Federalcharges and private lawsuits against the company are likely to be in the pipeline. This article explores possible offences (under English law) that might apply if “pretexting” methods were used by City analysts or others employed to support the research function, with particular emphasis on potential offences under the Fraud Act 2006.
Hedge funds and other asset managers often use “intelligence” or “match-making” services to source information or contacts relevant to stocks in which they have, or may take, a position. In addition, more than one firm has recently advertised in the financial press seeking investigative journalists to assist in conducting research and analysis. Extreme care is required to ensure that certain creative methods of doing research, which may be second nature to an investigative journalist, do not infiltrate the investment community. Pretexting may very well be one of these techniques. In the US, newly-enacted anti-pretexting laws are relatively narrow in scope – they focus on attempts to obtain financial and telephone records only. Under English law, however, it is conceivable that the use of pretexting methods to obtain any type of information, if accompanied by the intent to make a gain (or cause someone else to suffer a loss), could constitute a criminal offence.
The Fraud Act 2006 (“the Act”) was introduced by the Government as an attempt to combat a surge of fraud across various sectors of the economy. The Act creates new offences and clarifies existing ones. Prior to the Act, fraudsters were primarily dealt with through a collection of deception offences in the Theft Acts and/or by the common law offence of “conspiracy to defraud”.
The Act sets out a general offence of fraud, with three ways of committing it: by false representation, by failing to disclose information and by abuse of position (this article will focus on false representation and abuse of position). Each of these offences carries a maximum custodial sentence of up to 10 years. For each offence, the defendant’s behaviour must be dishonest (both subjectively and objectively) and must intend to secure either a gain for the defendant – or a loss to another – of money or any other property. Importantly, there is no requirement that any actual gain or loss be incurred.
The first type of fraud offence is couched in strikingly generic language. In effect, it prohibits the making of a false representation (by words or conduct as to any fact, law or state of mind of any person), whether express or implied, if the person making the representation either knows it is false/misleading or is aware that it might be. In other words, the offence criminalises lying, so long as the intent of the lie is to make a gain – or cause someone else to incur a loss – of money or property.
Such a general offence could be deployed in a number of novel scenarios. Consider the example of a hedge fund instructing a private investigator to uncover information (whether or not of an “inside” or otherwise confidential nature) relevant to the stock positions in its portfolio. Use of this technique could uncover extremely relevant information that might not otherwise be disclosed to the fund – and could theoretically lead to enormous gains – for the portfolio, the portfolio manager (as reflected in his bonus) and perhaps even the private investigator. Due to the wide nature of the general fraud offence, any use of pretexting techniques by the investigator would appear to be caught. Thus, the hedge fund (or relevant individuals) could potentially be prosecuted if they have sufficient jurisdictional links to the UK.
In general terms, such a prosecution would seek to establish that the hedge fund intended to make a gain, by using information knowingly obtained by deceit. Indeed, if the fund disseminated negative information obtained by deceit, in an effort to drive down the stock price of a stock it was short selling, this might amount to both an intent to make a gain for the fund (as it would profit from the stock’s decline) as well as to cause a loss to the targeted company’s shareholders.
It is interesting to note that a variation of this type of activity may have already occurred in America: In February 2007, federal prosecutors subpoenaed records of Allied Capital upon allegations that it hired private investigators to pretext for phone records of David Einhorn (a hedge fund manager who was shorting Allied Capital’s stock – and had been publicly critical of the company).
This separate offence criminalises the possession of “articles” that are specifically designed for fraud, such as credit-card cloning devices, but the offence may also cover more mundane articles, such as an ordinary computer that is used to store stolen credit card numbers. Since virtually any article might be used in a fraud, much will turn on a defendant’s state of mind. By way of example, knowing possession of a telephone might render a person liable for this offence if it can be proved that he had a general intention that the telephone be used for a fraudulent purpose, such as pretexting.
Where a person has been put in a privileged position, and by virtue of this position is expected to safeguard another’s financial interests or not to act against those interests, and he abuses this position (either by a positive act or omission), he could be subject to the offence of fraud by abuse of position. The types of relationships covered include director and company, employer and employee, and professional and client. An offence could potentially cover situations where a director or professional fails to take up the opportunity of a crucial contract, or where the compliance officer of an asset management firm fails to monitor the firm’s risk because he spends his day surfing the internet. If a jury finds that he is dishonest, he may be guilty of this offence because he is in a position of trust and, by omission, has abused this position – therefore placing the firm at risk of financial loss.
If persons who have a specified corporate role are party to the commission of an offence under the Fraud Act by their body corporate, they will be liable to be charged for the offence as well as the corporate entity. This concept is rather circular, as a entity cannot act independent of its officers, but the aim of the provision is to cover situations where an officer had a duty to intervene and stop the entity from committing a fraudulent act.
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