Blowin’ in the whistle

Plans to give the FSA power to grant immunity to whistleblowers are fine in principle – but clear guidelines are needed, argue Tom Epps and Shula de Jersey.

Blowin' in the whistleChancellor of the Exchequer Alistair Darling recently announced plans to arm the Financial Services Authority (FSA) with statutory powers to grant immunity from prosecution to individuals who are willing to ‘blow the whistle’ and provide evidence against others who have committed criminal offences of market abuse.

The anticipated introduction of the powers is intended to assist the City watchdog in prosecuting insider dealing and other market abuse cases. In the words of Darling, the idea is to give the FSA the “tools to do the job”. It is understood that the model being looked at is similar to that used by the US Securities and Exchange Commission (SEC), which already has the power to grant immunity and operates an insider trading bounty programme. Since the inception of the FSA in 2001 only one prosecution has been brought for the criminal offence of insider dealing, and that case is currently ongoing. Across the pond, the SEC has filed more than 300 insider trading cases since 2001.

If the immunity provisions are granted to the FSA, it will no doubt seek to use them as the ‘carrot’ to encourage those who have committed market abuse offences to give evidence against their partners in crime in return for immunity from prosecution.

Historically, the UK criminal courts have been reluctant to encourage the prosecution to rely on accomplice evidence. The trend of relying on ‘supergrass’ witnesses in the 1970s has long passed. However, the past few years has seen the re-emergence of accomplice evidence. The reason for this development is that in April 2006 the Crown Prosecution Service, Rethinking Crime & Punishment, Serious Fraud Office and Serious Organised Crime Agency were given powers to grant immunity to accomplices under Section 71 of the Serious Organised Crime and Police Act 2005 and the Office of Fair Trading (OFT) were granted similar powers under Section 190 of the Enterprise Act 2002 which came into force in June 2003.

If evoked, Section 71 specifies that an immunity notice must be drawn up by the prosecuting agency confirming the conditions that must be adhered to in return for the accomplice/suspect receiving immunity. If the prosecution considers that the conditions have not been met – for example, that truthful evidence has not been provided or disclosure withheld – the whistleblower may find themselves in the dock alongside the individuals they produced evidence against and for the offences they have admitted during the course of giving evidence to the prosecution.

The FSA has for some time coveted the statutory immunity powers enjoyed by the other prosecuting agencies. There is little doubt that those investigating market abuse would welcome the prospect of companies and individuals offering to provide them with evidence in return for immunity rather than being left to prove their case without any assistance or cooperation from those alleged to have abused the market.

However, a very cautious and responsible approach must be applied by the FSA if it is given statutory authority to granted immunity. It is imperative that the FSA devises a detailed and clear set of guidelines as to how immunity is to be applied if it is to operate fairly. It is of note that the OFT’s leniency and immunity guidance is far more detailed than the other prosecuting agencies’, some of which have virtually no available guidance for those who may be considering blowing the whistle.

Without such guidance as to how immunity ultimately will be granted, those who might blow the whistle are unlikely to come forward for fear of simply building a case against themselves. Equally importantly there must be some fair rationale for offering some co-defendants immunity while excluding others.

There is an obvious danger that investigators will be led in a direction by an accomplice at an early stage which solely serves the ends of those providing the evidence. Critics of the use of accomplice evidence state that it is likely to lead to investigators being pointed towards evidence which is helpful to the individual or company but not necessarily to all relevant evidence.

Sir Matthew Hale’s comments, adopted by Lord Justice Lawton in Turner in 1975, incorporate the above concerns. Hale said: “The truth is that more mischief hath come to good men by these kinds of approvements, by false accusations of desperate villains, than benefit to the public by the discovery and convicting of real offenders.”

It would be easy to imagine accomplices being keen to provide whatever evidence they feel may secure immunity if they are faced with the prospect of a trial and a custodial sentence together with all the potential adverse publicity.

There will undoubtedly be increasing pressure on the FSA to produce results, and some much-needed favourable publicity, by way of convictions in market abuse cases – particularly after the FSA’s failings over the collapse of Northern Rock and the suspected raid on HBOS shares.

Darling’s recent statements will not have been lost on the FSA. “We have a duty to ensure we have clean and efficient markets. We will come down hard on those manipulating the system,” he stated. However, it is vital that the FSA uses any further tools it is given responsibly, and that the desire to prove results does not cloud its judgement when determining how to use the immunity provisions.

Tom Epps is a partner and Shula de Jersey an assistant solicitor in the business and regulatory investigations department at Russell Jones & Walker