Claims against IFAs

The Action Group has been contacted recently by several investors who are contemplating claims against their IFAs for “misselling” the Guaranteed Low Risk Income Fund (subsequently renamed the Connaught Income Fund Series 1).

There are severe difficulties with making claims where the cause of loss for investors is fraud and the scheme was a Ponzi scheme. We have received evidence which shows that the fraudsters clearly lied to IFAs and this is a very serious issue to address. The IFAs may not have been negligent when carrying out due diligence on the Fund notwithstanding the information that they were given was a pack of lies. For example, how were they to know that Tiuta plc had bad debts when it claimed that there were none? Were they not entitled to rely on information provided by Tiuta plc (a firm regulated by the FSA) or by Capita (a firm regulated by the FSA) or by Blue Gate Capital (a firm regulated by the FSA)?

The Investment Memorandum contained a series of statements to the effect that the Fund lent monies on a short-term basis (bridging loans) to third parties secured on property on reasonable loan to value ratios. As Mike Davies (a person who was at various times an officer of Connaught Asset Management and/or Tiuta plc) explained to investors on August 13, 2011, this was not how the Fund was managed at any time. If the Fund had been managed as stated in the Investment Memorandum and the quarterly updates on the Fund, it would have been a medium risk investment. Clearly, it was not a low risk investment such as a bank account as the covenant of Tiuta plc (the FSA regulated firm that provided a guarantee to the Fund in 2008) was not as strong as that of a main street (or as you say in Britain) “high street” bank (given that the high street banks had an implicit state guarantee).

We are now piecing together a picture of who knew what and when. The most culpable seem to have been Capita which acted as the FSA regulated ‘operator’ of the Fund. We have evidence that it realised that the Fund was not managed in accordance with the memorandum and it knew there were loans to Tiuta that had not been authorised and that none of the short-term bridging loans had been repaid (merely renewed). Rather than close down the Fund, it sought to resign and pass on its role to another ‘operator’.

As we have stated in previous blogs, there were several parties who appear to have been negligent and thus allowed the fraudsters to prosper. These probably include the auditors of Tiuta plc (especially as the audited accounts for an 18 month period were radically re-stated) and also Mazars, the auditors of the Fund.

The investment memorandum could not have been promoted to the public had it not been approved by Capita as a financial promotion. Later investors may have seen later versions of the investment memorandum approved by Blue Gate Capital (a firm which replaced Capita as the operator and which must have been on notice that Capita had material issues concerning the operation of the Fund). Some investors have asked us about Mourants (now part of State Street) who were due to take over as operators of the Fund from Capita. It appears that Mourants contracted to replace Capita but then got cold feet and did not proceed. Blue Gate Capita replaced Capita instead.

We also have a large number of questions for the solicitors who at various times seemed to act for Connaught, Tiuta plc, Tiuta International Limited and the Fund. In particular, Lupton Fawcett has yet to explain how it could act for the Fund and Tiuta entities at the same time when the 2008 guarantee from Tiuta plc in favour of the Fund was nullified, the debts due from Tiuta plc to Tiuta International Limited were written off and a new inferior guarantee was put in place.

We have also queried the role of BDO and have yet to receive satisfactory answers to the allegations that it knew that there was widespread fraud in January 2011 and that the Fund was a Ponzi scheme. BDO continued to act for Tiuta plc whilst millions of pounds were stolen from the Fund and new investors piled into the Fund.

This is a complicated story and this is why we have called upon the FSA to organise a lifeboat for investors. The FSA should be putting pressure on Capita and others to contribute to a multi-million pound life boat to compensate investors.

It is quite extraordinary that those who are culpable are attempting to get away with fraud, negligence, etc whereas IFAs face huge claims. In fact, we have heard of individual IFAs leaving the industry and others who face bankruptcy because not only did their clients invest in the Fund, they also invested personally. There is not much point getting involved in expensive litigation (where the insurers of the better capitalised IFAs will join in third parties) unless you have evidence that your IFA was genuinely at fault.

In our view, this is not a misselling scandal. This is a Madoff style Ponzi scheme where fraudsters were allowed by negligent firms to misrepresent the true position to IFAs and their clients.

If you sue an IFA, you have to demonstrate that he was negligent. the IFA may in fact be the wrong target.

It may be easier to prove that the Investment Memorandum was wholly misleading and that Capita and (later on) Blue Gate Capital should not have approved it as a financial promotion. The due diligence that they undertook was plainly inadequate and later on they knew or must have known that the Investment Memorandum was misleading. As Mike Davies told investors on August 13, 2011, the Fund never was managed as set out in the Memorandum. It is a breach of the FSA’s conduct of business rules to approve a promotion that is plainly wrong. It was NOT clear, it was NOT fair and it WAS misleading. This gives rise to a cause of action (and damages) under Section 150 Financial Services and Markets Act 2000.

We suggest that investors should consider actions of this nature.