Guinness Share Trading Scandal

Introduction

The existing prosecuting authorities such as Department of Trade and Industry (DTI) and Serious Fraud Office (SRO) deals with corporate and fraud cases. DTI inspectors are investigators; unlike the police or SRO they are not prosecutors or potential prosecutors. The purpose of a DTI investigation under section 432 of the Companies Act is to find out and report on what happened.

The inspectors can look into any aspect of the matter under investigation and are not restricted to consideration of compliance with the Companies Act. Before the FSA, many fraud cases were unsuccessful because the defendant remained silent during the interviews. This made it difficult for DTI and the SRO to get the corporate fraud case. It was easy to destroy the evidence and documents of the convictions.

Thus, government abolished the right to silence in the investigation and allowed them to get the evidence under pressure to be used in criminal proceedings. However, there are still some areas where right to silence is allowed in criminal case. This has left them without any protection of incriminating themselves. The series of cases arose from Guinness scandal has been dealt with fairness, right to silence, self-incrimination and most importantly whether the European Conviction of Human Rights protect the right of suspect in business world.

Guinness Affair

The Guinness share trading fraud was one of the most famous British business scandals of the 1980s. Guinness shares were to be inflated in order to assist its takeover by the Scottish drinks company Distillers. Ernest Saunders, Gerald Ronson, Jack Lyons and Anthony Parnes were the perpetrators of this crime. They planned to raise the share price of the Guinness in order to win the bid of takeover of Distillers. They paid out indemnities to the companies who were part of the scheme and other awards were paid to the companies that supported them in the scheme. All four were convicted of dishonest conduct of share support in the Guinness Affair.

Issue Of The Case

The Guinness affair consisted of four trials. The first trial was that of R v Saunders 1996, in which appeals against conviction were except for one count of conspiracy dismissed by the Court of Appeal. The second trial was Saunders v United Kingdom 1996. The case confirmed the right to avoid self incrimination as a key component of a free trial. During the investigation of the case, the police relied on s434 of the Companies Act 1985 which carried punishment for refusal to answer any questions asked by Department of Trade and Industry inspectors. The trial judge refused to exercise his discretion to exclude the evidence under s.78 (1) of the Police and Criminal Evidence Act 1984. It was found that there was breach of Article 6 of ECHR. The Court declines to award compensation, but did award the costs.

The third case and fourth case was that of R v Lyons (2001) and R v Lyons (2003), in which the four appellants appealed against the refusal of the Court of Appeal to finish the convictions recorded against them. They argued that they were compelled to provide answers to questions by inspectors of DTI. However, the courts rejected their appeals and upheld their convictions.

Lyons was charged in 1987 along with the other defendants but he escaped prison because he was suffering from ill health. Lyons launched an appeal in 1995 which reduced his fine and removed one count of conspiracy. The lawyers of the defendants stated that the clients had lost their right to silence because they were forced to provide evidence to the Department of Trade and Industry inspectors.

The prosecution replied that the defendants had nothing to hide and that the share market had been regulated for centuries. Lyons, Parnes and Ronson relied on Saunders whose plans were not approved by the Guinness board of directors. Repeated appeals by Lyons and other defendants were upheld by the courts. The European Union declared in 2001 that the trial was not fair because the DTI inspectors compelled the defendants to testify.

Parnes was also another defendant in the scandal which involved the support for the Guinness share to enable it to merge favourably with Distillers. He was described as a flamboyant corporate executive who was sentenced to two and a half years on charges of false accounting contrary to section 17(1) of the Theft Act 1968 and theft. His sentence was reduced to twenty one months on appeal. He argued that the DTI transcript were admissible.

The interviews taken in the first three weeks should be excluded in pursuant to s.76 of PACE on the basis that they had been obtained by oppression or in circumstances which were likely to render them unreliable. Parnes made two appeals in 1991 and 1995 which reduced his sentences but did not overturn the verdict by the courts.

The case of Saunders was taken to ECtHR and question there was raised was ‘Should Saunders succeed there?’ at that time, the courts duty was to apply the domestic la to the case which is unambiguous. Parliament made it clear in s434(5) that it cannot be right for the judges to exercise his discretion to exclude the evidence of interview simply because the parliament had ought to have countenance the possibility of self incrimination. Nor could he bring the section 434(5) into line with section 2(8) of the Criminal Justice Act 1987, a step that parliament has declined to take.

Decision made by Human Rights Court

The European Court of Human Rights decided that Mr. Saunders trial was unfair because he had been pressurised to answer the Department of Trade and Industry inspectors’ questions in compulsion with s 437 of Companies Act. The criminal proceeding against him was a breach of his right to a fair trail under Article 6 of Human Rights Act.

The right to incriminate oneself is concerned with the respect of the accused person to stay silence during the investigation. The evidence cannot be used in the criminal proceeding that may have been gathered with the compulsory power. This means that if a person stays silent during the investigation, this will create independent proof for the defendants’ guilt without being tempted to self-incriminatory evidence from the accused.

Decision In Relation To Human Rights

After the case was heard in ECtHR, the case came back to the UK courts to give effect on the decision of whether the trail was fair or not. In R v Lyons, the ECtHR held that there had been violation of the rights of the appellants. The matter was again referred to the Court of Appeal by the CCRC on grounds that the United Kingdom’s treaty under Article 41 and 46 of ECHR with the European Union gave the appellants the right to rely on the violation established by the Human Rights Court.

However, the Lord Justice Rose rejected the right of the state to oblige under article 46 of ECHR as it did not confer any right on the appellants. They also doubted that whether article 46 required the reopening of convictions. According to them there was nothing in the Human Rights law to suggest that there was an obligation. The appellants could not derive rights from the convention which they were prevented from asserting under the Human Rights Act because it was not relevant. It was held that HRA 1998 is not retrospective, on an appeal to the court after it came into force in 2000, therefore, appellants cannot rely under the breach of article 6 of European Conventions.

Parliament could declare them as safe because the procedures were permitted by them. The question raised was that whether the appellants’ conviction was unsafe was a matter of English Law. The intention of Parliament prevailed over whatever obligations may arise from the ECHR and the judgments of the European Court of Human Rights. Parliament had expressly qualified the common law privilege against self-incrimination and the trial judge had been obliged by an express statutory provision to admit the evidence.

Aftermath (UK Law Decision)

After the decision made in European Court of Human right, s434 of the Companies Act has been amended in order to make sure that the court does not make the same mistake in future proceeding. This will give an effect to the protection against the right to silence, self-incrimination and fairness in the trial against the defendants. Moreover, as HRA came into force in 2000, s3 of the 1998 has been rendered to give effect to the domestic law to be compatible with the convictions.

Also, s59 of Youth and Criminal Justice Act has been amended by s3 in R v Saunders in order to be more lenient with the convictions where the statements given by the accused under pressure cannot be used in criminal proceedings against them. Furthermore, the FSA has been given more powers from the FSMA 2000. Section 174 of the FSMA 2000 provides that ‘a statement made by an investigator by a person in compliance with an information requirement is admissible in evidence in any proceedings, as long as it complies with any requirement governing the admissibility of evidence in the circumstances in question’.

However, there are certain circumstances in which prosecutors can adduce the statements against the person. Firstly, if the person has dishonestly or recklessly provided the statement and that the statement was misleading; secondly, the evidence relating to it is adduced, or a question has been asked relating to the proceedings by or on behalf of that person; and the false statement has been made otherwise than on oath under section 5 of the Perjury Act 1911.

Guiness Affair (New Legislation FSMA 2000)

In relation to the Guinness case, FSA could appoint s168 (2) investigators, because the scandal compiled with the insider dealing, market manipulation and market abuse that has taken place. This gives the power to FSA to investigate and take interview of everyone and collect all the evidence that was involved in the fraud. This also includes the power of s167 investigators. If a person refuse to give any answers in the investigation will be in contempt of courts under s177 (1) of the FSMA 2000.

FSMA has the power to collect any information from the authorised or unauthorised person under s.401 and s.402. This gives powers to investigators of s168 to investigate any circumstances in relation to criminal proceedings. FSA does not need to notify the criminals about any proceedings that will be taking place. Therefore, it was very likely that they would have not told Saunders about the investigation.

The reason for this was that they could not do anything before all the evidence and investigation has taken place. The information (interviews) taken of Saunders and others could not be used in the court as evidence against them under s174. However, the statements taken from Saunders were allowed to be used in non-criminal case as they meet the ordinary tests of admissibility which apply to many other cases.

S174 (2) states that whether a statement is given under an order, by either the FSA itself or the FSA appointed investigators, evidence relating to it may not be adduced by the prosecution or the FSA in any criminal proceedings or proceeding related to a penalty for market abuse. This is a general rule of criminal proceedings. The statements must comply with the rules concerning the admissibility of evidence.

In Saunders case, even though it was criminal related to criminal proceedings, it would seem to create a doubt also in government minds as to whether such proceedings are truly in fact civil/administrative in nature. The FSA may avoid this problem by choosing to conduct a non-compelled interview i.e. in which its power to require answers for the questions asked are not evoked.

The above exception under s174 (2) also relates to the market abuse regime. This is where the proceedings relate to action to be taken under s123 (which enables the FSA to impose a financial penalty or to censure a person for market abuse). The government inserted this market abuse regime to ensure that if it was found by a court to be criminal in nature, the legislation would already provide all the safeguards required in criminal proceedings by article 6 and would not, therefore, need altering on ECHR grounds.

However, if any other serious fraud offence was to be found by the FSA investigators, the matter will then be passed on to the Director of Public Prosecution (DPP). This could be in the case of insider dealing or money laundering. In addition, Saunders and others will be interviewed as they have been convicted of false accounting and theft.

They have been manipulating and abusing the market by increasing the share price to win the take over bid of Distillers. Saunders and others could/may be convicted under s118 (5) ss (a) (b) of 2000 as it applies to the information misuse (such as insider dealing) and market manipulation.

Conclusion

The scandal caused the British government to regulate its takeover policies. . Saunders and some of the defendants till this day maintain that they did nothing unethical. They also accuse of the Department of Trade and Industry inspectors of lacking the knowledge about corporate takeovers. Lyons is the only one of the defendant who feels remorse and regret for his behaviour. However he calls his behaviour foolishness rather than being criminal.

Under section.171, FSA would need to use the rights to force an appellant to answer questions asked during the investigation as an alternative. This right should only be exercised if the person is not willing to answer any questions or provide and evidence in relation to the crime. If this case was to be considered now under new legislation, I would personally think that Saunders and other would have succeeded in their trials.

This is because previously DTI violated them to get evidence. Because of this proceeding, parliament had to change its legislation in order to comply with the proceeding. S35 was in breach of article as it made the defendant to compel self-incriminating evidence. I think corporate fraud cases are different to criminal case and should be dealt differently under the new legislation.

References

Companies Act 1985

Criminal justice Act 1987

Financial Services and Market Act 2000

Human Rights Act 1998

Police and Criminal Evidence Act 1984

Perjury Act 1911

Youth Justice and Criminal Evidence Act 1996

R v Saunders and others [1996] 1 Cr App R 463

R v Lyons and others [2001] EWCA Crim 2860

Saunders V United Kingdom [1996] EHRR 313

Blair M, Minghella L, Taylor M, Walker G; Blackstone’s Guide to the Financial Service Act 2000 (Oxford University Press 2001)

Nick Kochan and Hugh Pym – The Guinness Affair: Anatomy of a Scandal (1987)

Berger Mark; Self-incrimination and the European Court of Human Rights: procedural issues in the enforcement of the right to silence (2007 European Human Rights law review)