October 11, 2011 8:24 pm/FT

FSA censured over Keydata

By Caroline Binham, Legal Correspondent

Reuters

The Financial Services Authority has been rebuked by a judge for the way it conducted part of its investigation into Keydata, the specialist investment firm that collapsed in June 2009.

It is the first time the regulator has been censured in a judicial review over one of its own investigations.

The FSA used two emails to Stewart Ford, the chief executive of Keydata, which were covered by legal professional privilege and were therefore private, Sir Ian Burnett ruled on Tuesday.

The regulator cannot use the emails as part of its continuing probe into Keydata, Mr Ford and other of the company’s executives, Mr Justice Burnett said.

He added that the FSA should look at procedures followed by the Serious Fraud Office and police that control how privileged information is handled.

Mr Ford said in a statement after the judgment: “The FSA’s illegal use of legally privileged material is only one in a long catalogue of abuses in its handling of its investigation into Keydata”.

The FSA had asked PwC, Keydata’s administrators, to waive privilege over eight particular emails to Mr Ford and other directors from their former lawyer. But while PwC acceded to the regulator’s request, the firm had no legal right to lift the privilege of the individual executives, the judgment said.

The ruling is an embarrassment for the FSA as it seeks to prove itself a tougher watchdog after criticism that it was toothless before the financial crisis. It is bringing more criminal investigations than before, and while Mr Ford’s case is a civil one, the regulator will be sensitive to criticism of how it handles inquiries and sensitive data.

The FSA said it noted the court’s decision. “The judgment concerned whether or not Mr Ford could claim privilege in respect of eight documents and concluded that in six cases he could not. There will be a further hearing in due course to determine remedy, which could take some time.”

The FSA has been investigating Keydata since December 2007 and launched a separate investigation into Mr Ford in September 2008.

The regulator shut down Keydata in June 2009 amid concerns that it was selling individual saving account (Isa) products that did not comply with tax laws.

Mr Ford has denied wrongdoing and claimed that the FSA’s intervention caused the firm’s collapse

PwC then discovered that £103m of investors’ money in bonds issued by SLS, a Luxembourg company, had been “misappropriated”, according to the FSA.

SLS was closely associated with David Elias, a fugitive from UK justice who reportedly died shortly before Keydata failed. The SFO announced in May that no one would face criminal prosecution over Keydata’s collapse.

At the time, the FSA said its own civil investigations were at an “advanced” stage. The judicial review, which was lodged by Mr Ford in March, effectively froze the regulator’s inquiries.