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Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539
Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539

Investment Fraud Risks

Author: Nicola Sharp  24 September 2014
5 min read

The SFO did not beat about the bush in 2014 regarding its investigation of allegations of fraud that had been made against Stirling Mortimer.

It came out and said quite categorically that its investigation was primarily focused on three of the funds operated by Stirling Mortimer Global Property Fund. The Fund was structured so that there was one umbrella fund, with sub-funds listed on the Channel Islands stock exchange. The funds invested in right-to-purchase contracts for properties around the globe, aiming to sell those on for profit during the construction process. Things had already taken a none too promising turn when, days before the SFO announcement, the Fund itself declared that it had been delisted from the Channel Islands Stock Exchange. The Stirling Mortimer saga may at least serve as a warning to others about the perils of investment fraud.

Investment Fraud and Dishonesty

The Serious Fraud Office’s website shows seven different areas of fraud.  Under investment fraud it lists bonds and boiler-room frauds, pyramid and Ponzi schemes, pension liberation frauds, land banking scams and a number of others. The names may vary but the principle is the same for all of them: clever individuals or groups taking from people who are either naïve or greedy or both. And the main issue at the heart of any prosecution is honesty. 

Selling shares in firms that don’t exist is one thing.  It is a clear investment fraud that has dishonesty at its core. No one could realistically argue otherwise. But selling investment schemes that no reasonable person would go anywhere near is not as clear cut. Is the person selling them carrying out a fraud? Or is he simply misguided in his judgement and overly optimistic? Bad investments cannot be classed as fraud. Yet it is often the case that prosecutors will mix the two up – with serious consequences for whoever is being accused of fraud.

At Rahman Ravelli, we defend accountants, investment brokers, hedge fund managers, directors, mortgage brokers and independent financial advisors and many other professionals accused of investment fraud. The cases may vary, the complexity of each allegation may be huge and the amounts being discussed may differ but the one key ingredient in each case is dishonesty. Unless the jury is persuaded that the defendant’s intent was dishonest then the prosecution will not succeed.

The Test for Dishonesty

The crucial issue of dishonesty is always a matter of fact for the jury. It relates to the defendant’s state of mind – not his conduct.  In Ghosh [1982] QB 1053, the Court of Appeal set down a two-stage test.  The jury must be directed to decide whether “according to the ordinary standards of reasonable and honest people what was done was dishonest”.  If so, the jury then must consider whether the defendant “himself must have realised that what he was doing was by those standards dishonest….”  This is the so-called objective-subjective test of putting a reasonable ordinary man in the shoes of the defendant.  It means that defenders in these cases must have the question of dishonesty at the heart of their case strategy.  The defendant had to be able to show either honesty or a clear lack of dishonesty. 

That test in criminal cases, however, is now history. This is due to the Supreme Court civil case of Ivey v Genting Casinos UK Ltd (t/a. Crawford’s Club) (2017). In this case, the Supreme Court considered the difference between how the civil courts decided dishonesty compared with the criminal courts. In the civil courts, there was no requirement to establish the second part of the Ghosh test - that the accused person must realise that what he was doing was dishonest. All that had to be established was that a person had acted dishonestly.

The Supreme Court decided that the Ghosh test was wrong and that the law needed simplification. As a result, a prosecution now only has to prove that what was done was dishonest objectively. It no longer has to establish that the person acting dishonestly knew that they were being dishonest. The criminal law test of dishonesty is now as straightforward as that in civil law.

Demonstrating Honesty

Demonstrating honesty requires considering all aspects of the defendant’s nature and working out how these can be used to present him to the jury as an innocent man looking to explain his actions. A defence solicitor in such a case must be able to know exactly what makes their client tick – and be able to convey this to a jury. A jury can only understand a defendant’s honesty if they can appreciate his motivation, impulses and pressures; even his weaknesses and eccentricities. Only then can they make an informed decision regarding him.

But beyond personality traits, a defence solicitor in such a case must be able to explain in detail and with authority the reasoning behind their client’s actions. This is where the experts come in. Defence teams can use experts to demonstrate industry norms and accepted practice. In this way, they can build on their efforts to explain their client’s personality by talking a jury through exactly what he did and why he did it. Experts, however, have to be seen as being vital in creating empathy with the jury.  So, for example, if an accountant is accused of conspiracy to cheat, his defence team can use an independent expert to explain to the jury what would be expected of an accountant in such a situation, how the defendant has complied with their professional requirements and how anything that appears suspicious is in fact perfectly explicable and above board.

 

Experts are arguably at their most important when it comes to examining other activity by the defendant to highlight how the behaviour for which he is accused of fraud is no different from all the other work he has carried out that has never raised suspicion. This is an approach that not only puts the defendant’s behaviour into the context of the dishonesty test; it also helps the jury empathise with him. They can now see him as someone who is simply doing his job and, as a result, prosecution evidence may no longer seem as deeply damning as it first appeared. If a defence team can show honesty and build empathy, its job is done.

Examining Relevant Material

But an investment fraud case is not simply about people. There are often huge amounts of material to be examined in any such investigation. Much of this will be used by the prosecution but there will often be masses of unused material – not being produced by the prosecution as part of their case – which defence teams can often examine and use to their advantage. There may be large amounts of material stored on computers that were seized and examined by prosecutors who then decide that they do not intend to serve it on the defence.

In July 2011, the Attorney General produced his Supplementary Guidelines on disclosure in relation to digitally stored material.  That document, along with Lord Justice Gross’ Review of Disclosure from September 2011 (see now Attorney General’s Guidance, December 2013) provides defenders with a large amount of scope for engaging with and influencing the way investigators handle the seized digital material.  In this way, defence teams can gauge the thinking of prosecutors, act accordingly and set about finding the evidence that will rebut any likely allegations or tactics employed by the authorities.  In our experience, prosecutors will take differing approaches to the issue of digital unused material. If the process on digital unused material is not followed properly then there are solid arguments for stating that no fair trial can take place.  Any defence team has to be alert to such a possibility at all times. The issue of such material cannot only provide valuable defence evidence – it can also be grounds for having a prosecution thrown out.

Where there are huge amounts of unused material in investment fraud trials, defence case statements (DCS) are also of vital importance.  They must be drafted with care and skill because in investment fraud cases the real gems for defenders often lie in the unused material.  For example there may be reams of material about similar transactions to the ones under scrutiny – transactions that have raised no concern - or even strong evidence that patterns of behaviour highlighted as suspicious are in fact quite usual. The right DCS can give the defence the greatest possible rights of disclosure, enabling them to use such material.

It all depends on the facts. But empathy, the proving of honesty, the use of stored material and the right DCS are all of huge importance when a defence team in an investment fraud case is looking to use those facts to prove innocence.

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Nicola Sharp

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Nicola is known for her fraud, civil recovery and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.

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