Category: failbonds

Basset & Gold: minimal recoveries expected for investors, 20% commissions paid

~ Phoenix ~ 5 Comments

The administrators of collapsed West Ham sponsor Basset and Gold have released their initial report.

Around 1,800 people, described as “everyday investors” by the administrators, invested nearly £36 million into Basset & Gold after being recruited by “internet based marketing and social media campaigns”.

Despite Basset & Gold’s literature claiming that investments were “backed by assets, such as property, corporate debentures and other forms of security in order to PROTECT our investments and your capital”, virtually all of investors’ money was loaned to a payday lender called Uncle Buck.

The opening stanza of the administrators’ potted history reads bizarrely like marketing copy.

The initial target for the business was to provide everyday investors with fixed interest returns, that were easy to understand, using fixed income investments with no additional fees involved.

What this nonsense has to do with Basset & Gold, which gave its investors little chance of understanding that they were investing almost all of their money in a single payday lender, or that “no additional fees” meant 20% of investor monies would be paid to companies controlled by B&G owner Hadar Swersky as commission, is unclear.

The administrators continue:

B&G achieved its targets and provided significant growth year on year.

The only thing that was actually growing was B&G’s debts to investors, from £2m in 2016 to £36 million in 2020. B&G’s (virtually) sole debtor, Uncle Buck, made a loss in all of the four financial years up until it went bust, with its net liaibilities deteriorating from minus £1.4 million in March 2017 to minus £20 million in February 2020.

In April 2019 Basset & Gold stopped marketing its bonds as the FCA started nosing around after the collapse of London Capital & Finance.

Basset & Gold employed an independent firm to carry out a due diligence exercise into Uncle Buck.

They concluded that Uncle Buck would only repay its loans if new money continued to flow in from B&G.

It is believed that the completed independent business review concluded that UB should be able to repay the debt due on time but this was contingent on B&G continuing to fulfil its obligation to UB by virtue of continuing to fund UB’s activities as a HCSTC [payday loans] provider.

In June 2019 B&G were contacted by the FCA who raised concerns about Uncle Buck’s negative balance sheet and bad debt provision. B&G commissioned another independent review, which “portrayed a positive situation with minimal issues identified in respect of UB’s systems and processes”. This failed to mollify the FCA.

Towards the end of 2019 Uncle Buck were supposedly confident of finding £3 million a month worth of lending which would allow it to become profitable. However, in March 2020, “for reasons yet to be explained to the Administrators”, Cypriot shell company River Bloom called in the loan to Uncle Buck, which it was unable to repay, and the jig was up.

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Basset & Gold owner Hadar Swersky

Note that as per a diagram in Appendix B, Basset & Gold = River Bloom = River Bloom UK Services = entities controlled by serial entrepreneur Hadar Swersky, which raised money from investors and loaned them to Uncle Buck, a company controlled by a Steven Murray.

While the administrators have managed to recover £2.3 million in cash, they do not expect “any material recoveries for bond holders from the Administration of Uncle Buck”.

Investors hopes for recovery rest largely on the FSCS. Despite minibonds not being covered by the FSCS, Basset & Gold representatives marketed their bonds specifically on the possibility of FSCS compensation if things went south.

Back in 2018, an investor was told by Basset & Gold’s official Facebook channel:

May I add that we are covered by the FSCS in the unlikely eventually of a mis-selling of one of our products. We to date have a 100% payment track record, and have a 98% recommended service rating from almost 200 of our investors. Lastly all our investments are 100% asset backed. Hope this provides more context.

Given Basset & Gold’s systematic use of misleading literature, which banged on about its irrelevant “100% payment track record” and compared its investments to cash deposits, all identified by the FCA as misleading practice, you’ll struggle to find a Basset & Gold “everyday investor” who won’t claim they were missold.

Still, it’s not all bad – thanks in part to sponsorship money funded by Basset & Gold investors, West Ham FC have successfully kept themselves in the Premier League to entertain us all next season. Which, if claims on the FSCS are successful en masse, will be converted into another load of subsidy from the general public. Up the Sc… I mean Hammers!

Carlauren administrator update: CEO Sean Murray bankrupt

~ Phoenix ~ 6 Comments

The administrators of Carlauren Group have released their first report.

As previously covered, Carlauren Group holds a total of £21.7 million in properties going by their purchase prices (with one unknown), despite reportedly taking in £76 million from investors.

Carlauren owner Sean Murray
Carlauren CEO Sean Murray

A £40 million asset freezing order has been placed on Carlauren owner Sean Murray. Murray subsequently filed for bankruptcy. Carlauren’s administrators, Duff & Phelps and Quantuma, have been appointed as receivers and are investigating his personal financial affairs.

The luxury pad in Poole with unclear commercial use owned by a Carlauren shell company is being sold. No recoveries are anticipated for investors due to the property being mortgaged to Together Commercial Finance.

Eight Carlauren properties were trading as hotels, but have now all closed; three were trading at a loss, one was flooded and Covid-19 finished off the rest.

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The administrators have also been busy marketing the following Carlauren assets:

  • a luxury motor cruiser named “Ademo”, sold for €455,000
  • a Hawker XS800 jet, tastefully callsigned “M-URRY”
  • a fleet of luxury motor vehicles, all but one of which seem to have gone AWOL.

One vehicle remains with a former member of staff and SIA have been instructed to collect and sell the vehicle, unforutnately due to the pandemic collection has not yet been possible. Investigations into the other vehicles are ongoing.

Jets (Bournemouth) Ltd, a modestly successful aircraft engineering business, which had been trading profitably since 2004 until Sean Murray decided he liked the look of it, has also been sold for the sum of £185,000, saving 25 local jobs according to the administrators.

According to Companies House the purchaser was Osama El Circy. El Circy is the founder of Future Green Investment, a Luxembourg company which describes itself as “a catalyst to spearhead a new global investment regime”. In addition to Bournemouth engineering, El Circy’s diverse investment interests include algae-based clean energy and, for some reason, running shoes.

The administrators anticipate that dividends may be payable to unsecured creditors of Carlauren, but due in part to the complexity of Carlauren’s scheme, how much is unclear.

Image credit: Wbarnato, CC BY-SA 3.0

Aston Darby Ponzi scheme shut down by Insolvency Service, £26m potential losses

~ Phoenix ~ 11 Comments

Aston Darby, which offered investment in car parking spaces paying 11% per year, has been shut down by the Insolvency Service after winding up petitions were presented in June. Reviews on Google allege the company had been defaulting on “guaranteed” interest payments as early as 2018.

According to the Insolvency Service, Aston Darby operated as a Ponzi scheme by paying off investors with new investors’ money rather than revenue from its car parks.

Investigators, however, established that these guaranteed returns were paid to investors from the original investments rather than income generated by the car parks.

Aston Darby also misled investors into investing in car parks that it didn’t even own yet, and on which it didn’t have planning permission.

Half of investors’ funds disappeared in commission in other charges.

The companies made misleading claims in their sales brochures and marketing materials. Documents claimed that the sites were already generating yields of 8% and failed to make clear that the companies did not own the sites when initial sales were made.

Investors were also misled into believing that planning permission had been granted for the Lode Hill site and that their funds would be specifically used to buy a parking space. However, 50% of their investments were used to fund commission and other charges by the companies and no development activity has been undertaken to convert the Lode Hill site into a ‘state of the art’ car park that investors were led to expect.

Two companies, Aston Darby Group Limited and Drake Estates Property Company Limited, have been wound up after taking £11.5 million and £14.3 million from investors respectively. The Chief Investigator for the Insolvency Service stated:

These two companies unscrupulously secured millions of pounds worth of investments from members of the public using misleading sales tactics.

The court rightly recognised the potential damage done to investors by Aston Darby Group Limited and Drake Estates Property Company Limited selling a flawed business model and has acted swiftly to shut the companies down.

In May 2020 Aston Darby had a novel idea to save its collapsed scheme; start a change.org petition.

TAKE ACTION NOW!! Your Investment is at risk due to the continued disruptive influence of the UK Government, and in particular [personal name removed – Brev] of the Government’s Insolvency Service.

According to the petition, action by the Insolvency Service prevented at least £4 million of further investor losses.

To date, simply by writing to these companies, [removed] has lost Aston Darby 4 bank accounts, 3 Legal teams, 1 company accountancy firm and over £4m in lost sales, over 160 spaces, which has impacted on the timescales of the development and led to increased costs.

Aston Darby’s attempt to rewrite the collapse of its scheme as a vendetta from a rogue agent at the Insolvency Service does not change the fact that there is no evidence that Aston Darby ever generated sufficient revenue from its car parks to pay investors returns of 11% per year, while spending 50% of investors’ money on commission and other charges, on top of the costs of running a car park.

The petition was deleted after Aston Darby received a “legal letter” from the Insolvency Service. Prior to being deleted it had garnered a grand total of 123 signatures. How many of these signatures were from investors duped by the old “Everything would have been fine if the administrators hadn’t shut us down” cliché, and how many were Aston Darby personnel, is unknown.

I reviewed Aston Darby’s scheme in January 2018 and noted that, contrary to Aston Darby’s claims to be “low risk” and “guaranteed”, the investment was inherently high risk.

Fortitude Capital goes into administration

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Fortitude Capital has collapsed into administration. Neil Bennett & Alex Cadwallader of Leonard Curtis have been appointed as administrators.

The administrators were appointed by a secured creditor, which based on Companies House’s list of charges is most likely to be Fortitude’s Security Trustee, More Group.

I reviewed Fortitude Capital’s bonds in September 2018 and noted that, despite Fortitude’s owner Ajaz Shah claiming in literature that “The foundation of Fortitude is capital preservation”, the bonds were inherently high risk.

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Fortitude CEO Ajaz Shah

Owner Ajaz Shah was a director of MJS Capital for a single day. In my original review of Fortitude, I noted that MJS Capital had stated that it held a forex investment with a former MJS director, which I speculated was Shah’s Fortitude Capital. Shah denied this. Falsely, as it turned out.

I can clearly state that my company Fortitude Capital Ltd has never managed funds for MJS Capital Plc. – Ajaz Shah, October 2018

The last administrators’ report for MJS Capital confirmed that in reality, MJS invested £6 million with Fortitude, and only a month before Shah’s inaccurate denial, had agreed with Fortitude to write this down to £1.6 million.

Fortitude’s 2018 bonds offered investors up to 12% per year and were promoted by Direct Property Investments, an unregulated introducer which also promoted MJS. The investment literature did not disclose that Fortitude’s was in enough financial difficulty for MJS Capital to accept a 75% write-down of its investment with Fortitude a few months later.

In unaudited accounts filed for March 2019, Shah claimed that the company held £7.4 million in net assets. How much is left in the company remains to be seen. In theory, given that Fortitude Capital claimed to generate returns via forex trading, Fortitude’s assets should consist mostly of whatever liquid currency it was trading at the time.

Prior to collapsing into administration, Fortitude had handed to MJS Capital’s administrators the sum of £140,960 and a Porsche with a second-hand value of £70,000. As at May 2020 the administrators were negotiating a payment schedule with Fortitude for the outstanding balance of £605,000. Fortitude’s collapse into administration presumably makes those negotiations moot.

At time of writing the administration has not been announced on the Gazette or Companies House. An anonymous reader informed me of the administration which was confirmed by the administrators. More to follow when the administrators report.

Blackmore: director says only £5m left, FCA’s “Operation Dump It On Other Countries’ Doorsteps” is dismal failure

Blackmore logo 2019
~ Phoenix ~ 4 Comments

Administrators Duff and Phelps have released their initial report into collapsed property minibond scheme Blackmore.

Of £46 million raised from investors, director Patrick McCreesh has estimated in a Statement of Affairs that less than £5 million is likely to be realised to pay them back.

Investors’ money was moved to a series of Special Purpose Vehicles which then invested in property developments. These SPVs borrowed more money from other sources, such as short-term bridging finance providers, whose loans would have been on very high interest rates.

In March 2019 Blackmore stated that “Our business model is entirely on track and current return on capital employed averages 54 per cent”. How it went so quickly from being “entirely on track” and generating 54% ROCE, to being unable to pay interest six months later and collapsing with (at least) 90% losses is unclear.

The £5 million that McCreesh estimates can be realised from Blackmore is less than the £9.2 million that would have been paid to their marketers Surge in commission. Surge ran Blackmore’s back office and marketing efforts, the same job they carried out for London Capital and Finance. (Blackmore’s December 2017 accounts suggested that Surge were paid 20% commission on virtually all the funds raised by Blackmore.)

Overseas efforts fail

In the aftermath of the collapse of London Capital and Finance, the FCA “made enquiries directly of the Company in relation to its business operations” in March 2019.

Blackmore subsequently lost its “Section 21 signoff” – the approval of its financial promotions by an FCA regulated firm that allowed its bonds to be marketed within the UK. In April 2019 it closed to all new investment from the UK, and, in an attempt to source funds from overseas, opened an office in Dubai, with further offices planned for Tokyo and Hong Kong.

To be clear, there was nothing to legally stop Blackmore from finding another FCA-regulated firm to sign off its promotions and continue sourcing investment from within the UK – provided its bonds were promoted only to high-net-worth and sophisticated investors (as they always should have been).

The inescapable conclusion is that Blackmore’s decision to stop taking money from all UK investors was to keep the FCA off their backs. Meanwhile the FCA crossed its fingers and hoped that overseas investors would somehow invest enough in Blackmore to avoid another scandal involving tens of millions of losses to UK investors.

I’m not seeing another reason to refuse to market to UK investors, even when it is perfectly legal and compliant to do so, while still taking money from overseas investors.

How did that go? The administrator’s report notes that “further minibonds totalling £2,331,340” were issued to overseas investors – so about 5% of the amount that had been raised before Blackmore closed to UK investment.

There is no indication that Blackmore had had any contact from the FCA prior to March 2019, despite the FCA being well aware that Blackmore Bonds were being systematically missold to retail investors since at least March 2017.

“Capital guarantee” schemes

The administrators note that Blackmore’s bonds were supposed to be covered by insurance policies in the event of default, from Ion Insurance Group S.A. for Series 1 bonds and Northern Surety Company, SRL for subsequent bonds.

Whether any funds will be recovered from these policies is described as “uncertain”. There is a long history of unregulated investments being marketed as being covered by insurance, which for one reason or another doesn’t pay out.

 

MJS Capital update: most of investors’ £42 million written off by directors

~ Phoenix ~ 7 Comments

The liquidators of MJS Capital have released an update into the first year of its winding up.

In total MJS Capital raised £42 million from investors, including via unregulated introducers. Claims for £36 million have been received by the liquidators and they estimate a further £6 million is yet to be claimed.

MJS Capital claimed that investors’ money would be invested in “low risk” arbitrage.

In reality, at the time of the liquidation, the bulk of investors’ money – £38 million, according to MJS’ balance sheet – was invested with just two companies, namely Angel World Family Office LLC , and Fortitude Capital.

The balance sheet puts the amounts owed by Angel World and Fortitude at £26m and £11m respectively, but the administrator goes on to put the amounts invested with Angel World and Fortitude at just £6m and £7m respectively. The only other assets held by MJS Capital consisted of a million or so loaned to other businesses, plus funds held by payment agents.

The loans to other business include £400k loaned to Tempus Media (London) Limited and used to acquire Tempus Magazine.

What happened to the rest of the £42 million invested is not clear from the report.

At the beginning of the liquidation the liquidator saw statements indicating an asset value of £36 million. This proved to be aggressively optimistic, as prior to the liquidators’ being called in, MJS Capital made settlement agreements with Angel World and Fortitude which left the potential asset value at £7 million.

Investors’ losses may yet be greater than this depending on what the liquidators manage to recover.

Angels and devils

MJS Capital had £7 million invested with Angel World, an entity in Dubai. Prior to the liquidation, with angry investors banging on the doors, MJS agreed with Angel World to take just £5.3 million in full and final settlement.

After a trawl of the emails relating to the deal, the liquidators were unable to find any evidence that this was not an honest “arms’ length” transaction.

Only an initial £250,000 was ever paid back to MJS, and even that was spirited out of MJS before the liquidators got in.

Angel World is now also in liquidation, meaning the chances of the liquidators recovering any of the remaining £5.05 million are unclear.

As for Fortitude, MJS had £6 million invested with their trading platform, but in another settlement agreement entered into prior to the liquidation, MJS agreed to accept just £1.6 million as full and final settlement.

When the liquidation began, Fortitude still owed £816k to MJS, of which the administrators (after serving a statutory demand) have so far recovered £141,000 and a Porsche valued at £70,000. A payment schedule is currently being negotiated for the rest.

Fortitude Capital claimed in its March 2019 accounts to have net assets of £7.4 million. These figures were not audited.

 

shaun prince
MJS Capital CEO Shaun Prince

Let us remind ourselves at this point that in September 2019, months after the liquidators were appointed, CEO Shaun Prince was still insisting that MJS had “cashflow issues” and should never have been put into liquidation.

 

How Prince thinks MJS was ever going to repay the £42 million owed to creditors while writing off its own debts down to £7 million is unclear.

Former MJS Capital advisory board member Nigel Peck, who was director of an MJS shell company MJSC Marketing Limited, alleged that MJS operated as a Ponzi scheme by using new investor money to pay off existing investors who were threatening winding up proceedings.

A total of £450,000 was paid to 25 parties after the winding up petition was presented. As per the Insolvency Act S127, these payments are now null and void. The administrators have recovered a total of £31,000 so far and are mulling whether it is worth pursuing legal action to recover the rest, which has met with “significant resistance”.

Thames Valley Police are currently also investigating. The investigation was passed to a specialist team in Hertfordshire Police but then passed back to Thames Valley’s finest. Details of the investigation have not been disclosed.

MJS investors have been repeatedly contacted by recovery fraudsters claiming they can get their money back – after they pay a fee, which of course they never see again.

The liquidators report that the fraudsters not only know the investors’ contact details but also details of their investment with MJS.

How the recovery scammers obtained details of the investors’ investments is not known.

To date the liquidators have recovered £149k from MJS Capital. Their own costs stand at £525k and a further £354k in legal costs is due to Taylor Wessing for legal advice.

Allansons LLP goes into voluntary liquidation

~ Phoenix ~ 1 Comment

Allansons LLP, the solicitors behind a collapsed investment scheme which offered returns of 50% over 6-18 months, described as “zero risk” and “100% secure” by its third-party introducers, has gone into voluntary liquidation.

Voluntary liquidation indicates that sole director Roger Allanson instigated the process rather than investors doing so.

Allansons LLP raised c. £20 million from investors to fund it bringing cases on behalf of mortgage borrowers who had been the victim of “automatic mortgage capitalisation”.

A statement of affairs filed by Roger Allanson claims that the company is due £24 million in costs and fees from the various mortgage capitalisation cases it took on, which it represented would generate returns of 50% to investors in a 6-18 month timescale. When Allansons was shut down by the SRA, its clients were told to find other solicitors. How much if any Allansons LLP is still due to receive in client fees is unknown. Allanson’s statement of affairs says that of this £24 million, the amount that can be recovered is “Uncertain”.

£105,000 is also owed by members to the partnership. Since July 2019 the only member of Allansons LLP has been Roger Allanson. Allanson appears to be unaware of how much of the £105,000 he can afford to pay back to his own company, listing the amount recoverable as “Uncertain”.

The only other assets of Allansons LLP are £75,000 worth of book debts and £3,000 of furniture.

A total of £23 million is owed by Allansons to creditors, including £20 million owed to litigation funding investors.

“100% secure with FSCS” claims

Third-party introducers claimed that the investment was backed by the FSCS by way of a complicated structure which involved an obscure insurance broker, Box Legal, undertaking to compensate investors if the litigation insurance didn’t pay out (which it didn’t).

FSCS Box Legal
The “any valid claim” bit may be Box Legal’s escape clause here.

Box Legal recently filed accounts for August 2019 (i.e. a few months after the collapse of the scheme) which show no sign of recognising any liability for the £20 million lost.

The details of Allansons’ investors were sold without investors’ consent to cold-callers who contacted investors offering other litigation investments. Who obtained and sold on the Allansons investor list is unknown.

An action group on Facebook remains active (at time of writing it had over 250 posts in the last month) but details are private.

Westway Holdings collapses into administration

~ Phoenix ~ 49 Comments

Westway Holdings has collapsed into administration, according to the Gazette.

Reviews left on Trustnet suggest the company stopped repaying investors around November 2019.

I reviewed Westway Holdings in January 2018 and concluded that, despite Westway’s brochure claiming “income underpinned by Government allowances”, its bonds were inherently high risk.

In June 2019 an individual calling himself “Mark” claimed in the comments under the review “many of your statements are factually incorrect and seem designed to scare people” and “every investor to date has received every coupon payment due, with over £2 million repaid upon maturity of historical bonds” (which sounds like inside information to me, unless Westway were touting this irrelevant factoid in promotions or investor communications).

“Mark” failed to point out any incorrect statements in my review. Westway collapsed a few months later.

How much investor money is at risk in Westway is not known, as the company fell overdue with its accounts around the same time that it stopped paying investors. (A figure of £20 million has been mentioned in the review comments but this is unverified.)

How do I get my money back from Westway?

Westway’s investor list has already made its way into the hands of recovery scammers, who have contacted investors already knowing about their Westway bonds. Anyone who cold-calls you claiming they can get your money back from Westway or want to buy your bonds is a scammer.

How Westway’s investor list was leaked to recovery scammers is not known.

If you were advised to invest in Westway by an FCA-regulated company, you may be able to recover your money by making a formal complaint to them.

If the company refuses to provide compensation, the complaint can be taken to the Financial Ombudsman, which can order compensation up to a defined limit. If the company is unable to pay, you would be covered by the Financial Services Compensation Scheme up to £85,000 per person.

Investors should avoid Claims Management Companies (CMCs) as they are unnecessary, often have a lower success rate than direct complaints, and charge eye-watering fees. The FOS and FSCS process is slow but straightforward.

Otherwise the standard procedure is to write off the investment and treat any recovery as a bonus.

Administrators appointed to Signature Capital

~ Phoenix ~ 7 Comments

According to the Gazette, the parent company of Signature Capital, Signature Living Hotel Limited, has been put into administration.

Duff and Phelps were appointed as administrators. Other collapsed unregulated investment schemes currently administered by Duff and Phelps include Blackmore Bonds and Carlauren.

Signature’s problems paying investors have been well documented over the last year.

In January this year Signature Living Hotel took two investors to court in attempt to prevent them serving winding up petitions on the company. Both investors loaned money to Signature Heritage (Belfast) Limited, with a guarantee given by the parent company Signature Living Hotel.

Signature argued that the guarantee – a guarantee that Signature had made much of in its investment literature – was invalid, because it hadn’t been witnessed, despite it being signed by sole director Lawrence Kenright.

The judge “had no hesitation” in throwing out this argument and allowing the investors to proceed with their winding up petitions.

I reviewed Signature’s investments in May 2019. I pointed out that, despite Signature’s claims on its website to offer “a safe place [for money]” and “fantastic returns in a secure environment”, its investments offering rates of up to 16% per year were inherently high risk.

A couple of weeks after I posted my review, Signature’s lawyers took umbrage with this entirely factual description, and threatened to sue me for defamation.

You state that it is “misleading” for our client to promote its product as “safe” and “secure”. The quote you refer to was however given by a third party investor [Brev: this is irrelevant as Signature chose to use that testimonial in its marketing, and remains responsible for its own marketing] and our client maintains that the nature of the guarantee given to investors by Signature Living Hotel Limited gives significant comfort to their investors.

Your article wholly fails to explain that the loans are guaranteed by Signature Living Hotel Limited, a company that you do note has significant assets. Your failure to appreciate this may have clouded your judgment in relation to the investment generally.

So let’s recap: Signature paid money (actual investors’ money) to get their lawyers to threaten me with a lawsuit. On the grounds it was defamatory (it wasn’t) to describe their investments as inherently high risk (they were), because I hadn’t understood their super-duper corporate guarantee (I had).

Less than a year later, Signature attempted to argue that this guarantee they threatened to sue me over didn’t actually exist (for two investors), on the basis that director Lawrence Kenright’s signature hadn’t been witnessed.

Just another year in the life of an unregulated investment scheme.

Signature’s attempt to wriggle out of the guarantee failed because, as the judge ruled, both parties clearly intended for this guarantee to form part of the loan contract, therefore it didn’t matter that they forgot this formality.

As Signature didn’t attempt to argue that the guarantee wasn’t supposed to exist, its argument was one level above “it doesn’t count because we had our fingers crossed”.

Signature Living Hotel has previously survived two winding up petitions, which were dismissed in September 2019 and March 2020. With that in mind, I’m saving Signature’s full obituary for when more details of the administration emerge, so more details as and when they appear on the public record.

 

Emboldened LCF investors secure crowd funding for FSCS legal challenge

London Capital & Finance logo
~ Phoenix ~ 3 Comments

After being denied compensation from the Financial Services Compensation Scheme (other than a tiny handful of exceptions,) London Capital & Finance investors have raised money via crowdfunding to launch a judicial review.

As at 23rd April the campaign had already raised £7,833, exceeding its initial £7,000 target. Technically the campaign is to fund the judicial challenges of only the four LCF investors on the creditors’ committee, but if their challenges succeed, this will surely set a precedent for the rest.

London Capital & Finance investors have been both emboldened and enraged by the FSCS’ early indications that it will bail out investors in fellow collapsed minibond scheme Basset & Gold, which went into administration on 1 April.

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In the case of LCF, the FSCS has only bailed out a handful of richer and more financially experienced investors – those who transferred stocks and shares ISAs to LCF. To everyone else it has indicated it is unlikely compensation will be payable.

We have concluded there will be some customers who were given misleading advice by LCF and so have valid claims for compensation. However, we expect that many customers will not be eligible for compensation on this basis.- Jan 2020 FSCS announcement

By contrast, Basset and Gold investors have been given a far more positive indication by the FCA that compensation will be payable on the grounds of misselling.

The FSCS has determined that many investors have a good prospect of claiming compensation.– Apr 2020 FCA announcement

The distinction between LCF and Basset & Gold is that LCF had one FCA-regulated company, which both issued the investment and the investment literature, while Basset & Gold had two separate companies, one of which was not FCA-regulated and issued the minibonds, the other of which was FCA-regulated and issued the investment literature.

Which is of course entirely meaningless from the perspective of an ordinary retail investor. Nothing was stopping LCF from setting up two different companies instead of one, and keeping the misselling separate from the bonds themselves, except that they didn’t think of it (or care).

It is therefore not a surprise that the Basset & Gold collapse has given LCF investors fresh hope for compensation.

Commentary

My own money would be on the regulator and the Government as a whole eventually figuring out a Barlow Clowes / Equitable Life solution – i.e. compensation paid, not in line with arcane FSCS rules that even they don’t seem to understand, but on a one-off basis in recognition of regulatory failures which allowed LCF to run longer than necessary and lose more ordinary savers’ money than was necessary. This is what happened in recognition of regulatory failures over Barlow Clowes (in the 80s) and Equitable Life (in the 90s).

The litany of regulatory failures by the FCA is not seriously disputed. The FCA gave London Capital & Finance the “CAT standard” of FCA registration and ignored the systematic misselling of its investments for a further 3 years afterwards despite numerous attempts by outsiders to blow the whistle. As the FCA CEO in charge at the time has now been kicked upstairs to the Bank of England, the FCA is now free to issue regular mea culpas and lessons will be learneds.

Whether the FSCS or the Treasury pays compensation makes little difference as the general public pays either way; nearly everyone pays taxes and nearly everyone pays FSCS levies via use of financial services.

The main obstacle in the way of compensating LCF investors is moral hazard; the fear that if LCF investors are compensated, it will encourage others to invest in schemes paying unrealistically high returns for supposedly safe investments on the assumption that they’ll get their money back if it goes wrong.

The obvious counterpoint to the moral hazard argument is that the exact same argument applied to compensation for Barlow Clowes, the exact same argument applied to Equitable Life, and the exact same argument applies to Basset & Gold. In the first two cases the moral hazard argument was beaten by the argument that such a monumental failure of regulation and Government should result in compensation, and improvements to the regulatory system to ensure it doesn’t happen again.

There is a better way than whataboutery for LCF investors to counter the moral hazard argument; campaign not just for compensation but for the UK to bring the UK’s securities laws out of the 1920s and require all investment securities offered to the public to be regulated by the FCA, as is the case in the US.

If it becomes more difficult to open unregulated investment schemes and promote them to the public, this would counteract the moral hazard incentive to open and invest in them. It offers the taxpayer’s purse a quid pro quo – a one-off compensation payment (trivial in the grand scheme, especially now) in exchange for less economic damage in the future.

Or we could just do nothing and wait for the next wave of unregulated investment scandals, some of which, like Basset & Gold or investments recommended by dodgy FCA-regulated advisers, will inevitably fall onto the public purse. As my old ma always said, if you keep doing what you’ve always done, you’ll keep getting what you’ve always got.