Sharing the blame

Following resolution of a High Court case in which a shareholder is to pay back dividends gained by contracts won through unlawful conduct, the Serious Fraud Office (SFO) has stated its intention to use the civil recovery process to pursue investors who have benefitted from illegal activity.

In particular, the SFO says it will be much less sympathetic to institutional investors whose due diligence has clearly been lax. The SFO believes shareholders and investors in companies are obliged to satisfy themselves with the business practices of the companies they invest in and this is particularly so for institutional investors who have the knowledge and expertise to do it.

The court has ordered Mabey Engineering (Holdings) Ltd, to pay over £130,000 in recognition of sums it received through share dividends derived from Iraq bridge-building contracts won through unlawful conduct. Mabey Engineering (Holdings) Ltd is the parent company of modular bridge manufacturers Mabey and Johnson (M&J) Ltd and part of the Mabey Holdings group.

It should be stressed that M&J has been working with the SFO since the beginning of 2008 when it approached the authorities to highlight irregularities it had identified as a result of an internal investigation. Following the self-referral and subsequent co-operation with the SFO’s investigations, M&J pleaded guilty to charges of corruption and breaches of UN sanctions and was convicted at Southwark Crown Court in September 2009.

Since the self-referral, the group has introduced new management, anti-bribery and corruption procedures and has appointed an independent monitor. The company is viewed by the SFO as having conducted itself in an exemplary way through its self-referral, extensive co-operation with the authorities and the transformation of the company.

But the case is not only notable for revealing a company which has recognised its own wrong-doing and subsequently done the right thing by shopping itself to the authorities. It is the SFO’s tough talk on investor responsibilities which have much wider implications if the fraud investigator plans to confiscate shareholder dividends paid by companies convicted of criminal offences. This could have significant consequences if this punishment is extended to external shareholders.

Institutional shareholders can reasonably claim that it is not their responsibility – indeed, they do not have the resources – to micromanage companies to the extent of scrutinising the minutiae of individual contracts.

Further, most shareholders can only rely
on readily available information such as annual reports. The existence of unexposed deals and shady goings-on will undoubtedly not be in the public domain. Why should investors, therefore, be expected to take the blame for that which is not in their sphere of influence?