New York’s Southern District Court Judge Jed Rakoff is always worth listening to. He expresses trenchant views about the rule of law elegantly and politely. He is fearlessly independent. Prosecutors in the US, who are normally prone to swagger just a bit, probably find his comments and rulings rather irritating.
In a speech to the Practicing Law Institute on 5 November the Judge directed a passing swipe at the Security and Exchange Commission’s in-house administrative court, complaining that increasing enforcement powers granted by Congress have led to the SEC bringing more and more cases before this court. Rakoff is concerned that this policy risks hindering the development of the law, because ‘it would not be good for the impartial development of the law in an area of immense practical importance’ without providing the opportunity for evidence and law to be tested by ‘impartial jurists’.
The Judge makes the point that the SEC’s record of success in front of its own administrative court is 100%, whereas it has suffered a number of defeats in recent insider dealing jury trials. Any prosecutor will acknowledge that although he or she might give their right hand to win every case, such a high success rate is unhealthy. It suggests either that they are only taking on the low hanging fruit, or that their system is artificially skewed against the defendant.
In the UK, the Financial Conduct Authority and its predecessor, the Financial Services Authority, have had a similar internal ‘court’ since 2000, the Regulatory Decisions Committee. The RDC receives proposals from Enforcement, with supporting evidence, which seek to impose penalties on individuals and firms which are alleged to have breached regulations. The matters before the RDC can range from a defaulting IFA, resulting in a £50,000 fine and prohibition, to a Libor settlement with UBS of £160m. In regulatory cases, the Committee decides whether to issue a Warning Notice, and then hears representations from both sides before deciding whether to issue Decision and Final Notices. Many cases settle and the Final Notice is an agreed document. Those who want to contest a Final Notice published after a contested hearing can appeal to the Upper Tribunal, where the appeal will be heard by a Judge. The members of the RDC are employees of the FCA, but are, in my experience, strongly independent – some within the FCA would say, too independent! The Committee’s existence has been challenged over the years, not least by the Regulator itself, and consideration was given to abolishing it when the FCA was set up in 2013. However, no better system for arbitrating and disposing of the majority of regulatory cases could be found, and the work of the RDC continues.
Some, but by no means all, of the cases that come before the RDC might amount to criminal offences as well as regulatory breaches. The most obvious example of this is insider dealing/market abuse, but there are other borderline cases where, for example, an allegation of lack of integrity – a breach of Principle 1 of the FCA Principles for Business – might equally be viewed as dishonesty.
Because insider dealing is both a regulatory (section 118 Financial Services Act 2000) and a criminal (section 52 Criminal Justice Act 1993) offence, a decision by the FCA to litigate a case in front of the RDC is one which most people accused of such activity in the UK will usually welcome. The prospect of a criminal conviction and a prison sentence (maximum 7 years) is removed. The worst that can happen – and it is bad enough – is a fine, disgorgement of profit, and, if the individual concerned is an approved person in the financial services regime, a prohibition from being involved in financial services for a fixed or indefinite period. If an individual wants to face criminal charges, and chance his luck in front of a jury, he can probably engineer that result simply by being obstructive and uncooperative, but no one has so far chosen this option.
In a market abuse case in 2012, David Einhorn, President of a US hedge fund, Greenlight Capital, was fined £3.5m, with Greenlight being fined a similar amount, in connection with the sale of its holding in Punch Taverns. Although Einhorn hotly denied that he had done anything wrong, he decided not to challenge the RDC’s decision. In that case, which involved questions of wall-crossing, it might be said that there were some unresolved issues at the conclusion of the case. The RDC, in effect, exonerated Einhorn of deliberate misconduct, finding only that he ought to have known that what he did was wrong.
In another recent and high profile case, Ian Hannam, who had been Chairman of Capital Markets at J P Morgan Cazenove, challenged a decision by the RDC that he had committed market abuse. He appealed to the Upper Tribunal which, in May this year, upheld the RDC’s decision. The ruling runs to 130 pages, and no one reading it will think that it has in any way restricted ‘the impartial development’ of financial services law. To the contrary, the ruling clarifies the law in a number of important respects. The fact that a jury was not faced with the legal and factual complexities, leading to guilty or not guilty verdicts which are entirely unexplained, does not strike one as a disservice to justice.
There is, however, a problem which mirrors a theme which Judge Rakoff has frequently articulated. Libor was originally treated as an administrative breach, with Barclays being fined by both the FSA and the SEC in June 2012. This sparked a public outcry – why was no one being prosecuted in the criminal courts for such outrageous misconduct? A cosy settlement with the firm, with no senior person being brought to account, came nowhere near slaking the public thirst for revenge. There was a hasty reassessment of the position, prompting the Serious Fraud Office to open an investigation, which has now led to 13 individuals being charged with criminal offences, and awaiting jury trial in 2015. One individual has pleaded guilty.
At the same time, the FCA is being asked questions about its failure to take action, either regulatory or criminal, against senior bankers in the wake of the global financial crisis. Recent legislation and public criticism are ramping up the pressure to take criminal proceedings against unethical banking practices. The fact that such cases, whether criminal or regulatory, are immensely difficult to investigate and prosecute does not deter those who are baying for blood.
Interestingly, however, when such cases do come to court, the results, like the SEC’s criminal insider dealing trials, are mixed. Juries, when they hear the facts in court, as opposed to the newspaper headlines and the posturing of politicians, do not always convict. On the 3 November 2014 a jury in a federal court in Fort Launderdale took just two hours to bring in not guilty verdicts against a senior UBS executive, Raoul Weil, in connection with off-shore tax havens sheltering the wealth of 20,000 US citizens. No doubt the US Internal Revenue Service, which prosecuted Weil, would have welcomed the opportunity to try the case in its own administrative court.