Introduction
Parties in dispute
SFO investigation into Kaupthing collapse
Judicial review decision
Subsequent claim for damages
Disclosure decision
Comment


Introduction

"They wanted to get some scalps… And now I'm going to butcher them," property investor Vincent Tchenguiz is reported to have observed of the Serious Fraud Office (SFO) and its investigation into the collapse of Icelandic bank Kaupthing hf., which had seen him and his brother Robert arrested in a March 2011 dawn raid. Following a successful judicial review of the lawfulness of the issue of the warrants which led to their arrest, the Tchenguiz brothers are now claiming £300 million of damages from the SFO. This claim is set for its substantive trial later this year. In the meantime, this update considers a recent interim decision of the High Court in the course of this long-running and hard-fought dispute.

Parties in dispute

The SFO investigates allegations of serious or complex fraud, bribery and corruption, and pursues prosecutions where appropriate. Cases under investigation by the SFO include the circumstances of the 2011 sale of Autonomy to Hewlett Packard, certain commercial arrangements made between Barclays Bank plc and Qatar Holdings in 2008, allegations of bribery and corruption at Rolls Royce and the manipulation of the London Interbank Offered Rate.

Robert and Vincent Tchenguiz are property investors and entrepreneurs, and were significant clients of Kaupthing. Acting with the financial support of Kaupthing, the Tchenguiz brothers had built up a significant share and property portfolio, holding positions in companies such as J Sainsbury plc and Mitchells & Butlers plc (a restaurant and pub operator).

SFO investigation into Kaupthing collapse

In October 2008, at the height of the global financial crisis, Kaupthing collapsed. In December 2009 the SFO announced that it would launch an investigation into this collapse, working closely with Iceland's Special Prosecutor's Office. On March 9 2011 the SFO, together with the City of London Police, mounted extensive search and arrest operations in London in relation to this investigation. Among those arrested were the Tchenguiz brothers, who were interviewed under caution and released on conditional bail.

However, the SFO's investigation subsequently began to unravel. In May 2011 the Tchenguiz brothers and companies and trusts through which their business was conducted applied for a judicial review of the circumstances surrounding the March 2011 raids, which was heard in May 2012.

Judicial review decision

On July 31 2012 the High Court handed down its judgment following the May 2012 judicial review hearing. The judgment made serious criticisms of the SFO and held that the search warrants in question had been unlawfully obtained. In a postscript to its judgment, the court noted that:

"The investigation and prosecution of serious fraud in the financial markets requires proper resources, both human and financial. It is quite clear that the SFO did not have such resources in the present case…

In the present case, the result has been to set aside search warrants against two well known businessmen after a long investigation of transactions in the financial markets. In other cases, the result could have been the failure properly to investigate and prosecute successfully conduct where there could be no doubt as to its criminality and serious effect on public confidence in financial institutions and the financial markets. It is clear that incalculable damage will be done to the financial markets of London, if proper resources, both human and financial, are not made available for such investigations and prosecutions in the financial markets in London."

On October 15 2012 the SFO announced that it had discontinued its investigation into the circumstances surrounding the collapse of Kaupthing on the grounds that there was insufficient evidence to justify its continuation.

Subsequent claim for damages

The Tchenguiz brothers and the entities through which their business was conducted are now seeking damages of approximately £300 million for trespass, wrongful arrest, human rights breaches, misfeasance in public office and malicious prosecution on the grounds that the effect of the SFO's searches, arrests and investigation and the publicity surrounding them had a disastrous effect on their business interests, causing extensive financial losses and reputational harm. The substantive trial to determine the damages claims is set to be held later this year. Meanwhile, there have been a number of noteworthy interim decisions, including in relation to third-party disclosure. One of these decisions illustrates the position in relation to the use in legal proceedings of privileged documents that were mistakenly disclosed during the course of the proceedings (use which would otherwise not be allowed).

Disclosure decision

Certain claimants in the damages claim applied for leave to use documents which the SFO had already disclosed by mistake. At the hearing of the application in early April 2014 the SFO maintained that four of these documents were subject to legal professional privilege and one to public interest immunity.

In relation to the four documents subject to the claim for legal professional privilege, the judge noted that it was common ground that:

  • the position was covered by Civil Procedure Rule 31.20, which provides that "Where a party inadvertently allows a privileged document to be inspected, the party who has inspected the document may use it or its contents only with the permission of the court"; and
  • in relation to these four documents, the relevant guidelines were the 'Al-Fayed principles', set out in Al-Fayed v Metropolitan Police Commissioner.(1) Under these principles, the court can intervene to prevent use of a disclosed document in circumstances where it would be obvious to a reasonable solicitor receiving the disclosed document that a mistake has been made in disclosing the document to him or her.

On behalf of the applicant, it was argued that no obvious mistake had been made. However, the judge noted that:

"given the scale and complexity of the SFO's disclosure review… it would be wrong, in my view, for anyone to assume that such review would be infallible. On the contrary, it seems to me almost inevitable that some mistakes would or at least might occur and that the SFO was not intending that there should be any waiver of the SFO's rights in documents which might be inadvertently disclosed."

The judge therefore refused to exercise his discretion under Civil Procedure Rule 31.20 to allow use of these four documents by the applicants.

As regards the fifth document, the SFO opposed its use on the grounds that it was subject to public interest immunity, having been the subject of a public interest immunity certificate served on the applicants. The judge did not consider it necessary to decide whether the Al-Fayed principles applied to public interest immunity documents. Rather, he took the public interest immunity certificate at face value and gave effect to it, refusing to exercise his discretion to allow use of this document.

Comment

The decision to refuse to allow use of the documents inadvertently disclosed by the SFO does not break new ground. However, it does usefully demonstrate the application of the Al-Fayed principles in relation to the legal professional privilege documents and the power of the public interest immunity certificate in relation to the remaining document. The observation that it was almost inevitable that some mistakes might occur in a large-scale disclosure exercise highlights not only the difficulty in conducting such exercises, but also the need for parties in receipt of documents following such disclosure exercises to be alert to mistakes that may have been made in completing the exercise. In short, it is not always straightforward for receiving parties to benefit from inadvertent disclosure of privileged documents.

More broadly, this case illustrates the difficulty for the SFO to pursue its stated objective – investigating serious or complex fraud, bribery and corruption – with limited resources. Had the SFO been able to deploy appropriate resources into the collapse of Kaupthing at the outset of its investigation, it may have avoided being dragged into subsequent costly and resource-hungry litigation arising from mistakes allegedly made in the course of conducting that investigation. The outcome of the Tchenguiz brothers' claim against the SFO remains to be seen, as does its impact on the SFO's future and the future of the investigation of serious fraud in the City of London.

For further information on this topic please contact Andy McGregor or Alan Williams at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (andy.mcgregor@rpc.co.uk or alan.williams@rpc.co.uk). The RPC website can be accessed at www.rpc.co.uk.

Endnotes

(1) [2002] EWCA Civ 780.