Author: Nicola Sharp
3 September 2015
4 min read
Investment fraud can take many forms, from selling of stocks and shares in companies that may or may not exist through to the latest newsworthy item, pension liberation. The wide range of such investments and the complexity of many of them means that the authorities are never too far from making fresh accusations of fraud. For this reason, anyone involved in investment fraud has to know how best to challenge such allegations.
The allegations may often not be clear cut. For example, a man who starts selling shares in a company that does not exist is clearly looking to perpetrate fraud. But what of the investment broker or financial advisor who recommended the shares to their client? Or the person who bought some of the shares and then sold them on at a profit? Are they guilty of investment fraud? Such cases are rarely simple. It is often up to the accused to show that they were not involved in fraud. The question is how can they do this?
Investment fraud is often a charge levelled at accountants, investment brokers, hedge fund managers, directors, mortgage brokers, independent financial advisors and many others in the financial chain. Cases and personnel may vary but the issue of dishonesty is at the crux of all investment fraud investigations. A prosecution will only succeed if a jury is persuaded that the investment scheme was a dishonest one and that the defendant knew it and dishonestly took part.
Dishonesty relates to the defendant’s state of mind – not his conduct. In Ghosh  QB 1053, the Court of Appeal set down set down a two-stage test. The jury had to decide whether “according to the ordinary standards of reasonable and honest people what was done was dishonest” and, if this is the case, the jury had to consider whether the defendant “himself must have realised that what he was doing was by those standards dishonest….” The prosecution had to prove dishonesty but, in reality, 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.
Many people charged with investment fraud will not recognise themselves in the damning description outlined in the prosecution case. They may worry that the complexity of the case will make it hard to prove their innocence. The key is to remember dishonesty is always at the heart of the case - and that creating empathy is at the heart of demonstrating honesty. By enabling the jury to empathise with the defendant, a defence team can cast doubt on the central issue of dishonesty.
Acknowledged experts can be used to explain why a defendant acted as he did. They can explain the defendant’s actions that are subject to prosecution, not to mention his track record and exemplary record up to that point, how he complies with industry norms and other aspects of his or his company’s business that may explain his conduct. In short, they put the jury in the mind and shoes of the defendant – creating empathy and challenging the idea of dishonesty.
Often, investment frauds will use huge amounts of paperwork – real or digital. Some will be used by the prosecution but there will be masses of unused material. The Attorney General’s 2011 Supplementary Guidelines on disclosure in relation to digitally stored material - coupled with Lord Justice Gross’ Review of Disclosure from the same year – enables defenders to influence the way investigators handle seized digital material. For example, the defence can ask the Crown to explain why it is looking for certain key words in digital searches. This little-known power can help defenders understand the mind-set of those conducting the searches, so they can make their own search term requests in response.
Computer seizures by authorities can cause a defence problems in helping to find and schedule digital material that could aid their case. But by using the Schedule of Unused Material (the MG6C) to ensure that the prosecution properly schedules all digital unused material – that not being used by the Crown – the defence has the potential to use all potential evidence to build its case. But it is vital that the Guidelines are applied to the letter as concerns about the disclosure process cannot be cured by warnings to the jury or the exclusion of evidence. The Guidelines can help build the strongest possible defence case if the legal team is alert to what can be achieved.
These are of huge importance in investment fraud cases; where there are massive amounts of unused material. They must be drafted with care and skill, as in investment fraud cases the real gems for defence teams often lie in the unused material, hence the importance of the MG6C. Understanding of the defendant, his business and his motivation has to be ascertained early so that the DCS ensures the fullest possible rights of disclosure.
All of the above have to be seen as the essential building blocks of any worthwhile defence case against investment fraud allegations.
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.