FSA obtains High Court judgment against unauthorised Mortgage Investment Scheme

The Court found that Mr Richard Prentis, Mr Steven Halsey, Premier Property Investment (Europe) Ltd, and PPP Client Account Limited had been operating the scheme without authorisation in breach of section 3 of the Financial Services Act 1986. The Court also found that Mr Prentis and Mr Halsey had made misleading statements, and dishonestly concealed material facts in breach of section 47 and had issued investment advertisements in breach of section 57 of the Act.

The Defendants had advertised the PPP scheme in the Daily Telegraph in late August 2000 and in the Sunday Telegraph in September. The advert offered a 13.5% guaranteed return and contained references to both the PIA and to IMRO, giving the misleading impression that the scheme was in some way authorised or approved. Those responding were sent a brochure telling them that their funds would be held in an account in the clients own name and later used to make loans secured by way of first charge mortgage on commercial properties.

Mr Prentis, through his solicitors firm (Prentis & Co solicitors) had previously operated a similar scheme known as the "Secured Property Investment Plan". That scheme had been brought to an end - only a few months before the start of the PPP scheme - when the Law Society intervened against his firm.

At the time of the FSA's intervention the PPP scheme had attracted funds totalling 737,000 from approximately 50 investors, and three onward loans were near completion. One loan was being offered on a property which plainly provided insufficient security for the size of the advance. A second loan was being made to a company whose directors were Janet Macaskill (the wife of Mr Prentis) and Alison Watters (registered on the electoral roll for the same address as Mr Halsey).

The FSA issued proceedings against the Defendants in September 2000 alleging various breaches of the Act. An asset freezing order was obtained, enabling the FSA to secure 99% of investors funds. On 29 September 2000 the Defendants applied unsuccessfully to have the injunctions discharged. The Defendants disputed the FSA's allegations and also issued a counterclaim seeking damages against the FSA.

At the High Court hearing on 29 March 2001, Mr Justice Ferris found that the business operated by the Defendants was an unauthorised Collective Investment Scheme which was being operated in breach of section 3 of the Act. The Defendants admitted that they had been conducting investment business without authorisation, but claimed that they had not 'knowingly' breached the Act. The judge found as a matter of fact and law that this provided no defence.

The Court also found that the following statements were misleading and had been made to investors in breach of section 47 of the Act:

• Statements that funds would be placed in individual client accounts at a reputable bank;

• Statements made in the promotional material to reassure investors; such as "a reliable and secure investment", "relatively low risk", "high level of security on commercial property", no loan to exceed "80% of the market value", "guaranteed return";

• The statement that PPP was "...in association with Gold Alliance Limited who are a firm of independent financial advisers and a member of the IFA Network Limited, regulated by the Personal Investment Authority (P.I.A.). All investments are held in a designated account in the clients own name with Adam & Company a wholly owned subsidiary of the Royal Bank of Scotland plc who are regulated by the Investment Managers Regulatory Organisation (IMRO)";

• The statements that this was the second phase of a successful scheme which had been going for 18 months.

The Court went on to find that the Defendants had dishonestly concealed material facts from investors, namely that their funds were pooled in a bank account held in the name of the fourth Defendant - PPP Client Account Ltd.

The Court dismissed the Defendants' counterclaim against the FSA as having no basis in fact or in law. The Court has ordered that all of the money frozen in the fourth Defendant's bank account be transferred to the FSA's solicitors so that it can be repaid to the investors. The Court also granted injunctions against the Defendants restraining them from breaching sections 3, 47 and 57 of the Act; ordered them to make good a shortfall of 5,695 which they had withdrawn from investors funds as an "administration fee"; and ordered them to pay the FSA's legal costs.

The FSA's Director of Enforcement, Dan Waters, said:

Unusually in this case, the FSA was alerted to the scheme after only a few weeks of operation. As a result, the PPP accounts were frozen before any investors money could be paid away in the form of loans. Because of this, PPP clients will get back at least the amount they originally invested. It is often the case, however, that investors do not bring such schemes to the FSA's attention until they have a problem getting their money out - by which stage it is often too late.

The key message here is that investors should always take care to ensure that an investment scheme they plan to use is authorised, even when the promotional material gives the impression that a scheme is authorised or uses familiar household names. An easy way to check is to call the FSA's consumer helpline (0845 606 1234) where up to date information about authorised persons and schemes is readily available.

Notes for editors

1. The hearing before Mr Justice Ferris was held on Thursday 29 March 2001. The sealed Order (which sets out the declarations, the orders for repayment, etc) was issued by the High Court today - 5 April 2001. The FSAs initial proceedings were the subject of an FSA press release dated 5 October 2000.

2. Section 3 of the Financial Services Act provides that no person shall conduct investment business in the UK unless he is an authorised or exempted person. Contravention of section 3 of the Act is a criminal offence.

3. Under section 47 of the Act, any person who makes a statement, promise or forecast which he knows to be misleading, false, or deceptive or which he makes recklessly may be guilty of a criminal offence; and any person who makes a statement and dishonestly conceals a material fact may be guilty of a criminal offence; if the statement is made for the purpose of inducing a person to enter into an investment agreement.

4. Under section 57 of the Act no person other than an authorised person shall issue or cause to be issued an investment advertisement in the UK unless its contents have been approved by an authorised person. Contravention of section 57 is a criminal offence

5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

6. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.