Call for a fundamental overhaul of the governance of the legal & advisory industry
More than three years after a group of minority shareholders in Nyrstar NV started a legal battle for transparency and justice in the allegedly fraudulent restructuring and takeover of Nyrstar by Trafigura, one of the world’s largest commodity traders with a questionable reputation, the Antwerp Court of Appeal recently decided to dismiss the minority shareholders' legitimate request to relaunch an expert investigation to foster transparency and issue an independent expert opinion. This despite numerous allegations of fraud, and after the Belgian regulator FSMA forwarded its final report on the restructuring to the criminal court, asking to further investigate allegedly criminal offences.
Excluding other envisaged actions, minority shareholders therefore remain deprived of the requested transparency and independent advice on the facts that led to the fraudulent restructuring of Nyrstar for an estimated damage of around € 2 billion, until then one of the few remaining industrial multinationals on the Belgian stock exchange now gone into foreign hands.
How could this happen? The motivation of the Court is based on two key arguments.
First, the Court states that at the moment of its decision there is no longer an imminent threat to the company, as it is three years after the facts and therefore the damage has already been done. This comes across as Kafkaesque, since the minority shareholders made their first cry of distress to the Belgian financial regulator FSMA before the restructuring was completed. The complexity and inherent lack of speed of our institutions, combined with the relentless efforts by Trafigura and Nyrstar to stall the proceedings, are the root causes for the delay – in addition to the fact that minority shareholders needed some time to get acquainted with the institutional labyrinth and had to do some prior research to get together a syndicate, legal team and formulate the request in the first place.
Based on this argument in the Court’s reasoning, the panel expert investigation procedure as defined and implemented in Belgian corporate law seems to be a very ineffective and inefficient tool. Indeed, for cuckoo fraudsters it suffices to stay under the radar long enough before making the final kill, thus ensuring that an in-depth investigation will never happen as the imminent threat will no longer exist by the time the Court has to take a final decision in appeal.
This reasoning therefore provides incentives for others to try their luck setting up a cuckoo scheme, further undermining the already weak minority shareholders and investor trust in the proper functioning of our capital markets and rule of law.
Second, the Court states that further investigations by, and an independent opinion of, an expert panel is not necessary given the large number of reports and expert reports submitted by Nyrstar and Trafigura from reputed parties who are themselves subject to deontological codes to be followed.
Extract (own underlining and redaction): 'The generally recognized quality, knowledge, experience and authority in general of firms such as [...], among others, imply that their analyses and decisions cannot be dismissed as subjective and/or untrue. [...] The Appellants all too easily fail to recognize that the specialist players, who gave their reasoned opinions both beforehand and afterwards on the evolution of Nyrstar since the entry of Trafigura to the present day, had to observe their professional and deontological standards in doing so."
This is where the shoe pinches. Apart from the question whether Lady Justice is not replacing her blindfold with colored glasses by making judgments on the merits of the case on the basis of the alleged reputation of numerous party-dependent service providers, paid and inspired by the accused parties, the question arises as to whether it can and may simply be assumed that these service providers have indeed complied with their professional and deontological standards, or whether the earlier judgment of the court of first instance could still be applicable: "Nyrstar has indeed made much information available, but for the numerous press releases and reports it contributes in these proceedings, it holds the pen, or pays the author to do so. " It was precisely to counter this bias of party dependence that a request for an independent expert investigation was launched, and the numerous indications that have since emerged – further boosted by the FSMA’s final report- only confirmed the need for an independent expert panel investigation and report.
With its reasoning, the Court seems to ignore the growing international awareness of, and indignation on, the role of professional service providers in creating, hiding and condoning major fraud and corruption cases. In major international fraud scandals such as Enron and Wirecard, or in the Nethys, Lernout & Hauspie, FNG and other scandals in Belgium, it appears over and over again that professional service providers were complicit in the organised fraud or the hiding thereof. In South Africa, numerous reputable consultants, audit and law firms actively collaborated in facilitating corruption on a large scale (the so-called "State Capture" scandal), resulting in many service providers with excellent reputations being denied the right to work on government assignments, hundreds of millions of penalties and numerous court cases, many of them still ongoing. In the USA, a recent book describes how mega law firms distort justice (see: Servants of the Damned – HarperCollins), and years ago Professor Katharine Pistor, Professor at the Columbia Law School, published an excellent book on enabling law firms which she calls ‘The Masters of the Code’ (see The Code of Capital | How the Law Creates Wealth and Inequality - Princeton University Press)
Also, the collective of investigative journalists ICIJ (known for the Offshore Leaks, Panama Papers, Paradise Papers, Pandora Papers, FinCEN Files and the Uber files, among others), the Bureau of Investigative Journalism and others are increasingly paying attention in extensive reports to the role of what they call "The enablers" - see, for example, The Enablers - The Bureau of Investigative Journalism (thebureauinvestigates.com).
Largely hidden from public attention and scrutiny, one might wonder which tools & tactics are used by enablers to help their clients win – regardless of whether they are right or wrong? I see five: (i) limiting own responsibility and scope of work through disclaimers, allowing them to write in a misleading and seemingly affirmative way what their clients ask them to write; (ii) hiding complicity behind commonly accepted principles; (iii) keeping the design, compliance and enforcement of deontological codes internally, (iv) using all means to stall proceedings and increase costs for the litigating minorities and (iv) infiltrating in the institutional framework originally designed to defend minorities against abuse of power by dominant parties.
1. Limiting own responsibility and scope of work through disclaimers;
In the consulting/expert business, service providers have become exceedingly skilled in evading their responsibility through elaborate disclaimers. In the Nyrstar case, each and every expert/consulting report uses disclaimers to limit the responsibility of the author, the scope of the investigation, the time period considered, the value that can be attached to the report (e.g.: ‘this is not a fairness statement’). Almost all have an explicit clause that states that the report is based on information received from the management, and that no responsibility can be assumed for the quality and completeness of this information. This allows them to write whatever their clients want them to write, without violating at first sight their professional rules – it only requires (a bit of) night blindness, so who cares?
2. Hiding complicity behind commonly accepted principles;
In the case of law firms, a commonly heard statement is “our client has the right of defence” – only to see how law firms actively contribute to identifying and setting up the mere schemes that enabled the crime, or to redacting texts to ensure that key information is not revealed. Another standard one is “the truth has many facets” – only to see how the facts are changed and turned into an “Alternative Truth”, which is then falsely presented to the Court as ‘the facts’, and based on which legal arguments are claimed – in an attempt to mislead the Judge.
3. Keeping the design, compliance, and enforcement of deontological codes internally;
The deontological supervision of the professional services industry relies mainly on self-regulation. Thus, codes of conduct, criteria for acceptance of clients and assignments and compliance therewith are regulated and monitored internally, without external control or at best with a limited supervision organized at sector level - if deontological issues are escalated at all, they must be submitted to the President of the Bar – a rotating role taken by a lawyer working himself at one of the law firms who will think twice before offending one of his colleagues, knowing that in a few years they can take his role and come after him. This leads too often to a very understanding/myopic attitude towards potential infractions reported, and even more often to stalling in the hope that things will evaporate spontaneously – which indeed happens often, as silencing turns out to be a very effective weapon.
4. Using all means to stall proceedings and increase costs for the litigating minorities
Countless examples can be given of cases whereby proceedings are stalled for technical legal reasons (the “exceptions”). Often this is done by (ab)using laws that were voted to protect minority rights. In the Nyrstar case for example, lawyers called for the inadmissibility of the minority shareholder claims because of the non-respect of the Language Act (requiring all documents to be in the Dutch language), because concepts like the “At arm’s length” principle were not translated in Dutch. Given that the defendants in the case are all foreigners who don’t even master the slightest notion of Dutch, one wonders how this could possibly harm the rights of the defendants, while it forces the claimants to spend considerable time and money to reply – a clear example of abuse of law and imposing costs on the other side.
5. Infiltrating in the institutional framework designed to defend minorities against abuse of power by dominant parties
Enablers are often large, international firms or local boutique firms who are strongly embedded in the tissue of the institutional framework of the country where the litigation occurs. As such, these enablers have a privileged access to the institutions that are designed to defend the rights of all stakeholders – and by their mere presence they can influence how these institutions look at individual cases.
Combined, this leads to a new form of class justice –not between the poor and the rich, but between minority stakeholders and very wealthy, ruthless multinationals who can afford the services of these enablers, at insane hourly rate cards simply not affordable to their victims. This in turn leads to the creation of a prerogative elite, almighty and inviolable, benefitting de facto impunity – threatening minority shareholder rights, local companies and our collective wealth.
From the above, it seems obvious that a fundamental redesign of the governance of the legal & advisory service industry is becoming urgent if we want to avoid a repetition of what happened in the Nyrstar case – a brutal act of cuckoo robbery actively enabled and hidden by a myriad of enablers in a stealth operation, surfacing only at the very end, making victims powerless faced with an institutional framework not capable of playing its protective role.
Such fundamental redesign, in my view, should be focused around
1. A fundamental overhaul of the deontological supervision of the professional services sector (lawyers, consultants, auditors and topical and PR experts). Some inspiration might e.g. be found in the Netherlands, where timid steps are being taken towards the establishment of a two-tier supervision of the business law firms, with a committee composed of non-lawyers at the top.
2. Giving this committee and judges more power to impose sanctions on lawyers & advisors (consultants and topic or PR experts) who abuse the law or their access to media only to stall proceedings or to inflict excessive costs on less wealthy victims, or, worse, who actively change the truth in an Alternative Truth in an attempt for contempt of the Court or the public. This should ideally include anincrease in the severity of the sanctions – including and up to the reimbursement of charged fees, significant fines and ultimately the withdrawing of their license to operate.
3. Creating a strict separation between the advisory and defense services of law firms, whereby law firms who assisted in setting up certain schemes cannot take the defense thereof – in analogy of the strict separation between advisory and audit services of audit companies.
Without such fundamental overhaul, our justice system will continue to stall and will prove unable to adequately defend its citizens, minority shareholders, businesses, and prosperity, nor to enforce the norms and values that Europe stands for, nor to restore confidence in its own functioning or in the good functioning of the capital market. On the contrary, a continuation of far-reaching blurring of norms, impunity and powerlessness can be expected which will only prove to be a pole of attraction for other cuckoo capitalists who will voluptuously throw themselves into their next hunting spree –dancing on the grave of the small investors and the regulatory ESG framework.
Managing Partner Quanteus Group
Responsible of the RSQ Investors syndicate of minority shareholders in Nyrstar