Smith & Williamson, the administrators of £230m FCA-authorised Ponzi scheme London Capital & Finance, have released their first six-monthly update to investors.

The administrators are currently envisaging a return of “as low as 25%” to investors. This is predominantly based on expected recoveries from Independent Oil & Gas. All other LCF assets remain of extremely uncertain value.

This is actually an improvement on S&W’s initial forecast of 20% as a “best case” figure. But that is little cause for celebration, given that the LCF asset with the best hope of delivering returns for investors – the “jewel in the crown“, in S&W’s characteristically optimistic language – is its complex interests in Independent Oil and Gas.

An AIM listed oil exploration company may well have a better prospect of a return than, say, loans to failing resorts on Cape Verde, but that’s still a lot of chance involved.

As for those other investments:

LCF lent a total of £12 million to two companies investing in Cape Verde resorts, but the companies never took any legal title to land, and the recoverability of the loan is doubtful.

A total of £70 million was lent to the “Prime” companies investing in resorts in Cornwall and the Dominican Republic. The administrators’ efforts to establish whether these are worth anything have met with frustration.

We are very concerned that the management of Waterside, which is well aware that the Bondholders are depending on the LCF borrowers and sub-borrowers for their repayment, has made no efforts to engage with the administration to prove to the administrators either the value of the Waterside business or of the value of the security provided to secure the repayment of the debt. The administrators will be continuing to increase the pressure on Waterside’s management in this regard.

In regards to the proposed refinancing of the Prime group, as advised to us in February 2019 by the directors of Prime Resorts Developments Ltd, to our knowledge, there has yet to be any deal done and to date we have had no substantial response to our enquiries to give us any assurance as regards progress towards any refinancing or any useful update from Prime Resorts Developments Ltd with regard tothe general financial position of the company. […]

It is very surprising to the joint administrators that the Prime group is so extraordinarily reluctant to engage and consider this to be either suspicious or naive.

And the hunt for LCF’s missing gee gees hasn’t gone much better.

Since our last report to creditors, we have continued our investigations in order to progress realisation of LCF’s assets for the benefit of creditors and Bondholders. In particular, we have requested that Mr Cubitt (the sole director and shareholder of FS Equestrian Services) attend for interview to assist us with our enquiries. We have also requested an up to date list of all FSE’s assets including the stock of horses (which were provided as security by FSE in respect of its borrowing from LCF), the names of such horses, their location and current value. In addition, we have requested details in relation to the sale of any horses and details of the use put to the proceeds of such sales. To date, Mr Cubitt has not attended voluntarily for interview.

As for £16.6 million invested in London Power & Technology, this seems to have disappeared.

We previously reported that this lending of £16.6m appeared to be in respectof a redemption of preference shares in London Power Corporation. Our investigations to date suggest that this transaction did not take place and furthermore, there does not appear to be any transaction to support lending of £16.6m.

So all eyes are still on Independent Oil and Gas, to which LCF lent a total of £38.6 million via its London Oil and Gas subsidiary.

IOG has agreed to farm out some of its Southern North Sea gas fields to CalEnergy Resources Limited. Should the deal go through, which is expected in September, IOG will get the cash to repay LCF’s non-convertible debt of £16.6 million, plus accrued interest.

LCF / LOG’s existing convertible loans will be renegotiated into unsecured loans convertible into shares at 8p and 19p, which the administrators will sell when they (and expert advisers) think the time is right.

At time of writing IOG currently trades at 18p. For conversion rights to be worth anything, the shares have to trade above the conversion price (otherwise you get more money from having the debt paid back). This suggests that S&W are still banking on IOG’s shares going up, and eventually getting back more than the £40 million that RockRose Energy offered for the debt back in March (which would have recovered the initial amount lent by LCF to IOG, plus change).

Another £5.4 million loaned to Atlantic Petroleum is said to have “high” prospects for being repaid.

Escrow payments

Readers may remember that the Four Horseman of LCF, CEO Andy Thomson, Simon Hume-Kendall, Spencer Golding and Elten Barker, all of whom benefited from multi million pound sums arising from the Waterside and Dominican Republic investments going into their “personal possession or control”, were asked by S&W to repay those sums into escrow, to be repaid if LCF investors were repaid in full.

 

At the time of that report, S&W stated that Thomson and Hume-Kendall had agreed to this arrangement, while Golding and Barker had yet to reply.

None of the Four have paid up.

Thomson has claimed, from his sickbed and through his lawyers, that he never said any such thing.

Mr Thompson, through his lawyers, and notwithstanding his illness, has disputed he ever made such an offer.

(Note: S&W use both spellings of Thomson’s surname throughout the report; I have stuck with the one on Companies House.)

Hume-Kendall “continues to engage with the administrators albeit little progress has been achieved in their dealings with him.”

Golding and Barker, through their lawyers, have told S&W to swivel.

Spencer Golding and Elten Barker have indicated through their lawyers that the Bondholders should be fully repaid through repayments to LCF from its borrowers. Accordingly, the administrators do not anticipate that Mr Golding or Mr Barker will agree with the proposal to put funds into escrow.

The entire point of the escrow proposal is that if bondholders are fully repaid, the escrow funds will not be drawn on, and the Four Horsemen will get their money back. This appears to have fallen on deaf ears.

Given that S&W are forecasting recoveries of 25%, Golding and Barker are probably the only people in the country who think that LCF will fully repay bondholders.

Paul “Captain” Careless, the CEO of LCF’s marketing agent Surge, has also comprehensively lawyered up, hiring the Serious Fraud Office’s former top lawyer, according to the Evening Standard.

In March S&W was reported to have written to Surge to ask them to repay the profit (not their entire 25% commission) it made from selling London Capital & Finance bonds.

No mention of this or Surge’s response is made in the latest update.

Fees to date

S&W have so far incurred a total of £2.3 million in fees. A further £2.9 million has been incurred by professional advisers to the administration, of which lawyers Mischon de Reya account for the lion’s share of £2.5 million. £215k of other costs have not yet been approved.

Most of these fees remain outstanding, and the creditors’ committee has not yet approved S&W’s fees.

Only £3.6 million has so far been realised by the administration, mostly cash that LCF still had in the bank when it collapsed. This should in theory change quite shortly if the Independent Oil and Gas deal concludes as hoped.

5% dividends put on hold

At the creditors’ meeting in April, Smith & Williamson indicated to investors that they could be paid dividends in 5% increments, with the first dividend potentially arriving in the summer, if sufficient funds were realised.

At the Creditors’ Meeting held on 24 April 2019, it was stated that dividends would be paid to Bondholders in 5% increments, once sufficient net funds were realised. It was envisaged that it may be possible to pay the first dividend at the end of the summer, dependent on the outcome of the IOG investment.

This turned out to be another bout of S&W’s optimismitis.

Whilst it is anticipated that the IOG deal will complete in September, this first dividend is now very likely to occur later than originally hoped, because of the potential strategy as regards realising the administrators’ interest in IOG in an orderly fashion as advised by our specialist oil and gas advisers.

As Smith & Williamson needs to have covered its own fees, plus the fees of Mishcon de Reya and its other advisers, plus the future costs of any further attempts to pursue recovery from individuals or LCF’s assets, before it issues any dividends, investors should probably not hold their breath.

As is standard as part of administrators’ duties, S&W have submitted a report to the Secretary of State for Business, Energy and Industrial Strategy (that would be Andrea “having kids makes you a better Prime Minister” Leadsom, at least at time of writing) into the conduct of LCF’s directors.

As is equally standard, S&W remain tight-lipped over what was in it.

S&W states that there is a “concerted and very likely co-ordinated” exercise aimed at frustrating the administration process.

It is unfortunate that the administrators are being required to deal with a concerted and very likely co-ordinated exercise on the part of a number of individuals aimed at frustrating the joint administrators’ enquiries, for their own reasons. This approach causes delay and additional expense to the joint administrators’ objectives, to the prejudice of Bondholders and so is most unwelcome.

Who these individuals are is not made clear by S&W.

The next report is due in six months’ time.

A brief interim update sent by the administrators of London Capital and Finance reveals that a number of investors have contacted Smith & Williamson in an attempt to secure recordings of phone conversations between the investors and LCF.

The purpose of requesting these conversations is virtually certain to be to support claims against the Financial Services Compensation Scheme, which has confirmed that it will compensate investors who received recommendations to invest from employees of LCF’s marketing agent, Surge Financial, if they amounted to regulated advice.

We have received a number of communications from Bondholders recently, requesting recordings of their calls with LCF or Surge employees, in relation to their investments. It should be noted that:

• The joint administrators do not yet have access to the call recordings database
• The joint administrators are however taking steps for delivery up to them of call recordings
• We understand that in parallel the FSCS are taking steps to secure call recordings.
• Our understanding is that the telephone recordings are not comprehensive.For example, the joint administrators are aware that a number of calls were made from mobile phones and accordingly there will not be records of these calls held by the third party provider which maintains the call recordings database
• We understand that the current third party provider only holds call recordings made/received during the last year prior to the FCA intervention in December 2018.

The inability of investors to obtain the evidence they need to make successful claims against the FSCS will likely exacerbate the potential injustice of the decision of the FSCS to compensate investors who received illegal but nonetheless FSCS-protected advice. Unless, of course, a more comprehensive and less arbitrary compensation scheme is set up.

In the world of actual regulated advice, this kind of issue almost never arises as it is a legal requirement to issue advice in writing. If that written advice is inadequate to support the recommendation, the investor has been mis-sold, and whether they were or were not told something else over the phone is virtually irrelevant. Any compliance consultant will tell you “if it’s not written down it didn’t happen.”

The decision to compensate investors largely on the basis of whether they were told over the phone that LCF was the best thing since sliced bread flips this equation on its head. Unfortunately for investors, if the FSCS takes the view that “if it’s not written down it didn’t happen”, then most LCF investors aren’t going to get compensation on the basis of being missold by LCF.

The FSCS has a big decision on its hands as to whether to take investors’ word for it as to whether they were given advice over the phone, given the lack of records that could prove or disprove their claim.

At present there will be numerous investors who spoke to LCF on the phone and were given the “I’d tell my own mother to invest in it” spiel. But cannot prove it due to the current lack of records.

There will also be numerous investors who only interacted with LCF via its website, never spoke to LCF over the phone, and never received anything that could be considered advice even by the FSCS’ relaxed standard. They are, as it stands, screwed.

Unless they invent a phone conversation if the FSCS decides that, given the lack of records, they will take the investor’s word for it in the absence of evidence to the contrary. We do not advocate committing fraud to secure FSCS compensation.

And on the other side the FSCS has to deal with the anger of the regulated advice sector, whose levies pay for the compensation scheme, who were not formerly aware that their levies allowed any FCA-regulated company to make a Ponzi scheme risk-free (up to £50,000 per person) by telling people, via an unregulated third party, that it was a good idea to invest in it.

The regulated advice sector knew this was the case for regulated financial advisers, who are required to pass exams and obtain a Statement of Professional Standing, but not for anyone who gets FCA authorisation for something like insurance intermediation. While the rules are old, the interpretation is new.

As it stands, no public action has been taken by the authorities against Surge Financial over the FSCS’ allegation it broke the law by giving regulated advice to retail investors without FCA authorisation. (LCF’s FCA permissions were for corporate finance business only.)

Intelligent Technology Investments

Smith & Williamson continues to spread its control through the further reaches of the London Capital & Finance web of companies.

Earlier this year S&W were appointed administrators of London Oil & Gas, which borrowed £122m from LCF, and in June S&W were appointed liquidators of Intelligent Technology Investments, which borrowed £5m from LOG.

ITI loaned £3m of this on to a company called Asset Mapping Limited.

Back in March, at the time of the initial administrators’ report, S&W said “Whilst AM has had some success in penetrating its market it is still seriously underperforming and short of the capital needed to develop its product further and for marketing costs”.

In April Asset Mapping went into administration, and was subsequently sold to its Chief Operating Officer Michael Grant, with funding from ex Nomura bankers Adrian Purvis and Gary Cottle, according to PlaceTech. It has now been renamed Metrikus.

According to S&W, “the consideration for the sale of this business is mostly contingent on the future performance of the business and so the return to LOG, and hence the LCF bondholders, is dependent on how that plays out.” The exact consideration and terms of future profit-related payments were not disclosed.

Another business which received funds from ITI was London Artifical Intelligence Limited, which according to the March report had developed software that could predict commodity prices with 85% accuracy (of one unspecified commodity). LAI has been overdue with its Companies House accounts since March 2019.

Elusive equine news

In other news for fans of metaphor, the Evening Standard’s Jim Armitage has revealed that S&W are almost literally trying to shut a stable door after the horses have bolted. Or more specifically, warning the wider equestrian world that if they should come across the bolted horses, they need to be put back in the stable right now.

Administrators to collapsed bond company London Capital & Finance are warning people in the equestrian world against buying horses from a stud farm that borrowed millions of pounds from the firm, the Evening Standard has learned. […]

Smith & Williamson said in a statement: “LCF has loaned very substantial funds to FS Equestrian and the administrators are getting no cooperation whatsoever in understanding where that value has gone.

“We would now put the equestrian world on notice that we will seek out all of the FS Equestrian horses which we have security over, irrespective of whose property they are on or whose possession they are in.”

FS Equestrian was owned by Spencer Golding, one of the Four Horsemen of LCF who were described in the initial administrators’ report as benefiting from millions of pounds which went into their personal possession or control, along with Andy Thomson, Simon Hume-Kendall and Elten Barker.

Spencer Golding declined to comment to the Evening Standard, as did Sean Cubitt, who took over FS Equestrian in January.

As prospects for recoveries go, it remains to be seen which has higher potential for recovery: FS Equestrian’s horses, or wondertech that predicts commodity prices with 85% accuracy.

Smith & Williamson’s next full update to bondholders is due to be delivered by 29 August.

The Times of London has revealed that of the £60 million commission paid by London Capital & Finance to its marketing agent Surge, £26 million was spent on marketing, of which £20 million went to Google.

Google was paid more than £20 million to promote high-risk mini-bonds for London Capital & Finance, the collapsed investment firm at the centre of a fraud investigation.

The Times has learnt that Surge Group, a digital marketing firm that was contracted by LCF to raise capital from investors, used the bulk of the money it spent on marketing to buy advertising via the search engine giant.

A person close to the matter said Surge spent about £26 million on marketing for LCF between 2015 and last year, with about 90 per cent of that sum going to Google.

 

To put that figure into context, a half-time advert at the NFL Superbowl costs about £4 million. Superbowl adverts are traditionally the biggest advertising opportunity on the planet, with £4 million buying you 30 seconds on front of 100 million people, or 800,000 human-hours of exposure.

But obviously London Capital & Finance wouldn’t have advertised at the Superbowl. The United States of America has meaningful securities legislation.

The fact that almost 10% of LCF investors’ money went to Google is fairly staggering. We already knew that Surge was an extremely expensive marketing channel for LCF, but didn’t know until now that the same was true of Google.

Until the ban on commission in 2012, regulated investments in the UK most commonly paid 3% initial commission to agents plus 0.5% each year or up to 7% without recurring commission. Even in the modern era, a marketing channel for an investment that costs £1 for every £10 you raise is a very expensive one.

The LCF administrators have already asked Surge to repay the profit element of the commission it received. Surge has so far not responded in public. Whether the administrators will make the same request of Google is yet to be seen, but the chances of Google repaying its £20 million seem slim to none.

It is worth bearing that £20 million figure in mind the next time Google claims it would be impractical to vet all of its ads to ensure it did not facilitate and receive stolen money from fraudulent investments or other scams by carrying their adverts.

Not that this applies to LCF. Thanks to the FCA giving it authorisation, even a prudent advertiser would have no qualms about allowing its Section-21-approved adverts onto the platform.

A spokesman for Google refused to comment. A spokesman for Surge says that LCF signed off all marketing materials and promotions.