The SFO: a new director, a new beginning?

When David Green QC took over from Richard Alderman as director of the Serious Fraud Office (SFO) in April this year, he inherited an organisation in crisis. Still reeling from budget cuts and speculation over its future in 2011, the SFO was fast heading for an embarrassing defeat in one of its most highly publicised cases – its criminal investigation into Vincent Tchenguiz, a high-profile businessman and one of several individuals arrested in a blaze of publicity in March last year in relation to the collapse of Kaupthing Bank hf.

In June, only two months into Mr Green’s four-year tenure, the SFO formally discontinued its investigation into Mr Tchenguiz on the basis that there were no longer reasonable grounds for suspicion. This latest embarrassment for the SFO followed an ‘urgent review’ of Mr Tchenguiz’s status in the investigation by the new director. So what led to this review and what does the case reveal about the SFO’s capacity as an investigator and prosecutor of serious fraud?

The allegations against Mr Tchenguiz were centred on a £100m loan transaction and a separate collateral transaction between Kaupthing Bank and a trust of which Mr Tchenguiz is a beneficiary. The SFO’s case was essentially that Mr Tchenguiz deliberately misled the bank as to the value of the security pledged in relation to the transactions. It was specifically alleged that:

  1. the same portfolio of assets had been pledged not only in respect of the £100m loan (the Pennyrock loan) but also in relation to an £80m increase in an overdraft facility (the Oscatello facility), in other words that the security had been double-pledged;
  2. that the value of the securities offered within the portfolio had been widely overstated, due to the basis on which the actuarial valuations of the assets had been carried out; and
  3. that substantial senior lending existed against the portfolio, which had not been disclosed to Kaupthing.

Not one of these three allegations was in fact supported by the evidence – evidence which was available to the SFO and was, or certainly ought to have been, considered by it. For a start, the Pennyrock loan agreement itself, which the SFO received almost six months before the search warrants were applied for, contained over 400 references to senior lenders against the portfolios. Even a cursory read of that document could have left the SFO in no doubt that Kaupthing had been well aware of the senior lending against the portfolios.

In June 2011, Kaupthing filed a defence in related civil proceedings which made clear:

  1. that separate assets had been pledged in respect of the Pennyrock loan and the Oscatello facility, in other words that there had been no double-pledging;
  2. that Kaupthing had fully understood the nature and significance of the actuarial valuations and the basis on which they were carried out; and
  3. that Kaupthing had been aware of the senior lending and had understood that the security proposed was being offered net of such existing debt.

Despite receiving the Kaupthing defence in late June 2011, it took a further five months for the SFO to concede, in the context of judicial review proceedings, that the search warrants executed on Mr Tchenguiz’s premises should never have been granted on the information put before the court. One might have thought that would be the end of the matter. However, the SFO maintained that they had an alternative case against Mr Tchenguiz and that the criminal investigation would continue.

Although, despite repeated requests, the SFO’s alternative case was never properly articulated, it became clear that the allegations against Mr Tchenguiz had effectively been turned on their head. Initially it was alleged that he had defrauded the bank, but when that was seen to be nonsense the SFO asserted that he had in fact conspired with the bank to defraud creditors. Evidence filed by the SFO in the judicial review proceedings suggested that this new suspicion rested on two clear misconceptions: an alleged lack of due diligence by Kaupthing into the value of the collateral advanced, and a perceived uncertainty as to the appropriateness of the valuation methodology used. In fact, a few basic enquiries and consideration of a due diligence report already in the hands of the SFO would quickly have dispelled those concerns.

The SFO’s second case against Mr Tchenguiz was therefore as hopelessly flawed as the first. In fact, it was so lacking in substance and so contrary to the original allegations, that the inescapable conclusion is that in truth the SFO had no alternative case against Mr Tchenguiz at all but was simply playing for time in the hope that it might find some evidence on which to build a case. But there was no such evidence, and it appears that it was only as a result of Mr Green’s arrival, which coincided with the judicial review hearing, that a proper, principle-based review of the case was conducted. The inevitable outcome of that review was the discontinuance of the investigation against Mr Tchenguiz.

Judgment in the judicial review was handed down on 31 July and was heavily critical of the SFO’s handling of the case, declaring the search warrants unlawful. The explanations offered by the SFO for its failures reveal a catalogue of errors so basic that they beggar belief. To give just a few examples: information provided by third parties including accountants Grant Thornton was simply relied upon, with no attempts to verify it, to assess its credibility or to check apparent conflicts of interest; key documents relating to the transactions under investigation were overlooked, or if they were read their significance was not appreciated by those charged with formulating the allegations; during the process of compiling the information in support of the application for search warrants, no record was kept of the evidential basis upon which each allegation was made.

The Tchenguiz fiasco is part of the legacy of the SFO’s previous director Richard Alderman, on whose watch all the key decisions in the investigation were made. Mr Green is keen to begin his tenure with a clean slate, and what better way to make his mark than to rid the agency of a hopeless and costly case that has caused it nothing but embarrassment for the past 18 months.

Mr Green has made no secret of the fact that his approach will differ significantly from that of Mr Alderman, and that he aims to ‘recharge the SFO’s corporate self-respect’ over his four-year tenure. He is likely to oversee a subtle shift in emphasis at the SFO, away from settled outcomes towards more traditional investigation and prosecution of corporate offending. Although, like Mr Alderman, he has substantial experience of government, he differs from his predecessor in that he has spent the majority of his professional life in private practice. He is perhaps not closely associated with white-collar crime, but he is particularly well-regarded as a prosecutor and his appointment will result in a more aggressive SFO with a greater emphasis on prosecution of serious fraud.

Under Mr Alderman’s leadership, the SFO saw a gradual move towards more collaborative methods of dealing with corporate offending. In recent years the SFO has relied increasingly on self-reporting, plea negotiations and civil settlements as alternatives to prosecution, particularly in relation to corruption cases. The first use by the SFO of its civil recovery powers occurred in 2008 in relation to Balfour Beatty, which entered into a £2.25m civil settlement in respect of ‘books and records’ offences, and there have been a number of similar settlements since that time. The government is currently consulting on the introduction of US-style deferred prosecution agreements (DPAs) which, if introduced, would put an additional plea bargaining tool at the SFO’s disposal. The new director will not seek to reverse this shift towards settled outcomes. He has declared himself in favour of DPAs, and the SFO’s recent £1.9m settlement with Oxford University Press over bribery allegations suggests that civil recovery orders continue to play an important role in appropriate cases. However, it is clear that this approach will now be less actively promoted in lieu of traditional prosecution and investigation. In the words of Mr Green on taking up his post in April: ‘A corporate might say: if we come and self report we might get prosecuted. Well, they might get prosecuted.’

Mr Green has already shown himself to be more decisive than his predecessor. He announced in July the launch of a full criminal investigation into the manipulation of Libor, which the SFO had decided not to pursue when it reviewed the evidence last year. At the time of writing, the investigation is ongoing and informed commentators think it is very possible that charges will be brought. The SFO has also reopened its investigation into the $600m collapse of Weavering Capital (UK) Ltd in 2009, following a review of a High Court civil judgment in May 2012 which found the hedge fund’s founder liable for deceit and breach of fiduciary duty. A previous SFO investigation had been discontinued in September last year on the basis that there was no reasonable prospect of conviction.

The Bribery Act 2010 having been in force for over a year, it is also likely that the SFO will be looking for a significant case to prosecute or in which to reach a large settlement, particularly in relation to the corporate offence of failure to prevent bribery. However, in addition to launching high-profile investigations and weeding out weak cases already on the books, Mr Green will need at the very least to initiate a substantial overhaul of internal processes to ensure that cases are properly investigated going forward. His appointment of Geoffrey Rivlin QC, formerly the senior resident judge at Southwark Crown Court, suggests that he has this very much in mind. However, he has joined the SFO at a time when its resources are under severe pressure. A 25% budget cut imposed in 2011 is expected to remain in place until 2013, and several senior members of staff resigned in 2011 as a result of speculation over the organisation’s future. The government’s plans to disband the SFO have since been shelved and Mr Green has declared that the SFO is ‘here to stay’. Nevertheless, the challenge for the SFO under Mr Green will be to make its mark as a credible prosecutor of corporate crime within the confines of limited resources.

WilmerHale acted for Mr Tchenguiz in relation to this investigation.