Financial Services Authority v Anderson & Ors

On 3^rd February 2010 I heard applications by each of the defendants in these proceedings for an adjournment of the hearing of a summary judgment application against them by the claimant (“the FSA”) which was listed for hearing during the week beginning 8^th February 2010. On 4^th February 2010 I gave an extempore judgment granting a shorter adjournment than had been sought, so that the hearing should not commence before the first week in March 2010. I have since been informed that the hearing has provisionally been re-listed for 17^th March 2010.

On 5^th February 2010 counsel for the FSA attended on short notice, and therefore in the absence of the defendants, to draw to my attention that one aspect of the reasons given in my judgment, relevant to my refusal of a longer adjournment, appeared to be based upon a misconception of the applicable law. Since the order for an adjournment which I had made on 4^th February 2010 had not by then been perfected, I withdrew my extempore judgment and directed that the matter be restored for further argument upon reasonable notice to the defendants, who had each appeared in person rather than by solicitors or counsel at the hearing on 3^rd February 2010.

I heard further argument from all the parties on 11^th February 2010 during which a further but less significant matter was drawn to my attention in relation to another part of my extempore judgment. Having heard those further submissions, I have concluded that I should confirm the Order which I made on 4^th February 2010, but for reasons which differ to a limited extent from those which I gave orally on that day. In order to avoid confusion, this reserved judgment contains the whole of my reasoning for the order that there should be a modest adjournment of the forthcoming summary judgment hearing. For the most part, it replicates the judgment which I gave orally on 4^th February. The respects in which I have altered those reasons after hearing further argument will become apparent.

The defendants put their application on two broad grounds: first, the potential prejudice to them as the subjects of a criminal investigation by the City of London Police, which is said to be based upon suspicion of fraud and conspiracy arising from the same facts as are in issue in these proceedings. Secondly, they point to difficulties which they anticipate encountering in preparing to oppose the summary judgment application without professional legal representation.

The background is as follows. The FSA claim that each of the defendants was from 2005 onwards carrying on regulated activities while unauthorised, contrary to Sections 19 and 21 of the Financial Services and Markets Act 2000 (“the Act”) and that each was knowingly concerned in the activities of the others. The relief sought in the proceedings is, first, a declaration essentially to that effect; secondly, a prohibition order under section 380(1); thirdly, a repayment order under section 380(2), and finally compensation or an account of profits under section 382(2). The FSA would be obliged to distribute any receipts under those monetary heads of relief to relevant investors, as directed by the court.

The alleged activities, of which complaint is made, are accepting deposits and establishing or operating a collective investment scheme. There is also a claim under section 21 which I need not describe. Freezing orders were obtained against the defendants on 10^th December 2008 and particulars of claim served in January 2009. Professionally prepared defences were served on behalf of each of the defendants in early March 2009. The first and second defendants had instructed City Legal Services LLP and the third defendant had instructed Sherrards.

On 21^st May 2009 the defendants were each arrested by the City of London Police on suspicion of conspiracy to defraud, money laundering and fraud by misrepresentation. I was told on 11^th February that the arrests followed a report by the FSA to the City of London Police about the defendants’ activities. That police investigation is continuing. No charges have been brought to date and no date has been given when the decision whether or not to charge will be made, although the defendants are to answer police bail on 30^th April 2010.

I will say something about the issues in these proceedings. It is common ground that the defendants were not in receipt of authority under the Act but each of them denies deposit-taking or setting up or operating a collective investment scheme. In relation to the denial that they were taking deposits all three defendants have relied on Article 2 of the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 which I will call the “Business Order”. Article 2 is in these terms:

“(1)

A person who carries on an activity of the kind specified by article 5 of the Regulated Activities Order (accepting deposits) is not to be regarded as doing so by way of business if –

(a)

he does not hold himself out as accepting deposits on a day to day basis; and

(b)

any deposits which he accepts are accepted only on particular occasions, whether or not involving the issue of any securities.

(2)

In determining for the purposes of paragraph (1)(b) whether deposits are accepted only on particular occasions, regard is to be had to the frequency of those occasions and to any characteristics distinguishing them from each other.”

I will call the defence under this Article the Article 2 defence.

The FSA had, by executing a search warrant and by obtaining disclosure from the defendants, obtained substantial documents from them and considered that it could obtain summary judgment on the deposit-taking case, and in particular a strike out of the Article 2 defence. On 31^st July the summary judgment application was issued, supported by a 52-page witness statement from a FSA investigator and 3 lever arch files of documents, as I am told, mainly emanating from the search of the defendant’s premises and from their own disclosure.

On 17^th August Peter Smith J gave directions for the preparation and hearing of the summary judgment application. In particular, he ordered that any forensic accountancy evidence upon which the defendants wished to rely should be served by 21^st September and any other evidence by 14^th October.

On 21^st October the City of London Police obtained a restraint order under section 41 of the Proceeds of Crime Act 1974 (“the Restraint Order”). It contained no exemption for legal expenditure by the defendants. On 22^nd October Mann J with, as I understand it, the consent of the FSA, varied the original freezing order made against these defendants in these proceedings so as to permit the third defendant to make use of certain insurance proceeds which he anticipated obtaining but made it clear that his order could not of course affect or operate as a variation of the Restraint Order. The police apparently were present before Mann J.

There was a listing application on 22^nd October which led to the listing of the summary judgment application in the week beginning 8^th February 2010 attended, as I understand it, among others by counsel for the first and second defendants. On 23^rd October the first and second defendants discharged their then solicitors. The time limits for the defendants’ evidence on the summary judgment application, pursuant to Peter Smith J’s directions, passed without any evidence having been served by any of them. The defendants have told me that they did not comply with those time limits because they were engrossed in responding to the criminal investigation and in getting funds for legal representation in these proceedings. I have no reason to doubt that.

In December 2009 the third defendant sought a variation of the Restraint Order as against him from H H Judge Taylor at Southwark Crown Court so as to permit him to use assets of his to fund his defence to this claim. The learned judge rejected that application. Doing the best I can from an incomplete attendance note of that hearing which I have been shown it appears that the judge rejected the application on the basis of a lack of jurisdiction by reason of the provisions of section 41(3) and (4) of the Proceeds of Crime Act (“POCA”) which is in the following terms:

“(3)

A restraint order may be made subject to exceptions, and an exception may in particular –

(a)

make provision for reasonable living expenses and reasonable legal expenses ...

(4)

But an exception to a restraint order must not make provision for any legal expenses which -

(a)

relate to an offence which falls within subsection (5).”

I need not describe subsection (5), which leads to a complicated trawl throughout the provisions of POCA. It is sufficient to say that a related offence includes an offence being investigated in respect of which the restraint order has been obtained.

I infer that, as a result, Sherrards came off the record as the third defendant’s solicitors shortly after that unsuccessful hearing. So far as I am aware Judge Taylor’s decision has not been made the subject of an appeal.

The second defendant was informed in January of this year that his former solicitors, CLP, had been the subject of a Law Society intervention and he was sent a claim form for recovery of his files by the Law Society’s agents, Messrs Devonshires, and I was told by the first and second defendants, both of whom had instructed that firm, that they anticipate getting their files back shortly.

Meanwhile, the FSA sent all the defendants what they regarded as the documents relevant and necessary for the summary judgment application on 19^th January, including in particular the statements of case, the summary judgment application, the evidence in support, and relevant orders made in the proceedings. There ensued correspondence between the defendants and the FSA in which the defendants sought, unsuccessfully, an adjournment of the hearing, following which they made this application.

The trial of these proceedings has been listed for three weeks from 14^th June. The first ground upon which it sought to adjourn the summary judgment application is, as I have said, that the defendants fear prejudice to their position in the criminal investigation. The principle to be applied in such cases is that the applicant for a stay or adjournment of civil proceedings on the ground that it may prejudice actual or threatened criminal proceedings must show a real risk of serious prejudice which may lead to injustice. That was confirmed, for example, by the Privy Council in Panton v The Financial Institutions Services Ltd [2003] UKPC 86; a case which, although in relation to a foreign country, was on the face of it similar to this one since it involved criminal proceedings and civil proceedings arising out of the same facts, brought by a body set up by government in the public interest to manage certain financial institutions.

Although there is not a fresh statement of the principles, the Privy Council’s approval of the principle which I have just described (which had been applied by the courts below) demonstrates its continuing vitality. It is not enough, for example, that both the civil and criminal proceedings arise from the same facts, or that the defence of the civil proceedings may involve the defendants in taking procedural steps such as exchanging witness statements and providing disclosure of documents which might not be imposed upon them in the criminal proceedings.

In the present case the defendants say firstly that the subject matter of both the FSA’s claim and the criminal investigation is in the public domain and in particular, they say, on the internet. They say that any judgment, for example, that the defendants were conducting regulated business while unauthorised will be prejudicial to them if criminal charges are brought, I suppose in the mind of jurors who may have picked up publicity about these proceedings on the internet or elsewhere. On 11^th February the third defendant produced a letter from solicitors advising him in relation to the criminal investigation, suggesting that the police could charge him with an offence under section 19 of the Act, and that a summary judgment against him might be used in evidence in the criminal proceedings.

I am not persuaded that a summary judgment hearing would cause a risk of serious prejudice which may lead to injustice in relation to any criminal proceedings which may follow from the present investigation. My reasons follow.

First, proof in these proceedings of the claim that the defendants were in breach of sections 19 and 21 of the Act will be of no real consequence in the context of the suspected crimes of fraud, conspiracy and money laundering. Dishonesty is not alleged in these proceedings, but it is likely to lie at the heart of criminal charges of that nature.

I was given to understand at the hearing on 3^rd February that breach of Section 19 of the Act was not of itself a crime. That was a misunderstanding, and it was my reference to it in my extempore judgment on 4^th February that impelled Mr Purchas, counsel for the FSA, very properly to return on 5^th February to draw the true position to my attention. section 23 of the Act provides that breach of Section 19 is an offence, subject to a defence where the accused shows that he took all reasonable precautions and exercised all due diligence to avoid committing it. The offence would of course require proof to the criminal standard.

I consider it very unlikely that the City of London Police would, even after summary judgment in the FSA’s favour on its section 19 case, then prosecute any of the defendants for a breach of section 19. The FSA can itself bring such a prosecution, but has elected not to do so in relation to these defendants, preferring to pursue civil remedies instead, for the benefit of the alleged investors. Even if such a prosecution were brought, the trial judge would have discretion to exclude any evidence considered unfairly prejudicial to the defendants. I am by no means satisfied that (if admissible) the deployment of evidence consisting of a summary judgment in these proceedings would be unfairly prejudicial, but that is not a matter which I need to decide. More generally, a summary judgment under section 19 would have little relevance to the charges currently under investigation.

The summary judgment application will be heard mainly on the statements of case, including these defendants’ own defences, which are subject to no confidentiality regime and upon documents of the defendants rather than upon oral evidence, let alone upon cross-examination. There is therefore no scope for the summary judgment hearing to travel down some unexpected and prejudicial avenue, likely to lead to self-incrimination or other admissions damaging to the defendants’ defence of the potential criminal charges under investigation.

There is only a criminal investigation at present, not criminal charges. A trial must therefore, if criminal charges are brought, be many months away. In my judgment there is no sufficient reason to suppose that potential jurors will include anyone with a present interest in the publicity about these proceedings which sticks in his or her mind when criminal proceedings come on for trial.

The main issue on the summary judgment claim is whether the conduct actually pleaded by the defendants in their defence attracts the exemption conferred by Article 2 of the Business Order. The defendants admit receiving what they describe as loans and admit being unauthorised. The main issue is whether the pattern of dealings revealed by their own documents falls within Article 2 or not. Litigation of this issue at a summary judgment hearing seems to me to be far removed from the categories of matters which might give rise to a risk of real prejudice. For those reasons the first ground of the defendants’ application fails.

I turn to the defendants’ second ground; namely lack of legal representation and of preparation for the imminent summary judgment application. In summary, the defendants say as follows: The first and second defendants say that they have had their preparation undermined by the Law Society’s intervention on their former firm and in the resulting non-availability of their files and of litigation funds previously provided by the second defendant to that firm.

The third defendant says that he is prevented by the Restraint Order from using proceeds of an insurance claim to fund legal representation. As for legal aid the first defendant says that he has been advised that legal aid is not available. The second defendant has just applied for legal aid and awaits the outcome and the third defendant has had a legal aid application refused. The reality, I fear, is that legal aid is probably not going to be available for defending the FSA’s claim since it arises out of the carrying on of a business. See paragraph 1(h) of Schedule 2 to the Access to Justice Act 1999.

In concluding that the Authority’s claim arises out of the carrying on of a business I do not of course mean to imply or decide one way or the other whether the deposit-taking activities were themselves business activities within the meaning of the Business Order, which is the subject of a very specific test, not otherwise generally applicable to the question whether someone is carrying on a business.

I should add that the defendants told me that their own computers containing records of email correspondence and matters of that kind are still held by the City of London Police as part of the criminal investigation.

Two aspects of the defendants’ predicament strike me as having real force. The first is the intervention on the first and second defendants’ former solicitors. In that context I bear in mind that the firm in question was discharged by the first and second defendants in October 2009, some months before the intervention, and apparently a return of the defendants’ files, so far as I can ascertain, was not then sought by the defendants.

Secondly, I bear in mind that they were notified of the intervention some time in January of this year and may not have moved with the utmost speed in terms of getting their files back from the Law Society’s agent, Devonshires. I bear in mind also that the FSA has, in January 2010, provided copies of the main documents relevant to the summary judgement application, and I also bear in mind that the first and second defendants, and for that matter the third defendant, were all in default of Peter Smith J’s evidence directions by the end of October 2009, albeit probably due to the pressure of the criminal investigation and lack of funds.

Nonetheless, it seems to me that the solicitors’ files may well contain material relevant and of assistance to the first and second defendants in their response to the summary judgment application. I have in mind in particular that their defence based upon Article 2 of the Business Order was professionally settled by counsel and that those files may contain, for example, the advice of counsel as to the precise way in which that Article might be said to apply to their activities.

In principle, time should in my judgment be given for the first and second defendants to recover and study their files if no overriding and irremediable prejudice would thereby be caused to the FSA.

The second aspect of the defendants’ predicament which strikes me as being of real force is that the third defendant is, as matters stand, deprived of the opportunity to obtain professional legal representation by virtue of the Restraint Order, despite his endeavour to have it varied so as to permit funding. The third defendant’s predicament stems from section 41(4)(a) of POCA to which I have already referred, and the interpretation placed on it by Judge Taylor in the Crown Court; namely that legal expense in defending the FSA’s claim relates to the offence of which the defendants are suspected and which forms the basis of the Restraint Order which has been obtained against them. It is not for me to express any view of my own as to that interpretation of section 41(4)(a) on the facts of this case and I was told, as I have indicated, that the decision of Judge Taylor in that respect has not been appealed.

The policy behind Section 41(4) is that, wherever it applies, public funding for the relevant legal expenses should be available. This is clear from the decision of the Court of Appeal Criminal Division in McInerney v Financial Services Authority [2009] EWCA Crim 997, and in particular at paragraphs 11 to 14 of that decision, in which Hooper LJ referred to the explanatory notes to the Act and in particular referred to the fact in the statement in those notes that:

“Subsection (4) prevents funds under restraint from being released to the defendant or the recipient of a tainted gift for legal expenses incurred in relation to the offences in respect of which the restraint order is made. However, public funding for legal expenses, on the standard conditions, will be available to both instead.”

He refers to the court having been shown a passage from Hansard in which Lord Rooker, speaking for the Government, confirmed that legal aid would be available in accordance with the statement in that sentence of the explanatory notes which I have just read out.

In that case the Legal Services Commission had offered public funding to Mr McInerney, but only on condition that he paid a monthly contribution. Rejecting submissions to the contrary from the Secretary of State for the Home Office, the Secretary of State for Justice and the Legal Services Commission the Court of Appeal held that the judge, (by coincidence Judge Taylor), was correct to hold that payment of a contribution could not be made the subject of an exception to the restraint order because of section 41(4).

In this case there is revealed another apparent defect in the policy that wherever a restraint order prohibits legal expenditure on litigation related to the relevant offence public funding will be available. I have explained earlier in this judgment why it looks as if public funding is probably not available. In this case the irony is that part of the policy behind the POCA Restraint Order procedure is to preserve assets for possible distribution to the victims of any proven offence, yet its effect is to deprive the defendants, in this case, of legal representation in defending a claim by the FSA which is designed, if successful, to provide restitution or compensation to what may be the very same alleged victims.

It may also prevent the defendants satisfying any money judgment in favour of the FSA obtained either on summary judgment where an interim payment is sought or a trial. Mr Purchas for the FSA suggested that this extraordinary outcome might be alleviated by some agreement between the FSA and the City of London Police, but none has so far been discussed, so I was informed. He also submitted that the possible prejudice to the defendants arising from that risk could be alleviated if the FSA confined the relief sought by way of summary judgment to a declaration rather than immediate orders for the payment of money.

In my judgment the inability of the third defendant to obtain professional legal representation to defend the FSA’s claim due to the draconian terms of the Restraint Order and the apparent non-availability of public funding is a real prejudice to him. It also affects the first and second defendants in the sense that professional representation for any one of these defendants is likely to assist all three of them since they all rely, albeit in slightly different ways, on the Article 2 defence.

There is no evidence that any defendants can, at least in time for next week, obtain funding from family or friends or pro bono representation. Bearing in mind that on Mr Purchase’s submission the issue to be determined on the summary judgment application is the true interpretation of Article 2 of the Business Order and its application to the pattern of the defendants’ borrowing activities, as they describe them, the absence of professional representation by an advocate with experience of financial services litigation may also give rise at least to some risk of injustice.

It is, in my judgment, urgent that this, I suspect, unintended effect of section 41(4); namely to prevent private funding of legal representation without there being corresponding public funding of the same representation, should be addressed at the earliest opportunity. True it is that public funding can be provided on a case by case basis where the complexity of the matter in issue means that without legal representation a party may be deprived of a fair hearing, but for reasons which I set out below, the forthcoming summary judgment hearing in this case does not fall into that category.

Nonetheless, the prejudice and risk of injustice to the defendants of having to face a hearing of the summary judgment application next week must be balanced against the prejudice and risk of injustice which the requested adjournment may cause to the FSA, which is in principle entitled to pursue a summary determination of its claim if the case justifies it so as to be able to obtain a public interest remedy without unnecessary delay and the disproportionate cost of a full trial.

My limited perusal of the case for summary judgment suggests that the FSA has a real prospect of success and I am persuaded that if successful the trial costs would be substantially reduced, but by no means eliminated. I have been told that the FSA would not, for example, proceed along the alternative liability route based upon a collective investment scheme if successful in summary judgment on the deposit-taking allegation, and if the deposit taking allegation succeeds against all three defendants it seems to me it would be unnecessary for there to be any investigation at trial of the additional allegation that each defendant was complicit in the activities of each of the others.

Nonetheless, there will have to be expenditure on the question of quantum, by which I mean the amount which the court should in justice order if liability is made out by way of restitution, compensation, or an account of profits and the summary judgment application, even if successful, will not avoid the need for that cost to be incurred.

There is, I fear, no magic solution which will eliminate all risks of prejudice and injustice to either side to this litigation. The court’s task is necessarily to fashion the case management response which will minimise injustice and prejudice as far as possible.

I bear in mind that the prejudice arising from an inability to pay for professional representation may often be occasioned to a litigant, for example, through lack of financial resources or because, in a case where the claimant seeks to recover property from the defendant on the basis that it belongs to the claimant, even a civil freezing order may not contain an exception for legal expenses.

It is also important to bear in mind that the application sought to be adjourned is only for summary judgment. It is not a trial. An applicant for summary judgment must show that there is no real triable issue. The court will be astute to identify any serious issue of fact standing in the FSA’s way and if it does so to direct a trial. Furthermore, if the Article 2 defence turns on a difficult issue of statutory interpretation the court may well direct either a trial or an adjournment of the summary judgment application to enable assistance to be obtained from an advocate to the court if the defendants are still, at that stage, entirely unrepresented. The court is in addition experienced in managing hearings, including summary judgment hearings, so as to minimise as far as possible the difficulties facing litigants in person. Counsel for any opponent has duties to assist the court where necessary.

I have carefully considered whether to adjourn the summary judgment application to trial, or to a date after the defendants’ next obligation to attend the City of London Police, which may or may not be an occasion upon which light may be shed as to whether the present criminal investigation will lead to charges. If the investigation does not lead to charges of course the Restraint Order will be discharged.

It seems to me, however, that taking either of those courses would cause an unacceptable risk of a heavy expenditure of costs by the FSA in preparing for the trial in June. Those are costs which, if its case for summary judgment is a good one, would then be wasted. Conversely, it would not, in my judgment, be fair to visit upon these defendants the immediate hearing of the summary judgment application in which monetary orders are sought running to many millions of pounds without giving the first and second defendants time to retrieve their files and all three defendants better time to prepare, if a modest adjournment for those purposes would leave intact the prospect of a substantial cost saving in preparation for and at trial.

I am not persuaded that the defendants have deliberately made this application at the last moment, or that they have simply sat on their hands. I ascertained before giving judgment on 4^th February from the clerk of the lists that time could be made available for a one to two-day hearing in the first week of March. In those circumstances a hearing at that time would give the best part of a month for these defendants to prepare (from the date of my extempore judgment) and if possible to seek pro bono representation. On 4^th February I therefore adjourned the summary judgment application until a date not before 1^st March. The precise hearing date has now been obtained by an application to the clerk of the lists.

It will be apparent that the matters which caused me to withdraw my extempore judgment, and the further submissions on 11^th February, have not caused me to depart from that decision, which I therefore confirm. The order which I then made may now be sealed.