Investment schemes—are you assisting fraudsters?
Guidance issued by the SRA
This guidance was issued in March 2009. The guidance does not form part of the rules and is not mandatory, but the SRA may have regard to it when exercising its regulatory functions. Solicitors who do not follow the guidance may be required to demonstrate how they have nevertheless complied with the rules.
A recent Court of Appeal case, Financial Services Authority v Fox Hayes [2009] EWCA Civ 76, is a warning to solicitors of the risks of associating themselves with investment schemes. The scheme in this case was a boiler room scam, but it is not necessary for a scheme to be proved to have been a fraud for a solicitor's involvement to give rise to regulatory concern.
Boiler room scams are so called because of high-pressure selling techniques used to persuade investors to purchase shares which are usually worthless. Boiler room operators are not authorised by the Financial Services Authority (FSA) and are not acting legally. The operators often add credibility to their scheme by using other entities to approve their promotional literature. Section 21 of the Financial Services and Markets Act 2000 restricts the making of financial promotions to those who are authorised by the FSA and others who can rely on exemptions in the legislation.
The Court of Appeal case overturned a ruling of the Financial Services and Markets Tribunal and found in favour of the FSA. It was held that Fox Hayes LLP, an FSA-authorised law firm, had not taken reasonable steps to prevent a boiler room scam and that the firm's approval of promotional material had contributed to a $21 million fraud on 670 UK investors. The Court of Appeal increased the level of penalty imposed by the tribunal on the firm from £146,000 to £954,770.
More broadly, the Solicitors Disciplinary Tribunal (SDT) has made it clear in many cases in the past that solicitors must not add credibility to dubious financial schemes. This approach was most recently upheld by the Divisional Court in Bryant v Law Society [2007] EWHC 3043 (Admin) (21 December 2007), which described transactions as dubious "in the sense that they bore the indicia of fraud or possible fraud, although not necessarily of fraudulent investment schemes".
It is professional misconduct for solicitors to act or to continue to act in relation to them "without at least carrying out sufficient enquiries to satisfy themselves that the transactions are not, in fact, fraudulent". Another way of putting it is that a dubious transaction is "one in which no reasonable solicitor would act".
The message to solicitors is clear: FSA-authorised firms must be satisfied that any promotional material that they are asked to approve for third parties satisfies the FSA's requirements and is clear and not misleading. Any firms which are not authorised by the FSA must ensure that they can rely on the exemptions in the legislation to make the promotion. Such exemptions are limited in scope. All firms must consider whether they have the competence and experience to accept such instructions and, as with so many forms of fraud, consider why they are being asked to assist in the transaction. Involvement in such scams will very likely infringe the basic requirement of integrity in rule 1 of the Solicitors' Code of Conduct.
Guidance is available from the Ethics Guidance Team.