Emma RadmoreThe judgment on several preliminary issues in the case brought by FCA against Robin Forster, Fortem Global Limited and Richard Tasker has been published. The trial considered only issues arising out of Mr Forster’s activities. FCA alleged he was responsible for operating UCIS, that units in the schemes were sold to investors through deception and that Mr Forster was knowingly involved in the deception and should therefore make restitution. Fortem Global is in liquidation, and its liquidators confirmed they would not take part in the proceedings.
Mr Forster had previously owned a number of companies which raised money from private investors by selling them a leasehold interest in a room in a rented commercial property at a very substantial overvalue. The investments, which were in care homes, student accommodation and hotels, were presented as buy to let investments. The fact the investment was overvalued was not hidden, and the relevant company (MBI) was prepared to guarantee the returns – generally, investors would have a guaranteed rental of 10% of their investment for 25 years, and at various points the operator would be prepared to repurchase the room for at least 115% of the initial investment. At least part of an investor’s payment would also be applied in the long lease of a specific room, and their interest would be registered at the Land Registry, which gave the appearance of securing that part of their investment.
Each of the 6 care homes was owned by a single legal entity, each of which appear to have been owned by Mr Forster. He also owned a service provider entity and later established 2 further “investment companies” to raise money from the public to invest in the acquisition of further care homes. These, and one further entity, operated under the “Qualia” brand. Fortem Global, owned by Mr Forster and Mr Tasker, was the main sales agent for the Qualia investments.
The investments operated on a standard opco/propco arrangement. The structure, though, did not require any investment at all from its originator. Since the sales were at an overvalue, the accounting profits appeared to constitute capital of the company, but in reality, the investors were taking all the risk.
The court looked at:
- what the investors were told about the investment
- what they legally acquired and
- the economics of the arrangements.
The investor would buy a 125 year lease of a specific room and then sublet the room back to Qualia on a sub-lease. They would get rental returns of 8-10% and be entitled to repurchase at specified intervals for a specified price. Qualia also had buy-back terms, also at a premium. At the end of the lease, the room would be sub-let to a resident, with profits split between the investor and Qualia. Often, Qualia had not acquired the care home at the point of sale so the investors sometimes signed their contracts before Qualia owned the home – so if the home purchase did not complete, the investors’ room purchase could not complete. One point of dispute was whether the investors understood this.
The court considered:
- whether the investments were CIS? On this, the judge asked the interesting question on what standard of proof might be required to reach a conclusion on this, given that the consequences of the determination could result in a person having committed a criminal offence. He also asked whether construction should strain against an interpretation that potentially gives rise to a criminal offence. He decided the answer to each question was “no”. He went on to note that the key to the applicability of s235 FSMA is the distinction between the purchase of an asset, and the making of an investment in an asset whose economic substance derives from its common management. FCA argued that the structure of the Qualia investments was broadly similar to those in the Asset Land case – that is that the investor has a small part of a larger vehicle which in reality they cannot exploit themselves, and, in practice, the scheme involves the investor participating in the business, with real property replacing what would otherwise be a share or bond. Mr Forster argued that the distinction here was that the investors would get a fixed return. Here, the judge said the apparent purpose or effect of the scheme was to enable investors to receive income from the acquisition, holding and disposal of the rights constituted by their payments. In this case, it seemed that the “property” which was the subject of the arrangements was all the care homes and cash balances not applied in room purchase. At no point did any investor information suggest they would be repaid from anything other than the profits made from the operation of the homes collectively. The judge felt it impossible to hold that the arrangements were anything other than a CIS.
- If they were CIS, were they promoted using false and misleading statements or impressions? Given that the arrangements were a CIS, all the promotional materials breached s21 FSMA as they were neither issued nor approved by an authorised person. Mr Forster was clearly the “moving light” behind the companies, and so the question of whether the companies made false or misleading statements is a question of whether Mr Forster knew the statements were false or misleading. Having considered the evidence and Mr Forster’s responses to questions, the judge held that the companies made and intended to make impressions of the investments’ sustainability to induce investment, that the impressions were misleading from the start and that the companies knew at least by 3 years in that they were. Further, the companies were reckless from the start as to the truth of the impressions. The judge reached a similar conclusion on statements made in relation to unowned care homes.
- was Mr Forster knowingly concerned in contraventions by the Qualia companies or Fortem? Was it a defence that the company secretary for the Qualia companies was a qualified solicitor and never raised the CIS issue, that Counsel had confirmed on 2 occasions that the arrangements did not constitute CIS, and that FCA itself had concluded that the original MBI investments were not CIS? The judge noted here that mere passive knowledge would not suffice to meet the test, but here Mr Forster was fully involved with all the companies’ activities and therefore clearly knowingly concerned in a variety of breaches by the companies and Fortem Global. The fact that he had received Counsel’s opinions was interesting. FCA said the opinion should be disregarded on the basis that ignorance of the law is no defence. Mr Forster said that he was entitled to rely on the advice as correct. The judge said that as a “legal opinion” can take many different forms, it cannot simply be a “get out of jail free” card, and everything must depend on the circumstances. In particular, the lay client is responsible for ensuring, for instance, that any assumptions made in the opinion apply to the situation in which it is relied on. This particular opinion noted that, on the basis of assumptions set out in instructions, the participants’ return was fixed and not dependent on the obtaining of profits – which Mr Forster must have known was not the way in which the schemes actually operated. Also, a follow up opinion clarified that in order to fall outside the CIS scope, there could be no pooling – and Mr Forster clearly knew that there was. In this case, the judge saw a clear reason for piercing the corporate veil. and
- whether Mr Forster had been personally enriched as a result of any of the claimed contraventions – the answer here was clearly yes.