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With 2008 ending with the collapse of its largest prosecution, the outlook for 2009 looks rather bleak for the Serious Fraud Office. Rod Fletcher and Shula de Jersey report on the impact of Operation Holbein

There is little doubt that 2008 was a difficult year for the Serious Fraud Office (SFO). It began with it receiving adverse criticism over the BAE corruption investigation; and then in June, Jessica de Grazia’s report detailing her review of the SFO was published, highlighting low conviction rates and unfocused investigations. Her report was published at a time when the new director, Richard Alderman (pictured below left), was beginning a radical overhaul of the SFO’s structure. The departure of a number of senior SFO figures followed and it was reported that staff morale was at an all-time low. The year ended with the collapse of the SFO’s largest and most costly prosecution to date, the pharmaceutical price-fixing case known as Operation Holbein.

Operation Holbein concerned allegations that between 1997 and 2000 the corporate and individual defendants from Goldshield, Ranbaxy, Norton Healthcare, Kent Pharmaceuticals and Generics UK conspired to defraud the NHS by fixing the prices of penicillin-based antibiotics and warfarin. The investigation began in 2000 following information provided to the NHS Counter Fraud Service by a whistleblower. Two years later on 10 April, 2002, the SFO conducted dawn raids on 30 offices and homes, seizing some six million documents and computer records. Philip Lewis, the assistant director heading the Operation Holbein investigation, was quoted as saying that the dawn raids involved a total of 300 people with the SFO having to “borrow 100 police officers from the National Crime Squad, take the whole of the Metropolitan Fraud Squad and various officers from around the country”. Charges were eventually brought against the five corporate and nine individual defendants in April 2006. Parallel civil proceedings were issued by the Department of Health and all but one of the corporate defendants settled without admission of liability with some £34m being paid.

One of the problems faced by the SFO in prosecuting this case was that cartel behaviour had only become a criminal offence following the introduction of the Enterprise Act 2002. From a very early stage the defence argued that at the material time, cartel activity alone could not form the basis of a criminal offence. Thus the journey to the House of Lords began.

The case was joined with the extradition appeal of Ian Norris, the former Morgan Crucible chief executive who was wanted by the American authorities for cartel offences alleged to have taken place in the 1990s. The House of Lords heard the joint appeals in January 2008 and in their opinion, handed down in March, ruled that participating in a secret cartel was not unlawful in common law: such conduct had only been made a criminal offence by section 188 of the Enterprise Act 2002. Price fixing before the Act came into force could only be elevated into an indictable conspiracy to defraud if there were aggravating elements such as fraud, misrepresentation, violence or intimidation.

The House of Lords did not quash the indictment but left any application to amend the indictment in the light of their ruling to be made before the trial judge, Mr Justice Pitchford. That application was heard in July 2008, when Pitchford refused the SFO’s application to amend on the basis that the proposed amended indictment did not meet the requirements of the House of Lords ruling and, even if it had, there was insufficient evidence to support the amended indictment. The SFO, however, continued the battle and appealed this ruling. In December, the Court of Appeal, in a hearing that lasted half-an-hour, refused leave to appeal, finally bringing to an end the SFO’s largest ever prosecution.

Tremendous costs have been incurred in prosecuting and defending these lengthy proceedings. Recent press articles have estimated these costs to be in the region of £40m. It is cases such as these that are encouraging the Government to seek to scrap the ability of an acquitted privately paying defendant to recover their full costs from central funds. As set out in the recent consultation paper, the budget for defence costs orders is £45m per year with more than £60m being paid out each year.

A parliamentary question asked in early 2006 revealed that the SFO had, at that stage, spent some £14m. Much of that had been spent on the disclosure suite which is housed on the first floor of the SFO’s premises at Elm House. Described as “the jewel in the crown”, the suite contained the computerised evidence database which was specially designed for the case. The subject of disclosure, as in many cases, was the topic of much discussion and argument throughout this case. While several of the defence teams involved spent many hours visiting the disclosure suite, the path the case took, coupled with the SFO’s narrow approach to disclosure, meant that the system was not utilised as it should have been. The technological capability of the system is immense. If the SFO were to adopt de Grazia’s view of the “key to the warehouse” approach to disclosure, the suite would no doubt prove to be a great asset to both the defence and prosecution in future cases. Arguably some of the money spent on this case has not therefore gone to waste.

It is difficult to underestimate how important the Operation Holbein case was for the SFO, having been described by many as its “flagship case”. Convictions would have given the SFO much-needed credibility and enabled it to respond robustly to its critics. Alderman has said of the case: “We have got to have a major review of what we have done in the case because it has consumed a great deal of resources… it is important to face up to what has happened and say what has happened.”

Alderman has made his vision for the future of the SFO clear since his appointment in April last year. He does not want lengthy, expensive investigations that end with nothing. He wants a faster, more effective and proactive SFO that mirrors the success enjoyed by prosecutors in the US system. He is actively encouraging corporates to self-report when they discover a problem and talk about restitution. He is looking to utilise the civil powers available to the SFO, as he has already done in the Balfour Beatty case. He has also made clear his wish for the SFO to seek to protect the public by placing emphasis on fraud prevention by raising awareness. As Alderman has said: “It is a radical departure from what is expected from the SFO, but I feel that being able to stop fraudsters before getting to litigation is the way forward.”

While the collapse of Operation Holbein is a major setback to the SFO, it is one that is likely to galvanise the new director in his commitment to achieve a fundamental reform of the way the SFO works. The recent appointment of Vivian Robinson QC in the newly-formed role of general counsel to the SFO is one of many changes that Alderman has made in his drive to make the SFO a leader in the fraud prosecution field. No doubt the SFO is hoping for a more prosperous 2009.

Rod Fletcher is a partner and Shula de Jersey a solicitor in the business and regulatory investigations team at Russell Jones & Walker.

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