Adam Anderson and Others v Sense Network Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Jacobs |
| Judgment Date | 26 October 2018 |
| Neutral Citation | [2018] EWHC 2834 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: CL-2015-000733 |
| Date | 26 October 2018 |
[2018] EWHC 2834 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Jacobs
Case No: CL-2015-000733
Gerard McMeel and Jay Jagasia (instructed by Cubism Law) for the Claimants
Simon Howarth (instructed by Reynolds, Porter, Chamberlain LLP) for the Defendant
Hearing dates: 02/07/2018 – 05/07/2018, 09/07/2018 – 12/07/2018, 16/07/2018 – 18/07/2018, 24/07/2018 – 25/07/2018
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
| Contents | Paragraph |
| A: The facts and the claims in outline | 1 |
| B: The trial and the witnesses | 11 |
| C: The relationship between Sense and MFSS | 21 |
| D: Introduction to Sense's oversight and supervision of MFSS and the concealment of the scheme | 41 |
| E: The investors' payments into the scheme | 58 |
| F: The legal basis of the claims and the Claimants' routes to liability | 87 |
| G: The Regulatory Background | 89 |
| H: The claim based on FSMA s.39 | |
| H1: The threshold point | 113 |
| H2: Collective Investment Scheme | 147 |
| I: Actual and apparent authority | 193 |
| J: Breach of Supervisory Duty: attribution of Mr. Ingram's knowledge | 244 |
| L: Breach of Supervisory duties – failure to monitor and related arguments | |
| L1: The expert witnesses | 336 |
| L2: Use of an in-house T&C Supervisor | 346 |
| L3: Managing risk where a member supervisor is used | 358 |
| L4: Lack of monitoring | 361 |
| M: Breach of Supervisory duties — failure properly to conduct investigations | 398 |
| M1: Accord Mortgages | 400 |
| M2: Jonathan Knowles and other matters | 443 |
| N: Causation and Contributory Negligence | 457 |
| O: Quantum Issues | 484 |
| P: Conclusion | 511 |
A: The facts and the claims in outline
In this action, 95 Claimants allege that they were the victims of a fraudulent “Ponzi” scheme (“the scheme”). The scheme was masterminded by Mr. Alistair Greig (“Mr. Greig”), who owned and ran a company called Midas Financial Solutions (Scotland) Limited (“MFSS” or, as it was frequently referred to in the course of the trial, “Midas”). MFSS was a financial advisory business based in Aberdeen. It was a continuation of a scheme that Mr. Greig had operated when he had previously worked for a financial advisory firm known as Park Row Associates Ltd (“Park Row”). It continued after Mr. Greig founded MFSS in 2006. Crucially, it continued at all material times after September 2007, when MFSS became an “Appointed Representative” (“AR”) of the Defendant in this case, Sense Network Ltd. (“Sense”). The question in this case is whether Sense is liable for the losses suffered by the Claimants.
The essence of the scheme was that individuals (or “investors”), most of whom were resident in Scotland and in particular in the Aberdeen area, were offered the opportunity to receive high guaranteed interest rates on short-term deposits. The deposits were made by the investors giving cheques (and in one case, cash) to Mr. Greig or one of the financial advisers who worked for MFSS. These cheques were not made payable to MFSS, but rather to a name such as “Midas Aberdeen” or “Midas Financial”.
When the deposit reached maturity, the investors would receive or be credited with interest and this would encourage their confidence in the scheme. They would frequently decide to roll over the deposit for a further period, and in many cases invest further funds. Investors who wanted to be repaid their deposits as well as interest were indeed repaid for many years, up until the collapse of the scheme in 2014. They would receive cheques which were not drawn on the account of MFSS, but rather on an account designated “Midas Financial – Aberdeen” which was an account at the Royal Bank of Scotland (“RBS”) operated by Mr. Greig.
In reality, the interest that was paid, and any capital returned, was not the product of successful investment whether by Mr. Greig or RBS, whose alleged involvement in the scheme had been described to many of the investors. Instead, as with any Ponzi scheme, Mr. Greig was simply making payment from funds subscribed by participants in the scheme. The scheme could continue as long as Mr. Greig, or the advisers at MFSS, could find investors who were willing to subscribe new funds to the scheme, or to leave their existing monies in the scheme. The amounts of money involved in the scheme were very significant. During the period 2010 to 2014, the total credit turnover on the “Midas Financial – Aberdeen” RBS account exceeded £ 27 million. During the same period, the total debit turnover on the account exceeded £ 26.6 million.
In August 2014, however, the whistle on the scheme was blown by Mr Keith Ingram, an employee of and financial adviser at MFSS. He provided information about the scheme to Sense. At the time he did so, he was not aware that the scheme was a Ponzi scheme, with no real underlying investment or arrangement with RBS. Rather, he was aware that Mr. Greig should not have been operating the scheme without the knowledge of Sense, and he had become concerned about developments in relation to a different scheme with which this case was not concerned.
Mr. Ingram's information led to a raid on MFSS's offices by the Financial Conduct Authority (“the FCA”) and the police. It also led to enforcement action by the FCA in September 2014. The FCA petitioned the Court of Session in Edinburgh for a number of interdictions against MFSS and Mr. Greig, and these were granted by the Lord Ordinary. The FCA alleged that MFSS and Mr. Greig had acted in breach of section 19 of the Financial Services and Markets Act 2000 (“ FSMA”) by carrying out a regulated activity, namely the accepting of deposits, without being authorised to do so, in breach of the general prohibition under section 19 FSMA. The correctness of that allegation has not been in dispute in these proceedings, and has been amply proven by the evidence in this case.
At the time of the enforcement action, according to the FCA's petition, there was approximately £ 379,000 remaining in the “Midas Financial – Aberdeen” RBS account. There were, however, some 279 members of the public who had investments in the scheme. They had deposited £ 12.8 million and were owed £ 13.6 million upon the maturity of their investments. The money remaining was manifestly insufficient to repay them.
Mr. Greig now faces criminal prosecution in Scotland. There was no dispute in these proceedings that Mr. Greig was operating a dishonest Ponzi scheme. The Claimants have lost very substantial sums of money, and the issue in these proceedings is whether these losses can be recovered from Sense. It is not alleged that any of the senior management or indeed any employees of Sense had any knowledge of the scheme. Indeed, the evidence is clear that it was successfully concealed from Sense over the 7 years that the relationship of principal and AR existed between Sense and MFSS. Sense's senior management therefore only learned about the scheme in August 2014 from Mr. Ingram, and they then took immediate action to terminate the relationship with MFSS.
The Claimants allege that Sense is liable for their losses as a result of a number (five or six, depending upon how they are analysed) of different legal routes. Most of these routes (namely, the claims based on (i) s.39 of FSMA, (ii) actual or apparent authority, (iii) the attribution of Mr. Ingram's knowledge to Sense in relation to a claim of breach of Sense's supervisory duties, and (iv) vicarious liability) do not involve any allegations of fault or wrongdoing by the management of Sense. However, the Claimants also allege two routes which do involve fault by Sense. They allege that there was a failure by Sense adequately to monitor MFSS. They also allege that there was a failure by Sense properly to investigate certain matters which came to their attention during the course of the relationship. The most significant of these matters concerned information received about Mr. Greig and two other MFSS financial advisers from Accord Mortgages (“Accord”), a mortgage provider within the Yorkshire Building Society. The Claimants contend that a proper investigation would have afforded Sense a golden opportunity to identify the lack of integrity of Mr. Greig and other financial advisers.
Sense's case is that none of the Claimants' routes to liability should succeed. If successful, however, Sense alleges that there should be a reduction in the quantum of any liability for the Claimants' contributory negligence.
B: The trial and the witnesses
The parties' respective cases, and the different legal theories advanced, meant that there was extensive factual evidence at the trial. This covered, in particular, the circumstances in which the Claimants came to invest in the scheme and the amounts lost; the way in which the scheme was operated at MFSS, and why Sense did not find out about it; the steps taken by Sense to monitor and supervise MFSS; Sense's reaction to various problems which came to their attention, and in particular the information received from Accord; and the work and role of Mr. Ingram and others who worked at MFSS.
On the Claimants' side, I heard oral evidence from a large number of individuals, principally the “Lead Claimants”, who had invested in the scheme. At the first Costs and Case Management Conference in November 2016, it was ordered that the claim should be managed and tried by reference to Lead Claimants, and that the claims of all claimants other...
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