The Financial Services Authority (a Company Ltd by Guarantee) v John Cecil Anderson and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Vos,MR JUSTICE VOS |
| Judgment Date | 29 June 2010 |
| Neutral Citation | [2010] EWHC 1547 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HCO8CO3304 |
| Date | 29 June 2010 |
[2010] EWHC 1547 (Ch)
Before: Mr Justice Vos
Case No: HCO8CO3304
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr James Purchas (instructed by the Financial Services Authority) for the Claimant
The Defendants appeared in person
Hearing dates: 14 th-17 th, and 21 st June 2010
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 Vos:
Introduction
On 25 th March 2010, Lewison J granted summary judgment against each of the Defendants. He declared that they had been carrying on a regulated activity without being an authorised or exempt person, in primary contravention of section 19(1) of the Financial Services and Markets Act 2000 (“ FSMA”).
The regulated activity that each of the Defendants was held to have undertaken was the carrying on of investment business in the United Kingdom in accepting or purporting to accept deposits within the meaning of article 5 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (the “RAO”) during the following periods:—
i) In the case of John Cecil Anderson (“Mr Anderson”) from 1 st April 2007 until 25 th November 2008;
ii) In the case of Kenneth Alun Peacock (“Mr Peacock”) from 15 th September 2007 until 25 th November 2008; and
iii) In the case of Kautilya Nandan Pruthi (“Mr Pruthi”) from 1 st September 2005 until 25 th November 2008.
In granting summary judgment, Lewison J also ordered that:—
i) The Defendants should be required to take any such steps as the Court may direct to remedy their contravention of section 19 of FSMA, pursuant to section 380(2) of FSMA; and
ii) The Defendants be required to pay to the Financial Services Authority (“FSA”):—
a) The amount of all profits that have accrued to them as a result of the Defendants' contravention of section 19 of FSMA; and
b) All losses that have been suffered by any person as a result of the Defendants' contravention of section 19 of FSMA;
pursuant to section 382(2) of FSMA.
Against this background, Lewison J referred the following quantum issues for trial:—
i) The question of what (if any) steps the Defendants should be required to take in order to remedy these contraventions under section 380(2) of FSMA.
ii) The question of what (if any) sum it would be just to require the Defendants to pay by way of restitution under section 382(2) of FSMA in respect of these contraventions (which has been referred to as the “just sum”).
In the result, the FSA has not pressed for an order requiring the Defendants to take steps to remedy their contraventions under section 380(2) of FSMA, preferring instead to obtain an assessment of the just sums that the Defendants should pay by way of compensation. The FSA's reason for adopting this course is that it doubts that the multiple transactions engaged in by the Defendants could in practice be unwound.
When I have assessed the just sums that each Defendant should pay, and those sums have been recovered, the FSA intends to apply to the Court for directions as to the distribution of such sums to qualifying persons pursuant to section 382(3) of FSMA.
Outline chronology
On 1 st September 2005, Mr Pruthi started accepting deposits for fixed periods of either 1, 4 or 12 months, under the trading name of “Business Consulting International” on the promise of high monthly interest rates. Deposits were accepted in sterling, euros and US dollars, and the rates of interest offered varied between 4 and 20% per month. The deposit periods began on either the 1 st or the 15 th of each month.
On 1 st April 2007, Mr Anderson started accepting deposits, under the trading name of “John Anderson Consulting” on very similar terms to those offered by Mr Pruthi.
On 15 th September 2007, Mr Peacock started accepting deposits, under the trading name of “Ken Peacock Consulting” also on very similar terms to those offered by Mr Pruthi.
In general terms, Mr Anderson and Mr Peacock passed the deposits they received to Mr Pruthi on the same terms as he offered generally. They made a profit by offering rather lower rates to their depositors than Mr Pruthi was agreeing to pay them. There is no evidence that Mr Pruthi ever made sufficient onward loans to businesses or others, as his literature suggested he would, to fund the high interest rates he was offering. It seems, therefore, that Mr Pruthi was, for a while at least, funding the payments of interest to old depositors by taking new deposits. In addition, in many cases, the deposits were rolled over to new deposit agreements without the need for Mr Pruthi actually to pay out cash to his depositors. Eventually, Mr Pruthi ran in to cashflow difficulties, and was unable timeously to pay out what was due to his depositors.
By 2008, Mr Pruthi had some 200 depositors, Mr Anderson had some 121 depositors, and Mr Peacock had some 178 depositors.
On 20 th and 29 th August 2008, tip-offs were received by the FSA in respect of the schemes being operated respectively by Mr Peacock and Mr Anderson. Mr Simon Bowker, the FSA's investigator (“Mr Bowker”) accepted in evidence, however, that the FSA had never received any complaints from depositors about not being paid what was due under their contracts with any of the Defendants.
On 21 st November 2008, Henderson J granted the FSA a without notice freezing injunction against all three Defendants, and made an order prohibiting the Defendants from accepting any further deposits.
Henderson J's order was served on 25 th November 2008, when a search warrant obtained by the SFA was executed by the City of London police and FSA enforcement investigators at the Defendants' business premises at 1 Relton Mews, London SW7 1ET (“1 Relton Mews”) and at two other properties. The FSA took possession of numerous contracts of deposit on this occasion. The 25 th November 2008 has been described as the date of the FSA's intervention.
On 10 th December 2008, Kitchen J continued the freezing injunction by consent until trial.
On 18 th December 2008, Messrs Anderson and Peacock swore affidavits exhibiting schedules of the amounts due on their outstanding deposit contracts. These schedules, as Mr Bowker accepted, proved a reasonably reliable account of the contracts that they had entered into. In February 2009, Mr Pruthi's executive assistant prepared a schedule for the FSA giving similar information in relation to Mr Pruthi's deposit contracts.
On 22 nd April 2009, Master Bowles stayed these proceedings for one month so that an attempt could be made to resolve the proceedings by ADR.
On 21 st May 2009, the Defendants were arrested by the City of London police on suspicion of conspiracy to defraud, money laundering and fraud by misrepresentation. They have been repeatedly bailed, but none of the Defendants has yet been charged with any criminal offence. As matters stand now, Messrs Anderson and Peacock are bailed to re-appear on 1 st July 2010, and Mr Pruthi is bailed to re-appear on 8 th July 2010.
On 29 th May 2009, the trial of all issues of liability and quantum was listed for an estimated 15-day hearing in a trial window from 1 st April to 30 th June 2010.
On 21 st October 2009, the City of London Police obtained a restraint order under sections 40 and 41 of the Proceeds of Crime Act 2002 (“ POCA”). The order contained no exemption for legal expenditure by the Defendants.
In December 2009, Mr Pruthi applied to HH Judge Taylor sitting in the Southwark Crown Court to vary the restraint order so as to permit him to fund the legal expenses associated with the defence of these proceedings. That application was refused, so far as it is possible to ascertain, on the grounds that section 41(4) of POCA prohibited any exception in a restraint order for legal expenses which “relate to an offence which falls within subsection (5)”, and it was held that these proceedings were sufficiently closely related to the offences being investigated.
On 22 nd February 2010, Briggs J rejected the Defendants' application to adjourn the summary judgment hearing pending the outcome of the criminal investigation, and on the ground that they were prevented from financing legal representation at that hearing. Messrs Anderson and Peacock relied also on the fact that the Solicitors' Regulation Authority had intervened in their solicitors' practice and that had resulted in the non-availability of files and funds held on account. Briggs J concluded that it was urgent that what he described as the unintended effect of section 41(4) of POCA should be addressed at the earliest opportunity. That effect was “to prevent private funding of legal representation without there being corresponding public funding of the same representation”.
On 25 th March 2010, as I have already said, Lewison J granted the FSA summary judgment in respect of its claims against all the Defendants.
The Defendants' representation
The Defendants were not represented at the summary judgment hearing and have not been represented before me, although all of them had previously been advised by solicitors at earlier stages in the proceedings. At the outset of the trial, the Defendants expressed concern about this state of affairs. Having read the concerns expressed by Briggs J and having seen that all the Defendants were to be unrepresented at a trial estimated to last 5–7 days before me, I asked Mr James Purchas, counsel for the FSA, to make...
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