Amro International SA & Anor, R (on the application of) v The Financial Services Authority & Ors

MR JUSTICE COLLINS: This claim is listed before me as a rolled up hearing. I decided at the outset that it was sensible to grant permission because there was clearly an arguable case. The defendants did not dissent from that. Accordingly, I granted permission. I abridged or avoided all procedural steps thereafter, save that the claimant gave an undertaking to pay the relevant fee, which I believe is £180, which is normally payable on the grant of permission.

The two claimants are what are described as financing companies which make capital investments in or lend money to businesses. In the case of Amro, the first claimant, it is incorporated in Panama and in the case of Creon, the second claimant, in the British Virgin Islands. Financing is provided in some instances through what are called Special Purpose Vehicles (SPVs) and some 100 or so of these, which are usually companies registered in the Virgin Islands, have been used. A company called Rhino Advisors Incorporated, a New York corporation, has acted as investment adviser for the claimants. Rhino had as an employee until 2002 a Mr Andreas Badian and, until 2003, his brother Thomas. In June 2002, the Securities and Exchange Commission (SEC), the regulatory body in the United States which is concerned with inter alia ensuring that manipulation of trading in stock, and so of the market, is prevented, commenced an investigation into Rhino's activities. In particular, there were allegations of manipulation of shares in companies to which Amro or Creon had made advances on Rhino's advice, the manipulation involving, it was alleged, short selling.

These investigations resulted in action against Rhino in respect of only one advance to a Pennsylvania company called Sedona in March 2001. In February 2003, proceedings were brought by SEC against Rhino and Thomas Badian. Those were settled by payment of $1 million and submission to an injunction prohibiting them from such activities in the future.

The investigation continued until 2004 and the SEC then informed Andreas Badian that proceedings would be issued against him in connection with the Sedona transactions. It was not until 3rd April 2006 that the relevant claim was lodged in the United State District Court for the Southern District of New York. This claim was against Andreas Badian and six others, who were said to have been parties to the unlawful short selling arrangements. I shall go into more detail in due course.

The claim has been managed by the judge of the court and discovery has been an issue. The SEC has had to ask for a number of extensions of time within which they should conclude the necessary discovery process. On 18th February 2009, the judge gave leave for an extension of time for non-expert discovery until 15th August 2009, that being an order which was apparently agreed to by all the parties. But he said, when giving his approval:

On 24th July 2009, a further extension until 31st August was sought by the SEC on the basis that they were having difficulty in being able to obtain a deposition from an individual called Robert Charron and so more time was needed to enable that deposition to be produced. Mr Charron was involved with Rhino. He had in fact made a statement in 2003, no doubt in connection with the original claim against Mr Thomas Badian and Rhino. What Mr Charron stated in that was that Rhino had been formed in January 2000 and had served as the investment adviser for Amro and Creon; indeed, those were its only two clients. He then indicated what Rhino was entitled to receive by way of fees in relation to its dealings. He was himself responsible for incorporating Rhino in January 2000 and was initially the sole director and shareholder. On 14th January 2000, Thomas Badian was elected president and Mr Charron secretary. Two days later he was removed as secretary in favour of Thomas Badian. Andreas was an employee of Rhino between 30th June 2000 and 30th April 2001 and thereafter, from 1st September 2001 until the date of Mr Charron's statement, which was May 2003, he was listed as a trader and Thomas was listed as president from 13th January 2000 until, according to the statement of Mr Martin made in connection with these proceedings recently, the present date, so Thomas Badian remained an investment manager. I was told that by "the present date" was meant when Mr Charron made his statement in 2003.

Mr Charron responded to the question asking him to identify all persons or entities that "are or have been investors in, shareholders of, partners in or owners of Amro or Creon", that the sole shareholder of Creon was Neil Galloway and the shareholders were two individuals called Pablo J Espino and Adelina M de Estribi respectively. However, in the course of his statement in 2003 it is right to note that Mr Charron had said as follows:

On 24th July of this year, the SEC wrote to the FSA, who is the first named defendant in this claim, asking for assistance in producing documents from a London firm of accountants, Goodman Jones, who were said to have documents relevant to SEC's claim. Goodman Jones acted for the claimants and had had some documents relating to deals involving Rhino. In due course, the request was made to Goodman Jones. I will come to that shortly. The request for assistance by the SEC was by letter of 24th July 2009. It set out the description of the claim and the complaint made and what it sought were the following documents:

Following the request, there was some communication with the SEC because the FSA were not originally satisfied that the documents that were requested fell within the scope of the claim which was being made by the SEC and thus they wondered whether it would be appropriate for them to agree to obtain them or to ensure that they were obtained. They received responses which satisfied them that they were. Obviously it will be necessary to go into that in due course but, to take the narrative on, Goodman Jones were asked first whether they would be able to produce the relevant documents within the short timescale that was demanded because it was said that they must be produced by 15th August because of the likelihood, as was then thought, that the judge would not extend time further. They agreed that, although there was a large volume of documents, it would be possible physically for them to be produced within that short timescale. They were further asked whether they would voluntarily produce the documents. That inevitably they refused because clearly the documents that they possessed were confidential and they would need the consent of their clients in order to disclose them to third parties. It should have been obvious to the FSA that Goodman Jones could not properly produce these documents voluntarily and thus it would be necessary, if they were to pursue the matter, to do it through their compulsory powers. This they decided to do and on 3rd August they decided to assist by the appointment of inspectors and those inspectors are named as the second and third defendants. On 4th August, a notice was sent to Goodman Jones demanding production of the documents and the demand was in the terms that I have already indicated.

It is those two decisions that are under attack in this claim. It is said that the FSA were acting unlawfully in agreeing to appoint inspectors in order to obtain the documents through their compulsory powers and it is further said that the notice was in any event far too wide and unspecific and the extent of the requirement was therefore beyond the powers granted to the FSA by the relevant statute.

Those powers are contained in the Financial Services and Markets Act 2000, specifically in part 11 of that Act ("the 2000 Act"). Section 165 contains the FSA's power to require information.