Manchanda v Financial Services Authority [2002] UKFSM FSM034 (17 May 2006)

DECISION

Introduction

1. These two applications are about one issue. Has the Applicant shown that he
is a fit and proper person to control a mortgage broker and to perform the
functions of a director of it? In late 2004 the Applicant Mr Manchanda
proposed to buy a controlling interest in a regulated firm, Diamond Lifestyle
Ltd, a mortgage broker. On 9 November 2004 Mr Manchanda applied for two
approvals which the Respondent ("FSA"), acting through its Regulatory
Decisions Committee and its Regulatory Transactions Committee, refused on
31 March and 1 April 2005. Mr Manchanda challenged these Decision
Notices by References dated 27 April 2005 and after direction hearings and
one adjournment the case was heard between 15 and 17 May 2006. The case
turns on Mr Manchanda's role at RBG Resources Pic ("RBG") a metal and
minerals trading company which suffered losses of over US $400 million as a
result of extensive frauds.

Legal and regulatory background

2. The function of a director of a company such as Diamond Lifestyle is
controlled under the Financial Services and Markets Act 2000 and requires
approval from the FSA under Section 60. Section 61 provides that the
authority may grant an application "only if it is satisfied that the person in
respect of whom the application is made is a fit and proper person to perform
the function to which the application relates". The consent of the FSA is also
required for a proposed change in the control of an authorised person such as
Diamond Lifestyle and, by Section 186 of the Act approval will only be given
if>

(a) the acquirer is a fit and proper person to have the control over
the authorised person that he has or would have if he acquired the
control in question; and

(b) the interests of consumers would not be threatened by the
acquirer's control or by his acquiring that control.

3. In deciding whether these requirements are met the FSA considers its
regulatory objectives and needs to ensure that the relevant person's affairs are
conducted soundly and prudently. These regulatory objectives include market
confidence, the protection of consumers and the reduction of financial crime.
In this case the FSA has placed emphasis on its financial crime objective of
"reducing the extent to which it is possible for a business to be carried on for
a purpose connected with financial crime". The FSA issues Guidance on the

fit and proper test which, although very helpful, is not legally binding. The
most important considerations in that Guidance are the person's honesty and
integrity and his competence and capability.

4. The Tribunal has received detailed and helpful submissions from the parties
about the legal approach to this case and to issues like the burden of proof.
These are largely uncontroversial and can be put as follows. The FSA can
only grant an application if it is satisfied that the person is fit and proper. It is
for the Applicant to establish that he is fit and proper not for the FSA to show
that he is not. The task of the Tribunal is not to review the reasonableness of
the FSA's decisions but for itself to determine what action the FSA should
take over the applications. We have to ask ourselves, looking at the
applications again in light of the evidence now available, whether or not we
are satisfied that Mr Manchanda is a fit and proper person to perform the
functions referred to above.

Factual background

5. Most of the relevant facts are agreed or not greatly in dispute. The
controversy lies in the inferences to be drawn from the facts. Mr Manchanda
was born in Singapore and after military service went to University in Dundee
and qualified as a Chartered Accountant in Scotland in 1985. He worked
successfully for KPMG reaching the level of Senior Manager. In 1991 he
joined a ladies clothes importer the By Design Group and by 1996 was that
company's Chief Executive Officer in the United States. In that year he was
introduced through a contact at HSBC, his company's bankers, to another of
their customers ADI an apparently very successful metal trading business
owned by the Rastogi family. Mr Manchanda was ready to change job and to
move back to England. The Rastogis wished to replicate their successful ADI
business in the UK and needed someone of Mr Manchanda's calibre in
London. Mr Manchanda was impressed with what he saw of ADI and with
the impeccable standing of its accountants, lawyers and bankers. He decided
to take up this opportunity and initially spent three months as a consultant to
ADI. He established relations with well known insurance brokers in the UK,
credit insurance being vital to a business like ADI's where many of the clients
were small and medium enterprises ("SME") around the world. He
approached banks. These were impressed by the name of ADI and keen to be
involved in the UK venture. He was appointed an Executive Director with the
new company RBG on 18 July 1996. He appointed PWC as the auditors. He
became RBG's Financial Director supporting Mr Virendra Rastogi who was
the CEO and chief trader. An experienced trader of unquestioned integrity,
Mr Christian LeJeune was also appointed as were a team of other
professionals. The third Director Mr Majumdar was appointed in December
1997 and a Mr Mirtra joined the board in June 1998.

6. It appears that some of RBG's metal trading was on a cash against documents
basis but some customers were allowed credit. The extent of that credit was

governed by RBG's procedures which Mr Manchanda set up and adopted
from those of ADI. ADI's procedures had met its own requirements and also
those of its bankers and auditors. The RBG system was in turn approved by
the credit insurers of RBG. When RBG dealt with an existing customer of
ADI they obtained and relied on copies of the customer files from ADI itself.
This was to prove a weakness. In 1998 RBG was growing fast and Mr
Manchanda sought trade finance facilities on its behalf. One proposed
facility was for securitisation through Westdeutsche Landesbank Girozentrale
("WestLB"). This involved assigning a very large number of customer trade
debts as security for traded debt instruments distributed to investors by
WestLB. That security was protected by credit insurance. An Agreement was
eventually reached between RBG and WestLB in January 1999 for a facility
of up to $35 million. Before any agreement could be implemented WestLB
needed to carry out extensive "due diligence" carefully investigating RBG's
business and the quality of its receivables. The Agreement also required the
facility to be operated in a careful fashion. WestLB were involved in training
RBG staff in how the process should be run. Mr Manchanda played an
essential role in negotiating the facility and indeed others which RBG entered
into. Mr Manchanda became Chief Operations Officer towards the end of
1998 with the task of monitoring the systems he had set up.

RBG appeared to thrive and grow. The auditors reported satisfactorily. Credit
insurers were satisfied. West LB appeared content having completed due
diligence and also having PWC conduct annual reviews distinct from the audit
process. By early 1999 however Mr Manchanda had become discontented
with his role. Mr Majumdar was recruited without reference to Mr Manchanda
and ran two major financial projects without him being involved. Mr
Manchanda also considered that his views about an appropriate corporate
structure were being ignored. He sought to resign as an Executive Director in
March 1999 but was persuaded to remain for a period and finally left with
effect from 2 August. Mr Manchanda remained as a non Executive Director
of RBG. Mr Anand Jain who had joined the board of RBG in June became
Company Secretary in August 1999.

Mr Manchanda devoted his attention to his consultancy 1 Group but retained
close links with the Rastogi family who invested £600,000 of the £1 million
share capital in this insurance venture. 1 Group worked closely with RBG and
ADI on insurance matters. Mr Rastogi and Mr Manchanda remained in very
frequent email contact about the business of 1 Group. Despite this close
relationship Mr Manchanda became unhappy about his role as a non Executive
Director of RBG. He complained about not being involved in decisions at
first informally and then by fax dated 19 July 2000. On 27 October 2000 he
gave Mr Rastogi three months notice of his resignation as a Director of RBG
and this took effect in January 2001.

It seems that in December 2001 PWC became suspicious about certain RBG
customers based in Hong Kong. PWC were not happy about the explanation

that they received from the Directors of RBG and resigned as auditors in
January 2002. Around this time Mr Manchanda visited ADI in the US with
insurance brokers. He learned that ADI was being investigated by the FBI. He
says that Mr Rastogi spoke to him of these difficulties but suggested they were
being overcome. On 2 May 2002 Provisional Liquidators were appointed for
RBG and freezing orders were granted against Mr Virendra Rastogi, Mr
Majumdar, Mr Jain and a Mr Patel and their homes were searched by the SFO
the following day. The civil proceedings led to a successful application for
summary judgment against Mr Rastogi and Mr Jain. Following the criminal
investigation the SFO charged Mr Rastogi, Mr Jain, Mr Majundar and Mr
Patel with conspiracy to defraud and a trial has been fixed for March 2007.

It has been clear since early 2002 that ADI and RBG were involved in huge
frauds over a significant period. These frauds are helpfully described in the
judgment of Mr Justice Hart in the summary judgment application. One
paragraph reads as follows:-

''The essence of the claim is that this situation is the result of a
fraudulent scheme which was designed to extract, and succeeded in
extracting, several hundred million US dollars from financiers.
According to the claimants, the scheme involved the invention of a very
large number of bogus metal and other mineral trading
transactions. It was implemented by the creation of a world wide
network of trading counter parties who were controlled by VR and
AJ(Virendra Rastogi and Anand Jain), by the fabrication of the trading
transactions and by the dissipation of the funds extracted. These
bogus transactions were presented to financiers as genuine trades
with independent trading companies for the purposes of extracting
funds. This was done first through the sale to the financiers under
receivables agreements of the liabilities purportedly owing to
RBG as a result of these trades and, secondly, the raising of
trade finance in respect of purported purchases. It is said that by the
time the music stopped in May 2002 at least two-thirds of RBG's
ostensible trade was the result of these activities.''

The fraud was carried out through personnel based overseas who issued
documents purporting to originate from a network of overseas companies in
Hong Kong, Singapore, Dubai, India and the United States. In fact those
companies secretly took instructions from Mr Rastogi and Mr Jain who
publicly maintained these were independent from each other and from RBG.
Documents seem to have been fabricated abroad. The liquidators have found
evidence to support this in a warehouse in Hong Kong. Daily reports were
sent to Mr Rastogi but not at RBG but to his home fax number. Mr
Manchanda, like other employees of RBG in London, says that he was
unaware of any fraud or forgery. The foreign counter parties had previously
been customers of ADI where documents appeared to be in order and checks
were satisfactory partly because of fraudulent or forged confirmations from

these companies and from those appearing to be their advisers. These false
transactions received 95% finance which was then siphoned off by
conspirators.

12. No proceedings, criminal or civil, have been brought against Mr Manchanda.
He has not been interviewed by any authority. He has not been the subject of
complaint to his professional body . When the matter was before the
Regulatory Decisions Committee and Regulatory Transactions Committee the
FSA sought information about the criminal investigation. In a letter dated 17^thMarch 2005 the SFO stated that the investigation was 'drawing to a close' and
that Mr Manchanda was to be interviewed, probably in June 2005. Yet
according to a letter from the SFO dated 3 May 2006 Mr Manchanda is still a
"suspect" and they add "the approach we take to Mr Manchanda will be
governed by a number of factors, including the weight of evidence (as opposed
to intelligence) against him as well as to the public interest in pursuing
him ".

13. In the United States 15 employees and other officers of ADI have pleaded
guilty to crimes as a result of participating in what a press release from the US
Attorney's Office for the Southern District of New York describes as "afar-
reaching scheme to defraud a number of major US and foreign banks by
fraudulently inducing them to issue hundreds of millions of dollars in loans".
This document also refers to the "extraordinary efforts by the Defendants to
create afaqade that sham, controlled customers were in fact real, independent
metals companies with actual employees and offices and with no ownership or
control relationship with the Defendants". It seems that some of these
Defendants established offices and phone lines for the sham companies and
arranged for fake letterhead and bank accounts.

Evidence

14. The FSA relied on some unchallenged witness statements and also on the
testimony of Mr Mike Parker and Mr Andrew Gardner.

15. Mr Parker was employed as an associate in the Regulatory Transactions
Division dealing with applications for approved person status. He described
the process by which he investigated Mr Manchanda's application. He
accepted that the FSA was concerned primarily with evidence not with
speculation. He confirmed that Mr Manchanda had offered to be interviewed
but that the FSA had not required this. Mr Parker gave a straightforward and
accurate account of his investigation which in our judgment was competent
and appropriate given the necessarily limited nature of the exercise.

16. Mr Andrew Gardner was from July 1998 until July 2005 an Executive
Director in the Securitisation and Principal Finance Group of West LB. He
was responsible for the negotiation of the programme entered into by RBG
and West LB in January 1999. Mr Gardner helpfully explained the

complexities of this form of finance and the negotiations which he conducted.
As Mr Gardner saw it Mr Manchanda was the Director at RBG primarily
responsible for arranging and negotiating the West LB deal. Mr Gardner had a
high opinion of Mr Manchanda's intelligence, competence and integrity. He
accepted that the inquiries made by West LB before embarking on this
financing and when conducting it were substantial and that due diligence was
intensive. He thought it likely that other banks making similar finance
available to RBG would carry out similar due diligence efforts. He was
unaware of RBG raising any constraints or limitations upon West LB's
evaluation process. Mr Gardner's second statement submitted very shortly
before the hearing consists mainly of opinions about Mr Manchanda's role.
He wonders why Mr Manchanda did not identify any suspicious activity at
RBG and expresses his surprise that no additional credit checks were carried
out when the volume of RBG's business increased so greatly. He also
suggests that Mr Manchanda's witness statement understates his
responsibility for implementation of the West LB financing for RBG. Mr
Gardner's direct evidence of fact was helpful, straightforward and entirely
credible. Some of the expressions of opinion in his second witness statement
were based upon a limited knowledge of the surrounding facts.

Ms Philippa Tebby is a Chartered Accountant seconded to the FSA who
provided an unchallenged statement to the Tribunal. She conducted an
analysis the accuracy of which is unquestioned. This shows that during the
period from 2 February 1999 to the end of July 1999 when Mr Manchanda
resigned as an Executive Director ,142 invoices were accepted in to the West
LB finance programme of which 80 were probably fraudulent.

The FSA also relied upon two witness statements prepared for use in, amongst
other things, pending criminal proceedings in London. The first statement is
that of Mr Anil Anand who was Chief Financial Officer of ADI. Mr Anand
has pleaded guilty in the United States to committing fraud and other offences
between 1995 and 2002. He makes his statement on the basis that he may
receive a substantial discount in sentence in return for full co-operation.
Under USA Sentencing Guidelines the maximum sentence for the offences to
which he has pleaded guilty is 65 years. Mr Anand has also pleaded guilty to
lying to the US Government in the early stages of the investigation when
offering a co-operation agreement. Mr Anand was based in the United States
and his account is therefore of limited relevance to RBG in London. He says
of Mr Manchanda "in my view almost certainly (he) knew about the fraud".
This view appears to be based only on the fact that Mr Manchanda worked
closely with Mr Rastogi in setting up the London operation. Mr Narendra
Rastogi, who ran ADI in the United States, (as opposed to his younger brother
Mr Virendra Rastogi, the RBG CEO) has provided a similar statement on the
same basis. He describes Mr Manchanda's role in general terms as someone
who could be trusted. Mr Manchanda does not however feature as one of the
"trusted deputies" placed in locations around the world. There is strikingly

little detail about the role which these two potential witnesses give to Mr
Manchanda.

Mr Manchanda applied for an order that the Tribunal decline to admit these
statements on the grounds, mainly, that the witnesses were unavailable to give
evidence and were obviously unworthy of belief. Although there are serious
doubts about the reliability of these statements we refused that application and
considered the material for what it was worth. We placed very little weight on
either statement in view particularly of the vagueness of what they say about
Mr Manchanda. Of course some other court or Tribunal considering these
frauds may take a different view of the quality of this material.

Mr Manchanda submitted three witness statements and also gave live
evidence. He insisted that he had known nothing of the fraud. He had been
introduced to ADI through reputable bankers and had worked only briefly for
that company. The references he took up were very favourable and once he
got to London he appointed reputable auditors, PWC, and insurance brokers
and recruited skilled and experienced personnel. He was always content to
give bankers and others access to RBG's books. He accepted that he played
the leading role in negotiating the West LB arrangement. He explained how
he moved from Finance Director to Chief Operating Officer. He said that
there were no particular features of RBG's dealings with customers which he
had reason to question. Many customers were inherited from ADI and
procedures for getting new customers were document based. Further he was
not the point of contact for customers. Others including notably Mr Lejeune,
RBG's senior trader, had far more customer contact than he did yet remained
unaware of the fraud throughout. Mr Manchanda also insisted that he had not
shown incompetence in carrying out his duties. There were no warning signs
of the fraud. Fellow employees, underwriters, bankers and auditors had
noticed nothing either. As came over strongly in his cross examination Mr
Manchanda was proud of RBG's systems which he believed to be of good
standard. These were subjected to frequent external reviews from auditors,
bankers and insurers including Lloyd's of London and AIG. Mr Manchanda
pointed to the conclusions of PWC when acting not as auditors but as
reviewers for West LB "that the company displays a good overall level of
control underpinned by robust work practices and systems". Mr Manchanda
emphasised the competence and integrity shown throughout his career until he
arrived at RBG. He also drew attention to a letter from the Institute of
Chartered Accounts of Scotland confirming that Mr Manchanda remains a
member in good standing, has no disciplinary record and has not been the
subject of complaint over his role in RBG. Mr Manchanda produced
impressive references as to his character and competence from the ASEAN-
UK Business Forum, from a Director of KPMG, and from a partner in Moore
Stephens. Mr Manchanda also has an impressive record of service to charities.
One charitable trust responsible for schools in Zambia describes him as "a
pillar of strength and inspiration". Mr Manchanda has sold his home to meet
the substantial and irrecoverable legal costs of a Tribunal hearing.

21. Mr Manchanda also relies upon a witness statement disclosed by the FSA
given by Mr Christian Lejeune. This statement, and a letter from Mr Lejeune
on which Mr Manchanda also relies, are not an explicit exoneration but they
do suggest that this witness did not see Mr Manchanda within any ring of guilt
atRBG.

Submissions of FSA

22. The FSA's starting point is that it is for Mr Manchanda to show that he is fit
and proper and to satisfy the Tribunal both that he did not know about the
fraud and that, if he did not, that this absence of knowledge was not culpable
in competence. The FSA's case is set out in its helpful skeleton argument. In
his closing submissions Mr Eadie emphasised the following factors which he
suggested pointed to the fact that Mr Manchanda knew or should have known
about the frauds. Mr Manchanda left to join Mr Rastogi, an admitted fraudster,
and was in day to day contact with him about the minutia of running a
company for a long period. He and Mr Rastogi were responsible for getting
RBG off the ground. As a Financial Director Mr Manchanda had or should
have had control over the financial systems of the company. The position of a
Finance Director, as an insider, is fundamentally different from that of an
auditor or outside adviser. That role is also very different from that of a
trader, even a senior one. Mr Manchanda was personally responsible for the
negotiation and signature of the West LB arrangement. While Mr Manchanda
had not been present at RBG throughout the frauds ,dishonesty affected over
half the relevant sales while he still held office. The fraud was not an isolated
one. It was endemic, widespread and continued for a number of years. The
customers generated suspiciously few payment or trading disputes. The nature
of the fraud involved a succession of circular financial transactions, a matter
for which someone in Mr Manchanda's role would naturally have
responsibility. The credit committee of RBG consisted of those involved in the
fraud and Mr Manchanda was able to tell the Tribunal very little about the
nature of the systems in place. (We say at once that it would have been
difficult for Mr Manchanda to address such detail some years later particularly
when the FSA did not itself seek to analyse those systems and procedures in
detail.) It was also perhaps suspicious that Mr Manchanda had underplayed the
extent of his continuing relationship with Mr Rastogi. A substantial number of
emails had recently become available showing an almost daily exchange
between Mr Rastogi and Mr Manchanda about the affairs of the Applicant's
insurance company. Mr Manchanda assisted Mr Rastogi's wife financially
when the freezing orders were first obtained. The US witnesses could be
expected to tell the truth because of the situation they were now in. The
Tribunal was invited to conclude that if Mr Manchanda did not know about
the fraud he should have done.

The Applicant's case

23. In addition to their written submissions Mr Malek QC and Mr Odgers made
oral closing submissions which included the following. It is for the Applicant
to show the FSA that he is fit and proper but FSA cannot rely upon suspicion
and must produce evidence if they are going to make a decision that someone
is or may be guilty of fraud or of failing to detect it. The fraud was established
in early 2002, civil action has been taken and criminal proceedings are
pending. No action has been taken against Mr Manchanda, none is in the
offing and not a single document has been produced to show that he is or may
be at fault. The FSA has good links with those, particularly the liquidators,
who are able to produce all relevant documents but nothing has been found.
Mr Manchanda answered all questions convincingly. It is inappropriate for the
FSA to make criticisms of systems and controls without putting to Mr
Manchanda even one document which suggests that he was fraudulent or
incompetent. If anyone had reached a conclusion that Mr Manchanda was
incompetent then material would have been available. The underwriters and
other professionals were all hard-nosed people in the first rank. They
identified nothing incompetent and indeed Mr Gardner had a high regard for
Mr Manchanda. While Mr Manchanda was at RBG there were on average
only four suspect trades each week. By 1999 Mr Manchanda was no longer
one of two Directors but part of a group of Executive Directors and he was by
then being marginalised. A man in Manchanda's position had no reason to get
involved in fraud or to risk his career. It would have been mad for him to hire
professionals like PWC (who ultimately detected the fraud) if he proposed to
involve himself in dishonest conduct. No one has suggested that Mr
Manchanda had anything to do with setting up the fraudulent customers. Mr
Manchanda was not a trader and could not be expected to pick up four bad
trades a week for a few months in 1999. It is clear that Mr Manchanda began
to have disagreements about the governance of RBG despite maintaining good
relations with Mr Rastogi. The statements from Mr Narendra Rastogi and Mr
Anand are vague but also unreliable, made as they were with people with
everything to gain from spreading blame as widely as possible. Even if one
were to accept the truth of some of the content of these statements the position
of Mr Anand as an accountant is distinguishable from that of Mr Manchanda
and even he was ignorant of the fraud for some time. It is striking that the
FSA rely upon a large number of emails between Mr Rastogi and Mr
Manchanda which they have identified to show continuing contact in the
period 2000 and 2001 yet not one of these shows or suggests improper
conduct or guilty knowledge of any kind. Mr Manchanda's glowing
testimonials speak not only of his integrity but to his competence. The
Applicant's competence was illustrated by many of the points which show he
was not fraudulent. No one else outside those involved detected this external
fraud. It is unsurprising that Mr Manchanda did not do so either. It is
important to bear in mind that ADI and RBG were substantial and well
regarded operations with well qualified staff and access to the best advisers.

There was no reason for Mr Manchanda to be more than usually alert. The
FSA had made an issue at the hearing which was not part of it's original case
on the accounting treatment of a US$ 4 million transfer in the financial year
1996/7. The payment was a cash injection to cover a shortfall caused by
hedging on the LME on behalf of customers who subsequently reimbursed
RBG. That issue was based on a misunderstanding between a loss and a
shortage of cash.

FSA's Decision Notices

24. Both Decision Notices conclude that, at the time they were taken, there were
"serious concerns relating to Mr Manchanda" which "remain unresolved at
the present time" leading the FSA to conclude that it cannot be satisfied that
Mr Manchanda is a fit and proper person. The Notices rely upon the decision
of Mr Justice Hart and conclude that this indicates that the fraud had been
continuing while Mr Manchanda was an Executive Director and Chief
Operating Officer of RBG (which had only six Directors at the relevant time,
one of whom was based in India), and the fraud was masterminded from
RBG's offices in London, where Mr Manchanda was based. The fraud
continued while Mr Manchanda was a non-Executive Director. The Notices
conclude that although Mr Manchanda was not mentioned in the judgment of
Mr Justice Hart his position as an Executive Director and Chief Operating
Officer would have allowed him full access to RBG's records. They say that
according to RBG's liquidators RBG staff have indicated that Mr Manchanda
was seen to work closely with Mr Rastogi and Mr Jain in the London office
and in these circumstances and having regard to Mr Manchanda's
qualifications and experience, and the scale and duration of the fraud the FSA
have serious concerns that Mr Manchanda would or should through the
exercise of due skill, care and diligence, have been aware of - or at least
suspected - the existence of fraudulent activities and taken appropriate action.
As no such action was taken, this indicates a serious failure in his fiduciary
duties to RBG, and raises serious doubts about his honesty and integrity and/or
his skills, competence and capability to perform the controlled function to
which the application relates. The Decision Notices also rely upon the fact
that a letter from the SFO stated that Mr Manchanda was to be interviewed
and that this was likely to take place some time in June 2005.

25. Mr Manchanda's lawyers have made various criticisms both of the process
adopted by the FSA and of the Decision Notices themselves. These are of no
direct concern to the Tribunal. The function of the Tribunal is not to act as an
appeal court evaluating the decision of the RDC but to rehear the case on the
evidence now available.

Decision of the tribunal

26. Has Mr Manchanda satisfied the Tribunal that he is a fit and proper person?
As his qualifications and previous experience are beyond reproach the only

question is whether the extent of his knowledge, if any, of the frauds at RBG
and his professional performance over them prevent him from being fit and
proper. The FSA does not have to prove that Mr Manchanda knew or was
involved in the frauds. He has to satisfy us that he did not know of the frauds
and that this absence of knowledge was not due to his lack of professional
competence.

If Mr Manchanda were on criminal trial or facing civil proceedings for fraud
the process would be a lengthy and rigorous one involving far more
documents and many more witnesses than have been put before us in a three
day hearing. It would be disproportionate for either Mr Manchanda or the
FSA to have to incur the time or expense of such a wide ranging inquiry. We
have considered the matter on the available material at what is necessarily a
broader level. Our findings on the question of Mr Manchanda's fitness
therefore have no bearing on any court decision dealing with other aspects of
the matter. That said it is our view that Mr Manchanda is fit and proper
because we do not consider, on the material we have seen, that he had any
knowledge of these frauds or that his professional conduct is open to serious
criticism.

Our reasons for forming the view that Mr Manchanda did not know of these
frauds are :-

(a) No contemporaneous document has been shown to us to
indicate or even suggest that Mr Manchanda knew of the frauds. No
witness has given evidence suggesting that he knew or might have
known of the frauds. Two admitted criminals Mr Narendra Rastogi
and Mr Anand have suggested Mr Manchanda knew of the fraud but
have done so in general terms when making allegations against at least
one other innocent individual and in a context which suggests that their
accounts are unlikely to be reliable. It is to us striking that there
should be such little evidence against Mr Manchanda when
conscientious enquiries have been conducted by competent regulatory
agencies and liquidators over more than four years. It is equally
striking that no complaints of professional misconduct have been
made, no civil proceedings have been brought, and while individuals
are to stand trial next year, Mr Manchanda has never even been
interviewed by the SFO let alone arrested or charged.

(b) We believe the evidence of Mr Manchanda who was rigorously
but properly cross examined about the frauds. Mr Manchanda came
across as a frank and straightforward witness. He answered the
questions directly. He was anxious to ensure that he had grasped a
point and answered it fully. On occasions Mr Manchanda chose to
speak the truth rather than to volunteer what would have been a
plausible and exculpatory alternative. It seemed obvious to us that Mr
Manchanda's strengths and main activities lay with organisation and

controls rather than the detailed evaluation of the integrity and credit
standing of counter parties.

(c) The circumstantial evidence properly deployed by the FSA
seems to us, after examination, to point either to Mr Manchanda's
innocence or to be equivocal. Mr Manchanda's background,
qualifications and experience were impeccable. He had the motivation
to join ADI/RBG in order to further his career and to return to the UK.
He had no reason to embark on criminal activity and, given the
standing at the time of ADI/RBG and the circumstances in which he
was introduced to it, no expectation of dishonest involvement. The
steps Mr Manchanda took to set up RBG in London, notably his choice
of professional advisers would be odd ones for a fraudster to take.
Those advisers and others of sophistication themselves noticed no
frauds or anything suspicious. Others appear to have been brought in
by Mr Rastogi to replace Mr Manchanda in that part of the role closest
to what were later exposed as frauds, including individuals now
alleged to have been involved. Mr Manchanda became concerned
about aspects of his job and left when the frauds were not at an
advanced stage. The nature of the frauds involving as it did dishonest
customers reporting when necessary to Mr Rastogi's home and not the
office was one which it would have been difficult for Mr Manchanda
to detect. Mr Manchanda did not emphasise his continued contact with
Mr Rastogi after his departure from RBG but he did not conceal it
either. That contact was not suspicious for so long as the frauds had
not come to light. The action of Mr Manchanda in assisting Mrs
Rastogi when freezing orders were obtained but the full facts were still
obscure is consistent with common humanity rather than dishonesty.
The frauds were indeed pervasive and long lasting. Mr Manchanda
was however only present for part of the relevant period. Mr
Manchanda was not alone in being an innocent employee. While it is
true that traders would be more remote from finance than Mr
Manchanda he in turn would be more remote from the customer
counter parties.

(d) The frauds were undetected by a sophisticated and watchful set
of bankers, insurance experts and other professionals. There is a
difference between their position and that of Mr Manchanda as an
insider but their lack of suspicion is significant.

29. We consider that Mr Manchanda's competence is not open to serious criticism
because:-

(a) of the considerations we have identified when dealing with the
frauds.

(b) RGB's systems and controls were accepted as appropriate by
auditors acting in two separate capacities, by insurers and by bankers
who gave these matters consideration continuously throughout the
period.

(c) There is no evidence of particular examples of negligence or
incompetence from any witness or in any of the relevant documents.
Furthermore it is not a criticism of FSA's conduct of this case for us to
point out that there is no expert evidence of Mr Manchanda's want of
care. Moreover the lay members of the Tribunal who have particular
experience in these areas consider that Mr Manchanda's ignorance of
the frauds was understandable in the circumstances.

As we have pointed out the function of this Tribunal is not to conduct appeals
from the FSA's but to carry out a rehearing. The Tribunal has the benefit of a
substantial amount of material which was not available to the RDC and the
RTC as well as the opportunity to hear witness evidence. There are limits to
the degree of investigation which the FSA can carry out when an application
raises a concern. We were told that the FSA deals with 160,000 applications a
year. Applicants understandably require the process to be conducted at a
reasonable cost and over a relatively short period. It is perfectly
understandable that the FSA may make a decision on the available material
which is appropriate and correct at the time but which, following more
detailed evidence and subsequent developments, results in a different decision
from this Tribunal. That is no criticism of the FSA or of its performance of its
important duty to protect the public.

One of the evils of serious financial fraud is that it casts suspicion on innocent
people whose careers may be blighted for years before their names are cleared.
When the RDC and the RTC dealt with this application investigations of this
fraud were less advanced and indeed Mr Manchanda was facing imminent
interview by the SFO. If we had been in the position of the RDC we would in
all probability have reached the same conclusion albeit differently expressed.
The FSA has a difficult task in balancing fairness to an applicant against its
duty to protect the public. It is not necessary for our Decision for us to
determine how far the FSA must be able to prove the existence of particular a
fact before having regard to a suspicion. But where it is for an applicant to
show his fitness and there are wider considerations to evaluate, the burden on
the FSA must be less than it would be where, for example, it is considering
imposing a penalty for wrongdoing.



	Conclusion

	32. It follows that Mr Manchanda has satisfied us that he is a fit and proper person for the purposes of his original applications. The Tribunal will therefore make an order directing the withdrawal of the Decision Notices.

	JUDGE DAVID MACKIE CBE, QC CHAIRMAN

	FIN 2005/0014 FIN 2005/0015

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	United Kingdom Financial Services and Markets Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom Financial Services and Markets Tribunals Decisions >> Manchanda v Financial Services Authority [2002] UKFSM FSM034 (17 May 2006) URL: http://www.bailii.org/uk/cases/UKFSM/2006/FSM034.html Cite as: [2002] UKFSM FSM034, [2002] UKFSM FSM34



	Fit and proper person — Sections 61 and 186 Financial Services and Markets Act 2000 — Mortgage broker — Alleged failure to detect fraud- Reference allowed

	FINANCIAL SERVICES AND MARKETS TRIBUNAL RAVI MANCHANDA Applicant - and - FINANCIAL SERVICES AUTHORITY The Authority Tribunal: JUDGE DAVID MACKIE CBE, QC MRS C E FARQUHARSON MR C H SENIOR Sitting in public in London on 15-17 May 2006 Mr H Malek QC and Mr J Odgers, instructed by Fladgate Fielder, for the Applicant Mr J Eadie, instructed by the Authority, for the Respondents

	© CROWN COPYRIGHT 2006



	DECISION

	Introduction 1. These two applications are about one issue. Has the Applicant shown that he is a fit and proper person to control a mortgage broker and to perform the functions of a director of it? In late 2004 the Applicant Mr Manchanda proposed to buy a controlling interest in a regulated firm, Diamond Lifestyle Ltd, a mortgage broker. On 9 November 2004 Mr Manchanda applied for two approvals which the Respondent ("FSA"), acting through its Regulatory Decisions Committee and its Regulatory Transactions Committee, refused on 31 March and 1 April 2005. Mr Manchanda challenged these Decision Notices by References dated 27 April 2005 and after direction hearings and one adjournment the case was heard between 15 and 17 May 2006. The case turns on Mr Manchanda's role at RBG Resources Pic ("RBG") a metal and minerals trading company which suffered losses of over US $400 million as a result of extensive frauds. Legal and regulatory background 2. The function of a director of a company such as Diamond Lifestyle is controlled under the Financial Services and Markets Act 2000 and requires approval from the FSA under Section 60. Section 61 provides that the authority may grant an application "only if it is satisfied that the person in respect of whom the application is made is a fit and proper person to perform the function to which the application relates". The consent of the FSA is also required for a proposed change in the control of an authorised person such as Diamond Lifestyle and, by Section 186 of the Act approval will only be given if> (a) the acquirer is a fit and proper person to have the control over the authorised person that he has or would have if he acquired the control in question; and (b) the interests of consumers would not be threatened by the acquirer's control or by his acquiring that control. 3. In deciding whether these requirements are met the FSA considers its regulatory objectives and needs to ensure that the relevant person's affairs are conducted soundly and prudently. These regulatory objectives include market confidence, the protection of consumers and the reduction of financial crime. In this case the FSA has placed emphasis on its financial crime objective of "reducing the extent to which it is possible for a business to be carried on for a purpose connected with financial crime". The FSA issues Guidance on the

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United Kingdom Financial Services and Markets Tribunals Decisions