Worldwide: Investment Fraud And Dishonesty

Last Updated: 6 December 2017
Article by Azizur Rahman

Royal Bank of Scotland has paid $44M to settle a US criminal investigation that accused its traders of lying to clients over investments.

The bank's payment, under a non-prosecution agreement with the US Department of Justice, means it will not face criminal charges over its alleged cheating of about 30 banks and investment clients over the prices and commissions of mortgage-backed assets.

But it is difficult to argue that it has got off lightly. The settlement is separate from a multi-billion dollar penalty that is likely to be imposed on RBS over claims it mis-sold mortgage bonds prior to the 2008 banking crisis. And RBS has also come in for stinging criticism over its behaviour.

Referring to RBS' activities from 2008-13, US Attorney Deirdre Daly accused the bank of fostering "a culture of securities fraud."

She added: "Those in a position of authority taught and encouraged fraudulent trading practices. Worse, those supervisors and compliance personnel then took steps to prevent victims and honest RBS employees discovering and exposing the scheme.''

The US Department of Justice said RBS's mortgage-backed securities trading desk "misrepresented material facts to deceive and cheat its customers" by lying about asking prices and inventing third party sellers to charge buyers extra commission. RBS also lied to customers who suspected they had been the victim of fraud and did not respond to complaints about this by its own employees.

Honesty

Honesty is a central theme in investment fraud cases. Having represented all possible parties in such cases – brokers, accountants, hedge fund managers, financial advisors and company directors – I can say that honesty is the key issue, regardless of the precise circumstances or complexity of each individual investigation. If the jury cannot be persuaded that the defendant acted dishonestly, the prosecution will fail; whether it be a Fraud Act prosecution or a conspiracy to cheat or defraud accusation.

Until very recently, the question of dishonesty was decided by a two-limb test. It was in Ghosh [1982] QB 1053, that the Court of Appeal established this two-stage test of dishonesty. The jury had to decide whether "according to the ordinary standards of reasonable and honest people what was done was dishonest".  If so, the jury then had to decide whether the defendant "himself must have realised that what he was doing was by those standards dishonest...." 

The case of Ivey V Genting Casinos (2017), however, has taken away the need to prove the second part of the Ghosh test: that the defendant knew that ordinary and honest people would regard his behaviour as dishonest. The issue, therefore, of whether the individual thought he was doing something dishonest is now irrelevant: what matters now is whether he was dishonest, according to fact and law. The test now is whether the conduct would be considered dishonest by reference to the standards of ordinary and honest people.

In this latest case, the court said "there can be no logical or principled basis for the meaning of dishonesty to differ according to whether it arises in a civil action or a criminal prosecution". And in specific relation to business crime cases, it added "there is no reason why the law should excuse those who make a mistake about what contemporary standards of honesty are, whether in the context of insurance claims, high finance, market manipulation or tax evasion".

Demonstration

The challenge for anyone accused of investment fraud, therefore, is to demonstrate to the investigating authorities and (if it goes to trial) a jury that there was no dishonest activity. This is the case whether the alleged fraud involves selling fake stocks and shares, Ponzi-style schemes, pension liberation or, as with RBS, the cheating of customers over prices and commissions.

Demonstrating honesty involves outlining a defendant's motivation, his working practices and his reasons for doing what he did. Only by a defence team explaining these can investigators or jurors understand exactly what the person has done, how they did it and why they did it – and determine whether dishonesty was involved.

From a defence point of view, this can involve testimony from the defendant. But a defence team should also be alert to the possibilities of using expert witnesses. These can outline the intricacies of an industry, explain why it would make sense for a defendant to act the way they did and emphasise how they have complied with regulatory requirements. Such witnesses can not only create empathy with a jury, they can give vital credibility to defence arguments that the accused did nothing dishonest.

Digital Material

Before an investment fraud case reaches court, a defence team can make huge strides towards establishing a client's honesty by intelligent use of digital unused material. Such cases will involve huge amounts of documentation, which will be on computers and other devices seized by the investigating authorities. Much of it will never be used by the prosecution.

Lord Justice Gross' Review of Disclosure from September 2011 and the Attorney General's Guidelines on Disclosure 2013, provide defenders with opportunities to use digital material. Such opportunities include asking prosecutors why they are looking for certain words in digital searches, which can help establish the course they are looking to take.

A defence can also check that the prosecution has properly scheduled all the material. This makes it easy to find documentation that could go a long way to establishing a client's honesty. But this is also important because if the scheduling process is not followed in accordance with the rules on disclosure, there is the chance to argue that a fair trial is impossible.

Investigations

If a firm has any suspicions that investment fraud is being carried out, there can be great value in it taking a close look at its working practices before any charges are brought - and even before the authorities have started to investigate. A thorough, carefully-conducted investigation will help a firm determine whether fraud has been committed.

It may be a course of action that some firms are reluctant to take. If they fear they are unable to do it themselves, there are experts available who can carry out an investigation and advise on the best course of action. At Rahman Ravelli, this is a regular part of our workload. An investigation will establish the facts. If the firm then voluntarily reports any wrongdoing to the authorities, it may gain more lenient treatment than if, for example, the Serious Fraud Office discovered the facts for itself.

Further proof, if any was needed, of the importance of honesty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions