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You are here: BAILII >> Databases >> United Kingdom Financial Services and Markets Tribunals Decisions >> Fox Hayes v Financial Services Authority [2007] UKFSM FSM047 (05 October 2007) URL: http://www.bailii.org/uk/cases/UKFSM/2007/FSM047.html Cite as: [2007] UKFSM FSM047 |
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FINANCIAL PROMOTIONS – approval of non-real time financial
promotions for unauthorized overseas persons – whether Applicant was able to show that it had taken reasonable steps to ensure that promotions clear, fair and not misleading – yes – whether Applicant had no reason to doubt that the overseas persons would deal with customers in the UK in an honest and reliable way – yes until mid-November 2003 but no thereafter – whether Applicant arranged for confirmation (that the promotions complied with the rules) to be carried out by an individual with appropriate expertise – yes – whether Applicant conducted its business with due skill, care and diligence – yes - whether penalty of £150,000 excessive – further submissions invited - FSMA 2000 Ss 21, 138 and 206 – Conduct of Business Rules 3.6.1; 3.8.4; 3.12.6; Principles for Businesses, Principle 2 |
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THE FINANCIAL SERVICES AND MARKETS TRIBUNAL
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FOX HAYES
Applicant
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- and -
THE FINANCIAL SERVICES AUTHORITY |
Respondent
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Tribunal : DR A N BRICE (Chairman)
MRS C E FARQUHARSON
MISS S C O’NEILL
Sitting in London on 5 to 14 June 2007
Charles Hollander QC, instructed by the Applicant, for the Applicant
Richard Coleman, Counsel, instructed by the Financial Services Authority, for the
Authority |
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©CROWN COPYRIGHT 2007
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CONTENTS
Paragraph
The reference 1
The legislation 5
The 2000 Act 5
The Conduct of Business Rules 9
The Principles for Businesses 13
The issues 14
The evidence 15
The facts 18
The Applicant 19
2000 – The Entrepreneurs Club 22
The OTC Bulletin Board 24
2002 – Mr Manning meets Mr Reade 25
Early January 2003 – Mr Rycott visits the Applicant 26
Mr Jones researches the rules 31
Late January 2003 – Condor Research SL 35
Stage 1 – the enquiries into Condor 37
Stage 2 – the approval of the initial letter 40
Stage 3 – the approval of the research report 46
Stage 4 – the operation of the escrow account 49
The other promotions and the other overseas companies 56
The enquiries into the other overseas companies 57
A summary of all the promotions 61
Later developments 64
May 2003 – The Authority’s seminar 65
May 2003 – The Authority’s press releases 66
July 2003 - The Authority visit the Applicant 72
2003-2004 – Correspondence from the press 78
December 2003 – The warning of the Spanish regulator 84
April 2003 – 2004 – The complaints from investors 85
March 2004 – The meetings between the Applicant and Mr Reade 88 June 2004 – The Applicant ceases to act 92
2003-2004 – The developments within the Authority 94
April 2004 - The Authority’s investigation into the Applicant 100
September 2006 – The Decision notice 102
2007 - The events shortly before the hearing 103
Mr Manning’s evidence to the Tribunal 107
Our findings about the commissions 109
The oral evidence of the investors 113
Reasons for decision 116
Issue (1) – Clear, fair and not misleading 119
Issue (2) – Honest and reliable 128
The enquiries about the overseas companies 132
What the Applicant knew at the outset 135
The press releases 137
The Authority’s visit 141
The other developments 142
The time of the reason to doubt 144
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Conclusion about issue (2) 148
Issue (3) – Appropriate expertise 149
Issue (4) – Due skill, care and diligence 152
The adequacy of the enquiries 154
Advice about the legality of the telephone calls 158
The Financial Promotions Order 159
The Regulated Activities Order 165
Conclusion about issue (4) 169
Issue (5) – Was the penalty excessive? 170
Decision 176
Directions 177
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DECISION
The reference
1. Between February 2003 and June 2004 Fox Hayes (the Applicant) approved a
number of financial promotions for unauthorized overseas companies. The financial promotions took the form of letters approved by the Applicant and sent by the overseas companies to private investors in the United Kingdom. Each letter offered a free research report into a company in which the investor already held shares. The Applicant also approved the research reports which were later sent by the overseas companies to the investors who requested them. 2. The Financial Services Authority (the Authority) was of the view that the
Applicant had not taken reasonable steps to ensure that the financial promotions were clear, fair and not misleading and was also of the view that the Applicant had reason to doubt that the overseas companies would deal with customers in the United Kingdom in an honest and reliable way. The Authority therefore decided to impose a penalty on the Applicant of £150,000 and gave a decision notice to that effect on 29 September 2006. The Applicant referred that decision notice to the Tribunal. 3 In its statement of case the Authority also argued that the Applicant had not
arranged for the confirmation exercises (that the financial promotions complied with the
rules) to be carried out by an individual with appropriate expertise and that the Applicant had not conducted its business with due skill, care and diligence. The Applicant accepted that, following the decision of the Tribunal in Philippe Jabre v The Financial Services Authority (Decision 035), the Tribunal had jurisdiction to consider these matters even though they had not been mentioned in the decision notice. 4. The Applicant disputed all the arguments of the Authority and was also of the
view that the amount of the penalty was excessive. The legislation
The 2000 Act
5. The legislation dealing with financial promotions, the Authority’s rule-making
power and the imposition of penalties is found in sections 21, 138 and 206 of the Financial Services and Markets Act 2000 (the 2000 Act). 6. Section 21 provides that a person must not, in the course of business,
communicate an invitation or inducement to engage in investment activity unless he is an authorised person or unless the content of the communication is approved by an authorised person. An investment activity includes selling securities and giving investment advice. Where a communication originates outside the United Kingdom, the section only applies if the communication is capable of having an effect in the United Kingdom. At the relevant time the Applicant was an authorised person. 7. Section 138(1) gives the Authority power to make such rules applying to
authorised persons as appear to be necessary or expedient for the purpose of protecting the interests of consumers. Under this provision the Authority has made the Conduct of Business Rules and the Principles for Businesses. |
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8. The penalty was imposed under the provisions of section 206 the relevant part of
which provides: “(1) If the Authority considers that an authorized person has contravened a
requirement imposed on him by or under this Act … it may impose on him a penalty, in respect of the contravention, of such amount as it considers appropriate.” The Conduct of Business Rules
9. Chapter 3 of the Conduct of Business Rules applies to every firm which
communicates or approves financial promotions. This reference concerns non-real time financial promotions. At the relevant time, real-time financial promotions were defined in rule 3.5.5R1 as “promotions which are communicated in the course of a personal visit, telephone conversation or other interactive dialogue”. Non-real time financial promotions were defined in rule 3.5.5R2 as “financial promotions which are not real time” and the examples given included promotions made by letter. 10. Rule 3.6 concerns confirmation of compliance and at the relevant time rules
3.6.1R1 and 3.6.1R2 provided: “3.6.1R
1. Before a firm communicates or approves a non-real time financial promotion, it
must confirm that the financial promotion complies with the rules in this chapter. 2. A firm must arrange for the confirmation exercise in (1) to be carried out by an
individual or individuals with appropriate expertise.” 11. Rule 3.8 concerns the form and content of financial promotions and rules 3.8.2R
to 3.8.20R apply to firms which communicate or approve non-real time financial promotions. At the relevant time rule 3.8.4R1 provided: “3.8.4R.1 A firm must be able to show that it has taken reasonable steps to ensure
that a non real-time financial promotion is clear, fair and not misleading.”
12. Rule 3.12 concerns the communication and approval of financial promotions for
an overseas person or unauthorized person. At the relevant time rule 3.12.6R applied to specific non-real time financial promotions for overseas persons and the relevant part provided: “3.12.6R
A firm must not communicate or approve a specific non-real time financial promotion
which relates to an investment or service of an overseas person, unless …
(2) the firm has no reason to doubt that the overseas person will deal with
customers in the United Kingdom in an honest and reliable way.”
The Principles for Businesses
13. Principle 2 of the Principles for Businesses provides;
“2. A firm must conduct its business with due skill, care and diligence.”
The issues
14. Thus what we had to decide was:
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(1) whether the Applicant had taken reasonable steps to ensure that the
promotions were clear, fair and not misleading within the meaning of COB rule 3.8.4R1; (2) whether the Applicant had no reason to doubt that the overseas persons
would deal with customers in the United Kingdom in an honest and reliable way within the meaning of COB rule 3.12.6R(2); (3) whether the Applicant had arranged for the confirmation exercises (that
the promotions complied with the rules) to be carried out by an individual with appropriate expertise within the meaning of COB rule 3.6.1R2; (4) whether the Applicant had conducted its business with due skill, care and
diligence within the meaning of Principle 2; and . (5) whether the amount of the penalty was excessive.
The evidence
15. Eleven bundles of documents were produced by the parties.
16. Oral evidence was given on behalf of the Applicant by two partners in the
Applicant, namely Mr Robert Manning and Mr Malcolm Jones. We found Mr Jones to be a credible and reliable witness and accept his evidence. We also formed the view that Mr Jones is a competent, careful, honest and conscientious solicitor. We consider Mr Manning’s evidence below. 17. Oral evidence was given on behalf of the Authority by Mr Dominic Clark, a
Manager in the Small Firms Division of the Retail Markets Division of the Authority and by Ms Verity Elizabeth Casey, the executive assistant to the Managing Director of Regulatory Services at the Authority. Written statements by six other witnesses employed by the Authority were also produced. These were: Ms Susan Cooper, Ms Nausicaa Delfas, Ms Tazeen Mirza, Ms Melanie Jane Ramsay, Ms Kelly Rouse and Mr Peter Willsher. Oral evidence was also given on behalf of the Authority by seven investors who had purchased shares from overseas companies who were clients of the Applicant. Written statements by three other investors, containing evidence on behalf of the Authority, were also produced. The facts
18. From the evidence before us we find the following facts.
The Applicant
19. The Applicant is a firm of solicitors based in Leeds. After the date of the
decision notice the Applicant transferred its business to a limited liability partnership known as Fox Hayes LLP. 20. At the relevant time the Applicant had ten partners including Mr Manning and
Mr Jones. Mr Manning had been with the firm throughout his professional life. At the relevant time he was the senior partner and specialized in company and commercial work. He was also the managing partner until about 1998. Mr Manning had by far the |
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largest capital account of all the partners. He and three other partners constituted an
Executive Committee that ran the firm. Each of those four was entitled to a share of the profits. The other partners received a fixed amount each year and sometimes a bonus. 21. Mr Jones was also a partner in the Applicant but he was not a member of the
Executive Committee nor was he one of the four profit-sharing partners. He qualified as a solicitor in 1982 and joined the Applicant in 2001. He was the Applicant’s compliance officer and also a member of the Committee of the Leeds Law Society. He undertook mostly company and commercial work and his clients were mainly small and medium- sized businesses. .
2000 - The Entrepreneurs Club 22. In about 2000 the Applicant decided to bring potential investors into contact
with unquoted companies wishing to raise capital and so established the Entrepreneurs Club. The Club used to circulate promotions for such companies to a list of investors who were either existing clients of the Applicant or were persons who had asked to be included on the list. Every two months the Club held a meeting where companies made presentations to the investors about their business plans. If an investor wished to invest in a company a formal investment agreement was signed; the Applicant would act for the company and not for the investor. 23. Mr Jones looked after the financial promotions and in this way gained
experience in approving financial promotions for United Kingdom companies. He became aware of the provisions of the 2000 Act and of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2001 SI 2001 No. 1335 (the Financial Promotions Order) and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 SI 2001 No. 544 (the Regulated Activities Order). It is also likely that he read a paper entitled “The FSA’s Approach to Financial Promotions” which was published by the Authority in 2002. The OTC Bulletin Board
24. In about 1999 Mr Manning started to advise United Kingdom companies who
wished their shares to be quoted on the OTC Bulletin Board in the United States. The operation of the OTC Bulletin Board is approved by the Securities and Exchange Commission of the United States. It is managed by The Nasdaq Stock Market, Inc and is a regulated quotation service which displays real-time quotes, last-sale prices and volume information about over-the-counter equity securities. Only market makers can apply to quote securities on the OTC Bulletin Board and issuers contact an authorized market maker for sponsorship of a security on the service. Issuers of all securities quoted on the OTC Bulletin Board are subject to periodic filing requirements with the Securities and Exchange Commission or other regulatory authority. Shares quoted on the OTC Bulletin Board are generally of smaller companies and are regarded as higher- risk investments than shares listed on the main NASDAQ exchange. 2002 - Mr Manning meets Mr Reade
25. In dealing with these matters Mr Manning came into contact with the New York
law firm of Piper Rudnick (now DLA Piper Rudnick) and met Mr Paul Pollock who was then one of that firm’s partners. Mr Pollock introduced Mr Manning to a Mr Jeffrey Reade as someone who might be able to assist in providing finance for United Kingdom companies that were attempting to have their shares quoted on the OTC Bulletin Board. |
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In 2002 Mr Reade invited Mr Manning to visit him in Spain. During that visit various
business opportunities were discussed and Mr Reade told Mr Manning that he provided finance to companies wishing to float on the OTC Bulletin Board in return for which he became entitled to 35% of the shares of the companies. When the shares were trading he instructed brokers to sell the shares on his behalf. During the 2002 visit Mr Manning was introduced to a Mr David Rycott who worked for A Street Capital Inc (A Street Capital) one of Mr Reade’s companies. Early January 2003 – Mr Rycott visits the Applicant
26. In early January 2003 Mr Rycott visited the Applicant in Leeds to discuss a
proposal for introducing business to the Applicant and met Mr Manning and Mr Jones. We saw a note prepared by Mr Rycott prior to the meeting which summarized the matters he wanted to discuss and which mentioned section 21 of the 2000 Act and the provisions of the Regulated Activities Order. 27. The background to Mr Rycott’s proposal was that A Street Capital owned or
controlled shares in a number of OTC Bulletin Board companies. Mr Rycott wanted to approach overseas companies who would contact investors in the United Kingdom in order to sell the OTC Bulletin Board shares to the investors. The overseas companies would receive a commission on the shares they sold. Mr Rycott appreciated that, if the overseas companies were unauthorized, then it would be necessary to have an authorized person to approve any promotions under section 21. 28. The proposal, therefore, was that Mr Rycott would introduce the overseas
companies to the Applicant who would undertake due diligence on them and make sure that their promotions were fair and not misleading. Typically, an overseas company would write to a United Kingdom investor offering a free research report about a United Kingdom company in which the investor already held shares. By returning the request for a research report the investor would agree to be contacted by the overseas company and told about other investment opportunities. If the investor so agreed, then he would be contacted by the overseas company direct and told about the OTC Bulletin Board shares. Mr Rycott explained that the typical investor would be someone working in the City who had just received a large bonus and wanted a more exciting investment. An investment of about £2,000 would be typical. If an investor agreed to buy shares he would be invited to send the purchase money to the Applicant who would place it in an escrow account. The share certificate would be delivered to the Applicant who would send it to the investor after which the Applicant would account for the purchase money as directed by the overseas company. 29. The phrase “escrow account” was used widely in the documentation we saw and
throughout the hearing and so we adopt that usage. In fact, the account was operated as part of the Applicant’s client account. It later emerged that in fact it was a company called Bonham Investments Limited (Bonham), which was associated with A Street Capital, who had contractual agreements with OTC Bulletin Board companies to purchase their shares and that it was these shares which were to be sold by the overseas companies to investors. The administrative arrangements for the provision of the share certificates to investors were undertaken by a Mr Anthony May of Zetland European Administration Limited (Zetland) in Geneva who acted for Bonham. When shares had been sold Mr May, through Zetland, ordered the share certificates and arranged for them to be delivered to the Applicant for onward delivery to the United Kingdom investors. |
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30. It was known by the Applicant from the outset that the OTC Bulletin Board
shares to be offered to investors were subject to Regulation S under the United States Securities Act of 1933 which meant that they could not be sold within twelve months and that there were further restrictions on transfer during the twelve months after that. Mr Jones researches the rules
31. After the meeting with Mr Rycott, Mr Jones looked into the regulatory
requirements. He knew that financial promotions had to be clear, fair and not misleading and should be approved by someone who had the appropriate expertise. He also knew that, if acting for an overseas person, a firm should have no reason to doubt that the overseas person would deal with customers in the United Kingdom in an honest and reliable way. 32. On 13 January 2003 Mr Jones prepared an internal note about the requirements
for the approval of financial promotions. The note set out a number of steps to be taken by the Applicant for the approval of the sender of the promotions, of the business, and of the promotion. Under the heading of the approval of business, Mr Jones noted that two references should be taken up, one of which should be from a professional person acting for the business; also a note was made that “we will check the FSA “black list””. The reference to the “FSA blacklist” was included because Mr Rycott had mentioned that there was a blacklist. Under the heading of the approval of promotion Mr Jones noted that it had to be clear, fair and not misleading and that statements of fact should be verifiable from an independent source. 33. Also on 13 January 2003 Mr Jones telephoned the Authority and explained the
steps he proposed to take. He was reassured that, if he followed those steps, he would be complying with the rules. We accept the evidence of Mr Jones that he was told that he would be doing “more than most” and that he repeated those words to Mr Manning. We also accept that Mr Jones formed the impression that the person to whom he spoke at the Authority would have preferred the rules to be such that the Authority could regulate the overseas sellers of the shares. We also accept the evidence of Mr Jones that if the Authority had told him that something was clearly wrong then the Applicant would not have done it. 34 On the next day, 14 January 2003, Mr Manning wrote to Mr Rycott and sent him
two draft letters which would be sent by the Applicant to any unauthorized overseas company who became a client of the Applicant. The draft letters set out the basis on which the Applicant would act in approving financial promotions and in operating the escrow account. In approving financial promotions the Applicant was to be remunerated by reference to the time spent on the work. Thereafter it was Mr Jones who had the day- to-day involvement with the financial promotions and the escrow account, assisted by other staff of the Applicant. On occasion Mr Jones discussed some matters with Mr Manning. Late January 2003 - Condor Research SL
35. Later in January 2003 the Applicant received instructions from Condor Research
SL of Spain (Condor), the first overseas company to be introduced to the Applicant by Mr Rycott. In all the transactions that followed it was, of course, the overseas |
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companies who were the clients of the Applicant and who gave instructions to the
Applicant. The investors were not the Applicant’s clients. 36. We describe the first promotion for Condor in some detail because subsequent
promotions, both for Condor and the other overseas companies, followed a similar pattern. The work done for the overseas companies was usually done in four stages. First, Mr Jones made enquiries into the overseas company and its business; these enquiries were, of course, only necessary when the Applicant received instructions from an overseas company for the first time. Next Mr Jones approved a letter to be sent by the overseas company to individual investors in the United Kingdom offering a free research report into a United Kingdom quoted company in which the investors already held shares. Later he approved a free research report into the United Kingdom quoted company. After that the overseas company communicated directly with the investors on the telephone about the OTC Bulletin Board shares. Some investors agreed to buy shares. If an investor did agree to buy then the overseas company informed Mr Jones. Mr Jones wrote to the investor with details about the payment of the purchase price into the escrow account which the Applicant operated on behalf of the overseas companies. We now give some further details about each of these four stages by reference to the facts of the first transaction for Condor. Stage 1 - The enquiries into Condor
37. On 22 January 2003 Mr Jones wrote to Condor saying that the Applicant would
act on their behalf in relation to financial promotions. The letter said that, before any financial promotions could be authorized the Applicant would need to satisfy itself about the identity of Condor and that Condor would deal with private customers in the United Kingdom in an honest and reliable way. A copy of Mr Jones’ note of 13 January 2003 about the requirements for approval of financial promotions was sent to Condor. The letter went on to state that any financial promotion had to be clear, fair and not misleading and comply with other regulatory provisions. 38. Condor replied and sent some information. This included a company search
report showing that the company had been registered on 14 August 2001 and that its principal or sole administrator was Mr Maurice Horsten; the passport and driving licence of Mr Horsten; a tax identification card for Condor; and certain documents in Spanish. Mr Jones did not speak Spanish and so he sent an email to his colleagues to see if any could assist. A colleague was able to assist and sent a note to Mr Jones describing the documents. These were (1) a certificate dated 22 January 2003 that Condor was a properly incorporated company engaging in financial services; that Mr Horsten, the manager, had exercised these duties for four years through other companies in compliance with the requisite law and that the registered office of Condor was in Marbella; (2) a document about the constitution of Condor given on 14 August 2001 in Marbella before a notary stating that the directors of the company were Mr Horsten and a named lawyer and that the share capital was 3,006 shares of one euro each of which Mr Horsten had contributed 3005 euros and the named lawyer one euro; and that the sole management of the company was with Mr Horsten; (3) a certificate attesting Mr Horsten’s solvency and his competence to fulfil his obligations; and (4) a certificate attesting Condor’s solvency and ability to fulfil its obligations. 39. Mr Jones asked his colleague to translate into Spanish a letter to be sent to the
referees named for Condor but no letter was in fact sent. |
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Stage 2 - The approval of the letter offering the research report
40. On 21 February 2003 Mr Jones approved three documents to be sent by Condor
to private investors in the United Kingdom. The details of the investors were obtained by Condor from the share register of a United Kingdom company called Premier Oil plc (Premier Oil). The three documents consisted of a letter from Condor to the investor, a response form and a document entitled Approval, Risks Warning and Additional Terms and Conditions (terms and conditions). 41. The letter offered the investor a free research report into Premier Oil, a company
in which he already held shares. The letter stated that Condor would use their experience and resources to prepare reports to assist clients in making their own investment decisions. It stated that Condor was not registered in the United Kingdom and was not authorized by the Financial Services Authority. The letter concluded that if the investor wanted the free report he should complete an enclosed response form and return it to Condor. 42. The response form was intended to be completed by an investor and began by
asking for a copy of the free independent research report “with no obligation whatsoever”. It then had spaces for the investor to complete his name, address and telephone number and included the following statement above space for the signature of the investor: “I would also like to hear about the services you provide to private investors and
I hereby consent to further communications from Condor Research SL [delete if inapplicable]. I have read the Approval, Risks Warning and Additional Terms attached and
understand that requesting the report places me under no obligation to transact business with yourselves.” 43. The terms and conditions started by saying that the documents were issued by
Condor and had been approved by the Applicant. Condor was a Spanish company and the Applicant was a firm of English solicitors authorized by the Authority. The rules made under the 2000 Act for the protection of private customers did not apply in respect of any communication from Condor. The investor should seek advice from his own advisers before entering into any transaction. Nothing in the documents amounted to a personal recommendation to any one investor. Condor had the right (with the consent of the investor) to contact him with details of the services they provided to private investors. Condor did not hold any stock positions but might receive commission on selected stock from the services advertised in subsequent communications. Condor provided opportunities for clients to invest in companies which were not quoted in the United Kingdom. If an investor did invest in any such company as a result of a recommendation by Condor then, on the realization of that investment, Condor was entitled to 15% of the profit. The terms and conditions also contained a paragraph in bold type about the value of investments going down as well as up and stated that the deduction of charges and expenses meant that an investor might not get back the amount he invested. |
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44. When approving these letters, response forms and terms and conditions, Mr
Jones normally inserted a manuscript note on each page stating that they had been approved, giving the date, and applying a stamp of the Applicant’s name and address. Any errors were corrected and if Mr Jones had a query he would write or send an email to the overseas company. 45. After approval by Mr Jones, Condor sent copies of the letter, the response form
and the terms and conditions to United Kingdom investors in Premier Oil. A number of them returned the response form to Condor asking for a free copy of the research report about Premier Oil. Stage 3 –The approval of the research report
46. On 28 February 2003 Mr Jones approved the research report on Premier Oil.
One of the research reports we saw contained a statement at the end that the report was issued by a named overseas company of Spain and approved by the Applicant. The statement added that the overseas company was not regulated in the United Kingdom; that the rules made under the 2000 Act for the protection of private customers did not apply; that no complaints procedure or compensation under the Financial Services Compensation Scheme was available; and that the Applicant was a firm of solicitors authorized by the Authority to approve financial promotions. 47. When approving research reports Mr Jones verified the facts in them and
suggested any necessary drafting amendments. He checked the factual information from another source, usually from the website of the company the subject of the report. He also visited other websites to check facts. In some cases he would ask the overseas companies direct where they got their facts from and they would give him a reference which he would check from an independent source. As with the letters, he inserted a manuscript note on each report stating that it was approved, with the date, and the stamp of the Applicant’s name and address. If Mr Jones had a query he would write or send an email to the overseas company. (In one case, in April 2004, he informed the overseas company (Tresaderns & Partners SL) that the shares in the company the subject of the research report had been suspended and the business sold and that a shareholders’ action group was seeking to take the directors to court. The overseas company decided not to proceed with that report.) 48. Condor then sent the free research report about Premier Oil to the investors in
that company who had asked for it. Such investors would also receive one or more telephone calls from Condor suggesting that they might like to buy shares in a company or companies listed on the OTC Bulletin Board. The Applicant was not involved with the telephone calls. Stage 4 - the operation of the escrow account
49. Once a sale of shares had been agreed by Condor with an investor over the
telephone, the Applicant was informed by Condor and wrote direct to the investor about sending the purchase money to the escrow account held by the Applicant for its clients, the overseas companies. The letter from the Applicant to the investor enclosed two documents, one called investment details and one called investor details. 50. The letter, which was headed “Proposed Investment”, stated that the Applicant
acted for Condor and understood that the investor was a client of Condor and wished to |
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invest in the shares referred to in the investment details. The letter continued by stating
that, to ensure that the investor did not part with his money without receiving the share certificate, Condor had asked the Applicant to act in the matter. The investor was asked, if he wished to proceed, to sign and return the investment details form and the investor details form after which the Applicant would send its bank details to the investor so that he could transfer the money direct to the Applicant’s bank. The letter went on to say that the Applicant would pay any money received from the investor into a separate client escrow account and the Applicant undertook that the money would not leave that account until the Applicant had sent a share certificate to the investor showing the shares registered in his name. The share certificate would be sent to the investor within three months of the date of the receipt of cleared funds but, if that were not possible, the money would be returned to the investor. (In March 2004 the period of three months was extended to four months in respect of shares purchased from Tresaderns & Partners SL. Mr Jones ensured that the alteration took effect only in respect of shares purchased after that date or in respect of shares purchased earlier if the investor consented.) 51. The investment details form gave the name and address of the investor, the
details of the proposed investment with the name of the company and the number of shares to be purchased, and a number of notes as follows: “Notes
1. The Shares are quoted on the NASDAQ OTC market.
2. Fox Hayes, Solicitors, are not advising on the suitability of the above
investment. We advise that investors seek independent advice on any proposed investment before sending their money to us. 3. There is no guarantee that the Shares will increase in value or that
anyone will be willing to buy them when you are wanting to sell. 4. The Shares can only be sold or transferred in accordance with the
constitution of the issuing company and the law of the state in which the Company was incorporated. In particular the Shares cannot be sold at all for 12 months from the date on which they are issued. 5. Please note that the exact number of shares you receive may vary from
the above figure to reflect changes in exchange rates.” 52. The investment details form concluded with a statement that the investor
confirmed that the information in it was correct and that he had read and understood the notes. 53. The investor details form asked for the name, address and telephone number of
the investor, copies of identity documents and the source of the money being used for the investment. It concluded with the following declaration: “Declaration
I declare that:
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1. The above information as to my identity is true and accurate and that the
copy documents supplied to confirm my identity are accurate 2. The money I am using for the investment is from a legal source.
3. I acknowledge that Fox Hayes, Solicitors,
• have not given any advice to me about the proposed investment;
• are not responsible for supplying the proposed investment to me.
4. I have taken independent advice about the investment from a suitable
qualified person or I consider I am sufficiently experienced in investment matters to form my own judgment as to the suitability of the proposed investment for my needs. 5. I have read and understand the notes on the Investment Details.
6. I am not a citizen of, nor resident in, the United States of America.
7. I am of sufficient financial standing to bear the risk of losing my
investment in the Shares. 8. I am aware of and understand the risks of dealing in shares in smaller
quoted companies. I accept that the purchase of the shares is a speculative investment carrying a high degree of risk with no assurance of any income or capital return.” [This latter sentence was printed in bold type on the form.] 54. After receiving the letter from the Applicant, and if the investor wished to
proceed with the purchase of the shares, he signed both the investment details and the investor details forms and returned both to the Applicant. The Applicant then sent the investor details of its client bank account and the investor made a direct transfer of the purchase price of the shares into that account. The money remained there until the share certificate was received by the Applicant. Once the investor had received the share certificate the Applicant accounted for the purchase money as directed by its clients, the overseas companies. Some investors who received the “Proposed Investment” letter did not return the forms to the Applicant; others returned the forms and sent the money but later asked for a refund. About 20% of all deals were either cancelled or the money was refunded. 55. The overseas companies had an arrangement with Zetland that the money would
be sent to Zetland who would account to the owners of the OTC Bulletin Board shares for the price of the shares and who would also account to the overseas companies for the commission due to them on the sale of the shares. Initially the money was sent to an account managed by Mr Pollock of New York. Later it was sent to Rosenman & Colin LLP. On 17 November 2003 this arrangement ceased and after that the money was sent to a firm called EuroNet in Zagreb, Croatia. In 2004 the Applicant was instructed to send the money to ABN AMRO in Holland. The other promotions and the other overseas companies
56. After the approval for Condor of the initial letters and the research report about
Premier Oil, the Applicant approved a number of other promotions for Condor and later |
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did similar work for four other overseas companies introduced by A Street Capital.
These other overseas companies were: Tresaderns & Partners SL of Madrid, (Tresaderns); Benjamin Fisher of Madrid; Universal Market Strategies SL (UMS) of Spain; and Rosenhof Financial Solutions (Rosenhof) of Cape Town, South Africa. On each occasion Mr Jones followed a procedure similar to that we have outlined above. The enquiries into the other overseas companies
57. We have already described the enquiries made by the Applicant into Condor. In
addition, Mr Jones frequently spoke to Mr Horsten on the telephone. In October 2003 Condor ceased trading and after that date Mr Horsten and a colleague (Mr Dimond) operated instead through UMS which was then a newly formed Spanish company. At that time Mr Horsten provided Mr Jones with updated information about himself and Mr Dimond. 58. The Applicant sent Tresaderns an engagement letter on 7 March 2003 with the
note about requirements for approval of financial promotions as prepared by Mr Jones on 13 January 2003. In reply were received (1) a company search report that said that the company was registered on 4 February 2003 and that its principal activity was advertising; (2) a passport for Daniel Tresadern valid from March 1999 to March 2004 which stated that he was twenty-eight years old and of British nationality; (3) a tax identification card for the company; (4) a document in Spanish which appeared to be a constitution prepared by a notary in February 2003; (5) a certificate dated 12 March 2003 which appeared to state that Tresaderns supplied marketing services and (6) a further certificate in Spanish about Tresaderns. We accept the evidence of Mr Jones that when these documents arrived he discussed the Spanish documents with a colleague who told Mr Jones what they were about. The Applicant also obtained a search report about Tresaderns from the London Law Agency Limited which indicated that it was a new company and that its principal activity was advertising. An associated company was Walker Stone. We did not see references for the individuals who worked for Tresaderns but accept the evidence of Mr Jones that copies were sent to the Authority (and later mislaid) and that the copies of the originals which were stored in the Applicant’s computer had become unreadable. Mr Jones also spoke to Mr Frolik of Tresaderns on the telephone. 59. The Applicant sent Benjamin Fisher an engagement letter on 4 June 2003 with
the note about requirements for approval of financial promotions as prepared by Mr Jones on 13 January 2003. In reply the Applicant received information much of which was in Spanish. The documents included (1) a credit report on a company called Diosa Xilon SL which named a Mr Gary Baldock as the sole administrator and which appeared to describe its activity as marketing and public opinion research; (2) corporate and administrative documents for Diosa Xilon; (3) an administrative document which stated that Diosa Xilon had changed its name to Benjamin Fisher; (4) an administrative document that described Benjamin Fisher’s business as marketing; (5) a certificate by Mr Baldock in Spanish about the company; (6) a financial statement in Spanish; (7) a formal notarised document about the company; (8) a passport for Gary Baldock which showed that he was thirty-three years old and of British nationality; (9) a reference from a police officer which stated that he had known Mr Baldock for ten years as a social friend and that he had found him to be reliable and trustworthy; and (10) a reference from Mr Baldock’s family doctor who had known Mr Baldock for twenty years and stated that he was honest, reliable, and trustworthy. On 16 July 2003 the Applicant |
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asked for details of the qualifications and experience of the staff and Benjamin Fisher
replied “What qualifications are you referring to?” but this was not followed up by the Applicant. Mr Jones thought that a member of staff at Benjamin Fisher had the right qualifications but there was no document to support that. Mr Frolik and a Mr Ian Hughes of Tresaderns were also connected with Benjamin Fisher. 60. The Applicant sent Rosenhof an engagement letter on 10 October 2003 with the
note about requirements for approval of financial promotions as prepared by Mr Jones on 13 January 2003. In reply the Applicant received: (1) a company search which showed that Rosenhof was incorporated on 10 September 2002 and that Mr David Hamburger was its director; (2) a copy of Mr Hamburger’s passport showing that he was thirty-two years old and of South African nationality; and (3) a reference from a partner in a firm of chartered accountants in New Zealand saying that Mr Hamburger had acted at all times professionally and was honest and intelligent. Mr Hamburger had some difficulty in providing a second personal reference as two of his referees felt that they were not in a position to give a reference. Mr Jones then spoke on the telephone to a lawyer in New Zealand who said he knew Mr Hamburger and had nothing to say against him but was not prepared to give a written reference. A summary of all the promotions
61. In total, the dates of the promotions approved by the Appellant, the names of
their clients, and the United Kingdom companies the subject of the research reports were: |
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