What is a “mini-bond”? A mini history of a much-maligned label

June 17, 2019June 16, 2019 ~ Phoenix ~ 2 Comments

[An expanded version of a Twitter rant posted last Monday ago.]

According to IFA trade rag Money Marketing, investors in London Capital and Finance are very angry that the Financial Conduct Authority has repeatedly referred to the loan notes in which they invested, marketed by LCF as “secured bonds”, as mini-bonds.

So what is a mini-bond and why are LCF investors annoyed about the label? The FCA says (in an article belatedly posted last month) “There is no legal definition of a ‘mini-bond’, but the term usually refers to illiquid debt securities marketed to retail investors.”

The crucial characteristics of a mini-bond are:

It is unlisted. If it is listed on a major stockmarket, like bonds in BT or major banks or investment trusts, it is a listed security. Debt issues listed on major stock exchanges are often worth hundreds of millions or billions and therefore too big to be a “mini-bond”.
It is issued directly to the public (aka retail investors). If it is issued to institutions it is a business loan. “Mini-bond” is a marketing label and business loans aren’t marketed, therefore to be a mini-bond it has to be marketed to the public.

The market for “mini-bonds” took off in 2010. The economy was recovering and people had money burning a hole in their pocket. But the banks, chastened by the credit crunch and recently tightened capital adequacy rules, were hanging on to theirs. So a few companies had the bright idea of borrowing money directly from their customers.

Among the most famous examples were Hotel Chocolat (whose bonds gave you the option of being paid in chocolate), the Jockey Club (whose bonds could pay you in racecourse tickets), and John Lewis.

Although this kind of investment took off in 2010, the “mini-bond” label seems to have gained currency around 2013. A 2013 Guardian article uses the term alongside “passion bond”.

This reflects that the target market for mini-bonds was not people trying to grow their money (like LCF investors), but people who were already fans of the company issuing the bond.

Why “mini-bonds”? Partly because of the small size of the amounts raised: typically 6 or at most 7 figures rather than the hundreds of millions or billions raised in listed securities by FTSE 100 firms.

But mostly because the term “mini” cosily implies that the bond issue poses no danger, despite the inherent risk of 100% loss. The complacent regulatory consensus was that no-one in their right mind would invest all their money in a bond paying interest in chocolate or racecourse tickets or burritos (seriously). The target market was not people trying to secure their financial future, but well-off fans of a company who could afford to invest a few thousand and wouldn’t mind even if they lost all of it.

The “mini-bond” label gained currency so quickly (leaving alternatives such as “passion bonds” to be forgotten) because of its cosy connotations of harmlessness. It was a tacit linguistic accommodation between the regulator and the promoters of the investments.

Who cares if an unlisted investment in a small company is inherently high risk? Does it really matter if all the investors have filed documentation with the company proving that they are high-net-worth or sophisticated? Nobody’s going to lose their life-savings investing in bonds paying interest in chocolate.

The “mini-bond” label allowed the FCA to indulge in its favourite kind of regulation, i.e. “masterly inactivity”, or classifying things as insigificant and not its problem, regardless of how many FSMA offences are being committed and how many people are being harmed.

But it is a truth universally acknowledged that investors throwing money at unregulated investments without meaningful due diligence are in want of being scammed.

Soon the first wave of companies were springing up out of nowhere offering minibonds offering attractive-sounding rates and some kind of spiel suggesting it was as safe as houses (secured loans, subsidised renewable energy, sheltered housing, blah blah). They were not targeting investors willing to lend a few thousand in return for “our favourite customer” status, but the mass of people fed up with losing money to inflation, but inexperienced and unaware of how to get a higher return without risking permanent loss.

By 2013, alarm bells were being sounded. Purple prose about “innovative” and “ethical” investments was out and risk warnings were in. No article about the amounts raised by minibonds was complete without a warning about the inherent risks. The aforementioned 2013 Guardian article’s subheading ended “…names such as John Lewis are issuing their own retail bonds, but analysts advise caution”.

By 2015 the mini-bond label had gone sour. In September 2015, the Guardian ran an article entitled “If you see something promoted as a ‘mini-bond’, bin it!” after the £7m collapse of Secured Energy Bonds. At the time, SEB’s FCA-regulated agent, Independent Portfolio Managers, had just completed raising another £7m for Providence Bonds. Providence Bonds also later collapsed with total losses.

A year later London Capital & Finance secured authorisation from the FCA, allowing it to turn its promotional activity up to 11 and use the FCA-authorised label to raise £230 million while reassuring investors that it was “safe as houses”. But it was in mini-bonds, so the FCA ignored it. Three years later, after the FCA could no longer ignore LCF’s misleading advertising, LCF duly collapsed as well.

It is no surprise that LCF investors are bemused and angered by the “mini-bond” label. The LCF bonds were not sold as “mini-bonds” but “secured bonds”, referring to investors’ “secured creditor” status. This is not surprising, given that by 2015 the “mini-bond” label was already toxic.

“Secured bonds” was in reality just another marketing label. The “secured creditor” status in reality gave virtually no meaningful security, as a) it is clear from the administration that there are in reality very few assets of value in LCF, and b) secured investors made up by far the largest category of creditors, so it would barely have made much difference if investors had been unsecured creditors instead.

This, perhaps, explains LCF investors’ anger. As I have said before, they are the last person to find out that their spouse is the village bicycle and all their friends and acquaintances have been laughing at them.

It is not just that they have been duped, but the feeling of betrayal that comes from knowing that other people knew and didn’t tell them.

The fact that alarm bells were being rung in 2013 and 2015 and onwards shows that this is not about hindsight. We are talking about a consistent regulatory policy which has had predictable and consistent results.

Everyone who was aware of what LCF was and had a basic level of financial understanding knew that LCF investors had been duped about the risks of LCF and were highly likely to lose their money. But nobody told the investors because either

they couldn’t get the word out (most of the general public)
or they were afraid of being sued (the media)
or they had both a public voice and immunity from being sued, but they didn’t give a shit. (The FCA.)

LCF spotlight turns to John Russell-Murphy: from SJP adviser to MJS director to LCF introducer

June 7, 2019June 7, 2019 ~ Phoenix ~ 12 Comments

john-russell-murphy-45998522 — Imagine if this was the last person your money ever saw.

Jim Armitage at the Evening Standard reports that administrators are investigating the role played in the collapse of London Capital & Finance by John Russell-Murphy, who pitched LCF bonds in person to wealthier investors.

The Evening Standard has spoken to 10 clients of LCF who invested between £100,000 and £580,000 and allege Russell-Murphy gave them financial advice that experts have suggested he was not allowed to give under Financial Conduct Authority rules because he is not a regulated adviser.

One, a severely disabled woman in her late seventies, claimed he had visited her at her home, looked at the paperwork for her existing savings and recommended she put £100,000 of her entire £150,000 into LCF. The former charity worker said: “I told him I had to keep back £20,000 for my grandchild’s university bills but he said if I invested £100,000 with LCF the interest would pay for them and I wouldn’t lose the capital. Now it looks like it’s all gone.”

One investor claimed that Russell-Murphy claimed inaccurately that LCF bonds were protected by the FSCS.

Michael Grice, 84, claimed Russell-Murphy came to his house last September and reassured him that if anything went wrong with the bonds, LCF investments were backed by the Financial Services Compensation Scheme.

In a case of crimes against cliché as well as the Financial Services and Markets Act 2000, another investor said that John Russell-Murphy said that he would recommend LCF bonds to his own mother.

Another said, when he came to her house, she asked if he would recommend LCF to his own mother. “He smiled and said, ‘yes’,” she claimed.

For the record, we are not in any way suggesting that John Russell-Murphy was being dishonest. We sincerely believe that John Russell-Murphy would indeed recommend LCF bonds to his own mother.

Russell-Murphy reportedly described himself as an “LCF senior account manager” but was actually employed by LCF’s marketing agent, Surge. Investors say that Russell-Murphy recommended other investments linked to Surge as well as London Capital & Finance. A spokesman for Surge said that Russell-Murphy was not authorised to cross-sell non-LCF investments.

According to the Evening Standard, Russell-Murphy was unavailable for comment on the above claims.

Not mentioned by the Evening Standard is John Russell-Murphy’s previous role in the unregulated bond world. Russell-Murphy was one of the three founding directors of MJS Capital – he was the “J” in “MJS”, along with Martin Westney and Shaun Prince. His directorship lasted from its incorporation in March 2015 to his resignation in February 2016.

Russell-Murphy left MJS two years before it collapsed in 2018 and there is no suggestion that he had anything to do with its failure.

In the dim and distant past Russell-Murphy and London Capital and Finance CEO Michael Andrew “Andy” Thomson were at upmarket salesforce St James’s Place together. The FCA register shows they were both at SJP on 1 December 2001 when the FCA’s register began*. Thomson left in December 2001, shortly before joining NatWest as a Trainee Adviser. Russell-Murphy remained at SJP until April 2003. Since when, according to the FCA register, he has never held FCA authorisation.

Not that this stopped him advising elderly investors to invest in his old mucker’s company 12-15 years later.

[Hat tip to Mark Taber for unearthing the St James’s Place connection.]

A lawyer for Mischon de Reya, who are working with LCF administrators Smith & Williamson, stated

“We are investigating all parties connected to LCF including those involved internally and externally in the sales and marketing function. We understand John Russell-Murphy was a key figure in the sales operation run by Surge on behalf of LCF including making home visits to certain bondholders. He also appears to have significant links to the former directors and shareholders of LCF.”

*Thanks to reader Adam Smith for explaining why the FCA shows Russell-Murphy and Thomson as joining on the same date of 1.12.01.

Lawyers for LCF investors throw kitchen sink at FSCS in compensation bid

May 10, 2019May 10, 2019 ~ Phoenix ~ 16 Comments

The law firm Shearman & Sterling has written a letter this week to the Financial Services Compensation Scheme, outlining a new legal justification for compensating London Capital & Finance investors en masse. Shearman & Sterling are reportedly acting pro bono for some LCF investors.

At the heart of their argument is a recent clarification by the FSCS that investors with a claim relating to FCA-regulated activities carried out by LCF are still covered by the FSCS even if LCF was not authorised to carry out that activity.

The specific activity in question was regulated advice.

Over the last month or so, LCF investors have been encouraged to pore over emails and rack their brains in case they can argue that they received investment advice from LCF call centre workers to invest in LCF minibonds. This would constitute misselling, which would open the doors to the FSCS.

Unfortunately, this is a low-percentage strategy which will not help the vast majority of LCF investors. By many accounts, LCF salespeople worked to a script which deliberately avoided straying into advice, just as any financial services call centre employee would.

The fact that some call centre workers may have gone off-script in order to close a sale does not change the fact that LCF was not a financial advice firm, did not advertise financial advice, was not authorised to give advice, and employed no advisers with recognised financial advice qualifications.

However, the fact that the FSCS will potentially pay out for claims in relation to regulated activities, regardless of whether LCF was authorised to carry out those activities, has inevitably raised the question: what if LCF was carrying out other regulated activities which would cover all LCF investors?

Shearman and Sterling think they have the answer. They are arguing that by arranging the minibonds, LCF was effectively “dealing in investments as principal” and “running a collective investment scheme”.

Unfortunately both these arguments have glaring holes.

The glaring problem with the second part is that UK securities legislation is specifically designed to avoid minibond issues being classified as collective investment schemes. An example of this specific exemption can be found in The Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001, Section 5 of the Schedule.

As for “dealing in investments as principal”, the only investments that LCF dealt in with were its own, and dealing in your own investments is again specifically excluded from the definition of this regulated activity, this time by Section 18 of FSMA (Regulated Activities) Order 2001.

More generally, if LCF was running a collective investment scheme, then every issuer of an unregulated minibond is running an illegal collective investment scheme, and all of them (and the FCA) are in a whole heap of shit.

But luckily for all concerned (except hapless investors), the whole point of the concept of a minibond in UK legislation is to allow every Tom, Dick and Harry to promote unregulated unlisted investment securities to the public while allowing the FCA to ignore it. Minibonds are not FCA regulated and are not covered by the FSCS.

Perhaps in an indication of the desperate quality of its argument, S&S resorts to appeal to emotion, claiming investors “rightly understood that the FSCS would stand behind their investments”.

This is complete nonsense as LCF’s website specifically stated that investors were not covered by the FSCS. And when FSCS-protected accounts on the high street pay no more than 2.5% per year, the idea of an FSCS-protected account paying 8% falls squarely into the category of “too good to be true”.

London Capital & Finance Plc is incorporated in England and Wales under the Companies Act 2006 as a Public Limited Company with registered number 08140312. Investments into the LC&F bond are not protected by the Financial Services Compensation Scheme (FSCS). – London Capital and Finance website circa Feb 2018

LCF investors were by and large convinced that FSCS protection didn’t matter, e.g. because LCF loans were backed by assets worth more than LCF’s liabilities (which turned out to be nonsense).

Shearman & Sterling continue “LC&F therefore presents exactly the situation that FSCS was established by Parliament to address.”

The FSCS was not established by Parliament to bail out Ponzi schemes. If it was, investors could happily sign up to Ponzi schemes en masse, knowing that if they got in early enough they would cash in, and if they didn’t they would be compensated by the FSCS.

There was no reason to think LCF was backed by the FSCS until it collapsed, at which point investors suddenly had a desperate need to think it was. This in turn has created a demand for a firm of lawyers looking for business to concoct legal reasons to think it was. This is a pretty thin attempt at finding some.

Hope and pseudolegalism springs eternal

Nonetheless there is hope for LCF investors yet. However the reasons why compensation may yet be awarded are political, not legal.

The investors naturally want compensation. Many MPs also want their constituents to be compensated. The FCA is also desperate for LCF investors to be compensated, because if they are, the bottom falls out of the political pressure being directed at the FCA, and the impetus for sackings and top-down reform.

If investors are bailed out they will stop writing to their MPs, and MPs will stop asking questions in Parliament, and when the FCA’s “independent” inquiry eventually reports several years later that the FCA could have done better but it was mostly the system’s fault, the conclusions will fall squarely into the long grass.

The main body which would stand against LCF investors being compensated would be the financial services industry, who will pay for it, via an interim levy to the FSCS. But no major financial services company will come out and condemn LCF compensation because it would be a PR disaster.

And the big firms in the financial services industry will not notice the cost of an LCF bailout, as they will simply pass it straight to the general public without it touching the sides.

IFAs and other smaller financial firms will notice, whether or not they pass on their FSCS levy to their clients, but nobody listens to them.

So the political impetus for a bailout is almost irresistable, and all that is left is to find a legal pretext for one. Who knows, Shearman and Sterling may have found exactly that. It is tissue-thin but the Government has spent much larger sums on much shakier grounds. And it is highly unlikely that such a bailout would be challenged in the courts by its funders as unlawful.

The best bet for the financial services industry is to lobby the government to bring UK securities laws out of the 1920s, in the hope of avoiding future £200m+ invoices.

Johnny Mercer appears on the BBC’s Have I Got News For You while suing them for libel

April 27, 2019 ~ Phoenix ~ 6 Comments

Johnny Mercer MP’s appearance on Have I Got News For You didn’t reach the heights of car-crash TV and may not even make the end-of-season highlights episode. It may however make it into the textbooks of law students – to my knowledge, no-one has ever sued a corporation for libel and then immediately appeared on a comedy panel show hosted by that corporation to state their position.

Mercer appears to be so confident in his hand that he’s showed it to the BBC before betting has even started.

Normally it would be slightly unfair to overanalyse what people on comedy panel shows say, as they’re there to be funny, not 100% accurate. However, it’s still worth examining Mercer’s stated position on his Crucial Academy job, as this was essentially a preview of a libel action. Held on the defendant’s home turf, as opposed to the neutral ground of a court.

It is also worth examining what the BBC said (via David Tennant’s autocue) as well. The BBC didn’t lose any time before doubling down on their allegation – which Mercer regards as libel – that Mercer’s salary can be linked to LCF.

Tennant: And with Paul tonight is a Conservative MP whose second job, partly funded by the marketing company for a bond scheme that lost savers millions, has caused him to sue the BBC, and that’s before we have even started the show. Please welcome along with his legal team, Johnny Mercer MP.

Hislop: This is great. It’s a libel action and I haven’t joined in yet!

The fact that the BBC (via Tennant) repeated the bit I have underlined, when their lawyers could have watered it down to, e.g, “who is suing the BBC over allegations regarding his second job”, indicates Mercer is not the only one confident in their position.

Hislop: You were on a reality show, you were on Hunted.

Mercer: I was, yeah, to raise money for Stand Up To Cancer.

Hislop: Oh, you’re pulling that whole charity…

Mercer: Of course, yes. Because I can just see you cocking your…

Hislop: What?

Mercer: Erm…

Zoe Lyons: You’ve got better eyesight than me!

Merton: How long did you survive before you were found?

Mercer: I won! *audience applauds*

Hislop [to audience]: You’re applauding the fact that one of your representatives bunked off for two weeks and went on telly instead. *audience laughs*

Mercer: Yeah, absolutely right. What a good man.

Hislop: This libel trial is going to go well!

Mercer: I can’t wait.

Hislop: What bit did the BBC get wrong?

Mercer: This idea… so I run a company that trains veterans to go into cyber employment, and four companies away from that is a company that’s gone bust.

Hislop: Yeah, it’s not many companies. It’s quite a big company, four people have been arrested. Big story.

Mercer: It’s a big story, but…

Hislop: But you never, you never…

Mercer: Of course not. Why would I have anything to do with financial products?

Hislop: Not interested in losing your £85,000 salary, for a four hour…?

Mercer: Yes, and it was provided through business in that company, that that company generated had nothing to do with us.

Hislop: How does training veterans make enough money to earn you 85 grand?

Mercer: Because if you train them in cybersecurity and they have specialist skills, they go into FTSE 100 companies and they earn quite a lot of money in cybersecurity. I sound like a right bastard, don’t I, doing this whole sort of veterans employment thing?

Hislop: No, it’s not the veterans bit, it’s the £85,000 for a four-hour job.

Mercer: I know what you’re thinking…

Hislop: I’m thinking “Why don’t you do it for free?”

Mercer: I know, because you get 20 grand for 2 hours tonight, don’t you?

Hislop: Yeah, but the people who lost money out of this company are very cross with you. It’s about your behaviour and the fact you didn’t know, and didn’t ask, as a non-executive director, “Where does the money come from?”

Mercer: I did ask where the money came from and it came from the business, it’s generated by the business that we do.

Hislop: They were providing the money that kept your company going.

Mercer: No they didn’t. That’s why the BBC are being sued for libel, because no money went from that company into Crucial Academy.

Hislop: But it did though.

Mercer: Ok, well, you can keep saying that but it really didn’t.

Merton: This is one for Judge Rinder. *bemused audience laughs*

At this point Hislop and Mercer are probably talking at cross purposes as neither has specified who they mean by “that company”. Hislop may be referring to Surge, as the fact that Surge made a £300k loan to Crucial is a matter of public record. Mercer is almost certainly referring to London Capital & Finance, who paid £60 million commission to Surge. Whether that £300,000 came out of LCF’s £60 million is the point at issue.

Hislop: I’m merely trying to establish the facts. You say you’re going to sue the BBC for reporting a story that everybody else has run, and you say that’s not how the money got there.

Mercer: I am absolutely sure that not a single penny has come from LCF and gone into Crucial Academy. If it has, I would leave.

Hislop: It hasn’t gone directly in, it’s gone through a series of other companies.

Mercer: No, directly or indirectly. If it had, I would leave. Any more?

Hislop: Alright, well, we’ll see what happens.

Lyons: This is like all of my Christmas dinners with my family. *bemused and bored audience laughs*

Tennant: [trying to move the show along] Remember Ann Widdecombe? *more laughter*

Hislop: I’m sorry, David, it’s a big story. Four people were arrested and I know you think your political enemies have smeared you with this story…

Mercer: No, I don’t. I don’t think that. I don’t think they have smeared me with this story.

Tennant: But you have accused the Deputy Chief Whip of trying to dig up dirt.

At this point Mercer begins talking about a non-LCF-related “smear” against him involving the Deputy Chief Whip checking whether stories in Mercer’s military memoirs were true.

Let’s leave that aside and remind ourselves what Mercer said specifically about the LCF story on Twitter:

The question at issue is a fairly simple one as corporate finance goes. The BBC asserts that the £300,000 received from Surge is part of the pot used to pay Mercer from September until the loan was repaid.

Mercer has asserted on national TV that his salary comes entirely from revenue received by Crucial Academy for its trading activity, training ex-soldiers in cyber security. And that the Surge loan went in and out of the company without touching the pot used to pay him.

As a non-executive director, Mercer has access to Crucial Academy’s accounts and it should be a fairly easy matter to determine whether Crucial Academy, despite being a new startup which only launched a year ago, earns sufficient revenue from cybersecurity training to pay its non-executive director £85,000 a year from that revenue source alone.

Even if it does, Mercer’s attempt to portray his £350-an-hour non-exec-post as an act of benevolence on behalf of fellow veterans – “[sarcastically] I sound like a real bastard, don’t I?” – is difficult to take seriously.

Investors queue round the block to attend London Capital & Finance creditors’ meeting

April 26, 2019 ~ Phoenix ~ 1 Comment

A lengthy queue formed outside Holborn’s City Temple Conference Centre on Wednesday as hundreds of London Capital & Finance victims attended a meeting called by the administrators.

Mike Stubbs, a lawyer for Mishcon de Reya who is working with the administrators, described LCF’s record-keeping as “virtually hallucinogenic . . . The whole show was a complete shambles.”

The administrators revised the best-case recovery estimation from 20% of the amount invested to 20-25%. This is apparently based on the “strong performance” of Independent Oil and Gas, described by administrators as the “jewel in the crown”.

“The turd that didn’t flush” would seem to be a more fitting description of IOG as far as LCF’s interests go. It seems unlikely that leaving IOG as the only asset in LCF that currently has any measurable realisable value (aside from cash in the bank and a whirlybird) was part of any coherent strategy on the part of LCF’s former directors.

“Strong performance” is perhaps overegging it. Since S&W were appointed as administrators at the end of January, when IOG traded at around 14p a share, the shares have dropped to 12p a share. There was a brief spike to 19p a share but after a potential deal to sell LCF’s IOG debt to RockRose Energy collapsed, the shares fell back down again.

However, the share price potentially doesn’t tell the full story as LCF’s debt comes with the right to convert the debt to shares in IOG. Exactly how valuable LCF’s oily nugget is will only become clear when LCF’s IOG interests are sold or repaid.

The administrators seem optimistic that this will happen relatively quickly once IOG’s refinancing is complete.

In what was described as a “shambles” by some creditors in attendance, a vote to form a creditors’ committee was postponed as a number of attendees were unaware that a vote was to take place, due to not having a Facebook account.

The administrators revealed that, having previously promised to pay money into escrow to potentially repay bondholders, former LCF directors Andy Thompson and Simon Hume-Kendall have so far failed to do so. In what is possibly the least surprising news since Johnny Mercer MP announced that he intends to nobly stand by his £350-an-hour Crucial Academy gig through thick and thin.

Johnny Mercer MP blasts coverage of his Surge non-exec role as a conspiracy against him

April 24, 2019April 24, 2019 ~ Phoenix ~ 6 Comments

Several weeks after his £350-an-hour non-executive position in Crucial Academy was exposed, which was formerly part of the Surge group of companies which promoted London Capital & Finance, high-flying Johnny Mercer MP has finally broken his silence.

Today the BBC has explicitly connected Mercer’s salary to LCF. Previously, while it was a matter of public record that Crucial Academy was part of the Surge group of companies, no one had been brave enough to trace a direct financial link between Mercer and LCF. The BBC reports:

Johnny Mercer receives £85,000 from Crucial Academy, a company ultimately funded by Surge Financial Limited.

Surge Financial Limited took 25% commission for marketing bonds by London Capital and Finance (LCF), which is now in administration.

[…]

However, the accounts of Surge Group have been published and show nearly £9m was loaned from Surge Financial to Surge Group without which, the auditors said, the company would be unlikely to survive.

Surge Group then loaned £325,095 to the Crucial Group, which owns Crucial Academy.

An industry expert told the BBC the cost of training 80 people on the courses provided by Crucial would be about £240,000.

When added to the cost of Mr Mercer’s £85,000 salary, the total almost exactly matches the amount loaned to Crucial Group.

Mercer has responded on Twitter by describing the coverage as a conspiracy against him and hints that the purpose is to undermine his leadership ambitions.

Clearly there is some co-ordinated effort to go after me at present – the reasons for which are unclear.

Mercer strongly disavows any link between LCF money and himself, and suggests that the link between him and LCF is nothing out of the ordinary.

It is possible to draw a link between an individual and any number of companies.

Mercer does not provide any other examples of MPs to whom one can draw a link from other collapsed unregulated investment schemes.

12225668-6915293-Happier_times_Mercer_left_and_Careless_far_right-m-105_1555148715912 — Mercer with Surge CEO Paul Careless

He describes the loan from Surge Group that funded Crucial Academy as a “historic link” which has now been repaid.

Mercer expresses sympathy with bondholders:

I have huge sympathies with bondholders, and would support them in any future action they take to try and recover their position.

before doubling down on his allegation that the coverage of his involvement with Surge is a political conspiracy.

The wider context of calling out deliberate efforts to smear me by so-called colleagues in the House of Commons, and then this story appearing so soon afterwards, I will leave for others to judge.

Why Mercer seems to think the national news media would need a political conspiracy in order to cover his recent work (prior to the management buyout) for a group of companies which took 25% commissions from London Capital & Finance I don’t know. Most of us would consider that newsworthy in and of itself.

By “calling out deliberate efforts to smear me”, Mercer appears to be referring to allegations he has recently made that Parliamentary colleagues are attempting to “dig up dirt” on him.

Mercer is spoken of as a potential future Tory leader. As yet he has not explicitly stated that he will stand to replace Theresa May, but he has called for an overhaul of Conservative Party rules to allow its membership to choose from four leadership candidates, rather than the current limit of two.

However much a threat it may pose to any leadership ambitions, Mercer does not view the coverage as sufficient reason to give up his £350-an-hour salary.

Let me be clear: Crucial Academy is a good organisation, doing good things, run by good people, with no financial link to London Capital and Finance. I have no intention of resigning or cutting them adrift in this storm.

Crucial Academy and Johnny Mercer MP distance themselves from London Capital & Finance wreckage in management buy-out

April 15, 2019April 15, 2019 ~ Phoenix ~ Leave a comment

Crucial Academy Limited, previously owned by Paul Careless, the director of London Capital & Finance‘s marketing agent Surge Financial, is to be sold to its chief executive, former Royal Marine Neil Williams.

The deal is expected to conclude this weekend. The consideration was not disclosed.

According to the Daily Mail:

Insiders said Careless has sold the firm to management because his involvement was damaging its work.

A source close to 43-year-old Careless said yesterday: ‘Paul decided to sell because he felt he was becoming a distraction to the company.

‘He did not want to get in the way of the great work being done at Crucial, and wishes the firm well for the future.’

Johnny Mercer remains a non-executive director of Crucial Academy, according to his register of interests. He is paid £85,000 a year for 20 hours’ work a month.

Mercer is tipped by some as a future Prime Minister and has previously hit back vehemently at any link between the collapse of LCF and his £354-an-hour gig.

“This effort to smear me by some loose connection to a company that I have never met, done business with or even heard of before its collapse is besmirching the good name of an exciting project at Crucial Academy run by good people doing good things.”

While other MPs have been busy weighing in on the London Capital & Finance scandal, many calling on the Treasury to investigate LCF and the Financial Conduct Authority’s role, Mercer has kept his counsel. His (very active) Twitter feed contains no mention of LCF or Surge at time of writing, preferring to focus on veterans’ issues and Brexit.

It remains to be seen whether Crucial will fully cut its ties with Surge by moving out of the Surge group’s offices at 19a Portland Street, Brighton.

London Capital & Finance and the Chinese investment fantasist

April 9, 2019April 9, 2019 ~ Phoenix ~ Leave a comment

Articles dug up from the archives of local papers have revealed that before London Capital and Finance invested £21 million in the Waterside Villages resort in Cornwall, the same resort was the subject of a planned £30 million investment which was to form part of a £250 million investment in UK tourism by China.

Chinese company Sinofortone and London Group plc, which was owned by Elten Barker and Simon Hume-Kendall, signed a Memorandum of Understanding in 2015. From a Cornwall Live story from October 2017:

The plan was to purchase of the Lakeview Country Club and rename it Waterside Luxury Village as a “first step with other locations to be announced”.

The development was set to include 36 luxurious villas, a state-of-the-art visitor centre, spa, dining facilities and sports venues. There would have also been a five star 105-bedroom hotel, a wide variety of outdoor pursuits, Mandarin-speaking receptionists and tour guides.

Sinofortone was headed by Peter Zhang. From 2015 to 2016 Sinofortone announced a dizzying array of expensive investments into the UK, which included:

an investment of £2 billion into Welsh biomass and food stations
the aforementioned £250m investment into holiday villages
£100m into a Paramount theme park in Kent
£10bn into housing and transport in Scotland
London’s Crossrail 2 rail line
A proposed science park in Cambridge
Regeneration scheme in Huddersfield and Stoke-on-Trent
A reported £700m takeover bid for Liverpool football club

None of these plans came to anything. Sir Richard Heygate, who was a co-director of Sinofortone’s UK company, later said that Sinofortone’s proposed investments were “all bollocks” and “Peter [Zhang] is a nice guy but he believed he could create a private vehicle for raising money without having any capital himself, and I just thought was impossible – a crazy idea”. Sinofortone’s website disappeared some time ago.

Peter-Zhang-Scott-Mann — L to R: Andy Thomson (London Capital & Finance CEO), Simon Hume-Kendall, Scott Mann (MP for North Cornwall) and Peter Zhang (Sinofortone CEO)

The only investment Sinofortone did manage to make was to buy a pub in Cornwall called the Plough, where Chinese Premier Xi Jinping and then Prime Minister David Cameron were photographed sharing a pint. The purchase was funded by a £2 million loan from the Royal Bank of Scotland. Whether RBS ever got their money back is not known.

Zhang claimed that he would capitalise on the photo op by building 50-100 replicas of the Cornish watering hole in China. This plan also appears to have come to nothing.

After the Sinofortone deal fell through, London Capital and Finance invested £21 million of money that actually existed in the Cornish resort instead, via Prime Resort Development Limited, which in turn lent to Waterside Villages Limited and Waterside Support Limited. Waterside Villages Limited.

As part of the transactions relating to Waterside, multi-million pound sums went into the personal accounts of Simon Hume-Kendall, Elten Barker, Andy Thomson and trusts/interests of Spencer Golding, according to the LCF administrators’ report.

The imaginary Sinofortone deal was by this time ancient history, and no blame attaches to LCF or its borrowers for the shenanigans of Zhang. It does however provide interesting context into how LCF investors’ money ended up in Cornwall.

The administrators continue in their attempts to establish how much money, if any, can be recovered from the Waterside resort. According to their report, the administrators “are very concerned that the management of Waterside, which is well aware that the LCF Bondholders are depending on the value of the LCF borrowers and sub-borrowers for their repayment, has made no real efforts to prove to the administrators either the value of the Waterside business or of the security provided to secure the repayment of the debt”.

Independent Oil & Gas to raise £16.6m from new share issue; London Capital & Finance administrators to give it more time to pay

April 3, 2019April 2, 2019 ~ Phoenix ~ Leave a comment

Independent Oil & Gas is hoping to raise £16.6 million from the AIM stockmarket in order to develop its North Sea gas wells while deferring repayment of the £38.6 million it owes to London Capital & Finance.

As part of a debt restructure, £7.1m of debt due to one of LCF’s underlying borrowers, London Oil & Gas, will be rescheduled. A further £1.64m of debt will be converted into ordinary shares, and the maturity of existing warrants will also be extended by 12 months.

The hope for LCF investors is that IOG will succeed in developing its gas wells and be able to sell part of its interest in the wells to a bigger energy firm, allowing IOG to repay the loan and causing the shares to jump in value, allowing the administrators to recover more than the £40 million that RockRose Energy recently offered to buy the debt.

IOG shares plunged on the news of the restructuring from 17p to 11p. At time of writing they have recovered to around 14p.

Broker Arden Partners described the deal as “good news for IOG”. Whether it is good news for LCF investors remains to be seen. RockRose Energy has withdrawn its offer to buy the debt and said that it “failed to understand” how the rejection of its offers were in the best interest of IOG shareholders.

FCA commissions independent inquiry into whether they can pass the buck on London Capital and Finance

April 2, 2019 ~ Phoenix ~ Leave a comment

The FCA announced yesterday that an independent inquiry will be held into its supervision of the FCA-authorised Ponzi scheme London Capital and Finance.

The inquiry will cover two areas:

whether the existing regulatory system adequately protects retail purchasers of mini-bonds from unacceptable levels of harm
the FCA’s supervision of LC&F

The first area of investigation will essentially cover whether the FCA can pass the buck.

The regulatory system is not the FCA’s creation but the creation of the Government; it is the Government that writes securities legislation and the Government that periodically sets up, abolishes, merges and reshuffles the regulators.

The FCA has therefore decided that the most important question (the one they have listed first of the two) is whether they can blame the regulatory system rather than the regulator, i.e. themselves. As a famous social scientist once said, don’t hate the playa, hate the game. Not our fault guv, we don’t make the rules.

The FCA has wide powers of rule-making and interpretation but could not fundamentally alter the Financial Services and Markets Act, give itself new powers or make unregulated minibonds regulated.

I’ll give the FCA’s as-yet-unamed independent reviewer a clue: the answer to the first question is no. But that has absolutely nothing to do with whether the FCA should have:

paid more attention to the repeated warnings from both industry professionals and members of the public about LCF’s misselling from 2015 onwards
while processing LCF’s application for FCA authorisation, conducted a cursory Google search for its name; which would have revealed, among other evidence of potential harm, the now long-running Moneysavingexpert forum thread in which numerous potential investors were asking whether LCF was safe, providing ample evidence of potential misselling
taken action on LCF’s misleading financial promotions (and those of third parties to whom LCF paid commission) earlier than December 2018
demanded that LCF produced evidence that all its investors qualified as high net worth or sophisticated investors; and that they had not just ticked a box to say so, but provided evidence that they qualified as such, as required by FCA regulation COBS 4.12.9 onwards

A timescale for the inquiry has not been given, but the phrase “broad and comprehensive remit” provides a clue. The FCA is likely to have plenty of time to fish out its “lessons will be learned” stamp.

Who is to lead the inquiry is yet to be decided. Whoever it is, if they truly want to demonstrate that they are genuinely independent, they could start by insisting that the first question should be a completely separate inquiry, as it is a completely different area of investigation.