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Exclusive: Regulators ran up £6m for case that collapsed

City watchdogs spent nearly £6m on the investigation and prosecution of three former directors of iSoft whose trial collapsed last month, it emerged last night.

Tim Whiston, finance director, John Whelan, former chief executive, and Steve Graham, chief operating officer, had been accused of plotting to create "huge discrepancies" in the software firm's accounts between October 2003 and July 2006. But the case against them was thrown out afer a retrial at Southwark Crown Court last month.

A Freedom of Information request by the law firm Pannone, which represented one of the three, revealed that the Financial Conduct Authority (FCA) – and its predecessor, the Financial Services Authority – spent £5.9m investigating and prosecuting the directors and also Patrick Cryne, the chairman, who did not stand trial due to ill health and has had his case dropped too.

The investigation stage alone – between August 2006 and January 2010 – cost £2.1m. Of that, around £980,000 was classed as internal FCA costs and £1.1m as external costs, including appointing legal counsel.

In the case's prosecution phase a further £3.7m was spent, of which £1.2m, was classed as internal FCA costs and a further £2.5m as "external costs". The figures illustrate the potentially huge costs that can be incurred in investigations of this kind, which rise further if prosecutions are attempted.

The initial trial resulted in a hung jury, and the watchdog, which called the outcome "disappointing", said pursuing a third trial would not be in the public interest. But defence counsel were sharply critical. Anthony Barnfather, a partner at Pannone, which represented Mr Whelan, described the costs as significant, particularly as the FCA's business plan for 2013-14 states that the entire enforcement budget for the year is £19.8m.

He said: "Having been unable to persuade the jury in the first trial in 2012 of the defendants' guilt, the FCA pursued a second lengthy trial which ultimately collapsed as a result of errors on the part of the prosecution.

"The cost of the case should not be ignored and it is important that lessons are learned from this case. The FCA has stated that the collapse of this case was as a result of problems which arose 'from a particularly unusual set of circumstances which are unlikely to recur'. However, the collapse of the case resulted from a disclosure error."

He added: "With its significant funding, the FCA is in my experience one of the better prosecutors when it comes to disclosure. However, this is a costly and embarrassing error for the organisation. The prosecution failing to disclose documents that may assist the defence is a major cause of trials collapsing and a factor in miscarriages of justice."

The three accused had directors' insurance but were left to fund the case on their own after their insurers withdrew cover.

The watchdog's enforcement chief, Tracey McDermott, who spoke of the "unusual circumstances" on the day of the trial's collapse, has pledged that lessons will be learnt.

Martin Wheatley, the FCA's chief executive, said the decision not to proceed with a third trial would not "undermine our determination to bring and prosecute difficult cases".

He said enforcement powers were important in bringing about a "change in the culture" of companies that operate in UK markets.