London Capital & Finance was a ‘Ponzi scheme’, judge rules

Former executives of the collapsed London Capital & Finance (LCF) participated in fraudulent conduct, while deliberately creating a false impression of the company, a High Court judge has ruled.

The investment company collapsed in January 2019 after the Financial Conduct Authority (FCA) intervened following a discovery it was marketing unregulated mini-bonds and misleading promises of returns.

It resulted in a scandal with several high-profile investigations into the firm including by the HM Treasury, the Financial Reporting Council (FRC) and the Serious Fraud Office (SFO).

LCF sold around 16,00 bonds to around 11,600 bondholders, with a total amount of over £237m.

The administrators for collapsed LCF launched this civil lawsuit in 2020 against the company’s former executives. The original claim was against 15 defendants but before the hearing, there were settlements with six of the defendants.

The headline grabbing trial went ahead in February against Michael Thomson, Spencer Golding, Paul Careless, John Russell-Murphy, Robert Sedgwick, Surge Financial, Grosvenor Park Intelligent Investment. However, during the 20-week trial, Golding was disbarred from defending himself.

Partners Mike Stubbs, Barry Coffey and Danny Davis of City-based law firm Mishcon de Reya acted for the LCF administrators from Evelyn Partners.

Today, Mr Justice Miles handed down his 341-page judgment, concluding that the investment company engaged in fraudulent conduct of business.

The judge noted that Thomson, Golding, Surge, Careless, Russell-Murphy and Sedgwick all knowingly participated in the fraudulent conduct.

He ruled that LCF had misrepresented itself to the public in a widespread, fundamental and systematic way, and had deliberately created a false impression about itself.

He went as far to conclude that LCF operated as a Ponzi scheme as it frequently paid funds from new bondholders to borrowers, which subsequently returned these amounts to LCF.

It was noted the company depended almost entirely on new bondholder investments to make payments to existing bondholders because it had no independent source of income.

Thomson and Golding were deemed by the court to be liable for breaches of duties owed to LCF as directors. While Careless, Russell-Murphy and Sedgwick dishonestly assisted these breaches of duty by Thomson and Golding.

Mr Justice Miles stated that LCF is entitled to claim certain property and assets received by the relevant former executives.

There will be a further hearing at which the High Court to decide the amount of the compensation
payable by the defendants and the process for identifying which assets the defendants hold on
trust.

Commenting on the ruling, administrators Colin Hardman of Evelyn Partners said: “This fraud was perpetrated against over 11,500 bondholders many of whom suffered significant financial hardship as a result of the fraudsters’ wrongdoings.”

“We hope that the outcome of this trial, together with tighter regulation which has subsequently been introduced, will act as a deterrent going forwards,” he added.