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On The Up

4 November 2013

Investment fraud has jumped by 75% to hit a four-year high.

Which means that there are a lot of people whose honesty and integrity is under investigation.

It’s a statistic that no one will be celebrating, According to the latest figures, fraud is at its highest level in four years.

The data from the Investment Management Association shows that investment fraud reached a new high in the first half of this year. According to the research, reported frauds were up to 350 from 200 in the second half of 2012. If any comfort can be found in these figures, it is that the number of successful frauds has remained pretty much the same. But the trend seems to be one of firms and financial advisors being targeted for fraud, with those carrying out the fraud often using the names or details of a genuine firm.

Whatever the names being used by the people involved and whatever the exact nature of what is being carried out, fraud in business can take a number of forms and can go by a variety of names. Bonds selling, boiler rooms, pyramid selling, Ponzi schemes, pension liberation and land banking. Just a few of the practices that have been used to convince people to invest in schemes that can make them wealthier. They are all methods of separating people from their money. And the finger of blame always, inevitably, points at the person who persuaded the investor to hand over their cash.

Such a person could be totally honest. It might just be that the product they were asking people to invest in did not produce the expected rewards. Alternatively, the salesman may be a little too enthusiastic in their belief in the value of what they are selling. They may wrongly (but honestly) believe the investment they are selling has success written all over it. No one else may agree with them – but they may honestly hold that belief. In such cases, it is fair to say such a person is misguided rather than dishonest.

It is an important distinction because the issue of dishonesty is central to fraud prosecutions. Rahman Ravelli represents professionals from all sectors of business who have been accused of fraud. Accountants, salesmen, investment brokers, financial advisors, hedge fund managers, company directors, mortgage brokers and lawyers. The cases may vary but the issues are invariably the same. Their investments may stall or fail in a number of ways, the losses may differ in size and the methods they used to pull in investors may bear little similarity but, in each case, the crucial issue that has to be established by the prosecution is whether they acted dishonestly. Did they have dishonest intent when they operated the scheme and convinced others to invest in it? In short, was it dishonesty rather than poor luck or bad judgement that led to investors’ cash being lost?

When it comes to the law, dishonesty relates to the defendant’s state of mind. In Ghosh (1982), the Court of Appeal ruled that it had to be “according to the ordinary standards of reasonable and honest people, what was done was dishonest’’ and that, if so, the jury must be convinced that the defendant “must have realised that what he was doing was, by these standards, dishonest’’.

This definition effectively puts an obligation on the defendant to prove their honesty. Which is often where the best legal advice is required. When it comes to honesty and fraud cases, anyone under investigation has to gain advice from a solicitor very familiar and well-versed in this field of law. In such cases, a person under investigation has to make sure the solicitor they appoint is experienced in dealing with organisations, such as the Serious Fraud Office (SFO), that carry out fraud investigations. A defendant may have to go to great and complex lengths to be able to argue and prove that they acted honestly (even though the burden is on the prosecution). The prosecution will be out to place the defendant in the least flattering light. This makes it very difficult for a defendant to convince a jury of his innocence. Any jury may not comprehend every aspect of a case, which can make it harder for a defendant to persuade jurors that they acted honestly.

And this is precisely why it falls to a defendant’s legal team to make sure the jury is made aware of the defendant’s honesty. It is up to the defence solicitor to outline and detail the defendant’s work, the reasons behind his actions and his thoughts when carrying them out. Careful, selective use of expert witnesses to show that the defendant was not exhibiting unacceptable, unprofessional or dishonest behaviour can be of great use in convincing a jury. Producing evidence of his previous work that has never been under suspicion can also help build a wider view of the defendant as a trustworthy professional unworthy of the character assassination being offered by the prosecution. The nature of the professional being accused and the commodities being sold may vary, but these defence principles can apply to all investment fraud cases. There are no guarantees but, if carried out intelligently, such tactics can win over jurors and dispel any lingering suspicions they may have that dishonesty was the motivating factor in what happened. And, before that, the issue of disclosure can give a defence team plenty of scope for challenging the prosecution’s claim of dishonesty.

Dishonesty, however, is not always the be all and end all of a fraud defence. For example Section 397 of the Financial Services and Markets Act 2000 makes it a criminal offence to make a misleading statement, promise or forecast or 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 section, a person can be guilty if they are not dishonest but merely reckless regarding the statements they make to convince others to invest their money. In such cases, it can be as important to prove that there was no recklessness as it is to prove there was no dishonesty in other cases.

Such issues require a defence solicitor to establish that their client believed his actions would not create a false or misleading impression and that they acted in accordance with rules of professional conduct. To do this requires the aforementioned ability to convince a jury that the defendant acted honestly and with professional integrity.

Incidents of fraud may be on the way up. But it will take skilled solicitors to establish the honesty and decency of defendants who find themselves being prosecuted. And only then will the number of investment fraud convictions be prevented from rising at the same alarming rate as the number of reported incidents.


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