Summer saw the conclusion of the Financial Services Authority’s (FSA) first criminal prosecution under Section 397 of the Financial Services and Markets Act 2000 (FSMA), when in August 2005 Carl Rigby, ex-chairman and chief executive officer of software company AIT, and Gareth Bailey, its former financial director, were found guilty by a jury at Southwark Crown Court of recklessly making a statement to the market which was misleading, false or deceptive, contrary to Section 397(1)(c) of the FSMA.
On 7 October 2005 Rigby was sentenced to three and a half years’ imprisonment and disqualified from being a director for six years; Bailey was sentenced to two years’ imprisonment and disqualified from being a director for four years.
His Honour Judge Elwen said: “This was conduct which, while not deliberate, amounted on the part of directors of a public company, whose shares were quoted on the London Stock Exchange, to recklessness as to the duties owed to fellow directors, employees, private and institutional shareholders and as to the faith and credit of the London market of so egregious and exorbitant a nature as to be so serious that only custodial sentences can possibly follow.”
The FSA prosecution centred on a trading statement released on 2 May 2002, which forecasted a profit of £6.7m based on the revenue from three contracts worth £4.8m. However, the contracts were not binding. When the true position came to light, profit warnings were issued and the company’s share price went into freefall, resulting in some 80 per cent being wiped off the value of AIT’s shares.
Although not the first prosecution under the FSMA, this case is still the FSA’s first contested trial.
Following a hard-fought three-month trial, the FSA must be delighted. Although some legal commentators may observe that the FSA did not secure convictions for the more serious offence of ‘knowingly’ making misleading statements and that a third defendant was acquitted, the convictions still send a significant warning to the regulated sector.
First, they illustrate that the FSA’s enforcement division can and will deal with complex financial crime. Following this success it will be interesting to see whether the FSA will consider prosecutions for insider dealing instead of taking action under the civil market abuse regime. Second, they show how seriously the courts consider offences against the financial markets. Last year Judge Elwen sentenced former compliance officer Asif Butt to five years’ imprisonment for conspiracy to commit insider dealing. In sentencing, Judge Elwen said: “If investors, large and small, come to the view that people are habitually stealing a march on them, the health of the financial services industry, on which almost all of us are dependent, will suffer severely.”
This case sends a strong message to the directors of listed companies regarding their personal liability for announcements made to the market and the consequences if the statements are inaccurate. Following the sentencing hearing, FSA enforcement director Margaret Cole said: “Before issuing a statement, directors must carefully consider their obligations and inform and consult their advisers early in the process.”
Before making a statement, directors must have confidence in the accuracy of the supporting information. Directors may wish to consider the sentencing comments of Judge Elwen, who said: “The directors of any company have responsibilities… to ensure that they give a true and fair view of the company’s affairs. The watchword in that regard is prudence. To put it another way, when in doubt, count it out.”
Richard Burger, senior solicitor, regulatory team, Mills & Reeve