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Newsletter Update - July 2006
Welcome to the Anti-Fraud Network's newsletter. In this edition we feature the first of a series of articles from members around the world outlining important issues relating to fraud or corruption. Here, David Baxter of A&L Goodbody, Ireland looks at the impact of EC regulatory requirements in this area for listed companies. This is an issue of increasing relevance across the world for national and international organisations, and in future issues we will examine differing liabilities across jurisdictions.
In the next edition of the AFN newsletter, Nick Akerman of Dorsey & Whitney, USA will look at issues arising from employees destroying data held on their computers. He will address whether the Computer Fraud and Abuse Act makes the destruction of data a criminal offence, and whether it provides a civil cause of action against employees.
Nick Burkil
When Does Fraud Trigger Disclosure?
The Market Abuse (Directive 2003/6/EC) Regulations has reinforced the obligation on public listed companies to disclose all "inside information" to the market without delay, except in very limited circumstances. The key test to determine if information is inside information remains whether it is price sensitive i.e.: if the information was made public, would it be likely to have a significant effect on the company's share price? Put another way - would such information be used by a reasonable investor as part of the basis of his investment decision? There are contemporary examples, from Barings to Parmalat where the obligation to disclose has been very clear. Less obvious though are circumstances where a fraud has been discovered that can be dealt with internally, and which is unlikely to have a significant impact on the company's share price. A board of directors will not thank advisors who recommend disclosure when no announcement may have been required. Rumours or allegations of fraud that, once investigated, can be shown to be unfounded should not trigger disclosure. However, the company may be caught between a rock and a hard place when balancing the need to carry out a full investigation of the alleged fraud with assessing whether that company can rely on the Legitimate Interest exemption (see below) thereby delaying an announcement. Disclosure Requirements: Once allegations or actual evidence of corporate fraud come within the ambit of inside information, i.e.: the information is precise, has not been made public and relates to the company or its securities, a duty to disclose is triggered. If a view is reached that the evidence or allegation of fraud constitutes inside information then the company must notify the market "without delay" - within a matter of hours - and post it on its website for not less than six months. Legitimate Interest Exemption: An exemption exists which enables companies to delay disclosing inside information so as not to prejudice its legitimate interests provided that:
- such a delay would not mislead the public;
- the company can ensure the confidentiality of the information;
- there are systems and controls in place to deny access to the information within the organisation other than to persons who “need to know” and to enable the release of the information at very short notice if confidentiality cannot be assured. A draft announcement for such a release should be prepared immediately.
The company should closely monitor the situation and maintain documentary evidence of the existence of the ongoing legitimate interest being protected. The board of directors should also consult with its advisors, carefully minuting all its decisions as to whether to make a disclosure or not. Be Prepared: Public listed companies need to be aware of their obligations under this directive and have in place systems & controls to allow the board of directors to quickly assess what constitutes inside information and react appropriately whether by making a disclosure, delay disclosing or electing not to disclose. Whatever option the company elects to follow, it is important to also have established mechanisms to deal with all eventualities - whether keeping a record of reasons as to why there was a delay or no disclosure, or dealing with the potential adverse publicity that a fraud-related disclosure will attract.
David Baxter
Partner, Corporate Criminal Offences Unit
A & L Goodbody, Dublin Contact details:
T: + 3531 6492514
E: dbaxter@algoodbody.ie |
