Latest from Mishcon de Reya

Mishcon de Reya advises Stylus Media Group Limited in connection with an investment by Hearst Interactive Media

feedback@mishcon.com — Mon, 14 May 2012 14:58:05 GMT

Mishcon de Reya has advised Stylus Media Group Limited in connection with an investment by Hearst Interactive Media into the company, which operates an online subscription service that tracks consumer behaviour and trends for the retail, technology, hospitality and other industries.

Stylus was founded in 2010 by internet entrepreneur Marc Worth, with an initial focus on providing business intelligence to the interior-design industry. Since then, Stylus has broadened its focus and today has around 220 clients across 20 industries, including Saatchi & Saatchi, Starwood Hotels, Mulberry, Sony, Ford, Colombia Sportswear, The Container Store, Marks & Spencer and Interbrand. Much of the information is provided by a full-time staff of approximately 45 researchers, journalists, forecasters and brand experts, based in the UK and the US.

Having acted for Stylus since its formation, Mishcons were delighted to advise the company on its first major outside investment. Marc Worth was also delighted: This investment is an extremely exciting opportunity for us to grow the Stylus business working alongside Hearst, he said, adding, I have appreciated Mishcons' sound commercial and legal advice over many years and look forward to continuing our strong relationship as we move to the next phase of the company's development.

Mishcon de Reya's team was led by corporate partner Richard Tyler and solicitor Andrew Wolfin.

Banks' changes to SME loans "Unlawful"

jameshurley@mishcon.com (James Hurley) — Mon, 14 May 2012 14:17:35 GMT

A quarter of entrepreneurs, private equity and hedge funds have reported that their bank had sought to change the original terms of their loan, while more than one in five (22pc) said their lender wanted to reduce the loan’s maturity, according to a survey of small companies and investors.

Masoud Zabeti, Head of Finance and Banking at Mishcon de Reya said businesses are being put under “increasing and unacceptable pressure by their banks”.

To read the full article, please click here.

Warning to the Twitterati: a single tweet can cost you £90,000

feedback@mishcon.com — Mon, 14 May 2012 10:10:32 GMT

Brief facts

Chris Cairns, former New Zealand cricket captain and one time captain of the Chandigarh Lions Indian Premier League (IPL) team in India, sued Lalit Modi, former chairman and Commissioner of the IPL and Vice-President of the Board of Cricketing Control for India. Cairn's claim revolved around one tweet, published by Mr Modi shortly after Cairns had been dismissed from the IPL for breach of contract. The tweet said that Cairns had been dismissed for match-fixing. That allegation was picked up by a website, which published further quotes Mr Modi on the subject.

Personal and professional views

Noting that “at the time of the events in question, Mr Modi was a very powerful figure in world cricket”, Mr Justice Bean confirmed that you cannot separate your personal and professional views for the purposes of a libel claim, even where such views are published on an informal forum, and particularly so where your professional view is likely to be considered authoritative.

The standard of proof

Bean J referred to Richards LJ's judgment in R(N) v Mental Health Review Tribunal (Northern Region) [2006] QB 468, and in particular to his views on the application of the civil standard of proof. Bean J quoted:

“although there is a single civil standard of proof on the balance of probabilities, it is flexible in its application. In particular, the more serious the allegation or the more serious the consequences if the allegation is proved, the stronger must be the evidence before a court will find the allegation proved on the balance of probabilities."

The judgment went on to note that some of the Defendant's evidence was hearsay (as was some of the Claimant's) and that in a criminal case "a witness alleging dishonesty is generally required to be available for cross-examination." Further, only a small proportion of some statements made by players made in 2008 were disclosed to the Claimant's solicitors, along with two unsigned statements and some attendance notes made by the ICL’s anti-corruption officer.

Bean J. also noted that the Defendant's first solicitors had the opportunity to examine a complete file of the 2008 statements, but they had kept themselves "and their client just on the right side of the line beyond which there would have been an obligation to disclose all the statements" to the Claimant's solicitors. It would appear that this may be a criticism of the Defendant's conduct with regard to production of evidence. In any event, Bean J was clearly not impressed with the evidence provided by the Defendant or on his behalf, which he found “contained no direct evidence of alleged match-fixing”.

A real and substantial tort

The original tweet was received by a limited number of followers. The Defendant’s expert submitted that they numbered 35, the Claimant’s that they numbered 95. The parties agreed that the Court should consider the compromise number of 65. The further publication of related, but not identical, allegations on Cricinfo’s website remained online for a few hours before being removed. Again, the parties’ experts disagreed on the number of readers of that publication, and the court proceeded on the basis that around 1,000 people would have read it. The total first hand readers of the allegations were therefore only 1,065.

The court accepted that publication was limited, but noted Lord Atkin's statement in Ley v Hamilton (153 LT 384) that "It is precisely because the 'real' damage cannot be ascertained and established that the damages are at large. It is impossible to track the scandal, to know what quarters the poison may reach…”. Bean J. added that this remains true today, but that modern technology only increases the speed with which the poison spreads. That there were few readers did not affect the amount of damages.

The Defendant also initially made an application for strike out on the Jameel principle that publication in the jurisdiction did not amount to a real and substantial tort. This was withdrawn before the hearing, so the Defendant clearly thought better of it. It is useful for Claimants to know that such low numbers of readers will still be taken seriously in court, although the seriousness of the allegations and the likelihood of them being spread throughout the small cricket community were also probably helpful factors in this case (although the judge made no direct comment about other factors in relation to publication). It would seem then, that the bar for a “real and substantial tort” is low, although it is probable that this is reasonably fact specific.

The dangers of justification

The case is also a stark warning that the defence of justification must be treated with caution. In the judgment, Modi’s defence was roundly criticised. Cairn’s damages were increased by 20%, not just because Modi attempted to prove the truth of the allegations, but also because of the manner in which he did so. Bean J. did not consider that Modi’s follow up statements to the effect of “if he sues us, we will prove his guilt”, later tweets in which he referred to the ongoing case saying “match fixing must be stopped”, nor allegations of libel tourism (which were found to be “misguided”) to be aggravating factors. It was found, however, that the manner in which the defence had been run was enough on its own to attribute a 20% increase on damages. Closing submissions were taken as an example: the words “liar”, “lie” and “lies” were used 24 times, and the Claimant’s alleged conduct was referred to as “abuse” of “children in an orphan’s home”. The defence "could hardly have [been] pitched…higher".

Going to the London Olympics? Apply for your visa now

feedback@mishcon.com — Thu, 10 May 2012 17:38:15 GMT

With the start date of the London 2012 Olympic and Paralympic Games fast approaching, we encourage anyone travelling to the UK for this event to plan ahead and apply now for their necessary UK visa.

For those travelling during this busy period Mishcon de Reya offers a bespoke immigration service. Our Immigration team has been appointed to the pro bono legal advice panel for the London 2012 Olympic and Paralympic Games by LOCOG. As part of this panel, we will be providing legal advice on a wide range of issues to athletes, teams and sporting federations during the Games.

Most recently we acted on behalf of a member of an Olympic team who had applied for an Olympic Games visa in the UK Embassy of their resident country. We were instructed the day before the athlete was required to travel to the UK and was in need of urgent assistance. We liaised with our contacts in the visa issuing post overseas and managed to obtain a successful and expeditious result for our client within the same day.

If you intend to apply for a UK visa or if you need a bespoke immigration advice, please contact Kamal Rahman.

Commerzbank loses banker bonus case

janecroft@mishcon.com (Jane Croft) — Wed, 09 May 2012 17:06:06 GMT

The German bank, which plans to appeal against the decision, was sued by the investment bankers who claimed they were entitled to a share of bonuses from a €400m pool set up in 2008 to help retain staff.

The case is one of the biggest bonus disputes to come out of the credit crunch and is being closely watched by the banking sector.

The bankers claimed they were promised bonuses ranging from €15,000 to €2m but were later awarded a tenth of the bonuses they expected.

The bankers were all employed by Dresdner Kleinwort in 2008 which was later taken over by Commerzbank at the height of the credit crunch.

DkW had told staff in a so-called "town hall" meeting in 2008 that a €400m bonus pool had been set up to retain staff ahead of the Commerzbank takeover and would be allocated on a discretionary basis.

Handing down his ruling Mr Justice Owen said that bankers' bonuses remained "a subject of intense public interest" but this dispute "arose within a narrow ambit" and concerned "the nature of contractual obligations owed to claimants by their employer" and "did not concern wider issues " or the "structure of remuneration in the banking industry."

Commerzbank said in a statement: "We are disappointed with the court's decision and will seek leave to appeal. The bank believes the decision to reduce discretionary bonuses in light of €6.5bn of losses at Dresdner Kleinwort for 2008 was responsible and justified."

The case has attracted huge interest pitting public anger against bankers' bonuses and Commerzbank's legal obligations.

In Germany it is politically sensitive as taxpayers helped Commerzbank twice at the height of the crisis.

Mark Levine, partner at Mishcon de Reya, who represented 21 of the bankers said: "We welcome the High Court ruling that these promises constituted a binding contract and, with the staff having performed their side of the contract, that the bank breached it by refusing to honour the payments it had promised. "

Clive Zietman head of commercial litigation at Stewarts Law, which represented the other bankers welcomed the ruling and said it had been "wrong" of the bank to renege on its commitments over bonuses.

This article was originally published on FT.com. To read the original article, please click here.
*Please note that this is a subscription only website.

Verdict delivered in bonus case against Commerzbank

feedback@mishcon.com — Wed, 09 May 2012 15:39:00 GMT

Today 104 ex-Dresdner bankers won a highly publicised three year battle against Dresdner/ Commerzbank for unpaid retention bonuses that were promised to them at the end of 2008.

Mark Levine and Daniel Naftalin, Partners at Mishcon de Reya, represented 21 of the bankers and commented on the decision:

We welcome the High Court's decision today confirming the Bank's contractual obligation to pay retention awards promised to our clients in exceptional circumstances in 2008. Dresdner made repeated promises to employees prior to its sale to Commerzbank in an attempt to avoid a mass exodus of staff - namely that they would be financially rewarded from a guaranteed retention pool for remaining at the bank and performing well. We welcome the High Court ruling that these promises constituted a binding contract and, with the staff having performed their side of the contract, that the Bank breached it by refusing to honour the payments it had promised. This case is likely to have significance whenever employment contracts are varied, particularly on the basis of verbal commitments or actions.

Verdict delivered in bonus case against Commerzbank

feedback@mishcon.com — Wed, 09 May 2012 15:39:00 GMT

Today 104 ex-Dresdner bankers won a highly publicised three year battle against Dresdner/ Commerzbank for unpaid retention bonuses that were promised to them at the end of 2008.

Mark Levine and Daniel Naftalin, Partners at Mishcon de Reya, represented 21 of the bankers and commented on the decision:

Recruitment Watch

feedback@mishcon.com — Thu, 03 May 2012 11:55:57 GMT

Welcome to Mishcon de Reya's Recruitment Watch, prepared by the Firm's Recruitment Services Group. Its aim is to provide those involved in the recruitment sector with a snapshot of what has been happening in the world of recruitment in the last month.

News

Policy

Damian Green, immigration minister, has confirmed that the annual limit on skilled workers from outside the European Union would remain at 20,700 until April 2014.
Helen Warrell, Financial Times, 5 April 2012

A revised Code of Professional Conduct, to be accompanied by modernised complaints and disciplinary procedures, has been unveiled by the Chartered Institute of Personnel and Development (CIPD). The new Code will come into force for all CIPD members on 1 July 2012.
The Global Recruiter, April 2012

Market

Adecco have reported that the number of job vacancies advertised for workers for the London 2012 Olympic and Paralympic Games has significantly increased.
Recruitment International, April 2012

Almost two-thirds of employers are exploiting loopholes to escape the worst impact of new rules giving temporary workers equal pay with permanent staff, a survey by law firm Eversheds has found.
Brian Groom, Financial Times, 10 April 2012

Trends / Practice

According to research carried out by adzuna.co.uk, Aberdeen was found to be the easiest place to find a job, while Hull was deemed the hardest.
Recruitment International, April 2012

Latest Hays Career Outlook Survey indicates that workers are being trapped in career silos because they don’t believe they can cross sector or industry boundaries.
Recruitment International, April 2012

Increased numbers of City IT workers are looking for jobs than would normally be anticipated due to poor bonus expectations according to a new report by JM Group.
Recruitment International, April 2012

Over half (59%) of UK executives in medium-sized to large businesses would choose a higher degree of mobility and flexibility at work over a salary increase and being office-bound, according to the ’Mobile Workplace’ study, carried out by independent industry researchers TNS on behalf of IFS, the global enterprise applications company.
The Global Recruiter, April 2012

More than six in 10 (61%) senior HR executives report that their organisations regularly award promotions without salary increases, finds new research by OfficeTeam.
The Global Recruiter, April 2012

Legal Developments

April brings with it a number of changes to employment law, from raising the unfair dismissal qualifying period to an overhaul of Tribunal procedure. Our summary of the changes can be found here.

From October 2012, new legislation will require employers to automatically enrol their staff in pension schemes.

Mishcon de Reya

Mishcon de Reya's Recruitment Watch is published by the Firm's Recruitment Services Group, established to meet the demands of our clients within the recruitment sector. The cross departmental Group is made up of specialist lawyers who have extensive experience within the sector and a proven track record in being able to meet the growing demand for a one-stop service amongst their recruitment clients.

UK Border Agency computer failure leaves thousands unable to travel

alantravis@mishcon.com (Alan Travis) — Thu, 03 May 2012 11:26:42 GMT

Having probably queued to get into Britain, thousands of overseas residents, including senior business people and academics, now face the prospect of being unable to leave the country, possibly for weeks, because a key UK border agency computer system has crashed.

Hundreds of people queuing at UKBA's public inquiry office in Croydon, applying to extend or renew biometric residence permits, were told to go home on Thursday because the computer system could not cope.

The details of more than 600,000 foreign nationals living in Britain have been logged on the biometric residents' identity card database since it was set up four years ago.

To read the full article, please click here.

Mishcon de Reya named in Private Client Practitioner's Top 25 Law Firms 2012

feedback@mishcon.com — Wed, 02 May 2012 16:27:32 GMT

Mishcon de Reya has been named one of the Top 25 Law Firms in the UK by Private Client Practitioner following a survey of 125 leaders within the Private Client industry.

James Libson, Head of Private, said 'We are delighted to be recognised in what is a very competitive and complex market; this recognition is testament to the great work that we do for our clients and the skill and dedication of our team.'

Visa delays overshadow passport queues

rogerblitzandhelenwarrell@mishcon.com (Roger Blitz and Helen Warrell) — Tue, 01 May 2012 10:14:03 GMT

The Heathrow queues fiasco prompted the CBI employers’ group and tour operators to put pressure on the government to act on the issue of visas, the other major bugbear affecting travellers trying to come to the UK.

The deployment – formalised by Damian Green, immigration minister, during a trip to China last month – is an attempt to lessen delays after an 80 per cent increase in demand for visas from Chinese tourists between 2009 and 2011.

More than 200,000 visitor visas were issued to Chinese nationals last year.

Visitors from China and Brazil are having to take several days off work to get UK visas processed, according to David Scowsill of the World Travel and Tourism Council.

The visa issue was “a much bigger deterrent” for visitors than passport queues, he said, adding that Brazilians “have to have a great determination to come to the UK”.

The US, which has also infuriated visitors with its draconian visa policy, took action in January when Barack Obama signed executive orders to expedite visas from Brazil and China by recruiting more consular staff.

“President Obama now gets it; he understands the economic benefits,” Mr Scowsill said.

Business leaders have long argued that the UK economy is losing out to Europe in attracting visitors because of visa policy.

Neil Carberry of the CBI said the “critical frustration” facing members was long processing times for prominent individuals.

“One of the things we get a lot of feedback on is having to wait a long time, or even not getting a visa quickly enough, for a key figure to attend a particular meeting,” Mr Carberry said.

For non-European passport holders already in the UK but trying to extend their visas or apply for indefinite leave to remain, the situation is no better.

Some lawyers are so fed up with the UK Border Agency’s backed-up booking system that they have taken to lobbying Mr Green’s private office directly.

Others reported that their clients faced delays of one-and-a-half months even to get an appointment at the UK Border Agency’s “super premium” service which costs £6,000.

Kamal Rahman, immigration partner at Mishcon de Reya, a law firm specialising in wealthy clients, said: “This is stopping clients who are senior investors, who want to travel freely. Captains of industry are not going to sit and wait.”

The UK visa processing system is regarded by tour operators as “the most problematic” in the world.

Visas to the UK are costlier, more complicated and take longer to process than the Schengen visa, which grants access to 26 European countries. The UK visa application form is nine pages long, compared with three for Schengen, and must be completed in English.

It costs £78, which is non-refundable, and requires photographs and fingerprints. A decision on the application can take up to three weeks, according to the European Tour Operators Association.

One Mumbai tour operator last year advertised the benefits of taking a trip to Europe “without London”, emphasising the benefit of not having to apply for a UK visa.

According to Tom Jenkins, executive director of the European Tour Operators Association, a three-hour wait at Heathrow passport control is minor compared to having to set aside working days at a British consulate.

“The visa issue represents a huge malevolent block on people coming to the country,” Mr Jenkins said.

Mishcon's Culture vs Corruption Diary - April 2012

feedback@mishcon.com — Mon, 30 Apr 2012 09:46:38 GMT

Welcome to the April edition of Mishcon's Culture vs Corruption Diary. Its aim is to provide businesses and their advisors with a snapshot of what has been happening in the world of corruption in the last month.

We make no judgment whatsoever as to the morality, legality or appropriateness of the conduct which forms the subject matter of this bulletin. We simply aim to bring these matters to the attention of those involved in the prevention, detection and investigation of fraud.

UNITED KINGDOM

Sport

The Bribery Act has prompted a rush of Olympic sponsors to seek legal advice on their hospitality packages and companies to tighten their internal procedures after fears of falling foul of bribery rules which outlaw "lavish" entertainment.
Roger Blitz
Financial Times, 13 March 2012

Reports

According to a report published by the OECD the way UK authorities settle bribery cases can be opaque and lead to uncertainty over whether penalties are proportionate.
Caroline Binham
Financial Times, 31March 2012

WESTERN EUROPE

Technology

Greece has reached an out-of-court settlement with Siemens over alleged bribery by Siemens Hellas, the group's Greek subsidiary, of local politicians and state officials.
Kerin Hope
Financial Times, 9 March 2012

EASTERN EUROPE

Government

President-elect Vladimir Putin has acknowledged that corruption in Russia is "systemic" and that levels of bribery payments depend on favouritism from officials within the state mechanism.
Tony Halpin
The Times, 21 March 2012

NORTH AMERICA

Pharmaceuticals

Medical device company Biomet has been fined $23 million by the United States Department of Justice for false record keeping and bribery in Argentina, Brazil and China.
Andrew Jack
Financial Times, 27 March 2012

ASIA

Real Estate

Thomas Chan, a manager at Sun Hung Kai Properties, the largest property developer by revenue in Hong Kong, has been arrested in an investigation over allegations of bribery.
Enid Tsui
Financial Times, 21 March 2012

Mishcon de Reya

Mishcon's Culture vs Corruption Diary is published by the Dispute Resolution Department of Mishcon de Reya. Widely recognised as the leader in the field of fraud investigations, the Department has extensive experience in conducting and/or project managing highly sensitive international investigations in respect of bribery and corruption allegations. The Department founded and runs both the Fraud Network, made up of international legal fraud specialists, and the Financial Risk Group, for risk and compliance officers.

Mishcon Fraud Watch - April 2012

feedback@mishcon.com — Mon, 30 Apr 2012 09:46:01 GMT

Welcome to the April edition of Mishcon Fraud Watch. Its aim is to provide businesses and their advisors with a snapshot of what has been happening in the world of fraud in the last month.

UNITED KINGDOM

Legislation

Plans allowing British companies to "put up their hands" to corporate fraud, bribery, market-fixing and other white-collar offences, and pay a fine and compensation, are reported to be included in legislation in the next parliamentary session.
Frances Gibb
The Times, 22 March 2012

Financial Services

Kautilya Nandan Pruthi has been jailed for masterminding what is believed to have been Britain’s largest Ponzi scheme, duping victims out of £115 million.
Jane Croft
Financial Times, 8 March 2012

Gaming

Worldspreads, one of the UK's largest spread betting operators, is to be wound up after the discovery of an alleged accounting fraud that left up to £12 million missing from its clients' accounts.
Simon Mundy
Financial Times, 19 March 2012

United States of AMERICA

Securities and Exchange Commission (SEC)

The SEC has charged two managers of private investment funds, Frank Mazzola and Laurence Albukerk over allegations of misleading investors and pocketing undisclosed fees and commissions.
SEC press release 2012-43, 14 March 2012

The SEC has charged Thornburg Mortgage Inc executives Larry Goldstone, Clarence Simmons and Jane Starrett over an alleged scheme to fraudulently overstate the company’s income by more than $400 million.
SEC press release 2012-42, 13 March 2012

The SEC has charged investment adviser Brian Raymond Callahan with allegedly defrauding investors in five offshore funds.
SEC press release 2012-38, 6 March 2012

The SEC has charged Chinese citizens Siming Yang, Caiyin Fan, Shui Chong Chang, Biao Cang, Jia Wu, and Ming Ni, and Prestige Trade Investments Ltd., a British Virgin Islands company, with insider trading for trading in shares of Zhongpin Inc., a China-based pork processor. In addition to the charges, the SEC also obtained a court order freezing the defendants' assets in U.S. brokerage accounts.
SEC press release, 6 April 2012

The SEC has charged Michael A. Baker and Michael Gluk, former chief executives of Texas-based ArthroCare Corporation, pursuant to Section 304 of the Sarbanes-Oxley Act, seeking the clawback of bonus compensation and stock sale profits received during a time when ArthroCare was in material non-compliance with financial reporting requirements. The complaint does not allege any personal misconduct by either defendant.
SEC press release, 2 April 2012

The SEC has charged former Coca-Cola Enterprises, Inc. executive Steven Harrold with insider trading for the purchase of company stock through his wife's brokerage account prior to the company's public announcement that it was to acquire The Coca-Cola Company's bottling operations in Norway and Sweden.
SEC press release, 8 March 2012

U.S. Department of Justice

BizJet International Sales and Support Inc., an Oklahoma-based aircraft maintenance, repair and overhaul services corporation, entered a deferred prosecution agreement with the U.S. Department of Justice to resolve a charge of bribing officials in Latin America in violation of the U.S. Foreign Corrupt Practices Act. BizJet agreed to pay an $11.8 million criminal penalty and implement an enhanced compliance program and internal controls. BizJet's indirect parent company, German company Lufthansa Technik AG, entered a separate agreement relating to BizJet's unlawful actions. Lufthansa's agreement requires it to implement internal controls and cooperate with the U.S. Department of Justice.
U.S. Department of Justice press release, 14 March 2012

Broadcasting

Trinity Broadcasting Network, the world's largest Christian TV channel, has become embroiled in a multimillion-dollar financial scandal after allegations of widespread embezzlement against founder Paul Crouch and his wife Janice Crouch. Mr and Mrs Crouch deny the allegations.
Peter Beaumont
The Guardian, 24 March 2012

Banking

The former CFO of Taylor, Bean & Whitaker Mortgage Corp, Delton de Armas, pled guilty to making false statements and conspiring to commit bank and wire fraud for his participation in a $2.9 billion fraud scheme that contributed to his company's collapse as well as the failure of Colonial Bank. Six other individuals have already pled guilty for their participation in the scheme; Lee Bentley Farkas, the chairman of Taylor, Bean & Whitaker, was convicted of 14 counts of conspiracy, bank, securities, and wire fraud in June 2011 and sentenced to 30 years in prison.
U.S. Department of Justice press release, 20 March 2012

EUROPE

Manufacturing

German prosecutors have charged Holger Haerter, the former chief financial officer of Porsche's holding company, with credit fraud for allegedly making incorrect statements to a bank during a €10 billion loan refinancing. Mr Haerter denies the allegations.
Chris Bryant
Financial Times, 6 March 2012

ASIA

Financial Services

Japanese regulators have fined Chuo Mitsui Asset Trust and Banking after allegations of insider dealing before new share issues.
Michiyo Nakamoto and Brooke Masters
Financial Times, 27 March 2012

Mishcon de Reya

Mishcon's Fraud Watch is published by the Dispute Resolution Department of Mishcon de Reya. Widely recognised as the leader in the field of fraud investigations, the Department has pioneered the use of financial fraud techniques in numerous fields, including the rapidly growing areas of theft of confidential information and counterfeiting. The Department founded and run both the Fraud Network, made up of international legal fraud specialists and the Financial Risk Group, for risk and compliance officers.

Mishcon de Reya announces Partner promotions

feedback@mishcon.com — Tue, 17 Apr 2012 14:55:05 GMT

Mishcon de Reya has today announced its annual promotions with the election of four new Partners: Helen Croft, from the Firm’s Employment department; litigator Claire Broadbelt; and Real Estate solicitors Simon Hart and Nick Strutt.

Helen Croft advises employers and employees on competition issues, unfair and wrongful dismissal and discrimination law matters. She also advises senior executives and high net worth individuals on their terms of employment and termination arrangements. As a member of the Firm’s Fashion and Retail Groups, a lot of Helen's work has been for businesses in these sectors, as well as financial services organisations, property and PR companies, bankers and high net worth individuals. Helen is a member of the Employment Lawyers Association.

Claire Broadbelt is experienced in pursuing or defending complex commercial and corporate fraud, specifically serious allegations of fraud or misconduct. Her work often includes asset tracing and recovery, and issuing or defending freezing and search orders and other associated injunctions. Claire is a former chairperson of the Young Fraud Lawyers Association (YFLA), a member of the London Criminal Court Solicitors’ Association and Fraud Women's Network (FWN) and a co-founder of Mishcon’s own Criminal Law Panel.

Simon Hart is a commercial property specialist with particular expertise in investment work. He also has experience in landlord and tenant and development matters. Clients that have drawn on this expertise include Helical Bar Plc, UBS Global Asset Management (UK) Limited and residential developer London & Newcastle. Simon is a member of Mishcon de Reya’s Retail and Leisure group.

Nick Strutt is a real estate finance specialist with over eight years' experience in advising financial institutions, funds, developers and investors on all aspects of real estate finance transactions. He has extensive expertise in bilateral, syndicated, club, structured, mezzanine and staple financings.In the last two years, Nick has primarily advised on restructurings, refinancings, enforcements, intercreditor issues and general work-outs for clients in the banking sector.

All promotions came into effect on 10 April 2012.

Mishcon de Reya's Managing Partner, Kevin Gold commented: As we continue to grow and develop our business, it is with great pleasure that we take the opportunity to promotion these individuals this year. All are thoroughly deserved and highlight the valuable and ongoing contribution each of these individuals make to the Firm.

Deals and Dealmakers

feedback@mishcon.com — Thu, 29 Mar 2012 08:57:17 GMT

Part 9 - Resources

In the Frame

feedback@mishcon.com — Thu, 22 Mar 2012 10:28:58 GMT

Artist's Resale Rights
Willie Christie: Limited Edition Collection
Metal Thefts - The Threat to Heritage
The Fleming Collection
Gifts of Pre-eminent Objects in consultation
The legacy of the Accidia Foundation case
A glass act
About Lawfully Chic

Artist's Resale Rights- The controversial royalty returns to the spotlight- Are you prepared?

Artists, and art market professionals who deal in contemporary and modern works should already be familiar with the Artist’s Resale Right Regulations 2006 (the Regulations). The Regulations provide a right of an artist of an original piece of work to receive royalties on their work when it is sold. The Regulations received a mixed reception when they originally came into force and opinion remains divided. To compound the issue the Regulations have now returned to the spotlight.

The Regulations were brought in to standardise the market in qualifying states and provide a royalty to the creators of certain works. The overriding intention was to give artists a share in the escalation of their work's value as they are subsequently resold. Up to 1 January 2012, the Regulations which implement the EC Directive 2001/84/EC, applied only to the work of living artists (where all the required conditions are met). However on 1 January 2012, an exemption (known as a derogation), that had been in place in the UK was be lifted. This now means that the royalty applies to qualifying works of deceased artists within the 70 year post-death copyright period. Therefore beneficiaries of artist's estates and their heirs now stand to benefit from the royalty in relation to any onwards sales made since 1 January 2012.

If not already done, art market professionals and artists need to take note and prepare for this change. This will mean that the Regulations will now apply to a much larger body of works, purported to be a fourfold increase. It is therefore likely that the consequences will be strongly felt by those working in the art market, and the impact more visible to those who look on.

If you are an artist, auction house, dealer or other art market professional, there will be different implications and you should ensure that you have a plan in place.

Artists and their heirs need to consider their legacy and probate position:

Could they be eligible for the royalty?
Has an inventory of the artwork been created?
How are the works resold- where and for how much?
Has a collecting society been elected to collect and pursue the royalty on their behalf?
Have they written a will and made necessary provisions within it?
Are there any sales which they can properly challenge for payment of the royalty?

Auction Houses need to look at their existing administration infrastructure and consider:

Will they be able to cope with the increased volume of qualifying works?
Will they be able to fulfil their obligations under the Regulations?
Do they have the necessary means in place to ascertain parties' eligibility?

Art market professionals in contemporary and modern art need to be aware of their obligations under the Regulations and start planning for the changes in 2012 now.

Question they should consider are:

Do they operate their business from an EEA or Schedule 2 (ARR) jurisdiction?
Does their method of business practice mean they would be liable to pay any royalties?
Do the type of works they deal in make them qualifying works under the Regulations or will they become qualifying works on 1 January 2012?
Are they administering and fulfilling their reporting obligations under the Regulations? If not, what could they be exposed to?
Will their current set up and business practice be able to cope with the increased volume of qualifying works?

The Regulations in their current form polarise opinion as to their efficacy and application. The removal of the derogation on 1 January 2012, means that the Regulations will be more sharply felt. Those in the art market need to start assessing their position and planning now for this change.

For further information and advice on Artist's Resale Rights please contact:

Karen Sanig

Partner
+44 207 440 7036
karen.sanig@mishcon.com

Amanda Gray

Solicitor
+44 207 440 4745
amanda.gray@mishcon.com

Metal Thefts - The Threat to Heritage

What has been happening?

Scrap metal theft has been a blight on the UK economy for a number of years and is estimated to cost the country £770 million each year. The number of thefts has doubled in the past five years as global metal prices continue to rise. Police have discovered ladders, tools and vans specially adapted for stealing metal items demonstrating the lengths thieves will go to, to cash in on this increasingly lucrative trade. The epidemic impacts on a wide range of victims from rail and electricity networks to churches and private homes, some often becoming repeat victims.

Artworks are now increasingly becoming the target. In December 2011 thieves stole Barbara Hepworth’s seven foot high sculpture Two Forms from Dulwich Park, Southwark. While the sculpture was insured for £500,000 experts say that if the work is melted down, it may fetch a mere £750. Southwark suffered another loss in 2011 when a bronze statue of former MP Alfred Salter was stolen from Cherry Garden Pier in Bermondsey. Similarly, in 2005 Henry Moore’s Reclining Figure was snatched from the grounds of the Henry Moore Foundation in Hertfordshire. Police later reported that the sculpture worth £3 million was melted down and sold off for just £1,500.

For collectors and galleries this growing trend is developing into a real concern. If you have works that may be at risk you need to consider what safeguards you can put in place.

What measures are the government taking?

Many have claimed that existing legislation in the form of the 1964 Scrap Dealers Act is out of date and insufficient. Amid growing calls for reform, on 26th January 2012 the home office announced their plan to amend the Legal Aid, Sentencing and Punishment of Offenders Bill. The Home Secretary Theresa May stated that the Government will create a new criminal offence to prohibit cash payments to purchase scrap metal and increase the fines for all offences under the existing 1964 Act. The Government may also introduce measures requiring all metal dealers to maintain records of all their sales and provide proof of identity when carrying out transactions.

The police are also cracking down on the problem. Scotland Yard has created its first unit devoted to combating metal theft based in Bexley, South East London, one of the most badly affected areas. Meanwhile, a pilot scheme named Operation Tornado has begun in the North East of England. This 6 month project will require those selling scrap metal to provide photographic proof of identity.

How can you protect your property?

While the government and police are mobilising on this specfic trend, owners of metal belongings- be they church roofs, artworks or gates of family homes should be looking to take preventative steps before theft occurs as theft frequently ends in destruction of the item taken.

We recommend the following precautions:

Maintain a detailed inventory of your property including photographs;
Prevent easy access by securely fencing your property and blocking vehicular access, without vehicles thieves cannot easily remove heavy and cumbersome items;
Store items such as ladders and cutting machinery in secure locations;
Consider installing security systems such as Closed Circuit Television or battery operated detector systems linked to a rapid response service;
Avoid placing valuable sculptures on view in grounds and consider moving vulnerable pieces from isolated locations; and
Consider replacing valuable works on display with replicas and keep original works in storage.

For advice on how to safeguard your collection contact Karen Sanig or Amanda Gray .

Karen Sanig

Partner
+44 207 440 7036
karen.sanig@mishcon.com

Amanda Gray

Solicitor
+44 207 440 4745
amanda.gray@mishcon.com

The legacy of the Accidia Foundation case - Art Dealer Commission Structure Acceptable Only with the Fully Informed Prior Consent of the Principal

The obligations of art dealers and intermediaries were put under the microscope last year by a judgment which makes obtaining the fully informed consent and authority of the principal vital in protecting the commission structure and ensuring the transaction is lawful. The effect of this judgment still ricochets throughout the art industry.

The case of Accidia Foundation v Simon C Dickinson Ltd [2010] EWHC 3058 (Ch) was a case brought by Accidia, the owner of a valuable drawing attributed to Leonardo da Vinci, against Dickinson, an art dealer who found the buyer for that drawing. In the judge’s view, there were actually three vital players, but – inexplicably - only two were joined to the litigation. The third was Luxembourg, the third party agent who provided the common thread between claimant and defendant, having first been engaged by Accidia to sell the painting and then in turn engaging Dickinson.

Dickinson agreed a sale price with the buyer of US$7 million, taking US$1 million commission directly and only revealing a net return price of US$6 million to Luxembourg. Although the judge found that Luxembourg must have known Dickinson would take a commission on top of the US$6 million being returned (as she did not share her commission), she agreed the arrangement between themselves and did not tell Accidia about any arrangement. Consequently, Accidia believed the painting had sold for their suggested price of US$5.5 million, added to which Luxembourg invoiced for her US$500,000 commission. Six months after the purchase, the buyer raised concerns over the drawing's authenticity and the actual sale price - which up to this point had been known only to the buyer and Dickinson - was revealed to Accidia.

The judge held that the art dealer was acting as agent for the undisclosed principal, Accidia, and not for the buyer. He also held that Luxembourg, the third party agent, did not have actual or implied authority from Accidia to instruct Dickinson.

The art dealer’s commission arrangement had been fixed by Dickinson himself, without seeking or obtaining consent from either buyer or seller. Dickinson’s submission that this was common international art market practice was not accepted by the judge, who was not satisfied that any custom or practice existed whereby art dealers agree a return price without informing the principle or agent of the ultimate sale price or level of commission taken. The judge went further, holding that not only was this contractual practice not customary but in fact was unlawful and unreasonable unless the fully informed consent of the seller had been obtained or the dealer accounted to the principal for the secret profit secured.

Dickinson would have been well advised, the judge said, to ensure that the ultimate seller understood the net return price arrangement that it had agreed with Luxembourg. The fact that he did not left him personally exposed, though he did not find that Dickinson had acted surreptitiously or dishonestly. While Dickinson should have done more to ensure that Accidia understood the arrangement, Luxembourg was also at fault for failing to properly report to Accidia.

The judge considered that it would be inequitable for Accidia to recover the whole US$1 million from Dickinson, but that it would also be unjust to allow Dickinson to keep it.

Based on the evidence, the judge would have expected Accidia to agree to pay 10% of gross sale price in the present market. That 10% of US$7 million would have been split between Luxembourg and Dickinson, and as the former was paid US$500,000, Dickinson’s just allowance was US$200,000. Accordingly, Dickinson was ordered to reimburse the difference to Accidia, namely US$800,000 less restoration costs of £2,500 which Accidia would have been obliged to pay), plus compound interest from the date of sale.

This litigation, and the unpicking of the commission arrangements of the art dealer, could have been prevented had there been transparent, clear agreements between the parties. Coming on board as a dealer or intermediary, it will be vital to interrogate any existing contracts between the parties and ensure that your position is robustly protected by appropriate legal agreements reflecting the extent of your authority to act and your commission structure.

You need to consider your position in any transaction:

Are you dealing direct with the principal or are there a number of intermediary parties?
What commission arrangement is in place and is the principal aware of the arrangement?
Who will be paying your commission?
Are you protected?

If you are an art dealer or intermediary, please contact Karen Sanig or Amanda Gray to discuss how to protect your position and safeguard your business.

Karen Sanig

Partner
+44 207 440 7036
karen.sanig@mishcon.com

Amanda Gray

Solicitor
+44 207 440 4745
amanda.gray@mishcon.com

Gifts of Pre-eminent Objects and Works of Art to the Nation - News for Collectors

At Budget 2011, the government announced its plan to boost philanthropy through a new scheme aimed at encouraging individuals to donate pre-eminent objects or works of art to the nation. This will be of interest to those who hold works of art or antiques.

When is it happening?

On 29 June 2011 the government launched a consultation on Gifts of Pre-eminent Objects and Works of Art to the Nation. The consultation period ended on the 21 September 2011. Following this, draft clauses that implement the new scheme were included in the Draft Finance Bill 2012. The scheme is expected to come into effect in April 2012.

What is happening?

The Gifts to the Nation scheme provides a reduction in income tax, capital gains tax, or corporation tax where individuals or corporations donate qualifying gifts of pre-eminent property to be held for the benefit of the public or the nation. A gift that qualifies for the tax reduction must be registered and accepted under the scheme set up by the Secretary of State. Jointly owned property is not eligible for the scheme. Trusts, trustees and personal representatives are also not eligible to apply.

How would the scheme work?

If an individual makes a qualifying gift, then a proportion of that individual's tax liability for the relevant year is deemed to have been paid, thus reducing the individual's tax liability for a relevant tax year. The tax reduction available for an individual making a qualifying gift is equal to 30% of the value of the qualifying gift. The individual can elect whether to apply the reduction to income tax or capital gains tax. The individual can also choose whether to apply the tax reduction in the year the offer is registered or spread the tax reduction across the succeeding four tax years. The individual must decide during the year that the offer is made exactly how he/she plans to allocate the tax reduction in advance of each relevant tax year- therefore one cannot say that one plans to distribute £400,000 of the tax reduction over 5 years without specifying exactly how much will be used in each year.
If a corporation makes a qualifying gift, the tax reduction available is 20% of the value of the property forming the gift. This must be applied in the year the donation is registered.
Such donations will also be exempt from capital gains tax and corporation tax.

What is a pre-eminent gift?

The definition is tight in scope and is set out at paragraph 16 of schedule 1 of the Draft Finance Bill. It includes pictures, prints, books, manuscripts, works of art, scientific objects or any other thing that the relevant minister is satisfied is pre-eminent for its national, scientific, historic or artistic interest. This definition is intended to reflect the definition which applies for the Acceptance in Lieu from Inheritance Tax Scheme (s230 Inheritance Act 1984) but it excludes land and buildings. The decision as to what falls into this definition will initially rest with a Panel of experts appointed by the Government.
If the Panel believes that the object meets the requirements it will recommend the application to the relevant minister. Generally, the relevant minister will be the Secretary of State for Culture, Olympics, Media and Sport. However if an object has a strong tie to Scotland, Northern Ireland or Wales the Minister of that country will be involved in the decision.

What institutions can accept an object under the scheme?

The Department for Culture Media and Sport defines an eligible institution as any museum, art gallery, library or similar institution having as its purpose or one of its purposes the preservation for the public benefit of a collection of historic, artistic or scientific interest. Donors may suggest an institution of their choice provided it meets the approval of the Panel. The transfer of the object to the Institution will be subject to the Institution agreeing to certain conditions, including agreeing to insure the work, to maintain the work in good condition and not to sell the work without the consent of the relevant minister.

How will an object be valued?

Applicants will provide information regarding the object's estimated value. The aim is to ascertain what price the object could reasonably be expected to fetch in an open and unrestricted market. The applicant should provide valuations supported by substantiating evidence.

Annual Limit

The gifts of pre-eminent objects scheme coupled with the acceptance in lieu scheme will exist under a cap of £30 million a year for both schemes. Therefore the annual reduction in tax liability accepted under both schemes cannot exceed £30 million in each tax year.

How does the scheme change the status quo?

There is presently no similar tax relief available for lifetime gifts of pre-eminent objects to the nation. The Inheritance Tax Acceptance in Lieu scheme applies to gifts of pre-eminent objects from estates, and operates in respect of Inheritance Tax only. There is also no philanthropic element to the Acceptance in Lieu scheme.

How has the government integrated suggestions produced during the Consultation Period into the Draft Finance Bill?

Many organisations criticised the proposal that the Pre-eminent Gifts scheme would operate under the same £20 million budget as the existing Acceptance in Lieu of Inheritance Tax scheme. The government has responded to this complaint by increasing the combined annual cap for the two schemes by 50% to £30 million.
The initial proposal also suggested that individuals would only be entitled to a tax reduction equal to 25% of the donated object's value. Critics felt that this was not a sufficient enough tax incentive and accordingly the government has increased the tax reduction to 30% of the donated object’s value. In addition, having suggested that the scheme would be only be open to individuals the government are now allowing corporate donors to take advantage of the scheme.

Only time will tell if the new scheme succeeds in meeting the Government’s aim to encourage philanthropy and support charitable giving. The Government has emphasised that this is only the beginning and it will continue to monitor the scheme to ensure its success.

If you are interested in taking advantage of the scheme contact Karen Sanig or Amanda Gray.

Karen Sanig

Partner
+44 207 440 7036
karen.sanig@mishcon.com

Amanda Gray

Solicitor
+44 207 440 4745
amanda.gray@mishcon.com

The Fleming Collection

by Amanda Gray

Peonies in a Chinese Vase
Courtesy of The Fleming-Wyfold Art Foundation

The Fleming Collection has become known as the embassy for Scottish art in London. The collection comprises over 750 oils and watercolours that span from 1770 through to the present day including works by Raeburn, Ramsay, Wilkie and the iconic paintings of the Highland Clearances, The Last of the Clan by Thomas Faed and Lochaber No More by John Watson Nicol.

It is particularly noted for its works by William McTaggart, the Glasgow Boys, DY Cameron, Anne Redpath and a superb group of paintings by the Colourists. This year marks the tenth anniversary of the opening of The Fleming Collection's public gallery in Mayfair.

The collection has two very different exhibitions taking place this year. W. Barns-Graham: A Scottish artist in St Ives, held in association with the Barns-Graham Charitable Trust, runs until 5 April 2012. This major exhibition marks the centenary of Barns-Graham's work and is currently being held at The Fleming Collection at 13 Berkeley Street, London W1.

The forthcoming exhibition Made in Scotland celebrates Scotland's contemporary artists and craftsmen at the Fleming Collection. This exhibition will run from 17 April to 2 June 2012.

Read full article »

Willie Christie: Limited Edition Collection

The relaxing and intimate ambience created by low lighting, comfortable leather sofas and private rooms at Eight Club – a private member's club situated in the heart of the City – make it an ideal venue for Willie Christie’s unseen, seminal photographs by British style icons. Guest blogger Elvira Patruno, MvF Managing Curator, gives us an insider’s perspective.

Limited Edition Collection showcases a selection of groundbreaking works across fashion, music and film during Christie’s decade as a fashion photographer. A tribute to polished 70s romanticism and emboldened 80s glamour, the show includes, among others, intimate portraits of Christie’s former spouse and one of his favourite subjects – Grace Coddington.

Read full article »

About Lawfully Chic

A blog for art-lovers and adventurers, fashionistas and culture vultures, who believe in fair play, fair trade and fair travel.

Created exclusively by Nueluxe and Mishcon de Reya

Visit the website »

A glass act

by Amanda Gray

Sunset Boat, Dale Chihuly
Courtesy of Halycon Gallery

Halcyon Gallery opens its new New Bond Street gallery on 5 December 2011 with an inaugural exhibition by Dale Chihuly. The exhibition will occupy all three levels of the new gallery space and will feature new site-specific work such as a 24-foot long Mille Fiori garden of glass and a two storey Gold and Quartz Two Tier Chandelier, as well as drawings and paintings by the artist.

Works across Chihuly's glass series since the 1970s will be represented in the exhibition. His exotic forms, which burst with rich, vibrant colours, include Cylinders and Baskets in the 1970s; Seaforms, Macchia, Venetians, and Persians in the 1980s; Ikebana and Chandeliers in the 1990s; and Mille Fiori in the 2000s.

The timing of this exhibition is significant for Chihuly, as 2012 will mark 50 years of the International Studio Glass Movement, of which he is a founding member and leading protagonist.

Read full article »

Pictures Courtesy of:

“Grace in Window by the Sea”, 1974 © Willie Christie
"Peonies in a Chinese Vase" Courtesy of The Fleming-Wyfold Art Foundation
"Sunset Boat", Dale Chihuly Courtesy of Halycon Gallery

Tax Planning for Entrepreneurs and Business Angels

feedback@mishcon.com — Wed, 29 Feb 2012 11:58:59 GMT

feedback@mishcon.com Wed, 29 Feb 2012 11:58:59 GMT

At Mishcon de Reya we regularly advise entrepreneurs and business angels on how to structure their business or their investment tax-efficiently. There are many ways for successful entrepreneurs and investors to avoid income tax, capital gains tax and inheritance tax legitimately.

In this brochure we outline a number of schemes available to individuals and companies to assist them in their investment and tax planning.

For more tax and wealth-planning information, be sure to follow Andrew Goldstone on Twitter - @GoldstoneTweets

Enforcement Watch

feedback@mishcon.com — Mon, 30 Jan 2012 15:14:59 GMT

Editor's Note
Dear CEO letters and client money breaches lead to substantial fines
Credit Suisse fined nearly £6m for SCARPs sales failings
Coutts fined £6.3m for AIG Fund sales failings
Failure to engage with responsibilities leads to Compliance Officer SIF ban and fine
HSBC receives largest ever retail fine
£2.8m fine for putting customers at risk of being treated unfairly
Substantial fine for failure to avoid files being altered

Editor's Note

Not only are we in a climate that sees enforcement action becoming more and more prevalent, we are increasingly seeing the battle lines for future enforcement being drawn as the new regulatory regime approaches.

This issue includes a contribution on US enforcement from our colleagues in Mishcon's New York office; there is no doubt that the regulatory regimes of the UK and US are overlapping and have a significant impact on one another in this global economy.

We hope you find our thoughts useful.

Adam Epstein

Partner

+44 20 7440 7102

adam.epstein@mishcon.com

On the Horizon

FSA makes its views known on early publication of Warning Notices

In Enforcement Watch 5 “FSA pushes for enhanced FCA powers”, we commented on the FSA's written submissions to the Joint Committee on the draft Financial Services Bill.

We highlighted in particular areas that, if they went through, were likely to have a real impact on enforcement/contested applications in future. One such area related to the publication of Warning Notices.

We believe that publication of Warning Notices will carry great risks for the subjects of enforcement action. In its written submissions, the FSA argued that the publication proposal did not go far enough. Specifically, it objected to the requirement for the FCA to consult the subject of the Warning Notice before publishing. It stated that most subjects were likely to object to details being published and it feared satellite litigation would result.

In her recent oral evidence to the Joint Committee, Margaret Cole (Interim MD of the FSA Conduct Business Unit) added some further colour to this position, emphasising:

the proposal was only to publish fairly limited details;
this is consistent with what happens in civil process generally, and it would be in the interests of transparency and consumer protection;
many firms take the view that they have to announce details of ongoing FSA enforcement action to the market in any event;
it would counter the suggestion that the regulator has closed door processes;
the need to consult in every case before publication erodes and undermines the use of the power;
consultation would lead to satellite litigation in every single case.

In the context of the reputational risk that firms may face from publication, it was put to Margaret Cole that the Practitioner Panel had suggested that approximately 30% of Final Notices do not bear a great deal of resemblance to the associated Warning Notice. Her view was different. Margaret Cole first pointed out that they only intended to publish brief details of Warning Notices, suggesting then that this should not be a concern. Further, she said that, where the matter was being defended, only about 5% of cases where there was a Warning Notice did not subsequently proceed to a Decision Notice.

In our view, in an industry where trust can be key, publication in relation to Warning Notices has the scope to cause huge business detriment, regardless of the level of detail published. Indeed, there have been high profile examples of business destruction when it has become known that the FSA is investigating. If it turned out that the Warning Notice was unfounded, a business may have been lost unnecessarily. We do not agree that there should be any publication relating to Warning Notices. If the proposal is enacted that details relating to them can be published, our view is that the FCA must consult the subject of the Warning Notice in order to understand the impact on the particular business.

The Joint Committee seems to share Margaret Cole’s view (see “The Joint Committee reports on draft Financial Services Bill”), but the Treasury Committee does not (see “Treasury Committee publishes report into FCA”). The Government has since published the Bill (see “Treasury publishes Financial Services Bill”) and has stuck to its original proposal, permitting publication of details, but only after consultation. This is a hot topic and we shall have to see where it ends up.

FSA’s focus on NEDs in retail arena a shape of things to come

The FSA is looking to adopt a step change in the supervision of retail conduct, with its supervision in this area to become more intensive and intrusive. One reason is no doubt because it does not consider that firms are treating conduct as a strategic issue at a senior level.

Against that background, in December 2011, the FSA ran a conference for Non Executive Directors, focussed on retail conduct issues. This was quickly followed by the FSA’s consultation on proposed guidance for NEDs on their role in ensuring customers are treated fairly.

Currently, the FSA has all manner of high level rules about senior management responsibility, but nothing that in any way approaches the quite full detail set out in these speeches and the proposed guidance. Although only guidance, the proposed text uses phrases such as “we expect NEDs to consider…” and “a NED should…”. These have an air of prescription about them. If this wording is adopted following the consultation, our view is that this will come to be treated as a Code of sorts, and that it will be the yardstick against which NEDs are judged.

If the NED guidance is produced, we see it as giving rise to enforcement action in the (probably quite distant) future for a variety of reasons, such as:

the more intensive and intrusive supervision highlighted above;
the FSA’s push for “personal accountability”. This is especially against a backdrop of the continuing agenda of credible deterrence and the lack of individual scalps in respect of a number of high profile failures;
the focus on treating customers fairly is intensifying; and
the FSA’s stated expectation that NEDs must play a pivotal part within firms’ governance by ensuring firms are meeting their regulatory responsibilities.

Individuals will no doubt have pause for thought before accepting a NED position, particularly in these times. In one sense, however, they may find their responsibilities in the retail arena easier to achieve with increased guidance from the FSA. What they must do, however, is to ensure (i) that they are fully familiar with what the FSA puts out in relation to their role and (ii) that they use it to assist them. Given the direction of travel, NEDs may well in future face enforcement action in the retail industry. If they do, the new guidance is likely to form a key part of any action.

FSA report on RBS failure opens up enforcement debate

The FSA has now published its long awaited report into the failure of RBS. The report is voluminous and touches on a variety of areas. It makes interesting reading, not least because in some respects it is as much about the failures of the FSA as it is about the failures of RBS. For current purposes, however, we focus on the enforcement aspects of the report.

With the fudged exception of the public settlement with Johnny Cameron covered in Enforcement Watch 1 (see “The FSA do a deal with Johnny Cameron (RBS)”), there has been no sanction/public censure of any senior RBS executive or Board Member in connection with the Bank’s failure. The FSA is plainly acutely aware of public disappointment in this “failure”.

It appears that Enforcement’s investigations into the collapse of RBS focused on three areas:

Decision making and controls within RBS’ Global Banking and Markets. The losses suffered by this Division (whose head was Johnny Cameron) were exacerbated by the sub-prime debt crisis and by the expansion of this aspect of the business in 2006.
The decision to acquire ABN AMRO.
The preparation of investment circulars by RBS in connection with the acquisition of ABN AMRO and with equity issuance exercises.

The Report states that Enforcement’s focus during its investigations was the possibility of action against individuals within the Bank, rather than against the Bank itself. The FSA’s view was that action against individuals would send a clearer message to market participants about accountability than imposing a sanction on a (failed) bank. However, Enforcement clearly had difficulties in marrying up their desire to send a strong message to the market with the legal regime in which they operated. In his foreword, Lord Turner explains the legal difficulty in bringing enforcement action. First, he explains that there is no provision for no-fault (“strict”) liability for board members of Banks. Second, he states that decisions taken by a Board which are, in hindsight, commercially unwise cannot give rise to sanction in the absence of a decision which is unreasonable or clearly deficient.

In order to illustrate this point, it is worth considering the Report’s discussion of the RBS Board’s decision to acquire ABN AMRO¹¹. There is criticism of the Board for making its decision on the basis of inadequate due diligence of the target (remarkably the due diligence appears to have been no more than obtaining two lever arch folders and a CD ROM). The Report states that while the Board can be criticised for oceeding with such inadequate due diligence, an enforcement case for inadequate due diligence would have “minimal chances of success given that there are no codes or standards against which to judge whether due diligence is adequate, and given that the limited due diligence which RBS conducted was typical of contested takeovers.” In short, it appears that the FSA concluded that it would not be able to establish that the decision was outside the bounds of reasonableness.

What this all leads to is a debate about whether the law ought to be changed to make sanctioning of executives easier in these circumstances.

In his foreword, Lord Turner raises the possibility that banks ought to be treated differently because of the risk they pose to society and the taxpayer in the event that they fail. He argues that there is a strong argument for new rules which ensure bank executives and Boards place greater weight on avoiding downside risks. He raises two possible reforms:

Strict liability for poor decision taking. He recognises that this may create injustice and face human rights challenges;
An automatic incentives based approach. For example, Lord Turner suggests executives of failing banks might be automatically banned unless they could demonstrate the action they had positively taken (in other words, not strict liability, but at least a presumption of guilt without needing a hearing). Alternatively, he talks about the strengthening of deferral and forfeiture remuneration structures designed to penalise them. Lord Turner notes however that these may not amount to sufficient disincentive.

He concludes that the options to achieve his goals merit careful public debate. Indeed, there has already been some.

For his part, giving evidence to the Joint Committee on the draft Financial Services Bill on 10 November 2011, Hector Sants (CEO of the FSA and CEO designate of the PRA) appeared to doubt the desirability of a regime based on strict liability. In his evidence, he struck a real note of caution about bringing action against executives for making decisions which, with hindsight, are not seen to have been the best option to have chosen. Whilst still stressing full accountability for actions taken, he envisages that such an environment would effectively kill off the possibility of achieving forward based regulation.

Serious Fraud Office Director Richard Alderman argues that the absence of any finding of individual responsibility at RBS means that the law should be changed. However, he has raised the stakes. His proposal is for a change to the criminal law to introduce an offence of being recklessly involved in or running a financial institution. This seems to ignore the real likelihood that, had Enforcement been able to establish that senior management of RBS had been reckless, FSA enforcement action could have been brought against them.

The Government recognises that some of the options would represent a radical change and has since said that the Treasury and the FSA will publish a joint consultation document on the topic in the spring. The debate on the regime for punishing individuals is set to run.

¹¹ This was the most significant of the decisions under review by Enforcement and was one of six factors identified by the FSA as giving rise to the failure of RBS

The Joint Committee reports on draft Financial Services Bill

In June 2011, the Treasury published a draft Financial Services Bill, largely consisting of amendments to FSMA, the Banking Act and other statutes. Shortly thereafter, the Joint Committee was appointed to consider and report on the draft Bill. That Report was published in December 2011. The Report is wide-ranging, and we focus on three aspects particularly relevant to enforcement matters.

First, there is the issue of early publication of Warning Notices. We discuss in fuller detail in this issue (see “FSA makes its views known on early publication of Warning Notices” and “Treasury Committee publishes report into FCA”) the significance of the early publication of details relating to Warning Notices - we set out our views on it, the views of the FSA, and the views of the Treasury Committee. The Joint Committee effectively sided with the FSA, and it made a different recommendation from that made by the Treasury Committee. The Joint Committee agreed that details relating to Warning Notices could be published, and it recommended removal of the requirement to consult before disclosing. It thought, however, that the FSA should be required to publish guidance as to how it will exercise its discretion in respect of disclosure. The Treasury has since published the Bill (see “Treasury publishes Financial Services Bill”. It has left its proposals as they were – an ability to publish details, but only after consultation with the person concerned. The issue of publication of details relating to Warning Notices is critically important in enforcement, and the debate is set to run.

Second, the Joint Committee comments on appeals from decisions of the regulator to a different, more judicial body, the Tribunal. In certain cases, the draft Bill provides that, if the Tribunal chooses not to uphold the decision of the regulator, it will not usually be able to substitute its own decision, but instead will have to refer the matter back to the regulator so that it can reconsider. This would not for example be the case in disciplinary matters, but would for example be the case in supervisory action taken in pursuit of wider public policy aims (eg a decision to vary a person’s permission to carry on regulated activities). There are plainly potentially concerns about this. For example, if the Tribunal cannot substitute its own decision, the review might look toothless. Nevertheless, the Joint Committee agreed with the proposal in the draft Bill, arguing that the regulators were better placed to reach an informed judgment. If enacted, this would, in our view, be regrettable. The dangers of the regulator as investigator, judge and jury are obvious, and they are all the more potent as the regulator becomes increasingly aggressive. Nevertheless, the Government has since elected to retain this proposal in the Bill (see “Treasury publishes Financial Services Bill”).

Third, in light of the FSA’s report into the RBS failure discussed elsewhere in this Issue (see “FSA report on RBS failure opens up enforcement debate”), it is worth commenting briefly on the proposals regarding reports into regulatory failures. In general terms, the Joint Committee is happy that it should be standard practice to publish a report after a major regulatory failure. One interesting aspect is how the requirement to report on regulatory failure interacts with ongoing enforcement action. Whilst the Joint Committee does not address the underlying way to deal with this, it recommends that the impact on other regulatory activity (including enforcement action) be taken into account when deciding on the conduct of a regulatory failure investigation. In the Bill it has since published, the Government has taken on board the recommendation (see “Treasury publishes Financial Services Bill”). Depending on how this all plays out, we may well find that, despite public clamour for a report, the report is long delayed by enforcement activity.

Treasury Committee publishes report into FCA

In September last year, the Treasury Committee announced an inquiry into the new Financial Conduct Authority (the FCA). Between October and December, it held four evidence sessions as part of its inquiry.

On 13 January this year, it published its report. The report summarises various key parts of the evidence and makes a number of recommendations for the Government’s consideration ahead of the drafting and publication of the new proposed legislation. We highlight two areas of particular interest coming out of the report.

The first relates to communications between the regulator and firms. The Treasury Committee emphasised that it was essential for the FCA to improve communication with firms. One particular aspect it stressed was that greater steps should be taken to ensure that when formal regulatory material is released by the FCA, it is clear to firms what is expected of them. For example, it discouraged the culture of "regulation by speech". It recommended that if regulatory material was released in this way, the regulations concerned should also be clarified in adequate detail at the time to all firms affected. In our view, this is to be welcomed. Where firms do not properly know what is expected of them, they are susceptible to enforcement action based on vague notions or high level principles.

The second concerns the early publication of Warning Notices, a topic we have commented on in previous Issues of Enforcement Watch. In this edition of Enforcement Watch, we set out our detailed concerns about the risks of early publication of Warning Notices, and we set out the views of the FSA on the topic (see “FSA makes its views known on early publication of Warning Notices”). The Treasury Committee has set out its views.

The Treasury Committee expresses itself to be concerned that a general rule permitting the FCA to publish early Warning Notices in respect of specific firms (which in some cases could subsequently prove to be unfounded) risks unreasonable reputational damage for which there may be inadequate redress. It is mindful of the risk to natural justice as the regulator can be investigator, judge and jury. Accordingly, whilst Margaret Cole’s evidence was that the proposed power did not go far enough, the Treasury Committee recommended that the Government continue to consult on the proposed power to issue early Warning Notices. In fact, the Government did not take on board this recommendation when it published its Bill (see “Treasury publishes Financial Services Bill”. Instead, it chose to retain the ability to publish details about Warning Notices.

Treasury publishes Financial Services Bill

The Treasury published its draft Financial Service Bill in June 2011. Between July and December 2011, the draft was subject to pre-legislative scrutiny (see "The Joint Committee reports on draft Financial Services Bill"). Following this scrutiny, the Treasury published the Financial Services Bill in January 2012.

The Bill is provisionally scheduled for a second reading on 6 February. The Government is looking for Royal Assent by the end of this year, with a view to the new system being operational in early 2013. We will have to see how it progresses in the coming months.

The Bill plainly covers a very wide range of matters. We comment in detail elsewhere in this issue on the treatment of three enforcement related issues during the pre legislative scrutiny phase (see "The Joint Committee reports on draft Financial Services Bill"). We set out below how they have ultimately been treated in the Bill.

First, there is the question of early publication of Warning Notices¹². The Treasury notes that there were divided views on the topic. Whilst industry broadly opposed the power and called for further safeguards, the FSA and some consumer groups strongly supported it, calling for the removal of the need to consult before publication. The Government concluded that its proposal in the draft Bill struck the right balance. It has left its proposals unchanged. Accordingly, the Bill allows for details to be published but requires the person in question first to be consulted.

Second, there is the question of appeals from decisions of the regulator to the Tribunal (a more judicial body). The draft Financial Services Bill proposed that, in some cases (non disciplinary matters and those involving specific third party rights), although the Tribunal could choose not to uphold the decision of the regulator, it would nevertheless have to remit it back to the regulator for decision. Accordingly, the regulator would be making the decision, not the Tribunal. Whilst it appears that a number of respondents objected strongly to this, readers of this issue will see that the Joint Committee supported it. The Government has decided to retain its proposal. It believes that its proposal is consistent with the judgement led approach of the new authorities.

Finally, there is the question of reports into regulatory failures. Whilst recognising the importance of them, they note the Joint Committee recommendations about taking into account the impact reports may have on ongoing regulatory activity (including enforcement action). The Government has amended the relevant provisions accordingly.

¹² This is the (in our view, controversial) new proposal to publish details of disciplinary action at a relatively early stage.

Spotlight on the US

US District Court rejects SEC/Citigroup Settlement Agreement

On 28 November 2011, Judge Jed Rakoff of the United States District Court for the Southern District of New York rejected a proposed settlement between the United States Securities and Exchange Commission (“SEC”) and Citigroup Global Markets Inc. in a strongly-worded fifteen (15) page opinion. (Judge Rakoff’s decision is available here).

Details of the Case

Although the SEC does not always commence a formal lawsuit against an alleged wrongdoer, in this case it chose to do so. The proposed settlement was presented to Judge Rakoff in the form of a Final Judgment concluding the lawsuit the SEC had commenced against Citigroup.

The SEC alleged in its lawsuit that Citigroup created a $1 billion fund with a substantial percentage of negatively projected assets, and then misrepresented those assets as attractive investments. At the same time, the SEC alleged, Citigroup took a short position in the same assets it was positively advertising. According to the complaint, this scheme allowed Citigroup to realise profits of $160 million while investors lost $700 million.

The proposed settlement would have prevented Citigroup from committing future violations of the Securities Act of 1933. It would also have required Citigroup to pay $285 million in disgorged profits, interest, and civil penalties, and to institute internal measures designed to prevent recurrences of the securities fraud perpetrated. On the other hand, Citigroup would not have had to admit or deny the allegations made against it. However, Judge Rakoff rejected the proposed agreement, finding that it was not in the public interest.

The standard of review applied by the Court was whether the settlement agreement is “fair, reasonable, adequate, and in the public interest,” emphasising the need for any agreement to protect the public. Because Citigroup did not admit or deny any of the allegations in the complaint, Judge Rakoff concluded there was no evidential basis upon which he could evaluate the proposed settlement agreement and determine whether it was in the public’s interest. Additionally, Judge Rakoff criticised the practice of accepting settlement agreements that do not include admissions, stating that such agreements “serve[] various narrow interests of the parties.” Specific to the agreement before him, Judge Rakoff noted that it was far more favourable to Citigroup (facing a charge only of negligence and a fine that was relatively small for the behemoth company) than to the SEC, and did almost nothing for the (allegedly) duped investors. The SEC has announced its intention to appeal Judge Rakoff’s decision.

Comment

Judge Rakoff’s rejection of the settlement is in and of itself significant. The fact that the SEC has decided to appeal the decision indicates just how seriously the SEC is treating it. If the decision is upheld by the Court of Appeals, it may have significant repercussions for future SEC settlement agreements, especially for the region over which the Court of Appeals presides (known as the Second Circuit - the region includes the states of New York, Connecticut, and Vermont). For example, an upholding of Judge Rakoff’s decision may end the practice of defendants neither admitting nor denying allegations.

SEC to step up use of Deferred Prosecution Agreements

In January 2010, as part of its Enforcement Cooperation Initiative, the United States Securities and Exchange Commission (“SEC”) announced that it would begin using “deferred prosecution agreements,” or DFAs.

A DFA is a formal written agreement in which the SEC agrees to forego an enforcement action pursuant to the terms of the specific agreement in exchange for cooperation from the potential defendant and compliance with certain prohibitions and undertakings. Cooperation by the target (the key to the SEC’s decision on which enforcement mechanism to employ) has four components:

self-policing prior to discovery of misconduct;
self-reporting of misconduct and conducting a review of the circumstances;
effective remediation; and
cooperation with law enforcement authorities following discovery of the misconduct. (More information on DFAs is available here).

In May 2011, the SEC entered into its first DFA for violations of the U.S. Foreign Corrupt Practices Act (“FCPA”). The SEC alleged that Tenaris SA had bribed Uzbekistani government officials during a bidding process for a contract to supply oil and gas pipelines. Tenaris won the contract and according to the SEC made almost $5 million in profits. In exchange for the deferred prosecution, Tenaris agreed to pay $5.4 million in disgorgement and prejudgment interest, as well as a $3.5 million criminal penalty agreed to in a Non-Prosecution Agreement entered into with the U.S. Department of Justice. It also agreed to institute enhanced due diligence requirements relating to the retention and payment of agents, to provide FCPA-related training, to require certification of compliance with anti-corruption policies, and to notify the SEC of any complaints or charges against Tenaris or its employees related to corruption or bribery laws. (Additional information on the Tenaris DFA is available here.)

The SEC decided to enter into a DFA with Tenaris because of the company’s proactive response to its discovery of the bribery. Tenaris learned of the bribery during an internal review and promptly informed the SEC. On its own, the company instituted new anti-corruption practices and policies. Tenaris also fully cooperated with the SEC’s subsequent investigation, and promised future cooperation.

Comment

The SEC has stated that it intends to use DFAs more in the future because of their benefits in obtaining cooperation from potential defendants. It remains to be seen just how prevalent the use of DFAs will be in the coming year (and in future years).

For the companies in question, the availability of DFAs can plainly be beneficial as they provide an opportunity for them to avoid prosecution.

However, DFAs carry risks for an accused company. For example, unlike a traditional settlement agreement, a DFA does not rule out future prosecution. Rather, the deferral only remains in place for as long as the accused company continues to cooperate with the SEC to the SEC’s satisfaction. Any further perceived or alleged violation by the company could cause the SEC to terminate the DFA and prosecute its case.

Dodd-Frank Whistleblower Provision

Section 992 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly known as “Dodd-Frank”) provides for payment of an award to any individual who voluntarily provides the SEC with information leading to a successful enforcement action with sanctions of more than $1 million. The award can be anywhere from 10%-30% of the total sanctions collected by the SEC or any related criminal case. The rules governing the whistle blower provision took effect in August 2011.

A critical issue that was debated was whether the whistleblower should be required to first report the alleged SEC violation internally to the firm’s compliance department. Not surprisingly, major corporations and their counsel advocated strongly for such a requirement. The final version of the provision contains no such requirement, but does leave open the possibility of a higher payment to a whistleblower who initially reports internally.

In the first seven weeks of the programme (August 12 - September 30, 2011), the SEC received 334 tips from individuals both inside and outside the United States. To date, no award payments have been publicised by the SEC. Additional information on the programme and how to report tips is available at:

www.sec.gov/whistleblower
www.sec.gov/about/offices/owb/whistleblower- annual-report-2011.pdf

Comment

Whistleblower provisions are a common feature of U.S. federal legislation. For example, in addition to the provision in the Dodd-Frank Act, whistleblower provisions are also included in the Federal Claims Act and certain major federal labour laws. Indeed, the existence and use of such provisions has become more prevalent in recent years as payments to whistleblowers have become larger. With respect to the Dodd-Frank whistleblower provision, it is likely that plaintiff-side attorneys will seek to exploit the provision in a similar way to how they have done in equivalent provisions in other federal legislation. We would expect to see a significant increase in the amount of litigation brought pursuant to this provision in years to come.

Dear CEO letters and client money breaches lead to substantial fines
14 September and 5 December 2011:

The FSA has recently handed out two large fines as a result of failures relating to client money. Integrated Financial Arrangements PLC (Integrated Financial) has been fined £3.5m and Towry Investment Management Limited (Towry) has been fined £494,900. They would have been fined £5m and £707,000 respectively, but each was reduced by 30% for early settlement.

Details of the cases

As part of its thematic review into client money, the FSA sent relevant firms a Dear CO letter in March 2009. In January 2010, the FSA then sent a Dear CEO Letter enclosing a Client Money and Assets Report. The letter asked firms to ensure the report was properly considered, including at Board level, and asked firms to confirm they were fully compliant with the client money and asset rules.

Integrated Financial: Integrated Financial is the UK's biggest wrap platform, which allows independent financial advisers to consolidate their clients’ portfolios in a tax-efficient way under one administrative umbrella. The average amount held by Integrated Financial as client money between December 2001 and June 2010 was £508m.

The FSA visited Integrated Financial in May 2010. It concluded that Integrated Financial had failed to put in place adequate risk management systems in relation to client money. The visit for example revealed that the firm had failed to perform client money calculations to check whether its client money resource was at least equal to its client money requirement. As a consequence, Integrated Financial failed to fund any shortfall in its client money bank accounts.

Further, the FSA found for example that in relation to three of its 28 client money bank accounts, Integrated Financial failed to put in place adequate trust documentation to ensure that client money was protected.

No clients suffered any loss or detriment as a result. Nevertheless, as a result of the firm’s failures, the FSA concluded that Integrated Financial had breached Principles 3¹ and 10², as well as the associated rules contained in the Client Assets Sourcebook (CASS).

Towry: Towry is an independent discretionary investment manager. It received money on behalf of its clients for the provision of a variety of investment and brokerage services. This money was subject to the requirements and standards set out in CASS.

Towry operated client money bank accounts under the normal approach to segregation, such that all client money was paid into those accounts. During the ten year period in question, Towry held an average of £50.6m of client money at any given time.

Towry responded to the January 2010 Dear CEO Letter only four business days after the FSA had sent it, stating that the firm was fully compliant. However, Towry failed to ensure that its response was properly considered before submitting it to the FSA. The reality was that the firm was not compliant; and this only became apparent after the FSA later discovered Towry’s breaches as part of a CASS thematic visit to the firm in November 2010.

The FSA found that Towry’s failure to provide an accurate response to the FSA was a breach of Principle 11³. As to the client money failures, the FSA determined that Towry had breached Principle 10² as it had failed to protect its clients’ money adequately throughout the ten year period in question. In particular, it failed to:

Perform timely reconciliations of its client money requirement against its client money resource;
Maintain accurate records in respect of client money;
Ensure that client money was properly segregated.

As in the Integrated Financial case, although there was no actual client detriment, Towry’s CASS breaches could have placed clients’ money at risk of potential loss or delay in distribution if the firm had become insolvent.

Comment

There are a number of interesting aspects that arise from these cases.

First, client money issues are not going away. Issues 2, 3 and 4 of Enforcement Watch covered the reasonably large number of client money cases in which the FSA has successfully taken action. The Integrated Financial and Towry cases show that client money is still very much on the FSA’s agenda. Moreover, the FSA was explicit that it would continue to take enforcement action against non compliant firms in this area.

Second, the way the cases came about is likely to be repeated in the future. The FSA is intervening earlier and the new FCA proposes to do the same. We have been consistently commenting that early intervention is likely to lead to increased enforcement actions, and that those actions are likely to come out of thematic reviews. These cases are yet further examples of this trend.

Third, the levels of the fines are of some significance. The majority of the above failings relate to a period before the imposition of the FSA’s new penalty setting policies that we covered in Issue 1, (see Enforcement Watch 1“Harsher Penalty Setting Introduced”). Accordingly, in both cases, the FSA set the penalty by reference to its previous rules. We pointed out in Issue 2 (see Enforcement Watch 2 “The FSA gets tough on the client money rules”) that whilst not a tariff or precedent, a fine based on 1% of the average amount of client money might for the old rules come to have some form of persuasive precedent value. In Towry, the headline figures incorporated a component representing approximately 1% of the average client money balances. In Integrated Financial, the fine was also calculated by reference to 1% of the average client money balances.

Finally, the breach of Principle 11 in relation to Towry is interesting. The FSA was explicit that Towry did not deliberately seek to keep information from it. Nevertheless, the FSA found that Towry’s failure properly to consider the FSA’s Dear CEO Letter before sending a clean response amounted to a failure to be “open and co-operative”. Dear CEO Letters need to be addressed with the utmost seriousness, and the utmost care needs to be taken in communications with the FSA.

¹ Principle 3 states that a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
² Principle 10 provides that a firm must arrange adequate protection for clients’ assets when it is responsible for them.
³ Principle 11 requires firms to deal with the FSA in an open and cooperative manner and to disclose anything relating to the firm of which the FSA would reasonably expect notice

Credit Suisse fined nearly £6m for SCARPs sales failings
25 October 2011:

The FSA has fined Credit Suisse (UK) Limited £5.95m for systems and controls failings in relation to its sales of Structured Capital At Risk Products (SCARPs⁴). The penalty would have been £8.5m had Credit Suisse not agreed to settle early.

Details of the case

Between January 2007 and December 2009, approximately 600 Credit Suisse customers invested more than £1 billion in over 1,700 SCARPs.

The FSA identified concerns during a routine supervisory visit in December 2009. This led to an FSA investigation. The FSA ultimately identified a number of serious failings in Credit Suisse’s systems and controls relating to the SCARPs sales. The failings included:

Inadequate systems and controls to assess customers’ attitudes to risk;
For example, some of the terms contained in the booklet that customers were obliged to complete in order to determine their risk profile may not have been clear to inexperienced investors. Further, Credit Suisse could not demonstrate the interaction between a customer’s attitude to risk and / or its investment objective.
Failing to take reasonable care to evidence adequately that the SCARPs it recommended were suitable in light of customers’ overall portfolios;
Failing to put in place adequate systems and controls concerning the recommendation of leverage to customers;
Failing to put in place adequate systems and controls concerning the levels of issuer and investment concentration within customers’ portfolios;
There was for example often no documentation to show that issuer or investment concentration had even been considered when transactions were recommended.
Failure to monitor staff effectively to ensure they took reasonable care about the suitability of their advice.
For example, it was the responsibility of the Credit Suisse Team Leaders and Sector Heads to supervise the work of the Relationship Managers. Yet, in many instances, the number of Relationship Managers within the scope of oversight of a Team Leader or Sector Head was too high, or the relevant management had too many competing responsibilities. This restricted effective monitoring of the work carried out by the Relationship Managers.

The FSA considered that Credit Suisse’s breaches were especially serious: because of the significant amount of customers’ money placed at risk; due to Credit Suisse’s position as one of the leading private banks in the UK; the fact that the failings spanned 3 years; because of the failure to monitor staff effectively.

In sum, the FSA found that there was an unacceptable risk that customers were sold SCARPs that were not suitable for them. The FSA fined Credit Suisse £5.95m (reduced from £8.5m due to early settlement). It did not consider whether any individual advised sales were in fact unsuitable. But Credit Suisse has agreed to a review of sales and to provide redress to the extent sales were unsuitable.

Comment

As with the HSBC and Coutts cases reported on elsewhere in this issue (see “HSBC receives largest ever retail fine” “Coutts fined £6.3m for AIG Fund sales failings”), this is another unsurprising example of the FSA coming down heavily on suitability issues.

Suitability (and the ability to demonstrate it) is likely to continue to be a key area of risk in the wealth management industry. See in that context also our features in Issues 3 and 5(see Enforcement Watch 3 “The FSA sends a tough message on suitability” and Enforcement Watch 5 “Dear CEO letter to wealth managers suggests action to come”).

Although a heavy fine, the fine is only part of the picture. Credit Suisse is also agreeing to pay redress where unsuitable sales are found. The FSA says that this was taken into account in determining the level of financial penalty. The FSA gives no estimate of the likely cost of redress.

Readers may be interested also to read the judgment of Mr Justice Teare in the case of Zaki and Others v Credit Suisse (UK) Limited [2011] EWHC 2422 delivered in October last year. This involved the unsuccessful attempt of a Mr Zeid to claim damages from Credit Suisse in respect of a number of structured financial products he purchased from them.

⁴ SCARPs are complex financial products that provide customers with an agreed enhanced level of income over a specified period, but which also expose them to the potential risk of losing some or even all of their capital.

Coutts fined £6.3m for AIG Fund sales failings
7 November 2011:

Coutts has been fined £6.3m (discounted from £9m for settling early) in relation to its failings concerning its sales of the AIG Fund. It will also compensate customers who have suffered a loss as a result of its failures.

Details of the case

Between December 2003 and September 2008, Coutts sold the AIG Life Premier Access Bond and Premier Bond, Enhanced Variable Rate Fund (“the Fund”) to 427 customers, with investments totalling £1.45 billion.

The Fund invested in financial and money market instruments. However, unlike a standard money market fund, it aimed to deliver an enhanced return by investing a material proportion of the Fund’s assets in asset backed securities and floating rate notes.

During the financial crisis, the market value of some of the assets in the Fund fell below their book values and, following Lehmans in September 2008, AIG’s share price fell sharply and suddenly. A large number of investors sought to withdraw their investments and there was a run on the Fund. As a result the Fund was suspended. Subsequently, (i) customers were permitted to withdraw 50% of their investment at full value (capital plus accrued interest) and (ii) to leave the remaining 50% in a protected fund until July 2012, obtaining at that stage the full amount of their investment, but only as it stood at December 2008. Those that did not follow this route suffered an immediate loss on the amount withdrawn.

Although the FSA found a large number of different failings in relation to Principle 9⁵, they essentially fall into two categories:

Failing to take reasonable care to ensure the suitability of its advice. A key contributor to this was that Coutts did not take the necessary steps to understand all of the Fund’s features and risks in order sufficiently to consider how they should be taken into account when it was being sold to customers.
Failing to respond appropriately to issues affecting the Fund in the latter stages. Subsequently failing properly to investigate and address questions identified about its past sales of the Fund and then carrying out a compliance review that was inadequate.

Coutts was fined £6.3m, after taking account of a 30% discount for early settlement. In addition, Coutts agreed to implement a comprehensive past business review of its sales of the Fund overseen by an independent third party and to compensate all customers who had suffered loss as a result of its failings.

Comment

As with the HSBC and Credit Suisse cases reported on elsewhere in this issue (see “HSBC receives largest ever retail fine” “Credit Suisse fined nearly £6m for SCARPs sales failings”), this is another unsurprising example of the FSA coming down heavily on suitability issues. As we comment in the HSBC case, this fine is entirely consistent with the messages the FSA has previously been sending out on suitability (see Enforcement Watch 3 “The FSA sends a tough message on suitability” and Enforcement Watch 5 “Dear CEO letter to wealth managers suggests action to come”).

The main significance of the case is probably in the size of the fine and the allied compensation that Coutts will need to pay. These will no doubt be heeded by firms in the context of the FSA’s credible deterrence generally.

Additional take aways from the case are limited. One may simply be that firms should have a careful read of the Final Notice in case it helps highlight for them those aspects of diligence that the FSA finds acceptable and those that it does not. Beyond this, it is maybe significant to note that one of the factors that contributed to the seriousness with which the FSA regards the case was Coutts' failure properly to respond to the situation once issues had been raised. For example, in its compliance review, the checklist used by compliance was poor, as it was process driven and not customer outcome focussed.

⁵ Principle 9 states that a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement

Failure to engage with responsibilities leads to Compliance Officer SIF ban and fine
18 November 2011:

Dr Sandradee Joseph, who breached Principle 6 whilst working as a Compliance Officer at a hedge fund management company, has received a £14,000 fine and been banned from performing any significant influence function.

Details of the case

In January 2008, Dr Joseph joined Dynamic Decisions Capital Management (DDCM), where she held the Compliance Oversight controlled function (CF10) and the Money Laundering Reporting controlled function (CF11).

In the wake of the collapse of Lehman Brothers, DDCM’s investment strategy for a fund it managed resulted in catastrophic losses (approx 85% of the fund’s assets under management between October and December 2008). With a view to concealing these losses, in late 2008, a senior employee entered into a number of contracts for the purchase and resale of a bond. Concerns were voiced about the bond.

DDCM’s prime broker was clearly one of those with concerns. It raised certain issues and terminated its relationship with DDCM. Dr Joseph failed properly to read the broker’s letter of resignation or to give adequate consideration to the matters raised in it.

In addition, two institutional investors raised serious concerns in a number of communications, copied into Dr Joseph. At one point, one set out its concerns about the legitimacy and provenance of the bond. Both submitted redemption requests.

The FSA concluded that, in her role, if Dr Joseph became aware of concerns that the firm was not complying with its regulatory obligations, she should have taken steps (i) to ensure those concerns were investigated, (ii) to verify if those concerns appeared to be legitimate, and (iii) if so, to take appropriate action.

In fact, the FSA found that Dr Joseph fell short in that she failed to act with due skill, care and diligence in breach of Principle 6⁶. For example, what had been raised with her ought itself to have raised concerns (i) that DDCM was not complying with its regulatory obligations, (ii) that the bond was not a legitimate financial instrument, (iii) that an attempt was being made to commit fraud against DDCM and the fund, and (iv) that potentially a senior employee might have been guilty of serious misconduct concerning his honesty and integrity. She failed to act on clear concerns raised about the bond and sought to absolve herself of all responsibility for compliance at DDCM in relation to the bond. She relied for example on her mistaken belief that external lawyers had advised on the bond.

Dr Joseph was found to be not fit and proper; this was as a result of failures of competence and capability. She received a ban from holding any significant influence function. In addition, she received a fine of £14,000.

Because she agreed to settle during the course of the FSA investigation, she qualified for a 30% reduction on her penalty, which would otherwise have been £20,000.

Comment

Final Notices that come out of the FSA (as opposed to decisions from the Tribunal) can be frustrating for those not involved in the particular case. There is often a sense that there is significant detail beneath the surface that helped inform the outcome, but that will never see the light of day. This can especially be the case where the Final Notice is the result of settlement negotiations, as is this case with Dr Joseph.

So, all we have to go on in those cases is what appears in the public domain. In this case, it would be interesting for example to have more information on why the headline penalty figure was set at £20,000, where other serious cases have far higher penalties. (The Final Notice says that the financial penalty imposed is considered to be “proportionate in relation to the seriousness of the misconduct”). In addition, it would be interesting to know quite what discussions there were on the scope of the ban, where the FSA found competence and capability failings only, rather than integrity issues. Further, whilst Dr Joseph was a CF10 and CF11, and clearly owed obligations as such, she was not a director. It would be interesting to know how that in reality impacted the way she conducted herself.

As much as there is unknown material, what is clear, however, is that Dr Joseph fell obviously short of what was required and received a serious sanction as a result.

⁶ An approved person performing a significant influence function must exercise due skill, care and diligence in managing the business of the firm for which he is responsible in his controlled function.

HSBC receives largest ever retail fine
2 December 2011:

The FSA has fined HSBC Bank Plc £10.5m (after applying a 30% discount for early settlement). The fine was for inappropriate investment advice provided to elderly customers by one of its subsidiaries, NHFA Limited. In addition to the fine, HSBC estimates that the amount of compensation to be paid to NHFA’s customers will be approximately £29m.

Details of the case

NHFA was acquired by HSBC in July 2005. It was the leading supplier in the UK of independent financial advice on long term care products to help pay for care costs, with a market share in recent years approaching 60%. Between 2005 and 2010, NHFA advised 2,485 elderly customers to invest in asset backed investment products, typically investment bonds, to fund long term care costs. The products were sold to individuals entering, or already in, long term care; and in many cases these elderly customers were reliant on the investments to pay for their care.

A review undertaken by a third party of a sample of 421 relevant customer files found unsuitable sales in relation to 87% of the files. The FSA found that in breach of Principle 9⁷, NHFA and HSBC failed to take reasonable care to ensure the suitability of NHFA’s advice to its customers. The sales process at NHFA failed to:

provide a consistent approach to assessing customers’ attitude to risk;
take into account all the relevant financial and personal circumstances of customers;
give sufficient consideration to the use of other suitable forms of investment;
provide customers with adequate suitability letters.

The FSA considered the failings particularly significant for a number of reasons. These included (i) the fact that NHFA’s customer base was particularly vulnerable (the average customer age was almost 83) and (ii) the mis-conduct occurred over a period of approximately five years.

HSBC is undertaking a past business review to determine whether customers of NHFA or their families are entitled to redress. In addition to the £10.5m fine, HSBC has indicated that it expects the amount of compensation to be paid to NHFA customers will be approximately £29m.

Comment

In one sense, this is another unsurprising example of the FSA coming down heavily on suitability issues. It sits alongside the £5.95m fine handed out to Credit Suisse on 25 October and the £6.3m fine handed out to Coutts on 7 November 2011 (see “Credit Suisse fined nearly £6m for SCARPs sales failings” and “Coutts fined £6.3m for AIG Fund sales failings”). Although not in the same markets, it is entirely consistent with the messages the FSA has been sending out on suitability (see Enforcement Watch 3 “The FSA sends a tough message on suitability” and Enforcement Watch 5 “Dear CEO letter to wealth managers suggests action to come”)

The fine, however, is the largest ever retail fine. It would have been £15m, but for a 30% discount for early settlement. In addition, the FSA points out that HSBC has been given full credit both for its proactive approach to addressing the failures and also for implementing a comprehensive redress package for customers. The suggestion is that, without these, the fine would have been significantly greater.

What is perhaps most interesting about the case is the relationship of NHFA to HSBC. HSBC acquired NHFA in 2005. However, the indications are that it was not properly integrated into the HSBC Group operations until some years later. For example, mis-selling was not detected until a review in 2009. The failures at NHFA emphasise the need for regulated firms to ensure that, where they acquire a new business, they implement appropriate systems and controls to manage and effectively oversee the new business’s activities. This includes positioning the new business in reporting structures that allow the wider group promptly to identify and monitor any risks associated with the new business.

⁷ Principle 9 provides that a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.

£2.8m fine for putting customers at risk of being treated unfairly
16 December 2011:

The FSA has fined Combined Insurance Company of America (CICA) £2.8m (after applying a 30% discount for early settlement) for failing to embed a culture that ensured its customers were treated fairly.

Details of the case

CICA sold accident and sickness insurance products on an advised basis via self-employed sales agents. During the period investigated by the FSA (April 2008 to October 2010), CICA had more than 500,000 policyholders and received £47 million in premiums in respect of the policies in question.

CICA was found to have breached Principle 3⁸ and Principle 6⁹ by failing effectively to manage its sales, claims and complaints handling processes to ensure customers were treated fairly. There were a whole host of systemic failings identified across the firm’s business, including:

CICA’s sales agent recruitment and training procedures. For example: the recruitment procedures focused on the quantity rather than the quality of recruits; there were no minimum qualification requirements for its sales agents; employment references were not always obtained; the induction training did not include a robust method to measure each representative’s ability to complete a Demands and Needs Statement used to record customers’ requirements and reasons for the advice given.
CICA’s sales agent attrition rate was consistently around 200% per annum and the average length of service in the period considered by the FSA was only three months. This created inexperience among the sales team that could impact on the quality of customer outcomes.
CICA failed to implement adequate systems to ensure that its customers would receive suitable advice and be treated fairly. For example, there was insufficient room on the Demands and Needs Statement to record the full details of any policies which customers held with other insurers; the Demands and Needs Statement did not record sufficient information to enable advisers to assess customers’ ability to afford a product.
CICA failed to put in place adequate controls around representatives’ behaviour. For example, it failed to take effective action against representatives who were the subject of customer complaints or found to have breached company rules.
Sales agents were paid on a commission only basis, with insufficient emphasis on the quality of their sales. Whilst a sales agent’s commission was subject to a claw back if a policy lapsed within the commission earn-out period, CICA did not set quality targets nor undertake any root cause analysis as to why policies lapsed.
CICA processed around 2,500 customer claims per month and, although it did monitor some of its claims handling function, it failed to put in place adequate controls to ensure that claims were handled fairly. There were no systems in place to use claims data to identify issues or drive improvements within the business. Nor was there any trend analysis in relation to declined claims.
CICA failed to identify and record all customer complaints. There was no evidence that the firm used the findings of complaint compliance reviews to change its complaint handling operations. Management information provided to the Board failed adequately to show or explain numbers, trends, anomalies or issues. It instead focused on the cost of complaint handling.

CICA agreed to cease writing any new business as from 26 October 2010. It also agreed to a past business review to identify any customer detriment and to provide appropriate loss as a result of CICA failings.

CICA settled early and accordingly received a 30% discount, resulting in a fine of £2.8m. Without this discount, the fine would have been £4m.

Comment

It is no surprise that the FSA should fine a firm for failings of this nature, placing as it did its customers at risk of being treated unfairly. The interest in this case is perhaps three fold.

First, the fine is fairly substantial in itself. Further, it would have been a fair deal more if CICA had not already begun to take steps to address some of the issues and also agreed to conduct a past business review and to provide redress.

Second, whilst there has been much emphasis by the FSA on treating customers fairly, insurance cases have not tended to dominate the headlines.

Third, the FSA frequently co-operates with other regulators internationally. This case appears to be a less common case in that the FSA worked closely with its Irish counterparts. The Central Bank of Ireland has taken its own enforcement action for similar misconduct at the Irish subsidiary of CICA.

⁸ Principle 3: A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
⁹ Principle 6: A firm must pay due regard to the interests of its customers and treat them fairly.

Substantial fine for failure to avoid files being altered
17 January 2012:

The FSA has imposed a fine of £2,170,000 for failings by Direct Line Insurance Plc (Direct Line) and Churchill Insurance Company Limited (Churchill) to prevent files that the FSA had requested from being improperly altered.

Details of the case

The FSA initially identified a number of areas for improvement in relation to complaints handling at Direct Line and at Churchill (the Firms). It subsequently informed the Firms in February 2010 that it would undertake a sample review of closed complaint files to further assess effectiveness.

In preparation for this review, the Firms asked a major accountancy firm to do a sample review. 28% of the 110 files reviewed failed the assessment.

In response to this, in March 2010, senior management initiated their own internal review of closed complaint files with a view to ensuring that files were complete and to ensure that there had been no customer detriment. Senior management also arranged for the Firms’ customer relations management to carry out two conference calls during which they told staff about the 28% failure in the sample review and that this was unacceptable. During the calls, messages delivered included:

A similar failure during the FSA's review, which was beginning soon, could lead to enforcement action for the firm;
Staff should consider what they might do to ensure that files were in a state that would pass FSA inspection and if that required staff to review their closed complaint files, they were encouraged to do so;
If staff took immediate action and changed things now, this would be an extremely positive result;
Staff found not to be operating to the required standard would face disciplinary investigation; and
Staff were reminded that the most important thing was to get the right outcome for customers

As part of the internal review, the Firms asked staff to add evidence that had been relied on in reaching a decision where that evidence was already referred to in the files. This was consistent with the FSA’s letter proposing a review. The Firms identified a significant risk that staff might make improper alterations to the files, and the Firms took steps to mitigate the risks. Nevertheless, some of these files included alterations of the type subsequently criticised by the FSA (see below) eg the addition of reference numbers.

The FSA then asked for and received 50 files for review. At this stage, no instructions were issued to staff with sufficient clarity that, whilst files should be complete (eg by adding evidence referred to in the file, but missing because held electronically), they should not be otherwise altered. It was particularly important that clear instructions were given because the earlier conference calls increased the risk that files could be altered improperly.

Following a detailed internal investigation by the Firms, it was subsequently discovered that 27 of the 50 files had been improperly altered before they were sent to the FSA, and seven internal documents were found to contain staff signatures forged by one member of staff. The majority of the alterations were found to be minor in nature eg addition of telephone voice recording numbers.

In sum, the FSA found the Firms to be in breach of Principle 2¹⁰ because they failed to take adequate steps to ensure that the 50 files would not be improperly altered before they were provided to the FSA. The Firms settled the case at an early stage and therefore qualified for a 30% discount. Without the reduction, the fine would have been £3.1 million.

Comment

Although this is an atypical case, it of course comes as no surprise that files presented to the FSA should not be improperly altered. Nevertheless, there are a number of interesting features of this case.

First, it provides a certain amount of guidance about what the FSA expects firms to instruct their staff who are responsible for collation of evidence for the FSA. Firms would do well to read certain parts of the Final Notice with real care. It would be a shame if firms that would otherwise suffer no enforcement action in respect of the underlying subject matter did so simply for how they dealt with an FSA request.

Second, it is an interesting example of penalty setting. The penalty was set under the relatively new 5 stage process (see Enforcement Watch 1 “Harsher Penalty Setting Introduced”). This was a case with limited objective elements under the process. In effect, the FSA came to a figure based on a rather more subjective view. It decided on a level 3 degree of seriousness under step 2, and made no adjustment to this except for a discount for early settlement.

Third, the level of fine is substantial. In a case even where the majority of alterations are described as being minor in nature, this sends a signal about the significance of firm’s dealings with the FSA in a manner that guarantees the integrity of information. It should be read alongside the Towry case reported on elsewhere in this issue in terms of dealings with the regulator (see “Dear CEO letters and client money breaches lead to substantial fines”).

¹⁰ A firm must conduct its business with due skill, care and diligence

Mishcon de Reya advises Limited Brands on La Senza deal

feedback@mishcon.com — Tue, 10 Jan 2012 17:55:29 GMT

Mishcon de Reya has advised Limited Brands Inc, the US retail group, which owns the rights to the La Senza and Victoria’s Secret lingerie brands, in connection with the recent acquisition of 60 La Senza UK stores from private equity fund, Lion Capital.

In a significant transaction for the beleaguered UK high street, the deal saw 1,100 UK jobs saved in the acquired business. Leading Kuwait-based retail franchise operator, Alshaya Group, purchased the business out of administration and will now operate in the UK under licence from, and with the support of, Limited Brands.

Mishcon de Reya's team was led by corporate partners Kevin McCarthy and Andrew Rimmington with support from Jeremy Hertzog (IP), Danny Davis (Reconstruction & Insolvency), Lewis Cohen and Mary Guinness (Commercial).

KPMG headed up the pre-pack administration, with Linklaters advising Alshaya and SJ Berwin advising La Senza/Lion.

The deal completed successfully on 9 January after two weeks of intensive negotiations over the Christmas and New Year period.

Mishcon de Reya advises Frutarom on the acquisition of Savoury Flavours

feedback@mishcon.com — Thu, 05 Jan 2012 10:08:27 GMT

Mishcon de Reya has advised Israeli client Frutarom Industries Ltd ("Frutarom") on the acquisition of Savoury Flavours (Holding) Ltd and its subsidiaries ("SFL") for the approximate value of £3.77 million.

SFL develops, manufactures and markets savoury taste solutions, including flavours, seasoning compounds, marinades and sauces specialising in snacks and convenience foods. SFL has a development, manufacturing and marketing site in the UK, and a wide customer base including food manufacturers and private labels manufacturers in the UK and in emerging markets.

Frutarom President and Chief Executive Officer, Ori Yehudai said "After five acquisitions completed in 2011, Frutarom is opening 2012 with an additional acquisition, which continues to strengthen its activities in the savoury segment in Europe and in developing markets. This is an additional step towards strengthening Frutarom's position in the UK market, where Frutarom is currently a leading sweet flavours manufacturer".

This is the second corporate transaction Mishcon has advised on in the last five months for this acquisitive company.

The Mishcon team was led by corporate partner Dean Poster and assisted by corporate lawyer Niki Stephens.

Mishcon de Reya advises Capital & Counties on strategic Covent Garden acquisitions

feedback@mishcon.com — Tue, 24 May 2011 00:00:00 GMT

The properties comprise: 19a and 19-26 Floral Street, 26 and 27-32 King Street and 34 Rose Street. The adjacent properties, which front King Street and Floral Street, provide 71,900 sq ft of office, retail and residential accommodation around a central courtyard. There are 10 tenants, producing an annual rental income of £2.5 million.

The office component comprises 46,000 sq ft with tenants including F&C Asset Management and Beale & Co Solicitors. The retail element is 23,000 sq ft and there is 2,900 sq ft of residential. Retail tenants include Moss Bros, Hackett and Carluccio’s.

The team advising Capco was led by Stephen Hughes (Partner, Real Estate) with assistance from Jonathan Legg (Partner, Real Estate Tax), Daniel Farrand (Head of Planning) and Claire Parker and Helena Liebster (Assistants, Real Estate).