On 20 June 2017 the Serious Fraud Office (“SFO”) charged Barclays Plc and four ex-employees John Varley, Roger Jenkins, Thomas Kalaris and Richard Boath with conspiracy to commit fraud and the provision of unlawful financial assistance contrary to Section 151 of the Companies Act 1985. This article looks at some of the regulatory issues and considers could this happen in Jersey?
Prosecutions against Banks and their Directors
The facts, as disclosed, are that in 2008 when banks such as Lloyds and RBS were supported by the UK government, Barclays decided to focus on capital raising from Qatari and other investors and successfully secured £11.3 billion in two investment rounds. The heart of the case brought by the SFO relates to the breach of the rules preventing financial assistance i.e. preventing a company lending to another to buy its own shares.
The case seems complex from a moral standpoint. At the time, many lauded Barclays for not taking tax payers money and finding a market solution. Yet the former chief-executive and senior colleagues are now facing criminal trial.
Few prosecutions have been brought in western countries involving senior executives of banks linked to the financial crisis. Iceland is one jurisdiction which went against the trend. Senior executives at Kaupthing was successfully convicted in 2015 for market manipulation. Just a few weeks before the bank became insolvent in 2008, Kaupthing had announced that Qatari investor Sheikh Mohammed Bin Khalifa Bin Hamad al-Thani bought a 5.1% stake. According to the Icelandic media, the charges stated that the monies were lent to a Quatari run entity through a series of transactions passing through jurisdictions including the BVI, and Cyprus before being used to buy shares in Kaupthing. Rather than the charges being related to unlawful financial assistance the charges related to the offence of market manipulation. The market believed that a substantial investor was buying shares in Kaupthing which in turn boosted the stock price of the bank.
Trials in other countries where prosecutions were brought have had less success. For example, the former chairman of Anglo Irish Bank, Sean Fitzpatrick, was acquitted in a case relating to charges that he sanctioned loans of millions of euros that were used to buy shares in the bank. The dismissal of that case included the technical grounds that the prosecutor’s agents had shredded evidence that could be used to mount a defence.
A different dilemma linked to bank "bail outs" was faced by the Italian bank resolution authority last year. Attempts to bail out a number of Italian banks because their “bail-in-able” capital was held by retail customers were initially prevented by European Union state aid rules. Yet similar “bail-outs” were permitted by the European authorities during the financial crisis itself. Again morally the Italian viewpoint was that they were not treated fairly by the European Authorities.
Legal position in Jersey
What is the legal position in Jersey relating to giving assistance for the purchase of shares? In Jersey the rule of law relating to financial assistance was abolished by Regulation 5 of the Companies (Amendment No. 2) (Jersey) Regulations 2008. The report to the proposition (which I wrote in my previous role) stated that this has been a longstanding problem, as it effectively makes it difficult for a person to acquire a company using a loan and at the same time using the shares in the company as security for that loan. There was a desire to make Jersey company law more flexible. It was the start of a move towards requiring solvency statements focusing on the viability of a company to be made prior to distributions to shareholders rather than focusing purely on the amount of financial capital held. It reflected the abolition of most of the rules for private companies in amendments made in 2006 to the Companies Act 1985 in England and Wales. But it went further in abolishing such rules for all companies. Instead the government recognised that other protections such as provisions against market manipulation were better tools to protect minority shareholders and creditors. Consequently, another change that took place in 2008 was to amend the Financial Services (Jersey) Law 1998 to insert offences of insider dealing and market manipulation into Part 3A.
While providing unlawful financial assistance is no longer unlawful in Jersey, the facts in the Barclays case include that a US$3 billion loan facility was made available to the State of Qatar acting through the Ministry of Economy and Finance in November 2008. The SFO’s case is that the failure to disclose such a loan was made fraudulently as well as being a breach of the financial assistance rules. In Jersey, there are no such rules against financial assistance but questions arise whether there might be a breach of the rules against market manipulation if loans to buy shares were hidden in relation to a listed company.
As the defendants in the Barclays case appear before Westminster Magistrates’ Court, the wider lessons are that care should always be taken to involve your lawyers when taking corporate actions. The alleged facts in the current case could amount to an offence of market manipulation if they were carried out in respect of a Jersey company and were proven in a court in Jersey. The reports do not mention if transactional lawyers were instructed with experience of regulatory matters. It is important to remember that doing what is seen as the “right thing” may be the “wrong thing” in the eyes of the law.