Financial Services Authority (FSA) v Anderson & Ors

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 granting summary judgment, Lewison J also ordered that:-

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

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 scheme revolves around a fund of monies which is pooled and then used by “Business Consulting International (BCI)” which is the trading style of the group of individuals that run the fund, and indeed the scheme.

The fund is used to provide Trade Finance to companies that usually require very short term finance, in an area typically referred to as “distressed”. The specific details are kept confidential to ensure this niche area has minimal competition.

The scheme itself was set up to provide a stream of income for the founding individuals of the fund, and further participation is strictly by invitation only, typically to family and friends of those individuals. The latter has recently been broadened, principally in the light of greater demand for funds.

The scheme runs bi-monthly, usually 1^st and 15^th of each month, and typically for a 4 month cycle. It is possible, although not guaranteed, that upon completion of the 4 month cycle, funds can be rolled-over for subsequent cycles.

The rates of interest for capital are honoured by recourse to personal guarantees, provided by the individual underwriting the contract, in your case, should you choose, by me …”

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:-

“I am writing to confirm our arrangement vis-à-vis your [amount] and the amount that will be returned to you over [120] days.

First, I would like to confirm that you are making an investment in [John Anderson Consulting], which is a “trading style” for my Management Consulting and advisory activities …

The term of our agreement will be [date] through to [date] (inclusive) which is exactly [120] days.

In consideration for your capital, I promise and personally guarantee to remunerate you [amount] exactly per month. The Capital component of [amount] will be returned to you in full on [date]. Your profit over the period is equivalent to [amount] or … ([percentage] simple interest) per month.

You have my personal guarantee that these monies will be returned to you in full on [date] as previously mentioned. You may of course continue with our arrangement after the maturity date dependent on your own personal cash flow circumstances and preference. Please advise me as apropos and in due course. …

By accepting the terms as contained in this agreement and through provision of your cleared funds deposited directly into my business bank account, you confirm that your involvement is entirely voluntary and without coercion. You have chosen to be involved with my business on a commercial level and the arrangement between us while personal in nature is also commercial given that I am paying a substantial commercial consideration for use of your capital.

Further you also acknowledge that you understand that I am not regulated by the FSA … and I am therefore not authorised to carry on personal investment business in the United Kingdom. I have not recommended to you that this loan to my business is in your best interests as I have no understanding of your total assets and liabilities or indeed tolerance to risk. However, I have solicited your involvement and hope that you will see fit to participate …”

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:

“I have an interest in a business operated in various jurisdictions in the Far-east specifically but not limited to; Macau, Hong Kong, Taiwan and Thailand. This business was started and operated by my associate Mr Charles Brugger …he and I met in late 2004 in London. We discussed the possibility of working together on a finance business looking to lend funds at high rates of Interest for short-term financing needs akin to mezzanine or bridge financing. Subsequently, he and I concluded that given his network of contacts and experiences in the Far-East it was best that he operate the business in those territories. He and I contributed different amounts back in early 2005 to a lending venture to be operated by him in the territories mentioned. Mr Brugger contributed £2.7M … and I contributed £5.7M …The business would be engaged in short-term loans to high net worth individuals with liquidity difficulties in the face of margin calls on trading accounts. Additionally, loans were made to trading entities engaged in International and local commerce including but not limited to the Import and Export of Agricultural products.

Funds under Mr Brugger’s control were and are effectively now mine, given that, Mr Brugger has made withdrawals from the combined funds under his Management equivalent to his original contribution plus profits as generated. Back in November 2009 when the original investigation with the [FSA] began, I advised Mr Brugger of the same and asked that he made no further loans and effectively begin an ordered recovery of all funds under his control with a view to repatriating those funds to the United Kingdom to meet my financial obligations. I had given a Personal Guarantee in good faith and always intended to make good the obligations to my lenders…As at 30 November 2008 I would estimate that the funds under control by Mr Brugger albeit on loan were approximately £60M … During the period November 2008 and April 2009, I am advised that, Mr Brugger made no further loans and, that he recovered funds of £57M … During this period I negotiated with Mr Brugger to ensure that those funds would be gathered up and secured in various bank accounts pending the outcome of negotiations with the ‘FSA’ and my own Civil Solicitors, Messrs Sherrards …In May 2009, I travelled to the Far-East with my Civil Solicitor. Through most of the early part of 2009, I worked with Mr Brugger to establish that he would provide details of all loans made to entities and individuals. The object of the exercise when my Civil Solicitor and I met with Mr Brugger in the Far-East was to seek to reassure him that neither he nor his various linked and unlinked businesses were the subject of any enquiry and that if he assisted, the matter would likely stop there. … I had no option to disclose [City of London Police investigation] to Mr Brugger who has subsequently indicated that he wishes nothing further to do with me … I am presently unaware of the whereabouts of Mr Brugger. However, I genuinely believe that the funds are secured in various financial institutions in the Far-East…”.

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:

“an activity of a specified kind which is carried on by way of business and (a) relates to an investment of a specified kind; or (b) in case of an activity which is also specified for the purposes of this paragraph, is carried on in relation to property of any kind”.

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

“4 Specified Activities General

(1)

The following provisions of this Part specify kinds of activity for the purposes of section 22 of the Act [FSMA] (and accordingly any activity of one of those kinds, which is carried on by way of business, and relates to an investment of a kind specified by any provision of Part III and applicable to that activity, is a regulated activity for the purposes of the Act). …

(3)

Subject to paragraph (4), each provision specifying a kind of activity is subject to the exclusions applicable to that provision (and accordingly any reference in this Order to an activity of the kind specified by a particular provision is to be read subject to any such exclusions)”.

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

“5 Accepting Deposits

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

“6 Sums paid by certain persons

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

““close relative” in relation to a person means-

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:-

“If on the application of the [FSA] … the court is satisfied-

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

“(1)

The court may, on the application of the [FSA] … make an order under subsection (2) if it is satisfied that a person has contravened a relevant requirement, or been knowingly concerned in the contravention of such a requirement, and-

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:-

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:-

“36.

This raises the question as to what bears on the justness of making an order. In turn, this raises the question of the statutory purpose behind the powers of the court under these sections. That purpose must, it seems to me, include protection of the investing public, consistent with the regulatory objective of the protection of consumers under section 5 of the FSMA. The main form of protection of investors, who have been drawn into investment as a result of contravention of sections 19 and 21 of the FSMA, is rescission or compensation. Disgorgement of profits acquired by the contravener is a further protection of the investing public because such disgorgement discourages future contravention. But the order of the court is required to be just, and that, to my mind involves an awareness of the gravity of the conduct of the contravener. The exercise of the court involves, it seems to me, a balancing of the interests of the investors against the culpability of the contravener. There may be cases in which the contravention of the FSMA was technical or inadvertent and this may temper the judgment of the court as to what it would otherwise be minded to order. It is incumbent upon the court to consider all the circumstances that bear upon the fairness of the order it makes”.

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:-

“43.

As Mr. Berrill-Cox points out, however, there was dishonesty in the carrying out of this scheme and he draws attention to the representation that the second defendant was regulated by the Financial Services Supervision Unit in St. Lucia. It seems to me that the first defendant was concerned to represent the second defendant as a legitimate and substantial organization and this scheme as a reputable one, and thus lure the investors into investing. Although it would have been more pernicious had Tramigo not been a genuine company with a genuine product and had the first defendant hidden his involvement, the scheme was bad enough, and the unsophisticated nature of the first defendant’s conduct is not enough, in my judgment, to dissuade me from making an order for compensation. The lack of sophistication might have made a difference in the context of an order seeking to achieve a disgorgement of profits in addition to compensation for loss. Gradations of wrongdoings are not easy to reflect in differing awards where compensation for loss is concerned. Generally speaking the loss is either compensated in full or not at all. Such differing gradations of serious conduct might be reflected in some other way, possibly in relation to the extent to which the order should reflect the disgorgement of profits in addition to the compensation for losses. An order under the sections under consideration here is a fairly blunt instrument for achieving redress in a case like this. The first defendant’s conduct may not have been as bad as it could have been, but it was sufficiently bad to encourage me, at least in the context of compensation for loss, to award the full extent of that loss against him”.

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

“48.

This brings me to a consideration of the form of relief which should be given in this case. As I have indicated, I do not think an order under section 380(2), however desirable, is practical in the light of the defendant’s lack of means. If the defendants are ordered to take steps to ensure a repayment to the investors of the purchase price against the retransfer and delivery of the share certificates and only a fraction of the purchase price is recovered, how is that to be distributed and against the transfer and delivery of what shares? The practical problems are immense and the recovery is likely to become embroiled in further disputes, and it will be a long time before anybody benefits. In any event, an order under section 380(2) could only be made in respect of those 64 investors who have indicated a wish to undo their transactions. It is difficult to imagine that they would not prefer to hold on to their shares and receive back by way of compensation more than 90% of the purchase price. That is an option they were not presented with in the letter from the FSA.

49.

By far the more practical course is to make an order under section 382. …”

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:-

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:-

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:-

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

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:-

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.