Financial Services Authority v Asset L I Inc. (trading as Asset Land Investment Inc.) and Others

JurisdictionEngland & Wales
JudgeMr Justice Andrew Smith
Judgment Date08 February 2013
Neutral Citation[2013] EWHC 178 (Ch)
Docket NumberCase No: HC12D02401
CourtChancery Division
Date08 February 2013

[2013] EWHC 178 (Ch)

IN THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Mr Justice Andrew Smith

Case No: HC12D02401

Between:
The Financial Services Authority
Claimant
and
Asset L. I. Inc (trading As Asset Land Investment Inc) And Ors
Defendants

Mr Tim Penny and Mr Philip Hinks (instructed by the Financial Services Authority) for the Claimant

Ms Susan Siggins in person for herself and the second defendant

Mr Philip Coppel QC and Ms Vivienne Tanchel (instructed by Aegis Tax LLP) for the third and fifth defendants

Hearing dates: 22, 23, 24, 25, 26, 29, 30, 31 October, 1 November and 17 & 18 December 2012

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.

Mr Justice Andrew Smith

Introduction

1

This case is about whether, as the Financial Services Authority ("FSA") alleges, so-called "land-banking" schemes established and operated by the first defendant, Asset LI Inc ("ALI-Panama"), and the third defendant, Asset Land Investment Plc ("ALI-UK"), were "collective investments schemes" ("CISs") within the definition in section 235 of the Financial Services and Markets Act, 2000 (" FSMA"). The FSA's case was put as follows by Mr Tim Penny and Mr Philip Hinks, who represented it:

"Land was acquired by ALI-UK and ALI-Panama, and sub-divided into small plots. Members of the public were contacted by telephone and invited to purchase such plots. The evidence obtained by the FSA establishes that, at the time that plots were sold to consumers, salesmen acting for ALI-UK and ALI-Panama represented to consumers that those companies would seek to obtain planning permission in respect of the site as a whole, or otherwise seek to have the site 're-zoned' or 're-classified' for residential building purposes. The evidence also establishes that salesmen informed consumers that ALI-UK and ALI-Panama would facilitate the onward sale of the site as a whole to developers, at which point consumers could expect to see a substantial return on their 'investments'. Based upon these representations, consumers understood that ALI-UK and ALI-Panama would apply for planning permission for the site as a whole and/or that ALI-UK and ALI-Panama would facilitate the sale of the site as a whole to developers, and that they would thereby derive profits from the scheme as a whole, and on the basis of these representations and understandings they acquired plots of land at the various sites concerned."

The statutory provisions

2

I introduce the relevant statutory provisions through the judgment of Arden LJ in FSA v Fradley and anor, [2005] EWCA 1183, para 3:

"The FSMA is a portmanteau statute dealing with all kinds of investment activity, not just activities in traditional investments such as securities. The former system of self-regulation in specific areas has been abolished. Instead, the demanding function of regulating the numerous and disparate activities that take place in the financial services industry in the United Kingdom is now vested in the FSA pursuant to FSMA. Under section 2(2) of FSMA, the regulatory objectives of the FSA are market confidence, public awareness, the protection of investors and the reduction of financial crime. In discharging its functions the FSA has to have regard to a number of factors, including the principle that the burden placed on a person should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction. To enable the FSA to regulate the many different types of activity in the financial services industry, section 19 of FSMA … imposes a general prohibition on the carrying on of regulated activities (as defined in section 22 of the FSMA, …) without authorisation or exemption. Regulated activities include the operation of … a "CIS". This concept is defined in section 235 of FSMA …. At the heart of the concept … is the requirement for the sharing of profit or income by participants who do not have day-to-day control over the management of the property. A paradigm example of a CIS would be a unit trust, but the definition applies in many more situations than that. The general prohibition in section 19 on unauthorised investment activity is buttressed by a number of other prohibitions, including a prohibition on the promotion of invitations to engage in financial activity unless authorised (section 21 …). Finally, the FSA is empowered to seek injunctions to restrain anticipated breaches of the basic prohibition in section 19, and also orders for the disgorging of profits by persons who have contravened FSMA and the payment by them of compensation to persons who have been adversely affected by their contraventions (sections 380 and 382 of FSMA)."

3

These statutory provisions are directly relevant in this case:

Section 19: The general prohibition

"1) No person may carry on a regulated activity in the United Kingdom, or purport to do so; unless he is -

(a) an authorised person; or

(b) an exempt person.

(2) The prohibition is referred to in this Act as the general prohibition."

Section 21: Restrictions on financial promotion

"(1) A person ("A") must not, in the course of business, communicate an invitation or inducement to engage in investment activity.

(2) But subsection (1) does not apply if —

(a) A is an authorised person; or

(b) the content of the communication is approved for the purposes of this section by an authorised person.

(8) "Engaging in investment activity" means -

(a) entering or offering to enter into an agreement the making or performance of which by either party constitutes a controlled activity; or

(b) exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment.

(9) An activity is a controlled activity if -

(a) it is an activity of a specified kind or one which falls within a specified class of activity; and

(b) it relates to an investment of a specified kind, or to one which falls within a specified class of investment.

(10) An investment is a controlled investment if it is an investment of a specified kind or one which falls within a specified class of investment.

(13) "Communicate" includes causing a communication to be made.

(14) "Investment" includes any asset, right or interest.

(15) "Specified" means specified in any order made by the Treasury."

By article 4(1) and schedule 1, the FSMA Financial Promotions Order 2005 (S/I 2005/1529) provides that dealing in securities is a controlled activity. Paragraphs 19 and 28 of the schedule define securities as including units in a CIS, and by article 4(2) of the Order units in a CIS are controlled investments.

Section 22: The classes of activity and categories of investment

"(1) An activity is a regulated activity for the purposes of this Act if is an activity of a specified kind which is carried on by the way of business and -

(a) relates to an investment of a specified kind; or

(b) in the case of an activity of a kind which is also specified for the purposes of this paragraph, is carried on in relation to property of any kind.

(4) "Investment" includes any asset, right or interest.

(5) "Specified" means specified in an order made by the Treasury…"

The Financial Services and Markets Act (Regulated Activities) Order, 2001 (the "2001 Order") provides by articles 4(2) and 51(1)(a) that establishing, operating or winding up a CIS is an activity a specified kind for the purposes of section 22(1)(a) and by articles 73 and 81 units in a CIS are a specified kind of investment.

Section 23: Contravention of the general prohibition

"(1) A person who contravenes the general prohibition is guilty of an offence and liable –

(a) on summary conviction, to imprisonment for a term not exceeding six months or a fine not exceeding the statutory maximum, or both;

(b) on conviction on indictment, to imprisonment for a term not exceeding two years or a fine, or both…"

Section 26: Agreements made by unauthorised persons

"(1) An agreement made by a person in the course of carrying on a regulated activity in contravention of the general prohibition is unenforceable against the other party.

(2) The other party is entitled to recover –

(a) any money or other property paid or transferred by him under the agreement; and

(b) compensation for any loss sustained by him as a result of having parted with it."

Section 235: Collective investment schemes

"(1) In this Part "collective investment scheme" means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.

(2) The arrangements must be such that the persons who are to participate ("participants") do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions.

(3) The arrangements must also have either or both of the following characteristics -

(a) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;

(b) the property is managed as a whole by or on behalf of the operator of the scheme…"

Section 380: Injunctions

"(1) If, on the application of the Authority …, the court is satisfied -

(a) that there is a reasonable likelihood that any person will contravene a relevant requirement, or

(b) that any person has contravened a relevant requirement and that there is a reasonable likelihood that the...

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