The Financial Conduct Authority v Avacade Ltd ((in Liquidation)) (Trading as Avacade Investment Options)
| Jurisdiction | England & Wales |
| Judge | Adam Johnson |
| Judgment Date | 30 June 2020 |
| Neutral Citation | [2020] EWHC 1673 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC-2017-001469 |
| Date | 30 June 2020 |
[2020] EWHC 1673 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (Ch D)
Rolls Building, Fetter Lane London EC4A 1NL
Adam Johnson QC (Sitting as a Deputy High Court Judge)
Case No: HC-2017-001469
Nicholas Vineall QC and Adam Temple for the Claimant
David Berkley QC and Steven McGarry (instructed by Zakery Khub Solicitors) for the Second and Fourth Defendants
The First, Third and Fifth Defendants did not appear and were not represented
Hearing dates: 21–23 January, 27–31 January, 4 and 13 February 2020
Further Written Submissions: 17 February 2020; 5 June 2020
Approved Judgment
| I | INTRODUCTION | 1 |
| II | THE TRIAL AND THE WITNESSES | 14 |
| III | AVACADE | 21 |
| Multiple Income Partners & Mosaic Caribe | 23 | |
| TailorMade | 34 | |
| Hotpods | 42 | |
| Introducer for TailorMade | 47 | |
| New Investment products | 51 | |
| Mosaic Caribe | 52 | |
| Sustainable AgroEnergy | 54 | |
| Ethical Forestry | 57 | |
| Global Plantations | 59 | |
| Berkeley Burke SIPP | 63 | |
| 1Stop IFA | 66 | |
| Liberty SIPP | 72 | |
| The Avacade Model Crystallises | 75 | |
| FSA/FCA Correspondence | 80 | |
| Sustainable AgroEnergy Fails | 84 | |
| Cherish | 85 | |
| InvestUS and REIUSA | 88 | |
| Steps in the Avacade Model | 92 | |
| Later Developments | 115 | |
| IV | AA | 124 |
| FCA Visit to Liberty SIPP | 124 | |
| AA is resurrected as “ Avacade Future Solutions” | 129 | |
| Guinness Mahon | 131 | |
| The Paraiba bond | 132 | |
| BlackStar | 137 | |
| The AA Model | 142 | |
| Operation of the Model | 165 | |
| V | TOTAL INVESTMENTS AND COMMISSIONS | 166 |
| VI | ALLEGED PERIMETER BREACHES | 170 |
| (1) | Regulated Activity & Other Preliminary Points | 170 |
| “Buying or Selling Securities” | 170 | |
| “By way of business” | 187 | |
| FSMA section 23 | 189 | |
| (2) | RAO Art 25(2): Making arrangements | 193 |
| The Relevant Provisions | 193 | |
| The Rival Submissions | 200 | |
| Construction of the Relevant Provisions | 207 | |
| Application to Avacade | 232 | |
| Overview | 232 | |
| “ Arrangements” | 243 | |
| Art 27: Means of Communication | 247 | |
| Art 29: Pecuniary reward “arising out of” the arrangements | 248 | |
| Art 33: Independent advice or independent exercise of discretion | 251 | |
| Application to AA | 281 | |
| “Arrangements” | 283 | |
| Art 27: Means of communication | 285 | |
| Art 29: Pecuniary reward “arising out of” the arrangements | 286 | |
| Art 33: Independent advice or independent exercise of discretion | 287 | |
| (3) | RAO Art 53: Advising on Investments | 298 |
| The Legal Framework | 298 | |
| The Defendants' Submissions | 310 | |
| The Factual Background | 311 | |
| Avacade | 312 | |
| AA | 324 | |
| Discussion & Conclusions | 337 | |
| Overview | 337 | |
| Terms of Business and Disclaimers | 347 | |
| “Particular investment” | 351 | |
| (4) | Art 53E: Advising on Pensions | 354 |
| VII | FINANCIAL PROMOTIONS | 356 |
| Preliminary Points | 356 | |
| The Parties' Submissions | 364 | |
| Discussion and Conclusions | 369 | |
| VIII | FALSE OR MISLEADING STATEMENTS | 379 |
| The Relevant Provisions | 379 | |
| The Proper Approach | 386 | |
| Some Issues | 386 | |
| The FCA's suggested framework | 389 | |
| Determining knowledge or recklessness | 392 | |
| The Complaints | 405 | |
| IX | S382 FSMA: “KNOWINGLY CONCERNED” | 448 |
| “Relevant requirements” | 449 | |
| “Knowingly concerned” | 453 | |
| The Parties' Submissions | 456 | |
| Discussion & Conclusions | 462 | |
| General | 462 | |
| Specific points | 469 | |
| X | CONCLUSION & DISPOSAL | 473 |
Adam Johnson QC:
I INTRODUCTION
The Financial Services and Markets Act 2000 ( “ FSMA”) contains a regime under which, in order for persons to conduct certain types of activity in relation to financial services, they require authorisation. Section 19 of FSMA prohibits persons who are not authorised or exempt from engaging in the stipulated activities. Such activities are said to be within the regulated perimeter, and breaches of the general prohibition in section 19 are therefore referred to as perimeter breaches. Prescribed activities for which authorisation is required are set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001/544 (the “ RAO”).
Separately, section 21 of FSMA contains restrictions on “ financial promotion.” Broadly speaking, no-one who is unauthorised can make financial promotions in relation to a prescribed investment activity unless the promotion has been approved by an authorised person. Relevant forms of investment activity are defined in a further Order, the Financial Services and Markets Act (Financial Promotions) Order 2005 (the “ FPO”).
Finally, section 397 of FSMA, and the later Financial Services Act 2012 ( “FSA”) section 89, contain prohibitions on the making of statements in the promotion of financial services which are false or misleading.
Between 2010 and 2014, the First Defendant, Avacade Ltd (“ Avacade”) provided a service under which consumers who had existing pensions were contacted by telephone and provided with a report on their present pension position, and with options as to alternatives they might pursue. A good many of them transferred their existing pension funds into self-invested personal pensions (“ SIPPs”), and within those SIPPs purchased investments which included assets such as Melina trees in Costa Rica, teak trees in Malaysia, and bonds relating to property developments in the USA known as the InvestUS and the “ REIUSA” bond. Many of the investments in the Melina tree, teak tree and similar products were made on an “ execution only” basis, that is to say, without any advice from an IFA, although before investing in either of the bond products, investors were referred to an IFA, Cherish Wealth Management Ltd (“ Cherish”). Cherish was the authorised representative of another entity, Shah Wealth Management Ltd (“ Shah”), which was regulated by the FCA.
Information about clients who transferred into SIPPs, and who invested in the products made available by Avacade, is contained in an important document provided by Avacade's solicitors to the FCA in May 2015. This has become known as the “ Avacade Client Schedule”. The FCA have taken the same data and converted it into a “ Consumer Analysis Spreadsheet”. These documents contain much useful detail about Avacade's clients and their investments. They show that overall, some 1,943 clients transferred some £86m of pension funds into SIPPs, of which almost £68m was invested in products from which Avacade made commissions.
During the period of Avacade's activity, the Third Defendant, Mr Craig Lummis, the Fourth Defendant and Craig's son, Mr Lee Lummis, and the Fifth Defendant, Mr Raymond Fox, were all directors of Avacade (without intending any disrespect, and simply in order to distinguish them, I will where appropriate refer to Craig and Lee Lummis below as “ Craig” and “ Lee” respectively.)
There is some uncertainty about when precisely Avacade's operations came to an end, but certainly by early 2015 the Second Defendant, Alexandra Associates (“ AA”) was in operation. By that time, there had been a falling out with Mr Fox, and he was no longer involved. Moreover, a modified business model had been developed. Although this still involved many consumers transferring their pension funds into SIPPs, there were no “ execution only” transactions. Assets such as Melina or teak trees were not made available as investment options, and neither were the InvestUS or REIUSA bonds. Instead, a new bond was offered, this time relating to property development in Brazil, called the “ Paraíba” bond. Before investing in the Paraíba bond, consumers were referred to a different IFA, BlackStar Wealth Management A Ltd ( “BlackStar”), which was the appointed representative of BlackStar Wealth Management Ltd. As with Avacade, an “ AA Client Schedule” has been produced by AA's solicitors, together with certain other schedules, but together they do not provide the same level of detail as the Avacade Client Schedule. Nonetheless they provide much useful information. Overall they show that at least 59 individuals transferred pensions worth some £4.8m into SIPPs, of which around £950,000 was invested in the Paraiba bond.
After exchanges of correspondence about Avacade's business model in late 2011/early 2012, and again in Spring 2013, the FCA opened up a formal investigation into Avacade's operations in June 2014, and into AA's operations in December 2014. Later, in 2016, BlackStar was also subject to an intervention by the FCA, which included a Skilled Persons Review conducted by ATEB Business Solutions Ltd (“ ATEB”), a firm of compliance consultants. They produced a detailed report ( “the ATEB Report”).
It is common ground that none of the Defendants was authorised (see Part III and Part 4A of FSMA), or otherwise exempt, at the relevant times. In those circumstances, the FCA's position is that, in conducting the activities summarised above, Avacade and AA (I will refer to them together as “ the Corporate Defendants”):
i) committed perimeter breaches, by carrying on while unauthorised...
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