Speed read: Jonathan Fisher QC discusses the inconsistencies around the criminalisation of financial conduct and the impact this has on answering a continuing question of the financial crisis — to what extent was financial crime involved?
Ten years after the global financial crisis, the contributory role played by financial crime in the collapse of the financial markets remains unclear. To a large extent, the lack of clarity can be attributed to a continuing ambiguity over the type of conduct which should be stigmatised as criminal when committed in connection with the financial markets. A decade after Lehman Brothers collapsed, there remains a lack of agreement over what type of conduct should be designated to constitute a financial crime. Lying to the investing public, by making statements which are demonstrably false, is clearly dishonest, and therefore criminal. In so far as there have been prosecutions for criminal conduct, invariably these cases have involved market traders and not directors or executive officers operating at the highest level. This is unsurprising, since there is little room for disputing lack of dishonest intent where a statement is demonstrably false. But placing investors’ funds into financial instruments where directors and senior executive officers had little or no understanding of the risk involved in making the investment raises more subtle considerations. It may be egregiously reckless, and indeed highly irresponsible, for directors and senior executive officers to turn a blind eye to the possibility of making large losses when taking a punt on the continuing success of derivative instruments, but the conventional view holds that this conduct is not criminal. Yet a coherent case can be advanced in favour of criminalising reckless trading. It is no answer to say that any trading on the financial markets involves risk. Indeed, it does; rather, it is the reckless taking of the risk which is objectionable. And is it not a form of dishonesty to take a risk with the investment of other people’s money, deliberately turning a blind eye to the possibility that at some point in time the market might change, and large losses could be sustained? Until there is greater clarity over the nature of market conduct which engages the criminal law, the relationship between financial crime and the global financial crisis will remain unclear. This is the first key issue which needs to be addressed.
In the last ten years, significant progress has been made with the anti-corruption agenda and the introduction of deferred prosecution agreements in the United Kingdom. As matters stand, it is a criminal offence for a company to fail to prevent bribery and tax evasion, but there is no equivalent offence where a company fails to prevent fraudulent conduct on the financial markets. This is a surprising omission, and it undermines the regulators in their attempts to ensure that adequate anti-fraud measures are met. The Financial Conduct Authority requires financial markets participants to apply stringent procedures to prevent their employees from committing financial crime. Whereas a participant’s failure to prevent bribery or facilitation of tax evasion exposes the participant to criminal sanction, the making of false representations in the sale of an investment does not. This lacuna is the second key issue which requires the legislator’s attention.
The ambiguity over the outer limits of the criminal law were vividly demonstrated following the collapse of Lehman Brothers in 2008. The Repo 105 off-balance sheet arrangements did not trigger any criminal response by the enforcement authorities, but the Valukas Report makes uncomfortable reading for all of those who were involved in the disguising of the enormous losses which the bank was making. In December 2010, the New York attorney general Andrew Cuomo was sufficiently motived to file charges against the bank’s auditors, alleging that the firm had “substantially assisted… a massive accounting fraud” by approving the accounting treatment. Today, ten years after the collapse, the National Theatre is producing Stefano Mancini’s play, The Lehman Trilogy. The play provides a marvellous evening’s entertainment, as the history of the bank is traced through three generations. It is almost ‘clogs to clogs’ in three generations, as the timeline in the play ends when the last Lehman family member surrenders control of the bank to a new generation of outsiders. The pity is that the play omitted to grapple with the elephant in the room which arrived some years later, namely, whether the bank’s collapse was characterised by instances of financial crime.
This piece is based on the quarterly commentary published by the Lloyds Law Reports: Financial Crime (Part 9, 2018), written by Jonathan Fisher QC.