24 Oct 2023, 12:09 pm
Investment frauds are a blight on our society and, currently, the problem only seems to be getting worse.
Reports of individuals and institutional investors being defrauded occur with depressing regularity and the sums at stake are often substantial or even ruinous. The frauds take numerous forms, including fraudulent property investment schemes, cryptocurrency scams and foreign exchange and other trading frauds, but there are many others besides.
The first port of call for victims in the UK is usually to contact the police and to notify Action Fraud. Unfortunately, however, the police often do not investigate investment frauds due to a combination of limited resources and the complexity involved.
In some cases, insolvency practitioners can use their extensive powers to collate evidence and recover assets from a fraudulent scheme with a view to making distributions to the victims – but this is not always possible. In addition, by the time a fraudulent scheme has collapsed into insolvency, the assets may have already been scattered by the fraudsters into far-flung jurisdictions and opaque asset structures, making the recovery process complex and uncertain.
In these circumstances, victims can end up only recovering small percentages of their losses. As a result, victims often ask for legal advice on whether they can take matters into their own hands and recover their losses via civil litigation before it is too late.
Unlike the criminal litigation process, which is administered by the police and prosecuting authorities and takes place in the criminal courts, civil litigation is a ‘self-help’ remedy whereby victims can seek compensation by bringing their own claims in the civil courts.
Every case is different, but a typical strategy is to start by obtaining disclosure orders against third parties to identify the fraudsters and the whereabouts of assets and then to seek a ‘freezing injunction’, which protects assets from dissipation so that they are kept available for enforcement purposes. Sometimes it is also possible to obtain a ‘proprietary injunction’, if the victims can establish that the proceeds of the fraud belong to them and not to the fraudsters.
The full litigation process then follows, the normal stages of which are statements of case – where each party sets out the details of its case – disclosure, witness statements, evidence from independent experts, and finally a trial. There are usually multiple hearings during the process prior to trial, known as ‘case management hearings’ or ‘interim hearings’.
Occasionally the process can be expedited, for example where the case is so strong that ‘summary judgment’ can be given without the need for a full trial, or in cases where the defendants do not participate and the victims can obtain ‘default judgment’. It is also possible to settle the case at any point during the process if the parties can agree terms.
The final stage is enforcement. A judgment in a victim’s favour is only worth the value of the assets it can be enforced against. Cross-border processes may be necessary in cases where the assets are held in multiple jurisdictions. Obtaining freezing and proprietary injunctions at the outset of the process is sometimes essential.
The typical costs of civil litigation include legal costs, court fees, disclosure-related costs, expert fees, and a range of other costs, depending on the specific features and administrative requirements of the case.
The level of cost varies hugely from case to case depending on numerous factors, including the complexity of the case, the volume of documents, the number of witnesses, whether it is a cross-border case, the approach taken by the defendants, whether summary or default judgment is obtainable, and whether a settlement is reached.
In English civil litigation, a victim who succeeds at trial or at some types of interim hearings can normally expect an order requiring the defendant to pay a significant proportion of their costs. The converse is also true, though, and an unsuccessful claimant will normally be ordered to make a significant payment towards the defendant’s costs.
Furthermore, a victim who obtains a freezing or proprietary injunction which later turns out to have been wrongly granted may be ordered to pay compensation to the defendant in respect of any harm caused by the injunction. Indeed, injunctions will not normally be granted unless the victims first undertake to comply with such compensation orders. This is known as the ‘cross-undertaking in damages’.
Insurance products can be acquired as cover for potential liabilities for the other party’s costs or under the cross-undertaking in damages.
In some cases, victims with high net worths will have the resources and appetite to fund their own claims. In other cases, there may be several victims who know each other and are able to pool resources. In these circumstances, lawyers are sometimes able to fix a fee for an initial investigation. Lawyers might also be able to act on a ‘no-win-no-fee’ agreement.
For victims who are not in this position, it is occasionally possible to obtain funding for the action from a commercial litigation funder. In general terms, the typical requirements of a commercial funder are:
Co-written by Hinesh Shah and Alexandra Algazy of Pinsent Masons.