What are the Different Types of Investment Fraud?
Below are explanations of some of the main types of investment fraud in operation within the UK.
Unlicensed Share Selling
Share dealing is a ‘regulated activity' per the Financial Services and Markets Act 2000, and therefore is prohibited (with both civil and criminal penalties) in the UK without the right authorisation from the Financial Conduct Authority. In a criminal case, unauthorised share dealing can result in a prison sentence of up to two years in the Crown Court.
Boiler Room Frauds
Boiler room frauds are a much more serious form of unlicensed share dealing and are the most common and destructive type of investment fraud. Boiler rooms are (often offshore) operations with trained telesales teams selling shares in companies that either don't exist or which have been set up as shells for the sole purpose of appearing as bona fide companies when they in fact do not trade.
The boiler room will often assume the identity of a licensed stockbroking firm, and the companies in which it offers shares will sometimes also have professionally composed marketing material and a website. The company's future success will often hinge on a medical or technological breakthrough, or the discovery of oil or other natural resources, and be promised to result in fabulous gains for the investor.
These types of frauds do not solely focus on the selling of shares. Common scams of this type in recent years have included the sale of coloured diamonds or rare "earth metals" as investment opportunities. Companies behind such frauds may, on the outside, present as being highly professional and legitimate organisations. The product, or investment, they are peddling is often, however, worth only a fraction of the sale price. Such companies often make it extremely difficult, if not impossible, for investors to sell their portfolio. Investors usually lose the vast proportion, if not all, of their money.
Victims, who are often old or vulnerable people, often complain of the high pressure sales tactics and promises of high returns. The average loss per person is estimated by the FCA at around £20,000 per victim, with losses to victims totalling £200 million per year in the UK.
Advance Fee Scams
These are frauds which, again, typically target elderly or vulnerable people. They involve extracting money from victims on the basis that it will unlock a significant reward. For example, a fraudster may send through literature which suggests the victim has won a lottery and that a fee of £200 is required in order to release their millions of pounds worth of winnings. The winnings, or in some case, the huge inheritance, do not exist.
Boiler room frauds are usually charged under the common law offence of conspiracy to defraud. In order to prove that a defendant was guilty, the prosecution has to show beyond reasonable doubt that he or she was a knowing participant in a plan to obtain money dishonestly.
Some defendants will find themselves charged with money laundering offences in connection with the operation of a boiler room. This may be a way in which the prosecution seeks to attack someone who they feel may have had a role in the main fraud, even if the evidence does not support it.
Defence Strategy - What did the client know?
It is important in conspiracy to defraud cases to note that not every employee in an operation will definitely know that the operation is bogus. Companies which are performing boiler room frauds can be sophisticated and professional-looking organisations. The literature and sales material relied upon can be so persuasive that staff themselves can be persuaded by its legitimacy. It is entirely possible staff not in the higher levels of the hierarchy within the company to be unaware that the company's purpose is fraudulent.
A director or shadow director can be guilty while even senior managerial level staff do not realise that the brokerage is fraudulent. Of course, much depends on the facts. Boiler room fraud solicitors will need to carefully consider any evidence linking the client to the activities of the operation. Such evidence must be tested and challenged where appropriate. It must be said that the less evidence linking the client to the operation and management of the boiler room and the money trail, the better his or her chances.
Where the evidence is strong, the issue may be one of damage limitation, and of aiming to avoid custody or protecting assets, as a conviction is often followed by confiscation proceedings.
Market Abuse and Insider Dealing
Insider dealing remains high on the list of FCA priorities. It is clear that the aim is prevention by making examples of insider dealers.
Insider Dealing - The Law
Inside information is information which has been obtained by a person from an inside source. The person must know it is inside information, and that it came from an inside source.
Insider dealing is illegal as a result of the Criminal Justice Act 1993. The offences created by the act are ‘tipping' and ‘dealing'.
Inside information relates to particular securities or a particular issuer of securities: it must be information that has not been made public, and be specific and precise. The publishing of the information must be capable of significantly affecting the price of the security.
‘Tipping' happens when a person has information as an insider and either:
a) Encourages another person to deal in securities; or,
b) Discloses the information to another person outside the legitimate course of his/her employment, office or profession
The person must know (or have reasonable cause to believe) that the dealing would take place on a regulated market, or with the receiver of the information acting as, or relying on, a professional intermediary during the dealing.
The dealing offence takes place when a person who has inside information acquires or disposes of securities. If someone agrees to acquire or dispose of securities, or obtains the agreement of someone else to do so, then he or she is guilty of the dealing offence.
The dealing must have taken place on a regulated market, or have been intended to take place on a regulated market, or via (or with the defendant acting as) an intermediary for the prosecution case to be made out.
There are several defences available to allegations of insider dealing. They include:
- That the defendant did not expect a profit to occur as a result of the information being price sensitive - That the information did not affect his or her decision to engage in the dealing - In cases of alleged ‘tipping', that the defendant did not expect the receiver of the information to act on that information by acquiring or disposing of assets him or herself.
Other defences relate to individuals who act, in one way or another, innocently in the context of a securities transaction. Protections are afforded to market makers, managers engaged in price stabilisation related stock buybacks
Strategy and Evidence
Where a criminal accusation of insider dealing has been made, the prosecution have to show a link between the knowledge and then the illegitimate acting on that knowledge. This represents a high standard of proof. Mere suggestion or coincidence is not enough. That a friend or associate of an insider has made a profit as a result of a transaction is not enough. Even if the insider himself has made a profit, if a jury believes that such purchases or disposals would have been made anyway, or that the insider was not aware that the information relating to securities was price-sensitive, the conviction will not occur. It is therefore important for the client and his defence solicitor to examine every aspect of the evidence chain in detail; what all parties were aware of in respect of the transaction; and which outside parties might have been informed. Nothing can be taken for granted. If one crucial party can be shown to have been ignorant of the significance of the information, the prosecution case could collapse.
The Defence Approach
While there are few principles that apply in every insider dealing case, there are certain things that a client should be able to expect from his or her defence solicitor. The most obvious is a basic familiarity with forms of financial instrument which may be affected by information. Of course, new forms of security evolve and most lawyers will know less in this area than, say, a stockbroker. However, an awareness of the main types and industry practices in respect of their disposal and acquisition are essential.
Similarly, the criminal defence lawyer should have an understanding of the division of management roles: for example, if accusations of insider dealing have been made relating to a company merger or other large structural transaction which has affected share prices, it is important to realise the distribution of information and responsibilities between the relevant executives. If the client feels that his/her solicitor does not have a high level of familiarity with management and company law principles, it may be a cause for concern.
What Sentence Can I Expect for Investment Fraud?
The courts take into account many different factors when determining sentences for these types of offences. As a starting point a court will look at the overall value of the fraud and will then assess the individual's role within the fraud. Those performing leading roles within frauds worth hundreds of thousands of pounds or even millions, can expect prison sentences of 5 years plus. This can be higher for the most serious of cases.
People at the lower end of the scale can often have a chance of avoiding an immediate custodial sentence.
It is vital if you find yourself in this situation that you seek early free legal advice from specialist boiler room fraud solicitors.