Regulators have their statutory responsibilities to perform and objectives to achieve, and the legislature and the courts will provide those regulators with a degree of freedom and latitude as to the manner in which they are performed and achieved.
Generally, the legislature requires those from whom information is sought, whether they be persons under investigation or not, to cooperate with regulators. Failure to cooperate often leads to invasive document and interview requests and failure to comply with those may lead to the imposition of penal sanctions.
The regulatory climate is often thought to be such that, for the most part, complaints that regulators are seeking, inappropriately, to exercise some exorbitant jurisdiction or to exercise their powers in a heavy-handed fashion, if not unheeded, are often unsuccessful in securing a change of direction or approach from regulators.
Two recent decisions have, once again, brought into sharp focus the exercise of statutory regulatory powers, and the checks and balances to which they may be subject.
Court of Appeal considers privilege in respect of documents produced in a company’s internal investigation
In The Director of the Serious Fraud Office v Eurasian Natural Resources Corp Ltd [2018] EWCA Civ 2006 (SFO v ENRC) the Court of Appeal considered the role and scope of legal professional privilege, as a constraint on the exercise of regulatory powers.
The case was concerned with documents which had been generated by solicitors and forensic accountants engaged by ENRC as part of an internal investigation into alleged fraudulent practices which had been notified to ENRC by a whistle-blower. The SFO carried out an investigation and sought declarations that the documents in question were not covered by legal professional privilege. At first instance, the High Court granted the declarations sought and ENRC appealed. The Court of Appeal considered the scope of both litigation privilege and legal advice privilege.
Litigation privilege
Litigation privilege comes into play, temporally, when legal proceedings are reasonably in contemplation. The issues for the Court of Appeal, the determinations of which, on this aspect of the case, were dispositive of the appeal, were whether criminal legal proceedings were reasonably in contemplation when the documents were produced and whether the documents were created for the dominant purpose of defending such proceedings. The Court of Appeal found that a criminal prosecution was reasonably within ENRC’s contemplation when it initiated its own internal investigation and that documents (including legal advice) produced during this investigation for the purpose of settling or avoiding reasonably contemplated proceedings were capable of being protected by litigation privilege.
Legal advice privilege
Given the Court of Appeal’s conclusions on litigation privilege, the legal advice privilege issue was less important. Nonetheless, the court clarified how it would have determined the question of legal advice privilege had it been required to do so and considered the effect of the decision in Three Rivers DC v Bank of England [2003] EWCA Civ 474. In Three Rivers, the Court of Appeal held that an employee of a corporation seeking advice from the corporation’s lawyers could only attract legal advice privilege if the advice was sought on behalf of the corporation. In SFO v ENRC, the Court of Appeal expressed doubts over the correctness of Three Rivers but noted that any departure from the principles applied in that case would need to be determined by the Supreme Court. In ENRC’s case, if the documents in question had not been subject to litigation privilege, the judge would have been right to decide that they were not covered by legal advice privilege based on Three Rivers.
The Court of Appeal’s decision in SFO v ENRC is of importance to both companies and regulators. Those regulators include the SFO and other regulatory bodies who have power to bring enforcement proceedings.
In essence the decision means that companies who are facing criminal or regulatory investigation may well be able to claim litigation privilege for communications with third parties at an early stage of engagement with a regulator or during internal investigations provided that they can meet the relatively low threshold of civil litigation or criminal proceedings being reasonably in contemplation.
The decision requires regulators to focus on when it may be said that legal proceedings are reasonably in contemplation. Regulators may choose to review their approach to, and actions within, any investigation, so that a company under investigation does not reasonably, albeit inappropriately, believe that legal proceedings are in contemplation. From the perspective of companies under investigation, no doubt they will be collecting and collating evidence so that they may, at an early stage of an investigation, identify when, and have reasonable grounds for believing that, legal proceedings are in contemplation by the regulator.
The SFO has confirmed that it will not seek to appeal the decision in SFO v ENRC, but that it will continue thoroughly to assess the merits of all privilege claims, and remains prepared to challenge those it considers to be ill-founded.
High Court considers whether production of documents to a regulator under statutory powers infringes legal professional privilege
Once again the court, this time Arnold J, sitting in the Chancery Division of the High Court, in The Financial Reporting Council Ltd v Sports Direct International plc [2018] EWHC 2284 (Ch) had to consider the scope of legal professional privilege, as a constraint on the exercise of the FRC’s broad powers under Regulation 10 and Schedule 2 Statutory Auditors and Third Country Auditors Regulations 2016. The powers were exercised to obtain information from a statutory auditor and its clients for the purpose of investigating statutory audit work.
The FRC criticised Sports Direct’s approach to document requests made by the FRC as one of obfuscation and delay verging on obstruction, a criticism Arnold J found to be entirely justified. Whilst that observation of the judge might give rise to the sound of warning bells to those who deal with regulators, for present purposes, that was not the crucial issue before the court.
The FRC had required Sports Direct to produce documents in connection with a confidential FRC investigation into Sports Direct’s auditor. Sports Direct claimed that the documents, produced in relation to obtaining legal advice, were protected by legal professional privilege.
One issue before the court was whether legal advice privilege could be claimed in respect of documents which, in themselves, were not privileged, but which were attached to emails from a client to its adviser for the purpose of seeking legal advice or from the lawyer to the client giving advice. Arnold J found that such pre-existing documents obtained for the purpose of giving legal advice did not attract, and were not protected by, legal advice privilege, and hence were disclosable to the FRC.
The court, however, also found that whilst legal privilege had been waived to a limited extent in certain documents which had been sent by Sports Direct to its auditor for the purposes of an audit, that waiver did not extend in relation to the FRC. Accordingly, the FRC was not entitled to those documents.
Finally, the court was concerned with the issue as to whether, even if all of a series of documents were covered by legal advice privilege, and that privilege had not been waived by sending them to its auditor, the production by Sports Direct of those documents to the FRC for the purposes of its investigation would infringe Sports Direct’s privilege in them.
Arnold J held that the production of documents to a regulator by a regulated person, or a client of a regulated person, solely for the purposes of a confidential investigation, is not an infringement of any legal professional privilege of those clients of the regulated person in respect of those documents. Accordingly, the court ordered disclosure of those documents to the FRC.
Thus whilst legal professional privilege of a company in documents may protect that company from the requirement to disclose them in circumstances in which that company is the subject of the investigation, that company may be required to disclose those documents to a regulatory body, where the company itself is not the subject of investigation by the regulator.
For more information on public interest entities in the context of audit, see Audit and auditors, Q&A here.