Financial Services Authority v Sinaloa Gold Plc & Ors

An enforcement authority may rely on suspected fraud when seeking interim freezing relief, even where fraud is not part of the cause of action. The suspicion may bear on both the risk of dissipation and the court’s discretion. The risk of dissipation must be assessed separately for each respondent. Where a statutory enforcement body obtains injunctive relief through the civil courts, the usual cross-undertaking in damages should ordinarily be given for the protection of innocent third parties, even if no undertaking is required for the respondents. Any question whether the undertaking should ultimately be enforced remains for the court.

The Financial Services Authority sought continuation of interim prohibitory and worldwide freezing injunctions against Sinaloa Gold plc, Mr Hoover and another defendant. It alleged breaches of the Financial Services and Markets Act 2000 and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 arising from the sale of penny shares and related financial promotions.

The application also raised whether the FSA had properly presented an asserted boiler-room fraud, whether there was a serious issue to be tried and a real risk of dissipation, the appropriate amount of the freezing order, and whether cross-undertakings in damages should be given to the respondents and to Barclays Bank plc as an affected third party.

1. Fraud allegation. The FSA had properly advanced causes of action independent of fraud. It was permissible to place evidence suggesting fraud before the court without asking it finally to determine fraud on the interim application. The evidence was relevant to the risk of dissipation and to the exercise of discretion. The material had been fully and fairly presented.
2. Serious issue to be tried. There was a serious issue concerning contraventions of sections 19, 21 and 85 of the Financial Services and Markets Act 2000, and the involvement of the defendants in those contraventions. The meaning of “arrangements” in regulations 25 and 26 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 was correctly stated in Re The Inertia Partnership LLP [2007] EWHC 502 (Ch). It could be wide and its application depended on whether the arrangements caused the relevant transaction.
3. Knowledge of the facts constituting a contravention was sufficient for knowing involvement; knowledge that those facts amounted to a contravention was unnecessary. The court left unresolved whether knowledge of lack of authorisation was required for involvement in the alleged sections 19 and 21 contraventions.
4. Risk and amount. The risk of dissipation had to be considered separately for each defendant. On the evidence, it was established against PH, Sinaloa and Mr Hoover. The appropriate sum to be frozen was the amount paid by investors, subject to adjustments for the original share and the refund to an investor.
5. Undertakings. The dispensation principle applied so that no cross-undertaking in damages was required in favour of the respondents. It did not follow that the FSA should be relieved of the standard undertaking protecting innocent third parties. The usual undertaking should be given to third parties, including Barclays, when the injunction was first granted. The court retained protection against inappropriate enforcement at the later stage.