Financial Services Authority v Sinaloa Gold Plc & Ors

The Financial Services Authority sought continuation of interim injunctive relief (including worldwide freezing relief) against Sinaloa Gold plc, PH Capital Invest and Mr Glen Lawrence Hoover under the Financial Services and Markets Act 2000 (notably sections 19, 21 and 85) and the Regulated Activities Order (regulation 25). The court found there was a serious issue to be tried on those statutory contraventions and on the question whether some defendants were knowingly concerned in contraventions, and that the evidence gave rise to a real risk of dissipation in relation to PH and Sinaloa and a reasonably arguable risk as regards Mr Hoover.

The judge held that assertions that the scheme may be fraudulent were properly put before the court on an interim application and were relevant both to the exercise of discretion and to the threshold question under section 380(3) of whether a person was "reasonably likely to dispose of or otherwise deal with" assets. The appropriate amount of the freezing order was the sums received from investors (identified on the evidence as £858,266.97 subject to small adjustments).

Procedure on undertakings: the court applied the dispensation principle so as not to require the FSA to give a cross-undertaking in damages to the named respondents, but held that the standard third-party cross-undertaking in the usual form (extending to loss as well as costs) should be required in favour of innocent third parties such as Barclays.

This was the adjourned hearing of an application by the Financial Services Authority to continue interim injunctive relief first obtained without notice. The application arose from the FSA's investigation into what it described as a scheme to persuade private investors in the United Kingdom to subscribe for penny shares in Sinaloa Gold plc at inflated prices. The FSA alleged contraventions of the Financial Services and Markets Act 2000 (notably sections 19, 21 and 85), and breaches of the Regulated Activities Order (regulation 25), and sought freezing relief under section 380(3) FSMA and restitution or compensation powers under section 382.

Procedural background: an initial without-notice order was made on 17 December 2010 by a Deputy Judge (Mr Prosser QC) and continued, with modifications, by Mr Justice David Richards on 31 December 2010. The claim form was issued on 20 December 2010. The matter returned for continuation on 25 January 2011 before HHJ Hodge QC sitting as a High Court judge. Sinaloa and Mr Hoover attended and reserved their position; PH did not attend. Barclays intervened as a third party affected by the freezing injunction.

Relief sought: continuation of negative injunctions and a worldwide freezing order up to the sums alleged to have been received from investors, together with information orders and related relief; the FSA declined to provide a conventional cross-undertaking in damages in respect of respondents.

Issues framed:

• Whether there was a serious issue to be tried on the statutory contraventions and on being knowingly concerned in contraventions;
• Whether fraud could be (and had been) properly asserted and whether such suspicions were relevant at an interim stage;
• Whether there was a real risk of dissipation of assets;
• What amount should be frozen;
• Whether the FSA should be required to give a cross-undertaking in damages in favour of the respondents and/or in favour of third parties affected by the order.

Court's reasoning and conclusions: The court accepted that it was permissible for the FSA, on an interim application, to present material giving rise to a suspicion or inference of fraud and that such material is relevant both to the exercise of the court's discretion and to the threshold under section 380(3) FSMA concerning risk of dissipation. The judge found a serious issue to be tried that PH had contravened section 21 and the general prohibition in section 19, that Sinaloa had contravened section 21 and section 85 (offering securities without an approved prospectus), and that Mr Hoover was triable as having made arrangements within regulation 25 and as possibly knowingly concerned in Sinaloa's section 85 contravention. The court found the evidence supported a real risk of dissipation by PH and Sinaloa and that the unsatisfactory explanations of Mr Hoover gave rise to a reasonably arguable inference of risk as regards him.

The appropriate frozen amount was the sums shown to have been received from investors (identified as £858,266.97 on the evidence, subject to minor reductions). On undertakings, the judge applied the dispensation principle and declined to require the FSA to give a cross-undertaking in damages in favour of the named respondents, but held that the usual third-party cross-undertaking in the standard form (extending to loss and costs) should be retained to protect innocent third parties such as Barclays. The court explained that the protection of innocent third parties should ordinarily be provided when a public enforcement authority seeks interim freezing relief and that third parties should not be left to apply later for redress.

The court continued the interim injunctive and freezing relief against the defendants up to the sums received from investors (subject to minor adjustments). The judge held there was a serious issue to be tried on alleged contraventions of sections 19, 21 and 85 of the FSMA and regulation 25 of the Regulated Activities Order and that the evidence established a real risk of dissipation (notably in relation to PH and Sinaloa, and to a reasonably arguable extent in relation to Mr Hoover). The FSA was permitted to place before the court material giving rise to a suspicion of fraud on an interim application. The court declined to require the FSA to give a cross-undertaking in damages to the named respondents (applying the dispensation principle for public enforcement bodies) but required the standard cross-undertaking in damages in favour of third parties, including Barclays, to protect innocent third parties.