Civil claims could be best recourse as UK investment fraud increases

Although it may seem easiest to turn to the authorities when a fraud is uncovered, launching a civil action could improve a victim’s chances of recouping their losses. 

The UK’s national fraud reporting centre Action Fraud said between September 2019 and September 2020 it had received just over 17,000 reports of investment fraud in the UK, amounting to £657.4 million in reported losses – a 28% increase from the same period the previous year.

The total amount of the losses caused by investment frauds in this period is likely to be significantly larger than the reported total as not all investor frauds are reported to Action Fraud and there is also usually a time lag between the perpetration of a fraud and its discovery by the victim.

A proportion of this increase is likely to be attributable to coronavirus-themed scams, but the types of investment fraud are many and diverse and the victims range from vulnerable individuals to highly sophisticated investors.

There are a number of third parties whom investors can contact when these frauds come to light, such as the police, the regulatory authorities, and insolvency practitioners. These options are always worth considering, but have limitations.

For example, the police may decide that the fraud is too complex and difficult to prove, and therefore too expensive to investigate. Many schemes operate outside the regulated sector and therefore fall outside the remit of the regulatory authorities.

Insolvency practitioners often have an important role to play in the asset recovery process, but the speed and effectiveness with which they can seize control of documents and assets from the fraudsters normally depends on the corporate structures which have been used and the status of any intercompany debts.

Civil proceedings

The other option for investors is to bring civil proceedings. There are significant advantages to doing this.

First, the civil courts offer a range of useful remedies to investors who have been defrauded, such as search orders, used to secure documents which might otherwise be destroyed; and freezing injunctions, used to obtain disclosure of and freeze assets, including overseas assets, so that they remain available for enforcement following the trial.

The standard of proof in civil proceedings – the balance of probabilities – is much lower than in criminal proceedings, where charges must be proved beyond reasonable doubt. In essence this means that civil fraud claims are easier to prove than criminal fraud charges.

Perhaps most importantly of all, by suing the fraudsters, investors are taking matters into their own hands and taking control of the recovery of their losses, instead of relying on third parties whose responsibilities and priorities may not be entirely aligned with their own.

To fund civil actions, one option is for investors to pool funds and finance their own claims, but an alternative is to seek financing from a third party. Litigation funding is a rapidly growing industry and, for investors, especially ones who have already suffered losses as a result of being defrauded, the ability to pursue claims without having to spend their own money is often an attractive option. Obtaining seed funding is especially important in investor fraud cases, which require intensive initial investigatory work and frequently involve applications for asset freezing orders and search orders at the outset of the case.

Naturally, in order to pursue an investor fraud claim, it is also necessary to instruct a law firm with specialism in the relevant legal subject matter, but other expertise is also required, particularly procedural and technological expertise.

Potential claimants can choose from a range of civil procedures to pursue investment fraud claims, including group litigation orders, representative actions and sample claims. Choosing the right procedure and strategy at the beginning of the case can have a huge impact on the prospects of a successful asset recovery at the end of the process.

It is also important for legal advisers to have the right technology at their fingertips. Collective actions need to be administered in a different way to a single-claimant case, with technology used to streamline the processes and progress the case efficiently.

The organisation of an investor fraud action can be a logistical challenge. In cases where the investors number in the hundreds or thousands, even identifying and contacting each potential claimant can be a major operation. It is then necessary to galvanise the group, which requires tried and tested methods, as some investors may be tempted to adopt a 'wait and see' approach instead of being proactive about recovering their losses.

Nevertheless, although the process may seem daunting, it is important that investors are aware of the limitations involved in relying on third parties, and that they consider seeking specialist legal advice on whether they could improve their prospects of recovering their losses by grouping together and pursuing their own civil claims.