A theme to which I frequently return is the potential for conflicts of interest between companies and their senior management. I do so — not to scaremonger — but to challenge the often held assumption that, provided they have not been dishonest, directors will be looked after by the companies they serve and therefore do not need to concern themselves with the details of their liability insurance policies. A recent criminal case brought by the Serious Fraud Office (SFO) against a number senior managers of a well-known high street U.K. food retailer for fraud and false accounting sheds fresh light on this difficult question. The case collapsed in January 2019 when the judge ruled that the individuals had no case to answer because the “prosecution case was so weak.”
The Deferred Prosecution Agreement
This is not the first time a criminal case has collapsed in this way, nor will it be the last. But to understand quite how dramatic this turn of events really is, we need to go back to March 2017. In that month, Sir Brian Leveson, president of the Queen’s Bench Division of the U.K.’s High Court, approved a Deferred Prosecution Agreement (DPA) entered into between the Serious Fraud Office and the company. His judgment can be found here.
The case concerned the restatement by the company of its financials following disclosure of the fact that there had been a £250 million overstatement of its profits in the 2013-14 accounting period. The criminal offence which the company successfully persuaded the Court to defer in relation to this restatement was an offence of false accounting contrary to s.17 of the Theft Act 1968. The director of the SFO stated he was satisfied that there was a realistic prospect of conviction of this offence. This was based on the allegation that the U.K. finance director was personally responsible for the truth and accuracy of the financial data submitted to head office, and that both he and others “were also aware of improper recognition of commercial income” but that despite the opportunity to put things right “….they failed to take any of these opportunities and instead concealed the true position”. This was later to form the guts of the case brought against the three company executives which collapsed.
As part of the DPA, the company admitted liability and paid a fine of £129 million.
A mismatch of crimes
By way of reminder, a deferred prosecution agreement is only possible in cases where the company concerned first accepts that a relevant offence has been committed. The advantages of this procedure for companies are addressed in my earlier blog on this subject, but they include cost and reputational damage limitation.
Pausing here, there is an obvious mismatch between a DPA in respect of an offence supposedly committed by a company (and accepted by it as having been committed) and the subsequent acquittal of the individuals who were supposed to have been responsible for the company’s commission of that offence. This has not escaped the attention of the individuals concerned. One of them interviewed by The Times newspaper (24 January 2019) after the criminal case collapsed said the supermarket group were responsible for “throwing him under the bus.” He also said, “There is no innocence until proven guilty. It is rather the other way around.”
To my mind it is less a case of asking how this could have happened and more to do with awareness raising around these risks for individual executives in the future. Neither in the U.K. nor in the U.S. does the Deferred Prosecution model allow individuals to avail themselves of deferral of prosecution against them. On the contrary: prosecutors in both jurisdictions explicitly require companies wishing to go down this route to cooperate fully with the authorities. And a key ingredient of this cooperation is a willingness to facilitate the consideration by prosecutors of criminal charges against individuals at a later date.
Readers may remember this was precisely the cause of the furore around the publication by U.S. Deputy Attorney General Sally Yates of the Yates Memorandum in 2015. In fact, partly as a result of the reaction, the circumstances in which cooperation is expected by the U.S. authorities have recently been changed under a U.S. Department of Justice revised policy which now states that “to receive cooperation credit in criminal investigations companies now “must identify all individuals substantially involved in or responsible for the misconduct at issue” and provide prosecutors with “all relevant facts relating to that misconduct.” The phrase “substantially involved in or responsible for” is the key change from the broader “involved in” formulation of the Yates Memo. No such change has been made in equivalent U.K. guidelines, but it is doubtful if it would have made much difference in this case.
There is no mechanism under which the individuals potentially affected by a DPA are consulted by either party to the proposed agreement. For quite obvious reasons, their agreement would be unlikely to be forthcoming and for them it is not hard to see how the process may feel like being thrown under the bus. In cases of obvious or admitted fraud or dishonesty you may feel this is no bad thing but then there is the principle of ‘innocent until proven guilty’ and that is where D&O insurance should come in.
I have no inside information on this case, but I imagine the costs for the individuals would be very considerable. All good D&O policies should cover these costs and the insurers should assume in the directors’ favour that they are innocent at least until ‘final adjudication’ in the underlying claim. The key takeaway is to check that this is the case for you before you leave the company. Remember that the claim may not be made against you for many years and these policies operate on a ‘claims made’ basis i.e. they only respond to claims made against you in the year in which the policy is in force.