Will C(r)apita take the rap?

Until now, hapless insolvency ‘experts’ BDO have been at the head of the queue of professional services firms investors are hoping the FSA will hold to account for making up any shortfall between whatever can be recovered from Tiuta’s dodgy loan book, its directors and shareholders and the grossly inadequate professional indemnity (PI) insurance held by the likes of Connaught and Bluegate.

There has always been a hope that a case could also be brought against Capita, the first Operator, for approving misleading marketing materials and failing to operate the Fund from the outset in accordance with the Information Memorandum and Limited Partnership Agreement. But, other than ‘forgetful’ Mike Davies’ public assertion that ‘from the outset, the Fund never operated as it should have done’, we’ve lacked a smoking gun. Until now, that is.

Two very interesting documents have come into the Action Group’s possession through a public-spirited source. The first is a set of minutes of a meeting between Connaught and Capita. Unusually, this did not take place in the back office facility in Exeter from which the outsourcing giant serviced the Fund, nor from the Minories head office of Capita Financial Group, the provider of fund administration services. Instead, it was held at Capita plc’s overall corporate headquarters, in London’s exclusive St. James’s. Moreover, Capita Financial’s CEO Chris Addenbrooke was present.

Curiously, this was not a glad-handing, thanks for the business meeting, nor a pitch for more work: on the contrary, Capita called the meeting because it had been pressurizing Connaught, for several months beforehand, to take its business elsewhere; the CEO became involved because a new Operator wasn’t being found quickly enough. We understand Capita gave Connaught four weeks to line up a successor; if it failed, Capita threatened to close down the Fund.

Barely a year after the Fund began raising investment, its Operator recognised that the Fund’s name [remembering that it was originally the ‘Guaranteed’, ‘Low Risk’ Income Fund, Series 1] was misleading and the Information Memorandum defective – Capita itself having responsibility for approving all marketing materials. It recognised that there was concern over the balance sheet of Tiuta and hence the value of the Guarantee to the Fund. It spotted that the promised debenture in favour of the Fund had not been put in place and that loans were being made by the (non- FSA regulated) Tiuta International Limited, were being rolled over and were being made outside the terms of the Information Memorandum  – serious matters given Capita’s role as the custodian of investors’ capital. It reads like the longest suicide note in history, for the careers of those involved – especially those who are approved persons, such as Capita’s Chris Addenbrooke, who are personally responsible for ensuring that their companies adhere to the Principles.

Remarkably, Capita’s instinct for self-preservation appears not to have deserted it when, earlier, the reputable and capable fund administration firm Mourant (now part of State Street Advisors) was considering taking on the mandate. Capita wrote this back-covering letter disclosing its reasons for stepping down. Unsurprisingly, Mourant walked away, leaving Connaught to line up Greg Mullarkey and Tamlyn Stone of Manchester-based minnow Bluegate Capital as the fall guys.

Being FSA regulated, Capita Financial Group is obliged to adhere to the 11 principles laid down in the regulator’s Handbook. These include requirements to behave with integrity, to act with skill, care and diligence, to treat customers fairly and protect their assets. It failed to do so. The FSA also requires regulated firms to notify it of anything relating to the firm ‘of which the FSA would reasonably expect notice’. This is code for whistle-blowing: if the firm has acted wrongly, and in particular if investors’ monies are at risk, there is an obligation to tell the regulator.

An investor has asked the FSA whether Capita shared its concerns with it during or prior to September 2009. The regulator has declined to comment; the suspicion must be that no such declaration was made.

The FSA has the power to remove permissions from firms that breach the principles it exists to police. Investors will be hoping that it uses this leverage with Capita, BDO and any other negligent regulated entities that have sufficient financial resources and PI insurance to give them a stark choice: either make up the shortfall so investors don’t lose a penny, or we’ll strip you of your permissions to undertake regulated activities.

Capita alone made £114.5m – almost 40 percent of group profits – from investor and banking services, general insurance and life and pensions services in 2011. The FSA has the power to take away most if not all of this business if Capita does not do the right thing. Investors are concerned that the FSA should have acted sooner to protect their money. Now that the full picture is gradually emerging, we hope it will make amends now by acting decisively with the big corporates that allowed the frauds to take place.

Eagle-eyed readers will note that there’s a familiar name on the Capita side of the minutes of the infamous meeting of September 16, 2009. Matt Bedding, at the time the business development manager who held the relationship between his firm and Connaught, subsequently accepted the lucrative position of Managing Director of Connaught Administration Services Limited. Investors will wonder where the line is drawn between legitimate inter-industry headhunting and paying someone to keep quiet…

Finally, we note that both Mike Davies and Alistair Mawdsley attended the meeting and, we presume, received copies of the minutes. Yet Connaught, of which they were directors, continued actively to market the Fund to investors, using claims they must surely have known were untrue. We hope they are well acquainted with the Fraud Act (2006) and the remedies open to the Courts in dealing with those who commit offences under that legislation…