Results of the case, The Financial Conduct Authority v Capital Alternatives Limited & Others, show that operators and participants of schemes should be aware that there are serious risks if it is found that those schemes are Collective Investment Schemes (CIS). The case also goes on to explain what exactly defines a scheme as a CIS and that the court will take a broad interpretation of who should be considered to be ‘knowingly involved’ in the CIS. Another result of the case is a warning that whilst it is still practical to seek professional advice, it won't prevent legal action if it deemed appropriate.
In March 2015, the Court of Appeal (in The Financial Conduct Authority v Capital Alternatives Limited & Others) considered whether four investment schemes constituted CISs pursuant to section 235 of FSMA. Of the four schemes, one was an African Land Scheme (offering investments in rice harvests in Sierra Leone) and the others were Carbon Credit Schemes (offering investments in carbon credits generated from land in Sierra Leone, Brazil and Australia). In total, 2,021 investors invested in the schemes between 2009 and 2013, with a total investment of £16.9m and all of their capital was lost.
The Court of Appeal (as the High Court had done before it) determined that the four investment schemes constituted CISs. The court handed down the judgment that those behind the schemes should pay a total of £16.9m in restitution for their roles in four unauthorised collective investment schemes which were unlawfully promoted to the public by false, misleading and deceptive statements.
This case is a warning to operators who structure their schemes in order to avoid regulation, even if they do so in good faith: the Court has proved willing to make restitution orders against a wide range of both corporate and individual contraveners on a broad interpretation of ‘involvement’ and on the basis that the requisite knowledge is of the underlying facts, rather than the regulatory breach. Even taking all due care to avoid the CIS regime, for example, by taking professional advice, will not protect schemes from a strict application of the law and its consequences. As the Court said “reliance on advice, whilst potentially relevant to whether a restitution order is made or the amount of any such order, does not provide a defence to the claims under S382 FSMA“. This is also the first case in which the Court has made restitution orders against persons who have been found to be knowingly concerned in false and misleading statements in breach of what was then section 397 FSMA.
Mark Steward, Executive Director at FCA Enforcement and Market Oversight Division, said, “This judgment should send a clear message to all of those who use corporate facades to sell dubious investments. We will do what it takes to hold them to account for their misconduct… We are acutely aware from experience that the risk to investors who deal with unauthorised firms is that most, if not all, investors are likely only to get a fraction of their money back.”
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