The future of the Serious Fraud Office is in doubt after the collapse yesterday of a £25 million case against drug companies accused of price fixing against the NHS.

In a devastating blow a judge threw out the SFO's case against the five companies, whose lawyers accused it of “costing the taxpayer millions of pounds” and of having brought a prosecution on the basis of a defective and misconceived assumption.

The ruling by Mr Justice Pitchford at Southwark Crown Court, London, has raised questions about the SFO's ability and role in tackling large, complex investigations and whether it should continue as an independent agency.

The SFO investigation, Operation Holbein, ran for eight years and was based on charges of conspiracy to defraud the NHS of an alleged £2 billion by fixing the price of generic drugs. It was the SFO's biggest case to date.

The SFO had applied to amend its indictment against Goldshield Group, one of the drug companies, after the law lords ruled this year that price- fixing alone did not amount to conspiracy to defraud. Mr Justice Pitchford rejected the SFO's application and also refused it leave to appeal. The SFO said that it would seek leave directly from the Court of Appeal.

Restrictions are in force that prevent reporting of the details of the ruling or the arguments put forward in the case.

The collapse of the case follows the High Court's castigation of the SFO over the dropping of a corruption investigation into BAE Systems. It was said to have acted unlawfully in halting the investigation in the face of “blatant” threats by Saudi authorities. The SFO is appealing against this decision in the House of Lords.

Craig Shuttleworth, who led Goldshield's defence, said: “While we are pleased that this matter may have finally come to a close, the charges should never have been brought in the first place. The SFO brought a case against Goldshield based on a legal assumption that was simply defective.The whole affair is another example of the SFO's investigative failings. Proceeding on the misconceived assumption that price fixing alone can constitute a conspiracy to defraud, the SFO has ultimately ended up costing the taxpayer millions of pounds.”

Edward de la Billiere, head of criminal fraud at Hill Dickinson law firm, said: “It is difficult to overestimate how important this case is for battered SFO morale. If the Court of Appeal upholds this decision to throw the case out, we need to ask if it will hole the SFO below the waterline?”

The problems in fighting large-scale economic crime have already resulted in the merger of several agencies. “Whether the SFO will be next in line for a change to its identity remains to be seen. I think it might, particularly if there is a change in government,” Mr de la Billiere said.

Tony Barnfather, head of regulatory work at the law firm Pannone, said: “I believe that if this decision is upheld it will lead to major change, not only at the SFO — if it survives in its present form — but more generally regarding the way major fraud is prosecuted in the UK.”

The SFO accused Goldshield, Ranbaxy, Norton Healthcare, Kent Pharmaceuticals and Generics UK, as well as nine company directors, of conspiring to defraud the NHS over the supply of the blood-thinning drug Warfarin or penicillin-based antibiotics. The defendants deny all claims of collusion.

Because the allegations refer to the period 1996-2001, they pre-date the Enterprise Act 2002, which makes price-fixing a specific offence. The charges were instead brought under the common law offence of conspiracy to defraud.

Last year Goldshield paid £4 million to settle a civil claim for damages with the NHS, but did not admit liability.

A spokesman for the NHS Counter Fraud and Security Management Service said that it had recouped £34million from the settlement of civil proceedings against four of the companies.

This money offsets the bill run up by the SFO, although it will be ploughed back into another department.

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