Rigby & Anor v R

This appeal concerns confiscation orders made in criminal proceedings under Part VI of the Criminal Justice Act 1988. It raises two difficult points on the construction and application of section 71 of that Act and, if Gareth Bailey’s appeal fails on the one of these points which applies to him, another difficult point about the relationship between confiscation orders and compensation orders.

AIT Limited was in 2002 a company, listed on the London Stock Exchange, which developed, supplied and maintained software programmes for financial businesses. Carl Rigby was its Chairman and Chief Executive Officer; Gareth Bailey its Chief Financial Officer. In the spring of 2002, the company had cash flow problems because, we are told, it had bought an American company expected to produce cash, which had in fact proved to be a drain on the company’s cash.

On 2^nd May 2002, AIT issued a trading statement which represented that its turnover and profit were going to be in line with what the market expected, in that the turnover would be in the order of £47m. and the profit £6.7m. The statement was false and misleading because it took account of revenue and profit from three putative contracts which between them contributed £4.8m. to the predicted profit. These contracts had not been entered into so as to bind the other contracting party, and their revenue and profit should not have been taken into account. The appellants accepted this. What is more, side letters were written to each of the three putative contracting parties relieving them from any obligation to proceed with the contracts. The existence of these letters was suppressed, and both appellants assured the AIT Board that these contracts had been entered into. So the market, the Board and the Company’s auditors were misled. The auditors’ advice that further written documentation should be obtained was not immediately disclosed to the Board.

Following the 2^nd May 2002 statement, AIT’s share price rose so that the value of Rigby’s own shareholding increased by £228,546. He did not realise or otherwise benefit from this temporary increase in value. It was during a period when by Stock Exchange rules he was unable to sell his shares.

It soon became clear that the putative contracts were illusory. On 31^st May 2002, a corrective announcement was made for one of them; and a similar announcement was made for the second on 13^th June 2002. Upon each of these announcements, the share price fell dramatically. Following these announcements, the company was forced by its bankers, Royal Bank of Scotland, to restructure and seek refinancing. A new Board formally took over on 12^th September 2002. Nicholas Randall became Chief Executive Officer. He and the new CFO had needed help from the appellants in restructuring the company. Gareth Bailey continued to be employed and paid by the company until 12^th September 2002 and Carl Rigby continued as a consultant into 2003. They worked hard for the company during this period.

On 16^th August 2005, in the Crown Court at Southwark before HH Judge Elwen and a jury, the appellants were convicted on count 2 of an indictment of recklessly making a statement, promise or forecast which was misleading, false or deceptive in a material particular contrary to section 397(1)(c) of the Financial Services and Markets Act 2000. The subject matter of the charge was the trading statement of 2^nd May 2002. Bailey was acquitted of a count which alleged that he knew that the statement was misleading, false or deceptive, and a not guilty verdict was entered by direction on a conspiracy count. Another conspiracy count was left on the file. For Rigby, the charge alleging knowledge and the two conspiracy charges were left on the file.

The appellants were each sentenced to terms of imprisonment reduced on appeal to this court to 18 months’ imprisonment for Rigby and 9 months’ imprisonment for Bailey.

There were confiscation proceedings and compensation orders. On 11^th November 2005, the judge made a confiscation order for Rigby of £381,272.97, and a compensation order of £208,796, with an order to pay £250,000 towards the prosecution costs. For Bailey, the judge ordered confiscation of £106,572.53 and compensation of £141,686. This amount of compensation comprised the £106,572 from the confiscation order and an additional £35,114 of Bailey’s realisable assets excluding any value of his matrimonial home.

Each of the appellants appeals against the confiscation orders, and Bailey appeals contingently against the compensation order by leave of the single judge. Each appellant contends that the judge was wrong to take account of their salary and other emoluments which they earned from AIT after 2^nd May 2002 as a benefit from the offence of which they were convicted. Rigby contends that the judge was wrong to take account of the £228,546 temporary and unrealised increase in the value of his shareholding as a benefit.

Part VI of the 1988 Act provides for confiscation of the proceeds of an offence. By section 71(1A), where an offender is convicted of an offence of a relevant description and section 71(1) applies, the court has first to determine whether the offender has benefited from an offence of which he is convicted in the same proceedings or from offences taken into consideration. By section 71(4), “a person benefits from an offence if he obtains property as a result of or in connection with its commission and his benefit is the value of the property so obtained.” By section 71(5), “where a person derives a pecuniary advantage as a result of or in connection with the commission of an offence”, he is treated as if he had obtained thereby “a sum of money equal to the pecuniary advantage”. By section 102(5) of the Act, “references … to property obtained, or to a pecuniary advantage derived, in connection with the commission of an offence include a reference to the property obtained, or to a pecuniary advantage derived, both in that connection and in some other connection”.

Having determined the amount of the offender’s benefit, the court then has to determine the amount that might be realised at the time the order is made, and must make a confiscation order for the lesser of these two amounts. The standard of proof is that applicable in civil proceedings. Section 72(7) is particularly relevant to compensation orders.

It is obvious that Rigby did not, according to normal understanding, benefit from the offence of which he was convicted in the amount of the temporary unrealised increase in the value of his shareholding. The first issue in this appeal is whether this was nevertheless under section 71(5) a pecuniary advantage which he derived. The second issue is whether the amounts of each appellants’ salary and other emoluments from their continued employment after 2^nd May 2002 were obtained by them “as a result of or in connection with” the commission of the offence of which they were convicted.

It was absolutely plain to the judge, “taking the wide definition of property in section 102 of the Act and the decision of the House of Lords in R v Smith [2002] 1 WLR 54, that the unrealisable increase in the value of the shares in AIT held by Mr Rigby on 2^nd May was obtained and a benefit for the purpose of the statute.”

As to the salaries and other emoluments, the judge accepted that the appellants provided very valuable assistance to Mr Randall and his co-investors. But that did not break the connection which was equally plain between the offence and the wages. It was only necessary for the Financial Services Authority to have proved on the balance of probabilities the slightest connection between the offence and the wages, and this they had clearly done. Explaining himself subsequently, the judge said that, as a result of the offence, the company needed restructuring and/or refinancing. In order to do that successfully, the new management needed the knowledge and expertise of the appellants. Thus however slightly, the wages were a benefit obtained in connection with the offence.

In R v Smith (David) [2002] 1 C.A.R. 466; [2001] UKHL 68, to which the judge referred, an offender fraudulently imported cigarettes by sea, sailing past customs houses at Immingham and Hull without paying excise duty. Customs officers found the cigarettes at Goole, and they and the boat were forfeited before the cigarettes were sold. The House of Lords, reversing this court, upheld the making of a confiscation order in the amount of the duty evaded. The respondent had derived a pecuniary advantage as a result of or in connection with the commission of the offence. Lord Rodger of Earlsferry, giving the judgment of the House, adopted the view of Laws LJ in R v Dimsey and Allen [2000] 1 Cr. App. R. (S) 497 that the ordinary and natural meaning of pecuniary advantage must surely include the case where a debt is evaded or deferred. He held that the court is concerned with the value of property – in that case the evaded customs duty – at the time when the offender obtained it. It made no difference if, after he obtained it, the property was destroyed or damaged or seized by customs officers. The same applied to a pecuniary advantage. The respondent derived a pecuniary advantage by evading the duty at the moment he imported the cigarettes. The fact that the respondent and his co-accused were unable to realise the value of the contraband cigarettes was irrelevant to the question whether they derived a pecuniary advantage from fraudulently evading the excise duty on them.

Mr Mitchell QC, for the Financial Services Authority, relies on Smith in submitting that it was not necessary for Rigby to have realised the increased value of his shares to have derived a pecuniary advantage. The pecuniary advantage was there. No positive act was required in relation to it. Mr Mitchell also relies on R v Wilkes [2003] EWCA Crim 848. In that case, this court held, applying Smith, that the value of property obtained in a burglary or received as stolen goods constituted a benefit within section 71(4), even though the offender was arrested by the police and the property all recovered. Mr Mitchell also refers to R v Carter and others [2006] EWCA Crim. 416, in which it was held at paragraph 22 that once an offender obtains proceeds from a criminal enterprise, what he does with them afterwards is irrelevant.

In our judgment, there is no proper sense in which Rigby obtained a benefit or derived a pecuniary advantage constituted by the temporary unrealised increase in the share price. The increase was not, as in Carter and Wilkes, the proceeds of the offence of which he was convicted, nor, as in Smith, the positive consequence of the offending. Rigby did not, in any ordinary sense derive a pecuniary advantage, because he did not sell his shares at the top of the market. It would have been a breach of the Model Code giving rise to the possibility of a penalty under section 91 Financial Services and Markets Act 2000. Nor did he derive any indirect pecuniary advantage as might conceivably have been possible. There is, in our view, a clear distinction between this case and Smith. In Smith, the benefit or pecuniary advantage – the evaded duty – was the very thing obtained by the offence. Here, the temporary increased value of the shares was not obtained at all. Indeed there was no pecuniary advantage and importantly no obtaining – see Lord Rodger at paragraph 26 of Smith – absent a sale of the shares. The increase in value was, for Rigby, purely notional and soon disappeared. Rigby did not evade or defer a debt. We accept that this is draconian legislation, but Mr Mitchell’s submission would take it beyond its proper or possible compass. Mr Rigby did not, by the temporary increase in the value of his shares, derive a pecuniary advantage from the commission of the offence of which he was convicted. It should not, therefore, have been included in his benefit from the offence.

As to the appellants’ salaries and other emoluments, their case is that there was no causal link between the offences of which they were convicted – recklessly making a misleading, false or deceptive financial statement – and their continued employment. The salaries were thus not obtained as a result of or in connection with the commission of the offence. They were employed to help restructure the company. The restructuring resulted, not from the false financial statement, but from the antecedent cash flow difficulties, made worse by the company’s failure actually to secure the three contracts referred to above. They were employed despite the offences, not because of them. By 13^th June 2002 at the latest, most of the facts which constituted their offending were known.

Mr Mitchell accepts that there has to be a causal link between the offending and the benefit, but a slight link, he says, is sufficient. He points to section 102(7), which is, we think, nevertheless concerned with concurrent connections, not with the sufficiency of the necessary causative connection. He also points to Jennings v CPS [2005] EWCA Civ 746, where the court concluded that a defendant obtains property within the meaning of the Act where his acts have contributed to a non-trivial extent to the getting of the property.

Mr Mitchell puts the Financial Services Authority’s case in one of two ways. First, the appellants were employed to help with the restructuring, and the restructuring was needed because of the offence. Second, the appellants were employed during a period when the false and misleading statement continued to be operative. The full extent of their activities, including the existence of the side letters, was not known to the non-executive directors until the trial. Had this been known, there was no possibility that a company listed on the London Stock Exchange could have retained their services. Had the company’s bankers been fully aware, their continued support would have been contingent on senior management changes. Mr Mitchell refers to R v Carter [2006] EWCA Crim 416 at paragraphs 38 and 39, where it was said that, where an offer of employment is induced by a false representation, the false representation continues thereafter for the benefit of the offender. Mr Mitchell submits that the restructuring and refinancing were directly connected with the false representations.

In our judgment, neither version of the Financial Services Authority’s submission is persuasive. We accept submissions on behalf of the appellants that they continued to be employed despite the offence, not because of it. There was a narrative connection between the offence and their continued employment, but no sufficient causal link. The offence was recklessly making a false and misleading financial statement. That the statement was false and misleading was very soon known. The need to restructure and refinance arose, not because a false and misleading statement was made, but because the company had severe cash flow difficulties unconnected with the statement. As to the alternative way of putting the Financial Services Authority’s case – that, had the full facts been known, the appellants’ employment could not have continued – we accept that this has no foundation in facts found by the judge, but depends only on assertion by Mr Mitchell. They are not facts which it is properly open to this court to find for itself. The fact that the trading statement had been false and misleading was well known by 13^th June at the latest. The appellants were employed thereafter because their knowledge of the company was needed to overcome problems which were not caused by the trading statement.

For these reasons, the appeals are allowed and the confiscation orders quashed in respect of the amounts for the appellants’ salary and other emoluments and, for Rigby, the notional temporary increase in the value of his shares. For Bailey, there is then no remaining issue about his compensation order, which is reduced to £35,114.