What is Civil Fraud?

Civil fraud occurs when someone intentionally deceives another party to gain an unfair advantage, typically resulting in financial loss. Unlike criminal fraud, which can lead to imprisonment, civil fraud usually results in monetary penalties and damages paid to the victim.

Elements of Civil Fraud

To prove civil fraud, certain elements must be established:

1. Misrepresentation of a Material Fact: The perpetrator must have made a false statement about a significant fact.
2. Knowledge of Falsity: The perpetrator knew the statement was false or showed reckless disregard for the truth.
3. Intent to Deceive: The false statement was made with the intent to mislead the victim.
4. Justifiable Reliance: The victim relied on the false statement when deciding to engage in the transaction.
5. Resulting Damages: The victim suffered a financial loss due to their reliance on the false statement.

Common Types of Civil Fraud

Understanding common types of civil fraud can help you recognize and avoid potential threats:

• False Advertising: Misleading consumers about a product’s features or benefits.
• Financial Statement Fraud: Falsifying financial documents to present a healthier financial status.
• Contract Fraud: Misrepresenting terms or conditions in a contract.
• Insurance Fraud: Making false claims to receive insurance benefits.

Protecting Your Business from Civil Fraud

Now that you understand civil fraud and its common forms, let's discuss how to protect your business.

1. Conduct Thorough Background Checks

Before entering into any business relationship, whether it's hiring a new employee or signing a contract with a vendor, conduct thorough background checks. Verify their credentials, history, and reputation. This can help you avoid dealing with individuals or entities that have a history of fraudulent activities.

2. Implement Strong Internal Controls

Internal controls are policies and procedures that help ensure the integrity of financial and accounting information. Examples include:

• Segregation of Duties: Divide responsibilities among different employees to reduce the risk of fraud.
• Regular Audits: Conduct periodic audits to identify and rectify discrepancies.
• Access Controls: Restrict access to sensitive information and financial systems to authorized personnel only.

3. Educate Your Employees

Employee training is crucial in fraud prevention. Educate your staff about what constitutes civil fraud, how to recognize warning signs and the importance of ethical behaviour. Encourage a culture of transparency and integrity.

4. Establish a Whistleblower Policy

A whistleblower policy encourages employees to report suspicious activities without fear of retaliation. Ensure that employees know how to report fraud and feel safe doing so. Anonymity and protection from retaliation are key components of an effective whistleblower policy.

5. Use Technology Wisely

Leverage technology such as cyber security or AI products to protect your business from fraud. Invest in fraud detection software that monitors transactions for suspicious activity. Use secure communication channels and data encryption to protect sensitive information.

6. Review Contracts Carefully

Always read and understand the terms and conditions of any contract before signing. If necessary, seek legal counsel to review contracts to ensure there are no hidden clauses or misrepresentations.

Conclusion

Civil fraud can pose a significant threat to your business, but with the right knowledge and precautions, you can protect your company. By understanding the elements and types of civil fraud, conducting thorough background checks, implementing strong internal controls, educating your employees, establishing a whistleblower policy, using technology wisely, and reviewing contracts carefully, you can significantly reduce the risk of falling victim to fraud.

Staying vigilant and proactive is your best defence against civil fraud. Protect your business, safeguard your assets, and maintain your reputation by following these guidelines.

FTX

Created in 2019 to trade cryptocurrency. Customers could open accounts to trade and buy cryptocurrency and then convert this into real cash which they could withdraw into their bank accounts

The Crimes

Late 2022 the company went bankrupt after billions of dollars of customers’ money had been lost due to fraud. The company went bankrupt and millions of customers were locked out of their accounts unable to withdraw their money. Some had lost their life savings.

Customers lost in total around $8bn as well as investors losing roughly, $1.7bn.

FTX shareholders are extremely unlikely to see their money returned and this includes, Tiger Global Management, the Ontario teacher’s pension plan, Sequia Capital as well as the New England Patriots owner Robert Kraft and NFL quarterback, Tom Brady and Ex-wife, Gisele Bundchen who advertised for FTX.

Their stakes were at one point valued at tens of millions and now are worthless.

The hedge fund, Alameda Research was supposedly holding $11.3bn but according to accounting experts present at the trial, only $2.3bn of this could be found.

In November 2023 Sam Bankman-Fried was convicted of 7 charges of wire fraud and conspiracy.

Sam Bankman-Fried had been living lavishly with colleagues using the money for their own personal lives and gains.

The Trial

Prosecutors demanded a 40-50 year sentence for Sam Bankman-Fried arguing that the crimes could be repeated as well as a need to deter other from similar acts.

Bankman-Fried’s lawyers asked for a 6 year sentence arguing that this was his first offence and he was non-violent, as well as the promise that customers would be paid back in full.

This latter claim was rejected by the judge as “illogical” and “Speculative”. The current CEO of FTX also rejected this as the amount of money lost could not be paid back by the company.

Today, the Judge agreed on a 25 year sentence for Sam Bankman-Fried.

This injunction required the withdrawal of the abusive claim made against the expert witness in the Ukrainian court. The case emphasises the High Court’s readiness to exercise its discretion to grant anti-suit injunctions to protect the integrity of the English Court and its own processes, even where the case law is undeveloped.

Case Summary

On 2 August 2023, the High Court handed down another judgment in this long running and hard-fought legal dispute, this time granting an anti-suit injunction against the First and Second Defendants, Mr and Mrs Tyshchenko, requiring them to withdraw a claim in Ukraine against the Ukrainian law expert for the Claimant, WWRT Limited. In exercising this discretionary power under s 37(1) of the Senior Courts Act 1981, Mrs Justice Bacon noted in her judgment that there is “no case where an anti-suit injunction has been sought on facts comparable to the present”.

Background
The context of the recent judgment is a claim brought by WWRT in relation to loans made by the now defunct Ukrainian bank, JSC Fortuna Bank, which WWRT asserts were granted to borrowers associated with Mr and Mrs Tyshchenko who had no intention or means of repaying them. The proceedings have been ongoing since September 2020, when Kelyn Bacon QC (as she then was) issued a £65 million without notice freezing injunction against Mr and Mrs Tyshchenko. WWRT’s application for a freezing order was supported by a report from WWRT’s Ukrainian law expert, who has since provided further expert evidence on behalf of WWRT.

In October 2022, Mr Tyshchenko issued a claim in Ukraine against WWRT’s expert, with Mrs Tyshchenko listed as a third party to it. By the claim, they sought an order recognising the conclusions of the expert in certain of his reports in the English proceedings as unlawful and requiring that he recant the evidence provided in those reports. The expert’s application for closure of the claim against him was rejected in rapid succession by the Commercial Court of Kyiv and North Commercial Court of Appeal. His appeal to the Ukrainian Supreme Court was listed for hearing on 15 August 2023.

In late July 2023, WWRT made an urgent application for an anti-suit injunction requiring the claim against the expert to be withdrawn on the basis that it is vexatious, abusive and an illegitimate interference in the practice and procedure of the English Court.

Legal Test

The Court’s power to grant an anti-suit injunction is derived from s. 37(1) of the Senior Courts Act 1981, which provides that the Court may grant interim or final injunctions where “it appears to the court to be just and convenient to do so”. This power extends to the granting of anti-suit injunctions where the continuation of proceedings in a foreign jurisdiction is “unconscionable”: South Carolina Insurance v Assurantie Maatshappij [1987] 1 AC 24. A principal example of this is where the foreign proceedings are regarded as “vexatious or oppressive”.

The Decision

In this latest development, Mrs Justice Bacon granted the first of its kind anti-suit injunction against Mr and Mrs Tyshchenko, requiring the withdrawal of the Ukrainian claim against the expert, on the basis that it was very clearly both vexatious and oppressive. In making her decision, Mrs Justice Bacon pointed out the likely reason for the lack of authority in this area is that it is “extremely unusual for a party to proceedings to launch such a direct and unambiguous attack in a foreign court on the substance of the evidence given in domestic proceedings”.

Although comparisons were made to Arab Monetary Fund v Hashim (No. 6), Financial Times Law Reports, 23 July 1992, where an order for an anti-suit injunction was not granted because (among other things) there was nothing to suggest that the US action had been commenced to dissuade the witness from giving evidence in the UK, in the present case Mrs Justice Bacon was confident that the claim was brought by Mr Tyshchenko in a “blatant and clearly abusive attempt to interfere with the due process of the English proceedings which have by now been on foot for almost three years”.

Commentary
Whilst the facts of this case are highly unusual, the decision demonstrates that the High Court stands ready to exercise its discretion to grant anti-suit injunctions to protect the integrity of the English Court and its own processes, even where the case law is undeveloped. The Judge in this case recognised the wider implications of the decision and the need to send “a strong signal to other litigants that this sort of conduct will not be tolerated”.

For further information, please contact partner Hannah Sharp at Rosling King LLP on hannah.sharp@rkllp.com or 0207 246 8000.

Hannah Sharp is a partner in Rosling King’s Dispute Resolution Group specialising in financial services disputes, fraud and commercial litigation, both domestic and cross-border. Hannah has significant experience of acting for banks (investment and retail) and other financial institutions, corporates and ultra high net worth individuals on a broad range of complex disputes.

Rosling King LLP is a London-based law firm specialising in serving the needs of financial institutions, corporates and individuals. For more information please visit www.rkllp.com.