Who is to blame?

Posted on September 21, 2012

It is clear that the blame game for the failure of the Connaught Income Fund, Series 1 (formerly called the Guaranteed Low Risk Income Fund) has begun. It is now easy to point out that the Investment Memoranda relating to the Fund was grossly misleading. Fundamentally, as Mike Davies of Connaught admitted to a meeting of investors on  August 13, 2012, the Fund was never managed in accordance with the Investment Memoranda. There were grossly inadequate controls which provided the opportunity to Tiuta plc (an FSA regulated firm) to misappropriate monies lent by the Fund. In a nutshell, the Fund was used as a general facility by Tiuta plc. Monies were used for wholly unauthorised purposes. We call this theft and fraud.

The audited accounts of Tiuta plc and of the Fund are now regarded as deeply suspect in material respects. The quarterly reports from Connaught now appear to be works of fiction. Many IFAs and wealth managers undertook additional due diligence by visiting Tiuta and/or Connaught and also held regular face to face review meetings with them. They were misled and lied to.

The 2008 guarantee (the Fund was guaranteed by Tiuta plc) was released without notice to IFAs and Wealth Managers. It was allegedly replaced by a new guarantee in 2012 but the inter-company debts between Tiuta plc and Tiuta International were allegedly written off without notice to investors, IFAs and wealth managers. This seems to be nothing less than a poor attempt by Tiuta to avoid paying back Tiuta International which in turn was meant to repay the Fund. We call this another attempted fraud.

 IFAs and wealth managers now face allegations that they should not have advised clients to invest in the Fund or (in the execution-only cases) they should not have introduced clients.

The core issue here is that IFAs, wealth managers and their clients have been grossly misled by Connaught, Tiuta and by Capita/Blue Gate (as such firms approved the marketing literature as financial promotions). There has been fraud on an industrial scale (tens of millions of pounds).The cause of the losses has nothing to do with the IFAs and wealth managers.

In fact there have been multiple failures by Connaught, Tiuta, Capita, Blue Gate, and auditors as set out above. In addition:

  • The FSA were told that there was fraud and false accounting at Tiuta plc by George Patellis, the ex-CEO in March 2011
  • BDO (accountants) were aware that Tiuta was insolvent and that there were allegations of fraud in February 2011
  • Watson Farley and Willams (lawyers who advised Tiuta and BDO) knew or suspected the same in January 2011
  • Connaught appears to have known of the same through Mike Davies. The earliest evidence of which we are aware dates back to March 2011 but we suspect that he knew much earlier because he had been director and the compliance officer of Tiuta plc

IFAs and wealth managers along with all investors were kept entirely and deliberately in the dark about the serious issues affecting the Fund. Some investors have pointed to the mild warning issued about the Fund by the FSA in or about May 2011. A copy of the 2012 version of the notice is attached.


Our comments on the notice are as follows:

1.       The Fund was an unregulated collective investment scheme and therefore it should only have been promoted to the narrow categories of clients permitted by law or under the FSA’s rules (COBS 4.12).

2.       On an advised sale, IFAs and wealth managers should have made all of the points raised by the FSA. The FSA’s notice did not actually contain any new information about the Fund. It merely corrected certain misleading impressions whilst not correcting others that were far more serious. Some clients invested on an execution-only basis and others had discretionary managed accounts. Therefore, not all clients received advice.

3.       The FSA’s notice did not actually change the appropriate risk rating of the Fund. It was never as low risk as a bank or building society account. The guarantee from Tiuta plc was only as strong as Tiuta plc’s balance sheet.

4.       Connaught issued deeply reassuring quarterly reports and emails to investors, IFAs and wealth managers which were grossly misleading. Many IFAs and risk managers were directly reassured by Connaught and Tiuta.

5.       At the time of the warning, the FSA knew of widescale false accounting and a behind the scenes attempt to shore up the balance sheet of the Fund with new charges over the assets of Tiuta Assets Limited. It knew from monthly reports from BDO that Tiuta was falling deeper into financial difficulties. We therefore point out that the FSA’s notice to investors was a totally inadequate response to the crisis affecting the Fund.

Every time an unregulated scheme fails, the FSA alleges mis-selling. In this case, there was an abject failure by the FSA to protect the interests of investors. It could and should have intervened to close down the Fund and Tiuta plc. The FSA abandoned its primary statutory duty. Furthermore, the FSA authorised Tiuta’s permission change in June 2012 which added the requirement that Tiuta obtain specific written approval from Connaught before entering into a loan agreement and that it return monies due back to funders immediately. The FSA must have known of allegations of fraud, theft and misappropriation of investors’ monies from the fund some 15 months earlier and had done nothing and said nothing about it. By definition, the FSA must have known that the fund’s money was not being used for the purpose for which it was raised (secured lending and prompt repayment).

Investors, please write to your MPs about the failure of Lord Turner’s organisation. We believe that its processes were corrupted. As we have highlighted before, in a separate blog, Lorraine Wadhams, the FSA supervisor of Tiuta plc used to work with Mike Davies of Connaught (and Tiuta). This is plainly at odds with the FSA’s internal procedures. We call for an external enquiry into the gross dereliction of duty by the FSA to regulate Tiuta plc in this case. The blame for this debacle does not rest with gullible investors or feckless IFAs or wealth managers.

Who is to blame?

  • Primarily Tiuta (theft, fraud and false accounting)
  • Connaught (misleading investors in sales literature, failure to protect the interests of investors, complicity in a cover-up of wrongdoing at Tiuta)
  • Capita/Blue Gate (failure to impose proper controls and approving misleading promotional literature)
  • Mazars (auditors of the Fund)
  • Rawlinson and Hunter (auditors of Tiuta plc)
  • BDO (advisers at various times to Tiuta plc, Connaught and to the FSA)

The Financial Services Authority (failure to follow up evidence from a whistleblower, the Chief Executive of Tiuta plc, a regulated company).

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