The High Court has declined to strike out civil proceedings brought by the Financial Conduct Authority (FCA) in respect of alleged market abuse, even though it found that the FCA had made impermissible collateral use of material obtained through mutual legal assistance (MLA) requests without first obtaining the consent of the relevant overseas authorities.
From a legal perspective, the decision is of interest in its consideration of the interpretation of the Crime (International Co-operation) Act 2003 (the 2003 Act), including what constitutes "use" of MLA material, the scope of the prohibition on collateral use, what constitutes consent, and the Court's exercise of the discretion not to strike out in the interests of public policy interest in what was described as a claim of "overwhelming merit".
On a purely practical level, the case demonstrates the multiplicity of ways in which such material may be "used" by the regulators and incorporated into the "warp and the weft" of their investigations, without actually being deployed in evidence. It highlights the potential difficulties to which the FCA's dual track approach to investigating market abuse can give rise where MLA requests have been made.
The case also illustrates the determination of the FCA to pursue market abuse cases, and the painstaking work this can involve. And finally, it serves as a useful reminder to firms and practitioners that their obligations under section 348 of the Financial Services and Markets Act 2000 (FSMA) may be engaged in the course of the investigation process without this being obvious to them, because of the way that confidential information is embedded into the fabric of the FCA's investigation.
Background to the proceedings
In October 2015, the FCA began an investigation into the conduct of the former CEO and the former CFO of Globo Plc ("Globo"), an AIM-listed company whose shares were suspended from trading on 23 October 2015; on 28 October Globo had announced that the former CEO of the Group, "had brought to the attention of the Board certain matters regarding the falsification of data and the misrepresentation of the Company's financial situation". The FCA's investigation involved the use of the FCA's information gathering powers, and requests for information made not only within the UK, but also from 13 foreign jurisdictions, under regulatory information sharing agreements and mutual legal assistance requests.
The FCA formed the view that the actions of the defendants had resulted in the publication of false or misleading statements, between at least November 2010 and October 2015, that caused the company's shares to be traded significantly above their true value, before the company collapsed in November 2015. It decided to bring criminal proceedings and obtained European Arrest Warrants for both defendants who reside in Greece. However, in June and September 2019, the Hellenic Court of Appeal denied the UK's extradition request.
In those circumstances, the FCA decided it was in the public interest for a civil claim to be brought so that redress could be obtained for investors who had been adversely affected by the defendants' conduct. The FCA brought proceedings for restitution under sections 382 and 383 of FSMA, asserting that the defendants had breached of section 118 of FSMA (market abuse) and/or been knowingly concerned in breaches of section 397 of FSMA and its successor, section 89 of the Financial Services Act 2012.
The former CEO of Globo sought to strike out the proceedings on the basis that in investigating, building and formulating the civil claim, the FCA made use of MLA material, without first obtaining the consent of the relevant overseas authorities, in breach of the absolute prohibition against collateral use set out in section 9(2) of the 2003 Act.
The MLA material and how it was used in the investigation
The FCA's standard practice in potential market abuse cases is to run dual track investigations, recognising that in most cases there will be the potential for both criminal offences and civil/regulatory contraventions to have been committed. In this case, as well as evidence obtained using the FCA's compelled powers under Part XI of FSMA, and under the IOSCO MMoU, the FCA made MLA requests to (amongst others) the authorities in Greece, Saint Vincent and the Grenadines (SVG) and Switzerland under the 2003 Act.
The FCA argued that the vast majority of the evidence in the investigation came through non-MLA routes and it was that material that supported the allegations in the FCA's claim. The FCA told the Court that, mindful of its obligations, it had taken care to ensure that MLA material was not included or relied upon for the purposes of the civil proceedings (with the exception of two sentences included in error in an affidavit in support of permission to serve proceedings out of the jurisdiction – which were expressly (but inadvertently) based on material supplied by the Swiss authorities under the MLA process).
However the FCA also acknowledged that material obtained under MLA requests was used to inform the continuing investigations.
In particular, in response to MLA requests made of the Greek authorities, the FCA received 19 files of audit papers for Greek subsidiaries for the year ending 2014; the FCA then made a further MLA request for audit files for Globo and its subsidiaries for 2012 and 2013 and additional evidence was provided in response. The FCA also sent MLA requests to the Swiss authorities which inter alia sought information regarding a safe deposit box (which referred to information obtained from the Greek MLA material) and received evidence in response. MLA requests were also made to US and Cypriot authorities (also informed by the Greek MLA material) but no evidence was produced in response.
The FCA also acknowledged that various IOSCO requests and two European Investigation orders were informed by the Greek MLA material.
In addition, some elements of questions put to witnesses and other interviewees were based on that material and possibly also on MLA material obtained from SVG.
The FCA told the Court that no passages in the pleadings served by the FCA had been informed by the contents of any MLA Material, and that no MLA Material had been provided to external counsel.
What use can be made of MLA material (without consent)?
The 2003 Act gives UK prosecuting authorities the power to request legal assistance from overseas authorities under MLA Treaties or bilateral Conventions. Section 9(2) provides that evidence obtained pursuant to a request for assistance under section 7 may not, without the consent of the appropriate overseas authority, be used for any purpose other than that specified in the request.
Because MLA requests are generally used for obtaining material that cannot be obtained on a law enforcement to law enforcement basis, particularly where enquiries may require coercive measures, safeguards in respect of the use to which MLA material can be put are "of critical importance to the functioning of international systems of cooperation". In Gohil v Gohil  EWCA Civ 550, the Court of Appeal pointed out that:
"Restrictions on use ensure that states are not deterred from assisting each other in the prosecution of crime by the fear that material that they supply for one or more specified purposes might be used for other unrelated purposes. There may be legal issues under the national laws of the requested state (for example, relating to obligations of confidence) which would discourage or prevent the disclosure of material for the purposes of a criminal investigation, if it might then be used for other purposes, including civil litigation".
In this case, the FCA argued that the restriction on "use" in the prohibition on collateral use in section 9(2) of the 2003 Act should be narrowly construed as being confined to use by way of deployment as evidence in proceedings. The FCA sought to rely on a comment by Lord Dyson in Gohil to the effect that that whilst the claimant could not adduce the MLA materials she could use the information in them as a springboard for her own inquiries. The FCA argued that the prohibition should not prevent the "use" of MLA material for the purposes of informing the content of pleadings, of questions posed in an investigative interview or as a springboard for seeking other material during an investigation.
By contrast, the defendants argued that the word "use" in section 9(2) should be given a broad meaning and should cover "any dealings at all with material whether it might be adduced in evidence or used in the course of investigations".
The Judge agreed, noting that the natural meaning of the words is to preclude use of any kind for any purpose other than stated in the request, although permissible use would include "use" as part of the criminal investigation (even if proceedings were not instituted) as well as evidential use in criminal proceedings. The Judge also took into consideration by analogy various cases dealing with the interpretation of the word "use" in the context of CPR r.31.22 (the collateral use protection).
The Judge held that interpreting "use" in the narrow way the FCA proposed would undermine the purpose of ensuring that mutual assistance in criminal matters works effectively, and that that purpose would not be achieved through, for example, use (without consent) of MLA material in, for example, other investigations. The Judge pointed out that in the Gohil case, the claimant was already aware of the contents of the MLA documents which had been referred to in open court; the statement that the claimant could use information from the MLA documents as a springboard for her inquiries was simply a solution to the practical difficulties that arose because the information was already in the public domain.
What constitutes consent
The FCA argued that the standard wording of the FCA's MLA requests conferred sufficient consent for the use of MLA material obtained from the Greek authorities, as it refers to use "in any criminal prosecution or judicial proceedings connected with this investigation, including any restraint or confiscation proceedings".
However, the Judge noted that the request referred to a criminal investigation being conducted into market abuse and insider dealing; this, together with the criminal context of, and set out in, the requests, make it plain that the reference to "judicial proceedings" should be confined to criminal proceedings ancillary to the investigation (such as restraint or confiscation proceedings).
The Judge stressed that section 7 of the 2003 Act is exclusively a mechanism to gather information for criminal investigations and proceedings. He rejected the argument that the FCA's standard wording had the effect of seeking permission for use in other judicial proceedings including civil proceedings, absent a clear reference to civil proceedings. The Judge did not go on to decide whether a request purportedly made under section 7(2) of the 2003 Act which also specified a purpose (namely use of MLA material in civil proceedings) that was outside the scope of that section would be lawful, or whether a separate request for consent would be required.
In fact, in 2016 at a meeting which dealt primarily with criminal investigations, the FCA asked the Greek Authorities whether it could disclose MLA material it had received from them to the FRC, which was also undertaking an investigation into Globo. The Greek Authorities indicated that if UK legislation permitted that disclosure, then they did not object. The Judge did not consider this was sufficient to constitute express or implied consent to the use of the MLA material in civil proceedings, and found on the available evidence that there was an actual or (at least) potential continuing unlawful use of MLA material in the civil proceedings.
Due to an oversight, the FCA's standard wording in relation to consent had not been used in the MLA Request made of the SVG Authorities. Long after commencement of the civil proceedings, the FCA requested the consent of the SVG Authorities to use of the MLA material in the proceedings, which was forthcoming. The Judge found that this subsequent consent did not cure any impermissible use of MLA material prior to the consent.
The MLA request made of the Swiss authorities also adopted the FCA's standard consent wording. However, the response included the Swiss authorities' own provisions regarding the use of MLA material. The Judge found that the question of whether these amounted to consent gave rise to a triable issue which he did not determine.
Should the claim be struck out?
The Judge accepted that the FCA had acted in good faith (albeit mistakenly) and had not deliberately attempted improperly to use the court's procedures, but had failed to put in place the necessary safeguards to collateral use.
In exercising his discretion on the matter of strike out, the Judge suggested that considerations of international comity might not necessarily preclude the potential admissibility of evidence obtained without consent. In addition, in this case the improper use did not involve deployment of the MLA material in evidence, nor reliance upon it in the Particulars of Claim, particularly given that external counsel advised and pleaded having regard only to non-MLA material. The Claimant argued that it was nonetheless impossible to strip out "derivative" or "tainted" material that would not have been obtained but for the use of the MLA material in the investigation. The Judge took into account the belated consent of the SVG Authorities and the apparently limited compass of any springboarding use. He noted that the proceedings were brought in the public interest, for the protection of consumers and to safeguard the integrity of the UK financial system, and bore in mind the FCA's description of its claim as having "overwhelming merit".
Ultimately, the Judge was not satisfied that a strike-out was a proportionate response to the conduct in this case, nor that the defendants could not have a fair trial. He considered that less draconian steps could be taken to ensure a level playing field, and mark the court's disapproval of the FCA's conduct.
Accordingly, the Judge proposed to rule that:
- none of the materials obtained via the MLA process from either the Greek or the SVG Authorities would be admissible in the current proceedings;
- those MLA materials must be retained solely for the purpose of any future criminal proceedings or returned to the relevant overseas authorities where that purpose has come to an end; and
- a formal request for permission to use the material in civil proceedings should be made by the FCA to the Greek Authorities, in order to address concerns around international comity.
The case is therefore likely to proceed on this basis, assuming that the Greek Authorities do give their consent.
In "dual track" investigations into both potential criminal and civil claims of market abuse which may involve MLA requests, the Judge was clear that the FCA should either:
- erect an information barrier between separate teams undertaking criminal and civil investigations, respectively – which arguably involves significant duplication of effort and resource for both the regulator and the subject(s) of the investigation; or
- seek express consent for the use of material obtained through such requests in any potential civil proceedings – which may not inevitably be forthcoming (depending on the constraints of the national legislation governing the relevant overseas authority).
It seems unlikely that the FCA will want to jettison its default dual track approach in market abuse cases. Since the MLA collateral use issue will only arise in a relatively limited number of cases, it seems unlikely that the decision will lead to wholesale changes in the FCA's investigative processes, but we may see some shift in cases with a significant cross-border dimension, with information barriers potentially being set up if and when MLA requests are to be made.
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.