Smith & Williamson have released their initial proposals as administrators of London Capital and Finance.

Their report confirms that London Capital & Finance was a Ponzi scheme.

Back in February S&W calculated that to return capital and interest to bondholders in full after paying out up to 25% commission, LCF needed returns of *at least* 19% per year.

Accordingly, in order for LCF to be able to repay the Bondholders, the Borrowers would need to make very substantial returns on the monies loaned from LCF to them. For instance, in the case of a… 5 year bond, we estimate that the associated Borrowers would need to repay LCF c.195% of the amount loaned to them over the 5 year period, requiring them to make a c.19% annual return on the monies loaned to them.

S&W’s latest report says:

The borrowers were charged 2% for the initial borrowing (and on subsequent lending) an annual interest of 1.75% was applied on a quarterly basis to their loan accounts. They were also charged, on top of these amounts, the rate of interest due to the Bondholders.

Bondholders were paid different rates of interest depending on when they invested and for how long, so it is not 100% clear what exact rate of interest was being charged. However, based on all the loans issued by LCF, the maximum rate that could have been paid by the underlying loans is 10.7% per year plus 2% at outset.

This means that even if all LCF’s underlying loans paid on time and in full (which they didn’t), LCF would never have had sufficient funds to repay investors from this source. (And this is without any allowance for bad debts or for LCF’s running costs.)

Some of LCF’s loans – specifically to Independent Oil and Gas and Atlantic Petroleum – are convertible to equity. In theory these loans could have returned more than the loan coupon if these conversion rights had been exercised, and the shares sold. There is no suggestion in the adminstrators’ report that any returns paid to investors came from converting LCF’s loans into equity or that this was ever a realistic possibility. Investing in equity was also never part of LCF’s business plan; the required rate of return was always supposed to be paid via secured loans.

As returns from its lending business were woefully inadequate to meet its liabilities, the only other way LCF could have maintained payments of interest and capital to investors was using new investors’ money.

Regardless of what proportion of repayments to investors came from the inadequate interest paid by the underlying borrowers, relying on new investors’ money to pay back existing investors made LCF a Ponzi scheme.

Other lies told by LCF

In an update posted on its website on 27 December, a day before the FCA froze LCF’s bank accounts, LCF claimed

For the avoidance of any doubt, LCF would wish to stress that at the date of this notice no borrower has defaulted on loans made to it and the security taken in respect of each borrower loan remains in place.

This, we now know, was a lie. In reality, according to S&W,

All borrowers had ceased paying the interest applicable to their loans by September 2018 which was 3 months before the FCA intervened into the Company in December 2018.

Failing to pay interest applicable is a default.

The list of assets

LCF has loans outstanding from a total of 12 borrowers, which Smith & Williamson has grouped into four controlling entities:

• London Group LLP – £154.6 million owed
• Prime Resort Development Limited – £70.1 million
• FS Equestrian Services Limited – £12.3 million
• London Financial Group – £0.8 million

London Group LLP

London Group LLP is an LLP controlled by Simon Hume-Kendall (ex LCF director) and Elten Barker.

The largest loan under London Group LLP is the £122m lent to London Oil & Gas.

This includes the £38.6m lent to Independent Oil & Gas. On Monday we noted that RockRose Energy had offered to buy this debt for £40 million, subject to S&W disclosing how big a share of the company this would give them via conversion rights, but their offer had been ignored by S&W, to the point that RockRose threatened legal action.

The administrators note the offer to buy the debt in yesterday’s report but do not offer any explanation as to why they have ignored it. They say that they are also seeking “to establish the value of the convertible loans mentioned and the share warrants they hold in IOG”,  which is fair enough. But a quick email or call to RockRose to say “we don’t know how much these loans and warrants are worth either, so give us a minute” would not go amiss when someone is offering to bail out the creditors and allow you to cash in the only asset you are currently fully confident of getting money out of.

London Group’s other assets consist of:

a loan to Atlantic Petroleum, a Danish / Norwegian listed oil and gas company, which the administrators consider to have high prospects for return.

a series of speculative technology investments. One, London Artificial Intelligence Limited, apparently makes software that predicts future commodity prices. “While still in its infancy”, the software supposedly has a prediction accuracy of 85% for the one commodity it is able to track so far. The administrators believe “that this business currently has limited value but has the potential to have great value”. If the administrators can really extract great value from a magic piece of software that makes free money by predicting future commodity prices with 85% accuracy, then good for them.

London Power & Technology, a corporate vehicle used by London Group LLP to buy London Oil & Gas. This shell owes LOG £16.6 million. The administrators see no commercial benefit for LCF in this loan.

LPE Support Limited, which owes LCF £18m used to facilitate the sale of property companies making up the Prime Resort Development Limited loan group (see below). The administrators “have not established with sufficient certainty the purpose of this loan, where the funds went, the nature or value of the security provided or the mechanism as to how the loan will be repaid; these matters are under continued, urgent investigation”.

Cape Verde Support Limited and CV Resorts Limited, which relate to a partly built resort in Cape Verde. The administrators “are highly suspicious of this transaction and currently can see no evidence that any of the c.£12m owed to LCF will be returned or recovered”.

Prime Resort Development Limited

LCF is owed money by six companies under this umbrella, which consist of three leisure investments: two in the sunny Dominican Republic and one in occasionally sunny Cornwall.

The management of the Dominican resorts is being “totally unhelpful” in S&W’s attempts to establish the value of these loans and LCF’s security.

In regard to the Cornwall development, the administrators do not yet have up-to-date information on Waterside’s financials, and have concerns of whether Waterside’s value is sufficient to satisfy the loan-to-value covenant under the security agreement.

The section on the Dominican Republic and Cornwall investment contains one of the most serious statements in the administrators’ report.

Our investigations indicate that some of LCF’s Bondholders’ monies flowed through a variety of transactions, including with regard to deferred consideration, relating to the Waterside and Dominican Republic property companies (see references to WSL, CSL and CSL2 above), which resulted in multi million pounds of those monies going into thepersonal possession or control of:

Simon Hume-Kendall

Elten Barker

Andy Thomson

and Spencer Golding related trusts or interests.

The administrators have approached all four parties asking them to pay these monies into escrow for the benefit of the LCF Bondholders, to be returned to the four parties in the event that the LCF Bondholders receive full repayment from the assets of LCF. Simon Hume-Kendall and Andy Thomson have agreed to this arrangement and legal documents are currently being drawn up. Spencer Golding and Elten Barker have been asked to enter into similar arrangements and the administrators await hearing from them in this regard. This area is a key focus for the administrators’ activities at present.

Whether Hume-Kendall and Thomson still have the money to comply with these agreements is not yet known.

Hume-Kendall and Thomson have already been named as two of the four people arrested by the Serious Fraud Office on 4 March, and subsequently released without charge.

FS Equestrian Services Limited

LCF initially loaned Spencer Golding £10,439,062, which then became a £20 million loan facility to a new company, FE Equestrian Services Limited, to which Golding’s loan is believed to have been transferred (although the administrators are taking advice on whether Golding can still be held personally liable).

The loan was secured over all the assets of FSE. According to a stock listing submitted to LCF in July 2018, FSE owned 85 horses valued at £15 million. However, when S&W went to the stables, they were given a stock list of only 50 horses, of which only 35 were in their stable, with 11 of the rest being held by a third party for sale and the other 4 out of the country competing on the showjumping “Sunshine Tour”.

Where the other horses have bolted to is unclear, and a full investigation is pending into the stable door.

London Financial Group

£839,775 was loaned to LFG, the immediate parent of LCF, to buy a certain infamous helicopter with LCF branding. The administrators are taking immediate steps to have the helicopter sold off.

The future

The administrators have reportedly warned investors that it may be two years before distributions are made.

Given that:

• a significant part of potential recoveries consist of clawbacks of millions of pounds from individuals, two of whom are yet to respond to the clawback request;
• ongoing FCA and SFO investigations may potentially interfere with any civil legal action;
• recovery strategies for other LCF funds include “hope that AIM-listed firms pay back the debt out of their earnings, despite the fact that the loans dwarf their gross revenue many times over” and “sell magic technology that makes free money from the commodity markets”,

this two-year timeframe seems like yet another attack of optimismitis on the part of Smith & Williamson. It would not be at all surprising if the administration lasted significantly longer.

With pre-administration costs already standing at £142k for Smith & Williamson and £53k for their legal advisers Mischon de Reya, plus a further £415k charged by Mischon de Reya in the administration period itself, S&W have more reasons to be cheerful than the bondholders. As yet Smith & Williamson has not proposed a basis for their fees to the creditors.

London Capital & Finance administrator Smith & Williamson’s hopes of limiting investors’ losses to 83% currently rest entirely on the recovery of £38 million lent to Independent Oil & Gas by via an LCF shell company, London Oil and Gas (also in administration).

S&W’s Finbarr O’Connell said earlier in March that he was optimistic about making a “full recovery” of the IOG loan. At time of writing the administrators have not put a figure on potential recoveries for any other of LCF’s assets.

RockRose Energy (which is listed on the LSE’s main market) has revealed that it has made a £40 million cash offer to buy LCF’s debt from London Oil. This deal would apparently result in the hoped-for recovery becoming real. However, this deal is in doubt over what RockRose describe as a “lack of engagement” from S&W and IOG.

RockRose Energy’s plan is to buy IOG’s debt to LOG and exercise debt-to-equity conversion rights, which it believes would give it more than 50% of the resulting diluted share capital – essentially allowing it to take over IOG via its debt.

However, RockRose Energy’s attempts to confirm that this plan would actually work, by asking LOG to disclose its diluted share capital, have been met with silence from Smith & Williamson and IOG.

As a result RockRose Energy are considering legal action to force IOG to disclose its undiluted share capital.

Whether there are any other potential bidders willing to hand over £40 million for IOG’s debt is unknown. If not, annoying RockRose to the point they threaten legal action doesn’t seem like a very good strategy for recovery.

If the debt is not bought, LCF investors are left hoping that IOG can pay back the debt from its revenues. The other potential strategy, which has been previously mooted,  is for the administrators to exercise the conversion rights themselves and then sell the shares on the AIM market at some point.

However, with IOG’s entire share capital currently valued at £23 million at time of writing, the chances of LCF’s resulting share ever being worth £40 million on the open market seems a very long shot – if RockRose’s bid is turned down.

LCF raised at Treasury Questions

At Treasury Questions on Friday, Shadow Business Minister Chi Onwurah asked three questions about LCF:

To ask the Chancellor of the Exchequer, what steps the Government is taking to compensate people who invested in London Capital of Finance [sic per Hansard].

To ask the Chancellor of the Exchequer, with reference to the collapse of London Capital of Finance, what steps he is taking to prevent investment schemes which engage in mis-selling from trading.

To ask the Chancellor of the Exchequer, with reference to the collapse of London Capital Finance, what recent assessment he has made of the (a) adequacy of the financial regulatory framework and (b) effectiveness of that framework in relation to inexperienced investors.

On compensation, Economic Secretary for the Treasury John Glen unsurprisingly repeated the current position; the FSCS is not currently accepting claims, but “if there are circumstances that give rise to potentially valid claims, the FSCS will begin to accept claims against LCF”. Investors should not get their hopes up prematurely, as the part in italics is a truism, equivalent to saying “if I jump in the water, I will get wet”.

On the other two questions, Glen issued generic responses, stating that the Government takes LCF very seriously, that “the regulatory framework for financial services is under constant review”, and that while the Government is committed to investor protection, “this needs to be balanced with a need to regulate only where there is a clear case for doing so”.

He commented correctly that the promotion of minibonds like LCF was already regulated, and this was the responsibility of the FCA, but did not specifically censure the FCA for ignoring the multiple warnings it received on LCF from 2015 onwards.

Link: All our articles on London Capital and Finance

Two of the four individuals arrested in connection with London Capital & Finance have been named as Simon Hume-Kendall, who founded the company that became LCF and whose companies later borrowed significant sums from it; and Andrew Thomson, LCF’s chief executive.

The identities of the other two people arrested remain unknown at time of writing. All four of those arrested were released without charge.

As MPs continue to demand answers from the FCA, the political plot has thickened with the news that the administrator may demand the return of over £50,000 donated to the Conservative Party by Hume-Kendall if it can be proved that the money came from LCF. A source close to Hume-Kendall claims that the money came from Hume-Kendall’s personal wealth.

Since the Tories helped out London Capital & Finance immensely by introducing the monstrosity that is the Intelligent Finance ISA, it would be a nice gesture if it didn’t wait for the administrator to go through LCF’s bank statements and instead handed the money back immediately. Particularly as there are likely to be a large number of Tory voters among LCF’s victims, given that they were predominantly elderly and, if not well-off, at least in possession of enough money to be a target.

The introduction of the Intelligent Finance ISA allowed LCF to promote itself using the ISA label (inaccurately, as it turned out). The ISA label is, rightly or wrongly, viewed by most UK retail investors as a “CAT standard”. Unsurprising given that the Government encourages people to invest in them as a tax break. Until the introduction of the IFISA, it also restricted investments to authorised deposits (cash ISAs), regulated collective investments or securities traded on a regulated exchange, which gave a further level of assurance.

The introduction of the IFISA by George Osborne in 2016 allowed promoters of investments like London Capital and Finance to not only use the ISA label, but access a lucrative new market; those savers who have built up significant sums in cash ISAs currently earning a very low rate of return.

From “the numbers all add up” to 20% to 17% to…

A company related to LCF, London Oil & Gas Limited, has also been put into administration by Smith & Williamson.

The Evening Standard also reveals that the administrators have revised the estimated recovery downwards. Previously Smith & Williamson were talking about recovering 20% of the money, but this has now become £40 million of the £236 million invested (which is 17%).

The 20% figure was originally described as a “base” figure on the BBC’s Money Box radio show, but it later become clear that a better term would be “best case”, which has now been proven by the fact that “best case” figure has now been cut to 17%.

It would sadly be no surprise if this figure is not revised downward further by the time the administration completes.

Link: All our articles on London Capital and Finance

The Serious Fraud Office has announced that it has opened an investigation into individuals associated with London Capital & Finance, and that four individuals were arrested in the Kent and Sussex areas on 4 March 2019. All four were subsequently released pending further investigation.

The SFO has not released the individuals’ names and will make no further comment at this time.

London Capital & Finance is (despite its name) based in Tunbridge Wells, Kent.

London Capital & Finance’s principal marketing agent, Surge Financial, is based in Brighton, Sussex. The SFO has not named Surge as a target in its investigation. Update 18.3.19: A Surge spokesman has told the Evening Standard that nobody from Surge has received “any contact whatsoever”.

The SFO wants to speak to anyone who invested in LCF between 1 June 2016 and 31 December 2018. They can be contacted via this online form.

The investigation into LCF has been codenamed “Operation Axite” (which despite sounding a bit like a mineral is a made-up word).

Link: All our articles on London Capital and Finance

As the fallout from the £230m collapse of London Capital & Finance continues, MPs have stood up in Parliament to ask angrily: where’s my job paying £354 an hour?

Excuse me a moment, I’ve been drinking too many Old Cynics. *sound of herbal tea pouring* There we go.

The Evening Standard’s Jim Armitage reveals today that the chairman of the Treasury Select Committee, Nicky Morgan, will formally write to the Financial Conduct Authority to ask why it did not act sooner over the repeated warnings it received from 2015 onwards, and what the circumstances were that made it finally take action.

She will also demand answers from the Treasury as to whether mini-bonds should continue to be unregulated by the FCA.

“The stories of those affected by the actions of LC&F are distressing, so the FCA is rightly investigating its promotional material for being misleading, not fair and unclear.

“However, the mini-bonds that were promoted by LC&F are unregulated.

“I will be writing to the FCA to understand what prompted the regulator to act, and whether it could have acted sooner. I will also write to HM Treasury to understand whether mini-bonds should continue to be unregulated.”

Shadow Chancellor John McDonnell has also called for answers.

“Many of the people who put their life savings into these investments will be asking the question: where was the regulator? It is starkly clear that the current system is not working effectively.”

Gavin Newlands (SNP member for Paisley and Renfrewshire North) also raised a question in Parliament regarding not just the collapsed LCF, but the currently-operating minibond firm Blackmore Bonds. In response, Tory leadership runner-up Andrea Leadsom described LCF’s collapse as “appalling”.

Gavin Newlands (Paisley and Renfrewshire North) (SNP): My constituent invested her £60,000 life savings in London Capital & Finance and had put £20,000 in a similar company called Blackmoor [sic from Hansard], which markets individual savings accounts with 7% interest, using a third party that took 25% commission, but the small print said they were not ISAs but investment bonds. LCF went into administration earlier this year after the Financial Conduct Authority ordered the sale of the bonds to stop, but investors’ money was lent to people with a connection to LCF, including its founder. Can we have a debate on this scandalous and fraudulent issue?

Andrea Leadsom: I had heard of this appalling collapse, and the hon. Gentleman is right to raise it. There will be people who have really suffered financially as a result of this. I suggest that he seeks an Adjournment debate so he can raise it directly with Ministers.

Wheeeere’s Johnny?

Johnny Mercer MP, meanwhile, who is employed part-time by Crucial Academy Limited, which is owned by Surge Group plc, and is a sister company to London Capital & Finance’s marketing agent, has started the PR fightback by: mocking another MP’s well-intentioned but rather silly idea to combat knife crime with a paper sign on his door reading “Ministry of Good Ideas”.

Link: All our articles on London Capital and Finance

Two months after London Capital and Finance was shut down, it has finally dawned on the big media players that over 10,000 people potentially losing £200m in life savings in a scheme with links to minor politicians is big news.

Two recent episodes from the BBC have covered London Capital & Finance; a further episode from Radio 4’s Money Box programme, and a regional news investigation from Inside Out South West.

Little on the programmes will be news to investors who have been following the case closely.

The most significant part of the Money Box programme is an update from administrator Finbarr O’Connell, who says that early indications are that investors should expect 80% losses as a “base figure”, with a “worst case scenario” being even less than that.

O’Connell says that while some of LCF’s underlying borrowers are being co-operative (Independent Oil & Gas is specifically named, and not for the first time), recovery from other LCF borrowers, whose assets include leisure property and bloodstock (racehorses), is highly uncertain.

He goes so far as to say that the returns necessary for LCF to pay its bondholders in full – 44% for a 1 year bond and 19% per year for a 5 year bond – were “unbelievable”.

Did the FSCS confirm that LCF was covered by them?

There is a brief mention of an investor who wrote to the Financial Services Compensation Scheme 18 months ago asking if LCF was covered, and who showed Moneybox a letter he received in response which says, according to the investor and his lawyer, that LCF is covered by the FSCS.

As I don’t have a copy of this letter and am going by third-hand information I’ve heard on the wireless, it is difficult to analyse.

However, I would be amazed if the letter said anything more that as an FCA-authorised company, the FSCS would potentially apply to LCF as a firm.

This is not enough for FSCS compensation. To be compensated you need a “protected claim” against an FCA-authorised company. All protected claims are against FCA-authorised companies but not all money owed by an FCA-authorised company is a protected claim.

In general a default on an unregulated loan notes is not a protected claim, even if it was a loan to an FCA-authorised firm. Though as regular readers of Bond Review will know, the waters have been muddied in the past.

The FSCS has recently confirmed that it is not accepting claims from London Capital & Finance investors at this time.

The Plymouth MP on the Surge payroll

The register of interests for Johnny Mercer, Tory MP for Plymouth Moor View, reveals that he has worked for Crucial Academy Limited since 18 September 2018.

Crucial Academy is part of the group of companies that includes Surge Financial and RPDigitalservices, the firm that ran LCF’s call centre and the two “comparison websites” that drove the most traffic to its website.

Both Surge Financial and Crucial Academy Limited are registered to the same office in Brighton at 3rd Floor 19a Portland Street. Both share a director, Stephen John Jones (also director of RPDigitalservices and a number of other Surge companies).

According to the most recent confirmation statements at time of writing, Crucial Academy Limited is 100% owned by The Crucial Group Limited. This in turn is owned 40% by Surge Group plc, 25% by Paul Careless, 25% by founder Neil Williams and 10% by George Carlo. Surge Group plc is owned 100% by Paul Careless.

This gives Paul Careless, the CEO of Surge, an overall 65% controlling share.

Mercer receives £85,000 a year for 20 hours’ work a month, equivalent to a full-time salary of almost £600,000 a year (based on a full time job being 35 hours a week). He claims he has no dealings with Crucial Academy’s sister company Surge, or the man who owns 65% of his side hustle, Paul Careless.

The Inside Out programme revealed that the honourable member has refused to step down from his Crucial Academy post. Well, you’d have to be a pretty honourable member to wave bye-bye to a £350 an hour gig.

Having only been incorporated in February 2018, Crucial Academy is yet to file accounts, meaning it is not known how Johnny Mercer MP’s £85,000-a-year salary is funded.

In other political news, Work & Pensions Secretary Amber Rudd received a £5,000 donation from former LCF director Simon Hume-Kendall in December 2018. Parliamentary records suggest this is Hume-Kendall’s first political donation since he gave a bottle of brandy to Strictly’s Ann Widdecombe in 2010.

What next?

On the Money Box programme, O’Connell stated that the administrators expect to submit their initial proposal between 25th and 27th March.

With O’Connell’s revelation that 80% losses are the “base” scenario, it is clear that standard procedure for investors in collapsed unregulated investments applies. Expect nothing, and treat any recovery from the administration as a bonus.