Criminal investigations aside, the rise of cyber crime and forum shopping means the UK is a perennially popular location for resolving civil fraud disputes. Dominic Carman reports
According to the Crime Survey for England and Wales, fraud offences now constitute nearly half of all recorded crime. Last year they increased by 9% to breach the four million mark, although the survey suggests that fewer than 20% of frauds are ever reported. Simultaneously, organisations that investigate large-scale fraud, such as the National Crime Agency and the Serious Fraud Office, are routinely regarded by commentators as underfunded, understaffed and – at times – unable to cope.
‘The SFO has to focus on bigger cases, which are the most difficult,’ says Mo Bhaskaran (pictured), Stewarts’ head of commercial litigation in Leeds. ‘The finite resources of prosecuting authorities is just a reality.’ Daniel Machover, head of civil litigation at Hickman & Rose, adds: ‘Our experience suggests that the police only really engage with cases where the victims are either high profile or the losses are over £1m.’
Michael Roberts, commercial litigation partner at Hogan Lovells, points to ‘the bizarre contrast between the speed at which civil proceedings move, especially in the fraud space, and how long some criminal fraud investigations drag on for’. Hickman & Rose’s founding partner Ben Rose says: ‘Successive budget cuts have resulted in a dramatic decline in prosecution agencies’ effectiveness. This has driven those who can afford it to seek other, more effective remedies such as private criminal prosecutions.’
Recent data shows that civil fraud also continues to flourish. The latest annual Commercial Courts report from Portland Communications reveals a 45% year-on-year increase in civil fraud and investigation cases in 2018/19: the third most common type of civil litigation after contractual disputes and arbitration challenges, comprising one-sixth of the Commercial Court’s aggregate caseload.
The increase in civil fraud has identifiable drivers, according to Machover. ‘There is an increased awareness that the police simply don’t have the resource or skills to properly investigate – let alone prosecute – complex fraud. The result is that victims are increasingly retaining lawyers to obtain freezing orders and seek compensation.’
Will Christopher, disputes partner at Kingsley Napley, suggests that fraud has increased ‘because it’s pretty risk-free for the people who want to perpetrate it and because there is no effective policing of it’. He notes a huge increase in the value of civil claims: ‘A big fraud used to be several million pounds, now it’s several billion. It has increased exponentially.’ To make it commercially viable to bring proceedings in the civil courts, he says, ‘the loss has to be very large, or you have to corral a sufficient number of victims of the same fraud. It is the larger frauds that are generally the subject of this increased litigation’.
London opens doors
Most civil fraud litigation in the English courts has a multi-jurisdictional dimension, routinely involving high-profile billionaire oligarchs who are UK-resident. Where there is a potential claim, victims will often seek to establish a connection to England to be able to use English lawyers and courts.
Roberts notes that many international frauds – Russian, Ukrainian or Kazakh – end up with disputes being heard in London. ‘Every case that comes our way involves numerous jurisdictions,’ he says. In one of 2019’s leading cases, Hogan Lovells acted for PrivatBank where £1.5bn was allegedly misappropriated, as well as in two other large CIS fraud disputes: Avonwick v Azitio & Dargamo; and JSC Mezhprombank v Sergei Pugachev.’
‘One notable aspect of last year’s Court of Appeal judgment in PrivatBank was recognition that it is perfectly legitimate for claimants to want their claim determined in England because of the quality, depth of expertise and trust in the jurisdiction,’ says Roberts. ‘There was no ulterior or improper objective. Clearly, you have got jurisdictional thresholds to cross and boxes to tick, but if that’s your motivation, that’s what the English court is there for and, as a matter of public policy, the doors are firmly open.’
Bhaskaran adds: ‘The cases are getting bigger, but many of the really big cases are not talked about by lawyers because they are sensitive and often involve clients seeking to recover from difficult positions. This applies just as much to the significant cases that Stewarts are handing.’
Stewarts’ civil fraud work, he notes, spans cases from oligarch and sovereign wealth embezzlement/bribery cases through to fraud arising from commercial corporate transactions. In two notable cases last year – Public Institution for Social Security of Kuwait v Man Group & Ors and National Bank of Kazakhstan & Anor v Bank of New York Mellon – Stewarts acted for the claimants in both.
‘When we have clients looking at cases that they might want to bring,’ says Bhaskaran, ‘we extol the virtues of how they are managed proactively in England: getting your own designated judge and having courts that are used to dealing with issues which in many countries would be handled by criminal courts.’
He points to the long-running Hewlett Packard Enterprise v Autonomy case, the UK’s largest-ever civil fraud trial, as the star turn last year – and also this. The Autonomy case is fascinating, concurs Roberts, for its sheer scale, adding: ‘It has become quite unusual to have something that the courts will allow to run for quite that long as a trial any more when there is such pressure to condense the length of trials.’
In a dispute that stretches back several years, Hewlett Packard Enterprise (HPE) is suing the founder of Autonomy, Mike Lynch, and the company’s former chief financial officer, Sushovan Hussain, for £3.4bn. It alleges that the duo ‘artificially inflated Autonomy’s reported revenues, revenue growth and gross margins’ before its $11bn sale to HPE in 2011, according to court filings. Travers Smith is representing the claimant, while Lynch turned to Clifford Chance. Arguing the case in front of Mr Justice Hildyard, HPE has had three QCs, including Laurence Rabinowitz QC, while Lynch had two, including Robert Miles QC.
Much of the big-ticket work done in civil fraud claims involves a range of asset-tracing and freezing orders, most of it international. This leads to a widely-held view that the UK civil courts are much better equipped to pursue fraud cases than in other countries because of the very powerful common law remedies that are commonly used.
Mishcon de Reya partner Gary Miller, who founded the firm’s fraud group, points to the ‘cocktail of available orders’ that help to cement London’s pre-eminent position as a litigation forum: Mareva injunctions, Anton Piller orders, and Norwich Pharmacal orders stand out from an extensive menu. ‘Those orders – when you explain to an American lawyer what you can do here without notice to the defendant, they are amazed and delighted,’ notes Miller.
The cases are getting bigger, but many of the really big cases are not talked about by lawyers because they are sensitive.’Mo Bhaskaran, Stewarts
He adds: ‘My normal bag of tricks when I go after a fraudster will vary between a proprietary freezing order, an ordinary Mareva injunction, a search order, and a third-party disclosure.’ In describing the ‘exponential growth’ in Mishcon’s civil fraud and investigations work, he identifies ‘the emergence and increase in arrangements by litigation funders in supporting asset recovery exercises’. Harbour Litigation has committed in excess of £130m to Mishcon’s current cases, an increasing part of which is civil fraud.
Rise of the machines
Digital technology creates a fresh set of legal challenges. ‘The internet, cyber fraud, missing cash, cryptocurrencies, some form of deception using online technology, identity theft, hacking, ransomware – it’s a real challenge,’ says Miller. ‘There’s been a flurry of fraud cases around cyber crime, hacking and ransomware,’ adds Roberts. ‘It’s an arms race: no sooner has one loophole or one weakness been closed, then a new piece of malware emerges or there’s a new trick in town – both in terms of the legal remedies and the technology.’
Christopher identifies the common features in most cyber fraud: ‘You don’t know who has done it, you know where the money has gone, but you don’t know who is behind it or who the owner of the account is.’ But, he suggests, English judges are potentially ahead of the rest in dealing with the issue. ‘One of the big trends is the willingness of the courts to grant injunctions,’ he says. ‘“Persons unknown” injunctions are taking off to deal with cyber frauds and cryptocurrencies.’
In September 2018, CMOC v Persons Unknown became the first world-wide freezing order made against persons unknown in a financial fraud case. This £7m cyber fraud set an important precedent, followed last year by AA v Persons Unknown, which dealt with crypto-assets: the claimant was the insurer of a company that fell victim to a ransomware virus that encrypted user files and demanded a $950,000 ransom, payable in Bitcoin, to decrypt them. In his judgment, Mr Justice Bryan held that crypto-assets, like Bitcoin, are legal property under English law.
‘The rise in civil fraud will not go away,’ concludes Christopher. ‘And the continuing rise of cryptocurrencies and the ability of people to commit fraud anonymously online will not go away either.’ LB