Royal Bank of Scotland recently paid $44M to settle a US criminal investigation that accused its traders of lying to clients over investments. The settlement is separate from a long-anticipated multi-billion dollar penalty that RBS faces over claims it mis-sold mortgage bonds prior to the 2008 banking crisis. And RBS has also come in for stinging criticism over its behaviour.
Its activities prompted US Attorney Deirdre Daly to accuse the bank of fostering "a culture of securities fraud’’ that was encouraged by senior figures who also “took steps to prevent victims and honest RBS employees discovering and exposing the scheme.’’ The US Department of Justice said RBS deceived and cheated customers, was dishonest about prices and lied to customers who suspected they had been victims of fraud.
The case painted a picture of fraud and dishonesty in RBS that the bank seemed unwilling or unable to tackle. So what must general counsel in a financial institution know?
The main thing to know is that honesty is a central theme in investment fraud cases, regardless of the precise circumstances of any investigation.
Until very recently, the question of dishonesty was decided by a two-limb test. It was in Ghosh  QB 1053, that the Court of Appeal established this two-stage test of dishonesty. The jury had to decide whether “according to the ordinary standards of reasonable and honest people what was done was dishonest”. If so, the jury then had to decide whether the defendant “himself must have realised that what he was doing was by those standards dishonest….”
The case of Ivey V Genting Casinos (2017), however, has taken away the need to prove the second part of the Ghosh test: that the defendant knew that ordinary and honest people would regard his behaviour as dishonest. The issue, therefore, of whether the individual thought he was doing something dishonest is now irrelevant: what matters now is whether he was dishonest, according to fact and law. The test now is whether the conduct would be considered dishonest by reference to the standards of ordinary and honest people.
In this latest case, the court said “there can be no logical or principled basis for the meaning of dishonesty to differ according to whether it arises in a civil action or a criminal prosecution”. And in specific relation to business crime cases, it added “there is no reason why the law should excuse those who make a mistake about what contemporary standards of honesty are, whether in the context of insurance claims, high finance, market manipulation or tax evasion”.
The challenge for anyone accused of investment fraud, therefore, is to demonstrate to the investigating authorities and (if it goes to trial) a jury that there was no dishonest activity. This is the case whether the alleged fraud involves selling fake stocks and shares, Ponzi-style schemes, pension liberation or, as with RBS, the cheating of customers over prices and commissions.
This may be an area where general counsel feel the need to bring in specialist help.
Demonstrating honesty involves outlining a defendant’s motivation, his working practices and his reasons for doing what he did. Only by a defence team explaining these can investigators or jurors understand exactly what the person has done, how they did it and why they did it – and determine whether dishonesty was involved.
From a defence point of view, this can involve testimony from the defendant. But a defence team should also be alert to the possibilities of using expert witnesses. These can outline the intricacies of an industry, explain why it would make sense for a defendant to act the way they did and emphasise how they have complied with regulatory requirements. Such witnesses can not only create empathy with a jury, they can give vital credibility to defence arguments that the accused did nothing dishonest.
Before an investment fraud case reaches court, a defence team can make huge strides towards establishing a client’s honesty by intelligent use of digital unused material. Such cases will involve huge amounts of documentation, which will be on computers and other devices seized by the investigating authorities. Much of it will never be used by the prosecution.
Lord Justice Gross’ Review of Disclosure from September 2011 and the Attorney General’s Guidelines on Disclosure 2013, provide defenders with opportunities to use digital material. Such opportunities include asking prosecutors why they are looking for certain words in digital searches, which can help establish the course they are looking to take.
A defence can also check that the prosecution has properly scheduled all the material. This makes it easy to find documentation that could go a long way to establishing a client’s honesty. But this is also important because if the scheduling process is not followed in accordance with the rules on disclosure, there is the chance to argue that a fair trial is impossible.
If a firm has any suspicions that investment fraud is being carried out, there can be great value in it taking a close look at its working practices before any charges are brought - and even before the authorities have started to investigate. A thorough, carefully-conducted investigation will help a firm determine whether fraud has been committed.
It may be a course of action that some firms are reluctant to take. General counsel may feel it is not their area of expertise. If they fear they are unable to do it themselves, there are experts available who can carry out an investigation and advise on the best course of action.
An investigation will establish the facts. If the firm then voluntarily reports any wrongdoing to the authorities, it may gain more lenient treatment than if, for example, the Serious Fraud Office discovered the facts for itself.