Boiler Room Fraud, Market Abuse (Including Insider Dealing) and other SFO/FSA related cases
The regulatory authorities have come under significant public scrutiny since the financial crisis and bail out of UK banks. The government now wants to be seen to be tough on malpractice in the financial services industry. Of course, this usually means the prosecution of individuals, not of the large financial institutions who helped create this regulatory ‘witch-hunt’ culture in the first place.
The reality is that stockbrokers and most other intermediaries dealing with shares and other investments are not responsible for the world recession. When a person is investigated, he or she has the right to expect to be treated fairly by the regulator or the judicial system.
Our fraud specialist lawyers have represented mortgage brokers, stock brokers, and bankers in the City for various types of criminal offence, as well as non-regulated individuals. We have a particular interest in allegations of so called ‘boiler rooms’ and offences prosecuted by the FSA and SFO. Our approach is pro-active and aggressive on our client’s behalf, and we take nothing for granted about the strengths of the prosecution case.
If the FSA notify you as an authorised person that an investigation is taking place, our team are on hand to advise you and interact with them on your behalf.
Barristers on our Preferred Fraud Barrister Panel have acted in a number of market abuse cases, ‘boiler room’ prosecutions and other SFO and FSA related cases. We maintain this panel so that our clients can have access to specialists in these areas at the earliest opportunity in the case.
We have included below some basic information about market and share trading related investigations and prosecutions, including market abuse allegations and unlicensed share trading offences.
Unlicensed Share Selling
Share dealing is a ‘regulated activity’ per the Financial Services and Markets Act 2000, and therefore is prohibited (with both civil and criminal penalties) in the UK without appropriate authorisation from the Financial Services Authority. When pursued criminally, unauthorised share dealing can result in a prison sentence of up to two years in the Crown Court. This activity can be referred to as a ‘perimeter breach’.
Boiler Room Frauds
Boiler room frauds, however, represent a much more serious form of unlicensed share dealing. Boiler rooms are (usually offshore) operations with trained telesales teams selling shares in companies that either don’t exist or which have been set up as shells for the sole purpose of appearing as bona fide companies when they in fact do not trade.
The boiler room will often assume the identity of a licensed stockbroking firm, and the companies in which it offers shares will sometimes also have professionally composed marketing material and a website. The company’s future success will often hinge on a medical or technological breakthrough, or the discovery of oil or other natural resource, and be promised to result in fabulous gains for the investor. Investors usually lose the vast proportion if not all of their money.
Victims, who are often old people, often complain of high pressure sales tactics and promises of high returns. The average loss per person is estimated by the FSA at around £20,000. The FSA estimate that Boiler Room frauds cause losses of £200 million in the UK each year.
Boiler room frauds are usually charged under the common law offence of conspiracy to defraud (see section on the left hand toolbar). In order to prove that a defendant was guilty, the prosecution have to show beyond reasonable doubt that he or she was a knowing participant in a plan to obtain money dishonestly.
Some defendants will find themselves charged with money laundering offences in connection with the operation of a boiler room. This may be a way in which the prosecution seek to attack someone who they feel may have had a role in the main fraud, even if the evidence does not support it. For more information on money laundering offences, please click the relevant section on the left hand toolbar.
Defence Strategy – What did the client know?
It is important in conspiracy to defraud cases to note that not every employee in an operation will definitely know that the operation is bogus. Like the character Bud Fox in the film Wall Street during the buyout of fictional airline Blue Star, a defendant can become unwittingly involved in illegal activity without realising. A director or shadow director can be guilty while even senior managerial level staff do not realise that the brokerage is fraudulent. Of course, much depends on the facts. From a defence perspective, any evidence linking the client to the activities of the operation must be tested and challenged where appropriate. It must be said that the less evidence linking the client to the operation and management of the boiler room and the money trail, the better his or her chances.
Where the evidence is strong, the issue may be one of damage limitation, and of aiming to avoid custody or protecting assets, as a conviction is often followed by confiscation proceedings.
Market Abuse and Insider Dealing
Insider dealing remains high on the list of FSA priorities. Margaret Cole, the FSA’s director of enforcement recently spoke of the need to ‘enhance the “fear factor” in the City’. It is clear that the aim is prevention by making examples of insider dealers.
Insider Dealing – The Law
Inside information is information which has been obtained by a person from an inside source. The person must know it is inside information, and that it came from an inside source.
Insider dealing is illegal as a result of the Criminal Justice Act 1993. The offences created by the act are ‘tipping’ and ‘dealing’.
Inside information relates to particular securities or a particular issuer of securities: it must be information that has not been made public, and be specific and precise. The publishing of the information must be capable of significantly affecting the price of the security.
‘Tipping’ happens when a person has information as an insider and either:
a) Encourages another person to deal in securities; or,
b) Discloses the information to another person outside the legitimate course of his/her employment, office or profession
The person must know (or have reasonable cause to believe) that the dealing would take place on a regulated market, or with the receiver of the information acting as, or relying on, a professional intermediary during the dealing.
The dealing offence takes place when a person who has inside information acquires or disposes of securities. If someone agrees to acquire or dispose of securities, or obtains the agreement of someone else to do so, then he or she is guilty of the dealing offence.
The dealing must have taken place on a regulated market, or have been intended to take place on a regulated market, or via (or with the defendant acting as) an intermediary for the prosecution case to be made out.
There are several defences available to allegations of insider dealing. They include:
– That the defendant did not expect a profit to occur as a result of the information being price sensitive
– That the information did not affect his or her decision to engage in the dealing
– In cases of alleged ‘tipping’, that the defendant did not expect the receiver of the information to act on that information by acquiring or disposing of assets him or herself.
Other defences relate to individuals who act, in one way or another, innocently in the context of a securities transaction. Protections are afforded to market makers, managers engaged in price stabilisation related stock buybacks
Strategy and Evidence
Where a criminal accusation of insider dealing has been made, the prosecution have to show a link between the knowledge and then the illegitimate acting on that knowledge. This represents a high standard of proof. Mere suggestion or coincidence is not enough. That a friend or associate of an insider has made a profit as a result of a transaction is not enough. Even if the insider him self has made a profit, if a jury believes that such purchases or disposals would have been made anyway, or that the insider was not aware that the information relating to securities was price sensitive, the conviction will not occur. It is therefore important for the client and his defence solicitor to examine every aspect of the evidence chain in detail; what all parties were aware of in respect of the transaction; and which outside parties might have been informed. Nothing can be taken for granted. If one crucial party can be shown to have been ignorant of the significance of the information, the prosecution case could collapse.
The Defence Approach
While there are few principles that apply in every insider dealing case, there are certain things that a client should be able to expect from his or her defence solicitor. The most obvious is a basic familiarity with forms of financial instrument which may be affected by information. Of course, new forms of security evolve and most lawyers will know less in this area than, say, a stock broker. However, an awareness of the main types and industry practices in respect of their disposal and acquisition are essential.
Similarly, the criminal defence lawyer should have an understanding of the division of management roles: for example, if accusations of insider dealing have been made relating to a company merger or other large structural transaction which has affected share prices, it is important to realise the distribution of information and responsibilities between the relevant executives. If the client feels that his/her solicitor does not have a high level of familiarity with management and company law principles, it may be a cause for concern.
Financial Services and Markets related prosecutions can result in people who never been in serious trouble before being treated as criminals, and this can be a very distressing experience.