London Capital & Finance roundup: investors’ money loaned out to firms controlled by LCF directors and mortgaged to a company in Malta

Link: All our articles on London Capital and Finance

It is now just over a week since the FCA froze the accounts of London Capital and Finance and, after over three years of masterly inactivity, dramatically plunged investors into limbo.

Drew J of the blog “Damn Lies and Statistics” and the members of the MoneySavingExpert forum have been doing some excellent digging into the limited amount that has been publicly disclosed about LCF’s finances. Rather than regurgitate all their research myself (which does deserve reading in full), here is a summary of the crucial points that have emerged over the past week:

LCF’s money has been loaned to a network of companies which are linked to LCF itself via a common registered address and common directors and ex-directors. The names that keep cropping up across these companies are Robert Sedgwick and Simon Hume-Kendall.

LCF representatives have apparently tried to explain this away by claiming that the reason these companies share directors with LCF is that LCF appointed non-executive directors to their borrowers’ boards to monitor their investment. This does not explain why so many of these companies share LCF’s old address of Wellington Gate, 7-9 Church Road, Tunbridge Wells.

At least one of these companies is subject to a strike-off proposal while another has used the same accounting trick that London Capital and Finance has used to delay filing accounts.

Robert Sedgwick was suspended by the Solicitors Disciplinary Tribunal earlier this year for moving money on behalf of a carbon credit scam around 2014, which he admitted was a “dubious investment”.

In one case, £5.7 million was loaned to a company called CV Resorts Limited, whose published accounts show no activity for the last three financial years.

London Capital and Finance’s last accounts (April 2017) disclosed that it had a total of 11 corporate borrowers. I haven’t missed off a digit. This figure was up from 5 in April 2016. It therefore seems likely that the web of interlinked companies identified by Damn Lies & Statistics and others continues to represent the majority of London Capital & Finance’s underlying loans.

London Capital & Finance has a Security Trustee, Global Security Trustees Limited, which has a charge over all London Capital & Finance’s assets. Global Security Trustees Limited is itself part of the LCF network of related companies; it was set up by Robert Sedgwick and registered at LCF’s former Wellington Gate, 7-9 Church Road address. Global Security Trustees Limited is majority owned by a company based on Malta named Oracle Limited.

In the event that LCF defaults on its bonds or for some other reason this charge is enforced, investors’ money will therefore be ultimately controlled by a company registered in Malta, which controls the Security Trustee.

Investor reaction

Early evidence suggests that investors in London Capital & Finance who are aware of the FCA’s actions fall into two camps – or possibly three.

1) The first group have resigned themselves to the worst almost as soon as the FCA’s freezing order was made public.

2) The second group are desperate to take the FCA’s initial statement that the FCA’s investigation relates to LCF’s marketing materials at face value. They hope that once the FCA has concluded its investigation, the actual underlying business will be left alone and allowed to continue paying interest and capital (which LCF had done without fail until the FCA froze its accounts).

Many of them have fallen into the familiar pattern of blaming the FCA for stopping their interest, bringing LCF bad publicity and potentially “causing the whole thing to crash”. It clearly suits LCF if investors blame the FCA. However, if existing investors’ returns depends on LCF not getting bad publicity, and therefore not being starved of new investors’ money, the scheme is going to crash eventually anyway. Whether this is the case with LCF is, of course, not known. What is known is that LCF’s borrowers aren’t going to stop paying because of bad publicity, and this is what LCF investors’ returns should depend on.

3) The third group doesn’t really care as they fully understood the risks and didn’t invest more than a small percentage of their investable capital – meaning that they can afford to write off their entire investment in LCF without caring too much what was going on (in the same way that most people with workplace pensions, tracker funds and other mainstream investments are not glued to the Carillion scandal in which they have lost less than 1% of their savings). This represents by far the smallest group. If indeed this accurately describes anyone at all.

How deep does this go?

Jane Sanders, a specialist lawyer who has worked on previous FCA investigations, commented on an earlier Bond Review article:

For the FCA to have frozen the bank account in question means there is a significant risk to the funds in question. It is more normal, if the business has been under review for some while, where it is not considered a ‘flight risk’ to implement a V REQ otherwise known as a voluntary requirement.

In those circumstances the FCA will normally ASK the business to voluntarily sign an undertaking that the business will not dispose of any assets and/or any other conditions it seeks to impose and register that notification on the FCA register under exclusions.

In this case there is no such exclusion which means that the FCA has injuncted the business quickly arguably because there is so much risk that it considers, in its inherent jurisdiction, that it MUST do so to prevent new investors getting ‘tainted’ and/or being exposed to unfair and/or unreasonable risk.

Until the FCA makes public the results of its investigation – which may not be for months – we won’t know for certain exactly how deep the investigation goes and how sound LCF’s finances are.

What is certain, going by the above, is that investors are wise to manage their expectations. The idea that this is just about misleading marketing material looks very shaky in the face of all the facts listed above. Which are all based on public knowledge from Companies House and elsewhere.