Obtaining Information on Frauds

One of the things that investors find frustrating is the failure of the regulatory authorities (FCA, SFO, the Police, LSE) to obtain information on the progress or results of investigations into the affairs of companies. For example, if a company and its shareholders are the clear victims of a fraud, often involving false accounting such as in Globo not so long ago and at BT only recently, then obtaining information about the matter is exceedingly difficult.

If the company goes into Administration, the Administrators have no obligation to tell shareholders anything (you are not even legally recognised as “creditors”), and although they have a legal obligation to produce a report for the BEIS Department this is not publicly disclosed.

So for example, Torex Retail (one of the largest AIM companies at the time) was a classic case of fraudulent accounting – sales revenue being invented in essence. The company was pushed through a pre-pack administration and shareholders lost everything. Only some years later were some of the executives actually prosecuted and convicted. In the meantime no information was provided and the chance of pursuing a civil action for recovery of losses was lost.

If you ask the FCA for information they will typically say “we never disclose information on the progress of investigations”, and the London Stock Exchange (LSE) take the same approach on AIM companies. Indeed we complained about this attitude in ShareSoc’s recent submission to the FCA on their “Future Mission”.

Now if you are the victim of other crimes the Police take a very different stance and will respond to questions. For example, they will indicate if a prosecution is likely and when, or if, their investigation has been concluded. If they plan no action, they will say so.

Do they simply have a more co-operative frame of mind? No – it’s probably because they know they are subject to a “Code of Practice for Victims of Crime” (you can find it on the internet). This was established by the Ministry of Justice as a result of the Domestic Violence, Crime and Victims Act 2004.

The key point for investors is that this Code actually applies also to anyone who is a victim of financial crime, and it specifically covers the Police and the FCA/SFO/BEIS – the latter being classed as “Other Service Providers” whose obligations are covered in Chapter 5.

So what are their obligations under the Code? They are:

1.27 Where a victim reports a criminal offence to a service provider responsible for investigating offences, the service provider must ensure that the victim receives a written acknowledgement, including the basic details of the offence.

1.35 The service provider responsible for investigating the offence must, without unnecessary delay, ensure that a victim is notified of their right to receive a decision not to proceed with, or to end, an investigation into that crime.

1.36 The service provider responsible for prosecuting an offence must, without unnecessary delay, ensure that a victim is notified of their right to receive the following information:

  1. a decision not to prosecute a suspect;
  2. the time and place of the trial and the nature of the charges against the suspect.

1.37 The service provider responsible for prosecuting an offence must, without unnecessary delay, ensure that a victim who is a witness in the criminal proceedings is notified of their right to receive the following information:

  1. information about the state of the criminal proceedings, unless in exceptional cases the service provider considers the proper handling of the case may be adversely affected by the notification of such information;
  2. the final outcome in any trial.

1.38 If a victim requests information following notification in accordance with paragraphs 1.35-1.37 above, the relevant service provider must ensure it is provided. In providing the information listed in paragraphs 1.35, 1.36(a) and 1.37(b) the service provider must give at least a brief summary of the reasons for the decision concerned (in the case of 1.37(b), only where such reasons are available).

So you can see that they do have an obligation to provide information within reason which they seem to have been ignoring in financial cases. Indeed sometimes they close an investigation and issue a “private warning” which is not made public or even advised to those who have complained.

Now these Code obligations primarily relate to those who are personal victims (business and other organisations are not covered so ShareSoc could not rely on the Code to represent our Members for example in this regard). So if you are the victim of a fraud by a company or its directors, then it is important that you report it personally to the FCA, SFO or another body and then they will have a duty to respond to questions on the matter. You can invoke the above “Code” if they think otherwise.

Roger Lawson

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3 thoughts on “Obtaining Information on Frauds

  1. Although not acknowledged by politicians or government departments, the investigation and prosecution of fraud is largely left to private litigants in the civil courts.

    This was more or less OK so long as the civil courts were accessible to private citizens. However the insurance industry has persuaded politicians (and indeed the public) that civil litigation is another species of scam by claimants, and to be discouraged.

    Remember that the FCA is funded by the financial services industry. So expect little hope from that quarter. The police hate prosecuting fraud – so much work for so few convictions. They avoid it if they can.

    This leaves the victims of fraud up the creek without a paddle. Their only hope is to band together and to litigate as a class. Very difficult to manage and fund, but ultimately feasible in many cases given good leadership.

    There was some hope that the EU would intervene via the Charter of Fundamental Freedoms, which in theory guarantees access to the courts with legal aid if necessary. But with Brexit I guess that will go.

    I see no light at the end of a very dark tunnel.

    Robert Morfee

    • I share Robert’s cynicism about the FCA. Not only is it funded by the financial services industry, but it is alarmingly close to the audit profession, with ex-head of KPMH John Griffith-Jones chairing the organisation. In all too many frauds, the auditors failed to spot false accounting or other misconduct – perhaps because they were so busy counting up the fees for non-audit work…

      What’s more, the standard operating procedure for most police services when presented with an allegation of finance-related crime is to seek feedback from the FCA. If the latter says ‘nothing happening, move along now’, most do precisely that. In the case of the City of London Police, which would be expected to see more than its fair share of allegations relating to the sector, there’s even an implant from the FCA seconded to the organisation, just to make sure…

  2. I fully support everything that has been said. The FCA is in essence totally worthless, paying lip service at best to fraud. It’s easy for Mrs May to talk about everyone benefiting from the economy but she really needs to put teeth into the FCA, as one comment said they only do anything because hey have to abide by legislation talking about the police.

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