This article was first published by Solicitors Journal in March 2013, and is reproduced by kind permission. Click here to view the article.
The case of the Tchenguiz brothers calls into question the Serious Fraud Office as a competent body, and even its very existence says Nicholas Cropp.
The Serious Fraud Office’s (SFO) investigation into the Tchenguiz brothers and their involvement with the Icelandic Bank Kaupthing can now safely be called a debacle.
In July 2012, the warrants used to justify searches of the Tchenguiz brothers’, and other, premises on 9 March 2011 were set aside, the High Court finding, in essence, that those warrants had been procured by the “misrepresentation and non-disclose” of the SFO in the written and oral information used to justify the warrants.
The High Court noted that: “The investigation and prosecution of serious fraud in the financial markets requires proper resources, both human and financial. It is quite clear that the SFO did not have such resources in the present case… it is clear to us that the SFO was not properly resourced for this investigation.”
Perhaps most damningly, the High Court effectively determined that certain SFO staff conducting the investigation were incompetent, in that they did not have a sufficient understanding of the markets to properly understand what information to present to justify the warrant or what they were actually looking for, and that they were too reliant on conflicted accountancy advice.
Following the collapse of that investigation, the SFO has subsequently been hit with a £200m lawsuit. The complaint made is that the SFO’s investigation caused extensive reputational damage to the Tchenguiz brothers, leading to a complete halt in their business dealings. The SFO has been accused, among other things, of malicious prosecution, false imprisonment, and misfeasance in public office. The SFO has faced similar complaints in the past – Asil Nadir, for example, complained bitterly and publicly about his treatment at the hands of the SFO for decades until his conviction – but unusually, these complaints are now backed by a lawsuit claiming six times the SFO’s annual budget in damages. Should the claimants prevail, this astonishing financial burden will be borne by the taxpayer, and could lead to a fundamental restructuring of the SFO or even its dissolution and replacement with another agency charged with a similar objective of investigation and prosecuting serious fraud.
The SFO’s response to the claims has been predictably bullish, calling the claims “inadequately pleaded” and “speculative.” While acknowledging the warrants were unlawfully obtained, the SFO insists it had proper grounds for investigating the Tchenguiz brothers, and that the claim seeks to recover losses which would have been suffered whether the SFO’s investigation had taken place or not. And it deflects some of the criticisms of its lack of resources, saying that such problems were exacerbated by having to divert numerous staff to deal with the Tchenguiz’s (ultimately successful) judicial review claim.
The Tchenguiz matter is somewhat unique. Kaupthing was taken over by the Icelandic Financial Supervisory Authority on 9 October 2008, at the height of the financial crisis. The Kaupthing affair had major implications for financial markets around the world. The Tchenguiz brothers themselves have been mainstays of the UK’s property and commercial sector for decades. And the SFO has instructed Slaughter and May, rather than simply relying on the Treasury Solicitor, to represent it in the action against the Tchenguiz’s, giving some indication of the unusual seriousness of this matter. But the entire affair does raise critical questions about the role and funding of the SFO; questions which are of concern within the organisation, and doubtless within government generally, given the pressing ongoing need to ensure that serious fraud is properly investigated and prosecuted. And the Tchenguiz affair is of great interest to defence practitioners charged with representing persons and organisations of any size that may come under investigation by the SFO.
The errors in the SFO’s handling of the Kaupthing affair may simply have been the by-product of the size and complexity of a matter the SFO was ultimately under-resourced to deal with. But the coalition government, now at the midpoint of its tenure, will be watching this litigation unfold very carefully, and will no doubt rely on the outcome to justify future changes to the nature, scope and extent of funding available to the SFO, or even changes to the SFO’s fundamental structure.
And defence practitioners will be take careful note if, for example, a reviewing court ultimately gives any broader indication than that which currently exists concerning the duties of care imposed on regulators; to conduct their affairs in a way that, while effective in the identification and prosecution of serious crimes, does not collaterally damage those under investigation.
Any such indications could be of broad application to a wide range of investigations, both large and small, and may significantly assist defence practitioners in future. In any event, the outcome of this litigation, which has only just commenced, will likely have wide-ranging impact on the future of fraud investigations and prosecutions in the UK for years to come.