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Article: December 2017: English Fraud Litigation: Weapons of Mass Destruction

Business Litigation Reports

Imagine if you could have your opponent’s premises searched, his Gmail, Hotmail, and Yahoo accounts secretly monitored, his assets frozen, his passport
seized, and even have him arrested and imprisoned – all before trial.

The English Courts have developed powerful and innovative remedies such as these to assist victims of fraud. And while they may be familiar to English civil
fraud lawyers, they are likely less familiar to lawyers in other jurisdictions. In this article, we summarize some of the different kinds of aggressive measures that are available in English civil fraud litigation, which include substantial fines, asset seizures, orders to search premises, and even imprisonment. These are
very effective deterrents and one of the reasons why victims of international fraud frequently turn to the English courts. Partly in recognition of these unique, wide ranging, and creative remedies, civil fraud litigation is treated as a separate, specialized practice area in England.

Worldwide Freezing Orders – “Nuclear Weapon” of English Litigation
“Worldwide Freezing Orders” (WWFOs for short) are referred to as the “nuclear weapons” of English litigation. They force potential fraudsters to disclose their assets wherever they may be based, freeze those assets, and ultimately prevent them from being dissipated. WWFOs can be made in support of English proceedings or in support of foreign proceedings. They can be made against parties domiciled outside England.

Compliance with WWFO’s can be extremely time consuming and burdensome. Very frequently the respondent may attempt to breach a WWFO in an effort to conceal assets or in the mistaken belief that there will be no consequences. The Court, however, has developed numerous devices to police compliance. If fraudsters refuse or fail to comply with the orders of the Court, they can be imprisoned, fined and/or barred from defending the claims against them (see
below). Border authorities keep records of parties in contempt of court, who are liable (if they are in transit through England) to be arrested and immediately taken to court for sentencing.

In view of its powerful effect, an application for a WWFO is almost always made without notice, so that the respondent does not dissipate its assets in the interim (i.e., between the application and the hearing date). Where an application is made without notice, the applicant must disclose all matters that are material to the court in deciding whether to grant the order and, if so, on what terms. This includes disclosure of relevant facts and legal principles even if they are not in the applicant’s favor. This is known as the duty of full and frank disclosure. Failure to give full and frank disclosure is something which the English Courts take very seriously given the draconian consequences of a WWFO.

The definition of assets for the purposes of the WWFO is broad. In addition to encompassing traditional assets (bank accounts, properties, investments, etc.), it can also extend to less obvious assets: for example, loan facilities, assets owned by wholly owned companies, interests in a trust fund, and assets owned by a trust. It includes assets in which the respondent has a legal or beneficial interest.

A WWFO does not give the innocent party any priority or security over the frozen assets in question. Rather, it seeks to preserve the assets so that any subsequent judgment in favor of the applicant can be enforced against the assets so preserved. In certain circumstances, a WWFO may also be made against other parties who appear to hold assets on behalf of the respondent. This is a very effective tool where a respondent controls (directly or indirectly) third parties and uses those third parties to create an artificial separation of ownership of assets.

In order to obtain a WWFO in England & Wales, the applicant must demonstrate to the Court that: (i) it has a cause of action, i.e., an underlying legal or equitable right that has been breached; (ii) the English Court has jurisdiction (as to which see below); (iii) it has a good arguable case against the potential fraudster – i.e., a case “which is more than barely capable of serious argument and yet not necessarily one which the judge believes to have a better than 50 per cent chance of success”; (iv) there is a real risk that, without the WWFO, the fraudster will seek to dissipate assets beyond the reach of the innocent party—the court may infer a risk of dissipation from the parties’ previous conduct, particularly if there is evidence of fraud or if the assets could easily be transferred to third parties; and (v) under the circumstances, it is just and convenient for the order to be granted.

Out of all these conditions, risk of dissipation is often the most difficult to prove. The courts will consider, objectively, whether there is a risk of dissipation, taking into account all the circumstances. Relevant factors in demonstrating risk of dissipation include inter alia: (i) the ease with which the assets in question could be moved out of the applicant’s reach; (ii) evidence of the respondent’s dishonesty, particularly in relation to misuse of assets; (iii) potential adverse inferences to be drawn from the respondent’s incorporation in a tax or finance haven (in the case of a company); (iv) the respondent’s past and present credit record; and (iv) circumstances where the underlying claim involves allegations of criminal behavior by the respondent.

Burdensome Compliance
Once a WWFO is obtained and served, the respondent is required to give disclosure of his worldwide assets over a de minimis amount, for example USD 5,000. This disclosure must be given in an extremely limited timeframe—often a matter of days. This makes compliance both burdensome and time-consuming, particularly where the respondent holds assets around the world in a number of various forms.

The information provided must include (among other things) the value of the assets; their location; and whether or not the assets are individually or jointly owned. In addition, within a further few days, the information must be verified by a sworn affidavit from the respondent to the Court. The obligation to provide the information is on-going and newly acquired assets must also be disclosed on a rolling basis.

Non-Compliance with a WWFO
Failure to comply with a WWFO (including unnamed parties that are placed on notice of the terms of the WWFO) is a serious offense. It may result in imprisonment, fines or asset seizures (as to which, see below). There is therefore a strong incentive on the respondent to a WWFO with any interest in maintaining links with England & Wales to provide the required information on a timely and accurate basis, and not to attempt to dissipate its assets or otherwise try to conceal them further.

To the extent, however, that information comes to light and shows that the disclosure provided by the respondent is deficient, there are a number of steps that the applicant can take to further increase pressure on the respondent.

Third-Party Disclosure Orders
A claimant’s priority is invariably to position itself so that it can recover the assets that were taken from it as quickly as possible. If a respondent complies fully with a WWFO, the innocent party will learn not only the location of the respondent’s assets but will also know that they are frozen by the WWFO. If, however, the respondent has been less than honest with its asset disclosures, the innocent party must locate the fraudulent proceeds as a priority. This can be far from straightforward, with potential fraudsters becoming increasingly sophisticated in hiding funds, often by means of complex corporate structures spread across numerous offshore jurisdictions.

In order to protect innocent parties as much as possible, and to enable them to trace the flow of funds from source to their current location, the English Court has developed a number of different forms of disclosure orders (“Disclosure Orders”), which can be used to obtain information from third parties as to the whereabouts of the stolen assets.

To obtain Disclosure Orders, the innocent party must typically demonstrate that a third party respondent against whom the order is sought is likely to have relevant documents or information available to it.

In many cases, Disclosure Orders are obtained against banks that the respondent is known to have accounts with. The banks can be required to provide the applicant with banking records held in relation to the respondent, including (but not limited to) client opening information, bank account statements and copies of checks. Critically, banks can be ordered to provide the information in a very short time frame (usually a matter of days) and to provide it not just in relation to the known bank accounts of the respondent but also in relation to any other account held by that individual. The innocent third party can therefore effectively “trace” the flow of funds through various accounts.

More recently, in addition to Disclosure Orders against banks, the Courts have been willing to grant Disclosure Orders against Internet and email providers, such as Yahoo. Such an order allows victims of fraud to access and review electronic communications in relation to a fraud that had been committed. This order was obtained in the JSC BTA Bank v. Ablyazov litigation and had devastating consequences as it effectively granted the Court a private window into the fraudster’s activities. The order is demonstrative of the extent to which Courts are increasingly prepared to help victims.

Of critical importance when seeking Disclosure Orders is the innocent party’s ability to request a “gagging order” from the Court. The gagging order prevents the disclosing party from “tipping off” the fraudster to the fact of the application or resulting disclosure. It is extremely helpful at allowing victims to attempt to stay ahead of a fraudster seeking to dissipate assets or avoid orders of the English Court. This maximizes the innocent parties’ prospects of locating both where funds have flowed since the fraudulent scheme took place and where they presently are.

Contempt of Court – Imprisonment
When a respondent has failed properly to comply with its obligations pursuant to a WWFO, it may be open to the applicant to issue contempt proceedings. These can be brought on an urgent basis soon after a respondent has breached its obligations, the purpose being to seek relief from the Court in an attempt to secure compliance with the order and to secure available assets.

If the Court is satisfied that the respondent has committed a serious breach of the Court’s order, sanctions are extremely severe.

In recent years, for instance, there have been many instances of respondents being given prison sentences of up to two years for breaches of WWFOs. These include, amongst many others, JSC BTA Bank v Ablyazov (Mr Ablyazov was sentenced to 22 months in prison for disposal of assets, non-disclosure of assets and lying to the Court); Thursfield v. Thursfield (a 24 month sentence was imposed for continued failure to provide documents under a WWFO); JSC BTA Bank v. Solodchenko and others (a 21 month sentence was ordered on the basis that compliance with the Court’s order was incomplete and had contained knowingly false information), and the very recent Ji-Chuen Jason Tsai case, where the respondent was sentenced to 18 months’ imprisonment for multiple individual breaches of the WWFO.

Contempt proceedings are, however, usually expensive and time-consuming applications. In practice, parties therefore often strategically take the preliminary steps necessary for contempt proceedings without ultimately following through with the application. This is to place the defendant or those associated with the defendant under significant pressure during the preliminary stages in litigation, with the objective of securing an early settlement of the dispute.

Debarring Orders
The Court is also increasingly issuing so-called “Debarring Orders” if it is satisfied that the defendant has failed to comply with a WWFO. The claimant victim obtains an “unless order”, which requires the respondent to properly comply with the WWFO, failing which the respondent will be barred from defending the claim against it.

While this can be seen as a draconian measure, the English Courts have traditionally considered that the overriding interest of justice includes orders of the court being respected and obeyed.

The opportunity to effectively tie the respondent’s hands from defending itself is a serious weapon in a litigant’s arsenal. If obtained, it can help facilitate a swift dispute resolution at reduced costs (particularly given that debarring orders are likely to be less costly than an application for contempt of court or even an application for cross examination of assets). For this reason, a trend is emerging in London proceedings whereby applicants are opting to strategically bring contempt proceedings in the knowledge that if contempt of Court is established, this could lead to a debarring order. In what is known as “sanctions based litigation,” parties are effectively seeking to obtain judgment by circumventing the trial procedure, thus saving significant time and costs. Sanctions based litigation can be a very effective means of obtaining swift justice.

Passport Seizure
If an individual respondent is considered a flight risk, the Court is sometimes prepared to order the respondent to hand over his/her passport to the applicant’s solicitors preventing him/her from leaving the country. This is another effective means of facilitating early settlement.

Search and Seize Orders
Finally, parties are able to seek Search and Seize Orders from the English Court. Search orders are a form of mandatory injunction, which require a defendant to allow the applicant’s representatives to enter the defendant’s premises and to search for, copy, remove, and detain documents, information, or material. The purpose of a search order is to allow applicants to preserve evidence or property which is, or may be, the subject of an action.

Search orders are effective weapons in circumstances where there is a belief that the defendant will destroy documents in contravention of a Court order. By obtaining a search order on a without notice basis, an applicant may be able to gain a significant advantage in the litigation by obtaining information and documents that it would otherwise never be able to obtain.

Due to their nature, search orders are considered one of the most draconian orders that the Court can make. If a defendant fails to comply with a search order, he may be held in contempt of court and similar sanctions to WWFOs (as set out above) may apply. Search orders should therefore always be considered when acting against fraudsters who are prepared to take steps to evade justice. They can be very effective tools in a English litigant’s armory.

Quinn Emanuel’s London Office
Quinn Emanuel’s London office has vast experience of obtaining WWFOs, Disclosure Orders, and Search Orders in London in aid of both domestic and foreign proceedings. We forensically review the documents and disclosures made by fraudsters and, where the information is misleading or incomplete, we take strategically aggressive and robust steps to use the full gamut of remedies, including applications for contempt of court.

When obtaining Disclosure and Search Orders, we trace and recover undisclosed assets belonging to fraudsters. Our approach allows our clients to make maximum recoveries of the sums that are owed to them.

For more information in relation to any of the above, please contact our London Partner, Nick Marsh (nickmarsh@quinnemanuel.com).