Proving Fraud in Complex Commercial Cases

Mark Giddings and Tim Bost

Bringing a successful claim in a large commercial case poses challenges in circumstances where proceedings usually take place many years after the events in question and can involve voluminous documentary and witness evidence. Successfully bringing such a claim where fraud is alleged can be even more challenging because courts will require cogent evidence before making a serious finding of dishonesty. In National Bank Trust v Yurov [2020] EWHC 100 (Comm) the High Court has summarised the legal authorities on a number of important issues which claimants commonly need to deal with when fraud is alleged in the civil context.

Following an eight-week trial in 2018, Bryan J found that three former majority shareholders of Russia’s National Bank Trust (the “Bank”) were liable for the misappropriation of over US$1 billion in bank funds in the years prior to 2014. This led to the Bank’s ultimate collapse and subsequent bailout by the Central Bank of Russia. The shareholders were found to have procured loans to companies under their control and then dissipated the loan money using a web of offshore companies beneficially owned by them.

The defendants denied being involved in a fraudulent scheme. Two of the defendants accepted that bank funds had been transferred through a network of companies but claimed that this had been done for the purpose of “balance sheet management”. This was alleged to be a common and legitimate practice in Russian banks at the time to get around the rigid and formalistic Russian regulatory system. The third shareholder, Mr Belyaev, denied having any knowledge of or involvement in the scheme. The judge rejected these submissions, finding that the so-called “balance sheet management” was “just a Ponzi scheme with a fancy name” in which each of the defendants had been involved.

Adequately Pleading Fraud

Bryan J cited Lord Millett’s judgment in the leading case of Three Rivers District Council v Bank of England [2003] 2 AC 1 for the proposition that fraud or dishonesty must be distinctly alleged and proved, and must be sufficiently particularised. Pleadings will not be sufficiently particularised if the facts pleaded are consistent with innocence. The facts, matters and circumstances relied on must show that the defendant was dishonest and not merely negligent. Here, the judge held that the Bank was not entitled to rely on an allegation that particular lending arrangements were “inherently dishonest” because the allegation had not been positively pleaded and particularised. However, the allegation was ultimately not necessary for the judge’s overall finding that the defendants were operating a fraudulent scheme.

Proving Fraud in Light of Inherent Probabilities

An allegation of fraud does not affect the standard to which a claimant must prove its case, insofar as allegations of fraud must be established on the balance of probabilities. However, the judge observed that fraud is “less likely” than negligence and the inherent probability or improbability of the allegation must be taken into account when weighing whether the event occurred. In other words, the more improbable the event, the more cogent the evidence must be to outweigh the inherent improbability. This is not an invariable rule, but is a factor to be applied to the extent appropriate on the facts of the particular case: In Re B (Children) [2009] 1 AC 11. Here, the judge found that the defendants had acted fraudulently on the basis of compelling documentary and circumstantial evidence, notwithstanding the seriousness of the allegations. In fact, the inherent improbabilities arose on the defendants’ side in light of their allegations that the transfers were legitimate or done without their knowledge.

Drawing Adverse Inferences from Witnesses Not Called

Citing the Court of Appeal in Wisniewski v Central Manchester HA [1998] PIQR 324, Bryan J addressed the circumstances in which adverse inferences may be drawn from the absence of a witness who might have been expected to have material evidence on an issue in dispute. Where there is a case to answer on a particular issue and no satisfactory reason is provided for a witness’ absence, inferences may be drawn which weaken any evidence adduced on the issue by the party who was supposed to call the witness, or strengthen evidence adduced by the other party. However, if a credible explanation can be given as to their absence, even if it is not wholly satisfactory, this may reduce or nullify the detrimental effect. Bryan J declined to draw any adverse inference from the failure to call an alleged insider to the fraud, because both the Bank and the defendants had good reasons not to call that witness.

The Primacy of Documentary Evidence

Bryan J observed it is now widely accepted that the human memory is fallible and that people can convince themselves of the veracity of false recollections. Moreover, a judge’s ability to evaluate honesty and reliability merely from a witness’ demeanour is also fallible. As such, where possible a court should rely on documentary evidence and other objectively provable facts. The judge cited Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm) in which the commercial court noted that “the process of civil litigation itself subjects the memories of witnesses to powerful biases [because] witnesses often have a stake in a particular version of events.” Here, Bryan J relied on documentary evidence to find that Mr Belyaev had in fact known about the dissipation of bank funds through offshore companies because he had received and signed documents evidencing this.

Observations

The nature of the fraud in this case was blatant and Bryan J was satisfied that the fraud had been clearly made out. However, even an apparently strong case of fraud can be unsuccessful if the allegations are inadequately pleaded or the material facts are not adequately proven. Here, notwithstanding the overall strength of the Bank’s case, the judge was not prepared to entertain submissions that lending arrangements were inherently dishonest in the absence of a fully pleaded allegation. In finding that the fraud was established the judge affirmed the importance of documentary evidence, which was determinative on numerous issues, including Mr Belyaev’s defence. The decision therefore highlights the importance of rigorous evidence gathering and thorough investigation in order to formulate an effective case for trial. The claimant had evidently done this and was able to rely on contemporaneous documents to undermine the shareholders’ defences and establish the fraud.

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