This is the first of a two-piece article on the use to which information from regulatory investigations can be put by disgruntled claimants long after the regulator has absolved the firm in question.

Regulatory investigations are an increasingly common part of corporate life, particularly in the financial services sector. In addition to receiving large fines, banks may also have to contend with civil claims, launched off the back of public criticism from a regulator in the knowledge that whistle-blowers or sensitive documents from the investigation already exist. Therefore, good strategy in one situation may not be good strategy in the other. Each case is unique and must be examined individually, but clear trends are starting to emerge.

Risk management

Firstly, risk management has been made more complex by the fact that many investigations now emanate from overseas regulators, particularly American ones, and engulf many jurisdictions. Since 2010, the volume of requests from the US Securities Exchange Commission (SEC) for co-operation from foreign regulators has increased by 59% and the volume of requests received by the Financial Conduct Authority (FCA) from foreign regulators has increased by 36%.

This throws up a number of difficult problems. Does one turn oneself in to the regulator and confess all in return for a lower fine, and even immunity, knowing that the price to pay for a public admission of wrongdoing might be a tidal wave of civil claims? If so, should one categorise and volunteer all relevant emails and data in a timely fashion, instead of opting for a 'document dump'? Some firms diligently sort through all the information, pick out the relevant details and organise it into sections. Others just hand over all emails for the relevant period and leave the regulator to get on with it – a strategy that lies at the lower end of co-operating. Such are the games that institutions play during investigations.

If one's firm co-operates with the regulator fully, the reward for its diligence could be a harsh one because potential claimants will be able to find and identify the most sensitive evidence more easily. Deutsche Bank is a case in point. It was forced to pay a record $2.5 billion of fines having admitted guilt under a deferred prosecution agreement (DPA) with US authorities relating to the rigging of the London Interbank Offered Rate (Libor). The FCA said that the bank repeatedly misled it during Libor investigations, took too long to produce relevant documents and was slow to fix inadequate systems and controls which, in turn, bumped the fine up. As a result of the case, the two joint chief executives of the bank had to stand down.

Legal privilege

In this situation, problems involving legal privilege may arise. If there is a regulatory investigation, the bank may supply the regulator with certain information that would normally be privileged (i.e. the subject of solicitor/client privilege or information compiled with litigation in mind) in the interests of helpfulness. In such a situation the bank must be careful to tell the regulator that it is not waiving legal privilege for all documents of that type. Even then, there may be a problem. In most cases it is not until a year or two after the regulatory investigation that someone issues a writ and makes a claim, at which point the court might say that the bank has not issued a valid waiver. The judge might say "I see what you were trying to do, but in handing over the information you have in fact waived privilege on all documents of this type." In general, courts in England are likely to accept that the waiver is valid and that other documents of the same type retain legal privilege; courts in the US are less likely to do so.

The never-ending cycle of litigation

This is all grist to the mill for civil claimants in the High Court. Unitech Global is pursuing Deutsche Bank for damages and for failing to repay $150 million of loans, relating to the alleged mis-sale of interest rate swaps linked to Libor. In the wake of regulatory sanction, it was able to amend its claim to allege that the bank impliedly represented that it would not falsely or fraudulently manipulate the benchmark. The courts have compared the case with a diner at a restaurant. By sitting down, the diner makes an implied representation that he can pay for his meal and a reasonable person in either scenario would not infer or suspect dishonesty.

Similarly, and having been fined £290 million by the British and American authorities in relation to Libor-fixing, Barclays is defending itself against a claim for £50 million in damages made by its customer Rhino Enterprises. The claim alleges that Barclays entered false Libor submissions, undermining various swap arrangements which then pushed the customer-firm into insolvency because it could not afford the swap payments. It has also alleged that the bank engaged in anti-competitive behaviour by colluding with other banks to manipulate Libor. This is separate from the $2.43 billion of fines that Barclays had to pay for allegedly rigging Forex and Isdafix benchmarks.

Global legal responsibilities

These cases show that as well as balancing the competing burdens demanded by regulatory sanction and civil claims, banks – and other providers of financial services – must also be aware of their legal responsibilities as set out by the different jurisdictions in which they have a corporate presence. The legal distinctions between the jurisdictions are, however, becoming increasingly blurred.

One such example of inter-jurisdictional crossover in regulatory law is the increasing use of Deferred Prosecution Agreements (DPAs). Originating in the US, DPAs are being employed more frequently by regulators in the UK because they think of them as a way of increasing compliance. In exchange for the 'suspension' of a prosecution (as long as there is no further wrongdoing, or in the case of HSBC even if there is and it is happening under the noses of two resident examiners from the Office of the Comptroller of the Currency), companies simply have to pay fines and comply with sets of agreed-upon measures.

Such deals have faced criticism because they can forestall criminal charges for bank executives. In a recent letter to the Serious Fraud Office (SFO)’s director, David Green, a group including Transparency International and Corruption Watch emphasised the importance of ensuring that DPAs do not replace public hearings as a way of resolving investigations.

Compelled evidence

Another similar factor present in investigations in the US and UK is the use of compelled evidence. Both the Serious Fraud Office and the Financial Conduct Authority have powers to compel various people to answer certain questions – in the FCA's case as part of a regulatory investigation, in the SFO's case as part of a formal investigation. Although these answers are generally not admissible as evidence against the interviewee in a criminal prosecution, they would be admissible in any enforcement or disciplinary action taken by the regulators. The extent to which firms and individuals co-operate is directly relevant to the sanction that is determined, so it is pretty hard not to co-operate!

[Editor's note: Just to dispel any incredulity that readers might feel at this point, British citizens can indeed go to prison for remaining silent when confronted by certain government officials in their own homes and offices and/or other places that are nowhere near courtrooms. Section 2(2) Criminal Justice Act 1987 empowers the SFO, once it has launched an enquiry, to require a person to answer questions or otherwise furnish information about fraud at a specified place and (if it so chooses) forthwith. Section 2A allows it to go further than usual to obtain information about bribery or corruption and compel people to talk to it even before it has launched a formal inquiry. Failure to answer without a reasonable excuse is an arrestable offence. The SFO, however, says that the answers that someone gives in response to a notice under s2(2) may not be used in evidence against him. The Thatcher Government presumably hoped that the act of criminalising any refusal to talk to various government officials about fraud would give it a useful precedent, sometime in the future, for criminalising any refusal to talk to any officials about anything else.]

In relation to civil claims in the UK, a witness summons can be served to require witnesses to attend court. If this happens to senior and middle managers at a bank, they should expect to be cross-examined on regulatory findings and documents discovered during an investigation. A recent example of such cross-examination occurred during the trial of the former chief operating officer of Barclays Capital. Documents uncovered during an earlier investigation showed that he once admitted that the Libor curve was based on "fantasy rates".

* In the second instalment of this treatise, we ask how evidence uncovered during a criminal trial could then be used to support a civil claim. Jonathan Kitchin is an associate at the City law firm of Michelmores. He can be reached on 01392 687635 or at jonathan.kitchin@michelmores.com