AIT case proves FSA has teeth, say lawyers
The Financial Services Authority's success in its first criminal prosecution for market abuse will not necessarily lead to a slew of criminal cases, lawyers have told Complinet. The guilty verdicts in the AIT case demonstrate that the regulator has the ability to punish criminal wrongdoing in the market, however, they said.
Last week saw the FSA secure guilty verdicts against Carl Rigby, former AIT chief executive, and Gareth Bailey, former finance director. The pair were found guilty of 'recklessly' making a false statement to the London Stock Exchange. Alistair Rowley, AIT's former sales director, was acquitted on the charges he faced.
The case centred on AIT's 2 May 2002 announcement, which stated that the software company was expecting to reach its profit forecast of £6.7m for the year. Six weeks later the company saw £90m wiped off its value after it revealed that three contracts essential to reaching its profits target were not valid.
Philip Rubens, head of regulatory enforcement at law firm Finers Stephens Innocent, told Complinet that the regulator would be happy with the outcome. It demonstrated to the City that the FSA had expertise in the criminal as well as the regulatory and civil sphere, but that it would not be reaching for the courts for every case.
"Clearly the appointment of Margaret Cole [as FSA director of enforcement] is very much on the civil side. That is in keeping with the FSA's enforcement ethos, which is to pursue individuals and companies essentially on the civil and regulatory front. Criminal cases are very much the exception," he said.
Clare Grayston, partner at Lewis Silkin, agreed that the regulator would be relieved that it had secured its first criminal conviction, following such a high-profile and long trial. In her view, it could be tempted to bring more criminal cases. "I think they will go for ones that look pretty uncomplicated. Next time they have got to get a prosecution," she said.
City impropriety
The FSA's practice of fining companies for misdemeanours is no solution to the problem of impropriety in the City because it does not affect individuals, according to Grayston. As a regulator, the FSA is becoming increasingly self-confident as it gets to grips with its new powers and grapples with the new European market abuse regime, she said.
"As time goes by it will build up more of a body of case law and will become more certain in its approach," she said.
Jonathan Herbst, partner at Norton Rose, told Complinet that he was not convinced that the FSA would be tempted to prosecute a large number of criminal cases, partly because of the cost and partly because the burden of proof is easier in civil cases. The AIT case would be the exception rather than the rule. Unless there were aggravating factors the FSA would be likely, in the main, to stick to civil cases, he said.
"Clearly their public statements are bringing home the philosophy to senior managers that they have to take this seriously and that the FSA will bring a case if it thinks it is appropriate," he said.
It is part of a bigger theme, including this case, the new European market abuse directive and senior management responsibility, according to Herbst. "If you put these three together then you have the big picture," he added.
Elizabeth Robertson, partner at Peters and Peters, believes the case brings up some of the tensions raised by Tony Blair's recent suggestions that the FSA was inhibiting business.
"The FSA had responded to Tony Blair by saying 'you either want us to be robust or you don't'. There is obviously a tension there between robust regulation and this kind of risk to commercial people that may damage the reputation of the FSA but, more importantly, the City," she said.
Past difficulties
The problems that the FSA faced during the long and complicated AIT trial were rooted in difficulties that the Department of Trade and Industry faced in the past, according to Robertson.
"These cases are notoriously difficult to prosecute to a criminal standard. The DTI had very little success in relation to insider dealing prosecutions and, with all its resources, the FSA is still having difficulty getting a conviction," she said.
In this case there was still an acquittal, which fits in with the traditional problems that the DTI faced, according to Robertson. "I think it again highlights the difficulties of prosecuting these types of offences. I am sure the FSA will be delighted that it has secured these convictions. When the new head of the FSA took over he made it clear that this was the way it was going to go," she said.
The acquittal also showed that the system was working and that the jury had understood and considered the issues carefully, she said.
The suitability of juries on fraud cases is an issue that could cause problems for the FSA, according to Grayston. Selective panels should instead be used for criminal fraud trials, she suggested.
"How on earth can a jury based down at Southwark Crown Court really understand it sufficiently in order to determine guilt or innocence? And I think that is going to be the problem that the FSA will have in getting prosecutions," Grayston said.