On 25^th March 2010, Lewison J granted summary judgment against each of the Defendants. He declared that they had been carrying on a regulated activity without being an authorised or exempt person, in primary contravention of section 19(1) of the Financial Services and Markets Act 2000 (“FSMA”).

The regulated activity that each of the Defendants was held to have undertaken was the carrying on of investment business in the United Kingdom in accepting or purporting to accept deposits within the meaning of article 5 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (the “RAO”) during the following periods:-

In the case of John Cecil Anderson (“Mr Anderson”) from 1^st April 2007 until 25^th November 2008;

In the case of Kenneth Alun Peacock (“Mr Peacock”) from 15^th September 2007 until 25^th November 2008; and

In the case of Kautilya Nandan Pruthi (“Mr Pruthi”) from 1^st September 2005 until 25^th November 2008.

In granting summary judgment, Lewison J also ordered that:-

The Defendants should be required to take any such steps as the Court may direct to remedy their contravention of section 19 of FSMA, pursuant to section 380(2) of FSMA; and

The Defendants be required to pay to the Financial Services Authority (“FSA”):-

The amount of all profits that have accrued to them as a result of the Defendants’ contravention of section 19 of FSMA; and

All losses that have been suffered by any person as a result of the Defendants’ contravention of section 19 of FSMA;

Against this background, Lewison J referred the following quantum issues for trial:-

The question of what (if any) steps the Defendants should be required to take in order to remedy these contraventions under section 380(2) of FSMA.

The question of what (if any) sum it would be just to require the Defendants to pay by way of restitution under section 382(2) of FSMA in respect of these contraventions (which has been referred to as the “just sum”).

In the result, the FSA has not pressed for an order requiring the Defendants to take steps to remedy their contraventions under section 380(2) of FSMA, preferring instead to obtain an assessment of the just sums that the Defendants should pay by way of compensation. The FSA’s reason for adopting this course is that it doubts that the multiple transactions engaged in by the Defendants could in practice be unwound.

When I have assessed the just sums that each Defendant should pay, and those sums have been recovered, the FSA intends to apply to the Court for directions as to the distribution of such sums to qualifying persons pursuant to section 382(3) of FSMA.

On 1^st September 2005, Mr Pruthi started accepting deposits for fixed periods of either 1, 4 or 12 months, under the trading name of “Business Consulting International” on the promise of high monthly interest rates. Deposits were accepted in sterling, euros and US dollars, and the rates of interest offered varied between 4 and 20% per month. The deposit periods began on either the 1^st or the 15^th of each month.

On 1^st April 2007, Mr Anderson started accepting deposits, under the trading name of “John Anderson Consulting” on very similar terms to those offered by Mr Pruthi.

On 15^th September 2007, Mr Peacock started accepting deposits, under the trading name of “Ken Peacock Consulting” also on very similar terms to those offered by Mr Pruthi.

In general terms, Mr Anderson and Mr Peacock passed the deposits they received to Mr Pruthi on the same terms as he offered generally. They made a profit by offering rather lower rates to their depositors than Mr Pruthi was agreeing to pay them. There is no evidence that Mr Pruthi ever made sufficient onward loans to businesses or others, as his literature suggested he would, to fund the high interest rates he was offering. It seems, therefore, that Mr Pruthi was, for a while at least, funding the payments of interest to old depositors by taking new deposits. In addition, in many cases, the deposits were rolled over to new deposit agreements without the need for Mr Pruthi actually to pay out cash to his depositors. Eventually, Mr Pruthi ran in to cashflow difficulties, and was unable timeously to pay out what was due to his depositors.

By 2008, Mr Pruthi had some 200 depositors, Mr Anderson had some 121 depositors, and Mr Peacock had some 178 depositors.

On 20^th and 29^th August 2008, tip-offs were received by the FSA in respect of the schemes being operated respectively by Mr Peacock and Mr Anderson. Mr Simon Bowker, the FSA’s investigator (“Mr Bowker”) accepted in evidence, however, that the FSA had never received any complaints from depositors about not being paid what was due under their contracts with any of the Defendants.

On 21^st November 2008, Henderson J granted the FSA a without notice freezing injunction against all three Defendants, and made an order prohibiting the Defendants from accepting any further deposits.

Henderson J’s order was served on 25^th November 2008, when a search warrant obtained by the SFA was executed by the City of London police and FSA enforcement investigators at the Defendants’ business premises at 1 Relton Mews, London SW7 1ET (“1 Relton Mews”) and at two other properties. The FSA took possession of numerous contracts of deposit on this occasion. The 25^th November 2008 has been described as the date of the FSA’s intervention.

On 10^th December 2008, Kitchen J continued the freezing injunction by consent until trial.

On 18^th December 2008, Messrs Anderson and Peacock swore affidavits exhibiting schedules of the amounts due on their outstanding deposit contracts. These schedules, as Mr Bowker accepted, proved a reasonably reliable account of the contracts that they had entered into. In February 2009, Mr Pruthi’s executive assistant prepared a schedule for the FSA giving similar information in relation to Mr Pruthi’s deposit contracts.

On 22^nd April 2009, Master Bowles stayed these proceedings for one month so that an attempt could be made to resolve the proceedings by ADR.

On 21^st May 2009, the Defendants were arrested by the City of London police on suspicion of conspiracy to defraud, money laundering and fraud by misrepresentation. They have been repeatedly bailed, but none of the Defendants has yet been charged with any criminal offence. As matters stand now, Messrs Anderson and Peacock are bailed to re-appear on 1^st July 2010, and Mr Pruthi is bailed to re-appear on 8^th July 2010.

On 29^th May 2009, the trial of all issues of liability and quantum was listed for an estimated 15-day hearing in a trial window from 1^st April to 30^th June 2010.

On 21^st October 2009, the City of London Police obtained a restraint order under sections 40 and 41 of the Proceeds of Crime Act 2002 (“POCA”). The order contained no exemption for legal expenditure by the Defendants.

In December 2009, Mr Pruthi applied to HH Judge Taylor sitting in the Southwark Crown Court to vary the restraint order so as to permit him to fund the legal expenses associated with the defence of these proceedings. That application was refused, so far as it is possible to ascertain, on the grounds that section 41(4) of POCA prohibited any exception in a restraint order for legal expenses which “relate to an offence which falls within subsection (5)”, and it was held that these proceedings were sufficiently closely related to the offences being investigated.

On 22^nd February 2010, Briggs J rejected the Defendants’ application to adjourn the summary judgment hearing pending the outcome of the criminal investigation, and on the ground that they were prevented from financing legal representation at that hearing. Messrs Anderson and Peacock relied also on the fact that the Solicitors’ Regulation Authority had intervened in their solicitors’ practice and that had resulted in the non-availability of files and funds held on account. Briggs J concluded that it was urgent that what he described as the unintended effect of section 41(4) of POCA should be addressed at the earliest opportunity. That effect was “to prevent private funding of legal representation without there being corresponding public funding of the same representation”.

On 25^th March 2010, as I have already said, Lewison J granted the FSA summary judgment in respect of its claims against all the Defendants.

The Defendants were not represented at the summary judgment hearing and have not been represented before me, although all of them had previously been advised by solicitors at earlier stages in the proceedings. At the outset of the trial, the Defendants expressed concern about this state of affairs. Having read the concerns expressed by Briggs J and having seen that all the Defendants were to be unrepresented at a trial estimated to last 5-7 days before me, I asked Mr James Purchas, counsel for the FSA, to make submissions on whether there were any grounds on which the decision of HH Judge Taylor could be questioned. I was, of course, aware that her decision had not been subject to an appeal. Mr Purchas put forward exemplary written submissions examining the law under POCA and concluding that there appeared to be a sufficient basis for the conclusion that the facts of these proceedings were sufficiently closely related to the offences being investigated to mean that the Crown Court had no jurisdiction to make an exception so as to allow the Defendants to use the assets covered by the restraint order to pay for their legal expenses of defending this action.

Having been given an opportunity to consider Mr Purchas’s submissions, the Defendants did not pursue any application to adjourn or challenge the manner in which the trial was being conducted, accepting, pragmatically if I may say so, that they would have to defend themselves.

I should say also that, in the result, each of the Defendants has defended his case most impressively, challenging matters that could properly be challenged, and conceding matters that should properly have been conceded. They cross-examined the FSA’s witnesses fairly but effectively. Despite the extreme emotions which this case has excited, all the Defendants have behaved courteously and with moderation throughout. I am most grateful to them for their care and hard work in preparing their submissions.

The scheme that the Defendants were running was extremely simple. Mr Anderson described it in a document he provided to potential depositors as follows:-

The deposit contracts that the Defendants offered were in broadly similar form, were signed by both parties, and contained the following terms and statements as follows:-

In essence, Mr Anderson and Mr Peacock started by depositing some of their own monies with Mr Pruthi, but then became so-called ‘aggregators’, taking deposits from third parties to pass on to Mr Pruthi. There was, as I have said, generally a differential between the rates paid by Mr Pruthi to Messrs Anderson and Peacock, and the rates paid by Mr Anderson and Mr Peacock to their own depositors. In general terms, Mr Pruthi paid Messrs Anderson and Peacock some 13-14%, but Messrs Anderson and Peacock only paid their depositors between 4 and 8%.

The FSA contends that the scheme was unsustainable because there was no evidence that Mr Pruthi was in fact able to lend the deposits on to third parties at a sufficiently high rate of return to fund the scheme. Indeed, the evidence that was available tended to show very little investment return received by Mr Pruthi.

That said, however, Mr Pruthi has made a witness statement in proceedings brought against him under POCA in the Southwark Crown Court (which was provided to the FSA in the course of these proceedings in response to an information requirement under section 173 of FSMA) in which he has explained his investments as follows:

Mr Pruthi has declined to give evidence in these proceedings or to give any further explanation of the whereabouts of his investments in the Far East, allegedly amounting to some £57 million. He has done so on the grounds that he has been advised that giving evidence in these proceedings might prejudice his eventual defence to any criminal proceedings that may later follow. The FSA has, however, undertaken this hearing on the premise that Mr Pruthi may in due course be able to repay some, at least, of his liabilities, and that Mr Anderson and Mr Peacock may, therefore, recover some, at least of what Mr Pruthi owes them, thus allowing them to repay some of their liabilities.

Section 19 (1) of FSMA provides that no person may carry on or purport to carry on a ‘regulated activity’ in the United Kingdom unless authorised or exempt. None of the Defendants was authorised or exempt.

Section 22 of FSMA provides that a ‘regulated activity’ is:

Article 4 introduces the RAO’s treatment of specified activities as follows:-

The first specified activity is “Accepting Deposits”, in respect of which Article 5 of RAO provides as follows:-

Article 6 of the RAO provides for the following relevant exceptions:-

A “close relative” is defined in article 3 of the RAO as follows:-

The system for redress is set out in Part XXV of FSMA and is headed ‘Injunctions and Restitution’.

Section 380 is headed ‘Injunctions’. Section 380(2) provides as follows:-

Section 382 is headed ‘Restitution orders’ and provides as follows:-

The issues in the case have changed significantly during the trial. At the outset, each of the Defendants was challenging the FSA’s figures for losses allegedly sustained by their depositors in a number of respects, and was raising various other points, including for example the ‘business’ exemption in article 6(1)(b) of the RAO. As the trial progressed, however, numerous points have been resolved by sensible and timely agreement, and challenges made by the Defendants have resulted in the FSA conceding numerous points on the figures. The issues have, therefore, been confined. The remaining issues that I have to decide may be summarised as follows:-

Issue 1: On the facts of this case, how should the court assess under section 382(2) the losses and other adverse effects, including interest losses, resulting from the contravention of section 19 of FSMA?

Issue 2: Can a restitution order under section 382 of FSMA include sums in respect of deposits made by those that are ‘close relatives’, who are exempt under paragraph 6(1)(d) of the RAO, or exclude sums in respect of deposits made by ‘close relatives’ of Mr Anderson’s former wife?

Issue 3: What are the following figures for the purposes of section 382(2) for each of the Defendants:-

The losses or other adverse effects resulting from the contravention of section 19?

The profits appearing to the court to have accrued to each Defendant?

Issue 4: What is the just sum that each Defendant should pay to the FSA under section 382(2)?

Mr Bowker is a forensic investigator in the FSA’s enforcement division. He gave his evidence clearly and carefully. He was much criticised in cross-examination for cross-checking exercises he had not undertaken, and for inaccuracies in the detail of his calculations. Mr Pruthi’s thesis, in particular, was that it would have been possible, using the available records kept by the Defendants, to reconstruct the entire account for each depositor from the beginning. Mr Bowker said that he had embarked upon this exercise in respect of Mr Peacock’s deposits with Mr Pruthi but had not been able to do so, reaching only 60 to 70% along the way. He explained, and I accept, that, whilst the Defendants had retained all the contracts of deposit, which reflected rollovers and withdrawals of interest, they had not always recorded what the instructions were that gave rise to those contracts, making it impossible to follow every transaction to the last detail. It was put to Mr Bowker that a firm of forensic accountants had said that they could have undertaken the exercise and achieved the desired objective of perfect accuracy, but Mr Bowker still maintained that the exercise could not have been achieved. It is true that Mr Bowker had made errors in his initial calculations and had perpetuated errors made by the Defendants in their schedules, but the effect of the trial process was to expose and eradicate these errors. In my judgment, Mr Bowker, was a reliable witness who was doing his best to ascertain the most accurate possible figure for the losses sustained by the Defendants’ deposit-taking activities.

Andrew Joseph Baum is a solicitor in the FSA’s enforcement division. His evidence was not seriously challenged and I accept what he said in his statements.

In Financial Services Authority v. Shepherd 22^nd May 2009, Jules Sher QC, sitting as a Deputy Judge of the Chancery Division, had to consider what the just sum that certain defendants who had unlawfully arranged a share deal contrary to section 19 of FSMA should pay under section 382(2). The deputy judge said the following about the principles that should be applied:-

As regards the relevance of the dishonesty of the scheme, and in relation to the disgorgement of profits and assessment of loss, Mr Sher QC said the following:-

Mr Sher QC then considered the desirability of making an order under section 380(2) saying this:-

It seems to me that this latter passage supports the FSA’s decision in this case not to pursue the order under section 380, but rather to seek an assessment under section 382 of FSMA.

The FSA submits that the full extent of the sums outstanding by way of capital and contractual interest due under deposit contracts that remained open at the date of the FSA’s intervention on 25^th November 2008 should be taken as representing the basic “losses and other adverse effects” under section 382(2). Once that sum has been ascertained, the FSA submits that 6% interest should be added to the balance from the date the various sums fell due until judgment.

The Defendants, on the other hand, originally contended that the “net losses” should be taken as representing the “losses and adverse effects” for the purposes of section 382(2). The net sum to which they referred was the total of all capital and interest outstanding at the date of intervention less all sums repaid to depositors over the entire period that the scheme was operating (i.e. from the dates determined by Lewison J as being the dates upon which each of the Defendants started to contravene section 19). In the result, each of the Defendants abandoned reliance on the net sum, making it clear that they accepted that they wished to perform on their obligations to depositors and to see them reimbursed to the extent of the contractual obligations under the deposit contracts. These concessions were, in my judgment, properly made.

It was broadly accepted that all the Defendants had paid interest due on all interest payment dates up to 15^th October 2008, but that they may not have paid interest that was due in some cases on either the 1^st or 15^th November 2008, shortly prior to the intervention on the 25^th November 2008. Against that background, two specific issues arose as to how the Gross Loss should be calculated:-

What interest was actually paid out in respect of the last two interest payment dates on 1^st and 15^th November 2008?

What interest should be paid on losses in respect of the period from the date of intervention to the date of judgment?

This issue ultimately only affects Mr Anderson. As later appears, Mr Pruthi agreed all the figures for losses with the FSA during the trial, and the FSA and Mr Peacock have agreed what payments were actually made by Mr Peacock by way of interest on 1^st and 15^th November 2008.

The FSA, however, prepared its calculations on the basis that Mr Anderson had not paid any interest to his depositors on 15^th November 2008, relying on the admissions that there were cashflow difficulties at that time. The FSA’s position was that £167,897.50, €13,265.00 and $2,000.00 remained unpaid by Mr Anderson on 15^th November 2008, and that those figures should be included in Mr Anderson’s overall loss calculation.

At the very last minute, in closing submissions on the last day of the trial, Mr Anderson presented a bank statement showing what he contended were the sterling sums he had paid between 15^th and 25^th November 2008, by way of interest due on 15^th November 2008. The statement of a joint account of Mr Anderson and his wife showed 46 payments made in this period amounting in total, by my calculation, to £92,265. The FSA had a very brief opportunity to check these figures, but made no submissions about them, although they did object to their being admitted so late. It seems to me that it would be unjust to Mr Anderson to exclude him from relying on these payments, albeit that they have been put forward so late. I propose to deduct the sum of £92,265 from the FSA’s figures for losses when reaching my conclusion as to the correct figure to be taken for Mr Anderson.

The FSA contends that interest of 6% per annum, being the ‘statutory account rate’ should be added to the loss figure at the date of its intervention (25^th November 2008) to reflect the loss of use of depositors’ money from that date up to the date of judgment. The Defendants do not contest the rate. Instead, Messrs Anderson and Peacock argue that the period for which interest should be allowed should be reduced, because they complain about the delays that have occurred in bringing the trial on for hearing. Their complaints are, in essence, that: (a) the FSA refused to negotiate a settlement of the figures with them, thus occasioning delay; (b) delay was caused by the commencement of a criminal investigation and the FSA’s co-operation with the City of London Police.

I do not think that the FSA’s unwillingness to negotiate caused any delay. Many issues relating to the quantum of the appropriate ‘just sum’ under section 382 remained outstanding at the start of the trial. Ultimately, it was the process of the trial itself which allowed these issues to be resolved. Neither side was particularly unreasonable. They were simply arguing points on the complex calculations that were open to them. It would have been difficult to reach a negotiated settlement of the ‘just sum’ without a trial, and I do not think that the failure to do so can be blamed on any one party. In these circumstances, I do not think that the FSA’s reluctance to engage in protracted discussions on the figures before the final preparations for trial had been made was, in the circumstances of this case, unreasonable.

Moreover, I do not think that any delay has been caused in the ultimate resolution of the ‘just sums’ that should be payable by the criminal investigation. The trial window was fixed, as I have said, as long ago as the 29^th May 2009. The trial date was held even when an application for summary judgment on liability was made and determined. I do not think that matters would have proceeded any more quickly, even if the criminal investigation had not been launched. In any event, the criminal investigation is not, in my judgment, a reason to reduce the period for which interest should be calculated on the losses sustained by depositors. The criminal investigation, whatever its outcome, has been occasioned by the Defendants’ conduct. In my judgment, interest on the losses sustained by investors should run for the entire period between the date of the FSA’s intervention on 25^th November 2008 and the date of judgment. I shall use the rate of 6% per annum suggested by the FSA.

Before leaving interest, I should mention that the FSA would not have argued that the depositors’ losses generally should be measured by the contractual interest rates taken from the deposit agreements, because the rates provided for in those agreements were obviously excessive and commercially unavailable. That said, I have included the relatively modest amounts of outstanding contractual interest for November 2008, because there is some uncertainty as to what precisely was paid and what was not paid in that month, and it seems to me that taking the seemingly outstanding contractual interest will balance out any sums that have been taken as paid on 1^st November 2008, but which were in fact not paid.

The position on this issue changed in the course of trial. Initially, Mr Anderson contended that 14 relatives were ‘close relatives’ within article 6(1)(d) of the RAO. 8 of those 14 relatives were, in fact, relatives by marriage, and the FSA contended that they were not covered by the exemption.

In the course of the trial, Mr Anderson realised that it would be to the advantage of his relatives to be included in the assessment of quantum so that they could participate in the eventual distribution to ‘qualifying persons’ under section 328(3) of FSMA. He had in mind the possibility of his being made bankrupt on a petition against him that is, he submitted, shortly to be heard. Accordingly, Mr Anderson changed his primary position, and argued that all the 14 relatives (both those of his wife and of himself) should be included, and should not be regarded as exempt under article 6(1)(d) of the RAO. His fall back alternative position was based on his desire to treat all his relatives equally, and was that all his 14 relatives should be treated as exempt if they could not all be included.

Mr Peacock raised the same argument in respect of his father, asking that his losses be included in the assessment under section 382(2)(b) of FSMA.

In the result, this issue is answered by the proper construction of the legislation, and not by Mr Anderson’s desire for equal treatment of his relatives. The legislation is clear, in my judgment: only close relatives of the person who has contravened the relevant requirement are exempt. And ‘close relatives’ do not include relatives by marriage, except where expressly stated in article 3(1) of the RAO, such as for step-children and step-parents and step-siblings and their spouses.

The reasons why Mr Anderson’s close relatives (and Mr Peacock’s father) cannot be included in the losses to be assessed under section 382(2)(b) of FSMA are as follows:-

Section 382(1) of FSMA only allows the court to make an order under section 382(2) if “it is satisfied that a person has contravened a relevant requirement” and either “(a) that profits have accrued to him as a result of the contravention”, or “(b) that one or more persons have suffered loss or been otherwise adversely affected as a result of the contravention”.

Mr Anderson and Mr Peacock are the only persons that have contravened a relevant requirement. Mr Anderson’s wife has not been held to have done so. The profits that accrued from Mr Anderson’s relative’s deposits accrued to him from his contravention, and the losses his relatives suffered were as a result of Mr Anderson’s contravention.

Section 382(2)(b) is directed at assessing a just sum having regard to the extent of the loss or other adverse effect referred to in section 382(1)(b), namely one that arose as a result of Mr Anderson’s contravention.

Section 382(3) only allows payments out to qualifying persons, who are defined in section 382(8) as being persons to whom the profits mentioned in subsection 328(1)(a) are attributable or who have suffered the loss mentioned in subsection 328(1)(b). Again, therefore, distribution can only be made to persons who have suffered loss as a result of the contravention, or from whom profits have been made as a result of the contravention.

Finally, articles 4 and 5 of the RAO provides that accepting deposits is in certain circumstances a specified kind of activity, so as to be a regulated activity within section 22 of FSMA, and to give rise to the prohibition in section 19 of FSMA. But article 6(d) of the RAO makes clear that a sum is not a deposit for the purposes of article 5 if it is paid by a close relative of the person receiving it.

Thus, the deposits paid by Mr Anderson’s close relatives and by Mr Peacock’s father were not deposits under article 5. The taking of those deposits was not a regulated activity under section 22, and was not prohibited under section 19. Mr Anderson and Mr Peacock were not undertaking any contravention in taking deposits from their close relatives. In these circumstances, the court does not, in my judgment, have jurisdiction under section 382(2) to assess a just sum under section 382(2) taking into account losses or profits accrued from those close relatives’ deposits. Nor does the Court have jurisdiction to make any distribution to those close relatives under section 382(3) of FSMA.

It only remains under this issue to deal with Mr Anderson’s alternative argument that his wife’s relatives could be exempt under paragraph 6(d) of the RAO, because the deposits were received by his wife as well as himself. The exception in article 6 is an exception to provisions that make deposit-taking a regulated activity, and prohibit persons taking deposits without being authorised or exempt. The amounts being assessed under section 382 are losses caused by Mr Anderson’s deposit-taking activities, not any losses that may have been caused by any deposit-taking Mrs Anderson may have engaged in. The deposits concerned are, therefore, solely those taken by Mr Anderson, and the exception for close relatives only relates to deposits that Mr Anderson himself took, whether or not the account to which those funds were received was also in the name of Mrs Anderson.

The Defendants spent much of their cross-examination attacking the reliability of the FSA’s figures for the losses sustained as a result of their activities. Mr Bowker was asked whether his figures were the best effort we could possibly have to assist the court in reaching the just sum. He replied that he believed that it was on the materials available.

As a result of the detailed cross-examination of Mr Bowker, the figures put forward by the FSA changed, and a significant measure of agreement was reached. It was true, as I have said, that the original figures put forward by the FSA contained some inaccuracies, both some that originated from Mr Anderson’s and Mr Peacock’s own schedules that they provided in December 2008, and some that arose from the FSA’s own work. It would not be useful to apportion blame for these errors. I accept that all the Defendants put forward schedules of the capital and interest outstanding under their deposit contracts in good faith, and in a genuine attempt to make a clean breast of all their activities. No attempt was made by any of the Defendants to conceal contracts when they made their disclosures pursuant to the orders of the Court at the end of 2008. I also accept that Mr Bowker did his best to assess the losses that were sustained accurately bearing in mind the paucity of material that was actually available. Both the FSA and the Defendants made some errors but, in the light of the complexity of the arrangements and the number of contracts concerned, none of the errors was in any way culpable.

Against, this background, the losses or other adverse effects resulting from the Defendants’ contraventions of section 19 can be assessed. There are no adverse effects to be taken into account beyond the losses. I have calculated the losses on largely agreed figures on the following bases:-

I have deducted the sum of £92,265 in respect of interest repaid by Mr Anderson that was due on 15^th November 2008.

I have excluded the losses sustained by Mr Anderson’s own close relatives, but not those sustained by his wife’s close relatives.

I have excluded the losses sustained by Mr Peacock’s father.

I have allowed interest on the total losses to 25^th November 2008 at 6% per annum up to Friday 25^th June 2010, when this judgment will be released to the parties.

I have taken the figures for losses agreed between Mr Pruthi and the FSA.

On the above bases, the figures for losses and adverse effects under section 382(2)(b) for each Defendant are as follows:-

As regards Mr Anderson, deducting the payments of £92,265 made for 15^th November 2008, the interest at 6% is reduced by £8,746.72 to £911,609.38, making total sterling losses of £9,763,882.57. Mr Anderson’s Euro losses were €459,181.87, and his dollar losses were $122,617.60.

As regards Mr Peacock, including 6% interest, the sterling losses were £10,228,019.69, the Euro losses were €664,763.65, and the Dollar losses were $328,440.00.

As regards Mr Pruthi, including 6% interest, the sterling losses were £72,097,597.14, the Euro losses were €3,375,709.07, and the Dollar losses were $22,292,893.47.

I turn now to deal with the profits appearing to have accrued to each Defendant. The FSA did not contend that Mr Pruthi had made any profits, and I, therefore, assess his profits at zero.

As regards Mr Anderson, the FSA has relied on Mr Anderson’s own profit calculations to assess the profit he made from his deposit making business. He undertook a contravening business from 1^st April 2007 until 25^th November 2008. His own figures showed a total interest receipt of £2,023,422 for the tax year 2007/2008, and an estimated £5,285,159 for the tax year 2008/2009. Assuming tax paid at 40%, the FSA suggest a figure of £1,214,053.40 for 2007/2008, and £1.5 million for the period from 6^th April to 25^th November 2008 (some 7½ months). Mr Anderson objected to this approach, suggesting that further deductions might be made and that a linear approach to 2007/2008 was inappropriate. In my judgment, the FSA’s suggested figures are generous to Mr Anderson, since they have taken less than half the post-tax profits for 2007/2008 of £3,171,095, when a period of 7 ½ months, not 6 months was in issue. Accordingly, I assess the profits accruing to Mr Anderson as a result of his contravention for the relevant period at £2,714,053.40. These profits had been made by 25^th November 2008 at the latest, and accordingly interest at the rate of 6% must be added from 25^th November 2008 to 25^th June 2010. That interest amounts to £257,835.07, giving a total for profits and interest of £2,971,888.47.

I should mention that, in reply, Mr Purchas sought to argue that Mr Anderson’s profits were represented by the net interest figure of £3.5 million shown in his December 2008 asset statement as being due to Mr Anderson from Mr Pruthi. That figure had been available to the FSA for 18 months, and I can see no basis why they should be permitted to bring it forward as an accurate reflection of Mr Anderson’s profits so late in the day. Accordingly, I reject that submission and a similar submission made in respect of Mr Peacock’s comparable figure. In any event, the net interest figure due from Mr Pruthi to Mr Anderson would not be pure profit, and the figure itself appears to be a rounded estimate. I prefer the method originally adopted by the FSA which I have set out above.

As regards the profits made by Mr Peacock, the FSA originally contended for the figures provided by Mr Peacock as to what was shown on his tax return for the 2007/2008 tax year, even though his contravention began on 15^th September 2007. That profit figure, net of tax, was £148,000. Bearing in mind the exponential growth in Mr Peacock’s business from April to November 2008, the FSA contended that 3 times the 2007/2008 profit should be taken for the period from 6^th April to 25^th November 2008, making a total of £444,000. In my judgment, these figures are generous to Mr Peacock, bearing in mind that his own asset schedule showed a net interest debt due to him from Mr Pruthi of £2.5 million. I propose, therefore, to assess the profits accruing to Mr Peacock as a result of his contravention for the relevant period at £592,000. These profits had been made by 25^th November 2008 at the latest, and accordingly interest at the rate of 6% must be added from 25^th November 2008 to 25^th June 2010. That interest amounts to £56,240 giving a total for profits and interest of £648,240.

This issue requires me to determine what the Defendants should justly pay under section 382(2) on the facts of this case. I have already set out the guidance that has been given in the case of Financial Services Authority v. Shepherd.

I entirely endorse what Mr Sher said in Shepherd about the statutory purpose including the protection of the investing public, consistent with the regulatory objective of the protection of consumers under section 5 of the FSMA. In addition, it seems to me entirely appropriate that those engaging in an unlawful deposit-taking business should disgorge the profits that they made before their contraventions were terminated. There may be cases where such disgorgement could be tempered on account of the fact that the breaches were technical or because, for example, the Defendants took adequate steps to ensure what they were doing was lawful. This is not, however such a case.

In this case, each of the Defendants continued contravening the prohibition in section 19 for a considerable period. None took any adequate steps to ascertain whether their activities were lawful. Indeed only Mr Anderson says that he discussed his activities with a solicitor, and then only informally with a relative who was a criminal solicitor and therefore unqualified to advise him, as he must have known.

I have considered what I should say about the Defendants’ culpability. It is not appropriate that I should say anything that might prejudice any criminal proceedings that may in the future be brought against the Defendants in respect of their deposit-taking activities. I can and should, however, say, that none of the Defendants has successfully excused his contravention of the FSMA. It seems that they knew about FSMA, since it is mentioned in their deposit taking agreements, but chose not properly to investigate whether their businesses required to be authorised. They should have done so. Moreover, leaving aside hyperbole, the rates of interest offered by each of the Defendants were far higher than those generally available in the market. That too, they must all have known. It seems to me that they must all also have known that the scale of the interest rates offered meant that the business was extremely risky, and might fail if, as must have ultimately been very likely, Mr Pruthi was unable to make very large returns on the deposits that were placed with him.

In the present case, I propose to assess the just sum that the Defendants must pay as the total of the losses and profits that I have already set out. There are no grounds, in the circumstances of this case, for reducing either figure in reaching the just sums. The schemes were deliberately undertaken without authorisation. Huge losses were caused to investors, and significant profits were made, at least, by the first two Defendants.

I should not leave this issue, however, without mentioning the Defendants’ perspective on this case. It seemed to me in the course of the trial that each of the Defendants felt more or less aggrieved by what they saw as the heavy-handed approach of the FSA. Underlying that ill-feeling was their perception that, had they been allowed to continue without FSA intervention, or with less dramatic FSA intervention, all their investors would have been fully recompensed. They each pointed to the fact that, apart from relatively minor cashflow difficulties immediately prior to intervention, all depositors were paid what was owed to them throughout the currency of the scheme. I regret to say that this approach by the Defendants demonstrated a naivety, with which I found it hard to sympathise. The rates of return offered by the Defendants were simply uncommercial and unsustainable. No business could sustain the payment of such rates without taking ever-increasing risks, which would, inevitably, have caused the collapse of the scheme. This is demonstrated by the unavoidable exponential growth in the scheme caused by the huge rates of return recovered month on month. In reality, such schemes must eventually fail, even if (and it is a big if) new capital deposits are not used to pay the interest due to previous depositors, because the large rates of interest are simply unsustainable commercially, and those paying them or agreeing to pay them will eventually be unable to do so. As for the use of capital deposits to pay existing interest commitments, Mr Pruthi admitted that this had happened on occasions when he was interviewed by the FSA. That is plainly another unsustainable feature of such schemes. In these circumstances, the FSA’s response was, in my judgment, entirely appropriate. The fact that the scheme had not actually failed at the time of intervention, did not mean that it would not, I would say inevitably, have failed before long. The Defendants hope that all their depositors would otherwise have been paid in full was just that – a hope. It was not reality, and the FSA was entirely justified in intervening, using the full force of the legislation, to bring the scheme to a speedy conclusion. It may be hoped now that Mr Pruthi’s supposed off-shore assets can be repatriated to satisfy the award that I shall make, in large part at least, so that depositors can be reimbursed for their losses.

I, therefore, determine the just sums that each Defendant must pay to the FSA under section 382(2) of FSMA as follows:-

Mr Anderson must pay the FSA the sums of £12,735,771.04, €459,181.87, and $122,617.60.

Mr Peacock must pay the FSA the sums of £10,876,259.69, €664,763.65, and $328,440.00.

Mr Pruthi must pay the FSA the sums of £72,097,597.14, €3,375,709.07, and $22,292,893.47.

As I made clear at the outset, I shall make no order under section 380(2) of FSMA.

I will hear the parties on the precise form of order, consequential directions, and costs.