Lord Grabiner QC helped the Financial Services Authority (FSA) to secure a landmark victory over Sir Philip Watts, the former chairman of Royal Dutch Shell, last week.
The tribunal decision was the latest twist in the high-profile scandal relating to Shell’s overstatement of its oil and gas reserves. Shell agreed to pay a £17m fine (the largest ever imposed by the FSA) in August 2004 following an investigation by the FSA into misstatements by the group concerning its hydrocarbon reserves between 1998 and 2004.
Watts, advised by Herbert Smith partner and former head of integrity in the FSA’s enforcement section Martyn Hopper, resigned from his role at Shell after the scandal broke. He faces a separate investigation into his own conduct.
Watts’ lawyers had claimed that even though Watts was not singled out in the FSA’s decision notice and final notice, he was nevertheless “identified and prejudiced” because informed observers knew he had been a senior executive.
But the Financial Services and Markets Tribunal last week ruled that the FSA had not identified and prejudiced Watts during its handling of the much-publicised debacle.
The FSA said in a statement that it welcomed the “clarification of the law in relation to the rights of third parties”. This is the first time the tribunal has examined rights of third parties in market abuse cases brought by the FSA under the powers of the Financial Services and Market Act (FSMA).
Indeed, the decision will be welcomed by the FSA in light of the recent criticisms levelled against it by the tribunal in the Legal & General (L&G) misselling case. In January the tribunal cleared L&G of widespread misselling of endowments, providing that only eight out of 152 were missold. In May the tribunal halved the fine imposed by the FSA against the life insurer. Following that devastating judgment, the FSA launched a sweeping review of its enforcement procedures.
What is more, the FSA’s victory saves the regulator from having to give third-party rights to a company’s entire board or senior management.
Freshfields Bruckhaus Deringer partner David Scott says: “The FSA must be delighted not to have suffered a defeat. If it had lost this one it would have caused a real problem with the FSA’s strong desire to speed up its enforcement procedure. The FSA can therefore carry on as it has been doing and use a twin-track approach and bring separate actions against the company and individuals.”
“It was a timely victory for the FSA as it could do with a lift,” concludes another source.
Section 393 of the FSMA says that anyone identified in an FSA notice has the right to see it before publication and make representations to the regulator.
But the FSA had argued that, because Watts was not identified in its notice, it was under no such obligation. The regulator also defended its decision to pursue separate investigations against Shell and Watts.
In the tribunal’s decision, published last week, the FSA argues: “Shell is a giant multinational corporation operating in public markets across the world, and the notion that the FSA would be discharging its regulatory function in a sensible and correct fashion by waiting until it had concluded enquiries against individuals potentially to be criticised before issuing the final notice vis-à-vis the corporate entity was unjustified.”
Scott, as a general proposition, agrees with this stance. “If the FSA was obliged to pursue corporations and individuals at the same time, it would invariably delay the prosecution of the corporate entity,” he says. “That would often make the prosecution look weak, but there still may be occasions when the facts are such that the two processes can’t run consecutively.”
Herbert Smith said in a statement: “Sir Philip is disappointed by the tribunal’s decision and we are giving careful consideration to the tribunal’s reasoning. Sir Philip continues to believe that the FSA’s factual findings in the final notice against Shell are flawed. Sir Philip acted properly and in good faith at all times.”
But one source comments: “[Watts] hasn’t done himself any favours by pursuing this claim. Now everyone’s been reminded about it once again. It’s like hanging your dirty laundry out in public.”
Herbert Smith instructed David Pannick QC and Pushpinder Saini of Blackstone Chambers. Essex Court’s Grabiner was instructed directly by the FSA.