On 7 October Gareth Bailey, former Financial
Director, and Carl Rigby, former Chairman and CEO, of software
company AIT Group Plc received custodial sentences of 2 and 3½
years respectively for releasing a misleading trading update to the
market. The prosecution was instigated by the FSA and is the first
time that the regulator has taken criminal proceedings under
section 397 Financial Services and Markets Act 2000 (FSMA).
Under the section it is an offence for anyone to
make a statement, promise or forecast that is designed to induce
someone else to buy or sell shares if the person making the
statement either knows it to be misleading, false or deceptive in a
material particular or is reckless as to whether may be. On
indictment, the maximum sentence is seven years imprisonment.
Since December 2001, when the FSA was given new
powers under FSMA to prosecute companies and individuals for the
'civil' offence of market abuse, and to fine companies and
directors for breaches of the listing rules, most cases involving
misleading statements by listed companies have been brought under
one or both of these heads. Because both are effectively civil
offences policed by the FSA, they require a lower standard of proof
than in criminal cases, but the maximum sanction in each case is a
fine. In this instance, however, the FSA chose to instigate
criminal proceedings under section 397.
Although the two directors were acquitted on the
charge of knowingly misleading the market (the 'dishonesty'
offence), they were found guilty of making the statement
Mr Rigby was also disqualified from being a company
director for 6 years, and Mr Bailey for 4 years.
On 2 May 2002 AIT (which was then listed on the
Official List) issued a trading update stating that both turnover
and profit were in line with expectations. However the forecast
profit of £6.7m depended on the inclusion of £4.8m in revenue from
three non-existent contracts in the 31 March 2002 year end
On 31 May 2002 an update stated that the 2 May 2002
statement was no longer accurate because one of the contracts had
not been confirmed, resulting in a £1.1m shortfall in revenue and
profit. The update also noted that short term cash requirements
were unlikely to be covered by AIT's available borrowing facilities
and other cash resources.
As a result, AIT's share price fell from 492.5p to
On 13 June 2002 AIT then announced that it would
not publish preliminary results that day, as was previously
expected, because of issues that had arisen in the company's audit.
It also said that there would be a further shortfall in revenue and
profit, partly because the company had failed to satisfy itself
that the value of a license agreement worth £2.5m could be
recognised in the year end results.
The share price then fell from 105p to 38.5p.
It seems clear that both the FSA and the court
intended to make an example of AIT's directors. Passing sentence,
His Honour Judge Elwen said:
"If investors, large and small, come to the view
that they cannot trust the information companies announce to the
market, they will avoid the market when making investment
decisions. The health of the financial services industry which is a
major contributor to the UK economy will suffer".
Margaret Cole, Director of Enforcement at the FSA,
"Directors can expect to be held personally
responsible for the announcements they make to the market, as these
convictions have shown. The sentences further demonstrate
that the Courts take a serious view of this type of
behaviour. Before issuing a statement, directors must
carefully consider their obligations and inform and consult their
advisors early in the process."
Criminal offences policed by the FSA
As well as section 397 FSMA, the FSA is also
primarily responsible for policing a number of other criminal
offences which carry a maximum sanction of imprisonment,
- carrying on a regulated activity in the United Kingdom without
FSA authorisation – eg. accepting deposits; managing,
advising on or arranging deals in investments; selling insurance
(section 19(1) FSMA)
- communicating in the course of business an invitation or
inducement to engage in investment activity (a "financial
promotion"), unless the promotion is approved by an authorised
person (section 21 FSMA)
- offering transferable securities to the public in the United
Kingdom, or requesting the admission of such securities to trading
on the Official List, without having first published a prospectus
(section 85 FSMA)
- operating or promoting an arrangement that constitutes a
collective investment scheme within section 235 FSMA without FSA
In each case there are various exemptions
available, and directors should seek advice on how to take
advantage of them.
The FSA's approach to enforcement
Although it will usually try to obtain information
voluntarily, the FSA has extensive statutory powers of
investigation, including powers to require the production of
documents and to require persons to attend interviews. Failure to
comply with an FSA-appointed investigator's notice requiring
attendance for interview is likely to amount to a contempt of
court. The FSA also has power to detain suspects for questioning in
relation to certain offences. In addition, in August 2003 the FSA
signed a memorandum of understanding with the City of London Police
Fraud Squad formalising the powers of the police to arrest people,
on the FSA's behalf, in cases of suspected market abuse, insider
dealing, money laundering or illegal deposit taking.
In deciding whether to bring criminal proceedings
or to refer the matter to another prosecuting authority, the FSA
will apply the basic principles set out in the Code for Crown
Prosecutors. In particular, it will consider whether:
- there is sufficient evidence to provide a realistic prospect of
conviction against the defendant on each criminal charge ('the
evidential test'); and
- having regard to the seriousness of the offence and all the
circumstances, criminal prosecution is in the public interest ('the
public interest test').
In considering the public interest test, the FSA
will bear in mind that its four statutory objectives include
maintaining market confidence and fighting financial crime.
Given its limited resources, the FSA's stated
policy is to adopt a risk-based approach, under which it aims to
prioritise and investigate only those cases which are significant.
One of the things illustrated by the AIT case, however, is that it
is not only the directors of the largest listed companies that the
FSA may seek to make an example of: in this case the FSA appears to
have regarded the offence as 'significant' even though the
company's turnover, profit and net assets were relatively modest by
comparison with many listed companies.