Investment Fraud And Dishonesty

Aziz Rahman explains the latest legal test for dishonesty
and its importance in investment fraud cases.

Royal Bank of Scotland has paid $44M to settle a US criminal
investigation that accused its traders of lying to clients over investments.

The bank’s payment, under a non-prosecution agreement with
the US Department of Justice, means it will not face criminal charges over its
alleged cheating of about 30 banks and investment clients over the prices and
commissions of mortgage-backed assets.

But it is difficult to argue that it has got off lightly.
The settlement is separate from a multi-billion dollar penalty that is likely
to be imposed on RBS over claims it mis-sold mortgage bonds prior to the 2008
banking crisis. And RBS has also come in for stinging criticism over its
behaviour.

Referring to RBS’ activities from 2008-13, US Attorney
Deirdre Daly accused the bank of fostering "a culture of securities
fraud."

She added: "Those in a position of authority taught and
encouraged fraudulent trading practices. Worse, those supervisors and
compliance personnel then took steps to prevent victims and honest RBS
employees discovering and exposing the scheme.’’

The US Department of Justice said RBS’s mortgage-backed securities
trading desk “misrepresented material facts to deceive and cheat its customers”
by lying about asking prices and inventing third party sellers to charge buyers
extra commission. RBS also lied to customers who suspected they had been the
victim of fraud and did not respond to complaints about this by its own employees.

Honesty

Honesty is a central theme in investment fraud cases. Having
represented all possible parties in such cases – brokers, accountants, hedge
fund managers, financial advisors and company directors – I can say that
honesty is the key issue, regardless of the precise circumstances or complexity
of each individual investigation. If the jury cannot be persuaded that the
defendant acted dishonestly, the prosecution will fail; whether it be a Fraud
Act prosecution or a conspiracy to cheat or defraud accusation.

Until very recently, the question of
dishonesty was decided by a two-limb test. It was in Ghosh [1982] QB 1053, that
the Court of Appeal established this two-stage test of dishonesty. The
jury had to decide whether “according to the ordinary standards of reasonable
and honest people what was done was dishonest”.  If so, the jury then had
to decide whether the defendant “himself must have realised that what he was
doing was by those standards dishonest….”

The case of Ivey V Genting Casinos (2017), however, has
taken away the need to prove the second part of the Ghosh test: that the
defendant knew that ordinary and honest people would regard his behaviour as
dishonest. The issue, therefore, of whether the individual thought he was doing
something dishonest is now irrelevant: what matters now is whether he was
dishonest, according to fact and law. The test now is whether the conduct would
be considered dishonest by reference to the standards of ordinary and honest
people.

In this latest case, the court said “there can be no logical
or principled basis for the meaning of dishonesty to differ according to
whether it arises in a civil action or a criminal prosecution”. And in specific
relation to business crime cases, it added “there is no reason why the law
should excuse those who make a mistake about what contemporary standards of
honesty are, whether in the context of insurance claims, high finance, market
manipulation or tax evasion”.

Demonstration

The challenge for anyone accused of investment fraud,
therefore, is to demonstrate to the investigating authorities and (if it goes
to trial) a jury that there was no dishonest activity. This is the case whether
the alleged fraud involves selling fake stocks and
shares, Ponzi-style schemes, pension liberation or, as with RBS, the
cheating of customers over prices and commissions.

Demonstrating honesty involves outlining a defendant’s
motivation, his working practices and his reasons for doing what he did. Only
by a defence team explaining these can investigators or jurors understand
exactly what the person has done, how they did it and why they did it – and
determine whether dishonesty was involved.

From a defence point of view, this can involve testimony
from the defendant. But a defence team should also be alert to the
possibilities of using expert witnesses. These can outline the intricacies of
an industry, explain why it would make sense for a defendant to act the way
they did and emphasise how they have complied with regulatory requirements.
Such witnesses can not only create empathy with a jury, they can give vital
credibility to defence arguments that the accused did nothing dishonest.

Digital Material

Before an investment fraud case reaches court, a defence
team can make huge strides towards establishing a client’s honesty by
intelligent use of digital unused material. Such cases will involve huge
amounts of documentation, which will be on computers and other devices seized
by the investigating authorities. Much of it will never be used by the
prosecution.

Lord Justice Gross’ Review of Disclosure from September 2011
and the Attorney General’s Guidelines on Disclosure 2013, provide defenders
with opportunities to use digital material. Such opportunities include asking
prosecutors why they are looking for certain words in digital searches, which
can help establish the course they are looking to take.

A defence can also check that the prosecution has properly
scheduled all the material. This makes it easy to find documentation that could
go a long way to establishing a client’s honesty. But this is also important
because if the scheduling process is not followed in accordance with the rules
on disclosure, there is the chance to argue that a fair trial is impossible.

Investigations

If a firm has any suspicions that investment fraud is being
carried out, there can be great value in it taking a close look at its working
practices before any charges are brought – and even before the authorities have
started to investigate. A thorough, carefully-conducted investigation will help
a firm determine whether fraud has been committed.

It may be a course of action that some firms are reluctant
to take. If they fear they are unable to do it themselves, there are experts
available who can carry out an investigation and advise on the best course of
action. At Rahman Ravelli, this is a regular part of our workload. An
investigation will establish the facts. If the firm then voluntarily reports
any wrongdoing to the authorities, it may gain more lenient treatment than if,
for example, the Serious Fraud Office discovered the facts for itself.

Further proof, if any was needed, of the importance of
honesty.

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