UK: FSA Enforcement Procedure

Last Updated: 18 August 2011
Article by Laurence Lieberman and Paul Glass

Traditionally, the English courts have been critical of plea-bargaining, co-operation agreements and immunity agreements. This is perhaps best reflected by the comments of Mr Justice Bean in December 2010 in relation to the settlement reached between the Serious Fraud Office (SFO) and BAE Systems following the well-publicised corruption investigations into BAE by the SFO and the U.S. Department of Justice. The Judge was scathing about the settlement entered into between the SFO and BAE, and noted that, whether or not pleas have been agreed, the Judge is not bound by any such agreement, and any view formed by the prosecution on a proposed basis of plea is deemed to be conditional on the Judge's acceptance of the basis of plea. Exploiting this unease, defence Counsel will no doubt emphasise that witnesses may have received some benefit for their testimony, which may carry more weight with English judges than it might in the U.S., where plea bargains and such attacks on evidence obtained as a result are more commonplace.

UK Immunity Notices

The Serious Organised Crime and Police Act 2005 gave certain prosecutors in the UK the ability to issue immunity notices and to enter into agreements with a view to reduced sentences in exchange for co-operation and assistance in bringing other offenders to justice. The Financial Services Authority (FSA) was not given these powers, and so during 2007 and 2008, it undertook sustained lobbying of the Government to obtain these powers on the basis that they were essential for the FSA to be able to successfully tackle insider dealing, on which it had a poor success record at the time. As a result, section 113 of the Coroners and Justice Act 2009 gave the FSA the power to issue immunity notices and to enter into plea-bargain agreements. It has exercised those powers on a number of occasions, more recently in the successful prosecution in 2010 of Malcolm Calvert, a former investment banker at Cazenove.1 In that case, a Mr Hatcher, who bought and sold shares for Mr Calvert on information he provided, was not prosecuted because he was granted immunity by the FSA (although he was given a civil fine)2 in return for evidence against Mr Calvert. However, there has been relatively limited use by the FSA of these powers, certainly when compared to their extensive use by the U.S. Securities and Exchange Commission (SEC), including in the successful Rajaratnam prosecution in 2011.

In the current political climate, the FSA will want to increase its use of immunity and/or plea-bargains as a tool in building major cases. That said, doubts remain as to the ability of the FSA to gather sufficient evidence for this to be a truly effective tool in its fight against insider dealing. Any prosecuting authority must be able to present a defendant with sufficient weight of evidence that he perceives the acceptance of a plea-bargain, or opting for immunity in exchange for giving evidence against other wrongdoers, is a preferable option to the risk of being prosecuted himself. This was shown to great effect in the Rajaratnam trial,3 where the SEC and the U.S. Attorneys Office were able to put wiretap evidence before the other parties involved in the insider dealing "ring," with those parties then accepting plea bargains which required them to cooperate in the prosecution. This substantially strengthened the case against the "ringleader," Rajaratnam himself, who was ultimately convicted on all counts (the criminal case was not brought by the SEC, but it is likely that such a prosecution would have been brought by the FSA in the UK).

We can expect to see increased attempts by the FSA to use plea bargains to continue its efforts against insider dealing, but it remains to be seen how the FSA intends to develop its capabilities in this area. Given the numerous arrests over the past two years by the FSA in its insider dealing investigations (which have not yet resulted in prosecutions), the FSA will no doubt be developing its strategies in this regard at the moment, but until information regarding any arrangements entered into following those arrests becomes public, the FSA's approach remains unclear.

U.S. Co-operation & Immunity Agreements

In stark contrast, the use of co-operation and immunity agreements has greatly accelerated in the U.S. since 2010, when the SEC announced its adoption of an initiative to incorporate new forms of "co-operation agreements" whereby individuals and entities would be able to obtain more favourable treatment by co-operating in the SEC's investigation and enforcement process.

The co-operation initiative introduced three new weapons into the SEC's enforcement arsenal:

  • Co-operation agreements: a formal written agreement pursuant to which the Division of Enforcement agrees to recommend to the Commission that a co-operator receive co-operation credit in exchange for providing substantial assistance in an ongoing investigation.
  • Deferred prosecution agreements: a formal written agreement through which the SEC agrees to forego for a period of up to five years from prosecuting a co-operating individual or entity in exchange for compliance with express undertakings (including co-operation during the term of the agreement, no further securities violations, and tolling of any applicable limitations period). If all undertakings are satisfied, the SEC will decline to pursue enforcement of the matter following the end of the deferred prosecution period.
  • Non-prosecution agreements: this program, which is intended to be used only in limited circumstances, entails a written agreement not to prosecute a co-operating individual or entity in exchange for the provision of substantial assistance and the assumption of express undertakings. As discussed below, this is intended for use in very limited circumstances, and in any event is available only to those co-operators without any past violations.

The co-operation program is intended to serve several purposes. First, it should facilitate the obtaining of evidence by converting scheme insiders to co-operators who would then be able to guide the investigation based on their knowledge. Secondly, it will smooth the SEC's pursuit of higher ranking violators by offering incentives to lower ranking employees to cooperate, enabling the SEC to focus on the most culpable wrongdoers. Thirdly, it will assist in preserving scarce prosecutorial resources in two ways: by using insiders to propose shortcuts and through earlier case resolution.

Co-operation also offers significant benefits to co-operators. Most obviously, a co-operator can secure far better terms than would be available should one be later held liable. By co-operating, one can secure an early resolution of the case against one, at far better terms. Secondly, even if one is still charged with some violation, it is a lesser one, and it can be done in a separate proceeding away from the publicity glare and spotlight of the main case.

The U.S. approach reflects the belief that it often pays to, in effect, make a deal with the (smaller) devil in order to catch the larger one. It also reflects the belief that, by providing incentives to co-operate with law enforcement, ultimately more good can be accomplished. It reflects an approach that prioritises resolving a problem over an automatically adversarial approach.

As noted above, co-operation agreements greatly aided the Rajaratnam prosecution. A brief look at the first cases of a non-prosecution and a deferred prosecution agreement help illustrate the factors that come into play when considering the real-life application of the above principles.

— First Uses of Powers

The first use of a non-prosecution agreement was in connection with an investigation into financial fraud and insider trading at Carter's, Inc., the children's clothing company. While the SEC ultimately charged Carter's' former Executive Vice President for the misconduct at issue, Carter's was not charged on an entity level but entered into a non-prosecution agreement in December 2010.

The non-prosecution of Carter's was predicated on several factors, most notably the fact that the conduct appeared to be isolated and that, once discovered, Carter's self-reported the conduct and undertook remedial action. The non-prosecution agreement was predicated on Carter's continued co-operation with any investigation, including but not limited to the one that produced the agreement relating to the conduct at issue, and its undertaking not to publicly deny any of the factual bases of the agreement in any proceedings involving the SEC. Any violation of the agreement would subject Carter to additional securities enforcement proceedings, as well as the risk of a reference for potential criminal proceedings for knowingly providing false or misleading information. Importantly for the co-operator, the agreement provided that, should Carter's come under investigation by any other federal, state, or self-regulatory organisation, it could request that the SEC issue a letter to that organisation detailing its co-operation, although it could not serve as blanket immunity from any other such prosecution.4

The first reported deferred prosecution agreement was entered into by the SEC and Tenaris, S.A. in May, 2011, with respect to an investigation into Tenaris having made various improper payments to Uzbeki officials in connection with bidding for government contracts. As the agreement publicly set forth, Tenaris voluntarily disclosed the violations on a timely basis to the SEC, conducted an extensive internal investigation, and issued a detailed report to the SEC. Furthermore, Tenaris reviewed its compliance programme and undertook to update it with enhanced procedures designed to prevent a recurrence of the violation. The agreement put off, for a period of two years, any enforcement action, as long as Tenaris tolled any applicable statute of limitations, and continued to co-operate fully during that time period.5

1 See Former Cazenove broker sentenced to 21 months in prison for insider dealing – FSA Press Release FSA/PN/043/2010 of 11 March 2010.

2 See Final Notice to Bertie Charles Hatcher – FSA, 13 May 2008.

3 For latest developments, see Rajaratnam Moves to Overturn Conviction on Five Counts of Insider Trading and Conspiracy, Bloomberg Law Reports – Securities Law, Vol 5, No 22 (31 May 2011).

4 A copy of the agreement can be found at http://www.sec.gov/litigation/cooperation/2010/carters1210.pdf.

5 See Deferred Prosecution Agreement between the SEC and Tenaris SA, March 2011.

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