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IDENTIFYING AND INVESTIGATING INVESTMENT FRAUD Autonomy’s chief financial officer has been charged with fraud over allegations he misled investors. But what is investment fraud? And what are your options if you are defrauded? Aziz Rahman and Neil Williams explain.

22 December 2016

The former chief financial officer of Autonomy has been indicted in the US for allegedly defrauding investors and Hewlett-Packard about his firm’s performance before its sale in 2011. Sushovan Hussain is accused of exaggerating the British software company’s finances and growth prospects prior to its $11 billion purchase by Hewlett Packard.

The allegation against Mr Hussain and others is that he sought to deceive Autonomy’s investors in order to artificially increase and maintain its share price to make it attractive to potential buyers like HP. In the simplest terms, Mr Hussain is accused of investment fraud.

Forms of Investment Fraud

Investment fraud can take many forms. It can be the selling of stocks and shares in companies that may or may not exist, pension liberation, Ponzi-style schemes or any number of illegal and unethical ways by which one person tries to persuade another to part with their money.

The allegations may not always be easy to understand. But investment fraud is an accusation often made against those who have created or promoted schemes, sales or arrangements that have not paid off as promised.

Chief executives and other senior business figures, accountants, investment brokers and managers and financial advisors are among those often accused of investment fraud. But what is it?

 

Dishonesty

Dishonesty is the central issue in all investment fraud investigations. A person will not be convicted unless a jury is persuaded that the investment scheme was a dishonest one and that the defendant knew it was dishonest and still took part. This is why anyone accused of investment fraud must seek expert legal advice if they are to have any chance of rebutting prosecution claims of dishonesty.

For the purposes of a prosecution, dishonesty relates to the defendant’s state of mind, not their conduct.  In Ghosh [1982] QB 1053, the Court of Appeal set down set down a two-stage test. 

The jury must decide whether “according to the ordinary standards of reasonable and honest people what was done was dishonest”. If this is the case, the jury must decide whether the defendant “himself must have realised that what he was doing was by those standards dishonest….”

Dishonesty can, of course, take many forms, depending on the circumstances and the nature of the allegations. For example – and this may be relevant in the Autonomy investigations -Section 397 of the Financial Services and Markets Act 2000 makes it a criminal offence to make a misleading statement, promise or forecast or to dishonestly conceal facts from someone with the intention of inducing someone to do, or refrain from doing, something in relation to an investment.

Under this law, a person can be guilty if they are not dishonest – simply being reckless regarding the statements they make to convince others to invest their money can be enough to establish guilt. In such cases, any successful defence must establish that the accused did not believe they were creating a false or misleading impression and that they were acting in accordance with professional and market rules. This involves not only honesty but also professional integrity.

Diligence

There is no defence available to those accused of investment fraud that the people they allegedly defrauded did not carry out due diligence. But anyone looking to invest in a product, scheme or company would be strongly advised to carry out thorough checks on whoever or whatever is seeking their finances.

Look into the background of those seeking your investment. What is their track record? Why are they seeking investment now? Why are they seeking it from you specifically? What proof is there of the claims being made about it being a worthy investment? Who is the ultimate beneficiary of the investment?

If such investigations seem beyond your abilities, seek legal advice. Legal experts can carry out the relevant checks, ask the questions that need to be asked and spot the warning signs that may indicate investment fraud.

Options

While the options facing those accused of investment fraud are linked to dishonesty and in some cases – as we have mentioned above – integrity, the possible approaches available to those who believe they have had investment fraud carried out against them are varied.

They can report it to the authorities and let them investigate and decide whether to bring a criminal prosecution. Alternatively, they can bring civil proceedings against those they believe have committed the fraud. They could even bring a private prosecution against those they are accusing of fraud.

It is important to remember that it is possible to report the matter while also pursuing a private prosecution or civil action.

Investigations

Whatever option is followed, however, it is important to conduct investigations in order to assess the likelihood that fraud has been committed. Some firms may shy away from this, fearing that they lack the relevant expertise.

But such investigations can be conducted by legal experts familiar with both the legislation and the ways prosecuting authorities and civil courts function. And if an internal investigation then leads to the firm seeking a civil resolution to the matter, it means far less risk of reputational damage than if the authorities bring a prosecution.

At Rahman Ravelli, our corporate fraud department has vast experience of carrying out investigations on behalf of clients and advising on the best course of action.

 

Authors


Neil Williams
Senior Associate Solicitor
neil.williams@rahmanravelli.co.uk
+44 (0)203 440 5515



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