This guide is based on UK law as at 1st February 2010, unless otherwise stated. It is part of a series on the FSA and Securities Regulation . A criminal offence seeks to catch those who make...

This guide is based on UK law as at 1st February 2010, unless otherwise stated. It is part of a series on the FSA and Securities Regulation.

A criminal offence seeks to catch those who make misleading statements in the financial services sector.  (See also: OUT-LAW's guides to Market abuse and Market manipulation)

A person can be liable if they:

  • make a statement, promise or forecast that they know to be materially misleading, false or deceptive;
  • recklessly make such a materially misleading, false or deceptive statement, promise or forecast – whether they are dishonest or not;
  • dishonestly conceal any material facts in a statement, promise or forecast.

In each of these cases, the person will be guilty if either of the following applies:

  • they made the statement for the purpose of inducing another to enter into an investment agreement or to exercise (or refrain from exercising) any share rights;
  • they were reckless as to whether the statement would have that effect.

Some of the most obvious cases occur when a company is floating on the stock market. Directors will commit the offence if a statement or a forecast in a prospectus that they know to be false induces investors to take up the shares; or if they are reckless as to whether the statement or forecast is false – that is, they have taken no care in establishing the truth and have simply shut their eyes to the misleading nature of what is said. Boards and their advisers must take extreme care in producing these types of document, verifying each and every statement that could influence the behaviour of investors. The same applies to documents sent to shareholders on a company takeover, whether by the bidder or the target.

Like market manipulation, the offence is punishable by up to seven years in prison and/or an unlimited fine. But directors who make misleading statements face more than criminal liability. They may also be liable for compensation to investors who lost money. (See the case of AIT, below.)

Case notes: AIT

Both imprisonment and a compensation order were the consequences for two directors of AIM company AIT in the first case brought by the FSA under the law on misleading statements. Carl Rigby and Gareth Bailey issued an announcement stating that the company’s turnover and profit were in line with expectations. Those expectations depended on revenue from three specific contracts. The problem was that the contracts did not exist.

In August 2005, Rigby and Bailey were convicted at Southwark Crown Court of recklessly making a statement that was misleading, false or deceptive and were sentenced to three-and-a-half and two years respectively (reduced to 18 and nine months on appeal).

The Court of Appeal upheld a compensation order against Rigby of £208,796 and a costs order of £250,000; Bailey had to pay the more modest sum of £35,114.

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