Former JC Flowers CEO Fined £2.867 Million & Banned for Fraudulent Activities
Sarah Jane Leake | Bloomberg Law
The Financial Services Authority (FSA) recently sanctioned Ravi Sinha, former chief executive officer of JC Flowers & Co UK Limited (JCFUK), part of the JC Flowers private equity group (JCF), for fraudulently obtaining £1.367 million.
Sinha has been fined £2.867 million, comprising £1.367 million disgorgement and a punitive element of £1.5 million, and has been banned from performing any function in relation to any regulated activity in financial services for the indefinite future.
This decision is of particular interest in terms of the FSA’s approach to setting the punitive element of the fine. Despite the fact that the level of the penalty is likely to cause Sinha serious financial hardship, not least because he was discharged from bankruptcy only six months ago, the FSA maintains that its size is justified by the seriousness of the misconduct, particularly given Sinha’s previously senior position at JCFUK.
The Business & The CEO
JCFUK was established in 2005, to act as investment adviser to JC Flowers & Co LLC (JCFUS), which itself acts as fund manager for private equity funds that focus on financial services investments (JC Funds). Under the terms of the agreement entered into between these two companies, JCFUK was to provide sub-advisory services to JCFUS, as a professional client under the FSA’s rules, in relation to investments made by the JC Funds within Europe.
During his time at JCFUK, Sinha held a total of nine controlled functions (CFs)1 and, in particular, was responsible for ensuring compliance with the relevant regulatory rules and requirements. Moreover, he was also managing director of JCFUS and, as such, was the most senior person within JCF’s European arm of the business.
In part to demonstrate his personal commitment to the group’s investments, Sinha, from time to time, injected his own funds into the companies in which the JCF Funds had invested. To be able to continue making these investments, Sinha borrowed substantial sums of money. The JCF Funds were, however, hit hard by the financial crisis and in consequence Sinha’s own financial position was badly affected. As his investments declined in value, and the income he received from them also started to dwindle, Sinha became unable to meet his debts.
— The Loan
In view of his rapidly deteriorating financial position, Sinha, in 2009, took out a personal loan with a company (Company A) in which JCF Funds were invested, to the tune of €248,396.67. The loan was made on the basis that JCF had given its authorisation, which Sinha explicitly advised he had secured. JCF, however, remained unaware of the loan arrangement until some months later when its existence was uncovered.
— The Advisory Fees
Shortly after securing the loan, Sinha approached Company A again, this time advising that JCF had authorised him to charge advisory fees to the company. This was, however, untrue. Between May and October 2009, Sinha obtained three further payments from Company A, amounting to a total of €1.3 million. He submitted an invoice to Company A in respect of each payment, for fees to be directly payable to him, purportedly setting out the advisory services he had provided. The invoices were, however, fraudulent, as the only work Sinha undertook in relation to Company A was monitoring the investments that the JCF Funds had in the company and exploring potential exit routes.
In total, Sinha dishonestly obtained €1.548 million (£1.367 million)2 over the space of 10 months, without approval or authorisation, and in clear breach of his fiduciary duty to the company. His actions removed value from Company A, which, in turn, negatively affected the JCF Funds’ investors.
Given the dishonest, deliberate and sustained course of misconduct that spanned several months, the FSA concluded that Sinha had “failed to act with honesty and integrity”3 and was therefore in breach of Principle 1. Lacking in honesty and integrity, Sinha therefore fell below the requisite standard of fitness and propriety to continue to perform any CFs within the management of UK authorised financial institutions.
— Financial Penalties
Under section 66(1) of the Financial Services and Markets Act 2000 (FSMA), the FSA may, where it considers that an approved person is guilty of misconduct, impose a financial penalty on that person of such an amount as it considers appropriate.
A person is considered to be guilty of misconduct if, while an approved person, he, amongst other things, fails to comply with one of the FSA’s Principles for Approved Persons.4 An approved person is only in breach of these Principles, however, where they are personally culpable; their conduct must have been deliberate or their standard of conduct must have fallen below that which would have been reasonable in all the circumstances.
Principle 1 is particularly relevant in this instance. It provides that an approved person must “act with integrity in carrying out his controlled function.” Behaviour that falls below the requisite standard in this regard includes deliberately misleading by act or omission a client, his firm, or the FSA5 (including by falsifying documents or by providing false or inaccurate information/documentation6), and misappropriating a clients assets (including wrongly transferring to personal accounts cash or securities belonging to a client).7
— Prohibition Order
Under section 56 FSMA, the FSA may, where it considers that an approved person is not sufficiently fit and proper to perform a function in relation to a regulated activity, make an order prohibiting that person from performing any function. The regulator’s Fit and Proper Test for Approved Persons (FIT) sets out the key criteria for assessing a candidate’s fitness and propriety in this regard. As these criteria are used when assessing an approved person’s continuing fitness and propriety, due regard should therefore be given to these provisions when determining the appropriateness of imposing a prohibition order. The FSA must take into account a number of factors when assessing a person’s fitness and propriety, including his honesty and integrity.8
The FSA’s policy on imposing penalties is set out in its Decision Procedure and Penalties Manual (DEPP) at DEPP 6. Provisions of the FSA’s Enforcement Guide (EG) are also relevant. When assessing the appropriateness of imposing a financial penalty and/or making a prohibition order, the FSA must consider all the relevant circumstances of a case.
Weighing up the aggravating and mitigating factors, the FSA considered a financial penalty, including £1.367 million disgorgement, combined with a prohibition order, to be the most appropriate sanction.
— In Mitigation
While Sinha accepted that he had engaged in regulatory misconduct, he argued, on several grounds, that the level of the fine should be reduced.
Sinha submitted that, when calculating the disgorgement element, the FSA should apply a literal interpretation of the words contained within DEPP 6.5.2(G)(6) – that the FSA “will propose a penalty which is consistent with the principle that a person should not benefit from the breach.” In his view, the FSA should decide whether he had benefited from the breach and, if so, the extent of that benefit.
Sinha contended that he had not benefited from the breach as, when his employment was terminated on discovery of his misconduct, he forfeited his right to any bonus that he otherwise would have been entitled to. Going further, he argued that he had, in fact, suffered a loss in this regard. On a proper interpretation of DEPP, he argued, he had derived no benefit from his misconduct and should therefore not be liable to pay any sum in disgorgement.
The FSA, however, refused to accept that Sinha’s potential bonus should be offset against the sum fraudulently obtained and stressed that “where individuals engage in serious misconduct . . . those individuals will, when their wrongdoing is discovered, face the unpleasant but foreseeable consequences of this misconduct, and this will often include the loss of various benefits associated with their work.”9
The punitive element of the fine, argued Sinha, was too high in light of previous comparable cases. In his view, he had caused a significantly smaller loss, which affected only a small number of parties.
The FSA maintained that the punitive element is both “appropriate and proportionate”10 and rejected the notion that it was inconsistent with previous penalties imposed; each case has its own particularities. Although the FSA admitted that the loss that Sinha had caused was comparably smaller, it maintained that Sinha’s high level of seniority and the leading position of the firm in the financial sector justified the penalty.
As a recently discharged bankrupt, Sinha stressed that the imposition of the financial penalty would cause him serious financial hardship and that he would be likely to be made bankrupt once again. He therefore urged the FSA to adopt the approach taken n David John Bedford v The Financial Services Authority11 where the Upper Tribunal (Tax and Chancery Division) held that it:
cannot see any purpose to imposing on a person . . . a penalty he is unable to pay. It is not, we think, an immaterial consideration that if the imposition of such a penalty should provoke his bankruptcy, that eventuality would quite possible cause prejudice to his other creditors.12
The FSA dismissed this argument, distinguishing the case in hand from Bedford on the basis of Sinha’s seniority within JCF, the prominent position of the group in the market, and the fact that Bedford’s misconduct, unlike that committed by Sinha, did not cause financial detriment to others.
The FSA instead followed the approach taken in Atlantic Law LLP and Andrew Greystoke v The Financial Services Authority13 where it was held that “[t]he fact that the purpose of imposing a financial penalty is not to bring about insolvency does not mean that the Tribunal cannot and should not fix a penalty which may have that unfortunate result.”14 While it accepted that the imposition of the penalty would probably cause serious financial hardship, and possibly bankruptcy, the FSA concluded that the seriousness of Sinha’s misconduct did not merit a reduction in the punitive element of the fine.
Soon after the misconduct was discovered in late 2009, Sinha was suspended from work and his employment was terminated shortly afterwards. No criticism has been made of the systems and controls in place at JCFUK, which has recently compensated Company A and the JCF Funds’ investors to ensure that they suffered no loss as a result of Sinha’s actions.
This is another case in a long line of actions brought by the FSA against those who contravene the regulatory system. Speaking on behalf of the FSA, Tracey McDermott, acting director of enforcement and financial crime, warned those who take on the responsibility of being an approved person that they “should be aware of our commitment to take the strongest action to tackle such behaviour – wherever we find it.”15
1 A list of CFs is set out in the FSA’s Supervision manual (SUP) at SUP 10.4. Sinha was authorised to perform: CF1 (director), CF3 (chief executive), CF8 (apportionment and oversight), CF10 (compliance oversight), CF11 (money laundering reporting), CF13 (finance), CF23 (corporate finance adviser), CF28 (systems and controls), and CF30 (customer).
2 For details of the relevant exchange rates used by the FSA in arriving at this calculation, see Final Notice, para. 6.16(1).
3 Final Notice, para. 2.5.
9 Supra note 3, para. 5.21.
10 Supra note 3, para. 5.23.
12 Id. para. 34.
14 Id. para. 110.
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