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Unlawful 'investment club' case proceeds to trial

6 April 2010

A case involving three men who unlawfully took deposits from a wide circle of acquaintances will proceed to trial, the High Court has ruled.

The Financial Services Authority brought the case against the three men after it emerged that they had, without being licensed by the FSA, been taking money from clients to provide loans to businesses unable to secure funding from banks.

The defendants appeared without representation. Two of the men initially instructed a firm which was later the subject of an intervention by the Solicitors Regulation Authority and was shut down in late 2009.

All three said they could not afford a lawyer after their assets had been frozen.

They claimed the activity was not one that was regulated by the FSA because the transactions were loans made to them and that the money was not received by way of business.

Ruling in Financial Services Authority v Anderson, Peacock and Pruthi [2010] EWHC 599 Ch, Mr Justice Lewison said “all the ingredients” required for the definition of “deposit” were present in the case.

The judge also found that the defendants took deposits “by way of business”, giving them no defence to an exclusion from regulation: they had been taking deposits with a view to making money, over a substantial period, and on a large scale. There were also repeated references to their “business”, “business venture”, and “commercial” arrangements.

The standard documents used by one defendant made clear that his business was not regulated by the FSA and referred to the transaction in terms of investment in his business, Business Consulting International. A typical return on investment was 11 per cent.

The standard letter also read: “I have not recommended to you that this loan to my business is in your best interests as I have no understanding of your total assets and liabilities or indeed tolerance for risk.

“However, in the light of our personal friendship and the fact that we are peers, I have solicited your involvement and hope that you will see fit to participate.”

In two years, the lead defendant entered into 757 agreements with 293 participants, for sums ranging between £2,000 and £1.6m.

The case started after a police investigations led to arrest in May 2009 on suspicion of conspiracy to defraud, money laundering and fraud by misrepresentation. A criminal investigation into Business Consulting International is ongoing but the FSA will now pursue the civil aspect of the case in the civil courts.

As the defendants were not regulated, their clients will not be able to rely on the FSA’s compensation scheme. However, section 382 of the Financial Services and Markets Act 2000 allows the court to make a restitution order where a person has breached regulatory requirement, providing for the sums available to paid or be distributed to ‘qualifying persons’.

The next stage of the case will determine who and the extent to which any potential ‘qualifying person’ will be eligible. A hearing is expected to take place in June.

Margaret Cole, director of enforcement and financial crime at the FSA, said the regulator was “pleased that the court has agreed with the FSA that these individuals were involved in unlawful deposit taking. They were not authorised by the FSA but were clearly involved in activities which meant they should have been.”

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Company, Consumer, and Contract Financial services & Tax Procedures