February 5, 2012 4:47 pm

UK looks to bridge regulatory divide with US

Americans and the British are said to be two peoples divided by a common language, and three recent enforcement cases involving financial groups that operate on both sides of the Atlantic have shown that the subtle, and sometimes surprising, differences extend to the way US and UK regulators and law enforcement seek to police their markets.

First David Einhorn, one of the US’s best-known hedge fund managers, and his firm Greenlight Capital, together paid £7.2m for trading ahead of a UK equity raising, even as he protested that he believed he had done nothing wrong.

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Then Ravi Sinha, formerly the top UK executive of the US private equity firm JC Flowers, was ordered to pay nearly £2.9m after admitting to a fraudulent billing scheme. Critics complained that, had he been in the US, he would have been criminally prosecuted.

Finally the US criminally charged three former Credit Suisse bankers with fraud for allegedly inflating the value of mortgage-backed securities, more than three years after the UK Financial Services Authority fined the bank £5.6m for systems and control failings that allowed mismarking.

Two of the traders have pleaded guilty, and a lawyer for the third said he was “saddened and disappointed” by the US action.

Historically, the differences between the two countries were pretty clear. The US aggressively enforced laws against insider trading, overseas bribery and other white-collar fraud and the UK did not.

In the early 2000s, for example, the US sent the former chief executives of WorldCom, Enron, Tyco and Adelphia to prison and secured billions of dollars in penalties from banks, mutual fund companies and insurers. Hundreds of people have been prosecuted for insider trading, including nearly 60 convictions from the ongoing probe of hedge-fund misbehaviour.

Until recently the UK’s Financial Services Authority rarely sought fines above £1m and it brought its first criminal insider dealing case in 2008. Even now, the longest sentence handed down for insider dealing is just over three years and the largest civil FSA penalty was £33m.

Last week’s enforcement action against Mr Sinha, formerly UK chief executive of JC Flowers, reinforced the view that the UK is reluctant to criminally prosecute top executives.

He admitted fraudulently billing a Flowers portfolio company £1.3m and was told to return the money and pay an additional fine of £1.5m, but the City of London police decided not to launch a criminal investigation.

“If the situation had arisen in the US, it is likely that it would have been dealt with by the Department of Justice and Securities and Exchange Commission by way of criminal proceedings, with parallel civil enforcement action,” said Chris Stott, a UK-based lawyer at Clifford Chance

When law firm Crowell & Moring fired New York real estate attorney Douglas Arntsen last autumn for allegedly stealing $7.3m from a client, Manhattan district attorney, a local law enforcer, followed up last month with criminal charges of grand larceny and a scheme to defraud. Mr Arntsen has denied wrongdoing and his lawyer declined to comment.

“The clear sense I have is that the hurdles for bringing a criminal prosecution in the UK are higher, and the system is heavily stacked in favour of the defendant, whether we’re talking about disclosure, or getting the right counts brought,” says Charles Hewetson, London-based litigator at Reed Smith.

In any case, the wind is shifting. The UK is starting to adopt some of the most aggressive US tactics, such as dawn raids on financial institutions and plea bargains, and it recently enacted a ban on bribery that is even tougher than the US foreign corrupt practices act.

The eye-watering fines that companies pay in the US may also become a reality in the UK under new proposals from the solicitor general, Edward Garnier. Mr Garnier would like to introduce deferred prosecution agreements (DPAs) akin to those across the Atlantic. The US Department of Justice netted $2.3bn from 32 deferred prosecution agreements in 2010, according to statistics gathered by Gibson Dunn, the law firm.

Under a DPA a company can admit wrongdoing, pay a fine and bring in independent monitors. In exchange, prosecutors agree to suspend criminal charges, allowing the company to remain on lucrative government tender lists.

In theory, UK regulators and prosecutors could become more powerful than Wall Street expects. In addition to the far-reaching 2010 Bribery Act, the UK laws prohibiting insider dealing are also broader than those in the US, as Mr Einhorn discovered to his peril.

But in the end the UK’s reach may be limited by its relatively light sentencing regime. One of the reasons US prosecutors enjoy so much success is that underlings routinely agree to testify against their bosses in exchange for shorter sentences. The Credit Suisse allegations, for example, rest on evidence from two traders who have already pleaded guilty.

The faces of regulation

Preet Bharara
Preet Bharara Since taking over as the US attorney in Manhattan in 2009, Preet Bharara’s office has charged 63 individuals from hedge funds, law firms, and consulting outfits with leaking secret company information.

Of these 56 have been convicted, making it one of the most successful tenures of insider trading enforcement in the US. Mr Bharara worked on drug and organised crime cases as a young prosecutor. He sharpened his political skills as an adviser to Senator Chuck Schumer, a powerful Democrat on the judiciary committee where he investigated the firing of US attorneys.

Robert Khuzami
Robert Khuzami, director of the Securities and Exchange Commission’s enforcement division, is credited with reinvigorating the US regulator by creating specialised units and removing bureaucratic hurdles in order to speed up investigations.

A former federal prosecutor in Manhattan, Mr Khuzami has taken a page from the Department of Justice’s playbook, seeking to strike deals for co-operating witnesses and non-prosecution agreements for corporations that assist in investigations.

Since taking the helm at the SEC, the agency has taken action against nearly 90 individuals and entities, including 45 senior executives, for violating disclosure and accounting rules in connection with to the financial crisis.

David Green
David Green QC will be the UK’s most senior fraud-buster when he becomes director of the Serious Fraud Office in April.

Like present incumbent Richard Alderman, Mr Green has previously held a senior role at HM Revenue and Customs, where he was director of prosecutions.

HMRC is an organisation known for its pragmatic deal-making, a characteristic that Mr Green may need should the SFO gain the power to enter into deferred prosecution agreements.

He presided over the merger of the Revenue and Customs Prosecutions Office into the Crown Prosecution Service, leaving some SFO insiders worry that his arrival may presage a similar eventual fate for the agency.

Margaret Cole
Margaret Cole Now a managing director of the UK’s Financial Services Authority, Margaret Cole has won praise for building the enforcement arm into a credible watchdog.

She arrived at the FSA in 2005 and revamped the unit, bringing the FSA’s first criminal prosecutions for insider dealing and introducing a new fines policy that dramatically stepped up penalties for both firms and individuals.

A firm believer that publicising enforcement actions helps maximise their deterrence value, Ms Cole has irked the defence bar by seeking to reveal the FSA’s work earlier in the appeals process.

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