason of so accepting it will do or not do some act and that act or omission shall be to his or another person’s prejudice. It should be noted that the offence of forgery is complete on the making of a false instrument with the relevant intention. It matters not that no one was in fact prejudiced. It follows that an accused cannot escape liability ‘… merely because at the time when he is creating the document he has not made up his mind about the method of despatch …’.184 Section 10(3) provides that ‘references to inducing someone to accept a false instrument as genuine … include references to inducing a machine to respond to the instrument … as if it was genuine’. Furthermore, section 10(4) adds that ‘the act or omission intended to be induced by the machine responding to the instrument … shall be treated as an act or omission to a person’s prejudice’. The notion of prejudice is set out in section 10(1) where it is provided ‘an act or omission intended to be induced is to a person’s prejudice if, and only if’, it is one which, if it occurs will result in his temporary or permanent loss of property, or deprivation of an opportunity to earn remuneration or to gain a financial advantage, or will result in somebody being given an opportunity to earn remuneration or gain a financial advantage or will be the result of his having accepted a false instrument as genuine in connection with his performance of any duty. 6.99 The offence of forgery is extended to the copying of a false instrument by section 2 of the 1981 Act. It is an offence ‘for a person to make a copy of an 183 [1971] AC 835. 184 R v Ondhia [1998] 2 Cr App R 150.

197

6.99  Fraud and financial crime instrument which is, and which he knows or believes to be, a false instrument, with the intention that he or another shall use it to induce somebody to accept it as a copy of a genuine instrument, and by reason of so accepting it to do or not to do some act to his own or any other person’s prejudice’. 6.100 Section 3 of the Forgery and Counterfeiting Act 1981 provides that ‘it is an offence for a person to use an instrument which is, and which he knows or believes to be, false, with the intention of inducing somebody to accept it as genuine, and by reason of so accepting it to do or not to do some act to his own or any other person’s prejudice’. It should be noted that if the person uttering or using the false instrument knows or believes that the instrument is false and in fact it is false, it matters not that the person actually making the instrument has not been guilty of forgery. It is necessary, however, to establish some kind of nexus between the user and the instrument. It is not sufficient that someone acts in a manner where he knows someone else will supply a forged document, he must himself use it. Section 4 creates a similar offence in regard to use of a copy of a false instrument. 6.101 Given the ease with which forged documents can be transferred and hidden, it is under the English law an offence to merely be in possession of certain specified forged instruments. These include forged money and postal orders, postage stamps, share certificates, cheques and other bills of exchange, travellers’ cheques, bankers’ drafts, promissory notes, cheque, debit and credit cards and certificates relating to entries in official registers. It is an offence under section 5(1) of the Act ‘for a person to have in his custody or under his control an instrument’ to which this provision applies, ‘which is, and which he knows or believes to be, false, with the intention that he or another shall use it to induce somebody to accept it as genuine and by reason of so accepting it to do or not to do some act to his own or any other person’s prejudice’. It should be noted, however, that there is a lesser offence where the person will be guilty, if he has ‘in his custody or under his control without lawful authority or excuse’ a false instrument within the scope of this provision and ‘which is and which he knows or believes to be false’. It is also an offence to have in possession ‘a machine or implement, or paper or any other material’ which to that person’s ‘knowledge is or has been specially designed or adapted for the making of an instrument’ to which this provision applied with the intention that he or another will in fact make such an instrument and use it to another’s prejudice (section 5(3)). The accused must actually know that the equipment has been so adapted or designed, but it is important to note that they need not have been adapted or designed to create a ‘false’ document. Section 5(4) creates an offence of merely being in possession of such equipment or materials without lawful excuse. 6.102 Suppression of documents in the commission of fraud is addressed in the English law under section 20 of the Theft Act 1968. This provides that ‘a person who dishonestly, with a view to gain for himself or another or with intent to cause loss to another, destroys, defaces or conceals any valuable security, any will or other testamentary document or any original document of or belonging to, or filed or deposited in, any court of justice or any government department shall’ be guilty of an offence. The notion of defacement is broad and might extend to altering a document and thus, this might be an alternative charge to one of forgery.

198

Fraud and financial crime  6.105

ACTS PREPARATORY TO FRAUD 6.103 Most frauds require the assistance of others and a considerable amount of preparation. However, generally speaking there is a reluctance to punish mere acts of preparation other than in the context of terrorist related crime. While fraud is a crime of intent and the offence is complete whether or not the accused actually manages to dupe someone, there may be situations where all the requirements for a charge of fraud are not present and yet justice demands intervention. On the other hand, the current English law is in regard to the relationship between inchoate offences and secondary liability is confused. Under section 1(4)(b) of the Criminal Attempts Act 1981 there cannot be an attempt to aid, abet, counsel; and procure an offence by another person.185 The position is, however, uncertain as to whether this amounts to a conspiracy,186 although as we shall see the Serious Crime Act 2007 now impacts on this. 6.104 Where a person agrees with another to carry out a course of conduct that would amount to the crime of fraud, he may as we have seen be guilty of conspiracy to defraud.187 We have already referred on a number of occasions to the important offence of conspiracy and noted that it remains in England a common law conspiracy although it may also be charged as a conspiracy to commit the substantive crime of fraud as a statutory conspiracy. Section 1 of the Criminal Law Act 1977 renders it a statutory offence if a person agrees with any other person, including a company, that a course of conduct shall be undertaken, where if the agreement is carried out in accordance with their intentions it will amount to or involve the commission of a specific crime. Before a conviction can take place the jury must be satisfied that there was in fact an agreement between two or more persons to commit the crime in question; that the particular accused was a party to that agreement in the sense ‘that he agreed with one or more of the other persons that the crime should be committed and at the time of agreeing to this, he intended that they (and he) should carry it out’.188 It is not necessary that the agreement be to commit a specific offence under a statute. For example, an agreement to launder the proceeds of insider dealing or another crime, may be charged as a single conspiracy. The Criminal Law Act in section 1(2) provides that a person shall not be guilty of conspiracy under the Act unless he and at least one other party to the agreement intend or know that the facts necessary to the commission of the offence shall or will exist at the time of the conduct. This would seem to have the effect of blocking charges for conspiracy to commit crimes under, for example, the Fraud Act and the anti-money laundering provisions, where the accused might in the substantive offence be liable for reckless conduct or in the case of certain money laundering offences ‘having reasonable grounds to suspect …’. 6.105 The common law conspiracy to defraud is preserved by the Act, as we have seen.189 It was said by Buckley J in London and Globe Finance Corporation190 that ‘to defraud is to deprive by deceit; it is deceit to induce a 185 Given the scope of the dealing offence under the Criminal Justice Act 1993, see 3.9, it is unclear whether it is more than academic to consider whether an attempt to commit the substantive offence is relevant. Article 14 of the EU Market Abuse Regulation specifically prohibits an attempt to engage in insider dealing, albeit not an attempt to encourage another to deal or disclose inside information. 186 See R v Hollinshead [1985] AC 975. Sections 45 and 46 of the Serious Crime Act 2007 would now be the appropriate offences. 187 See at 6.17 et seq above. 188 Judiciary Studies Board, England and Wales, Specimen Direction 2005. 189 See 6.19 above. 190 [1903] 1 Ch 728.

199

6.105  Fraud and financial crime man to act to his injury’. It would seem on the authorities that an agreement by two or more persons by dishonesty to deprive a person of something which he is or to which he is or would be or even might be entitled and an agreement by which two or more by dishonesty to injure some proprietary right of another is a conspiracy at common law. Furthermore, an agreement to deceive a public official, as we have seen, into doing something, or not doing something, that he would not have done but for the deceit is also a conspiracy to defraud.191 It is important to appreciate that it is the risk of prejudice not actual prejudice that is necessary for the offence. Thus, in Attorney General of Hong Kong v Wai Yu-Tsang,192 the fact that the bank accountant covered up bad cheques passing through the bank to prevent a run on the bank still amounted to a conspiracy to defraud the bank. The Privy Council stated ‘it is … important to distinguish a conspirator’s intention or immediate purpose … from his motive (or underlying purpose.) The latter may be benign in that he does not wish the victim … to suffer harm; but the mere fact that it is benign will not of itself prevent the agreement from constituting a conspiracy to defraud’. The scope and arguable vagueness as to the perimeters of this offence have resulted in criticism over many years. Where it is possible to charge a conspiracy to commit a specific statutory offence – such as fraud under section 1 of the Fraud Act 2006, then the common law should not be used as we have noted. There are situations, however, where the crime of conspiracy to defraud is wider than the statutory law. For example, in the case of a statutory conspiracy to commit fraud, it would need to be shown that at least one of the parties to the agreement was intended to commit the fraud. In a situation where the agreement is to enable or facilitate someone else to commit the fraud, who is not a party to the agreement, the only charge would be conspiracy to defraud at common law. The creation of a general false impression over a period of time, such as in a long firm fraud along the lines we have already discussed, might be charged as a conspiracy to defraud. 6.106 If a person does an act which is more than merely preparatory to the commission of a crime then he or she may well be guilty of an attempt to commit that crime and generally punished in the same manner, under section 1 of the Criminal Attempts Act 1981. He or she must have moved beyond the stage of planning and preparation to that of starting to implement his or her intention. Merely putting oneself in a position to commit a crime is different from actually trying to commit it. In the case of fraud, given what has been said above, there is relatively little scope for the offence of ‘attempt’ to operate. It might be relevant where, for example, the accused makes a representation which he or she intends to be false, but which as a result of a mistake of fact, is true, or where he or she tries to communicate a false representation but this fails. However, in regard to other financial crimes there is rather more scope for charging attempt. 6.107 The Serious Crime Act 2007 has made a significant impact on the relevant law.193 Under section 44 a person commits an offence if he does an act which is capable of encouraging or assisting the commission of an offence

191 See generally Scott v Metropolitan Police Commissioner [1975] AC 819 and DPP v Welham [1961] AC 103. 192 [1992] 1 AC 269. 193 See Inchoate Liability for Assisting and Encouraging Crime, Law Commission (2006) Law Com No 300, Cm. 6878.

200

Fraud and financial crime  6.109 and can be shown to have intended to encourage or assist in its commission194. Section 45 provides that a person commits an offence if he does an act capable of encouraging or assisting the commission of an offence, and he believes that the offence will be committed and that his acts will encourage or assist its commission. Section 46 further provides that a person commits an offence if he does an act capable of encouraging or assisting the commission of one or more of a number of offences and he believes that one or more of those offences will be committed, but has no belief as to which, and that his act will encourage or assist the commission of one or more of them.195 Section 50 provides a defendant with a defence of acting reasonably in two situations. Firstly, where the defendant knew that certain circumstances existed and it was reasonable for him to act as he did in those circumstances and secondly, where he reasonably believed certain circumstances to exist and it was reasonable for him to act as he did in the circumstances as he believed them to be. 6.108 The law will in certain specific contexts punish the mere possession of certain substances, articles and equipment. In the context of burglary, for example, section 25 of the Theft Act 1968 renders it an offence for an accused to be found at a place ‘other than his place of abode’ with ‘any article for use in committing a burglary or theft …’ Furthermore, ‘proof that he had with him an article made or adapted for us in committing a burglary or theft shall be evidence that he had it with him for such use’. In the case of fraud, under section 6 of the Fraud Act 2006 a person will be guilty of an offence if he has in his possession or under his control any article for use in the course of or in connection with any fraud. Under this offence the accused can be charged for possession of equipment, such as skimmers and letters used for ‘flash’ purposes, in his home. It should also be noted that section 8 makes it clear that ‘article’ includes ‘any program or data held in electronic form’. It is only necessary for the prosecution to prove that the accused was in possession and intended the article to be used by himself or another, in the commission of a fraud or merely in connection with a fraud. It is interesting to compare the breadth of this provision with section 16 of the Terrorism Act 2000. This renders it a crime to possess money or other property but only if ‘he intends that it should be used, or has reasonable cause to suspect that it may be used, for the purpose of terrorism’. This provision has been used effectively against those engaged in various frauds and other fund-raising activities in support of terrorists. Finally, in this regard, section 7 of the Fraud Act 2006 makes it a crime for a person to make, adapt, supply or offer to supply any article ‘knowing that it is designed or adapted for use in the course of or in connection with fraud, or intending it to be used to commit, or assist in the commission of a fraud’.

PERJURY AND FALSE DECLARATIONS 6.109 From our discussion above, it is clear that a number of abuses have occurred as a result of the ‘crooks’ misleading the market authorities and other regulators into permitting a state of affairs to come about or continue, which of

194 In the case of insider dealing this is, as we have seen, a substantive offence of encouraging another person to deal, see 3.68 et seq. 195 These offences are not objectionable under article 7 of the European Convention on Human Rights, see R v Sadique [2012] 1 WLR 1700.

201

6.109  Fraud and financial crime itself creates an impression that certain underlying and justifying events have satisfactorily taken place. In R v Aspinall,196 it was held that it is an indictable conspiracy at common law to obtain a listing of securities on the Stock Exchange by falsely representing that the required number of shares have been allotted and paid for. In this case, it was emphasised that it was enough for the prosecution to show that the defendants’ purpose was to mislead the Stock Exchange’s officials; it was not necessary to prove that the defendants intended to injure investors by securing a higher price for the shares they were floating than would otherwise have been obtainable. It might also amount to the crime of conspiracy to defraud, to agree with others to induce, by false statements, made by word or conduct, a public official to do, or not to do, an act in the course of his official duties. For example, it has been argued that furnishing the executive of the City Panel on Takeovers and Mergers with false information designed to mislead it in exercising its responsibilities under the Code might well fall within the scope of this offence. The FSMA, section 398, as amended by the Financial Services Act 2012, makes it a criminal offence for a person knowingly or recklessly to give ‘in purported compliance with any requirement imposed by or under this Act’ false or misleading information to the Authority or, under the FSMA, section 399, to the Competition and Markets Authority.197 This provision is somewhat narrower than the offence which was created under the Financial Services Act 1986, section 200 and which was not confined to misleading officials of the Securities and Investments Board. 6.110 There are many situations where documents and statements are required to be made under oath or pursuant to some solemn legal undertaking to tell the truth. For example, section 5 of the Perjury Act 1911 renders it a crime to ‘knowingly and wilfully make (otherwise than on oath) a statement false in a material particular’ if the statement is made in a statutory declaration, ‘in any abstract, account, balance sheet, book, certificate, declaration, entry, estimate, inventory, notice, report, return, or other document’ which the person concerned is authorised, or required to make, attest, or verify by an ‘public general Act of Parliament’ and in any oral declaration or oral answer which he is required to make by, under, or in pursuance’ of any such law. The statement must be intentionally false and under section 13 of the Act its falsity must be corroborated. 6.111 There are, however, many other statutory offences under various Acts imposing liability for false statements made in purported compliance with statutory obligations to tell the truth or affirm the veracity of certain facts or the genuineness of certain documents. For example, section 1112(1) of the Companies Act 2006 provides for an offence where a person for any purpose knowingly or recklessly delivers or causes to be delivered to the Registrar of Companies a document or makes to the Registrar a statement that is misleading, false or deceptive in a material particular. 6.112 Finally, it is important to remember that there are numerous and quite diverse provisions making it a criminal offence to disclose information in certain circumstances and usually without appropriate authority. Obviously, these offences have some degree of relevance in the policing of insider abuse. There are, of course, offences under the Official Secrets Act 1989, but also many statutes establishing regulatory and specialised agencies contain specific

196 (1876) 1 QBD 730; affd (1876) 2 QBD 48, CA. 197 Amended by Enterprise and Regulatory Reform Act 2013.

202

Fraud and financial crime  6.113 offences criminalising the unauthorised disclosure and in some cases misuse of information obtained in an official capacity.

CIVIL FRAUD 6.113 When examining the law relating to the manipulation of markets, reference was made to the possibility of suing in the civil courts for compensation.198 Mention has also been made of the prospect of civil liability for violations of the various rules promulgated by the FCA.199 In the context of restitution and compensation, it is also important to remember the various powers that the FCA has to initiate civil actions. None of the statutory provisions, however, displaces the traditional common law remedies based on fraud. It is therefore worthwhile examining briefly the civil law relating to fraudulent misrepresentation. However, before doing so it is helpful to consider the relationship of the civil and criminal law in the context of our discussion. As we have seen issues related to insider abuse might well give rise to potential liability at different levels within the legal system both domestically and overseas. For example, there may be liability in the criminal law, regulatory actions and civil proceedings. Indeed, when one considers that there might within the criminal justice system be not only a prosecution but also proceedings related to suspect property and in within regulatory law a variety of different types of intervention ranging from civil enforcement to essentially civil ‘prosecutions’ for breach of regulatory rules, the situation may become quite complex. The issue of civil liability might well manifest itself in a number of ways involving different causes of action with different plaintiffs. Added to all this might be in the interest of tax and revenue authorities and disciplinary authorities. There might also be associated concerns relating to compliance and breaches of employment and other contracts. All these issues might be magnified by proceedings in other jurisdictions. In so far as all these concerns might relate to the same or a related set of facts and circumstances, there are profound issues of evidence, fairness and perhaps proportionality. While judges and prosecutors are mindful of the problems thrown up by parallel proceedings the issues are difficult to address in practice and may well raise concerns of fair treatment and even human rights.200 198 There is no restriction on a civil action being commenced in parallel or in advance of criminal or regulatory proceedings on the same facts, see R v Panel on Takeovers and Mergers, ex parte Fayed [1992] BCC 524 and R v Institute of Chartered Accountants in England and Wales, ex parte Brindle [1994] BCC 297. However, on application the court may stay civil proceedings if there is a real risk of serious prejudice to existing or prospective criminal proceedings, see FSA v Anderson [2010] EWHC 308 (Ch). This is a high threshold although there is a concern not to frustrate or undermine prompt regulatory and disciplinary interventions to prevent further alleged misconduct. The courts prefer, however, in the case of parallel proceedings to exercise their powers of management rather than order a stay, see Akcine Bendove Bankas Snoras v Antonov [2013] EWHC 131 (Comm) and Polonskiy v Alexander Dobrovinsky & partners LLP [2016] EWHC 1114 (Ch). See also in regard to parallel proceedings M Andenaes, ‘Disciplining Auditors – Problems of parallel disciplinary and civil proceedings’, Chapter 10 in B Rider and M Andenaes (eds), Developments in European Company Law (Kluwer 1997). 199 See Chapter 4. 200 Concern has been expressed where regulators, professional bodies, the police and litigants have initiated or threatened action against the same individual for alleged misconduct. For example, see Neill LJ, ‘there is a great risk of serious prejudice which may lead to injustice, in ex parte Fayed [1992] BCC 524. There are also issues of disclosure and cost. See above at note 198.

203

6.114  Fraud and financial crime 6.114 We have already noted that a conviction for an offence may be relevant in subsequent civil proceedings.201 Section 11 of the Civil Evidence Act 1968 provides that the fact that a person has been convicted of an offence by a court in the UK is admissible evidence that the person committed the offence.202 Furthermore, without prejudice to the reception of other admissible evidence for the purpose of identifying the facts on which the conviction is based, the contents of any document which is admissible as evidence of the conviction, and the contents of the information, compliant, indictment or charge-sheet on which the person in question was convicted, is admissible in evidence for that purpose.203 It is open to a convicted person in subsequent civil proceedings204 to argue that the offence was in fact not committed, but to do so it will be necessary to ‘call his previous witnesses and hope that the judge will believe them now, even if they were not believed before.’205 The circumstances of a conviction, such as whether it was on the basis of a guilty plea or after a full jury trial, might give differing weight to it.206 Under section 13 of the 1968 Act the presumption that a conviction is evidence of the commission of the offence is irrebuttable in cases of defamation. However, what is the impact on the viability of civil proceedings of an acquittal? Where the civil proceedings are conducted on the same grounds as gave rise to the acquittal, the question has been raised as to whether this might undermine the acquittal and give rise to issues of fairness.207 It is acceptable to use evidence obtained in the criminal process in civil proceedings even if the accused was acquitted.208 6.115 The dividing line between the criminal and civil law with regard to fraudulent conduct until relatively recently has not been entirely clear in 201 The situation in regard to a regulatory intervention is not so clear cut, given the different standards of proof and the essential difference between, in particular, preventive interventions and those seeking to impose punishment. See note 211 below. The regulators in the UK have not exhibited any great willingness to assist private litigants in regard to matters under their supervision and have not, for example, as in the US the SEC has done attempted to intervene as amicus curiae let alone in support of a private parties. 202 Civil Evidence Act 1968, s11(1) 203 Civil Evidence Act 1968, s 11(2)(b). 204 Civil Evidence Act 1968, s 11(2)(a). 205 See Lord Denning MR in Stupple v Royal Insurance Co [1971] 1 QB 50 at 72. He might also call fresh witnesses and/or show that earlier witnesses in the criminal trial were mistaken. See also J v Oyston [1999] 1 WLR 694. In regard to whether this could be an abuse of process, see Secretary of State for Trade and Industry v Bairstow [2003] EWCA Civ 321. 206 See Lord Denning MR above at note 211 at 72–73 considered that the conviction ‘does not merely shift the burden of proof. It is a weighty piece of evidence in itself’, but see also the different approach of Buckley LJ at 75 who thought that the conviction simply gives rise to the presumption and has no evidential weight in itself. Davies LJ in Taylor v Taylor [1970] 1 WLR 1148 at 1152 endorsed the view of Lord Denning MR, that it is ‘obvious that, when a man has been convicted … at a criminal trial, the verdict of the jury is a matter which is entitled to very great weight when the convicted person is seeking, in the words of the statute, to prove the contrary’. Of course, whatever the outcome of the civil matter, the conviction stands. 207 The concerns that might arise are related to the principles of the presumption of innocence, finality and due process, see SOCA v Galle [2011] 1 WLR 2760 (Sup Ct) applying Walsh v UK (Application No 43384/05) ECtHR, but see more recently in regard to civil asset recovery, Larranaga Arando v Spain (Application No 73911/6) ECtHR (2019). 208 See SOCA v Galle above at note 207. Indeed, evidence that has been found inadmissible at a criminal trial because it resulted from an unlawful arrest, may be admitted if relevant in a civil case, SOCA v Olden [2010] EWCA Civ 143. Indeed, in civil proceedings hacked documents might be admissible as the courts are uninterested, at least in terms of admissibility, as to the circumstances in which evidence was obtained, see Ras Al Khaimah Investment Authority v Azima [2021] EWCA Civ 349. Of course, the court does have a discretion to exclude evidence (CPR 32.1) but in balancing ‘two potentially conflicting public policies … the

204

Fraud and financial crime  6.115 English law. Indeed, one of the earliest causes of action, that of deceit, involved considerations of almost a penal nature. Given the harm that allegations of dishonesty can cause to individuals, particularly if they are in business, the courts have always been concerned by way of procedure and proof to ensure as far as is practical that such allegations are not made and pursued wantonly.209 Therefore, as a matter of pleading in the civil law, averments of fraud must be specifically pleaded with all the relevant facts establishing the specific averment set out.210 While there is manifestly a difference between the standard of proof in an ordinary criminal trial and one for fraud in the civil law, judges have often emphasised that as the seriousness of the allegation increases in criminal proceedings, the standard of proof that is required to be met will be more exacting and compelling – cogent.211 Therefore, in practice, there may achieving of justice in a particular case on the one hand and promoting the observance of the law on the other ’, it the absence of the claim being fraudulent, will generally admit relevant evidence no matter how it was obtained, see also Jones v University of Warwick [2003] EWCA Civ 151. But see dicta in Summers v Fairclough Homes Ltd [2012] UKSC 26. 209 See, for example, the comments of Cockerill J in King v Stiefel [2021] EWHC 1045 in particular she warned about the dangers of being too prepared to allege fraud – ‘it does not mean that an inference of fraud can be justified by lumping together a number of disparate allegations which bear no relation to the conspiracy, fraud or deceit …’. She also made it clear that particulars of the fraud needed to be pleased before disclosure and ‘when faced with a summary judgment application it is not enough to say, with Mr Micawber, that something may turn up’ after disclosure. Note also the comments of Picken J, in Marme Inversiones 2007 SL v Natwest Markets plc [2019] EWHC 360 in regard to contriving a claim or ‘reverse engineering’ it to fit the guidelines set out by the Court of Appeal in Property Alliance Group v Royal Bank of Scotland [2018] EWCA Civ 355. See also Michael v IE&D Hurford Ltd [2021] EWHC 2318 (QB) in regard to dishonest claims. 210 See King v Stiefel [2021] EWHC 1045 and also Elite Property Holdings Ltd v Barclays Bank plc [2019] EWCA Civ 204. For much the same reasons until the amendment of Rule 24.2 of the Civil Procedure Rules in 1992, summary judgement was not available in fraud cases, see Foglia v The Family Officer Ltd [2021] EWHC 650 (Comm) where the court underlined that very compelling evidence was required, as ‘… experience teaches us that on occasion apparently overwhelming cases if fraud and dishonestly somehow inexplicably disintegrate.’ 211 See, for example, Hornal v Neuberger Products Ltd [1957] 1 QC 247 where the Court of Appeal stated in a civil action where fraud or what could amount to a crime is alleged while the standard of proof is that applicable in civil actions generally: proof on the balance of probability, there is no absolute standard of proof, and ‘no great gulf between proof in criminal and civil matters.’ Lord Denning MR put it, ‘A civil court, when considering a charge of fraud, will naturally require for itself a higher degree of probability than that which it would require if considering whether negligence were established. It does not adopt so high a degree as a criminal court, even when it is considering a charge of a criminal nature, but still it does require a degree of probability which is commensurate with the occasion.’ Ungoed-Thomas J in Re Dellow’s Will Trusts [1964] 1 WLR 451 stated: ‘The more serious the allegation the more cogent is the evidence required to overcome the unlikelihood of what is alleged and, thus, to prove it; for in all cases the degree of probability must be commensurate with the occasion and proportionate to the subject-matter. The elements of gravity of an issue are part of the range of circumstances which have to be weighed when deciding as to the balance of probabilities.’ More recently, Teare J in JSC BTA Bank v Ablyazov [2013] EWHC 150 held ‘I have also kept well in mind that although the standard of proof is the civil standard, the balance of probabilities, the cogency of the evidence relied upon must be commensurate with the seriousness of the conduct alleged’, and see also Burton J in Alpstream v PK Airfinance [2013] EWHC 2370. However, the idea that the evidence required is of a different quality or cogency has been questioned, for example, Lord Hoffmann in Re B (children) [2008] UKHL 35, ‘I think that the time has come to say, once and for all, that there is only one civil standard of proof and that is proof that the fact in issue more probably occurred than not’, and in particular, Elder J in Otkritie v Urumov [2014] EWHC 191. See also Three Rivers DC v Bank of England [2001] UKHL 16, and in particular, Federal Republic of Nigeria v JP Morgan Chase Bank [2022] EWHC 1447 (Comm). See for a discussion of the issues R v Oxfordshire Senior Coroner [2020] UKSC 46 in regard to inquests deciding unlawful killing and suicide the appropriate standard of proof is the civil one.

205

6.115  Fraud and financial crime not be a great deal of difference in the proof that is required to establish fraud in the civil and criminal law, particularly when it is remembered that in most cases considerable reliance will need to be placed on documentary evidence. Where allegations of fraud or deliberate misconduct involving moral turpitude are made and persisted with in circumstances which the court considers unjustified, there will be serious cost implications for the plaintiff and on occasion judges have expressed their disapproval of counsel.212 6.116 The issue of fraud may arise in the civil law in a number of ways. However, since Paisley v Freeman,213 it has been the rule that if a person knowingly or recklessly – that is not caring whether it is true or false, makes a statement to another with the intention that it shall be relied upon by that person, who in fact does rely214 on it and as a consequence suffers harm, then an action in deceit will be available.215 It is the need for the plaintiff to establish that the defendant acted with actual knowledge or could not care less whether what he said was true or not, which distinguishes liability in fraud from, for example, liability in the tort of negligence.216 In the case of 212 Consequently, a claim based on negligence may be preferred or in appropriate circumstances under section 2(1) of the Misrepresentation Act 1967, see Cramaso LLP v Ogilvie-Grant, Earl of Seafield (Scotland) [2014] UKSC 9. On the other hand, there are clearly situations which require and justify allegations of fraud invoking the oft quoted by mantra ‘fraud unravels all’ including in extremis earlier judgments, see Takhar v Gracefield Developments Ltd [2019] UKSC 13. There might also be important considerations relating to the Statute of Limitations, see the Irish Court of Appeal in Cantrell v Allied Irish Banks [2019] IECA 217. 213 (1789) 3 TR 51. 214 See the leading case of Smith v Chadwick (1884) 9 App Cas 187, where Lord Blackburn stated ‘if it is proved that the defendants with a view to induce the claimant to enter into a contract made a statement to the claimant of such a nature as would be likely to induce a person to enter into a contract, and it is proved that the claimant did enter into the contract, it is a fair inference of fact that he was induced to do so by the statement.’ In Leeds City Council v Barclays Bank [2021] EWHC 363, Cockerill J while recognising the misrepresentations could occur in many different settings expressed the view that in the context of interest rate rigging the claimant had to establish that he had been materially influenced by the representation in the sense that it was at the material time ‘actively present to his mind.’ See also BV Nederlandse Industrie van Eiprodukten v Rembrandt Enterprises Inc [2019] EWCA Civ 596 where Teare J took the view in the case of fraudulent misrepresentations the test should be based on ‘but for the misrepresentation, the party might have acted differently.’ This broader approach clearly allows for multiple influences to operate. See also Marme Inversiones 2007 v Natwest Markets plc [2019] EWHC 366. It was thought that the Supreme Court in Zurich Insurance Co plc v Hayward [2017] AC 142 had disapproved of thew ‘but for’ approach, however, in BV Nederlandse Industrie van Eiprodukten case Teare J following an obiter dicta of Clarke J in Raiffeisen Zentralbank Osterrich v Royal Bank of Scotland [2010] EWHC 1392, that the ‘but for’ test was weaker in a case of fraud as opposed to negligent misrepresentation. In the case of the latter, it was only necessary for the claimant to show that but for the misrepresentation he might well have acted differently and not that he would have in fact done so. In adopting this approach, Teare J distinguished the Supreme Court decision on the basis that the issue of inducement was not before the court. `More recently in Ahuja Investments Ltd v Victorygame Ltd [2021] EWHC 2382 (Ch), a civil action failed albeit the defendant had acted fraudulently, as the claimant could not show that the representation had induced him to enter into contract. See also Anthony Crossley v Volkswagen Aktiengellschaft [2019] EWHC 3444 (QB) and the interlocutory decision in the NOx litigation pursuant thereto, of Waksman J, High Court, January 2022. In regard to the law of mistake, see Longley v PPB Entertainment Ltd [2022] EWHC 977. 215 The classic formulation is that of Lord Hershell in Derry v Peek (1889) 14 App Cas 337 at 374: ‘in order to establish an action of deceit, there must be proof of fraud, and nothing short of it will suffice … fraud is proved when it is shown that a false representation has been made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false.’ See for an interesting historical perspective, F Pollock, ‘Derry v Peek in the House of Lords’ (1889) 5 Law Quarterly Review 410. 216 See Derry v Peek (1889) 14 App Cas 337.

206

Fraud and financial crime  6.117 negligent misstatement, the defendant will be liable if an ordinary reasonable person would have known that what was said was untrue, the standard being objective. Where a person has been induced to enter into a contract as a result of a fraudulent misrepresentation, the law provides remedies or rescission and damages. While rescission may be a more attractive remedy in the case of investment transactions, it will not always be available. There is a strict rule which requires full restoration of property transferred under the relevant contract. In other words, the parties must be restored to their original position. It follows that if the victim of the fraud, rather than run the risk of a further, perhaps unrelated, diminution in the value of his securities, disposes of them, he will have lost his right to rescind. In Smith New Court v Scrimgeour Vickers,217 Nourse LJ observed that, in the case of a fungible asset like quoted shares, the rule which requires restitution in specie is a hard one and in cases of fraud it was clear that the court had little sympathy with it, although in the circumstances it was not appropriate to depart from it. The rule works harshly, particularly in the case of an omission to disclose information which does not give rise to an independent cause of action for damages.218 6.117 In an action for damages while the traditional approach is to compensate the innocent party for his loss many courts have been concerned to ensure that a fraudster takes no benefit from his fraud or the false circumstances that he has created. In Clark v Urquhart, Stracey v Urquhart,219 Lord Aitkin emphasised that the measure of damages is the ‘actual damage directly flowing from the fraudulent inducement’ and this includes consequential loss.220 On the other hand, depreciations of the value of shares by market forces operating after the date of acquisition do not flow directly from the fraudulent inducement, but from the purchaser’s decision to retain the shares and accept the hazards of the market rather than sell at once.221 The measure of damages will therefore be the difference between the price that the plaintiff paid and the ‘true value’ of the securities at the time he was fraudulently induced to acquire them. Valuation is always a difficult task and determination of the price depends upon a number of assumptions, one of the most important being what assumption should be made about the information which was available to the market.222 In Smith New Court v Scrimgeour Vickers (Asset) Management,223 the Court of Appeal considered that there were only two plausible possibilities in determining what assumption should be made as to information in the case of fraud. First, to assume that the market knew everything it actually did know, but was not influenced by the misrepresentation itself or, secondly, to assume that the market was omniscient. The Court of Appeal thought that the first approach was rational, but the second arbitrary and therefore disagreed with Chadwick J 217 [1994] 4 All ER 225. 218 See Banque Keyser Ullman v Skandia [1989] 2 All ER 952. In BV Nederlandse Industrie van Eiprodukten v Rembrandt Enterprises Inc [2019] EWCA Civ 596 Teare J did allow rescission on the basis that the rescinding party could make restitution in the form of the monetary value of the relevant products. The Court emphasised a person guilty of a fraudulent misrepresentation should not be able to retain any benefit resulting therefrom. 219 [1930] AC 28 at 68. 220 See Doyle v Olby (Ironmongers) Ltd [1969] 2 All ER 119 and see Tuke v Hood [2022] EWCA Civ 23. 221 See Waddell v Blockley (1879) 4 QBD 678. 222 See Lynall v IRC [1971] 3 All ER 914 and with regard to insider trading. In regard to the determination of value in a illiquid market, see LBI EHF v Raiffeisen Bank International AG [2018] EWCA Civ 719. 223 [1994] 4 All ER 225 and see K Handley, ‘Causation in Misrepresentation’ (2015) 131 Law Quarterly Review 275 at 285 et seq.

207

6.117  Fraud and financial crime who at first instance appeared to have assumed that the market was omniscient. In the result, the Court of Appeal held that the correct measure of damages in a case where a person is induced to acquire shares by deceit is the difference between the price that was actually paid and the price which, in the absence of the misrepresentation, the parcel of shares would have fetched on the open market at that time. In the House of Lords, their Lordships emphasised that the plaintiff is entitled to recover the amount by which it is out of pocket but not for the loss of the bargain, which would be a measure of damages appropriate for a contractual claim rather than one based on the tort of deceit.224 In Glossop Cartons and Print Ltd v Contact (Print & Packaging) Ltd225 the Court of Appeal held that the appropriate measure of damages for a claimants’ direct loss as a result of being induced into a transaction by the defendant’s fraudulent misrepresentation was the difference between the price actually paid and the market value of the assets purchased. This was to be objectively assessed disregarding subjective factors and considerations. It was irrelevant what matters the claimants had factored into their assessment of the purchase price – the court should simply ascertain on the evidence the actual value of the assets purchased at the relevant date226 and then deduct from that amount the price paid. While direct loss was simply the difference between the price paid and the market value, consequential loss to be recoverable had to flow directly from the transaction not the misrepresentation, being caused by it and being unaffected by any failure by the claimants to mitigate.227 6.118 The relationship between actions based on the torts of deceit and negligence have already been alluded to. As it is not necessary for a plaintiff in an action for damages to specify the particular tort which he is seeking to rely on for a remedy, provided he asserts and establishes the facts required for liability under at least one accepted cause of action, there may in practice be little lost in not alleging to being able to prove dishonesty, given the court’s attitude to allegations of fraud. Apart from the desire to brand a person as a fraudster, it remains possible to obtain exemplary damages in cases of proven fraud and the statute of limitation may be more favourable,228 but in the majority 224 See [1997] AC 254 and Lord Browne Wilkinson at 267. 225 [2021] EWCA Civ 639. At first instance the court adopted a deduction method considering that damages ‘… should not operate to insulate the claimants from potential commercial risk which they had appreciated and had factored into their calculation of the purchase price because to do so would over-compensate the claimants for the consequences of the defendants’ fraud.’ The Court of Appeal rejected this subjective approach as over complex and preferred a ‘broad brush’ approach. 226 Which as a general rule will be ‘the date of the contract purchase’. Per Lord Browne Willlkinson, above at note 224, at para 261. However, Jacobs J in Valld. Nielson Holdings A/S v Baldorino [2019] EWHC 1926 pointed out there could be exceptions to this rule particularly in regard to the assessment of consequential loss, see Doyle v Olby (Ironmongers) [1969] 2 QB 158. 227 In regard to assessment for loss of chance see Wellesley Partners LLP v, Withers LLP [2015] EWCA Civ 1146, Floyd LJ at para 94. 228 The Limitation Act 1980, s 32 provides that where an action is based on fraud the limitation period of six years (see section 2) does not begin to run until the claimant has ‘discovered the fraud … or could with reasonable diligence have discovered it.’ This means that the claimant must have knowledge of sufficient facts to be able to properly plead fraud, see Law Society v Sephton & Co [2004] EWCA Civ 1627 in regard to actions brought under section 90A of the FSMA, as amended, see Allianz Global Investors GmbH v RSA Insurance Ltd [2021] EWHC 2950 (Ch). This case is of particular interest in that the court discusses the times at which different classes of investor might reasonably have been expected.to have notice of the misrepresentations and omissions in question, The test in regard to diligent discovery is not whether the claimant should have discovered the facts, but could they reasonably in the circumstances, with not unlimited resources and a reasonable sense of

208

Fraud and financial crime  6.120 of cases plaintiffs are well advised to refrain from specific averments of fraud. In the case of a misrepresentation inducing a contract between the parties the statutory remedies for negligent statements provided by the Misrepresentation Act 1967, section 2(1) are, in practical terms, superior to an action in tort. Under section 2(1), the person responsible for the misrepresentation has the burden of establishing that he had reasonable grounds for believing and did in fact believe what he said to be true. As regards the assessment of damages in cases where the misrepresentation has become a term of the contract or where there has been a breach of a warranty, the starting point is to assess the value of the claimant’s loss of bargain – ‘the basic principle in contract is that the claimant is entitled to be put into the position he would have been in if the contract had never been broken.’229 6.119 Finally, it is worth mentioning briefly here the tort of malicious falsehood. A person making maliciously a false statement to another which refers to a third person or that person’s property, resulting in loss to him is actionable as a malicious or injurious falsehood. Malice230 in this context requires proof that the person making that false statement knew it was untrue or was reckless indifferent as to its veracity and made the statement for some dishonest or improper purpose.231 This tort is different to that of defamation as what it said need not be defamatory although it must be untrue. Furthermore, it is not necessary to prove special damage if the statement is calculated to cause pecuniary damage and appear in a published or other permanent form pr relate to a business, trade or profession.232 6.120 As we have seen, the issues of fraud may also be relevant in other actions such as conspiracy and under specific statutory provisions giving rise to a civil remedy. Equity follows the law and will not enforce a bargain that has been procured by fraud.233 Furthermore, as we have seen the courts have developed a form of restitution liability for those who receive property transferred in breach of trust or who facilitate the laundering of such property with the requisite degree of dishonesty.234 It must also be remembered that whilst there have been significant developments in the criminal law facilitating the taking and receipt of evidence from overseas, the civil law has significant

urgency, see Paragon Finance plc v DB Thakerar & Co [1998] EWCA Civ 1249, FII Group Test Claimants v HMRC [2020] UKSC 47 and Boyse (International) Ltd v NatWest Markets plc [2021] EWHC 1387 (Ch). The courts are less willing to find a remedy where there is full disclosure, see CJ and LK Perks Partnership v Natwest Markets plc [2022] EWHC 726. 229 Per Moulder J in Overseas-Chinese Banking Corporation Ltd v ING Bank NV [2019] EWHC 676. See also Morris-Garner v One Step (Support) [2018] UKSC 20. 230 See, albeit in regard to malicious prosecution, Rees v Commissioner for Police of the Metropolis [2018] EWCA Civ 1587. 231 Dunlop v Maison Talbot (1904) 20 TLR 579. If the defendant words are understood in a way he did not intend he is not malicious, see Cruddas v Calvert (No 2) [2015] EWCA Civ 171 at 111. 232 See section 3(1) of the Defamation Act 1952 creating the presumption of loss. 233 The remedies of equity are discretionary and unconscionability is a prime issue. See Patel v Mirza [2016] UKSC 42. Those who seek equitable interventions need to show that they come to the court with ‘clean hands’, see Dering v Earl Winchelsea 9917870 1 Cox Eq Cas 318. It is said that fraud unravels all, see Takhar v Gracefield Developments Ltd [2019] UKSC 13, but this is not an unequivocal principle as we have already seen in the case of the misuse of corporate personality, see Petrodel Resources Ltd v Prest [2013] UKSC 34 and at 6.140 below and see also Sinocore International Co Ltd v RBRG Trading (UK) Ltd [2017] EWHC 2511 (Comm). 234 See Agip (Africa) Ltd v Jackson [1992] 4 All ER 385 at 451; El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717; and Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378.

209

6.120  Fraud and financial crime weapons at its disposal in obtaining evidence and discovery, in freezing funds and in enforcing orders of the court. Whilst the criminal courts possess statutory power, in certain circumstances, to order restoration and even compensation, as we have seen in the context of insider dealing, such orders are rarely appropriate in the case of securities related fraud.

DISCLOSURE ORDERS AND FREEZING ORDERS 6.121 The range of orders that the court can make in theory may be limited only by the judge’s imagination, but in practice orders tend to follow precedents and in most countries the law has been settled into recognised procedures and orders. Perhaps the most significant from our perspective are orders for the freezing of monies in bank accounts or the immobilisation of wealth.235 Section 37 of the Supreme Court Act 1981 enables the High Court to grant injunctions ‘in all cases in which it appears to the court to be just and convenient to do so’ and within this wide power the courts are prepared to issue a freezing injunction to restrain a party from removing from the jurisdiction assets located there or dealing with any assets whether located in the jurisdiction or not. Freezing orders were previously referred to as Mareva injunctions. In Mareva Compania Naviera SA v International Bulkcarriers SA,236 the court issued an injunction restraining the defendant from improperly disposing of his assets or concealing or moving them overseas and thereby making himself ‘judgement proof’. A freezing order may be obtained in the English Court and most other common law jurisdictions whenever there is a real risk of dissipation of assets.237 Such orders play a most significant role in fighting financial crime and render the courts of common law jurisdictions attractive to those who wish to pursue the assets of fraudsters and their confederates. While many non-common law jurisdictions may order the interdiction of property, few have procedures as effective and as wide reaching in terms of their personal jurisdiction. It is important to remember that in so far as the order enjoins individuals to whom it is addressed or who have proper notice of it, it is in no way confined, unless it so provides, to territorial jurisdiction. The order may have worldwide 235 These powers apply to pre-litigation, litigation and the enforcement of judgements, see Les Anassadeurs Club Ltd v Songbu Yu [2021] EWCA Civ 1310. 236 [1975] 2 Lloyd’s Rep 509. 237 See, for example, Ras Al Khaimah Investment Authority v Bestfort Development [2017] EWCA Civ 1014. Such orders are available before determination and to assist in enforcing judgement. In the case of a post-judgement order the only test is whether there is a real risk of dissipation of the defendant’s assets, see Les Ambassadeurs Club Ltd v Yu 2021] EWCA Civ 1320. In Broad International Ltd v Convoy Collateral Ltd (Convoy Collateral Ltd v Cho Kwai Chee (BVI) [2021] UKPC 24, Lord Leggat, justified the availability of such relief on the basis of the ‘enforcement principle’. In doing so a majority of the Privy Council significantly developed the law and underlined the flexibility of the court’s discretion. He said ‘… a court with equitable and/or statutory jurisdiction to grant injunctions where it is just and convenient to do so has power – and it accords with principle and good practice – to grant a freezing injunction against a party (the respondent) over whom the court has personal jurisdiction provided that: (i) the applicants has already been granted or has a good arguable case for being granted a judgment or order for the payment of a sum of money that is or will be enforceable through the process of the court; and (ii) the respondent holds assets (or, as discussed below, is liable to take steps other than in the ordinary course of business which will reduce the value of assets) against which a judgment could be enforced; and (iii) there is a real risk that, unless the injunction is granted, the respondent will deal with such assets (or take steps which make them less valuable) other than in the ordinary course of business with the result that the availability or value of the assets is impaired and the judgment is left unsatisfied.’ It is important to note that the majority of the Board of the Privy Council

210

Fraud and financial crime  6.123 application and relate to persons known or unknown.238 A considerable amount of law has been developed as to the availability, reach and terms of such orders given the devastating impact that they can have on a person’s business and life. 6.122 Application is usually made without notice possibly before the action has even commenced. There will be three primary issues for the High Court judge hearing the ex parte application. First, whether there is a good arguable case; secondly, whether the claimant can adduce sufficient evidence as to the existence and location of assets which the injunction, if made, would affect; and whether there is a real risk that the defendant may deal with those assets so as to render nugatory any judgment which the claimant may obtain. The application must identify as precisely as possible the bank accounts or other assets that the injunction is to be aimed at. Generally speaking, if there is sufficient wealth within the jurisdiction to satisfy a likely judgment, the order will be confined to the jurisdiction. It might apply to bank accounts and other wealth in the name of other people if there is evidence that in fact it belongs to the defendant.239 If the defendant is the majority shareholder in a company than an order can be made against the assets of that company and the company will become a co-defendant in the cause.240 The risk of dissipation will be decided on the facts of each case. However, dishonesty or any proof of lack of integrity on the part of the defendant will be relevant, as will the use of offshore banking facilities in suspect jurisdictions. 6.123 Section 25 of the UK Civil Jurisdiction and Judgments Act 1982 empowers the court to grant all forms of interim relief in aid of foreign courts unless ‘in the opinion of the court, the fact that the court has no jurisdiction apart from this section in relation to the subject matter of the proceedings in question makes it inexpedient for the court to grant it’. Thus an application can be made to an English High Court judge to freeze assets relevant to a proceeding in any foreign court. The courts have been careful to in effect issue a world-wide freezing order when the foreign proceedings have nothing to do with the UK and the parties are not resident here. However, in Motorola Credit Corporation v Uzan (No 2)241 the court was prepared to uphold on appeal certain orders in regard to various defendants based in Turkey, who were accused of participating in an international fraud and who were subject to local freezing orders in New York. While the court accepted that the requirements for an order on behalf of a foreign applicant in foreign proceedings were much

238

239 240 241

considered that such an order can be issued in support of domestic or foreign judgment or arbitration award, not only against the party subject to judgment but any appropriate person. It can be issued in support of current or future proceedings. ‘There is no principle or practice which prevents an injunction from being granted in appropriate circumstances against an entirely innocent party even when no substantive proceedings against anyone are taking place elsewhere’, at para 82. CMOC Sales and Marketing Ltd v Persons Unknown [2018] EWHC 2230 (Comm) – in this case claims were brought for a variety of torts and dishonest assistance in regard to a complex cyber-fraud in which persons unknown caused CMOC’s London bank to pay out large amounts to various accounts in nineteen jurisdictions. See also PMLL v Persons Unknown [2018] EWHC 838 (QB) and see in particular, SD v (1) Persons Unknown and (2) Huobi Global Ltd [2022] EWHC 280 (QB) It is also worth noting that disclosure may still be available in the UK in regard to information the disclosure of which is protected in another jurisdiction even if disclosure would amount to a criminal offgence, see Bank Mellat v HM Treasury [2019] EWCA Civ 449. SCF Finance Co v Masri [1985] 1 WLR 876. TSB Private Bank International SA v Chabra [1992] 1 WLR 231. [2004] 1 WLR 113.

211

6.123  Fraud and financial crime the same as those for an application in regard to proceedings in the English courts, it recognised the need for caution. For example, in the present case the New York court did not have the ‘unusually wide powers against a foreign defendant’ that the English courts had, Furthermore, there was sensitivity in Turkey and an order had been obtained in the Turkish Courts attempting to restrain the claimants from resorting to the New York and UK courts. 6.124 It is important to realise that the making of an order gives the claimant no property rights in the relevant monies and he does not become a secured or preferential creditor. He will also have to give undertakings in damages, as in the case of any interim injunction. The applicant will have to undertake to indemnify any person upon whom notice of the order is served in respect of expenses and liabilities they may incur in seeking to comply with the order. This is in addition to the claimant’s cross undertaking to compensate the defendant if the case is not substantiated. Of course, these undertakings present a serious hurdle to the claimant. However, in RBG Resources plc v Rastogi,242 Laddie J accepted a limited cross undertaking where there was strong evidence of the defendant’s wrongdoing and the claimant was financially weak. 6.125 A curious feature of freezing orders is that although it is made against the defendant it may be effective only if notice of it is given to the relevant bank or person in possession of the assets. It would seem on the authorities that a claimant cannot sue a bank or other person for failing to preserve the relevant assets, even after proper notice has been served, as they do not owe him a duty of care.243 Nonetheless, it may be that such a person would be subject to a tracing claim or liable to pay compensation if they dishonestly assisted the defendant to transfer assets. Their primary liability is, however, to the contempt jurisdiction of the court. If they knowingly ignore an order of the court they will stand in contempt. However, to be guilty of contempt it must be shown that the bank or other person had notice of the probability that the monies would be disposed of in breach of the terms of the injunction.244 It should be noted that the courts in such cases have the power to order the person in contempt to pay compensation. If the parties are outside the jurisdiction and the order has been made without notice, then it is unlikely foreign courts would give effect to an order of the English Courts, as in like circumstances in all probability an English court would not. The issue of enforceability is a real one, as the courts will not act in vain and if there is no real prospect of an order being obeyed or enforced out of jurisdiction the courts will be reluctant to issue one. 6.126 Once an order has been made, the claimant is under an obligation to forge ahead with his claim. He is also under a continuing duty of disclosure to the defendant in regard of any matter which may render his cross undertaking unreliable. Of course, it is always open to the defendant to seek discharge or variation of the order. While the courts will generally allow release of monies for living expenses, outstanding debts and legal fees, the courts will be alert to any attempt to use up the monies within jurisdiction. They will be prepared to inquire into the financial resources of the defendant on a world-wide basis. It is also open to third parties to intervene in regard to relevant assets and obligations.

242 (2002) LTL May 31 2002. 243 Commissioners of Customs and Excise v Barclays Bank plc (2006) 3 WML 1. 244 Bank Mellat v Kazmi [1989] QB 541.

212

Fraud and financial crime  6.128 6.127 Perhaps as important as freezing orders in dealing with financial misconduct are civil search orders. This is in addition to the various systems that operate in different legal systems to require parties in civil litigation to make proper disclosure and respond to interrogatories. It may well be that one party will suspect that the other is about to destroy or conceal information. Consequently, in some countries the civil courts have authority to authorise essentially a civil search. It is important to appreciate that this is not the same as a search warrant as it gives no authority to force entry on to private property. The sanction for non-compliance is the court’s contempt power. A search order compels the defendant to permit the claimant’s agents, usually his solicitor, to enter the defendant’s property to search for and in most cases seize certain documents or property. In England this is a special form of mandatory injunction the object of which is to preserve evidence. While some commonwealth jurisdictions have similar procedures most civilian countries do not, nor do the US courts. These injunctions used to be referred to as Anton Piller orders after the case Anton Piller KG v Manufacturing Processes Ltd.245 The order must be made by a High Court judge and the applicant must make a cross undertaking in damages as in the case of a freezing order. In the nature of the case, the application will normally be made without notice and the applicant must show that there is a strong case that serious harm or injustice will occur. Failure to comply with an order of the High Court may well amount to contempt and this may constitute unlawful means for the tort of conspiracy exposing those assisting the person in breach to liability in damages.246 6.128 The court may order the defendant in proceedings, even interim proceedings, to disclose information.247 In the case of an application for a freezing order the defendant can be required to disclose immediately and then subsequently in affidavit, for example, the whereabouts of his assets. An issue that has arisen in this context is whether the defendant is bound to disclose information that might incriminate him in future criminal proceedings.248 If the defendant does assert the privilege against self-incrimination and the court considers it is not made out, then he will be in contempt. Furthermore, there is no privilege against exposure to criminal proceedings in other jurisdictions. The courts have also held that even threats of violence overseas do not justify refusal to disclose information that has been ordered to be revealed. Courts in the UK and USA have also held that where a question is properly put to a defendant it is still contempt if he refuses to answer on the ground that to do so would constitute a criminal offence under the secrecy or blocking laws of another state. In cases where information can only be disclosed under the 245

[1976] Ch 55. This type of order together with a worldwide freezing order and proprietary injunctive relief against unknown fraudsters has proved important in addressing cryptocurrency frauds, see Fetch.ai.Ltd v Persons Unknown [2021] EWHC 2254. 246 See JSC BTA Bank v Khrapunov [2018] UKSC 19. 247 Norwich Pharmacal Co v Customs and Excise Commissioners [1974] AC 133 and Lightman J’s three conditions for relief set out in Misui & Co Ltd v Nexen Petroleum (UK) Ltd [2005] EWHC 625 (Ch): ‘(i) a wrong must have been carried out, or arguably carried out, by an ultimate wrongdoer: and (ii) there must be the need for an order to enable action to be brought against the ultimate wrongdoer; and (iii) the person against whom the order is sought must; (a) be mixed up in so as to have facilitated the wrongdoing; and (b) be able or likely to be able to provide the information necessary to enable the ultimate wrongdoer to be sued.’ This was approved in EUI Ltd v UK Vodaphones Ltd [2021] EWCA Civ 1771. See, for example, JSC Mezhdunarodniy Promyschlenniy Bank v Pugachev [2015] EWCA Civ 139 and JSC BTA Bank v Ablyazov [2015] UKSC 64 and PSJC Commercial Bank Privatbank v Kolomoisky [2018] EWHC 1910 and Court of Appeal at [2020] 2 WLR 993. 248 See Coca-Cola Company v Gilbey [1995] 4 All ER 711.

213

6.128  Fraud and financial crime relevant laws of another state with the consent of the person to whom the information ‘belongs’, certain US courts have been prepared in both civil and criminal cases to order the defendant or another within their jurisdiction to furnish this authorisation for disclosure to the appropriate person. Failure to do so is treated as contempt. Of course, it goes without saying that furnishing false or misleading information to the court is contempt and it may constitute a specific offence, as we have seen. It might also result in the court deciding a matter against the interests of that party. In Canada Trust Co v Stolzenberg,249 Neuberger J held that where a foreign defendant, with no assets in the UK, failed to comply with an order for disclosure and there was a strong case against him, it may be appropriate to debar him from defending the case, if he persisted in his failure to comply with the terms of the injunction. His contention that compliance with the order would involve a breach of the laws of another jurisdiction was, while a factor to be taken into account, not determinative. 6.129 There will always be a temptation for those under investigation to flee the jurisdiction. While there have been significant developments facilitating co-operation and mutual assistance, particularly within the European Union, it is always more problematic to ensure justice is served once a suspect or material witnesses leaves the jurisdiction. In criminal cases arrest will effectively prevent this, at least, in regard to those suspected of a criminal offence. In civil cases the position is more difficult. The courts are not, however, without power. In Bayer AG v Winter250 an injunction was issued against the defendant ordering him to deliver up his passport and restraining him from leaving the jurisdiction of the English courts. The courts have, as we have seen, significant powers over property and can make a wide range of orders including the appointment of receivers to get in property and monies. In International Credit and Investment Co (Overseas) Ltd v Adham (Appointment of Receiver)251 the court held that it could pierce the veil of incorporation of a company and appoint a receiver over property in a case where a world-wide freezing order had been granted over property and where there was a real risk that the order would be breached.

DISQUALIFICATION PROCEDURES 6.130 While fraud does not always involve the use of a company, it often does. Consequently, it is sensible to deprive those who have committed fraud and other misconduct, of the opportunity to misuse the privilege of using a company as a vehicle for their dishonesty. This is one of the justifications for disqualifying certain persons from being involved in the management of companies. Disqualification proceedings under the Company Directors Disqualification Act 1986252 play an important role in preventing further abuses and constitute an additional sanction with regard to conduct that has already taken place.253

249 250 251 252 253

The Times, November 10 1997. [1986] 1 WLR 497. [1998] BCC 134. Amended by the Small Business, Enterprise and Employment Act 2015, s 110. See generally A Walters and M Davis-White, Directors’ Disqualification and Insolvency Restrictions (Sweet & Maxwell 2010).

214

Fraud and financial crime  6.134 6.131 It should be noted that in certain circumstances an order may be made with regard to a foreign citizen in relation to conduct taking place outside the UK.254 In construing the Company Directors Disqualification Act 1986, section 6, Arden J decided that the fact that modern communications enabled companies to be controlled across frontiers, given Parliament’s intention to create an effective and integrated response to misconduct, justified an interpretation of the provisions which could extend to foreigners and conduct out of the jurisdiction.255 An order made under the Act against a director or a shadow director makes it unlawful for him to be a director, liquidator, administrator or receiver of a company or be in any way, either directly or indirectly, concerned with the promotion, incorporation or management of a company in the UK during the currency of the order. 6.132 There are a number of statutory grounds upon which an application can be made by the Secretary of State, or in some instances the liquidator or even a creditor, to the court under the Company Directors Disqualification Act 1986. Conviction for an indictable offence in connection with the promotion, formation, management or liquidation of a company is a ground under the Company Directors Disqualification Act 1986, section 2. It has been held that a conviction for insider dealing, when the conduct in question clearly had a relevant factual connection with the management of the company, was sufficient to justify a disqualification order.256 Under the Company Directors Disqualification Act 1986, section 3, a court may make a disqualification order where there has been persistent default in making returns or delivering accounts and other documents required under the Companies Act 1985. The Company Directors Disqualification Act 1986, section 5 empowers the court to make an order on summary conviction for failing to comply with the statutory provisions relating to the filing of returns where there have been three default orders within a period of five years. Section 5A empowers the Secretary of State to seek disqualification, where it appears to be in the public interest, against a person who has been convicted of an offence in a foreign jurisdiction. The offences covered include indictable crimes and, inter alia, those associated with management. Therefore, a conviction overseas for insider dealing would be sufficient. 6.133 The Company Directors Disqualification Act 1986, section 4 empowers the courts to make an order where it appears to the court in the course of insolvency proceedings, which need not necessarily end in a determination of insolvency, that there has been fraudulent trading, or any fraud in relation to the company or a breach of duty to the company. It should be noted that a conviction is not a prerequisite to the court exercising its powers under this section. 6.134 The Company Directors Disqualification Act 1986, section 6 requires the disqualification of a director who has been associated with an insolvent company and is found to be unfit to be a director. It has been accepted by the courts that deliberately concealing transactions from the company and 254 Note, it also extends to a member of a limited liability partnership, see Re Pottinger Private Ltd [2021] EWHC 672 (Ch). 255 See Re Seagull Manufacturing Co Ltd (No 2) [1994] 1 BCLC 273. 256 See R v Goodman [1994] 1 BCLC 349 and R v Sanders (unreported), Southwark Crown Court, 20 June 2012. Disqualification may also be appropriate in cases of bribery under the Bribery Act 2010, see, for example, R v Skansen Interior Ltd (SIL) (unreported), Southwark Crown Court, 21 February and 23 April 2018, Judge Taylor.

215

6.134  Fraud and financial crime its shareholders is sufficient for the court to determine that a person is unfit to be a director.257 The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 extends the scope of the powers of the Insolvency Service to seek disqualification of a director or former director where the process of dissolution has been abused. Consequently, directors who intend to evade obligations and potential liability by winding up their company will now be subject to the provisions of the Act, without the need of an application to restore a company once dissolved to the register. Section 8ZA provides for the disqualification of persons who have instructed and influenced a person disqualified under section 6. Section 8ZD further extends this power to persons who have influenced a director disqualified under section 8 of the Act. 6.135 Under section 8, the Secretary of State is empowered to seek an order for disqualification when he has received a report from inspectors appointed under the companies’ legislation or FSMA, or information pursuant to his own powers of investigation, indicating that it is in the public interest that an individual should be so disqualified. Before the court can make an order, it must be satisfied that the conduct in relation to the company makes the person concerned unfit to be involved in corporate management under the Company Directors Disqualification Act 1986, section 9. In determining the issue of unfitness, it is further provided that the court has regard to the matters set out in the Company Directors Disqualification Act 1986, Schedule 1, Part 1 which relates to the question of unfitness in cases brought under the Company Directors Disqualification Act 1986, section 6. Thus, a director who abuses his power in circumstances indicating a lack of commercial probity was held to be unfit.258 The House of Commons Select Committee on Trade and Industry severely criticised the refusal of the Secretary of State to initiate such proceedings against the Fayed brothers following a recommendation by inspectors appointed to inquire into the House of Fraser affair. Although there was evidence that the Fayeds and their advisers had misled the City Panel on Takeovers and Mergers, the Department of Trade and Industry took the view that their conduct was not related to the management of a company, albeit that it is arguable that their misconduct facilitated the acquisition of the House of Fraser.259 6.136 Finally, with regard to the grounds for disqualification, the Company Directors Disqualification Act 1986, section 10 permits a court to disqualify a person against whom it decides to make an order under either the Insolvency Act 1986, section 213 for fraudulent trading or the Insolvency Act 1986, section 214 for wrongful trading. 6.137 Breach of a disqualification order constitutes a criminal offence under the Company Directors Disqualification Act 1986, section 13, as well as contempt of court. Under the Company Directors Disqualification Act 1986, section 15, a person who is involved in the management of a company in violation of an order made under the Act, or a person who acts or is willing to act as a ‘front man’ for a person whom he knows to be subject to disqualification, will be personally liable for all debts of the company. It should

257 See Re Godwin Warren Control Systems plc [1993] BCLC 80. 258 See Re Looe Fish Ltd [1993] BCLC 1160. 259 See Company Investigation, Third Report of the Trade and Industry Committee (HMSO 1990).

216

Fraud and financial crime  6.140 be noted that the same rules apply with regard to un-discharged bankrupts.260 Section 15A, introduced by the Small Business Enterprise and Employment Act 2015, empowers the court to order compensation to be paid at the same time as making a disqualification order. 6.138 Under the FSMA as amended by the Financial Services Act 2012, section 56, the FCA is empowered to issue ‘a prohibition order’ prohibiting an individual from performing a specified function or any function falling within a specified description if it appears to the Authority that the individual ‘is not a fit and proper person to perform’ the relevant functions in relation to regulated activity carried on by an authorised person. Before the Authority makes such an order, it is necessary for the individual concerned to be given a warning notice and he may request that the decision is referred to the Financial Services Tribunal. While the notion of ‘fit and proper’ is open textured, it is clear that fraud and many of the other forms of misconduct described in this chapter would justify the Authority in concluding that the person responsible is not a fit and proper person to be involved in investment business. The same may well also apply to those responsible for supervising that person’s activities. It is a criminal offence under section 56(4) to perform or agree to perform a function in breach of a prohibition order, although it is a defence to show that the person concerned took all reasonable precautions and exercised all due diligence to avoid committing the offence. Furthermore, under section 56(6), an authorised person must take reasonable care to ensure that no function of his, in relation to the carrying on of a regulated activity, is performed by a person who is prohibited from performing that function pursuant to a prohibition order. If an authorised person violates this, any private person who suffers loss as a result has a right of action against him under the FSMA, section 71. 6.139 In this context, it is also important to note the provisions in the FSMA as amended, Part XII relating to control over authorised persons. Obviously, the safeguards that have been put in place to ensure that only fit and proper persons become authorised, or employ persons that are fit and proper, would count for very little if authorised persons could come under the control of unscrupulous individuals. The obligations to give notice and comply with orders by the FCA are reinforced by the criminal law under the FSMA, section 191.

OFFENCES BY BODIES CORPORATE 6.140 Mention has already been made of the use that fraudsters make of companies as a vehicle for fraud and for facilitating criminal activity including money laundering.261 In Salomon v Salomon & Co Ltd262 the House of Lords established that on incorporation companies have a quite distinct legal personality and capability from those who incorporated it or who run it.263 The property of the company is owned by the company and not by the shareholders, who have no proprietary interest in the company’s undertaking.264 On the other hand, given the misuse that is made of corporate facades for the perpetration

260 See the Company Directors Disqualification Act 1986, ss 11 and 15. 261 See Chapter 15 and 1.16 above. 262 [1897] AC 22 263 See Chapter 5. 264 See Short v Treasury Commissioners [1948] AC 534 (HL).

217

6.140  Fraud and financial crime of serious crime, there has been almost an assumption that the courts will be prepared to cut through corporate personality and fix liability directly on the individuals responsible when the corporate form is a sham or has been employed merely as an engine of fraud.265 However, recent decisions have underlined the importance of retaining the integrity of the principle established in Salomon as the ‘unyielding rock on which company law is constructed.’266 Lord Neuberger in Prest v Petrodel Resources Ltd took the view that there probably was not a set of principles allowing the courts to lift the corporate veil, but rather in cases of appropriate liability beyond the company itself, the matter should be resolved by application of the general law.267 Lord Sumption’s analysis was a little different. He doubted whether invoking allegations of the company being a mere sham or a fraud were helpful, nor for that matter acceptable. Instead, he preferred to see the law as justifiably intervening where it was claimed a company was being used as a device or facade to conceal the personal liability of the individual controlling the company. In such cases the company would be liable alongside the controller. So, for example, in the case of a tort it might be jointly liable,268 or in the case of receipt of suspect funds, a constructive trustee. Thus, the separate personality of the company was part and parcel of its liability. It was only in cases where the company was employed to frustrate or evade a liability of the controller that it would be appropriate to lift the veil of incorporation. So if, for example, a company was interposed between the controller and others in an attempt to evade existing liabilities the veil might be lifted. 6.141 We have already discussed the problems involved in determining culpability of a company in both the criminal and civil law.269 The law is able to attribute knowledge and a guilty intent to a company, provided that knowledge or intent reposes in an individual who is sufficiently senior to be regarded

265 For example, see Woolfson v Strathclyde RC 1978 SLT 159 HL and Jones v Lipman [1962] 1 WLR 832 and Gilford Motors Company Ltd v Horne [1933] Ch 935 (CA) and E Cohen and C Simitis, ‘English legal thinking … shows no inhibition to piercing the veil (of incorporation) where it is intended to use the veil for the protection of interests which are unworthy of such protection’ (1963) 12 ICLQ 189 at 219. Other jurisdictions have shown a willingness to lift the veil of incorporation where the corporate form has been invoked for the purposes of committing fraud, see, for example, US v Milwaukee Refrigerator Transit Co 142 F (1906) 247 where Sanborn J at 255 held ‘when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.’ South African courts have also been robust, see, for example, Cattle Breeders Farm (PvT) Ltd v Veldman 1974 (1) SA 1169. But see the reservations of the Canadian courts in the absence of clear proof of fraud, Clarkson Co Ltd v Zhelka (1967) 64 DLR (2d) 457. 266 Prest v Petrodel Resources Ltd [2013] BCC 571 (SC) and VTB Capital plc v Nutritek International Corpn [2013] UKSC 5 and see E Mujih, ‘Piercing the corporate veil – where is the reverse gear?’ (2017) 133 Law Quarterly Review 322. 267 The courts have been willing in extreme cases to regard companies as the agents of those who control them. For example, note the ambiguous comments in regard to lifting the veil of Lord Denning MR in Wallersteiner v Moir (No 1) [1974] 1 WLR 991, speaking of several foreign companies, Lord Denning stated even if they had separate legal identity, ‘I am quite clear that they were just the puppets of Dr Wallersteiner. He controlled their every movement. Each danced to his bidding. He pulled the strings … Transformed into legal language, they were his agents to do as he commanded. He was the principal behind them. I am of the opinion that the court should pull aside the corporate veil and treat these concerns as being his creatures – for whose doings he should be, and is, responsible.’ 268 Or the company may be vicariously liable for the tort of its agent or employee, see 15.4. 269 See generally, Cheong-Ann Png, Corporate Liability (Kluwer 2001); A Pinto and M Evans, Corporate Criminal Liability (4th edn) (Sweet & Maxwell 2021); and P Davies et al, Gower: Principles of Modern Company Law (11th edn) (Sweet & Maxwell 2021), 8-048 et seq.

218

Fraud and financial crime  6.143 as the company’s mind or at least determinant over the function in question. Indeed, in some cases, the courts have gone even further and held that the acts of an individual may be attributed to the company, even if that person is acting outside the duties of his employment and in breach of his employer’s instructions, if acts are carried out in the course of his employment.270 In such cases, the attempts that the employer has gone to in ensuring compliance with the law are merely an issue for mitigation. 6.142 Conversely, where an offence is committed by a company it may well be appropriate to consider the criminal liability of individuals in or associated with it. Where an individual is in fact the principal offender and it is his fault that is attributed to the company, then there is a clear prospect of personal criminal liability alongside that of the company. Indeed, given the legal difficulties in attributing a relevant state of mind to a company,271 there are strong arguments that such individuals should be the primary focus of the criminal justice system – as in the case of insider dealing. The same is true in regard to civil liability in the law of tort and possibly in contract albeit this would most usually arise as collateral liability. Individuals might also be prosecuted along with the company as accessories. The scope for this in the civil law is limited.272 We have already noted the relevance of the law of conspiracy both in the civil and criminal law. 6.143 There is also the prospect in regard to statutory offences that provision will be made for individual criminal liability of directors who consent or connive at the relevant criminal conduct. For example, section 12 of the Fraud Act 2006 provides that in regard to any offence under the Act by a company, if its is proved that it has been committed with the consent or connivance of a director, manager, secretary or other similar officer of a company including a person purporting to act in such a capacity, they along with the company will be guilty of that offence. Consent and connivance require rather more than mere encouragement. Consent necessitates proof that the person concerned was aware of the circumstances and some kind of positive action. Connivance requires proof that the person was well aware of what was going on but none the less allows it to continue with tacit agreement. It would extend to wilful blindness. It is important to appreciate that this liability is wider than that of an accessory since a positive act of aiding and abetting is not required. Furthermore, it is probable that a conscious failure to prevent or report a director committing an offence would be sufficient for liability. Section 400 of the FSMA provides that if an offence under the Act committed by a company is shown to have been committed with the consent or connivance of an officer or to be attributable to any neglect on his part, that officer, as well as the company, will be guilty of the offence in question. The concept of ‘officer’ is defined to include all those who have managerial responsibility, including directors and ‘an individual who is a controller’ of the company. Similar rules are applicable to partnerships. The extension of liability to negligence is important. For example, it is arguable that an offence under section 89 of the Financial Services Act 2012,273 which requires proof that the defendant knew the statement to be false or misleading in a material respect, or is reckless as to whether it is, or dishonestly conceals

270 See 2.37 and 15.15. 271 See Corporate Criminal Liability; A discussion paper, The Law Commission, 9 June 2021. 272 See Chapter 14. 273 See Chapter 5.

219

6.143  Fraud and financial crime a material fact – may result in liability for an officer of the defendant company on the much lower threshold of negligence.

CONCLUSION 6.144 Given the emphasis that has been placed on the protection of investors, the need to maintain confidence in the integrity of the markets and the desirability of reducing financial crime, the policing of fraud and other abuses will inevitably attract a great deal of attention. The FCA cannot complain that it has not been given the weapons to police at least those offences within its statutory purview. The civil enforcement powers that have been entrusted to it are considerable and there has been a significant ‘tidying up’ of the relevant legislation which will no doubt render enforcement less problematic. On the other hand, experience has shown in the UK and elsewhere that the problems in dealing effectively with serious fraud are far ranging and intractable.274 Obviously, much will depend upon the level of co-operation and collaboration that the FCA is able to achieve, not only with other authorities in the UK, but also with its counterparts overseas. A great deal will also depend upon how much it can rely upon those in the industry and in particular those working in compliance to get their own houses in order and work effectively with the authorities. While civil enforcement by or through the FCA is destined to become a more significant feature of policing the markets, it remains very doubtful whether private litigants will become the champions of integrity to the extent that some think they are in the United States.275 Finally, it is worth pointing out that there has been renewed interest in private prosecutions in the commercial world. Section 6 of the Prosecution of Offences Act 1985 preserves the right of any person to initiate a private criminal prosecution, except as in the case of insider dealing under the Criminal Justice Act 1993 where that responsibility is specifically allocated. Successful private prosecutions, notwithstanding the cost and practical issues,276 have been brought for investment related fraud.277 Furthermore, the Court of Appeal has held that private prosecutors are entitled to pursue confiscation proceedings notwithstanding they have no financial or personal interest in the outcome.278 274 See generally B Rider (ed), International Financial Crime (Edward Elgar 2015). 275 In recent years there has been an increasing amount of interest in stimulating and facilitating civil actions in regard to certain types of misconduct such as corruption and misappropriation. The United National Convention against Corruption (2004) places a great deal of emphasis on asset recovery and interdiction and the Convention contains a number of provisions designed to promote the use of the civil law including empowering those who have suffered harm as a result of corruption to sue those involved. Governments and international organisations have also become involved in assisting civil recovery, often in the context of aid programmes, in regard to corruption. The practical and especially financial hurdles are significant. Notwithstanding, in some quarters concerns as to maintenance and champerty, third party funding has played a significant role in a number of recent asset recovery cases. On the other hand, where the funder has a ‘considerable degree of control over the litigation’, it may be exposed to a non-party costs order, see Laser Trust v CFL Finance Ltd [2021] EWHC 1404 (Ch). 276 See, for example, Fuseon Ltd v Senior Court Costs Office, The Lord Chancellor [2019] EWHC 126 (Admin). Note, however, the dangers of bringing a private prosecution for motives other than the public interest, Muhammed Asif v Adil Iqbal Ditta and Noreen Riaz [2021] EWCA Crim 1091 compared with R (G) v SS [2017] EDWCA Crim 2119. 277 For example, in a private prosecution brought by the victim of fraud against Ketan Somaia, the defendant was sentenced to a term of eight years’ imprisonment, Central Criminal Court, 13 June 2014. 278 R (Virgin Media Ltd) v Zinga [2014] EWCA Crim 52.

220

Chapter 7

Anti-money laundering and proceeds of crime

THE CORPORATE AND FINANCIAL DIMENSION 7.1 In 2020, the National Crime Agency (NCA) published a report that stated that ‘The UK remains an attractive place for criminals from around the world who want to set up companies to launder their profits. Criminals exploit the ease with which UK companies can be established, the broad range of professional services on offer and the access UK systems provide to higherrisk jurisdictions. Research by Transparency International suggests 929 UK companies were involved in cases of corruption and money laundering in 2019, amounting to £137 billion in economic damage’.1 The report continued ‘Criminals continue to purchase property in the UK to launder large sums of money. Complex company structures make the true owner(s) behind corporate purchasers difficult to identify’. 7.2 There can be little doubt that criminals have found the organisational advantages of the corporate form beneficial in their illicit enterprises. More importantly the ability to hide behind corporate nominees and obscure the ownership and control of business, whether legal or illegal, has proved invaluable. While the courts have long been prepared to look at the real purpose for which a company has been incorporated2 and will not allow criminals and fraudsters to hide behind the legal fiction of incorporation, to distort responsibility and avoid accountability,3 it is in the context of the relatively recent significance that has been attached to pursuing the proceeds of crime, that concern about the misuse of incorporation has become most pressing. The facility that easily incorporates companies offer those engaged

1

National Crime Agency, ‘National Strategic Assessment of Serious and Organised Crime’ (2020), para 161 2 See Bowman v Secular Society Ltd [1917] AC 406. Normally incorporation should be denied, R v Registrar of Joint Stock Companies [1931] 2 KB 197. Once incorporated, it should be wound up, rather than struck down – Princess of Reuss v Bos (1871) LR 5 HL 176, Lord Hatherley LC at 193. For the current principles in this area, see Prest v Petrodel Resources Ltd [2013] 2 AC 415 (SC) in which Lord Sumption JJSC found that the ‘concealment’ and ‘evasion’ principles should be applied. 3 Smith v Hancock [1894] 2 Ch 377; Gilford Motor Co Ltd v Horne (1933) Ch 935 and Jones v Lipman [1962] 1 WLR 832. In the context of confiscation under the Proceeds of Crime Act 2002, see R v Sale [2014] 1 WLR 663 (CA) in which the principles of Prest v Petrodel Resources Ltd were applied.

221

7.2  Anti-money laundering and proceeds of crime in hiding the proceeds of crime (or at least seeking to sever the nexus between the predicate crime that produces the illicit sum its present location) has been recognised throughout the world. While there has always been a variety of reasons why those in possession of wealth, whatever its source, may wish to hide it,4 the development of laws that allow the proceeds of crime, actual or even presumptive, to be seized by the authorities, has given a real incentive to those capable of laundering wealth. In this process the company plays a vital role. Consequently, there are a number of legal issues thrown up directly by these new laws and perhaps more importantly, in terms of risk, indirectly, by virtue of the shift of responsibility to fight serious crime, on to those who in the ordinary course of their commercial and financial business mind other peoples’ wealth. Indeed, such is the concern that section 1D of the Financial Services Act 2012, which created the Financial Conduct Authority (FCA), states that the integrity of the UK financial system includes ‘its not being used for a purpose connected with financial crime’ and ‘its not being affected by behaviour that amounts to market abuse’. Section 1B ensures that the ‘integrity objective’ is one of three operational objectives for the FCA.5 The impact of anti-money laundering laws on the way in which financial and wealth business is conducted, in many respects has probably been greater than any other substantive body of law. In assisting in the interdiction of the proceeds of serious crime and the flow of funds to terrorist organisations, company law clearly has a role to play. 7.3 Having regard to the risks both legal and otherwise, that can arise for those involved, innocently or not, in the laundering of the proceeds of crime or the transfer of terrorist funds, ensuring proper and effective compliance with the statutory and other obligations is an important task of management. Oversight in terms of the establishment and support of such systems is an important issue in governance. In certain situations, the failure of management and those responsible for governance might well result in legal and regulatory liability. It is also important to note the complex web of law and regulation thrown up by anti-money laundering laws often has the effect imposing obligations with the risk of legal consequences, internationally. For example, generally speaking under most laws, the offences relating to money laundering apply to conduct within jurisdiction, even if the criminal activity generating the property in question took place entirely out of jurisdiction. It is also the case that some provisions operate on wider notions of jurisdiction than would traditionally be encountered in most criminal justice systems. The significance that governments and, in particular inter-governmental organisations, now attach to combating serious crime, corruption and the funding of terror, through inhibiting the transfer and concealment of funds associated or representing such activity, means that regulators and indeed, even the courts, have been robust in the administration and application of relevant laws and procedures. A powerful illustration of the importance now attached to depriving criminals of their illicit wealth is provided in the United Nations Convention Against Corruption.6

4 5 6

See generally B Rider, Memorandum 15, Organised Crime, Minutes of Evidence and Memoranda, Home Affairs Committee SI Session 1994–95, HMSO and B Rider and M Ashe (eds), Money Laundering Control (Sweet & Maxwell 1996), Ch 1. The FCA also has the power to prosecute money laundering offences, see R v Rollins [2010] 1 Cr. App. R. 14 (CA), a case that determined this issue for the FCA’s predecessor, the Financial Services Authority. See generally, B Rider, ‘Recovering the Proceeds of Corruption’ (2007) 10 Journal of Money Laundering Control 5.

222

Anti-money laundering and proceeds of crime   7.4 Article 51 states that pursuing the proceeds of corruption is a fundamental principle of the Convention. It should be noted that many of the Convention’s provisions might well have impact on the business world.7 Furthermore, it must also be borne in mind that as it has proved in practice difficult to interdict property associated with crime and terror, law enforcement and regulatory authorities have adopted strategies designed rather more to disrupt criminal and subversive enterprises than interdict specific property. The NCA has as one of its five operation priorities ‘To operate proactively at the high end of high risk, undertaking significant investigations resulting in disruption of threats by the most effective means’.8 The problem with this approach is that the perimeters of what is acceptable, let alone lawful, disruptive conduct are not clear. It is also the case that often those being used knowingly or otherwise in the processes of disruption will be individuals and companies engaged in business or the financial sector. The legal risks in placing such persons in the ‘high end of high risk’ have not been sufficiently determined, or for that matter considered. 7.4 Few laws can or do operate in a legal vacuum and the interrelationship of rules is not always predictable or does not always produce desirable results. A serious problem, in many jurisdictions, is that those laws relating to the imposition of criminal and increasingly, what might be described as administrative, penalties for misconduct, impact on the way business is conducted. The laws facilitating and controlling business and in particular financial business may not adequately or comfortably interface with these essentially criminal laws. A good example is the obligation not to reveal, to anyone other than the appropriate public authority, one’s suspicion of money laundering. In the UK the unauthorised disclosure of this information may well amount to the serious crime of ‘tipping off’. While this offence is intended to facilitate effective law enforcement by allowing the secret monitoring of transactions by the authorities, the relationship of this crime with the obligations occasionally imposed under the civil law were not sufficiently recognised. For example, there are situations where a person, in a fiduciary relationship or in a position which may result in the imposition of fiduciary obligations, is under a duty, in the proper discharge of those fiduciary responsibilities, to search out and inform those who may, in line with the suspicions that he has properly formed, have a claim against the property in question.9 There are other situations, in which, there would be a duty in the civil law, to take steps on protect the relevant property, which might have the effect of ‘tipping off’ those under suspicion.10 The courts have been required to consider such situations, but have not always found it possible to provide a degree of guidance, let alone protection, that would meet the expectations of those engaged in legitimate business.11 Again, while it is clear, under the relevant statutory provisions, that liability for breach of contract or disclosure of confidential information, when 7

See, for example, Article 12 in regard to anti-corruption initiatives in the private sector; Article 20 on unjust enrichment and Articles 21 and 22 in regard to bribery and embezzlement in the private sector. 8 National Crime Agency Annual Plan 2020–2021, at p 19. 9 See, for example, Finers v Miro [1991] 1 WLR 35. See generally, Banking on Corruption, The Legal Responsibilities of those who Handle the Proceeds of Corruption (Sir Richard Scott and Lord Steel of Aikwood, 2000), Society of Advanced Legal Studies. 10 See, for example, Bank of Scotland v A Ltd [2001] EWCA Civ 52. 11 See C v S [1999] 2 All ER 343, Amalgamated Metal Trading Ltd v City of London Police Financial Investigation Unit [2003] EWHC 703 (Comm) and Hosni Tayeb v HSBC and Al Farsan International [2004] EWHC 1529 (Comm).

223

7.4  Anti-money laundering and proceeds of crime reporting a bona fide suspicion to the proper authorities, is unlikely, although in certain cases not entirely unthinkable, there are real and unresolved issues in the law of defamation. Therefore, in seeking to comply and ensure proper compliance, with these laws and the various rules they have spawned, care needs to be taken in regard to the general law as well. It is often the case that compliance systems and advice focus almost exclusively on the criminal and administrative laws and ignore the legal environment within which the relevant transactions or conduct occur. This is particularly important in the context of corporate life given the many relationships that, for example, a director will find himself in, both to his company and others. This is not a simple or straightforward area of law.

MONEY LAUNDERING IN CONTEXT 7.5 Given the significance, for various reasons, that has been attached to attacking the proceeds of crime and now the wider concept of ‘criminal property’ as a means of disrupting criminal enterprises, all legal systems have complex laws facilitating the identification, pursuit, seizure and then either confiscation or forfeiture12 of the property in question. This is not the place to enter into a discussion of these provisions. Suffice it to say, that in the vast majority of cases, by the time that these statutory powers are properly invoked by the appropriate authorities, the situation in terms of the probable legality of the relevant transactions or conduct, will be sufficiently obvious. A director or officer acting in good faith in the proper performance of his duties would not normally be at risk. Having said this, the expansion of these powers, which are often very far reaching, to cases where no crime has actually been proven and their re-casting into the civil law,13 has increased the potential for uncertainty. The relevant provisions whether in the criminal or the civil law do not, however, present a major problem for those who act and continue to act within the scope of, for example, the traditional duties of directors. Of rather greater impact, in practice, is the use of the civil law in essentially a restitutory role.14 The perimeters of liability for receipt of property that is subject to a fiduciary obligation, and providing assistance in the handling and concealment of such property, are far more uncertain and potentially dangerous.15 This important and dynamic area of the law, has in recent years had a significant impact on the law relating to directors duties and in particular the recovery of the proceeds of fraud and breaches of fiduciary duties.16 It is not without interest that the United Nations’ Convention Against Corruption places significant emphasis on the ability of litigants, public and private, to pursue the proceeds of corruption and fraud and impose liability to make restoration on those who facilitate, with 12 13

14 15 16

See generally T Millington and M Sutherland Williams, The Proceeds of Crime, Law and Practice of Restraint, Confiscation, Condemnation and Forfeiture (5th edn) (Oxford University Press 2018). See generally, the POCA 2002 and in particular Part 5. Note in particular the ability to recover unlawful property, by civil process, irrespective of criminal guilt. See also the civil forfeiture case of Gogitidze v Georgia [2015] ECHR 475, in which the Chamber found that reversing the burden of proof after the unexplained wealth had been identified accorded with internationally accepted standards and was A1P1 proportionate. See for example Attorney General of Hong Kong v Reid [1994] 1 AC 324. Reference should be made to, for example, G Virgo, The Principles of the Law of Restitution (2nd edn) (Oxford University Press 2006), at Ch 20. See 2.23 and 6.143 and 9.15 above.

224

Anti-money laundering and proceeds of crime   7.6 the requisite degree of culpability, the laundering of such property. It is this area of the law that has created issues for banks and other financial institutions in attempting to comply with the criminal law and in particular the offence of ‘tipping off’.17 It must also be born in mind that invariably cases that do arise, involve a number of different jurisdictions with differing legal standards. The vitality of civil law in ensuring integrity on the part of those who are stewards of other peoples’ wealth is increasingly being recognised around the world and private actions in pursuit of fraudsters and in particular corrupt officials and those complicit in such crimes are likely to increase significantly. 7.6 Before we examine the specific offences relating to the laundering of criminal wealth, it is also important to flag the importance of other areas of the criminal law. It has been held that conspiring to evade a civil duty of disclosure, such as might arise under statute or, for example, the fiduciary obligations of director to his company, can amount to a conspiracy to defraud in the criminal law.18 Indeed, dishonesty may well be established, simply by the desire of those involved to act in secret.19 After all, secrecy is the badge of fraud! Charges for handling stolen property may also be appropriate.20 It is important to remember that this offence is not confined merely to the property that is stolen in the narrow legal sense. Money or other property that results from fraud or even blackmail may well be handled in the criminal sense. Many money laundering operations will involve fraudulent conduct. Indeed, in some cases those involved in laundering might well be susceptible to a substantive change of theft. There is also the prospect of offences under the insolvency law, in appropriate cases, and invariably implications under the relevant tax laws. Indeed, the significance of the role of Her Majesty’s Revenue and Customs (HMRC)21 in pursuing the proceeds of crime and in particular the disruption of criminal enterprises has been clear in a number of major cases. Finally in this context, the level of international co-operation,22 at all levels, in this area is second to none. The law enforcement authorities, regulators and courts have been zealous in providing assistance to the authorities of other jurisdictions in the tracking of funds and their interdiction. Even post-Brexit, the EU and the UK sought to maintain powers that are very close to mutual recognition23 17 18 19

See below at 7.26. See, for example, R v Adams [1995] 1 WLR 52. Norris v Government of the United States [2007] EWHC 71 (Admin), 25 January 2007, QBD. 20 See section 22 of the Theft Act 1968. 21 It is important to remember that HMRC, under a number of statutory provisions, have considerable powers to identify, interdict and charge funds and property that is or may be subject to taxation in one form or another. The proceeds of crime are, of course, taxable income in the hands of the criminal or anyone in control thereof. Note that the Revenue and Customs Prosecutions Office merged with the Crown Prosecution Service in 2010 and the position of Director of Revenue and Customs Prosecutions has since been abolished by virtue of the Public Bodies (Merger of the Director of Public Prosecutions and the Director of Revenue and Customs Prosecutions) Order 2014. 22 See generally, T Millington and M Sutherland Williams, above, Ch 19. 23 With many similarities to the intra EU’s mutual recognition scheme in terms of the limited grounds for refusal and where substantive reasons for the requested measures must not be challenged in the requested state (see Article 689 of the Trade and Cooperation Agreement (TACA) between the EU and the European Atomic Energy Community, of the one part, and the UK of the other part, as published in revised form on 30 April 2021), albeit TACA is not quite mutual recognition as: (a) there is no freezing order required this time of the requesting state to send so there is no recognition of an order just limited grounds to refuse, (b) it is the domestic law through which TACA now must operate via the Proceeds of Crime Act 2002 (External Requests and Orders) Order 2005, SI 2005/3181, and (c) the grounds for refusal, whilst similar are now a little wider.

225

7.6  Anti-money laundering and proceeds of crime when it came to requests between the parties for freezing and confiscation. The parties could have reverted to standard national legislation to deal with each other’s freezing and confiscation request, but still chose (despite their Brexit differences) to have an enhanced form of freezing and confiscation assistance when it came to the proceeds of crime. 7.7 The law relating to money laundering suffers from having been developed on an ad hoc basis without a great deal of regard to the different characteristics of the laundering process in relation to the nature of the underlying criminal or subversive activity. The process of laundering will be rather different in the case of a continuing criminal enterprise, than in, for example, an isolated case of fraud, insider dealing or corruption. The law relating to money laundering has also been adopted and applied, more or less without modification, to those who provide financial support for terrorist activity. The processes involved in channelling such funds to terrorist organisations are different in character from most cases involving profitable crime. While there is disappointment in most jurisdictions that the amounts of money and other property seized, let alone actually confiscated or forfeited, are relatively small compared with the guesstimates as to the amount of wealth that could be subject to such procedures,24 the offences relating to money laundering have proved rather useful. The regime of reporting, recording and monitoring suspicious funds, has generated useful intelligence and has served to place a hurdle in front of those who seek to conceal their ill-gotten gains. The use of the regime has been increasing.25 It has created additional risk and cost for criminals, particularly organised crime. It has also fostered a greater degree of awareness of the dangers of serious crime, and co-operation among those who, in the ordinary and legitimate course of their business or profession mind or assist in the minding of other peoples’ wealth. To some extent it has placed such persons in the forefront of the ‘financial war’ against organised crime and even terrorism. Whether the use to which intelligence has been deployed justifies the considerable costs and risks, legal and otherwise, to those in the financial community, remains to be seen. The effect of the law and the various systems of compliance that have been developed, is to facilitate the reconstruction of financial transactions by providing a ‘paper trail’ and assist in the financial profiling of suspects. Of course, the laws also have the effect of essentially criminalising those who facilitate profitable and enterprise crime, thereby placing yet another risk and financial hurdle in the path of organised crime. Prosecutions simply for breach of the substantive

24

25

See, for example, the opening comments of Margaret Hodge to the Committee of Public Accounts on 15 January 2014, in which she stated ‘if we are really getting only 26p or 35p in every £100 that criminals are benefiting from in their activity, it is pathetic. It is ludicrously small. The other fact – maybe this is where I should start – is that you are spending between you, in the NAO assessment, about £100 million, and in 2012–13 you only got back £130 million. That is dismal. What do you feel about that as a cost-benefit?’ at Public Accounts Committee, available at http://www.publications.parliament.uk/pa/cm201314/ cmselect/cmpubacc/942/150114.htm. The situation has not improved, see the confiscation section of this chapter below for the most recent statistic as to the amount still outstanding at confiscation. In 2019–20 there were 573,085 suspicious activity reports (SARs) raised, an increase since the last edition of this book from more than 350,000 SARs raised in 2013–14. 62,408 requests for a defence (formerly consent SARs) were made compared to more than 14,000 seeking consent to proceed at the time of the last edition of this work. In the period April 2019 to March 2020, 80.78 per cent of SARs were raised by banks and building societies, and the remainder from a range of regulated organisations.

226

Anti-money laundering and proceeds of crime   7.9 offences of money laundering are not common. In most jurisdictions a charge of money laundering is added to other substantive charges. However, it is noticeable that in the USA prosecutors appear to prefer charges for money laundering than basing prosecutions on the so-called predicate offence in many cases of securities and corporate related fraud and abuse. Having said this, however, it is important to recognise that in the USA laws relating to integrity, whether in the corporate or market context, tend to be enforced through civil enforcement proceedings rather than the traditional criminal law. As has already been emphasised, in this area of law, the environment and in particular the institutional aspects of law enforcement, in particular jurisdictions, play a very significant role in the way matters are brought before the courts and are disposed of.

PROCEEDS OF CRIME 7.8 Money laundering is defined in the Explanatory Notes to the Proceeds of Crime Act 2002 (POCA 2002) as ‘the process by which the proceeds of crime are converted into assets which appear to have a legitimate origin, so that they can be retained permanently or recycled into further criminal enterprises’.26 The law in the UK relating to money laundering developed after the creation of statutory powers to seize the proceeds of particularly profitable crimes. Indeed, there is a view that the failure to criminalise the laundering of the proceeds of crime at the time such statutory powers were given to the courts, may have constituted another incentive for criminals to develop money laundering in Britain. In common with most legal systems, the early law focused exclusively on the proceeds of illicit drug related crime. The difficulty in law and practice of establishing that particular property was related to specific drug offences rendered these provisions of relatively little value. Consequently, the offences were extended to the proceeds of all serious crime and even such crimes committed overseas.27 7.9 There are a number of international instruments relating to the criminalisation and control of money laundering, including no less than six EU Directives specifically on the subject, five of which have been transposed into UK law.28 Although the UK has opted out of the sixth Directive, this is primarily as a result of its requirements being largely covered already by UK law. One notable exception relates to a proposed new corporate liability offence, which is the subject of Law Commission consideration.29

26 27

28

29

A statement that was approved by the Supreme Court as the ordinary meaning of the expression, in R v GH [2015] 1 WLR 2126. See generally on the initial development of the law, T Graham, E Bell and N Elliott, Money Laundering (Butterworths 2003); K Hinterseer, Criminal Finance, (Kluwer 2002); S Savla, Money Laundering and Financial Intermediaries (Kluwer 2001); P Alldridge, Money Laundering Law (Hart 2003) and S Bazley and C Foster, Money Laundering – Business Compliance (LexisNexis 2004). The fourth directive was agreed in 2015 and must be implemented by 26 June 2017: Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC, published at OJ L 141/73. Law Commission, ‘Corporate Criminal Liability’, available at https://www.lawcom.gov.uk/ project/corporate-criminal-liability/.

227

7.9  Anti-money laundering and proceeds of crime Generally speaking, however, the English law has run ahead of the various international obligations and therefore, in this brief discussion we will not refer to the various and many international documents.30 The importance of the international community in developing this area of the law, should not, however, be underestimated. For example, almost a third of the provisions in the United Nations Convention Against Corruption relate directly or indirectly to the identification, interdiction, recovery and laundering of wealth related to corruption. In addition, States that are party to the Financial Action Task Force are required to implement the FATF Recommendations and these are often adopted by other regional bodies.31 It is also important to appreciate the strength of the political imperative, largely set by the US Government, but taken up by many others, to foster ‘stability’ through integrity of the financial system. Of course, cynics may argue that all this has rather more to do with fostering and strengthening western banking and facilitating the recovery of tax, than promoting integrity and frustrating organised crime. 7.10 The principal legislation relating to money laundering is now the POCA 2002. However, there are also important provisions in the Terrorism Act 2000, the Anti-terrorism, Crime and Security Act 2001 and the Terrorism (United Nations) Order 2001. The POCA 2002 has also been amended on many occasions; most recently (of a substantive nature) in the Serious Crime Act 2015 and the Criminal Finances Act 2017. As the relevant statutory provisions have been brought into effect in stages, by Order, care needs to be taken in ascertaining, at any point in time, exactly what provisions are pertinent. The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs)32 have replaced the Money Laundering Regulations 200733 and are of particular significance. Our analysis and discussion here needs to be general and cannot descend to the considerable detail that is required for proper compliance with the many and varied obligations. Of course, given the significance of authoritative guidance from such bodies as the FCA, British Bankers Association and the Law Society, which have an impact on the determination of liability, businesses engaged, in particular, in regulated activities and especially in the financial sector, will need to have specific regard to industry standards and advice. Having said this, here we will focus rather more on the substantive law. 7.11 Part 7 of the POCA 2002 establishes three basic crimes. These offences are ‘parasitic’, because they are predicated on the commission of another offence yielding proceeds, which then become the subject of a money laundering offence.34 Section  327 makes it a criminal offence to conceal, disguise, convert or transfer criminal property, or remove it from the jurisdiction. Section  327, renders it criminal to make an arrangement to

P Schott, Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism (2nd edn) (World Bank/IMF 2006). Reference should also be made to the relevant websites of the Financial Action Task Force, United Nations, European Union, World Bank and International Monetary Fund. 31 For an examination of money laundering from an international perspective, see Bryant ‘Money Laundering Offences’ in B Rider (ed) Research Handbook on International Financial Crime (Edward Elgar 2015). 32 SI 2017/692. These regulations implement the 4th Money Laundering Directive and have since been amended by the Money Laundering and Terrorist Financing (Amendment) Regulations 2019, SI 2019/1511 to enforce the 5th Money Laundering Directive. 33 SI 2007/2157. 34 See JSC BTA Bank v Ablyazov [2010] 1 WLR 976 (CA). 30

228

Anti-money laundering and proceeds of crime   7.13 facilitate the acquisition, retention, use or control of criminal property, by, or on behalf of, another person. Section 329 makes it an offence to acquire, use or have possession of criminal property. 7.12 In regard to all three basic offences, a person does not commit a crime if an authorised disclosure is made to the relevant authority and when appropriate, the necessary consent to continue the relevant transaction is given, pursuant to section 338. By the same token, there is no offence if the person concerned intended to make such a disclosure, but had a reasonable excuse for not doing so. Nor does a person commit a section 327–329 offence if he knows, or believes on reasonable grounds, that the relevant criminal conduct35 occurred in a particular country or territory outside the UK, and the relevant criminal conduct was not, at the time it occurred, unlawful under the criminal law then applying in that country or territory, and is not of a description prescribed by an order made by the Secretary of State.36 In regard to all the substantive offences, it is also a defence to establish that what has been done is in fact merely carrying out a function that the accused has in relation to enforcing any provision in the Act or other statute relating to the benefits of criminal activity. Given the panoply of provisions allowing the interdiction of property that is suspected or proven to be the proceeds of criminal conduct, the burden placed on officials and others charged with preserving and managing it, before final determination by the courts, is considerable and would present certain risks of prosecution under the anti- money laundering laws, but for such a defence. By section 329, in the case of the offence under section 329, namely acquisition or use of property, no offence will be committed if this has been done for ‘adequate consideration’. The substantive offences are supported by a number of provisions which oblige certain persons to ensure that they know for whom they act and the character of their business and transactions. As we have already seen, other provisions require disclosure of suspicions to the authorities and outlaw ‘tipping off’. 7.13 While we are concerned essentially with the proceeds of crime, the legislation is concerned to impose criminal responsibility on any person who benefits from property derived from criminal conduct or uses or comes into possession of such. It is important to note that this responsibility applies whenever or wherever the crime ‘creating’ the property is committed and it is irrelevant whether the ‘launderer’ is aware of who was involved in that original criminal activity. The Act defines property extremely widely as it does the concepts of obtaining, possession and use. Any involvement in the use, possession or realisation of the property or any interest in such will be caught. Under section  340(3) of the Act, property is ‘criminal property’ if (a) it constitutes a benefit from criminal conduct, whether directly or indirectly, in whole or in part37 and (b) the alleged offender knows or suspects that it

35

The ‘relevant criminal conduct’ is the criminal conduct by reference to which the property concerned is criminal property, see ss 327(2B), 328(4) and 329(2B), added by the Serious Organised Crime and Police Act 2005. 36 See ss 327(2A), 328(3) and 329(2A), added by the Serious Organised Crime and Police Act 2005. 37 In R v Smallman [2010] EWCA Crim 548, it was held that the breadth of the definition of (a) must be given its full weight. In this case, gambling winnings were mixed with criminal property at the time of the transfers made to the defendant. Kay LJ found that ‘notwithstanding that the transfers were made as and when he won at gambling, it was open to the jury to conclude that the money transferred represented, in part at least, MS’s benefit from criminal conduct’.

229

7.13  Anti-money laundering and proceeds of crime constitutes or represents such a benefit. The definition of ‘criminal property’ has a broad meaning.38 Where the allegation is a conspiracy or an attempt, then knowledge or belief is required and suspicion is not sufficient.39 By section 340(5), a person benefits from conduct if he obtains property as a result of or in connection with the conduct. The requirement to prove benefit in a section 327 conversion case, only applies to the proof of criminal property, not to the conversion.40 If a person obtains a pecuniary advantage as a result of or in connection with conduct, then by section 340(6) he is to be taken to obtain as a result of or in connection with the conduct a sum of money equal to the value of the pecuniary advantage. A pecuniary advantage is obtained when cheating the revenue, but profits from trading in legitimate goods without declaring the profits do not however become criminal property simply by reason of the failure to declare profits.41 In a tax evasion case where turnover was falsely represented the criminal property was the entirety of the undeclared turnover and not merely the tax due.42 7.14 Regarding knowledge or suspicion, it relates to the legitimacy of the property in issue, not those creating it.43 Of course, knowledge that those individuals are engaged in crime would be sufficient, but such is not necessary. The law focuses on the status in law of the property and rights in it. The concept of criminal conduct is set out in section 340(2) of the Act. It is broad in every respect. It includes offences in the UK, or conduct overseas, whether criminal there or not, which had it occurred in the UK would constitute such an offence. Under section 340(4) of the Act, it is immaterial who carried out the conduct, who benefited from it or whether the conduct occurred before or after the passing of the Act. 7.15 The substantive offence of concealment is contained in section 327 of the Act, as we have seen. This section sets out five types of concealment which are potentially criminal; namely concealment, conversion, transfer, removal and disguising the property in question. Receiving criminal property from another into a bank account that the defendant controls, with the appropriate mens rea, does constitute the conversion of that criminal property

38 R v Ogden and others [2016] EWCA Crim 6 at para 50. 39 See R v Saik [2007] 1 AC 18 (HL) for conspiracies and R v Pace and Rogers [2014] 1 WLR 2867 (CA) for attempts. The reason for this is that the act of conspiracy or attempt requires a higher mens rea than suspicion. Mistakes on the Saik point are still being made by the Crown Court, see eg R v Thomas [2014] EWCA Crim 1958 or R v Tree [2008] EWCA Crim 261. Where a defendant can, however, be shown deliberately to have turned a blind eye to the provenance of goods and deliberately to have failed to ask obvious questions, then that can be capable, depending on the circumstances, of providing evidence going to prove knowledge or belief, see Pace and Rogers. 40 R v Ogden and others [2016] EWCA Crim 6 at para 51. 41 See R v IK [2007] 1 WLR 2262 (CA) and R v Yip [2010] EWCA Crim 1381. R v Gabriel [2007] 1 WLR 2722 (CA) was distinguished by R v IK upon this basis. 42 See R v William and Others [2013] EWCA Crim 1262. 43 Suspicion goes further than the UK’s international obligations. This is noted by Lord Toulson in R v GH [2015] 1 WLR 2126 (SC), ‘As the Court of Appeal explained in Bowman v Fels (Bar Council intervening) [2005] EWCA Civ 226, [2005] 1 WLR 3083, POCA gave effect to Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering (as amended by Council Directive 2001/97/EC), but the Directive set minimum requirements and in some respects POCA was more stringent. For example, money laundering as defined in POCA includes dealing with property known “or suspected” to constitute or represent a benefit from criminal conduct; by contrast, the definition in the Directive required knowledge. The current version of the Directive is 2005/60/EC. This repealed and replaced 91/308/EEC.’

230

Anti-money laundering and proceeds of crime   7.15 even if the defendant did not himself make the deposit.44 Conversion bears its plain, ordinary meaning.45 Where a huge number of small transactions are made there is no requirement to specify each and every transaction in separate counts.46 Concealing and disguising the property’s nature, source, location, disposition, movement, ownership or any right in regard to it, are potentially an offence. For liability all that need be proved is that such took place in regard to criminal property and the person concerned knew or suspected that it constituted the benefit of criminal conduct. The property must be criminal property at the time of the transfer etc.47 This can be shown either directly or by an irresistible inference that the property can only be derived from crime; ie the prosecution do not need to establish precisely what crime or crimes had generated the property in question.48 In civil recovery or cash forfeiture proceedings, an irresistible inference is not enough to show that property is recoverable property and the claimant must show that the property seized was obtained through conduct of one of a number of kinds each of which would have been unlawful conduct.49 Where, however, the case in cash forfeiture is predicated upon the property being ‘intended by any person for use in unlawful conduct’, then an irresistible inference would suffice.50 Of course, it should be noted that this offence will invariably be

44 See R v Fazal [2010] 1 WLR 694 (CA) and The Queen v HO Ling MO [2013] NICA 49. In Fazal, Lord Justice Rix held that ‘The reference to converting criminal property in this statute is not necessarily a reference to the civil tort of conversion, but it cannot be far removed from its nature and, of course, conversion in the civil law is a broad tort which is essentially concerned with the taking or receiving or retaining or parting with someone else’s property. When that is wrongfully done, it is a strict offence and requires no mens rea at all in the civil law, but only requires a dealing with someone else’s property so as to question, deny or interfere with the owner’s title to it. So it is seems to us that not only when these monies were lodged but also when they were credited to the appellant’s account, when they were retained in it, and when they were withdrawn from it, all of which occurred with the full co-operation, knowledge, approval and authority of the appellant, there were successive acts of converting criminal property’. These cases can be contrasted with R v Loizou [2005] 2 Cr App R 37 (CA) in which it was held that ‘Section 327(1) does not create an offence of receiving criminal property’, though this comment was made in the context of a case involving receipt of cash and the nature of the receipt is therefore different. R v Loizou should be treated with caution, see R v Ogden and others [2016] EWCA Crim 6 at para 54. 45 R v Ogden and others [2016] EWCA Crim 6 at para 53. 46 See R v Middleton [2008] EWCA Crim 233. 47 The transfer of monies not obtained through crime to a criminal will not be sufficient even where that property becomes criminal property by virtue of the transaction, see R v Loizou [2005] 2 Cr App R 618 (CA), although as noted above the case of Loizou should be treated with caution, see R v Ogden and others [2016] EWCA Crim 6 at para 54. 48 See R v Anwoir [2009] 1 WLR 980 (CA); Ahmad v Her Majesty’s Advocate [2009] HCJAC 60 and R v Craig [2007] EWCA Crim 2913. It is of note that the Court of Appeal has treated R v Anwoir as having settled this issue and despite previous conflicting case law, the Court of Appeal has refused to consider whether Anwoir was wrongly decided, see R v MK and AS [2009] EWCA Crim 952. 49 For civil recovery, see Director of Assets Recovery Agency v Green [2005] EWHC 3168 (Admin); Director of Assets Recovery Agency v Szepietowski [2007] EWCA Civ 766. For cash forfeiture, see Angus v UK Border Agency [2011] EWHC 461 (Admin); R (on the application of Bavi) v Snaresbrook Crown Court [2013] EWHC 4015 (Admin); and Wiese v The UK Border Agency [2012] EWHC 2019 (Admin). A cash forfeiture case making a separate point is Fletcher v Chief Constable of Leicestershire [2013] EWHC 3357 (Admin), where the innocent finder of section 327 concealed cash was held not to be entitled to keep the cash, which was subsequently forfeited as recoverable property. 50 Sandhu v Chief Constable of the West Midlands Police [2019] EWHC 3316 (Admin). The court noted at para 30 ‘that this interpretation produces what may at first glance seem an odd result, in that it appears to relieve the relevant authority of a burden which it would carry if it

231

7.15  Anti-money laundering and proceeds of crime committed by the perpetrator of the crime that gives rise to the criminal benefit. Prosecution guidance from the Crown Prosecution Service states that where there is any significant attempt to transfer or conceal ill-gotten gains money laundering should normally be considered as an additional charge, in part because the purpose of the concealment will be to defeat or avoid prosecution and confiscation.51 The case of Ogden and others was described as a ‘paradigm example of when it is appropriate for the Crown to charge the generic rather than the specific offence … The police found substantial documentary evidence that Neil Ogden was heavily involved in supplying drugs on a wholesale basis to the co-defendants; however, the Crown faced the difficulty of proving the type and quantity of drugs involved. Accordingly, it was appropriate for the Crown to charge the generic of conspiracy to convert criminal property rather than specific drugs supply offences and there was no abuse in this case’.52 When dealing with sentencing a section 327 offence, as opposed to assessing benefit in confiscation proceedings, the court will take into account the scale of the offence that the defendants conspired to commit. The Court of Appeal found in Fulton53 that ‘In money laundering it is the whole amount involved, not merely that part which comprises criminal property, which impacts on the system’ and upheld sentencing on the basis of £30m passing through the accounts as the relevant amount for applying the guideline sentence, not the £6.1m tax loss as asserted by the appellant. The Court of Appeal noted

brought its application under subparagraph (a). However, like Lewis J in Fletcher, we regard that as the inescapable result of the statutory provisions and consistent with the intention of Parliament. It seems to us that the second of the two approaches permitted by Anwoir sets a high bar for a prosecuting authority, particularly where cash is seized which cannot be ascribed to a particular kind of criminal activity’. 51 http://www.cps.gov.uk/legal/p_to_r/proceeds_of_crime_money_laundering/#Charging_ practice_plea. A similar point was made in R v GH [2015] 1 WLR 2126 (SC) in which it was said that it would be bad practice for the prosecution to add additional counts of that kind unless there is a proper public purpose in doing so. The Court of Appeal has discouraged the charging of a defendant with money laundering rather than handling stolen goods in R (Wilkinson) v Director of Public Prosecutions [2006] EWHC 3012 (Admin) and R v Rose [2008] 1 WLR 2113 and the Supreme Court in R v GH [2015] 1 WLR 2126 stated that ‘courts should be willing to use their powers to discourage inappropriate use of the provisions of POCA to prosecute conduct which is sufficiently covered by substantive offences’. It would also be an abuse to prosecute money laundering when strikingly in conflict with a defendant’s previously accepted basis of plea in relation to a predicate offence, see Crown Prosecution Service v Mattu [2009] EWCA Crim 1483. Any finding in relation to a defendant’s benefit, however, does not prevent a subsequent court from finding against a different defendant that they laundered a greater sum of money from that offence, see R v Y and ZSB [2013] 1 WLR 2014 (CA). More recently, the Court of Appeal found that ‘we reject Mr Reiz’s submission that the Crown’s construction “cannot be correct” because otherwise every person found in possession of minor quantities of illicit drugs even for their personal use is at risk of being charged with, and found guilty of, money-laundering. HHJ Mooncey rightly dismissed this view as “alarmist”. In our judgement, he was right to do so. Whilst, as Mr Blackburn acknowledged, technically every person who buys illicit drugs even for their own personal use may also be guilty of an offence under s.327, the spectre of the authorities habitually charging the latter generic offence rather than the specific offence of possession is unreal. There would be no forensic advantage in doing so and some considerable disadvantages. We have no doubt that good sense will prevail and that prosecutors will only resort to charging the generic offence in appropriate circumstances in accordance with good prosecuting practice’, see R v Ogden and others [2016] EWCA Crim 6 at para 56. 52 R v Ogden and others [2016] EWCA Crim 6 at para 57. 53 R v Fulton and Wood [2017] EWCA Crim 308.

232

Anti-money laundering and proceeds of crime   7.17 ‘It is inherent in the concept of money laundering by transfer, disguise or conversion that criminal property will often be moved into a financial system and mixed with other money within it. That is what allows it ultimately to be absorbed into the economy and enjoyed by criminals without it being capable of being traced to the original crime. Money laundering often involves a complex web of transactions. The money laundering operation is designed by criminals to provide a benefit which is a different benefit from, and an additional benefit to, that which is gained from the underlying crime. The additional benefit lies in the money laundering operation itself because the criminal hopes thereby to be able to enjoy the fruits of the underlying crime without detection. The separate offence of money laundering is thus widely drawn in section  327 covering activity which extends to something which “represents” and only in part and only indirectly, the criminal property obtained from the underlying crime’. 7.16 Under section  327(2C), a deposit taking body, electronic money institution or payment institution,54,55 that converts or transfers criminal property will not commit an offence, provided it does the act, in the context of operating an account that it maintains, and the value of the criminal property does not exceed the relevant threshold amount. Similar provisions exist for section  328 and 329 offences. At present this threshold is only £250, see section 339A. 7.17 Section 328 is concerned with assisting another to retain the benefit of his or another person’s criminal conduct. So far as this section  affects financial institutions, the purpose of this section is not to turn innocent third parties into criminals but to put them under pressure to provide information to the relevant authorities to enable the latter to obtain information about possible criminal activity and to increase their prospects of being able to freeze the proceeds of crime.56 The actus reus of the offence is entering into or being concerned in an arrangement which in fact facilitates the acquisition, retention, use or control of criminal property. The property must therefore be criminal property and mere suspicion that it might be will not be enough for a section 328 arrangement offence. The criminal property does not, however, need to exist or be criminal at the time the arrangement is made. What matters is that the property should be criminal at a time when the arrangement operates on it.57 It is not enough that the arrangement will facilitate the acquisition

54 55

As defined in section 340(14) of the Act, as amended by the Financial Services Act 2021. The latter two being inserted by the Financial Services Act 2021, s 32(2) (as of 29 June 2021). 56 Squirrell Ltd v National Westminster Bank plc [2006] 1 WLR 637 (Ch). 57 See R v GH [2015] 1 WLR 2126 (SC), where the appellant H opened an account for B; victims paid monies into the appellant’s account and the Supreme Court found that H had agreed to retain property which became criminal upon entering the account. R v GH was followed in R v Haque [2020] 1 WLR 2239, in which victims were instructed to handover or transfer monies. The Court of appeal found that the transfers themselves could not suffice in itself to make the property criminal property before the transfer. See also R v Amir and Akhtar [2011] 1 Cr App R 464 (CA) and R v Montila [2004] 1 WLR 3141 (HL). The Supreme Court’s position in R v GH conflicts with the High Court’s comments in Squirrell Ltd v National Westminster Bank plc [2006] 1 WLR 637 in which Laddie J stated in relation to a bank account that ‘Even if it does not contain funds which are, in fact, criminal property and no offence has been committed, section 328(1) bites if NatWest has a relevant suspicion’. See also K Ltd v National Westminster Bank plc [2007] 1 WLR 311. Squirrel Ltd was not a case cited in the judgment of GH and Montila was not cited in Squirrel Ltd.

233

7.17  Anti-money laundering and proceeds of crime of criminal property by another.58 The mens rea required is knowledge or suspicion. Merely suspecting that one might be entering into an arrangement to acquire etc criminal property is insufficient for the offence to be committed.59 7.18 It is the section 328 offence that is most likely to be of concern to those involved in business and advising those in business. However, section  328 is not intended to cover or affect the ordinary conduct of litigation by legal professionals or to override legal or litigation privilege.60 A bank employee or professional adviser, however, who suspects that the property they are dealing with has resulted from criminal activity would be at risk. Of course, as we have already seen, such a person would also, in many instances, be under certain duties in the civil law. The assistance that is provided may be for personal reward or not. The crime is committed whether the benefiting from the criminal property is by the person who committed the original criminal activity, or others. No offence is committed if the accused makes an authorised disclosure of his knowledge or belief to the authorities and receives permission to proceed, or where he does not disclose before acting and has a reasonable excuse for not having done so.61 An authorised disclosure is defined in section 338 as disclosure to a constable, a customs officer or nominated officer on the individual’s own initiative as soon as it is reasonable for him to do so. The term constable is defined in section 340(13), as amended, to include any person authorised by the Director General of the NCA. In the case of a person who is employed, and this includes persons whether remunerated or not, then disclosure to a person nominated by his employer, according to certain procedures within the organisation of company, will amount to disclosure to a constable. Of course, that person must then pass the information on. Under section 339 of the Act the Secretary of State is authorised to prescribe the form and manner of the disclosure. It should be noted that by virtue of section 335 of the Act, if after proper disclosure consent is not refused within seven working days, or if a restraint order is not obtained 31 calendar days thereafter, then no offence would be committed under section 328 in continuing the transaction. Of course, this would not absolve the person concerned and in appropriate circumstances his employer and organisation from civil liability. Indeed, in the civil law his head is already on the block, as he has documented the fact that he suspects that the relevant property may well be subject to legal claims by third parties. To proceed, without regard to the obligations that the civil law may on the facts impose, would be rash. This moratorium period of 31 days is now extendable by the court pursuant to sections 336A and s336C of POCA 2002, as introduced in the Criminal The decision in R v GH can be contrasted with the case of R v Geary [2011] 1 WLR 1634 (CA), where property did not become criminal if merely being transferred to conceal them from matrimonial proceedings. The fact that the arrangement involved a conspiracy to pervert the cause of justice did not mean that the money had a criminal quality independent of the arrangement. Similarly, see R v Gillies [2011] EWCA Crim 2140. R v GH should also be contrasted with In Kensington International Ltd v Republic of Congo [2008] 1 WLR 1144 where no section 328 office was committed by the giving of a bribe as the property was not criminal at the time of the arrangement becoming operative. 58 See Dare v Crown Prosecution Service [2012] EWHC 2074 (Admin). 59 See R v Saik [2007] 1 AC 18 (HL). 60 See Bowman v Fels [2005] 1 WLR 3083 (CA). 61 An example of an authorised disclosure being made after the act and of having good reason for not disclosing before the act can be seen in Sarwar v Her Majesty’s Advocate [2011] HCJAC 13.

234

Anti-money laundering and proceeds of crime   7.20 Finances Act 2017. Each extension under section 336A must be for 31 days or less and the total period cannot exceed 186 days beginning with the day after the end of the first 31-day moratorium period. The application must be made by a senior officer and the court must be satisfied that an investigation is being carried out in relation to a relevant disclosure (but has not been completed), the investigation is being conducted diligently and expeditiously, further time is needed for conducting the investigation and it is reasonable in all the circumstances for the moratorium period to be extended. Applications can also be made by an immigration officer in limited circumstances. There is also provision to exclude from any part of the hearing an interested person or anyone representing them. In addition, there is provision for specified information to be withheld from those persons, if there are reasonable grounds to believe that if the specified information were disclosed: (a) (b) (c) (d) (e)

evidence of an offence would be interfered with or harmed; the gathering of information about the possible commission of an offence would be interfered with; a person would be interfered with or physically injured; the recovery of property under this Act would be hindered; or national security would be put at risk.

Section 336C of the Act permits an extension period of up to five days pending determination of proceedings to extend the moratorium period. The definitions of an interested person and other terms under consideration in s336A to s336C POCA are found at s336D of the Act. 7.19 As has already been pointed out, the transmission of ‘suspicion based’ reports to the Financial Intelligence Unit of the NCA is at the very heart of the Government’s initiative to disrupt organised crime and discourage career criminals.62 Unlike the obligation to report all transactions above a certain amount in value, as exists in most jurisdictions, reports based on a reasonable suspicion, particularly those that have already gone through a process evaluation within a financial institution, by experts, are of particular value to the police. They often provide real and valuable intelligence. Of course suspicions, no matter how reasonable and well founded, are not evidence. Action based on such may need to be justified in the end before a court, and it is the ability to convert information into intelligence and then into evidence which presents the biggest challenge to law enforcement, and for that matter regulatory agencies. The emphasis that is now being placed on intervention and disruption of criminal activity may be, in practice, justified by intelligence, but those who are exposed to legal risk and possible claims will need the reassurance of evidence behind their actions. It is also important, in the context of disclosure of suspicious activity, to consider the impact of the general law relating to ‘whistle blowing’ and, of course, data protection. 7.20 The third substantive money laundering offence is provided for in section  329 of the Act. This renders the acquisition, use and possession of the proceeds of criminal activity a specific crime. There is no definition of

62 See Proceeds of Crime: Consultation on Draft Legislation, (2001), Home Office, Cm 5966 and in particular One Step Ahead, A 21st Century Strategy to Defeat Organised Crime, (2004), Home Office. Reference should also be made to FIU’s In Action, (2001), Egmont Group.

235

7.20  Anti-money laundering and proceeds of crime the word acquisition; however, it is right to concentrate on ownership rather than possession.63 However, section  329(2) states that the offence is not committed if the person concerned makes an authorised disclosure as in the case of section 328, or has acquired or used or had possession of the property, albeit criminal property, for adequate consideration. The notion of adequate consideration is explained in section  329(3). A person acquires property for inadequate consideration if the value of the consideration is significantly less than the value of the property; or in the case of use or possession, the value is significantly less than the consideration.64 Consideration has its ordinary meaning in contract law.65 Once the defendant has raised the issue of consideration, the burden is on the Crown to show that there was not adequate consideration.66 It is also provided under section 329(3) that the provision by a person of goods or services which he knows or suspects may help another to carry out criminal conduct is not consideration. Indeed, in the case of the civil law it is probable that such would not be considered good consideration. It is, of course, necessary for the prosecution to establish that the accused knew or suspected that the property in question is criminal property. In practice, the manifest inadequacy of the consideration required, might itself indicate this. However, with all three substantive offences, it must be remembered that the knowledge or suspicion of the accused is subjective. It must be proved beyond a reasonable doubt that the accused did in fact have knowledge of the status of property in question or at least a suspicion. 7.21 The three substantive offences apply to everyone. There are, however, offences which apply only to those in what is termed the regulated sector set out in Schedule 9, as amended, of the Act. The scope of this sector is ever expanding, but the notion justifying the imposition of a greater responsibility on such persons, is that they engage usually for remuneration in a specific activity which gives rise to a reasonable expectation of professionalism. Consequently, it is reasonable to hold such persons to a standard of greater diligence in the provision of their essentially facilitative services and impose an objective standard of culpability upon them. Thus, in regard to certain offences, it will not be necessary for the prosecution to establish that the accused did actually have knowledge or was suspicious, it will be enough for criminal liability that an ordinary and reasonable person in their line of work would have known or, more likely, have been at least suspicious. Of course, it is rare in crimes based on a state of mind, that objective knowledge or belief is sufficient for the imposition of criminal liability. The scope of these provisions is those engaged in ‘relevant financial business’ as set out in Schedule 9 of the Act. 7.22 Section  330 imposes an obligation on those in the regulated sector to report to the authorities their suspicions of laundering activity. Unlike section 328,67 there is no requirement, in fact, for the property in question to be criminal property.68 Where a person fails to make the required disclosure 63 See R v Heera [2010] EWCA Crim 1779. 64 This means that if adequate consideration has been given for the acquisition of property, then no offence is made out under the Act, even if the defendant who has acquired the property knows that it was stolen, see Hogan v DPP [2007] 1 WLR 2944 (CA). 65 See R v Kausar [2009] EWCA Crim 2242 and R v Nawaz [2010] EWCA Crim 819. 66 See Hogan v DPP [2007] 1 WLR 2944 (CA). 67 Following R v GH, above. 68 See Ahmad v Her Majesty’s Advocate [2009] HCJAC 60, at para 30: ‘There is nothing in the language of section  330(2) which states or requires that money laundering is in fact taking place. It is plain that the obligation thereunder can arise if a person suspects or has reasonable cause for suspecting that it is.’

236

Anti-money laundering and proceeds of crime   7.25 as soon as is practicable, when he knows or suspects, or has reason for knowing or suspecting, another person is engaging in money laundering, and this information or other matter came to him in the course of his trade, profession, business or employment within the regulated sector, he commits a crime, provided that the person known or suspected to be engaged in money laundering, or the whereabouts of any of the laundered property, can be identified; or where there is belief or a reasonable expectation thereof that the information or other matter will or may assist in identifying the other person or the whereabouts of any of the laundered property. 7.23 A suspicion that property represents the benefit of criminal conduct committed overseas, including from inchoate offences such as conspiracy, would be caught under this provision. There is some protection, although not much, in that a person who does not in fact know or suspect that laundering is taking place, and has not had the benefit of the training that is required to be given the Regulations, will not be guilty of an offence. 7.24 There are other limited defences. Where there is a reasonable excuse for non-disclosure then no offence is committed. Furthermore, a professional legal adviser or other relevant professional adviser69 will not be guilty for failing to disclose information that comes to him in privileged circumstances, provided such information is not in furtherance of criminal activity. Of course, under the general law, privilege is restricted in that it cannot serve to hide and facilitate crime. However, in this context it should also be noted that in Bowman v Fels,70 the Court of Appeal confirmed that the obligation to report, in that case as a defence under section 328, did not override the common law legal professional privilege in the ordinary course of litigation. In addition, a disclosure to a professional legal adviser for obtaining advice about making a disclosure and not intended to be a disclosure to a nominated officer, is not to be taken as a disclosure.71 An offence is also not committed if the person knows, or believes on reasonable grounds, that the relevant criminal conduct occurred in a particular country or territory outside the UK, and the relevant criminal conduct was not, at the time it occurred, unlawful under the criminal law then applying in that country or territory, and is not of a description prescribed by an order made by the Secretary of State. 7.25 Section 331 of the Act imposes responsibility on nominated officers commonly referred to as Money Laundering Reporting Officers (MLROs) to pass on information that they receive in consequence of a disclosure made under section 330, in circumstances similar to that already described above in relation to section 330.72 They are under an obligation to forward this information, in the prescribed manner, to the authorities as soon as practicable. However, in considering whether an offence has been committed, courts are required to consider whether the officer in question followed guidance issued, with the 69 See section 330(14): ‘A relevant professional adviser is an accountant, auditor or tax adviser who is a member of a professional body which is established for accountants, auditors or tax advisers (as the case may be) and which makes provision for (a) testing the competence of those seeking admission to membership of such a body as a condition for such admission; and (b) imposing and maintaining professional and ethical standards for its members, as well as imposing sanctions for non-compliance with those standards.’ 70 [2005] EWCA Civ 226. See also section 106 of the Serious Organised Crime and Police Act 2005. 71 See section 330(9A). 72 Knowledge or suspicion that another person is engaged in money laundering, with similar provisions about the identification of the other person or property.

237

7.25  Anti-money laundering and proceeds of crime approval of the Treasury, by appropriate designated bodies under Schedule 9 of the Act. Thus, compliance with, for example, the Guidance Notes of the Joint Money Laundering Steering Group of the British Bankers Association, the Law Society or the FCA would be relevant in the determination of guilt. In the case of the non-regulated sector, section 332 imposes similar obligations on other nominated officers to report, as soon as practicable, knowledge or suspicion based on information that they have received, in a similar manner to section 331; however, as we have seen here the test for liability is only subjective rather than section 331 in which either subjective or objective knowledge or suspicion is sufficient for the offence to be made out. For both sections 331 and 332 there are similar territorial defences in as found in section 330 and under both sections no offence is committed if the person has a reasonable excuse for not making the required disclosure. In addition, a nominated officer can only give consent to the doing of a prohibited act if disclosure has been made to a person authorised by the Director General of the NCA and consent has been given, or where notice has not been received in the relevant time period that consent is refused, or where consent has been refused but the moratorium period has expired, see POCA 2002, section 336. 7.26 Reference has already been made to the offence of ‘Tipping off’ contained in section  333A of the Act. This crime involves disclosing any matter already disclosed to a constable, Revenue and Customs officer, nominated officer or an authorised NCA officer that is likely to prejudice any investigation73 that might be conducted following the disclosure, where the information on which the disclosure is based came to the person in the course of a business in the regulated section. It is not just the fact of disclosure but also the information disclosed which is forbidden.74 It is also an offence to disclose that such an investigation is being contemplated or carried out, where the disclosure is likely to prejudice that investigation75 and where the information on which the disclosure is based came to the person in the course of a business in the regulated sector. This second offence applies to everyone, including professional advisers. 7.27 Section 333B provides that a section 333A offence is not committed in respect of disclosures to employees, officers or partners of the same undertaking; or if in respect of a disclosure by a credit institution or financial institution if to a similar institution in the UK or an EEA or in a country or territory imposing equivalent money laundering requirements if both institutions are part of the same Group. Section  333B also ensures that a professional legal or relevant professional adviser commits no section 333A offence if to another similar person, where both persons carry on business in the EEA or in a country or territory imposing equivalent money laundering requirements, and where both persons perform their professional activities within different undertakings that share common ownership, management or control. 7.28 Section  333C provides that a Section  333A offence is also not committed if the disclosure is to a client, former client, a transaction involving

73

Where the person does not know or suspect that the disclosure is likely to have this effect, no offence is committed, see section 333D(3). 74 See Becker v Lloyds TSB Bank plc [2013] EWHC 3000 (Ch). 75 Where the person does not know or suspect that the disclosure is likely to have this effect, no offence is committed, see section 333D(4).

238

Anti-money laundering and proceeds of crime   7.29 them both or the provision of a service involving them both, where the disclosure is for the purpose only of preventing an offence under this Part of the Act, where the institution or adviser to whom the disclosure was made is in the UK or an EEA State or another country or territory imposing equivalent money laundering requirements, and where both parties to the disclosure are subject to equivalent duties of professional confidentiality and protection of personal data. 7.29 Section 333D provides that a section 333A offence is not committed if the disclosure is to the authority that is the supervisory authority for that person by virtue of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, or for the purpose of proceedings in relation to the power of the court to extend the moratorium period, disclosures in good faith within the regulated sector pursuant to section 339ZB,76 for the detection, investigation or prosecution of a criminal offence, an investigation under the Act or the enforcement of any order of a court under the Act, eg a restraint or confiscation order. Where the application is made to extend a moratorium period under section 336A, an offence is not committed if the disclosure is made to a customer or client of the person, where the latter appears to the person making the disclosure to have an interest in the relevant property, and where the disclosure contains only such information as is necessary for the purposes of notifying them that the application under section 336A has been made. Section 333D also provides that a professional legal adviser or a relevant professional adviser does not commit an offence under section 333A if the disclosure is to the adviser’s client, and is made for the purpose of dissuading the client from engaging in conduct amounting to an offence. Section  333E defines what is a business in the regulated sector and what is a supervisory authority, including determining what is a credit

76

These are voluntary disclosures within the regulated sector. Condition 1 for such disclosures is that the person is carrying on a business in the regulated sector as a relevant undertaking, the information on which the disclosure is based came to the person in the course of carrying on that business, and also that the person to whom the information is to be disclosed (or each of them, where the disclosure is to more than one person) is also carrying on a business in the regulated sector as a relevant undertaking (whether or not of the same kind as the person disclosing). Condition 2 is that (a) an NCA authorised officer has requested A to make the disclosure, or (b) the person to whom the information is to be disclosed (or at least one of them, where the disclosure is to more than one person) has requested A to do so. Condition 3 is that, before A makes the disclosure, the required notification has been made to an NCA authorised officer (see section 339ZC(3) to (5)). Condition 4 is that A is satisfied that the disclosure of the information will or may assist in determining any matter in connection with a suspicion that a person is engaged in money laundering. If the conditions are made out, then a person may disclose information the other person for the purposes of making a disclosure request if, and to the extent that, the person has reason to believe that A has in A’s possession information that will or may assist in determining any matter in connection with a suspicion that a person is engaged in money laundering. The content of such disclosure requests and required notifications can be found at section 338ZC of the Act. The effect of such disclosures upon required disclosures under sections 330 or 331 of the Act can be found at section 339ZD of the Act. Certain limitations on the application of s339ZD(2)–(3) can be found at section 339ZE of the Act and some supplementary provisions and interpretation sections can be found at s339ZF–G of the Act). Further powers, namely further information orders, requiring the respondent to produce the information specified or described in the application for the order, or other such information as the court thinks appropriate, can be found at sections 339ZH–K of the Act.

239

7.29  Anti-money laundering and proceeds of crime institution or a financial institution, what are equivalent money laundering requirements, and what is a relevant professional adviser for the purposes of sections 333A–D. 7.30 Under section  342 of the Act, a person commits an offence if he knows or suspects that a money laundering investigation is being or is about to be conducted and he makes a disclosure which is likely to prejudice the investigation. There are defences rather similar to those relating to an offence under section 333A. Of course, where there is a deliberate interference with the administration of justice or destruction, concealment or falsification of evidence, then there would be the prospect of prosecution for offences under the general criminal law.77 7.31 Mention has been made of the possibility of liability resulting from the disclosure of information, pursuant to the statutory obligations in the Act, under the general law. Section 337 provides that a disclosure which satisfies the following three conditions is not to be taken to breach any restriction on the disclosure of information (however imposed). First, the information or other matter disclosed must have come to the discloser in the course of his trade, profession, business or employment. Secondly, the information or other matter must have caused the discloser to know or suspect, or given him reasonable grounds for knowing or suspecting, that another person is engaged in money laundering. Thirdly, the disclosure must be made to a constable, a customs officer or a nominated officer as soon as is practicable after the information or other matter comes to the discloser. A disclosure to a nominated officer is a disclosure which is made to a person nominated by the discloser’s employer to receive disclosures under section 330 or under section 337 and is made in the course of the discloser’s employment. 7.32 Section  338 extends protection to all authorised disclosures made under the provisions of the Act, whether by persons in the regulated sector or not, but with slightly different criteria. For the purposes of section 338, a disclosure is authorised if it is a disclosure to a constable, a customs officer or a nominated officer by the alleged offender that property is criminal property, and one of the following three conditions are satisfied. If authorised, the disclosure is not to be taken to breach any restriction on the disclosure of information (however imposed). If authorised and made in good faith, no civil liability arises in respect of the disclosure on the part of the person by or on whose behalf it is made. The disclosure to a nominated officer is a disclosure which is made to a person nominated by the alleged offender’s employer to receive authorised disclosures, and is made in the course of the alleged offender’s employment. 7.33 The three conditions for the section  338 disclosure are as follows: first, if the disclosure is made before the alleged offender does the prohibited act. Secondly, the disclosure is made while the alleged offender is doing the prohibited act; he began to do the act at a time when, because he did not then know or suspect that the property constituted or represented a person’s benefit

77

The justification would be similar to that in R v Kenny [2013] 3 WLR 59 in which a prosecution for perverting the course of justice was upheld for a serious breach of a restraint order. A perverting charge is appropriate when sensibly applied. This may be where it is appropriate to reflect the gravity or complexity of the wrongdoing in question and where it may be thought (whatever the ultimate outcome) that the maximum sentence for contempt may prove insufficient.

240

Anti-money laundering and proceeds of crime   7.36 from criminal conduct, the act was not a prohibited act; and the disclosure is made on his own initiative and as soon as is practicable after he first knows or suspects that the property constitutes or represents a person’s benefit from criminal conduct. Thirdly, the disclosure is made after the alleged offender does the prohibited act; he has a reasonable excuse for his failure to make the disclosure before he did the act; and the disclosure is made on his own initiative and as soon as it is practicable for him to make it. 7.34 It is important to note that sections 337 and 338 are capable of protecting against liability, based on a breach of any restriction on the disclosure of information, however imposed. Thus, there would be no liability for breach of confidentiality arising, for example, by contract or a fiduciary relationship. However, this protection does not extend to, for instance, liability in the law of defamation. While it would be possible in most cases to assert a defence of qualified privilege, the threat of suit is a significant inhibition. Furthermore, it must not be forgotten that these statutory defences under the Act can only apply to proceedings within jurisdiction. Another matter which affects both section 337 and 338 disclosures is that if made to a constable or an officer of Revenue and Customs, then section  339ZA requires the constable or officer of Revenue and Customs to disclose it in full to a person authorised by the Director General of the NCA as soon as practicable after it has been made. 7.35 As far as penalties are concerned, section  334 provides that, anyone convicted on indictment of an offence under sections 327 to 329, is liable to a prison term of up to 14 years and an unlimited fine. In the case of sections 330 to 332, on conviction on indictment, the maximum penalty is five years imprisonment and an unlimited fine. Of course, in the case of summary convictions the maximum term of imprisonment is six months and a level 5 fine. In the case of an offence under section 333A, the maximum penalty is two years imprisonment and an unlimited fine if convicted on indictment and for a summary conviction the maximum term of imprisonment is three months and a level 5 fine. It is also an offence under section 339(1A) to make a disclosure in a manner other than in the form prescribed by the Secretary of State, absent reasonable excuse. The summary only penalty for a breach of section 339(1A) is a fine not exceeding level 5 on the standard scale. Offences under all these provisions might well be suitable for triggering proceedings for confiscation, for which see later in this chapter. 7.36 Before finishing this section, we refer briefly to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.78 These Regulations are substantial – there are 110 regulations and 7 Schedules to the Regulations, so the examination here is cursory. As the Explanatory Memorandum to the Regulations explain: ‘These Regulations replace the Money Laundering Regulations 2007 and the Transfer of Funds (Information on the Payer) Regulations 2007 with updated provisions that implement in part the Fourth Money Laundering Directive (4MLD or “the Directive”) 2015/849/EU and the Funds Transfer Regulation (FTR) 2015/847/ EU. 4MLD seeks to give effect to the updated Financial Action Task Force (FATF) global standards which promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.’ 78

SI 2017/692.

241

7.37  Anti-money laundering and proceeds of crime 7.37 Regulation 879 sets out that Parts 1 to 6 and 8 to 11 of the Regulations apply, subject to certain exclusions set out in Regulation 15, to credit institutions, financial institutions, auditors, insolvency practitioners, external accountants and tax advisers, independent legal professionals, trust or company service providers, estate agents and letting agents, high value dealers, casinos, art market participants, cryptoasset exchange providers and custodian wallet providers. The definitions of these bodies are set out at regulations 10–14A. Auction platforms acting in the course of business carried on by them in the UK are also caught by some of the regulations, see regulation 8(3). 7.38 It is an offence pursuant to regulation 86(1)80 to contravene a relevant requirement imposed upon a person under the regulations. Regulation 75 states that a relevant requirement has the meaning given in Schedule 6, which is a substantial Schedule defining the requirements and includes: ••

••

••

79 80

a requirement imposed by the funds transfer regulation specified in relation to a payment service provider of a payer, as set out in: —— Sch 6, para 2(a): Article 4 (information accompanying transfers of funds); —— Sch 6, para 2(b): Article 5 (information within the EEA); —— Sch 6, para 2(c): Article 6 (transfer of funds outside the EEA); —— Sch 6, para 2(d): Article 14 (provision of information); —— Sch 6, para 2(e): Article 15 (data protection); —— Sch 6, para 2(f): Article 16 (record retention); a requirement imposed by the funds transfer regulation specified in relation to a payment service provider of a payee, as set out in: —— Sch 6, para 3(a): Article 7 (detection of missing information on the payer or the payee); —— Sch 6, para 3(b): Article 8 (transfers of funds with missing or incomplete information on the payer or the payee); —— Sch 6, para 3(c): Article 9 (assessment and reporting); —— Sch 6, para 3(d): Article 14 (provision of information); —— Sch 6, para 3(e): Article 15 (data protection); —— Sch 6, para 3(f): Article 16 (record retention); a requirement imposed by the funds transfer regulation specified in relation to a payment service provider of an intermediary, as set out in: —— Sch 6, para 4(a): Article 10 (retention of information on the payer and the payee with the transfer); —— Sch 6, para 4(b): Article 11 (detection of missing information on the payer or the payee); —— Sch 6, para 4(c) Article 12 (transfer of funds with missing information on the payer or the payee); —— Sch 6, para 4(d): Article 13 (assessment and reporting); —— Sch 6, para 4(e): Article 14 (provision of information); —— Sch 6, para 4(f): Article 15 (data protection); —— Sch 6, para 4(g): Article 16 (record retention);

As amended by the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (SI 2019/1511). In addition, there is a further offence at regulation 45(1A) relating to auction platforms.

242

Anti-money laundering and proceeds of crime   7.38 ••

the following requirements imposed in or under the Regulations (otherwise than on supervisory authorities, registering authorities or auction platforms), as set out in: —— Sch 6, para 5(a)(i): regulation 18 (risk assessment by relevant­ persons); —— Sch 6, para 5(a)(ii): regulation 19 (policies, controls and procedures); —— Sch 6, para 5(a)(iii): regulation 20 (policies, controls and procedures: group level); —— Sch 6, para 5(a)(iv): regulation 21 (internal controls); —— Sch 6, para 5(a)(vi): regulation 23 (requirement on authorised person to inform the FCA); —— Sch 6, para 5(a)(vii): regulation 24 (training); —— Sch 6, para 5(b): those imposed by supervisory authorities under regulation 25 (supervisory action); —— Sch 6, para 6: those imposed in regulation 26(1), (4), (5) and (10) (prohibition and approvals); —— Sch 6, para 7(a): regulation 27 (customer due diligence); —— Sch 6, para 7(b): regulation 28 (customer due diligence measures); —— Sch 6, para 7(c): regulation 29 (additional customer due diligence measures: credit institutions and financial institutions); —— Sch 6, para 7(d): regulation 30 (timing of verification); —— Sch 6, para 7(da): regulation 30A (requirement to report discrepancies in registers); —— Sch 6, para 7(e): regulation 31(1) (requirement to cease transactions); —— Sch 6, para 7(f): regulation 33(1) and (4) to (6) (obligation to apply enhanced customer due diligence); —— Sch 6, para 7(g): regulation 34 (enhanced customer due diligence: credit institutions, financial institutions and correspondent relationships); —— Sch 6, para 7(h): regulation 35 (enhanced customer due diligence: politically exposed persons); —— Sch 6, para 7(i): regulation 37 (application of simplified due diligence); —— Sch 6, para 7(j): regulation 38(3) (electronic money); —— Sch 6, para 8(a): regulation 39(2) and (4) (reliance); —— Sch 6, para 8(b): regulation 40(1) and (5) to (7) (record keeping); —— Sch 6, para 8(c): regulation 41 (data protection); —— Sch 6, para 9(a): regulation 43 (corporate bodies: obligations); —— Sch 6, para 9(b): regulation 44 (trustee obligations); —— Sch 6, para 9(c): regulation 45(2), (9) and (10A) to (10I) (register of beneficial ownership); —— Sch 6, para 9(d): regulation 45ZA(3) to (7) (register of beneficial ownership: additional types of trust); —— Sch 6, para 9A: regulation 45B (duty to respond to requests for information) and 45G(1) and (3) (record keeping); —— Sch 6, para 10(a): regulation 56(1) and (5) (requirement to be registered); —— Sch 6, para 10(b): regulation 57(1) and (4) (applications for registration in a register maintained under regulations 54 or 55); —— Sch 6, para 10(c): regulation 60A (disclosure by cryptoasset businesses); —— Sch 6, para 11: regulation 64(2) (obligations of payment service providers); 243

7.38  Anti-money laundering and proceeds of crime —— Sch 6, para 12(a): regulation 66 (power to require information); —— Sch 6, para 12(b): regulation 69(2) (entry, inspection of premises without a warrant); —— Sch 6, para 12(c): regulation 70(7) (entry of premises under warrant); —— Sch 6, para 12(ca): regulation 74A (reporting requirements: cryptoasset businesses); —— Sch 6, para 12(cb): regulation 74B (report by a skilled person: cryptoasset businesses); —— Sch 6, para 12(cc): regulation 74C (directions: cryptoasset businesses); —— Sch 6, para 12(d): regulation 77(2) and (6) (power to impose civil penalties: suspension and removal of authorisation); —— Sch 6, para 12(e): regulation 78(2) and (5) (power to prohibit individuals from managing); and —— Sch 6, para 13: regulation 84(1) (publication and the FCA). 7.39 In deciding whether a person has contravened a relevant requirement, regulation 86(2) sets out that the court must decide whether that person followed any guidelines issued by the FCA or by any other supervisory authority or appropriate body and approved by the Treasury. Under regulation 86(3), a person is not guilty of an offence under this regulation if that person took all reasonable steps and exercised all due diligence to avoid committing the offence. There are also the following offences: •• •• •• ••

offences of prejudicing investigations (regulation 87); information offences (regulation 88); offences that can be brought against partnerships or unincorporated associations (regulation 91); and offences that can be brought against company officers, partners in partnerships and officers of unincorporated associations who can also be liable under regulations 92, where the offence has been committed with the officer’s consent or connivance or is attributable to any neglect on their part (regulation 92).

7.40 The penalty for a breach of the Regulations is on summary conviction, imprisonment for a term not exceeding three months, to a fine or to both, and on conviction on indictment, to imprisonment for a term not exceeding two years, to a fine, or to both. There is a defence at regulation 86(3) to ensure that a person is not guilty of an offence under this regulation if that person took all reasonable steps and exercised all due diligence to avoid committing the offence. Regulation 86(4) sets out that where a person has been convicted of an offence, that person is not also to be liable to a civil sanction under Chapter 2 of Part 9 of the Regulations.

2017 MONEY LAUNDERING REGULATIONS – CIVIL PENALTIES 7.41 As noted above, civil sanctions are available under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. Regulation 76 sets out that if a designated supervisory authority is satisfied that any person has contravened a relevant requirement

244

Anti-money laundering and proceeds of crime   7.44 imposed on that person – those requirements being set out at 7.39 above – then the designated supervisory authority may do one or both of the following: (a) (b)

impose a penalty of such amount as it considers appropriate on the person; and/or publish a statement censuring the person.

7.42 Under the same regulation, if a designated supervisory authority considers that another person who was at the material time an officer of P was knowingly concerned in a contravention of a relevant requirement by P, the designated supervisory authority may impose on that person a penalty of such amount as it considers appropriate. A designated supervisory authority must not impose a penalty on a person under regulation 76 if the authority is satisfied that the person took all reasonable steps and exercised all due diligence to ensure that the requirement would be complied with. Just as under the criminal regime under the 2017 Regulations, in deciding whether a person has contravened a relevant requirement, the designated supervisory authority must consider whether at the time the person followed any relevant guidance which was at the time issued by the FCA or by any other supervisory authority or appropriate body and approved by the Treasury. In addition, where the FCA proposes to impose a penalty under regulation 76 on a PRA (Prudential Regulatory Authority) authorised person or on a person who has a qualifying relationship with a PRA-authorised person, it must consult the PRA. An appropriate penalty is defined under regulation 76 as one that is effective, proportionate and dissuasive. Penalties under regulation 76 are payable to the designated supervisory authority which imposes it. A ‘designated supervisory authority’ is defined in regulation 76 as the FCA or the Commissioners. 7.43 Regulation 77 enables the FCA to cancel, suspend or limit permissions (eg to carry out a regulated activity), authorisations and registrations, for such period as the FCA considers appropriate (up to 12 months for suspensions and limitations) where a relevant person or a payment service provider has: (a) (b) (c) (d) (e)

repeatedly or systematically failed to include the information it is required to include on the payer or the payee under Articles 4, 5 or 6 of the funds transfer regulation; failed to implement effective risk-based procedures in breach of Articles 8 or 12 of the funds transfer regulation; failed to comply with Articles 11, 12 or 16 of the funds transfer regulation, where the failure is a serious one; repeatedly or systematically failed to retain records in breach of Article 16 of the funds transfer regulation; or failed to comply with a relevant requirement

7.44 There are also powers for the designated supervisory authority to impose prohibitions on management under regulation 78 or to obtain injunctions at the High Court under regulation 79 if there is a reasonable likelihood that any person will contravene a relevant requirement or that such a contravention would continue or be repeated. Regulation 79 also enables the High Court to require a person (and any other person who appears to have been) knowingly concerned in the contravention, to take such steps as the court may direct to remedy it. There is also the power under regulation 79 to restrain someone who has contravened a relevant requirement (or been knowingly concerned in the

245

7.44  Anti-money laundering and proceeds of crime contravention of a relevant requirement) from disposing of or dealing with their assets. When exercising powers under regulations 76–78, under regulation 79 the FCA81 must give the person a warning notice, check whether they have relevant convictions, consult the PRA if the person is PRA authorised (or if the person has a qualifying relationship with a PRA authorised person), give a decision notice without undue delay and must when determining the type of sanction and level of any penalty to be imposed on a person, take into account all relevant circumstances including where appropriate: (a) (b) (c) (d) (e) (f) (g) (h)

the gravity and the duration of the contravention or failure; the degree of responsibility of the person; the financial strength of the person; the amount of profits gained or losses avoided by the person; the losses for third parties caused by the contravention or failure; the level of co-operation of the person with the FCA; previous contraventions or failures by the person; and any potential systemic consequences of the contravention or failure.

MONEY LAUNDERING LIABILITY IN THE CIVIL LAW 7.45 We have already referred to liability in equity for breach of trust and other fiduciary obligations.82 While every breach of trust will amount to a breach of fiduciary duty, not every breach of a fiduciary relationship will amount to a breach of trust. Trusts, even remedial constructive trusts, involve property and rights in property. The relationship between the trust and the trustee is a proprietary relationship. It is upon this basis that trustees are under a strict obligation that does not depend upon culpability or a state of mind, to replace property that has been improperly removed or diverted from the trust.83 Trustees are also held to the general and strict fiduciary obligations to avoid all conflicts of interest, to act in good faith in the best interests of their beneficiaries and to act with prudence and diligence. They have an overall obligation of loyalty and fair dealing. While the obligations of a trustee are expressed in proprietary terms, many of the obligations are also personal, and the remedies that are applied may well be compensatory. One area which has caused difficulty is the situation where a person receiving property, including rights in or to property, appreciates that it is being transferred to him in breach of trust. Generally speaking, in terms of priorities a bona fide purchaser of such property, without actual knowledge, will be able to take the property unencumbered. The original owner’s rights in the property, which are equitable, will be defeated by the stronger right of the so called ‘equity’s darling’. The position may be different if the ‘original’ owner has been able to re-establish his legal ownership in the property. For example, in cases of theft, or fraud where there has been an effective rescission of the contract, the legal ownership remains in or reverts in full to the owner and even ‘equity’s darling’ will, save in exceptional circumstances, in most common law as opposed to most civilian jurisdictions, have no right to the property against the owner. Of course, in such cases as where the original owner’s equitable

81 There are separate requirements for the Commissioners under Regulation 83. 82 See 2.29 above and at 14.13 below. 83 See Clough v Bond (1838) 3 My & C 490; Target Holdings v Redferns [1996] 1 AC 421 and Attorney General for Hong Kong v Reid (1994) 1 AC 324.

246

Anti-money laundering and proceeds of crime   7.47 interest is defeated, the remedy will be in damages against the fraudster – who sadly is likely to have disappeared. Where a third party takes property with knowledge of a breach of trust, then in many legal systems he will become a constructive trustee and hold the property on much the same terms as the trustee in breach. There are cases which indicate that in such circumstances, actual knowledge of the breach does not need to be established. Knowledge of facts that would put a reasonable man on inquiry would be sufficient to create the obligation of trustee. Reckless indifference to the rights of another would be enough, but whether negligence is an appropriate standard has been questioned. Deliberately refusing to make inquiries in circumstances where you are suspicious is generally considered to place on you the risk of what you might have found had you made proper and reasonable inquiry. Of course, if the person who takes the transfer is a volunteer, that is, does not provide consideration, then he will not be considered a bona fide purchaser and the issue of knowledge is irrelevant. He will not be able to resist a claim by the beneficial owner and may well be considered to possess the property as a constructive trustee. While the courts as a matter of contract law generally do not consider the adequacy of consideration, in cases such as we are discussing a wholly inadequate consideration might not be considered as dealing in good faith. 7.46 The circumstances where a fiduciary obligation is imposed are not fixed. The courts may be prepared to find that in the circumstances of a case, a person has stepped into a fiduciary relationship and is thus subject to fiduciary obligations. There are many factors influencing the courts in this regard, but issues such as reposing confidence in another and reasonably expecting fairness and good faith play a role.84 As do deliberate taking advantage of an imbalance of opportunity in unfair circumstances. Having said this, given the onerous obligations attaching to fiduciary status, the courts do not find such a relationship easily. Where a person is a fiduciary, however, then the obligations are strict and remedies generally do not depend upon the state of mind of the fiduciary in breach. If a fiduciary enters into a conflict of interest or takes a secret profit, he will be liable irrespective of whether he was dishonest or not. His breach of stewardship is sufficient harm and justification for a remedy.85 The state of mind of the fiduciary may, however, have an impact on the way in which the court deals with him and in regard to such issues as ratification and indemnity. The more dishonest a person is the less easy will it be for him to persuade a court that there has been agreement, express or implied, to his conduct. 7.47 Mention has been made of the liability that equity has developed for those who assist others in the breach of their fiduciary obligations. Where the trust property is actually transferred to the third party, then it is often appropriate to talk in terms of liability based on a constructive or resulting trust, as we have just seen. There is a proprietary relationship. Of course, there are issues as to what can be considered trust property for the purposes of imposing or rather finding a trust relationship. In equity it seems that confidential information and opportunities to profit, such as by virtue of an embryo contract, may be considered, unlike in the criminal law, to be a form of property.86 We have

84 See 6.44 above. 85 See 6.46 and Chapter 2 above. 86 See Boardman v Phipps [1967] 2 AC 46 and Cook v Deeks [1916] 1 AC 554.

247

7.47  Anti-money laundering and proceeds of crime already seen that in certain circumstances secret profits and bribes may be considered to amount to trust property on the basis that equity looks as done that which should be done and will look to the stage after the fiduciary has been ordered to account for the illicit benefit.87 However, what is the position of a third person who does not actually receive into their control or possession, property that can be the basis of a tracing claim, but nonetheless assists the fiduciary to breach his duties or launder the proceeds of such? It is misleading to describe such a person as coming into a constructive trust relationship with the ultimate beneficiary as there is no proprietary nexus – there is no property upon which equity can focus. Of course, imaginative lawyers and occasionally sympathetic judges – who do not like to see fraudsters retaining their ill-gotten gains, invent arguments by which rights to call to account or even sue, are transmuted into something resembling a right in property. However, this is not really good law and creates uncertainty and potential unfairness, particularly for relatively innocent third parties. 7.48 Rather than bend property law, in many common law jurisdictions the courts have found liability for culpable third parties on the basis of their dishonest assistance in the breach of another. This form of accessory liability is based purely on their dishonesty and not upon notions of property or for that matter the viability of a tracing claim. In a number of cases the courts in many Commonwealth and even some non-common law jurisdictions, have imposed personal liability on those who dishonestly assist others to breach their fiduciary duties, including the laundering of the proceeds of such. In providing assistance it is not necessary that the accessory has at any time control over or possession of the illicit wealth. On the other hand, the assistance must be material. There has been debate as to the state of knowledge that the accessory must be proved to have to justify his personal liability. Actual knowledge of the facts relating to the breach of duty by the fiduciary is obviously sufficient.88 It has also been held that the reckless disregard of the rights of another might well be sufficient.89 It is on this level of knowledge that dishonesty can be found. Of course, unlike in the criminal law, the test is in civil cases objective.90 Thus, the defendant will be taken to know or appreciate what a person in his position, with his knowledge and skill, would appreciate. It has, for example, been held that an accountant who refrains from asking why his client wants companies registered in England with bank accounts, might well be taken to know the facts that would have come out if he had received answers.91 By not asking, he deliberately put himself in a position of ignorance. He had what has been termed ‘Nelsonian’ knowledge. When Admiral Nelson was asked if he saw his commander’s flag signals requiring

87 88

89 90 91

Attorney General for Hong Kong v Reid [1994] 1 AC 324 and see 2.29 et seq. By way of example, see Frank Houlgate Investment Co Ltd v Biggart Baillie LLP [2015] SC 187 (Court of Session (Inner House, Extra Division)). In this case a solicitor’s firm was liable for £100,000 advanced to their client when the solicitor knew that their client was not the title holder of the property that was to be the security and that their client was committing fraud. Lord McEwan noted that the solicitor did not tell the money laundering reporting officer in his firm and found that the solicitor should have stopped acting for his client, told his partners why and also advised the solicitors on the other side as to the reason for it and that the security too was a fraud and worthless. Royal Brunei Airlines v Tan [1995] 1 AC 378 and Selangor v Cradock (No 3) [1968] 1 WLR 1555; see also at 2.34 above. But it has been held that the defendant must realise that his actions would be considered dishonest by ordinary reasonable people, see Twinsectra Ltd v Yardley [2002] 2 All ER 377. Agip (Africa) v Jackson [1991] Ch 547.

248

Anti-money laundering and proceeds of crime   7.51 that he withdraw from a navel engagement he held his spyglass to his blind eye and asserted he saw nothing! Setting out the POCA 2002, Part 5 powers, dealing extensively with civil recovery, account forfeiture, cash forfeiture, and supporting investigative powers such as unexplained wealth orders, is beyond the scope of this book; however, the powers are noted here for reference. In addition, please see the section  above on civil liability under the 2017 Money Laundering Regulations.

NAUGHTY KNOWLEDGE AND MENS REA 7.49 It is useful here to briefly consider in the context of the criminal law what the prosecution needs to prove, beyond a reasonable doubt, in the case of a prosecution under the relevant statutory provisions. It will be noted that most of the substantive offences require either knowledge or suspicion. 7.50 Knowledge is a straightforward word that does not need judicial explanation.92 As we have seen in the case of certain of the offences relating to terrorist finance, it will suffice to prove that the accused has reasonable cause to suspect. In other words, an ordinary reasonable man, in the position of the accused, would have formed a suspicion. Of course, it has to be proved even under this objective standard, that the accused knew such facts as would have properly grounded such a suspicion. In the case of handling charges, under section  22 of the Theft Act 1968, it is necessary to prove that the accused knew or believed that the relevant goods were stolen or were the proceeds of fraud. Some of the commentaries on the anti-money laundering provisions refer to belief as suspicion. This is certainly wrong in the criminal law and probably misleading in the civil law. Knowledge in the criminal law is certain knowledge of the relevant facts. 7.51 Belief is something less than certain knowledge and the presence of uncertainties does not prevent there being reasonable cause to believe.93 Nor is there, when assessing reasonable cause to believe, any need to reach a final conclusion even to the civil standard as to any liability on the part of the defendant at an interim stage.94 A stricter definition is taken during a criminal trial where belief is an inherent element, for example in a handling stolen goods case, belief is when a person might say to himself: ‘I cannot say I know for certain that those goods are stolen, but there can be no other reasonable conclusion in the light of all the circumstances, in the light of all that I have heard and seen.’95 A suspicion would not be sufficient. However, it has been accepted that wilful blindness, that is deliberately not acquiring knowledge, is sufficient to establish a belief.96

92 See R v Afolabi [2009] EWCA Crim 2879. An example of the issue of knowledge being at issue can be found in Sarwar v Her Majesty’s Advocate [2011] HCJAC 13, in which it was found that the managing director of a company did not have access to the details of the transactions with the customer and in such circumstances could not be found to have the requisite knowledge. 93 See Windsor and Hare v Crown Prosecution Service [2011] 1 WLR 1519 (CA). 94 See Re Al Zayat [2008] EW Misc 3 (CCC). 95 R v Hall (1985) 81 Cr App Rep 260. 96 R v Moys (1984) 79 Cr App Rep 72 and see also in regard to a ‘great suspicion’ and a refusal to believe, R v Forsyth [1997] 2 Cr App Rep 299.

249

7.52  Anti-money laundering and proceeds of crime 7.52 Suspicion is defined in the Oxford Dictionary to include: an impression of the existence or presence of; belief tentatively without clear grounds; being inclined to think; being inclined to mentally accuse or doubt innocence and to doubt the genuineness or truth of a suspected person. In R v Da Silva, the Court of Appeal, in regard to an earlier provision, thought that the accused must be shown to think that there is a ‘possibility, which is more than fanciful, that the relevant facts exist’; neither a vague feeling of unease nor gross negligence was sufficient as the suspicion had to be firmly grounded and targeted on specific facts.97 The definition of suspicion in R v Da Silva applies equally to civil cases.98 However, in Squirrell Ltd v National Westminster Bank plc99 Laddie J rather unhelpfully noted that there was no direct authority on what ‘suspect’ means under the anti-money laundering provisions. He did recognise that there is no need for the suspicion to be reasonable.100 The definition in R v Da Silva has though since been followed in the courts in a number of subsequent cases.101 In practice, it may well be possible to establish the requisite state of mind from circumstantial evidence, although this is problematic. The conduct of the accused may well indicate, beyond a reasonable doubt, that he or she was in fact suspicious. It is clear that negligence is not sufficient. While culpable and gross negligence are terms that rather distort the criminal law, it may well be that self-interested negligence102 may be a sufficient basis. Wilfully shutting one’s eyes to what would have been obvious,103 would be sufficient in most cases. An accused who deliberately prevented himself acquiring certain knowledge, would, in the vast majority of situations, be doing so because he suspected the truth. Having said all this, the notion of suspicion is a difficult one, especially for the criminal law.104

COMPLIANCE 7.53 Mention has been made of the importance of secondary legislation in this area of the law, particularly in regard to what might be described as compliance issues. The legislation requires those within the regulated sector

97 [2006] EWCA Crim 1654. 98 See K Ltd v National Westminster Bank plc [2007] 1 WLR 311 (CA). 99 [2005] EWHC 664 and also K Ltd v National Westminster Bank plc [2006] EWCA Civ 1039. In Hussein v Chong Fook Kam [1970] AC 942, Lord Devlin, observed ‘suspicion in its ordinary meaning is a state of conjecture or surmise where proof is lacking’. He also added that suspicion did not require admissible evidence or, for that matter, evidence. 100 Note the contrast between the subjective standards in the substantive offences in sections 327 to 329 as compared with the objective standard in the reporting obligations imposed under POCA 2002, ss 330 and 331. 101 Not just in K Ltd v National Westminster Bank plc, above, but also Shah v HSBC Private Bank (UK) Ltd [2010] 3 All ER 477 (CA); R v Afolabi [2009] EWCA Crim 2879; and Parvizi v Barclays Bank plc (unreported), 1 May 2014, QBD case number HC13A02291). In K Ltd, the court also noted in the context of section 328 that ‘the existence of suspicion is a subjective fact’. 102 See, for example, albeit in a rather different context, Daniels v Daniels [1978] 2 WLR 73 discussed in B Rider ‘Amiable Lunatics and the Rule in Foss v Harbottle’ (1978) CLJ 270. 103 See, for example, Millett J’s comments in AGIP v Jackson (1990) Ch 265, affirmed (1991) Ch 547, see at 7.48 above. 104 While the courts generally take the view that it is wrong to try and define concepts such as knowledge and belief for juries (see R v Harris (1986) 84 Cr App Rep 75 and in particular R v Smith (1976) 64 Cr App Rep 217), ‘where much reference is made to suspicion, it will be prudent to give (a direction)’ to the jury, R v Toor (1986) 85 Cr App Rep 116.

250

Anti-money laundering and proceeds of crime   7.55 and in many respects those outside, to establish procedures for identifying and knowing clients (Know Your Client – KYC) and others with whom one deals, the recording or relevant information, training of staff and the development and implementation of procedures for monitoring, reporting and handling suspicions.105 As has already been pointed out, the actual requirements differ, at least in emphasis, from one business or profession to another. It is also the case that the requirements, in law and good practice, differ in regard to whether one is considering, for example, serious crime, market abuse,106 corruption, tax fraud or terrorist related activity. Added to this is the need to incorporate into such systems and procedures provisions to address other areas of legal and other risk, such as that presented by restitutory actions or proceedings for the interdiction of property.107 There has been concern that the burdens placed on particularly financial institutions are not cost effective and produce little of real value in discouraging crime or in assisting law enforcement. This was a concern that was taken up by the Financial Services Authority.108 The FSA abandoned its detailed and prescriptive rules relating to money laundering in favour of a risk-based approach, which placed the burden on particular businesses to identify and address the peculiar risks facing them. Consequently, while the FCA (the FSA’s successor for this part of the FSA’s role) was concerned to take action, including enforcement action,109 where records are not adequately maintained, or there is a failure of KYC, in practice it is concerned with failure to establish and adequately operate and supervise systems. 7.54 A tension that financial institutions face under the POCA 2002 regime is that on the one hand they have a contractual duty to their client and on the other they have a duty not to tip their client off, as set out above. How should a financial institution deal with this tension and what can they say to their client if freezing their account for 7 working days or 31 calendar days (or any further extended period authorised by the court) thereafter? This question has been looked at in a succession of cases. 7.55 In Squirrell Ltd v National Westminster Bank plc,110 the claimant lodged an application nine days after its account was frozen pursuant to a SAR made by the bank. The legal action was taken after the bank declined to unblock the bank account, providing the claimant with no explanation for its decision. The claim was for an order that the bank accounts be unfrozen.

105 See Chapter 12 and S Bazley and A Haynes, Financial Services Authority Regulation and Risk-based Compliance (2nd edn) (Tottel 2007), and Money Laundering and Terrorist Financing, Reporting Officer’s Reference Guide 2007 (British Bankers Association), in particular the Joint Money Laundering Steering Group Guidelines, www.jmlsg.org.uk, and the website of the International Compliance Association www.int-comp.com. 106 In particular note the Financial Services and Markets Act 2000, s 131A in regard to protected disclosures. 107 See generally, P Birks (ed), Laundering and Tracing (Oxford University Press 1995) and J Ulph, Commercial Fraud (Oxford University Press 2006), Part B. 108 See, for example, P Robinson, The Fight Against Money Laundering; Promoting Effectiveness, 22 June 2005. Reference should be made to the FSA website www.fsa.gov. uk. See also Anti-money Laundering current customer review cost benefit analysis: Report prepared by Pricewaterhouse Coopers for the FSA (2003), FSA and Anti-Money Laundering Requirements; Costs, Benefits and Perceptions (X/Yen, 2005), Corporation of the City of London. 109 See for an early example, Final Notice: The Governor and Company of the Bank of Ireland, 31 August 2004, FSA. 110 [2006] 1 WLR 637 (Ch).

251

7.55  Anti-money laundering and proceeds of crime The bank stated that it wished to comply with its client’s instructions but it was forced to block them because of the provisions of section  328(1) and because of the anti-tip off provisions, it could not explain its actions. HMCE intervened in the proceedings. It was investigating possible VAT offences. Before examining the law in his judgment, Laddie J noted that: ‘I should say that I have some sympathy for parties in Squirrell’s position. It is not proved or indeed alleged that it or any of its associates has committed any offence. It, like me, has been shown no evidence raising even a prima facie case that it or any of its associates has done anything wrong. For all I know it may be entirely innocent of any wrongdoing. Yet, if POCA 2002 has the effect contended for by Natwest and HMCE, the former was obliged to close down the account, with possible severe economic damage to Squirrell.’ Despite finding that on the material before the court, there was nothing to justify concluding that the bank account held criminal property, Laddie J found that the course adopted by NatWest was ‘unimpeachable. It did precisely what this legislation intended it to do’. 7.56 The rationale behind and proportionality of the legislative position was explained by Longmore LJ in K Ltd v National Westminster Bank plc,111 who found that: ‘The truth is that Parliament has struck a precise and workable balance of conflicting interests in the 2002 Act. It is, of course, true that to intervene between a banker and his customer in the performance of the contract of mandate is a serious interference with the free flow of trade. But Parliament has considered that a limited interference is to be tolerated in preference to allowing the undoubted evil of money-laundering to run rife in the commercial community. The fact that the interference lasts only for 7 working days in what we were told were the majority of cases and a further 31 days only, unless the relevant authority goes to the length of applying to the court for a Restraint Order when all cards will have to be on the table in any event, shows that the interference with freedom of trade is limited. Many people would think that a reasonable balance has been struck’. 7.57 In K Ltd, the claimant raised more developed arguments than those in Squirrell Ltd. It was submitted that if the bank was going to rely on any suspicion that the money in the customer’s account was criminal property, it should have given admissible evidence to the court of any such suspicion. It was argued that a solicitor’s letter which baldly stated that the Bank had made a disclosure was insufficient and that if there had been admissible evidence before the court, the maker of the statement could be cross-examined on the question whether he did actually entertain a suspicion and (perhaps) whether there were any grounds for such suspicion. Otherwise, it was argued, a customer’s account could be effectively frozen even if a suspicion had not been entertained. It was further submitted that the claimant was deprived of access to a court in breach of Article 6 of the ECHR and deprived of his possessions under Article 1 Protocol 1. 7.58 On these submissions, Longmore LJ again found that the bank complied lawfully and properly complied. It would be a fruitless exercise to cross-examine the solicitor about the existence of the bank’s suspicion. There was no mechanism whereby any officer of the bank can be required

111 [2007] 1 WLR 311.

252

Anti-money laundering and proceeds of crime   7.60 to attend for cross-examination since there was no provision enabling the relevant person to give evidence of his suspicion. It may well have been the intention of the statute to protect those having a suspicion and reporting that suspicion to the authorities from being identified and any cross-examination of a bank employee would, in fact, be almost as pointless as cross-examination of a bank’s solicitor. Once the employee confirmed that he had a suspicion, any judge would be highly likely to find that he did indeed have that suspicion. Any cross-examination would be bound to decline into an argument whether what the employee thought could amount in law to a suspicion, which is not a proper matter for cross-examination at all. From an ECHR perspective, the limited interference was found to be proportionate and in the public interest. 7.59 The law in this area developed further in the case of Shah v HSBC Private Bank (UK) Limited.112 In this case the claimant and his wife sought damages against the bank for failure to comply with his instructions and for other breaches of duty. Unlike most previous decisions, this case raised for the first time the question as to whether the same considerations applied to an action for damages for breach of contract or duty which fell to be resolved well after the time within which consent to transact had to be given or a restraint order applied for. Longmore LJ held that in these circumstances, the claimant could require the bank to prove its case that it had the relevant suspicion and be entitled to pursue the case to trial so that the bank can make good its contention in this respect and that: ‘By the time of any trial the dust will have settled and it is most unlikely that the tipping-off provision will continue to be relevant. It will also almost certainly be known whether any investigation is or might be taking place which any disclosure by admissible evidence in court proceedings would be likely to prejudice within section  333(1). If any such investigation is occurring (or is likely to occur) the court can be informed of that matter in an admissible manner.’ The difficult position of the bank was, however, acknowledged, namely that ‘the 2002 Act has put banks in a most unenviable position. They are at risk of criminal prosecution if they entertain suspicions but do not report them or, if they report them, and then nevertheless carry out their customer’s instructions without authorisation. If they act as instructed, their customers are likely to become incensed and some of those so incensed may begin litigation. But it cannot be right that proper litigation should be summarily dismissed without any appropriate inquiry of any kind. The normal procedures of the court are not to be side-stepped merely because Parliament has enacted stringent measures to inhibit the notorious evil of money-laundering, unless there is express statutory provision to that effect’. 7.60 Two years later, this matter was put to the test in further litigation between the same parties113 and the bank’s nominated officer had to give evidence for six days, being cross-examined at length. Supperstone J found that he was ‘left in no doubt’ that the nominated officer ‘honestly and genuinely suspected that the funds were criminal property when he submitted his report’. He did not act in bad faith and was a patently honest witness. There was an implied term in the contract permitting the defendant bank to refuse to execute payment instructions in the absence of appropriate consent under section  335 where it suspected a transaction constituted money laundering.

112 [2010] 3 All ER 477 (CA). 113 Shah v HSBC Private Bank (UK) Ltd [2009] EWHC 79 (QB).

253

7.60  Anti-money laundering and proceeds of crime So far as providing the claimant with information was concerned, there was a further implied term between the claimant and the defendant bank, permitting the defendant to refuse to provide information where it might, in providing that information, contravene the banks duties under sections 333 and 342 of the POCA 2002, so the bank was not under a duty to provide the information sought. 7.61 In Parvizi v Barclays Bank plc,114 the relevant bank employee was again cross-examined in court outside of the relevant period where tipping off might have been in issue. Master Bragge dealt with the burden of proof in such cases, accepting that:‘a claim by a customer that its bank has failed to carry out instructions will be usually a strong claim in contract. The burden of proof that the implied term, which effectively is what is in issue here, operates because a suspicion is on the bank, because, as I observed in the course of argument, only the bank can explain its position.’ A frontline monitoring analyst in the antimoney laundering team gave made a witness statement. This type of material had not been made available in the Shah v HSBC Private Bank (UK) Ltd and although there was an arguable lack of reasoning in some of what the analyst said, the evidence still established a clear belief by her of a relevant suspicion that was not simply fanciful. There was no real prospect of the case being made out at trial and the claim was struck out. When the court should consider challenges during the moratorium period was examined in NCA v N. The court found that where a bank suspects the money in the customer’s account is criminal property and freezes an account, ‘ordinarily the court should not intervene during the course of the 7-day notice period and 31-day moratorium period. Parliament has entrusted to the NCA the task of deciding whether consent should be given to the carrying out of instructions and to consequent transactions following authorised disclosure. It has also laid down a timetable for that to be done, a timetable which this court has described as being both a “workable” and a “reasonable” balance of conflicting interests’. This does not mean however that ‘the jurisdiction of the court to grant interim relief is ousted’. However, ‘the statutory procedure is highly relevant to the exercise of the court’s discretion. It cannot be displaced merely on a consideration of the balance of convenience as between the interests of the private parties involved. The public interest in the prevention of money laundering as reflected in the statutory procedure has to be weighed in the balance and in most cases is likely to be decisive. Cases justifying such intervention are likely to be exceptional, although the test is not one of exceptionality’.115 In addition, the court in NCA v N also found that ‘one cannot infer from NCA consent that there is no evidence known to it that the monies constitute or represent a benefit from criminal conduct’ or that there is ‘no suspicion that the monies constitute or represent a benefit from criminal conduct’. 7.62 In summary, these cases highlight the tensions that the bank faces between when complying with its statutory and contractual obligations. It is clear that once a suspicious activity report is made, that during the period before consent is granted or a restraint order is made, then the bank is required to give its client no reason for suspending his account should this constitute a tipping

114 (unreported), 1 May 2014, QBD case number HC13A02291. 115 NCA v N [2017] EWCA Civ 253.

254

Anti-money laundering and proceeds of crime   7.68 off offence. This does not, however, absolve the bank of being challenged as to its actions or as to why it held such a suspicion and these matters can be contested at a trial after the Bank is no longer at risk of committing an offence in defending its actions.

CONFISCATION 7.63 It is essential to remove from defendants the value of their proceeds of crime, as the incentive to commit the crime must be removed upon conviction. Without powers to confiscate at the end of a criminal trial, defendants may often be able to retain their proceeds of crime.116 7.64 The purpose of the confiscation regime is to resolve this issue. It is to ensure that criminals (and especially professional criminals engaged in serious organised crime) do not profit from their crimes, and it sends a strong deterrent message to that effect.117 7.65 The effectiveness of the confiscation regime has been questioned in recent years. In particular, there has been considerable concern about recovery levels, culminating most recently in a Law Commission Report on Confiscation under Part 2 of POCA 2002, which was published on 17 September 2021118 and which noted that ‘As at 31 March 2019, the value of outstanding confiscation orders was £2,065,303,000’. It is beyond the scope of this book to set out the changes to the legislation being considered or to speculate on the proposals that might have sufficient merit to become final recommendations (the report itself if 744 pages long!). It is of note, however, that the Law Commission is aiming to publish its final report in the summer of 2022. 7.66

The process for making a confiscation order is as follows:

7.67 Confiscation proceedings can be initiated either by the prosecutor or the court.119 The court has a discretion as to whether or not it institutes proceedings but when initiated by the prosecutor, the court is obliged to follow the statutory process120 and can only reduce the amount of a confiscation order where it is necessary to do so to make the confiscation order proportionate.121 7.68 The first question that the court must ask itself is whether or not the defendant has a criminal lifestyle.122

116 The power to confiscate goes much further than the power to compensate. For example, in confiscation proceedings, the value of any tainted gifts made by the defendant can be recovered from the recipients of those gifts, whereas a compensation order can only be based upon the defendant’s means to pay. 117 R v Waya [2013] 1 AC 294 (SC). 118 Law Commission, ‘Confiscation under Part 2 of the Proceeds of Crime Act 2002’ (Consultation Paper 249, 2021), available at https://s3-eu-west-2.amazonaws.com/lawcomprod-storage-11jsxou24uy7q/uploads/2020/09/6.6837_LC_Confiscation-consultationpaper_FINAL_180920_WEB3.pdf. 119 POCA 2002, s 6(3). All statutory sections referenced in the confiscation section  of this chapter are in relation to the POCA 2002 unless otherwise stated. 120 Sections 6(1) and (5). 121 See R v Waya [2013] 1 AC294 (SC) and the subsequent amendment to POCA 2002, s 6(5) implementing R v Waya in statutory form. 122 Section 6(4).

255

7.69  Anti-money laundering and proceeds of crime 7.69 A defendant has a criminal lifestyle if (a) he is convicted of a Schedule 2 offence;123 (b) if the defendant is convicted of four offences or more on the indictment from which the defendant has benefited, cumulatively having a value of £5,000 or more;124 or (c) if the offence is committed over a period of at least six months and the defendant has benefited in the value of £5,000 or more.125 7.70 If applying the above test, the court finds that the defendant has a criminal lifestyle then the court must decide whether the defendant has benefited from his general criminal conduct.126 If the defendant does not have a criminal lifestyle then the court must decide whether the defendant has benefited from his particular criminal conduct.127 7.71 Benefit in particular criminal conduct cases includes benefit from the offences the defendant was convicted of and offences which the court will be taking into consideration in deciding his sentence.128 7.72 In particular criminal conduct cases, the court must first ask what has the defendant obtained as a result of or in connection with his criminal conduct129 and then go on to assess the value of the property obtained.130 This may produce some interesting results. Take by way of example a case involving market abuse, where the defendant gave inside information to his son so that his son could make a profit trading shares. The son may have benefited from his trading, but may not have realised that the information was inside information. The father will argue that he obtained nothing from his offence; he committed the offence so that his son could benefit, not so that he could. In this situation, it may be that no confiscation order can be made against the father in relation to his son’s gains.131 7.73 A similar issue may arise where a company is involved in an offence. It is trite law that a company has separate legal personality to its shareholders132 and that shareholders do not own company property. Where a defendant has been convicted of an offence which his company has benefited from, it is necessary to apply the ‘concealment principle’.133 A court may treat company property as if it were the defendant’s property in confiscation proceedings where an offender: (a) attempts to shelter behind a corporate façade, or veil to hide his crime and his benefits from it; (b) does acts in the name of a company which constitute a criminal offence which leads to the offender’s conviction;

123 Which include sections 327 (concealment etc) and 328 (arrangement) money laundering offences. 124 This is referred to as conduct forming part of a course of criminal activity. 125 Section 75. 126 Ibid. 127 Ibid. 128 Section 76(3). 129 Whether that is the obtaining of property or the obtaining of a pecuniary advantage (such as the evasion of a tax liability). For the relevant provisions, see sections 75(4)–(5), (7), 130 These are simplifications of the first two questions that the court is required to ask taken from the Endnote to R v May [2008] 1 AC 1028 (HL). 131 It may be that civil recovery is an option against the son’s profits, by way of an action against criminal property. 132 See Salomon v A Salomon and Co Ltd [1897] AC 22 (HL) and see 2.42 et seq above and at 15.14 below. 133 See R v Sale [2014] 1 WLR 663 (CA) which applied the principles of the civil law case Petrodel Resources Ltd v Prest [2013] 2 AC 415 (SC).

256

Anti-money laundering and proceeds of crime   7.77 or (c) the transaction or business structures constitute a ‘device’, ‘cloak’ or ‘sham’, ie an attempt to disguise the true nature of the transaction or structure so as to deceive third parties or the court.134 7.74 It is also important to note that ‘obtains’ does not mean ‘retains’. It makes no difference if the property is subsequently lost, destroyed or damaged.135 Once the defendant has obtained the property, he benefits from it and the value of that benefit136 is the higher of its value when first obtained137 and its value at the date of the confiscation hearing.138 Again, this can produce some interesting results. In R v Rigby and Bailey,139 a company’s share price rose after a false trading statement was made. Rigby’s shares rose in value by around £250,000. The FSA argued that Rigby benefited by this sum even though he did not sell any of the shares and even though the share price subsequently collapsed. The Court of Appeal found that there was no proper sense in which Rigby obtained a benefit or derived a pecuniary advantage constituted by the temporary unrealised increase in the share price. The increase in value was, for Rigby, purely notional and soon disappeared. The Court of Appeal also quashed the finding that the defendant’s benefited by their salaries. They were ‘employed despite the offence, not because of it. There was a narrative connection between the offence and their continued employment, but no sufficient causal link’. 7.75 Where property is obtained as a result of a joint criminal enterprise, it will often be appropriate for a court to hold that each of the conspirators ‘obtained’ the whole of that property.140 A paid hand in the enterprise, e.g. a cash courier, custodian or other minor contributor; or a latecomer to a conspiracy in which nothing was obtained after his arrival, will not however have jointly obtained the whole of the property.141 The facts of each case must therefore be carefully analysed. 7.76 General criminal conduct includes all a defendant’s criminal conduct committed at any point in time.142 This will include the indictment benefit, any benefit that can be proven using the assumptions and any other criminality that the prosecution can prove. 7.77 Section 10 sets out the assumptions that can be made. Any property transferred to the defendant or expended by the defendant at any time after the relevant day, can be assumed to be obtained by him as a result of his general criminal conduct. In addition, any property held by the defendant at any time after the date of conviction can be assumed to have been obtained by him as a result of his general criminal conduct. Finally, when valuing any 134 See R v Sale, ibid, in which it was found that the activities of both the company and the appellant (who corruptly procured a contract for the benefit of the company which he owned 100 per cent) were so interlinked as to be indivisible. 135 See R v Islam [2009] 1 AC 706 (HL). 136 See section 80. 137 Adjusted to take account of later changes in the value of money. 138 Including the value of any property that might directly or indirectly represent the property obtained. 139 [2006] 1 WLR 3067 (CA). 140 See R v Ahmad [2015] AC 299 (SC). Apportionment as a general principle was rejected in the linked case of R v Fields. 141 See R v May, above, though a courier putting monies through his bank account will benefit because unlike a cash courier there is a thing in action in favour of the defendant rather than him being a mere bailee, see R v Allpress [2009] 2 Cr App Rep (S) 58 (CA). 142 Section 76(2).

257

7.77  Anti-money laundering and proceeds of crime property obtained by the defendant, it can be assumed that he obtained it free of any other interests in it. The assumption will be made unless incorrect or unless there would be a serious risk of injustice if the assumption were to be made.143 7.78 The relevant day for the property transferred and expenditure assumptions is six years before the proceedings for the offence started.144 If there are two or more offences and proceedings for them were started on different days, then the relevant day is the earliest of those days. If, however, a confiscation order has already been made against the defendant during the six-year period, the relevant day is the day when the defendant’s benefit was last calculated and the assumptions do not apply against any property held on or before the previous confiscation order date. 7.79 When looking at general criminal conduct, it is important to take into account the varying standards of proof. (a) (b) (c)

The indictment offences will already have been proved to the criminal standard by virtue of the convictions. For criminal offences not on the indictment, the prosecution must prove the offence to the criminal standard.145 The criminal standard of proof does not however apply to the assumptions. When the court makes the statutory assumptions, the prosecution need only show that the defendant has received, expended, or held property to the civil standard.146 The burden is then on the defendant on the civil standard to displace the assumptions.

So differing standards need to be applied to differing parts of the general criminal conduct. 7.80 After determining the defendant’s benefit, the court must then consider the ‘available amount’.147 The available amount is the total value of all the free property148 held by the defendant (minus priority obligations149), plus the value of the tainted gifts that the defendant has made.150

143 Section 10(6). The defendant must produce clear and cogent evidence; vague and generalised assertions will not suffice, see R v Williams [2007] EWCA Crim 1768. The application of the assumptions is not incompatible with the ECHR, see R v Benjafield and Rezvi [2003] 1 AC 1099 (HL); Phillips v United Kingdom (41087/98) 11 BHRC 280. 144 Section 10(8). 145 See R v Briggs-Price [2009] 1 AC 1026 (HL). 146 See R v Whittington [2010] 1 Cr App R (S) 83 (CA). 147 Section 9. 148 Pursuant to section 82, free property is property not already subject to certain other court orders, eg forfeiture or deprivation orders. Property includes property in which the defendant merely has an interest, see section 84. 149 A priority obligation is the amount due in respect of a previous fine or court order as well as well as any sum that would be a preferential debt if bankrupt. This importantly includes secured loans, but excludes unsecured loans. 150 A gift is any transfer of property by the defendant for significantly less consideration than the value of the property at the time of the transfer, see section  78. The gift is tainted if made at any time after either (a) six years before criminal proceedings began in criminal lifestyle cases or (b) the offence in particular criminal conduct cases, see section 77. There is no requirement for a tainted gift to be the proceeds of crime. A tainted gift includes a gift of property not derived from criminal conduct. There have been a significant number of important cases on the gift provisions in recent years, including, but not limited to, R v Box [2018] 4 WLR 134 (CA), R v Johnson [2016] 4 WLR 57 (CA) and R v Morrison [2019] 4 All ER 181 (CA).

258

Anti-money laundering and proceeds of crime   7.85 7.81 The ‘recoverable amount’151 is then made in the value of the defendant’s benefit unless defendant can show that the available amount is less than his benefit.152 This is because whatever the defendant’s benefit, the defendant cannot be expected to repay monies that he does not have. 7.82 The court must then make a confiscation order in the value of the recoverable amount,153 unless (a) a victim has started or intends to start civil proceedings against the defendant in relation to the criminal conduct, in which case the duty to make a confiscation order in the recoverable amount becomes a discretionary power; or (b) it would be disproportionate to make a confiscation order in the recoverable amount, in which case the court should refuse to make a confiscation order in that sum but accede only to an application for such sum as would be proportionate.154 7.83 The issue of proportionality, introduced by R v Waya155 and now imposed on a statutory basis,156 is one that has brought a wave of litigation in the appeal courts where many tenets of confiscation law have now been re-tested to see if it is proportionate to confiscate the amount of the benefit determined under the Act.157 7.84 The Supreme Court has made it clear however that the introduction of proportionality is not the reintroduction of discretion into the confiscation process.158 What then is proportionality? To answer this one must consider the purpose of confiscation proceedings, which is to recover the financial benefit that the offender has obtained from his criminal conduct. A confiscation order must bear a proportionate relationship to this purpose and a confiscation order should not operate as if it were an additional fine.159 7.85 A confiscation order might be disproportionate where property has already been restored to the victim,160 if joint obtainers each have to repay

151 Section 7. 152 Section 7(2). This reverse burden upon the defendant is to the civil standard. The imposition of the reverse burden regarding the available amount is ECHR compatible, see Grayson and Barnham v United Kingdom (2009) 48 EHRR 30. 153 Section 6(5). 154 See R v Waya, above. 155 See R v Waya, above. 156 Introduced into section 6(5) by virtue of para 19 of Sch 4 to the Serious Crime Act 2015. 157 See eg R v Ahmad, above, which was in the Supreme Court on whether it is proportionate to confiscate from multiple defendants; R v Kakkad [2015] EWCA Crim 385 (whether it is proportionate to confiscate in the value of drugs that have already been seized by the police); R v Harvey [2017] A.C. 105 (SC), as to whether or not it was proportionate to confiscate in the value of sums since accounted for to the government by way of VAT. Another key case citing Waya was Paulet v United Kingdom (6219/08) 37 BHRC 695, looking at whether or not it was proportionate to confiscate the wages of an illegal immigrant who properly performed the work his contractual (but fraudulently obtained) work. The case of Paulet will be considered in the forthcoming Supreme Court hearing of R v Andrewes, a CV fraud case, which is due for hearing in June 2022 and is an appeal of the judgment in R v Andrewes [2020] EWCA Crim 1055, where the Court of Appeal found it would be disproportionate to confiscate in the value of the wages of Andrewes (his benefit from lying to get remuneration from a Hospice (CEO) and two NHS Trusts (Chair), on the basis that he properly performed the jobs. The Court of Appeal also refused to confiscate the increase in his remuneration as a result of his fraud finding to do so would be arbitrary. These are just a select few of the cases that have since been before the appeal courts. 158 See R v Waya, above. 159 See R v Waya, above. 160 See R v Waya, above.

259

7.85  Anti-money laundering and proceeds of crime the value of the amount jointly obtained,161 where a corruptly procured contract is properly performed,162 or where the underlying activity is lawful.163 7.86 In regulatory offences, the critical question is as follows: what is the conduct made criminal by the statute – is it the activity itself; or is it the failure to register, or obtain a licence for, the activity? There is a narrow but critical distinction to be made between an offence that prohibits and makes criminal the very activity admitted by the offender or proved against him and an offence in failing to obtain a licence to carry out an activity otherwise lawful. In the former case, the defendant benefits by the proceeds received. In the latter case, the defendant does not benefit at all by his offending.164 7.87 The confiscation hearing can be postponed until after sentence, however any postponed hearings must take place within two years of conviction without there being exceptional circumstances.165 Confiscation hearings may also be postponed pending an appeal against conviction; however, any postponed hearing for an appeal must take place within three months of the determination of the appeal without there being exceptional circumstances.166 7.88 Confiscation hearings, albeit part of the criminal sentencing process, are partly civil in nature. The judge can decide issues on the balance of probabilities, compel the defendant to disclose documents, draw adverse inferences from the absence of evidence, and rely on hearsay evidence.167 The confiscation court can also make final determinations of the extent of the defendant’s interest in property, if it has given a reasonable opportunity to persons who may be holding an interest in that property to make representations to the court. These determinations are conclusive as to the extent of the defendant’s interest in the property and can therefore bind civil courts.168 7.89 Where compensation is an issue for the court, it must first of all make the confiscation order.169 Having made the appropriate confiscation order, the 161 See R v Ahmad, above. 162 See R v Sale [2014] 1 WLR 663 (CA). 163 See R v Beazley [2013] 1 WLR 3331 (CA); R v Parsons [2014] EWCA Crim 2500; R v King [2014] 2 Cr App R (S) 54 and R v Hussain [2014] EWCA Crim 2344, as well as the cases in the note 165 below. 164 See R v McDowell and Singh [2015] 2 Cr App R (S) 14 (CA). The former conviction related to trading in arms without the appropriate licence and the underlying activity was unlawful. The latter conviction was scrap metal dealing without registering and the underlying activity was said to be lawful, although this conclusion is not one easily distinguishable on the facts or reconcilable with the principle; see also R v JGE Commercials Limited [2015] EWCA Crim 1048, a breach of the money laundering regulations case where the failure to cease the transaction without complying with customer due diligence was said to be on the McDowell side of the line, ie underlying activity was unlawful. These three cases are difficult to reconcile with each other. Other regulatory cases considering this same issue include R v Neuberg [2017] 4 WLR 58 (CA) regarding carrying on a business under a prohibited name; R v Palmer [2017] 4 W.L.R. 15 (CA) dealing with undertaking licensable activity under the Private Security Industry Act 2001 without a license and R v Boyle Transport (Northern Ireland) Ltd [2016] 4 WL. 63 (CA) haulage industry breaches such as falsifying records and altering tachographs and whether the corporate veil could be pierced for work that was underlying lawful but carried out in an unlawful manner. Boyle Transport is particularly interesting as a case that is critical of the case of R v Sale (above) and which looks at the corporate veil in one-person companies. 165 Section 14. 166 Ibid. 167 See R v Ahmad, above. 168 Serious Crime Act 2015, s 1. 169 Sections 13(2) and 13(3)(a).

260

Anti-money laundering and proceeds of crime   7.92 court then ignores it when deciding the appropriate compensation order.170 If, having made both orders, the defendant has not got the means to pay both compensation and confiscation orders, the court must direct that compensation be paid out of confiscation in the amount of the shortfall.171 If on the other hand, the defendant does have the means to pay both orders, then he is at risk of paying the same sum twice for the same offence; once in compensation and once in confiscation and it would be disproportionate to have the certainty of double payment.172 To avoid this outcome, where it is asserted by a defendant that there will be restitution made after the date of the hearing, then the court should scrutinise very carefully and critically the evidence and arguments raised in support of such assertion. If the court remains uncertain whether the victims will be repaid under the compensation order then a confiscation order which includes that amount will not ordinarily be disproportionate. However, mathematical certainty of restitution is not required. The court should approach matters in a practical and realistic way in deciding whether restitution is assured. Restitution to the victims in the future is capable of being properly assessed as assured, depending on the particular circumstances, notwithstanding that such restitution will not be immediate, or almost immediate, at the time of the confiscation hearing. Obviously the longer the time frame, the greater force there will be to an argument that restitution is not assured: but a prospective period of delay in realisation is not of itself necessarily a conclusive reason for proceeding to make a combination of such orders without adjusting the amount of the confiscation order.173 7.90 The court must also make the confiscation order before making a fine or an order for costs.174 7.91 Once a confiscation order is made, a default sentence of up to 14 years can be imposed, consecutive to the defendant’s substantive term of imprisonment, to be activated in default of payment. The default sentence lengths have recently been strengthened.175 Time to pay of up to three months can be given, extendable to up to six months where despite having made all reasonable efforts, the defendant is unable to pay within the specified period.176 There are a number of other options available to the prosecutor and the courts to enforce the confiscation order, including the appointment of a receiver.177 Compliance orders can also be made against the defendant or third parties, giving the court the power to make such order as it believes is appropriate for the purpose of ensuring that the confiscation order is effective.178 There is also the power to vary the benefit and available amount findings at a later date.179 7.92 Finally, in order to preserve assets that might be needed to satisfy a confiscation order that has or which may be made, the prosecutor may apply

170 Section 13(4). 171 See section 13(5)–(6) 172 See R v Jawad [2014] 1 Cr App R (S) 16 (CA) for this point and the remainder of the points in this paragraph. 173 R v Davenport [2016] 1 Cr App R (S) 41 (CA). 174 See section 13(2). 175 Section 10 of the Serious Crime Act 2015. 176 POCA 2002, s 11 (as amended by the Serious Crime Act 2015). 177 Sections 54–57. 178 POCA 2002, s 13A. 179 Sections 19–25.

261

7.92  Anti-money laundering and proceeds of crime to the Crown Court for a restraint order to be imposed.180 At the investigatory stage, there must be reasonable cause to suspect that the alleged offender has benefited from their offence. At the proceedings stage, the standard is elevated to reasonable cause to believe.181 A restraint order has the effect of prohibiting any specified person from dealing with any realisable property held by him.182 Realisable property is any free property held by the defendant as well as any free property held by the recipient of a tainted gift.183 Restraint orders can have worldwide effect in personam and can bite on assets whether or not the realisable property is specified in the restraint order or held in the name of the defendant.

TERRORIST FINANCE 7.93 It has long been recognised, particularly in the context of terrorist activity in Northern Ireland and more recently in the context of the Global War on Terror, that there is value in attempting to disrupt the flow of funds to terrorist organisations. There is also value in being able to subject such organisations to financial investigation and profiling. There is, however, an important difference between attempting to interdict the funds of terrorist organisations and those of organised crime. Generally speaking, a significant proportion of the funding for criminal and other activity by organised crime will be derived from criminal activity. In other words, it will be the proceeds of crime. However, while terrorists may be indistinguishable from organised crime in what they do, some organisations derive their financial support from legitimate sources. To take action against such funds, it is necessary to ‘taint’ them by virtue of the purpose for which they are given. Thus, it is the intention or at least, knowledge of the donor that renders the property ‘criminal property’. This is an important difference. 7.94 The principle offences in regard to terrorist funds are found in the Terrorism Act 2000 (TA 2000), as amended.184 Section 1 defines terrorism as having three parts. First there must be the use or threat of action involving serious violence against a person, serious damage to property, which endangers a person’s life other than that of the person committing the action, which creates a serious risk to the health or safety of the public or a section of the public, or which is designed seriously to interfere with or seriously to disrupt an electronic system. Secondly, the use or threat must be designed to influence the government or an international governmental organisation or to intimidate the public or a section of the public, however where the action involves the use of firearms or explosives it is terrorism whether or not the use or threat is 180 Sections 40–47. A restraint order may be imposed from the outset of a criminal investigation and there must be reasonable cause to suspect that the defendant has benefited from his criminal conduct. This is a lower test introduced under section  11 of the Serious Crime Act 2015, before which the test was reasonable cause to believe. 181 POCA 2002, s 40 (as amended by the Serious Crime Act 2015). 182 Section 41(1). 183 Section 83. 184 SI 2001/3365. See also Review of Safeguards to Protect the Charitable Sector from Terrorist Abuse; A Consultation Document, (2007), Home Office. There are provisions in the antiterrorist law that may be relevant in the context preparatory activity and investigation, see generally C Walker, The Anti-Terrorism Legislation (Oxford University Press 2002) and A Jones, R Bowers and H Lodge, The Terrorism Act 2006 (Oxford University Press 2006). See also R Cranston, The Funding of Terror, The Legal implications of the Financial War on Terror (Society of Advanced Legal Studies 2002).

262

Anti-money laundering and proceeds of crime   7.97 designed to have such influence. Thirdly, the use or threat must be made for the purpose of advancing a political, religious, racial or ideological cause. It is of note that action, person, property, public and government are all given extraterritorial definitions.185 7.95 There are offences in relation to proscribed organisations. Section 11 of the Act makes it an offence to belong to a proscribed organisation. Section 12 of the Act makes it an offence to provide support for a proscribed organisation. Section 13 of the Act makes it an offence to wear the uniform of a proscribed organisation, whether in the form of clothing or by means of a badge or something of that kind implying membership or support. It also makes it an offence to publish an image of an item of clothing or any other article in such a way or in such circumstances as to arouse reasonable suspicion that the person is a member or supporter of a proscribed organisation. 7.96 There are further offences that relate generally to terrorist property and are not limited to proscribed organisations. Section  14 defines terrorist property as ‘(a) money or other property which is likely to be used for the purposes of terrorism (including any resources of a proscribed organisation), (b) proceeds of the commission of acts of terrorism, and (c) proceeds of acts carried out for the purposes of terrorism’. This definition is wider that that under sections 327–329 of the POCA 2002 as it includes forward looking acts whereas the definition of criminal property under section  327 looks backwards.186 Section 14(2)(b) further provides that any money or other property which is applied or made available or is to be applied or made available for use by such an organisation is also included. It is also made clear that the proceeds of the commission of acts of terrorism as well as the proceeds of acts carried out for the purposes of terrorism will be considered to be terrorist property. In this context, the proceeds of such crimes have a similarly wide meaning to that of ‘criminal property’ in the general anti-money laundering law. 7.97 Raising funds and providing property for terrorism is outlawed in section 15 of the Act. Under section 15(1) a person commits an offence if he invites another to provide money or other property and intends that it should be used, or has reasonable cause to suspect that it may be used for the purposes of terrorism. Section  15(2) renders it a crime187 to receive money or other 185 See TA 2000, s 1(5). As a result, it is important to note that section  1 ‘does not specify that the ambit of its protection is limited to countries abroad with governments of any particular type or possessed of what we, with our fortunate traditions, would regard as the desirable characteristics of representative government. There is no list or Schedule or statutory instrument which identifies the countries whose governments are included within section 1(4)(d) or excluded from the application of the Act. Finally, the legislation does not exempt, nor make an exception, nor create a defence for, nor exculpate what some would describe as terrorism in a just cause. Such a concept is foreign to the Act. Terrorism is terrorism, whatever the motives of the perpetrators’, see R v F [2007] QB 960 (CA). Also of note is R v Gul [2012] 1 WLR 3432 (CA), in which it was held that ‘there is nothing in international law which would exempt those engaged in attacks on the military during the course of an insurgency from the definition of terrorism’. In Gul the Court of Appeal also found that ‘although it is clear that in all forms of armed conflict civilians should not be attacked, that does not amount to state practice or opinio juris that those who attack military personnel in non international armed conflict cannot be designated as terrorists’. 186 See R v GH [2015] 1 WLR 2126 (SC). 187 It is not a crime under this Act for council tax to be raised. The applicant in The Queen on the Application of Coverdale v Hastings Magistrates Court [2014] EWHC 2348 (Admin) had argued that the money when collected would be transferred to central government and then reallocated to the councils and that in this way, the council tax supported the Government in waging wars.

263

7.97  Anti-money laundering and proceeds of crime property with the intention that it will be used for the purposes of terrorism. It is also an offence to receive funds or property where there is reasonable cause to suspect that it will be so used. Section  15(3) renders the financing of terror a crime, in that a person commits a crime if he provides money or other property and knows or has reasonable cause to suspect that it will or may be used for the purposes of terrorism. It is made clear that a reference to the provision of funds or other property includes it being lent or otherwise made available, whether or not for consideration. The objective aspect to this crime should be noted. 7.98 Section  16 provides that a person commits an offence if he uses money or other property for the purposes of terrorism. The section 16 offence is committed if a person possesses money or other property, and intends that it should be used, or has reasonable cause to suspect that it may be used, for the purposes of terrorism. The Section 16 offences are not incompatible with the right to freedom of expression.188 7.99 Section 17 makes it an offence to enter into or become concerned in a funding arrangement where there is reasonable cause to suspect that the funds will or may be used for the purposes of terrorism.189 The test is objective and ‘the proper approach is to examine the evidence in relation to the appellant’s actings and state of knowledge and ask whether a reasonable person in the position of the appellant would suspect that the payments would or might be used for the purposes of terrorism’.190 7.100 Section 17A makes it an offence for insurers under insurance contracts to make certain payments in respect of any money or other property that has been, or is to be, handed over in response to a demand made wholly or partly for the purposes of terrorism, and where the insurer or the person authorising the payment on the insurer’s behalf knows or has reasonable cause to suspect that the money or other property has been, or is to be, handed over in response to such a demand. A director, manager, secretary or other similar officer of the body corporate may also commit an offence if a Section 17A offence was committed with their connivance or if attributable to their neglect. 7.101 Section  18 provides that it is a crime to become concerned in an arrangement which facilitates the retention or control of terrorist property by or on behalf of another whether this is done by concealment, removal from the jurisdiction, transfer to nominees, or in any other manner. However, an accused is entitled to a defence if he can prove that he did not know and had no reasonable cause to suspect that the arrangement related to terrorist property. It should be noted that it is not enough for the defence to raise this issue it must actually be proved, albeit to the civil standard of proof.

188 It was held in O’Driscoll v The Secretary of State for the Home Department [2003] ACD 35 that ‘If there is no question about the terrorist nature of the organisation it is difficult to see why section 16 should be regarded as disproportionate, bearing in mind the need for proof of a guilty mind and the extent of the criminal court’s powers in relation to sentence. This section is not about freedom of expression. It is about knowingly providing money or other property to support a proscribed organisation, and so long as the organisation has been properly proscribed the section cannot in my judgment be regarded as disproportionate.’ 189 It is not a crime under this Act for council tax to be raised, see The Queen on the Application of Coverdale v Hastings Magistrates Court, above. 190 See Nasserdine Menni v Her Majesty’s Advocate 2014 SCL 191 (HCJ).

264

Anti-money laundering and proceeds of crime   7.104 7.102 Section  19 imposes a duty on those who acquire information, as a result of it coming to their attention in the course of a trade, business, profession or employment. Where such a person believes or suspects that another person has committed an offence under sections 15 to 18 of the Act and bases his belief or suspicion on information which comes to his or her attention in the course of a trade, profession or business, or in the course of his employment (whether or not in the course of a trade, profession or business, then the person commits an offence if he or she does not report his or her belief or suspicion and the information upon which it is based as soon as is reasonably practicable to the police or an officer of the NCA authorised for this purpose.191 This section  does not apply if the information came to the person in the course of a business in the regulated sector. It is a defence for an accused to prove that he had a reasonable excuse for not making a report or that he did in fact report his suspicions to his employer in accordance with an established compliance procedure. The obligation to disclose does not extend to professional legal advisers, in regard to information obtained in privileged circumstances, or a belief or suspicion based upon such. Of course, information relevant to furtherance of criminal activity would not be privileged, as we have seen in regard to the general law on anti-money laundering. The scope of section  19 is significantly extended by virtue of section 19(7), which provides that for the purposes of determining whether a person has committed a crime activating the obligation to report, if that person has taken an action or been in possession of a thing, and he or she would have committed an offence under sections 15 to 18 if that had taken place in the UK, he or she will for the purpose of section 19 be considered to have committed the relevant crime. There is protection from any liability arising from the restriction on the disclosure of information, for disclosures to the authorities, or in accord with compliance procedures, both generally and in regard to section 19. Of course, as we have seen, this would only provide legal protection within jurisdiction and not from actions based on, for example, the law of defamation or malicious prosecution. 7.103 Section 20 permits disclosures to a constable or an authorised NCA officer. Section 21 provides that no offence is committed under sections 15–18 if disclosure is made to a constable before he becomes involved and the authorities consent, or afterwards, on his own initiative as soon as is reasonably practicable, along the same lines as in the general anti-money laundering law. There are also similar penalties for breach of these provisions as discussed above under section 334 of the POCA 2002. 7.104 Defences are contained in sections 21ZA–21ZC to the sections 15 to 18 offences. Section  21ZA ensures that no offence is committed where there has been an arrangement with prior consent from an authorised officer. Section  21ZB ensures that no offence is committed where disclosure took place to an authorised officer after becoming involved in the arrangement and where there was a reasonable excuse for failing to make the disclosure before and where the disclosure was of the person’s own initiative and as soon as reasonably practicable to be made. Section  21ZC ensures that no offence is

191 In Malik v Manchester Crown Court [2008] EMLR 19 (Admin), a journalist judicially reviewing a production order could not rely upon the ground that the judge failed to take into account the privilege against self-incrimination with regards to section 19 if he did not raise that issue before the judge.

265

7.104  Anti-money laundering and proceeds of crime committed where the person intended to make a disclosure and where there was a reasonable excuse for not doing so. 7.105 At sections 21A and 21D, there are similar provisions to those found at sections 330 and 333A of the POCA 2002, discussed above, creating, respectively, offences for non-disclosure in the regulated sector and for tipping off. The mens rea is similarly knowledge or suspicion. Section 21B contains the section on protected disclosures akin to section 337 of the POCA 2002. 7.106 Section 21C requires a constable to whom a disclosure has been made to disclose it in full as soon as practicable after it has been made to a NCA officer. Section 21C also requires a constable to whom a disclosure has been made under section 21 to disclose it in full as soon as practicable after it has been made to an authorised NCA officer. Provision is also now included for the sharing of information within the regulated sector with the introduction of sections 21CA–CF, and for further information orders pursuant to sections 22B–E, as introduced by the Criminal Finances Act 2017. 7.107 Section  21E ensures that it is not an offence under section  21D to disclose to an employee, officer or partner of the same undertaking. 7.108 It is also not an offence by virtue of section 21E for a credit financial institution to disclose to another credit or financial institution in the same group in the UK or European Economic Area or in a country or territory imposing equivalent money laundering standards. Similar protection applies between professional legal advisers or relevant professional advisers where those persons perform their professional activities within different undertakings that share common ownership, management or control. Section 21F ensures that these persons also do not commit section 21D offences if the disclosure relates transactions with clients or former clients or provision of services involving them both, provided the disclosure is for the purpose only of preventing an offence under the terrorist property part of the Act, where the institution or adviser to whom the disclosure is made is situated in an EEA State or in a country or territory imposing equivalent money laundering requirements; and where the institution or adviser making the disclosure and the institution or adviser to whom it is made are subject to equivalent duties of professional confidentiality and the protection of personal data (within the meaning of section 1 of the Data Protection Act 1998). 7.109 Section 21G ensures that it is not an offence under section 21D if the disclosure by a person is to the supervisory authority for that person by virtue of the Money Laundering Regulations 2007 and where the purpose of the disclosure is the detection, investigation or prosecution of a criminal offence, an investigation under the POCA 2002, or the enforcement of any order of a court under that Act. In addition, a professional legal adviser or a relevant professional adviser does not commit an offence under section  21D if the disclosure is to the adviser’s client, and is made for the purpose of dissuading the client from engaging in conduct amounting to an offence. 7.110 There is a definitions section for sections 21D to 21G at section 21H, dealing with ‘credit institution’, ‘business in the regulated sector’ and other words and phrases referred to in those sections. 7.111 Section  23 permits a court to make a forfeiture order where a defendant is convicted of an offence under sections 15 to 18. The money or property must have been under the person’s possession or under their control

266

Anti-money laundering and proceeds of crime   7.114 or be the property that the arrangement related to. The property must also have been used for the purposes of terrorism or intended for such use, or in sections 15(1)–(3) and 16 cases, it is enough for there to have been reasonable cause to suspect the property might have been used for those purposes. For insurance cases under section 17A, the court may order the forfeiture of the amount paid under, or purportedly under, the insurance contract. For money laundering cases under section  18, the court may order the forfeiture of the money or other property to which the arrangement in question related. Finally, where a person is convicted of an offence under any of sections 15 to 18, the court may order the forfeiture of any money or other property which wholly or partly, and directly or indirectly, is received by any person as a payment or other reward in connection with the commission of the offence. 7.112 Section  23A deals with forfeiture for other specified terrorism offences and offences with a terrorist connection. Forfeiture of money or property make be ordered after conviction if under the possession or control of the person convicted and where it had been used for the purposes of terrorism, was intended by that person that it should be used for the purposes of terrorism, or where the court believes that it will be used for the purposes of terrorism unless forfeited. 7.113 Whether forfeiting under section 23 or 23A, a court must give third parties an opportunity to be heard where they are claiming to be the owner or otherwise interested in anything which can be forfeited. The court must have regard to the value of the property, and the likely financial and other effects on the convicted person of the making of the order. 7.114 Finally, it is noted that there are civil proceedings available for the forfeiture of terrorist cash pursuant to section 1 of and Schedule 1 to the Antiterrorism, Crime and Security Act 2001, as amended by the Criminal Finances Act 2017.

267

268

Chapter 8

Conflicts of interest

A FUNDAMENTAL RULE 8.1 The significance of the law relating to conflicts of interest in the control of abuse and in particular insider dealing has already been emphasised on several occasions in this work.1 We have seen that much of the traditional fiduciary law is based on the fundamental obligation to avoid conflicts of interest and account for any benefit that results from an actual conflict of interest.2 In this regard it is probably worth quoting Lord Herschell LC in Bray v Ford3 that ‘it is an inflexible rule of a Court of Equity that a person in a fiduciary position … is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in apposition where his interest and duty conflict’. And Lord Russell of Killowen in Regal (Hastings) Ltd v Gulliver:4 ‘The rule of equity which insists on those, who by the use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of the profit having, in the stated circumstances, been made. The profiteer, however, honest and well intentioned, cannot escape the risk of being called to account’. This strict rule has been underlined by the Supreme Court in FHR European Ventures LLP v Cedar Capital Partners LLC.5 We have already considered the liability

1

2 3 4 5

See 2.3 et seq and generally C Nakajima and E Sheffield, Conflicts of Interest and Chinese Walls (Butterworths 2002); B Rider, ‘Liability for Conflict of Interest – An English Problem’ in G Ferrarini and M Andenaes (eds), European Securities Markets – The Investment Services Directive and beyond (Kluwer 1998), Ch 2; S Coates, ‘Conflicts of Interest in the Securities Industry’ in B Rider and M Ashe (eds), The Fiduciary, the Insider and the Conflict (Sweet & Maxwell 1995), Ch 8; B Rider, Developments in European Company Law (Vol 2) (Kluwer 1997); and L Thevenoz and R Bakar (eds), Conflicts of Interest, Corporate Governance and Financial Markets (Kluwer 2007). See generally Chapter 2. [1896] AC 44. [1967] AC 152 and see 2.8 and 6.46 et seq above. [2014] UKSC 45 and see also In Plus Group Ltd v Pyke [2002] EWCA Civ 370 and Lee v Futurist Developments Ltd [2010] EWHC 2764 (Ch).

269

8.1  Conflicts of interest of those who abuse unpublished price-sensitive information in the civil law6 and now let us consider the ‘codification’ of these principles, in so far as they relate to company directors, in the Companies Act 2006. However, before doing so it is appropriate to emphasise two important factors in addressing the potential harm that conflicts of interest and conflicts of duty might cause. Firstly, within and beyond the law there is much of relevance in culture, ethics and religion. Many religions recognise the same truth expressed by Christ7 when tested as to the appropriate response to having apparently conflicting obligations: ‘No one can serve two masters, for either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve God and money.’ Ethical responses have been built on the same pragmatic common sense and it is this which the fiduciary law recognises and promotes. Secondly, it is equally clear that no economic system of any complexity could function entirely without people assuming positions in which a conflict of interest or duty might arise. Indeed, it has long been recognised that conflicts of interest are an inevitable reality, in, for example, the way the City of London operates.8 Consequently, in the real world it is impossible and undesirable to eschew all such conflicts and the law’s proper role is to better facilitate their proper and honest management.

DIRECTORS AND THEIR DUTY OF LOYALTY 8.2 Section 175(1) of the Companies Act 2006 provides that ‘a director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company’. It is made clear in section 175(7) that the ‘no conflict rule’ applies also to conflicts of duties.9 It has been argued that all the relevant fiduciary obligations are based on this fundamental principle. Consequently, the obligation to account for secret profits is but a manifestation of this strict obligation of loyalty.10 This is, however, an over simplification.11 Indeed, it is clear even in the context of directors’ duties that there are at least three relatively distinct, albeit often related, situations. This is underlined by the fact that section 175(3) states that the duty set out in section 175(1) ‘does not

6 7 8

9 10 11

See Chapter 2. Matthew 6.24 ESV and Luke 16.13 ESV. See, for example, K Griffiths, ‘Conflicts give banks rich pickings …’, The Times, 31 March 2021; R Spiegelberg, The City, Power without Accountability (Blond & Biggs 1973); M Clark, Regulating the City, Competition, Scandal and Reform (Open University 1986); J Dundas Hamilton, Stockbroking Today (2nd edn) (Macmillan 1979); and B Widlake, In the City (Faber and Faber 1986). From a historical perspective, see A Kynaston, The City of London (Pimlico 1994), G Gilligan, Regulating the Financial Services Sector (Kluwer 1999) and R Michie, The London Stock Exchange – A History (Oxford University Press 1999). See also section 176(5) in regard to benefits from third parties. In Breitenfeld UK Ltd v Harrison [2015] EWHC 399 (Ch) Norris J justified the strict rule on the basis that directors might otherwise ‘be swayed by interest rather than driven by duty’. See for example, Bhullar v Bhullar [2003] 3 BCLC 241. But note also that the courts have increasingly taken note of whether a director actually does have responsibility for the issue in hand. If there is no responsibility and influence then the courts have questioned whether equitable supervision is necessary, see Framlington Group plc v Anderson [1995] BCC 611, Plus Group Ltd v Pyke (2002) 2 BCLC 201 and Halcyon House Ltd v Baines [2014] EWHC 2216.

270

Conflicts of interest  8.4 apply to a conflict of interest arising in relation to a transaction or arrangement with the company’. Self-dealing in such transactions, on the part of a director, is governed by a specific set of rules relating to disclosure, control and approval. 8.3 The common law imposed a very strict obligation on directors. Lord Cranworth LC in Aberdeen Railway v Blaikie12 stated ‘it is a rule of universal application that no one’ having duties of a fiduciary nature ‘shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict with the interests of those whom he is bound to protect’ and ‘so strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into …’. To hold directors to the duties of a trustee was not practical, or perhaps in many cases in the commercial interests of the company. Consequently, despite the strict law, the courts permitted directors to deal with their own companies provided the shareholders, after full disclosure, ratified what had occurred. Indeed, in the case of prior authorisation by the shareholders, it is arguable that the potential conflict is avoided. The exigencies of business led to the courts going somewhat further and accepted that provided adequate disclosure was made to an appropriate body, determined by the company’s constitutional documents, which may be merely the board of directors, the so called ‘universal’ rule of Lord Cranworth was effectively avoided. Commercial practice went perhaps too far and since the Companies Act 1929 there has been a statutory obligation of disclosure to the board which cannot be excluded or modified by the articles of association.13 Section 177(1) of the Companies Act 2006 places a statutory obligation on a director who is ‘in any way, directly or indirectly’ interested in a proposed transaction or arrangement with his company to declare to the other directors the ‘nature and extent’ of the interest before the relevant arrangement is entered into. It is important to note that this obligation goes beyond contract and includes non-contractual arrangements. The purpose of this provision is to alert the board to the existence of a conflict and therefore obligate it to address it in the interests of the company. It follows that changes in the nature and extent of the relevant interest must also be disclosed and recorded. While the scope of this obligation is wide in so far as it includes ‘indirect’ interests such as a shareholding in another company with which a transaction is proposed, section 177(6)(a) provides that a director need not declare an interest ‘if it cannot reasonably be regarded as likely to give rise to a conflict of interest’. Furthermore, he need not disclose any interest that his fellow directors are already aware of and ‘the other directors are treated as aware of anything of which they ought reasonably to be aware’ under section 177(6)(b). A similar obligation to disclose interests is imposed on directors and shadow directors by section 182 in regard to existing transactions or arrangements. It should be noted that failure to disclose existing interests, usually upon appointment, is made a specific criminal offence under section 183. 8.4 Section 180 of the Companies Act 2006 provides that compliance with the disclosure obligation means that the director will not be in breach of his

12 13

(1854) 2 Eq Rep 1281 and Parker v McKenna (1874) 10 Ch App 96 and CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704. See generally, J Birds et al, Boyle and Birds’ Company Law (11th edn) (Jordan Publishing 2019), Chs 16 and 17.

271

8.4  Conflicts of interest duty to the company if the relevant transaction is then entered into. Compliance will also ensure that ‘the transaction or arrangement is not liable to be set aside by virtue of any common law rule or equitable principle requiring the consent or approval of the members of the company’.14 While section 178(1) of the Companies Act 2006 provides the consequences of breach of section 177 are to be the same as under the corresponding common law or equitable rules,15 it should be noted that the imposition of a statutory obligation to disclose may well render the law of fraud relevant.16 A dishonest failure to disclose might well constitute the offence of fraud, and connivance on the part of others might well amount to a conspiracy to defraud.17 8.5 The Companies Act 2006, as the previous legislation, recognises that there are certain situations where the temptation and consequent risks of selfdealing are of such significance that mere disclosure to the board is not enough. Consequently, in regard to substantial property transactions18 and loans to directors19 and those connected with them,20 and certain aspects of their service contracts,21 there must be full disclosure to the shareholders and a vote in general meeting. While of importance in promoting and ensuring the integrity of directors and in certain respects other insiders, we need not address these provisions here in detail. The Act provides specific civil remedies, which while resembling the general law, are specifically honed to deal with the involvement of persons connected with the director.22 8.6 The other two areas of liability that arguably flow from the general rule against conflict of interest, in the context of corporate law, relate to the misuse of corporate property, information and opportunities and the making of secret profits. In our discussion of civil liability, we have already noted that section 175(2) specifically refers to the misuse of information.23 It also refers to the exploitation of property and so-called corporate opportunities.24 We have examined the liability that can arise where a person in a fiduciary relationship, without proper consent or approval, derives profit from the exploitation of information or property, including expectant property25 or receives a benefit from a third party. It has been argued that the strict obligations of stewardship

14 15 16 17 18 19 20 21 22 23 24

25

Section 180(1). Note, however, ‘this is without prejudice to any enactment, or provision of the company’s constitution, requiring such consent or approval’. Section 178(2) provides: ‘the duties … are, accordingly, enforceable in the same way as any other fiduciary duty owed to a company by its directors’. See Alan Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch) discussed at 2.10 above. See 6.40 et seq above. See 6.17 above. See sections 190 to 196. Note in particular section 194, which excludes transactions on a recognised investment exchange through an independent broker. See section 197 et seq. See sections 252, 253 and 254. See sections 188 and 189 and generally Part 10, Chapter 5. See section 195 and also section 213. See 2.8 above. See 2.24 et seq above. Note that these obligations extend to the exploitation of opportunities (and information) acquired while a director, after ceasing to hold office, CMS Dolphin Ltd v Simonet [2001] 2 BCLC 704 and Killen v Horseworld Ltd [2012] EWHC 363 and Safetynet Security Ltd v Coppage [2012] 1 All ER 57. The important issue is whether the opportunity or information was acquired during the currency of a fiduciary relationship, see Chapter 2 at note 14. Terminating such a relationship with a view to exploiting an opportunity or information could well indicate bad faith, albeit it is not necessary to show that the termination was done to take up the advantage. See 2.24 et seq above.

272

Conflicts of interest  8.7 should render any risk of a conflict of interest or duty unacceptable. However, in the case of directors who are in the commercial world, the law is less exacting. Section 175(4) in regard to the avoidance of conflicts of interest, in the context of exploiting information, property and opportunity, states ‘the duty is not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest’. By the same token section 176(4), in the context of outlawing benefits from third parties, provides ‘this duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest’. Consequently, theoretical and unrealistic conflicts actual as well as potential should not expose a director to the prospect of liability.26

MULTIPLE APPOINTMENTS 8.7 An issue that has caused controversy is the position of directors who hold multiple directorships. We have seen that the courts have tended to treat directors less strictly than other fiduciaries, recognising the commercial environment within which they are required to operate.27 Indeed, there is authority, albeit not particularly strong, that a director cannot be restrained from serving as a director of another company actually competing in the same line of business.28 Without informed consent this would not be permissible in the case of an ordinary fiduciary.29 The situation is complicated where the director is also an employee. While the duty of fidelity owed by an employee to his employee is less demanding than the ordinary fiduciary obligations, it has been held that an employee cannot work for a competitor even in his

26 27

28

29

See generally Island Export Finance Ltd v Umunna [1986] BCLC 460; Framlington Group plc v Anderson [1995] 1 BCLC 475; and Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638. For an example of the court appearing attentive to commercial realities and in particular the impact of proprietary claims on the rights of third persons see Sinclair Investments Holdings SA v Versailles Trade Finance Ltd [2011] EWCA Civ 722, but see FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45. There is also the issue as to in what capacity a director may have learnt of a particular opportunity or item of information. In Re Westshield Ltd [2019] EWHC, the defendant director claimed that he had come to hear of an opportunity on a social occasion and not in his capacity as a director of the company. The court considered such an argument as ‘wholly artificial’ as HH Judge Eyre QC found that the information had been communicated to him ‘only because of his position in the company that others would know that he might be interested in such information …’ and the opportunity could not ‘be seen separately from the ability to cause the company to engage in those activities and so is to be seen as coming to him by reason of his position in the company.’ As we shall see, in the majority of situations a financial institution and its customer will not be in a fiduciary relationship, see, for example, Governor and Company of the Bank of Scotland v A Ltd [2001] EWCA Civ 52. London & Mashonaland Exploration Co v New Mashonaland Exploration Co [1891] WN 165 approved by Lord Blanesburgh in Bell v Lever Bros [1932] AC 161 at 195, but see In Plus Group Ltd v Pyke [2002] 2 BCLC 201 where doubts were expressed as to whether today this is appropriate. Of course, a director should not subordinate the interests of one company to another, even within the context of a group, see Scottish Co-op Wholesale Society Ltd v Meyer [1959] AC 324 at 366. See also First Subsea Ltd v Balltec Ltd [2014] EWHC 866 (Ch) and [2017] EWCA Civ 186. On the other hand, the courts do speak in terms of directors having an undivided duty of loyalty to their company, see for example, Burns v The Financial Conduct Authority [2017] EWCA Civ 2140, although in this case there had not been adequate disclosure and the court found that the director was actively pursuing a course of action which might involve a conflict of interest.

273

8.7  Conflicts of interest spare time.30 Of course, if the director makes adequate disclosure and secures permission under section 175, which provides that the ‘no conflict rule’ will not be breached if the matter has been authorised by the board – presumably in such a case of both companies, he should not be at risk. However, any material change in the nature of the conflict will need to be disclosed for this to provide protection. It goes without saying that if a director does exploit information, property or opportunity belonging to another company personally or for the benefit of another, then he will be liable, as may well the company or person for whose benefit that property or information is used.31 It is worth pointing out that the courts, while always mindful of the importance of preserving more or less inviolate the separate personality of a company32 will not allow directors, or for that matter others, to use a company as a means of escaping legal obligations properly applying to them.33 The courts have generally declined to find obligations between parent and subsidiary companies or sibling companies let alone their directors, however, recent cases indicate a greater willingness to adopt a more realistic and responsible approach.34

MODIFICATION OF DUTIES 8.8 We have seen that in regard to the various obligations associated with the ‘no conflict rule’, directors are able to secure authorisation or obtain ratification of their conduct from the shareholders and in some cases simply the board. We have also referred to the practice of attempting to redefine fiduciary obligations in the company’s constitutional documents and in particular articles of association. Successive legislation has intervened to curb this. Section 232(1) provides that any provision that purports to exempt a director or shadow director from any liability that would otherwise attach to him in connection with any negligence, default, breach of duty or trust in relation to the company is void. On the other hand, section 232(4) states that ‘nothing in this section prevents a company’s articles from making such provision as has previously been lawful for dealing with conflicts of interest’.35 The problem is that the law before the enactment of these provisions was not entirely clear. In Movitex Ltd v Bulfield36 Vinelott J distinguished between the fundamental principle that directors would be accountable for any benefit resulting from a conflict of interest regardless of whether it was fair or not, and the obligation of directors to always pursue the best interests of the company. This second obligation could not be varied or excused. In the case of the obligation to yield up benefits, the articles or shareholders could essentially redefine what might

30 See Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch 169. See also Industrial Development Consultants v Cooley [1972] 1 WLR 433. 31 See 2.25 and 2.41 et seq above. 32 Saloman v Saloman & Co Ltd [1897] AC 22. 33 See discussion at 6.140 and also at 1.16 et seq. 34 See Okpabi v Royal Dutch Shell plc and Shell Petroleum Development Company of Nigeria Ltd [2021] UKSC 3 and Vadanta Resources plc v Lungowe [2019] UKSC 20. The Supreme Court was prepared to accept that in certain circumstances a parent company might owe a duty of care to its subsidiary and possibly to a third parties damaged by a subsidiary. 35 See also section 180(4)(b) in the same vein. Consequently, where a company’s articles of association contain provisions for dealing with conflicts of interest, the statutory duties under section 175 will not be infringed providing the director has acted in accordance with the relevant articles. 36 [1988] BCLC 104.

274

Conflicts of interest  8.9 be considered to be a conflict of interest. If what might otherwise have been considered to be a conflict is rendered no longer a conflict then there is nothing for the fundamental rule to bite upon and therefore there is no breach to be excused. Thus, would it be acceptable to provide that directors could exploit information that came to them in their capacity as directors? Of course, it may be difficult in practice to distinguish information from property or opportunity. We have seen that the courts, at least in the civil law, are willing, in certain circumstances, to regard information as resembling property and to protect it accordingly.37 There is also an informational element in every case of so called ‘corporate opportunity’. Indeed, some cases that have been regarded as illustrating the taking of an opportunity might equally be considered examples of insider trading on the basis of price-sensitive information.38 It would seem that where the company has itself an interest in exploiting the information or opportunity, then a misappropriation or diversion by the directors would be contrary to their obligation to place the interests of the company first. In such a case a purported modification of their duty would be void. However, if the relevant organ of the company has made a bona fide decision not to use the information or pursue the opportunity then there may be no objection, as there is no actual conflict. This in the context of insider dealing may not be as simplistic. As we have seen it would not generally be in the interests of a company for its directors to be seen to be utilising unpublished price-sensitive information improperly.39 8.9 The cases indicate that in regard to most, but not all, fiduciary obligations, the person to whom they are owed may after full disclosure decide to waive their performance or excuse their non-performance.40 However, in the case of companies there is a problem. We have seen that directors owe their fiduciary duties to the company. While there are situations where the board of directors is the proper organ of the company to decide on performance, there are situations where the decision falls to the shareholders in general meeting. In such cases what is the position of a director who wishes to see his duties modified or excused, if he is also a shareholder. May he vote his own shares to change or excuse performance of his duties as a director to the company? Traditionally the law has taken the view that as shares are proprietary rights and shareholders are not in a fiduciary relationship with the company, there is no inhibition on director shareholders exercising their votes in general meeting as they choose.41 Having said that, there are cases which indicate a willingness

37 See 2.30 et seq above. 38 See Boardman v Phipps (1967) AC 46 and see in this context, B Rider ‘The Fiduciary and the Frying Pan’ (1978) Conveyancer 114. 39 See 2.13 above and Diamond v Oreamuno (1969) 248 NE 2d 910 (NY 1969) where the view was expressed that insider dealing by directors may damage the reputation of their company, although the court left open whether this would itself justify the imposition of liability. See also at Chapter 2 note 43. 40 Non-fiduciary duties such as the so-called Quincecare duty of care on banks may be contractually modified, see, for example, JP Morgan Chase Bank NA v The Federal Government of Nigeria [2019] EWCA Civ 1641 and see at first instance Burrows J at [2019] EWHC 347 (Comm). 41 For example, Lady Arden in Children’s Investment Fund Foundation (UK) v Attorney General [2020] 3 WLR 461 at para 88 observed, ‘members of companies are not normally fiduciaries in relation to any of their powers.’ There is no general obligation in the law to exercise a property or contractual right with regard to others, see Allen v Flood [1898] AC 1 HL, albeit the law might impose specific obligations in certain circumstances. In the case of the majority of shareholders exercising their constitutional right to amend the articles of association, the Supreme Court has recognised that they must exercise that power not

275

8.9  Conflicts of interest of the courts to have regard to the actions of directors in such circumstances as an indication of their good faith.42 If a director who is in breach of his duties is prepared to have the matter resolved by an independent majority of the shareholders, after full disclosure, this surely indicates integrity.43 Furthermore, an independent resolution better reflects what is in fact considered to be in the best interests of the company. Section 239(4) in regard to the ex post facto ratification of directors’ breaches of duty and trust provides that the ordinary resolution is to be considered passed ‘only if the necessary voting majority is obtained disregarding the votes in favour of the resolution by the director … and any member connected with him’. In some respects, this section is narrower than the common law, which is not necessarily pre-empted. The recent approach of some judges when considering the effect of a resolution on the ability of minority shareholders to raise a challenge on behalf of the company is rather wider and more searching. The section only ‘disqualifies’ the votes of the specific director and those connected with him as defined in the provisions relating to substantial property transactions.44 Thus, cronies and others who may be very interested in the wrongdoing, but who are not connected in a formal sense, will be able to vote as they choose. 8.10 We have noted that it is the better view that there are certain duties which cannot be excused even after full disclosure and purported ratification. It has been argued that it would be against public policy to allow ratification of fraudulent conduct or other misconduct that amounts to a serious crime, such as, presumably, money laundering or for that matter insider dealing. The perimeters of what might be considered excusable as a matter of public policy, albeit from merely the perspective of the civil law, are unclear. We have seen that courts have taken differing views on insider dealing.45 Perhaps assistance can be obtained from the law of insurance? Directors and Officers indemnity cover does not extend to allegations of fraud or deliberate wrongdoing. However, there has been uncertainty in regard to regulatory misconduct and civil enforcement. It is argued that a breach of duty involving the misappropriation of property belonging to the company cannot be excused. For example, in Cook v Deeks46 directors who misappropriated a corporate opportunity which ‘belonged’ to their company were not allowed to exercise their votes, which constituted a majority, to ‘make a present to themselves’.47 Whether the position would have been different had the vote been by a disinterested majority is open to question. It is important in this regard to remember that section 239 only applies to

only within the scope of the power, but also bona fide for the benefit of the company as a whole, see Children’s Investment Fund Foundation (UK), above and Marex Financial Ltd v Sevilleja [2020] BCC 783 at para 97 and Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, CA. 42 See Smith v Croft (No 2) [1988] Ch 114. Vinelott J’s more extreme view expressed in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) (1981) Ch 257 is probably not good law. But see also Daniels v Daniels [1978] Ch 406. 43 As we have seen, directors may secure authorisation in regard to the taking of a benefit which might otherwise amount to a conflict of interest, provided there is appropriate provision in the company’s constitution and their vote is disregarded, see section 175(3) and ((6) of the Companies Act 2006. 44 See sections 252 to 254 of the Companies Act 2006. 45 See 2.53 above. 46 [1916] 1 AC 554. 47 [1916] 1 AC 554 at 564 and see Templeman J in Daniels v Daniels [1978] Ch 406 discussed on this point in B Rider ‘Amiable Lunatics and the Rule in Foss v Harbottle’ (1978) Cambridge Law Journal 270.

276

Conflicts of interest  8.12 breaches of duty and trust that the law has considered capable of ratification. The traditional interpretation of Cook v Deeks is that as a misappropriation of corporate property was in issue, ratification was not possible. On the other hand, there are cases involving forms of self-dealing where the courts have allowed or contemplated allowing ratification. It is argued that in these cases the company’s claim was simply for an account of unauthorised profits and did not involve a misappropriation of corporate property.48 This analysis has always been open to question given the different ways in which courts have regarded the misuse of information. In some, the courts have regarded it as giving rise to a personal claim for the benefit that the fiduciary has received and in others to a proprietary claim based on the misuse of information as a species of corporate property.49 Of course, the explanation may be rather more to do with whether the benefit remains in the hands of a fiduciary and can therefore be subjected to a personal claim. After the approach of the Privy Council in Attorney General of Hong Kong v Reid50 it is doubtful whether a sensible distinction can now be made between these cases simply on the basis of the traditional approach to whether a personal and proprietary claim is in issue. Perhaps a better approach is to return to the issue of honesty, conscionability and fair dealing.51 8.11 Our discussion has focused on the ratification of conduct which, without such informed approval, would have amounted to a breach of fiduciary duty. The effect of the ratification is to render the conduct no longer objectionable. Of course, it may well be that a particular transaction that could be avoided for breach of duty might be affirmed by the board or the shareholders, albeit the liability of those responsible for the wrong not excused. There is also the issue which we have touched upon of prior authorisation. We have noted the attempts, primarily through the articles of association, to authorise actions which would otherwise constitute a breach of fiduciary duty. The Companies Act 2006 does not as in the case of ex post facto ratification address the issue whether the directors as shareholders might use their votes in this context. It is probably the case that, save in exceptional circumstances, there is no objection to those who might well be interested in some other capacity – even as a potential wrongdoer, utilising their own votes to amend the articles to include a relevant provision. We have seen that there are limitations on what can be excluded or modified in terms of duty to the company.52 Finally in this context, it is important to remember that directors who have acted honestly and reasonably and who in fairness ought to be excused from all or part of liability for a breach of duty can apply to the court under section 1157 for the judge to exercise his discretion. 8.12 Section 232 of the Companies Act 2006 prohibits any provision by which the company provides directly or indirectly an indemnity to a director or

48 49 50 51

52

North West Transportation Co v Beatty (1887) LR 12 App Cas 589 and Regal (Hastings) v Gulliver [1967] AC 152. For example, Phipps v Boardman [1967] AC 46; Attorney General of Hong Kong v Reid (1994) 1 AC 324 and Daraydan Holdings Ltd v Solland International Ltd [2005] Ch 119. Above at note 49 and in particular FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45. See B Rider above at note 38. Of course, where actual dishonesty is alleged then the allegations of fraud have allowed judges to cut through procedural and other barriers, Atwood v Merryweather [1867] LT 5 Eq 464. Having noted this, however, the courts do not like allegations that are justified purely as procedural devices and circumspection and care is required in pleading fraud see, above at 6.114 et seq. See 8.8 above.

277

8.12  Conflicts of interest a director of an associated company.53 However, under section 233, companies are permitted to purchase insurance cover for their directors even in regard to liability arising for breach of their duties to the company. It is most unlikely that this cover would extend to deliberate misconduct and in particular fraud, as we have seen. By the same token it is questionable whether such cover is available for secret profits as opposed to losses actually occasioned to the company. The company may also provide indemnity, directly or indirectly, in regard to liability to third parties. However, under section 234, this may not extend to fines imposed as a result of criminal proceedings, costs incurred in unsuccessfully defending a prosecution, a penalty imposed by a regulatory authority54 and the costs of defending civil proceedings brought by the company or an associated company in which judgment is given against the director.55 It should be noted that under this section there is no objection to a company indemnifying a director against the costs of unsuccessfully defending an action brought by a regulator, such as the Financial Services Authority, although this would not extend to the penalty.

OTHER FIDUCIARIES 8.13 Our discussion has so far focused on the directors of companies and in particular the issue of conflict of interest. Of course, in the context of financial service industry the range of fiduciary relationships is somewhat wider. There will be many individuals and companies that find themselves owing fiduciary obligations who are not in the position of directors.56 The regulatory system has, as we shall see, imposed obligations relating to the control and management of conflicts of interest and duty on persons who would not, in law be considered fiduciaries.57 It is also the case that the regulatory system and its rules have not always been in compliance with fiduciary law58 and 53

However, see sections 205 and 206 in regard to loans for defending civil actions and regulatory procedures. 54 See generally 12.41 et seq below. 55 The company cannot, by any provision, cover a director in regard to liability for any breach of duty to the company. Therefore, this provision is directed at actions where it is not the director’s own breach of duty to the company that is in issue. 56 See generally C Nakajima and E Sheffield, Conflicts of Interest and Chinese Walls (Butterworths 2002); B Rider and TM Ashe (eds), The Fiduciary, the Insider and the Conflict (Sweet and Maxwell 1995) and C Hollander and S Salzedo, Conflicts of Interest (3rd edn) (Sweet and Maxwell 2008). As we have noted above, at note 27, financial institutions will not necessarily be in a fiduciary relationship with their customers, see, for example, Governor and Company of the Bank of Scotland v A Ltd [2001] EWCA Civ 52, although there may be situations where the imposition of fiduciary obligations are appropriate, see Diamantides v JP Morgan Chase Bank [2005] EWCA Civ 1612 and Fahad Al Tamimi v Mohamad Khodari [2009] EWCA Civ 1109. Mention has already been made of the FCA’s plans to impose an obligation on financial services firms to act in good faith in their dealings with retain customers, see above at Chapter 6 note 16. However, unlike the imposition of a general fiduciary obligation under the Dodds-Frank Act in the USA, this will not, according to the FCA’s present thinking, give rise to a private cause of action. We have already referred to the possibility of the courts finding, albeit in exceptional circumstances, a duty of good faith in what are described as relational contracts, such as in Bates v Post Office Ltd (No 3) [2019] EWHC 606 (QB), although English law as we have seen does not impose a general duty of good faith or for that matter one in financial dealings. 57 See Chapter 14. 58 See generally Law Commission, Fiduciary Duties and Regulatory Rules, A Consultation Paper (LC No 124) (1992) HMSO; Law Commission, Fiduciary Duties and Regulatory Rules, Report (LC No 236) (1995) HMSO and B Rider (ed), The Regulation of the British Securities Industry (Oyez 1979) Ch 5.

278

Conflicts of interest  8.13 certainly the reliance that some have placed on following industry practice and even regulatory guidance may as a matter of law be misplaced.59 There are numerous conceivable situations where conflicts of interest and duty may arise in the conduct of financial business. This is not the place to try and identify these, let alone address them. It is also the case that the intervention of law on a much broader basis has made a considerable difference in resolving certain conflicts. For example, today it could not be sensibly argued that a stockbroker who learnt unpublished price-sensitive information is under a duty to use it for the benefit of his client.60 The same would also be true of a trustee in the prudent management of the trust funds.61 However, potential conflict issues arise that have perhaps not been considered with as much thought in the past. For example, the position of members of a shari’ah council advising financial institutions on issues of shari’ah compliance in regard to different products and funds may raise issues of conflict and handling of price-sensitive information.62 It will not always be clear, where fiduciaries operate in multiple functions or for different clients, who is entitled to primacy and on what basis. The traditional rules of equity that give primacy in the discharge of a duty, to those who are first in time – subject to issues of notice – is not in the context of the realities of financial life, practicable.63 Attempts to expand and apply rules based on simple conflicts between two principals, in the context of simple commercial transactions or agency agreements, have also proved inadequate for the task.64 Referring to the strict rules of confidentiality and no conflict developed, for example, in the practice of law, tends to neglect the public policy issues that dictate exacting standards as a matter of justice, which are arguably inappropriate in the world of business. Reliance on so called ‘Chinese walls’65 59 60

See B Rider and T M Ashe, above at note 56. See G Cooper and R Cridlan, The Law and Procedure of the Stock Exchange (Butterworths 1971) at p 104 and also see the allegations in Briggs v Gunner (unreported), Chancery Division, 16 January 1979 discussed in B Rider and HL Ffrench, The Regulation of Insider Trading (Macmillan 1979) at p 440. Of course, much depends upon whether a duty to offer advise and the discharge of that obligation, see generally Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 and Khan v Meadows [2021] UKSC 21. There have been significant issues in regard to the anti-money laundering laws and the possible dilemma that the fiduciary obligations on an intermediary who suspects that property under its control might be the proceeds of a breach of a fiduciary obligation and who has reported their suspicions that this might be criminal property to the authorities, see Bank of Scotland v A [2001] EWCA Civ 52 and N v The Royal Bank of Scotland [2019] EWHC 1770 Comm. 61 But see Phipps v Boardman [1967] 2 AC 46 and B Rider ‘The Fiduciary and the Frying Pan’ (1978) Conveyancer 114. 62 See B Rider and C Nakajima, Chapter 18 in S Archer and R Karim, Islamic Finance, the Regulatory Challenge (Wiley 2007) and in particular B Rider, ‘Corporate Governance for Institutions offering Islamic Financial Services’ in C Nethercott and D Eisenberg (eds), Islamic Finance, Law and Practice (2nd edn), (Oxford University Press 2020). 63 See generally, C Nakajima and E Sheffield, above at note 56. 64 See Anglo-African Merchants Ltd v Bayley [1969] 1 All ER 421 and North and South Trust Company v Berkeley (1971) 1 All ER 980. 65 The FCA has expunged the term ‘Chinese Wall’ from its material on the alleged basis that some found it to be offensive, see P Hosking, ‘Chinese Wall banned as City regulator strives to be more inclusive’, The Times, 8 July 2021. It intends to use the terms firewall and ethical wall instead. Chinese walls as a term has been used throughout the financial world for many years (see, for example, B Rider, ‘Conflicts of Interest and the Chinese wall’ in B Rider (ed), The Regulation of the British Securities Industry (Oyez 1979), Ch 5 and TM Ashe, Insider Trading (Company Communications Centre 1980)) and referred to the efforts expended to build the Great Wall of China. As the FCA is evidently still working on its new terminology, we have not changed the term in this discussion. Of course, the authors apologise for any offence that this may occasion. See generally, L Aitken, ‘Chinese walls and Conflicts of Interest’ (1992) 18 Monash L Rev 91.

279

8.13  Conflicts of interest and other methods of segregating information, focus on liability attaching to the flow of information and knowledge rather than the issue of conflict of duty.66 While as we shall see the regulators and professions have attempted to deal with some of these issues, given the complexity of the issues and vested interests, successive governments have been reluctant to resort to legislation and the matter has somewhat pragmatically been left largely in the hands of the courts.67 8.14 At the heart of the modern law is the colourful case of Prince Jefri Bolkiah v KPMG.68 Essentially this involved the issue of whether KPMG, by constructing various informational barriers, could act for the government of Brunei in investigating the dispersal of certain funds to companies possibly associated with Prince Jefri, when KPMG has undertaken work relating to these issues on instruction from Prince Jefri. At first instance Pumfrey J granted an injunction on the basis that KPMG had not convinced the court that its arrangements would satisfactorily protect Prince Jefri’s confidential information.69 The court considered that KPMG in providing forensic services were in much the same position as a solicitor and accordingly a very high burden was upon them. Lightman J had adopted a similar stance in Re Solicitors (A Firm).70 The Court of Appeal disagreed with Pumfrey J and thought on the facts that there was no real danger of information leaking across the Chinese Wall and the matter was one for the court to take a balanced view on.71 The House of Lords agreed with the court at first instance. It is interesting to note that the House of Lords emphasised that KPMG were under no fiduciary obligations to Prince Jefri as he had been a former client. The matter was therefore to be resolved purely on the issue of protection of confidential information. Prince Jefri’s right to protection was unqualified. It was not an issue of balance and unless KPMG could persuade the court that there was no risk other than a fanciful one of disclosure, he was entitled to an injunction.72 Lord Millett who delivered the leading speech attempted to set out principles of wider application than to the facts before the court. It is worth considering these here. 8.15 In circumstances where a person is in a fiduciary relationship with two clients at the same time, he cannot discharge his duties of loyalty to both and he will be in a conflict of interest.73 In such circumstances the issue is wider than that of the protection of confidential information. Where there is such a conflict the fiduciary must obtain the informed consent of both parties. However, Lord Millett considered that there are circumstances where the conflict is such that even written consent after full disclosure may not resolve

66

67 68 69 70 71 72 73

See, for example, Financial Services in the UK, A new framework for investor protection, DTI (1985) Cmnd 9432 HMSO para 7.4 ‘the Government is not convinced that total reliance can be placed on Chinese Walls because they restrict flows of information and not the conflicts of interest themselves’ and see also Dunford & Elliott Ltd v Johson & Firth Brown Ltd [1977] 1 Lloyds Rep 505, per Roskill LJ at 515. See generally above at 2.38. [1999] 2 AC 222. (1999) BCLC 1. [1997] Ch 1, see also Re Solicitors (A Firm) [1992] QB 959, and see D Curley, ‘How Solid are Chinese Walls?’, The Times, 16 April 2002. (1999) BCLC 1. (1999) 2 AC 222. Bristol & West Building Society v Mothew [1998] 1 Ch 1 and Clark Boyce v Mouat [1994] 1 AC 428.

280

Conflicts of interest  8.16 the problem. If one of the fiduciary relationships ceases then the only issue will be protection of confidential information obtained during the currency of that relationship.74 As we have seen, the duty of loyalty exists only during the currency of a fiduciary relationship except possibly where an opportunity to exploit it continues. This is similar to the situation of a director whose ceases to hold office. As there was in the Jefri case and also in other cases relating to solicitors, if there is confidential information the person seeking to enter into another relevant relationship must be able to show that there is no risk of this information being misused. While the courts in practice, if not in law, probably do adopt a higher standard in cases involving privileged information in the hands of lawyers,75 the burden of showing that there is no real risk of leakage or misuse is a very exacting one. Where it is possible to show that the information has been effectively isolated within a firm or company, the problem is not necessarily resolved. In many cases the business or professional adviser will have duties of care involving obligations to search out relevant information and use it for the benefit of other clients. While it has been accepted that in the discharge of such duties a fiduciary is under no obligation to acquire inside information,76 it is not clear that it would have a defence to an action based on negligence.77 Would it be acceptable to argue that the firm was not negligent because in its own commercial interests it had disabled those responsible for advising the relevant client from access to certain material information in its possession? This is not likely to be an appealing argument for most firms. It must be remembered that in many cases the action will be brought against the firm and not necessarily against individuals. Where the quality of advice is tested solely at the level it was in fact given, then it may be arguable that the individual professional could not reasonably be expected to have access to information that in any case had been acquired by the firm in confidential circumstances. The issue would be whether in the discharge of his duties the relevant professional adviser or manager should have acquired this or similar knowledge from another unobjectionable source? However, the courts have shown themselves to be relatively unsympathetic to banks and other financial institutions who for purely their own commercial reasons find themselves in a conflict of duties in money laundering cases.78

CONTRACTING OUT 8.16 We have already raised the issue in the case of directors of companies seeking to redefine or exclude their fiduciary and other duties by

74

75 76 77 78

Albeit a different issue, the court has held that an impression of impropriety will be enough to involve the ‘no conflict rule’, see Supasave Retail v Coward Chance (a firm) see Lee (David) & Co (Lincoln) Ltd v Coward Chance (a firm) [1991] Ch 259, [1990] 3 WLR 1278, [1991] 1 All ER 668 at 674, per Brown-Wilkinson VC. Information should be used only for the purposes for which it was given, Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. Furthermore, in certain cases it may not be appropriate to terminate the relationship, see Young v Robinson Rhodes [1999] 3 All ER 524. See Briggs v Gunner (unreported), Ch D 16 January 1979 discussed in B Rider Insider Trading (Jordan Publishing 1983), at p 224. See generally, B Rider and TM Ashe above at note 56 and also Jones v Canavan [1972] 2 NSWLR 236 and Daly v The Sydney Stock Exchange Ltd (1986) 160 CLR 371. See, for example, D Curley, ‘How solid are Chinese Walls?’, The Financial Times, 15 April 2002.

281

8.16  Conflicts of interest contractual provisions.79 In most situations involving activity in the financial services industry, there will be a contractual as well as fiduciary relationship. The terms of the relevant contract may well be pertinent in regard to many of the issues discussed in this book. We have already seen that contractual terms may well determine the scope of disclosure obligations there by having relevance in both the civil and the criminal law.80 The parties may agree by contract to vary and inhibit the enforcement of other legal obligations including those arising by virtue of a fiduciary relationship. While responsibility for fraud and certain other criminal acts cannot be excluded by contractual terms, we have seen that the law is by no means certain. Much will depend upon a construction of the contractual terms.81 Obviously, the courts will be unsympathetic to those who seek to abuse their position or act unfairly. We have already seen that judges have indicated in certain cases a dislike for directors who seek to manipulate circumstances in furtherance of dishonest designs.82 However, the courts must give effect to the clear and unambiguous intentions of the parties, determined objectively, unless such is contrary to statute or public policy. In Clark Boyce v Mouat83 the Privy Council accepted that a solicitor could act for two parties with conflicting interests provided he had the informed consent of both. It is important to note, however, that the Board of the Privy Council were most concerned to determine exactly what the scope of the solicitor’s duties were on the facts of the case. Lord Jauncey stated that ‘when a client in full command of his faculties and apparently aware of what he is doing seeks the assistance of a solicitor in the carrying out of a particular transaction, that solicitor is under no duty whether before or after accepting those instructions to go beyond those instructions by proffering unsought advice on the wisdom of the transaction’. This is important in the context of fiduciaries operating in the financial sector. For example, absent a contractual provision it has been held that a stockbroker in the ordinary course of his business when instructed to execute a particular transaction is under no obligation to provide advice.84 The express obligations

79

See 8.8. Consideration also needs to be given to the general issues that arise when attempts are made to exclude or modify legal obligations by contract. In particular, section 3 of the Misrepresentation Act 1967 and the Unfair Terms in Consumer Contracts Regulations 1999, noting that the Unfair Contract Terms Act 1977 excludes contracts relating to securities, may well be relevant. There are developed rules of construction which operate against the party seeking the benefit of the exclusion or limitation of liability. It may also be relevant to consider pre-contractual negotiations in the context of the law of misrepresentation and as to whether other contractual obligations of a collateral nature have been entered into. Note also specific statutes which in certain contexts give considerable discretion to the courts, for example, section 140A of the Consumer Credit Act 2006. 80 See 6.36 et seq above. 81 In Mott MacDonald Ltd v Trant Engineering Ltd [2021] EWHC 754 (TCC) Eyre J emphasised that all contractual clauses should be construed according to the ordinary principles of construction and that there was no presumption that they did not apply to fundamental breaches, see also AstraZeneca UK Ltd v Albermarle International Corporation [2011] EWHC 1574 and in particular the House of Lords in Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827. The court should always construe the wording of such clauses in accordance with the parties’ intentions at the time of contract, see Arnold v Britton [2015] UKSC 36. 82 See 8.9 above. 83 [1994] 1 AC 428. 84 Scheder & Co v Walton and Hemingway (1910) 27 TLR 89. However, note in this case the client’s instructions were unequivocal and irrespective of whether there is an obligation to proffer advice, if it is given it must be honest, see Allun KC at 89, accepted by Ridley J at 90. Furthermore, considerable caution needs to be exercised on the impact of obligations imposed by the FCA in regard to the conduct of business, particularly in regard to vulnerable investors.

282

Conflicts of interest  8.17 imposed by a contract may not, however, be determinative. For example, additional contractual obligations may arise by implication or by virtue of a collateral contract. It is also the case that reasonable expectations may arise as a result of a course of dealing or the circumstances of the case. The obligations in the law of negligence85 and equity are by no means confined within the precise terms of contract.

INFORMED CONSENT 8.17 There has been much discussion as to the adequacy of informed consent. In Clarke Boyce the Privy Council appear to accept that ‘consent given in the knowledge that there is a conflict between the parties and that as a result the solicitor may be disabled from disclosing to each party the full knowledge which he possesses as to the transaction or may be disabled from giving advice to one party which conflicts with the interests of the other’ is sufficient.86 The cases do indicate that where the fiduciary’s conflict is as a result of a conflict with his own self-interest, the obligations to ensure proper understanding on the part of the client are somewhat more onerous.87 Indeed, they are of the utmost good faith.88 Disclosure must be full and complete as to the material facts and not serve merely as a warning to the client. Where the conflict arises between two or more clients, the law is not entirely certain as to exactly what needs to be disclosed. The better view is that it must be enough to allow those concerned to fully appreciate the risks. Of course, much will depend upon the circumstances and the status of the parties. Given that we are in the realm of fiduciary obligations, it is clear that the test will be subjective and take account of the circumstances and knowledge of the relevant parties. Thus, disclosure must be in a legal sense suitable to the parties. On the other hand, full disclosure might itself conflict with a specific obligation to one or more of the parties. For example, too much detail might involve a breach of confidence and even the disclosure as to the existence of a specific conflict or other party might prejudice a legitimate interest. In such cases, perhaps the fiduciary must just take the consequences of liability. As Donaldson J observed in North and South Trust Company v Berkeley, ‘… he cannot say to his principal “I have not discharged my duty to you because I owe a duty to another”’.89

85

86

87 88 89

In the law of negligence, it is rarely true that the claimant will have contracted to have received the relevant advice. There may also be concurrent and overlapping duties in contract and tort, see Pirelli General Cable Works Ltd v Oscar Faber & Partners [1983] 2 AC 1, and for that matter in equity. It should be noted, however, the courts are reluctant to find duties to disclose information which would not otherwise require disclosure, see Banque Financiere de la Cite SA v Westgate Insurance Co (1991) 2 AC 249. [1993] 4 All ER 268 Lord Jauncey at 273. In Rhodes v Macalister (1923) 29 Com Cas 19 Atkin LJ stated: ‘the remedy is a very simple one and it is well within the compass of any ordinary businessman. The complete remedy is disclosure, and if an agent wishes to receive any kind of remuneration from the other side and wishes to test whether it is honest or not, he has simply to disclose the matter and rest upon the consequences if that.’ See also Jacob LJ in Imageview Management Ltd v Jack [2009] EWCA Civ 63 and Towers v Premier Waste Management Ltd [2011] EWCA Civ 923. Note that the FCA has expressed the view that reliance by a fiduciary on informed consent should be the last defence! See 8.21 et seq below. New Zealand Society ‘Oranje’ v Kuys [1973] 1 WLR 1126 and Phipps v Boardman [1967] 2 AC 46. See discussion at 6.37. [1971] 1 All ER 980.

283

8.17  Conflicts of interest As Donaldson J. emphasised, in such a case the fiduciary has to accept the ‘consequences flowing from the unlawful nature’ of the position in which he has deliberately got himself into, in most cases for financial reward! Such strict principles do not sit well with the way in which business has traditionally been done in the City of London where the wearing of many hats has long been fashionable. The self-regulatory authorities and even the Securities and Investment Board took the view that these rules could be varied by practice and their own rules. The Financial Services Authority has been rather more circumspect, accepting that the law may only be changed by legislation specifically addressing the relevant issues.90 Mere compliance with best City practice91 or even non-statutory principles and rules will not protect a fiduciary who has breached his fundamental duty. As Donaldson J. pointed out, ‘how do you train anyone to act properly in such a situation? What course of action can possibly be adopted which does not involve some breach of duty to one principal or the other? … Neither skill nor honesty can reconcile the irreconcilable.’92 8.18 It has been argued that there are situations where it is reasonable to find that the parties, because of the circumstances or the nature of the business, can be taken to have given their consent to the conflict. In Kelly v Cooper93 the Privy Council accepted that an estate agent could act for a number of vendors and ‘ring fence’ the confidential information he received from each vis à vis other parties with admittedly competing interests. The Board considered that this was justified by the implication of a term in the relevant contracts and this determined the scope of the fiduciary obligations. The basis upon which the Privy Council found this implied term is not clear from their decision. In the Jefri case Lord Millett took the view that the Privy Council in Kelly based their opinion not so much on an implied term, but the deemed consent to a state of affairs on the part of the competing principals. Referring to firms of accountants engaged in audits for clients with possibly competing interests, Lord Millett stated ‘their clients are taken to consent to their auditors acting for competing clients though they must of course keep confidential the information obtained from their respective clients’.94 It would seem, however, that the courts require evidence that the relevant parties were aware of the conflicts and that such are common in the particular business or activity. While not entirely satisfactory, such a pragmatic approach has much to commend it.95 Indeed, in Kelly their Lordships emphasised the advantage of such an approach, as a matter of expedience, in regard to stockbrokers with competing clients, who could not reasonably be expected to share inside information obtained in other capacities.96 8.19 The situation would therefore appear to be that provided the fiduciary can show that he has the informed consent of his clients, he will be at risk. The courts will, however, be prepared to examine the scope of his contractual obligations and the terms, express or implied, might well fashion the extent of other obligations including those arising in equity. The basis upon which an 90 91 92 93 94 95 96

See above at 8.13. See 8.22 et seq below. [1971] 1 All ER 980 at 991. [1993] AC 205. [1999] 2 AC 222 at 235. See B Rider, ‘The Fiduciary and the Frying Pan’ (1978) Conveyancer 114 at 119 and see D Curley ‘How solid are Chinese Walls?’, The Financial Times, 15 April 2002. [1993] AC 205 at 214.

284

Conflicts of interest  8.21 implied term may be found is not free from controversy and, although there is no authority particularly in point, it has been argued that this may be as a result of an established trade practice.97 Nonetheless, this would have to be something rather more than mere common practice.98 The extent to which it is reasonable to infer a contractual agreement to reduce the expectations of a client on the basis of his knowledge of what takes place in a particular trade or business remains unclear. It is therefore perhaps better to take the approach that where certain practices, such as the acting for multiple clients, are well established and the client appreciates this, then consent may be inferred or deemed. On the basis of the knowledge that the client has of what goes on it is reasonable to assume he will not object! Indeed, to allow him so to do would be unconscionable. As Donaldson J stated in the Berkeley case, ‘if X, a third party, knowing that A is the agent of P, the principal enters into an agreement with A involving duties which are inconsistent with those owed to P then in the absence of the fully informed consent of P, X acts at his peril’.99 While this observation is in a somewhat different and perhaps easier context,100 it does show that the courts have no sympathy with those who come into relationships in the knowledge that there are pre-existing obligations. Of course, much depends upon the degree of knowledge that the client has and the burden is on the fiduciary to ensure, in his own interests, that each client is aware of the circumstances.

A CASE AT LAST! 8.20 Having regard to the practical significance of many of the issues that we have raised and the implications that such have for proper legal and regulatory risk management, it is perhaps surprising that there is such a dearth of directly relevant authority pertaining to the financial services sector. The financial crisis as a result of the sub-prime scandal did result in the threat of a great deal of litigation alleging that banks and others had acted or given advice tainted by conflicts of interest. However, with very few exceptions these matters were settled and did not reach court. More recently, in the context of the Covid-19 pandemic concern has been expressed by many, including the Financial Conduct Authority (FCA) and the Bank of England, that the usual mechanisms and procedures for segregating potentially conflicting functions might, given the number of people required to work from home, breakdown. As we have noted, the FCA also takes the view that the term ‘Chinese Wall’ is no longer appropriate.101 8.21 A more recent case102 before the Federal Court of Australia has addressed many of the questions that we have raised in this chapter. The case was 97 98 99 100 101 102

See generally Hutton v Warren (1836) 1 M& W 466 and in particular Baron Parke at 475 and Cunliffe-Owen v Teather and Greenwood [1967] 3 All ER 561. See 8.17 above. Lord Langdale MR in Gillett v Peppercorne (1840) 3 Beav 81 expressed the view that the fact that something might be ‘every day practice in the City’ did not necessarily mean it was not a fraud. [1971] 1 All ER 993. This approach as we have seen does not adequately address the situations where there are many potential principles with various expectations, perhaps changing over time. See in particular C Nakajima and E Sheffield at note 55. See above at note 65. Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd [2007] FCA 963.

285

8.21  Conflicts of interest brought by the Australian Securities and Investments Commission against Citigroup Global Markets Australia Ltd on the basis that Citigroup as an adviser to another company in the context of a takeover – Toll Holdings Ltd – was in a fiduciary relationship and was therefore obliged not to violate its duty of loyalty by virtue of undertaking any activity which could amount to a conflict of interest. While Citigroup had constructed a Chinese Wall, its own proprietary trading was characterised as insider dealing. ASIC contended that to avoid allegations of breach of duty and deception it was necessary for the bank to obtain the informed consent of Toll to its own trading. The Commission maintained that the fiduciary relationship arose from the contractual arrangement between the bank and Toll despite the fact that Citigroup had inserted a term in the contract making it clear that the bank was acting ‘as an independent contractor and not in any other capacity including as a fiduciary’. Jacobson J, following other Australian cases, took the view that where a contractual and fiduciary relationship co-exist, the fiduciary relationship must conform to the contractual terms.103 He distinguished between a pre-existing fiduciary relationship and one that comes about as a result of a particular agreement of occurrence. In the latter case the relevant contract or agreement defines and determines the scope of the fiduciary duties that arise. With the exception of fraud and deliberate dereliction of duty, the court took the view that all such duties were capable of being varied or excluded by the terms of the contract.104 As there was no pre-existing fiduciary relationship between the parties, as there had been in, for example, some of the cases involving agents and solicitors, the court doubted whether it was even necessary for the bank to obtain the informed consent of Toll for its own share dealings. Jacobson J also considered that given Toll’s knowledge of the banks structure and operations and its own sophistication, it had sufficient knowledge of the real possibility of proprietary trading by Citigroup to amount to an informed consent. ASIC also failed in its assertion that certain transactions amounted to inside information. While the court considered that an un-communicated supposition could constitute inside information within the relevant provision105 it would not, on the facts, have had the required material effect.106 Furthermore, Jacobson J held that the arrangements that the bank had put in place to reinforce its ‘Chinese Wall’ were adequate within the statutory test.107 He noted, however, that such arrangements would not necessarily have addressed the conflict of interest had one actually arisen. He referred to Lord Millett in the Jefri case where it was emphasised that the efficacy of a Chinese Wall would depend upon the facts and it being ‘an established part of the organisational structure’ and not created on ad hoc basis.108

103 Hospital Products Ltd v US Surgical Corporation (1984) 156 CLR 41 and Breen v Williams (1996) 186 CLR 71. See also Chan v Zacharia (1984) 154 CLR 178. 104 The Law Commission (see note 58 above), has also adopted this view and was cited with approval by Jacobson J. However, on the older authorities the position is perhaps not as clear as it seems, see, for example, in regard to gross negligence, Ferguson v Paterson [1900] AC 271 at 281 and Re Poche (1984) 6 DLR 40 at 55. We have already seen that the courts have been reluctant to allow directors to excuse themselves for self-dealing: see 8.8 above and 2.14. 105 See section 1043A of the Australian Corporations Act. 106 See section 1042D. 107 See sections 912A and 1043F. 108 [1999] 2 AC 222 at 239. Jacobson J also referred to Bryson J in D & J Constructions Pty Ltd v Head & Ors Trading as Clayton Utz (1987) 9 NSWLR 118 at 123 where the practical efficacy of Chinese Walls was doubted. As we have seen the English courts have in practice been reluctant to accept that Chinese Walls actually do secure confidential information.

286

Conflicts of interest  8.23

CONFLICTS COMPLIANCE AND THE REGULATORY ENVIRONMENT 8.22 In this part of the chapter, we examine the impact of regulatory requirements for firms authorised to carry on regulated investment activity in the UK to establish internal arrangements to manage and control conflicts of interest that arise from their services or the activities they undertake. In particular, we identify that compliance with ‘Control of Information rules’ under the Financial Services and Markets Act 2000 (FSMA),109 and the Markets in Financial Instruments Regulations, whilst creating challenging procedural requirements, can provide valuable defences to allegations of certain classes of market abuse. In Chapter 13, we examine some of the regulatory obligations and systems of control obligations required to ensure compliance with the law. In many circumstances, dealing on price-sensitive information relies on the exploitation of a conflict of interest. Furthermore, individuals and firms can use their position of conflict in a financial market to facilitate manipulative market trading or gain an advantage at the expense of a customer, counterparty or other users of the market. Firms authorised to conduct investment business under FSMA are thus subject to a range of regulatory duties intended to ensure the identification and control of conflicts that may arise within their business activities. Furthermore, we will examine in Chapter 13, the ‘legitimate behaviour’ provisions at Article 9 of the UK Market Abuse Regulation 596/2014, which will recognise in appropriate circumstances how information barriers can protect against prohibited insider dealing. 8.23 Indicating the seriousness with which the UK’s FCA (or Authority) views the importance of conflicts management, it has (and when previously operating as the Financial Services Authority) taken enforcement action against authorised firms that have breached its conflict management rules. It is important to note, that the FCA’s, conflict management enforcement work has not been confined to conflicts management failures associated with the prohibited behaviours in the UK Market Abuse Regulation, or the criminal offences of market abuse in sections 89–91 of the Financial Services Act 2012, or the offence of insider dealing in the Criminal Justice Act 1993. Conflicts management concerning trading activities in hitherto unregulated corners of the financial markets are considered worthy of attention where they involve an authorised firm and indeed can provide useful guidance to the wider financial services sector on the characteristics of an effective conflicts management process. The FCA’s Final Notice to Barclays Bank on 23 May 2014110 set out details of failings identified by the Authority in the adequacy of Barclays arrangements to manage conflicts of interest arising from its participation in the London Gold Fixing process and activities on the Gold market. Together with additional breaches relating to the adequacy of Barclays’ systems of organisation and control, the breaches identified by the Authority resulted in a financial penalty of £26,033,500. The facts of the case in their simplest sense were that Barclays participated in a process that involved it in the ‘fixing’ of the price for gold and also to sell products

109 FSMA 2000, s 137P (as amended). 110 FCA Final Notice to Barclays Bank PLC 23 May 2014, see http://www.fca.org.uk/your-fca/ documents/final-notices/2014.

287

8.23  Conflicts of interest to its customers that were affected by prices set at the ‘Gold Fixing’. By way of example the Final Notice refers to one occasion where a Barclays representative was able to place orders that contributed to the fixing of the price of gold at a level that resulted in the Bank not having to make a US$3.9m payment to a customer but making a US$1.75m profit. Although the aforementioned enforcement decision against Barclays does not concern behaviour or investments covered by the market abuse regime then in force in in FSMA, Pt 8, it does serve to illustrate the extent of the nature of conflicts of interests and the regulatory liability that can occur when conflicts of interests are not effectively managed. 8.24 As examined earlier in this chapter, conflict situations such as where a firm acts on the buy and sell side of a transaction can often be at the core of an allegation of insider dealing or present a threat or risk to the effective control of a firm’s market conduct. In Chapter 13, when examining the compliance arrangements that authorised firms are required to establish, we show that compliance with many of such obligations is be based on an appropriate assessment of the risks to a firm’s ability to act in compliance with its regulatory obligations.

Authorisation to conduct an investment business – the interplay between threshold conditions and conflicts management 8.25 The effectiveness of a firm’s internal processes and controls, including its conflicts controls may be a key consideration for the firm’s application for authorisation and its ongoing ability to meets the ‘conditions’ for authorisation. Section 55B(3) of the FSMA requires the relevant regulatory authority (either the Prudential Regulation Authority or FCA) to be satisfied that the applicant firm meets (and will continue so to do) the Threshold Conditions set out in Schedule 6 of the FSMA. The conditions set out at paragraph 2E of Schedule 6 to the FSMA111 (for firms that do not conduct any PRA regulated activity) and paragraphs 3D, 4E and 5E of Schedule 6 to the FSMA (for firms that do carry on PRA regulated activities) address issues relating to the firm’s ‘suitability’. (Once again, the relevance of the suitability threshold condition to a firm’s wider compliance arrangements is examined in Chapter 13). 8.26 To better illustrate this point, it is helpful to consider the guidance provided in the Threshold Conditions Sourcebook within the FCA Handbook at COND 2.5.6G 1A, specific reference is made to the imperative of a firm’s internal arrangements being able to comply with regulation, which arguably draws in consideration of a firm’s conflicts management arrangements, including compliance with the provisions of the FCA Handbook Senior Management Systems and Controls (SYSC) sourcebook which will be examined in further detail below. The guidance at COND sets out that in assessing the suitability threshold condition the FCA will consider whether ‘the firm has made arrangements to put in place an adequate system of internal control to comply with the requirements and standards for which the FCA is responsible under the regulatory system’. 111 As amended by the Financial Services Act 2012.

288

Conflicts of interest  8.29

High Level Principles for Business and Fundamental Rules 8.27 FCA authorised persons are subject to 11 High Level Principles for Business, in essence setting out the ‘spirit’ of a firm’s regulatory obligations, The nature of and regulatory imperative of the FCA’s high levels principles was addressed in R on the application of British Bankers Association v the Financial Services Authority,112 (although not a case relating to conflicts management or indeed market abuse), in which Ouseley J stated,113 ‘The Principles are best understood as the ever present substrata to which the specific rules are added. The Principles always have to be complied with. The specific rules do not supplant them and cannot be used to contradict them. They are but specific applications of them to the particular requirements they cover …’. 8.28 High Level Principle for Business 8 sets out a direct conflict management obligation stating: ‘A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.’ As seen in the FCA’s Enforcement decisions against Barclays114 the obligations created by Principle for Business 8 can be used for non-market abuse regime trading activity conflicts management. Other High Level Principles for Business arguably touch upon the wider control framework in which conflicts management sits, addressing standards of business conduct (such as Principle 2: ‘A firm must conduct its business with due skill, care and diligence’), the necessity to have appropriate systems of control and to ensure the firm conducts its business effectively (Principle 3: ‘A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems’), the conduct of the firm as measured by standards in the financial markets (Principle 5: ‘A firm must observe proper standards of market conduct’) and the firm’s direct obligations to its customers (Principle 6: ‘A firm must pay due regard to the interests of its customers and treat them fairly’). When considering the nature of regulatory obligations addressed as High Level Principles for Business it is important not to overlook that credit institutions authorised by the Prudential Regulation Authority and other firms covered by the EU Capital Requirements Directive115 are additionally required to meet ‘Fundamental Rules’, including at Fundamental Rule 6 a requirement that’ A firm must organise and control its affairs responsibly and effectively’.

The FCA’s rules on organisational systems and controls 8.29 A series of obligations addressed at the level of ‘Governance’ and management control within an authorised person’s business address amongst other things the necessity of conflicts management arrangements and are set

112 R (on the application of) British Bankers Association v the Financial Services Authority & ors [2011] EWHC 999 (Admin), 2011 Bus LR 1531. 113 [2011] EWHC 999 (Admin) per Ouseley J at [162]. 114 See note 110 above. 115 Directive 2013/36/EU on access to the activity of credit institutions and prudential supervision of credit institutions and investment firms, 26 June 2013. OJ L176/338 and Regulation (EU) 575/2013 on prudential requirements for credit institutions and investments firms and amending regulation, 26 June 2013, OJ L321/6.

289

8.29  Conflicts of interest out within the SYSC. The applicable provision of SYSC varies dependent on the class of regulated business activity undertaken by a firm, and in many cases provisions of European legislation, now adopted into UK law such as the Markets in Financial Instruments Directive (MiFID II)116 at Article 16 and Article 23 and the MiFID Delegated Regulation on organisational requirements,117 address similar core underlying regulatory themes. 8.30 Although many of the provisions of SYSC address matters relating to how a firm is governed and controlled, including specific provision for ‘Compliance’ and ‘Financial Crime’ at SYSC 6 and ‘Risk Management’ at SYSC 7 (which we further examine in Chapter 13), there can be found at SYSC 10 separate and distinct reference to conflicts of interest obligations and guidance covering matters such as conflicts identification and management and provision relating to the effect of information barriers – so-called ‘Chinese Walls’. Such arrangements may be effective in addressing the’ legitimate behaviour’ requirements of Article 9 of the UK Market Abuse Regulation. The FCA defines a ‘Chinese Wall’ as ‘an arrangement that requires information held by a person in the course of carrying on one part of its business to be withheld from, or not to be used for, persons with or for whom it acts in the course of carrying on another part of its business.’118 Indeed, as examined further below, the rules and guidance at SYSC 10.2 are significant in relation to how an effective information barrier can operate as a defence to proceedings for ‘criminal market abuse’ under Part 7 of the Financial Services Act 2012 or civil market abuse under the UK Market Abuse Regulation.

Application of the conflicts rules and conflict identification and disclosure 8.31 The rules at SYSC 10 apply to certain classes of authorised persons in relation to a range of regulated activity119 they provide including those which provide services ‘in the course of carrying on regulated activities or ancillary activities or provide ancillary services’.120 For the purpose of SYSC 10.1, there is no relevance in the class of customer to whom the services are being provided (see SYSC 10.1.2R). The prime obligation within SYSC 10.1 and Article 23 of MiFID is for the identification of conflicts of interest. The specific obligation, however (see SYSC 10.1.3R and MiFID, Article 23(1)), is high requiring for in scope persons to ‘take all appropriate steps’ to identify and to prevent or manage conflicts of interest between the firm, including its managers and employees … and a client of the firm or one client of the firm and another client.’ Nonetheless, Article 34(4) of MiFID

116 EU Directive 2014/65/EU on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU. 117 EU Regulation 2017/565/EU supplementing Directive 2014/65/EU as regards organisational requirements and operating conditions for investment firms and defined terms for the purpose of that Directive (MiFID Delegated Regulation). 118 FCA Chinese Wall definition, see FCA Glossary https://www.handbook.fca.org.uk/ handbook/glossary/?starts-with=C. 119 See SYSC 10.1.1R and SYSC 10.1.1A R for rules on application and associated defined terms. 120 An ‘ancillary activity’ by reference to Part 3A of Schedule 2 to the FSMA Regulated Activities Order 2001 (SI 2001/544).

290

Conflicts of interest  8.34 Delegated Regulation on organisational requirements and provisions at SYSC recognise that where a firm’s internal arrangements are not sufficient to prevent the risk of damage to the firm’s clients, then before undertaking the client business and so that the client may make ‘an informed decision’ about the services, the firm will provide and by reference to the conflict, details of it and how it is mitigated.

Defining a conflict and identifying its characteristics 8.32 Although the rules at SYSC 10 do not provide a definition for the meaning of ‘Conflict’, guidance provided at SYSC 10.1.5G (derived from Recital 45 of the MiFID Organisation Directive121) illustrates that there needs to be more to the conflict situation than the firm gaining a benefit where the client suffers no potential disadvantage. Furthermore, provisions at SYSC 10.1.4R and Article 33 of MiFID Delegated Regulation on organisational requirements in essence require firms to take into account certain conflict characteristics where the conflict may ‘… damage the interests of a client …’ including requiring the firm to take into account matters where it: ‘(1)

is likely to make a financial gain, or avoid a financial loss, at the expense of the client; (2) has an interest in the outcome of a service provided to the client or of a transaction carried out on behalf of the client, which is distinct from the client’s interest in that outcome; (2A) … (3) has a financial or other incentive to favour the interest of another client or group of clients over the interests of the client …’ 8.33 The record-keeping obligations at SYSC 10.1.6R and Article 35 of MiFID Delegated Regulation on organisational requirements essentially require applicable authorised persons to maintain a conflicts register setting out the types of services and activities they carry out that may give rise to the risk of material damage to the interest of clients. Furthermore, the general record keeping obligations imposed on authorised firms set out at SYSC 9, allow the FCA to monitor a firm’s compliance with its regulatory obligations and operate to require a firm to maintain a record of all conflicts it has identified in accordance with its obligations in SYSC 10.1.3R and MIFID II, Article 23.

The obligation to maintain a conflicts policy 8.34 The requirement for firms to ‘establish, implement and maintain’ a conflicts policy operates to ensure firms plan for and embed their conflicts management arrangements. The wording of the obligation set out at, for example, Article 34 of MiFID Delegated Regulation on organisational requirements and SYSC 10.1.10R, referring to the appropriateness of the policy by reference to the ‘nature, scale and complexity’ of the firm’s business

121 Commission Directive No 2006/73/EC implementing Directive 2004/39/EC of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive.

291

8.34  Conflicts of interest provides sufficient flexibility in the regulatory obligation to allow a firm to design a policy appropriate for the unique features of its business, rather than having to adopt a standardised and perhaps inappropriate policy solution. 8.35 The substantive content of the conflicts policy for MiFID firms are as set out in Article 34 and cover matters such as: (a)

(b)

‘[… t]he circumstances which constitute or may give rise to a conflict of interest entailing a risk of damage to the interests of one or more clients’ Furthermore, guidance at SYSC 10.1.12G suggests that firms should address what are, it is submitted, high risk conflict services and activities such as ‘investment research and advice, proprietary trading, portfolio management and corporate finance business’); ‘ … procedures to be followed and measures to be adopted in order to manage such conflicts’.

Procedural requirements for managing conflicts of interests 8.36 The conflicts policy requirement in Article 34 sits alongside the discrete obligation to establish conflicts procedures. Indeed, the specific procedural obligation may be viewed as one complementing the operational effectiveness Principle for business (at PRIN 3) as well as the more generic governance obligations, including the obligations to have ‘internal control mechanisms’ (SYSC 4.1.1R) and ‘adequate policies and procedures … to ensure compliance … with its obligations under the regulatory system and for countering the risk that the firm might be used to further financial crime’ (SYSC 6.1). 8.37 Article 34(3) and, for example, SYSC 10.1.11(2) R set out an obligation for a firm to establish procedures for managing conflicts of interest including processes to ensure that persons involved in the firm’s activities that give rise to the conflict do so ‘at a level of independence’ albeit that the regulatory provision allows for the staff independence arrangement to be determined as necessary by reference to the firm’s size and activities as well as ‘the materiality of the risk of damage to the interests of clients’. Furthermore, Article 34(3) (along with SYSC 10.1.11(3) R) address a range of procedural mechanisms including barriers, separation of management and remuneration, outlining that the conflicts procedures should ‘at least’ where it is ‘necessary for the firm to ensure the requisite degree of independence’: a)

(b)

(c)

‘… prevent or control the exchange of information between relevant persons engaged in activities involving a risk of a conflict of interest where the exchange of that information may harm the interests of one or more clients; … separate supervision of relevant persons whose principal functions involve carrying out activities on behalf of, or providing services to, clients whose interests may conflict, or who otherwise represent different interests that may conflict, including those of the firm; the removal of any direct link between the remuneration of relevant persons principally engaged in one activity and the remuneration of, or revenues generated by, different relevant persons principally engaged in another activity, where a conflict of interest may arise in relation to those activities; 292

Conflicts of interest  8.38 (d) (e)

… prevent or limit any person from exercising inappropriate influence over the way in which a relevant person carries out investment or ancillary services or activities; … prevent or control the simultaneous or sequential involvement of a relevant person in separate investment or ancillary services or activities where such involvement may impair the proper management of conflicts of interest.’

8.38 The FCA imposed a financial penalty of £1,200,000 on WH Ireland Limited122 for failings in its systems and controls to ‘protect against the risk of market abuse’ between 1 January 2013 and 19 June 2013, including failings to meet the conflicts requirement of SYSC then in force, failings relating to conflict recording keeping, and its conflicts policy – stating in the Final Notice at [4.30], ‘A significant risk of market abuse arises from inadequate systems and controls to deal with potential conflicts of interest.’ And in relation to the adequacy of the firm’s conflicts policy, illustrating the importance of the policy being thorough and appropriately referring to the specifics of conflicts identification and management, stating at [4.33], ‘… the document referred to WHI’s “regulatory control environment” and other policy documents relating to market abuse and inside information. Consequently, staff may have been confused by the inclusion of market abuse related policies and procedures in a document dealing with conflicts of interest. More importantly, the document does not allow WHI to take reasonable steps to identify the circumstances which constitute or may give rise to a conflict of interest and does not specify procedures to be followed and the effective organisational and administrative arrangements to manage conflicts, in breach of SYSC 10.1.11R.’ Although SYSC 10.1.11(2) does not specifically refer to the incorporation of staff training into conflict procedures, it is not difficult to imply into the notion of ‘prevention and control’ arrangements the need to train or familiarise staff with the firm’s controls and the types of conflicts that may arise in the firm’s activities. Indeed, we have considered in Chapter 14 regulatory standards and expectations for the skills and capability of staff. There can of course be found in the FCA’s rules at SYSC 5 generic obligations addressing staff competence and training, which can be applied to staff knowledge of conflicts management arrangements as well as wider areas of the firm’s business and compliance arrangements. The FCA in its Final Notice to Barclays123 referred to the adequacy of the Bank’s staff training arrangements in the context of its conflicts management. Training may thus be regarded as an inherent part of a firm’s conflicts management procedures. In the Barclay’s Final Notice the FCA stated: ‘The firm’s lack of specific training and guidance, given the absence of clear and sufficiently-tailored policies and procedures with respect to the Gold Fixing, meant that Barclays’ personnel (including supervisors) may have been unaware of which conflicts of interest they should pay particular attention to in relation to the Gold Fixing.’124

122 FCA Final Notice, WH Ireland Limited 22 February 2016, see https://www.fca.org.uk/ publication/final-notices/wh-ireland.pdf. 123 See note 110 above. 124 See note 110 above, at [2.7].

293

8.39  Conflicts of interest

Control of Information rules and the regulatory impact of the Chinese Wall 8.39 By virtue of section 137P of the FSMA the FCA is required to publish rules addressing the ‘control of information’. These Control of Information Rules are set out at SYSC 10.2 and provides at SYSC 10.2.2R(1) that a firm maintaining a Chinese Wall may ‘(a) withhold or not use the information held; and (b) for that purpose, permit persons employed in the first part of its business to withhold the information held from those employed in that other part of the business’. Importantly, at SYSC 10.2.3R(4) the FCA provides that conformity with the control of information rule at SYSC 10.2.2(1): ‘(a) … provides a defence against proceedings brought under sections 89(2), 90(1) and 91(1) of the Financial Services Act 2012 (Misleading statements, Misleading impressions and Misleading statements etc. in relation to benchmarks) … ‘(b) … provides a defence for a firm against FCA enforcement action, or an action for damages under section 138D of the Act, based on a breach of a relevant requirement to disclose or use this information.’ Additionally, as examined further in Chapter 13, the legitimate behaviour provisions at Article 9 of the UK Market Abuse Regulation have the effect of recognising effective internal procedures that separate information and dealing or disclosure decisions to protect against the insider dealing prohibition. Article 9(1) provides, for instance: ‘… it shall not be deemed from the mere fact that a legal person is or has been in possession of inside information that that person has used that information and has thus engaged in insider dealing on the basis of an acquisition or disposal, where that legal person: (a)

(b)

has established, implemented and maintained adequate and effective internal arrangements and procedures that effectively ensure that neither the natural person who made the decision on its behalf to acquire or dispose of financial instruments to which the information relates, nor another natural person who may have had an influence on that decision, was in possession of the inside information; and has not encouraged, made a recommendation to, induced or otherwise influenced the natural person who, on behalf of the legal person, acquired or disposed of financial instruments to which the information relates.’

The FCA comments on the nature of Chinese Wall arrangements and the effective operation of them when it may be appropriate to permit information to be disclosed often referred to as ‘wall crossing’ in its Final Notice to WH Ireland Limited, stating ‘The purpose of a Chinese wall is to prevent inside information or other sensitive information being disclosed to individuals within a firm who should not have access to that information. When a decision is made that particular people need to be granted access to inside information, those individuals can be wall-crossed to permit them to receive relevant inside information. It is important for the wall- crossing procedure to be carefully controlled and recorded so that individuals: understand the obligations of

294

Conflicts of interest  8.43 becoming an insider, are only wall-crossed if appropriate and the firm is aware at all times of who has been wall-crossed.’125 8.40 Previously this chapter has considered the notion of the ‘Chinese Wall’ as an arrangement that can be used for the prevention and control of the exchange of information within an organisation. The Law Commission’s Consultation Paper on Fiduciary Duties and Regulatory Rules (1992),126 considered the purpose of the Chinese Wall as ‘… to prevent the attribution of knowledge between the component parts of a firm on different sides of the wall’127 and highlighted that to be considered effective it would normally involve some combination of the following organisational arrangements: ‘(a) (b) (c) (d) (e)

the physical separation of the various departments in order to insulate them from each other …; an educational programme … to emphasise the importance of not improperly or inadvertently divulging confidential information; strict and carefully defined procedures for dealing with a situation where it is felt that the wall should be crossed and the maintaining of proper records where this occurs; monitoring by compliance officers of the effectiveness of the wall; disciplinary sanctions where there has been a breach of the wall.’128

8.41 In the opinion of the House of Lords in the case of Bolkiah v KPMG,129 it was observed by Lord Millet that whilst Chinese Walls are in common use, such an arrangement can only be considered effective where it is an established part of a firm’s structure. Lord Millet stated: ‘In my opinion an effective Chinese Wall needs to be an established part of the organisational structure of the firm, not created ad hoc and dependent on the acceptance of evidence sworn for the purpose by members of staff engaged on the relevant work …’.130 8.42 Whilst conflict management procedures anticipated by Article 34 and SYSC 10.1.11R may not necessarily have the characteristics of a ‘Chinese Wall’, it is certainly the case that arrangements that can legitimately be characterised as a Chinese Wall will satisfy some of the MiFID and SYSC process requirements. There is recognition at SYSC 10.2 as to the effect of information control on any presumption of corporate knowledge of the controlled information. 8.43 In conclusion, the obligations imposed on authorised firms to establish arrangements to identify and manage conflicts of interest are complex and arguably operationally challenging but can, if maintained effectively, provide protection against allegations of market abuse. In Chapter 13 we examine in more detail the broader compliance procedure and systems obligations imposed on authorised firms, including those aimed at financial crime, dealing and investment research.

125 See note 122 above, at [4.21]. 126 Law Commission, Fiduciary Duties and Regulatory Rules. A Consultation Paper No 124 (1992) (HMSO). 127 See note 126 above, at [4.5.1]. 128 See note 126 above, at [4.5.2]. 129 Bolkiah v KPMG [1998] 2 AC 222, [1999] 1 All ER 517. 130 [1998] 2 AC 222 at p 239.

295

296

Chapter 9

Issuer disclosure and liability

DISCLOSURE AND THE ISSUER 9.1 Issuer liability for market abuse is an important compliance concern for companies and their advisers. The UK listing rules, which are administered by the Financial Conduct Authority (FCA), cover issuers whose securities are admitted to the official list and issuers whose securities are admitted for trading on regulated UK markets (or for which a request for admission to trading has been made). The FCA makes the listing rules under powers in Part VI of the Financial Services Markets Act 2000 2000 (FSMA).1 This chapter primarily discusses the disclosure requirements for issuers and related third parties that have been on-boarded into UK law pursuant to the legislation for exiting the European Union. Most of the ongoing reporting requirements in the listing rules are similar to those that were previously required under the EU Market Abuse Regulation (EU MAR).2 Moreover, the disclosure requirements apply to professional third parties, such as lawyers, accountants and investment banks who advise issuers. The chapter will discuss the disclosure requirements as they relate to market abuse offence and potential liability issues. It will also discuss related areas of issuer disclosure and liability involving takeovers and mergers.

DISCLOSURE OBLIGATIONS 9.2 The listing rules contained in Part VI of the FSMA require issuers to disclose via the Regulatory Information Service information that is not public knowledge that, if known, would lead to substantial movement in the price of their listed securities (ie price-sensitive information). The listing rules set out the Listing Principles which apply to every listed company with a primary listing of equity securities. The purpose of the Listing Principles is to ensure that listed companies have regard to the important role they play in maintaining market confidence and ensuring fair and orderly markets. The disclosure requirement applies to all issuers with securities traded on regulated UK markets.3 This requirement applies to all issuers who have 1 2 3

FSMA, Part VI. Pursuant to Part VI, the FCA makes the Listing, Prospectus and Disclosure and Transparency Rules. See FCA Handbook, The Disclosure and Transparency Rules (DTRs). The principle can be interpreted as requiring a listed company to communicate information to holders and potential holders of its listed equity securities in such a way as to avoid the creation or continuation of a false market in such listed equity securities.

297

9.2  Issuer disclosure and liability securities trading, or who are seeking to have securities trading, on a UK regulated market. The FCA Handbook publishes the Disclosure and Transparency Rules (DTRs) for listed companies. The DTR rules require an issuer to publish specified inside information (FSMA, section 96A). DTR 2.2.1 states that: ‘[a]n issuer must notify a RIS [Regulatory Information Service] as soon as possible of any inside information which directly concerns the issuer unless DTR 2.5.1R applies’. DTR 2.2.1 refers to DTR 6.3.2R regarding disclosure of inside information. DTR 6.3.2R states ‘an issuer or person must disclose regulated information in the manner set out in DTR 6.3.3R to DTR 6.3.8R. An issuer or a person must ensure that the minimum standards set out in DTR 6.3.4R to DTR 6.3.8R are met when disseminating regulated information and an issuer or a person must entrust a RIS with the disclosure of regulated information to the public and must ensure that the RIS complies with the minimum standards according to DTR 6.3.4R to DTR 6.3.8R. The minimum standards set out are the following: (a) (b)

(c)

Regulated information must be disseminated in a way to ensure that it is capable of being disseminated to as wide a public as possible, and as close to simultaneously as possible in the UK. Regulated information must be communicated to the media in unedited full text, except for annual financial reports. Annual financial reports must not be communicated to the media in unedited full text except for the information that would be required to be disseminated in a halfyearly financial report. Regulated information must further be communicated to the media in a manner ensuring the security of the communication, minimising the risk of data corruption and unauthorised access, and providing certainty as to the source of the regulated information.4

A communication to a RIS must make clear that the information is regulated information and clearly identify the issuer concerned, the subject matter of the regulated information, and the time and date of the communication of the regulated information by the person or the issuer. If requested by the FCA, an issuer or other person must be able to communicate the name of the person who communicated the regulated information to the RIS, the security validation details, the time and date on which the regulated information was communicated to the RIS, the medium in which the regulated information was communicated, and details of any embargo placed by the issuer on the regulated information.

DISCLOSURE AND INSIDE INFORMATION 9.3 The duty of disclosure arises when the issuer comes into possession of ‘inside information.’ Inside information is defined in section 118C of FSMA (as amended),5 as: ‘[I]nformation of a precise nature which has not been made public, relating, directly or indirectly, to one or more issuers of financial instruments and

4 5

See FCA Handbook, DTR 2.2.1 and DTR 6.31R–6.3.8. See section 118C of FSMA. See also Code of Market Conduct (MAR), art 7.

298

Issuer disclosure and liability  9.4 which, If it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.’ Section 118C defines ‘inside information’ by reference to four criteria: (1) the information is of a precise nature; (2) it has not been made public; (3) it relates to one or more issuers of financial instruments; and (4) if it were made public, would be likely to have a significant effect on the prices of those financial instruments, or on the price of related derivative financial instruments. Significantly, these elements must coexist for any information to qualify as ‘inside information’ and to trigger an issuer’s disclosure obligation. However, it should be noted that the criteria of information of a precise nature and significant price effect are very much linked to each other and hence it is important not to consider each criterion in isolation. Nevertheless, UK practice has been based on a previous interpretation by the Committee of European Securities Regulators that it is possible to identify separately the factors which should be taken into account in respect of each criterion.6 9.4 Among these criteria, the interpretation of the ‘precise nature’ and the ‘significant price effect’ requirements are the most contentious. The precise nature requirement is met where, first, the information relates to an existing event or set of circumstances, or a future event or set of circumstances which are likely to occur; and, secondly, the event or circumstances are specific enough to allow an evaluation of their potential impact on the price of the issuer’s financial instrument. The precise nature test must be based on firm and objective evidence, not mere rumours or speculation, and assessed on a case-by-case basis. In this respect, in Hannam v Financial Conduct Authority, the Upper Tribunal held that the likelihood of occurrence of the event or set of circumstances does not mean ‘that there must be a more than even chance of the circumstances coming into existence or the event occurring. It certainly means that the prospect must not be fanciful … [and] … [w]here the communication or statement contains a mix of accurate and inaccurate information the exercise will be to establish what actual or reasonably expected circumstances and events are indicated by the information taken as a whole’.7 In this context, when considering what may reasonably be expected to come into existence, a crucial issue will be whether it is reasonable to draw a conclusion based on ex ante information available at the time. This issue was also addressed by the Court of Justice of the European Union (CJEU) in Geltl v Daimler AG, where the question raised was whether information that is part of a chain of events or a protracted decision-making process could constitute inside information and thus be disclosable. The CJEU ruled that intermediate steps that are part of a protracted decision-making process that lead to a future event can be regarded as inside information irrespective of whether the final event is reasonably expected to occur. In practice, the intermediate steps would, according to CJEU reasoning, constitute historical facts which, in turn, may be deemed as information of a precise nature.8

6 7 8

See Committee of European Securities Regulators (CESR), 2007, p 4. Hannam v Financial Conduct Authority [2014] (UKUT 0233). Markus Geltl v Daimler AG, Case C-19/11, 28 June 2012; see also Article 7(3) of EU MAR stating that: ‘intermediate step in a protracted process shall be deemed to be inside information if, by itself, it satisfies the criteria of inside information as referred to in this Article’.

299

9.5  Issuer disclosure and liability 9.5 As to the ‘significant price effect’ requirement, UK law has onboarded the definition in Article 7 of EU MAR that specifies that ‘information which, if it were made public, would be likely to have a significant effect on the prices of financial instruments or related derivative financial instruments shall mean information a reasonable investor would be likely to use as part of the basis of his investment decisions’.9 This definition has been interpreted as providing the so-called ‘reasonable investor test’, according to which the determination of whether the information has an impact on the price of financial instruments depends on whether the reasonable investor would be likely to use the information as part of the basis for his investment decisions. In the UK, the Upper Tribunal in Massey v Financial Services Authority, interpreted the reasonable investor test based on section 118C(6) of the FSMA10 as follows: ‘We consider next whether the information was likely to have a significant effect on the price of the shares. Mr Massey’s case is that it was not likely to have such an effect. We would have considerable sympathy with his view if the phrase “likely to have a significant effect on the price” had been used in the Act in its ordinary sense. But we have to apply the specially extended meaning assigned to this expression by s 118C(6). Whether or not the information was (in the ordinary sense) likely to have a significant effect on the price, we consider it is clear that it was information “of a kind which a reasonable investor would be likely to use as part of the basis of his investment decisions”.’ According to the Tribunal, the reasonable investor test was, by itself, sufficient for determining whether the information had a significant effect on the price of the securities. Consequently, regardless of whether the information may actually have had an impact on the price of the securities, it is sufficient, according to the Tribunal in Massey, that a reasonable investor uses the information as part of the basis of his investment decision.11 This interpretation raised doubts in some quarters that the Tribunal had given the reasonable investor test a meaning which, rather than supplementing, supplanted the significant price effect test and that it could create uncertainty and inconsistent market practices amongst market participants with regard to disclosure obligations and dealing decisions.12 9.6 Successive FCA decisions followed the Upper Tribunal’s broad interpretation of the reasonable investor test in Massey.13 In 2014, however, in the Hannam case, the Upper Tribunal reconsidered its view regarding the Massey approach calling it ‘simplistic’ and ruled that the reasonable investor, in the process of making an investment decision, would only rely

9 10

See EU Regulation 596/2014, art 7. Massey v Financial Services Authority [2011] UKUT 49 (TCC), Upper Tribunal reference FIN/2009/0024. 11 Ibid. 12 See, Financial Markets Law Committee, Issue 154 – Analysis of Legal Uncertainties Arising From Article 6 of the Proposal for a Regulation on Insider Dealing and Market Manipulation (30 March 2012) Appendix 2. 13 See Hartmut Krause and Michael Brellochs, ‘Insider trading and the disclosure of inside information after Geltl v Daimler – A comparative analysis of the ECJ decision in the Geltl v Daimler case with a view to the future European Market Abuse Regulation’ (2013) 8 CMLJ 3, 292.

300

Issuer disclosure and liability  9.8 on information which is likely to have an impact on the price of the security. Also, once made public, this information should enable a prediction as to an upward or downward price movement.14 Significantly, the Hannam case rebalanced the interaction between the reasonable investor test and the significant price effect so that the former supplements (and does not replace) the latter.

DELAYED DISCLOSURE 9.7 Issuers are required to ensure that any information falling under the definition of ‘inside information’ is disclosed to the public by the issuer ‘as soon as possible’. The rationale for this requirement is to provide investors with material information in a timely manner. To this end, it is necessary that the disclosure occurs as soon as possible and is synchronised such that all categories of investors can have equal access to the disclosed information. UK issuers are required to inform the public ‘as soon as possible’ of inside information that concerns them.15 This means as soon as the event occurs. The requirement, however, has been criticised on the grounds that the near immediacy of the disclosure obligation would not give the issuer adequate time to assess the relevance of the information and therefore might result in issuers becoming far more reluctant to disclose information.16 The FCA has authority to make rules governing information disclosure with respect to instruments admitted to trading in regulated markets.17 The rules related to instruments admitted to trading on a regulated market are subject to strict disclosure requirements.18 Issuers are required under the rules to publish and update, if necessary, any inside information. The rules also allow an issuer to delay the publication of insider information in certain circumstances, and require an issuer who discloses information to a third party to publish that information without delay with certain exceptions. It also requires an issuer to draw a list of those persons who have access to inside information that directly relates to the issuer, and requires the issuer’s senior management, and those closely connected, to disclose transactions conducted on their own account in the issuer’s shares. 9.8 Disclosure obligations raise the question of the extent to which the interest to ensure an adequate level of investor protection can be balanced with the issuer’s interest to legitimately delay the disclosure of the information. In this respect, ‘the public good in investors obtaining information as soon

14

15 16

17 18

Hannam v Financial Conduct Authority, para 105: The tribunal appears from that passage to have considered that it might be possible to find a situation where a reasonable investor would take into account, in making his investment decision, information which would not in fact have a significant effect on price; but, because of the extended definition in s 118C(6), that information would nonetheless be inside information. It is not at all clear to us why the tribunal put the matter the way it did ‘. See FCA Handbook, DTR 2.2.1A, referring to article 17(1) of MAR, which provides that information is required to be disclosed as soon as possible. HM Treasury observed that this requirement should allow for a longer period to disclose, but the FCA has onboarded the previous EU CESR interpretation for immediate disclosure, which is now reflected in MAR, art 17(1). See CESR, ‘Advice on Level 2 Implementing Measures for the Market Abuse Directive’, CESR/02 89d (CESR, Paris), p 34. FSMA, s 73A. Rules made under this power and the existing power with respect to listed securities are known as Part VI rules. MAR, art 17.

301

9.8  Issuer disclosure and liability as possible is preferred to any public good in allowing companies to delay disclosure, in all but the most limited circumstances’.19 However, issuers are allowed to delay the disclosure of information. In this respect, an issuer may under its own responsibility delay the public disclosure of inside information such as not to prejudice its legitimate interests provided that such omission would not be likely to mislead the public and provided that the issuer is able to ensure the confidentiality of that information. The FCA requires that an issuer shall without delay inform the competent authority of the decision to delay the public disclosure of inside information. It is possible for the issuer to delay disclosure, if such delay is based on legitimate reasons. Such legitimate reasons and circumstances to delay disclosure can include the facts related to negotiations in course or decisions taken on contracts by the management body. These are situations which may make a delay legitimate if the disclosure may jeopardise the interest of existing or potential shareholders. It appears that, under these circumstances, the decision of delaying the disclosure must be the result of an ex ante evaluation by the issuer as to the possibility of hampering the shareholders’ interest through the disclosure. The above circumstances for justifying a delay in disclosure are not exhaustive of all situations and therefore other factual scenarios might qualify to permit the issuer to delay the disclosure of inside information if doing so for a legitimate reason that is in the interest of shareholders and serves broader public policy regulatory objectives.20 The FCA has accepted several examples of when delay is acceptable, such as if disclosure would harm the issuer’s interests, or affect the negotiation of a deal.21 Moreover, Article 17(4)–(5) MAR provides that an issuer or emission allowance market participant may delay disclosure to the public of inside information if the following conditions are met: immediate disclosure is likely to prejudice the legitimate interests of the issuer or emission allowance market participant, delay of disclosure is not likely to mislead the public, and the issuer or emission allowance market participant is able to ensure the confidentiality of that information. Credit institutions or financial institutions may delay public disclosure of inside information if the disclosure entails a risk of undermining the financial stability of the issuer or the financial system, it is in the public interest to delay the disclosure, the confidentiality of that information can be ensured, and the competent authority has consented to the delay. Article 17(8) of the Code of Market Conduct (MAR), however, provides that no disclosure of inside information is permitted if inside information is disclosed to a third party which owes a duty of confidentiality. Issuers, however, delay at their own risk and, therefore, if delay is unjustified, they may incur market abuse liability. The FCA has made it clear in several enforcement actions that listed companies must carefully consider what could be inside information and their obligations to disclose. For example, it is unacceptable for a company not to disclose negative news because it believes other matters are likely to offset it. By failing to correct the negative news immediately, an investor’s ability is hampered to make informed investment decisions and risks distorting the market.22

19 20 21 22

See European Securities Market Expert Group (ESME), 2007 Report (providing a first evaluation of the EU market abuse regime). See article 17(5) of MAR which widens the range of possible scenarios for legitimate delay by referring, inter alia, to the need to preserve the stability of the financial system. See DTR 2.5.1R (referring to article 17(4), (5), and (8) of MAR). FSA, Final Notice, Wolfson Microelectronics plc (January 2009). See also, FSA Final Notice Woolworths Group plc (12 June 2008).

302

Issuer disclosure and liability  9.12 The FCA has highlighted its concerns that issuers are not sufficiently aware of their obligations pursuant to MAR in relation to the identification, delay of disclosure, and notification of delayed disclosure of inside information. The FCA thus intends to intensify its monitoring activities in this regard.23

SELECTIVE DISCLOSURE 9.9 The sharing of information is key for efficient business transactions in modern financial markets. The internet has facilitated the dissemination of information to market participants. It can also, however, be a source of abusive behaviour. In such an environment, it is important that the distribution of information in the normal course of business is conducted in a way that does not unduly expose the firm or its agents to liability for insider dealing or market manipulation. This concern is reflected in DTR 2.2 in the requirement that issuers must make prompt public disclosure when they have disclosed inside information to a third party in the course of their employment, profession or duties.24 9.10 The FCA has put this in practice with DTR 9A.7 which allows an issuer to delay disclosure of inside information provided that it does not mislead the public and provided the issuer can ensure confidentiality. The rule states, however, that any decision to delay disclosure is taken at the issuer’s own risk. For instance, delayed disclosure could be limited to matters under negotiation, but is unlikely to be extended to other circumstances. When the disclosure is made, it should distinguish between an event giving rise to inside information (ie loss of a big contract) and subsequent events (ie attempting to renegotiate contract).

MANAGERIAL DISCLOSURES 9.11 The managers of issuers and other senior officers are required to disclose their share dealings in the issuer. All managers privy to inside information are required to disclose to the RIS every time they buy or sell shares in their employers. This has had broad impact on corporate disclosure, as a large number of senior managers below board level are exposed to pricesensitive material. It should be remembered that these rules apply to spread bets and derivatives as well as to shares trading.

SAFE HARBOURS 9.12 The safe harbours permitted in MAR for behaviour that would otherwise amount to market abuse or insider dealing have been onboarded postBrexit to exempt from the insider trading prohibitions an issuer’s buy-back of shares in an initial public offering and any buying and selling of securities intended to stabilise the market for an issuer’s equity or debt securities in a

23 24

FCA, ‘Review of Delayed Disclosure of Inside Information’ (November 2020). See DTR 2.2. Pursuant to section 157 of FSMA, the FCA has published guidance on DTR obligations in the DTR.

303

9.12  Issuer disclosure and liability secondary offering by insiders who have complied with the stabilisation rules. However, trading in own shares and stabilisation must be carried out transparently in order to avoid insider dealing or giving misleading signals to the markets. The rationale for classifying trading in own shares as an exempt safe harbour is that it can be used to strengthen the equity capital of the issuer and so would be in the investors’ interest.

ISSUER DISCLOSURE AND THIRD-PARTY LISTS 9.13 As discussed in 9.1–9.2, the FCA disclosure rules apply to all issuers who have requested or been approved admission of their financial instruments to trading on a UK regulated market.25 These disclosure rules require the issuer to publish without delay in the following circumstances: when the issuer has certain price-sensitive information about the issuer’s securities; when there has been any significant change concerning inside information in certain circumstances; and when an issuer or any person acting on its behalf discloses inside information to a third party.26 Moreover, an issuer is required to maintain lists of those persons working for it (as independent advisers or employees) who have access to inside information relating directly or indirectly to the issuer.27 Individuals discharging managerial responsibilities within the organisational structure of the issuer, and any persons connected to such persons discharging managerial responsibilities (eg family members, close associates or friends), are required to disclose transactions conducted on their own account in shares of the issuer, or derivatives or any other financial instrument relating to those shares.28 9.14 In addition, issuers must create lists of third parties who are likely to have access to inside information. These lists must be released to the FCA when required or requested by the FCA. This requirement has been criticised because of the significant compliance costs of monitoring information within a business organisation. It has been argued that the cost of maintaining these lists is disproportionate to the regulatory benefit or to the benefit of the market.29

ISSUER AND SENIOR OFFICER LIABILITY 9.15 As a general matter, it should also be emphasised that market abuse can be committed by individuals, legal persons (companies, businesses, limited liability companies and limited liability partnerships and other business entities) where the entity commits the offence. Civil or administrative

25 26 27 28

29

See MAR, art 17. See DTR 2.2 and note 24 above. Section 2 of the Financial Services Act 2021 amended article 18 of MAR to create certainty that issuers and any person acting on the issuer’s behalf have to draw up insider lists. See MAR, art 19. According to the Financial Services Act 2021, s 30(3)(a), the wording was amended from business days to working days. Furthermore, issuers now have two working days after they have been notified by a manager to make transaction information public. See the Financial Services Act 2021, s 30(3)(b). CESR (August 2003) ‘Feedback Statement for Level 2 Implementing Measures’ CESR/03– 213b (CESR: Paris), p 12.

304

Issuer disclosure and liability  9.18 sanctions for market abuse may be imposed on ‘any natural or legal person’. This makes all corporations, partnerships and other business entities civilly liable for market abuse. Further, any natural person, or entity, professionally arranging transactions in financial instruments, shall refrain from entering into transactions, and reject orders on behalf of its clients, if it reasonably suspects that a transaction would be based on inside information. The entity may have been deemed to have committed the offence if its senior managers or officers have engaged in behaviour that amounts to market abuse while discharging their official functions for the firm. The attribution of liability to the firm for the market misconduct of its employees was an issue in the FCA’s enforcement action against GLG Partners in 2005.30 GLG Partners was a limited partnership whose managing director, Philippe Jabre, had committed market abuse after trading on the basis of price-sensitive information which he had received from a third-party bank. The issue was whether GLG Partners should be subjected to a penalty for Jabre’s abuse of the market. The FCA issued a Decision Notice holding that GLG Partners had failed to maintain adequate internal controls to oversee the activities of Jabre, a leading fund manager at the firm, and that the weaknesses in its internal oversight significantly contributed to the environment in which Jabre was able to abuse the market. The FCA imposed a £750,000 penalty on GLG Partners in part to require the firm to disgorge its ill-gotten gains and to deter future poor oversight of its senior fund managers. 9.16 Officers, employees, or agents of the company or business organisation may also be held liable personally or individually for the firm’s commission of the market abuse offence if certain conditions are satisfied: (a) if the offence was committed with consent or connivance of the officer, or (b) the offence is attributable to neglect on the part of the officer. The FCA would need to show that the individuals in question had in fact participated in some meaningful way – either through action or inaction – in the firm’s commission of the offence.

PROFESSIONAL DISCLOSURE REQUIREMENTS 9.17 Civil liability for market abuse arises for any person professionally arranging transactions in financial instruments who reasonably suspects insider dealing or market manipulation if they fail to report the suspected behaviour to the FCA. In other words, professionals must disclose suspicious transactions.31 For issuers, the determination of indicative factors that identify suspicious transactions is determined by guidelines set forth by the FCA. For third party professionals, indicative factors will be determined in part by professional codes and guidelines approved by the FCA. 9.18 Brokers and spread betting firms are obliged to report all transactions to the FCA if they suspect insider dealing or market manipulation. Brokers have complained about these suspicious transaction reports, as they are duplicative

30 31

See the Financial Service Authority’s Decision Notice to Philippe Jabre and to GLG Partners (28 February 2006). This provision mirrors the UK money laundering legislation that requires disclosure of suspicious transactions: Proceeds of Crime Act 2002, s 330.

305

9.18  Issuer disclosure and liability of existing requirements to report transactions that might be related to money laundering or terrorist financing. In addition, brokers will have to report the sources of research information and any potential conflicts of interest.

PROFESSIONALS AND CONFIDENTIALITY 9.19 The emphasis on disclosure in the market abuse regime can arguably be criticised on the grounds that it places an undue burden upon professionals, requiring them to be responsible for policing their firms and professions. Following the corporate governance scandals of the early 2000s and the subsequent weaknesses of financial institutions as demonstrated in the 2007/08 financial crisis, however, the focus on issuer disclosure and thirdparty professional disclosure is now more favourably viewed by investors and other users of financial products. 9.20 The market abuse regime’s requirements that professionals disclose suspicious transactions has raised confidentiality concerns, as they are obliged to report to the FCA if they suspect insider dealing or market manipulation in respect of a client’s account. This action can potentially harm professionalclient relationships, possibly undermining investor confidence, and inhibiting issuers from using third party professionals when accessing the capital markets if they fear disclosure to regulatory authorities of confidential information. On the other hand, a strict disclosure regime can reduce the likelihood of market abuse, thus promoting more transparency in the market and enhancing its integrity with the result that more investors will have confidence to invest in the market. It should be recalled that issuers of financial instruments are required to inform the public as soon as possible of inside information, subject to confidentiality rules and other exemptions or circumstances justifying delay.32

FCA FAVOURS ENHANCED DISCLOSURE 9.21 In light of the Financial Services Authority’s (FSA) investigations into volatile share price movements of UK financial institutions during the 2008–09 market turbulence, the UK government has taken a stricter stance on disclosure to enhance the integrity of UK financial markets. Although most of the volatility in 2008–09 arose from a loss of investor confidence in UK equity markets and a dramatic de-leveraging in asset exposures by institutional investors and hedge funds due to limited access to liquidity, the UK government in 2008 blamed much of the market turbulence on short selling by institutional investors and other allegedly abusive practices.33 9.22 The resulting regulatory practice of both the FSA and later the FCA was to require much stricter disclosures by issuers and professional advisers of suspicious transactions that could possibly, but not necessarily, amount to market abuse. In deciding whether to take enforcement action in cases involving issuer disclosure, the FCA will have regard to specific guidance

32 33

See 9.7–9.10 above. See FSA, ‘Limitations on short selling in the shares of financial institutions’ (August 2008).

306

Issuer disclosure and liability  9.23 on the identification of inside information set out from DTR 2.2.3G to DTR 2.2.8G.34

DISCLOSURE OF SUSTAINABILITY RISKS 9.23 This section discusses the application of existing UK disclosure requirements pertaining to the market abuse regime to sustainabilityrelated disclosures. The European Union is moving towards recognition of sustainability risks as being classified as material risks that are subject to mandatory disclosure requirements by issuers of securities under the Sustainable Finance Disclosure Regulation (SFDR).35 The UK’s Green Finance Technical Standards Commission has also recommended that sustainability risks should be subject to mandatory disclosure requirements under the UK’s on-boarded market abuse rules, prospectus and ad hoc disclosure requirements. The FCA consulted in 2021 on how to incorporate the sustainability-related disclosures of the SFDR into the UK listing rules.36 The FCA issued a policy statement on 17 December 2021, which provides an overview for the application of the climate-related financial disclosure requirements that can be extended to issuers of standard listed shares and Global Depositary Receipts representing equity shares.37 The FCA will likely recognise the financial materiality of sustainabilityrelated information in terms of the market abuse rules.38 Given the increasing importance of sustainable finance to UK financial regulation, the FCA will define the situations in which sustainability-related information is deemed to be inside information, that is, likely to have a significant effect on the prices of an issuer’s financial instruments, if such information were made public. Another question relevant to the UK market abuse regime is to what extent sustainability-related information is subject to ad hoc disclosure requirements. Finally, as sustainability-related information is increasingly recognised as financially material to an issuer, the FCA may well consider it to be ‘specific’ or ‘precise’ information as defined under UK criminal insider dealing law. As a result, corporate issuers have substantial criminal and civil liability exposure for failing to disclose sustainability-related information (or mis-reporting it) if the information is likely to have a significant impact on the price of the issuer’s securities. 34 35

36 37

38

See FSA Final Notice Entertainment Rights plc (19 January 2009). In particular, the SFDR aims to ensure that end investors are given sufficient information regarding sustainability risks in order to make informed investment decisions. See Busch Danny, ‘Sustainability Disclosure in the EU Financial Sector’ (2021) 70 European Banking Institute Working Paper Series, at: https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=3650407, accessed 22 December 2021; Hooghiemstra Sebastiaan Niels, ‘The ESG Disclosure Regulation – New Duties for Financial Market Participants & Financial Advisers’, at: https://ssrn.com/abstract=3558868, accessed 22 December 2021. See FCA, ‘Enhancing climate-related disclosures by standard listed companies and seeking views on ESG topics in capital markets’ (June 2021) Consultation Paper CP21/18. FCA, ‘Enhancing climate-related disclosures by standard listed companies’ (December 2021) Policy Statement PS21/23; see also for enhanced climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers, FCA, ‘Enhancing climaterelated disclosures by asset managers, life insurers and FCA-regulated pension providers’ (December 2021) Policy Statement PS21/24. In relation to financial materiality of sustainability-related information, see Jebe Ruth, ‘The Convergence of Financial and ESG Materiality: Taking Sustainability Mainstream’ (2019) 56 American Business Law Journal 645.

307

9.24  Issuer disclosure and liability

ISSUER’S DISCLOSURE DECISION TREE 9.24 To summarise the issuer’s obligations in a general context, the following decision tree could be useful. Detailed compliance, however, should always take account of the facts of each situation and the issuer involved and applicable regulatory rules and requirements.

Does the issuer have inside information? ↓ Can an issuer legitimately delay disclosure of inside information? ↓ Can an issuer selectively disclose inside information?

Does the issuer have inside information? To be inside information the information must be: -

Precise Not generally available Relate to qualifying investments Price sensitive (DTR 2.2.4 G)

Can an issuer legitimately delay disclosure of inside information? It can delay so as not to prejudice its legitimate interests provided: -

It does not mislead the public Selective disclosure is confidential Issuer can ensure confidentiality (DTR 2.5.1.R)

Can the issuer selectively disclose inside information? -

Yes as long as there is a confidentiality obligation and

-

The recipient has valid reason to receive the information (DTR 2.5.7 G)

Disclosure must be made as soon as possible if the issuer is not able to ensure confidentiality of the information (DTR 2.6.2 R)

Issuer disclosure 308

Issuer disclosure and liability  9.28

TAKEOVERS 9.25 The Panel on Takeovers and Mergers administers the City Code on Takeovers and Mergers. The City Code (known as the ‘Takeover Code’) contains general principles and rules governing takeovers and mergers for companies listed on the UK market.

GENERAL PRINCIPLES 9.26 The essential requirements of the Takeover Code’s general principles are the following: equality of treatment for shareholders; adequate information and advice for shareholders; the maintenance of fair and orderly markets for shares of the company during periods of the offer; and no board or management action to thwart an offer by a target company during the offer period without shareholder approval. Significantly, General Principle 7 prohibits defensive measures to frustrate bids by target companies (ie poison pills) without shareholder approval. Also important is Rule 21.1, which allows the offeror company to break through certain offeree company restrictions (eg restrictions on share voting rights and transfer of securities) and to tender for a company’s shares.

THE TAKEOVER PANEL’S POWERS 9.27 The Takeover Panel has no formal sanctioning power but its decisions are respected and have been given effect by market participants and regulated persons. The Takeover Panel exercises influence in a number of ways including by making critical statements about the conduct of a bid; panel members often influence senior management which can affect a firm’s commitment to follow through with a merger. Some Panel decisions may be recognised by professional bodies and by the FCA and thereby serve as a basis for sanctions to be imposed against the person in a breach of the Code. For example, the FCA can withdraw authorisation from a person or company for failing to comply with the Code which can result, for instance, in a delisting from the London Stock Exchange.

THE FCA’S ROLE 9.28 Under the FSMA, the FCA has significant investigative and enforcement powers against conduct which may amount to market abuse. In the context of takeovers there can be an overlap between the FCA and the Takeover Panel which may disrupt the takeover bid process. Consequently, the two regulators issued a set of guidelines to ensure effective coordination between them. According to the 2013 ‘Operating Guidelines between the Financial Conduct Authority and the Panel on Takeovers and Mergers on Market Misconduct’, the FCA and the Panel will liaise on market, policy, and enforcement issues of mutual interest.39 In particular, if issues amounting to 39 The guidelines can be accessed at: http://www.fca.org.uk/static/documents/operatingguidelines-takeover-panel.pdf.

309

9.28  Issuer disclosure and liability market misconduct arise during a takeover bid, the FCA and the Panel will be required to liaise as follows: (1) the FCA will not exercise its investigative and enforcement powers during a takeover bid prior to the conclusion of the procedures under the Takeover Code except in certain circumstances;40 (2) the FCA will consult the Panel before taking any action which may affect the timetable or outcome of a takeover bid. However, the following principles apply in case the FCA decides to exercise its powers during a takeover bid: (a) the FCA will keep the Panel informed of the steps it is taking in the exercise of its powers and will give due weight to the Panel’s views on any issues which arise; and (b) in cases where the Panel also has the power to take action, the matter will be reviewed regularly as it develops to determine whether the lead responsibility for dealing with the matter should be with the FCA or the Panel. Furthermore, in case of concurrent investigations and enforcement actions, the FCA and the Panel will be required to coordinate in accordance with the following principles: (1) persons should not be subject to more than one investigation or set of enforcement proceedings for the same misconduct unless it is appropriate for the FCA and the Panel to exercise different powers in relation to that person or the two sets of investigations or proceedings relate to different aspects of the suspected misconduct; and (2) cases of mutual interest will be reviewed regularly as they develop to determine whether the lead responsibility for conducting any necessary investigation should be with the FCA or the Panel. 9.29 The FCA may overrule the Panel in areas such as takeovers where they have overlapping responsibility. The Code of Market Conduct provides a defence for persons who take certain actions to comply with the Takeover Code that come within the safe harbour provisions of the EU Market Abuse Directive.41 For instance, if an issuer is engaging in certain acceptable market practices as defined in the Directive and recognised by the FCA in disclosing information according to a timetable recognised by the FCA in the Takeover Code, then that behaviour – ie a disclosure (or not) that is required by Takeover Code – is protected against market abuse liability.

MARKET ABUSE 9.30 Certain Takeover Code rules if not complied with may result in market abuse liability. Rule 2.2 requires that the offeror must announce a possible takeover when, following the approach to the offeree company, unusual movements occur in the offeree’s share price, or the offeree is subject to rumour or speculation.42

40

41 42

The exceptional circumstances to be considered during a takeover bid are: (1) where the Panel requests the FCA to consider the use of any of the following powers: the FCA’s power to impose penalties (FSMA, s 123), the power of the court to impose penalties (FSMA, s 129), injunctive powers (FSMA, s 381) and restitutionary powers (FSMA ss 383 or 384); (2) where the suspected misconduct falls within section 118(2)–(4) of FSMA (misuse of information) or Part V of the Criminal Justice Act 1993 (insider dealing); (3) where the suspected misconduct extends to securities or a class of securities which may be outside the Panel’s jurisdiction; (4) where the suspected misconduct threatens or has threatened the stability of the financial system. See discussion in Chapter 4 at 4.32–4.39. See Rule 2.2(c) of the City Code on Takeovers and Mergers (the Takeover Code), available at: http://www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/code.pdf.

310

Issuer disclosure and liability  9.31 Also, the offeror must announce a takeover attempt before an approach is made to the offeree if there is an unusual share price movement and it is reasonable that such movement is attributable to the offeror’s actions.43 The offeror must also announce when negotiations are extended to include more than a restricted group of persons (‘outside those who need to know in the parties concerned and their immediate advisers’).44 Breach of these rules can potentially lead to a FCA enforcement action for market abuse.

ACTUAL OR POTENTIAL OFFERORS 9.31 Rule 2.1 requires third party advisers (eg accountants) who are privy to price-sensitive inside information to keep offer discussions secret and that they should not approach additional third parties without prior approval of the Panel. According to the Rule, secret information can be passed to another person if it is necessary to do so and that person is made aware that the information must be kept secret. The FCA can enforce breach of this rule by imposing sanctions. For example, an accountant seeking to avoid market abuse liability under this rule would be required to obtain approval from the Panel before disseminating the information to other parties. This would be an example of acceptable market practices under the safe harbour of the EU Market Abuse Directive and the FCA would likely recognise the safe harbour by not seeking market abuse sanctions.

43 44

See Rule 2.2(d) of the Takeover Code. See Rule 2.2(e) of the Takeover Code.

311

312

Chapter 10

Information gathering

INTRODUCTION 10.1 This chapter considers a range of tools at the Financial Conduct Authority’s disposal to gather information and intelligence about potential abuse in the financial markets and potential weakness in the arrangements that firms are required to have in place to comply with their regulatory obligations (see further Chapter 14 Compliance procedures and systems). The chapter will show that even before the Financial Conduct Authority (FCA) chooses to conduct a formal investigation, information is gathered from a variety of sources including that routinely obtained from public interest disclosures, transaction reporting, reports of suspicious activity and information otherwise supplied by authorised persons. The gathering of information and market intelligence facilitates the FCA in developing and understanding the extent to which market participants are involved in, or the market itself is exposed to, abusive behaviour, thus allowing it to appropriately focus its investigation and enforcement activity. Indeed, the FCA’s use of information gathering is an integral part of its role as an investigator and enforcement agency. The analysis provided in this chapter thus complements Chapter 11’s examination of the FCA’s powers of investigation. Notably this chapter will identify that the FCA places significant reliance on firms to be open and cooperative, even to the extent of it recognising in its enforcement guide the merit, in appropriate circumstances, for an authorised person to carry out its own investigation for the purpose of supplying information to the FCA. In paragraph 3.11.2 of the Enforcement Guide (EG) the FCA states: ‘A firm’s report – produced internally or by an external third party – can clearly assist the firm, but may also be useful to the FCA where there is an issue of regulatory concern. Sharing the outcome of an investigation can potentially save time and resources for both parties, particularly where there is a possibility of the FCA taking enforcement action in relation to a firm’s perceived misconduct or failing … But a firm’s willingness to volunteer the results of its own investigation, whether protected by legal privilege or otherwise, is welcomed by the FCA and is something the FCA may take into account when deciding what action to take, if any …’1

1

FCA Enforcement Guide, Chapter 3, paragraph 3.11.2 ‘use of Information gathering and investigation powers’. See FCA release, 20 June 2022, https://www.handbook.fca.org.uk/ handbook/EG/3/11.html, accessed 25 June 2022.

313

10.2  Information gathering 10.2 In analysing the role of information gathering this chapter considers the general reporting obligations imposed on authorised firms, the regulatory obligation imposed upon those persons executing transactions to routinely and timely report those transactions to the FCA, and the regulatory obligation to report suspicious transactions, along with the FCA’s statutory powers to gather information including the use of skilled persons pursuant to section 166 of the Financial Services and Markets Act 2000 (FSMA).2

GENERAL REPORTING AND THE OBLIGATION TO COOPERATE 10.3 The FCA provides in its rules a series of obligations requiring authorised persons, and to an extent approved persons, to proactively disclose matters that may be of concern to the FCA as well as to cooperate during any FCA supervisory or investigative activity. As will be apparent from the following analysis such obligations apply equally to concerns of market abuse and more general issues regarding an authorised person’s systems and controls. The primary reporting and cooperation obligation applying to authorised persons is provided in FCA Principle for Business 11, which requires ‘A firm must deal with its regulators in an open and cooperative way, and must disclose to the FCA appropriately anything relating to the firm of which the FCA would reasonably expect notice.’ An equivelant obligation is imposed on those subject to the FCA’s conduct rules, first for all individuals at rule 3 ‘You must be open and cooperative with the FCA the PRA and other regulators.’3 and similarly for those subject to the FCA senior managers regime at rule 4 of the senior managers conduct rules, ‘You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice’4 An illustration of the importance attached to compliance with Principle 11 can be found in the FCA Final Notice to Threadneedle Asset Management Limited on 10 December 2015.5 Although that case is not concerned with Market Abuse but rather with Threadneedles’ trading controls and its communication with the FCA about the steps it had taken to strengthen those controls, it is clear from wording of the Final Notice and the level of the financial penalty (£6,038,504) that the FCA treats non-compliance with Principal 11 seriously. The FCA states in the Final Notice at paragraph 2.10: ‘TAML breached Principle 11 because it did not accurately describe the trading processes in place on its Emerging Markets and High Yield trading desks when it responded to the Authority in the RMP Response on 30 June 2011 and it did not correct its response until 28 October 2011.’

2 3 4 5

In addition to drawing from and updating material from B Rider et al Market and Abuse and Insider Dealing (2nd edn), this chapter includes material drawn from S Bazley, Market Abuse Enforcement Practice and Procedure (Bloomsbury Professional 2013). FCA Code of Conduct, Chapter 2 Individual Conduct Rules, Section 2.1 Individual Conduct Rules. See FCA release, 20 June 2022, https://www.handbook.fca.org.uk/handbook/ COCON/2/1.html, accessed 25 June 2022. FCA Code of Conduct, Chapter 2 Individual Conduct Rules, Section 2.2 Senior Manager Conduct Rules. See FCA release, 20 June 2022, https://www.handbook.fca.org.uk/ handbook/COCON/2/2.html, accessed 25 June 2022. FCA Final Notice Threadneedle Asset Management Limited (10 December 2015), http:// www.fca.org.uk/your-fca/documents/final-notices/2015/threadneedle-asset-managementlimited.

314

Information gathering  10.5 10.4 Considering first authorised persons general duty of notification, disclosure and co-operation, the generality of the obligations leaves for interpretation the nature and materiality of what the FCA would expect to be dislcosed as well as the timliness of the disclosure. Determining what information is required to be disclosed under Principle 11 is challenging, although what is apparent from the wording of Principle 11 is that information to be disclosed is not determined by reference to the reasonable assessment of the authorised person but rather by reference to an objective assessment of the FCA’s expectations. Indeed the FCA’s notification expectations are to some extent likely to vary, dependent on the circumstances, size and risks of the business of the individual authorised person. Some assistance to this notification dilemma is provided in the FCA Supervision sourcebook (SUP) which, for instance, at SUP 15.3.8G, provides guidance, by way of a non exhaustive list, on those matters of which the FCA would expect notification under Principle 11. However, none of the examples at 15.3.8G directly address instances of market abuse. Arguably given the existence of the market abuse suspicious transaction reporting requirement in SUP 15.10 (which is examined in 10.16–10.18 below), a Principle 11 disclosure may better serve notification of systemic failing within an authorised firm’s business than addressing issues of market abuse. For example, a failure in an authorised firm’s conflict management and information barrier controls (see further Chapter 8 Conflicis of Interest and Chapter 13 Compliance procedures and systems) is likely to warrant a notification to the FCA. Indeed SUP 15.3.8G(2) describes a Principle 11 notification of ‘any significant failure in the firm’s systems or controls, including those reported to the firm by the firm’s auditor’. It is submitted, however, that when one applies the generality of the the disclosure duty of Principle 11, in the context of the FCA’s statutory ‘integrity objective’ (see section 1D of the FSMA which defines at section 1D(1) the FCA integrity objective as ‘protecting and enhancing the integrity of the UK financial system’ and at section  1D(2) where ‘integrity of the UK financial system’ is defined as including ‘… not being used for a purpose connected with financial crime’ and ‘its not being affected by contraventions by persons of Article 14 … or Article 15 … of the market abuse regulation’; Section  1H(3) defines financial crime as including offences invloving ‘a) fraud or dishonesty, b) misconduct in, or misuse of information relating to, a financial market, c) handling the proceeds of crime, or d) the financing of terrorism’), it is difficult to forsee the FCA not expecting disclosure under Principle 11 of market abuse subject matter where a disclosure is technically not required under the suspicious transaction reporting regime, such as where there has been an unsuccessful attempt at abuse. Of course, it is important to have regard to the duty to report suspicions of market abuse orders and transactions arisng under the EU Market Abuse Regulation (2014/596/EU) (EU MAR), now adopted into UK law. 10.5 A second tier of more specific authorised persons reporting obligations is provided by the FCA in SUP, many of which, can have an application to market abuse as well as the market abuse compliance arrangements that authorised persons are required to maintain. For instance, SUP 15.3.11R imposes a reporting obligation in the context of significant breaches of the FCA rules, breaches of financial services regulation or FSMA and prosecution for a FSMA offence, whether in relation to the authorised person or its employees, directors, officers or agents. Additionally, SUP 15.3.15R(4) requires an authorised person immediately to notify the FCA where it is ‘prosecuted for, or convicted of an offence involving fraud or 315

10.5  Information gathering dishonesty …’ and SUP 15.3.17R outlines a duty to report certain significant events relating to, amongst other things, suspicions or potential fraud by employees against customers or by any persons against the authorised person along with serious misconduct by employees. The FCA does not define ‘fraud’ in SUP 15.3.15R or 15.3.17R, although of course constituent elements of fraud offences are dishonesty and intention (for example, see the offences under the Fraud Act 2006). 10.6 The exploitation of information or market trading resulting in another investor suffering a loss may in certain circumstances consitite an offence of fraud (see further Chapters 3, 5 and 6). However, (as explored in Chapter 4) dishonesty and an ‘actuating purpose’ is not a constituent element of market abuse and thus not all instances of abuse may be notifable under the fraud notification provisions of SUP 15.3.15R and 15.3.17R. 10.7 In addition to proactive disclosure, Principle 11 also refers to an imperative to cooperate with the FCA. The FCA addresses in guidance at SUP 2.3 amongst other things the obligation for cooperation in the context of information gathering, paying particular attention to the need for cooperation under Principle 11 when addressing (at SUP 2.3.3G) its access to an authorised person’s records as well as for authorised persons to ‘answer truthfully, fully and promptly all questions which are reasonably put to it’. The need for, and extent of, cooperation becomes particulalry pertinent during FCA formal investigations and enforcement. At EG 2.12 the FCA explains that an authorised person’s cooperation will be taken into account when considering enforcement action, including the extent to which the substance of the enforcment action was self reported by the authorised person. The FCA states at EG 2.12.1 ‘In this respect, relevant matters may include whether the person has self-reported, helped the FCA establish the facts and/or taken remedial action such as addressing any systems and controls issues and compensating any consumers who have lost out’. Furthermore, the FCA sets out in its Decision Procedure and Penalties Manual (DEPP) at DEPP 6.2.1 a range of potential factors, which the FCA described may be relevant, ‘… when determining whether or not to take action for a financial penalty or public censure.’ These factors include at DEPP 6.2.1(2) ‘(a) how quickly, effectively and completely the person brought the breach to the attention of the FCA …; (b) the degree of co-operation the person showed during the investigation of the breach …’. Further similar guidance is provided at DEPP 6.5.3G as to its mitigating effect in step 3 of the FCA’s 5-step approach to financial penalty setting. (Chapter 12 of this book examines in detail the FCA approach to enforcement and financial penalties). Although it is important to highlight that the obligation to cooperate under Principle 11 does not apply to members of the public (who may be exposed to the market abuse regime), the provisions in DEPP are applicable to the FCA’s decision in commencing a formal investigation or taking enforcement action against the public. The impact of self-reporting and cooperation by members of the public can be illustrated in decisions such as the FSA Final Notice to Mehmet Sepil,6 in respect of insider dealing under the then section 118(2) of the FSMA, where Mr Sepil chose to notify the FCA of his trading behaviour. In that case the Final Notice states: ‘The FSA has taken into account your high degree of co-operation in coming forward, providing information about your dealing and others and in co-operating with the FSA investigation.’7 6 7

FSA Final Notice Mehmet Sepil (12 February 2010). Mehmet Sepil (note 6) at [3.6].

316

Information gathering  10.8

Whistleblowing and public interest disclosure 10.8 Recital 74 of EU MAR references the benefits of whistleblowing as a means of competent authorities gathering information about potential market abuse. It reads’ ‘Whistleblowers may bring new information to the attention of competent authorities which assists them in detecting and imposing sanctions in cases of insider dealing and market manipulation.’ The FCA may receive confidential or anonymous disclosures relating to potential market abuse made under the Public Interest Disclosure Act 1998. Indeed the FCA has been given powers, subject to consent from the Attorney General, under sections 71 and 72 of the Serious Organised Crime and Police Act 2005 to give so-called whistleblowers who cooperate with the FCA statutory immunity from prosecution,8 although concern has previously been expressed about the extent to which city professionals may be willing to ‘whistleblow’ on their colleagues.9 The FCA promotes the availability of confidential disclosures through confidential reporting to its whistleblowing team10 confirming on its website how it protects the identify of those that make a disclosure, stating ‘Protecting the identity of our whistleblowers is at the heart of what we do. Our team will work with you to ensure we understand what has happened, or may happen in the future.’ And further ‘You can choose to remain anonymous, and many people do. If you do share with us any information about yourself we will keep this safe. We will not confirm the existence of a whistleblower when making enquiries, or to anyone outside of the FCA, unless we are legally obliged to do so.’11 In parallel to arrangements for whistleblowing reports to the FCA, authorised firms are required by rules in the FCA Handbook Senior Management Systems and Controls sourcebook (SYSC) 18 to maintain internal confidential whistleblowing procedures, and states at SYSC 18.3.9(G) the FCA’s view of the impact of detrimental treatment of a whistleblower: ‘The FCA would regard as a serious matter any evidence that a firm had acted to the detriment of a whistleblower. Such evidence could call into question the fitness and propriety of the firm or relevant members of its staff, and could therefore, if relevant, affect the firm’s continuing

8

The FSA was given power under s 71 of the Serious and Organised Crime and Police Act 2005 (following amendment by the Coroners and Justice Act 2009, s 113(2)). For general comment on proposals for an FSA statutory immunity and commentary on the City’s culture of blowing the whistle, see Gary Wilson and Sarah Wilson, ‘Market Misconduct, the Financial Services FSA and creating a system of “city grasses”: blowing the whistle on whistle-blowing’ (2010) 31(3) Comp Law 67. 9 See ‘Whistles the City boys just won’t blow’ Evening Standard, Business Section, 1 April 2008. In addition, the BBC reported at http://news.bbc.co.uk/1/hi/business/7317845.stm, ‘Treasury eyes whistleblower plan’, that Chris Brennan (partner at law firm Barlow Lyde and Gilbert) said ‘I am not sure how much the whistleblowing provisions will help, but the plea bargaining may well incentivise individuals to plead and avoid the need for a trial’. 10 See the FCA whistleblowing section  of its website at https://www.the-fca.org.uk/ whistleblowing. The promotion of so-called whistleblowing to encourage the reporting of financial crime has increased amongst regulatory agencies. For example, the Serious Fraud Office promotes a confidential reporting system for ‘victims, witnesses and whistleblowers’ at https://www.sfo.gov.uk/publications/information-victims-witnesses-whistleblowers/#whi stleblowers. 11 FCA, ‘Whistleblowing: Speaking to the FCA’, 21 October 2020, https://www.fca.org.uk/ firms/whistleblowing/speaking-fca.

317

10.8  Information gathering satisfaction of threshold condition 5 (Suitability) or, for an approved person or a certification employee, their status as such.’12

FCA supervision and information requests 10.9 The FCA gathers a range of information and intelligence about authorised persons’ compliance with the regulatory system during its routine supervisory work. The FCA has published its current approach to supervision in ‘FCA mission, Approach to supervision’.13 In that publication the FCA states, ‘Every piece of intelligence is relevant to a firm or to a sector. We assess all the intelligence that we receive’.14 Increasingly the FCA has moved towards a more data-led approach to intelligence and information gathering. The FCA describes this as becoming a ‘data-led regulator’. In its business plan for 2022/23, the FCA outlines how it is transforming how it operates using data and analytical tools, including stating, ‘We can engineer, connect, and blend data to create new insights to help us monitor how markets and firms are functioning in line with our market integrity objective. We have explored the use of synthetic data sets to test financial crime controls.’15 The FCA’s data-led approach is also apparent in its work in surveillance of market abuse, where it has stated, ‘Ours is a data-led approach. We undertake daily monitoring to ensure the timeliness and accuracy of the disclosure of inside information. Firms and venues send over 30 million transaction reports and over 100 million order reports a day, which are analysed by our market data processor. This processor is a source of regulatory sunshine that allows us to oversee the market in close to real time, with dedicated software and algorithms to detect potential issues.’16

Transaction reporting 10.10 Those authorised persons executing or transmitting transactions in financial instruments as defined by the Markets in Financial Instruments Directive17 are required to report within one business day, to the EU competent authority (the FCA for transactions executed in the UK) information on those transactions. The basis for and requirements to meet the transaction reporting obligation is described in Article 26(1) and Article 26(4) of the Markets in Financial Instruments Regulation (MiFIR),18 Article 26(1) provides, ‘Investment firms which execute transactions in financial instruments shall report complete and accurate details of such transactions to the competent

12

For an example of FCA action in relation to whistleblowing arrangements, see Final Notice Mr James Staley (11 May 2018), https://www.fca.org.uk/publication/final-notices/ mr-james-edward-staley-2018.pdf. 13 ‘FCA mission, Approach to supervision’, https://www.fca.org.uk/publication/corporate/ourapproach-supervision-final-report-feedback-statement.pdf. 14 FCA mission, Approach to supervision’ (note 13), page 17. 15 FCA, Business Plan 2022/23, 7 April 2022, https://www.fca.org.uk/publications/ business-plans/2022-23. 16 FCA, ‘FCA’s work on market abuse and manipulation – update’, June 2022, https://www. fca.org.uk/news/news-stories/market-abuse-manipulation-update. 17 EU Directive 2014/65/EU in Markets in Financial Instruments. 18 EU Regulation 600/2014/EU on Markets in Financial Instruments and amending Regulation 648/2012 as ‘on shored’ in the United Kingdom.

318

Information gathering  10.13 authority as quickly as possible, and no later than the close of the following working day.’ Similarly, in relation to order transmission, Article 26(4) provides that ‘Investment firms which transmit orders shall include in the transmission of that order all the details as specified in paragraphs 1 and 3. Instead of including the mentioned details when transmitting orders …’. The duty in Article 26(1) requires investment firms to report a wide range of technical information about each transaction and the identity of the firm’s client, as indicated by Article 26(3), which provides: ‘The reports shall, in particular, include details of the names and numbers of the financial instruments bought or sold, the quantity, the dates and times of execution, the transaction prices, a designation to identify the clients on whose behalf the investment firm has executed that transaction, a designation to identify the persons and the computer algorithms within the investment firm responsible for the investment decision and the execution of the transaction, a designation to identify the applicable waiver under which the trade has taken place, means of identifying the investment firms concerned, and a designation to identify a short sale as defined in Article 2(1)(b) of Regulation (EU) No 236/2012 in respect of any shares and sovereign debt within the scope of Articles 12, 13 and 17 of that Regulation.’ 10.11 EU Delegated Regulation 2017/590/EU provides technical standards for the reporting of transactions and in Article 1 requires that a firm’s transaction report includes the information set out in Table 2 to Annex 1 of the Regulation. The technical standards provide definitions in Article 2 for ‘transaction’, Article 3 ‘execution of a transaction’ and Article 4 ‘transmission of an order’ and go on to provide a more detailed explanation of the types of information that must be reported in Annex 1. Article 15(1) deals with requirements for the ‘methods and arrangements’ for how investment firms (and trading venues) should generate and submit transaction reports, covering matters such as mechanisms ‘… to avoid reporting of any transaction where there is no obligation to report …’ and for identifying unreported transactions for which there is an obligation to report …’, and more generally at Article 15(3) deals with arrangements for complete and accurate reporting including testing of processes for reporting. The accuracy of transaction reporting is vital as explained at 10.15 below (see further, Chapter 13 which considers compliance procedures and systems). 10.12 The Regulation anticipates the possibility for reporting errors, omissions and rejections, and require at Article 15(2), firms to ‘promptly notify the relevant competent authority …’. The FCA requires error reporting to be made through its Connect reporting system.19 10.13 Article 26(7) of MiFIR allows for transaction reports to be made by the investment firm or on its behalf by the venue ‘through whose system the transaction was completed’ or, an Approved Reporting Mechanism (ARM). It is vital for investments firms to recognise that where an ARM is used, Article 2(7) makes clear that the firm remains responsible for the completeness, accuracy and timeliness of the reports (save in circumstances where the reports are submitted to an ARM acting on behalf of a trading venue – see

19

See FCA website page ‘Transaction reporting’, https://www.fca.org.uk/markets/transactionreporting, accessed 25 June 2022.

319

10.13  Information gathering Article 26(7) third indent, although firms should verify the accuracy of reports made). 10.14 The FCA relies on information supplied through transaction reports to monitor for incidents of market abuse. In its Market Watch publication Issue 65, the FCA, stated, ‘Transaction reports remain a fundamental part of our work to prevent, detect and investigate market abuse’ and highlighted the importance for firms to review how accurate and complete their reports are.20 Indeed, as will be explored further below, the FCA has taken tough enforcement action against firms that fail to report, albeit so far in relation to the transaction reporting obligations that apply prior to MiFIR – and thus, given the general reporting obligations discussed earlier in this chapter, such as that arising from high-level principle for business 11 and with the regard that will be had to self-reporting confirmed at DEPP 6.2.1G(2), it is clear that effective systems of control for transaction reporting and prompt reporting of failings to report are vital. 10.15 The FCA’s Transaction Monitoring Unit has a variety of responsibilities covering both market abuse surveillance including surveillance of wider market issues, as well as monitoring whether the transaction reporting rules have been complied with. Given this context, the FCA has routinely stressed the importance of daily transaction reporting. In Market Watch Issue 39,21 but related to the pre-MIFIR transaction reporting regime, it stated: ‘Transaction reports are vital in detecting and investigating potential market abuse cases. Recently, where transaction reporting breaches were particularly serious, we used our enforcement tools …’ and ‘We therefore encourage firms to regularly review the integrity of their transaction reports to ensure they have been successfully submitted’. Furthermore, the importance of transaction reporting is also shown by the FCA’s willingness to take enforcement proceedings where there have been transaction reporting failings at authorised firms. The FCA reports on its website that, as at 23 May 2022, it has taken enforcement action against 14 firms for transaction failings,22 with the largest financial penalty to date being £34.3m imposed on Goldman Sachs International in March 2019,23 albeit relating to breaches of the transaction reporting regime operating prior to MiFIR. The FCA’s press release to the Goldman Sachs International decision highlighted the contribution transaction reporting makes to the FCA’s work in identifying market abuse allied to the importance of accurate reporting, stating, ‘Accurate and complete transaction reporting helps underwrite market integrity and supervise firms and markets. In particular, transaction reports help the FCA identify potential instances of market abuse and combat financial crime.’24 And further with, Mark Steward the FCA’s Executive Director of Enforcement and Market Oversight stating, ‘The failings in this case demonstrate a failure over an extended period to manage and test controls that are vitally important to the integrity of our 20 FCA Market Watch Issue 65, September 2020, https://www.fca.org.uk/publication/ newsletters/market-watch-65.pdf. 21 FSA Market Watch Issue 39 March 2011. 22 See FCA, ‘Transaction reporting fines’, https://www.fca.org.uk/markets/transactionreporting/transaction-reporting-fines. 23 FCA Final Notice Goldman Sachs International (27 March 2019). 24 FCA, ‘FCA Fines Goldman Sachs International £34.3 million for transaction reporting failures, 28 March 2019, https://www.fca.org.uk/news/press-releases/fca-fines-goldmansachs-international-transaction-reporting-failures.

320

Information gathering  10.16 markets. These were serious and prolonged failures. We expect all firms will take this opportunity to ensure they can fully detail their activity and are regularly checking their systems so any problems are detected and remedied promptly, unlike in this case.’25 Similarly, commenting on the contribution of transaction reporting to the FCA’s work on market abuse, in an earlier transaction reporting enforcement decision action against Merrill Lynch International, the FCA’s then acting director of enforcement and market oversight said, ‘accurate and timely reporting of transactions is crucial for us to perform effective surveillance for insider trading and market manipulation in support of our objective to ensure that markets work well and with integrity.’26

Suspicious transaction reporting 10.16 The EU Market Regulation at Article 16, as adopted into UK law, establishes a regulatory framework allowing for the reporting of suspicions of market abuse. Analysis of some of the arrangements needed to comply with this reporting obligation is provided in Chapter 13 to this book. The obligation to report applies to both persons operating trading venues (see Article 16(1)) and investment firms arranging or executing transactions (Article 16(2)). Article 16(2) provides, ‘Where such a person has a reasonable suspicion that an order or transaction in any financial instrument, whether placed or executed on or outside a trading venue, could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation, the person shall notify the competent authority as referred to in paragraph 3 without delay.’ The FCA draws intelligence about potential market abuse from the suspicious transaction reports it receives (along with the information supplied in transaction reports). In a recent update about its work on market abuse the FCA commented on the value of and use of suspicious transaction reports, stating, ‘The data we collect and analyse is complimented by Suspicious Transaction and Order Reports sent to us by market participants when they have ‘reasonable grounds’ to suspect market abuse, such as insider dealing, or market manipulation. We received over 90 reports a week last year, and the number sent increased by almost 15% on 2020. Each one of these is assessed by our specialist team, which seeks to establish whether any abusive or manipulative behaviour has taken place and, if we suspect it has, what further action it’s right for us to take.’27 Indeed, the FCA publishes yearly data, including numbers of received reports by asset type and whether the reports relate to insider dealing or market manipulation. For the 2021 calendar year, the FCA shows that it received a

25 Mark Steward FCA Executive Director of Enforcement and Market Oversight. See FCA, ‘FCA fines Goldman Sachs International £34.3 million for transaction reporting failures, 28 March 2019, https://www.fca.org.uk/news/press-releases/fca-fines-goldmansachs-international-transaction-reporting-failures. 26 FCA Final Notice Merrill Lynch International (22 April 2015). FCA press release, ‘FCA fines Merrill Lynch International £13.2m for transaction reporting failures, http://www.fca. org.uk/news/fca-fines-merrill-lynch-international-for-transaction-reporting-failures. 27 FCA, ‘FCA’s work on market abuse and manipulation – update’, June 2022, https://www. fca.org.uk/news/news-stories/market-abuse-manipulation-update.

321

10.16  Information gathering total 4,871 reports, with 4,233 relating to insider dealing and 638 relating to market manipulation.28 10.17 The Article 16 provisions are subject to a series of clarifications of the core reporting proposition. First, firms must ensure the confidentiality of all reports made to the FCA (see Article 3(8) of EU Regulation 2016/957/EU. Secondly, the duty to report applies to both transactions and orders, actual and attempted market abuse (see Article 16(2). In its Market Watch Issue 69, giving feedback on a thematic review of suspicious order reporting, the FCA highlighted weakness in some firms not monitoring all cancelled orders, stating, ‘We observed instances where firms are not monitoring all orders and trades, including cancelled and amended orders. The surveillance of orders, particularly those that do not result in a trade, can be critical in identifying certain forms of market manipulation, such as those that involve false or misleading signals to other market participants.’29 Third, the duty to report applies where a person has a reasonable suspicion of market abuse. The nature of a reasonable suspicion in Article 16 is one based on an objective test. Arguably, one of the most challenging aspects of the reporting and underlying surveillance requirement is the determination of the grounds that give rise to a reasonable suspicion. Assistance on the question of what constitutes a reasonable suspicion is provided by EU technical measures as well as the FCA. The FCA presents a number of indicators for possible reasonable suspicions at SUP 15 Annex 5. Nonetheless, put into the context of contemporary securities business, where firms have to evaluate suspicious activities at the same time as routinely dealing with thousands of transactions each day, the practical reality of the suspicious activity reporting obligation and the likelihood of it effectively being able to detect abusive transactions should not be underestimated. The indicators provided at SUP 15 Annex 5 are of some assistance and provide signals of both insider dealing and market manipulation. By way of example, in relation to insider dealing at SUP 15 annex 5 section 4 the FCA provides an indicator for where, ‘a client specifically requests immediate execution of an order regardless of the price at which the order would be executed …’ Additionally, EU Regulation 2016/522/EU sets out indicators of potential manipulative behaviour in Annex II, including at Section  1 in relation to indictors of manipulation ‘relating to false or misleading signals and to price securing’ such as at Section 1(6)(a) ‘Entering of orders which are withdrawn before execution, thus having the effect, or which are likely to have the effect, of giving a misleading impression that there is demand for or supply of a financial instrument …’.30 The effectiveness and viability of a firm’s reporting should also take into account the arrangements which need to be in place to train staff in order

28

FCA, ‘Number of STORS received’, 24 February 2022, https://www.fca.org.uk/markets/ how-report-suspected-market-abuse-firm-or-trading-venue/number-stors-received-2021. 29 FCA Market Watch Issue 69, May 2022, https://www.fca.org.uk/publications/newsletters/ market-watch-69. 30 EU Delegated Regulation 2016/522/EU, supplementing EU Regulation 596/2014/EU.

322

Information gathering  10.18 for them to identify suspicious transactions as orders are passed to or executed by them. Secondly the viability and effectiveness of any automated surveillance systems established and operated by the firm for the purpose of detecting suspicious transactions do need to be enabled to take into account indications of potential abusive behaviour. Chapter 13 in this book will further examine the compliance arrangements and systems a firm needs to establish in order to manage the risks that clients or its staff may expose it to market abuse. 10.18 Regulatory liability can occur for failings to identify the grounds for reasonable suspicion. Chapter 14 on personal liability of senior managers and compliance officers, examines the liability that can arise for compliance officers failing to report a reasonably held suspicion. The FCA has published enforcement decisions relating to breaches of the suspicious transaction reporting regime in operation prior to MiFIR, but such decision give a flavour of the importance the FCA attaches to reporting. For example, the then Financial Services Authority (FSA) took enforcement action against a Mark Lockwood,31 an approved person and investment adviser with a stockbroking firm, on grounds that he had failed, despite clear warning signs, to identify that a client was placing an order on the basis of inside information. Mr Lockwood’s employer was required under the then applicable SUP 15.10.2.R to report to the FSA suspicious transactions and in turn, Mr Lockwood was, as recorded in the final notice, required by his employer to report to his firm’s compliance department any suspicious transactions. It is not evident from this decision whether the FSA considered that the failure to report had deprived it of an early opportunity to act upon the client’s abusive activities, but in the final notice the FSA linked Mr Lockwood’s failings to the firm’s obligations under SUP 15.10 stating that: ‘The impact of your failings was that the retail stockbroking firm was used to facilitate a transaction made on the basis of inside information and was prevented from considering whether to report the trade to the FSA through a STR.’32 The case is an indication of the FSA’s willingness to use its enforcement tools in cases where there has been a regulatory failure to highlight responsibilities to report activities providing evidence of levels of reasonable suspicion. In particular the FSA used the notice to set out the suspicious transaction reporting expectations it has of approved persons by stating: ‘The FSA expects market participants to be alert to indications that customers are seeking to use regulated firms to facilitate financial crime, including insider dealing. Where there is a clear risk that a trade is in breach of relevant legal or regulatory requirements a market participant should refuse to execute the trade. Where it is not apparent to a broker whether or not the trade is in breach or the suspicion only becomes apparent once a trade has been executed, the trader should report the trade internally in order to facilitate the appropriate filing of a STR.’33 In the more recent 2018 decision against Interactive Brokers (UK) Limited, but once again in relation to the reporting requirements in place prior to MiFIR, the FCA imposed a financial penalty of £1,049,412 for ‘failings in

31 32 33

FSA Final Notice Mr Mark Lockwood (1 September 2009). Lockwood (note 31) at [2.3]. Lockwood (note 31) at [4.1].

323

10.18  Information gathering [the firms] post trade systems and controls for identifying and reporting suspicious transactions’. The failings occurred in the period February 2014 to February 2015.34 Commenting on the decision, the FCA Mark Steward stated, ‘Firms not only have a key responsibility to report suspicious conduct in our capital markets, they also have an obligation to ensure their trading systems are not used for the purpose of financial crime. IBUK’s systems were inadequate and ineffective in the face of potentially suspicious transactions; they fell below the appropriate standards and exposed counterparties and the market to risks they did not bargain for. The FCA will continue to enforce appropriate standards of market conduct to ensure our markets function well.’35

THE FCA’S STATUTORY INFORMATION GATHERING Information gathering by the FCA 10.19 The FCA is given power under section 165 of the FSMA to require authorised persons (as well as certain other persons defined in section 165(7)) to disclose information or documents. Although (as discussed earlier in this chapter) there are ocassions where the FCA will routinely obtain information through its supervisory activity or from proactive reporting by authorised persons, there may be occasions when the FCA will consider it more appropriate to rely on its section 165 information gathering powers. The FCA provides a little guidance on how it determines which of its information gathering powers to use essentially recognising that it will use the most appropriate method for the case in question, stating in its Enforcement Guide at EG 3.1.1: ‘… In any particular case, the FCA will decide which powers, or combination of powers, are most appropriate to use having regard to all the circumstances. Further comments on the use of these powers are set out below.’36 10.20 The FCA considers the variety of use that information requests may be put to, stating at EG 3.2.1: ‘the FCA may use its section 165 power to require information and documents from firms to support both its supervisory and its enforcement functions’. The core section 165 information gathering powers as set out at section 165(1) and (3) relate to ‘specified information or information of a specified description’ or ‘specified documents or documents of a specified description’. The power in section 165(1) may be exercsied only upon written notice by the FCA to the authorised person and that in section 165(3) by an officer of the FCA (has defined in section 165(9) who has written authorisation from the FCA to require the provision of the information or documents. The term ‘information and documents’ is defined in section 165(10) as either those ‘specified in the notice’ (in respect of section  165(1) and (2) or specified in the authorisation (in regard to requests under section  165(3)). In relation to

34 35 36

FCA Final Notice Interactive Brokers (UK) Limited (25 January 2018), https://www.fca.org. uk/publication/final-notices/interactive-brokers-uk-limited-2018.pdf. FCA, ‘FCA fines Interactive Brokers (UK) Limited £1,049, 412 for poor market abuse controls and failure to report suspicious client transactions’, 25 January 2018, https://www. fca.org.uk/news/press-releases/fca-fines-interactive-brokers-uk-limited. FCA Enforcement Guide Release 20, https://www.handbook.fca.org.uk/handbook/EG/3/1. html.

324

Information gathering  10.24 an equivalent provision at section 171(2) allowing an investigator to request documents of a ‘specified description’ in The Financial Services Authority v Amro International SA,37 Lord Justice Burnton (at para 57) commented: ‘what is important is that the person on whom the requirement is made can identify the documents he has to produce, since failure to produce them may lead to the imposition of a penalty under s177’. The terms of a formal request under section 165(1) is in part addressed by section 165(2) requiring the FCA to provide a reasonable period for provision or production of the information as well as details for where the information must be provided or produced. 10.21 Unlike section 165(1), the terms of a section 165(3) request require compliance ‘without delay’. The FCA’s powers under section  165 may not, however, be exercised for the purpose of a random search for information. Section 165(4) in essence establishes an information request limit by providing that the section  165 powers only apply to ‘information and documents reasonably required in connection with the exercise by the [FCA] of functions conferred on it by the Act’.

Information gathering by skilled persons 10.22 Sections 166 and 166A of the FSMA provide the relevant regulator with power to appoint a ‘skilled person’. Section  166 is used to require the appointment of a skilled person to report on a matter and section  166A for a skilled person to collect or update information that an authorised person has failed to keep in contravention with a regulatory requirement. This section will focus on the powers to appoint a skilled person for the purpose of reporting. 10.23 The FCA is given power under section 166 to require an authorised person (or other persons described below) to provide it with a report by a ‘skilled person’. The formalities of the requirement for a skilled person report are provided in section  166(1)–(4). The FCA further sets out in the Enforcement Guide at EG 3.3 its policy on the use of skilled persons and uses rules and guidance in its Supervision Manual (SUP) at SUP 5 to define in some detail the process to be followed when it exercises its powers under section 166. In recognition that the nature of a skilled person’s appointment is to provide expertise which may by its very essence not be consistent with more formal evidence gathering, the FCA’s Enforcement Guide paragraph 3.3.2(2) provides: ‘If the FCA’s objectives include obtaining expert analysis or recommendations (or both) for, say, the purposes of seeking remedial action, it may be appropriate to use the power under section  166 instead of, or in conjunction with, the FCA’s other available powers.’ 10.24 Section  166(1)–(3) provides the core scope of the skilled person appointment. The section  166(1) in essence limits the use of section  166 to situations where the FCA can require the provision of information or documents, stating: ‘This section  applies where either regulator [the PRA or FCA] has required or could require a person to whom subsection (2) applies (“the person

37

The Financial Services Authority, Elisabeth Connell, Patricia Senra v Amro International SA, Creon Management SA [2010] EWCA Civ 123.

325

10.24  Information gathering concerned”) to provide information or produce documents with respect to any matter (“the matter concerned”).’ The provisions of section  166(2) further limit the persons that may be subject to a skilled person report requirement to authorised persons and a tightly defined group of persons connected with the approved person, namely: ‘(a) (b) (c) (d)

an authorised person (A); any other member of A’s group; a partnership of which A is a member, or a person who has at any relevant time been a person falling within paragraph (a), (b) or (c),

who is, or was at the relevant time, carrying on a business.’ Under the terms of the FSMA as originally drafted, skilled persons would be appointed by the authorised person following the issue of a requirement notice by the authority. One of the notable amendments made to section 166 by the Financial Services Act 2012 was the introduction of a power for the FCA (or PRA) itself to appoint a skilled person to make a report. Section 166(3) now provides that: ‘The regulator mentioned in subsection (1) may either— (a) (b)

by notice in writing given to the person concerned, require the person concerned to provide the regulator with a report on the matter concerned, or itself appoint a person to provide the regulator with a report on the matter concerned.’

The FCA provides some clues as to the circumstances when it will appoint a skilled person in SUP 5 Annex 1 which in essence cover circumstances where the FCA might appoint a skilled person rather than the firm, such as ‘to assert a greater degree of control over the appointment’. Furthermore, the FCA now maintains a panel of skilled person firms, from which it will select following a formal tendering process, the most appropriate firm.38 10.25 Given that the reporting requirement under section 166 is restricted to the authorised person community, the value of skilled person reporting in respect of market abuse may be limited to situations when the FCA seeks to receive a report on the standard of a firm’s anti-market abuse systems and controls. Section 166(6) requires that the skilled person must be ‘(a) appearing to the Regulator [eg the FCA] to have the skills necessary to make a report on the matter concerned’; ‘(b) … nominated or approved by the Regulator [eg the FCA]’. The former requirement operates essentially to ensure that any person proposed as a skilled person has relevant skills. The FCA sets out at SUP 5.4.6G–5.4.9G guidance for the appointment of the skilled person, including material addressing how it may evaluate whether the person has the necessary skill. At SUP 5.4.6G the FCA states that where it is to appoint a skilled person it ‘… will normally seek to agree in advance with the person … the skilled person who will make the report …’.The FCA explains at SUP 5.4.8G that where it will ‘nominate, approve or appoint a Skilled Person’,

38

SUP 5 Annex 1, Release 20, June 2022, https://www.handbook.fca.org.uk/handbook/SUP/5/ Annex1.html.

326

Information gathering  10.27 it will consider both ‘the skills necessary to make a report on the matter concerned’, and ‘the ability to complete the report within the time expected by the FCA’; together with other factors such as the person’s ‘relevant specialist knowledge’ (SUP 5.4.8G()), ‘professional difficulty or potential conflict of interest’ (SUP5.4.8G(4)) and whether there may be ‘enough detachment, bearing in mind the closeness of an existing professional relationship’ (SUP 5.4.8G). 10.26 Ordinarily prior to a formal skilled person appointment the FCA will (as confirmed at SUP 5.4.2G) enter into a discussion with the person subject to the skilled person report about the purpose of the appointment, the scope of the report, which skilled person should be appointed and by whom, and the expected cost of the skilled person’s report. The FCA will also seek to explore alternative ways in which the information could be obtained. In terms of the structural elements of the skilled persons appointment, section 166(4) allows for the FCA to specify in the requirement notice the form it requires for an individual skilled person’s report. The FCA sets out in SUP 5.4.1G–5.4.5G the process it follows in setting and specifying the form of the report, including at 5.4.3G that it will set out in the section 166 written requirement notice the form the report is to meet as well as ‘the purpose of the report, … its scope, the timetable for completion and any other relevant matters’ and also ‘the matters which the report is to contain’. 10.27 The FCA traditionally utilises skilled person reporting to satisfy a variety of objectives, including as set out by the FCA at EG 3.3.1 ‘… to support both its supervision and enforcement functions’. SUP 5.3 additionally explains the FCA’s policy on using skilled persons and makes clear that the FCA will consider a range of matters in deciding whether to require a section  166 report such as at SUP 5.3.3G factors including ‘the circumstances relating to the firm’; ‘alternative tools available, including other statutory powers’; ‘legal and procedural considerations’; ‘the objectives of the FCA’s enquiries’; ‘cost considerations’; and ‘considerations relating to FCA resource’. In considering the availability of alternative tools the FCA states at SUP 5.3.5G that it will have regard to formal requests for information under section  165 or the appointment of investigators (which will be examined further in Chapter 11). Additionally at SUP 5.3.5G(1) the FCA does consider whether it is alternatively appropriate to rely on non-statutory powers such as visiting the authorised person or requesting ‘information on an informal basis’. The FCA further explains at SUP 5.3.1G four potential uses for the report requirement, namely, ‘diagnostic purposes’, ‘monitoring purposes’, ‘in the context of preventative action’ and ‘for remedial action’ each of which is provided with examples of their use at SUP 5 Annex 1. By way of example the diagnostic purpose may be used to ‘find out more about a concern … or to determine whether there may have been a breach of a rule …’. Furthermore, the FCA explains at EG 3.3.3 that when a report is required it will ‘make clear both to the firm and to the skilled person the nature of the concerns … and the possible uses of the results of the report’. If a report is required to initially satisfy supervisory reasons, the matters reported on may be such that the FCA determines to make a reference to its enforcement division. Confirming the possibility of such an escalation of the report EG 3.3.3 provides: ‘But a report the FCA commissions for purely diagnostic purposes could identify issues which could lead to the appointment of an investigator and/or enforcement

327

10.27  Information gathering action.’ In such circumstances it appears likely that the FCA would formally appoint an investigator but that the material produced by the skilled person would be relied on by the FCA as information relevant to its enforcement decision-making. 10.28 Section  166(7) sets out a basic safeguard to ensure the efficacy of the skilled person’s report by setting out an obligation of cooperation for the person concerned (the authorised person or others listed in section 166(2) as well as those persons ‘providing (or who at any time has provided) services to a person concerned’. The FCA sets out in SUP additional and important safeguards to ensure an appropriate degree of assistance to the skilled person. SUP 5.5.9R imposes on authorised persons a regulatory obligation of skilled person cooperation providing: ‘A firm must provide all reasonable assistance to any skilled person appointed to provide a report under section 166 of the Act (Reports by skilled persons)’ together with guidance at 5.5.10G–5.5.11G on how reasonable assistance may be provided, which covers matters such as access to the firm’s records, the provision of ‘information and explanations … reasonably considered necessary or desirable’ and the obtaining of information directly from the firm’s auditor. In addition, the FCA addresses in SUP a series of other safeguards relating to both the authorised person and skilled person applying where the skilled person is appointed by the firm (rather than by the FCA under section  166(3)(b)), thus recognising in those circumstances that the FCA has no contractual relationship with the skilled person. SUP 5.5 sets out rules and guidance addressing required terms of the skilled person’s contract of appointment, including, at SUP 5.5.5R(2)(a), allowing the FCA to ‘enforce the provisions of the contract’ and specific obligations relating to the operation of the skilled person reporting, including at SUP 5.5.1R(1) that the contract must ‘require and permit the skilled person … (a) to cooperate with the FCA … in relation to the firm’; and at 5.5.1R(2) ‘requiring the skilled person to prepare a report, as notified to the firm by the FCA, within the time specified by the [FCA]’. 10.29 Furthermore given the potential that as set out in EG 3.3.3 the skilled person’s report may result in the formal appointment of an investigator and a referral to the FCA enforcement division (as considered above at 10.27) SUP 5.5.1R(1)(b) specifies that the contract must ‘require and permit the skilled person … (b) to communicate to the [FCA] information on, or his opinion on, matters of which he has, or had, become aware in his capacity as skilled person reporting on the firm …’ in the following circumstances: ‘(i)

(ii)

the skilled person reasonably believes that, as regards the firm concerned (A) there is or has been, or may be or may have been, a contravention of any relevant requirement that applies to the firm concerned; and (B) that the contravention may be of material significance to the [FCA] in determining whether to exercise, in relation to the firm concerned, any functions conferred on the [FCA] by or under any provision of the Act other than Part VI. (Official Listing); or the skilled person reasonably believes that the information on, or his opinion on, those matters may be of material significance to the [FCA] in determining whether the firm concerned satisfies and will continue to satisfy the threshold conditions; or

328

Information gathering  10.30 (iii)

the skilled person reasonably believes that firm is not, may not be or may cease to be a going concern.’

10.30 Since 30 June 2012, the FCA has reported on the number of appointed skilled persons, and in its Annual Report for 2020/21,39 the FCA reported that during the year, 68 skilled person appointments had been made with 17 of the 68 relating to financial crime.

39

FCA Annual Report and Accounts 2020/21 (15 July 2021) at [147]–[148], https://www.fca. org.uk/publication/annual-reports/annual-report-2020-21.pdf.

329

330

Chapter 11

Investigations

INTRODUCTION 11.1 This chapter considers the key statutory powers of investigation granted to the Financial Conduct Authority (FCA) under Part XI of the Financial Services and Markets Act 2000 (FSMA). Given the FCA’s capability of prosecuting for criminal market abuse as well as undertaking administrative enforcement action, the deployment of appropriate investigation powers can be vital for the determination of a successful enforcement outcome. Referring to the role of an investigation being part of its overall enforcement process, the FCA states in its investigation opening criteria, that, ‘During an investigation, we aim to find out whether serious misconduct has occurred and get a full understanding of the facts so we can decide whether to act and, if so, what kind of action may be necessary.’1 11.2 Provisions of the FSMA underpin the substantive law relating to market abuse and misconduct, with a wide range of investigation and enforcement powers. Extensive powers of investigation are provided in the FSMA in respect of all types of market misconduct (ie, market abuse and the criminal offences of market manipulation and insider dealing). These powers of investigation are reinforced by a number of sanctions for failure to cooperate and comply (considered below at 11.37). Furthermore, as will be shown in this chapter and Chapter 10 on information gathering, the FCA has refined its approach to investigations and information gathering, allowing it to select the most appropriate method to secure information and evidence in light of the circumstances of the case and person concerned. Indeed (as will be explored in Chapter 12 on enforcement issues) with some market misconduct cases involving authorised persons it is not uncommon for the FCA to rely on breaches of its High Level Principles for business as opposed to the specific provisions in Part VIII of the FSMA and the Market Abuse Regulations to secure an enforcement outcome.2

1 2

FCA, webpage ‘Investigations opening criteria’, https://www.fca.org.uk/about/enforcement/ investigation-opening-criteria. For an historical analysis of the FSA and FCA market abuse enforcement arrangements, see generally S Bazley, Market Abuse Enforcement Practice and Procedure (Bloomsbury Professional 2013).

331

11.3  Investigations

INVESTIGATIONS AND TRANSPARENCY 11.3 The FCA is concerned to ensure that it conducts its investigations in accordance with principles of fairness, efficiency and transparency; in part its investigation procedures and policies are designed to meet such standards. The obligation to operate such standards in its investigations can be derived from a number of sources. Certainly the need to operate efficient and transparent investigation processes can be assessed as an inherent part of the FCA’s risk-based approach to regulation, being in part derived from the ‘regulatory principles’ set out in the FSMA applying to how it discharges its ‘general functions’,3 including at section 3B(1)(a) ‘the need to use [its] … resources … in the most efficient and economic way’, and at section 3B(1)(h) ‘the principle that the [FCA] should exercise [its] functions as transparently as possible’. Furthermore, it must also be recognised that the conduct of an FCA investigation can significantly impact its enforcement decision making and as a consequence can lead to the standard of the investigation procedure being open to close scrutiny during any reference of its decision making to the Upper Tribunal4 (see Chapter 12 for jurisdiction of the Upper Tribunal (Tax and Chancery). Standards of fairness also arise from the obligation imposed on the FCA to separate its investigatory and enforcement decision making from its supervisory functions. In this regard, section 395(2)(a)(i) and (ii) of the FSMA (as amended) requires that the FCA procedures in relation to warning and decision notices ‘… must be designed to secure …’ that the decision leading to the warning or decision notice is taken ‘by a person not directly involved in establishing the evidence on which that decision is based, or by 2 or more persons who include a person not directly involved in establishing that evidence’. 11.4 To inject further fairness and transparency into the FCA’s investigation powers, the FCA publishes an Enforcement Guide (EG), which in part describes the FCA’s approach to its information gathering powers and how it conducts investigations.5 11.5 The EG expressly recognises the need for standards of fairness. While addressed at the FCA’s investigation and enforcement process EG 2.1.2 recognises a series of principles underlying its approach to enforcement by making reference to the need to ensure ‘fair treatment when exercising its enforcement powers’ as well as matters such as transparency and proportionality. A considerable element of fairness in any enforcement process is achieved

3

4

5

The FCA’s general functions are defined by FSMA, s 1B(6) as: ‘(a) its function of making rules under this Act (considered as a whole); (aa) its function of making technical standards in accordance with Chapter 2A of Part 9A(b) its function of preparing and issuing codes under this Act (considered as a whole); (c) its functions in relation to the giving of general guidance (considered as a whole); and (d) its function of determining the general policy and principles by reference to which it performs particular functions’. See for example Paul Davidson and Ashley Tatham v FSA cost decision, Financial Services and Markets Tribunal, case number 40. Reported 11 October 2006, in which the FSA’s investigation report together with its decision making in the matter was considered by the Tribunal for the purpose of assessing whether the FSA had acted reasonably. It should be noted that the FSA’s enforcement and decision-making process applied during the Davidson and Tatham matter had been altered by the FSA as a result of its enforcement review published in July 2005. FCA, Enforcement Guide, Release 21, July 2022, https://www.handbook.fca.org.uk/ handbook/EG/1/?view=chapter.

332

Investigations  11.7 through the consistency with which the process is applied, as without such standard the regime’s application may be considered as arbitrary. The need for consistency is also referred to by the FCA in EG 2.1.2 and, it is submitted, is central to the role played by the FCA’s investigation process in contributing to it meeting its operational objectives at section 1B(3) of the FSMA. 11.6 The FCA’s decision to commence a formal investigation is closely aligned to its policy towards commencing enforcement proceedings (which is explored further in Chapter 12). The ‘investigation opening criteria’ published by the FCA on its website,6 as confirmed by the FCA at section 2.2.8 of its Enforcement Guide, along with commentary in the FCA’s April 2019 publication ‘Approach to Enforcement’,7 indicate that the FCA may utilise, in appropriate cases other of its regulatory tools to address any concerns it may have. Indeed, the FCA does not take enforcement action or commence investigations in every case, partly because it does not have the resources to do so. Nonetheless, in instances of suspected market abuse, the FCA highlights that alternative regulatory options may not be available – leading the FCA to consider the nature of the abusive behaviour to determine whether to commence an investigation, stating at EG 2.2.9: ‘However, given the often limited alternatives to enforcement action available to address market abuse (with many of the subjects typically unauthorised), greater emphasis will be given to the egregiousness and deterrence value of a particular case when making such decisions.’ The FCA’s basic premise in commencing an investigation is linked to whether there may have been ‘serious misconduct’. In its Investigation opening criteria the FCA states, ‘We will start an investigation where we have reason to believe serious misconduct may have taken place. This means that we may investigate at an early stage, before harm occurs.’8 The FCA goes on to describe broadly in its investigation opening criteria the types of things that might constitute series misconduct, including reference to market integrity and confidence, both being relevant to market abusive behaviour, stating ‘Not all harm is caused by serious misconduct. However, serious misconduct is likely to cause harm to market integrity, confidence in the financial system or cause harm to consumers.’9 11.7 The investigation and information gathering powers granted to the FCA under Part XI of the FSMA set out a variety of tests to ensure the FCA is satisfied there are grounds to investigate before it may invoke its powers and thus the threshold of these tests may act to restrict the FCA from commencing a formal statutory investigation. This requirement is acknowledged by the FCA at EG 2.2.6 ‘… Before it proceeds with an investigation, the FCA will satisfy itself that there are grounds to investigate under the statutory provisions that give the FCA powers to appoint investigators … If the statutory test is met, it will decide whether to carry out an investigation after considering all the relevant circumstances.’

6 7 8 9

See the FCA’s ‘Investigation opening criteria’, 21 February 2022, https://www.fca.org. uk/about/enforcement/investigation-opening-criteria, which are further considered in this chapter. FCA, ‘FCA Mission: Approach to Enforcement’, April 2019, https://www.fca.org.uk/ publication/corporate/our-approach-enforcement-final-report-feedback-statement.pdf. See note 5 above. See note 6 above.

333

11.8  Investigations 11.8 Where the FCA wishes to formally commence an investigation it has at its disposal a range of statutory powers dealing with a variety of subject areas allowing it to formally appoint investigators, authorise them to conduct the investigation and compel the subject to cooperate with the investigator. It is usual for investigators to be FCA staff, which is permitted by section 170(5) of the FSMA. The core occasions on which the FCA may appoint an investigator are provide in sections 167–169 (including section 169A) of the FSMA, which are in turn supported by rules relating to the conduct of and powers that may be exercised in relation to investigations as set out in sections 170–173. These specific provisions, particularly relating to investigations into market abuse, are explored in further detail below.

POWERS OF INVESTIGATION 11.9 The FSMA provides a variety of formal powers of investigation, enabling the FCA, Prudential Regulation Authority (PRA) and the Secretary of State to appoint persons to conduct an investigation where there are concerns regarding potential breaches of regulatory obligations including market abuse. The FCA has both ‘general’ powers of investigation under section 167 of the FSMA as well more specific powers under section 168, which under section 168(2) can be exercised in relation to specific concerns about both administrative market abuse and criminal insider dealing and market abuse (in the Criminal Justice Act 1993 and Financial Services Act 2012). In part, sections 167 and 168 draw a distinction between investigations into the conduct of authorised persons (section 167), and investigations relating to the conduct of unregulated persons (section 168 is unlimited as to the type of person in respect of whom such powers may be exercised). The FCA’s Enforcement Guide at EG 3.4.2 recognises that in cases where there is both a specific concern about potential market abuse and general concerns, then it may appoint investigators under both sections 167 and 168. Indeed, where an investigator appointed in relation to general matters under section 167 has identified specific concerns such as market abuse, the investigation may be extended to cover matters within section 168.

General power of appointment of investigator 11.10 General powers to appoint a person to investigate business matters of authorised persons, a parent of an FCA investment firm, persons who provide services to authorised persons (or their parent) or recognised investment exchanges (as set out in section 167(1)A (a)–(d)), may be exercised by the FCA under section 167 of the FSMA where, as described in section 167(1), ‘there is good reason for doing so’. Given the restricted scope of section 167 it is unlikely that the FCA will exercise such powers to investigate market abuse behaviour although it is submitted that a section 167 appointment could be relied on to investigate concerns about an authorised person’s systems of control for countering market abuse, such as its information barriers and controls (see Chapter 13 Compliance procedures and systems). The conduct of investigations under section 167 together with the powers available to appointed investigators are set out in sections 170 to 172 of the FSMA, and are examined at 11.21–11.27 below.

334

Investigations  11.15

Special market abuse investigation powers 11.11 More specific powers to appoint investigators are granted to the FCA under section 168 and unlike the powers in section 167, the FCA may make an appointment under section 168 in relation to any person including members of the public. Investigator appointments under section 168 and their consequent powers may be made to cover a range of specially described circumstances including those relating to market abuse. Section 168(2)(a) highlights that where circumstances suggest that ‘an offence under … Part 7 Financial Services Act 2012 [criminal market abuse] or under Part V of the Criminal Justice Act 1993 [criminal insider dealing] may have been committed’; and section 168(2)(d) for civil law market abuse, stating, ‘a person has contravened Article 14 (prohibition of insider dealing and of unlawful disclosure of inside information) or Article 15 (prohibition of market manipulation) of the market abuse regulation.’ In addition to suggestions of specific market abuse, an investigator may be appointed under section 168(4) in circumstances relevant to wider market misconduct, which may be relied on by the FCA as an alternative to strict market abuse enforcement or indeed an additional measure, such as where there are potential breaches of FCA rules (see section 168(4)(c)) and misconduct in regard to approved persons (see section 168(4)(i)). 11.12 The FCA has indicated that it will normally use the power pursuant to section 168 where there are ‘… circumstances suggesting that contraventions or offences …’ set out in that section may have occurred (EG 3.4). The power to appoint an investigator under section 167 is stated by the FCA to be more likely to be used where although the circumstances ‘… do not suggest any specific breach or contravention covered by section 168’, the FCA still has concerns relevant to the power under section 168 (EG 3.4.1). Further, investigators may be appointed under both provisions (EG 3.4.2).

Investigation powers to support an overseas regulator 11.13 The global nature of financial markets means that any investigation into market abuse may result in enquiries having to be made into trading activity in financial markets situated in different jurisdictions. The FCA extends regulatory cooperation to regulatory agencies in other jurisdictions by virtue of sections 169 and 169A which enables the FCA to utilise its investigation powers for the purpose of international regulatory assistance and the more general cooperation requirement at section 354A of the FSMA which provides that: ‘The [FCA] must take such steps as it considers appropriate to co-operate with other persons (whether in the United Kingdom or elsewhere) who have functions – (a) similar to those of the FCA; or (b) in relation to the prevention or detection of financial crime’ and at section 354A(4): ‘Cooperation may include the sharing of information which the FCA is not preveted from disclosing’. 11.14 The FCA sets out in EG 2.6.1 its general view that overseas regulatory cooperation is considered as ‘… an essential part of its regulatory functions’ and stating: ‘In fulfilling this duty the FCA may share information which it is not prevented from disclosing, including information obtained in the course of the FCA’s own investigations, or exercise certain of its powers under Part XI of the Act.’ 11.15 Section 169 sets out provisions which in essence permit the FCA to use its information gathering powers under section 165 of the FSMA (as examined 335

11.15  Investigations in Chapter 10) or investigation powers to support an overseas regulator where it has been requested by the overseas regulator to do so. Section 169(1) provides: ‘(1) At the request of an overseas regulator, a regulator [FCA] may– (a) (b)

exercise the power conferred by section 165; or appoint one or more competent persons to investigate any matter.’

11.16 Consideration was given in Chapter 10 of the extent to which the FCA will rely on voluntary disclsoure by firms and it is evident from EG 3.7.4 that the FCA will consider the potential for voluntary disclosure before using its section 169 information gathering or investigation powers. It is also essential to take into account in the context of section 169(1)(a) that the FCA’s powers under section 165 are restricted to information requests directed to authorised persons, persons connected with authorised persons, operators, trustees or depositories of recognised collective investment schemes and recognised investment exchanges and clearing houses. In practical terms therefore, unless the overseas regulator request for support relates to any such person the FCA will have to appoint an investigator to gather information pursuant to formal investigator powers. 11.17 Section 169(2) operates to link an investigation under section 169 to the investigator powers under section 168(3) and thus the defined powers provided in sections 171 and 172 of the FSMA (which are explored in 11.21–11.27 below). In deciding whether to exercise its information gathering powers or appoint an investigator in support of an overseas regulator, section 169(4) sets out the following matters that the FCA may take into account: ‘(a) whether in the country or territory of the overseas regulator concerned, corresponding assistance would be given to a United Kingdom regulatory authority; (b) whether the case concerns the breach of a law, or other requirement, which has no close parallel in the United Kingdom or involves the assertion of a jurisdiction not recognised by the United Kingdom; (c) the seriousness of the case and its importance to persons in the United Kingdom; (d) whether it is otherwise appropriate in the public interest to give the assistance sought.’ 11.18 A series of issues regarding the statutory powers to provide support pursuant to its powers in section 169 were considered by the Court of Appeal in The Financial Services Authority v Amro International SA, Creon Management SA.10 In that case, the FSA had appointed investigators pursuant to section 169 in response to a request for information made by the US Securities and Exchange Commission (SEC), in connection with US legal proceedings, in the SEC alleged that a number of persons had engaged in trading to manipulate the price in shares of a US company named Sedona Corporation. The SEC sought the FSA’s support in obtaining documents from a UK based accountancy firm named Goodman Jones Chartered Accountants, which the SEC had identified had in its possession certain documents relating to persons that a were relevant to its US legal proceedings.11 The Appeal was concerned with a number of

10 11

The Financial Services Authority, Elisabeth Connell, Patricia Senra v Amro International SA, Creon Management SA [2010] EWCA Civ 123. FSA v Amro (see note 10 above) at [5]–[11].

336

Investigations  11.20 matters specifically relating to the Authority’s appointment of investigators under section 169 and the extent of the documents they could seek production of, in particular: whether the Authority ‘when considering whether to exercise the powers conferred by s169(1)’ was ‘under a duty to investigate or to verify the information provided by the overseas regulator’; whether the Authority was required to give a written notice of the appointment of an investigator pursuant to section 170(2) when appointing an investigator under section 169; and whether the appointed investigators ‘were … confined by the terms of their appointment to seek documents relevant to the issues pleaded in the … [US] proceedings …’.12 In addressing the issue relating to the appointment of investigators, the Court of Appeal considered the international nature of financial services and the importance of transnational regulatory cooperation and whether the Authority has any obligation to evaluate the ‘necessity’ or ‘desirability’ of the documents requested from the ‘standpoint of the foreign regulator’. Stanley Burnton LJ noted that the Authority had considered the matters outlined in section 169(4) when considering whether to appoint an investigator. He stated ‘The FSA must, and did, consider the request when deciding whether to exercise its discretion under section 169 by the exercise of its investigative powers … it is clear that the FSA decided to exercise its investigative power having considered the matters listed in section 169(4) …’13 However, Burnton LJ in essence contrasted the Authority’s obligation to consider the request, particularly in the context of section 169(4), with a necessity for it to ‘examine the SEC’s request critically’. In general, Burnton LJ set out a useful background into the nature of regulatory cooperation and the investigator appointment powers set out in section 169, stating: ‘It would be surprising if the Act [FSMA] did not permit the FSA to accord full faith and credit (to borrow the phrase of the Constitution of the United States and applied to a judgment of a court of the State of New York by Lord Denning MR in Colt Industries v Sarlie (No 2) [1966] 1 WLR 1287) to a foreign regulator, particularly one as important as and of the reputation of the SEC. I can see no good reason why Parliament should have required the FSA to second-guess as to its own laws and procedures, or as to the genuineness or validity of its requirement for information or documents.’ 11.19 In addressing the question of the nature of the documents that may be sought when an investigator is appointed under section 169, it is submitted that the Court of Appeal appears to have linked its conclusion that the Authority was under no obligation to evaluate the ‘necessity’ or ‘desirability’ of the documents sought together with the objective of the investigators appointment to ‘assist the FSA’. Lord Justice Burnton stated: ‘The FSA was exercising an investigatory power, not a power of discovery, and it was not limited to requiring documents relating to the allegations then pleaded in the New York proceedings.’

Interaction with other investigatory authorities 11.20 In matters involving serious allegations of financial crime or misconduct it is not uncommon for the matters under investigation to fall within the jurisdiction of a number of other UK authorities. In particular, allegations of market abuse might also fall within the jurisdiction of the enforcement division 12 13

FSA v Amro (see note 11 above) at [34]. FSA v Amro (see note 11 above) at [39].

337

11.20  Investigations of the investment exchange on which the trading activity took place. Indeed where the investigation concerns matters that may impact the authorisation of a firm authorised by the PRA, a joint FCA and PRA investigation may be necessary and is recognised by the FCA at EG 2.5.2.14 Where the subject matter of an investigation strays into the jurisdiction of another, the FCA might consider it appropriate to refer some of the issues to that agency or exchange for consideration, refer the matter when it appears that the exchange is better placed to take action or investigate and perhaps ultimately take action in parallel with the exchange. In taking such a decision in relation to exchange investigations the FCA practice, confirmed at EG 2.5.1, is to consider ‘… the extent to which the relevant exchange … has adequate and appropriate powers to investigate and deal with a matter itself’. It also envisages that in appropriate cases that ‘The FCA may investigate and/or take action in parallel with another domestic or international authority …’. The FCA has established referral and liaison guidelines set out in its Enforcement Guide at appendix 2 and 3 and at EG 12.4 in respect of criminal offences. These set out a framework for the liaison and cooperation between it and certain other UK authorities where each have an interest in investigating or prosecuting any aspect of a matter or where a rule breach might also result in action by other domestic or overseas regulatory authorities or enforcement agencies. The additional guidance at EG appendix 2 provides in particular some broad principles on matters such as how the FCA determines which agency should investigate a particular case; cooperation ‘where more than one agency is investigating a matter’; preventing ‘undue duplication of effort’, and preventing unfair treatment of investigation subjects because of the ‘unwarranted involvement of more than one agency’. EG appendix 2 para 2.1.9 provides indicators of when the action is most appropriately taken by the FCA and includes matters such as: ‘Where the suspected conduct in question would be best dealt with by: •• •• ••

criminal prosecution of offences which the FCA has powers to prosecute by virtue of the Financial Services and Markets Act 2000 (“the 2000 Act”) (See Appendix paragraph 1.4) and other incidental offences; civil proceedings under the 2000 Act (including applications for injunctions, restitution and to wind up firms carrying on regulated activities); regulatory action which can be referred to the Tribunal (including proceedings for market abuse) …’.

‘Where the likely defendants are authorised persons or approved persons’ and conversely provides indicators at EG appendix 2 para 2.1.9 (b) of where another agency is more appropriate such as ‘Where serious or complex fraud is the predominant issue in the conduct in question (normally appropriate for the SFO) …’ [and] ‘Where powers of arrest are likely to be necessary …’.

Investigation conduct and powers 11.21 The process to be followed for the appointment of investigators as well as the powers that investigators may exercise are prescribed in sections 170–176 of the FSMA. 14 Information about the Prudential Regulation Authority’s investigation and enforcement arrangements can be found at the PRA website page, ‘The PRA’s statutory powers and enforcement’, https://www.bankofengland.co.uk/prudential-regulation/pra-statutory-powers.

338

Investigations  11.25

Notification of the appointment of investigators 11.22 When appointing an investigator under section 167 or for the circumstances described above where an investigator is appointed under section 168, the FCA is required under section 170(2) to give the subject of the investigation ‘written notice of the appointment of an investigator’. The obligation to provide a written notice applies at the initial appointment stage as well as in circumstances recognised under section 170(9) ‘where there is a change to the scope of the investigation,’ although in such event section 170(9) provides significant lattitude for the FCA to decide whether or not to issue a revised notice, stating: ‘If there is a change in the scope or conduct of the investigation and, in the opinion of the investigating authority, the person subject to investigation is likely to be significantly prejudiced by not being made aware of it, that person must be given written notice of the change.’ 11.23 Section 170(3)(b) excludes the notice requirement for market abuse investigator appointments under sections 168(2) and similarly under section 170(3)(a) for investigations under section 168(1) or (4) where the FCA ‘believes that the notice required by subsection (2) or (9) would be likely to result in the investigation being frustrated’. Despite the complete exclusion under section 170(3)(b) the FCA indicates at EG 4.2.2 that save where a notification might ‘prejudice the FCA’s ability to conduct the investigation’ it will normally nonetheless provide notice ‘when it becomes clear who the person under investigation is’.

The investigator’s powers and conduct 11.24 Given that the decision to appoint an investigator is made by the FCA, based on identified concerns, then decisions relating to the conduct of the investigation will be taken by the FCA. Section 170(7) and (8) confirm that the FCA may direct and control the scope of investigators’ work, including at section 170(7) ‘the scope of the investigation’, ‘the period during which the investigation is to be conducted’, ‘the conduct of the investigation’ and ‘the reporting of the investigation’ and under section 170(8) matters such as whether to ‘extend the investigation to additional matters’, ‘require the investigator to discontinue the investigation …’ and ‘require the investigator to make such interim reports as so specified’. 11.25 Investigators are granted specific powers depending on whether the appointment is under section 167 or 168. In addition, the investigator’s powers are supported by sanctions for non-compliance. As described in section 171(1A), the powers available to an investigator appointed under sections 167 and 168(1) or (4) (by virtue of section 172(1)), extend to both the person under investigation as well as any person connected with him (such as a member of a group or a controller of the person under investigation) and allow the investigator to interview, gather information or documents, but only where, under section 171(3), the investigator ‘reasonably considers [it] … relevant to the purposes of the investigation’. More specifically section 171(1) provides that: ‘An investigator may require the person who is the subject of the investigation (“the person under investigation”) or any person connected with the person under investigation– (a)

to attend before the investigator at a specified time and place and answer questions; or 339

11.25  Investigations (b)

otherwise to provide such information as the investigator may require.”

11.26 Further, and in relation to document production, section 171(2) provides: ‘An investigator may also require any person to produce at a specified time and place any specified documents or documents of a specified description.’ 11.27 Investigators appointed under section 168, are given additional powers described in sections 172 and 173, depending on the circumstances of their section 168 appointment. Thus investigators appointed under section 168(4) to investigate misconduct may extend a requirement for attendance to answer questions and provide information to any persons provided that under section 172(3) ‘the investigator is satisfied that the requirement is necessary or expedient for the purposes of the investigation’. The powers available to investigators appointed to investigate market abuse under section 168(2) are more widely drafted giving the investigator significant latitude to gather investigation materials from a wide variety of sources. In such a case the powers in effect allow, under section 173(2), an investigator to interview or request information, and under section 173(3) to request ‘specified documents or documents of a ‘specified description …’ from any person who under section 173(1) the investigator (under section 173(4)) ‘considers … is or may be able to give information which is or may be relevant to the investigation’ as well as to ‘give him all assistance in connection with the investigation …’. Further provision is made in section 175 for investigators to obtain documents required under sections 161–173 that are in the possession of third parties.

Use of statements obtained in investigations: compulsory interviews 11.28 FSMA pays specific attention in section 174 to the evidential admissibility of statements made to investigators and in particular, given the investigation sanctions at section 177 of the FSMA (which are outlined below) which have the effect of compelling a person to answer an investigator’s sections 170–173 requests, section 174(2) in effect provides that statements made to an investigator are not admissible in criminal proceedings (although the investigation offences in section 177 are excluded) and market abuse actions under section 123. Recognising, these admissibility issues, the FCA sets out at EG 4.7.1 and 4.11 an indication of its approach to interviews, including at 4.11.5 that ‘Individuals suspected of a criminal offence may be interviewed under caution’, having the right to remain silent. In such circumstances in order not to create difficulties for the admissibility of any evidence obtained the FCA investigator will not be able to make a formal interview request under the statutory powers. Similarly, at EG 4.7.1 the FCA states, ‘For suspects or possible suspects in criminal or market abuse investigations, the FCA may prefer to question that person on a voluntary basis, possibly under caution. In such a case, the interviewee does not have to answer but if they do, those answers may be used against them in subsequent proceedings, including criminal or market abuse proceedings.’ 11.29 However, different principles are likely to apply where a statement is made voluntarily. Such statements would not attract the protection from admissibility afforded by the FSMA 2000, section 174(2) as the decision of 340

Investigations  11.31 the European Court of Human Rights (ECHR) in Staines v United Kingdom15 illustrates. The applicant (who was tried in connection with insider dealing) had first given voluntary statements and then attended a formal interview where she gave evidence under oath. The prosecution later made use of the statements that she had given under compulsion. She objected on the basis that her right to a fair trial had been breached. The ECHR distinguished the renowned case of Saunders v United Kingdom16 on the facts in part because the statement in the voluntary interview did not depart from the compulsory. 11.30 This distinction may account for the FCA’s stated policy set out above to prefer to question on a voluntary basis, possibly under caution, for suspects or possible suspects in criminal or market abuse investigations (EG 4.7.1(1)). The FCA’s guidance notes that in these circumstances ‘the interviewee does not have to answer, but if they do those answers may be used in subsequent proceedings, including market abuse proceedings’. However, the FCA also warns that ‘an adverse inference may be drawn from the failure to attend a voluntary interview, or a refusal to answer any question at such an interview’ (EG 4.7.3). Irrespective of whether the interview is voluntary or under compulsion, those attending are entitled to be accompanied by a legal advisor if they wish (EG 4.11.4).

Additional investigation measures – scoping and preliminary findings Scoping discussions 11.31 The FCA sets out in its Enforcement Guide other measures that it will normally operate as part of an investigation, despite there being no statutory obligation to do so. The FCA explains at EG 4.8 that it will ordinarilly hold ‘scoping discussions’ with ‘firms, approved persons or conduct rules staff’ at the beginning of an investigation into them in order to describe the reason for and scope of an investigation. Such a scoping discussion will generally take place in a meeting between the FCA investigator, its supervisor (that is if it is a firm which is FCA ‘relationship managed’), and representatives of the firm as well as any individuals that might be under investigation. Thereafter it is usually unlikely that an authorised firm’s FCA supervisor will continue to have involvement in any investigation ensuring a clear distinction between the FCA’s investigation and supervision activity. The FCA does nonetheless recognise the benefit in the investigation team having access to supervisory knowledge about the firm or any individuals that has been developed by the supervisor and at EG 4.9 the FCA sets out a policy on the provision of such supervisory expertise during an investigation. The FCA will in particular use the scoping discussion to provide an indication of the documents and individuals it will need access to and how the investigation is likely to proceed. The FCA provides some guidance to the role of scoping meetings within EG 4.8, but does make it clear that ‘[t]here may be a limit, however, as to how specific the FCA can be about the nature of its concerns in the early stages of an investigation’.

15 16

(16 May 2000, unreported). (1997) 23 EHRR 313.

341

11.32  Investigations

Terminating the investigation 11.32 The FCA also contemplates at EG 4.5 notices of termination of investigations in circumstances where it ceases an investigation having previously issued an investigator appointment notice, despite there being no statutory requirement to issue a notification of discontinuance. Stating at EG 4.5.1 that, ‘… where the FCA has given a person written notice that it has appointed an investigator and later decides to discontinue the investigation without any present intention to take further action, it will confirm this to the person concerned as soon as it considers it is appropriate to do so, bearing in mind the circumstances of the case.’ The extent to which the FCA may terminate an investigation has been considered by the courts. In the first instance decision in R (Grout) v Financial Conduct Authority,17 the applicant challenged an FCA decision to terminate an investigation into him on the basis that it was unlawful to do so and that the termination deprived him the opportunity to have his name cleared given the publicity. In dismissing the application, Males J stated, ‘… the FCA’s decision to terminate its investigation of Mr Grout was entirely rational. The matters which it took into account were legitimate considerations and it was for the FCA to determine what weight to give to them …’.

Preliminary findings letter 11.33 Following the outcome of its investigation, the usual practice of the FCA is to send a preliminary findings letter, annexing a preliminary investigation report, to the subject of the investigation before submitting a report to the Regulatory Decisions Committee (EG 4.13.1). The recipient then has an opportunity to respond and is usually allowed 28 days for this purpose (EG 4.13.3). However, there is no statutory requirement that the FCA send a preliminary findings letter. 11.34 The purpose of such letters is described by the FCA at EG 4.13.2 as a way of ‘… focussing decision making on the contentious issues in the case’. The FCA has indicated that it may decide not to send such a letter, for instance where action is urgently required to restore market confidence or no useful purpose would be achieved by sending such a letter (EG 4.13.2). Indeed, the courts have recogised such position. In an application for judicial review in R (Griggs) v The Financial Services Authority18 following an application for judicial review of the FSA’s decision not to issue a preliminary finding letter, because it had concerns that it might be unable to meet the FSMA statutory time limit for taking enforcement action against approved persons, Burnett J, expressed the view that the FSA’s concern about the 56 statutory two-year time limit was ‘a good reason for it adopting a practice other than that set out in the Enforcement Guide’; and also supported the view that in any event EG did not give rise to any ‘enforceable legitimate expectation’, in particular because the FSA’s Enforcement Guide made clear that ‘issuing a Preliminary Findings letter and the opportunity to respond to it will not invariably be a practice which is followed’.19

17 18 19

[2015] EWHC 596. See also the Court of Appeal decision in R (Grout) v Financial Conduct Authority [2018] EWCA Civ 71, an appeal concerning third-party rights under the FSMA, s 393. R (Griggs) v The Financial Services Authority [2008] EWHC 2587 (Admin), [2009] ACD 28. R (Griggs) at [20].

342

Investigations  11.37

Time frame for responding to information and document requirements 11.35 The FCA expects as set out at EG 4.10 that responses to information and document requests to be made in a timely manner and that any appropriate deadlines are met. A failure to meet any such deadlines can expose those concerned to investigation or regulatory sanctions (these are discussed in further detail below). Investigations into complex matters, can however, give rise to practical concerns affecting the identification and delivery of information and documents and it is not unusual as recognised at EG 4.10.1, providing that there is sufficient time within the FCA’s investigation timetable, for the FCA to issue a draft information or document request allowing for comment on the practicalities of meeting the request, by the proposed deadline. Once the FCA has considered such comments it will duly confirm or amend the request and thereafter, save where there are compelling reasons, the FCA will not usually agree to an extension of time for complying with the request.

CONFIDENTIALITY 11.36 In general, the FCA must not disclose ‘confidential information’, which includes information it receives during an investigation, unless the source of the information and, if different, the person to whom it relates, consents.20 Disclosure of such information is a criminal offence (FSMA, s 352). One of the characteristics of ‘confidential information’ for these purposes is information relating to the ‘business or other affairs of any person’ (FSMA, s 348(2)). It should also be noted that a person obtaining ‘confidential information’ directly or indirectly from the FCA is also subject to these restrictions (s 348(1)). There are, however, a wide number of exceptions to this starting point. In particular, there are a range of circumstances involving ‘the carrying out of a public function’, both in this jurisdiction and overseas in which such information may be disclosed (FSMA, s 349). Significant detail is given in the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001 (SI 2001/2188).

SANCTIONS FOR FAILING TO COMPLY WITH AN INVESTIGATION 11.37 The FSMA provides a series of measures to support a persons compliance with the FCA’s statutory powers, including under section 176 the availabllity of a warrant for a police constable to enter and search premises and take copies of docments. Section 177 further established a series of offences arising from a failure to comply with an investigator’s requirement, including under section 177(2) failing ‘without reasonable excuse to comply with a requirement’; section 177(3) falsifying, concealing, destroying or disposing of documents; section 177(4) providing ‘false or miselading material’; and section 177(6) the intentional obstruction of the exercise of a search and seizure warrant under section 176.

20

FSMA, s 348(1).

343

11.37  Investigations Chapter 10 discussed circumstances where the FCA might expect voluntary disclosure of information and considered the obligations to be open and cooperative with the FCA that are imposed upon authorised firms under Principle 11 and approved persons under rule 3 of the individual conduct rules. Such obligations might be relied upon by the FCA in an attempt to secure the disclosure of information without the need for it to rely on the information gathering powers in the Act. The obligations within those principles might also be used by the FCA as a method of enforcing its investigatory powers against authorised or approved persons as an alternative to the sanctions contained within section 177. The FCA indicates at EG 4.7.4 that a failure to comply with the exercise of the FCA’s statutory investigation powers can be viewed as a serious form of non-cooperation resulting in it bringing regulatory proceedings for breach of Principle 11 or Statement of Principle 4 or the individual conduct rules (the conduct rules are considered further in Chapter 14). From a strict regulatory point of view, a refusal to cooperate with the FCA is a breach of the obligation to be open and cooperative, and therefore authorised and approved persons need to weigh up carefully their motivation for not answering questions against their regulatory responsibilities. The FCA states at EG 4.7.3 that it will not bring disciplinary proceedings against a person under the principles simply because ‘they choose not to attend or answer questions at a purely voluntary interview.’ The FCA goes on in EG 4.7.3 to make clear, however, that ‘there may be circumstances in which an adverse inference may be drawn from the reluctance … to participate in a voluntary interview.’

CRITERIA FOR ENFORCEMENT ACTION 11.38 Having concluded an investigation and assuming that regulatory breaches have been identified, the FCA in dealing with those breaches has a number of regulatory tools at its disposal. It is not always the case that the FCA will determine to impose a disciplinary sanction even though it does view its enforcement process as a necessary element of it providing a credible deterrent. The FCA places significance on the importance of maintaining a cooperative and open relationship with firms and thus considers in appropriate circumstances that in some cases, even though a contravention has taken place, formal disciplinary or enforcement action may not be taken where it can expect the firm to act promptly in taking the necessary remedial action agreed with its supervisors. Nonetheless where a firm does not do this, the FCA makes clear at EG 2.1.4 that it may take disciplinary or other enforcement action in respect of the original contravention.

CASE SELECTION BY THE FCA 11.39 The FCA’s enforcement selection method for cases involving authorised and approved persons and in market abuse is determined by both its strategic planning such as priority and thematic work and its decision-making on individual cases. Chapter 12 examines the FCA’s approach to enforcement case selection method. The FCA will, however, be concerned that to take a case to enforcement, its investigation has gathered sufficient evidence to

344

Investigations  11.41 proceed with a case. It confirms this position in its Approach to Enforcement publication stating: ‘We will only make a decision about the outcome, including whether the case merits criminal, civil, regulatory action once there is sufficient evidence to justify such a decision at the end of an investigation. If there is, we will take into account the evidential merits of the case, whether there is a proper foundation for bringing the case and the public interest in deciding to start proceedings to obtain the appropriate remedy or sanction.’21 11.40 One factor that can have a material impact on whether the FCA will determine not to seek a disciplinary sanction is whether the authorised person has self-reported (such as was explored in Chapter 10 in relation to the obligation under High Level Principle for Business 11 (to be open and cooperative), helped the FCA establish the facts and taken adequate remedial action. Any such response is likely to be an indicator to the FCA that a firm is sufficiently responsible to manage its own regulatory failings in an appropriate and responsible manner. Firms, cannot, however, assume that a strong regulatory relationship will exclude them from disciplinary proceedings and the FCA will consider each case on its own merits as well as its overall regulatory priorities. This along with the criteria the FCA uses to determine when it will take enforcement action is considered further in Chapter 12 on enforcement. 11.41 In the next chapter consideration is given to whether the results of an investigation may result in a decision to take enforcement action and, if so, the nature of the FCA market abuse enforcement process.

21

See note 7 above.

345

346

Chapter 12

Enforcement issues

INTRODUCTION 12.1 This chapter examines the framework of law within which the Financial Conduct Authority (FCA) conducts civil or administrative enforcement to address persons who contravene provisions of the Market Abuse Regulations, enforcement powers relevant to persons authorised to conduct regulated activity under the Financial Services and Markets Act 2000 (FSMA), together with statutory provisions allowing applications to be made to the court in order to support the FCA’s enforcement activity.1 12.2 Although the market abuse regime extends to all users of the market, much of the FCA’s work in this area involves the conduct of regulated firms. Indeed, the FCA approaches its enforcement as a critical component of an effective market abuse regime and in its Strategy for 2022 to 2025 it stated (at [19]): ‘When we find market abuse, we will take decisive action. We will use the full range of our supervisory and enforcement tools, including criminal and civil sanctions where appropriate, to pursue offenders and deter future wrongdoers.’2 It is thus essential when considering market abuse enforcement to take into account the extent to which the FCA considers whether abuse in the market impacts on a regulated firm’s authorisation to conduct regulated business and how it uses its Principles for Business and its general rules when dealing with misconduct. The term ‘enforcement’ is used generally, applying to both the powers available to discipline persons involved in market misconduct as well as to those powers available to the FCA to secure or confiscate assets. 12.3 This chapter explores both the statutory framework within which the FCA must operate its enforcement activity as well as the FCA handbook provisions in the Decisions Procedures and Penalties Manual (DEPP)3 and

1 2 3

For a recent historical perspective on aspects of market abuse enforcement, see generally, S Bazley, Market Abuse Enforcement Practice and Procedure (Bloomsbury Professional 2013). FCA, ‘Our strategy 2022 to 2025’, https://www.fca.org.uk/publication/corporate/our-strategy2022-25.pdf. FCA, Decisions Procedures and Penalties sourcebook, Release 20, June 2022, https://www. handbook.fca.org.uk/handbook/DEPP/1/?view=chapter.

347

12.3  Enforcement issues enforcement policy as set out in the FCA’s Enforcement Guide (EG)4 which set out how it approaches its enforcement case selection and decision-making including its methodology for setting financial penalties and determining the most appropriate enforcement outcome.

SANCTIONS FOR MARKET ABUSE 12.4 The FCA has at its disposal a range of enforcement powers5 to combat and address market abuse by persons that use the financial markets, including powers to: (a) impose a financial penalty under section 123(2) of the FSMA; (b) temporarily prohibit an individual from managing an investment firm or dealing in securities under section 123A of the FSMA; (c) suspend or impose limitations on authorised person carrying on regulated business activities under section 123B of the FSMA; and (d) to require an authorised person that has accrued profits from market abuse to pay restitution pursuant to the FSMA, section 384(2). In addition to instances of direct market abuse, that is where a person’s behaviour is contrary to one of the prohibited behaviours in Articles 14 or 15 of the Market Abuse Regulation (MAR)6 (see further Chapter 4 of this book), section 123(1)(b) allows the FCA to impose a financial penalty where a person has breached or been knowingly concerned in a breach of MAR other than Articles 14 and 15. 12.5 Additionally, and of significance, the FCA may also exercise disciplinary measures and enforcement action against authorised persons and persons subject to rules of conduct under section 64A of the FSMA including senior management function holders, as defined in section 59ZA of the FSMA, by reference to its general rules including high-level principles for business or the Code of Conduct (see further Chapters 14 and 15) by imposing a financial penalty or, in very serious cases, withdrawing a person’s authorisation or approval, or prohibiting a person from performing a controlled function. In the context of market abuse, the FCA’s enforcement activity relates specifically to identified breaches of the prohibited behaviours in Articles 14 and 15 of MAR or more widely to authorised persons where abusive behaviour is considered a breach of the FCA’s high-level principle and rules. In addition, the FCA also has power to apply to the civil courts for injunctions and restitution orders to support its enforcement activities as well as power to prosecute criminal offences of market misconduct (which has been considered in further detail in Chapters 3 and 5).7 The decision to take enforcement proceedings, is not, however, a straightforward one. Historically, there had been the view that instances of abuse in the markets do go undetected and that the market abuse cases brought by the FCA are merely the tip of the market abuse iceberg, with

4 5

6 7

FCA, Enforcement Guide, Release 20, June 2022, https://www.handbook.fca.org.uk/ handbook/EG/1/?view=chapter. Reference to enforcement applies to both disciplinary measures such as the FCA’s powers to impose penalties for market abuse under the FSMA, s 123, to impose financial penalties on authorised persons under section 206 and approved persons under section 66 and its wider enforcement protectionist powers such as business permission withdrawal and restraining orders or restitution orders or requirements for restitution under the FSMA, ss 381–384. UK retained EU Market Abuse Regulation 596/2014/EU. Each of the measures described may run in parallel with the enforcement powers of other financial regulatory agencies such as the Regulated Exchanges and The Panel for Takeovers and Mergers.

348

Enforcement issues  12.7 many abusive activities going either undetected8 or considered inappropriate for formal enforcement activity.9 The FCA’s finite resources result in it having to apply a risk-based approach to its enforcement work and it not being able to pursue each and every identified instance of abuse. Even where it determines that enforcement action is necessary, it must select from wide ranging statutory powers a response that is most appropriate for dealing with the issues that it has identified. 12.6 The FCA has indicated that it does not undertake enforcement action in all cases of market abuse10 and thus it may be inferred that a significant element of the FCA’s case selection process and approach to market abuse enforcement is influenced by policy considerations. At the heart of any decision to commence proceedings for market abuse is consideration of a number of principles and case selection criteria, some of which have been explored in Chapter 11. The FCA articulates elements of its enforcement objective in paragraph 2.2 of its Enforcement Guide (EG), including an indication of a policy of deterrence in appropriate cases at EG 2.2.4. ‘This does not mean that the FCA will only take enforcement action in priority strategic areas. There will always be particularly serious cases where enforcement action is necessary, ad hoc cases of particular significance in a markets, consumer protection or financial crime context, or cases that the FCA thinks are necessary to achieve effective deterrence.’ In addition, when considering the policy considerations behind the FCA’s market abuse enforcement activity it is also important to recognise that the FCA will pursue market abuse enforcement in order to demonstrate that it meets its statutory objectives, including those relating to the maintenance of market confidence and protecting the interests of consumers.11

Enforcement case selection 12.7 Historically, the Authority has stressed that it is not an enforcementled regulator with its Enforcement Division sharing the same priorities as those of the FCA generally.12 Arguably, however, the emphasis of financial regulation since the global banking crisis has resulted in a more active regard for the FCA’s role as a law enforcement agency as well as a supervisory regulator. For example, in its report on the Review of enforcement decisionmaking at the financial services regulators (December 2014) HM Treasury

8 9 10

11

12

For comments about the existence of dealing rings see Simon English ‘A Chancellor who keeps on selling himself short’, Evening Standard (London 1 April 2008) Business 31. The criteria used by the FCA to determine whether to commence enforcement proceedings for market abuse are considered at 12.7–12.9 below. See Enforcement Guidance which positions the FCA’s enforcement and supervisory options and also comments by Margaret Cole, the then FSA Director of Enforcement ‘The UK FSA: Nobody does it better’ Fordham Law School, New York (17 October 2006), http://www. fsa.gov.uk/pages/Library/Communication/Speeches/2006/1017_mc.shtml and also Carlos Conceicao (previously Head of Wholesale Department in the FSA’s enforcement division) ‘The FSA’s approach to taking action against market abuse’ (2007) 28(2) Co Law 43–45 at [45]. See EG 2.1.1 which refers to enforcement having a role in ‘pursuit of [FCA’s] statutory objectives including its operational objectives of … protecting and enhancing the integrity of the UK financial system …’ and FSMA 2000, ss 3–6 as amended which sets out the objectives. For example, see Margaret Cole’s speech ‘Enforcement priorities and issues for 2006’, SII Compliance forum (18 January 2006), http://www.fsa.gov.uk/library/communication/ speeches/2006/0118_mc.shtml.

349

12.7  Enforcement issues remarked, ‘The new regulators have already delivered strong enforcement action, and will continue to do so …’ (paragraph [1.3]). The emphasis on strong enforcement has continued and indeed on its website in 2021 the FCA highlights the important role played by enforcement in the regulatory system, stating, ‘The Enforcement division supports our objectives by making it clear there are real and meaningful consequences for firms and individuals who don’t follow the rules … The Enforcement division works closely with our Authorisation, Supervision, and Strategy and Competition divisions, as well as other regulators and law enforcement. This means we can identify and act early when enforcement action is necessary.’13 – and further comments in its publication ‘Our approach to enforcement’ its view that enforcement plays a necessary role in holding those in the regulated community to account if and when they breach regulatory standards, stating, ‘The overriding principle in our approach to enforcement is a commitment to achieve fair and just outcomes in response to misconduct. Wrongdoers must be held to account and our rules and requirements must be obeyed.’14 Prioritisation of regulatory activity not only shapes the general work of the FCA but also how each division of the FCA uses its resources. There has, however, been a growing realisation that FCA enforcement offers a significant deterrence and that greater enforcement prominence, in part accomplished through higher financial penalties, can contribute to a change of behaviour in the financial markets. The FCA indicates that in deciding whether to refer a matter to enforcement for investigation, it will consider if enforcement rather than other supervisory tools are the most appropriate approach, stating at EG 2.2.6 ‘… A referral to Enforcement for an investigation will be made if the FCA considers that an investigation, rather than an alternative regulatory response, is the right course of action given all the circumstances.’ (See Chapter 11 for an outline and examination of the FCA’s powers of and approaches to investigations.) 12.8 The FCA also describes at section 12.3.2 of its Enforcement Guide a policy for selecting cases for prosecution as opposed to administrative action under Part VIII of the FSMA, where market abuse behaviour may have breached the criminal law. This criteria includes: ‘(1)

the seriousness of the misconduct: if the misconduct is serious and prosecution is likely to result in a significant sentence, criminal prosecution may be more likely to be appropriate …; (4) the effect of the misconduct on the market: where the misconduct has resulted in significant distortion or disruption to the market and/or has significantly damaged market confidence, a criminal prosecution may be more likely to be appropriate …; (5) the extent of any profits accrued or avoided as a result of the misconduct: where substantial profits have accrued or loss avoided as result of the misconduct, criminal prosecution may be more likely to be appropriate; (10) whether the person is being or has been voluntarily cooperative with the [FCA] in taking corrective measures; however, potential 13 FCA website page ‘Enforcement’, 22 October 2021, https://www.fca.org.uk/about/ enforcement, accessed 1 June 2022. 14 FCA, ‘Our approach to enforcement’, April 2019, https://www.fca.org.uk/publication/ corporate/our-approach-enforcement-final-report-feedback-statement.pdf, accessed 1 June 2022.

350

Enforcement issues  12.10

(11)

defendants will not avoid prosecution merely by fulfilling a statutory duty to take those measures …; whether an individual’s misconduct involves dishonesty or an abuse of a position of authority or trust …’

12.9 In addition to the general enforcement election criteria described above, the FCA describes in DEPP, additional criteria to help it determine the most appropriate action in individual cases. For instance, at DEPP 6.2.1, and more specifically for market abuse in DEPP 6.2.2, it sets out criteria to help it decide whether to action to impose a financial penalty or publish a censure (this criteria will be considered further below) and at DEPP 6A criteria for imposing a ‘suspension, restriction, condition, limitation or disciplinary prohibition’. Considering the FCA’s wider approach to enforcement case selection, it is right to assume that the FCA applies its criteria with a view to ensuring that enforcement cases are selected and conducted consistently. However, the FCA acknowledges in EG 2.2.5 that consideration of its available resource means that it will focus its attention towards the priority given to certain types of misconduct over others and that such ‘… risk-based approach to enforcement means that certain cases will be subject to enforcement action and others not …’. It is important to take into account however, that the FCA may propose alternative or additional enforcement action to address market abuse, particularly in relation to authorised or approved persons. DEPP 6.2.1 provides a nonexhaustive list of factors that address the generic decision to take enforcement action including factors under the heading of ‘(1) the nature seriousness and impact of the suspected breach …’ Furthermore DEPP 6.2.4–6.2.9 sets out additional factors relevant to approved persons, including at DEPP 6.2.6G (1): ‘the more senior the approved person responsible for the misconduct, the more seriously the FCA is likely to view the misconduct’ and DEPP 6.2.8G:’An individual will not be in breach if they have exercised due and reasonable care when assessing information, has reached a reasonable conclusion and has acted on it.’

PRINCIPLES-BASED ENFORCEMENT 12.10 The market abuse regime is to an extent a unique aspect of regulation applying to all persons, whether or not authorised. The market abuse regulations also rely on a series of technical measures that can have the effect of ruling in and excluding certain classes of financial instruments and markets from the regime (see further Chapter 4).15 However, it should be noted that it is not uncommon that concerns about abuse in the markets, including where

15

Historical FSA enforcement cases, such as FSA Final Notice Roberto Chiarion Casoni (20 March 2007) and the FCA’s LIBOR failings enforcement case against Deutsche Bank AG, FCA Final Notice Deutsche Bank AG (23 April 2015), show that the Authority, when dealing with authorised and approved persons, will take enforcement action by reference to breaches of high-level Principles for Business and failures in systems and controls obligations particularly where there has been misconduct that falls outside of the technical provisions of the market abuse regime. In the Deutsche Bank case, the FCA Final Notice stated (at [2.1]), ‘Serious misconduct by Deutsche Bank led to breaches of Principles 5, 3 and 11 of the Authority’s Principles for Businesses: first, through Deutsche Bank’s attempted manipulation of IBOR rates and improper influence over IBOR submissions, second,

351

12.10  Enforcement issues authorised persons’ firms might be at risk of facilitating or being exposed to market abuse often addressed by the FCA reaching an enforcement decision by reference to obligations drawn from high-level principles for business. For instance, in February 2016, the FCA imposed a financial penalty on WH Ireland Ltd (WHI)16 including for breaching high-level Principe 3 (which requires that ‘A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.’), Stating in its Final Notice that ‘ WHI … failed to take reasonable care to organise and control effective systems and controls to protect against the risk of market abuse occurring during the period 1 January to 19 June 2013.’ Once again illustrating the use of principles-based enforcement, in a much earlier enforcement case the FCA’s predecessor the Financial Services Authority (FSA) referred to breaches of high-level Principle 2 of due skill, care and diligence, and Principle 3 of organisation and control, in its Final Notice to Citigroup Global Markets Ltd (CGML)17 in relation to a trading strategy by four traders on CGML’s European Government bond desk involving the building up and rapid sale of long positions in government bonds resulting in a temporary disruption to the volumes of bonds quoted and traded. The Final Notice reports that although the traders had discussed their proposal with their head of desk, who in turn sought and gained approval of the strategy from CGML’s head of interest rate trading, there was no common or clear understanding between them as to the size of the proposed trade and thus no effective communication of the arrangements CGML was to establish. 12.11 The FCA does, however, acknowledge that principles-based regulation ‘… encourage[s] firms to exercise judgement about, and take responsibility for, what principles mean for them in terms of how they conduct their business.’18 It also accepts that firms must be able to ‘reasonably predict, at the time of the action concerned, whether the conduct would breach the principles’.19

FCA’s enforcement decision-making 12.12 Section 395 of the FSMA requires the FCA to establish procedures for decisions that require a warning or decision notices20 (which will be explored in further detail below), which must under section 395(2)(a) be taken ‘by a person not directly involved in establishing the evidence on which the decision is bases, or by 2 or more persons who include a person not directly involved in establishing that evidence’ The requirement in section 395 has the effect of

16 17 18 19 20

through its systems and controls failings and third, through serious deficiencies in the way Deutsche Bank dealt with the Authority in relation to IBOR matters [IBOR is a generic term for EURIBR and LIBOR]’. Nonetheless, as is evident from analysis of the FCA’s case selection, the contrasting approach between principles-based and market abuse regime enforcement in cases such as FSA Final Notice Sean Pignatelli (20 November 2006), http:// www.fsa.gov.uk/pubs/final/Pignatelli.pdf and FSA Final Notice Winterflood Securities Ltd (22 April 2010), http://www.fsa.gov.uk/pubs/final/winterflood.pdf – it is sometimes difficult to determine the exact reason why certain enforcement cases are selected over others and why cases on similar facts are concluded in different ways. FCA Final Notice WHI Ireland Ltd (22 February 2016), https://www.fca.org.uk/publication/ final-notices/wh-ireland.pdf. FSA Final Notice Citigroup Global Markets Ltd (28 June 2005). EG 2.8.3. EG 2.8.3. See further 12.16–12.22 below.

352

Enforcement issues  12.13 requiring the FCA to maintain an operational barrier between its enforcement division and those FCA persons that make decisions leading to statutory notices. Arguably, complementing the requirements of section 395, the FCA explains the importance of the fairness of its enforcement making processes and decision making stating at EG 2.1.2 ‘(2) The FCA will seek to exercise its enforcement powers in a manner that is transparent, proportionate, responsive to the issue, and consistent with its publicly policies.’ and ‘(3) The FCA will seek to ensure fair treatment when exercising its enforcement powers.21 The FCA decision-making procedures, including those applying to enforcement decisions are set out in its DEPP.22

Regulatory Decisions committee 12.13 The FCA Regulatory Decisions Committee (RDC) functions as a key ingredient for the Authority’s supervision and enforcement separation obligations under section 395.23 Provisions relating to the nature and procedure of the RDC are set out in the FCA’s Decisions Procedure and Penalties Manual (DEPP) Chapter 3, which explains at DEPP 3.1 a number of points relevant to the independence of the RDC from the FCA’s enforcement division, in particular at DEPP 3.1.1 that the RDC is ‘… a committee of the [FCA] board … it exercises certain regulatory powers on behalf of the FCA and is accountable to the FCA Board for its decisions generally’; at DEPP 3.1.2(1) that ‘The RDC is separate from the FCA’s executive management structure. Apart from its Chairman, none of the members of the RDC is an FCA employee’; and at DEPP 3.1.3 that ‘the RDC has its own legal advisers and support staff. The RDC staff are separate from the FCA staff involved in conducting investigations and making recommendations to the RDC’. Confirming the desirability of the RDC’s operational independence DEPP 3.2.21 provides that after a person has been issued with a warning notice (which will be discussed below at 12.16–12.22), the RDC does not meet or discuss the case with the FCA staff responsible for the matter ‘without other relevant parties being present or otherwise having the opportunity to respond’. DEPP 3.2.3 also makes clear that the composition of each committee panel is variable with the panel members being selected based on the nature of an individual matter. In addition, the FCA is also concerned to ensure that the RDC’s decision-making is absent conflicts of interest which is, it is submitted, essential to ensure that its decision making is not exposed to complaints of bias. In relation to conflicts, at DEPP 3.2.4–3.2.6 the importance of avoiding and disclosing conflicts is made clear stating that persons will not be invited to attend a panel ‘in which he has a potential conflict of interest’ and ‘If a member of the RDC has a potential conflict of interest in any matter in which he is asked to participate he will disclose the conflict to the RDC office and disclose it to … [one of a number of nominated persons specified at DEPP 3.2.5(1)(a)–(c) depending on the panel member] …’.

21 22 23

EG 2.1.2. FCA, Decisions Procedures and Penalties sourcebook (DEPP), Release 20, June 2022, https://www.handbook.fca.org.uk/handbook/DEPP/1/?view=chapter. For a description of the Regulatory Decision Committee and its role in the market abuse regime, see Carlos Conceicao, ‘The FSA’s approach to taking action against Market Abuse’ (2007) 28(2) Co Law 43–45.

353

12.14  Enforcement issues 12.14 It may be evident from the description of the RDC’s operating procedures in DEPP 3.2 that its approach to decision-making matters is not as formal as judicial adjudication, for example DEPP 3.2.7 explains that although the RDC will follow the DEPP 3.2 procedures ‘it will conduct itself in a manner the RDC chairman or deputy chairman considers suitable in order to enable the RDC to determine fairly and expeditiously the matter which it is considering’. DEPP 3.2.17 and 3.2.18 make provision for persons who wish to make oral representations including the fixing of dates for meetings and at DEPP 3.2.18 to: ‘… ensure that the meeting is conducted so as to enable (1) (2) (3) (4)

the recipient of the warning notice … to make representations, the relevant FCA staff to respond to those representations, the RDC members to raise with those present any points or questions about the matter, … and the recipient of the notice to respond to points made by the FCA staff or the RDC …’

12.15 DEPP 3.2.18 does however make clear that the RDC chairman may seek to limit the extent of a person’s representations and provides, ‘the chairman may ask the recipient of the notice or FCA staff to limit their representations or response in length or to particular issues arising from the warning notice …’. Notwithstanding the RDC procedures in DEPP 3.2, the FCA makes clear that the RDC is not ‘an appeal body’.24 Having said that, there has been competing opinion about the judicial nature of the RDC’s meetings. In an earlier decision of the Financial Services and Markets Tribunal, the Tribunal in Baldwin25 observed ‘In taking this approach, we remind ourselves that the process leading to the FSA’s decision was not a full judicial hearing of the kind conducted by the Tribunal’.26 In R (Christopher Willford) v Financial Services Authority,27 an appeal which considered the requirement for the content of a Decision Notice, the Court of Appeal considered the then FSA’s enforcement process and the role of the RDC, drawing a clear distinction between it and a judicial body. Lord Justice Moore-Bick stated in his judgment (at [21]) ‘Although the function of the RDC carries with it an obligation to act fairly and to give fair consideration to any representations made to it, the RDC remains an organ of the FSA and the giving of a Decision Notice is the final step in a disciplinary process conducted by the FSA.’ Furthermore, Lord Justice Pill stated in his judgment (at [64]): ‘While it cannot be said that the RDC is a judicial body, the statutory framework is such, in my view, that scrupulous attention to its provisions is required, including the duty to give reasons, and for fairness throughout.’

Warning Notices and Representations 12.16 Following an investigation, if FCA staff consider that action under section 123 of the FSMA is appropriate, they will recommend to the relevant decision maker (in the case of market abuse the relevant decision maker is

24 25 26 27

See information published by the FCA on its website describing the Regulatory Decisions Committee, https://www.fca.org.uk/about/committees/regulatory-decisions-committee-rdc. Timothy Baldwin and WRT Investments Ltd v Financial Services Authority (2006) FSMT Case 028. Baldwin (note 25) at [15]. R (Christopher Willford) v Financial Services Authority [2013] EWCA Civ 677.

354

Enforcement issues  12.18 the FCA’s Regulatory Decisions Committee) that a warning notice be given.28 Following such recommendation, it is possible that the decision maker may decide not to take further action and in such an event if the FCA had previously informed the person concerned that it intended to recommend action, it will communicate the decision not to take further action promptly to such a person.29 However, if instead the FCA decides to take action, it is obliged by the FSMA 2000, section 126(1) to give a warning notice to a person against whom it proposes to impose a censure, penalty, prohibition or restriction for market abuse under the FSMA 2000, section 123. Under section 391(1)(c) of the FSMA, warning notices falling within section 391(1ZB), which include those issued under section 126 for market abuse (that is prior to the RDC reaching a decision), may be published, although section 391(6) goes on to provide that the FCA may not publish a warning notice where it would be unfair to the person against who the action is taken. The FCA sets out in chapter 6 of its Enforcement Guide its policy towards the publication of investigations and regulatory actions, including at EG 6.2.7 that ‘A person to whom the warning notice is given or copied who seeks to demonstrate potential unfairness from publication must provide clear and convincing evidence of how that unfairness may arise and how he could suffer a disproportionate level of damage.’ 12.17 The first stage in the notice process is the giving of a written warning notice and arises where the FCA proposes to take enforcement action. A warning notice, as its name suggests, operates as a warning that the FCA proposes to take action and notifies its recipient of their right to make representations about the proposed action. Confirmation of the requirement for a warning notice is provided in section 126(1) of the FSMA in relation to a market abuse financial penalty, censure, prohibition or restriction; section 385 regarding a restitution requirement (which may be applied to market abuse); section 207 in relation to authorised person discipline generally; and section 67(1)–(3) in relation to discipline against person subject to FCA rules of conduct described in section 64A. Each of the aforementioned sections together with the definition of a warning notice set out in section 387 provide that the warning notice must satisfy minimum content requirements including a description of the action the FCA proposes to take, the reasons for that action, the amount of any proposed penalty and the terms of any proposed statement.30 The process adopted by the FCA in relation to the issuing of warning notices is set out at DEPP 2.2, which makes it clear that the decision to issue a warning notice will be made by an FCA decision maker on the recommendation of an FCA member of staff and that at DEPP 2.2.3G(1) the decision maker will ‘consider whether the material on which the recommendation is based is adequate to support it …’ or at DEPP 2.2.3(2): ‘satisfy itself that the action recommended is appropriate in the circumstances’ and at DEPP 2.2.3(3) ‘decide whether to give the notice and the terms of any notice given’. 12.18 The FCA’s warning notice must, in order to satisfy the provisions of section 387(2) ‘specify a reasonable period (which may not be less than 14 days) within which the person to whom it is given may make representations to the [FCA]’. The notice thus acts as the formal trigger for a response and

28 29 30

See DEPP 2.2.1G. EG 4.5. See, for instance, FSMA, s 126(3).

355

12.18  Enforcement issues the opportunity to make formal representations to the FCA (as well as any settlement negotiations, which is explored in more detail below at 12.48–12.5). 12.19 The time permitted for making representations may, as recognised by section 387(3) be extended by the FCA. A process for addressing extensions of time is embodied in the FCA Decision Procedure and Penalties Manual. DEPP 3.2.16 provides that any request for an extension of time for making representations must ‘normally be made within seven days of the notice being given’, with the decision about the time extension being made by the RDC chairman or deputy chairman (DEPP 3.2.16(2). 12.20 Following receipt of a warning notice, the person concerned may, in accordance with DEPP 3.2.17,31 make oral representations to the FCA about the action set out in the warning notice. Making representations to the FCA following the warning notice and ensuring that these are made within the relevant time limits is a critical step in the process and provides a formal opportunity for the recipient of the notice to put forward their case.32 Furthermore, the FCA sets out at DEPP 2.3.2–2.3.3G what it refers to as a ‘default procedure’ whereby it may in the absence of representations treat allegations made in its warning notice as undisputed. 12.21 Even where a person’s representations do not satisfy the FCA, the representations may nonetheless carry sufficient force to be persuasive that the action set out in the warning notice should be modified or tempered. For example, in an earlier FSA final notice to Darren Morton,33 Mr Morton made a series of representations about practice in the bond market and the expectations of that market, which included representations that no guidance had been available to him at the time relating to his market abuse behaviour, ‘which went to support his representations about general market expectations’.34 Although in that case the FSA decided that Mr Morton’s belief was not reasonably held and that he engaged in market abuse, it responded to the representation regarding guidance by stating: ‘The FSA notes Mr Morton’s representations on the market practice prevalent at the time. It also accepts that Mr Morton believed that his behaviour did not amount to market abuse. In the absence of any guidance from ICMA the only specific guidance available to Mr Morton were the interim guidelines from Dresdner where “in the past it has been determined that SCI is not routinely privy to price sensitive non-public [information]”. Consequently, in these circumstances it is noted that Mr Morton was working in an environment where until a deal had closed, the accepted view was that, in the absence of information generally regarded as inside information, that information was not regarded as specific or price sensitive and therefore any activity related to such information could not be abusive.’35

31 32

33 34 35

The process for representations at DEPP 3.2.17 applies directly to where the RDC is the decision maker but a similar process is followed for executive decision making by virtue of DEPP 4.1.13. For an illustration of representations made about whether market abuse took place, albeit before the Upper Tribunal and not the RDC, see Ian Hannam v Financial Conduct Authority [2014] (UKUT 0233) in which the Upper Tribunal rejected Mr Hannam’s arguments that he believed he was not engaging in market abuse. FSA Final Notice Darren Morton (6 October 2009). Morton (note 33) at [5.20]. Morton (note 33) at [6.11].

356

Enforcement issues  12.24 12.22 The FCA’s decision-making procedures make provision at DEPP 5.1.8E for an expedited reference to the Upper Tribunal (see 12.34 below), thus allowing, in appropriate cases, challenges of FCA enforcement actions without involving all of the FCA’s decision making procedures. The expedited process, if available, may result in the FCA not issuing a formal warning notice. The expedited process is, however, available only for those categories of enforcement cases described at DEPP 5.1.8F, being where (a) the proposed action requires the FCA to issue a warning notice; (b) the FCA considers that it has a sufficient understanding of the nature and gravity of the breach to make a reasonable assessment of the appropriate penalty or other outcome; and (c) the FCA has communicated that assessment to the person concerned. Conversely, under DEPP 5.1.8G the subject of the enforcement action must notify the FCA of their desire to make a reference to the Tribunal and waive their right to receive a warning notice.

Access to FCA material 12.23 Where the FCA has issued a warning or decision notice it is obliged under section 394(1) of the FSMA to provide the recipient of the notice ‘(a) … the material on which it relied in taking the decision which gave rise to the obligation to give the notice and (b) … any secondary material which in the regulator’s opinion might undermine that decision’. Certain material is, however, excluded from the access obligation including at section 394(3) where ‘access to material (a) would not be in the public interest; or (b) would not be fair, having regard to (i) the likely significance of the material to [the recipient of the notice] …; and (ii) the potential prejudice to the commercial interests of a person other than [the recipient of the notice] …’.

Decision Notice and Notice of Discontinuance 12.24 If, having considered representations made regarding the content of a warning notice, the FCA decides to take action, it is required to issue a written Decision Notice.36 In practical terms a Decision Notice is the communication of the FCA’s determination of the matter and indicates that the enforcement action set out in the notice will take effect unless the respondent refers the matter to the Upper Tribunal (see 12.34 below). The statutory obligation to issue a Decision Notice arises under section 127(1) in relation to the range of market abuse decisions, section 386 for restitution requirements which may apply in cases of market abuse, section 208 in relation to authorised person discipline and section 67(4) in relation to persons subject the code requirements under sections 64 and 64A. The FCA sets out at DEPP 2.3 its procedure for issuing Decision Notices, making clear that the determination on whether to issue a Decision Notice as well as the content of the notice rests with an FCA ‘decision maker’ following, at DEPP 2.3.1G (2), the decision maker ‘consider[ing] any representations made (whether written or oral or both) and any comments by FCA staff or others in respect of those representations …’. The statutory minimum content of a Decision Notice is prescribed through a combination of section 388 together with the respective sections of the regime to which

36

But see an examination of the third-party rights provided under FSMA, s 393(7) is provided at 12.32–12.34.

357

12.24  Enforcement issues the action relates. In effect, a Decision Notice must set out the action the FCA has decided to take and the amount of any financial penalty or restitution,37 the reason for the decision and give an indication of any right as well as the procedure for the respondent to refer the matter to the Upper Tribunal. At this juncture it is important to note that pursuant to the Tribunal reference rights relevant to each of the enforcement actions described above, namely: section 127(4) (for market abuse decisions); section 386(1) (restitution requirements); section 208(4) (authorised person penalties); and section 67(7) (approved person penalties). By virtue of section 133A(4) (or the equivalent provision in the part of the FSMA to which the decision notice relates) ‘the action specified in the decision notice must not be taken (a) during the period within which the matter to which the notice relates may be referred to the Tribunal (whether under this or any other Act); and (b) if the matter is so referred, until the reference, and any appeal against the Tribunal’s determination, has been finally disposed of.’ In R (Christopher Willford) v Financial Services Authority,38 the Court of Appeal considered the nature of the FSA’s duty under the FSMA, section 388(1)(b) to set out in the Decision Notice, ‘reasons for the decision to take the action to which the notice relates’. The appeal concerned an application for judicial review of the FSA’s decision to issue a decision notice. The applicant had been subject to an FSA investigation into his conduct as an approved person. Having received a statutory warning notice, the applicant made written and oral representations to the then FSA’s Regulatory Decisions Committee, following which the RDC decided to issue a Decision Notice. Mr Willford maintained that the committee had failed to give adequate reasons for its decision because it had not specifically addressed each of the individual submissions that he had made. He therefore brought a claim for judicial review seeking to have the Decision Notice quashed.39 In considering the detail that a Decision Notice should provide, Lord Justice Moore Brick stated in his judgment: ‘What is necessary, however, is that the RDC should leave the recipient of the notice in no real doubt about why it has decided to give the notice. In deciding how fully its reasons are expressed the RDC is entitled to take into account the fact that the recipient will be aware of the arguments that were presented to it on both sides. There is a tendency in some cases of this kind for relatively simple issues to be addressed at some length and with a considerable degree of elaboration. If that is the case, the RDC is entitled when giving its reasons to concentrate on the substance of the matter and need not address every aspect of the arguments directed to it …’.40 12.25 The Court of Appeal found that the FSA’s Decision Notice contained sufficient detail and considered it in the context of a reference to the Upper Tribunal. Lord Justice Moor Brick said in his judgment, ‘The purpose of giving reasons is to inform the recipient why the Decision Notice has been given. The Decision Notice may be the trigger for a reference to the tribunal, but in contrast to some other kinds of decision (eg planning decisions) neither the notice itself nor the RDC’s reasons play an integral part in the procedure for challenging it. In my view the reasons given by the RDC in this case were sufficient to comply

37 38 39 40

See FSMA, s 127, for market abuse, section 208(3) and 3A in relation to authorised person discipline and section 67(5) -6 in relation to approved person discipline. R (Christopher Willford) v Financial Services Authority [2013] EWCA Civ 677. R (Christopher Willford) v Financial Services Authority (note 38) at [9]. R (Christopher Willford) v Financial Services Authority (note 38) at [44].

358

Enforcement issues  12.28 with the requirements of section 388.’41 Lord Justice Pill, however, although allowing the appeal on the basis that on a consideration of the Decision Notice as a whole, sufficient reasons were given to comply with the statutory requirement (at [73]) was not of the view that the availability of a Tribunal referral could overcome a Decision Notice lacking in detail, stating: ‘A person subject to a decision notice is entitled to a reasoned decision. The availability of a reference to the Upper Tribunal does not excuse failure to comply with that requirement. There is prejudice to a respondent in being required to embark upon a full judicial hearing of all issues and to do so without knowing why the FSA has decided against him. The duty to give reasons cannot be sidelined and the existence of the alternative remedy must be considered in a context which recognises that duty and other provisions mentioned …’.42 12.26 Section 391(4) of the FSMA allows the FCA to publish such details of Decision Notices as it considers appropriate, thus allowing the FCA to publish details of an enforcement action in circumstances where a person may have referred the matter to the Upper Tribunal and before a Final Notice has been issued. Section 391(6) provides further, however, that the FCA cannot publish a decision notice, ‘if publication of it would, in its opinion, be unfair to the person with respect to whom the action was taken’ or ‘prejudicial to the interests of consumers’, or ‘detrimental to the stability of the UK financial system’. 12.27 The FCA’s policy approach to the publication of Decision Notices is set out in EG 6.2.12–6.2.19A. Although the FCA will determine whether or not to publish a Decision Notice by reference to the circumstances of each case, it outlines at EG 6.2.12 that it expects to publish the Decision Notice for cases referred to the Upper Tribunal. In addition, it states that it may also publish a Decision Notice where there is ‘a compelling reason to do so’, giving the examples of market confidence or where it considers that publication is necessary ‘to allow consumers to avoid potential harm arising from a firm’s actions’. The FCA also uses EG 6.2.13 to describe the steps it will take where it intends to publish a decision notice, essentially providing for the giving of ‘advance notice of its intention’ to publish and allowing for the recipient of the notice to make representations. Needless to say, the recipient of a notice will be concerned about whether publication of a Decision Notice, might compromise their desire for confidentiality of the matter, particularly where on referring the matter to the Upper Tribunal they intend making a privacy application, although the FCA states at EG 6.2.13: ‘The FCA will also not decide against publication solely because a person asks for confidentiality when they refer a matter to the Tribunal.’ 12.28 It is unclear however, whether the policy statement in EG 6.2.13 is meant to refer to a subject’s desire for confidentiality of the detailed facts of a case or where the person indicates they intend to make a privacy application. It is important to note that any decision by the FSA to publish a Decision Notice may be taken before the Tribunal reference is made, by which time it is possible that the FCA’s Decision Notice will have been published. In R (Canada Inc) v Financial Services Authority,43 the applicant commenced judicial review

41 42 43

R (Christopher Willford) v Financial Services Authority (note 38) at [48]. R (Christopher Willford) v Financial Services Authority (note 38) at [69]. R (on the application of Canada Inc, Peter Beck, BRMS) v the Financial Services Authority [2011] EWHC 2766 (Admin).

359

12.28  Enforcement issues proceedings concerning the FSA’s intention to publish a decision notice in respect of market abuse and obtained an interim injunction restraining the FSA from publishing the notice, pending the applicant making a reference of the FSA decision to the Upper Tribunal and applying for a direction from the Tribunal that the FSA’s decision notice should not be published. That application for directions was rejected. The applicants then applied for an extension to the interim injunction. In rejecting the application, the court considered the nature of the discretion given to the FSA in section 391(4) and whether the FSA had misinterpreted section 391(4) in the way it had drafted its decision notice publication policy, as well as whether that policy was irrational. Wyn Williams J stated: ‘It does seem to me that it was the intention of Parliament to confer a broad discretion upon the Financial Services Authority, leaving it to them to consider whether it was appropriate to publish and leaving it to them to consider when it would be unfair to publish … For my part, given the broad discretion which I believe is conferred upon the FSA, I see nothing irrational about the way it has phrased its policy …’.44 12.29 The FCA is obliged to give a notice of discontinuance to a person to whom it has given a warning or decision notice if it decides not to take the action proposed in the warning notice or the action to which a decision notice relates.45 The FCA has also indicated that it will send such notice to all persons to whom a warning notice or decision notice has been sent.46 12.30 In particular, a decision to discontinue, may arise following the FCA’s assessment of representations from the recipient of a warning notice. The FCA decision-making process allows for the ongoing assessment of the proposed action in the context of the emergence of both information and representations and for any decision to discontinue to be taken by FCA staff. DEPP 3.2.26G provides, ‘FCA staff responsible for recommending action to the RDC will continue to assess the appropriateness of the proposed action … The decision to give a notice of discontinuance does not require the agreement of the RDC …’ When there has been a decision to discontinue, section 389(1) of the FSMA requires the FCA ‘to give a notice of discontinuance to a person to whom the warning or decision notice was given’. The FCA also indicates in DEPP 3.2.26 that the decision to give a notice of discontinuance does not require the agreement of the RDC but FCA staff will inform the RDC that the proceedings have been discontinued The FCA is further required to identify in the notice ‘the proceedings which are being discontinued’.47

Third party rights 12.31 Where a warning notice is, in the opinion of the FCA, prejudicial to a third party and such a party is identified in a warning notice to which the FSMA 2000, section 393 applies, the FCA must give a copy of the notice to that third party.48 This section does not apply if the FCA has given the third party a separate warning notice in relation to the same matter or gives him such 44 45 46 47 48

R (Canada Inc) (note 43) at [19]. FSMA, s 389. DEPP 3.2.26G. See FSMA, s 389(3). FSMA, s 393(1).

360

Enforcement issues  12.33 notice at the same time as it gives the warning notice which identifies him.49 Such notice must specify a reasonable period (not less than 14 days) within which such a third party may make representations to the FCA.50 However, this right to be informed is qualified. The FCA is not obliged to give a copy to such a third party if the FCA ‘considers it impracticable to do so’.51 The FSMA 2000, section 394 relating to access to material, considered above, applies equally to a third party served with a warning notice.52 Importantly, section 393 makes similar provision for decision notices. 12.32 The rights set out in section 393 ensure that third parties should not be identified and adversely criticised in a warning notice issued by the FCA without having had an opportunity to make representations in response and if they are identified and criticised in a decision notice, they should have the right to challenge such criticisms in the Tribunal.53 In respect of the right to make a reference to the Upper Tribunal, section 393(9) makes provision for references in respect of both the FCA decision and ‘any opinion expressed’ by the FCA in relation to the third party. There may be occasions where the FCA considers that it has no obligation to provide a person with a copy of a relevant notice, but the third party disagrees. In such circumstances the third party may make a reference to the Tribunal under section 393(11) which provides that: ‘A person who alleges that a copy of the notice should have been given to him, but was not, may refer to the Tribunal the alleged failure and: (a) (b)

the decision in question, so far as it is based on a reason of the kind mentioned in subsection (4); or any opinion expressed by the [the regulator giving the notice] in relation to him.’

12.33 In Financial Conduct Authority v Macris54 the UK Supreme Court considered the provisions in section 393 and whether a third party had been identified in the respective notice. The case was an ultimate appeal from an Upper Tribunal decision on a preliminary issue that Mr Macris had been identified in statutory notices to JP Morgan Chase Bank NA. Lord Sumption in the UK Supreme Court in finding that the notice in the case had not identified a third party stated:55 ‘I do not accept, any more than the Court of Appeal did, the judge’s view that because reporting lines lead to individuals, any reference to “management” must be to an individual. Nor do I accept Mr Macris’s argument that because the notices referred to actions such as making statements, attending meetings or sending e-mails, which must have been done by individuals, a single individual is meant, as opposed to any of a number of individuals comprised within the term “the firm”, “CIO” or “CIO management”. The real question is whether the terms of the notice itself would have conveyed to a reasonable member of the public without extrinsic information that

49 50 51 52 53 54 55

FSMA, s 393(2). FSMA, s 393(3) FSMA, s 393(7) FSMA, s 393(12) FSMA, s 393(9). Financial Conduct Authority v Macris [2017] UKSC 19. Financial Conduct Authority v Macris (note 54), at [17]. See also the Court of appeal decision in Financial Conduct Authority v Julien Grout [2018] EWCA Civ 71.

361

12.33  Enforcement issues any of these terms was a synonym for Mr Macris. Plainly it would not. I would therefore allow the appeal and declare that Mr Macris was not a third party for the purposes of section 393 of the Financial Services and Markets Act 2000.’

Reference to the Upper Tribunal 12.34 Although an indepth analysis of the jurisdiction of the Upper Tribunal (Tax and Chancery) in relation to market abuse enforcement is outside of the scope of this chapter, it is worth mentioning the role played by that Tribunal in providing an independent check and balance on the powers of the FCA. The Upper Tribunal is administered by HM Courts Service as an independent tribunal, created under section 3 of the Tribunals, Courts and Enforcement Act 2007 (the ‘2007 Act’) and responsibility was transferred to it under Article 2 of the Transfer of Tribunal Functions Order 2010.56 In respect of market abuse, the Tribunal’s jurisdiction and decision-making powers are conferred on it by sections 127 and 133 of the FSMA. References to the Tribunal are not appeals as the Tribunal hears the case afresh. Specifically, in relation to the market abuse regime, the Tribunal may receive references to determine the FCA’s decisions to impose penalties in cases of market abuse under section 123 of the FSMA.57 The nature of the orders that can be made by the Upper Tribunals, described in section 133 of the FSMA including at section 133(5), must determine the reference by either ‘dismissing it, or remitting the matter back to the decision maker with a direction to reconsider and reach a decision in accordance with the findings of the Tribunal’.

Final Notice 12.35 If the matter is not referred to the Upper Tribunal, the FCA must give final notice to the person concerned pursuant section 390 of the FSMA. Similarly, if the Upper Tribunal or a court on an appeal on a point of law gives the FCA directions to take certain action, the FCA must give the person to whom the Decision Notice was given a Final Notice pursuant to section 390(2). Section 390 sets out mandatory requirements that must be included within the notice. 12.36 Pursuant to section 391(4) the FCA ‘must publish such information about the matter to which a Final Notice relates as it considers appropriate’, unless pursuant to section 391(6) publication would, in the opinion of the FCA, ‘be unfair to the person with respect to whom the action was taken or prejudicial to the interest of consumers’.58 Equally under section 390(2), the FCA is required ‘… on taking any action in accordance with directions given by a) the Tribunal or b) a court on appeal against the decision of the Tribunal …’ to give the person a Final Notice. Section 390(3)–(7) of the FSMA prescribes the minimum content requirements of the Final Notice, which is in part determined by the type of FCA decision being addressed in the Final

56 57 58

SI 2010/22. For analysis of the role of the Upper Tribunal in relation to Market Abuse Enforcement, see S Bazley, Market Abuse Enforcement Practice and Procedures (Bloomsbury Professional 2013), Chapters 6, 7 and 8. The FCA publishes copies of Final notices on its website.

362

Enforcement issues  12.38 Notice. In particular the Final Notice under section 390(3) must set out the terms of any statement that is to be made and the ‘details of the manner’ and ‘the date on which the statement will be published’; and in regard to a financial penalty, it must, pursuant to section 390(5), ‘state the amount of the penalty’, ‘the manner and period for payment as well as how ‘the penalty will be recovered’ if not so paid. The Final Notice has the effect of formally concluding the FCA’s enforcement action and all of the actions set out in the notice legally take effect, including payment of the financial penalty which by virtue of section 390(8) ‘must not be less than 14 days beginning with the date the final notice is given’.59

Publication 12.37 The FCA is required by s 391(4) to publish such information about the matter to which a Final Notice relates as it considers appropriate and by s 391(7) ‘in such manner as it considers appropriate’, unless publication would, in the opinion of the FCA, be ‘unfair to the person with respect to whom the action was taken’ or ‘prejudicial to the interest of consumers’.60

STATEMENTS AND PENALTIES 12.38 The FCA has power under section 123(3) of the FSMA to publish a statement that a person has engaged in market abuse rather than impose a penalty.61 Although the imposition of a penalty may be more appropriate for serious cases, the publication of a statement as a sanction allows the FCA to deploy its disciplinary measures to varying degrees of seriousness of market abuse. DEPP 6.4 sets out a non-exhaustive list of criteria applied by the FCA to determine whether a public censure alone is a more appropriate disciplinary measure than a financial penalty. On analysis, each of the factors within the DEPP 6.4.2 criteria arguably are to a significant extent the very reverse of the factors used for determining whether a financial penalty is an appropriate disciplinary outcome and indeed at DEPP 6.4.2, the FCA clarifies that it will also include in its determination of the appropriateness of a public censure, the factors that it will take into account when determining the size of a financial penalty. It is submitted that the most significant of the factors in light of the FCA’s wider general enforcement policy of deterrence is that at DEPP 6.4.2(1) which in essence questions ‘whether or not deterrence may be effectively achieved by issuing a public censure’ and further and in the same context, the FCA clarifies at DEPP 6.4.2 (8) that where a financial penalty is appropriate, a public warning will only be used instead in exceptional circumstances and at DEPP 6.4.2(7) the importance of ensuring like cases consistently. Other factors included at 6.4.2 that might indicate that a public censure is more appropriate than a penalty include, whether a profit or loss has been avoided (at 6.4.2(2)); the seriousness of the breach (6.4.2(3)); whether the matter was

59 60 61

See FSMA, s 390(8). Similar provisions apply in section 390(10) to FCA restitution requirements (see 12.63–12.64 below), which may be enforceable by way of injunction. See FSMA, s 391(6). FSMA, s 131 provides that ‘the imposition of a penalty … does not make the transaction in question void or unenforceable’.

363

12.38  Enforcement issues self-reported by the person concerned to the FCA (6.4.2(4)); and whether there has been an admission of the breach and cooperation with the FCA (6.4.2(5)). The imposition of a published statement alone in market abuse decisions is rare,62 although in such decisions the justification for the public censure alone followed consideration of the wider circumstances of the case in another two cases involving Welcome Financial Services Ltd and Cheickh Tidiaane Diallo (the decisions were made on the basis of financial hardship). In the FCA’s Final Notice to Redcentric plc,63 the FCA decided to impose only a public censure, stating ‘In the particular circumstances of this case, which are unusual, the Authority does not consider it would be appropriate to impose a penalty. The Authority believes that its objectives may appropriately be achieved by means of a public censure.’ In an earlier case of Morton64 the then FSA had taken action in respect of market abusive behaviour in the bond market, although identifying that there was little available industry guidance at the time addressing whether the behaviour amounted to abuse. The RDC considered in the circumstances of the case that in line with DEPP 6, it was more appropriate to issue a public statement than impose a financial penalty and pointed to the following mitigating features: ‘(a) that Mr Morton did not make any personal profit; (b) Mr Morton has subsequently undertaken further training in market abuse; (c) No clear guidance was provided to Mr Morton or the OTC credit markets; and (d) Mr Morton has no adverse previous disciplinary record of compliance history.’65 In Jason Geddis v The Financial Services Authority,66 where the applicant, a London Metals Exchange trader, built up a dominant position in short-terms lead contracts and caused an increase to the price of those contracts (this behaviour is often referred to as ramping up), the Upper Tribunal determined that the ramping up of the contracts price was not part of an abusive squeeze but the result of Mr Geddis getting caught up in the excitement of trading during the LME’s open outcry session; the Tribunal directed the then FSA to publish a statement without a penalty or prohibition order. In reaching this determination, the Upper Tribunal pointed to both the FSA’s Market confidence statutory objective (which was, prior to amendments made by the Financial Services Act 2012 at FSMA, section 2(2)) and the aims of its enforcement powers described at EG 2.2(4);67 it considered on the facts of the case that the FSA’s ‘regulatory objectives will be properly advanced by a public censure’.68 12.39 It may be helpful once again to consider the factors the FCA considers in deciding whether to censure or impose a financial penalty, some of which have particular relevance for market abuse cases. These factors are set out in the FCA’s Decision Procedure and Penalties manual, which makes clear that the factors are not a substitute for an analysis of the full circumstances of each individual case and nor do they provide an exhaustive list of criteria. It is

See, for instance, FSA Final Notice Christopher Parry (6 October 2009); FSA Final Notice Morton (note 33); Jason Geddis v Financial Services Authority [2011] UKUT 344 FS/22010/0014; FSA Final Notice Welcome Financial Services Ltd (28 March 2012), and FSA Final Notice Cheickh Tidiane Diallo (24 January 2013). 63 FCA Final Notice Redcentric plc (26 June 2020), https://www.fca.org.uk/publication/finalnotices/redcentric-plc-2020.pdf. 64 Morton (note 33). 65 See Morton (note 33) at [7.6]. 66 Geddis (note 62). 67 Geddis (note 62) at [51]. 68 Geddis (note 62) at [55]. 62

364

Enforcement issues  12.42 therefore possible that the unique features of an individual case may give rise to issues that warrant an enforcement outcome in order for the FCA to meet its Operational Objectives69 despite not obviously being identified by any of the FCA enforcement criteria. 12.40

The criteria set out in DEPP 6.2.1 include the following:

‘1(a) whether the breach was deliberate or reckless …; 1(c) the amount of any benefit gained or loss avoided as a result of the breach …; 1(e) the impact or potential impact of the breach on the orderliness of markets including whether confidence in those markets has been damaged or put at risk; 2(b) the degree of cooperation the person showed during the investigation of the breach; … 2(e) whether the person concerned has complied with any requirements or rulings of another regulatory authority relating to his behaviour (for example the Takeover Panel or a Recognised Investment Exchange; and 3 the previous disciplinary record and compliance history of the person.’

Determining the level of financial penalty 12.41 The FCA’s approach to the imposition of financial penalties for market abuse has, since the market abuse regime was first introduced, experienced significant procedural advancement, including in 2005 the development of a more transparent approach to financial penalty settlement discounts and in 2010 the publication of a more structured approach to the calculation of penalties.70 Although the FCA does not operate a penalties tariff, it has adopted a five-step approach to penalty calculation of (1) disgorgement; (2) seriousness of the breach; (3) factors which mitigate or aggregate the breach; (4) a deterrence adjustment; and (5) a discount for early settlement. Each of these steps are described generally at DEPP 6.5 with special provision at DEPP 6.5A for penalties on firms and with DEPP 6.5C adapting the steps for penalties against individuals in market abuse cases.71 Broadly, the essence of the FCA’s approach to penalty setting is illustrated by three principles at DEPP 6.5.2 underlying the imposition of a penalty, namely: (a) ‘disgorgement’, that is’ a firm or individual should not benefit from any breach’, (b) ‘discipline’, and (c) ‘deterrence’. In essence the five-step approach operates in a formulaic manner, adding and then deducting amounts calculated by reference to the subject areas identified by the FCA. 12.42 Focussing on penalty setting in market abuse cases, the first step in a five-step approach looks to deprive the person concerned of the financial benefit derived from the market abuse behaviour and as made clear at DEPP 6.5A.1 and 6.5C.1 the FCA will seek to disgorge any loss avoided as a result of the market abuse. The disgorgement under Step 1 is an approach distinct

69 70 71

FSMA, s 1B(3). Financial Services Authority ‘Enforcement Financial Penalties: Feedback on CP 09/19’, Policy Statement 10/4 (March 2010), http://www.fsa.gov.uk/pubs/policy/ps10_04.pdf. See DEPP 6.5.3, 6.5A, 6.5B and 6.5C which outline the five-step approach.

365

12.42  Enforcement issues from any restitution requirement under section 384 of the FSMA (which is considered further below.) Cases such that of Mehmet Sepil,72 where the FSA imposed a financial penalty of £967,005 inclusive of £267,005 disgorgement of profit, and David Einhorn73 where the FSA imposed a financial penalty of £3m plus a penalty of £638,000 for disgorgement, illustrate the FSA’s use of its power to impose a financial penalty to recover any profits made from abusive behaviour. Furthermore, in circumstances where the FCA determines that a financial penalty is inappropriate, as in the FSA case of Stewart McKegg,74 it will nonetheless disgorge profits made from the activity in question. Moreover, illustrating the then FSA’s utilisation of its power to impose a financial penalty creatively and in a way that advances its purpose in bringing the action, in the case of Bertie Hatcher,75 who agreed to cooperate with the FSA as part of the insider dealing criminal prosecution in R v Calvert,76 the penalty imposed on Hatcher comprised only a profit disgorgement, showing the value the FSA placed on the assistance and cooperation that persons can provide to its wider investigations. In the Hatcher Final Notice the FSA stated that it ‘had regard to Mr Hatcher’s level of culpability and the value of the evidence that he has provided and considered that the penalty imposed is appropriate in all the circumstances’.77 12.43 The second step allows for a penalty to be calculated by reference to a person’s revenue or as the case may be, income. In so doing the FCA will apply a ‘seriousness level’ multiplier, where level 1 is the least serious and level 5 the most. DEPP 6.5A.2 shows that for firms, the multiplier operates in a sliding scale of 0–20% (whereas in DEPP 6.5B for non-market abuse penalties for individuals, the FCA applies a sliding scale of 0%–40%). This multiplier approach is made complicated by the approach taken by the FCA to market abuse penalties for individuals as set out in DEPP 6.5C, which attempts to recognise a difference in penalty calculation for persons committing market abuse by virtue of their employment as illustrated in the FCA’s Final Notice to Corrado Abbatista,78 and abuse committed by members of the public. The basic principle set out in DEPP 6.5C is to allow the FCA at Step 2 to calculate a penalty as a multiplier of the profit or loss avoided (at DEPP 6.5C.2(8) it shows a sliding scale of multipliers of 0–4) as well as an additional percentage of their income if they commit the abuse as part of their employment, (at DEPP 6.5C.2(8) it shows a sliding scale of 0%–40%). In either circumstance, the FCA outlines at DEPP 6.5C.2(2)(c) and 6.5C.2(3)(b), that for individuals it expects in instances of deliberate market abuse it will assess the seriousness at either its level 4 or 5 and the starting point for the penalty will be £100,000. The FCA goes on to set out a series of tests that it applies in determining which seriousness level is appropriate for an individual case, which include at DEPP 6.5C.2(10) factors relating to the impact and nature of the market abuse and whether the abuse was deliberate or reckless. The FCA highlights the typical

FSA Final Notice Mehmet Sepil 12 February 2010. FSA Final Notice David Einhorn 15 February 2012 FSA Final Notice Stewart McKegg (16 October 2008), http:///www.fsa.gov.uk/pubs/final/ stewart_mckegg.pdf. 75 FSA Final Notice Bertie Hatcher (13 May 2008), http:///www.fsa.gov.uk/pubs/final/bertie_ hatcher.pdf. 76 See R v Calvert (2010) (Southwark Crown Court Trial Unreported). 77 FSA Final Notice Bertie Hatcher (13 May 2008, published in March 2010) at [4.11]. 78 FCA Final Notice Corrado Abbattista (15 December 2020), https://www.fca.org.uk/ publication/final-notices/corrado-abbattista-dec-2020.pdf. 72 73 74

366

Enforcement issues  12.46 factors that tend to show that cases are the most or less serious. For instance, at 6.5C.2(15) it highlights level 4 or 5 factors as including matter such as at (a) ‘the level of the benefit gained of loss avoided … was significant’; at (b) ‘the market abuse had a serious adverse effect on the orderliness of or confidence in the market’; at (d) ‘the individual breached a position of trust’; at (e) ‘the individual has a prominent position in the market’; and at (f) the market abuse was committed ‘deliberately or recklessly’. 12.44 The provisions at DEPP 6.5C.3, which apply to individuals in market abuse cases, illustrate well the third FCA step in the calculation of a financial penalty. This provision allows for an adjustment to the financial penalty calculated under step 2 in light of any mitigating or aggravating factors, although a step 3 adjustment will not affect the disgorgement figure arrived at under step 1. The factors included under DEPP 6.5C.3(2) cover matters relating to the person’s dealings with the FCA about the market abuse case, the person’s previous regulatory and compliance history and whether the person has agreed ‘to undertake training subsequent to the market abuse’. It is important to note, however, where mitigating factors are present, the FCA will not allow a reduction to the amount disgorged at step 1, stating at DEPP 6.5.C.3(1) ‘The FCA may increase or decrease the amount of the financial penalty arrived at after Step 2, but not including any amount to be disgorged as set out in Step 1 …’. 12.45 Step 4 in relation to an individual at DEPP 6.5C.4 makes provision for a further upward adjustment for deterrence in appropriate cases where the FCA considers that the penalty arrived at by steps 2 and 3 ‘is insufficient to deter the individual who committed the market abuse or others, from committing further or similar abuse …’. Finally step 5 (set out at DEPP 6.5C.5) recognises that the FCA may in appropriate cases allow a settlement discount (once again, save in respect of the disgorgement amount). The FCA policy towards settlement is examined further at 12.48–12.52 below. Although the five-step approach provides for the calculation of the financial penalty, the FCA provides at DEPP 6.5D.1 allowance for cases where there is serious financial hardship, providing at DEPP 6.5D.1(2) that: ‘Where an individual or firm claims that payment of the penalty proposed by the FCA will cause them serious financial hardship, the FCA will consider whether to reduce the proposed penalty only if: a) b)

the individual or firm provides verifiable evidence that payment of the penalty will cause them serious financial hardship; and the individual or firm provides full, frank and timely disclosure of the verifiable evidence, and cooperates fully in answering any questions asked by the FCA about their financial position.’

12.46 In the FCA Final Notice to Conor Foley,79 Mr Foley was censured, but the FCA stated, ‘Had Mr Foley not provided verifiable evidence that the imposition of a financial penalty of any amount would cause him serious financial hardship, the Authority would have imposed on him a financial penalty of £658,900.’

79

FCA Final Notice Conor Martin Foley (7 September 2020) at [1.5], https://www.fca.org.uk/ publication/final-notices/fn-conor-martin-foley-2020.pdf.

367

12.46  Enforcement issues In Scerri v The Financial Services Authority,80 (although in the context at the time of a prior version of DEPP) the Upper Tribunal was required to consider whether the applicant lacked the means to pay the financial penalty sought by the FSA. The Tribunal confirmed that where a person’s lack of means has been raised in a case ‘it is for the Applicant in question to establish by “verifiable evidence” that he lacks the means to pay …’. In respect of individuals the FCA reveals at 6.5D.2 that it will consider permitting a penalty to be paid over a period of up to three years (including at DEPP 6.5D.2(3) an instalment arrangement) and consequently will only consider financial hardship ‘if during that period his net annual income will fall below £14,000 and his capital fall below £16,000 as a result of the payment of the penalty …’. Applicants for a serious financial hardship reduction should exercise care, as the FCA does not provide an automatic and formulaic approach to the reductions, presumably as a matter of policy the FCA explains at DEPP 6.5D.2(7) that in serious cases such as instances of fraud or dishonesty, or where ‘the individual has spent money or dissipated assets in anticipation of FCA or other enforcement action with a view to frustrating or limiting the impact …’ it may not be appropriate to reduce a penalty. There are a number of instances of penalty reduction in market abuse cases where serious financial hardship has been shown. For example, in the decision against Jay Rutland81 the FSA reduced its penalty from £160,000 to £30,000 and in Oluwole Fagbulu v The Financial Services Authority,82 the Upper Tribunal reduced the financial penalty from £350,000 to £100,000. In Fagbulu the Tribunal identified that even where there is evidence of financial hardship in certain circumstances the deterrence component of a penalty is still important; it stated: ‘This is not a case in which we think, the penalty should be fixed without regard to the bankruptcy it might cause, yet it is one in which even a reduced penalty must be large enough to make clear that conduct of the kind in which Mr Fagbulu engaged will be severely punished …’.83 In contrast, in the matter of Swift Trade Inc v Financial Services Authority,84 the Upper Tribunal determined that a penalty of £8m was acceptable, Judge Bishop stating (at [142]): ‘We do not, therefore, approach determination of the penalty from the viewpoint of ability to pay, nor by reference to the profits made by Swift Trade or the losses sustained by others. What is clear, as we have said, is that this was a prolonged, cynical course of market abuse committed by a company which, as the OSC Settlement Agreement shows, exhibited a wholesale disregard of regulatory requirements …’. 12.47 The approach to determining an appropriate penalty in market abuse was addressed by the Financial Services and Markets Tribunal in Parker85 which confirmed that by virtue of the language in the FSMA, section 124, the question of imposition of a penalty is discretionary and the Authority is under no obligation to impose a financial penalty.86 It held that the FSA’s statutory

80 81 82 83 84 85 86

Andre Scerri v the Financial Services Authority [2010] UKUT (Penalty decision) Fin/2009/0016. FSA Final Notice Jay Rutland 9 July 2012. Michael Visser and Oluwole Fagbulu v the Financial Services Authority [2011] UKUT FS/2010/0001.and FS /2010/0006. Visser and Fagbulu (note 82) at [125]. Swift Trade Inc v Financial Services Authority [2012] (UKUT FS/2011/0017 & 0018). Parker v Financial Services Authority (2006) FSMT case 37. Parker (note 85) at [148].

368

Enforcement issues  12.49 penalties policy (now contained in DEPP) was ‘fair and reasonable’87 and ‘that any penalty should be proportionate to the gravity of the offence it is designed to punish and discourage’.88 It further stated, ‘A significant factor must be the financial advantage the person committing the abuse set out to obtain, which will not necessarily be the same as the gain actually made or the loss actually avoided.’89 The Upper Tribunal in Visser and Fagbulu90 stated, however, that it was not bound to follow the FSA penalties policy in DEPP: ‘We are not bound by the policy or guidance, but they are a convenient and useful starting point.’91 Having said that, in referring to specific provisions of DEPP then in force and relevant to the calculation of an appropriate financial penalty, the Tribunal commented: ‘In our view they constitute proper guidance to the determination of the level of a penalty, in conjunction with a close consideration of an individual applicant’s own circumstances.’

Settlement 12.48 Step 5 allows for a discount to be applied to a financial penalty in the event that the enforcement case can be settled between the FCA and the person under discipline. The opportunity for a settled solution is available also in partly contested cases where the FCA offers at DEPP 5.1.8A a procedure for ‘focused resolution agreements’ that is a potential settlement about certain but not all relevant issues. A focused settlement agreement was used in the Upper Tribunal reference in Linear Investments Ltd v the Financial Conduct Authority.92 In relation to opportunities for case settlement, the FCA indicates some of the benefits of early settlement on its website, stating ‘Settling enforcement cases early is sometimes in the public interest. It can help both the industry and consumers by sending timely messages about the required standards … Early settlement may also result in consumers receiving compensation earlier. It can also save resources for the firm or individual and us.’93 12.49 The FCA’s settlement policy is described in Chapter 5 of DEPP.94 It is important to note that a settled solution is not reserved for those enforcement cases involving a financial penalty, and applies equally to proposed public censures. It is not uncommon for the FCA to put forward an enforcement settlement proposal at the end of an investigation and prior to it formally issuing a statutory notice. Furthermore, DEPP 5.1.3 makes it clear that settlement discussions can take place at all stages throughout the enforcement process even following a referral to the Upper Tribunal or during Court proceedings as was the case in the FSA’s case of Barnett Michael Alexander.95 Furthermore,

Parker (note 85) at [155]–[156]. Parker (note 85) [172]. Parker (note 85)) at [172]. Visser and Fagbulu (note 82). Visser and Fagbulu (note 82). Linear Investments Ltd v the Financial Conduct Authority [2019] UKUT 0115 (TCC). FCA website page ‘Settlement and mediation in enforcement cases’, https://www.fca.org. uk/about/enforcement/settlement-mediation-enforcement-cases. 94 Increased enforcement settlement transparency was introduced following the FSA’s enforcement process review: Report and recommendations, July 2005. 95 FSA Final Notice Barnett Michael Alexander (14 June 2011) and The Financial Services Authority v Barnett Alexander & ors (2011) (unreported) HC 10C01696. A copy of the consent order in the case is appended to the FSA’s final notice. 87 88 89 90 91 92 93

369

12.49  Enforcement issues the FCA recognises that to encourage early settlement, discussions or negotiations between it and the person concerned will often be required on a without prejudice basis and thus at DEPP 5.1.4 it provides that there may be agreement ‘that neither the FCA nor the person concerned would seek to rely against the other on any admissions or statements made in the course of their settlement discussions if the matter is considered subsequently by the RDC or the Tribunal’. The FCA decision maker in cases of market abuse is the FCA’s Regulatory Decisions Committee; however, the FCA’s settlement process at DEPP 5.1.1(3) allows for settlement discussions and agreement to be conducted by two members of FCA senior management as settlement decision makers, requiring that one decision maker must be at director level and the other at head of department level and further providing at DEPP 5.1.1(4) that although one of the settlement decision makers may be from the FCA’s enforcement and financial crime division, the second must not be. 12.50 In practice, settlement discussions may begin between the person subject to enforcement (or that person’s representative) and FCA staff (usually from the FCA enforcement division). Any such discussion might not (as recognised by DEPP 5.1.5(1) include the ‘settlement decision makers’. It is common in such circumstances for the FCA staff conducting the settlement discussions to make recommendations to the settlement decision makers and in such circumstances, in accordance with DEPP 5.1.7(1) and (2), the settlement decision makers may accept or decline the proposed settlement terms. In addition to the substantive components of an enforcement settlement, such as the terms of the FCA Decision Notice, level of penalty and wording of a public statement, the FCA requires at DEPP 5.1.6 that the terms be in writing and waive any statutory rights that the person may have in relation to the warning or decision notice, such as the right to make representation to the RDC or rights of referral to the Upper Tribunal. 12.51 Although the FCA is given statutory powers to impose enforcement sanctions for market abuse, many of the administrative cases brought by the FCA are concluded following an early managed settlement. Arguably, the benefits offered by early settlement apply to both the FCA and those against whom the action is brought both in financial terms (by reducing cost and a recognised discount on any financial penalty) and by affording the opportunity to acknowledge any regulatory failing at an early stage, permitting rectification of any such failing. 12.52 Turning to the impact that early settlement may have on financial penalties, DEPP 6.7 articulates a clear and transparent penalty discount scheme applied at the stage of the enforcement process that settlement is reached, with the basic principle being that the earlier that settlement is reached, the greater the percentage penalty discount. The FCA outlines, however, at DEPP 6.7.2 that a penalty discount will not be applied to any amount of disgorgement of profit made or avoided loss. Different discounting is applied to settled decisions and focused resolution agreements (with the latter subject to an approach set out at DEPP 6.7.3A. For fully settled decisions arising after 1 March 2017, the FCA offers:96 (a)

96

a 30% discount for settlement during what the FCA describes as ‘stage 1’ at DEPP 6.7.3(1) as, ‘… the period from the commencement of an investigation until the FCA has (a) a sufficient understanding of the See DEPP 6.7 for an outline of the FCA’s penalties discount scheme.

370

Enforcement issues  12.54

(b)

(c)

(d)

nature and gravity of the breach to make a reasonable assessment of the appropriate penalty; and (b) communicated that assessment to the person concerned and allowed a reasonable opportunity to reach agreement as to the amount of the penalty …’; a 20% discount for settlement during what the FCA describes at DEPP 6.7.3(4)(a) as ‘… the period from the end of stage 1 until the expiry of the period for making written representations or, if sooner, the date on which the written representations is sent in response to the giving of a warning notice …’; a discount of 10% for settlement during what the FCA describes at DEPP 6.7.3(4)(b) as ‘… the expiry of period of making representations, or if sooner, the date on which representations are sent in response to the giving of a warning notice and the giving of a decision notice …’; and no discount for settlement thereafter.

ENFORCEMENT AND THE IMPACT ON POSITIONS OF INFLUENCE, TRADING AND BUSINESS PERMISSIONS 12.53 Under section 123A of the FSMA, in instances of market abuse contrary to Articles 14 or 15 of MAR, in addition to imposing a financial penalty or publishing a censure under section 123, the FCA may temporarily prohibit an individual from (a) holding an office or position of responsibility for taking decisions about the management of an investment firm; (b) acquiring or disposing of financial instruments; (c) making a bid at an auction conducted by a recognised auction platform. Similarly, under section 123B of the FSMA, the FCA may suspend, limit or restrict an authorised person’s business permission granted under Part IV of the FSMA. The FCA’s approach to decision making for cases involving such temporary prohibitions, suspensions, limitations and restrictions is set out a DEPP 6A.1, where the FCA states at DEPP 6A.1.3 the purpose of such measures being linked to both regulatory standards and deterrence, ‘The principal purpose of imposing such a measure is to promote high standards of regulatory and/or market conduct by deterring persons who have committed breaches from committing further breaches, helping to deter other persons from committing similar breaches, and demonstrating generally the benefits of compliant behaviour.’ 12.54 More generally, in misconduct cases including those relating to market abuse against authorised persons or persons subject to the section 64A rules of conduct, the FCA may take enforcement action to withdraw or vary a firm’s business permissions or prohibit a person subject to the code. Part IV of the FSMA contains powers granted to the FCA to cancel or vary a firm’s business permissions and section 63 of the FSMA grants power to withdraw approved person status (see further Chapters 14 and 15). The severity of the situation might reveal that the firm ceases to satisfy the threshold conditions97 for authorisation or that the interests of consumers are at risk to such an extent that the FCA considers it desirable to impose limitations or restrictions on the firm’s regulated activities. Indeed, the FCA might have concerns that the facts

97

FSMA, Sch 6 together with the Financial Services and Markets Act 2000 (Threshold Conditions) Order 2013 (SI 2013/555).

371

12.54  Enforcement issues of the matter show that an individual ceases to be a fit and proper person.98 If as a result of a withdrawal of a firm’s business permission there remains no regulatory activity for which the firm has permission, then the FCA may under section 33 of the FSMA ultimately withdraw the firm’s authorisation. 12.55 Furthermore, pursuant to section 56, the FCA may prohibit an individual under section 56(2) ‘from performing a specified function’ if under section 56(1) ‘… it appears to it that an individual is not a fit and proper person to perform functions in relation to regulated activities …’ (see further Chapters 14 and 15). For instance, in its FCA’s Final Notice to Adrian Horn99 the FCA prohibited Mr Horn for performing any functions. As an alternative to withdrawal of authorisation, the FCA has power under the FSMA, section 206A to suspend or impose limitations or conditions on a person’s authorisation, or under section 66(2A,) an individual’s approval. The FCA sets out at DEPP 6A certain matters it takes into account in deciding whether to impose a suspension, including at DEPP 6A.2.3 ‘whether it believes that such action will be a more effective and persuasive deterrent than the imposition of a financial penalty alone’. Further at DEPP 6A.3, the FCA sets out a nonexhaustive lists of factors it will apply in deciding the appropriate period of suspension, including at 6A.3.2 the ‘deterrence’ effect of the suspension, ‘the seriousness of the breach’, ‘aggravating and mitigating factors’ and ‘the impact of suspension or restriction on the person in breach’. The FCA uses it Enforcement Guide to set out its approach to the variation of business permissions and withdrawal of approval, stating at EG 8.2.11 that when considering how to address concerns, it ‘will have regard to it statutory objectives and the range of regulatory tools that are available to it’. The FCA provides at EG 8.2.3(1) that it may take formal action to vary permissions in particular where it, ‘has serious concerns about a firm, or about the way its business is being conducted’, and at EG 8.2.5 examples are provided of scenarios when the FCA may consider varying a permission, including at 8.2.6(b) where ‘the firm appears not to be a fit and proper person to carry on a regulated activity because (i) it has not conducted its business in compliance with high standards which may include putting itself at risk of being used for the purpose of financial crime or being otherwise involved in such crime’. Analysis of market abuse enforcement cases against approved persons shows that the FCA is increasingly determining that abusive behaviour by approved persons is inherently lacking in integrity and thus, without any mitigating circumstances, it appears likely that an approved person engaging in abusive behaviour will face a prohibition order. Indeed EG 9.3.2(4) specifically refers to market abuse as one factor the FCA will take into account when considering a prohibition order against an approved person. Emphasising the interplay between deliberate abuse, fitness, probity and the FCA statutory objectives in justifying a prohibition, in the matter of Andrew Kerr,100 the FSA considered that Kerr’s deliberate engagement in market abuse and subsequent provision of false and misleading information to the Authority directly impugned his honesty, integrity and reputation, demonstrating that he was not a fit and

98 FSMA, s 60 and the Fit and Proper Test for Approved Person FCA sourcebook (FIT). 99 FCA Final Notice Adrian Geoffrey Horn (3 March 2021), https://www.fca.org.uk/ publication/final-notices/adrian-horn.pdf. 100 FSA Final Notice Andrew Kerr (1 June 2010), http://www.fsa.gov.uk/pubs/final/andrew_ kerr.pdf.

372

Enforcement issues  12.57 proper person and presented a risk to the FCA’s statutory objective of market confidence. Furthermore, in Massey v The Financial Services Authority,101 the Upper Tribunal linked a finding of market abuse with other misleading behaviour in the case and stated: ‘On the evidence of this case he is in our view not a fit and proper person, and a prohibition order is justified’,102 although in the case the Tribunal did not consider the case was so serious that it justified a ‘lifetime ban’.

APPLICATIONS TO THE COURT 12.56 In broader terms and in addition to the disciplinary measures explored above, the FCA has a number of enforcement measures available which may be viewed as protectionist rather than disciplinary in nature. Such additional measures may be taken where the FCA considers it is necessary to take enforcement action to ensure the protection of the market or individual investors. The FCA’s Enforcement Guide is used to describe the FCA’s approach to injunctions (see EG 10) and restitution and redress (see EG 11). In both sections the FCA explains that injunction and restitution decisions are usually made by the FCA’s Executive Director of Enforcement or in that person’s absence’ the acting director of enforcement’. Further applicable provisions of EG are set out below.

Injunctions to prevent market abuse 12.57 Section 381 of the FSMA makes specific provision allowing the FCA to apply to the court for a range of orders to address market abuse. Section 381(1) addresses situations where a person has engaged in or may engage in market abuse allowing the court to ‘restrain’ the activity. In Financial Conduct Authority v Da Vinci Invest Ltd,103 the FCA obtained a permanent injunction under section 381 restraining market abuse (albeit in the section operating prior to MAR). FSMA, section 381 provides: ‘If, on the application of the FCA, the court is satisfied– (a

(b)

that there is a reasonable likelihood that any person will contravene Article 14 (prohibition of insider dealing and of unlawful disclosure of inside information or Article 15 (prohibition of market manipulation) of the market abuse regulation, or that any person is or has contravened article 14 or 15 of the market abuse regulation and that there is a reasonable likelihood that the contravention will continue or be repeated,

the court may make an order restraining (or in Scotland an interdict prohibiting) the contravention.’ Commenting on the nature of the ‘reasonable likelihood under section 381(b) that market abuse would continue, Mr Justice Snowden stated, ‘In my judgment, the degree of potential harm caused by market abuse is sufficiently high

101 David Massey v the Financial Services Authority [2011] UKUT 49 (TCC) Ref Fin/2009/0024. 102 Massey (note 101). 103 Financial Conduct Authority v Da Vinci Invest Ltd [2015] EWHC 2401.

373

12.57  Enforcement issues that the legislature cannot have intended that the grant of an injunction under section 381(1)(b), with the sanction of contempt proceedings in the event of breach, should only be available in cases where the risk of repeat abuse is more likely than not: still less that an injunction should only be available upon satisfaction of the very restrictive “similar fact” test proposed by Dr. Peglow. I consider that the legislative intention was to enable the court to grant an injunction under section 381 in an appropriate case if the risk of repetition of market abuse is a real possibility that cannot sensibly be ignored.’104 Section 381(2) further makes provision allowing the court by order to require a person to take steps to remedy a market abuse. It provides: ‘If on the application of the FCA the court is satisfied– (a) (b)

that any person is or has contravened article 14 or 15 of the market abuse regulation, and that there are steps which could be taken for remedying the contravention,

the court may make an order requiring him to take such steps as the court may direct to remedy it.’ 12.58 Section 381(3) and (4) combine to make provision for an order to restrain a person from dealing with or disposing of assets. Section 381(3) provides: ‘Subsection (4) applies if, on the application of the FCA, the court is satisfied that any person– (a) (b)

may be contravening article 14 or 15 of the market abuse regulation; or may have contravened article 14 or 15 of the market abuse regulation.’

Section 381(4) provides: ‘The court may make an order restraining (or in Scotland an interdict prohibiting) the person concerned from disposing of, or otherwise dealing with, any assets of his which it is satisfied that he is reasonably likely to dispose of, or otherwise deal with.’

Factors the FCA may consider in determining whether to seek injunctions 12.59 The FCA sets out at EG 10.2 factors it will take into account when considering whether to apply for an order under section 381, although it states at EG10.2.2 that it will apply a ‘broad test’ of ‘whether the application would be the most effective way to deal with the FCA’s concerns’. The wider factors include consideration of the following: ‘The nature and seriousness of a contravention or expected contravention … [10.2.2(1)] [Including for market abuse] the impact or potential impact on the financial system of the conduct in question [10.2. (2)(a)] … the extent and nature of any losses or other costs imposed … [10.3.(2)(b)]

104 Financial Conduct Authority v Da Vinci Invest Ltd (note 103) at [262].

374

Enforcement issues  12.62 Whether the conduct in question has stopped or is likely to stop … [10.2(3)] Whether there are steps a person could take to remedy a contravention of a relevant requirement or market abuse … [10.2(4)] Whether there are steps a person could take to remedy a contravention have a relevant requirement or market abuse … [10.2(4)] Whether there is a danger of assets being dissipated … [10.2(5)] The costs the FCA would incur in applying for and enforcing an injunction and the benefits that would result [10.2(6)] The disciplinary record and general compliance history of the person who is the subject of the possible application … [10.2(7)] Whether there is information to suggest that the person who is the subject of the possible application is involved in financial crime … [10.2(10)]’

Restitution 12.60 Section 383 of the FSMA sets out provisions allowing the FCA to apply to the court for an order in market abuse cases for a payment that will be passed on by the FCA to another person, who generically might be referred to as the victim of the market abuse where a person’s market abuse behaviour has given rise to a profit (section 383(2)(a)), or other persons have suffered a loss or affected by the abuse (section 383(2)(b)) may pursuant to section 383(4) order the person to make a payment to the FCA. Further under section 383(5) the money received by the FCA under the restitution order must be ‘paid’ or ‘distributed’ to the person to whom under section 383(10) the abuser’s profits are ‘attributable’ or ‘who has suffered the loss or adverse effect’. 12.61 In the FSA’s market abuse enforcement case against Barnett Michael Alexander105 due to Mr Alexander’s on-going market abuse, the FSA applied for an order under the then section 381 of the FSMA restraining him from committing market abuse and also under the then applicable section 383 for restitution. The orders were agreed by consent between the parties including a restitution payment of £322,818, and a financial penalty of £700,000 agreed with the FSA under its settlement arrangements but ordered under FSMA, section 129. 12.62 At EG 11.2.1 the FCA sets out criteria that it will generally apply in deciding whether to utilise its powers to obtain or require restitution whether under section 383 or 384 (the power for the relevant regulator to require restitution). The basic premise at EG 11.2.1 is that the FCA ‘will consider all the circumstances of the case’, but specific factors considered include: ‘Are the profits quantifiable?’ (11.2.1(1)); ‘Are the losses identifiable?’ (11.2.1.(2)); ‘The number of persons affected’ (11.2.1 (3)); ‘The FCA’s costs’ (11.2.1 (4)); ‘Is redress available elsewhere?’ (11.2.1(5)); ‘Can persons bring their own proceedings?’ (11.2.1(7); ‘What other powers are available to the FCA?’ (11.2.1(9)).

105 FSA Final Notice Barnett Michael Alexander (14 June 2011) and The Financial Services Authority v Barnett Alexander & ors (2011) (unreported) HC 10C01696. A copy of the consent order in the case is appended to the FSA’s final notice.

375

12.63  Enforcement issues

The FCA’s own requirements for restitution 12.63 Section 384(2) makes provision allowing the FCA, without the need for a court application, to require a person to make a payment in restitution if it is satisfied that a person contravened Article 14 (prohibition of insider dealing and of unlawful disclosure of inside information or Article 15 (prohibition of market manipulation) of MAR, and under section 384(3), ‘profits have accrued to the person as a result of the contravention article 14 or 15 of the market abuse regulation, or … one or more persons have suffered a loss or been adversely affected as a result of contravention article 14 or 15 of the market abuse regulation’. The FCA used its powers under section 384 against Tesco plc, a listed company, arising from market abuse under section 118(7) of the FSMA (being provisions relating to market abuse in operation prior to MAR).106 The FCA comments on its website announcement about the restitution and the importance of compensation where investors have suffered a loss arising from another market abuse ‘Conduct by issuers in the primary market affects the integrity of investments and securing compensation is an important step in ensuring effective access to redress for those investors, especially for the very significant number of retail investors that this redress scheme will benefit, whether they invested privately or through participation in a pension fund or similar investment.’107 12.64 Perhaps, however, the most significant question is whether the FCA should rely on its own powers under section 384 or make an application to court for restitution under section 383. In this respect the FCA states at EG 11.3.1 that it ‘… will first consider using its own administrative powers under section 384 [FSMA] before considering taking court action …’ but that it will go on to consider wider issues such as where there may be other court action against the person (11.3.2 (1)); and perhaps most importantly where there is either ‘a danger that assets … may be dissipated …’ (11.3.2(3)) or where it considers that the sanction of breaching an order of the court is necessary because it has concerns that its own requirement under section 384 may not be complied with (11.3.2(4)).

106 FCA Final Notice Tesco plc (28 March 2017), https://www.fca.org.uk/publication/finalnotices/tesco-2017.pdf. 107 FCA, ‘Tesco to pay redress for market abuse’, FCA website page, 23 August 2017, https:// www.fca.org.uk/news/press-releases/tesco-pay-redress-market-abuse.

376

Chapter 13

Compliance procedures and systems

INTRODUCTION 13.1 This chapter examines compliance procedures and systems from the standpoint of both users of the market and authorised persons. In so doing, it will consider a range of control obligations imposed on users of the market each of which may be considered as designed to underpin or facilitate compliance with certain provisions of the Market Abuse Regulation (MAR),1 alongside more general obligations imposed on authorised persons to establish and maintain systems and controls to ensure compliance with their obligations under the wider regulatory system and counter the risk of financial crime.2 In so doing the chapter will consider compliance from the standpoints of both internal firms’ governance arrangements and an authorised firm’s ‘compliance function’ and how that function serves to support the compliance arrangements established by a firm. Certain law and regulation can be analysed as expressly setting out and requiring a person to establish and operate systems of control or put in place arrangements to control against the risk of or avoid market abuse in certain situations. Such requirement may be conveniently described as compliance obligations in that they require a person to take certain steps in order to secure or demonstrate compliance with the law, as distinct from not doing something, which might contravene a prohibition in the law. When considering systems of control requirements for the purpose of market abuse, although not exhaustive, examples of obligations can be found in the Market Abuse Regulations, the Markets In Financial Instruments Directive (MiFID II)3 as well as discrete provisions in the Financial Conduct Authority’s (FCA) Disclosure and Transparency rules.4 For instance, Article 11(4) and (5) of MAR requires that a person engaging in a market sounding under Article 10 of MAR, (being a form of a lawful disclosure of inside information), must comply with certain

1 2

3 4

The EU Market Abuse Regulation 596/2014 which on 31 December 2020 was ‘onshored’ into UK Law by the EU Withdrawal Act 2018. See generally, S Bazley, Market Abuse Enforcement Practice and Procedure (Bloomsbury Professional 2013) and Chapter 6 by S Bazley of Special Report, The Regulation of Investment Services in Europe under MiFID: Implementation and Practice (General Editor Emilios Avgouleas) (Tottel Publishing 2008). EU Directive 2014/65/EU on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU. Disclosure and Transparency regulations.

377

13.1  Compliance procedures and systems requirement under Article 11, including for instance under Article 11(5)(a) to ‘obtain the consent of the person receiving the market sounding to receive inside information’ and under Article 11(c) to ‘inform the person receiving the market sounding that he is prohibited from using that information …’. An example of a more generic, but nonetheless relevant example of an express compliance obligation applicable to firms authorised to carry on regulated activity, can be found in the FCA sourcebook for Senior Management Arrangements, Systems and Controls (SYSC) at 6.1.1R: ‘A firm must establish, implement and maintain adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and appointed representatives (or where applicable, tied agents) with its obligations under the regulatory system and for countering the risk that the firm might be used to further financial crime.’5 It is helpful to consider a range of compliance obligations from the standpoint of market users, such as issuers of securities, and those persons authorised under section 31 of the Financial Services and Markets Act 2000 (FSMA) to carry on regulated activities.

General systems of control for market users 13.2 MAR requires that operators of markets and trading venues establish systems of control to detect and prevent actual and attempted insider dealing and market abuse. The requirements of MAR are additionally supported by Articles 31 and 54 of MiFID II. Article 16(1) provides ‘Market operators and investment firms that operate a trading venue shall establish and maintain effective arrangements, systems and procedures aimed at preventing and detecting insider dealing, market manipulation and attempted insider dealing and market manipulation, in accordance with Articles 31 and 54 of Directive 2014/65/EU’. Not dissimilar requirements are imposed on authorised persons, albeit targeted at detection and reporting (although it is important for authorised persons to consider the market abuse compliance obligations holistically, taking account of the general obligation in MiFID II and the FCA rules in SYSC, some of which are addressed further in this chapter). Article 16(2) provides ‘Any person professionally arranging or executing transactions shall establish and maintain effective arrangements, systems and procedures to detect and report suspicious orders and transactions.’

Systems of control to prevent to insider dealing 13.3 The UK Market Abuse Regulations set out obligations and describe measures aimed at controlling the threat of market abuse by issuers of securities and their advisers including those carrying on financial services activity. Article 9(1) of MAR describes a control framework for ‘legitimate behaviour’ available to show that a person in possession of insider information may not have used that information for a transaction, and thus not engaged in insider dealing, as prohibited under Article 8, nor unlawful disclosure, as prohibited

5

FCA, Sourcebook, Senior Management Arrangements, Systems and Controls. In force 28 March 2022. See https://www.handbook.fca.org.uk/handbook/SYSC/6/?view=chapter. The obligation in SYSC 6.1.1R is derived from Article 16(2) of MiFID II.

378

Compliance procedures and systems  13.5 under Article 14. Article 9(1) sets out the requirement for appropriate controls and provides: ‘… it shall not be deemed from the mere fact that a legal person is or has been in possession of inside information that that person has used that information and has thus engaged in insider dealing on the basis of an acquisition or disposal, where that legal person: (a)

has established, implemented and maintained adequate and effective internal arrangements and procedures that effectively ensure that neither the natural person who made the decision on its behalf to acquire or dispose of financial instruments to which the information relates, nor another natural person who may have had an influence on that decision, was in possession of the inside information; …’

Insider lists and controlling disclosure 13.4 Article 18 of MAR requires issuers of securities as well as a person acting on an issuer’s behalf to compile and maintain a list of persons having access to inside information, and to control a disclosure to persons who have had information lawfully disclosed as recognised in Article 8(4) and under Article10(1). The core components for the content of the list can be gleaned from a combination of Article 18(1), which requires a list to be drawn up of: ‘… all persons who have access to inside information and who are working for them under a contract of employment, or otherwise performing tasks through which they have access to inside information, such as advisers, accountants or credit rating agencies (insider list);’ and Article 18(3): ‘The insider list shall include at least: (a) (b) (c) (d)

the identity of any person having access to inside information; the reason for including that person in the insider list; the date and time at which that person obtained access to inside information; and the date on which the insider list was drawn up.’

Article 18(2) additionally, however, imposes a duty to ensure persons receiving inside information and being on the insider list to confirm their legal responsibilities for the information they have received and sanctions that may be applied for insider dealing and disclosure, providing as follows: ‘Issuers or any person acting on their behalf or on their account, shall take all reasonable steps to ensure that any person on the insider list acknowledges in writing the legal and regulatory duties entailed and is aware of the sanctions applicable to insider dealing and unlawful disclosure of inside information.’

Controlling disclosure in market soundings 13.5 Article 11 of MAR recognises the practice of and makes provision for market soundings (which will often involve and necessitate the disclosure of price-sensitive information by an issuer or someone acting on the issuer’s behalf). It describes a market sounding as ‘the communication of information, prior to the announcement of a transaction, in order to gauge the interest of 379

13.5  Compliance procedures and systems potential investors in a possible transaction and the conditions relating to it such as its potential size or pricing, to one or more potential investors’. Recital 33 to MAR states ‘Conducting market soundings may require disclosure to potential investors of inside information …’ and ‘… Given the timing of such discussions, it is possible that inside information may be disclosed to the potential investor in the course of the market sounding after a financial instrument has been admitted to trading on a regulated market or has been traded on an MTF or an OTF …’. Article 11(3) provides that ‘A disclosing market participant shall, prior to conducting a market sounding, specifically consider whether the market sounding will involve the disclosure of inside information. The disclosing market participant shall make a written record of its conclusion and the reasons therefor …’. Article 11(5) provides: ‘For the purposes of paragraph 4, the disclosing market participant shall, before making the disclosure: (a) (b)

(c)

(d)

obtain the consent of the person receiving the market sounding to receive inside information; inform the person receiving the market sounding that he is prohibited from using that information, or attempting to use that information, by acquiring or disposing of, for his own account or for the account of a third party, directly or indirectly, financial instruments relating to that information; inform the person receiving the market sounding that he is prohibited from using that information, or attempting to use that information, by cancelling or amending an order which has already been placed concerning a financial instrument to which the information relates; and inform the person receiving the market sounding that by agreeing to receive the information he is obliged to keep the information confidential.’

The European Market and Securities Authority (ESMA) publishes technical standards including for arrangements for market soundings by disclosing participants.6 The ESMA technical standards have been ‘onshored’ into UK law following Brexit and been amended by the FCA.7 These technical standards set out the arrangements to be established and information to be disclosed when a market sounding occurs and include variations of requirements for when inside information may or may not be involved. Article 3(3) of the technical standards, applicable when insider information is being disclosed, includes requirements to give the following, much of which is designed to ensure the recipient understands the nature of the information being disclosed and the restrictions imposed on them by the law if they receive the information: ‘(a) … 6 7

a statement clarifying that the communication takes place for the purposes of a market sounding;

EU Regulation 2016/960/EU with regard to regulatory technical standards for the appropriate arrangements, systems and procedures for disclosing market participants conducting market soundings. The FCA, Technical Standards (Market Abuse Regulation) (EU Exit) Instruments 2019. FCA 2019/45. See https://www.handbook.fca.org.uk/instrument/2019/FCA_2019_45.pdf.

380

Compliance procedures and systems  13.7 (d)

… (f) (g)

(h)

a statement clarifying that, if the contacted person agrees to receive the market sounding, that person will receive information that the disclosing market participant considers to be inside information and a reference to the obligation laid down in Article 11(7) of Regulation (EU) No 596/2014; a statement informing the person receiving the market sounding about the obligations laid down in Article 11(5) subparagraph 1 points (b), (c) and (d) of Regulation (EU) No 596/2014; a request for the consent of the person receiving the market sounding to receive inside information, as referred to in Article 11(5) subparagraph 1 point (a) of Regulation (EU) No 596/2014 and the reply to that request; where the consent required under point (g) is given, the information being disclosed for the purposes of the market sounding, identifying the information considered by the disclosing market participant to be inside information …’

COMPLIANCE AND AUTHORISED PERSONS 13.6 MiFID II8 and its framework law, including MiFID Delegated Regulation governing organisational requirements,9 set out detailed provision for minimum regulatory standards regarding the internal organisation of investment firms. To a large extent these measures have shaped the FCA’s rules, namely SYSC. Additionally, elements of prudential rules, including those related to risk management and firm capital, impact how certain authorised persons including investment firms must control their activities and are governed. Some of these rules have been addressed within the FCA rules at SYSC and within prudential rules for investment firms such as those at the FCA prudential sourcebook for MiFID Investment firms (UKMiFIDPru).10 This section of the chapter will consider the provisions of MiFID II, UKMIFIDPru as well as the rules and associated guidance of the FCA SYSC rules along with a number of relevant FSA and FCA Final Notices. It should be recognised that not all authorised firms are subject to the provisions of MiFID II, such as insurers, although they may participate in market trading. Alternative provisions with the FCA’s sourcebook SYSC set out governance and compliance obligations relating to other classes of authorised persons. 13.7 When considering issues of compliance in respect of market abuse, a number of more discrete obligations concerning the prevention and detection of abuse should be considered. In so doing, this chapter will consider regulatory obligations to control record keeping and personal account trading, as well as the interaction between the compliance function and conflicts management (more detailed analysis of conflicts management is provided in Chapter 8). 8 9

Incorporated into UK law following the UK ceasing to be an EU member state. EU Regulation 2017/565/EU supplementing Directive 2014/65/EU as regards organisational requirements and operating conditions for investment firms and defined terms for the purpose of that Directive (MiFID Delegated Regulation). 10 The FCA, The prudential sourcebook for MiFID Investment Firms (UKMIFIDPRu), Investment Firms prudential regime Instrument 2021. FCA 2021/38. In force from 1 December 2021 and 1 January 2022. See https://www.handbook.fca.org.uk/instrument/2021/ FCA_2021_38.pdf.

381

13.7  Compliance procedures and systems What will become evident, however, is that compliance is the responsibility of the authorised firm and its governing body and not merely something that can be delegated to a firm’s compliance officer. Furthermore, it is important to recognise the role of organisational culture in ensuring that a firm’s business activities meet its regulatory obligations, as neither detailed provisions of the rulebook nor the appointment of a compliance function will by themselves ensure compliance with regulatory obligations. In addition, the effectiveness of a firm’s compliance function is influenced by the firm’s senior management and its organisational culture; that is the right ‘tone’ for the business must be created by its governing body and senior management will determine how effectively a compliance function will operate. Chapter 14 explores the FCA senior managers and certified persons regime and the regulatory duties imposed on senior people at an investment firm. But for now, it may be helpful to consider remarks made by the FCA relating to a firm’s culture. Andrew Bailey, former FCA Chief Executive, stated during a speech in 2018: ‘As essays in our volume indicate, culture is about encouraging and incentivising good things, positive ethical customs to use Friedman’s phrase. It would not be a winning pitch for business to describe a culture as preventing the bad things that would otherwise inevitably happen. ‘No thanks’ should be the response. Nor should good culture just be about investigating when things go wrong … Positive culture, as I will call it, goes right to the heart of what firms and their staff are, what values they represent and the positive ethical customs …’.11

AUTHORISATION, GOVERNANCE, SENIOR MANAGEMENT AND COMPLIANCE 13.8 Before beginning an analysis of the detailed regulatory provisions relating to the firm’s internal processes and compliance arrangements, it is important to consider a number of the core provisions within the FSMA that determine whether or not a firm meets the conditions for authorisation. Section 53 and Sch 6 of the FSMA, together with the Financial Services and Markets Act (Threshold Conditions) Regulations 2013,12 impose a series of threshold conditions that firms must meet and demonstrate they are capable of continuing to meet in order to be considered fit and proper and be granted authorisation. The threshold conditions relating to ‘suitability’ and ‘resources’, it is submitted, have a major impact on the internal arrangements which investment firms must establish to secure compliance with regulatory obligations.13 Following amendments made by the Financial Services Act 2012, which created a twin peaks system of regulation, the establishment of the Prudential Regulation Authority (PRA) of the Bank of England and variation to the jurisdiction of the FCA, the threshold conditions are now divided between those applicable to firms authorised and regulated by the FCA, conditions relevant to the FCA

11

12 13

Andrew Bailey, former FCA Chief Executive, speech at the Transforming culture in financial services conference, ‘Transforming culture in financial services (19 March 2018), https://www.fca.org.uk/news/speeches/transforming-culture-financial-services. See also, Clive Adamson, FCA Director of supervision, speech at the CFA Society, ‘The importance of culture in driving behaviours of firms and how the FCA will assess this’ (19 April 2013), http://www.fca.org.uk/news/regulation-professionalism. SI 2013/555. For further analysis of compliance systems relating to financial crime, see B Rider (ed), Chapter 24 ‘Compliance’, in Research Handbook on Financial Crime (Edward Elgar 2015).

382

Compliance procedures and systems  13.10 but in relation to firms authorised by the PRA, conditions relevant to PRA authorisation of insurers, and conditions applicable to all other PRA authorised firms. In the following sections of this chapter consideration will be given to the threshold conditions applying to investment firms authorised and regulated by the FCA. The FCA provides guidance on its application of the threshold conditions in the conditions sourcebook (COND) of the FCA Handbook.14 13.9 The suitability threshold condition at FSMA, Sch 6, para 2E requires the FCA to consider issues relating to the applicant firm’s fitness and properness, in addition to a consideration of the antecedents of the firm and its controllers (see further Chapter 15). Paragraph 2E specifically requires the FCA to consider the applicant’s suitability in the context of matters such as the nature and complexity of the regulated activities that it will carry on; along with how its business will be managed and controlled; that its business will be conducted appropriately and; ‘the need to minimise the extent in which it is possible for the business carried on by [the firm] … to be used for a purpose connected with financial crime’. The FCA guidance at COND 2.5.6G provides examples of matters the FCA will consider when assessing suitability, which in relation to the adequacy of internal controls and compliance arrangements includes consideration of whether: ‘(1A) the firm has made arrangements to put in place an adequate system of internal control to comply with the requirements and standards for which the FCA is responsible under the regulatory system; … (7) the firm has put in place procedures which are reasonably designed to:(a) ensure that it has made its employees aware of, and compliant with, those requirements and standards under the regulatory system that apply to the firm for which the FCA is responsible and the regulated activities for which it has, or will have permission … (16) the firm has taken reasonable care to ensure that robust information and reporting systems have been developed, tested and properly installed; (17) the firm has in place appropriate systems and controls against financial crime, including, for example, money laundering; …’ 13.10 In many respects the suitability condition overlaps with the resources threshold condition at the FSMA, Sch 6 para 2D. This condition in part addresses the capital requirement imposed on an authorised firm, dependent on the category of business it undertakes. Although an assessment of regulatory capital is outside the scope of this book, for the purpose of analysis of systems and controls, it is important to highlight that a firm’s capital position will be impacted by the risks of its business activities. The obligations in certain FCA prudential rules such as UKMIFIDPru 7.4R include a requirement that applicable investment firms must assess whether they should hold additional capital as well as liquid assets to meet ‘material potential harm’.15 Additionally,

14 15

The FCA, Sourcebook Threshold Conditions (COND), https://www.handbook.fca.org.uk/ handbook/COND/1/?view=chapter. Certain applicable firms are required to carry out an internal capital adequacy and risk assessment (ICARA). See UKMIFIFPru for the required components of the ICARA and specifically UKMIFIDPru 7.4.9R.

383

13.10  Compliance procedures and systems however, the non-financial resources of a firm which under the FSMA, Sch 6, para 1A(2) will include matters such as management experience, policies and internal systems, will be assessed (see Sch 6, para2D(4)). The FCA guidance at COND 2.4.4G concerning non-financial resources, including in the context of how it is prepared for the risks of its business, states: ‘… (d) whether the firm has taken reasonable steps to identify and measure any risks of regulatory concern that it may encounter in conducting its business (see COND 2.4.6 G) and has installed appropriate systems and controls and appointed appropriate human resources to measure them prudently at all times …’. 13.11 In the context of the suitability condition, the MiFID II regime provides a series of measures governing the appropriateness of a firm’s senior management and their responsibilities within the firm. Article 9(1) of MiFID II, along with Article 91 of the Capital Requirements Directive (CRD),16 incorporated SYSC at 4.2.1R to provide that ‘The senior personnel [of a firm] must be of sufficiently good repute and sufficiently experienced as to ensure the sound and prudent management of the investment firm.’ (Further analysis relating to the suitability of senior personnel including compliance officers as well as those in control is provided in Chapters 14 and 15.) 13.12 Components of the UK MiFID and the CRD, along with FCA rules at SYSC, describe the role that a firm’s senior management had in the operation of a firm’s business, including its overall role in ensuring that the firm operates in compliance with its requirements. For instance, at SYSC 4.3.1 the FCA rules provide that ‘A firm … must ensure that senior personnel and, where appropriate, the supervisory function, are responsible for ensuring that the firm complies with its obligations under the regulatory system. In particular, senior personnel and, where appropriate, the supervisory function must assess and periodically review the effectiveness of the policies, arrangements and procedures put in place to comply with the firm’s obligations under the regulatory system and take appropriate measures to address any deficiencies.’ It is evident that SYSC 4.3.1R, shapes the requirement for applicable authorised firms to undertake on-going monitoring of and remedy weaknesses in their internal control arrangements. It will be seen later in this chapter that monitoring and oversight is also a core component of the MiFID II requirement for a compliance function.

GOVERNANCE AND THE NEED FOR POLICY, PROCESS, AND PROCEDURE 13.13 Effective governance is often viewed as essential to the effective and successful operation of an undertaking. An overarching obligation in relation to organisational control is provided by way of FCA High Level principle for business 3, stating: ‘A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.’ As examples of the FCA’s reliance on Principle 3 to enforce control failings, in 2016 it imposed a financial penalty on WH Ireland Limited in relation to its internal system of control ‘because it failed to take reasonable care to organise

16

EU Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC.

384

Compliance procedures and systems  13.14 and control effective systems and controls to protect against the risk of market abuse …’,17 and in 2015 it imposed a financial penalty of £226,800,000 on Deutsche Bank AG, in part as a result of the bank failing to have in place specific financial benchmark systems and controls and having ‘seriously defective systems and controls in place to support audit and investigation of trader misconduct …’.18 The FCA’s Final Notice and decision against WH Ireland Limited offers an insight into the FCA’s expectations for firms’ compliance arrangement for guarding against market abuse and are informative for the analysis provided in this chapter. For instance, in that final Notice the FCA refers to control failings including, ‘(1) weak market abuse controls to detect and mitigate against the risk of market abuse arising from how inside information was handled, personal account dealing and conflicts of interest; (2) deficient compliance oversight including monitoring and oversight of market abuse controls, the provision of MI, risk assessment and dealing with suspicious transactions; (3) poor governance including a lack of clearly allocated responsibilities, reporting lines and accountability and, as Board packs were insufficiently detailed, a lack of market abuse MI and a lack of challenge and review of this by the Board and its committees …’19 13.14 FCA rules at SYSC 4.1.1R refer specifically to the need to have in place ‘robust governance arrangements’ which are defined as including ‘effective processes to identify, manage, monitor and report the risks it is or might be exposed to and internal control mechanisms …’. Additional and more prescriptive governance obligations are provided at SYSC 4.3A.1, including that such firm’s management body ‘defines, oversees and is accountable for the implementation of governance arrangements that ensure effective and prudent management of the firm …’. The nature of the arrangements required under SYSC 4.1.1R, clarified further by provisions at SYSC 4.1.2, allows for the design of internal arrangements appropriate for a business in the context of individual risks, stating ‘The arrangements, processes and mechanisms referred to in SYSC 4.1.1 R must be comprehensive and proportionate to the nature, scale and complexity of the risks inherent in the business model and of the … firm’s activities …’. SYSC 4.1.4R(1)–(4) addresses more specific requirements concerning a firm’s internal control arrangements which once again may be formulated to take account of the ‘nature, scale and complexity’ of the firm’s business and includes the need to establish: ‘… decision-making procedures and an organisational structure … … adequate internal control mechanisms designed to secure compliance with decisions and procedures at all levels of the firm; … effective internal reporting and communication of information at all relevant levels of the firm; …’

17 FCA Final notice WH Ireland Limited (22 February 2016) https://www.fca.org.uk/ publication/final-notices/wh-ireland.pdf. 18 FCA Final Notice Deutsche Bank AG (23 April 2015) http://www.fca.org.uk/your-fca/ documents/final-notices/2015/deutsche-bank-ag. 19 FCA Final notice WH Ireland Limited (22 February 2016), at [2.3].

385

13.15  Compliance procedures and systems

Systems for compliance and financial crime 13.15 Although the governance and general internal control obligations at SYSC 4 make discrete reference to compliance, more focused reference addressing both arrangements for securing compliance as well as the operation of a compliance function are provided for by SYSC. Article 16(2) of MiFID II together with Article 22 of MiFID Delegated Regulation on organisational requirements, applied by the FCA at SYSC 6.1.1R requires that: ‘A firm must establish, implement and maintain adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and appointed representatives (or where applicable, tied agents) with its obligations under the regulatory system and for countering the risk that the firm might be used to further financial crime.’ Indeed, the compliance arrangements established by a firm (including those relating to conflicts management, wall crossing and personal account trading which are considered below at 13.38–13.42, may be sufficient to provide the ‘reasonable grounds’ defence to an allegation of market abuse at section 123(2) of the FSMA (see further Chapter 4). Financial crime is defined by section 1H of the FSMA as including any offences involving the following: (a) (b) (c) (d)

fraud or dishonesty; misconduct in or misuse of information relating to a financial market; or handling the proceeds of crime; the financing of terrorism.

Section 1H(4) further defines ‘offence’ to include an act or omission, which would be an offence if it had taken place in the United Kingdom. 13.16 SYSC 6.1.1R draws out from its general compliance systems obligation a requirement that firms pay specific attention to the risk that they may be used to further financial crime. Moreover, the specific reference in the financial crime definition to misconduct in or misuse of information relating to the financial market will naturally include market abuse behaviours under MAR but it is submitted that the offences of insider dealing under Part V of the Criminal Justice Act 1993 and market manipulation under Part 7 of the Financial Services Act 2012 are also included. In highlighting financial crime, the FCA’s rules provide an expectation that firms should put in place special financial crime compliance procedures and policies that supplement their general compliance systems. Amplifying this point, the FCA has published a Financial Crime Guide providing guidance to firms on financial crime including on insider dealing and market abuse and which addresses some of the features of the systems of control to be established under SYSC 6.1.1R. For instance, at section 8.2 of the guidance, the FCA sets out a series of self-assessment questions designed to help firms considerer arrangements they might best establish and gives specific guidance on firms’ ‘Governance’, ‘Risk assessment’, ‘Policies and procedures’ and ‘Ongoing monitoring’. For instance, at para 8.2.4 of the guidance, commenting about on-going monitoring the FCA writes, ‘For their risk assessments, firms should regularly take steps to consider whether their employees and/or clients may be conducting insider dealing or market manipulation. This could be achieved by transaction, order and communications surveillance, with consideration given to the employee’s or client’s usual trading behaviour

386

Compliance procedures and systems  13.18 and/or strategies, and in respect of clients: initial on-boarding checks and ongoing due diligence, or other methods.’20 13.17 Some key points emerge from Article 21 of MiFID Delegated Regulation that should shape a firm’s efforts to organise their compliance function. It is clear that an obligation is established requiring the design as well as operation of policies and procedures. The use of the terms ‘adequate’ and ‘designed to detect any risk of failure’ in the context of firms’ obligations under MiFID, help make it clear that firms’ policies and procedures must be designed to meet their individual business model and the risks presented by that model. In the same mode, after initial authorisation, policies and procedures should be kept under review and adjustments to them made whenever the firm’s regulatory risks alter. There is recognition at SYSC 6.1.2 that the scale and nature of the complexity of a firm’s business should allow for it to determine appropriate policies and procedures to deal with its risk of non-compliance financial crime risk in much the same way at the more general provisions within SYSC 4. Equally, the compliance specific rules at SYSC 6.1.2R impose upon investment firms an obligation to carry out regular assessments of the adequacy of their compliance and financial crime risk procedures for the purpose of ensuring that such procedures continue to comply with the systems and controls obligations in SYSC 6.1.1R. The Authority does not provide any minimum expectation of the frequency of regular assessment, and in the same way that it provides scope for firms to determine the appropriateness of overall systems and controls, leaves the question of how regular assessment of financial crime risk management and systems and controls should be, to be determined by reference to the nature of the risk and complexity of the firm’s business. Investment firms might, therefore, consider that to comply with the regular assessment obligation, that alongside ad hoc reviews, they should review the extent to which their business is impacted by the risk of market abuse each and every time a change to business activities or service is planned. It is worth mentioning the interplay between market abuse controls and those required for money laundering. As addressed in Chapter 7 and elsewhere in this book, successful insider trading or market manipulation may give rise to the proceeds of crime. Investment firms will thus need to consider under SYSC 6.1.1R the extent to which their financial crime controls satisfy their obligations under the Money Laundering Regulations 2017.21 The FCA Financial Crime Guide provides useful assistance along with the UK Joint money laundering steering group.22

THE COMPLIANCE FUNCTION AND REGULATORY CHARACTERISTICS 13.18 Many investment firms have traditionally established a compliance function as an integral part of their arrangements for the oversight of their compliance procedures, sales function and to provide regulatory advice to 20 21 22

The FCA, Financial Crime Guide. Available within the FCA handbook of rules. See https:// www.handbook.fca.org.uk/handbook/FCG/1/?view=chapter. SI 2017/692. For a brief commentary on aspects of money laundering systems of control albeit not in relation to market abuse, see S Bazley. ‘The Financial Conduct Authority and NatWest Bank’, ICC Fraudnet Global Annual report 2022, part 8.

387

13.18  Compliance procedures and systems the firm’s senior management and governing body. The need to operate a compliance function has become an inherent part of a firm’s arrangements under Article 21 (organisational requirements) of MiFID Delegated Regulation. These provisions are adopted by the FCA at SYSC 6.1.3R.23 These obligations set out both the characteristics of a compliance function along with the work it is required to carry out. Additionally, Article 22(3) describes a range of measures that must be met in order for the function to perform its work properly and independently, including measures for the appointment and safeguarding removal of a compliance officer. The three characteristics described at Article 22(2) are: •• •• ••

permanence; effectiveness; operational independence;

And the work the function is required to perform is described at Article 22(2) as: •• •• ••

••

monitoring and assessment of the effectiveness of the firm’s compliance arrangements and responses to any non-compliance; providing advice and assistance; reporting to the firm’s management body ‘on the implementation and effectiveness of the overall control environment for investment services and activities, on the risks that have been identified and on the complaintshandling reporting as well as remedies undertaken or to be undertaken’; and monitoring on the effectiveness of the firm’s complaints handling arrangements.

SYSC 6.1.3R provides as follows ‘A firm … must maintain a permanent and effective compliance function which operates independently and which has the following responsibilities: (1)

(2)

to monitor and, on a regular basis, to assess the adequacy and effectiveness of the measures and procedures put in place in accordance with SYSC 6.1.2 R, and the actions taken to address any deficiencies in the firm’s compliance with its obligations; and to advise and assist the relevant persons responsible for carrying out regulated activities to comply with the firm’s obligations under the regulatory system.’

Permanence 13.19 The requirement for permanence in SYSC 6.1.3R may be regarded as operating as a fundamental requirement for a firm’s compliance function. It might be considered that the premise of permanency is based on a notion of the function being ‘fixed’ and ‘routine’, thus allowing the compliance function to operate continually, rather than ad-hoc. Confirming this notion, ESMA

23

Whist most authorised firms are required to appoint a senior manager with responsibility for compliance oversight not all are. The provisions at SYSC 6.1.3, however, refer to the establishment of a compliance function.

388

Compliance procedures and systems  13.21 provides guidance24 on the compliance function and in relation to the issue of permanence includes at its General Guideline 7 reference to the following: ‘Firms should … establish adequate arrangements for ensuring the responsibilities of the compliance officer are fulfilled when the compliance officer is absent, and adequate arrangements to ensure that the responsibilities of the compliance function are performed on an ongoing basis. These arrangements should be in writing.’ (at [55]) And: ‘The compliance function should perform its activities on a permanent basis and not only in specific circumstances. … The compliance function should be able to respond rapidly to unforeseen events, thereby changing the focus of its activities within a short timeframe if necessary.’ (at [58]) The ESMA guidance considers additional permanence by reference to a preplanned statement of a firm’s policy towards its compliance functions role within the firm and skill of the function, stating: ‘The responsibilities and competences as well as the authority of the compliance function should be set out in a “compliance policy” or other general policies or internal rules that take account of the scope and nature of the firm’s investment services and activities.’ (at [57]) It may be argued that there is an overlap between the various descriptors of the permanency obligation, as evident from paragraph 57 of the ESMA General Guidance 7, and both those relating to effectiveness and operational independence, given that (as will be examined below), the rules endorse the idea of proportionality and so offer some flexibility for operational independence in the context of the size and scale of the firm. Thus Article 22(4) of MiFID Delegated Regulation allows in appropriate circumstances a compliance function additionally to undertake other work within a firm.

Effectiveness 13.20 Effectiveness of the compliance function is partly established by the nature and extent of the arrangements that are put in place to meet the monitoring, reporting and advisory responsibilities within Article 22 of MiFID Delegated Regulation. Arguably, there is a very clear linkage between the arrangements under these provisions and the general organisational arrangements that a firm must have in place to meet its regulatory obligations. The latter may be designed in the context of the nature and complexity of the firm’s business. 13.21 Effectiveness will also be determined by the compliance function’s ability to operate and brings into consideration issues such as the compliance function’s level of authority within the firm, its resources and whether these are sufficient, its expertise, both in terms of the firm’s business as well as the regulatory environment relevant to the business and the access provided to relevant information within the firm.25 Article 22, implemented at SYSC

24 25

The European Securities and Markets Authority Final report: Guidelines on certain aspects of the MiFID compliance function requirements (5 June 2020). Article 22 MiFID Delegated Regulation.

389

13.21  Compliance procedures and systems 6.1.4R, sets out conditions that must be met in order to demonstrate that the compliance function is able to properly meet its responsibilities, some of which touch upon the effectiveness component. SYSC 6.1.4R addresses effectiveness in terms of what might be described as organisational capability, stating that ‘(1) the compliance function must have the necessary authority, resources, expertise and access to all relevant information …’. The ESMA Compliance Function guidance26 again addresses issues relating to capability and considers the extent of the functions resource and people, stating: ‘When ensuring that appropriate human and other resources are allocated to the compliance function, firms should take into account the scale and types of investment services, activities and ancillary services undertaken by the firm’ (at [43]) and extends such resource consideration to situations where extra resource capacity is needed, stating, ‘Where an investment firm’s business unit activities are significantly extended, the investment firm should ensure that the compliance function is similarly extended as necessary in view of changes to the firm’s compliance risk. Senior management should monitor regularly whether the number of staff is still adequate for the fulfilment of the duties of the compliance function’ (at [44]). 13.22 The appointment of a compliance officer is also an integral requirement of the effectiveness component of SYSC 6.1.3 R. SYSC 6.1.4(2)R requires that ‘A compliance officer must be appointed and must be responsible for the compliance function and for any reporting as to compliance required by SYSC 4.3.2 R’. Article 22(3)(b) of MiFID Delegated Regulation gives a degree of protection to the appointed compliance officer by providing that the compliance officer is to be appointed by and may only be replaced by a firm’s management body. Chapter 14 in this book considers the liability that may arise for compliance officers along with their duties if approved to perform the FCA compliance oversight senior management function. At this juncture it is merely useful to highlight two Senior Manager Conduct rules applying to compliance officers holding a senior management function, which impact the question of effectiveness of the compliance function – namely at SC1 of the Senior Manager Conduct rules: ‘You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively’, and at SC2: ‘You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system.’ 13.23 The ESMA Compliance Function guidance considers a number of factors relevant to the effectiveness of the appointed Compliance Officer, which in the main address that person’s capability and experience both generally and in regard to the business undertaken by their firm, including: ‘The compliance officer should have sufficiently broad knowledge and experience and a sufficiently high level of expertise so as to be able to assume responsibility for the compliance function as a whole and ensure that it is effective …’ (at [52]) ‘The compliance officer should demonstrate sufficient professional experience as is necessary to be able to assess the compliance risks and conflicts of interest inherent in the investment firm’s business activities.

26

ESMA Guidelines on certain aspects of the MiFID II compliance function requirements, Guideline 5 (5 June 2020).

390

Compliance procedures and systems  13.26 The required professional experience may have, amongst others, been acquired in operational positions, in other control functions or in regulatory functions.’ (at [53]) ‘The compliance officer should have specific knowledge of the different business activities provided by the investment firm.’ (at [54])

Operational independence 13.24 The requirement at SYSC 6.1.3R for firms to establish and maintain a permanent and effective compliance function which operates independently can raise a number of operational sensitivities for investment firms. Although larger investment firms will have the luxury of significant resource allowing them to identify compliance resources separate from their operational functions, the criteria for compliance independence can undoubtedly present challenges for many firms. SYSC 6.1.4(3)R provides that to ensure a compliance function discharges its responsibilities properly and independently, ‘ the relevant persons involved in the compliance function must not be involved in the performance of services or activities they monitor’.27 ESMA guidance addressing this aspect of independence stresses the importance of the separation of compliance activity from the activity of other business units28 (but see 13.26–13.27 below) and the responsibility is placed on the firm to ensure that the compliance function can operate independently, including that: ‘Firms should ensure that the compliance function holds a position in their organisational structure that ensures that the compliance officer and other compliance staff act independently when performing their tasks’ [at 59] and a de facto segregation of duties between the compliance function and other functions, stating ‘… The tasks performed by the compliance function should be carried out independently from senior management and other units of the investment firm. In particular, the investment firm’s organisation should ensure that other business units may not issue instructions or otherwise influence compliance staff and their activities’ (at [60]). 13.25 The concept of independence also takes into account remuneration with SYSC 6.1.4(4)R providing ‘the method of determining the remuneration of the relevant persons involved in the compliance function must not compromise their objectivity and must not be likely to do so.’29 This latter requirement suggests that a firm may have difficulties where its compliance staff remuneration, such as performance related pay, is linked to the financial performance of a business unit or division they monitor or advise. 13.26 However, some flexibility for the operational independence requirement may be available, particularly for smaller firms. Article 22(4) of MiFID Delegated Regulation (with SYSC 6.1.5 operating guidance) allows firms to exit or ‘opt out’ from SYSC 6.1.4(3) or SYSC 6.1.4(4) if they can show that: ‘In view of the nature, scale and complexity of its business, and the nature and range of financial services and activities, the requirements under those rules are not proportionate and that its compliance function continues

27 28 29

SYSC 6.1.4 (3)R is mirrored in Article 22(3)(d) MiFID Delegated Regulation. ESMA Compliance guidelines (note 26), Guideline 8. Article 22(3)(e) MiFID Delegated Regulation.

391

13.26  Compliance procedures and systems to be effective.’ If available, and proportionate, this limited exit, however, only partly assists firms, which still have to meet the base requirements for independence, and thus firms should always consider whether compliance staff with dual roles have sufficient independence and the ability to operate effectively. ESMA’s guidelines30 provide some assistance into how firms can formulate whether they can take advantage of the SYSC 6.1.5R proportionality opt out, with many aimed at smaller firms, such as: ‘A firm may fall, for example, under the proportionality exemption if the performance of the necessary compliance tasks does not require a full-time position due to the nature, scale and complexity of the firm’s business, and the nature and range of the investment services, activities and ancillary services offered.’ (at [65]). ‘While a compliance officer must always be appointed, it may be disproportionate for a smaller investment firm with a very narrow field of activities to appoint a separate compliance officer (i.e. one that does not perform any other function) …’. (at [66]) 13.27 The ESMA guidance proceeds to offer views on the extent to which a compliance function may be combined with other ‘internal control functions’, although the ESMA view is that as a general rule it should not be combined with internal audit,31 In general terms, however, ESMA does not rule out combing functions provided that the reason for doing so are documented so that a regulatory agency may assess the appropriates (at [69]). ESMA general guideline 10 states: ‘… The combination of the compliance function with other control functions may be acceptable if this does not compromise the effectiveness and independence of the compliance function …’ (at [67]) 13.28 Additional complexity arises from the question as to whether the compliance function should have either representation on or a direct reporting line to the firm’s governing body. The general organisational requirement, set out in Article 21 of MiFID Delegated Regulation and at SYSC 4.1.4R, in many ways shapes the basic structural obligations that underpin a firm’s compliance arrangements, and how the compliance function will interact and communicate with the firm’s senior management and other parts of the organisation. Although Article 21 is addressed towards the general organisation of a firm, many of its requirements also impact on how the compliance function should operate effectively; these areas include requirements broken down into areas covering procedures, responsibilities, internal control mechanisms, competence, effective internal reporting and communication and record keeping. Furthermore, Article 21 as set out at SYSC 4.1.4(1)R requires that a firm ‘… establish, implement and maintain decision-making procedures’32 and an organisational structure which clearly and in a documented manner specifies reporting lines and allocates functions and responsibilities.33 This still leaves open the question of the most appropriate reporting line for compliance. Article 22(3)(a) and SYSC 6.1.4(1)R do refer to the necessity of the compliance

30 31 32 33

ESMA Compliance guidelines (note 26), Guideline 9. ESMA Compliance guidelines (note 26), Guideline 10 at [69]. Article 21(1)(a) MiFID Delegated Regulation. Article 21(1)(a) MiFID Delegated Regulation.

392

Compliance procedures and systems  13.30 function’s ‘authority’, but without reference to reporting lines the solution is best left to be determined by following the proportionality provisions within SYSC 4.1.4R, that is, by ‘taking into account the nature, scale and complexity of the business of the firm, and the nature and range of the financial services and activities undertaken in the course of that business …’.

Monitoring 13.29 The monitoring component of the compliance functions responsibilities within Article 22(2) of MiFID Delegated Regulation is required to be performed on a ‘permanent’ and ‘regular basis’ and for the purpose of assessing ‘… the adequacy and effectiveness of the [firms]’ … measures, policies and procedures’ (see 13.13 above), ‘and the actions taken to address any deficiencies in the firms compliance with its obligations …’. This chapter earlier examined in the context of more general governance and systems and controls the obligation placed on firms to keep their internal control arrangements under review (see, for instance, 13.13 above) and thus sensibly the Article 22(2) compliance monitoring component may be viewed as one part of an overall duty for a firm to keep its controls under review, albeit with the added benefit of independence. The ESMA compliance guidance relating to monitoring refers to the need for the compliance function to establish a monitoring programme (at [19]) and within the aim of that programme being ‘… to evaluate whether the investment firm’s business is conducted in compliance with its obligations under MiFID II …’ and ‘whether its internal guidelines, organisation and control measures remain effective and appropriate …’ (at [19]). 13.30 Before moving on from the examination of the compliance function monitoring component, some consideration can be given to the types of special market abuse relevant monitoring activity that are often conducted by a compliance function. At Chapter 10 some analysis was provided of the suspicious transaction reporting requirement under Article 16(2) of MAR (and with FCA guidance at SUP 15.10R.) The obligation under Article 16(2) for firms to report where ‘there are reasonable grounds for suspicion’ necessitates firms to establish formal methods for detecting reasonable suspicions. In the FCA’s Market Watch newsletter No 50 in April 2016, the FCA gave feedback about its thematic review of firms’ market abuse surveillance and comments on the success of surveillance operating within a second line or control function, commenting that, ‘Traditionally, we have seen firms positioning their surveillance functions within the second line of defence. Some firms then provide very detailed management information to the first line of defence management in order to stimulate debate and challenge. We have seen many effective examples of this, especially where the first line can add colour, context and further background detail (such as why certain clients or traders may be alerting more than others). Our experience has demonstrated, however, the importance of having a well-resourced and independent second-line surveillance function in order to provide genuine challenge to the business.’34

34

FCA Market Watch No 50 (April 2016), https://www.fca.org.uk/publication/newsletters/ market-watch-50.pdf.

393

13.31  Compliance procedures and systems

Advice, assistance and reporting 13.31 The provision of advice and assistance to the firm’s directors, managers and employees ‘to comply with the firm’s obligations under the regulatory system’ forms another key component of the compliance function responsibilities provided for under Article 22(2(b) of MiFID Delegated Regulation. ESMA guidance35 provides a range of comments on what constitutes advice and assistance, initially outlining at paragraph 33 of the guidance that the investment firm carries the responsibility to ensure its compliance function ‘can fulfil is advisory and assistance responsibilities’ linking this to the firm providing compliance staff with training and allowing ‘participation on the establishment of policies and procedures’. In addition, ESMA guidance interestingly links compliance advice to the provision of staff training and routine assistance to staff (at [35]). The guidance emphasises the importance of the compliance function’s involvement in the development of new business; arguably, it is submitted, because potential regulatory breaches can be avoided when the compliance function can advise the business on its regulatory obligations at the earliest opportunity. For instance, the guidance provides ‘In this context, the compliance function should be enabled, for example, to provide compliance expertise and advice to business units about all strategic decisions or new business models, or about the launch of a new advertising strategy in the area of investment services and activities. If the compliance function’s advice is not followed, the compliance function should document this accordingly and present it in its compliance reports (possibly as ad-hoc reports, where necessary)’ (at [40]). 13.32 It is important that there is proper and efficient engagement between a firm’s senior management and the compliance function. Proper communication of the efficiency of the firm’s regulatory procedures in meeting the risk presented by the business as well as the efficacy of steps taken to deal with any identified risks helps to ensure senior management remains appropriately engaged with the firm’s regulatory responsibility. This is particularly important given that MIFID II makes clear that senior management are responsible for ensuring compliance. With this in mind, it seems logical that the compliance function is required to report to the firm’s governing body on the results of the function’s work – as per Article 22(2)(c) ‘to report to the management body, on at least an annual basis, on the implementation and effectiveness of the overall control environment for investment services and activities, on the risks that have been identified and on the complaints-handling reporting as well as remedies undertaken or to be undertaken.’

AUTHORISED FIRMS’ OBLIGATION TO MAINTAIN RECORDS 13.33 The regulatory system requires authorised firms to maintain records relating to a wide variety of their business activity and conduct. In addition to the generic obligation presented by FCA Principle for Business 3 to ‘organise and control its affairs responsibly and effectively’, general record-

35

N26 ESMA Compliance guidance, Guideline 4.

394

Compliance procedures and systems  13.37 keeping obligations are also required under Article 19(6) of MiFID II and as further specified in Article 72 and Annex 1 of MiFID Delegated Regulation. These MiFID-based record-keeping obligations are also set out in the FCA’s Conduct of Business Sourcebook (COBS) at COBS 11.5A The thrust of the MiFID II record-keeping obligations is that an authorised person must maintain records of the spectrum of its services, activities and transactions such as to enable the FCA to carry out its supervisory work. More particularly, under Article 19(7) of MiFID II, a firm’s records are to be kept of telephone conversations and electronic communications relating to the execution or transmission of a customer’s order and of its own account dealing. Records relating to order handling, which may be of relevance and assistance to demonstrate compliance with MAR, are required by Articles 74 and 75 of MiFID Delegated Regulation which specifically address the need for firms to maintain records relating to clients’ orders and decisions to deal as well as transactions and processed orders. (The additional provisions relating to record keeping of employee personal dealing are addressed in 13.43–13.47 below.) 13.34 As was evident from the analysis of the market abuse behaviours in Chapter 4, the exploitation of information is also a core component to market abuse and misconduct. As is explored in Chapters 10, 11 and 12, the FCA’s information gathering, investigation and enforcement activity is reliant on timely access to accurate information regarding market conduct, necessitating authorised persons to keep timely, accurate and accessible records of the trading activities undertaken in their businesses. Moreover, given how sensitive information can be subject to exploitation, appropriate information controls are a necessary ingredient for the prevention of market abuse.

Transaction records and electronic communications 13.35 Article 16(7) of MiFID II and Article 76 of MiFID Delegated Regulation also require MiFID investment firms to record telephone conversations or keep a record of electronic communications, such as email or text messages relating to activities regarding the receipt, transmission and execution of both client and authorised persons’ orders. Article 16(7) of MiFID II, third indent provides: ‘For those purposes, an investment firm shall take all reasonable steps to record relevant telephone conversations and electronic communications, made with, sent from or received by equipment provided by the investment firm to an employee or contractor or the use of which by an employee or contractor has been accepted or permitted by the investment firm.’ 13.36 To support firms’ compliance with the MiFID II electronic communications record-keeping obligations, Article 76 of MiFID Delegated Regulation requires firms to develop and adopt a written policy about telephone and electronic communications; although it recognises that the policy should be appropriate to the firm in the context of the size, type and complexity of its business. In addition, Article 76(2) stipulates that the electronic communications policy must be overseen and controlled by the firm’s management body. 13.37 Needless to say the proliferation of privately-owned electronic equipment, such as mobile telephones and smart phones, presents something of a challenge to record-keeping avoidance by employees and indeed there are instances of market abuse, such as in the matter of Winterflood Securities 395

13.37  Compliance procedures and systems v Financial Services Authority,36 where the Financial Services Authority (now the FCA) had concluded that communciations between Winterflood and its client ‘were undertaken on mobile telephones in order to avoid those conversations being taped’.37 Although the FCA’s rules, which are not directly binding on employees (save where they may be FCA Approved Persons), Article 16(7) of MiFID II requires that authorised persons (firms) address the risk of their non-recording by requiring them to ‘take all reasonable steps to prevent an employee or contractor from making, sending or receiving relevant telephone conversations and electronic communications on privately-owned equipment which the investment firm is unable to record or copy.’

COMPLIANCE AND CONFLICTS MANAGEMENT, AND INFORMATION BARRIERS 13.38 Chapter 8 examined the law relating to conflicts of interest and considered some of the regulatory provisions regarding conflicts management, information barriers and Chinese Walls. In this section further consideration is given to the use of Chinese Walls as part of a firm’s overall compliance arrangements. Information about client orders or corporate transactions which have not been disclosed to the market can give rise to obligations to secure the information in order to ensure it is not improperly disclosed together with measures to manage or indeed eradicate conflicts of interest in the information between clients and the authorised person, clients and employees, employees and the authorised person and between clients. Regulation addressing information control is presented in a cascade framework being derived from Article 16(3) and 23 of MiFID II along with the FCA power to create control of information rules at section 137P of the FSMA. Article 16(3) of MiFID II provides that ‘An investment firm shall maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps designed to prevent conflicts of interest as defined in Article 23 from adversely affecting the interests of its clients.’ And Article 23(1) provides ‘Member States shall require investment firms to take all appropriate steps to identify and to prevent or manage conflicts of interest between themselves, including their managers, employees and tied agents, or any person directly or indirectly linked to them by control and their clients or between one client and another that arise in the course of providing any investment and ancillary services, or combinations thereof, including those caused by the receipt of inducements from third parties or by the investment firm’s own remuneration and other incentive structures.’ Firms are required by Article 34(1) of MiFID Delegated Regulation to have in a place a written conflicts policy appropriate to the size of the firm and its business complexity, which must identify ‘the circumstances which constitute or may give rise to a conflict’ and set out the conflict procedures that will be followed to prevent or manage conflicts (see Article 34(2)(b)).

36 37

Winterfloods Securities Ltd, Stephen Sotiriou and Jason Robins v Financial Services Authority [2010] EWCA Civ 423 ((2009) FIN 2008/0012, FIN 2008/0013, FIN 2008/0014). FSA Final Notice Winterflood Securities Ltd (22 April 2010) at [81].

396

Compliance procedures and systems  13.40 Of course, not all conflicts of interest are relevant to potential market abuse, but the potential flow of information and disclosure of price-sensitive information held by an investment firm are of concern. Of note there are specific conflict control requirements set out at Article 34(3) of MiFID Delegated Regulation, both of which are aimed at stemming the potential unlawful sharing or disclosure of information, through information control processes. For instance, Article 34(3)(a) provides that the required procedures are to include ‘(a) effective procedures to prevent or control the exchange of information between relevant persons engaged in activities involving a risk of a conflict of interest where the exchange of that information may harm the interests of one or more clients’, with Article 34(3)(b) addressing physical separation of people in a firm, stating ‘the separate supervision of relevant persons whose principal functions involve carrying out activities on behalf of, or providing services to, clients whose interests may conflict, or who otherwise represent different interests that may conflict, including those of the firm’. Indeed, as will be illustrated below, when considering compliance controls for personal account dealing, elements of the personal dealing control requirements are aimed at preventing a flow of information and potential disclosure, with Article 29(4) of MiFID Delegated Regulation stating ‘… investment firms shall ensure that relevant persons do not disclose, other than in the normal course of his employment or contract for services, any information or opinion to any other person where the relevant person knows, or reasonably ought to know, that as a result of that disclosure that other person will or would be likely to take either of the following steps: (a) to enter into a transaction in financial instruments which, if it were a personal transaction of the relevant person, would be covered by paragraphs 2 or 3 or Article 37(2)(a) or (b) or Article 67(3); (b) to advise or procure another person to enter into such a transaction.’ 13.39 The FCA uses its Principles for Business and Senior Management Systems and Controls sourcebook to set out fundamental and generic information control obligations, with more conduct specific obligations set out in discrete sourcebooks of rules such as COBS. The FCA High Principles for Business address information control and conflict management in a number of ways including at Principle for Business 2, ‘A firm must conduct its business with due skill, care and diligence’ and Principle for Business 5, ‘A firm must observe proper standards of market conduct’, require authorised persons to address how they control and manage information. Additionally, Principle for Business 8 specifically targets the need for conflicts management providing that authorised persons ‘must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client’. 13.40 Section 137P(2) of the FSMA helps provide an insight into the nature of information control and conflict procedures relevant to market abuse, describing the circumstances in which control of information rules may be used in the following terms: ‘Control of information rules may– (a) (b)

require the withholding of information which A would otherwise have to disclose to a person (“B”) for or with whom A does business in the course of carrying on any regulated or other activity; specify circumstances in which A may withhold information which he would otherwise have to disclose to B; 397

13.40  Compliance procedures and systems (c) (d)

require A not to use for the benefit of B information– (i) which is held by A, and (ii) which A would otherwise be required to use for the benefit of B; specify circumstances in which A may decide not to use for the benefit of B information A holds which A would otherwise have to use in that way.’

The FCA’s rules glossary defines a ‘Chinese Wall’ as ‘an arrangement that requires information held by a person in the course of carrying on one part of its business to be withheld from, or not to be used for, persons with or for whom it acts in the course of carrying on another part of its business’. The FCA’s core information barrier provision is set out in SYSC 10.2.2R(1) which recognises that information held behind the so-called ‘Chinese Wall’ is excluded from having to be otherwise disclosed (which ordinarily might be the case where a conflict situation arises). The behavioural effect of the operation of the information barrier in the context of market abuse is described by the FCA in SYSC 10.2.5G and may be such that knowledge about the information held behind the barrier will not be attributed to persons ‘on the other side of the wall’ unless they have been wall crossed, that is the person has been given the information. It is essential for firms to consider their Chinese Wall obligations and wall crossing arrangements in the context of their internal systems of control. In this regard taking into account the provision at SYSC 6.1.1R the arrangements, which allow for the method of operation as well as the written processes should be ‘sufficient to ensure compliance of the firm including its managers, employees and appointed representatives (or where applicable, tied agents) with its obligations under the regulatory system and for countering the risk that the firm might be used to further financial crime’. 13.41 In the FSA Final Notice to Andrew Osborne,38 the FSA states: ‘Wall crossing is a process whereby a company can legitimately provide inside information to a third party. A company may wall cross a variety of third parties ranging from large institutional shareholders to small shareholders or completely unrelated parties.’ Compliance with the arrangements is particularly significant for concerns about market abuse behaviour as ‘conformity with control of information rules’ is a defence to the offences of misleading statement (Financial Services Act 2012, s 89(3)(b)) or misleading impressions (Financial Services Act 2012, section 91(9)(b)(ii)) and misleading statements in relation to benchmarks (Financial Services Act 2012, section 91(3)). The FCA’s enforcement actions against David Einhorn,39 Greenlight Capital40 and Andrew Osborne41 illustrate the regulatory significance of failing to have regard to Chinese Wall or information barrier arrangements. All three of the cases were concerned with discussions regarding a new share issue by Punch Taverns plc in June 2009. Mr Osborne worked at Merrill Lynch International, leading its broking team acting for Punch Taverns plc. Greenlight Inc, a US fund manager, was an existing Punch Tavern shareholder. Mr Einhorn was Greenlight’s President and owner. It is common for existing investors to be approached about new share offerings and subject to confidentiality undertakings and restriction over trading

38 39 40 41

FSA Final Notice Andrew Jon Osborne 15 February 2012 at [3.4]. FSA Final Notice David Einhorn 15 February 2012. FSA Final Notice Greenlight Capital Inc 15 February 2012. FSA Final Notice Andrew Jon Osborne 15 February 2012.

398

Compliance procedures and systems  13.44 any existing holdings, be given price sensitive information for the purpose of gauging their appetite for investing. In such circumstances the investors are ‘wall crossed’ and any trading in the investment prior to the information being formally released to the market will be abusive. The FSA found that Mr Osborne disclosed inside information regarding the Punch Taverns new share issue to Greenlight and Mr Einhorn despite a refusal to be wall crossed, who having been given inside information (which they disputed) traded in Punch Tavern shares. In respect of Mr Osborne’s control of the wall crossing, the FSA Final Notice states, ‘bearing in mind the fact that Greenlight had refused to be wall crossed and that, as a result, significant legal and regulatory risk arose from a conversation proceeding between Punch management and Greenlight, Mr Osborne should have taken great care regarding the information he disclosed, and taken adequate steps to ensure that he complied with regulatory requirements’.42 13.42 For the ‘wall crossing’ process to work, the third party will need to consent to be given inside information and as a result will be prevented from trading until the inside information is announced to the market. In the FSA’s Final Notice to David Einhorn, the FSA stated, ‘Once a third party agrees to be wall crossed, it can be provided with inside information and it is then restricted from trading. The party is only able to trade in the company’s shares again once the information it has been given is made public …’.43

PERSONAL ACCOUNT DEALING RULES 13.43 One consequence of information being held behind an information barrier is that it may present opportunities for an authorised person’s employees to exploit it by trading on it for their personal account. Furthermore, information about pending client orders in investments significant enough to cause a share price movement, can be exploited by staff placing personal orders in that same security ahead of the client orders being executed: a practice known as ‘trading ahead’ or ‘pre-positioning’ – something which is raised at recital 110 of MiFID Delegated Regulation, in relation to which the FCA uses rules in COBS 11.7A relating to the management of client dealing to address information control in the context of staff dealing. 13.44 Addressing specifically the need to manage risk related to personal account trading, Article 16(2) of MiFID II requires that ‘An investment firm shall establish adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and tied agents with its obligations under this Directive as well as appropriate rules governing personal transactions by such persons’ and specifically concerned with the risk of trading ahead, Article 67(3) of MiFID Delegated Regulation (and FCA rules at COBS 11.3.5A referring to ‘use of information relating to pending clients orders’) requires that, ‘An investment firm must not misuse information relating to pending client orders, and shall take all reasonable steps to prevent the misuse of such information by any of its relevant persons.’

42 43

FSA Final Notice Andrew Jon Osborne 15 February 2012 at [2.7(iii)]. FSA Final Notice David Einhorn 15 February 2012 at [3.11].

399

13.44  Compliance procedures and systems Indeed, the provision at COBS 11.3.6R links the risk of trading ahead to potential market abuse: ‘Without prejudice to the Market Abuse Regulation, for the purposes of the provision on the misuse of information (see COBS 11.3.5AEU), any use by a firm of information relating to a pending client order in order to deal on own account in the financial instruments to which the client order relates, or in related financial instruments, should be considered a misuse of that information.’ Additionally, provisions at Article 37(1) of MiFID Delegated Regulation operate to prevent research analysts from trading ahead of the publication of their research. In certain circumstances, analyst reports upon publication have the capability of affecting the price of a company’s securities, presenting the opportunity for analysts to exploit knowledge of the information with an unpublished report. Article 37(2)(a) recognises that the trading ahead limitation should only apply where the information in an analyst’s report cannot be ascertained from information that is publicly available, but nonetheless Article 37(2)(b) prohibits analysts, from carrying out personal transactions contrary to the analyst’s recommendations. 13.45 Article 16(2) of MiFID II, Articles 28 and 29 of MiFID Delegated Regulation and the FCA’s core personal account dealing rules provided at COBS 11.7A, set out a control framework of prevention, notification, record keeping and awareness and apply to a ‘relevant person’ (defined as including a director, partner, employee (including a contractor)) and relate to ‘personal transaction’, which is defined at Article 28(1) of MiFID Delegated Regulation as including: ‘a trade in a financial instrument effected by or on behalf of a relevant person, where at least one of the following criteria are met: (a) the relevant person is acting outside the scope of the activities he carries out in his professional capacity; (b) the trade is carried out for the account of any of the following persons: (i) the relevant person; (ii) any person with whom he has a family relationship, or with whom he has close links; (iii) a person in respect of whom the relevant person has a direct or indirect material interest in the outcome of the trade, other than obtaining a fee or commission for the execution of the trade.’ 13.46 It is essential for firms to consider their staff personal account dealing obligations in the context of their internal systems of control. The obligation to establish a framework of control for personal account dealing provides authorised firms with the flexibility to develop arrangements relevant to the personal account dealing and information control risks. It is submitted that the essence of the personal account dealing control framework, as set out in Article 16(1) of MiFID II and Articles 28 and 29 of MiFID Delegated Regulation, are designed to prevent personal motivated transactions that exploit circumstances where ‘relevant persons’ have a conflict of interest, access to inside information or where they have ‘other confidential information relating to clients transactions’. This basic proposition, however, is clarified by Article 29(2) of MiFID Delegated Regulation: ‘Investment firms shall ensure that relevant persons do not enter into a personal transaction which meets at least one of the following criteria: (a) that person is prohibited from entering into it under Regulation (EU) No 596/2014; (b) it involves the misuse or improper disclosure of that confidential information; (c) it conflicts or is likely to conflict with an obligation of the investment firm under Directive 2014/65/EU.’ 400

Compliance procedures and systems  13.48 13.47 An indication is given at Article 29(5) of MiFID Delegated Regulation of the arrangements that are expected to be in place to meet Article 29(1), including measures to ensure that relevant persons are aware of the arrangements including the trading restrictions, prompt notification of any ‘personal transactions’ and a requirement for the authorised person to keep a record of personal transactions. Article 29(5) provides: ‘The arrangements required under paragraph 1 shall be designed to ensure that: (a) each relevant person covered by paragraphs 1, 2, 3 and 4 is aware of the restrictions on personal transactions, and of the measures established by the investment firm in connection with personal transactions and disclosure, in accordance with paragraphs 1, 2,3 and 4. (b) the firm is informed promptly of any personal transaction entered into by a relevant person, either by notification of that transaction or by other procedures enabling the firm to identify such transactions; (c) a record is kept of the personal transaction notified to the firm or identified by it, including any authorisation or prohibition in connection with such a transaction.’ When considered as part of a firm’s compliance arrangements, the personal account dealing rules will importantly operate as part of a firm’s conflicts and Chinese Wall arrangements allowing a firm to safeguard any staff trading in shares that are currently restricted from trading due to the firm being in possession of inside information, which is confirmed at Article 29(4) stating ‘… investment firms shall ensure that relevant persons do not disclose, other than in the normal course of his employment or contract for services, any information or opinion to any other person where the relevant person knows, or reasonably ought to know, that as a result of that disclosure that other person will or would be likely to take either of the following steps: (a) to enter into a transaction in financial instruments which, if it were a personal transaction of the relevant person, would be covered by paragraphs 2 or 3 or Article 37(2)(a) or (b) or Article 67(3); (b) to advise or procure another person to enter into such a transaction.’ Moreover, such a safeguard is required at Article 29(5)(b) which provides that the firm ‘(a) is informed promptly of any personal transaction entered into by a relevant person, either by notification of that transaction or by other procedures enabling the firm to identify such transactions …’. 13.48 In conclusion the rules considered in this chapter relating to the compliance function and internal compliance arrangements form just a part of the strict governance and systems and controls rules applicable to investment firms. Nonetheless a number of the enforcement cases considered in this chapter and elsewhere in this book serve to illustrate how the outcome of a breakdown in a firm’s internal arrangements can lead to non-compliance with discrete regulatory obligations including exposing firms and employees to market abuse and misconduct.

401

402

Chapter 14

Personal liability of senior managers and compliance officers

PERSONAL RESPONSIBILITY 14.1 The enormous financial penalties that have been imposed particularly in the USA and UK on financial institutions in recent years, primarily for compliance related failures, have been welcomed by many. In the main, however, these have been directly or indirectly the result of negotiated settlements with regulatory authorities and have not involved the courts. Having said that, because of the perception in the USA that bodies such as the Securities and Exchange Commission (SEC) had become too soft, even to some degree captured by those whose conduct they oversee, there has been more emphasis on the criminal law. The problem with swingeing financial penalties against institutions, regardless of how they are imposed, is that they do not directly focus responsibility on those primarily responsible for the misconduct. Indeed, it is arguable that the penalties weaken the institution thereby harming investors, creditors, employees and many other stakeholders. This will no doubt have implications for those in senior management, certainly in terms of reputation and possibly financially through the loss of incentives and even employment. However, in practice these penalties are a blunt weapon and do not generally bring justice to those at fault. It is the case that regulators are not primarily enforcement agencies and they rightly have a responsibility to measure their actions alongside the other and often competing concerns that they have.1 Furthermore, there is a genuine responsibility to ensure that the institution addresses the problems that have been exposed and in practice monitoring arrangements and the like have possibly a more constructive role to play.2 14.2 Nonetheless, it is arguable that if integrity is to be promoted and better assured then there has to be a good possibility of those who engage in blameworthy conduct being effectively and efficiently brought to book.3 Public

1 2 3

See, for example, section 3B and in particular section 3B(b) of the Financial Services and Markets Act 2000 (FSMA), as amended by the Financial Services Act 2012. See discussion at 6.3. See 6.91 in regard to deferred prosecution agreements. See, for example, J. Hurley ‘Bank chiefs warned over laundering: you could be personally liable – says City regulator’, The Times, 17 July 2021 referring to a letter sent out by D Geale, Director of Retail Banking, FCA. Compliance personnel are particularly vulnerable

403

14.2  Personal liability of senior managers and compliance officers concern has traditionally, as we have seen,4 justified the intervention of the criminal law. On the other hand, for a variety of good reasons responsibility in the criminal law generally requires proof of culpability. We have seen that almost all fraud-related offences and those relating to the abuse of inside information require in effect proof that the individual concerned was dishonest. Given the high standard of proof that is required in the criminal law it is often, given the circumstances in which the suspected offence has taken place, too difficult to establish this level of culpability.5 While the financial crisis, following the so-called sub-prime scandal in the USA was caused by many factors, there is a widespread concern that with very few exceptions, the criminal law was unable to identify and bring anyone of significance to account. In part, it is argued, that this is because the requirement to show personal dishonesty in regard to often complicated and possibly structured and, thus, fragmented activity simply defeated the investigators – assuming that there was in fact the will to use the criminal law. We have already referred to the enactment of section 36 of the Financial Services (Banking Reform) Act 2013 which imposes criminal liability on senior officers or banks and building societies for participation in decisions that cause their institution to collapse. To be liable it must be shown that their conduct, or failure to act, fell far below the standard that could reasonably be expected of persons in their position. It is widely accepted that this standard is essentially one of recklessness. However, as we have pointed out6 the same words are used in other places in the criminal law to impose liability for gross negligence, assuming that there is a difference – which is still a matter of debate. While there has been considerable concern expressed by many in the financial sector and their advisers, as to the criminalisation of recklessness given the fact that the consequences need to be catastrophic there is little likelihood of many cases arising.

THE ROLE OF THE LAW 14.3 In this chapter we will examine the circumstances where individuals may find themselves personally responsible under the criminal law, various regulatory systems and in the civil law. Of course, we have already considered many of the substantive offences that are relevant to a greater or lesser degree in controlling misconduct in the financial markets and we will not rehearse them again here.7 Instead, we will focus rather more on the situation of an individual who becomes involved in a criminal investigation and or prosecution. We will also consider sentencing policy in regard to insider dealing and related offences and refer back to our discussion of confiscation. It is also pertinent to remember that in certain circumstances the criminal courts may order the

4

5 6 7

to regulatory and employment related liability. See, for example, C Flood, ‘Compliance officers feel they have a target on their backs’, The Financial Times, 22 June 2015, referring to the concern expressed by SEC Commissioner, Daniel Gallagher, about the unclear threat to compliance personnel in the USA. See, for example, 3.2 and B Rider, ‘Insider Trading – A Question of Confidence’ (1980) 77 Law Society Gazette 113, B Rider and HL Ffrench, ‘Should Insider Trading be regulated – some initial considerations’ (1977) 95 South African Law Journal 79 and B Rider, ‘Insider Trading – A crime of our times’ (1989) 42 Current Legal Problems 63. See our discussion at 6.29 in regard to establishing dishonesty. See 6.76 above. See Chapters 5, 6 and 7.

404

Personal liability of senior managers and compliance officers  14.4 payment of compensation.8 Criminal proceedings may well impact on action in other areas of the law. For example, a criminal conviction may in limited circumstances be used as evidence of certain facts in a subsequent civil action.9 A conviction will certainly have implications from the perspective of the regulators in the UK and overseas. 14.4 While not all financial services business will be incorporated the majority will be. Consequently, it is important to remember that the directors of such companies have a number of responsibilities to their companies. We have already examined the more significant duties that directors owe to their companies in the context of conflicts of interest and insider abuse.10 We emphasised, however, that these duties are owed to the company and not shareholders collectively, let alone individually.11 It is only in exceptional circumstances that directors as directors will owe duties, whether fiduciary or of care, to shareholders and possibly other stakeholders.12 We have also seen that generally speaking directors of one company owe no duties to other companies whether they are holding, subsidiary or sister companies.13 Having said that, it is probable that directors would be accountable to their company for profiting by the use of inside information that comes to them by virtue of their position.14 It is also possible that directors may in exceptional circumstances also be liable for assisting others to profit through the use of inside information.15 It is also argued that directors have a duty to maintain the reputation of the company and protect it almost as an asset of the company.16 The problem is that directors are

8 9 10 11

12

13 14

15 16

Sections 130 to 134 of the Powers of Criminal Courts Act 2000. See Civil Evidence Act 1968, s 11 and see 6.114. See Chapters 2 and 9. See 2.13 et seq above. Note, however, directors may well incur personal liability alongside their company, see, for example, Lifestyle Equities v Ahmed [2021] EWCA Civ 675. See also B Rider, ‘Changes in Company Law’ (1978) 128 New Law Journal 1113 continued 1138 and B Rider, ‘The Conduct of Company Directors’ (1978) 128 New Law Journal 27. The most likely category of stakeholders is the creditors. Section 127(3) of the Companies Act 2006 reflects the common law obligation on directors to consider the interests of creditors as the company approaches insolvency: see Facia Footwear v Hinchcliffe [1998] 1 BCLC 218. The directors need only know the facts giving rise to the actual or potential insolvency, they do not have to subjectively appreciate that an insolvency is imminent, see Re HLC Environmental Products Ltd (in liq) [2013] EWHC 2876 (Ch). See 8.8 and note 35 and generally Chapter 2. See Chapters 2 and 9. This is the position in the US, see Brophy v Cities Services Co 31 Del Ch 241 (1949), In re Oracle Derivative Litigation, 867 A 2d 904 (Del. Ch 2004), Karz Corp v TH Canty & Co Inc 168 Conn 201 (1975) and the leading case of Diamond v Oreamuno 24 NY 2d 494 (1969). In Ferris v Polycast Technology Corp, 180 Conn 199 (1980), the Supreme Court of Connecticut stated: ‘inside trading by a corporate fiduciary may be a violation of the common law duty which he owes to his corporation. That principle is not at issue.’ See 2.24 et seq. Section 172 provides a director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole and in doing so have regard, amongst other matters) to (section 172(e)) the desirability of the company maintaining a reputation for high standards of business conduct.’ Of course, this falls far short of imposing an actionable obligation to protect the good name of the company. In the Diamond case (above, note 14) and see also at Chapter 2 note 43 the New York Court of Appeal in part justified its decision on the basis that the insiders had damaged the reputation of their company by abusing the inside information. This would reflect adversely on the company’s operations and its ability to secure additional financing. There remains debate in the US as to whether harm needs to be shown, or whether the abuse of loyalty is enough, as it appears to be in English law. See also Malik & Another v Bank of Commerce and Credit International [1997] IRLR 462 in regard to the reputation of a company vis à vis

405

14.4  Personal liability of senior managers and compliance officers not keen to sue themselves and in many cases they are well placed to frustrate inquiries and influence voting in general meetings. The law relating to the circumstances when a minority of shareholders can in effect sue on behalf of the company – deriving a right of action from the company, is complex and fairly beyond the scope of this work.17 Suffice it to say, that in cases of insider abuse, where there is manifestly self-dealing and certainly where there is dishonesty, it is likely that a minority could secure permission under the statutory provisions to maintain a derivative action18 Of course, as the action is effectively that of the company, recovery would go back to the company. We have also explored the extent to which others such as officers, employees and controllers might also step into a fiduciary relationship with the company and be similarly accountable.19 In the case of partnerships the position is rather different as each partner owes his colleagues a duty of good faith.20 Where the partners fail in a duty to customer or other third party other members of the partnership would be vicariously liable.21 The courts, depending upon the facts, might also be willing to imply particularly in relational contracts obligations of good faith and honesty.22

THE DUTY OF FIDELITY 14.5 First, however, we will look at the civil law. We have already discussed in some detail the liability that arises where there has been a breach of a fiduciary duty.23 The prerequisite for fiduciary liability is that there is a fiduciary relationship and we have seen that this may arise in a number of ways.24 Indeed, it may arise as a result in part, of the conduct that is in issue. While the courts have been loath to hold that the categories of relationship that give rise to at least some fiduciary duties are closed, it would be exceptional for a court today to find an entirely new situation. Having said that, we have seen that in rather special circumstances at least some judges have been prepared

17 18 19 20 21 22 23 24

its employees. There are examples, albeit perhaps not as many as there should be, of senior executives stepping down voluntarily or with ‘encouragement’ in circumstances where their continued involvement with the business is perceived as damaging its reputation. For example, the resignation of the head of Barclays after allegations of contacts with the bank’s former client Epstein which were considered to give rise to a ‘destabilising situation’ and a reputational crisis, notwithstanding the absence of any allegation or suggested wrongdoing on his part, The Guardian 2 November 2021, and B Martin, ‘Barclays king who lost his throne …’, The Times, 31 December 2021. See 2.10, and generally, J Birds et al, Boyle and Birds’ Company Law (11th edn) (Jordans 2019) and AJ Boyle, Minority Shareholders’ Remedies (Cambridge University Press 2002) (Cambridge Studies in Corporate Law). See 2.10 et seq and B Rider and TM Ashe (eds), The Fiduciary, the Insider and the Conflict (Sweet and Maxwell 1995), Ch 12, and B Rider, ‘Amiable Lunatics and the Rule in Foss v. Harbottle’ (1978) Cambridge Law Journal 270. See 2.10 above. See generally, B Rider, ‘Partnership Law and its impact on Domestic Companies’ (1979) CLJ 148. See Partnership Act 1890, s 10 and Dubai Aluminium Ltd v Salaam & Others [2003] 2 AC 366. See Eaton v Caulfield [2011] EWHC 173 in regard to the relationship of partners in limited liability partnerships incorporated under the Limited Liability Partnership Act 2000. See, for example, Bates v Post Office [2019] EWHC 606 and Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan v Ioannis Kent [2018] EWHC 333, See Chapter 8. See generally, Chapters 2 and 8.

406

Personal liability of senior managers and compliance officers  14.5 to find a fiduciary relationship between directors and shareholders.25 There is debate as to whether the duty of fidelity that employees owe to their employers has a fiduciary quality to it.26 As we have seen employees are not in a fiduciary relationship with their employer per se.27 However, a fiduciary relationship may arise by virtue of contractual provisions which require the employee to act generally or in certain respects solely in the employer’s interest.28 It would seem that in the case of most employees, unless there are highly unusual provisions in their contracts of engagement, they will be expected to eschew conflicts of interest and account for ‘secret profits’ and certainly bribes.29 An employee who takes advantage of inside information obtained in the course of his employment or for that matter in breach of it, would probably be so accountable.30 It is likely that an English court would consider that he is in the same position as a director of a company.31 It is also the case that the betrayal of trust could amount to gross misconduct and justify dismissal as would, of course, the commission of a crime.32 In many situations where the risk of abuse is better appreciated by employers then there are likely to be specific provisions in the contract of employment requiring compliance with relevant procedures. It is also the case that conduct that would attract the adverse attention of the regulators might well also justify dismissal. The extent to which an employer is able to bring an action for damages against an employee for misconduct amounting to breach of contract will depend upon the circumstances. Even where there are not relevant express terms in a contract, there will often be implied terms of fidelity and good conduct. It is also perhaps worth pointing out that employers also have significant and ever expanding duties to employees,

See 2.20 et seq above. Some judges have been prepared to stretch legal principles so as to deprive someone who has manifestly acted improperly of their gains, see, for example, Lord Templeman in Attorney General of Hong Kong v Reid [1990] 1 AC 324 and Denning J in Reading v The King [1948] 2 KB 268 and our discussion at 2.34 and 2.60 above. However, it is always important to distinguish the issue of liability, in other words whether there is a viable cause of action from the nature of the remedy. We have already noted that there has in certain areas of the law been a temptation for the judges to express the form of liability in a manner best suited to the award of an efficacious remedy. 26 See generally, A Stratford and A Ritchie, Fiduciary Duties, Directors and Employees (2nd edn) (Jordan Publishing 2015) and A Frazer, The employees’ Contractual Duty of Fidelity’ (2015) 131 Law Quarterly Review 53. 27 See University of Nottingham v Fishel [2000] ICR 1462 and Helmet Integrated Systems Ltd v Tunnard [2007] IRLR 126. Note, however, that the more senior the employee’s position, the more likely the courts will be prepared to find a relationship. Furthermore, it may be possible that on the exceptional facts of the case the employee acts as a de facto or shadow director; see 2.41 et seq above. 28 See generally Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244. 29 Reading v The King [1951] AC 507, Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339 and Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443. 30 The courts have found a fiduciary relationship in cases of fraud, AGIP (Africa) Ltd v Jackson [1990] Ch 260, per Millett J at 290 and Tesco Stores Ltd v Pook [2004] IRLR 618; and in the case of bribes, see Attorney General for Hong Kong v Reid above at note 25. 31 But see Lewison LJ in Customer Services plc v Ranson [2012] EWCA Civ 841 contrasting the position of directors and employees, and see Crowson Fabrics Ltd v Rider [2007] EWHC 2942 (Ch). 32 In Neary v Dean of Westminster [1999] IRLR 288 it was held that the ‘conduct amounting to gross misconduct justifying dismissal must so undermine the trust and confidence which is inherent in the particular contract of employment that the master should no longer be required to retain the servant in employment’. In the majority of cases involving misconduct by employees that have come before the authorities involving allegations of insider dealing, the relevant employee has been dismissed or resigned. 25

407

14.5  Personal liability of senior managers and compliance officers including not to damage the employment prospects of their staff by allowing the company to be run fraudulently.33 14.6 One issue that has arisen, is the extent to which an employee is under a duty to bring to the attention of his employer facts which would justify dismissal or other disciplinary action. The law is not entirely clear. However, it would seem the better view, that employees are under no obligation in English law to disclose mere breach in the provisions of their contracts.34 However, there is strong authority supporting the view that those who stand in a fiduciary relationship to their employer are obliged to disclose breaches of duty.35 Of course, as we have seen the very breach of certain duties can effectively place the person responsible into a fiduciary relationship.

CONTRACT AND TORT 14.7 In the English civil law unlike in the criminal law there is no general concept, outside the law of restitution, analogous to accessory liability.36 Given that in the civil law we are primarily concerned with compensation for harm that has been caused and is causally attributable to the acts or omissions of a specific individual, there is conceptually little scope for developing accessory liability. Of course, were there is participation in the infliction of recoverable loss on another, by more than one party there may be joint and several liability.37 For contractual liability in most cases it must be established that the parties are privy to the contract.38 It may be possible to find a collateral contract, express or implied, but this is not something that the courts are over-willing to do, unless it represents the clear intention of those involved.39 33 See Malik v Bank of Credit and Commerce International [1997] IRLR 462. 34 Bell v Lever Brothers Ltd [1932] AC 161 and Tesco Stores Ltd v Pook [2003] EWHC 823 (Ch). Of course, where there is a contractual provision requiring disclosure, the position will be different. It is also important to note the various statutory obligations to report suspicions within organisations or to the appropriate authority under, for example, section 330 of the Proceeds of Crime Act 2002. While the most recent CPS guidance makes it clear that a prosecution can be brought under this section as a standalone offence, it is debatable and probably academic to consider whether this imposes an obligation to self-report, albeit professional disciplinary bodies, such as the Law Society consider that there is. Of course, employees will be under a duty of confidentiality to their employer, but this obligation is subsidiary to their privilege to report suspected fraud and crime, see generally, Saab v Dangate Consulting Ltd [2019] EWHC 1558 (Comm). 35 Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, Governor of the Bank of Ireland v Jaffery [2012] EWHC 1377 (Ch), Crown Dilmun and Another v Sutton [2004] EWHC 52 (Ch) and Hanco ATM Systems Ltd v Cashbox ATM Systems Ltd [2007] EWHC 1599 (Ch) in which it was held that the duty extended to the misconduct of employees. 36 See 2.24 et seq above and at 14.12 et seq below. 37 See, for example, Lumley v Gye (1853) 2 Bl & Bl 216 and Bowen v Hall (1881) 6 QBD 333. However, note that in regard to the tort of inducing or procuring a breach of contract, the commentators and some judges do speak in terms of accessory liability as the procurer attracts an independent liability in tort for the breach of the contract. 38 Subject, of course, to the Contracts (Rights of Third Parties) Act 1999 which provides that a person who is not a party to a contract may enforce a contractual term if the contract expressly provides that he may. If the contract purports to confer a benefit on such a person he may enforce it provided on a proper construction of the contract it appears that the parties did not intend the benefit to be unenforceable. Note also the application of the general rule that there should also be ‘privity’ of consideration. There are, of course, other exceptions such as agency and trusts. 39 See, for example, the discussion in Evans (J) & Sons (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 2 All ER 930 between Lord Denning MR and Roskill and Geoffrey Lane LJJ.

408

Personal liability of senior managers and compliance officers  14.9 14.8 In the law of tort, the defendant is either a tortfeasor or he is not. Of course, the relevant tort may be sufficiently encompassing in the imposition of its duty to impose liability on those who foresaw the consequences of an action,40 or exceptionally a failure to act, and who participated in the wrongdoing.41 However, in such cases liability is as a participant not as an accessory in the tort. We have already considered the tort of conspiracy in the context of market manipulation42 and deceit.43 It is wide enough, however, to extend to a defendant who induces another person to divert a corporate opportunity in breach of his contract of employment and fiduciary relationship.44 14.9 Perhaps the closest the English law comes to in providing for liability as an accessory is in the tort of inducing or procuring a breach of contract by another person.45 There must actually be an actionable breach of contract and, contrary to early opinion,46 mere interference with performance not amounting to a breach is insufficient for liability. It would seem facilitating a breach might be sufficient,47 although as we have pointed out the courts have been reluctant

However, foreseeing the potential for harm is not in itself sufficient. See Banca Nazionale del Lavoro SPA v Playboy Club [2018] UKSC 43. 41 See generally, Customs and Excise Commissioners v Barclays Bank plc [2007] AC 181, and in particular, Caparo Industries plc v Dickman [1990] 2 AC 605 and Charles B Lawrence & Associates v Inter-commercial Bank Ltd (Trinidad and Tobago) [2021] UKPC 30, and discussion at 2.46 et seq, above. In regard to failures to act, see Stovin v Wise [1996] AC 923 and Lord Hoffmann at 943. 42 See 6.17 et seq above. The tort of conspiracy ‘involves an arrangement between two or more parties, whereby they … agree that at least one of them will use unlawful means against the claimant, and, although damage to the claimant need not be the predominant intention of any of the parties, the claimant must have suffered loss or damage as a result’: Revenue and Customs Commissioners v Total Network SL [2008] UKHL 19 per Lord Neuberger and see also Lonrho plc v Fayed [1992] 1 AC 448. The unlawful means utilised by the conspirators or one of them need not be independently actionable. In Pakistan International Airline Corpn v Times Travel (UK) Ltd [2021] UKSC, Lord Hodge, considered ‘morally reprehensible behaviour which in equity was judged to ender the enforcement pf a contract unconscionable’ was sufficient to establish liability for lawful act duress, without necessarily establishing bad faith, contra Lord Burrows. Therefore, it could be a crime such as insider dealing, which itself does not give rise to a cause of action. This is not, however, the position in regard to the tort of intentionally causing loss by unlawful means, see OBG Ltd v Allan [2008] 1 AC 1. 43 See 6.113 et seq above and see, in particular, Concept Oil Services Ltd v En-Gen Group LLP [2013] EWHC 1897 (Comm). While the Court of Appeal considered insider dealing ‘a species of fraud’ in R v McQuoid [2009] EWCA Crim 1301. it is debatable how far the mere abuse of inside information can properly be regarded as fraud in the conventional sense of the word. 44 See Aerostar Maintenance International v Wilson [2010] EWHC 2032. In this case Morgan J expressed concern that the principles applicable in the law of tort were different to and did not necessarily sit well with accessory liability in the law of restitution. 45 See OBG Ltd v Allan [2008] 1 AC 1. In this case the House of Lords recognised that the tort involved secondary liability – Lord Hoffmann said ‘No secondary liability without primary liability’, at 5. Indeed, the House of Lords questioned whether inducing a breach of contract is properly regarded as an independent tort but rather some form of accessory liability. While this has found a degree of support in the academy, it is difficult to conceive of effective third-party liability for a breach of contract of which the defendant is not a party, without an independent cause of action. See also A Simester, ‘Accessory Liability and common unlawful purpose’ (2017) 133 Law Quarterly Review 73. 46 Torquay Hotel Co Ltd v Cousins [1969] 2 Ch 106. 47 In British Motor Trade Association v Salvadori [1949] Ch 556, Roxburg J referred to ‘an active step taken by the defendant … by which he facilitates a breach’ of contracts as being sufficient for liability. Where a person enters into a contract with another appreciating that this is inconsistent with that other person’s contractual obligations to a third person, the courts have considered liability as being justified because this amounts to more than mere 40

409

14.9  Personal liability of senior managers and compliance officers to accept that a person who merely assists another to commit a tort should be held liable. On the other hand, it is sufficient that he intends to cause a breach and not necessarily loss to the other contracting party. The Supreme Court in Secretary of State for Health v Servier Laboratories Ltd,48 mindful of the need to ensure that the tort remained within reasonable limits, underlined as a necessary element that the unlawful means used by the defendant should have directly impacted and affected the third party’s freedom to deal with the claimant. The Supreme Court recognised that this requirement had been identified by the House of Lords in OBG Ltd v Allan49 and was necessary to avoid indeterminate liability to a wide range of possible claimants perhaps for purely economic loss. It is uncertain whether this tort extends to inducing or procuring breaches of other legal duties, not involving a contract. It probably does extend to breaching a statutory duty where a statutory tort action has been recognised.50 It has been argued that it might well extend to inducing or procuring a breach of a fiduciary duty,51 not involving a breach of trust.52 The basis, for this distinction was that in cases of a breach of trust those procuring or inducing such might well become trustees themselves. Whether such a distinction is now meaningful after recent decisions remains to be seen?53 In the OBG case Lord Hoffmann made it clear that to be liable for inducing a breach of contract the defendant must know that he is inducing a breach of contract and it is not enough for him to know that he is procuring an act which as a matter of law is a breach – he ‘must actually appreciate that it will have this effect’.54 In DC Thompson v Deakin while the court was emphasising the need for knowledge, Jenkins LJ observed ‘inconsistent dealing … may, indeed, be commenced without knowledge by the third party of the contract thus broken; but if it is continued after the third party has notice of the contract, an actionable interference has been committed’.55 Furthermore, inducing this breach must be something that he intended either as an end in itself or to achieve some other objective.

48 49 50 51 52 53

54 55

assistance, see One Money Mail Ltd v Ria Financial Services [2015] EWCA Civ 1084. On a slightly different point, the courts have accepted that banks and other financial institutions may properly discontinue their contractual relationship with a customer if they suspect the customer ’s accounts are vulnerable to fraud and or money laundering, N v The Royal Bank of Scotland [2019] EWHC 1770 Comm. [2021] UKSC 24. [2008] AC 1. Meade v Haringey LBC [1979] 1 WLR 637 and Associated British Ports v Transport and General Workers’ Union [1989] 1 WLR 939. PK Airfinance SARL v Alpstream AG [2015] EWCA Civ 1318 comments of Clark LJ at 310. Metall und Rohhstoff AG v Donaldson Lufkin & Jenrette Inc [1990] 1 QB 391 where it was also noted that equity had developed a comprehensive liability for dishonest assistance in the breach of trust. FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 58 discussed at 2.33 et seq above. In OBG Ltd v Allan [2008] 1 AC 1, Lord Nicholls, at 189 left open the question of how far the Lumley v Gye principle applies equally to breach of other actionable obligations such as statutory duties or equitable or fiduciary obligations. [2008] 1 AC 1 at 39. [1952] Ch 646 followed in The Beans Group v MyUniDays [2019] EWHC 320 (Comm). Reckless indifference as to whether another is in breach of contract is sufficient for liability, Michael Fielding Wolf v Trinity Logistics USA Inc [2018] EWCA Civ 2765. Gross negligence is not. There is room for debate as to whether gross negligence is in substance any different in law to ‘simple’ negligence. Perhaps the difference, albeit equally anomalous, is the presence or absence of a quality of culpability, see, for example, B Rider, ‘Amiable lunatics and the Rule in Foss v. Harbottle’ [1978] Cambridge Law Journal 270.

410

Personal liability of senior managers and compliance officers  14.11 14.10 There have been cases brought in the UK and particularly the US where it has been alleged that loss has been caused by virtue of the negligence of a compliance officer or official. As a general proposition banks and financial institutions do owe a duty of care both in contract and tort to their customers and it has been argued that this extends to forming an opinion as to whether, for example, a transaction is sufficiently suspicious to report to the authorities or not. It has also been argued that banks are under a duty of care to the customer once a report has been made to seek, in appropriate circumstances, a clearance from the authorities to enable a transaction to be completed.56 Indeed, it has also been suggested that where the decision or conduct is itself wrongful this could expose the individuals and the institution to liability in regard to third parties who are harmed by the blocking of funds. There are important issues of public policy and although the courts have been prepared to require defendants to establish that they actually had the relevant suspicions, there appears to be a reluctance to go further.57 The courts have also been reluctant to grant claimants disclosure as to the individuals who formed an opinion upon which a suspicion based report was filed.58 It is also worth pointing out that there have also been allegations made against financial institutions and their officers and employees of defamation and infringement of privacy in regard to the making of statutory reports. In the absence of bad faith, it is most unlikely such a claim would succeed.59 14.11 A related issue is the obligation on a bank or financial intermediary to decline to implement a customer’s instructions when it has been ‘put on enquiry’ that a fraud may be being perpetrated on that customer. This is often referred to as the Quincecare duty. In the leading case of Barclays Bank v Quincecare Ltd60 Steyn J held that a bank owes on implied duty to exercise reasonable care in executing a customer’s instructions if there are reasonable grounds for believing that if the instructions are followed, a fraud might be perpetrated on the customer. Thus, in such circumstances the bank should refrain from transferring money on instruction, to prevent a suspected misappropriation.

See, for example, Shah v HSBC Private Bank (UK) Ltd [2012] EWHC 1283 (QB) and see 7.59 above. 57 In Shah v HSBC Private Bank (UK) Ltd above, Supperstone J was particularly impressed by the professionalism and honestly of the Money Laundering Reporting Officer (MLRO) who had formed a genuine suspicion. 58 See Shah v HSBC Private Bank (UK) Ltd [2011] EWCA Civ 1154. The bank was prepared to disclose the identity of the MLRO but not the employees who first reported their suspicions to the MLRO. The Court of Appeal did not consider, on the facts, that disclosure would assist the claimant and that he was essentially on a ‘fishing expedition’. Consequently, it was not necessary to consider whether the bank would have been entitled to assert public interest immunity. The Court of Appeal dismissed as fanciful the allegation that one of the bank’s employees had initiated the process which led to the MLRO making the report out of malice. At first instance Coulson J indicated that of there had been bad faith this may have undermined the bank’s assertion that it had a genuine suspicion. See also Eurasian Natural Resources Corporation Ltd v Ake-Jean Qajygeldin [2021] EWHC 462 and Revenue and Customs Commissioners v IGE USA Investments Ltd [2020] EWHC 1716 (Ch). 59 See above at notes 57 and 58. Malice vitiates the defence of qualified privilege in the law of defamation. Indeed, it might expose that person to the tort of malicious falsehood. In regard to misuse of private information, see Campbell v MGN Ltd [2004] UKHL 22. In addition to the law of tort, equity protects confidential information and there may be specific statutory protection in certain cases. 60 [1992] 4 All ER 363 approved in Lipkin Gorman v Karpnale Ltd [1989] 1 WLR 1340. 56

411

14.11  Personal liability of senior managers and compliance officers It is important to appreciate that this is part and parcel of the bank’s duty of care and skill. In Federal Republic of Nigeria v JP Morgan Chase61 the Court of Appeal considered that this duty was more than simply a negative one to decline an instruction, but rather more placed an obligation on the bank to make inquiries. In this case the Court of Appeal thought that the defendants should have questioned the integrity of the claimant’s officials notwithstanding they had authority to instruct the transfer in question, the more so because the defendant had filed a suspicious activity report with the authorities. Exactly what is involved in the discharge of this duty where a corporate customer is involved is unclear. The Supreme Court in the first case upholding a claim under the duty gave no guidance on this.62 In the case of an individual customer the High Court in Philip v Barclays Bank63 was conscious of the need not to place an unrealistic and burdensome obligation on banks to second-guess the instructions of a customer with an individual account. Indeed, HHJ Russen QC emphasised the primary obligation of the bank is to execute instructions properly given.64 On the other hand, the Financial Ombudsman has in a series of cases shown greater sympathy for customers and expected banks to be rather more alert. The Court of Appeal, mindful of this, in disagreeing with HHJ Russen QC has recognised that a bank’s ‘Quincecare’ duty can be invoked in circumstances where the relevant instruction has been given by an individual and that authorisation is induced by fraud.65 The Court of Appeal considered that where an individual account holder has been induced by fraud to authorise the transfer of funds, it is arguable the relevant bank owes a duty of care. Their Lordships considered that the Quincecare duty ‘does not depend on whether the instruction is being given by an agent. It is capable of applying with equal force to a case in which the instruction to the bank is given by a customer themselves who is the unwitting victim of Authorised Push Payment fraud provided the circumstances are such that the bank is on inquiry that executing the order would result in the customer’s funds being misappropriated.’ The bank would be properly under a legal obligation to its customer not to execute the order while it was on inquiry and to make further inquiries. The standard of knowledge that the bank must be shown to have had is knowledge of circumstances which would put an ordinary prudent

61 62

63 64

65

[2019] EWCA Civ 1641, see also the judgement of Judge Andrew Burrows QC [2019] EWHC 347 (Comm) and [2022] EWHC 1447 (Comm). See also Royal Bank of Scotland v JP SPC 4 [2022] UKPC 18. Singularis Holdings Ltd (in liq) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50. Lady Hale emphasised in the case of companies being defrauded by their own officers and agents it played a significant role. Interestingly, the Supreme Court recognising the public interest in banks and financial institutions taking a role in preventing and combating fraud, ruled that the fraud of the agent (who was the sole shareholder and a director) could not be attributed to the company so as to provide the bank with a defence based on illegality. On the need to carefully consider the application of the illegality defence, see also Stoffel v Grondona [2018] EWCA Civ 2031. [2021] EWHC 10 (Comm). The banks according to HHJ Russen QC, ‘cannot be expected to carry out such urgent detective work, or treated as a gatekeeper of the commercial wisdom of the customer’s decision.’ Indeed, the court questioned whether the duty applied to other than corporate clients. Referring to the Supreme Court decision in Singularis Holdings Ltd, above, it noted that the Supreme Court ‘said nothing about a bank protecting an individual customer (and her monies) from her own intentional decision.’ But see, for example, Stanford International Bank Ltd (in liq) v HSBC Bank plc [2020] EWHC 2232 (Ch). Philip v Barclays Bank UK plc [2022] EWCA Civ 318.

412

Personal liability of senior managers and compliance officers  14.12 banker on inquiry.66 The duty is according to their Lordships a species of the duty that arises under section 13 of the Supply of Goods and Services Act 1982 or at common law. While it is important to note that the Court of Appeal was in this application deciding simply on an appeal against summary judgement, it is important in accepting that the duty of care is not limited to agents. 14.12 Compliance personnel will inevitably be in some kind of contractual relationship and this itself will impose express or implied obligations of care, but only between the parties to the contract.67 Whether there is a broader and potentially actionable obligation to others, such as the firm’s clients is questionable. It may be the case that special circumstances arise where the competent fulfilment of the obligations of a compliance officer can be foreseen to have implications for another party and therefore, possibly give rise to a duty of care in the law of tort.68 However, even in such cases it is more likely that the failure will be rather more that of the system than the individual and consequently attributable to the employer. If an individual deliberately causes harm, such as through deceit, then the position may be very different. Where an employee acting bona fide within the scope of his employment causes or, indeed, procures a breach of contract between his employer and another, then it is established that he cannot be sued for interference with the contractual obligations.69 Again, where he steps outside his employment the position will be different as he is not his employer’s alter ego.70 Finally, it should be emphasised that in many cases of tort the liability of the employer and the employee will be joint and several. In other words, a claimant can choose to sue either or both. Given the costs of litigation it would normally be the employer that would be the primary target. However, proceeding against individual may well have tactical advantages in securing their cooperation against the employer. Indeed, there have been cases where allegations of defamation have been made against those directly responsible for reporting suspicious transactions to their employer and then to the authorities.

66

Birss LJ considered that ‘the transfer of a huge sum of money out of the appellant’s account to a payee overseas’ in the circumstances of the case, was arguably sufficient to put a cashier on inquiry. Lord Burrows in Nigeria v JP Morgan Chase Bank NA [2019] EWHC 347 Comm observed ‘in the fight to combat fraud, banks with the relevant grounds for belief should not sit back and do nothing.’ 67 It would be unlikely for an employer in the financial services sector to expressly provide in a contract of employment that an enforceable expectation would be accorded to customers. Where a contract purports to confer a benefit, as we have seen, on a third party under the Contracts (Rights of Third Parties) Act 1999, the burden is on the employer (as promisor) to rebut the presumption that the contracting parties intended this, Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003] EWHC 2602. 68 In Caparo Industries plc v Dickman [1990] 2 AC 605 Lord Roskill stated at 628: ‘There is no simple formula or touchstone to which recourse can be had in order to provide in every case a ready answer to the question whether, given certain facts, the law will or will not impose liability for negligence or, in cases where such liability can be shown to exist, determine the extent of that liability. Phrases such as “foreseeability”, “proximity”, “neighbourhood”, “just and reasonable”, “fairness” will be found used from time to time in different cases. But … such phases are not precise definitions. At best they are but labels or phrases descriptive of the very different factual situations which can exist in particular cases and which must be carefully examined in each case before it can be pragmatically determined whether a duty of care exists and, if so, what is the scope and extent of that duty.’ The finding of a duty of care is essentially pragmatic, see Rowling v Takaro Properties Ltd [1988] AC 473. However, note Manchester Building Society v Grant Thornton [2021] UKSC 20 and see Chapter 2 note 162. 69 Said v Butt [1920] 3 KB 497. 70 DC Thomson & Co Ltd v Deakin [1952] Ch 646 per Lord Evershed MR at 681.

413

14.13  Personal liability of senior managers and compliance officers

ACCESSORY LIABILITY IN EQUITY 14.13 We have seen that perhaps the most significant area of the law where the courts have been eager to develop a form of accessory liability is in the fast developing law relating to restitution.71 Where a person receives into their control assets that have been transferred in breach of a trust the law has long regarded them as stepping into the position of a trustee. Debate has taken place as to the degree of knowledge that needs to be shown before it is appropriate to apply the onerous obligations of trusteeship. There has also been debate as to the nature of the assets and whether these principles apply to information and maturing business opportunities. Today, however, we recognise that really what is at stake is whether it is unconscionable to allow the recipient of trust property to retain it against the interests of other claimants. Thus, innocent receipt and the provision of consideration or a relevant change in position will generally absolve the recipient from liability.72 As we have seen, in FHR European Ventures LLP v Cedar Capital Partners LLC,73 the Supreme Court was prepared to allow tracing of property in cases where the breach of fiduciary duty did not involve property but a claim to an account. In other words, the distinction between proprietary claims and personal claims, which was thought to govern the availability of tracing and the constructive trust,74 was in many respects redundant. 14.14 The courts have also been prepared to fashion a form of liability for those who no longer possess the relevant property or who have never come into possession or control.75 This is a form of accessory liability and is essentially based on the dishonest assistance that the person concerned has provided those who innocently or otherwise have transferred property in breach of a trust, or arguably merely violated the principle of loyalty.76 Given that this form of liability is also based on unconscionable conduct, including omissions, by the accessory, the issue of notice is crucial. The law has been perhaps unduly complicated by the fact that many of the cases that have arisen involve transactions relating to land, where it was reasonable and practical to expect purchasers to make certain inquiries as to the integrity of the transaction.77 In the wider world of business to base liability on essentially a failure to know what an honest and reasonable person in the position of the recipient would know or deduce, has been thought a too exacting standard. Thus in the case of a proprietary claim against a bank, that has received suspect funds, it will be liable unless it can prove that it was a bona fide recipient without actual, constructive or imputed notice of the customer’s fraud or other wrongdoing. In the case of a personal claim the issue will be whether the bank’s conscience is sufficiently affected for it to be placed under an obligation to account to

71 72

73 74 75 76 77

See 2.34 and 2.57 et seq above. See generally, A Burrows, The Law of Restitution (3rd edn) (Oxford University Press 2011) and in particular A Stafford and S Ritchie, Fiduciary Duties, Directors and Employees (Jordan Publishing 2015), Ch 9. See also Newey LJ in Byers v Saudi National Bank [2022] EWCA Civ 43 in regard to knowing receipt. In regard to money laundering and civil liability, see 7.15 and seq. [2014] UKSC 45. Sinclair Investment Holdings SA v Versailles Trading Finance Ltd & Others [2011] EWCA Civ 347 affirming Lister & Co v Stubbs (1890) 45 Ch D 1 and Metropolitan Bank v Heiron [1880] 5 Ex D 319. See for example AGIP (Africa) Ltd v Jackson [1990] Ch 265 aff’d [1991] Ch 547. See for an illustration of the reach of these principles, Finers v Miro [1991] 1 WLR 35. For example, Re Montagu’s Settlement Trust [1987] Ch 264 per Megarry VC at 272.

414

Personal liability of senior managers and compliance officers  14.16 the person who has the relevant claim to the money. On the other hand, it is important to remember that the test, in the civil law, is essentially objective and the test of honesty is that of normally accepted standards in the particular circumstances. For liability it needs to be shown that the bank either actually had knowledge which renders its receipt unconscionable or assistance dishonest or that the circumstances were such that turning a blind eye to ‘commercially unacceptable conduct in a particular context’ or ‘acting in reckless disregard of other’s possible proprietary rights’ amounts to the same.78 The extent to which financial institutions and their officers and employees could find themselves exposed to proprietary and more likely personal claims is real and reinforces many of the obligations that would normally be encountered in compliance systems. 14.15 Moving away from the common law, there are a number of statutory provisions which impose directly or indirectly the prospect of personal liability on persons performing particular functions. Perhaps the most significant in the context of our present discussion are those relating to reporting suspicions of money laundering under the Proceeds of Crime Act 2002 and the relevant antiterrorist legislation.79 While these provisions are addressed in Chapter 7 given their relevance to the civil law it is appropriate to set out the relevant issues here. 14.16 Having regard to the risks both legal and otherwise, that can arise for those involved, innocently or not, in the laundering of the proceeds of crime or the transfer of terrorist funds, ensuring proper and effective compliance with the statutory and other obligations is an important task of management. Oversight in terms of the establishment and support of such systems is an important issue in governance. In certain situations, the failure of management and those responsible for governance might well result in legal and regulatory liability. It is also important to note that the complex web of law and regulation thrown up by anti-money laundering laws often has the effect of imposing obligations with the risk of legal consequences, internationally. For example, generally speaking under most laws, the offences relating to money laundering apply to conduct within jurisdiction, even if the criminal activity generating the property in question took place entirely out of jurisdiction. It is also the case that some provisions operate on wider notions of jurisdiction than would traditionally be encountered in most criminal justice systems. The significance that governments and, in particular inter-governmental organisations, now attach to combating serious crime, corruption and the funding of terror, through inhibiting the transfer and concealment of funds associated or representing such

78

79

Credit Agricole Corporation and Investment Bank v Papadimitriou [2015] UKPC 13. In this case the Privy Council thought that ‘the web of companies and the cost would have alerted a reasonable banker to the improper motive, namely to launder the money’. Lord Sumption observed that ‘there must be something which the defendant actually knows (or would actually know if he has a reasonable appreciation of the meaning of the information in his hands) which calls for inquiry. The rule is that the defendant in this position cannot say that there might well have been an honest explanation if he has not made the inquiries suggested by the facts at his disposal with a view to ascertaining whether there really is … If there are features of the transaction such that if left unexplained they are indicative of wrongdoing, then an explanation must be sought before it can be assumed that there is none.’ Reference should also be made to Armstrong DLW GmbH v Winnington Networks Ltd [2012] 3 All ER 425. See also at 7.48 et seq above. See B Rider and TM Ashe (eds), Money Laundering Control (Sweet & Maxwell 1996), Ch 1 and generally B Rider (ed), International Financial Crime (Edward Elgar 2015).

415

14.16  Personal liability of senior managers and compliance officers activity, means that regulators and indeed, even the courts, have been robust in the administration and application of relevant laws and procedures. A powerful illustration of the importance now attached to depriving criminals of their illicit wealth is provided in the new United Nations Convention against Corruption.80 Article 51 states that pursing the proceeds of corruption is a fundamental principle of the Convention. It should be noted that many of the Conventions provisions might well have impact on the business world.81 Furthermore, it must also be borne in mind that as it has proved in practice difficult to interdict property associated with crime and terror, law enforcement and regulatory authorities have adopted strategies designed rather more to disrupt criminal and subversive enterprises than interdict specific property. The problem with this approach is that the perimeters of what is acceptable, let alone lawful, disruptive conduct are not always clear. It is also the case that often those being used knowingly or otherwise in the processes of disruption will be individuals and companies engaged in business or the financial sector. The legal risks in placing such persons in the ‘front line’ have not been sufficiently determined, or for that matter considered. 14.17 We have already emphasised particularly in our discussion of the law relating to criminal property and the offences of money laundering that rules of law no matter how well-crafted do not operate in a vacuum. While there is a reasonable degree of interface between the criminal law and the various obligations that have been developed within the regulatory system this is not always the case in regard to the civil law. Conceptually why this should be the case is not easy to explain, however, in practical terms it may well be due to the fact that very rarely are civil lawyers involved in crafting the various obligations that for perfectly understandable reasons have been imposed on those doing business in the financial sector. The complexity that arises by virtue of the very nature of transactions together with uncertainties and, indeed, in recent years the dynamic nature of the civil law and in particular the law relating to restitution, is sadly not always appreciated let alone understood by those engaged in the criminal and regulatory aspects of relevant conduct. In our discussion of the anti-money laundering provisions in Chapter 7 we have already discussed the offence of ‘tipping off’ and given the significance of this we return to it again in the context of our analysis of personal liability below. There are situations, however, where persons in receipt or control of property, that has been transferred in breach of trust or who may be at risk of being considered to be affording assistance to another who is in breach of a fiduciary obligation, are under a duty to take reasonable steps to search out and inform those who have a proper claim to the property in question.82 There are other situations in which there is at least arguably a duty in the civil law to take steps to protect the relevant property or the proper interests of others, which might

80 81 82

See generally, B Rider, ‘Recovering the Proceeds of Corruption’ (2007) 10 Journal of Money Laundering Control 5. See, for example, Article 12 in regard to anti-corruption initiatives in the private sector; Article 20 on unjust enrichment and Articles 21 and 22 in regard to bribery and embezzlement in the private sector. See, for example, Finers v Miro [1991] 1 WLR 35 and 2.57 above. In practice this has proved to be a ‘minefield’ for financial intermediaries, albeit few cases have come before the courts; see generally, Banking on Corruption, The Legal Responsibilities of those who Handle the Proceeds of Corruption (Sir Richard Scott and Lord Steel of Aikwood, 2000), Society of Advanced Legal Studies and B Rider (ed), Research Handbook on International Financial Crime (Edward Elgar 2016) at Ch 60.

416

Personal liability of senior managers and compliance officers  14.18 well have the effect of ‘tipping off’ those under suspicion.83 Notwithstanding a reluctance in both the Treasury and regulators to acknowledge such issues, the Courts have been required to consider the position of, in particular, banks that find themselves on the ‘horns of a dilemma’, and have rarely if ever been able to provide those at risk with particularly clear let alone determinative guidance.84 Given the likelihood that in many financial transactions other jurisdictions with their own laws and practices will be involved, legal and especially regulatory risk arising by virtue of a lack of proper interface is very real. Indeed, as we have already seen in our analysis as to the efficacy in law, as opposed to regulatory practice, of ‘Chinese Walls’, in Chapter 8, it is not always appreciated that ‘good practice’ and adherence to regulatory guidance and even rules, will protect an intermediary from the legal implications of being in a conflict of interest or duty. Similarly, there is at least at the international level uncertainty as to how far an intermediary and or individual would be protected by domestic legislation or common law rules from allegations of, for example, defamation in making a report to the authorities on the basis of a suspicion. Traditionally those concerned with constructing compliance systems and advising on such have tended to focus disproportionately on the issues that arise under the Financial Services and Markets Act 2000 (FSMA) and related legislation, together with specific areas of the criminal law, such as insider dealing and money laundering. Consequently, there are very real areas of potential risk which are not always adequately addressed in compliance procedures. It is not always the case that it is sufficiently appreciated that directors and officers of companies are under the degree of control and, thus risk, pursuant to ordinary company law that they are. Indeed, as we attempt in this work to emphasise even just the control of insider abuse is a rather more complex issue, as a matter of law, than is often appreciated within essentially two-dimensional compliance structures. 14.18 Of particular significance is section 330 of the Proceeds of Crime Act 2002 (POCA) which imposes an obligation on those in the regulated sector to report to the authorities their suspicions of laundering activity. Where a person fails to make the required disclosure as soon as is practicable, when he knows or suspects, or has reason for knowing or suspecting, another person is engaging in money laundering, and this information came to him in the course of his trade, profession, business or employment within the regulated sector, he commits a crime. Thus, a suspicion that property represents the benefit of criminal conduct committed overseas, including from inchoate offences such as conspiracy, would be caught under this provision. There is some protection, although not much, in that a person who does not in fact know or suspect that laundering is taking place, and has not had the benefit of the training that is required to be given the Regulations, will not be guilty of an offence. There are other limited defences. Where there is a reasonable excuse for non-disclosure then no offence is committed. Furthermore, a professional legal adviser will not be guilty for failing to disclose information that comes to him in privileged

83 84

See, for example, Bank of Scotland v A Ltd [2001] EWCA Civ 52 and Shah v HSBC Private Bank (UK) Ltd [2010] 3 All ER 477 (CA) discussed at 7.59 above. See, for example, C v S [1999] 2 All ER 343, Amalgamated Metal Trading Ltd v City of London Police Financial Investigation Unit [2003] EWHC 703 (Comm) and Hosni Tayeb v HSBC and Al Farsan International [2004] EWHC 1529 (Comm) and 7.45 et seq above. As to the efficacy of the regime, see UK National Risk Assessment of Money Laundering and Terrorist Finance, (October 2015) HM Treasury and the Home Office.

417

14.18  Personal liability of senior managers and compliance officers circumstances, provided such information is not in furtherance of criminal activity.85 Of course, under the general law, privilege is restricted in that it cannot serve to hide and facilitate crime. However, in this context it should also be noted that in Bowman v Fels,86 the Court of Appeal confirmed that the obligation to report, in that case as a defence under section 328, did not override the common law legal professional privilege. 14.19 Section 331 of the Act imposes responsibility on nominated officers commonly referred to as Money Laundering Reporting Officers (MLROs) to pass on information that they receive. They are under an obligation to forward this information, in the prescribed manner, to the authorities as soon as practicable. However, in considering whether an offence has been committed, courts are required to consider whether the officer in question followed guidance issued, with the approval of the Treasury, by appropriate designated bodies under Schedule 9 to the Act. Thus, compliance with, for example, the Guidance Notes of the Joint Money Laundering Steering Group of the British Bankers Association, the Law Society or the Financial Conduct Authority (FCA) would be relevant in the determination of guilt. In the case of the nonregulated sector, section 332 imposes similar obligations on nominated officers to report, as soon as practicable, knowledge or suspicion based on information that they have received. However, as we have seen here the test for liability is subjective rather than objective. Furthermore, they are not guilty if they have a reasonable excuse for non-compliance. 14.20 Reference has already been made to the offence of ‘tipping off’ contained in section 333 of the Act. This crime involves making a disclosure that is likely to prejudice a money laundering investigation. If a person knows or suspects that a protected or authorised disclosure has been made to the authorities or an employer and he makes a disclosure which is likely to prejudice any investigation that may be undertaken as a result of the protected or authorised disclosure, he commits an offence. This provision applies to everyone, including professional advisers. However, in the case of a professional legal adviser no offence will be committed in regard to the disclosure of information to a client or the client’s representative, in regard to the provision of legal advice, or to any person in contemplation of, or in connection with, legal proceedings for the purpose of those proceedings, unless, of course, the disclosure was made with a view to furthering a criminal purpose. If the accused did not know or suspect that the disclosure was likely to prejudice an investigation, no offence is committed. Furthermore, as in the case of all the offences, there is no crime if what is done is pursuant to statutory authority or in the enforcement of the law. 14.21 Under section 342 of the Act any person who, knowing or suspecting that someone is acting or proposing to act in connection with a confiscation or money laundering investigation makes a disclosure that is likely to prejudice the investigation or interferes with evidence, is guilty of an offence. There are defences rather similar to those relating to an offence under section 333. Of course, where there is a deliberate interference with the administration of

85 86

But see The Jamaican Bar Association v the Attorney General of Jamaica [2017] JMFC Full 02 and see R Clarke, ‘Financial services development and economic crimes in the Commonwealth: taking stock’ (2021) 42 The Company Lawyer 251. [2005] EWCA Civ 226 and see Shah v HSBC Private Bank (UK) Ltd [2012] EWHC 1283 (QB).

418

Personal liability of senior managers and compliance officers  14.25 justice or destruction, concealment or falsification of evidence then there would be the prospect of prosecution for offences under the general criminal law. 14.22 Mention has been made of the possibility of liability resulting from the disclosure of information, pursuant to the statutory obligations in the Act, under the general law. In the case of disclosure by persons within the regulated sector, section 337 provides that they are protected from any legal or other obligation that might otherwise prevent them from revealing confidential information, provided the information upon which they acted came to them in the course of their trade, profession, business or profession. Such disclosures are referred to as ‘protected disclosures’. Section 338(4) extends a similar protection to all authorised disclosures made under the provisions of the Act, whether by persons in the regulated sector or not. It is important to note that these provisions protect against liability, based on a breach of any restriction on the disclosure of information, however imposed. Thus, there would be no liability for breach of confidentiality arising, for example, by contract or a fiduciary relationship. However, this protection does not extend to, for instance, liability in the law of defamation. While it would be possible in most cases to assert a defence of qualified privilege, the threat of suit is a significant inhibition. Furthermore, it must not be forgotten that these statutory defences under the Act can only apply to proceedings within jurisdiction. 14.23 As far as penalties are concerned, section 334 provides that, anyone convicted on indictment of an offence under sections 327 to 329, is liable to a prison term of up to 14 years and an unlimited fine. In the case of sections 330 to 333, on conviction on indictment, the maximum penalty is five years imprisonment and an unlimited fine. In the case of summary convictions, the maximum term of imprisonment is six months. Offences under these provisions might well be suitable for triggering proceedings for confiscation or asset recovery.

PERSONAL CRIMINAL LIABILITY 14.24 We have already considered when a person might be liable for market abuse and insider dealing offences and we do not intend to rehearse these offences again. What is clear is that individuals may commit the following offences, amongst others: (a) (b)

section 52 of the Criminal Justice Act 1993 (insider dealing); sections 89–91 of the Financial Services Act 2012 (making misleading statements or impressions).

14.25 In addition, section 400 of the FSMA ensures that an officer of a company may also be guilty of an offence where the company is guilty of an offence under the 2000 Act if the offence was committed with the consent87 or connivance88 of that officer, or where the offence was attributable to any

87

88

In the Banking Act 1987 case of Attorney General’s Reference (No 1 of 1995) [1996] 1 WLR 970 (CA), for consent: ‘A defendant has to be proved to know the material facts which constitute the offence by the body corporate and to have agreed to its conduct of its business on the basis of those facts.’ The word ‘connivance’ was examined in Huckerby v Elliott [1970] 1 All ER 189 (QBD), in relation to failing to obtain a gaming licence and a person was said to connive where ‘he is equally well aware of what is going on but his agreement is tacit, not actively encouraging what happens but letting it continue and saying nothing about it’.

419

14.25  Personal liability of senior managers and compliance officers neglect on his part. This will include failure to comply when required to do so under Part XI of the 2000 Act on information gathering and investigations. 14.26 Other legislation not directly concerned with insider dealing and market abuse also creates personal criminal liability, as we have seen in Chapter 6, including but not limited to: (a)

(b) (c)

(d)

(e)

section 19 of the Theft Act 1968, which creates the offence of making false statements by company directors (or officers of an unincorporated association) with intent to deceive members or creditors about the organisation’s affairs; the Fraud Act 2006, including the offences of fraud by false representation, by failing to disclose information or by abuse of position; section 993 of the Companies Act 2006, which creates the offence of fraudulent trading, whereby every person who is knowingly a party to the carrying on of the business in the fraudulent manner commits an offence; the Bribery Act 2010, including the offences of offering or receiving a bribe, or bribing a foreign public official. Where an offence is committed by a company, the senior officer or person purporting to act in that capacity may also be convicted if the offence was committed by the company with their consent or connivance; the POCA, the Terrorism Act 2000 and the Money Laundering Regulations 2007 offences as set out in Chapter 8, arising out of the obligations on compliance officers, professional advisers, directors and others.

CRIMINAL PROCEEDINGS 14.27 Criminal proceedings for market abuse and insider dealing are not generally dissimilar from criminal proceedings for any other offences, with some limited points of note. 14.28 First, the starting point is that criminal proceedings for the offence of insider dealing under Part V of the Criminal Justice Act 1993 cannot be instituted except by or with the consent of the Secretary of State or the Director of Public Prosecutions (see section 61 of the 1993 Act); however, despite this section, the FCA does not need such consent.89 Other prosecution authorities may be bound by the requirement under section 61 where they also have the power to prosecute this offence. This will include the Crown Prosecution Service. 14.29 Second, there are evidential issues that must be taken into account. The FCA has the power under section 171 of the FSMA to compel persons to answer questions; a power that the Serious Fraud Office also has. The ability to compel a response is obviously subject to ECHR, Article 6 protection against selfincrimination and any compelled evidence cannot be used against a defendant

89 See R (on the application of Uberoi) v Westminster Magistrates’ Court [2009] 1 WLR 1905 (CA), which dealt with the FCA’s predecessor the Financial Services Authority, in which May LJ stated that ‘it must have been the Parliamentary intention that the FSA would be able to institute proceedings under Part V of the 1993 Act without consent from outside’.

420

Personal liability of senior managers and compliance officers  14.32 in criminal proceedings. Section 174(2) of the FSMA states that, in criminal proceedings, no evidence relating to the statement may be adduced, and no question relating to it may be asked by or on behalf of the prosecution, unless evidence relating to it is adduced, or a question relating to it is asked, in the proceedings by or on behalf of that person. Section 174(3) creates exceptions for perjury, the offence of knowingly or recklessly providing false information pursuant to section 177(4) and the offence of knowingly or recklessly giving the FCA information which is false or misleading in a material particular. The new section 174(3A) states that section 174(2) applies to proceedings in relation to action to be taken under section 123(2) or (3) against a person who may have contravened Article 14 (prohibition of insider dealing and of unlawful disclosure of inside information) or Article 15 (prohibition of market manipulation) of the EU Market Abuse Regulation.90 14.30 Third, it is of note that civil and criminal proceedings are not exclusive. As the FCA notes in its Handbook at EG 12.1.4: ‘In cases where criminal proceedings have commenced or will be commenced, the FCA may consider whether also to take civil or regulatory action (for example where this is appropriate for the protection of consumers) and how such action should be pursued. That action might include: applying to court for an injunction; applying to court for a restitution order; variation and/or cancellation of permission; and prohibition of individuals. The factors the FCA may take into account when deciding whether to take such action, where criminal proceedings are in contemplation, include, but are not limited to the following: (1) (2) (3)

whether, in the FCA’s opinion, the taking of civil or regulatory action might unfairly prejudice the prosecution, or proposed prosecution, of criminal offences; whether, in the FCA’s opinion, the taking of civil or regulatory action might unfairly prejudice the defendants in the criminal proceedings in the conduct of their defence; and whether it is appropriate to take civil or regulatory action, having regard to the scope of the criminal proceedings and the powers available to the criminal courts.’91

14.31 Having noted the above, the main procedural point of note between charge and trial/conviction for the defendant will be whether or not the case is to be dealt with in the magistrates’ court or the Crown Court. Where the charge is conspiracy, this is not an issue as conspiracy is triable only on indictment in the Crown Court.92 The initial procedure for substantive cases that are triable either way is set out at section 17A of the Magistrates’ Courts Act 1980; the defendant is asked whether or not he intends to plead guilty or not guilty. 14.32 If he pleads guilty, then the magistrates’ court will treat the plea as a conviction in the magistrates’ court and if it considers its sentencing powers

90 91 92

Regulation 596/2014/EU on market abuse (market abuse regulation). FCA Handbook at EG 12.1.3 as last updated on 1 March 2016, available at https://www. handbook.fca.org.uk/handbook/EG/12/?view=chapter. See section 1(1) of the Criminal Law Act 1977 and Archbold: Criminal Pleading, Evidence and Practice (Sweet and Maxwell, 2022) at 33-2. In regard, however, to the importance of reinforcing integrity in the markets, see R v Hayes, Court of Appeal, 21 December 2015, referred to at 6.11 note 29 above and in particular, 3.7 note 22 above.

421

14.32  Personal liability of senior managers and compliance officers to be insufficient,93 the magistrates’ court may commit the defendant to be sentenced in the Crown Court. 14.33 If he pleads not guilty, then the magistrates’ court applies the process set out under sections 19–23 of the Magistrates’ Courts 1980 and it shall decide whether the offence appears to it more suitable for summary trial or for trial on indictment. As well as taking into account the nature and circumstances of the offence, any previous convictions and any representations, the magistrates’ court must consider whether the sentence which it could impose for the offence would be adequate and it must also have regard to any allocation guidelines issued as definitive guidelines under section 122 of the Coroners and Justice Act 2009. Allocation Guidance, effective from 1 March 2016,94 states that in general, either way offences should be tried summarily unless: (a) (b)

the outcome would clearly be a sentence in excess of the court’s powers for the offence(s) concerned after taking into account personal mitigation and any potential reduction for a guilty plea; or for reasons of unusual legal, procedural or factual complexity, the case should be tried in the Crown Court. This exception may apply in cases where a very substantial fine is the likely sentence. Other circumstances where this exception will apply are likely to be rare and case specific; the court will rely on the submissions of the parties to identify relevant cases.

In cases with no factual or legal complications the court should bear in mind its power to commit for sentence after a trial and may retain jurisdiction notwithstanding that the likely sentence might exceed its powers. All parties should be asked by the court to make representations as to whether the case is suitable for summary trial. The court should refer to definitive guidelines (if any) to assess the likely sentence for the offence in the light of the facts alleged by the prosecution case, taking into account all aspects of the case including those advanced by the defence, including any personal mitigation to which the defence wish to refer.

SENTENCING POLICY 14.34 There is not a large amount of authority on sentencing policy for market abuse and insider trading. This is not a surprise given that the number of prosecutions is low; the FCA reports in its 2020–21 Annual Report that

93

94

See the maximum terms for the offence and note that for offences committed before 2 May 2022, the magistrates’ court cannot impose more than 12 months’ imprisonment consecutively or six months’ imprisonment for any one offence. For offences committed on or after 2 May 2022, section 13 of the Judicial Review and Courts Act 2022 amends section 224 of the Sentencing Act 2020, by increasing the sentencing powers of the magistrates’ court so that magistrates can impose imprisonment of 12 months for either way offences. The maximum total sentence in the magistrates’ court remains at 12 months. This change was introduced to help reduce the backlog of criminal cases created during the covid-19 pandemic. Section 13 of the 2022 Act also permits the Secretary of State, by regulation, to revert the maximum sentence back to six months’ imprisonment per offence. The change applies only to offences committed on 2 May 2022 by virtue of section 282(4) of the Criminal Justice Act 2003. Sentencing Council Guidelines on Allocation, available at https://www.sentencingcouncil. org.uk/overarching-guides/magistrates-court/item/allocation/.

422

Personal liability of senior managers and compliance officers  14.38 it secured just three criminal prosecutions that year using its enforcement power.95 Despite this, the authorities provide a fair amount of guidance as to the considerations that the court should take into account when sentencing for insider dealing. 14.35 Before turning to these authorities, the maximum sentences should be noted. The maximum that the Crown Court can impose for insider dealing is imprisonment of up to seven years and an unlimited fine. The maximum sentence that the magistrates’ court can impose is imprisonment of up to six months and a fine not exceeding the statutory maximum.96 14.36 First, although insider dealing cannot be directly equated with theft, a comparison with breach of trust cases ‘is not wholly devoid of relevance’.97 In such breach of trust cases, sentences of five to nine years were merited where thefts of £250,000 to £1 million had been made.98 Taking this into account, a sentence of five years’ imprisonment was reduced in R v Butt to four years’ imprisonment, for a net share of the profit made by the appellant of £237,000. 14.37 Second, the starting point for insider trading, for reasons of deterrence, is a custodial sentence even for those not professionally involved in the City.99 Previous good character does not diminish the criminality.100 14.38 Third, the fact that insider trading can also be dealt with by regulatory or disciplinary means does not mean to say that substantial sentences of imprisonment cannot be imposed.101 It also does not matter if previously

95 FCA, ‘Annual Report 2020/21’ (FCA 2021), available at https://www.fca.org.uk/data/ enforcement-data-annual-report-2020-21. 96 See Criminal Justice Act 1993, s 61. 97 R v Butt [2006] EWCA Crim 137. 98 On this point, see R v Butt, above; R v McQuoid [2010] 1 Cr App R (S) 43. For the key breach of trust case, see R v Clark [1998] 2 Cr App R (S) 95 (CA). 99 In R v Spearman [2003] EWCA Crim 2893, Hughes J stated that: ‘the judge was right in this case to say that an immediate custodial sentence was necessary for these offences, and secondly, we are quite sure that he was right to conclude that there needed to be an element of deterrence in such sentences. There has been for some years now a good deal of publicity about the process of insider trading. It has been well known for many years that it is conduct which is a serious criminal offence. We have little doubt that if the defendants had been professional City traders they could have expected a sentence significantly greater than the sentences which were imposed here.’ These observations were adopted by Lord Judge CJ in R v McQuoid, above, as were the observations in note 100 below. 100 See R v McQuoid, above, per Lord Judge CJ: ‘The principles of confidentiality and trust, which are essential to the operations of the commercial world, are betrayed by insider dealing and public confidence in the integrity of the system which is essential to its proper function is undermined by market abuse. Takeover arrangements are normally kept secret. Very few people are permitted to have advance knowledge of them. Those who are entrusted with advance knowledge are entrusted with that knowledge precisely because it is believed that they can be trusted. When they seek to make a profit out of the knowledge and trust reposed in them, or indeed when they do so recklessly, their criminality is not reduced or diminished merely because they are individuals of good character.’ 101 R v Spearman, above, per Hughes J: ‘We have been referred to the fact that new legislation enables some insider trading to be dealt with by means of regulatory or disciplinary process. That does not mean that the activity ceases to be a criminal offence which is likely to be prosecuted and if prosecuted likely in appropriate cases to be met by substantial sentences of imprisonment. Overall insider trading is a serious matter. On a large scale it corrupts the whole of the market in capital.’ See also R v McQuoid, above, per Lord Judge CJ: ‘We therefore emphasise that this kind of conduct does not merely contravene regulatory mechanisms. If there ever was a feeling that insider dealing was a matter to be covered by regulation, that impression should be rapidly dissipated. The message must be clear: when it is done deliberately, insider dealing is a species of fraud; it is cheating. Prosecution

423

14.38  Personal liability of senior managers and compliance officers prosecution policy would have meant that one would have been dealt with by non-criminal methods.102 14.39 Fourth, the general considerations that a sentencing court should take into account include the following:103 (1) (2) (3) (4) (5) (6) (7)

the nature of the defendant’s employment or retainer, or involvement in the arrangements which enabled him to participate in the insider dealing of which he is guilty; the circumstances in which he came into possession of confidential information and the use he made of it; whether he behaved recklessly or acted deliberately, and almost inevitably therefore, dishonestly; the level of planning and sophistication involved in his activity, as well as the period of trading and the number of individual trades;104 whether he acted alone or with others and, if so, his relative culpability; the amount of anticipated or intended financial benefit or (as sometimes happens) loss avoided, as well as the actual benefit (or loss avoided); although the absence of any identified victim is not normally a matter giving rise to mitigation, the impact (if any), where proved, on any individual victim; and

in open and public court will often, and perhaps much more so now than in the past, be appropriate. Although those who perpetrate the offence may hope, if caught, to escape with regulatory proceedings, they can have no legitimate expectation of avoiding prosecution and sentence.’ 102 See R v McQuoid, above, per Lord Judge CJ: ‘We understand the submission, but the answer to it is simple. Those involved in the earlier investigations when a different policy was apparently adopted (and assuming that a different policy was adopted) may have been very fortunate. But their good fortune cannot enure to the benefit of anyone else. It is not suggested that the former policy of using the regulatory system misled the appellant into thinking that insider dealing, if proved, would be, or could be, other than criminal, or that he had some kind of reasonable expectation that it would or even that it might. In these circumstances the complaint that somehow the prosecution was unfair, or that the fact of prosecution was unfair, and that the sentence, if the prosecution were successful, should have reflected the kind of financial penalty that would have followed from a regulatory intervention is not sustainable.’ 103 See R v McQuoid, above, per Lord Judge CJ, who also stated immediately thereafter that: ‘Age and a guilty plea will always be relevant. So, too, will good character. However, it must be borne in mind that it will often be the case that it is the individual of good character who has been trusted with information just because he or she is an individual of good character. By misusing the information, the trust reposed as a result of the good character has been breached.’ In addition, on the facts of this case, Lord Judge CJ found that full weight must be given to ‘the impact on the appellant and his family, as well as the destruction of his professional reputation. This will be significant for the future. There is now no financial benefit. All his profit has been confiscated, and, no doubt because he elected to deny his guilt so that it had to be proved, he has been required to pay £30,000 towards the costs of the prosecution.’ In this case, a sentence of 12 months’ imprisonment was upheld for a single act of insider dealing resulting in profit of £48,919, for an appellant who was a solicitor and former General Counsel for a public limited company, who had become party to inside information regarding a takeover by another public limited company. 104 By way of example, see R v Rollins [2012] 1 Cr App R (S) 64 (CA), in which for a similar sum of money to that in R v McQuoid, above, a total sentence of 18 months for five counts of insider dealing (with three months consecutive for three counts of money laundering) was justifiable rather than the original 27 months (based on 15 months for counts 1–4, 21 months for count 5 concurrent, with six months’ imprisonment consecutive for the money laundering). Lord Judge CJ held that: ‘Whilst the sums involved in each case are comparable, the appellant undertook five separate transactions over a period of weeks, as opposed to the single transaction in McQuoid.’

424

Personal liability of senior managers and compliance officers  14.43 (8)

the impact of the offence on overall public confidence in the integrity of the market; because of its impact on public confidence, it is likely that an offence committed jointly by more than one person trusted with confidential information will be more damaging to public confidence than an offence committed in isolation by one person acting on his own.

14.40 Fifth, the laundering of criminal proceeds will justify a consecutive sentence if the offence adds to the culpability of the conduct involved in the primary offence.105 In particular, deliberately attempting to dispose of the proceeds of insider dealing within days of being contacted by the Financial Services Authority (FSA) has justified a consecutive sentence.106 14.41 As well as considering the issue of the appropriate length of imprisonment, whether suspended or not, a sentencing court may also in an appropriate case disqualify the convicted defendant from acting as the director of a company.107 Under section 2 of the Company Directors Disqualification Act 1986, the defendant does not need to have been a director of the company and the court does not need to find that the individual is unfit to act as a company director. In criminal courts, there is no statutory minimum period of disqualification. The maximum period of disqualification is 15 years in the Crown Court and five years in the magistrates’ court.108 14.42 As noted above, the court may also, upon conviction, impose a confiscation order upon the defendant. The law relating to confiscation orders and discussion thereof can be found in Chapter 8 and we do not intend to repeat here what has already set out. It may be that the court may also fine a defendant, in addition to making a confiscation order.109 The purpose of the fine is punitive. The purpose of the confiscation order is to deprive the defendant of the value of his criminal conduct. 14.43 Fining a defendant in excess of the profit made from insider dealing can be seen in the civil courts. In Massey v Financial Services Authority,110 the Upper Tribunal reduced a fine to the profit made (£100,000) plus 50 per cent (£150,000 in total), where the applicant had persuaded himself on inadequate grounds that he could trade. Had the applicant deliberately traded knowing full well that he was committing market abuse, the Upper Tribunal would have

105 See R v Linegar [2009] EWCA Crim 648; R v Greaves and Others [2011] 1 Cr App R (S) 8 (CA). 106 See R v Rollins [2012] 1 Cr App R (S) 64 (CA), in which three months’ imprisonment consecutive was imposed, reduced from six months given personal mitigation and the stress occasioned by the delay in bringing the matter to trial. 107 See R v Goodman (1993) 97 Cr App R 210 (CA), in which the defendant, a company director, arranged to sell 692,000 shares a few days before his company announced an unexpected loss. The Court of Appeal upheld the defendant’s disqualification as a director pursuant to section 2 of the Company Directors Disqualification Act 1986. The offence was found to be in connection with the management of a company. 108 Guidance on the appropriate length of a disqualification was given in the civil law case of Re Sevenoaks Stationers (Retail) Ltd [1991] Ch 164 (CA). Periods over ten years should be reserved for particularly serious cases. These may include cases where a director who has already had one period of disqualification imposed on him falls to be disqualified yet again. Six to ten years’ disqualification should apply for serious cases which do not merit the top bracket. Two to five years’ disqualification should be applied where the case is, relatively, not very serious. 109 See POCA, s 15(3). 110 [2011] UKUT 49 (TCC).

425

14.43  Personal liability of senior managers and compliance officers upheld the original fine of £281,474, which would be equivalent to the profit plus over 180 per cent. 14.44 In criminal courts, a fine may be combined with a sentence of imprisonment, in particular when there has been a substantial profit from the offence;111 however the extent of any fine that might be imposed has not yet been tested in the relevant case law. There is also a lack of relevant authority as to the appropriateness and extent of any fines that can be made in market abuse and insider dealing cases after the making of a confiscation order.112 14.45 The other financial order that the court will consider is whether or not to make a compensation order pursuant to sections 133–135 of the Sentencing Act 2020. By virtue of section 55 of the 2020 Act, a court is required, on passing sentence, to give reasons if it does not make a confiscation order when dealing with an offender for an offence and where a compensation order was available. Two key principles may be of importance in cases involving compensation requests in market abuse and insider dealing cases. First, there must be a causal link for compensation to be ordered.113 Second, when detailed and complex issues fall to be decided,114 then compensation should be left to the civil courts.115 In this context, and in the context of any regulatory proceedings that might follow, it is of note that a convicted defendant cannot use the civil courts as a means to initiate a collateral attack on his conviction. This would constitute an abuse of process,116 and the principle might be departed from only where there was fresh evidence which entirely changed the aspect of the case.117

REGULATORY LIABILITY, PERSONAL ACCOUNTABILITY – SENIOR MANAGERS, CERTIFIED PERSONS AND CODE STAFF 14.46 In addition to potential liability in the criminal law outlined above, it is important to consider the extent to which personal liability can arise under the regulatory system. In Chapter 15, we consider the extent to which a person in a position of control can attract liability under the regulatory system for the failings of others or a breakdown of the control environment within an organisation. In this chapter, we consider the potential for liability under the regulatory system where a person engages in personal misconduct, such as where a director compliance officer, Money Laundering Reporting Officer (MLRO), senior manager (and as we will see, other people subject to the regulatory code) engage in market abuse, or otherwise fail to meet the standards required of them in relation to conduct in the market.118 111 See Current Sentencing Practice (Sweet and Maxwell 2015), at J1-3A. 112 See POCA, s 15(4) for the general power to make a fine within 56 days of the making of a confiscation order, though such a fine will not be a consideration in those cases where the defendant has insufficient means to even repay his benefit from his crime. 113 See R v Deary (1993) 14 Cr App R (S) 648 (CA); R v Derby (1990–91) 12 Cr App R (S) 502 (CA). 114 Other than those already determined at trial or sentence. 115 See R v Kneeshaw (1974) 58 Cr App R 439 (CA); R v Bewick [2008] 2 Cr App R (S) 31(CA). 116 See Hunter v Chief Constable of the West Midlands Police & Others [1982] AC 529 (HL). 117 See Earl Cairns LC in Phosphate Sewage Co Ltd v Molleson (1879) 4 App Cas 801. 118 For further examination of compliance officer responsibility and liability, see KrambiaKapardis (ed), Financial Compliance, Issues, Concerns and Future Directions (Palgrave Macmillan 2019), Chapter 6, ‘Risk-Based Financial Regulation and Compliance Officer Liabilit’y by Stuart Bazley.

426

Personal liability of senior managers and compliance officers  14.48 14.47 Part V of the FSMA sets out a framework of regulation applying to certain persons working in financial services, including, although not limited to, those that perform defined controlled functions. This part of the FSMA along with supporting FCA and Prudential Regulation Authority (PRA) rules have the effect of providing for a system of individual accountability, setting out required standards of conduct and behaviour and allowing for a system of enforcement and discipline, when the required standards are not complied with. In this chapter we provide an overview of the approach to enforcement under the FSMA. The framework of regulation in Part V of the FSMA has experienced significant change following initial criticism of the culture and behaviour in the UK banking sector by a UK Parliamentary Commission on Banking Standards.119 Consequently, rules apply to senior managers, certified person and other code staff, with new rules that came into force in March 2016 for those working in the banking sector, December 2018 for those working in the insurance sector, and more recently in December 2019 for those working in the majority of the remainder of people working at FSMA authorised firms. For convenience and consistency with the FCA and PRA, we refer to the new regime as the ‘senior managers and certification regime’ (SMCR), but as will be shown below, aspects of the new regime do extend to other persons. In addition, because of the division of authorisation and thus rules between PRA and FCA, to illustrate the operation of SMCR, we tend to refer to rules of the FCA, but it is important for the scholar of financial regulation to consider where relevant each regulator’s requirements and expectations.

Senior management function holders 14.48 Part V of the FSMA sets out three main components of the SMCR regime, along with what might be considered as mechanisms for discipline and enforcement. First, in sections 59–63ZE, the Act sets out requirements for regulator approval of persons performing defined ‘Controlled Functions’ For instance, section 59(1) provides, ‘An authorised person (“A”) must take reasonable care to ensure that no person performs a controlled function under an arrangement entered into by A in relation to the carrying on by A of a regulated activity, unless that person is acting in accordance with an approval given by the appropriate regulator under this section.’ Controlled functions are those specified in the rules of the PRA and the FCA (in respect of PRA authorised persons, see section 59(3)(a), and in respect of FCA authorised persons, see section 59(3)(b)), and which meet the definition of ‘senior management function’ in section 59ZA. In essence, such functions and thus the focus of the regime applicable to senior managers is centred on the most senior roles with responsibility for parts of a business, which if performed incorrectly can give rise to a significant negative outcome. Section 59ZA(2) provides: ‘A function is a “senior management function”, in relation to the carrying on of a regulated activity by an authorised person, if— (a)

the function will require the person performing it to be responsible for managing one or more aspects of the authorised person’s affairs, so far as relating to the activity, and

119 Parliamentary Commission on Banking Standards. Changing Banking for Good. Vlm 1 HC 175-I. 12 June 2013.

427

14.48  Personal liability of senior managers and compliance officers (b) those aspects involve, or might involve, a risk of serious consequences— (i) for the authorised person, or (ii) for business or other interests in the United Kingdom.’ 14.49 The PRA and FCA set out and describe their respective senior management functions in the FCA’s supervision sourcebook (SUP) of its Handbook and PRA’s senior management function section of the relevant authorised firm rulebook. Throughout this part of the chapter, to simplify our examples we largely make reference to provisions of the FCA rulebook, although it is important for PRA authorised firms to consider PRA rules applying to senior management functions. Some of the defined functions are applicable only to certain categories of authorised persons, (such as the PRA Actuarial function holder being applicable to insurers), whereas others apply in relation to specified activity or governance characteristics, and other functions are more generic. SUP 10C describes and recognises senior management functions under the broad headings of: ‘Executive’ in SUP 10C.5 – such as executive directors; Partners and Chief Executive; ‘Oversight’ in SUP 10C.5A – such as non–executive directors and persons chairing certain board committees such as a Risk Committee or audit committee; ‘Required functions’ in SUP 10C.6 – such as the person responsible for compliance oversight and the person acting as a firms money laundering reporting officer (see Chapter 13 of this book which examines certain aspects of the obligations of an authorised person under the regulator system to establish a compliance oversight function); and ‘systems and controls functions‘ in SUP 10C.6A – such as Chief Finance and Chief Risk functions and ‘head of internal audit function’. SUP 10C also describes a range of other functions applicable to more discrete firm circumstances. 14.50 An application for senior management approval must be submitted to the PRA or the FCA as the case may be, meeting the broad requirements in section 60 of the FSMA, although section 60A of the FSMA requires that before submitting an application the authorised person must itself first have satisfied itself that the applicant is fit and proper, including under section 60A(2) that the applicant: ‘(a) (b) (c) (d)

has obtained a qualification, has undergone, or is undergoing, training, possesses a level of competence, or has the personal characteristics,

required by general rules made by the regulator in relation to persons performing functions of the kind to which the application relates.’ In order to be approved the senior management function applicant must, in accordance with section 61(1) of the FSMA, satisfy the relevant regulatory authority that they are fit and proper to perform the function applied for.120 Guidance provided in the FCA Handbook at the sourcebook for ‘The fit and proper test for persons’ (FIT) indicates a series of issues relevant to an applicant’s suitability.121 This includes matters such as: (a) the applicant’s

120 FSMA, s 61 allows the appropriate regulator to grant approval, approve with conditions or limitations or decline it (for which see section 62(2)). 121 See FCA Handbook ‘The Fit and Proper test for Approved Persons (FIT) at FIT 2 ‘Main assessment criteria’.

428

Personal liability of senior managers and compliance officers  14.51 honesty, integrity and reputation, including their antecedents, such as whether they have been convicted of any criminal offences, been the subject of adverse civil proceedings, been the subject of an investigation or proceedings of a disciplinary or criminal nature, contravened previously the requirements for the regulatory system, been a director, partner of or involved in the management of a business which has got into ‘insolvency, liquidation or administration’ during the period the applicant’s connection with the business or within one year of being connected, and whether the applicant has been ‘candid and truthful in all his dealings with’ the relevant regulatory authority; (b) financial soundness, including outstanding judgment debts and arrangement with creditors or bankruptcy; and (c) competence and capability including whether the person’s training and experience demonstrates suitability to perform the control function applied for whether they have ‘adequate time to perform the controlled function meet the responsibilities associated with that function’. (Certain specified functions such as those that are customer facing are subject to prescribed examination requirements, although these requirements do not apply to compliance functions specifically considered in this chapter and Chapter 10.)

Certification employees 14.51 The second component of Part V of the FSMA is that applying to persons described in section 63E who must be issued by their employer with a certificate of fitness and propriety under section 63F. Certification employees are those persons described in section 63E as performing a role which may give risk to ‘significant harm’ to the authorised firms business or its clients, is not a controlled function (see above) and which has been specified in FCA or PRA rules. The FCA sets out rules relating to aspects of the certification regime in its senior management arrangements, system and controls sourcebook (SYSC) chapter 27 and provides a specification of certified functions at SYSC 27.7 and 27.8 as covering discreet functions such as that for oversight of a firms’ compliance with the client asset rules (but for medium and significant CASS firms as described), and more generic functions such as;’ significant management’ or ‘material risk taker’. The complete list of FCA specified function is as follows: (a) (b) (c) (d) (e) (f) (g) (h)

CASS oversight – SYSC27.8.1; Propriety trader –SYSC 27.8.3; Significant management –SYSC 27.8.4; Functions requiring qualifications under the FCA training and competence rules – SYSC 27.8.10; Managers of certification employees – SYSC 27.8.13; Material Risk Takers – SYSC 27.8.14; Client dealing – SYSC 27.8.18; and Algorithmic trading function – SYSC 27.8.23.

In order to issue a certificate of fitness and propriety to an employee performing a function, the authorised person must satisfy the requirements in section 63E of the FSMA, for which the FCA provides guidance at SYSC 27.2. The key element of the requirement of section 63E is the demonstration that a certification employee is a fit and proper, which includes in keeping with 429

14.51  Personal liability of senior managers and compliance officers the requirements for senior management function holders described above, including meeting requirements at section 63F taking into account a persons, qualifications, training that has been taken or is being undertaken, competence and ‘personal characteristics’, Again, and in keeping with the requirement for senior management function holders, the FCA’s sourcebook FIT provides guidance on subject areas relevant to a person’s fitness and propriety, which include questions relating to integrity, reputation, and financial soundness.

All staff and the general requirements for competence 14.52 Senior management function holders and certification employees are subject to the rules of conduct issued by the FCA or PRA (as relevant) under section 64A – further details about the Conduct rules are described below. (Liability that may arise from regulatory discipline and enforcement is considered further below and in Chapter 12.) Certain provisions of the rules of conduct are, however, applicable (with some minor exceptions) applicable to all employees of an authorised person, in that section 66 coupled with section 66A (for FCA authorised firms) and section 66B (for PRA authorised firms), permit the FCA or PRA, as relevant, to impose a financial penalty, publish a statement about misconduct, or suspend, impose conditions or limits on a person’s approval (in the case of a senior management function holder). It must of course be remembered that section 56(10 and (1A) of the FSMA also gives the FCA and PRA power to impose a prohibition order ‘… if it appears that an individual is not a fit and proper person to perform functions in relation to regulated activity carried on by, a) an authorised person …’. The FCA has published rules and supporting guidance requiring firms to satisfy themselves that all persons acting for them (which will include employees) are suitable, including the persons, competence and integrity. See, for instance, SYSC 3.2.13G applying to insurers and SYSC 5 for MIFID firms. In addition, the European Securities and Markets Authority published guidelines in January 2017 on competence and knowledge122 for staff that advise or give investment information to clients, and similarly and as explored further in Chapter 13 of this book, has published guidelines on a firms’ compliance function, including at its guideline 6, aspects of competence and skills123 And authorised persons must make employees, in addition to senior management function holders and certified persons, aware of the provisions of the code. In January 2022, the FCA published on its website commentary about its views on the competence and skills of applicants for approval for the compliance oversight and money laundering reporting officer senior management functions, covering issues such as ‘Training’, ‘Experience’, and ‘Capacity’, stating in general terms ‘Authorised and registered firms should have heads

122 European Securities and Markets Authority, ‘Guidance for the assessment of knowledge and competence’, 3 January 2017, ESMA71-1154262120-153EN(rev), https://www.esma.europa.eu/ sites/default/files/library/esma71-1154262120-153_guidelines_for_the_assessment_of_ knowledge_and_competence_corrigendum.pdf. 123 The European Securities and Markets Authority Final report: Guidelines on certain aspects of the MiFID compliance function requirements (6 April 2021), https://www.esma.europa. eu/sites/default/files/library/guidelines_on_certain_aspects_of_mifid_ii_compliance_ function_requirements.pdf.

430

Personal liability of senior managers and compliance officers  14.53 of compliance and money laundering reporting officers (MLROs) who are suitably competent and capable of effectively performing the roles. Firms should carefully consider how individuals can demonstrate this ahead of seeking regulatory approval’.124 14.53 Senior management function holders, certification employees and employees are required to comply with the relevant rules – the FCA and PRA section 64A conduct rules. The conduct rules published by the FCA Code of Conduct sourcebook (COCON) ‘are supported by guidance on the steps that may be taken to comply with the code requirements evidential factors that the relevant regulatory authority may take into account to determine compliance by the approved person with the statements of principle’. The FCA code rules provide as follows: Individual Conduct Rules ‘Rule 1: You must act with integrity. ‘Rule 2: You must act with due skill, care and diligence. ‘Rule 3: You must be open and cooperative with the FCA, the PRA and other regulators. ‘Rule 4: You must pay due regard to the interests of customers and treat them fairly. ‘Rule 5: You must observe proper standards of market conduct.’ Senior management conduct rules ‘SC1: You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively. ‘SC2: You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system. ‘SC3: You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively. ‘SC4: You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.’125 As set out COCON, Rules 1–5 are of general application, applying to all staff along with senior management function holders and certification employees, whereas Rules SC1 to SC4 are applicable to those persons performing a senior management function. Upon analysis, it is evident from the language of SC1 to SC4 that they relate to standards required of the senior management function holder in managing and organising the affairs of the business they are responsible for, including (as covered by SC2) the extent to which the function holder take steps to ensure the area of the business for which they are responsible complies with the relevant regulatory standards.

124 FCA Head of Compliance and MLRO applicant competency and capability, FCA website page, 28 January 2022, https://www.fca.org.uk/firms/approved-persons/ heads-compliance-mlro-applicant-competency-capability. 125 FCA Code of Conduct sourcebook (COCON), https://www.handbook.fca.org.uk/handbook/ COCON/1/?view=chapter.

431

14.54  Personal liability of senior managers and compliance officers 14.54 The extent to which a person will be considered in breach of the code requirements is addressed to some extent in the introductory sections of COCON. Moreover, at COCON 3.1.3G the FCA Handbook positions compliance in the context of personal culpability and talks in terms of whether the person’s conduct in giving rise to the breach was deliberate or falls ‘below that which would be reasonable in all the circumstances’. This is further confirmed at paragraph 6.2.7G of the FCA’s Decisions Policies and Procedures sourcebook (DEPP) which, in setting out the Authority’s policy towards the discipline of individuals, provides: ‘… disciplinary action will not be taken against … a senior conduct rules staff member simply because a regulatory failure has occurred in an area of business for which he is responsible. The FCA will consider that … a senior conduct rules staff member may have breached rules SC1 to SC4 in COCON 2.2 only if their conduct was below the standard which would be reasonable in all the circumstances at the time of the conduct concerned …’. COCON 3.1.5G makes clear the objective nature of the code rules stating in particular, ‘In assessing compliance with, or a breach of, a rule in COCON, the FCA will have regard to the context in which a course of conduct was undertaken, including: (1) (2) (3)

the precise circumstances of the individual case; the characteristics of the particular function performed by the individual in question; and the behaviour expected in that function.’

By way of example, and of relevance to a person with responsibility for compliance oversight as an authorised person in the context of the management of a compliance function, guidance at COCON 4.2.24 addresses the suitability of individuals working under the control of the Compliance Oversight senior management function holder and considers that for the purposes of SC3: ‘In determining whether or not the conduct of a senior conduct rules staff member complies with rule SC3 in COCON 2.2.3R, the factors which the FCA would expect to take into account include: (1) the competence, knowledge or seniority of the delegate; and (2) the past performance and record of the delegate.’ 14.55 With regard to the Rule 2 obligation to exercise due skill care and diligence, COCON 4.1.2 to 4.1.8A address a range of skill, care and diligence requirements from the standpoint of different activities and levels of seniority. Of relevance to compliance officers and MLROs, COCON 4.1.8 sets out behaviour that the FCA may consider being in breach were it including ‘Failing to take reasonable steps to adequately inform themselves about the affairs of the business for which they are responsible …’ and further includes reference to ‘permitting transactions without a sufficient understanding of the risks involved’; ‘inadequately monitoring highly profitable transactions or business practices or unusual transactions or business practices’; and ‘accepting implausible or unsatisfactory explanations from subordinates without testing the veracity of those explanations’. An earlier FSA Final Notice to Alexander Edward Ten-Holter,126 albeit relating to standards under a previous approved persons code and not in relation to the current FCA code requirements, illustrates the possible expectations of standards of due care and skill on due skill care and diligence to a compliance officer in the context of market abusive transactions. Mr Ten-Holter was employed by Greenlight Capital (UK) LLP as its compliance officer (then 126 FSA Final Notice Alexander Edward Ten-Holter 26 January 2012.

432

Personal liability of senior managers and compliance officers  14.57 described as Controlled Function 10), MLRO (then described as Controlled Function 11), as well as a partner of the firm (Controlled Function 4) and to execute trades based on instructions from Greenlight Capital Inc (Customer Controlled Function 30). The FSA found that Greenlight Capital Inc had engaged in market abuse in that it had sold securities and executed contracts for differences in shares it owned in Punch Taverns plc, following a conversation with management at Punch Taverns during which price-sensitive information was disclosed.127 The order to execute the sell transaction was given to and executed by Mr Ten-Holter. The FSA identified that Mr Ten-Holter. ‘was aware that: Greenlight had made the decision to sell all of its shares in Punch having just spoken to Punch management’ and that at the time that he was given the sell order he had been told by the Greenlight analyst: ‘a) Punch management would have told them “secret bad things” had Greenlight been prepared to sign a non-disclosure agreement (“NDA”); b) other shareholders had signed the NDA and in Greenlight’s opinion would want to sell; and c) Greenlight potentially had a window of a week to sell before the stock “plummets”, although that “might be a lie”.’ 14.56 In that decision, the FSA further identified that subsequent to the execution of the sell order, Mr Ten-Holter became aware of an unscheduled announcement by Punch Taverns concerning its intention to raise further finance, which caused a decline in the price of Punch Tavern Shares. The FSA considered that Mr Ten-Holter failed to ‘question and to make reasonable enquiries prior to effecting the sell order’ and that Mr Ten-Holter should have been alerted to the risk of market abuse by Punch Tavern’s subsequent announcement. In this regard the FSA stated in its Final Notice that: ‘Mr Ten-Holter did not recognise the risk and took no action. His behaviour whilst performing the Compliance oversight function at Greenlight UK was in breach of Statement of Principle 6 of APER [Code of Practice for Approved Persons]. His behaviour also demonstrates a lack of competence and capability, such that he is not fit and proper to perform the Compliance oversight (CF10) and Money laundering reporting (CF11) significant influence functions.’ 14.57 Importantly moreover, in respect of more specific standards required for a compliance officer, the FSA Final Notice commented on the failure in the context of ‘detecting and preventing’ market abuse being a ‘key part’ or Mr Ten-Holter’s compliance role and of the need to consider risk of market abuse based on available information rather than in reliance on a personal view of the firms overall standards, stating: ‘He relied on his view of Greenlight’s high standards of compliance in making any assessment of risk. This was inappropriate; the possibility of risk should be considered on the basis of the information available.’ In a more recent combined FCA and PRA decision128 relating to the individual conduct Rule 2 and illustrating the ambit of that rule (albeit a decision not in 127 See further, FSA Final Notice Greenlight Capital Inc 12 January 2012. 128 See FCA Final Notice Mr James Edward Staley 11 May 2018, https://www.fca.org.uk/ publication/final-notices/mr-james-edward-staley-2018.pdf; and PRA Final Notice Mr James Edward Staley 11 May 2018, https://www.bankofengland.co.uk/-/media/boe/files/prudentialregulation/regulatory-action/final-notice-from-pra-to-mr-staley.pdf?la=en&hash= B440E988E324EC0696CABAA83C83DCA620C0ABAD.

433

14.57  Personal liability of senior managers and compliance officers relation to market abuse), a financial penalty totalling £642,430 was imposed on the then Barclays Group Chief Executive for failing to act with ‘due skill, care and diligence’ for his response to a ‘whistleblowers’ letter received at the bank, including attempting to identify the whisleblower. Commenting on the decision, the FCA’s Executive Director of Enforcement and Market Oversight, Mr Mark Steward, stated, ‘Mr Staley breached the standard of care required and expected of a Chief Executive in a way that risked undermining confidence in Barclays’ whistleblowing procedures. Chief Executives must act with a high degree of care and prudence at all times. Whistleblowers play a vital role in exposing poor practice and misconduct in the financial services sector. It is critical that individuals are able to speak up anonymously and without fear of retaliation if they want to raise concerns.’129 14.58 SMC2 and its supporting guidance addresses specifically a senior management function holder’s responsibility to take reasonable steps to ensure that the areas of the business for which they are responsible comply with standards under the regulatory system. The guidance and COCON 4.22.11 to 4.2.16 set out a series of failures and behaviours relating to organisational systems and controls. Two such provisions are aimed firmly at the person with responsibility for compliance oversight and the MLRO in the context of steps they should take to discharge their responsibilities. The provisions at APER 4.2.16(7) consider that the MLRO will be in breach of SMC2 where the person fails to ‘discharge the responsibilities imposed on him by the firm’ pursuant to the money laundering system and controls provisions of SYSC. For instance, at SYSC 6.3.9R an authorised firm is required to ‘appoint an individual as money-laundering reporting officer with responsibility for oversight of its compliance with the FCA’s rules on systems and controls against moneylaundering’. Similarly, in relation to compliance oversight, the provisions at COCON 4.2.16(8) indicate ‘For a senior conduct rules staff member who is responsible for the compliance function, failing to ensure that: (a) (b) (c)

the compliance function has the necessary authority, resources, expertise and access to all relevant information; or a compliance officer is appointed and is responsible for the compliance function and for any reporting as to compliance; or the persons involved in the compliance functions are not involved in the performance of services or activities they monitor; or …’

Personal liability for compliance officers and failure to report reasonable suspicions 14.59 We considered in Chapter 13 a range of obligations imposed on authorised firms to ensure compliance with the regulatory system for market abuse, including mechanisms for the reporting of suspicions of abuse orders and transactions. Instances have occurred where a compliance officer at a firm has information that is indicative of a reasonable suspicion but has failed to report that suspicion. It is important to consider by reference to previous

129 FCA press release, ‘FCA and PRA jointly fine Mr James Staley £642,430 and announce special requirements regarding whistleblowing systems and controls at Barclays’, 11 May 2018, https://www.fca.org.uk/news/press-releases/fca-and-pra-jointly-fine-mr-james-staleyannounce-special-requirements.

434

Personal liability of senior managers and compliance officers  14.62 regulator disciplinary decisions, the extent to which such a failure might create personal liability for the compliance officer. 14.60 In practice, it is often the case that the initial identification of suspicious arises either with persons reasonable for the receiving or orders to trade or execution of transactions or those involved with transaction surveillance. Once suspicious activity is first identified many authorised firms have established arrangements requiring the suspicious transaction to be assessed, and where necessary reported to the FCA by the firm’s compliance function. Indeed as examined in Chapter 13, rules in the Senior Management Systems and Controls (SYSC) sourcebook at SYSC 6.1.1R require: ‘A firm must establish, implement and maintain adequate policies and procedures sufficient to ensure compliance of the … with its obligations under the regulatory system and for countering the risk that the firm might be used to further financial crime.’ Article 16(2) of MiFID II applies a similar provision requiring a firm to ‘… establish adequate policies and procedures sufficient to ensure compliance … with its obligations under the Directive …’. 14.61 A number of individual enforcement cases serve to highlight the individual liability that can arise for approved persons, including those holding the compliance oversight-controlled function, when a suspicion of market abuse should be reasonably held but it is not reported. In Carrimjee v Financial Conduct Authority the Upper Tribunal considered an application relating to an FCA decision concerning whether Mr Carrimjee knew or suspected that one of his clients intended to engage in market abuse. In relation to the regulatory obligation to report suspicious transactions Judge Herrington stated:130 ‘As we have indicated … the Authority relies on authorised firms and the approved persons who work for them to be vigilant as to suspicions of market abuse because of their position at the “coal face” in the market. If approved persons fail to meet the requirements market confidence can be damaged, financial crime can be facilitated and in this particular case, on the assumption that the trades concerned resulted or would have resulted in market abuse being committed, the impact on market participants could have been significant.’ 14.62 Disciplinary liability for suspicious reporting failures, as they related to persons holding the Compliance Oversight Controlled Function was addressed in the FSA decision involving Mr Ten-Holter where the Authority stated in its Final Notice: ‘The UK regulatory system requires individuals approved to hold the Compliance oversight (CF10) significant influence function to act with due skill, care and diligence and, in doing so, to recognise the signs of possible market abuse and to take action accordingly. Compliance failures of this nature can have a dramatic effect on the orderliness of the markets.’131 In the case, the FSA considered that Mr Ten-Holter’s failure to identify and react to ‘warning signs’ of market abuse amounted to a breach of the then approved persons principle 6 in that he did not act with due skill care and diligence and as a consequence he was not competent and capable to hold the compliancecontrolled function. In reaching such decision the FSA stated: ‘Individuals approved to hold the Compliance oversight (CF10) significant influence function are a fundamental part of the regulatory system and 130 Carrimjee v Financial Conduct Authority [2015] UKUT 79 (TCC), FS/2013/0003, at [323]. 131 FSA Final Notice Alexander Edward Ten-Holter 26 January 2012, at [5.5].

435

14.62  Personal liability of senior managers and compliance officers provide front line protection against market abuse for the firms for which they work and the wider market. Mr Ten-Holter’s conduct shows that he is unable to recognise signs of possible market abuse and has a flawed approach to compliance. As such, he does not have the requisite levels of competence and capability required to be fit and proper to hold the Compliance oversight (CF10) significant influence function. For the same reason he lacks sufficient competence and capability to hold the Money laundering reporting (CF11) significant influence function, which requires a similar level of alertness to warning signs.’132

132 Note 131, at [4.9].

436

Chapter 15

Control liability

RESPONSIBILITY AND CONTROL 15.1 In Chapter 14 we have examined the law and regulatory provisions which in certain circumstances might impose direct personal liability on individuals and in particular those involved with compliance, for misconduct related to insider abuse. In this chapter we will address the imposition of liability on those in managerial and supervisory positions for the misconduct of those for whom they have a responsibility. We will first examine the relevant English law and regulatory practice and then consider the position in the USA where control liability plays a much more significant part in promoting and maintaining integrity in the financial markets. The notion of imposing the risk of liability on those in authoritative relationships with those who commit or might commit wrongdoing is relatively foreign to the modern English law, where the emphasis is on personal responsibility for one’s own culpable acts.1 The position is, however, changing. We recognise that in many areas of activity where individuals are particularly vulnerable it may be justified to impose responsibilities on others to act in their or another’s protection.2 Their omission to protect or take steps to protect, in such circumstances, justifies the intervention of the criminal and civil law. Of course, these essentially paternalistic considerations are not particularly relevant in the financial markets albeit the ethos and, indeed, orientation of the law has become more like that relating to the protection of consumers.3 15.2 In addition to what might be described as the protection argument, we also recognise that in certain circumstances the temptation to abuse one’s position will be influenced by the hurdles and risks that one is likely to encounter in achieving the illicit advantage or benefit. We have already discussed this in the context of insider dealing.4 The imposition of potential liability on those who are in a supervisory position for a failure of, for example, a compliance system will, at least in theory, reinforce that system’s efficacy. It will certainly

1 2 3 4

See, for example, the discussion in G [2004] 1 AC 1034. See, for example, section 5(1) of the Domestic Violence, Crime and Victims Act 2004 in regard to allowing the death of a child or vulnerable adult. We have already referred to the amendments introduced by the Financial Services Act 2012. The imposition of a fiduciary relationship or something approaching such can also import obligations to advance and protect the other parties’ interests and property. See generally, Chapter 1 and in regard to the ‘risk-benefit’ approach, E Sutherland, White Collar Crime, The Uncut Version (Yale University 1983).

437

15.2  Control liability encourage those in authority to better fund and support compliance and ensure that it is fit for purpose. We have already seen a manifestation of this approach in regard to section 7 of the Bribery Act 2010.5 There were some who wished to see the creation of an offence applicable to managers for failure to prevent, by adequate supervision and compliance, acts of bribery. In the result, however, the initial proposals were diluted into the form of a corporate offence.6 We have already discussed whether imposing liability on individuals is likely to be more efficacious than on corporate employers.7 While section 7 is of considerable interest because it imposes strict criminal liability on companies that cannot show that they did have in place adequate arrangements to address the risk that someone acting for them would commit the offence of bribery and in fact did so, it remains to be seen whether it could be used as a model for other areas of activity.8 As we have seen there are real practical issues in subjecting companies to the criminal justice system. However, there is evidence that the threat of a criminal prosecution particularly with the attendant adverse publicity has brought home to many in senior management positions the importance of funding adequate compliance procedures and training. Recent initiatives by the Serious Fraud Office (SFO) involving corporate self-reporting of violations and deferred prosecution agreements have also played a role in underlining the importance of managerial responsibility. It is probable, as we have noted and discuss below, that in addressing the practical and legal problems associated with criminal liability for companies, further legislation will be introduced criminalising failure to prevent certain crimes, such as fraud and money laundering, as we have noted.9 15.3 The offence in section 7 of the Bribery Act, is an entirely separate offence predicated on different criteria than the offence of the agent or other person who actually commits the crime of bribery. The wrong is the failure of the company to take proper steps to address and control the risk, rather like the approach of the Financial Conduct Authority (FCA) to failures of compliance by authorised persons. Outside the area of social regulatory offences and perhaps to some degree, fiscal offences and those relating to national security, it is hard to find other examples in the English criminal law. As we have seen, there is an increasing tendency to place obligations that may result in criminal and regulatory liability on individuals and institutions to report their suspicions that certain crimes have or are taking place. This is, however, a personal responsibility and is not predicated on control or supervision.

5 6 7 8

9

See 6.89 above and in regard to the offence of failure to prevent the facilitation of tax evasion under Part 3 of the Criminal Finances Act 2017, see note 8 below. See also discussion below, 15.6 et seq and at Chapter 3 note 29 and 6.140. See 6.89 et seq above. See 14.1 et seq above. Similarly, see section 45 of the Criminal Finances Act 2017 in regard to the offence of failing to prevent the facilitation of tax fraud. The facilitation being undertaken by persons associated with the relevant company or partnership. This is extended to failure to prevent facilitation of a tax fraud under foreign law, by section 46. It is a defence for the business to be able to establish that it had ‘in place such prevention procedures as it was reasonable in all the circumstances to expect.’ Note also Part 3 of the Economic Crime (Transparency and Enforcement) Act 2022, which creates a civil offence with strict liability for breaches of financial sanctions; see Policing and Crime Act 2017, s 146. Other financial penalties may be imposed and the criminal law remains as it was. See also Law Commission, Corporate Criminal Liability: A discussion paper, 9 June 2021 at p 20. See Chapter 7 in regard to suspicions of money laundering and involvement with terrorist finance. See also specifically in regard to insider dealing, Chapter 4.

438

Control liability  15.4

VICARIOUS LIABILITY IN THE CRIMINAL LAW 15.4 We have already discussed the circumstances where a person may become involved in a criminal enterprise as a primary or secondary offender.10 While in some cases this may resemble control liability, the responsibility of the individual under the criminal law is both direct and personal as an accessory or conspirator. Given the emphasis that the law places on the culpability of the defendant, strictly speaking there is no doctrine of vicarious liability in English criminal law.11 Unlike in the law of tort where the object of the law is to provide compensation for wrongs and therefore find a deep pocket is appealing, the criminal law is primarily about punishing those who have committed crimes. Having said this there are circumstances in the criminal law where the acts and or state of mind of one person may be attributed to another, so as to resemble vicarious responsibility.12 It has been argued that authority exists in English law to simply treat the acts of an employee or agent as that of the employer.13 We have already seen that this is not so much attribution of knowledge and responsibility, but merger of the culpability of the relevant actor with the personality of the person to be held accountable.14 The courts have adopted this approach in cases involving complex financial and commercial dealings to give effect to statutory prohibitions and obligations. While prosecutors have been reluctant to invoke this approach,15 it is not without interest that the Labour Party’s Policy Review, Tackling Serious Fraud and White Collar Crime, quoting the second edition of this work, commended it as a sensible approach.16 An important aspect of this approach is that provided what is done

10 11 12

13 14 15

16

See 3.10 and at 6.103 and generally Chapter 14 above. R v Huggins (1730) 2 Str 883. The crime of public nuisance is an exception to the general rule, R v Stephens (1866) LR 1 QB 702, where an employer can be vicariously liable. This may be under statute or according to the doctrine of delegation. However, neither is of particular relevance in our present discussion, but see below at note 17. Issues have arisen in the context of partnerships. The courts have, however, refused to consider an innocent partner as ‘party or privy’ to the fraud of another partner generally and specifically in the context of section 2(1)(a) of the Limitation Act 1980, see Bishop of Leeds v Dixon Coles and Gill, [2021] EWCA Civ 1097. See, for example, Coppen v Moore (No 2) [1898] 2 QB 306. See 2.38 et seq above, and in particular, Meridian Global Funds Management Asia v Securities Commission [1995] 2 AC 500. See note 21 below. There is legitimate concern that a broad application of the ‘merger’ doctrine might well open the door to unpredictable and uncontrollable criminal responsibility on the part of companies. As Lord Templeman recognised in Re Supply of Ready Mixed Concrete (No 2) [1995] 1 All ER 135 corporate employers would be at risk notwithstanding they have done everything reasonable to promote compliance. Of course, it is important to remember that before adopting this seemingly draconian approach, the court should have first determined that without departing from the traditional approach to attribution, the purpose of a statutory obligation would be defeated. This point is often ignored in discussion as to utility and appropriateness of this approach. Labour Party (2013) at p 3. The 2017 manifesto of the Conservative Party also called for reform in policing and controlling economic and financial crime. See also the Treasury Select Committee, Economic Crime; Anti-money laundering supervision and sanctions implementations, Initial Report, House of Commons, 8 March 2019. The Committee noted that the Ministry of Justice conducted a call for evidence in 2017 (2017 Cm 9370) on the case for reform of the law of corporate liability for economic crime. On 3 November 2020, the Ministry of Justice stated that after careful consideration and a further evidence gathering exercise, the government concluded that the evidence submitted was inconclusive (Ministry of Justice, Corporate Liability for Economic Crime – Call for Evidence; A Government Response, 2020). The Law Commission published a Discussion Paper – Corporate Criminal Liability, 9 June 2021 and held a consultation between 9 June and 31 August 2021. See Corporate Criminal Liability – an options paper, Law Commission, 10 June 2020.

439

15.4  Control liability by the employee is in the course of employment it matters not that he is in breach of his employer’s instructions. Indeed, the House of Lords has held that if what is forbidden does in fact take place, then by definition there has been a failure of compliance and management and these aspects are simply issues for mitigation.17 15.5 The Law Commission in its consultation paper on Criminal Liability in Regulatory Contexts, published in 2010,18 welcomed the development of the law by the Privy Council in Meridian Global Funds Management Asia v Securities Commission19 and the House of Lords in Director General of Fair Trading v Pioneer Concrete plc20 as ‘it is clear from the decisions … that the courts now have latitude to interpret statutes imposing corporate liability as imposing it on different bases depending on what will best fulfil the statutory purpose in question.’ The Law Commission added that this allowed courts to in appropriate cases give full effect to the perceived intention of Parliament and that statutory intervention was not required. The reluctance of judges to take this on, has, however, disappointed the Law Commission,21 as we shall see. 15.6 The infliction of criminal liability on companies is arguably another aspect of control liability. There is debate as to the practical value in imposing criminal as opposed to civil liability of companies given the fictitious nature of their personality and the impracticality of most forms of punishments. We have seen that in English law companies cannot be guilty of insider dealing under Part V of the Criminal Justice Act 1993. Notwithstanding the reluctance of many legal systems to attempt to attribute criminal responsibility to corporations, the English law for a number of pragmatic and policy reasons is prepared to threat companies as if they are capable of committing many types of criminal activity in the same manner as a natural person. Offences involving strict liability present few issues and as we have seen Parliament has created corporate offences of failure to prevent bribery and the facilitation of tax fraud,22 in which liability is strict albeit with the defendant business being provided with a statutory defence. However, where the law necessitates proof of mental culpability, the matter is far more problematic. The law has fashioned and developed a number of theories which allow judges to transfer, impute and aggregate the knowledge and intentions, including recklessness, of one or more individual with that of the company.23 17 18 19 20 21 22 23

Re Supply of Ready Mixed Concrete (No 2) [1995] 1 All ER 135 at 142 per Lord Templeman. (2010) Law Commission Consultation Paper No 195. [1995] 2 AC 500. [1995] 1 AC 456, not that this case involved contempt nor criminal proceedings as such. The Law Commission, A Discussion Paper – Corporate Criminal Liability, 9 June 2021, at 2.37. See section 7 of the Bribery Act 2010 and Part 3 of the Criminal Finances Act 2017 at 6.89. The two principal theories used in the criminal law are the so-called alter ego and/or directing mind theory, Lennard’s Carrying Co Ltd v Asiatic Petroleum Ltd [1915] AC 705 and the identification theory, DPP v ICR Haulage Ltd [1944] KB 551 and Moore v Bressler [1944] 2 All ER 515. See S Worthington, ‘Corporate Attribution and Agency: back to basics’ (2017) 133 Law Quarterly Review 118. In recent cases, however, the courts have tended to merge these and speak in terms of identification. The ability to attribute liability on the basis of these theories was restricted in Tesco Supermarkets Ltd v Nattrass [1972] AC 153 to only very senior officials (the board of directors, managing director and possibly other senior officials). Lord Reid’s most restrictive approach (over Lord Diplock and Viscount Dilhorne) that the mind of only those with ‘full discretion to act independently of instructions’ and without responsibility to the board of directors for the way in which their duty is discharged, in regard to the relevant corporate action will be attributed or identified with the company, was followed by Davis LJ in SFO v Barclays plc [2018] EWHC 3055 (QB). He considered

440

Control liability  15.8

VICARIOUS LIABILITY IN THE LAW OF TORT 15.7 The civil law given its concern to assure adequate compensation for those who have suffered harm has always been rather more flexible and imaginative than the criminal law.24 On the other hand, as we have seen there, accessory liability with the exception of dishonest assistance in the breach of a fiduciary duty is very limited. Liability in the law of contract, in the context of our present discussion, is limited to the relevant parties. It is conceivable that in exceptional circumstances agency or a collateral contract might be invoked to place an obligation on someone who stands behind a wrongdoing party, but this would be highly exceptional. We have, however, already seen that the law of tort may in limited circumstances be relevant, such as in the case of inducing another breach of contract.25 The two areas of civil law that are rather more pertinent are those of vicarious liability in the law of tort and in equity. 15.8 The Court of Appeal in Natwest Markets plc v Bilta (UK) Ltd,26 referring to two recent decisions of the Supreme Court,27 emphasised that in determining whether vicarious liability is appropriate there was a twostage test. Firstly, there is a need to consider the relationship of the two defendants and to ascertain whether this is in law capable of giving rise to vicarious responsibility on the part of one for the acts or omissions of the other.

24

25 26

27

that where there are clear lines of authority in a company de facto authority was not sufficient, it had to be proved that the relevant individual ‘had entire autonomy to do the deal in question …’. This approach admittedly reduces the chances of successfully attributing a state of mind of an individual to a large company, but in Davis LJ’s view this was a matter for Parliament. See also Seaboard Offshore Ltd v Secretary of State for Transport [1994] 1 WLR 541. Davis LJ was not keen on the more flexible approach adopted by the House of Lords in Director General of Fair Trading v Pioneer Concrete plc [1995] 1 AC 456 and the Privy Council in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500. In Meridian Lord Hoffmann took the view that when principles of agency and the company’s constitution (ie ‘the general and primary rules of attribution’) failed to achieve the ascertained intention of Parliament in regard to a specific statutory offence it is acceptable for the court to depart from the traditional directing mind approach and find as a special rule a means of establishing culpability ‘otherwise, the policy of the Act would be defeated.’ Lord Templeman took a similar approach in Pioneer Concrete plc. Davis LJ in Barclays plc agreeing with Jay J. at first instance, that ‘none of Lord Hoffman’s general rules of attribution operate to fix Barclays with the acts or omissions of the individuals involved.’ We have already noted a considerable reluctance on the part of the judiciary, Law Commission and commentators to follow the more robust approach of Lord Templeman and Lord Hoffman, above at note 21. But note also the move to organisational liability in the Corporate Manslaughter and Corporate Homicide Act 2007. Davis LJ criticised the reliance placed by the SFO in its arguments in favour of attribution to cases in the civil law and particularly on El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685. He held ‘the position in tort and/or contract by no means necessarily corresponds with the position of attribution of liability in the criminal law’, SFO v Barclays plc [2018] EWHC 3055 (QB) at 136. See also Law Commission, A Discussion Paper, 9 June 2021, Ch 5. See, for example, Proform Sports Management Ltd v Proactive Sports Management Ltd [2006] EWHC 22903 (Ch) and Meretz Investments NV v ACP Ltd [2008] Ch 244 and at 14.9 et seq above. [2021] EWCA Civ 680 and see Blackpool Football Club Ltd v DSN [2021] EWCA Civ 1352. See in particular, CPS v Aquila Advisory Ltd [2021] UKSC 49, where the Supreme Court refused to allow the CPS to assert confiscation over secret profits acquired by directors of a company on the basis that their wrongdoing should be attributed to the company so as to justify the defence of illegality. The Supreme Court held that the illicit profits were held on constructive trust for the company and the wrongdoing of the directors could not be imputed to the company. See our discussion at 2.37 et seq. Catholic Child Welfare Society v Institute of the Brothers of the Christian Schools [2012] UKSC 56 and Barclays Bank plc v Various Claimants [2020] UKSC 13.

441

15.8  Control liability Secondly, the court needs to examine the connection that links the relationship between the two defendants and the act or omission of the defendant who engages in the relevant conduct or omission. 15.9 Vicarious liability in transmitting liability to another person does not relieve the person actually committing the wrong from liability.28 However, as we have already noted in regard to the position of compliance officers, it will usually be far more attractive for a claimant to pursue the employer or principal as they are rather more likely to have access to funds. The basis of liability is that the person committing the wrong is in a particular relationship to the defendant and the wrong is referable to that relationship. We have already noted that employment will often give rise to the prospect of vicarious liability for the employer.29 It is important to appreciate that the liability of the employer or principal in such cases does not depend on any fault as such on his or its part.30 Thus, this is an exception to the general reluctance of the civil law to contemplate strict liability other than under statute. It is also important to distinguish vicarious liability form an independent duty that an employer or principal may have, by virtue of some other relationship or situation to the claimant. Deciding which relationship can justify the imposition of vicarious responsibility on an employer has vexed the courts. The old approach based on control over the relevant employee is no longer thought to be suitable,31 at least for all situations.32 Today it is rather more common for the courts to adopt a test which looks at whether the relevant act was integral to the employer’s business or was merely ancillary.33 It is, however, necessary that all elements of the actionable wrong did in fact occur within the relationship. In other words, the employee must himself be liable for a tort.34 15.10 The second important element is whether the wrong – the tort – is sufficiently connected to the relevant relationship so as to justify the imposition of vicarious liability on the employer or principal. In the case of those in an employment relationship or one that is taken to resemble such, the test is whether the wrong was committed in the course of that employment or perhaps in more recent decisions, whether it was in the scope of the duties attaching to the relationship. Of course, what is meant here is not whether the commission of a wrong, by act or omission, was required by the employer, but

Standard Chartered Bank v Pakistan National Shipping Corporation [2002] UKHL 43. The principle is not confined to employment contracts per se: see Catholic Child Welfare Society v Institute of the Brothers of the Christian Schools [2012] UKSC 56. 30 The Court of Appeal in Natwest Markets plc v Bilta (UK) Ltd [2021] EWCA Civ 680 underlined that imposing such liability on employers who were themselves at no fault, was based on their assuming the organisational or business relationship which the employer undertakes for their own benefit. Consequently, to displace this responsibility an employer has a heavy burden of proof. Furthermore, as vicarious liability is placed on another party as a matter of public policy, contractual arrangements between the defendants can at best apportion liability, but not exclude or limit it, see Mersey Docks & Harbour Board v Coggins & Griffiths (Liverpool) Ltd [1947] AC 1. 31 See above at note 16. 32 Where it can be applied then the test may survive, see Jennings v Forestry Commission [2008] EWCA Civ 581. While an employer is not liable for the torts of a truly independent contractor, sometimes it will be unclear as to whether an individual is an employee or contractor. The courts are inclined to see whether what is being done is of benefit to the ‘employer’ and is integral to his business. Employment law is not always the determinant of the relationship in this area of the law of tort. 33 See Lee v Cheung [1990] 2 AC 374. The court have also emphasised that there should be mutual obligations in the relationship. 34 Credit Lyonnais Bank Nederland NV v ECGD [2001] 1 AC 486. 28 29

442

Control liability  15.12 whether the circumstances in which the wrong occurred was within the course or scope or the engagement. Thus, there will be liability if this is authorised, expressly or impliedly by the employer or is necessarily incidental thereto. So much, however, will depend upon the facts of the case.35 Indeed, the House of Lords in Lister v Hesley Hall Ltd36 said that the test was really nothing more than whether what took place was closely connected with the employment or business and whether it was just to impose liability on the employer. In WM Morrison Supermarkets plc v Various Claimants37 the Supreme Court addressed the issue of what was a sufficient connection in this context. Lord Reid emphasised that the wrongdoing needs to be closely connected to the tasks that the employee was employed to carry out for his employer. On long established principles the mere fact that the employment gave the employee an opportunity to engage in the tortuous act or omission is not sufficient to justify the imposition of vicarious liability on the employer. Lord Reid pointed out that an employer would not normally be vicariously liable where the employee was not engaged in furthering the employer’s business. 15.11 An issue which we have already touched upon in the context of accessory liability38 is whether it makes any difference if the employee in committing his wrong was acting against the express instructions of his employer. It would seem on the authorities that it does not, provided what took place was still within the scope of employment.39 It is also the case that it matters not whether the employee was not acting with the intention to benefit his employer, but rather in his own self-interest.40 Indeed, where the employer has allowed the wrongdoer to appear to have authority and this has resulted in a fraud against a third party, then the employer may well be liable.41 It is important, however, that the employer or principal has done something to contribute to the appearance of authority. However, it is no defence that the employer or principal may himself have also been wronged by the employee or agent. Indeed, in many cases involving vicarious liability the employer will have a claim in contract and or tort against the wrongdoer.

VICARIOUS RESPONSIBILITY IN RESTITUTION 15.12 Similar issues as in the criminal law and the law of tort have also manifested themselves in the law of restitution. In this context there are really 35 In Natwest Markets plc v Bilta (UK) Ltd [2021] EWCA Civ 680 the Court of Appeal emphasised that the determination of vicarious liability was a highly fact-sensitive exercise. 36 [2002] 1 AC 215. Depending upon the nature of the tort, it may be where the employer can show that the employee was ‘off on a frolic of his own’ then it would be inappropriate to hold him vicariously liable, see Joel v Morison (1834) 6 C & P 501 per Parke B at 503. 37 [2020] UKSC 12 applying Lord Nicholl’s approach in Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 and explaining Lord Toulson comments in Mohamud v WM Morrison Supermarkets plc [2016] UKSC 11. 38 See, for example, 14.13 above. 39 See In Re Supply of Ready Mixed Concrete (No 2) [1995] 1 AC 456 and Limpus v London General Omnibus Co (1862) 1 H & C 526. But see at 2.38 et seq above. 40 Lloyd v Grace, Smith & Co [1912] AC 716 and Uxbridge Permanent Benefit Society v Pickard [1939] 2 KB 248 and in regard to theft by an employee of a third party’s property, see Morris v CW Martin & Sons Ltd [1966] 1 QB 716 and Mendelssohn v Normand Ltd [1970] 1 QB 177 and in regard to forgery Dollars & Sense Finance Ltd v Nathan [2008] NZSC 20. 41 See Lloyd v Grace, Smith & Co, above at note 40 and Armagas Ltd v Mundogas SAQ [1986] 1 AC 717.

443

15.12  Control liability three issues. First, there is the possibility of vicarious liability for the acts of others and in particular agents. Secondly, there is the attribution of knowledge and, of course, acts of an individual to a body corporate and, thirdly the attribution of knowledge and or a state of mind one person to another.42 We have already considered on the context of the common law vicarious liability which traditionally has been invoked to provide a deeper pocket than that of the actual wrongdoer.43 We have also noted that it is an exception to the general dislike of the civil law of strict liability. The employer or principal of the agent concerned will be liable regardless of any moral blame on his or its part. We have discussed the circumstances where the courts are prepared to hold individuals personally responsible as if they were constructive trustees for providing assistance dishonestly to another where there has been a breach of trust or fiduciary obligation.44 As we have seen the House of Lords has accepted in the case of a partnership, that notwithstanding the innocence of all the partners save one, who had dishonestly facilitated a breach of trust, the firm – in this case of solicitors – was vicariously liable for the wrongdoing.45 Indeed, the view was expressed that equity should and did follow the common law and was ready and willing to impose liability where the wrongdoing is one which can ‘fairly be said to be reasonably incidental to the employer’s business’.46 A firm has been held vicariously liable for one of its employees bribing an employee of another company to provide him with confidential information. The claimant successfully alleged that the partner concerned had wrongfully induced their employee to breach his contract of employment.47 15.13 We have already referred to the attribution of knowledge and mens rea from an individual to a corporation in the context of the criminal law.48 In the civil law the courts have adopted much the same approach as in the criminal law, but arguably with more flexibility.49 In the case of what used to be described as knowing receipt of property transferred in breach of trust and which today is probably better described as unconscionable possession or retention, we have seen that it must be established that the bank or other person holding the property, or what it has become, must have sufficiently knowledge for the court to consider their position unconscionable. The same is true in regard to where they no longer hold traceable property or have merely given assistance in circumstances that render their conduct, or conceivably their omissions, unconscionable.50 Consequently, the ability to the attribute

42 43 44 45

46 47 48 49 50

See Moore-Bick LJ in Man Nutzfahrzeuge AG v Freightliner Ltd [2005] EWHC 2347 and Moulin Global Eyecare Trading v Commissioner of Inland Revenue [2014] HKFCA 22. See Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366. See Chapter 2. See also Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366, and in particular, Lord Millett who emphasised the jurisdiction that equity had always asserted to impose vicarious liability for dishonest breaches of fiduciary duty in the case of partnerships and trusts; see, for example, Brydges v Branfill (1842) 12 Sim 369. See Lord Millett above at note 45 and see also Laddie J in Balfron Trustees Ltd v Peterson [2001] IRLR 758. Hamlyn v John Houston & Co [1903] 1 KB 81 and see UBS AG (London Branch) v Kommunale Wasserwerke Leipzig GmbH [2014] EWHC 3615. See above 15.5 and also the excellent discussion of this topic in Cheong-Ann Png, Corporate Liability, A Study in the Principles of Attribution (Kluwer 2001) and A Stafford and S Ritchie, Fiduciary Duties, Directors and Employees (Jordan Publishing 2014) at Ch 8. See above at note 23. See in particular Credit Agricole Corporation and Investment Bank v Papadimitriou [2015] UKPC 13.

444

Control liability  15.14 knowledge of the pertinent facts in the part of the individuals involved in the objectionable conduct to the company or partnership is of great importance.51 The courts in such cases have tended to adopt an approach which asks whether the individual is performing his function for the company and therefore is effectively the company in regard to those acts. If so then it may be appropriate to attribute his state of mind to that of the company. While the formal position that an individual has in the corporate hierarchy might well be relevant, so are other issues.52 Indeed, even a non-executive director if allowed by the board to represent the company in discussions may effectively be the company.53 The courts have also been prepared to use agency as a test for imputation.54 This involves a determination that, for example, the bank or company, expressly or impliedly, authorised an individual, or for that matter another corporation, to receive communications on its behalf. In such circumstances the bank or other institution will not be able to deny that it had the relevant knowledge if it is proved that its agent in fact had it. 15.14 The courts have accepted that in line with the general law of agency, a company as principal will be estopped from denying knowledge that it gave its agent actual, apparent or ostensible authority to receive from others. Where it was known or indeed, intended that the information would not be passed on or would be distorted the position would be different.55 It is debatable the extent to which it is possible to aggregate the knowledge of two or more individuals and fix the company with this composite state of mind.56 While some judges have come close to doing this in circumstances where it is clear that the company did act in fact improperly, the better view is that it is desirable to identify one individual who has a sufficient state of mind to justify the imposition of liability for receipt or assistance. As we have already seen in regard to the law of tort, knowledge will not generally be imputed where the agent or other fiduciary, such as a director, is defrauding the principal.57 As Lord Philips observed in

51 52

53 54 55 56 57

See El Ajou v Dollar Land Holdings Ltd [1994] 2 All ER 685. See, for example, Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 and Man Nutzfahrzeuge AG v Freightliner Ltd [2005] EWHC 2347. This approach is based on the directing mind theory propounded by Viscount Haldane in Lennard’s Carrying Co Ltd v Asiatic Petroleum Ltd [1915] AC 705 as developed into what is sometimes referred to as the organic theory, which seeks to identify the relevant organ of the company. See El Ajou v Dollar Land Holdings Ltd [1994] 2 All ER 685 but see Man Nutzfahrzeuge AG v Freightliner Ltd [2005] EWHC 2347. See also in regard to the position of those who influence the boards of companies at 2.41 et seq above. See El Ajou v Dollar Land Holdings Ltd [1994] 2 All ER 685 and Jafari-Fini v Skillglass [2007] EWCA Civ 261. The courts may be prepared, however, to be rather more robust where there is evidence that individuals have deliberately structured their activity to obscure what is afoot, El Ajou v Dollar Land Holdings Ltd [1994] 2 All ER 685 and see Adams v R [1995] 1 WLR 52. See, for example, London County Freehold & Leasehold Properties Ltd v Berkeley Property & Investment Co [1941] 2 All ER 379. See Bilta (UK) Ltd v Nazir (No 2) [2014] Ch 52. The principle is applicable to other types of liability than fraud, see Safeway Stores Ltd v Twigger [2011] 2 All ER 841 and see the leading case of Re Hampshire Land [1896] 2 Ch 743. The exception does not, of course, apply in regard to the company’s liability for the fraudulent acts of its directors or employees to third parties and seemingly cannot be relied upon in regard to allegations against its auditors, see Stone & Rolls Ltd v Moore Stephens [2009] AC 1 1391, restrictively interpreted by the Court of Appeal in Bilta (UK) Ltd v Nazir (No 2) [2014] Ch 52. Where the company is essentially a one-person company and is essentially being used as a ‘engine of fraud’ the exception will not apply, see Berg, Sons & Co Ltd v Mervyn Hampton Adams [2002] Ll Rep PN 41 cited with approval in Stone & Rolls Ltd, by Lord Phillips.

445

15.14  Control liability Stone & Rolls Ltd v Moore Stephens ‘… it is contrary to common sense and justice to attribute to a principal knowledge of something that his agent would be anxious to conceal from him’.58

DIRECTORS’ KNOWLEDGE 15.15 The question as to the comprehensiveness and depth of knowledge that a company has or can be taken to have as a result of one or more of its directors having the relevant information is of course, a wider issue than justifying liability for restitution to third parties. As we have seen, if in all cases a director’s knowledge were attributed to the company, the company would not be in apposition to challenge the director for a failure in his duties to the company. The company would itself be tainted. Consequently, it is necessary to consider these issues from the standpoint of who the complainant is and what the relevance of knowledge is to that particular claim. The courts have accepted that not all knowledge that a director has can reasonably be attributed. Indeed, directors might reasonably forget information59 or be under a duty not to disclose it, albeit this may result in a conflict of interest.60 While directors and agents are under a duty to communicate relevant information to their company or principal, the courts have adopted a realistic approach and have been prepared to accept that this might not always be a duty that is properly discharged.61 15.16 Many of the issues that we have canvassed are complicated by the very nature of the separate personality of corporations.62 This is something we have already noted. Generally speaking, the courts are reluctant to look behind incorporation and fix liability on those who stand behind a company, including other companies.63 Having said this where incorporation is used to

58

59

60 61

62 63

See above at note 57 and see also Group Josi Re v Walbrook Insurance Co Ltd [1996] 1 WLR 1152 at 1170 and Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250 in which the Court of Appeal rejected the argument that the company could be considered a conspirator with two directors in regard to conduct which was illegal and detrimental to the company. This will, however, be exceptional, see Arden LJ in Real Estate Opportunities Ltd v Aberdeen Managers Ltd [2008] 2 BCLC 116 and El Ajou v Dollar Land Holdings Ltd [1994] 2 All ER 685. There is also a question of timing. What if a director, with knowledge has ceased to be a director at the material time? Is it reasonable to impute knowledge over a period of time? In practice the court will examine the facts. Similar issues have arisen in the so-called corporate opportunity cases, see Chapters 2 and 8 above where a director has left a company taking with him a maturing business opportunity. See generally, Chapter 8 above. See El Ajou v Dollar Land Holdings Ltd [1994] 2 All ER 685. Where the agent is required to investigate and report on a matter then it will be presumed, vis à vis a third party that this has occurred justifying imputation. Of course, if a third party is aware that the information has not or will not be effectively communicated to the company or principle the position will be different, Blackley v National Mutual Life Insurance [1914] 3 KB 722. Where the duty to investigate is imposed directly on the company or principal, which might well be the case in the so-called knowing receipt and assistance cases and an agent is instructed to discharge this duty then the knowledge of the agent will be imputed. In the case of partnerships, where a partner is innocent and unaware of another partner ’s fraud, at least for the purposes of limitation, he will not be considered as ‘party or privy’ to a breach of trust, see Bishop of Leeds v Dixon Coles & Gill [2021] EWCA Civ 1097. See the classic justifications in Saloman v Saloman & Co [1897] AC 422 and see our discussion at 6.140.

446

Control liability  15.17 evade a duty of disclosure or facilitate a fraud including the drawing down of the proceeds of such64 the courts are very prepared to look through to the reality.65

FINANCIAL SERVICES REGULATION AND CONTROL LIABILITY 15.17 In this part of the chapter we examine issues concerned with accountability and liability under the regulatory system for those persons involved in the control and management of firms authorised to carry on regulated investment business in the UK. As a matter of policy, the regulatory system seeks to hold to account those persons in senior management positions that effectively direct the affairs of an authorised business. A series of business failures in the 1990s heightened the desire to ensure that the regulatory system did not allow for senior management to avoid personal responsibility for organisational failure and at the same time allow for them to merely move to another regulated financial services business following the failure and possible collapse of their former employer. Following the collapse of Barings Bank in 1995 the Securities and Futures Authority experienced press criticism for its dealings with senior management at the Bank.66 Although many of the agencies regulating financial services business prior to the coming into force of the Financial Services and Markets Act 2000 (FSMA) introduced rules and arrangements to ensure that senior personnel within firms they regulated could be subject to personal discipline, the FSMA introduced into law a statutory system of regulatory approval and as a consequence liability for persons holding ‘controlled functions’. Subsequently and following the banking crisis, the significance of accountability along with the complexities associated with liability for those persons holding control in relation to banking was emphasised by the Parliamentary Commission on Banking Standards as follows: ‘The complex structure and diverse activities of many large banks obscured senior executives’ understanding of what was really going on in the

64

65

66

The courts while traditionally conservative have no problem in disregarding the corporate form where it has been invoked as part of a fraud or other crime. The use of an existing company, which has incurred obligations to others, is more problematic. The willingness of judges to look behind incorporation – lift the veil of incorporation, or effectively disregard it – pierce the veil, is not confined to fraud and crime, but extends to a much wider spectrum of obligations, see, for example, Burton J in Antonio Gramsci Shipping Corp v Stepanovs [2011] EWHC 33 who held that there was ‘no good reason of principle or jurisprudence why the victim cannot enforce the agreement against both the puppet company and the puppeteer who, all the time, was pulling the strings’ and see also Alliance Bank JSC v Aquanta Corporation [2011] EWHC 3281 and the approach of Lord Denning in Wallersteiner v Moir (No 2) [1975] QB 373. See Prest v Petrodel Resources Ltd [2013] UKSC 34 and VTB Capital plc v Nuteitek International Corporation [2013] UKSC 5. In Prest at paragraph 35, Lord Sumption stated: ‘There is a limited principle in English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality.’ Anthony Hilton, ‘SFA backing off over the Barings accused’, The Evening Standard, 10 December 1996, City Comment 33.

447

15.17  Control liability businesses they were supposedly running. When conduct and risk failures came to light, this ignorance allowed many leaders to profess their shock at what had been happening, duck personal accountability and instead blame systems failures or rogue individuals. Many banks had a structure of crosscutting functions and committees which meant that key decisions and risks were not owned by single executives but were shared, undermining a sense of individual responsibility.’67 15.18 Regulatory discipline against those that control the affairs of an authorised person (such as its senior executives) is not always straightforward and regulatory misconduct within an authorised firm may not necessarily give rise to liability for those in control, unless it can be shown in accordance with evidential standards, that the persons in control are in breach of the regulatory duties they are obliged to meet (such as those set out in the FCA Code of Conduct sourcebook (COCON). Although not related to market abuse and relating to regulatory standards applicable prior to COCON (there were Approved Person principles in a sourcebook referred to as APER), the Financial Services Authority (FSA) attempt to discipline John Pottage, the Chief Executive Officer of the wealth management businesses of UBS AG and UBA Wealth Management (UK) Limited (collectively referred to as UBS), illustrates some of the challenges that may be faced in attributing responsibility for a person in a position of control for weakness at a firm. In a decision of the Upper Tribunal following a reference by Mr Pottage, Sir Stephen Oliver judge of the Upper Tribunal stated:68 ‘Our views of the evidence as a whole and of those points in particular have led us to the conclusion that the FSA has not established its case that Mr Pottage had committed misconduct. There were, as we have found in Part II of this Decision, and as UBS AG have in some respects admitted, failings in the Firm’s compliance with relevant standards of the regulatory system (see APER 4.7.3E). The FSA has not satisfied us however from the evidence as a whole that Mr Pottage’s standard of conduct was “below that which would be reasonable in all the circumstances” (see APER 3.1.4G). In particular we are not satisfied that his failure to institute a Systematic Overhaul at an earlier date (than when the LORR was initiated) was beyond the bounds of reasonableness. Put positively, we think that the actions that Mr Pottage in fact took prior to July 2007 to deal with the operational and compliance issues as they arose were reasonable steps.’ 15.19 Not all issues relating to senior management responsibility necessarily results in formal regulatory proceedings and indeed what may be described as extended regulatory influence can and has resulted in criticism of senior management. Illustrating the extent to which external accountability can operate, following the FSA’s first enforcement case relating to the manipulation of LIBOR,69 the UK Treasury Select Committee heard in evidence from the then Chairman of the FSA, Lord Turner and the then Governor of the Bank of England, Sir Mervyn King, of the existence of concerns about the senior

67 68 69

Parliamentary Commission on Banking Standards Changing Banking for Good, Fifth Report Volume II, Chapters 1-11 [94]. John Pottage v The Financial Services Authority [2012] Upper Tribunal (Tax and Chancery Chamber) Financial Services. FS/2010/33. FSA Final Notice, Barclays Bank plc 27 June 2012.

448

Control liability  15.22 management at Barclays.70 Shortly after there followed a series of resignations from Barclays senior management, including its Chief Executive Officer, Mr Bob Diamond. 15.20 Moreover, it would be erroneous to assume, that control of a financial services business is exercised only by the directors and senior management within the firm. An organisation’s business activity can be influenced significantly by those that own or control the business capital, such as a limited company’s shareholders. Indeed, it is the case that when considering issues relating to regulatory control liability and accountability that one has to consider the statutory system for authorisation within FSMA and the consideration it requires for both the owners in influencers of would be authorised persons as well as those persons that work as its directors and senior managers.

Control liability and misleading the FCA and PRA 15.21 FSMA makes provision for a small number of what might be classified as regulatory disclosure offences, which if committed by a corporate body or partnership may in defined circumstances expose the directors, officers or partners of the company or partnership to prosecution. It is an offence under section 398 of the FSMA71 for a person when complying with a requirement under FSMA to knowingly or recklessly give the Prudential Regulation Authority (PRA) or FCA false or misleading information. Section 398 does however limit the offence to where the false or misleading information is material. Section 400 of the FSMA72 expressly extends liability for an offence under section 398 to directors, officers or partners where the offence was committed with the ‘consent’ or’ connivance’ of the officer or partner or ‘attributable to any neglect on his part’. Liability for the section 398 misleading information offence may conceivably arise in any case where a firm is required under FSMA to inform or disclosure information to the FCA or PRA, such as in applications for authorisation or variations to business permissions, applications for approval to perform a controlled function, and disclosures or notification of information, such as where an authorised firm is required to disclose information pursuant to an obligation under Principle 11. Of particular interest is whether the section 398 offence can be committed in connection with information that is omitted from a disclosure. 15.22 In R v Vijay Sharma73 the defendant pleaded guilty to charges under sections 178(1) and 191 of the FSMA for failing to give the FSA prior notice of his taking a controlling interest in an authorised firm as well as a charge under section 398 of the FSMA of making false and misleading statements to the FSA by virtue of him failing to disclose information that the FSA considered material to ‘an assessment of whether he was fit and proper to acquire control’.74 In a press release following the case, the FSA’s then Director of

70 71 72 73 74

‘Barclays sailed close to the wind, Bank governor says’, BBC News, 17 July 2012, http:// www.bbc.co.uk/news/business-18870461. Section 398 was amended by section 36 of the Financial Services Act 2012. Section 400 was amended by section 37 of the Financial Services Act 2012. R v Vijay Sharma [2009] (Unreported) City of Westminster Magistrates Court. Note 74, Witness Statement in the case of R v Sharma, Graeme Ashley-Fenn, FSA Director of Permissions, Reporting and Decisions [para 2], http://www.fsa.gov.uk/pages/Library/ Communication/PR/2009/120.shtml.

449

15.22  Control liability Enforcement, Margaret Cole, drew attention to the nature of the misleading disclosure, saying: ‘… This was made worse by the false and misleading statements he made in his applications to the FSA about the control change and his former employment in the financial services industry …’75

CONTROL LIABILITY AND AUTHORISATION 15.23 Schedule 6 to the FSMA sets out the threshold conditions that must be satisfied by applicant authorised firms in order to be granted authorisation by the PRA or FCA and, once authorised, they must continue to meet. In respect of conduct-related matters, three of the conditions are of direct relevance to the question of the capability of those that control the authorised firm. Guidance on the matters that will be considered for the assessment of the Threshold Conditions are provided in the FCA Handbook at ‘COND’ including matters such as: the ‘effective supervision’ which deals with, amongst other things, the extent to which the applicant for authorisation may be influenced by other members of its Group of companies and persons with whom it has ‘close links’. Both of these may be considered in terms of persons that control the authorised firm; suitability of the applicant firm and thirdly its resources, which covers both financial and non-financial resources. By way of example, paragraph 2D(4) of Schedule 6 to the FSMA applying to FCA authorised firms defines non-financial resource as including matters such as systems and controls and human resource. A number of these threshold conditions take into account the nature and extent of persons that have ‘control’ of or are connected with the applicant, and thus allow the FCA or PRA to consider whether such control of connection impacts on a decision to authorise the firm. If we use again provisions relevant to FCA authorised persons as an example, in relation to the suitability condition at paragraph 2E of Schedule 6 to the FSMA, the decision to authorise an applicant will have regard to matters such as the applicant’s ‘connection with any person’ and ‘whether those who manage [the applicants] affairs have adequate skill and experience and act with probity’. The FCA provides specific guidance on the type of matters it will take into account when considering the persons connected with it such as (COND 2.5.6G) the connected person’s antecedents including whether the connected person has ever been in contravention of financial services regulation (see COND 2.5.6G(4)). 15.24 In regard to an authorised person’s non-financial resources, the threshold conditions seek to consider whether these are ‘sufficient’. Once again if we use provisions relevant to FCA authorised persons as an example, paragraph 2D(4) of Schedule 6 to the FSMA, (for firms which do not carry on PRA regulated activity) provides: ‘The matters which are relevant in determining whether A has appropriate non-financial resources include – (a)

75

the skills and experience of those who manage A’s affairs;

FSA press release, ‘Mortgage Broker fined by Court in FSA’s first criminal prosecution for change of control failures’ FSA/PN/120/2009, 10 September 2009, http://www.fsa.gov.uk/ pages/Library/Communication/PR/2009/120.shtml.

450

Control liability  15.26 (b)

whether A’s non-financial resources are sufficient to enable A to comply with – (i) requirements imposed or likely to be imposed on A by the FCA in the course of the exercise of its functions; (ii) any other requirement in relation to whose contravention the FCA would be the appropriate regulator for the purposes of any provision of Part 14 of this Act.’

Controllers 15.25 The Effective Supervision Threshold Condition set out at paragraph 2C of Schedule 6 (for non-PRA activity) and paragraph 3B of Schedule 6 (for PRA activity) requires the FCA to consider the extent to which persons that ‘control’ or have close links with the authorised firm allow for the effective supervision of the authorised person. Both paragraphs 2C and 3B define ‘close link’ in consistent terms The definition taken from paragraph 2C(2) is: ‘A [the authorised firm] has close links with CL [The close link] if – (a) (b) (c) (d) (e) (f)

CL is a parent undertaking of A; CL is a subsidiary undertaking of A; CL is a parent undertaking of a subsidiary undertaking of A; CL is a subsidiary undertaking of a parent undertaking of A; CL owns or controls 20% or more of the voting rights or capital of A; or A owns or controls 20% or more of the voting rights or capital of CL.’

Supporting the FCA’s obligation for effective supervisions (with similar arrangements in place for PRA authorised firms), Part XII of FSMA sets out a series of obligations to allow for regulator assessment of a change of control of an authorised person and which require in certain circumstances prior disclosure of an acquisition defined under section 181(2) of the FSMA as (with B being the authorised person): ‘(a) (b) (c)

10% or more of the shares in B or in a parent undertaking of B (“P”); 10% or more of the voting power in B or P; or shares or voting power in B or P as a result of which A is able to exercise significant influence over the management of B’,

or an increase in control under section 182 defined as being increases in shareholding, or voting power: ‘(a) (b) (c)

from less than 20% to 20% or more; from less than 30% to 30% or more; from less than 50% to 50% or more.’

SENIOR MANAGEMENT FUNCTION HOLDERS AND CONTROLLED FUNCTIONS 15.26 As we examined in Chapter 14, the ‘controlled function’ regime is a necessary tool to ensure accountability, impose liability and responsibility and in extreme cases restrict access to the regulated financial services markets only for those persons that are considered fit and proper. However, large elements of 451

15.26  Control liability the regime are concerned with articulating the standards of behaviour expected of approved persons and thus arguably are directed at preventing regulatory problems from occurring. 15.27 We examined in Chapter 13 Part V of the FSMA, which sets out a statutory regime for the approval of persons performing ‘controlled functions’ including factors that must be satisfied for approval to be granted including issues relating to integrity, competence and financial soundness and the requirement to meet rules of conduct issued by the FCA and PRA under section 64A of the FSMA. At this juncture, it is relevant to highlight the provisions in section 56 of the FSMA which extend to all persons performing regulatory activity and not merely approved persons and senior management function holders and allow for the FCA to prohibit a person from performing regulated activity where it considers the person is not fit and proper. 15.28 The FCA rules in its Supervision sourcebook (SUP) (with similar rules applying to PRA authorised persons), provides an exhaustive list of the controlled functions referred to in section 59 of the FSMA. The applicability of individual controlled functions to different types of authorised firms is provided at SUP 10A.1R and it is important to note that not all of the functions are applicable to every class of authorised firm. We have examined in Chapter 13 the types and range of senior management functions that require approval as controlled functions and it now may be appropriate to recognise that the identified ‘Governing Functions’ in SUP 10C.5 such as executive directors and partners, and governing oversight functions in SUP 10C.5A such as nonexecutive directors and chairs of certain committees such as those overseeing risk and audit, are in a position of governance-oriented control. 15.29 It is important not to overlook that liability that attaches to persons who perform such ‘control functions’ without approval. Section 63A of the FSMA provides the FCA and PRA with power to impose a financial penalty on such persons regardless of whether or not there has been any underlying misconduct, where they ‘… knew or could have reasonably been expected to have known that [they] were performing a controlled function without approval’. Indeed such ‘unapproved performance may in extreme cases be such that the FCA may consider exercising its powers under section 56 to prohibit that person from performing’. 15.30 In Chapter 12 we consider in outline enforcement issues, some of which are relevant to senior management function holders. Section 66 of the FSMA sets out the PRA and FCA’s disciplinary powers in regards to persons covered by Part V of the FSMA, providing in section 66(1) that action may be taken ‘if it appears’ the person is ‘… guilty of misconduct’ and the regulator ‘… is satisfied it is appropriate in all the circumstances to take action against him’. Section 66A(2) relating to action by the FCA goes on to describe when a person is guilty of misconduct by reference to the code rules, stating (a) ‘the person has at any time failed to comply with rules made by the FCA under section 64A … or alternatively under S66A (3) (b) where the person’ has at any time been knowingly concerned in a contravention by the relevant authorised person of a relevant requirement imposed on that authorised person …’. 15.31 Although not in relation to market abuse and relating to approved person rules in force prior to when the section 64A conduct rules came into effect, we may draw an example of approved person disciplinary action addressing issues of being knowingly concerned in the Final Notice on

452

Control liability  15.33 March 2013 to Mr Tidjane Thiam, the then Chief Executive Officer of the Prudential. Mr Thiam was censured by the FCA for being knowingly concerned with the Prudential’s failing to meet its obligation under High Level Principle for Business 11 to be open and cooperative with the FCA, arising from the Prudential’s failure to inform the FCA of a proposed takeover.76 In its press release following the notice, it was stated by Tracy McDermot, the FCA’s then Director of Enforcement and Financial Crime, ‘This case should send a clear message to all board members of their collective and individual responsibility for the decisions they make on behalf of their companies.’ 15.32 As examined further in Chapter 15 on personal liability and Chapter 12 on enforcement issues, pursuant to section 66(3) where there has been misconduct, the FCA may impose one or more of the following range of disciplinary actions: ‘(a) impose a penalty on him of such amount as it considers appropriate; (aa) suspend, for such period as it considers appropriate, any approval of the performance by him of any function to which the approval relates; (ab) impose, for such period as it considers appropriate, any conditions in relation to any such approval which it considers appropriate; (ac) limit the period for which any such approval is to have effect;’

The Approved Person Code and its impact on governing function holders 15.33 The FCA publishes its section 64A code rules (set out below) in its Code of Conduct sourcebook (COCON). The code requirements along with supporting guidance in COCON set out the expectation of standards of behaviour and conduct of all persons subject to the code, including senior management function holders in governing functions. Both the individual conduct rules plus the four senior management code rules apply to senior management function holders, and although the senior manager conduct rules set standards for how a function holder is responsible for management of the authorised person, the individual rules apply equal rigour to the standards expected of such a person. Individual Conduct Rules ‘Rule 1: You must act with integrity. ‘Rule 2: You must act with due skill, care and diligence. ‘Rule 3: You must be open and cooperative with the FCA, the PRA and other regulators. ‘Rule 4: You must pay due regard to the interests of customers and treat them fairly. ‘Rule 5: You must observe proper standards of market conduct.’

76

FCA Final Notice, Mr Cheick Tidjane Thiam 27 March 2013. See also FCA Final Notice, The Prudential Assurance Company Limited 27 March 2013 and FCA Final Notice, Prudential plc 27 March 2013.

453

15.33  Control liability Senior management conduct rules ‘SC1: You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively. ‘SC2: You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system. ‘SC3: You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively. ‘SC4: You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.’77 15.34 Individual conduct Rule 1 requiring that a function holder acts with integrity is supported with guidance at COCON 4.1 where the FCA indicates (and of relevance to issues concerning market abuse) that it considers that behavioural activity includes matters such as ‘falsifying documents’, ‘mismarking the value of investments or trading positions’, ‘failing to disclose dealings where disclosure is required by the firm’s personal account dealing rules’, and ‘deliberately misusing the assets or confidential information of a client or of his firm’. Whereas senior management Rule SC2 addresses responsibility for the firm’s regulatory obligations providing ‘You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant requirements and standards of the regulatory system’ and is supported by FCA guidance – COCON at 4.2.16(1) indicates (and once again of relevance to market abuse issues) that a person will not comply with SMC2 where there is a ‘failing to take reasonable steps to implement (either personally or through a compliance department or other departments) adequate and appropriate systems of control to comply with the relevant requirements and standards of the regulatory system for the activities of the firm.’ Indeed, guidance at COCON addresses the expected behavioural standards of both the Compliance Officer (see COCON 4.2.16(8) and the Money Laundering Reporting Officer (see COCON 4.2.16(7), seemingly, although not specifically stated as such, by reference to their responsibilities allocated in the Senior Management Systems and Controls sourcebook (SYSC) and the Market in Financial Instruments Regulations. Thus, under COCON 4.2.16(8): ‘For a senior conduct rules staff member who is responsible for the compliance function, failing to ensure that: (a) (b) (c) (d) (e)

77

the compliance function has the necessary authority, resources, expertise and access to all relevant information; or a compliance officer is appointed and is responsible for the compliance function and for any reporting as to compliance; or the persons involved in the compliance functions are not involved in the performance of services or activities they monitor; or the method of determining the remuneration of the persons involved in the compliance function does not compromise their objectivity; or the method of determining the remuneration complies, where applicable, with the remuneration codes set out in SYSC 19B, SYSC

FCA Code of Conduct sourcebook (COCON), https://www.handbook.fca.org.uk/handbook/ COCON/1/?view=chapter.

454

Control liability  15.36 19D, SYSC 19E and SYSC 19G or, for a Solvency II firm or a small non-directive insurer, other relevant requirements in relation to remuneration.’ 15.35 There is no doubt that the FCA does instate enforcement proceedings by reference to senior management responsibility for compliance with regulatory standards including instances of senior personnel of firms engaged in manipulation. Although in relation to the approved person regime in fore prior to the section 64A code, in its Final Notice of 22 January 2014 to David Caplin78 the Chief Executive of Martins Brokers UK Limited, Mr Caplin agreed an administrative settlement resulting in a financial penalty of £210,000 and an FCA order prohibiting him from performing any significant influence function. The enforcement action against Mr Caplin was in connection with Martins having engaged in the manipulation of LIBOR79 and was settled by reference to the duty in APER Principle 7. In particular, the FCA referred in the Final Notice to Mr Caplin failing to ‘ensure the timely and adequate implementation of recommendations made … to carry out a risk review’, and ‘to identify and remedy Martins’ lack of controls to prevent Brokers making or receiving corrupt inducements’. 15.36 Under the Federal Deposit Insurance Corporation Act of 1991 (the FDIC Act 1991), US bank regulators and prosecutors can bring cases against individuals – senior and mid-level – for failure to meet their duties. For example, the FDIC Act 1991 authorises regulators to bring civil lawsuits against former directors and officers of a failed bank for a demonstrated failure to satisfy the duties of loyalty and care. The degree of protection afforded to directors of failed banks by the FDIC under the business judgment rule has often been the subject of litigation. Similarly, Title II of the Dodd-Frank Act 2010 provides that in the event of a receivership of a large financial institution, the Orderly Liquidation Authority can impose personal liability on directors and officers in a civil action brought by the FDIC for gross negligence or conduct that demonstrates a greater disregard of a duty of care than gross negligence, including intentional tortious conduct. Furthermore, under clawback provisions, the FDIC is authorised to recover incentive payment and other compensation from directors and senior executives for the two years prior to the company’s failure if they are found to be substantially responsible for the failure. Moreover, the Securities and Exchange Commission recently proposed a rule to implement section 954 of the Dodd-Frank Act that would, among other provisions, require listed issuers, including but not limited to banks, to develop, implement, and disclose policies requiring clawback of ‘erroneously awarded compensation’ in the event of an accounting restatement.80

78 79 80

FCA Final Notice, David Caplin 22 January 2015. See also FCA Final Notice Jeremy Kraft 22 January 2015. Mr Kraft had been Martins Brokers UK Ltd Compliance Oversight Approved Person (CF10). FCA Final Notice, Martins Brokers UK Limited 15 May 2014. See discussion in Shearman & Sterling LLP, ‘SEC Proposes Highly Anticipated Clawback Rules’ (9 July 2015) (on file with author). Specifically, issuers would be required to recover incentive-based compensation received by any executive officer in the three years prior to a material restatement of the issuer ’s financial statements that is in excess of the compensation that would have been received if the compensation had been determined based on the restated financial statements. The clawback would be required regardless of the reason for the restatement, ie not limited to restatements required because of misconduct, and including restatements that are required because of no-fault computational errors.

455

15.37  Control liability 15.37 US banking regulators can dismiss employees as part of enforcement actions against regulated institutions and can take enforcement actions against directors and officers (and other so-called ‘institution-affiliated parties’) for violations of laws, breach of fiduciary duties, and unsafe and unsound practices. For example, the Federal Reserve bank regulation division can remove any officer, director, or employee of a foreign banking organisation involved in its US branch or other operations upon a finding of improper conduct or as a result of being convicted of certain criminal offences. 15.38 Despite strong US regulatory and enforcement powers, the US business judgment rule presumption generally affords directors and officers protection from personal liability for prudent, informed business decisions made in good faith. As in the UK and other European jurisdictions, directors and officers generally obtain protection from personal liability through indemnification agreements and directors and officers liability insurance in the absence of bad faith or malfeasance, but such protections are limited in certain circumstances by law and regulation.

456

Chapter 16

The impact of other laws: domestic and overseas

INTRODUCTION 16.1 The globalisation of financial markets has resulted in increased interaction among securities firms and investors in different jurisdictions. The securities and derivatives markets underpin economic growth and development and the overall strength of market economies by, for example, supporting corporate initiatives, providing finance for new ideas and facilitating the management of financial risk. Sound and effective regulation can, in turn, enhance market confidence and the integrity and development of securities markets. Increasingly, globalised and integrated securities markets pose significant challenges for regulators. Share transactions are increasingly international in character. In global and integrated securities markets, national regulators must be able to monitor and assess cross-border conduct if they are to ensure the integrity, efficiency, and transparency of their domestic markets. 16.2 Globalised securities and derivatives markets have led to increasing interdependence amongst national regulators. Accordingly, there must be strong cooperation and coordination between regulators and capability to give effect to those links. Cross-border trading in securities has caused a great deal of overlap in the regulatory responsibilities of national regulators and, in some instances, where economically powerful countries (eg the United States) impose their regulations extra-territorially, it can result in a diminution in sovereignty of affected nation states. Indeed, the world’s largest and most liquid securities and derivatives market is the United States and many non-US companies are subject to extra-territorial jurisdiction under US securities and banking laws because of their cross-border contacts with US commerce and financial markets. 16.3 The barriers to a global securities market are diminishing: financial information has become inexpensive to obtain and advances in technology allow more complicated cross-border share transactions. Ultimately, the forces of liberalisation and technology will link most financial markets with the result that regulators should develop improved regulatory links to improve the effectiveness and efficiency of their financial markets. More efficient crossborder enforcement necessitates bilateral and multilateral agreements between national regulatory authorities that allocate jurisdictional authority amongst

457

16.3  The impact of other laws: domestic and overseas regulators so that they can have the capacity to investigate and enforce market abuse other financial crimes that occur on a cross-border basis. The following sections elaborate on the law and regulation of market abuse and insider dealing in the European Union, the United States and other selected jurisdictions that have a substantial impact on UK markets and regulation. The chapter discusses some of the issues of institutional coordination in the EU/EEA in applying the Market Abuse Directive and examines the extraterritorial aspects of US anti-fraud law for insider dealing and insider trading and market manipulation under the US securities laws. This chapter also analyses emerging international standards, principles and rules that relate to market abuse and insider dealing that have been promulgated by the world’s leading international body of securities regulators, the International Organisation of Securities Commissions (IOSCO). IOSCO has adopted international standards and principles to protect investors against market abuse and has set out standards for national regulators to use while investigating and prosecuting those who attempt to use unlawful means to manipulate securities markets.11

EU MARKET ABUSE REGULATION (EU MAR) 16.4 The EU MAR2 replaced the Market Abuse Directive (MAD 1)3 in 2016. The EU MAR’s stated purpose is to establish a more uniform and stronger framework in order to preserve market integrity, avoid potential regulatory arbitrage and provide more legal certainty and less regulatory complexity for market participants.4 Another important objective of the EU MAR was to address the problem of market abuse in the over-the-counter (OTC) derivatives markets by extending the scope of MAD 1 to apply to a wider range of financial instruments, including all OTC derivative contracts traded by EU counterparties or on EU markets or trading platforms.5 The EU MAR was adopted in tandem with a separate Directive imposing an obligation on all EU Member States to create criminal sanctions for market abuse (MAD 2).6 MAD 2 was introduced to harmonise administrative sanctions for market abuse in each Member State and to introduce for the first time a requirement to establish criminal offences for market abuse in Member States

1

2 3

4 5 6

IOSCO Multilateral Memorandum of Understanding (May 2002), Article 4(a) (describing the MOU’s application to national laws and regulations dealing with insider dealing, market abuse and securities fraud). The IOSCO standards are important for understanding how the FSA may interpret the UK market abuse regime and how EEA states may implement these principles in their regulatory practices. Council Regulation (EU) 596/2014 of 16 April 2014 on market abuse (market abuse regulation) and repealing Council Directive 2003/6/EC and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC [2014] OJ L 173/1 (‘MAR’). See also Article 8 of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC [2014] OJ L 173/1. See for the criminal offence 3.25 et seq above. Regulation 596/2014, Recital 4. In this regard, it should be recalled that the G20 Heads of State 2009 Pittsburgh communique provided that one of the three pillars of the international regulatory reform agenda should include ‘protecting against market abuse’. Council Directive 2014/57/EU of 16 April 2014 on criminal sanctions for market abuse (market abuse directive) [2014] OJ L 173/179.

458

The impact of other laws: domestic and overseas  16.5 where market abuse had previously only been enforced with administrative sanctions.7 As the UK left the EU in 2021, the EU MAR is no longer directly applicable in the UK. However, by adopting the European Union (Withdrawal) Act 2018, Parliament incorporated (onshored) the rules and requirements set out by the EU MAR into UK law. The Market Abuse Exit Regulation 20198 subsequently amended the UK MAR to ensure effective operation of the UK MAR in the UK post-Brexit. In spring 2021, the Financial Services Act 2021 (FSA 2021) introduced further changes to the UK MAR. The FSA 2021, for example, clarifies who has to maintain an insider list and made changes to the timetable within which issuers have to disclose certain transactions by persons discharging managerial responsibilities and persons closely associated to the public (section 30). Because of the UK’s onshoring of most of the EU MAR’s rules and requirements, this section will discuss those sections that are applicable under UK law.

EU MAR’s scope 16.5 The scope of MAD 1 was limited to activity relating to financial instruments admitted to trading on a regulated market or for which a request for admission to trading on such a market has been made. The view taken now by the EU authorities is that financial instruments are increasingly traded on other venues and the scope of the EU MAR should therefore apply to these new trading facilities. The new trading facilities have been defined in Article 4 of the Markets in Financial Instruments Directive (MiFID 2) which was published at the same time as the Markets in Financial Instruments Regulation (MiFIR).9 As a result, the EU MAR applies not only to financial instruments admitted to trading on a regulated market but also to any financial instruments traded on a multilateral trading facility (MTF),10 admitted to trading on an MTF, or for which a request for admission to trading on an MTF has been made, and to financial instruments traded on an organised trading facility (OTF).11 It also applies to financial instruments not covered by any of the above, the price or value of which depends on or has an effect on the price or value of a financial instrument otherwise covered by the EU MAR. This effectively broadens the

7

8 9

10

11

The European Commission published its first formal legislative proposal for a new market abuse regulation and a new market abuse directive in October 2011. An updated proposal was published in July 2012, reacting primarily to the LIBOR scandal and extending the market abuse regime to cover directly also any manipulation of benchmarks. SI 2019/310. Council Directive 2014/65/EU of 15 May 2014 on markets in financial instruments [2014] OJ L 173/349 (MiFID 2) and Council Regulation 600/2014 of 15 May 2014 on markets in financial instruments (MiFIR). MiFID 2 and MiFIR together replace Directive 2004/39/EC of the European Parliament and Council of 21 April 2004 on markets in financial instruments (MiFID 1) which had been in force since November 2007. An MTF is defined in Article 4 of MiFID 2 as: ‘a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments – in the system and in accordance with nondiscretionary rules – in a way that results in a contract in accordance with Title II of this Directive’. An OTF is defined in Article 4 of MiFID 2 as: ‘a multilateral system which is not a regulated market or an MTF and in which multiple third-party buying and selling interests in bonds, structured finance products, emission allowances or derivatives are able to interact in the system in a way that results in a contract in accordance with Title II of this Directive’.

459

16.5  The impact of other laws: domestic and overseas scope of the EU MAR to various instruments traded over the counter (such instruments, ‘OTC instruments’) such as credit default swaps and contracts for differences. In addition, the EU MAR now also covers behaviour which occurs outside any of these trading venues, acknowledging the fact that a financial instrument may be manipulated through behaviour that does not occur on any of the trading venues.12 By broadening the scope to cover instruments traded on an MTF or OTF, the EU market abuse rules now apply to very diverse markets and instruments. While the regulated market and MTF are categories covering markets where financial instruments are traded continuously, an OTF is a category that covers a number of fixed income broker crossing systems, wholesale interdealer markets and voice-hybrid systems that do not rely on continuous trading. By extending the application of the rules to other trading venues, the European market abuse rules now apply to a number of securities that are listed on markets outside the EU as many of them are also traded on an EU MTF. This significantly extends the extra-territorial reach of the market abuse regulation to insider dealing and market manipulation taking place entirely outside the EU simply because the trading relates to an instrument which happens also to be admitted to trading on a trading facility in the EU. There is no need for any EU entity to be involved or for there to be any impact on the markets in the EU. 16.6 The EU MAR’s approach was to extend the application of the concepts developed in MAD 1 to be applied to instruments traded on a regulated market. The regulation, however, does not seem to make any distinction between the equities markets, the bond markets and the commodities markets although it is generally understood that for example the pricing of bonds is less dependent on the issuer itself than is the case with pricing of shares. Equities are priced based on expectations regarding the issuing company, expectations of future earnings and overall expectations regarding the industry. In contrast, bond markets are dependent on a number of other factors such as interest rate levels, volatility, inflation and liquidity. By focusing on the differences in how these markets operate, the regulator could tailor different approaches to applying and enforcing the market abuse rules for different instruments traded in different markets. The EU MAR, however, applies concepts developed primarily in the context of equity markets and applies them broadly to the debt markets and to all other covered financial instruments and commodities. The regulation also does not distinguish between different products when referring to the ‘issuer’ of a financial product. Derivatives, for example, do not have an ‘issuer’ so applying the EU MAR to derivatives remains problematic where the regulation refers to an ‘issuer’ of a financial product.

EU MAR AND MARKET MANIPULATION 16.7 The EU MAR strengthens civil offence of market abuse involving market manipulation. Article 12 of MAR sets out what constitutes market manipulation and Annex 1 provides details of indicators that shall be taken into account when transactions or orders to trade are examined. Most importantly, due to the broadened scope of MAR, the market abuse provisions now apply to any financial instruments traded, admitted to trading, or for which a request for admission to trading on a RM or MTF has been made, any financial instrument 12

Regulation 596/2014, Art 2(3).

460

The impact of other laws: domestic and overseas  16.11 traded on an OTF, OTC derivatives (including CDS and CFDs) and spot commodity contracts (if the price of such a commodity contract is based on that of a derivative or if certain financial instruments are referenced to such spot commodity contracts). Following the information on LIBOR rigging, the initial MAR proposal was amended in 2012 to also cover manipulation of calculation of benchmarks.13 The European Securities and Markets Authority (ESMA) has prepared in the final report containing its final technical advice on possible delegated acts concerning MAR (the ‘FR 2015/224’14) a nonexhaustive list of examples of practices that could be considered as market manipulation, linking the examples to the indicators set out in Annex 1. It has been clarified that market manipulation can occur across products if for example a transaction in a derivative may result in undue influence on the price of the underlying financial instrument. 16.8 Notwithstanding such non-exhaustive list, ESMA did confirm that an example of a practice that is deemed illicit could be justified by legitimate reasons if otherwise in compliance with the applicable rules and regulations. A person entering into a transaction that could be deemed to constitute market manipulation may be able to establish that his reasons for entering into such transaction were legitimate and in conformity with accepted practice on the relevant market.15 However, the current proposal in FR 2015/224 does not give any further guidance on what would constitute ‘legitimate reasons’ in this context. 16.9 On the other hand, ESMA did state that absence of an intent to manipulate the market does not necessarily imply that particular conduct may not still fall within the scope of market manipulation. A person may therefore commit market abuse unintentionally by engaging in practices that have certain manipulative effects even without realising that such activity may have such consequences. 16.10 MAR also extends the discretion afforded to Member States under MAD 1 to decide what are accepted market practices in the OTC markets and thus do not constitute market manipulation. Under MAD 1, accepted market practice (AMP) is a specific market practice that could fall under the definition of market manipulation but is accepted by the competent authority of a Member State if carried out for a legitimate reason and therefore does not constitute market manipulation. Since MAR applies also to OTC transactions, AMP may be also established in the context of the OTC markets. ESMA left to the competent authority to decide when approving an AMP whether such AMP can be conducted only by regulated entities or also by any unregulated entities participating in the market.

BUYBACKS AND PRICE STABILISATION 16.11 Buy-backs and stabilisation activities are designed to increase price of securities or maintain prices for such securities at an increased level. In order for such activity not to be considered as market manipulation, it has

13 14 15

Regulation 596/2014, Art 12(1)(d). SMA, ‘Final Report: ESMA’s technical advice on possible delegated acts concerning the Market Abuse Regulation’; see www.esma.europa.eu/system/files/2015-224.pdf. Regulation 596/2014, Recital 42.

461

16.11  The impact of other laws: domestic and overseas to be carried out within limitations set out by a ‘safe harbour’. Initially, this safe harbour was set out in Regulation 2273/2003, implementing the buyback and stabilisation measures in MAD 1. MAR details the framework for the exception from the overall prohibition of market manipulation granted to certain buy-back transactions in Article 5. 16.12 Interestingly, ESMA concludes on the basis of the fact that Article 5(1) and (3) and Article 3(17) refer to ‘shares’ that buy-backs using derivative instruments should not benefit from the safe harbour set out in Article 5 of MAR.16 This would be a significant limitation of scope of the safe harbour compared to the approach in MAD 1 and the Implementing Regulation 2273/2003 which expressly recognises in Article 5(1) that the purchase of own shares can be effected through a derivative financial instrument. Since the wording in Article 8 of MAD 1 and Article 5 of MAR is identical, there seems to be very little ground for such a significant departure from the existing approach. 16.13 In order for a buy-back programme to be within the safe harbour, the issuer must publicly disclose information regarding any purchase transactions within seven trading days. It also has to provide detailed information about such transactions to each relevant competent authority (ie if the shares are listed on multiple markets, it has to report to each competent authority for the market on which the transactions have been executed). There seems to be no limitation in the proposed Article 5(3) of the draft RTS set out in Annex IV of the Consultation Paper 809 that would only require information to be provided to a competent authority of an MTF or an OTF with respect to which the issuer has approved trading of its financial instruments. This may mean that in practice an issuer will have to report to each relevant competent authority if its instruments happen to be traded on an OTF even if the issuer has not approved such trading. Any purchases cannot be made at a price higher than the highest price of the last independent trade or the highest current bid on the relevant trading venue. The safe harbour is not available to any transactions during an auction (such as the closing auction) if the instrument is otherwise traded on a trading venue on a continuous basis. Any purchase transactions are limited to 25 per cent of the daily volume traded on the relevant venue.17

EU MAR AND CROSS-BORDER COOPERATION IN INVESTIGATIONS AND ENFORCEMENT 16.14 The EU MAR continues the obligation under MAD 1 requiring EEA states to create a single regulatory authority for investigations and enforcement of market abuse, which must serve as a point of contact with other EEA regulators for coordinating cross-border surveillance, investigations and enforcement in cases involving cross-border elements between EEA states. Moreover, the EU MAR continues MAD 1’s practice of requiring all home state authorities to keep records of all transactions, ie, the number of 16 17

ESMA, ‘Consultation Paper: Draft Technical Standards on the Market Abuse Regulation’, (2014/809, ESMA 2014) para 9, see www.esma.europa.eu/ system/files/esma_2014809_ consultation_paper_on_mar_draft_ technical_standards.pdf. Ibid, Article 4 of the proposed RTS attached as Annex IV to CP 809. See www.esma.europa. eu/system/files/esma_2014-809_consultation_paper_on_mar_draft_technical_ standards. pdf.

462

The impact of other laws: domestic and overseas  16.16 instruments bought and sold and the dates, times and transaction prices. The home state is obliged to exchange this information upon request with host state regulators during investigations of financial service firms based in other EEA states who are operating in the host jurisdiction. Host state authorities continue to be responsible for supervising and regulating all firms and persons operating within host state territory for conduct of business-related issues. 16.15 MAD 2 imposes an obligation on all Member States to create criminal sanctions for market abuse18 and requires the harmonisation of administrative and civil sanctions across Member States. As with MAD 1,19 MAD 2 requires EEA competent authorities – both home and host state – to facilitate transnational investigations and enforcement of market abuse laws and regulations in the following way. If a financial firm with a passport from another EEA state is suspected or found to have violated market abuse laws, the host state regulator must take the following steps in order to address the breach: (a) approach the firm’s home state regulator to seek assistance in conducting an investigation, and then (b) to co-operate with the home state regulator regarding any enforcement action. Generally, the host state must take all appropriate measures at its disposal to end the violation and to adopt measured procedures in seeking cooperation and information before undertaking direct enforcement. Officials of the home and host state competent authorities are bound by professional secrecy in respect of proprietary information they obtain from individuals or regulated entities during the course of their duties. These restrictions on disclosure of proprietary and other confidential information, however, are qualified to allow home and host state authorities to provide mutual assistance in conducting oversight, investigations and enforcement. Under MAR, these principles and obligations between home and host states are maintained and enhanced. 16.16 The EU MAR and MAD 2 incorporate the provisions of MAD 1 that allow Member States to enter into mutual assistance agreements with third countries (eg countries outside the EEA) so long as the information exchanged is covered by guarantees of secrecy equivalent to those provided in Article 25 of MAD 1. The UK has entered into many mutual assistance agreements and memoranda of understanding (MOU) with countries outside the EEA that provide for the exchange of information and evidence to support investigations and enforcement actions by national authorities. For instance, the UK–US 1986 MOU20 is a non-binding statement of principles and procedures for making requests for information in regard to investigations and enforcement actions in regard to alleged breaches of securities laws. Each national authority retains discretion whether to cooperate in the disclosure of requested information.21 The UK–US MOU covers insider dealing, misrepresentations in the course of dealing and market manipulation and it applies to securities or futures traded

18 19 20 21

Council Directive 2014/57/EU of 16 April 2014 on criminal sanctions for market abuse (Market Abuse Directive) [2014] OJ L 173/179. European Communities Directive on Insider Dealing and Market Manipulation (Market Abuse), Articles 6–10 (encouraging cooperation in enforcement matters by allowing national regulators to obtain necessary information). The relevant agencies today would be the US Securities and Exchange Commission and the Commodities and Futures Trading Commission and the UK Financial Conduct Authority and the Serious Fraud Office. For example, the UK Secretary of State may deny requests for cooperation on the grounds of public interest.

463

16.16  The impact of other laws: domestic and overseas within the territorial jurisdiction of each regulatory authority.22 The impact of EU law and mutual assistance agreements has been substantial in requiring UK authorities to take account of international developments in financial regulation and to adopt practices that are similar to those taken by other regulatory authorities. Conflicts occur, however, when the laws of some jurisdictions are imposed unilaterally and in an extra-territorial manner without the consent of UK authorities. This has become a major issue in regard to the extra-territorial application of US insider trading and market manipulation laws as discussed below. 16.17 The EU MAR has established a viable institutional and legal framework to enhance investor confidence and market integrity that has gone beyond enhancing co-operation between supervisors by establishing a more common approach to detection and investigation as well as to enforcement. Nevertheless, many EU national regulators agree that there should be more harmonisation regarding the standards of market practice enforced across Member States and in the criteria used to decide whether to investigate and enforce, and in the type and level of sanctions and liability imposed. ESMA will play a crucial role in devising more harmonised approaches for EEA competent authorities to adopt more harmonised approaches for implementing and enforcing obligations under the EU MAR and MAD 2.

EXTRA-TERRITORIAL APPLICATION OF US SECURITIES LAWS, FOREIGN ISSUERS AND ANTI-FRAUD PROVISIONS 16.18 This section addresses the extra-territoriality of US securities laws in the context of how the anti-fraud provisions apply to foreign issuers and to transactions involving activities that take place, in part, in non-US territories. The extraterritorial dimension of US anti-fraud law merits discussion because of the close links between US and UK securities markets. US securities laws can expose UK persons and other non-US persons to civil and criminal liability for insider dealing and market manipulation. Most US case law addressing the extra-territorial application of US securities laws focuses on the anti-fraud provisions of the Securities and Exchange Act 1934.23 The courts have developed two tests for determining subject matter jurisdiction in civil securities fraud cases. One test relies on the ‘effects test’ that assesses the effects in the United States of conduct that occurs in foreign countries, while the other focuses on the ‘conduct’ of foreign persons within the United States. Under the Dodd Frank Act, the Exchange Act now provides that the courts have jurisdiction over actions by the Securities and Exchange Commission (SEC) or Department of Justice (DOJ) involving ‘(1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.’24 Regarding the

22 23 24

Paragraph 11 of the MOU provides for spontaneous provision of information by one agency to another. 15 USCA, s 78a et seq. 15 U.S.C. § 78aa(b).

464

The impact of other laws: domestic and overseas  16.19 ‘conduct’ test, the Dodd-Frank Act extends extraterritorial jurisdiction beyond that applied by the US Supreme Court in Morrison v National Australia Bank.25

Anti-fraud provisions of the US Securities and Exchange Act 1934, section 10(b) 16.19 Section 10(b) of the Securities and Exchange Act 1934 makes it unlawful, inter alia, to use or employ any manipulative or deceptive device or contrivance ‘in connection with the purchase or sale of any security’. Moreover, section 27 of the Act vests the district courts with jurisdiction of all actions ‘to enforce any liability or duty created by this title or the rules and regulations thereunder’. The federal courts, therefore, have jurisdiction to enforce the provisions of section 10(b), while the SEC has authority under Rule 10b-5 to enforce section 10(b) as a regulatory offence. Regarding tender offers in takeovers, Exchange Act Rule 14e-3 combined with Rule 10b-5 make it illegal for any insider who is privy to undisclosed material information about the issuer to profit from the purchase or sale of its securities. Both the SEC in administrative enforcement actions and the federal courts in deciding private litigation claims, SEC private lawsuits, and DOJ prosecutions for insider trading, have established principles for determining when there is unfair trading based on material non-public information.26 For instance, if a director, officer or highly placed employee possesses material non-public information concerning the issuer that has not been released to the public, any trading in the securities of the issuer by such insiders prior to public disclosure can violate Rule 10b-5 and expose these individuals to private civil actions for damages and to SEC enforcement action and potential criminal liability (breach of trust theory). Rule 10b-52 provides a non-exclusive definition of circumstances in which a person has a ‘duty of trust or confidence’ for purposes of the ‘misappropriation theory’ of insider trading under section 10b of the Exchange Act. According to this theory, anyone who misappropriates (‘steals’) information from its employer and uses that information to trade stock, even if it is not the employer’s stock, has committed insider trading. Rule 10b-52 specifically cites examples of when a duty of trust or confidence exists. The insider holding the material and non-public information is referred to as the tipper, while the individual receiving the information is the tippee. Both can be held equally liable for violating section 10b as long as the tippee had knowledge of the breach of the duty of trust.27 However, in recent years, US courts have decided that tippee liability can only arise if the tipper received a benefit (quid pro quo) for the leaked information and if the tippee was aware that the tipper received a benefit (monetary or non-monetary) for leaked information.28 These court decisions have created uncertainty and a lack of clarity regarding the definition of Insider trader liability.

25 561 U.S. 247, 130 S. Ct. 2869 (2010). 26 See US v O’Hagan, 521 US 642 (997) (applying misappropriation theory as the basis for insider trading liability); see also, Dirks v SEC, 463 US 646 (1983) (upholding tipping as a basis for insider trading liability); Chiarella v US, 445 US 222 (1980) (classical insider trading liability based on breach of fiduciary duty by an insider). 27 SEC v Galleon Management LP, 683 F Supp 2d 316 (SDNY 9 February 2010). 28 US v Newman, (2nd Cir. 2015) 773 F.3d 438 (2d Cir. 2014).

465

16.20 The impact of other laws: domestic and overseas

Insider Trading Prohibition Act of 2021 16.20 The uncertainty created by the US courts in adopting the quid pro quo benefit theory for insider trading liability and the related uncertainty regarding the legal basis upon which insider trading liability is based led the US Congress to pass the Insider Trading Prohibition Act of 2021.29 The Act has the objective of clarifying the legal basis of US insider trading law.30 In doing so, the Act aims to make only modest changes to the definition of insider trading by clarifying the uncertainties of the ‘benefit theory’ adopted in recent US case law, while also attempting to achieve the much bigger task of codifying existing case law on insider trading liability. The Act’s main provisions include a new section 16(A)(a) (amending the Insider Trading Act 1984), which contains a ‘prohibition against trading securities while aware of material, non-public information’ by providing that ‘it shall be unlawful for any person, directly or indirectly, to purchase, sell, or enter into, or cause the purchase or sale of or entry into, any security, security-based swap, or security-based swap agreement, while aware of material, nonpublic information relating to such security, security-based swap, or security-based swap agreement, or any nonpublic information from whatever source, that has, or would reasonably be expected to have, a material effect on the market price of any such security, security-based swap, or security-based swap agreement, if such person knows, or recklessly disregards, that such information has been obtained wrongfully, or that such purchase or sale would constitute a wrongful use of such information.’31 In addition, section 16(A)(b) states that a tipper can be held liable for tipping ‘if she wrong-fully communicates material nonpublic information to a tippee if it is reasonably foreseeable that the tippee will purchase or sell the security in question or wrong-fully communicate the information to another tippee’, whereby according to subsection (c)(2) it requires the tipper to have received ‘a direct or indirect personal benefit (including pecuniary gain, reputational benefit, or a gift of confidential information to a trading relative of friend)’.32 The aim of the new Insider Trading Prohibition Act has mainly been to adopt a clearer definition of insider trading, i.e., codifying judicial opinions in one statute. However, one may argue that the statute at the same time creates further need for clarification since it contains ambiguities and may have unintended effects.33 For instance, some commentators argue that an unintended effect of the new Act will be that market analysts will seek to reduce their potential liability under the Act by providing less meaningful analysis of companies for their clients, and in turn this will undermine efficiency in the capital markets. In addition, section 16A(a) creates two new ambiguities: On the one hand, according to the Act, it is unlawful, if one ‘is aware’ of prohibited information and trades on such information. The term ‘is aware’ raises new uncertainty, as there is an unresolved debate about ‘whether insider trading liability arises only when one trades on the basis of such information or when one trades while in 29 30 31 32 33

H.R. 2655, 117th Cong. (2021). See discussion in Stephen M Bainbridge, A Critique of the Insider Trading Prohibition Act of 2021, Harvard Law School Forum on Corporate Governance, 5 July 2021. H.R. 2655, 117th Cong. (2021). Ibid. Stephen M Bainbridge, A Critique of the Insider Trading Prohibition Act of 2021, Harvard Law School Forum on Corporate Governance, 5 July 2021.

466

The impact of other laws: domestic and overseas  16.22 possession of such information.’34 Second, it is unclear, whether section 16A(a) also applies to criminal cases. Therefore, by using the term ‘aware of’, a new standard is adopted, which could be interpreted in a way that ‘knowing possession’ is required, meaning that insider trading could be interpreted to be a strict liability crime.35 Third, section 16(A)(a) also implies liability if one executes trades based on non-public information which one can expect to have ‘a material effect on the market price of any such security’, whereby the term ‘material effect’ remains unclear. Also, the statute in subsection (c)(1)(D) does not clearly resolve the uncertainty regarding the definition of ‘indirect personal benefit’ for tipper and tippee liability.36 Overall, even though the Act aims to clarify the current insider trading law, it creates itself new uncertainties, which will likely require further clarification by the courts. 16.21 The federal circuit courts have interpreted the anti-fraud provisions (including the prohibition on insider trading) to have extra-territorial effect in a number of circumstances. Generally, the courts apply alternative tests: the ‘conduct’ test or the ‘effects’ test.37 Under the conduct test, the court has subject matter jurisdiction ‘where conduct material to the completion of the fraud occurred in the United States’.38 Mere preparatory activities and conduct far removed from the conduct of the fraud will not suffice;39 rather, ‘[o]nly where conduct ‘within the United States directly caused’ the loss will a district court have jurisdiction …’. Essentially, jurisdiction exists when ‘substantial acts in furtherance of the fraud were committed in the United States’.40 The test is met whenever the defendant’s activities in the US are more than ‘merely preparatory’ to a securities fraud committed abroad, and the ‘activities or culpable failures to act within the United States “directly caused” the claimed losses’.41 16.22 Under the ‘effects’ test, the court has jurisdiction ‘whenever a predominantly foreign transaction has substantial effects within the United States’.42 Thus, remote or indirect effects in the United States do not confer subject matter jurisdiction. The Second Circuit Court of Appeals held in Schoenbaum v Firstbrook43 that extra-territorial jurisdiction could be imposed on a transaction involving securities issued by a foreign corporation that were listed on a US stock exchange and held by US citizens on the grounds that such a transaction affected US securities markets. The court found that extra-territorial subject matter jurisdiction was justified under the federal securities laws on the basis that the challenged foreign transaction had an ‘effect’ on domestic US securities markets. Similarly, the Ninth Circuit also found extra-territorial jurisdiction based on the ‘effects’ test44 in a case involving a takeover of a Canadian corporation by a US corporation that involved the improper use 34 Ibid. 35 Ibid. 36 Ibid. 37 Butte Mining plc v Smith 76 F 3d 287 (9th Cir, 1996). 38 United States v Vilar, 729 F.3d 62 (2d Cir. 2013), Morrison v National Australia Bank Ltd. 561 U.S. 247, 130 S. Ct. 2869 (2010), SEC v Berger 322 F. 3d 187, 193 (2nd Cir, 2003); Psimenos v E F Hutton & Co 722 F 2d 1041, 1046 (2nd Cir, 1983). 39 Psimenos v EF Hutton, 722 F 2d at 1045. 40 IIT v Vencap Ltd 519 F.2d 1001, 1018 (2nd Cir 1975). 41 Itoba Ltd v Lep Group PLC 54 F.3d 118, 121–122 (2nd Cir 1995). 42 Consolidated Gold Fields plc v Minorco SA 871 F 2d 252, 261–262 (2nd Cir, 1989). 43 405 F 2d 200 (2nd Cir, 1968); cert denied 395 US 906 (1969). 44 Des Brisay v Goldfield Corpn 549 F 2d 133 (9th Cir, 1977).

467

16.22  The impact of other laws: domestic and overseas of the US corporation’s securities, which were registered and listed on a US national exchange and had adversely affected both the foreign plaintiffs and the US securities markets. Further, extra-territorial jurisdiction can be imposed on foreign actors who make misrepresentations to US investors in the sale of foreign securities that were only traded in foreign markets.45 In this case, the Second Circuit premised jurisdiction upon domestic conduct and the direct effect on US investors. Therefore, the US courts will consider two factors in determining whether extraterritorial subject matter jurisdiction will be applied: (1) whether the wrongful conduct substantially occurred in the US; or (2) whether the wrongful conduct had a substantial effect in the US or upon US citizens, wherever they are located.46 However, extra-territorial jurisdiction will not be conferred on a transaction or occurrence if its only connection to US territory are activities in the United States that are ‘merely preparatory’ to the actual fraud.47 16.23 The extra-territorial scope of the anti-fraud provisions also extends to the acts of a defendant based in the United States who perpetrates fraud upon non-US persons in a foreign country. The Second Circuit observed that the jurisdictional basis was sufficient in this case because Congress could not have intended ‘to allow the United States to be used as a base for manufacturing fraudulent security devices for export, even when … peddled only to foreigners’.48 Moreover, foreign nationals who are resident in the United States are protected to the same extent as US nationals so long as their claims arise at the time they are resident in the United States. This rule applies even though the fraudulent scheme is devised and set into motion abroad,49 but a foreign corporation whose sole shareholder and chief executive officer was a foreigner residing in the United States was required to prove that losses incurred on account of the fraudulent scheme were directly caused by acts within the United States.50 However, deception of a foreigner who is a sole shareholder within the United States, while necessary to demonstrate a fraudulent scheme, has thus been held insufficient proof of direct causation of loss.51 16.24 The Eighth Circuit imposed extra-territorial subject matter jurisdiction on foreign conduct that involved the use of the US telephone system and US mail to further a fraudulent scheme, even though the only victim of the fraud was a foreign corporation purchasing stock in another foreign company.52 In this case, the foreign defendant sellers relied, in part, on the US telephone system and US mail fraudulently to induce foreign investors to purchase securities of a foreign company not listed on a US exchange. The court imposed

Leasco Data Processing Equipment v Maxwell 468 F 2d 1326 (2nd Cir, 1972). Europe and Overseas Commodity Traders, SA v Banque Paribas London 147 F.3d 118, 125 (2nd Cir 1998). But the effects test will not create extraterritorial subject matter jurisdiction over the federal securities claims of foreign investors against foreign persons if the wrongful conduct in question was predominantly foreign. See In re Alstom SA, 406 F. Supp. 2d 346 (2005). 47 SEC v Berger 322 F 3d at 193; Zoelsch v Arthur Andersen & Co 824 F 2d 27 (DC Cir, 1987); Bersch v Drexel Firestone Inc 519 F 2d 974 (2nd Cir, 1975). 48 Consolidated Gold Fields plc v Minorco SA 871 F 2d 252 (2nd Cir, 1989); see also IIT v Vencap Ltd 519 F 2d 1001, 1017 (2nd Cir, 1975); on remand 411 F Supp 1094 (SDNY, 1975). 49 O’ Driscoll v Merrill Lynch, Pierce, Fenner & Smith Inc Fed Sec L Rep 99, 486 (SDNY, 1983). 50 O’ Driscoll v Merrill Lynch, Pierce, Fenner & Smith Inc WL 1360, 1361 (1983). 51 Ibid. 52 Continental Grain (Australia) Pty Ltd v Pacific Oilseeds Inc 592 F 2d 409 (8th Cir, 1979). 45 46

468

The impact of other laws: domestic and overseas  16.27 extra-territorial jurisdiction, despite the fact that no transaction occurred in the United States nor involved US securities, by finding that the defendants’ conduct (use of the US telephone and mail system) was significant – not ‘merely preparatory’ – and constituted a fraud devised and completed in the United States.53 16.25 The Second and Third Circuits have also upheld extra-territorial subject matter jurisdiction based on conduct in the United States that directly caused a foreign plaintiff’s losses, even though the fraud had no direct effect on US securities markets or upon investors in the United States.54 Therefore, foreigners purchasing securities in the United States are protected by US federal securities laws.55 Jurisdiction, however, will not extend to conduct that is, at most, ‘ancillary’ or peripheral and therefore not the direct cause of the plaintiff’s losses. The Second Circuit took this position in Fidenas AG v Compagnie Internationale Pour L’ informatique CII Honeywell Bull SA,56 when it denied extra-territorial jurisdiction to the claims of foreign investors against a foreign subsidiary that was wholly-owned by a US parent on the grounds that knowledge by the US parent of fraudulent conduct committed by its foreign subsidiary was insufficient US conduct. In a subsequent suit filed against the US parent for the same fraud, the court denied jurisdiction on the basis that mere knowledge of the fraud was insufficient to confer extraterritorial subject matter jurisdiction upon US courts. The court then relied on the Second Circuit’s view that the transactions were ‘predominantly foreign’ and thereby dismissed the suit for failing to satisfy either the ‘conduct’ or ‘effects’ test for subject matter jurisdiction. 16.26 Similarly, the US District Court for the Southern District of New York applied the transaction test to deny extra-territorial subject matter jurisdiction in a case where the primary fraud and every fact essential to the plaintiff’s claim of fraudulent misconduct was committed or occurred in Costa Rica.57 The transaction was considered not to have had significant enough effects on US securities markets and the fraudulent conduct in question was ancillary to the US and was ‘predominantly foreign’.58 In addition, extra-territorial subject matter jurisdiction will not be conferred where US investors used circuitous means (by setting up an overseas shell corporation) in order to conceal their US nationality so that they could participate in a foreign public offering in which they purchased the non-US securities of a foreign corporation. The court held that the plaintiffs were estopped from bringing a claim under the US securities laws because they had gone to great efforts to avoid and evade the Act’s requirements.59

Extraterritorial criminal liability for insider trading 16.27 In United States v Vilar, the Second Circuit extended the ‘conduct test’ to determine extraterritorial criminal liability for insider trading.60 In Vilar, 53 54 55 56 57 58 59 60

Continental Grain (Australia) Pty Ltd v Pacific Oilseeds Inc at 420. SEC v Kasser 548 F 2d 109 (3rd Cir, 1977); cert denied 431 US 938 (1977). IIT v Cornfeld 619 F 2d 909, 918 (2nd Cir, 1980). See also Arthur Lipper Corpn v SEC 547F 2d 171 (2nd Cir, 1976); cert denied 434 US 1009 (1978). 606 F 2d 5 (2nd Cir, 1979). Mormels v Girofinance SA 544 F Supp 815 (SDNY, 1982). Mormels v Girofinance SA. MCG Inc v Great Western SA 544 F Supp 815 (SDNY, 1982). United States v Vilar, 729 F.3d 62 (2d Cir. 2013).

469

16.27  The impact of other laws: domestic and overseas the Second Circuit applied the ‘presumption against extraterritoriality’ for civil liability cases to claims of criminal liability under Section 10(b) of the Securities Exchange Act. In doing so, the Second Circuit expressly extended the Supreme Court’s 2010 decision in Morrison v National Australia Bank Ltd. – a civil case in which the Court barred federal fraud suits by foreign investors over foreign-traded securities – to criminal actions brought by the Department of Justice. Rejecting the government’s argument that Morrison only applies to civil actions, the Second Circuit concluded that criminal and civil defendants alike can only be found liable under Section 10(b) if the fraud occurred in connection with ‘a security listed on a U.S. exchange’ or with ‘a security purchased or sold in the United States’. 16.28 Because none of the securities at issue in Vilar were listed on an American exchange, the Second Circuit followed Morrison and questioned whether the securities transactions constituted a domestic purchase or sale of securities. The Second Circuit held that a securities transaction is considered domestic ‘when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed in the United States’. The Second Circuit concluded that, because certain alleged victims entered into and renewed agreements in Puerto Rico and New York, a jury would have found that the defendants engaged in fraud in connection with a domestic purchase or sale of securities and upheld the defendants’ convictions. By focusing on the nature of the securities transaction, the Second Circuit’s analysis in Vilar materially limits the conduct that is susceptible to extraterritorial criminal liability, thereby limiting the applicability of the ‘conduct test’.

Extraterritorial Jurisdiction and the Dodd Frank Act 2010 16.29 The Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 contains certain provisions that amend the Exchange Act (and other securities laws) to acknowledge expressly the federal courts’ extraterritorial reach when enforcing the federal securities laws. Under the Dodd Frank Act, the Exchange Act now provides that the courts have jurisdiction over actions by the SEC or DOJ involving: ‘(1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.’61 The Dodd Frank Act has arguably extended the extraterritorial reach of the ‘conduct’ test and thus supersedes Vilar‘s more limited jurisdictional test, while reaffirming a robust application of the ‘effects’ test. 16.30 Based on the above cases and legislation, the following propositions can be made about the extra-territorial application of the anti-fraud provisions of the US securities laws: ••

that jurisdiction will be conferred on acts of material importance that occur in a foreign country if such acts cause losses in the sale of securities to US resident investors in the United States;

61

15 U.S.C. § 78aa(b).

470

The impact of other laws: domestic and overseas  16.32 •• •• ••

that jurisdiction will be conferred on acts of material importance that occur in the United States if they cause losses in the sale of securities to US residents abroad; that extraterritorial jurisdiction can apply to foreign persons so long as the wrongful conduct substantially occurred within the US; and that jurisdiction will not be conferred on transactions that result in losses in the sale of securities to foreigners outside US territory unless acts within the United States directly caused such losses.62

Reporting and disclosure requirements 16.31 The collapse of Enron and WorldCom in 2002 demonstrated the importance of accurate and non-misleading reporting by companies whose securities are listed on US exchanges and/or make public offerings to US investors. The jurisdictional scope of the US securities laws’ disclosure and reporting requirements, however, are more narrowly defined. A foreign issuer’s filing of misleading reports to the SEC will not of itself provide a sufficient jurisdictional basis to support a private right of action by foreign investors. This means that there will be no US jurisdiction over claims by foreign investors residing abroad against a foreign corporation for filing misleading reports with the SEC, even though the misrepresentations were contained in documents filed with the SEC and also were circulated in the US press.63 In contrast, there will be US jurisdiction where a non-US national residing abroad brings an action against a foreign corporation for fraud in connection with the sale of US securities since some of the acts that were a part of the fraud occurred in the United States.64 Jurisdiction will also extend to misrepresentations in a prospectus delivered outside US territory by a foreign corporation to foreign investors residing abroad if negotiations relating to the prospectus took place in US territory.65 The Sarbanes-Oxley Act 2002 creates extraterritorial subject matter jurisdiction over a foreign issuer and its chief executive and chief financial officer for signing annual or quarterly reports that are materially incorrect which can lead to civil and criminal liability. Generally, however, the extra-territorial application of US securities law’s reporting and disclosure requirements will not permit a foreign shareholder of a US-listed non-US company to bring a private right of action against the foreign company arising out of misrepresentations in a prospectus or other similar documents if the plaintiff cannot provide adequate proof of causation from acts that took place in the United States.

Foreign manipulation of US markets 16.32 The US government imposes criminal liability on non-US persons or business entities that are engaged in off-shore manipulations affecting US markets or US issuers.66 The basis for such jurisdiction is the Securities and Exchange Act 1934, section 9(a) that prohibits ‘any person’ from using 62 See Bersch v Drexel Firestone Inc 519 F 2d 974 at 993 (2nd Cir, 1975); cert denied 423 US 1018 (1975). 63 Kaufman v Campeau Corpn 744 F Supp 808 (SD Ohio, 1990) at 810–812. 64 Kaufman v Campeau Corpn. 65 Alfadda v Fenn 935 F 2d 475 (2nd Cir, 1991). 66 General Foods Corpn v Brannon 170 F 2d 220, 234 (7th Cir, 1998).

471

16.32  The impact of other laws: domestic and overseas ‘any means or instrumentality of interstate commerce’ (including e-mails, faxes and telephones) or of the mail, ‘or of any facility of a national securities exchange [for a] manipulative or deceptive device or contrivance’ in contravention of the SEC rules.67 Moreover, the SEC, the Department of Justice and the Commodities Futures Trading Commission (CFTC) are targeting foreign traders that utilise algorithmic trading and other types of high frequency trading methods to manipulate markets and unfairly benefit from privileged inside information.68 The US Department of Justice (DOL) in February 2015 indicted a British trader for contributing to the 2010 US ‘Flash Crash’ through wire fraud, commodities fraud and market manipulation.69 The DOL is seeking extradition following his arrest by the British authorities in relation to the ‘Flash Crash’. This raises important policy issues about how insider dealing and market manipulation regulation should be applied to technologically sophisticated trading activity, including high frequency trading. 16.33 US courts have generally held that, given the principal purpose of US securities laws to protect US investors exposed to fraudulent or manipulative activities that implicate the jurisdictional means of interstate commerce, foreign activities by foreign nationals producing such a result in the United States or affecting US investors will be subject to US jurisdiction, which will displace the foreign law and will, as a matter of conflict of laws, allow US courts to apply US laws to foreign nationals.

Extra-territorial jurisdiction over commodities trading and civil RICO 16.34 Where a cause of action arose from trading on US commodities exchanges, US courts will uphold extra-territorial subject matter jurisdiction, even though the parties to the suit were non-resident US aliens and the fraudulent transactions and conduct occurred in a foreign country.70 In Tamari, the court relied on the ‘effects’ test to find that ‘where the … transactions involve trading on domestic exchanges, harm can be presumed, because the fraud … implicates the integrity of the American market’.71 The court also noted that extra-territorial jurisdiction could attach to a foreign defendant’s transmission of orders on behalf of the foreign plaintiffs when such transmissions went from Lebanon to the commodities exchange in Chicago. Such transmissions constituted ‘conduct within the United States that was of substantial importance to the success of the fraudulent scheme’.72 16.35 The Racketeer Influenced Corrupt Organisations Act (RICO) contains no express provision regarding its extra-territorial application.73 RICO applies

Cargill Inc v Hardin 452 F 2d 1154 at 1163 (8th Cir, 1971). See Report on the US ‘Flash Crash’. Report of the Staffs of the CFTC and SEC To The Joint Advisory Committee on Emerging Regulatory Issues, ‘Findings Regarding the Events of May 6, 2010’ (30 September 2010). 69 See US DOL Criminal Complaint AO 91 (Rev. 11/11), www.justice.gov/sites/default/files/ opa/press-releases/attachments/2015/04/21/sarao_criminal_complaint.pdf. 70 Tamari v Bache & Co (Lebanon) SAL 547 F Supp 309 (ND Ill, 1982); order affd 730 F 2d 1103 (7th Cir, 1984); cert denied 469 US 871 (1984). 71 Tamari v Bache & Co (Lebanon) SAL at 313. 72 Tamari v Bache & Co (Lebanon) SAL at 315. 73 See John Doe v UNOCAL Corpn 110 F Supp 2d 1294, 1310 (CD Cal, 2000). 67 68

472

The impact of other laws: domestic and overseas  16.37 to civil and criminal actions and provides an express private right of action for those who were defrauded by individuals who used their controlling influence over a business enterprise to commit a fraud. To determine extraterritorial jurisdiction, the courts seek guidance from precedents ‘concerning subject matter jurisdiction for international securities transactions and antitrust matters’.74 Therefore, the courts will look to the cases discussed above to determine issues of extra- territoriality under RICO. 16.36 In addition, jurisdiction may be imposed on the activities of non-US persons residing abroad when their activities affect the US marketplace. The Ninth Circuit in Bourassa v Desrochers75 held that the jurisdictional link was satisfied by a Canadian broker’s telephone call from Canada to an investor in the United States and later the US investor was able to serve the writ on the Canadian defendant while the defendant was on holiday in Florida. Jurisdiction was not satisfied, however, in a case where defrauded US investors brought an action for aiding and abetting liability against a foreign auditor for producing a report that was used by a foreign company without the consent of the auditor.76 A US court also dismissed a claim based on lack of jurisdiction when it involved US investors who owned American Depository Receipts (ADRs) and had received a press release announcing a UK company’s tender offer for shares in a UK target company whose securities were trading in the United States through the use of ADRs.77 The determination of whether to impose extra-territorial subject matter jurisdiction will be a highly factual inquiry which must be made on a case-by-case basis.78

IOSCO AND UK EFFORTS AT INTERNATIONAL COOPERATION 16.37 IOSCO is the leading international body concerned with the regulation of securities markets.79 Its membership comprises regulatory bodies from over 100 countries who have responsibility for day-to-day oversight and administration of securities laws. The preamble of IOSCO’s byelaws states: ‘Securities authorities resolve to co-operate together to ensure a better regulation of the markets, on the domestic as well as on the international level, in order to maintain just, efficient and sound markets.’ To accomplish this, IOSCO encourages its member regulatory bodies to co-ordinate the establishment of standards and mutual assistance with other regulators as follows: (a) to exchange information on their respective experiences in order to promote the development of domestic securities markets, (b) to unite national efforts to establish standards and an effective surveillance of international securities transactions, and (c) to provide mutual assistance to ensure the integrity of the markets by a vigorous application of the standards and effective enforcement against offences.

74 75 76 77 78 79

North South Finance Corpn v Al-Turki 100 F 3d 1046, 1051 (2nd Cir, 1996). 938 F 2d 1056 (9th Cir 1991). Reingold v Deloitte Haskins & Sells 599 F Supp 1241 (SDNY, 1984). Plessey Co v General Electric Co 628 F Supp 477 (D Del, 1986). Dept of Economic Development v Arthur Andersen & Co 683 F Supp 1463 (SDNY, 1988). See IOSCO’s website: www.iosco.org.

473

16.38  The impact of other laws: domestic and overseas 16.38 IOSCO seeks to develop international standards to provide advice for national regulators which serves as a yardstick against which national regulatory efforts can be measured. IOSCO also recognises that providing minimum international standards and effective international cooperation in establishing, maintaining and investigating standards will not only result in investor protection, but also reduce systemic risk. IOSCO recognises that the increasing integration and liberalisation of global financial markets poses significant challenges for the regulation of securities markets. Moreover, markets, especially emerging markets, have experienced remarkable growth in recent years, but have also been exposed to the volatility of short-term capital flows which have resulted in some countries experiencing financial instability and the increased risk of contagion. This has been exacerbated by the lack of transparency and disclosure of material information for investors to assess risks in emerging markets. National regulators must now take account of transactions and activities that occur in other countries and IOSCO seeks to establish standards to assess the nature of cross-border conduct with a view to ensuring the fair, efficient and transparent operation of securities markets.

IOSCO and market abuse 16.39 IOSCO recognises that investors should be protected from misleading, manipulative or fraudulent practices. IOSCO adopts a broad definition of ‘manipulative or fraudulent’ conduct to include insider trading, front running or trading ahead of customers and the misuse of client assets. IOSCO has designated the principle of full disclosure of material information to be the primary principle for ensuring investor protection. Full disclosure reduces information asymmetries in the marketplace and thereby improves the investor’s position to assess the potential risks and rewards of their investments. 16.40 IOSCO asserts that a key component of full disclosure requirements is adequate accounting and auditing standards, which should be of a high and sufficiently robust standard to inspire international confidence. Moreover, only duly licensed or authorised persons should be allowed to hold themselves out to the public as providing investment services. This should also apply in the case of market intermediaries and the operators of exchanges. IOSCO also encourages national authorities to require initial and ongoing capital requirements for those licence holders and authorised persons. These standards should be designed to achieve an environment in which a securities firm can meet the current demands of its counterparties and, if necessary, wind down its business without losses to its customers. 16.41 IOSCO also encourages national authorities to adopt strict standards of supervision for market intermediaries for the purpose of achieving investor protection by setting minimum standards for market participants. Investors should be treated in a just and equitable manner by market intermediaries based on standards that should be established in rules of business conduct. An effective system of surveillance is needed which would entail inspection, oversight and internal compliance programmes for investment firms and intermediaries. 16.42 Investors are particularly vulnerable in securities markets to misconduct by intermediaries and others, but the capacity of individual investors to take action may be limited. Further, the complex character of securities transactions and of fraudulent schemes requires strong enforcement 474

The impact of other laws: domestic and overseas  16.47 of securities laws. In the event a violation occurs, investors should be protected through effective enforcement of the law. 16.43 IOSCO also sets out the principle that investors should have access to neutral fora, such as courts or administrative tribunals, to seek redress for damages and other injuries arising from market abuse and other misconduct. Remedies should include adequate compensation and/or restitution. The network of mutual assistance agreements that IOSCO has encouraged national regulators to adopt should lead to more effective enforcement. Effective crossborder supervision and enforcement will depend on close cooperation and coordination by national regulators. The Financial Services and Markets Act 2000 (FSMA) contains provisions that implement many of these principles and standards adopted by IOSCO. 16.44 The FSMA authorises the Financial Conduct Authority (FCA) to co-ordinate their investigations and to subpoena documents and witnesses from foreign jurisdictions and to prosecute parties allegedly committing acts in foreign jurisdictions that breach the market abuse provisions of the FSMA.80 Part X provides for more effective information gathering to be collected as part of investigations in foreign jurisdictions and thereby provides mechanisms for cooperation with foreign authorities. 16.45 More specifically, the FSMA 2000, section 139 refers to ‘assistance to overseas regulators’ and lists a number of matters that the FCA must take into account before deciding whether to exercise its investigative powers or not. Sections 140 and 141 of the FSMA authorise broad powers for the FCA to gather information and documents from an authorised firm, its employees and even a member firm within the authorised firm’s corporate or entity group. 16.46 The FSMA, section 139(6) makes it mandatory for the FCA to respond to requests for cooperation and information from other EU Member State authorities. Further, the FSMA develops safeguards to provisions authorising disclosure to foreign regulators by more narrowly defining and reducing the categories that can be relied on by UK authorities to reject requests for information and to coordinate investigations and enforcement actions. For example, the FSMA, section 305(1) tightly restricts the disclosure of all confidential information that arises from fiduciary and privileged relationships. Such information can only be provided with the consent of the person from whom it was sought. The FSMA, section 306(1) provides exceptions to this restriction on disclosure that are more specifically defined by secondary legislation. This list of prescribed recipients will be entitled to take, obtain and utilise information that would otherwise be non-disclosable. 16.47 The principle of reciprocity will determine the willingness of the FCA to intervene on behalf of foreign authorities in investigations and enforcement actions.81 The FCA will act if there is a corresponding legal obligation in the requesting jurisdiction that would allow them to provide comparable assistance to the FCA, if asked. The principle of reciprocity is a key component of the UK MOU and mutual legal assistance treaties that authorise UK authorities to coordinate information collection, investigations and enforcement with foreign

80 81

Part I of the consultation document issued with the Financial Services and Markets Bill emphasised the need for ‘extensive co-operation with regulatory bodies in other countries’. See discussion in FSA Consultation Paper 17 (2001) discussing the FSA’s powers to intervene on behalf of foreign authorities.

475

16.47  The impact of other laws: domestic and overseas jurisdictions if those jurisdictions allow UK authorities to have reciprocal rights in UK investigations and enforcement actions. The FSMA, Pts IV and XII both provide detailed procedures that authorise the FCA, acting on a request from another jurisdiction with which it has an agreement guaranteeing reciprocal rights, to support an enforcement action of a foreign regulator by allowing the FCA to vary, cancel and intervene in a regulated firm’s ability to conduct permitted financial services activities whilst operating in the UK. Part IV addresses disclosure of information from foreign firms which seek to carry on regulated financial activities in the UK. Part XII authorises the FCA to intervene in order to protect the integrity and good governance of UK financial markets by imposing jurisdiction extra-territorially on persons or transactions outside the UK that may affect UK markets. 16.48 The FSMA, sections 42 and 164 allow the FCA ultimately to exercise discretion as to whether it should exercise its broad powers. It should be noted that such discretion may appear to be an obstacle to enhanced transnational cooperation, as such discretion can only be restrained by bilateral or multilateral agreement.82

CONCLUSION 16.49 The barriers to a global securities market are diminishing; financial information is becoming available and inexpensive to obtain and it has been become easier to effect share transactions abroad.83 Ultimately, the forces of liberalisation and technology will link most financial markets with the result that regulators should develop improved regulatory links to improve the effectiveness and efficiency of their financial markets. National regulatory authorities will come under pressure to enter agreements that allocate jurisdictional authority amongst regulators in different jurisdictions in order to forge a more coordinated attack on those who engage in complex and crossborder market manipulation, insider dealing and fraud. The EU Market Abuse Regulation and the Market Abuse Directive 2 will result in a more harmonised approach to investigations, enforcement and sanctions for EEA states. This should result in a more consolidated and efficient European regulatory regime that can address some of the main challenges in cross-border market misconduct. 16.50 The impact of foreign laws, especially extraterritorial US anti-fraud securities laws, on UK financial markets will pose a major challenge for regulatory compliance by UK companies and other market participants. US courts apply alternative tests: the ‘conduct’ test or the ‘effects’ test. Under the ‘conduct’ test, the court has subject matter jurisdiction where conduct material to the completion of the fraud occurred in the United States. Under the ‘effects’ test, the court has jurisdiction whenever a predominantly foreign transaction has substantial effects within the United States. The close links between US and UK securities markets require an analysis of how US securities laws can expose UK persons and other non-US persons to civil and criminal liability for insider dealing and market manipulation. Finally, the efforts of IOSCO have been instrumental in developing international standards in the areas of market 82 83

FSMA, s 139. See Merritt B Fox, ‘Securities Disclosure in a Globalising Market: Who Should Regulate Whom’ (1997) 95 Mich L Rev 2498.

476

The impact of other laws: domestic and overseas  16.51 abuse and insider dealing that have been generally adopted by most IOSCO countries. The IOSCO standards are important for understanding how the FCA will interpret and enforce the market abuse regime and for how the UK Upper Tribunal and courts will interpret the regime in legal proceedings. 16.51 Overall, the onshoring of the EU MAR into the UK market abuse regime will support more effective cross-border cooperation and coordination between EEA/EU regulators and the UK FCA. This will lead to enhanced crossborder market surveillance across Europe for enhanced controls over complex cross-border market misconduct. The UK market abuse regime provides the FCA with express authority to engage in investigations and enforcement actions in market abuse cases that occur partly or solely in the UK so long as it relates to qualifying investments on a UK prescribed or regulated market. HM Treasury’s authority to prescribe markets on recognised investment exchanges that could be based outside the UK constitutes a potentially significant extension of the UK Treasury’s and the FCA’s regulatory authority over market misconduct abroad. UK financial policy might be guided by a principle that allows it to regulate extraterritorial market misconduct – acts or omissions – that take place in foreign jurisdictions, but have a significant or direct effect on UK markets, so long as substantial wrongful conduct occurs in the UK or conduct outside the UK relates to qualifying investments traded on a UK regulated market. Indeed, these legal and regulatory issues will continue to pose complex challenges for regulators, firms and practitioners who will find it increasingly difficult to reconcile different market practices and attitudes to market misconduct across jurisdictions, while effectively managing risk in today’s turbulent financial markets.

477

478

Index

[all references are to paragraph number] A Abuse of position fraud, and, 6.28 Abusive squeezes market abuse, and, 5.10–5.12 Accepted market practice Code of Market Conduct, and, 4.29 generally, 4.37–4.38 introduction, 4.5 market abuse, as, 4.17 Accessory liability compliance and senior officers, and, 14.13–14.23 Acts preparatory to fraud financial crime, and, 6.103–6.108 Advice and assistance compliance procedures and systems, and, 13.31–13.32 Anti-fraud provisions extraterritorial jurisdiction, and, 16.19 Anti-money laundering laws acquire, retain, use or control of criminal property generally, 7.17–7.19 introduction, 7.11 acquire, use or have possession of criminal property generally, 7.20 introduction, 7.11 application of offences, 7.21 authorised disclosures generally, 7.32–7.34 introduction, 7.12 belief, 7.51–7.52 civil liability, 7.45–7.48 compliance, 7.53–7.62 conceal, disguise, convert or transfer criminal property generally, 7.15–7.16 introduction, 7.11 confiscation, 7.63–7.92 context, 7.5–7.7 corporate dimension, 7.1–7.4 criminal property, 7.13

Anti-money laundering laws – contd defences, 7.12, 7.24 disclosure pursuant to statutory obligation, 7.31 EU Directives, 7.9 facilitate acquisition, retention, use or control of criminal property generally, 7.17–7.19 introduction, 7.11 failure to disclose nominated officers, 7.25 regulated sector, 7.22–7.24 FATF Recommendations, 7.9 FCA integrity objective, and, 7.2 introduction, 7.1–7.4 knowledge, 7.49–7.52 make an arrangement to acquire, retain, use or control criminal property generally, 7.17–7.19 introduction, 7.11 ‘money laundering’, 7.8 NCA report, 7.1 nominated officers (MLROs), and, 7.25 offences, 7.11 penalties, 7.35 prejudicing an investigation, 7.30 proceeds of crime, 7.8–7.40 proof of knowledge, 7.49–7.52 protected disclosures generally, 7.31 introduction, 7.12 purpose, 7.7 reasonable excuse for non-disclosure, 7.24 regulated sector, and, 7.21–7.23 Regulations 2017 civil penalties, 7.41–7.44 generally, 7.36–7.40 removal of criminal property from jurisdiction generally, 7.15–7.16 introduction, 7.11

479

Index Anti-money laundering laws – contd statutory framework, 7.10–7.11 suspicion, 7.52 terrorist finance, 7.93–7.114 tipping off defences, 7.27–7.29 generally, 7.26 UN Convention Against Corruption, 7.9 use, 7.7 Authorisation compliance procedures and systems, and, 13.8–13.12 control liability, and controllers, 15.25 generally, 15.23–15.24 Authorised disclosures generally, 7.32–7.34 introduction, 7.12 Authorised persons compliance procedures and systems, and, 13.6–13.7 B Behaviour Code of Market Conduct behaviour not amounting to market abuse, 4.30–4.31 generally, 4.26–4.28 safe harbours, 4.32–4.39 specified behaviour, 4.29 definition, 4.5 generally, 4.25 not amounting to market abuse, 4.30–4.31 safe harbours accepted market practice, 4.37–4.38 implications for practitioners, 4.39 introduction, 4.32 price stabilisation, 4.36 share buy-backs, 4.33–4.35 specified behaviour, 4.29 Blackmail financial crime, and, 6.79–6.81 ‘Boiler room’ operations financial crime, and, 6.60 Breach of trust financial crime, and, 6.42–6.46 Bribery control liability, and, 15.2 liability of compliance and senior officers, and, 14.26 Buybacks disclosure requirements, and, 9.12 insider dealing, and, 3.105–3.106 market abuse, and, 16.11–16.13 safe harbours, and, 4.33–4.35

C Capital Requirements Directive (CRD) compliance procedures and systems, and, 13.1 Certification employees competence requirements, 14.52–14.58 regulatory liability, 14.51 Chinese walls compliance procedures and systems, and, 13.85–13.86 Civil liability compliance and senior officers, and accessory liability, 14.13–14.23 conspiracy, 14.8 contractual liability, 14.7 deceit, 14.8 duty of fidelity, 14.5–14.6 equitable liability, 14.13–14.23 generally, 14.1–14.2 inducing or procuring a breach of contract, 14.9 role of the law, 14.3–14.4 tortious liability, 14.8–14.12 financial crime, and disclosure orders, 6.121–6.129 disqualification procedures, 6.130–6.139 freezing orders, 6.121–6.129 generally, 6.113–6.120 offences by bodies corporate, 6.140–6.143 money laundering, and, 7.45–7.48 Civil penalties money laundering, and, 7.41–7.44 Code of Market Conduct (MAR) and see Market abuse abusive squeezes, 5.10 behaviour, 4.29 behaviour not amounting to market abuse, 4.30–4.31 generally, 4.26–4.28 safe harbours accepted market practice, 4.37–4.38 implications for practitioners, 4.39 introduction, 4.32 price stabilisation, 4.36 share buy-backs, 4.33–4.35 specified behaviour, 4.29 Code staff regulatory liability staff, 14.52–14.58 certification employees, 14.51 competence requirements, 14.52–14.58 failure to report reasonable suspicions, 14.59–14.62 generally, 14.46–14.47 senior management function holders, 14.48–14.50

480

Index Commodities trading extraterritorial jurisdiction, and, 16.34–16.36 Compliance officers see also Compliance procedures and systems civil liability accessory liability, 14.13–14.23 conspiracy, 14.8 contractual liability, 14.7 deceit, 14.8 duty of fidelity, 14.5–14.6 equitable liability, 14.13–14.23 generally, 14.1–14.2 inducing or procuring a breach of contract, 14.9 role of the law, 14.3–14.4 tortious liability, 14.8–14.12 control liability APER Code, 15.33–15.38 generally, 15.26–15.32 criminal liability bribery, 14.26 fraud, 14.26 fraudulent trading, 14.26 generally, 14.24–14.26 insider dealing, 14.24 misleading statements and impressions, 14.24 proceedings, 14.27–14.33 sentencing, 14.34–14.45 theft, 14.26 regulatory liability all staff, 14.52–14.58 certification employees, 14.51 competence requirements, 14.52–14.58 failure to report reasonable suspicions, 14.59–14.62 generally, 14.46–14.47 senior management function holders, 14.48–14.50 Compliance procedures and systems advice and assistance, 13.31–13.32 authorisation, 13.8–13.12 authorised persons, 13.6–13.7 Capital Requirements Directive (CRD), 13.1 Chinese walls, 13.85–13.86 conflicts of interest, and authorisation to conduct investment business, 8.25–8.26 FCA Handbook, 8.29–8.30 generally, 8.22–8.24 High Level Principles, 8.27–8.28 SYSC sourcebook, 8.29–8.43 control systems disclosure, for, 13.4–13.5 market users, for, 13.2 prevent insider dealing, to, 13.3

Compliance procedures and systems – contd dealing controls, 13.38–13.42 disclosure control insider lists, and, 13.4 market soundings, in, 13.5 effectiveness, 13.20–13.23 electronic communications, 13.35–13.37 Financial Conduct Authority, and, 13.1 financial crime, 13.15–13.17 function advice and assistance, 13.31–13.32 effectiveness, 13.20–13.23 generally, 13.18 monitoring, 13.29–13.30 operational independence, 13.24–13.28 permanence, 13.19 independence, 13.24–13.28 information barriers, 13.38–13.42 insider dealing, and, 13.3 insider lists, 13.4 introduction, 13.1–13.5 maintenance of records, 13.33–13.34 MAR, and, 13.1 market soundings, 13.5 market users, 13.2 MiFID II, and, 13.1 monitoring, 13.29–13.30 operational independence, 13.24–13.28 permanence, 13.19 personal account dealing, 13.43–13.48 policy process, 13.13–13.14 ‘pre-positioning’, 13.43 prevention of insider dealing, 13.3 Prudential Rules for Investment Firms (IFPRU), 13.1 record keeping electronic communications, 13.35–13.37 maintenance, 13.33–13.34 transaction records, 13.35–13.37 resources condition, 13.9–13.10 senior management, 13.11–13.12 Senior Management Systems and Controls (SYSC) sourcebook, 13.1 suitability condition, 13.9–13.11 systems of control market users, for, 13.2 prevent insider dealing, to, 13.3 telephone conversations, 13.35–13.37 ‘trading ahead’, 13.43 threshold conditions, 13.8–13.11 transaction records, 13.35–13.37 ‘wall crossing’, 13.85–13.42

481

Index Computer-assisted trading meaning of insider dealing, and, 1.48–1.49 Computer-related crime financial crime, and, 6.82–6.83 meaning of insider dealing, and, 1.45–1.47 Concealment financial crime, and, 6.40–6.41 Confidentiality disclosure requirements, and, 9.19–9.20 investigations, and, 11.36 Confiscation anti-money laundering, and, 7.63–7.92 Conflicts of interest case law, 8.20–8.21 compliance authorisation to conduct investment business, 8.25–8.26 FCA Handbook, 8.29–8.30 generally, 8.22–8.24 High Level Principles, 8.27–8.28 SYSC sourcebook, 8.29–8.43 contracting out, 8.16 control of information rules, 8.22 duty of loyalty, 8.2–8.6 Financial Conduct Authority, and authorisation to conduct investment business, 8.25–8.26 generally, 8.23 Handbook, 8.29–8.30 High Level Principles, 8.27–8.28 SYSC sourcebook, 8.29–8.43 fundamental rules, 8.1 High Level Principles for Business and Fundamental Rules, 8.27–8.28 informed consent, 8.17–8.19 insider dealing, and, 2.3–2.7 introduction, 8.1 modification of duties, 8.8–8.12 multiple appointments, 8.7 ‘no conflict’ rule, 8.2 other fiduciaries, 8.13–8.15 regulatory environment, 8.22–8.43 self-dealing, 8.2 Senior Management Systems and Controls (SYSC) sourcebook application of rules, 8.31 Chinese Walls, 8.39–8.43 conflict identification, 8.31–8.33 control of information rules, 8.39–8.43 generally, 8.29–8.30 maintenance of conflicts policy, 8.34–8.35 procedural requirements for managing conflicts, 8.36–8.38 shari’ah council, and, 8.13

Conspiracy financial crime, and enforcing the bargain, 6.20–6.25 generally, 6.17–6.19 liability of compliance and senior officers, and, 14.8 Contractual liability compliance and senior officers, and, 14.7 Control liability authorisation controllers, 15.25 generally, 15.23–15.24 bribery, and, 15.2 compliance officers APER Code, 15.33–15.38 generally, 15.26–15.32 controllers, 15.25 directors’ knowledge, 15.15–15.16 Financial Conduct Authority, and authorisation, 15.23–15.24 controllers, 15.25 generally, 15.3 misleading the FCA, 15.21–15.22 senior management function holders, 15.26–15.38 financial services regulation generally, 15.17–15.20 misleading the FCA and PRA, 15.21–15.22 firm authorisation controllers, 15.25 generally, 15.23–15.24 FSMA 2000, and, 15.17 integrity argument, 15.2 introduction, 15.1–15.3 misleading the FCA and PRA, 15.21–15.22 protection argument, 15.1 restitution, and, 15.12–15.14 senior management function holders APER Code, 15.33–15.38 generally, 15.26–15.32 vicarious liability criminal law, in, 15.4–15.6 restitution, in, 15.12–15.14 tort, in, 15.7–15.11 Control of information conflicts of interest, and, 8.22 Control systems disclosure, for insider lists, and, 13.4 market soundings, in, 13.5 market users, for, 13.2 prevent insider dealing, to, 13.3 Corporate issuer insider dealing, and, 1.37 Corruption financial crime, and, 6.84–6.91

482

Index Criminal liability compliance officers bribery, 14.26 fraud, 14.26 fraudulent trading, 14.26 generally, 14.24–14.26 insider dealing, 14.24 misleading statements and impressions, 14.24 proceedings, 14.27–14.33 sentencing, 14.34–14.45 theft, 14.26 Law Commission consultation paper, 15.5 senior managers bribery, 14.26 fraud, 14.26 fraudulent trading, 14.26 generally, 14.24–14.26 insider dealing, 14.24 misleading statements and impressions, 14.24 proceedings, 14.27–14.33 sentencing, 14.34–14.45 theft, 14.26 vicarious liability criminal law, in, 15.4–15.6 restitution, in, 15.12–15.14 tort, in, 15.7–15.11 Criminal property anti-money laundering, and, 7.13 D Dealing offence see also Insider dealing elements, 3.18–3.25 generally, 3.8–3.11 ‘insider’, 3.12–3.17 ‘insider information’, 3.26–3.66 ‘personal intermediary’, 3.13–3.15 primary insiders, 3.12 secondary insiders, 3.12 statutory framework, 3.8–3.11 territorial scope, 3.67 Deceit liability of compliance and senior officers, and, 14.8 Decision notices access to FCA material, 12.23 generally, 12.24–12.30 Defences anti-money laundering, and, 7.12, 7.24 burden of proof, 3.88 general, 3.87–3.96 information sufficiently widely disseminated so no one be prejudiced, 3.92 introduction, 3.86

Defences – contd no expectation to make profit or avoid loss from inside information, 3.90–3.91 person would have acted in same way without the information, 3.93–3.94 Defences (insider dealing) dealing burden of proof, 3.88 general, 3.87–3.96 information sufficiently widely disseminated so no one be prejudiced, 3.92 introduction, 3.86 no expectation to make profit or avoid loss from inside information, 3.90–3.91 person would have acted in same way without the information, 3.93–3.94 disclosure of inside information, 3.96 encouraging, 3.95 general, 3.86–3.96 market information, 3.97 market makers, 3.98–3.104 price stabilisation, 3.105–3.106 special, 3.97–3.106 Directors control liability, and, 15.15–15.16 Disclosure of inside information defences, 3.96 generally, 3.71–3.73 territorial scope, 3.74 Disclosure orders financial crime, and, 6.121–6.129 Disclosure requirements application, 9.15–9.16 brokers, and, 9.18 buyback of shares, and, 9.12 decision tree, 9.24 delayed disclosure, 9.7–9.8 enhanced disclosure, 9.21–9.22 extra-territorial jurisdiction, and, 16.31 FCA role, 9.28–9.29 inside information, and, 9.3–9.6 introduction, 9.1 liability of compliance and senior officers, and, 14.22 Listing Particulars, 9.2 managerial disclosure, 9.11 MAR Regulation, 9.1 obligations, 9.2 ‘precise nature’, and, 9.4 price stabilisation, and, 9.12 professional disclosure confidentiality issues, 9.19–9.20 generally, 9.17–9.18 safe harbours, 9.12

483

Index Disclosure requirements – contd selective disclosure, 9.9–9.10 senior officers, and, 9.15–9.16 ‘significant price effect’, and, 9.4 spread betting firms, and, 9.18 sustainability risks, 9.23 takeovers FCA role, 9.28–9.29 general principles, 9.26 introduction, 9.25 market abuse, 9.30 offerors, 9.31 Takeover Panel’s powers, 9.27 third party lists, and, 9.13–9.14 UK Listing Rules, 9.1 Dishonesty fraud, and, 6.29 Disqualification procedures financial crime, and, 6.130–6.139 Dodd Frank Act 2010 extraterritorial jurisdiction, and, 16.29–16.30 E Electronic communications compliance procedures and systems, and, 13.35–13.37 Encouraging insider dealing defences, 3.95 generally, 3.68–3.70 territorial scope, 3.74 Enforcement access to FCA material, 12.23 applications to court generally, 12.56 injunctions, 12.57–12.59 restitution, 12.60–12.64 business permissions, and, 12.53–12.55 decision-making of FCA, of, 12.12 decision notices access to FCA material, 12.23 generally, 12.24–12.30 Decisions Procedures and Penalties Manual (DEPP), 12.3 Enforcement Guide (EG), 12.3 final notices generally, 12.35–12.36 publication, 12.37 Financial Conduct Authority, and access to material, 12.23 decision-making, 12.12 generally, 12.1–12.3 FSMA 2000, and, 12.1 influence, and, 12.53–12.55 injunctions factors to be considered, 12.59 generally, 12.57–12.58

Enforcement – contd insider dealing or trading, 3.107–3.108 introduction, 12.1–12.3 investigations, and case selection, 11.39–11.41 criteria, 11.38 introduction, 11.37 market abuse case selection, 12.7–12.9 impact of enforcement on, 12.53–12.55 injunctions, 12.57–12.59 introduction, 12.4–12.6 private enforcement, 4.41 penalties criteria, 11.39–11.41 determining level, 12.41–12.47 introduction, 12.38 settlement, 12.48–12.52 positions of influence, and, 12.53–12.55 principles based obligations, 12.10–12.11 Procedures and Penalties Manual (DEPP), 12.3 reference to Upper Tribunal, 12.34 Regulatory Decisions Committee (RDC), 12.13–12.15 restitution factors to be considered, 12.63–12.64 generally, 12.60–12.62 statement of market abuse, 12.38–12.40 third party rights, 12.31–12.33 trading, and, 12.53–12.55 warning notices access to FCA material, 12.23 generally, 12.16–12.22 third party rights, 12.31–12.33 Equitable liability compliance and senior officers, and, 14.13–14.23 EU Directive (MAD) and see Market abuse introduction, 16.4 information gathering, and, 10.16 regulatory policy, 4.42 EU Regulation 596/2014 (EU MAR) and see Market abuse buy-backs, 16.11–16.13 compliance procedures and systems, 13.1 cross-border co-operation, 16.14–16.17 disclosure requirements, 9.1 information gathering, 10.16 introduction, 16.4

484

Index EU Regulation 596/2014 (EU MAR) – contd investigations and enforcement, 16.14–16.17 market manipulation, 16.7–16.10 price stabilisation, 16.11–16.13 scope, 16.5–16.6 Extortion financial crime, and, 6.79–6.81 Extra-territorial jurisdiction anti-fraud provisions of Securities and Exchange Act 1934, section 10(b), 16.19 commodities trading, 16.34–16.36 conclusion, 16.49–16.51 disclosure requirements, 16.31 Dodd Frank Act 2010, 16.29–16.30 foreign manipulation of US markets, 16.32–16.33 generally, 16.18 high frequency trading, 16.32 insider trading criminal liability, 16.27–16.28 Insider Trading Prohibition Act of 2021, 16.20–16.26 Racketeer Influenced Corrupt Organisations (RICO) Act, 16.35 reporting requirements, 16.31 F Failing to disclose information fraud, and, 6.28 Failure to report reasonable suspicions regulatory liability, and, 14.59–14.62 Fair price financial crime, and, 6.15–6.16 False declarations financial crime, and, 6.109–6.112 False markets financial crime, and, 6.9–6.10 False or misleading impressions market abuse, and, 4.17 False reporting financial crime, and, 6.92–6.96 False representation fraud, and, 6.28 False statements financial crime, and, 6.58–6.59 FATF Recommendations anti-money laundering, and, 7.9 Fidelity liability of compliance and senior officers, and, 14.5–14.6 Fiduciary obligations benefiting another, 2.24–2.40 conflicts of interest, 2.3–2.7

Fiduciary obligations – contd illegality, and, 2.53–2.54 introduction, 2.1–2.2 investors, 2.44–2.52 loss to the insider’s company, 2.13–2.14 narrow obligation, 2.15–2.23 ‘no conflict’ rule, 2.8 officers of the company, 2.42 public policy, and, 2.53–2.54 remedies, 2.55–2.62 secret profits, 2.8–2.12 senior employees of the company, 2.42 shadow directors, 2.41 Final notices generally, 12.35–12.36 publication, 12.37 Financial Conduct Authority (FCA) abusive squeezes, 5.10 accepted market practice, 4.37–4.38 anti-money laundering integrity objective, 7.2 behaviour Code of Market Practice, 4.26–4.29 introduction, 4.25 not amounting to market abuse, 4.30 compliance officers’ control liability APER Code, 15.33–15.38 generally, 15.26–15.32 compliance officers’ criminal liability bribery, 14.26 fraud, 14.26 fraudulent trading, 14.26 generally, 14.24–14.26 insider dealing, 14.24 misleading statements and impressions, 14.24 proceedings, 14.27–14.33 sentencing, 14.34–14.45 theft, 14.26 compliance procedures and systems, and, 13.1 conflicts of interest, and authorisation to conduct investment business, 8.25–8.26 generally, 8.23 Handbook, 8.29–8.30 High Level Principles, 8.27–8.28 SYSC sourcebook, 8.29–8.43 control liability, and authorisation, 15.23–15.24 controllers, 15.25 generally, 15.3 misleading the FCA, 15.21–15.22 senior management function holders, 15.26–15.38

485

Index Financial Conduct Authority (FCA) – contd criminal liability of compliance officers and senior managers bribery, 14.26 fraud, 14.26 fraudulent trading, 14.26 generally, 14.24–14.26 insider dealing, 14.24 misleading statements and impressions, 14.24 proceedings, 14.27–14.33 sentencing, 14.34–14.45 theft, 14.26 enforcement, and access to material, 12.23 decision-making, 12.12 generally, 12.1–12.3 extraterritorial jurisdiction, 4.17 financial crime, and civil fraud, 6.113 corruption, 6.87 false statements and manipulation, 6.58 fraudulent trading, 6.62 generally, 6.3–6.5 high pressure selling, 6.61 integrity objective, 6.6–6.7 prohibition orders, 6.138 reckless management of banks, 6.78 implications for practitioners, 4.39 information gathering, and generally, 10.19–10.21 introduction, 10.1–10.2 Principle for Business, 10.3 issuer disclosure, and, 9.1 insiders, 4.20–4.23 integrity objective, 7.2 introduction, 4.1 investigations, and, 11.1–11.2 issuer disclosure, and delayed disclosure, 9.7–9.8 enhanced disclosure, 9.21–9.22 introduction, 9.1 professional disclosure, 9.17–9.18 reasonable investor test, 9.6 selective disclosure, 9.10 senior officers, 9.15–9.16 takeovers, 9.28–9.31 third party lists, 9.13–9.14 liability of compliance and senior officers accessory liability in equity, 14.19 criminal proceedings, 14.28–14.30 regulatory liability, 14.47 market abuse, 4.3

Financial Conduct Authority (FCA) – contd market manipulation abusive squeezes, 5.10 introduction, 5.1 price positioning, 5.9 prosecution, 5.13–5.16 meaning of market abuse, 4.17 practitioners’ implications, 4.39 precise information, 4.24 price positioning, 5.9 price stabilisation, 4.36 prosecutor, as insider dealing, 3.7 market manipulation, 5.13–5.16 recognised investment exchanges, 4.7 regulatory policy, 4.42 relevant products, 4.10 responsibilities, 4.2 sanctions, 4.40 senior managers’ control liability APER Code, 15.33–15.38 generally, 15.26–15.32 senior managers’ criminal liability bribery, 14.26 fraud, 14.26 fraudulent trading, 14.26 generally, 14.24–14.26 insider dealing, 14.24 misleading statements and impressions, 14.24 proceedings, 14.27–14.33 sentencing, 14.34–14.45 theft, 14.26 Financial crime acts preparatory to fraud, 6.103–6.108 blackmail, 6.79–6.81 ‘boiler room’ operations, 6.60 civil fraud disclosure orders, 6.121–6.129 disqualification procedures, 6.130–6.139 freezing orders, 6.121–6.129 generally, 6.113–6.120 offences by bodies corporate, 6.140–6.143 common law, 6.11–6.14 compliance procedures and systems, and, 13.15–13.17 computer-related crime, 6.82–6.83 concealment, 6.40–6.41 conclusion, 6.144 conspiracy enforcing the bargain, 6.20–6.25 generally, 6.17–6.19 corruption, 6.84–6.91 creation of false markets, 6.9–6.10 criminal breach of trust, 6.42–6.46

486

Index Financial crime – contd disclosure orders, 6.121–6.129 disqualification procedures, 6.130–6.139 extortion, 6.79–6.81 fair price, 6.15–6.16 false declarations, 6.109–6.112 false reporting, 6.92–6.96 false statements, 6.58–6.59 Financial Conduct Authority, and civil fraud, 6.113 corruption, 6.87 false statements and manipulation, 6.58 fraudulent trading, 6.62 generally, 6.3–6.5 high pressure selling, 6.61 integrity objective, 6.6–6.7 prohibition orders, 6.138 reckless management of banks, 6.78 forgery, 6.97–6.102 fraud abuse of position, 6.28 acts preparatory to, 6.103–6.108 civil law, and, 6.113–6.120 concealment, 6.40–6.41 dishonesty, 6.29 failing to disclose information, 6.28 false representation, 6.28 fraudulent intention, 6.30–6.32 fraudulent trading, 6.62–6.75 generally, 6.26–6.28 high pressure selling, 6.60–6.61 introduction, 6.1–6.8 mens rea, 6.29–6.30 misrepresentation by words or conduct, 6.33–6.35 proof of dishonesty, 6.31–6.32 silence, 6.36–6.39 types, 6.28 fraudulent trading, 6.62–6.75 freezing orders, 6.121–6.129 handling, 6.57 high pressure selling, 6.60–6.61 insolvency-related offences, 6.62–6.75 introduction, 6.1–6.8 manipulation, 6.58–6.59 misappropriation, 6.47–6.56 perjury, 6.109–6.112 reckless management of banks, 6.76–6.78 suppression of documents, 6.102 theft generally, 6.47–6.48 mens rea, 6.49–6.50 property, 6.51–6.53 unjust enrichment, 6.54–6.56

Financial Services Act 2021 generally, 4.5 introduction, 4.2 market abuse, 16.4 Financial Services and Markets Act 2000 and see Market abuse amendment, 4.4–4.5 control liability, and, 15.17 enforcement, and, 12.1 generally, 4.1–4.3 investigations, and, 11.1–11.2 market manipulation, 5.1–5.19 Foreign manipulation of markets extraterritorial jurisdiction, and, 16.32–16.33 Forgery financial crime, and, 6.97–6.102 Fraud see also Financial crime abuse of position, 6.28 acts preparatory to, 6.103–6.108 civil law, and, 6.113–6.120 concealment, 6.40–6.41 dishonesty, 6.29 failing to disclose information, 6.28 false representation, 6.28 Financial Conduct Authority, and, 6.3–6.7 fraudulent intention, 6.30–6.32 fraudulent trading, 6.62–6.75 generally, 6.26–6.28 high pressure selling, 6.60–6.61 introduction, 6.1–6.8 liability of compliance and senior officers, and, 14.26 mens rea, 6.29–6.30 misrepresentation by words or conduct, 6.33–6.35 proof of dishonesty, 6.31–6.32 silence, 6.36–6.39 types, 6.28 Fraudulent trading generally, 6.62–6.75 liability of compliance and senior officers, 14.26 Freezing orders financial crime, and, 6.121–6.129 G Gathering information EU MAD, 10.16 EU MAR, 10.16 FCA, by generally, 10.19–10.21 introduction, 10.1–10.2 Principle for Business, 10.3 supervision and information requests, 10.9

487

Index Gathering information – contd FSMA 2000, and, 10.2 information requests, 10.9 introduction, 10.1–10.2 MiFIR, 10.10 multilateral trading facilities, 10.10 public interest disclosure, 10.8 reporting and cooperation obligation generally, 10.3–10.7 public interest disclosure, 10.8 whistleblowing, 10.8 skilled persons, by, 10.22–10.30 supervision and information requests, 10.9 Supervision sourcebook, 10.4 suspicious transaction reporting, 10.16–10.18 transaction reporting, 10.10–10.15 whistleblowing, 10.8 ‘Gun jumpers’ insider dealing, and, 1.40–1.41 H Handling financial crime, and, 6.57 High frequency trading extraterritorial jurisdiction, and, 16.32 High Level Principles for Business and Fundamental Rules conflicts of interest, and, 8.27–8.28 High pressure selling financial crime, and, 6.60–6.61 I Illegality insider dealing, and, 2.53–2.54 Improper disclosure of inside information generally, 4.17 Inducing or procuring a breach of contract, liability of compliance and senior officers, and, 14.9 Information gathering EU MAD, 10.16 EU MAR, 10.16 FCA, by generally, 10.19–10.21 introduction, 10.1–10.2 Principle for Business, 10.3 supervision and information requests, 10.9 FSMA 2000, and, 10.2 information requests, 10.9 introduction, 10.1–10.2 MiFIR, 10.10 multilateral trading facilities, 10.10 public interest disclosure, 10.8

Information gathering – contd reporting and cooperation obligation generally, 10.3–10.7 public interest disclosure, 10.8 whistleblowing, 10.8 skilled persons, by, 10.22–10.30 supervision and information requests, 10.9 Supervision sourcebook, 10.4 suspicious transaction reporting, 10.16–10.18 transaction reporting, 10.10–10.15 whistleblowing, 10.8 Informed consent conflicts of interest, and, 8.17–8.19 Injunctions factors to be considered, 12.59 generally, 12.57–12.58 Inside information see also Insider dealing characteristics, 3.26–3.30 definition, 3.28 disclosure requirements, and, 9.3–9.6 generally, 3.26–3.30 introduction, 1.15–1.22 ‘made public’, 3.45–3.63 market abuse, and generally, 4.23 introduction, 4.20–4.21 particular issuers of securities, 3.31–3.36 particular securities, 3.31–3.36 ‘precise’, 3.37–3.44 ‘price’, 3.28 ‘price-affected securities’, 3.28 price sensitive information, 3.64–3.66 ‘specific’, 3.37–3.44 Insider dealing or trading access insiders, 1.33 civil law benefiting another, 2.24–2.40 conflicts of interest, 2.3–2.7 illegality, and, 2.53–2.54 introduction, 2.1–2.2 investors, 2.44–2.52 loss to the insider’s company, 2.13–2.14 narrow obligation, 2.15–2.23 ‘no conflict’ rule, 2.8 officers of the company, 2.42 public policy, and, 2.53–2.54 remedies, 2.55–2.62 secret profits, 2.8–2.12 senior employees of the company, 2.42 shadow directors, 2.41 stewardship, and, 2.3–2.7

488

Index Insider dealing or trading – contd compliance procedures and systems, and, 13.3 computer-assisted trading systems, 1.48–1.49 corporate issuer, 1.37 criminals, 1.45–1.47 dealing offence defences, 3.86–3.94 elements, 3.18–3.25 generally, 3.8–3.11 ‘insider’, 3.12–3.17 ‘insider information’, 3.26–3.66 ‘personal intermediary’, 3.13–3.15 primary insiders, 3.12 secondary insiders, 3.12 statutory framework, 3.8–3.11 territorial scope, 3.67 defences dealing, 3.86–3.94 disclosure of inside information, 3.96 encouraging, 3.95 general, 3.86–3.96 market information, 3.97 market makers, 3.98–3.104 price stabilisation, 3.105–3.106 special, 3.97–3.106 defences (dealing) burden of proof, 3.88 general, 3.87–3.96 information sufficiently widely disseminated so no one be prejudiced, 3.92 introduction, 3.86 no expectation to make profit or avoid loss from inside information, 3.90–3.91 person would have acted in same way without the information, 3.93–3.94 disclosure of inside information defences, 3.96 generally, 3.71–3.73 territorial scope, 3.74 effect, 2.1–2.2 encouraging insider dealing defences, 3.95 generally, 3.68–3.70 territorial scope, 3.74 enforcement, 3.107–3.108 extraterritorial jurisdiction of the US, and criminal liability, 16.27–16.28 Insider Trading Prohibition Act of 2021, 16.20–16.26

Insider dealing or trading – contd ‘gun jumpers’, 1.40–1.41 inside information characteristics, 3.26–3.30 definition, 3.28 generally, 3.26–3.30 introduction, 1.15–1.22 ‘made public’, 3.45–3.63 particular issuers of securities, 3.31–3.36 particular securities, 3.31–3.36 ‘precise’, 3.37–3.44 ‘price’, 3.28 ‘price-affected securities’, 3.28 price sensitive information, 3.64–3.66 ‘specific’, 3.37–3.44 inside source, 1.14 liability of compliance and senior officers, and, 14.24 ‘made public’ generally, 3.45–3.48 information available for a price, 3.61 information communicated to only section of public, 3.59 information contained in public records, 3.53 information derived from information made public, 3.55–3.57 information obtained as result of diligence and expertise, 3.58 information published according to the rules of a regulated market, 3.49–3.52 information published outside the UK, 3.62–3.63 information readily acquired by people likely to deal in securities, 3.54 observed information, 3.60 market abuse, and, 4.17 market information, 3.97 market makers, 3.98–3.104 meaning access insiders, 1.33 computer-assisted trading systems, 1.48–1.49 corporate issuer, 1.37 criminals, 1.45–1.47 ‘gun jumpers’, 1.40–1.41 inside information, 1.15–1.22 inside source, 1.14 introduction, 1.9 persons ‘in the market’, 1.34–1.36 primary insiders, 1.9–1.12 problem areas, 1.29–1.31

489

Index Insider dealing or trading – contd meaning – contd public officials, 1.44 ‘scalpers’, 1.38–1.39 secondary insiders, 1.13 shareholders, 1.42–1.43 statutory definition, 3.12–3.17 technological impacts, 1.48–1.49 transaction, 1.23–1.25 unauthorised disclosures, 1.26–1.28 nature, 1.1–1.43 offences dealing, 3.8–3.67 disclosure of inside information, 3.71–3.74 encouraging insider dealing, 3.68–3.70 pre-1980 law, 3.1–3.7 ‘tippee’ liability, 3.75–3.85 particular issuers of securities, 3.31–3.36 particular securities, 3.31–3.36 penalties, 3.107–3.108 ‘personal intermediary’, 3.13–3.15 persons ‘in the market’, 1.34–1.36 perspective, in, 1.1–1.8 ‘precise’, 3.37–3.44 ‘price’, 3.28 ‘price-affected securities’, 3.28 price sensitive information, 3.64–3.66 price stabilisation, 3.105–3.106 primary insiders generally, 1.9–1.12 statutory definition, and, 3.12 problem areas, 1.29–1.31 public officials, 1.44 ‘scalpers’, 1.38–1.39 secondary insiders, generally, 1.13 statutory definition, and, 3.12 shareholders, 1.42–1.43 ‘specific’, 3.37–3.44 technological impacts, 1.48–1.49 territorial scope, 3.67 ‘tippee’ liability FSMA 2000, and, 3.85 generally, 3.75–3.77 secondary persons, 3.78–3.84 transaction, 1.23–1.25 unauthorised disclosures, 1.26–1.28 US law, and criminal liability, 16.27–16.28 Insider Trading Prohibition Act of 2021, 16.20–16.26 Insider lists compliance procedures and systems, and, 13.4 Insiders generally, 4.20–4.23

Insolvency-related offences financial crime, and, 6.62–6.75 International Organisation of Securities Commissions (IOSCO) generally, 16.3 international cooperation, and generally, 16.37–16.38 market abuse, 16.39–16.48 Investigations additional measures, 11.31–11.34 appointment of investigators generally, 11.10 notification, 11.22–11.23 compulsory interviews, 11.28–11.30 conduct, 11.21 confidentiality, 11.36 effect of failure to comply, 11.37 enforcement action case selection, 11.39–11.41 criteria, 11.38 Enforcement Guide, 11.4–11.7 Financial Conduct Authority, and, 11.1–11.2 FSMA 2000, and, 11.1–11.2 interaction between investigatory authorities, 11.20 introduction, 11.1–11.2 investigators appointment, 11.10 notification of appointment, 11.22–11.23 powers, 11.24–11.27 market abuse, and, 11.11–11.12 overseas regulators, and, 11.13–11.19 powers of investigation appointment of investigators, 11.10 conduct of investigation, 11.21 introduction, 11.9 market abuse investigation, 11.11–11.12 supporting an overseas regulator, 11.13–11.19 powers of investigator, 11.24–11.27 preliminary findings letter, 11.33–11.34 procedure, 11.21 sanctions for failure to comply, 11.37 scoping discussions, 11.31 supporting an overseas regulator, 11.13–11.19 termination, 11.32 time limits for responses to requirements, 11.35 transparency, and, 11.3–11.8 use of statements obtained, 11.28–11.30 Investors insider dealing, and, 2.44–2.52

490

Index Issuer disclosure decision tree, 9.24 delayed disclosure, 9.7–9.8 enhanced disclosure, 9.21–9.22 Financial Conduct Authority, and delayed disclosure, 9.7–9.8 enhanced disclosure, 9.21–9.22 introduction, 9.1 professional disclosure, 9.17–9.18 reasonable investor test, 9.6 selective disclosure, 9.10 senior officers, 9.15–9.16 takeovers, 9.28–9.31 third party lists, 9.13–9.14 inside information, and, 9.3–9.6 introduction, 9.1 MAR, 9.1 managerial disclosure, 9.11 obligations, 9.2 ‘precise nature’, 9.4 professional disclosure confidentiality issues, 9.19–9.20 generally, 9.17–9.18 reasonable investor test, 9.6 safe harbours, 9.12 selective disclosure, 9.9–9.10 senior officers, and, 9.15–9.16 ‘significant price effect’, 9.4 sustainability risks, 9.23 takeovers FCA role, 9.28–9.29 general principles, 9.26 introduction, 9.25 market abuse, 9.30 offerors, 9.31 Takeover Panel’s powers, 9.27 third party lists, and, 9.13–9.14 UK Listing Rules, 9.1 L LIBOR market abuse, and, 5.3 Listing Particulars disclosure requirements, and, 9.2 M ‘Made public’ see also Insider dealing generally, 3.45–3.48 information available for a price, 3.61 information communicated to only section of public, 3.59 information contained in public records, 3.53 information derived from information made public, 3.55–3.57 information obtained as result of diligence and expertise, 3.58

‘Made public’ – contd information published according to the rules of a regulated market, 3.49–3.52 information published outside the UK, 3.62–3.63 information readily acquired by people likely to deal in securities, 3.54 observed information, 3.60 Manipulating devices market abuse, and, 4.19 Manipulating transactions in the relevant market market abuse, and, 4.17 Manipulation financial crime, and, 6.58–6.59 Market abuse abusive squeezes, 5.10–5.12 accepted market practice Code of Market Conduct, and, 4.29 generally, 4.37–4.38 introduction, 4.5 market abuse, as, 4.17 behaviour Code of Market Conduct, 4.26–4.39 definition, 4.5 generally, 4.25 not amounting to market abuse, 4.30–4.31 safe harbours, 4.32–4.39 specified behaviour, 4.29 categories, 4.17–4.18 Code of Market Conduct (MAR) abusive squeezes, 5.10 behaviour, 4.29 behaviour not amounting to market abuse, 4.30–4.31 generally, 4.26–4.28 safe harbours, 4.32–4.39 specified behaviour, 4.29 conclusion, 4.44 duty to the market, 4.15–4.16 ‘effect’ on price, 4.24 enforcement, and case selection, 12.7–12.9 impact of enforcement on, 12.53–12.55 injunctions, 12.57–12.59 introduction, 12.4–12.6 private enforcement, 4.41 EU Directive (MAD) introduction, 16.4 information gathering, and, 10.16 regulatory policy, 4.42

491

Index Market abuse – contd EU Regulation 596/2014 (EU MAR) buy-backs, 16.11–16.13 compliance procedures and systems, 13.1 cross-border co-operation, 16.14–16.17 disclosure requirements, 9.1 information gathering, 10.16 introduction, 16.4 investigations and enforcement, 16.14–16.17 market manipulation, 16.7–16.10 price stabilisation, 16.11–16.13 scope, 16.5–16.6 false or misleading impressions, 4.17 Financial Conduct Authority, and, 4.3 Financial Services Act 2021 generally, 4.5 introduction, 4.2 market abuse, 16.4 Financial Services and Markets Act 2000 amendment, 4.4–4.5 control liability, and, 15.17 enforcement, and, 12.1 generally, 4.1–4.3 investigations, and, 11.1–11.2 market manipulation, 5.1–5.19 improper disclosure of inside information, 4.17 inside information, 4.20–4.23 insider dealing, 4.17 insiders, 4.20–4.23 introduction, 4.1–4.3 investigations, and, 11.11–11.12 IOSCO, and, 16.39–16.48 Jabre case, 4.13–4.14 legislative background, 4.2 LIBOR, and, 5.3 manipulating devices, 4.19 manipulating transactions in the relevant market, 4.19 market distortion generally, 5.7–5.9 introduction, 4.17 market manipulation abusive squeezes, 5.10–5.12 analysis and conclusion, 5.17–5.19 FCA prosecutions, 5.13–5.16 generally, 5.7–5.9 introduction, 5.1 ‘manipulation’, 5.2 price positioning, 5.10 UK offences, 5.3–5.6

Market abuse – contd market practice, 4.37–4.38 meaning behaviour, 4.25 ‘effect’ on price, 4.24 generally, 4.17–4.18 inside information, 4.20–4.23 insiders, 4.20–4.23 manipulating devices, 4.19 ‘precise’ information, 4.24 misleading impressions generally, 5.3–5.5 introduction, 4.2 misleading statements generally, 5.3–5.5 introduction, 4.2 misleading statements etc as to benchmarks generally, 5.6 introduction, 4.2 misuse of information, 4.17 multilateral trading facilities, and, 4.4 ‘precise’ information, 4.24 prescribed markets, 4.6–4.8 price positioning, 5.10 price stabilisation, 4.36 private enforcement, 4.41 qualifying investments generally, 4.9–4.10 Jabre case, 4.13–4.14 recklessness, 5.3–5.4 recognised investment exchanges (RIEs), 4.10 Regulation 596/2014 (EU MAR) buy-backs, 16.11–16.13 compliance procedures and systems, 13.1 cross-border co-operation, 16.14–16.17 disclosure requirements, 9.1 information gathering, 10.16 introduction, 16.4 investigations and enforcement, 16.14–16.17 market manipulation, 16.7–16.10 price stabilisation, 16.11–16.13 scope, 16.5–16.6 regulatory policy, 4.42 related investments generally, 4.11–4.12 Jabre case, 4.13–4.14 safe harbours accepted market practice, 4.37–4.38 implications for practitioners, 4.39 introduction, 4.32 price stabilisation, 4.36 share buy-backs, 4.33–4.35

492

Index Market abuse – contd sanctions, 4.40 share buy-backs, 4.33–4.35 statutory framework, 4.17 Market Abuse Directive (MAD) and see Market abuse introduction, 16.4 information gathering, and, 10.16 regulatory policy, 4.42 Market Abuse Directive (MAD 2) generally, 16.4 Market Abuse Regulation 596/2014 (EU MAR) and see Market abuse buy-backs, 16.11–16.13 compliance procedures and systems, 13.1 cross-border co-operation, 16.14–16.17 disclosure requirements, 9.1 information gathering, 10.16 introduction, 16.4 investigations and enforcement, 16.14–16.17 market manipulation, 16.7–16.10 price stabilisation, 16.11–16.13 scope, 16.5–16.6 Market distortion generally, 5.7–5.9 introduction, 4.17 Market information insider dealing, and, 3.97 Market makers insider dealing, and, 3.98–3.104 Market manipulation abusive squeezes, 5.10–5.12 analysis and conclusion, 5.17–5.19 FCA prosecutions, 5.13–5.16 generally, 5.7–5.9 introduction, 5.1 ‘manipulation’, 5.2 price positioning, 5.10 UK offences, 5.3–5.6 Market practice market abuse, and, 4.37–4.38 Market soundings compliance procedures and systems, and, 13.5 Markets in Financial Instruments Directive (MiFID) 2014/65/EU compliance procedures and systems see also Compliance procedures and systems generally, 13.1 regulatory liability competence requirement, 14.52 failure to report suspicions, 14.60 Senior Management Systems and Controls sourcebook, 8.29–8.35

Markets in Financial Instruments Regulation 2017/565/EU compliance procedures and systems, 13.6 Senior Management Systems and Controls sourcebook, 8.29–8.35 Markets in Financial Instruments Regulations (MiFIR) 600/2014/EU suspicious transaction reporting, 10.18 transaction reporting, 10.10–10.15 Market users compliance procedures and systems, and, 13.2 Misappropriation financial crime, and, 6.47–6.56 Misleading impressions market abuse, and generally, 5.3–5.5 introduction, 4.2 personal liability of compliance and senior officers, and, 14.24 Misleading statements benchmarks, as to, 5.6 generally, 5.3–5.5 introduction, 4.2 liability of compliance and senior officers, and, 14.24 Misleading the FCA and PRA control liability, and, 15.21–15.22 Misrepresentation by words or conduct fraud, and, 6.33–6.35 Misuse of information market abuse, and, 4.17 Money laundering acquire, retain, use or control of criminal property generally, 7.17–7.19 introduction, 7.11 acquire, use or have possession of criminal property generally, 7.20 introduction, 7.11 application of offences, 7.21 authorised disclosures generally, 7.32–7.34 introduction, 7.12 belief, 7.51–7.52 civil liability, 7.45–7.48 civil penalties, 7.41–7.44 compliance, 7.53–7.62 conceal, disguise, convert or transfer criminal property generally, 7.15–7.16 introduction, 7.11 confiscation, 7.63–7.92 context, 7.5–7.7 corporate dimension, 7.1–7.4

493

Index Money laundering – contd criminal property, 7.13 defences, 7.12, 7.24 disclosure pursuant to statutory obligation, 7.31 EU Directives, 7.9 facilitate acquisition, retention, use or control of criminal property generally, 7.17–7.19 introduction, 7.11 failure to disclose nominated officers, 7.25 regulated sector, 7.22–7.24 FATF Recommendations, 7.9 FCA integrity objective, and, 7.2 introduction, 7.1–7.4 knowledge, 7.49–7.52 make an arrangement to acquire, retain, use or control criminal property generally, 7.17–7.19 introduction, 7.11 ‘money laundering’, 7.8 nominated officers (MLROs), and, 7.25 offences, 7.11 penalties, 7.35 prejudicing an investigation, 7.30 proceeds of crime, 7.8–7.40 proof of knowledge, 7.49–7.52 protected disclosures generally, 7.31 introduction, 7.12 purpose, 7.7 reasonable excuse for non-disclosure, 7.24 regulated sector, and, 7.21–7.23 Regulations 2017 civil penalties, 7.41–7.44 generally, 7.36–7.40 removal of criminal property from jurisdiction generally, 7.15–7.16 introduction, 7.11 statutory framework, 7.10–7.11 suspicion, 7.52 terrorist finance, 7.93–7.114 tipping off defences, 7.27–7.29 generally, 7.26 UN Convention Against Corruption, 7.9 use, 7.7 Money laundering reporting officers (MLROs) accessory liability in equity, 14.19 generally, 7.25

Money laundering reporting officers (MLROs) – contd regulatory liability staff, 14.52–14.58 certification employees, 14.51 competence requirements, 14.52–14.58 failure to report reasonable suspicions, 14.59–14.62 generally, 14.46–14.47 senior management function holders, 14.48–14.50 Multilateral trading facilities information gathering, and, 10.10 market abuse, and, 4.4 N ‘No conflict’ rule conflicts of interest, and, 8.2 insider dealing, and, 2.8 Nominated officers (MLROs) accessory liability in equity, 14.19 generally, 7.25 regulatory liability staff, 14.52–14.58 certification employees, 14.51 competence requirements, 14.52–14.58 failure to report reasonable suspicions, 14.59–14.62 generally, 14.46–14.47 senior management function holders, 14.48–14.50 O Officers of the company insider dealing, and, 2.42 Organised crime financial crime, and, 6.5 meaning of insider dealing, 1.45–1.47 Overseas regulators investigations, and, 11.13–11.19 P Penalties criteria, 11.39–11.41 determining level, 12.41–12.47 insider dealing or trading, 3.107–3.108 introduction, 12.38 settlement, 12.48–12.52 Perjury financial crime, and, 6.109–6.112 Personal account dealing compliance procedures and systems, and, 13.43–13.48 Personal intermediary insider dealing, and, 3.13–3.15

494

Index Personal liability civil liability accessory liability, 14.13–14.23 conspiracy, 14.8 contractual liability, 14.7 deceit, 14.8 duty of fidelity, 14.5–14.6 equitable liability, 14.13–14.23 generally, 14.1–14.2 inducing or procuring a breach of contract, 14.9 role of the law, 14.3–14.4 tortious liability, 14.8–14.12 criminal liability bribery, 14.26 fraud, 14.26 fraudulent trading, 14.26 generally, 14.24–14.26 insider dealing, 14.24 misleading statements and impressions, 14.24 proceedings, 14.27–14.33 sentencing, 14.34–14.45 theft, 14.26 regulatory liability staff, 14.52–14.58 certification employees, 14.51 competence requirements, 14.52–14.58 failure to report reasonable suspicions, 14.59–14.62 generally, 14.46–14.47 senior management function holders, 14.48–14.50 ‘Precise’ insider dealing, and, 3.37–3.44 issuer disclosure, and, 9.4 market abuse, and, 4.24 Prejudicing an investigation anti-money laundering, and, 7.30 liability of compliance and senior officers, and, 14.21 Preliminary findings letter investigations, and, 11.33–11.34 ‘Pre-positioning’ compliance procedures and systems, and, 13.43 Prescribed markets market abuse, and, 4.6–4.8 ‘Price’ insider dealing, and, 3.28 ‘Price-affected securities’ insider dealing, and, 3.28 Price positioning abusive squeezes, and, 5.10

Price positioning – contd market abuse, and, 5.7 market distortion or manipulation, and, 5.8–5.9 Price sensitive information insider dealing, and, 3.64–3.66 Price stabilisation disclosure requirements, and, 9.12 insider dealing, and, 3.105–3.106 market abuse, and, 16.11–16.13 safe harbours, and, 4.36 Primary insiders generally, 1.9–1.12 statutory definition, and, 3.12 Private enforcement market abuse, and, 4.41 Proceeds of crime anti-money laundering, and, 7.8–7.40 Protected disclosures generally, 7.31 introduction, 7.12 Prudential Rules for Investment Firms (IFPRU) compliance procedures and systems, and, 13.1 Public interest disclosure reporting and cooperation obligation, and, 10.8 Public officials meaning of insider dealing, and, 1.44 Public policy insider dealing, and, 2.53–2.54 R Racketeer Influenced Corrupt Organisations (RICO) Act extraterritorial jurisdiction, and, 16.35 Reasonable investor issuer disclosure, and, 9.6 Reckless management of banks financial crime, and, 6.76–6.78 Recklessness market abuse, and, 5.3–5.4 Recognised investment exchanges (RIEs) market abuse, and, 4.10 Record keeping compliance procedures and systems, and electronic communications, 13.35–13.37 maintenance, 13.33–13.34 transaction records, 13.35–13.37 Regulatory liability all staff, 14.52–14.58 certification employees, 14.51 competence requirements, 14.52–14.58

495

Index Regulatory liability – contd failure to report reasonable suspicions, 14.59–14.62 generally, 14.46–14.47 senior management function holders, 14.48–14.50 Related investments market abuse, and generally, 4.11–4.12 Jabre case, 4.13–4.14 Remedies insider dealing, and, 2.55–2.62 market abuse, and, 4.40 Reporting requirements See also Disclosure requirements extra-territorial jurisdiction, and, 16.31 Restitution control liability, and, 15.12–15.14 factors to be considered, 12.63–12.64 generally, 12.60–12.62 S Safe harbours accepted market practice, 4.37–4.38 implications for practitioners, 4.39 introduction, 4.32 issuer disclosure, and, 9.12 price stabilisation, 4.36 share buy-backs, 4.33–4.35 Sanctions insider dealing, and, 2.55–2.62 investigations, and, 11.37 market abuse, and, 4.40 ‘Scalpers’ insider dealing, and, 1.38–1.39 Secondary insiders generally, 1.13 statutory definition, and, 3.12 Secret profits insider dealing, and, 2.8–2.12 Self-dealing conflicts of interest, and, 8.2 Senior employees insider dealing, and, 2.42 Senior management and officers civil liability accessory liability, 14.13–14.23 conspiracy, 14.8 contractual liability, 14.7 deceit, 14.8 duty of fidelity, 14.5–14.6 equitable liability, 14.13–14.23 generally, 14.1–14.2 inducing or procuring a breach of contract, 14.9 role of the law, 14.3–14.4 tortious liability, 14.8–14.12

Senior management and officers – contd compliance procedures and systems, and, 13.11–13.12 control liability APER Code, 15.33–15.38 generally, 15.26–15.32 criminal liability bribery, 14.26 fraud, 14.26 fraudulent trading, 14.26 generally, 14.24–14.26 insider dealing, 14.24 misleading statements and impressions, 14.24 proceedings, 14.27–14.33 sentencing, 14.34–14.45 theft, 14.26 issuer disclosure, and, 9.15–9.16 regulatory liability all staff, 14.52–14.58 certification employees, 14.51 competence requirements, 14.52–14.58 failure to report reasonable suspicions, 14.59–14.62 generally, 14.46–14.47 senior management function holders, 14.48–14.50 Senior Management Systems and Controls (SYSC) sourcebook compliance procedures and systems, and, 13.1 conflicts of interest, and application of rules, 8.31 Chinese Walls, 8.39–8.43 conflict identification, 8.31–8.33 control of information rules, 8.39–8.43 generally, 8.29–8.30 maintenance of conflicts policy, 8.34–8.35 procedural requirements for managing conflicts, 8.36–8.38 Shadow directors insider dealing, and, 2.41 Share buy-backs market abuse, and, 4.33–4.35 Shareholders insider dealing, and, 1.42–1.43 Shari’ah council conflicts of interest, and, 8.13 ‘Significant price effect’ issuer disclosure, and, 9.4 Silence fraud, and, 6.36–6.39

496

Index Skilled persons information gathering, and, 10.22–10.30 ‘Specific’ insider dealing, and, 3.37–3.44 Statement of market abuse enforcement, and, 12.38–12.40 Stewardship benefiting another, 2.24–2.40 conflicts of interest, 2.3–2.7 illegality, and, 2.53–2.54 introduction, 2.1–2.2 investors, 2.44–2.52 loss to the insider’s company, 2.13–2.14 narrow obligation, 2.15–2.23 ‘no conflict’ rule, 2.8 officers of the company, 2.42 public policy, and, 2.53–2.54 remedies, 2.55–2.62 secret profits, 2.8–2.12 senior employees of the company, 2.42 shadow directors, 2.41 stewardship, and, 2.3–2.7 Supervision and information requests information gathering, and, 10.9 Suppression of documents financial crime, and, 6.102 Sustainability risks disclosure requirements, and, 9.23 Suspicious transaction reporting information gathering, and, 10.16–10.18 T Takeovers FCA role, 9.28–9.29 general principles, 9.26 introduction, 9.25 market abuse, 9.30 offerors, 9.31 Takeover Panel’s powers, 9.27 Technology meaning of insider dealing, and, 1.48–1.49 Telephone conversations compliance procedures and systems, and, 13.35–13.37 Terrorist finance anti-money laundering, and, 7.93–7.114 Theft generally, 6.47–6.48 liability of compliance and senior officers, and, 14.26 mens rea, 6.49–6.50 property, 6.51–6.53

‘Tippee’ liability FSMA 2000, and, 3.85 generally, 3.75–3.77 secondary persons, 3.78–3.84 Tipping off defences, 7.27–7.29 generally, 7.26 liability of compliance and senior officers, and, 14.17, 14.20 Tortious liability compliance and senior officers, and, 14.8–14.12 ‘Trading ahead’ compliance procedures and systems, and, 13.43 Transaction records compliance procedures and systems, and, 13.35–13.37 Transaction reporting information gathering, and, 10.16–10.18 Transparency investigations and, 11.3–11.8 U UK Listing Rules issuer disclosure, and, 9.2 UN Convention Against Corruption anti-money laundering, and, 7.9 Unauthorised disclosures insider dealing, and, 1.26–1.28 Unjust enrichment financial crime, and, 6.54–6.56 Upper Tribunal enforcement, and, 12.34 US securities law anti-fraud provisions of Securities and Exchange Act 1934, section 10(b), 16.19 commodities trading, 16.34–16.36 conclusion, 16.49–16.51 disclosure requirements, 16.31 Dodd Frank Act 2010, 16.29–16.30 foreign manipulation of US markets, 16.32–16.33 generally, 16.18 high frequency trading, 16.32 insider trading criminal liability, 16.27–16.28 Insider Trading Prohibition Act of 2021, 16.20–16.26 Racketeer Influenced Corrupt Organisations (RICO) Act, 16.35 reporting requirements, 16.31

497

Index V Vicarious liability criminal law, in, 15.4–15.6 restitution, in, 15.12–15.16 tort, in, 15.7–15.11 W ‘Wall crossing’, compliance procedures and systems, and, 13.85–13.42

Warning notices access to FCA material, 12.23 generally, 12.16–12.22 third party rights, 12.31–12.33 Whistleblowing reporting and cooperation obligation, and, 10.8

498