A recent decision in the SFO’s continuing battle with the Tchenguiz brothers confirms the position regarding inadvertent disclosure of privileged documents.

“They wanted to get some scalps … And now I’m going to butcher them,” the property investor Vincent Tchenguiz is reported to have observed of the United Kingdom’s Serious Fraud Office (SFO) and its investigation into the collapse of the Icelandic bank Kaupthing hf. (Kaupthing), which had seen him and his brother 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 £300m of damages from the SFO. This claim is set for its substantive trial later this year. In the meanwhile, this article considers a recent interim decision made by the English High Court in the course of this long-running and hard fought dispute.

The parties in dispute

The SFO, a UK government department, investigates allegations of serious or complex fraud, bribery and corruption, and pursues prosecutions where appropriate. Current cases being investigated by the SFO include the circumstances of the sale in 2011 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 LIBOR.

The Tchenguiz brothers, Robert and Vincent, are property investors and entrepreneurs, who 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 restaurant and pub operator, Mitchells & Butlers plc.

SFO investigation into the collapse of Kaupthing

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 the collapse of Kaupthing, working closely with Iceland’s Special Prosecutor’s Office. On 9 March 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 Robert and Vincent Tchenguiz, 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.

The Judicial Review decision

On 31 July 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 15 October 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.

The subsequent claim for damages

The Tchenguiz brothers and entities through which their business was conducted are now seeking damages of approximately £300m  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. In the meantime, there have been a number of noteworthy interim decisions, including in relation to third-party disclosure. This article focuses on one of these which has illustrated the position in relation to the use in legal proceedings of privileged documents mistakenly disclosed during the course of the proceedings (which use would otherwise not be allowed).

The Disclosure decision

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

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

First, 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, second, that in relation to these four documents, the relevant guidelines were the “Al-Fayed principles”, set out in the judgment in Al-Fayed v Metropolitan Police Commissioner1. For example, under the Al-Fayed principles, the court can intervene to prevent the use of a disclosed document in circumstances when it would be obvious to a reasonable solicitor receiving the disclosed document, that a mistake has been made in disclosing the document to him.

On behalf of the applicant it was argued that no obvious mistake had been made here. 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 CPR 31.20 to allow the 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 PII, having been the subject of a PII certificate served on the applicants. The judge did not consider it necessary to decide whether or not the Al-Fayed principles applied to PII documents. Rather, he took the PII certificate at face value and gave effect to it, refusing to exercise his discretion to allow use of this document.

Comment and conclusion

The decision to refuse to allow the 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 LPP documents, and the power of the PII certificate in relation to the remaining document. The observation that it was almost inevitable that in a large scale disclosure exercise that some mistakes might occur, highlights not only the difficulty in conducting such exercises but 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 objectives of investigating serious or complex frauds, bribery and corruption, with limited resources. Had the SFO been able to deploy appropriate resource 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. It remains to be seen what the outcome of the Tchenguiz brothers’ claim against the SFO will be, and what impact it will have on the SFO’s future, and more broadly on the future of the investigation of serious frauds in the city of London; this case is one to watch.