 With powers to grant immunity to whistleblowers on the horizon and telephone interviews under caution being used to target suspects directly, the Financial Services Authority (FSA) is clearly clamping down on insider dealing and market abuse. How can regulated companies adapt and respond effectively to these new techniques and powers?
The FSA has, over the past year or so, repeatedly stated its goal of ‘credible deterrence’ by bringing criminal prosecutions rather than imposing civil or administrative measures in appropriate cases. The rhetoric has been matched by a marked increase in criminal prosecutions for insider dealing by the FSA. Cases that have recently hit the headlines include that of Malcolm Calvert, former partner in Cazenove, and Christopher McQuoid, former general counsel of TTP Communications.
The city watchdog is clearly intent on using the criminal process with more regularity and powers to grant statutory immunity to whistleblowers are in the pipeline. The need for companies to adapt and respond effectively to the current FSA investigative techniques and to be prepared for the FSA’s use of statutory immunity powers has therefore never been more important.
This article outlines one of the most controversial investigative techniques, namely interviewing those suspected of market abuse under caution by telephone, and sets out practical suggestions to assist in-house lawyers and others dealing with the FSA’s telephone interviews.
We have also addressed the background to and significance of the FSA’s immunity powers due to be brought into force by the beginning of next year and again set out some practical suggestions to assist those likely to be affected by their enactment.
Telephone Interviews Under Caution Are Being Conducted By The FSA
The FSA’s practice of interviewing suspects by telephone, while novel amongst most UK prosecution bodies, is an established investigative technique on the other side of the Atlantic. The US Securities and Exchange Commission (SEC) has been conducting interviews of suspects by telephone for a number of years, most commonly after suspicious trading.
The FSA considers this interviewing technique advantageous, as the events under consideration by the FSA are more likely to be fresh in the mind of the interviewee and they can obtain an increased amount of information more immediately. Being able to assess the amount of information the FSA may have at its disposal to commence an investigation may also assist in indicating the route it would prefer the investigation to take, whether criminal or civil, and how resources will be best allocated.
The use of telephone interviews or ‘cold calling’ has, on this side of the Atlantic, been seen by many as indicative of an increasingly aggressive approach by the FSA and there have been a range of opinions as to whether it is a fair investigative technique to deploy. However, consideration of the latter falls beyond the scope of this article.
A Summary Of The Relevant Law In Relation To FSA Interviews Under Caution
The interviewing of suspects by the FSA should be conducted in accordance with the Codes of Practice issued under the Police and Criminal Evidence Act (PACE) 1984. Code C requires that if there are grounds to believe that a suspect has committed an offence, they should be cautioned before being questioned about the offence. Failure to do so is likely to render any evidence obtained during questioning inadmissible in any criminal proceedings.
In line with Code C, the FSA is also under an obligation to advise the suspect of their right to legal advice and confirm that the interview can be delayed for that advice to be sought.
Practical issues
Typically, interviews under caution are conducted face-to-face with the investigating team, often at a police station or prosecuting authority’s offices. In those circumstances, an individual would ordinarily seek legal advice prior to determining how to deal with questioning in interview. However, when responding to an unexpected telephone call from the FSA there is a risk that those cautioned do not consider their entitlements, including access to legal advice, as carefully and underestimate the significance of the interview process. This risk is particularly acute when the FSA approaches those in regulated firms and approved persons mindful of their obligation to co-operate with the FSA and assist its investigation of suspicious activity.
In light of the above it may be sensible for companies to consider imposing a policy on staff that if they are contacted by the FSA by telephone and cautioned they should request a reasonable time to seek legal advice. The advice may best be sought from in-house counsel or, if issues of conflict or other difficulties arise, specialist legal advice. Given that Code C provides for a right to seek legal advice it is difficult to see how any such request could properly constitute a regulatory breach.
Immunity from prosecution: background
Aside from the trend of using ‘supergrass’ witnesses during the 1970s, UK law enforcement agencies have historically been reluctant to consider granting immunity against prosecution to those who have committed offences, even in exchange for valuable evidence against others. This approach is in direct contrast to that of the US, where enforcement agencies have traditionally embraced the practice of using evidence from those who admit their part in illegal activity to secure convictions of others in return for a substantially reduced sentence or total immunity from prosecution.
This historical reluctance is changing as US law enforcement strategies become increasingly influential on agencies and corporate criminal investigations in the UK. In April 2006 the Crown Prosecution Service (CPS), Revenue and Customs Prosecutions Office (RCPO), Serious Fraud Office (SFO) and Serious Organised Crime Agency (SOCA) were given the authority to grant immunity to accomplices under s71 of the Serious Organised Crime and Police Act (SOCPA) 2005. Previously, the Office of Fair Trading (OFT) received similar powers under s190 of the Enterprise Act 2002, which came into force on 20 June 2003.
The way forward
Significantly, the FSA will become armed with statutory powers to grant immunity from prosecution to individuals who are willing to ‘blow the whistle’ on offences such as insider dealing and market abuse when the Coroners and Justice Act comes into force in late 2009 or early 2010.
The introduction of statutory immunity powers to the FSA will provide a statutory framework whereby the prosecution can effectively draw up a signed agreement (known as an ‘immunity notice’ under SOCPA) for those who admit offences to be assured of immunity from prosecution provided they fulfil their obligations as set out in the immunity notice. Those obligations typically include a duty to disclose all offences that have been committed by an individual, all documents relevant to the current investigation and to give truthful evidence at any trial that may be brought against their accomplices.
However, those who accept immunity are placed in a precarious position, as the prosecution may revoke immunity if it considers that the conditions of the agreement have not been met. The effect being that the whistleblower would lose any protection against prosecution that they had been granted and could be placed in the dock facing trial with their former colleagues. It is possible that they may even be faced with the evidence they had previously provided in the expectation that immunity would not be revoked.
The granting of statutory immunity powers maybe particularly useful to the FSA in insider-dealing investigations. Under s52 of the Criminal Justice Act (CJA) 2003, Part V:
‘An individual who has information as an insider is guilty of insider dealing if, in [certain circumstances mentioned below] he deals in securities that are price-affected securities in relation to the information.’
Further:
‘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 [certain circumstances mentioned below]; or
‘b) he discloses the 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’.
It should be noted, however, that there are eight statutory defences set out in CJA 2003 (four general defences in s53 and four special defences contained in Schedule 1). The success of those defences depends on the relevant defence being proven on the balance of probabilities; in other words, the civil standard of proof.
Given the number of defences that can be pursued in insider-dealing cases and the wide range of circumstances that they cover, the prosecution may well in future seek to secure the assistance of accomplice witnesses in order to undermine the defence case, an exercise which previously has often proved difficult. The FSA will no doubt seek to use those provisions as the ‘carrot’ to encourage those who have committed insider-dealing offences to come forward and give evidence against their ‘partners in crime’ in return for immunity from prosecution.
What Will This Mean For Businesses And Individuals?
The significance of immunity being granted should not be underestimated. Those running businesses need to be aware that they face an increasing risk of investigations instigated by the FSA following those seeking immunity or blowing the whistle coming forward to ‘assist’. It may be easier to appreciate the potential significance of immunity to prosecuting authorities when you consider that immunity from prosecution was used extensively by the OFT during their investigation of the alleged BA/Virgin price-fixing case and that there are four BA executives currently facing trial for cartel offences.
The potential seriousness of insider-dealing proceedings has also been brought home to those who have followed the investigation and prosecution of Timothy Power, Belgo’s former operations director. Power faced prosecution for insider dealing relating to the restaurant group’s £9.8m takeover by Lonsdale Holdings in 1997. During the course of the investigation, he was remanded in custody for more than 163 days and ultimately pleaded guilty. The sentencing judge in passing sentence confirmed that were it not for the exceptional circumstances of his case, Power would have received a custodial sentence of 18 months. In light of the exceptional circumstances, that sentence was suspended.
The importance of implementing rigorous controls, especially in areas of a business that are vulnerable to staff committing market abuse or insider-trading offences, remains paramount in order to reduce the risk of impropriety and potential whistleblowing. Investment in preventative measures (through training and compliance programmes, and building a response plan should there be an incident) could not only minimise exposure further down the line, it could also be looked upon favourably by regulatory bodies and investigative agencies. It could similarly prevent a prosecution or, where a prosecution is brought, provide useful mitigation.
For the individual, there will be a vast range of considerations to be taken into account when considering whether immunity should be sought or accepted, including a thorough consideration of the strength of the case against them. If immunity is attractive a carefully orchestrated negotiating process will need to be conducted in order to reduce the risk of immunity being revoked or refused. A specialist legal adviser, independent from the company, may well be best placed to assist an individual through that process.
Further published procedural guidance is keenly awaited as to the criteria that will be applied by the FSA in determining whether immunity may be granted. There will undoubtedly be continuing pressure on the FSA to produce results, and some much-needed favourable publicity, by way of convictions in insider-dealing cases, particularly after the FSA’s failings regarding the collapse of Northern Rock and the suspected raid on HBOS shares. However, it is absolutely vital that the FSA uses immunity powers responsibly. Adherence by the FSA to clear and sensible guidance for assessing the suitability of cases for immunity would contribute to achieving that aim.
Prevention is better than cure
The FSA is becoming more active in pursuing criminal proceedings and using innovative investigative techniques.
In its business plan for 2009/2010 the FSA states:
‘We consider the threat of a custodial sentence to be a significant deterrent against market abuse and we will continue to bring insider dealing prosecutions against those suspected of abusing the markets. We recognise that not all such prosecutions will be successful but believe that visible activity of this sort is an important part of credible deterrence.’
Companies must ensure that their compliance and risk management strategy incorporates policy and procedure to eliminate or at least minimise the opportunity for criminal conduct and/or regulatory infractions to occur. The damage, much of which is unquantifiable, can go far beyond mere legal costs, damage to shareholder confidence and damage to reputation. The fall-out from investigations can result in extreme personal and professional strain for those involved with a great deal of in-house resources, time and money, being diverted to cope with the situation.
The question every company must ask is whether they want to assess the potential risks they face now, or deal with the potential crisis they may face later. If companies or individuals are faced with investigations or proceedings specialist legal advice should be sought without delay.
Tom Epps, partner, and Amanda Shaffu, paralegal, in the business and regulatory investigations team, Russell Jones & Walker, London. E-mail: t.a.epps@rjw.co.uk.
