Fraud focus

The extreme length of the SFO’s unsuccessful investigation into TransTec’s payments to Ford highlight the need for fraud prosecutors to review their own cases on an ongoing basis – and to be held accountable for their own failures to do so, says Stephen Parkinson

For too long fraud prosecutors have avoided detailed scrutiny of their work. But questions are increasingly being asked about the time it takes them to bring cases to court, whether they are choosing the right cases and whether they are flexible enough to change course and abandon cases when they cannot be sustained.

Following close on the heels of the Serious Fraud Office’s (SFO) well-publicised failures in the Wickes and SSL International cases, its most recent setback, arising out of the collapse of TransTec in 1999, illustrates a number of these problems.

The problem with TransTec
TransTec was a medium-sized engineering company in the Midlands. A large part of its business involved the manufacture of engine parts for the automotive industry. In 1996 it ran into difficulties over the manufacture of a new single overhead camshaft that it was producing for Ford’s Explorer vehicle. Many of the problems were caused by the punishing timetable that Ford, its major customer, insisted upon for production of the camshaft, and changes that it made to the specification. Other problems were caused by the failure of the automated manufacturing process installed by TransTec.

In April 1996, Ford wrote to TransTec alleging that it had made huge losses as a direct consequence of TransTec’s failures and demanding a payment of $36m (£19.22m) on the basis that TransTec was in breach of contract. In fact, as Ford knew, the limit of TransTec’s legal liability was no more than $140,000 (£74,740).

But Ford was not interested in a legal claim; it intended to use its commercial weight in order to force its will. During the negotiations which took place that summer, it deprived TransTec of new orders for business and threatened to withdraw all existing business.

Faced with this pressure, TransTec chief executive Richard Carr and his team negotiated an agreement, meaning that $18m (£9.61m) would be paid over a period of time, beginning in 1998, but only if Ford continued to place profitable business with the company in the future. The agreement appeared to give Ford what it wanted, but it was designed specifically to protect TransTec’s future book of work. It seemed a reasonable outcome in a difficult situation.

Ford was paid $12m (£6.41m) during 1998, but late that year trading conditions became very difficult, and orders, particularly from Ford, declined. The following year trading was so bad that TransTec was left fighting for survival. It refused to pay Ford any more under the agreement, claiming that Ford had failed to give it the business it had promised. In the last weeks of 1999 details of the agreement with Ford became known to TransTec’s bankers and allegations were made that the company’s accounts had not properly reflected the agreement. The banks claimed that their confidence was dented and, declining to provide further funding, they called in the receivers.

There then began a series of investigations that lasted a total of six years. The receivers, the Department of Trade and Industry, the Accountants’ Joint Disciplinary Scheme and finally the SFO all looked into the circumstances in which the agreement was created and the accounting for it. Carr cooperated throughout with all the investigations. His case was that he struck a good deal in the circumstances, which was not concealed from anyone and, as far as he was aware, was properly accounted for.

Despite this, in October 2004 Carr was charged by the SFO with six offences of publishing false accounts and one offence of misleading auditors. TransTec finance director Bill Jeffrey was also charged. The case proceeded on the basis that the agreement was the settlement of a claim and should have been accounted for as an actual or contingent liability in 1996 and in full in 1997. Since this did not happen, it was claimed that the agreement should have been accounted for in full in subsequent years. Evidence cracks the case
With a couple of months to go before the criminal trial, the defence served expert evidence from a leading forensic accountant. His report examined in detail the commercial substance of the agreement and demonstrated convincingly that it was conditional, and that therefore the accounting-based charges on which the whole case rested could not survive. Despite this, the SFO pressed on.

The trial itself began this January and lasted three months. From the start the prosecution case unravelled, and it became clear from the jury’s body language that it was unimpressed with the case and the witnesses. The Ford witnesses, on whom the SFO case was based, gave evidence that firmly buttressed the defence case.

A compelling picture emerged of TransTec managing to secure, despite enormous pressure from Ford, a conditional agreement that benefited both sides and not just Ford. The SFO’s case that the agreement was concealed was damaged when evidence was given that revealed the auditors knew the essential facts of the agreement when they approved TransTec’s accounting treatment. Late in the case the Crown conceded that the agreement was conditional, but argued unconvincingly that the conditions were meaningless.

Jeffrey had surprisingly pleaded guilty at the outset, but the jury appears to have accepted the assertion of Carr’s counsel that he was wrong to do so. In any event, it acquitted Carr on all counts. The judge had no option but to sentence Jeffrey, but he gave him a suspended sentence, which enabled his immediate release.

Accountability required
This case took six years to come to court following three separate investigations, during which time Carr’s life was brought to a halt and he and his family suffered significant stress and uncertainty. The combination of Carr’s evidence (which never changed from the first statement he made to the SFO), the documents in support and the evidence of his expert fundamentally undermined the case that the SFO brought – yet it proceeded regardless.

The evidence that emerged even from its own witnesses supported Carr’s case, but rather than abandon the case the SFO changed it to try to fit the facts. If the SFO had been prepared to show more scepticism internally about its case it could have saved itself and the public a great deal of money.

Surely the time has now come for the SFO to become subject to more accountability. Given the size and importance of its cases, it ought to submit them to independent oversight by an inspectorate, as is the case for the Crown Prosecution Service and HM Revenue & Customs. It should also review its internal mechanisms for ensuring quality control.

Although the SFO does review its cases at crucial stages, the temptation to keep the juggernaut going, once a significant level of time and resources have been invested in a case, must often be irresistible. One solution is to bring in peer review by colleagues who have had nothing to do with the case. This would bring a fresh perspective by people with no territory to defend.

Finally, the SFO should examine its vetting processes. Even on its subsequently discredited version of the facts, it must be doubtful whether the case of Carr should ever have been prosecuted. The case was essentially a dispute about the accountancy treatment of payments made to Ford. Regulators were already on the scene. They should have been left to get on with it. n
Stephen Parkinson is a partner at Kingsley Napley