Misleading statements
A further criminal offence seeks to catch those who make
misleading statements in the financial services sector (FSMA,
s.397(2)).
A person can be liable if they:
- make a statement, promise or forecast that they know to be
materially misleading, false or deceptive;
- recklessly make such a materially misleading, false or
deceptive statement, promise or forecast – whether they are
dishonest or not;
- dishonestly conceal any material facts in a statement, promise
or forecast.
In each of these cases, the person will be guilty if either of
the following applies:
- they made the statement for the purpose of inducing another to
enter into an investment agreement or to exercise (or refrain from
exercising) any share rights;
- they were reckless as to whether the statement would have that
effect.
The reference here to entering into an investment agreement is a
poor shorthand for the whole panoply of controlled activities
regulated by FSMA and the secondary legislation derived from it. If
there is any doubt about whether a sphere of activity is caught by
the misleading statements provision, professional advice should be
taken.
Some of the most obvious cases occur when a company is floating
on the stock market. Directors will commit the offence if a
statement or a forecast in a prospectus that they know to be false
induces investors to take up the shares. Or if they are reckless as
to whether the statement or forecast is false – that is, they have
taken no care in establishing the truth and have simply shut their
eyes to the misleading nature of what is said. Boards and their
advisers must take extreme care in producing these kinds of
documents, verifying each and every statement that could influence
the behaviour of investors. The same applies to documents sent to
shareholders on a company takeover, whether by the bidder or the
target.
Like market manipulation, the offence is punishable by up to
seven years in prison and/or an unlimited fine. But directors who
make misleading statements face more than criminal liability. They
may also be liable for compensation to investors who lost
money.
Both imprisonment and a compensation order were the consequences
for two directors of AIM company AIT in the first case brought by
the FSA under these provisions. Carl Rigby and Gareth Bailey issued
an announcement stating that the company’s turnover and profit were
in line with expectations. Those expectations depended on revenue
from three specific contracts. The problem was that the contracts
did not exist. In August 2005, Rigby and Bailey were convicted at
Southwark Crown Court of recklessly making a statement that was
misleading, false or deceptive and were sentenced to three and a
half and two years respectively (reduced to 18 and nine months on
appeal). The Court of Appeal upheld a compensation order against
Rigby of £208,796 and a costs order of £250,000; Bailey had to pay
the more modest sum of £35,114.
