FSA ACTED UNLAWFULLY, CONCLUDES KEYDATA JUDICIAL REVIEW
11 Oct, 2011
• First ever successful judicial review of FSA-initiated investigation
• High Court Judge recommends FSA look to SFO and Police to review its approach
• FSA “in blind pursuit of a pre-determined outcome”, says Ford
• FSA spurned opportunity to avoid a Judicial Review and the delay to its investigation
Stewart Ford, the founder of Keydata, today (11th October) won a landmark High Court judgment against the Financial Services Authority (FSA) when the judicial review he brought against the regulator concluded that the FSA acted unlawfully in its use of legally privileged material in its enforcement investigation.
The FSA has previously been censured by a judicial review only with respect to action it took at the request of the US Securities and Exchange Commission (SEC). This is the first time an FSA own-initiated investigation has been the subject of a successful judicial review.
Stewart Ford secured leave to take the FSA to judicial review in March this year over the regulator’s use of legally privileged emails from Keydata’s and Ford’s former legal advisers, Irwin Mitchell. The FSA obtained the emails, which contained legal advice and attendance notes of meetings with Irwin Mitchell and counsel, after it had successfully applied to the High Court for the appointment of its own nominated administrators, PriceWaterhouseCoopers (PwC), to take control of Keydata. At the FSA’s request, PwC gave the FSA full access to Stewart Ford’s email account and then waived Keydata’s legal privilege with respect to the content of the documents.
It was only many months later that Stewart Ford became aware that the information the High Court has now confirmed as privileged was in the hands of the FSA, when he and Keydata were served with the FSA’s investigation reports. These reports placed heavy reliance on the legal advice he and the company had been given in confidence in defending themselves in the FSA investigation.
Ford argued that the advice was subject to joint legal privilege, as it was given to the senior executives of Keydata in their personal capacities as well as in their capacity as legal representatives of Keydata. The privilege in the relevant communications could not therefore be waived by the company alone.
Today, the judge, Mr Justice Burnett, determined that, due to joint legal privilege, “the FSA may not rely upon the content of those communications in the regulatory proceedings”.
Neither the FSA nor PwC had informed Stewart Ford that his email account was being accessed and copied. Nor did they consult him on the waiver of legal privilege. This was despite the FSA having assumed in correspondence with Irwin Mitchell in September 2008 that the firm was representing Mr Ford and his fellow Keydata executives as well as Keydata.
Stewart Ford commented: “The FSA’s illegal use of legally privileged material is only one in a long catalogue of abuses in its handling of its investigation into Keydata. I highlighted the FSA’s underhand behaviour in the open letter and report I sent to Mark Hoban MP last autumn*. We have witnessed further abuses and underhand tactics since then, not least in the continually obstructive position the regulators have adopted with respect to the various rescues of Lifemark that have been attempted. It is appalling just how far the FSA’s enforcement investigation team has gone in seeking to justify its destructive and ill-judged actions with respect to Keydata and Lifemark. It is a scandal that demands a full public enquiry. I hope this High Court judgment will help to open more people’s eyes to just what a regulatory stitch-up the FSA intends Keydata and Lifemark to be.”
Judge recommends FSA look to SFO and Police to review its approach
In light of the FSA’s breach of legal privilege, Mr Justice Burnett suggested that the FSA might usefully review what is done by the Serious Fraud Office and Police to deal with potentially legally privileged material “to determine whether similar practices might be adopted”.
Unlike the FSA, the Police and SFO both follow rigorous procedures to ensure that potentially privileged material is not seen by their investigators. This ensures any dispute relating to privilege is resolved in advance of the material being read or relied upon by their investigators, and so the integrity of their investigations is preserved.
Harvey Knight, Partner at law firm Withers LLP, who have represented Stewart Ford since the FSA took over control of Keydata, commented: “This episode, along with the FSA continually ignoring its own guidance and procedures in its investigation into Keydata, raises serious questions about the regulator’s own conduct. In light of this ruling, there can be no doubt that the FSA needs to take a long, hard look at its procedures and how it conducts itself.”
FSA “in blind pursuit of a pre-determined outcome”, says Ford
The issue of joint legal privilege was argued in court by the authors of the two leading textbooks on the subject, Bankim Thanki QC, acting for the FSA, and Hodge Malek QC, acting for Stewart Ford.
Stewart Ford continued: “The FSA’s decision not to rely on this legally privileged material despite the objections of my solicitors is symptomatic of an arrogance and an attitude that has been in evidence throughout its investigation into Keydata. The FSA investigation team is in blind pursuit of a pre-determined outcome. They have made up their minds what the result should be and that no inconvenient truths should be permitted to stand in their way.”
Ford says that in line with this same “blinkered” attitude, the FSA’s enforcement investigation team called a meeting for the FSA’s Regulatory Decisions Committee (RDC) without waiting to receive the responses of either Ford or his fellow Keydata executives to the investigation report in which the legally privileged material had been used. The FSA’s own guidance provides that those persons who are sent these investigation reports should be given a reasonable period to confirm that their facts are complete and accurate or to provide further comment.
Harvey Knight explained: “The FSA’s own guidance provides that the FSA should have reviewed our comments on the Supplementary Investigation Report before deciding whether or not referral to the RDC was necessary. The FSA says that this in turn makes for better quality and more efficient decision making. But, by the time we received the report, the date for the RDC had already been set. An extremely important step in the FSA investigative process had been deliberately side-stepped.”
Moreover, precious little time was allowed for the Keydata executives to respond to a report that the FSA investigators had taken over a year to compile. The report was served on them, along with an accompanying bundle of some 5,000 pages, on 31 August 2010 – the first business day after a bank holiday, when the FSA knew both of Mr Ford’s solicitors would be on holiday until 6 September. The deadline for a full response was set at a mere 28 days.
When Mr Ford’s solicitors returned from holiday and asked for an extension of the deadline, it was refused. The FSA justified this refusal on the grounds that a date had already been set for the RDC to consider the report and to decide what formal warning notices should be issued.
For reasons that have yet to be explained, PwC, as the FSA’s own nominated administrators of Keydata , had been sent the investigation report in draft on 13 August 2010 for their comments. These were then incorporated into the reports formally issued to Keydata and its former senior management more than two weeks later.
FSA spurned opportunity to avoid a Judicial Review and the delay to its investigation
On 28 September 2010 Withers wrote to the RDC in an effort to halt any further consideration of a warning notice until the dispute over privilege had been resolved, suggesting tha
t the RDC should itself consider the question of privilege as a preliminary issue. Withers also made it clear that that Mr Ford would seek a judicial review if the RDC did more than consider the privilege issue when it met. But the RDC issued warning notices on the basis of the reports, which included reliance on the privileged material, regardless.
Harvey Knight said: “We gave the FSA every opportunity to pursue an alternative route and avoid the need for a judicial review. Unfortunately our proposals were ignored. The FSA gave us no choice but to pursue this matter through a judicial review. As a result, the FSA has caused itself substantial delay in bringing its investigation to any conclusion, a delay it unfairly seeks to attribute to Mr Ford. The courts have found that Mr Ford had no alternative remedy but to seek a judicial review and that he was right to do so.”
As well as advice from lawyers, the disputed emails also contained advice from accountancy firm Grant Thornton, on which the FSA’s investigation report similarly relied. Ford’s lawyers chose not press for privilege over Grant Thornton’s advice at the judicial review hearing, as the Court of Appeal, in a case brought by Prudential against the Income Tax Commissioner, has recently reaffirmed that legal privilege ‘only applies to communication with a member of a relevant legal profession’. However, if the Prudential’s appeal to the Supreme Court is successful, Ford says he intends to revisit the point.
A further hearing will be required to determine what the full implications of today’s ruling will be for the FSA’s investigation into Keydata.