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Jersey Unreported Judgments |
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You are here: BAILII >> Databases >> Jersey Unreported Judgments >> JFSC -v- Alternate Insurance and Ors [2007] JRC 048 (16 February 2007) URL: http://www.bailii.org/je/cases/UR/2007/2007_048.html Cite as: [2007] JRC 48, [2007] JRC 048 |
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[2007]JRC048
royal court
(Samedi Division)
16th February 2007
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Before : |
R. Southwell, Esq., Q.C., Commissioner, and Jurats Le Brocq and Georgelin. |
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Between |
Jersey Financial Services Commission |
Plaintiff |
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And |
(1) Alternate Insurance Services Limited (2) Douglas Clark (3) Robert Le Fustec |
Defendants |
Advocate A.D. Hoy for the Plaintiff.
Advocate F.B. Robertson for the Defendants.
judgment
the commissioner:
1. This action concerns disastrous investments into which 28 investors with little or no understanding of financial investing (either individuals or husbands and wives) were induced to enter by a company registered to carry on business as an investment adviser in Jersey. The investments were wholly unsuitable for all the investors, and the investors have suffered serious losses, in some cases part or all of their savings, or even in some cases more than their entire savings. The action raises directly (inter alia) questions as to whether the registered investment adviser acted recklessly (but without dishonesty) in advising the investors to make these investments. The action also raises, indirectly, questions as to how the adviser obtained registration, how the principal and other persons acting for the registered adviser could have been able to give advice which bore no relation at all to the highly risky nature of the investments into which they were placing the investors, questions as to why the relevant statute provides for reparation to be made only where the registered person is dishonest or reckless, and not where it is negligent, however seriously, or it fails to meet acceptable professional standards, questions as to why the States of Jersey have chosen not to exercise their statutory power to establish compensation schemes, questions as to the requirements for insurance of persons registered to give investment advice in Jersey, and questions as to the conduct of the two banks and one building society which lent large sums to these investors apparently without any proper enquiry as to the ability of the investors to maintain or repay the loans, or if such enquiry was made, without taking adequate account of the investors' financial circumstances. The consequences for almost all of the investors are tragic.
2. The Plaintiff, the Jersey Financial Services Commission ("JFSC"), has been established under the Financial Services Commission (Jersey) Law 1998 ("the FSC Law"), as amended. Under Article 5 of the FSC Law the JFSC is responsible for (inter alia) the supervision and development of financial services provided in or from within Jersey (Article 5(1)(a)) and preparing and submitting to the Minister for Economic Development recommendations for the introduction, amendment or replacement of legislation appertaining to financial services, companies and other forms of business structure (Article 5(1)(c)), and such functions in relation to financial services or such incidental or ancillary matters as are required or authorised by or under any enactment (Article 5(1)(d) (i)). Article 7 of the FSC Law lays down guiding principles to be taken into account by the JFSC, as follows:
Under Article 8(1) the JFSC is given power to do anything that is calculated to facilitate or is incidental or conducive to the performance of any of its functions.
3. The matters in issue in this action arise out of the provisions of the Financial Services (Jersey) Law 1998 ("the 1998 Law"). Under Article 2 of the 1998 Law "financial service business" is defined as including investment business carried on by a person who gives investment advice to persons in their capacity as investors or potential investors on the merits of the purchase, sale, subscription for or underwriting of a particular investment (Article 2(1) and (2)(c)(i)). Under Article 5 the JFSC has the powers conferred on it by the 1998 Law and the duty generally to supervise the persons registered by it in the exercise of those powers.
4. By Article 7(1) of the 1998 Law (inter alia)
Provision is made for applications for registration in Article 8, and for registration, with or without conditions, or refusal or revocation of registration, in Articles 9-11. Registration depends on (inter alia) the JFSC being satisfied that an applicant is "a fit and proper person to be registered" (Article 9(3)(a))
"Principal person" is defined in Article 1 in relation to a company as including a shareholder with more than 10% of the share capital and a director. Provision is made in Articles 13 and 14 in relation to principal persons, including in Article 14(1) the provision that no one shall become a principal person in relation to a registered person unless the JFSC has first been notified and the JFSC has in turn notified that the JFSC has no objection.
5. Under Article 19 the JFSC is given power to prepare, issue and revise Codes of Practice for the purpose of establishing sound principles for the conduct of financial service business. The Court will refer later in this judgment to the Code of Practice which it has been shown.
6. Under Article 27 dealing with Compensation Schemes
The Court has been informed that, despite the existence of this power since 1998, the States have established no such compensation schemes.
7. Under Article 30 dealing with misleading statements and practices it is provided (inter alia):
In this action one of the primary issues has been whether statements made by the Defendants were made recklessly (but not dishonestly) and were misleading, false or deceptive within Article 30(1).
8. Article 26 gives powers of intervention to the JFSC and the Court (inter alia) as follows:
In this action the next set of primary issues arises on the applicability to the Defendants of Article 26(1) and (2).
9. Under Article 24(1) the JFSC is empowered to apply to the Court for an injunction restraining a person from committing or continuing or repeating a contravention of (inter alia) Article 30, and Article 24(2) provides as follows:
The JFSC has not, in this action, applied for any relief under Article 24(2), and the Court will return to this provision at the end of this judgment.
10. The First Defendant, Alternate Insurance Services Limited ("Alternate"), is a Jersey Company and has been at all material times registered under the 1998 Law as a financial services business acting only as a financial services adviser.
11. The Second Defendant, Mr Douglas Clark ("Clark"), has at all material times been the sole shareholder in and a director of Alternate, and a principal person in relation to Alternate.
12. The Third Defendant, Mr Robert Le Fustec ("Le Fustec"), was a director of Alternate from August 2000 to April 2004, and during that period was also a principal person in relation to Alternate.
13. Two other representatives of Alternate were involved in some of the matters raised in this action, Mr John Cronin ("Cronin") and Mr David Harrison ("Harrison"). Both were employees of or associated with Alternate and were not principal persons. Cronin was at an earlier stage joined as a Defendant, but was subsequently released from the action as a party. We omit the title "Mr" in relation to these four persons only because their names are repeated so often in this judgment, and intend no disrespect by this omission.
14. In this action Advocate Ashley Hoy appears for the JFSC, and Advocate Fraser Robertson appeared initially for the three Defendants. The Court is indebted to them for the assistance they have given to the Court in the resolution of the issues between the parties.
Background
15. This action is brought by the JFSC seeking relief under Article 26(1) and (2) of the 1998 Law against the Defendants in relation to advice given by Alternate through Clark, Le Fustec, Cronin and/or Harrison between about September 2000 and July 2002 to 28 individual investors or married couples who were investors. It is the JFSC's case that such investors were induced to make certain investments and to borrow money in order to make such investments by false, deceptive and misleading statements made recklessly (but not dishonestly) by Clark, Le Fustec, Cronin and/or Harrison on behalf of Alternate as to the risks involved.
16. This action concerns investment in second-hand with-profit endowment insurance policies, which are commonly known as "traded endowment policies", or "TEPs" for short. If the original insured under an endowment policy wish to cease to maintain the policy by not continuing to pay the premiums until the maturity date, the original insured have two options: they can surrender the policy to the insurance company and be paid the surrender value at the time of surrender, or they can sell the policy in the TEP market at the then market value. Market values are usually but not always higher than surrender values. The level of the market value, and the surrender value, will depend on factors such as (1) the time left until the maturity date; (2) the level of premiums to be paid during that period; (3) the bonuses already credited to the TEP by the time of sale or surrender; (4) estimates as to the likely bonuses to be credited from then until maturity, including terminal bonuses; (5) the strength and quality of the insurance company liable under the TEP, including its past record on bonuses and market estimates as to its future policies on bonuses; (6) generally, the state of the market in TEPs, since the value of TEPs can go down as well as up in the marketplace, and can be affected by other changes, such as rises and falls in share prices and interest rates.
17. What were involved for the 28 investors advised by Alternate were not simple purchases of TEPs. They were advised to buy a portfolio of TEPs, usually in part funded from the investors' own savings, and as to the balance by a loan from a bank or building society, which loan was secured in favour of the lender by the underlying TEPs, and in some cases also by existing TEPs or other investments already held by the investors. Such transactions are called Traded Endowment Portfolio Plans, or for short, "TIPPs".
18. TIPPs plainly involve "gearing", i.e. an increase of investment risk by borrowing money in order to purchase the investment. The level of gearing depends on the ratio of money borrowed to the surrender value of the underlying TEPs. Usually the lender agrees to pay the premiums due on the TEPs until the maturity dates. So the amount loaned increases over time by the addition of such premiums paid by the lender, and other charges by the lender, and by the relevant floating interest rate charged by the lender on the total of the loan over the periods to maturity. When each of the TEPs matures, the proceeds at maturity go to the lender to reduce the total amount of the loan, and the hope is that in the end, once all the TEPs have matured, the investor will be left with a sum of money materially larger than the amount of the investor's savings originally invested in the TEPs. In all or almost all of the 28 cases the "gearing" (as the ratio of money borrowed to the surrender value of the policies purchased) was excessive having regard to the financial position of the investors.
19. The maximum level of gearing available from most banks, building societies or other lenders for the purposes of TIPPs was in the region of 85-90%, ie the lender would lend money up to a maximum of 85-90% of the combined surrender value of the underlying TEPs. If the investor did not have savings to invest, they could still invest in TIPPs by borrowing against the security of other TEPs or policies or bonds which they already owned. If the security consisted of other TEPs, the lender might lend up to a maximum of 85-90% of the surrender value of the TEPs. If the security consisted of investments other than TEPs, the lending might be only up to a lower percentage of the value of such investments. The lender would assess its total lending by reference to a percentage of the surrender values of the TEPs, but knowing that usually the market values would be likely to be above the surrender values.
20. The basic aim in investing in TIPPs is to take advantage of the hoped for excess of the growth in value of the TEPs to maturity, over the total amount of the loan, added to as indicated above, at maturity. Clearly if that excess existed the investor would have made a profit. But if on the other hand the total loan increased (e.g. through a substantial increase in interest rates) by more than the value of the TEPs, then the investor would have made a loss. Such a profit or such a loss could be substantial.
21. In the case of the purchase of one or more TEPs with the investor's savings, provided that the TEPs were carefully selected, the risk of loss over the periods to maturity would be relatively low. Annual bonuses once declared would usually be fixed and not removable by the insurance company. The investor would know what premiums would have to be paid to maturity, and would, subject to the rates of bonuses declared, be reasonably able to assess whether the final payments of maturity values would exceed the amounts paid initially in the market to buy the TEPs and the further amounts paid in premiums. So the risk of loss, certainly of any serious loss, would be relatively low, provided that the selection of the TEPs had been careful and appropriate.
22. Investments in TIPPs, because of the gearing by the borrowing of money to pay for part or all of the TEPs, would carry a much higher degree of risk. Introduction of a loan in order to buy a substantial part or all of the purchased TEPs would inevitably increase the risk of loss considerably. Investment in a TIPP involves not only the risk that the bonuses to maturity on the TEPs might be smaller than anticipated, but also the risk that if interest rates rise, the amount of the loan may rise more than anticipated, and may exceed the amount available on maturity from the TEPs, facing the investor potentially with a substantial loss which might involve the loss of part or indeed all of the savings (if any) used by the investor to invest in the TIPP.
23. The investors in relation to whom the JFSC bring this action were almost all wholly unsophisticated investors. Not a few of them in fact, even after the event and by the time when they came to give evidence in November 2006, were unable to understand how the TIPPs worked in which they had invested. All had placed total reliance on Alternate's personnel, and particularly on Alternate's principal persons (Clark and Le Fustec) in taking up the investments in TIPPs. Most were personal friends of Clark or Le Fustec. To take just two examples:
(i) Mrs Investor 11 is a young widow with three small children. Le Fustec was her husband's best man at their wedding. The result of Alternate's advice through Le Fustec is that Mrs Investor 11 may lose a large part of her original savings, and is tied into the TIPP until 2012-13, unless the policies can be sold.
(ii) Mr and Mrs Investor 4 are a young married couple. The husband has suffered from a degenerative spine condition, and in early 2001 when Le Fustec was advising them to invest in a TIPP, the husband had been warned that his early retirement for medical reasons (though he was then only 33 years old) was inevitable. Mr and Mrs Investor 4's mortgage protection cover, taken out through Alternate and Le Fustec, did not extend to cover the husband's spine condition, and they could not keep up their mortgage repayments. They sold their property, and received a balance of £55,000, which they wanted to invest against the time when the husband could no longer work. They were advised by Le Fustec to invest £40,000 in a TIPP, and the result is that they have lost a substantial part of that £40,000.
These are just two of the most tragic consequences of Alternate's investment advice among the 28 investors advised by Alternate. It should be added that some of these investors were so lacking in understanding of investments and investment decisions that, as they state they told Le Fustec at the time, they signed the relevant purchase and loan documents without even reading the documents, because they could not understand Le Fustec's verbal explanation and knew that the detailed documents would be beyond their capacity to understand. Several of the investors arranged for documentation coming from the insurance companies and the lenders to go to Alternate and to be held by Alternate, so that they did not even see such documents, unless they had to sign the documents.
The Issues
24. Each of the issues in this action has to be considered in relation to each of the investors, and to the specific evidence going to the circumstances in respect of the advice given to each by Alternate, the TIPPs in which each invested, the loans which each borrowed, and the outcome of each of the TIPPs and of the loans. Mr Hoy most helpfully summarised the issues in his List of Issues, dividing the issues into three groups: (1) liability; (2) the imposition of conditions; and (3) restoration of the position.
Settlement
25. After two and a half days of hearings, in the course of which the Court heard the Advocates' opening addresses and the cross-examined evidence of 10 investors (Investors 9, 3, 4, 12, 1, 27,11, 19,15 and 18, the trial was adjourned to enable the Advocates to discuss settlement and obtain instructions from their clients in this regard. By the time of the adjournment the Court had been informed that (1) Alternate was virtually without funds; it was being represented by Mr Robertson pro bono; though its articles of association required a minimum of two directors, since Le Fustec's resignation in April 2004 Clark had been the sole director, with the result that Mr Robertson had not been validly appointed to represent Alternate; and the insurance company with which Alternate was insured had treated the insurance policy as void on the ground of late notification; (2) Clark and Le Fustec were in receipt of legal aid for their representation by Advocate Robertson.
26. On 15 November 2006 a without prejudice settlement agreement was reached between the parties. It is unnecessary to set out the terms in this judgment. The Court accepted that those terms were appropriate, having regard to (inter alia) the burden on the public purse of representation of all parties except Alternate, and the burden on Mr Robertson's firm of pro bono representation of Alternate.
The Issues following the Settlement
27. The consequences for this action following the settlement are these:
(i) Clark and Le Fustec are released from the action as Defendants, on the basis of undertakings which they have given and this Court accepts;
(ii) the action continues against Alternate which has no longer been represented by Mr Robertson;
(iii) the relief sought under Article 26(1) of the 1998 Law is still in issue, but this issue has become of less importance in the light of the undertakings given to the Court by Clark and Le Fustec;
(iv) the issues as against Alternate under Article 26(2) of the 1998 Law remain to be decided, because, though Alternate is unable to put the 28 investors back in their position before they made these regrettable investments, it may yet be possible for the JFSC to obtain relief in other proceedings (whether in Jersey or in England) against Alternate's insurers.
28. The issues remaining against Alternate as stated by Mr Hoy under the headings of "Liability" and "Restoration of the Position" are as follows:
"Liability
1. Whether, in relation to each of the Investors, they entered into transactions with Alternate, namely, agreements with Alternate to purchase a TIPP.
(a) The meaning of "transaction" in Article 26(2) of the Financial Services (Jersey) Law 1998;
2. Whether the Investors were induced to enter into these transactions as a result of statements made by Alternate;
3. Whether the statements were false or misleading;
4. Whether the statements were made recklessly;
(a) The meaning of "reckless" and "recklessly" in Article 30 of the Financial Services (Jersey) Law 1998;
5. Whether the statements were made for the purpose of inducing the Investors to purchase TIPPs or recklessly as to whether they would have such an effect.
Imposition of Conditions
6. ..........
7. .........
8. ..........
Restoration of the Position
9. Whether the Court should order under Article 26(2) of the Financial Services (Jersey) Law 1998 that Alternate take steps for restoring the parties to the position in which they were before the relevant transactions were entered into;
10. If so, what form of relief ought to be granted for the purpose of restoring the position:
(a) Whether the Court should direct Alternate to transfer to the relevant investor the price of the TIPP (as defined in the Re-Amended Order of Justice) conditional upon the relevant investor disgorging the value of the TIPP (as defined in the Re-Amended Order of Justice);
(b) Whether the Court should order that the price of the TIPP be paid to the Investors conditional upon:
(i) where the endowment policies purchased as part of the TIPP have not matured or surrendered, the relevant Investor agreeing to assign the benefit of those policies to Alternate; and
(ii) where the endowment policies have matured or have been surrendered, the investor agreeing to pay the proceeds to Alternate;
(c) Whether, in the alternative, the sum representing the price of the TIPP should be set off against the sum representing the value of the TIPP;
(d) Whether further or other relief ought to be granted."
29. Each of these issues has to be considered and decided by reference to the circumstances relating to each investor. But they raise three general issues of statutory interpretation of the relevant Articles of the 1998 Law, and the Court takes these three general issues first, before turning to their application to the circumstances relating to each investor.
First General Issue: "Transaction"
30. The first general issue concerns the meaning to be given to the word "transaction" in Article 26(2) of the 1998 Law (paragraph 8 above) in the context of these words:
This is not a good piece of statutory drafting. However, these points are reasonably clear:
(1) the "person" referred to is the person alleged to have contravened Article 30; here Alternate;
(2) "another party" must refer to the party induced by Alternate to enter into a transaction; here the 28 investors.
31. In its original Consolidated Order of Justice the JFSC pleaded in respect of each of the investors that the "transaction" relied on was the contract by which each investor purchased a TIPP. Mr Robertson argued that this did not plead a relevant transaction because it was not an agreement to which Alternate was a party (except in so far as it acted as agent for the investor in arranging such agreement). Accordingly the Defendants applied to strike out in its entirety the JFSC's claim under Article 26(2). If that application had succeeded, the JFSC would have been left with only its claim that conditions be imposed under Article 26(1). As explained in the judgment of Commissioner Richard Southwell QC of 17 July 2006, it became apparent, in the course of the Advocates' oral submissions at the hearing of the application to strike out, that the JFSC's then pleading did not accurately reflect the case which the JFSC in reality wished to make, because the JFSC wished to rely on, not just the purchases by the investors of TIPPs from the TIPP providers, and the loans obtained by investors from the lenders, but also the dealings between the investors and Alternate, which were summarised in paragraph 19(1) of the judgment of 17 July 2006. Accordingly, as explained in that judgment, leave was given to the JFSC to amend, the application to strike out was adjourned, and in the event that application was not renewed by Mr Robertson.
32. What is now pleaded in the Amended Consolidated Order of Justice in relation to each investor (we take paragraphs 14 and 15 in respect of Mr and Mrs Investor 4 as an example) is as follows:
"14. As a result of advice given by Alternate through Mr Le Fustec, [Mr and Mrs Investor 4] agreed with Alternate that they would to [sic] purchase a TIPP. Pursuant to such agreement, Alternate thereafter made appropriate arrangements for effecting the purchase of the TIPP and ultimately received a commission from the seller of the TIPP once the TIPP had been purchased. .........
15. Documents given by Alternate to [Mr and Mrs Investor 4] in relation to the purchase of the TIPP record that the following statements were made by Alternate to [Mr and Mrs Investor 4] for the purpose of inducing them to enter into the purchase of the TIPP, alternatively recklessly as to whether they might induce [Mr and Mrs Investor 4] to enter into the said purchase: ........"
In the Amended Answer it is pleaded in response (to such paragraph 14) in paragraph 35(2):
"(2) It is denied that [Mr and Mrs Investor 4] agreed (in any legal sense) with Alternate that they would purchase a TIPP. There was no contract between Alternate and [Mr and Mrs Investor 4] in such regard: Alternate had no right to require [Mr and Mrs Investor 4 to purchase a TIPP, nor any entitlement to compensation if [Mr and Mrs Investor 4] chose not to do so. It is admitted, however, that Alternate arranged for the purchase of the TIPP on [Mr and Mrs Investor 4's] instructions. It is also admitted that Alternate received a commission from the seller of the TIPP once the TIPP had been purchased."
33. As Mr Robertson submitted before he left the trial, the pleading of the JFSC is not perhaps as clearly drafted as it might be so as to plead what Mr Hoy for the JFSC relies on, namely, a form of agency agreement, under which Alternate agreed with each of the investors to take the necessary steps to enable the investors to buy TIPPs. Such steps included (1) the selection of a TIPP provider; (2) the selection of the portfolio of TEPs; (3) the arrangement of an appropriate price for each of the TEPs; (4) the selection of a lender; (5) the arrangement of appropriate terms of the loan agreement, including the interest rate to be paid; (6) arrangements as to the remuneration of Alternate, which in the event came from the TIPPs providers rather than from the investors themselves. All these steps had to be carried out by Alternate with reasonable skill and care, and attention to the investors' interests. What is not submitted by Mr Hoy is that each of the investors agreed with Alternate to purchase a TIPP from Alternate, though Mr Hoy's pleaded paragraphs, such as paragraphs 14 and 15 in relation to Mr and Mrs Investor 4, might appear to be so alleging.
34. Despite the not entirely clear wording of JFSC's pleading, and some answers given by some of the 10 investors who gave evidence before the adjournment of the trial to enable settlement discussions to take place (answers to questions some of which trespassed out of the field of fact into that of law), this Court finds as a matter of fact and holds as a matter of law that such an agency agreement was made between each of the investors and Alternate. Plainly until each of the investors had signed agreements with the TIPP providers and the lenders, the investors would be able to withdraw and not to proceed with the purchases or the loans (though Alternate might then have been entitled to reasonable remuneration for their work done before the withdrawal either pursuant to an implied term or on a quantum meruit). But in so far as Alternate acted on behalf of each of the investors in procuring agreements with TIPP providers and with lenders, Alternate did this pursuant to an agreement with each of the investors under which Alternate undertook to take each of the necessary steps summarised in paragraph 33 above with reasonable skill and care, and under which Alternate was to be remunerated by commission from the TIPP provider.
35. Mr Robertson submitted that such agency agreements between the investors and Alternate were not relevant "transactions" for the purposes of Article 26(2). This submission goes to two points: first, whether such an agency agreement could be a "transaction" within Article 26(2); and secondly, whether in relation to any such agreement (if any) relief can be given under Article 26(2). This second point is left over until later in this judgment when the relief sought by the JFSC will be considered.
36. Mr Robertson's submission was that "transaction" in Article 26(2) could only refer to the agreements with TIPP providers for the purchase of TEPs, and perhaps the loan agreements with the lenders, and could not relate to mere agency agreements between an investor and an investment adviser.
37. He also referred to the wording of paragraph 15 of the Amended Consolidated Order of Justice, and of several paragraphs of Mr Hoy's written opening skeleton (see e.g. paragraphs 3, 25, 28 and 29) in which Mr Hoy was referring to the transactions within Article 26(2) on which the JFSC relied as being the purchase of a TIPP, sometimes put as a purchase from Alternate, and sometimes generally as a purchase of a TIPP, into which Alternate had induced each of the investors to enter.
38. On the other hand in paragraphs 47 - 54 of Mr Hoy's skeleton it was submitted that the relevant transactions include those between investors and Alternate such as the Court has found to have been made. Despite the inconsistencies in the ways in which the JFSC has chosen to put its case, the Court is satisfied that the JFSC is relying on the agency agreements as constituting the relevant "transactions" for this purpose, as well as the purchases of TIPPs which Alternate arranged as such agents.
39. The Court is also satisfied that such agency agreements are relevant transactions for this purpose. The wording of Article 26(2) does not, in the Court's judgment, confine "transaction" to agreements of purchase, loan or other investment, and is sufficiently wide to include such agency agreements. As Mr Hoy correctly observed, in Jersey the arrangements for the purchase of investments are in the great majority of instances made for purchases from insurance companies, stock markets and like away from the Island through financial advisers operating within the Island. If Article 26(2) were to be interpreted as excluding the agency agreements such as these made in these circumstances with Alternate, that would leave out of Article 26(2) almost all the agreements made within the Island in relation to financial products. In the Court's judgment such an agency agreement between an investor and an adviser in the Island is within the words "any transaction" and is covered by Article 26(2). Mr Hoy also relied on the English case of Securities and Investment Board v Pantell & Ors (No. 2) [1993] Ch. 253 Browne-Wilkinson V-C and C of A ("Pantell"), which is considered below.
Second General Issue: Recklessness
40. The second general issue is how the words "reckless" and "recklessly" in Article 30(1)(b) of the 1998 Law (see paragraph 7 above) are to be interpreted. For the JFSC Mr Hoy submitted that the correct test is the "objective" test which found favour with a majority in the House of Lords in a different statutory context in R v Caldwell [1982] AC 341 HL(E). Caldwell concerned a man who had been convicted of recklessly endangering life contrary to section 1(2) of the Criminal Damage Act 1971 by setting fire to a building when drunk. We describe this as an "objective" test despite Lord Diplock's protestations to the contrary. Lord Diplock at p. 354F-G stated that a man was reckless within that section if:
It may be noted that the number of Court of Appeal decisions which were overruled in Caldwell was large, many distinguished judges with greater experience of English criminal law had decided those cases, and the decision in Caldwell was contrary to the opinions of distinguished jurists (especially Professor Kenny) before and also after the Caldwell decision. The main dissent was by Lord Edmund-Davies who at pp. 357G - 358F said this:
41. A longer part of this dissenting speech in Caldwell is cited here because of the subsequent case-law in England and Wales, and because Lord Edmund-Davies (unlike Lord Diplock) recognised that the rival interpretations did involve what can properly be described as "subjective" and "objective" elements.
42. Mr Hoy submitted that, since Caldwell was not departed from until well after the 1998 Law was enacted, this Court should proceed on the footing that the States in 1998 was intending to adopt Lord Diplock's Caldwell test.
43. This submission is met with at least two objections. The first is that "recklessness", even after the Caldwell decision, and the decision on the same day on reckless driving in R v Lawrence [1982] AC 510 HL(E), had different meanings in other statutory contexts in English law. In relation to assaults under the Offences against the Person Act 1861, the test was still a subjective one (R v Spratt [1990] 1 WLR 1073 CA) as it was in relation to consent as an issue in cases of rape (R v Satnam (1983) 78 Cr. App. R. 149 CA). In R v Reid [1992] 1 WLR 793 HL(E) the House of Lords approved Lawrence in relation to reckless driving as an objective test, but expressly confined the decision to reckless driving, and recognised that "reckless" is used in several different contexts, and may not necessarily be expected to bear the same meaning in all statutory provisions in which it is found: see per Lord Ackner at p.807. At one time it was authoritatively suggested that there were at least six different meanings of recklessness in different contexts in English criminal law (despite Caldwell and Lawrence). This is not a case of recklessly endangering life or reckless driving.
44. The second objection is that recently in R v G [2004] 1 AC 1034 HL(E) the House of Lords disapproved Caldwell, and unanimously held that the test of recklessness in Section 1 of the Criminal Damage Act 1971 is more of a subjective test involving mens rea and that Caldwell should no longer be followed. Lord Bingham in paragraph 41 adopted the Law Commission's definition contained in its draft Criminal Code Bill, that
Though this test was established for criminal damage, it was recognised that in other contexts the objective test in Lawrence and Reid may be more appropriate. Further, it was also recognised by Lord Bingham in paragraph 39 in R v G that:
See also Lord Steyn at paragraph 58.
45. The Court notes that Article 30 makes it a criminal offence to make misleading, false or deceptive statements recklessly (without dishonesty), and provides for a sentence of up to 10 years' imprisonment on those found guilty of the offence. In the context of criminal proceedings under Article 30 the Court considers that it would be right to adopt the same test as in R v G, which having a "subjective" element may be more favourable to the accused. Since criminal proceedings may yet be brought against (inter alios) Clark and Le Fustec, the Court considers that the same test should be applied whether the proceedings are civil or criminal. Though this Court is not bound by decisions of the House of Lords, it recognises the need to apply a test of recklessness which involves directly the mens rea of the defendant, and the good sense of the Law Commission's draft definition (paragraph 44 above) as applied by the House of Lords in R v G.
46. The Court adds that, in its judgment, the choice of the Caldwell test instead of the R v G test in the present case would have made no difference, because the main risk (that the total maturity values of the TEPs would be less than the total of the moneys lent) was a risk of which those acting for Alternate were aware, but on which they seriously misled the investors by representing it to be a low or very low risk.
Third General Issue: Relief
47. The power to grant relief in Article 26(2) is contained in the words:
Mr Hoy for the JFSC submits that this provides a wide discretionary power to the Court to direct the taking of such steps as are necessary to put the parties back in the position they were in before the relevant "transaction" took place. This means before Alternate facilitated the purchase of TEPs from TEP providers, and arranged loans from the lenders, on behalf of the investors. Because Alternate was not itself providing either TEPs or loans, the only step which Alternate can take is the payment of money. But account must be taken of any residual benefit from the TEPs available to the individual investor. In theory this could be done by some form of assignment of the TEPs, or more realistically by the investors holding the TEPs in trust for Alternate. But since Alternate has no money, that would in the present case be impractical. So Mr Hoy submits that a sum representing the value of the TEPs should instead be set off against the moneys restoring the investors to their former position, and the order against Alternate should therefore be only for the net sum after such set-off. The value of the TEPs should be treated as
either
(i) the actual realised value of the TEPs, if they have matured or been surrendered;
or
(ii) where the TEPs have not matured or been surrendered and are still held by the investor, the current surrender value of the TEPs
48. Article 26(2) follows the form of the old section 6(2) of the English Financial Services Act 1986 which was considered in Pantell (above) by Browne-Wilkinson VC and the Court of Appeal, and in Securities and Investments Board v Scandex Capital Management A/S [1998] 1 WLR 712 by the Court of Appeal, on appeal from the decision of Carnwath J. In Pantell the only question was whether the SIB had an arguable case against solicitors who were not parties to the relevant transaction, but were alleged to have been "knowingly concerned" in contravention of the English statute. The SIB submitted that the statute provided for a form of statutory restitution, under which the contravener could be ordered to restore the property or money he or it had received from the investor, in return for the investor restoring whatever he had received. If the contravener could be ordered to make such restitution, then a third party knowingly concerned (such as the solicitors in Pantell) could also be ordered to pay money to the investor, even though they had received nothing themselves. This argument was accepted by Browne-Wilkinson VC, and also by the Court of Appeal. The Court of Appeal held that those who received no money and no property could be ordered to pay money to assist in restoring the party to the transaction to his former position. The remedy under the English statute, so far as concerned such third parties, was not limited to a strict rescission of the relevant transaction. Scott LJ dealt with a situation, such as here, where an investor was induced by a contravener to purchase a product from a third party, e.g. a purchase of shares. Scott LJ said at p.278 in Pantell:
49. As to the conditions to be satisfied before the English Courts could make an order by way of relief under section 6(2), Scott LJ at p.277-278 said this:
50. The Court observes that the SIB itself was in Pantell (and similarly in Scandex) arguing that section 6(2) contemplated a rescission of the transaction (such as might be effected at common law or in equity). This Court does not consider that the Jersey statute, and in particular Article 26(2), is to be interpreted as restrictively as seems to have been argued for the SIB in Pantell and Scandex. The second passage from the judgment of Scott LJ quoted above, though in it Scott LJ was recognising that wider orders might be made, was limited to some extent by his statement that "Rescission under section 6(2), as under the general law, must go both ways". But rescission at English common law (part of the "general law" to which he referred) requires the return by each party of what it has received: if that is no longer possible, rescission is not available by way of remedy. In the view of this Court, that was too narrow an approach, which resulted from the narrow way in which the two cases were argued for the SIB. Even if property has moved on to other parties (which might render common law rescission unavailable) the general words of Article 26(2) - as those of section 6(2) - enable the Court to order a restoration by the payment in money of the equivalent of the values transferred.
51. Mr Robertson for Alternate argued that in the absence of an ability to rescind, no relief could be given. The real underlying transactions here were the sale of TEPs and the grant of loans which involved innocent parties who could not be ordered to restore what they received, and without such restoration, argued Mr Robertson, there was no basis for ordering Alternate to do anything. Alternate could not undo the TEPs sales or the grants of loans, and so no order could be made against Alternate. In the judgment of the Court this argument proceeded on two erroneous bases:
(i) even under the English statute the Court had the wider power described by Scott LJ in Pantell; and
(ii) the relevant transactions here are the agency arrangements between Alternate and the investors, rather than the purchases or the loans which Alternate procured for the investors as their agents.
52. In the Court's view Mr Hoy's basic argument is correct. The Court does have a sufficiently wide power to order Alternate to pay whatever is needed to restore the position of the investors. If Mr Robertson's argument were correct, then however serious Alternate's contravention might have been (for example, however dishonest and fraudulent), still no relief could be given under Article 26(2). But in Jersey much financial business is on the basis of Jersey advisers advising their clients as to purchases of choses in action outside Jersey. Mr Robertson's argument, if right, would in the context of Jersey render Article 26(2) largely useless. The Court does not agree. Alternate can be ordered to pay money to investors to restore their former position, provided always that due allowance is made for any benefits which the investors have gained. Precisely what the relief should be in the different cases here in question will be considered after the Court has dealt with liability.
Risk: Mr Trevor Gray's Expert Evidence
53. The Court has touched on the risks involved in transactions of these kinds in paragraphs 16-23 above. We now turn to consider the expert evidence, especially that concerned with risk, in more detail. The Court had the benefit of the written evidence of Mr Trevor Gray, the expert called on behalf of the JFSC, which he confirmed on oath. The Court also saw the written report of Mr George Banbury, the expert who was to have been called on behalf of the Defendants. Though Mr Banbury was in the event not called to give evidence, the Court has not ignored his report.
54. Mr Trevor Gray has been in business in Jersey as an insurance broker for about 30 years. For much of that time he was Managing Director of Martin-Gray Insurance Ltd, and after that company was taken over in 2000 he remained as Managing Director (until 1 March 2005) and thereafter as Chairman of Alexander Forbes Channel Islands Limited. He clearly has a wide experience in the endowment assurance market.
55. As Mr Trevor Gray stated, this action is concerned with With Profit Endowment Policies, which are contracts written by life assurance companies to pay a fixed sum (the basic sum assured, plus any accumulated profits declared as bonuses either annually, or as one-offs, or at the end of the contract) to the insured on a fixed maturity date in the future, usually ten to forty years ahead. If the assured person dies before the maturity date, the basic sum assured, plus bonuses added until the date of death, is paid to the estate of the deceased. Premiums are usually paid monthly or annually.
56. The investments in which With Profit Endowment Funds are invested vary from time to time and from company to company. At the time when most of the policies were sold to the 28 investors, most of such Funds would have held 50-60% in equities, and in the case of Standard Life nearer 70%. The balance would have been held in fixed interest investments (gilts and bonds) and a much smaller percentage in property. Because of the substantial holdings in equities the Endowment Funds would be subject to movements in the equity markets, whether up or down, in the medium term.
57. The bonuses normally added to the basic sum assured are of three types:
(i) Reversionary bonuses declared annually;
(ii) Special, one-off bonuses;
(iii) Terminal bonuses at maturity.
Each bonus once declared could not be withdrawn. The level of bonuses depends on the overall Endowment Fund performance, and therefore to a material extent on the performance of the equities and other investments in which such fund is invested.
58. Expenses tend to be loaded into the early years of an endowment policy, such expenses including commissions and the cost of life assurance. This means that, if the policyholder wishes to surrender the policy in the early years, the surrender value may be less than has so far been paid to the insurance company.
59. As an alternative to surrender, the policyholder may be able to sell the policy to one of the companies making a market in TEPs. The market price of a policy will be based on the basic sum assured and bonuses added to date, and an assessment of the bonuses likely to be added by the insurance company down to the maturity date. The factors governing the market prices of TEPs are set out in more detail in paragraph 16 above. If a careful selection of a TEP is made, the guaranteed basic sum assured plus bonuses already added can be a significant proportion of the purchase price. The market price is likely to be above the surrender value. In his Appendix 2.3 Mr Trevor Gray showed how a market price for a sale by a market maker might be arrived at, giving, for example, a mark-up of 20% above the surrender value:
|
Surrender value |
£20,000 |
|
Extra account offered by market maker to buy policy |
£1,000 |
|
Commission to seller's broker or agent (normally 3%) |
£ 630 |
|
Legal fees for transfer of ownership, title checks etc |
£ 500 |
|
Commission to buyer's broker or agent (normally 3%) |
£ 720 |
|
Profit for market maker
|
£22,850 £ 1,150 |
|
Market price |
£24,000 |
60. In the early years the policyholder may have difficulty in obtaining a surrender value or a market price which reflects what has been paid to take out the policy. The surrender value in the early years will reflect the up-front loading of expenses, not yet balanced by the declaration of sufficient bonuses; and the same is likely to apply as regards the market value in the early years. In the middle years, if the bonuses already added are sufficient, and the premiums still to be paid not too high, the market value may be materially above the surrender value. In the years shortly before maturity the policy may become unsaleable on the market because the difference between maturity value and any price that could be obtained on the market may be too small to allow for the necessary mark-up to cover expenses and profit for the market maker.
61. Mr Trevor Gray assessed the risks involved in the purchase of a TEP as "a low to medium risk investment, though individual policies can differ". He explained this conclusion as follows:
"In the mid-late 1990's the market thrived due to high bonus rates being declared by insurers. At the time, I would have placed these investments in a medium risk category simply because the guarantees within the plans would have formed a lower proportion of the projected maturity value than they did 3 or 4 years ago, when the markets had collapsed. When markets are buoyant and bonuses high, the market-makers assume these high bonuses will continue and therefore the future bonuses form a larger part of the projected maturity value. When the markets are depressed and bonus rates are low, the future is not so bright and the guarantees already within the policies become more important.
2.3.2. As an example of the above, I was able to personally purchase individual policies once markets had fallen where the guaranteed sum assured and bonuses to date exceeded the sum I paid for them plus the future premiums I had to pay. In other words, I was guaranteed a profit, even if no future bonuses were paid.
2.3.3. Plunging surrender values and often ill-informed press comments led investors to either cancel policies, or decline to invest in new ones. Like most investments, however, this was the time to invest and therefore during the time that the markets had fallen a Traded Endowment policy was a low risk investment.
2.3.4. It should be noted that surrender values are not directly linked to the short term performance of the markets, although long term trends will eventually appear in them. A number of factors are taken into account when calculating a surrender value. These include the start up costs, the length of the contract, the cost of the life assurance based on the age of the assured person, the performance of the underlying investments and more importantly the actuaries' assessment of all of these factors, which are taken into account when allocating a fair value for each individual policyholder. Every surrender value will be different taking these factors into account. The only time they would be exactly the same is if an identical policy were to be sold by an insurance company to two people of the same sex with the same date of birth and exactly the same terms and conditions prevailing, and on the same day.
2.3.5. Taking into account the constituent parts of the With Profit fund and the performance of these contracts over a long period of time, I would normally assess individual policies as low to medium risk."
62. Mr Trevor Gray sharply contrasted with this low to medium risk the risks involved in a TIPP with the gearing created by the borrowing of money to buy more TEPs within the TIPP. His experience led him to conclude that a TIPP is "a high risk product" and that "Any investment that is geared is in my opinion a high risk investment." His summary of the reasons why he reached this conclusion is as follows:
"(a) Gearing is introduced with no cap on the future rates of interest charged on the borrowing.
(b) Falling surrender values and/or increasing interest rates can result in the requirement for the investor to commit additional assets or cash funds to the plan.
(c) Re-trading in the early years involves another layer of costs and is almost certain to result in a loss. The examples in Appendix 2.3 show how in theory a market price is arrived at. If an investor were to wish to sell a policy, say, two or three months after purchasing it, it is highly likely that the surrender value would be much in line with the figure at the date of purchase. Therefore to put this policy back on the market, the same level of costs would again be incurred in order to transfer the policy to a new owner.
(d) Re-trading in the final years is often very difficult. Surrender values tend to move closer to the actual maturity value as maturity date nears. As shown in Appendix 2.3 a margin needs to be created between the surrender value and the purchase price in order to be able to pay all the professionals involved and provide the vendor with an enhanced sale price. When policies are in their last years, there is often not enough 'margin' between what is likely to be a good surrender value being offered by the insurance company and the projected maturity value. The policies therefore become difficult to trade.
(e) These Portfolios hold a small number of plans typically between 5 & 10. This does not give a big enough spread of risk as achieved by a Traded Endowment Fund.
(f) Active management as available in a [Traded Endowment Fund] such as the EGF is not available to a TIPP holder. [i.e. the Endowment Growth Fund - such Funds involve substantial investments in large numbers of TEPs, spreading the risks and enabling the managers of the Funds to manage actively the spread of TEPs in which the Funds are invested.]
(g) Escalating interest rates and falling surrender values can, in some cases, mean the total loss of the initial investment. This is not the case with any of the other types of investment detailed above."
63. Mr Trevor Gray emphasised that, in his own business at Alexander Forbes, and in businesses purchased by Alexander Forbes - Marsh and Shepherd Financial Services, the staff were not allowed to recommend TIPPs to their customers because of the high risks involved.
64. As Mr Trevor Gray pointed out in his paragraph 2.4.4:
"Problems arise if the surrender values fall and / or interest rates rise. Also, the level of on-going premiums can be a factor. If a particular policy has a very high premium to be paid for a long period going forward, the compounding of the premium and interest upon it can have a significant negative factor if the increase in surrender value is less than the accumulating debt."
65. The Court considers it important to quote the rest of Mr Trevor Gray's report where he dealt with the risks involved in investment in TIPPs:
"2.4.5. Using my theoretical example of a purchase price of £24,000 [see paragraph 59 of this judgment], let us assume that markets fall by 25% and consequently the surrender value falls by say 20% to £16,000 one year after purchase. If the client is paying interest on the monies to buy the policy, this will have accumulated over the year. The risk of markets falling and affecting surrender values is something every IFA should be aware of. This possibility, however remote, should be conveyed to all clients with an explanation that if surrender values fail to keep pace with escalating debt, a loss will result.
2.4.6. Let us be conservative again, and assume a rate of interest of 5% giving an increased debt of £25,000. However, if the policy had been one with larger on-going premiums of say, £150 per month, the total debt would have increased to £27,000. I have not included interest on these premiums for the sake of simplicity. It is therefore easy to see that a relatively small fall in the surrender value, without any increase in interest rates can cause a serious differential between the value of the policy and the monies owed to the lending institution. Without producing another example it is clear to see that if an individual policy had been bought for 15%, 20%, or 25% more than its surrender value and then surrender values fall as in my theoretical example, the whole plan would unravel. The situation becomes even worse if interest rates rise.
2.4.7. Each case is slightly different but typically the lending institution will advance between 1 & 2 times the amount of the original investment made by the client. All the money is then used to buy the Portfolio, but again, typically but not exclusively, the lender will require the outstanding loan not to exceed 85-95% of the total surrender value of the Portfolio of policies.
2.4.8. If the lending limits are breached the investor is required to pay off some of the loan or pledge other investments. This has happened in the majority of cases here.
2.4.9. A simple example of gearing a low risk investment and turning it into a high risk investment would be to consider an investor's private house.
2.4.10. Let us assume an investor owns a private house valued at £400,000 with a mortgage of £300,000. It would universally be agreed that in investment terms this is a very very low risk investment as fluctuations in the value of the property will have no affect on the investor simply due to the fact that as long as he is able to meet the mortgage payments, the market value of his house is irrelevant.
2.4.11. If, however, the investor decides to "gear" his house by buying another identical house next door and let it out, it would, on the face of it, be the addition to his Portfolio of another low risk investment. However, this is not the case.
2.4.12. Let us assume that due to the fact that he had £100,000 equity in his house, a lender was willing to advance £400,000 for the purchase of the second house, therefore, his assets total £800,000 and his total indebtedness £700,000.
2.4.13. In the initial weeks and months after purchase, he will incur costs and expenses such as legal fees, redecoration, rates etc. This increases the cost of the purchase to him.
2.4.14. Let us assume there is a slump in the property market reducing property values by 20%. The two properties are then valued at a total of £640,000 but the indebtedness to the bank is £700,000 plus accumulating interest, which the investor has been unable to service due to the fact that he has been unable to let the property. At the same time he has been running up extra costs to maintain the second property.
2.4.15. In this situation, he is unable to finance his increased borrowings and the lender decides that as he is now in a negative equity situation the properties must be sold to clear the indebtedness. The upshot of all of this is that he loses his home and is seriously in debt to the lender. The underlying investments that caused the problem were deemed to be low risk, but the gearing changed them into a very high risk investment indeed.
2.4.16. In summary, therefore, gearing can produce enhanced returns when all the necessary criteria fall into place. Equally, when these criteria are not met the gearing will magnify any losses.
2.5. The type of investor that a Traded Endowment is suitable for.
2.5.1. In my opinion an individual Traded Endowment policy or an investment in a Traded Endowment Fund (ungeared) - see Appendix 2.1 is suitable for the vast majority of investors.
2.6 The type of investor that a TIPP is suitable for
2.6.1.In my opinion a TIPP is suitable for only the most sophisticated investor who fully understands the concept of gearing and appreciates the risks involved. The investor must have the ability to top-up the plan should it be necessary during its term without any significant effect on their financial circumstances. In any event, only a small proportion of personal wealth, even for the most sophisticated investor, should be placed in this type of plan.
2.7. The advice in relation to the risk that you would give to the client if that client was to consider investing in a TIPP
2.7.1. I would have used the above example of a house which I think all investors can understand easily. I would stress that any gearing introduces a higher level of risk. Quite simply, the whole object of gearing is to provide a higher rate of return and if it did not introduce a higher level of risk then every investment ever made would be geared.
2.7.2. I would stress that only a small proportion of an Investment Portfolio should be invested in a TIPP and cash funds or other investments should always be available to "top-up" to cover the scenario that has in fact happened here."
66. The example which Mr Trevor Gray gives of the purchase of a second house with a loan secured on the purchaser's home is significant for this reason. The evidence before the Court shows that those who acted for Alternate were aware of risks involved in the purchase of TIPPs. But it shows also that they greatly minimised those risks when advising the investors. In minimising the risks with TIPPs, the example of buying a second house was used by Alternate to persuade the investors that the risks were low or very low, contrary to the opinion of Mr Trevor Gray which, in the judgment of the Court, correctly assessed the potentially high risk of gearing, whether in the purchase of a house or of a TIPP.
67. The point made by Mr Trevor Gray in paragraph 2.7.2 of his report (see above) is also a significant one for this action. Mr Trevor Gray was there correctly drawing attention to the major risk involved in putting all one's eggs in one investment basket, rather than spreading the risks by investing in a range of different investments. This was of particular importance to those of the investors who were advised by Alternate to place all or most of their life savings in one TIPP.
68. In the judgment of the Court, Mr Trevor Gray correctly assessed the risks of investment in TIPPs as high risks.
69. Mr Trevor Gray went on in later sections of his report to consider the particular cases of four investors - Mr and Mrs Investor 4, Mr Investor 28, Mr and Mrs Investor 14 and Mr Investor 10. Here we summarise the overall conclusions which Mr Trevor Gray reached, and which apply equally to all of the 28 investors:
(i) In giving advice to the investors, Alternate failed to take into account that the value of the underlying TEPs could fall as well as rise.
(ii) In giving advice Alternate failed to take into account the high level of gearing which meant that in many cases there was a real risk that the investors would be called on to contribute further assets to the lenders so as to maintain their TIPP investment.
(iii) Alternate failed to take into account that, given the limited resources of most of the investors with which to meet any such call, this represented a serious risk to the safety of their TIPP investment.
(iv) Alternate failed to take into account that due to the costs, including interest charges, associated with the loans used to buy most or all of the TIPPs, it was necessary for the underlying TEPs to produce significantly high returns if the investors were to avoid suffering loses.
(v) Alternate failed to take into account the concentration of a substantial part (almost all in some cases) of the investors' wealth into one product which itself was highly geared.
(vi) Alternate failed to take into account the potential difficulties in unravelling the TIPPs at an early stage without incurring a loss.
70. Finally in his report Mr Trevor Gray considered the professional standards of Clark and Le Fustec as the principal persons of and acting for Alternate, and reached the conclusion that their conduct "fell well below usual professional standards for the following reasons":
"7.11.1. They failed to fully establish the client's financial circumstances.
7.11.2. They failed to consider numerous other products or investments that may have been suitable for the clients.
7.11.3. They totally ignored the clients' stated attitude to risk.
7.11.4. They at all times stressed the positive points of the TIPP scheme without due regard to the far more important high risk factors.
7.11.5. They led clients to believe that they would carry out reviews of the plans, when in fact this was left to the lender on an annual basis.
7.11.6. Regardless of whether or not they assessed a TIPP to be a high or lower risk investment, they concentrated far too much of each individual client's wealth in a single product.
7.11.7. In my opinion, Messrs Clark and Le Fustec should have been aware that any investment that promises returns significantly outside of the band of returns offered by bonds, gilts and fixed deposits, must involve either long-term or high risk investment or a combination of both. Quite simply, if the promised returns, often in the range of 10%-15% per annum, were easily achievable by a low risk investment, then everybody would be doing it. In such a situation financial advisers should ask themselves the question as to why very few people were.
7.11.8. Many of the statements made in the reason why letters are correct in as much as they apply to endowment policies, the market-makers and the lenders. However, it is not these factors that introduce the high risk but the fact that the portfolios are geared. The failure to emphasize (in the reason why letters), the high risk involved in TIPP plans is highly misleading to clients, particularly most of those involved here who have limited or no financial background."
71. The Court accepts Mr Trevor Gray's evidence in its entirety. The particular circumstances of each of the investors are considered below. Here it suffices to state that in the Court's assessment Mr Trevor Gray's expert evidence is plainly correct in its conclusions.
Chronology
72. The 28 investors were advised by Alternate to invest and did invest in TIPPs during a period from July 2000 to November 2002. The Court will be considering their individual cases in chronological order, which appears to be as follows, taking the dates on which each investor entered into a TIPP purchase:
|
September 2000 |
Mr and Mrs Investor 1 |
|
October 2000 |
Mr Investor 2 (first TIPP) |
|
March 2001 |
Mr and Mrs Investor 3 |
|
April 2001 |
Mr and Mrs Investor 4 |
|
May 2001 |
Mr and Mrs Investor 5 |
|
June 2001 |
Mr Investor 6 |
|
June 2001 |
Mr Investor 7 |
|
August 2001 |
Mr Investor 8 (first TIPP) |
|
The New York twin towers tragedy occurred on 11 September 2001 |
|
|
October 2001 |
Mr Investor 9 |
|
November 2001 |
Mr Investor 10 |
|
November 2001 |
Mrs Investor 11 |
|
November 2001 |
Mr and Mrs Investor 12 |
|
November 2001 |
Mr Investor 13 |
|
November 2001 |
Mr and Mrs Investor 14 |
|
December 2001 |
Mr Investor 15 |
|
December 2001 |
Mr Investor 2 (second TIPP) |
|
January 2002 |
Mrs Investor 16 |
|
February 2002 |
Mr and Mrs Investor 17 |
|
February 2002 |
Mr and Mrs Investor 18 |
|
March 2002 |
Mr and Mrs Investor 19 |
|
April 2002 |
Mr Investor 20 |
|
May 2002 |
Mr and Mrs Investor 21 |
|
May 2002 |
Limited Company Investor 22 |
|
May 2002 |
Mrs Investor 23 |
|
May 2002 |
Mr Investor 24 |
|
May 2002 |
Mr and Mrs Investor 25 |
|
May 2002 |
Mr and Mrs Investor 26 |
|
June 2002 |
Mr Investor 27 |
|
July 2002 |
Mr Investor 28 |
|
November 2002 |
Mr Investor 8 (second TIPP) |
73. The first observation on this chronology is by reference to the line drawn at September 2001 in the above list. The documents placed before the Court show that there was a decline in UK equity values from September 2001, when the attack on the World Trade Centre twin towers took place, until late in 2002, when a slow rally began. The decline in equity markets, coupled with the shift by insurance companies out of equities and into fixed interest investments, adversely affected the surrender and market values of TEPs. Mr Trevor Gray indicated, in paragraphs 2.3.2-3 of his report, that a time when surrender values are declining can be a good time for canny investors to buy suitable TEPs, because sometimes the basic sum assured plus bonuses to date could exceed the market price of the TEP plus the premiums still to be paid. But, for TIPPs, such an investor would still have to speculate as to future interest rates on the loan to buy the TIPP, and whether the total payable to the lender at maturity would or would not exceed the maturity values of the TEPs within the TIPP. As Mr Trevor Gray emphasised, such speculation was not for small investors investing the major part of their life savings.
74. In the Court's view the events of 11 September 2001 and the decline in equity markets should have alerted Alternate to the dangers for their client investors in investing in TIPPs. But out of the 30 TIPPs bought by these 28 investors, 8 were bought before 11 September 2001, and 22 TIPPs were bought after that date.
75. The second observation is that by March 2002 Alternate knew that at least one of the investors' TIPPs (Mr and Mrs Investor 5's) had exceeded the maximum level of gearing permitted by their lender because of the decline in stock market values and therefore in surrender values. This was a further event which should have alerted Alternate to the dangers for their client investors in investing in TIPPs. Nevertheless Alternate continued to advise client investors to invest in TIPPs, and 10 further TIPPs were bought by investors after that time.
What has to be proved in each case by the JFSC to establish liability
76. For the purposes of Articles 30 and 26(2) the JFSC has to prove on the balance of probabilities, so as to establish Alternate's liability in relation to each of the investors, that
(i) the investor entered into a transaction with Alternate for the purposes of the purchase of a TIPP, the making or performing of which transaction constituted financial service business;
(ii) the investor was induced to enter into such transaction as a result of statements made by Alternate;
(iii) such statements were misleading or false;
(iv) such misleading or false statements were made by Alternate recklessly (though without dishonesty);
(v) such statements were made by Alternate for the purpose of inducing the investor, or in making the statements Alternate was reckless as to whether the statements might induce the investor, to enter into the transaction.
The JFSC has also to prove in relation to each investor what steps by way of relief the Court may direct for restoring the parties to the position in which they were before the transaction was entered into.
77. The Court will now consider the cases of each investor in connection with each TIPP into which the investor entered. As will become apparent, many of the points apply to more than one investor; and the Court will try to reduce the length of this judgment by keeping repetition to a reasonable minimum.
78. The Court wishes to emphasise that it has heard no evidence from the Defendants. It is aware of a number of matters which the Defendants might have put before the Court, from the Defendants' Amended Answer, from Mr Robertson's written and oral opening submissions, from the witness statements filed by the Defendants from Clark, Le Fustec and Cronin, and the expert report of Mr Banbury, and from the questions asked by Mr Robertson in cross-examination of 10 of the investors (see paragraph 25 above). In the absence of any evidence from the Defendants the Court cannot place reliance on most of those matters. But where even in the absence of evidence such matters can be taken into consideration, the Court has endeavoured to do so.
Mr and Mrs Investor 1
79. Mr and Mrs Investor 1 were at the time of their TIPP investment in September 2000 aged 65 and 61 respectively: so they are now 71 and 67 years old. The husband was a hard-working farmer. He was not an astute businessman, particularly as regards financial investments. The wife had done the family paperwork - both secretarial and bookkeeping, but was equally without real expertise in relation to financial investments. Their practice was to ask as many questions of their advisers as they could and to try to understand any investment before they bought it. They had before 2000 been clients of another company owned by Le Fustec which merged with Alternate in 2000, when they became clients of Alternate. Mr Investor 1 was one of the investors cross-examined by Mr Robertson.
80. They met Le Fustec at their home in July 2000. Le Fustec did not ask them to complete a confidential client questionnaire, as was the practice of Alternate, and they never completed such a document. In this discussion it appears, from Mr Investor 1's evidence in chief and in cross-examination, that they told Le Fustec that
(i) They had available for re-investment £24,000, the proceeds of two endowment policies maturing in 2000, and they wished to receive advice on such re-investment.
(ii) They presently had sufficient income for their needs; and they had other investments in low risk with profit bonds.
(iii) Capital growth would be a primary consideration, but they were looking only for small capital growth and perhaps a small income return.
(iv) They wanted a "safe" investment, and did not like to take risks with their money.
81. Mr Investor 1's evidence in chief was that Le Fustec recommended an investment called a TIPP. Le Fustec said that this would involve obtaining second-hand endowment policies, and that the whole thing would be self-financing. Le Fustec described the TIPP investment as being simple and easy and safe. He described it as "finishing off" other people's policies. He said that the investment was so good that he encouraged Mr and Mrs Investor 1 to borrow money from the Bank of Ireland to finance the investment. Mr Investor 1 said that he did not understand the "gearing" aspect of the investment, and still did not understand it. Once Le Fustec had tried to explain TIPPs to them, they asked for an alternative to TIPPs; but Le Fustec told them that TIPPs were really all he had.
82. Mr Investor 1 made clear to Le Fustec that they wanted to have easy access to their money for holidays and other matters during their retirement. This was because they had sold their house, and were living in a flat while a new house was designed and built for them, which would require the use of most of their capital from the sale of their house. Le Fustec said to them that this would not be a problem.
83. On 7 August 2000 Le Fustec wrote to them a long letter. He started with a summary of their discussion in which he stated that
"Although you are not "adventurous" investors, you are not adverse to using the money for more "interesting" investments".
This statement was denied by Mr Investor 1 in cross-examination. He said that a lot of what Le Fustec wrote in this letter was what Le Fustec thought, and not what he and his wife had told him. He accepted that Le Fustec's summary of the discussion came from talking to Mr and Mrs Investor 1. But he emphasised that "interesting" could only mean "secure investments" because they had made clear that they wanted to invest safely.
84. Le Fustec referred in the letter to certain tax considerations. He then wrote:
"Therefore with that [in] mind, I decided to look at a specific plan designed to maximise returns without increasing the downside risk significantly, as well as looking at some other higher risk products:"
The "specific plan" was a TIPP, which Le Fustec was indicating to be a less risky product than the other two products with which he ended the letter (a Royal and Sun Alliance Eurotech Fund and an Invesco GT Japanese Enterprise Fund). Since investment in those two funds could at worst result in the loss of the whole investment, it is plain that Le Fustec was representing to Mr and Mrs Investor 1 that the TIPP was a safer investment. But investment in a TIPP could result in the loss not only of all the money Mr and Mrs Investor 1 had available for investment, but also of part or all of the additional money borrowed for the purposes of the TIPP, so this representation by Le Fustec was false and misleading. Mr Investor 1 said that he and his wife did not at the time understand Le Fustec's explanation of TIPPs, and thought that they were merely buying TEPs. We will return to this letter of 7 August 2000 after tracing through the progress of Mr and Mrs Investor 1's investment.
85. On 22 August 2000 Mr and Mrs Investor 1 signed a number of contract notes for the purchase of TEPs from Rochford Policies, part of Rochford Premier Ltd ("Rochford"), a market-maker in TEPs, based in Manchester. On 23 August 2000 Mr and Mrs Investor 1 signed an application for a TIPP loan from Bank of Ireland ("BoI") which for the purposes of "TEP Finance" operated through a branch at 36 Queen Street, London EC4. The application form seems to have provided BoI with no information about Mr and Mrs Investor 1's financial circumstances. Mr and Mrs Investor 1 were not existing customers of BoI.
86. On 31 August 2000 Rochford wrote to Le Fustec concerning some alterations to the portfolio of the TIPP being purchased by Mr and Mrs Investor 1. Rochford stated (inter alia):
"The application still stands and all we have done is reduced the prices of some of the policies and increased the surrender values which increases the investment to loan rates."
It seems, therefore, that Rochford had thought that the TIPP as originally arranged would have been over-geared. Rochford ended the letter, stating:
"This is just a minor bit of tweeking to ensure that the Bank of Ireland are satisfied and has not held up this application in any way."
87. Rochford enclosed a revised summary of the TIPP dated 30 August 2000. This showed (inter alia) the following:
Investment of Mr and Mrs Investor 1's money |
£ 29,480 |
|
Initial loan from BoI |
£ 43,114 |
|
Estimated annual rate of increase of surrender value |
17.5% |
|
Total investment (Policy Cost) |
£ 72,594 |
|
Premiums |
£ 37,720 |
|
Estimated Bank Interest |
£ 23,758 |
|
Estimated Maximum Bank Balance at maturity |
£102,316 |
|
Estimated Maturity Value |
£159,823 |
|
Estimated Profit on investment (End Bank Balance after Investment Repaid) |
£24,590 |
|
Gearing (Maximum Bank Balance ÷ Surrender Value Percentage) |
101.97% |
This was a high level of gearing, which meant that a decline in surrender values and/or an increase in the bank borrowing would be likely to result in a loss for Mr and Mrs Investor 1, a loss which would naturally be exacerbated by the high gearing of the investment. It is not clear whether this document was either shown or explained to Mr and Mrs Investor 1. The surrender value was £51,357, to be contrasted with the policy cost of £72,594.
88. On 12 September 2000 Mr and Mrs Investor 1 signed further contract notes sent by Rochford. Before that, on 8 September 2000 BoI wrote to Le Fustec enclosing documents to be signed by them. There was enclosed a letter of the same date to Mr and Mrs Investor 1 with which there were sent for signature an offer letter, a "new" application letter (it appears that one had been sent before), a mortgage of life policies and other documents. The Court has not seen a copy of the application form; but it is likely to have been similar to the earlier application form. If so, it provided BoI with very little information as to the financial position of Mr and Mrs Investor 1.
89. The BoI offer letter (signed by Mr and Mrs Investor 1 on 12 September 2000) recorded that the initial loan was to be £43,815.44, with premiums on the TEPs, interest and annual fees to be added
"subject to the projected loan outstanding at the next review date not exceeding 90% of the projected surrender value of the underlying policies at the same date."
Loans were to be reviewed at 6 or 12 month intervals, and it was provided (inter alia) that
"(c) If the loan is likely to exceed 90% of the projected SV [Surrender Value] in the course of the following 12 months, you will be required, within 10 working days of being notified by the Bank, to either:
Deposit an amount with Bank of Ireland to make the loan account sufficient to fund premiums due until the next review date. You will be notified of the amount of deposit required following review of the loan. Any deposits made to the loan account will reduce the loan balance on which interest is payable, once the funds have been cleared.
or
Assign additional Approved Policies to the Bank with an aggregate guaranteed surrender value which in the Bank's opinion will restore the Bank's security value requirements.
The Bank reserves the right to review the loan at more frequent intervals than those specified in a) and b) above, in the event of a sharp upward movement in interest rates or other unforeseen adverse circumstances."
90. Given that the projected gearing was 101.97% (see paragraph 87 above), it appears to have been highly likely that, if the surrender value declined during the period of the loan, Mr and Mrs Investor 1 would have to deposit further money with or mortgage further security to BoI. Le Fustec not only failed to point this out to Mr and Mrs Investor 1, but rather told them that the investment would be "self-financing": see paragraph 81 above. That statement was false and highly misleading.
91. Mr and Mrs Investor 1 provided security for the loan by a mortgage of the endowment policies they purchased .
92. On 26 July 2002 BoI wrote to Mr and Mrs Investor 1 following a review of the TIPP advising them that their loan outstanding was 91.4% of the surrender value of their TEPs, and requiring on or before 9 August 2002 a deposit of £5,000 or of additional unencumbered TEPs with a surrender value of not less than £6,250. As a result Mr and Mrs Investor 1 had in due course to mortgage in favour of BoI a number of Legal and General policies.
93. On 27 July 2002 Le Fustec wrote to Mr and Mrs Investor 1 to give them a means of raising £200,000 - £250,000 to build their new home. This means would have involved a substantial "gearing" of a large proportion of their existing investment portfolio, by the borrowing of at least £738,871, and perhaps substantially more. This letter was wholly misconceived, given what is set out in paragraph 92 above, and fortunately Mr and Mrs Investor 1 did not follow Alternate's advice. What is, however, of significance is the early part of Le Fustec's letter, in which he stated:
"as you will see, [that] although current values continue to rise, surrender values have been affected by the continuing stock market turmoil. As always, over time the markets will settle down. We are not in recession - in fact the economy is quite robust and growing at a good pace.
However investor confidence has been severely dented by the recent spate of large companies owning up to lying about the state of their balance sheets. It will take a while for that confidence to return and also for the market to find fair value. But it will."
The significance of this passage is that in it Alternate were accepting that surrender values had been affected by the decline in the equity markets, something which was strongly contested on behalf of Alternate in the early part of the trial: see also the discussion of the Chronology in paragraphs 72-75 above. A similar acceptance by Alternate is to be found in Le Fustec's letter to Mr Investor 1 dated 26 February 2003.
94. The Court now returns to Le Fustec's letter on behalf of Alternate dated 7 August 2000. This type of letter from Alternate, many of which were sent to others of the investors, has been referred to as a "reason why" letter, i.e. by such a letter Alternate were explaining to their customers (here Mr and Mrs Investor 1) why they should invest in a TIPP. We will consider the relevant parts of the letter section by section. Le Fustec first described a TIPP in this way:
"Initially, a portfolio of policies are bought with appropriate maturity dates: in this instance in five years time as this is the minimum amount of time required for the plan to be effective.
The portfolio is then 'geared': That means that a loan is raised against the policies, up to 90% of their surrender values and this money is used to purchase further policies for the portfolio."
95. Le Fustec went on:
"The whole thing is self-financing. All the costs, interest payments, premium payments etc are The loan is non-recourse as it is wholly secured against the policies. As the amount borrowed in 90% of their surrender value, a large measure of tolerance has been built in. In the worst case scenario, you would be left with your original investment. However, the end result is that a greater return is possible using the gearing method, then by just simply buying a portfolio with the initial investment money. The brochure provides full details."
The statement that a TIPP was "self-financing" was, as already found in paragraphs 81 and 90 above, entirely false and highly misleading. Mr and Mrs Investor 1's own experience of having to provide a further deposit of either money or security (paragraph 92 above) showed this. The statement that the loan was "non-recourse as it is wholly secured against the policies" was equally false and misleading, since, as the offer letter from BoI showed, BoI could on a review require a further deposit. The statement that "As the amount borrowed is 90% of their surrender value, a large measure of tolerance has been built in" ignored the facts that (i) the surrender values might decline significantly if equity markets so declined; and (ii) the level of gearing was 101.97% (paragraph 87 above). This statement was similarly false and misleading. The statement that "In the worst case scenario, you would be left with your original investment" is shown by the facts in the cases of many of these investors who have lost part or all of their "original investment" to be wrong. The reality was that because of the high gearing, loss of part or all of the original investment was probable, if surrender values declined (as they did). This statement was also false and misleading. The next sentence, beginning "However, the end result ....." set out the position if the investment in the TIPP was successful, so that maturity values exceeded the total repayable to the bank. But it was grossly misleading, because Alternate failed to point out that by virtue of the high gearing, if surrender values fell, a much larger loss would be suffered than if the investors had not borrowed to invest more. This statement was, therefore, also misleading because by this omission a false picture of the investment was given.
96. In the reason-why letter Le Fustec then dealt with some tax matters particular to Mr and Mrs Investor 1 and finally stated:
"The reasons why the gearing plan works so well are as follows:
(a) The security for the loan is based on 90% of the Surrender Values of the policies not on their Market Value. This provides a 15 to 20% 'buffer' which is realised on maturity.
(b) Gearing amplifies the amount of money invested, so that the return in turn is amplified in relation to the initial investment."
These statements are also false and misleading as explained above. The suggestion that the "buffer" existed and would be "realised on maturity" was false because realisation on maturity depended on success, and would be falsified if surrender values fell. The suggestion in (b) failed to recognise that gearing would amplify losses, and was therefore by omission false and misleading.
97. The Court finally turns to what has to be proved by the JFSC in relation to Mr and Mrs Investor 1 as regards liability:
(i) The Court finds that Mr and Mrs Investor 1 did enter into a transaction with Alternate for the purposes of the purchase of a TIPP.
(ii) Mr and Mrs Investor 1 were plainly induced to enter into such transaction by Alternate's statements, as the evidence of Mr Investor 1 established.
(iii) Such statements, as set out above, were false and misleading in the respects already spelled out.
(iv) Such false and misleading statements were made by Le Fustec on behalf of Alternate "recklessly", within the meaning of that word as discussed in paragraphs 40-46 above. Le Fustec acting on Alternate's behalf knew that surrender values could go up as well as down, and knew that there was a risk that such values might go down. He had, therefore, foresight of the risk and of the consequence if it occurred. But he took the risk, effectively wholly discounting it in his advice to Mr and Mrs Investor 1. In the Court's judgment it was obviously unreasonable for him, for Alternate or for any financial investment adviser to discount the risk so completely, and in effect to advise Mr and Mrs Investor 1 that the risk was non-existent. The Court cannot conceive of a more obvious case of serious recklessness on the part of an investment adviser.
(v) Alternate through Le Fustec made the statements deliberately for the purpose of inducing Mr and Mrs Investor 1 to enter into the transaction, and they were so induced. It is therefore not necessary to consider the alternative - that Alternate were reckless as to whether they might be induced, though the Court would (if not satisfied that Alternate intended to induce) have so held.
The Court will consider the issues as to relief at the end of this judgment.
98. In the Order of Justice the JFSC rely on the statements referred to above, and on some other parts of the reason why letter of 7 August 2000: see e.g. paragraph 51(a) and (e) of the Order of Justice. The Court has not thought it necessary to consider these further statements in any detail, but confirms that the same conclusion would have been reached in relation to each of them.
99. BoI is not a party to this litigation, and the Court cannot reach any conclusion in relation to the conduct of BoI. But the Court observes that (i) Mr and Mrs Investor 1 were not customers of BoI before taking this loan; (ii) so BoI had no prior knowledge of the Mr and Mrs Investor 1's circumstances; (iii) there is no indication in the evidence before the Court that BoI made any of the usual enquiries before granting the loan, e.g. as to the ability of Mr and Mrs Investor 1 to repay the loan in the event of serious changes in the surrender values or the interest rates. If (and the Court emphasises "if") it is the case that BoI made no such enquiries, then serious questions may arise for consideration by the JFSC as to the activities of this Irish-based bank making substantial loans to Jersey residents. If on the other hand BoI did make appropriate enquiries, and obtained relevant information as to Mr and Mrs Investor 1's circumstances, it seems improbable that BoI would have been prepared to make the loan. The Court will return to this point below.
Mr Investor 2 (first TIPP)
100. Mr Investor 2's witness statement was admitted in evidence by a consent order dated 31 October 2006 under the hearsay rules. Mr Investor 2 was booked to be away by the trial date carrying out charitable work in Kenya, and his evidence was to have been taken before the Viscount before he left. In the event he had to go to France first, and was unable to return to Jersey before his departure for Kenya. The Court has taken full account of this in weighing what Mr Investor 1 has stated in his statement. On the major issues the Court had to place primary reliance on the contemporary documents.
101. At the time of his first TIPP investment Mr Investor 2 was 55 years old. He had been separated from his wife who had died in 2004. He has two children in their thirties. He has been working for 30 years as a driver at Normans Ltd, earning a salary of about £16,250 a year. He used to supplement his income with evening and weekend work, but no longer does so. He has a home on which he has paid off the mortgage. He first met Le Fustec about 20 years ago, and has since then relied on Le Fustec for investment advice. Le Fustec has come to his flat every three or four months to discuss his financial position and possible investments. As Le Fustec knows and has known throughout this period, Mr Investor 2 has worked very hard for a living and has carefully budgeted to make sure that he saved. He did and does not like risks, and frequently told Le Fustec that he was not prepared to take any risks.
102. In about 2000 Mr Investor 2 was hoping to semi-retire so as to spend more time doing voluntary work in Africa. He had money to invest and existing investments due to mature. He saw Le Fustec who recommended a TIPP investment. He told Le Fustec that, at his stage of life, he did not want again to be committed to pay outgoings from his bank account. Le Fustec, Mr Investor 2 states, did not explain to him that there were any risks involved. Mr Investor 2 states:
"I usually had a rough idea of what Mr Le Fustec was explaining to me, but I would often be unable to understand the precise details of how the investment worked. He is a good talker and I trusted him fully."
He followed Le Fustec's advice whenever that advice was given. He agreed to proceed with a TIPP investment, which, he understood, involved buying some policies from Rochford. He did not appreciate that any of his other investments were going to be used as security for a loan. He believes that Le Fustec did not mention the need for a loan, because if this had been explained to him he would not have been interested in going ahead. He would not have agreed to the TIPP if the high level of risk involved had been explained to him. But Le Fustec did not explain that there were any risks involved. He is not aware of the details of the TIPP transaction.
103. On 9 August 2000 Rochford sent a fax to Le Fustec with details of a portfolio of policies for a TIPP to be invested in by Mr Investor 2. Rochford stated (inter alia):
"These are all long term policies with high surrender values hence the high level of gearing. The loan element can be put through either the Bank of Scotland or the Bank of Ireland."
A document of the same date faxed by Rochford to Le Fustec shows that Mr Investor 2 was himself to invest £11,619, and in addition borrow an initial loan from BoI of £28,590. With premiums, interest and charges over periods to the maturity dates in 2009, the total loan was estimated at £68,978. The estimated total maturity value of all the policies in 2009 was £113,567: this was based on the remarkable estimated growth of surrender values at 17.5% per annum. The "gearing" ratio of maximum bank loan divided by the total of the surrender values was 91.43%.
104. On 16 August 2000 Mr Investor 2 signed three contract notes for the purchase of policies from Rochford. On the same day he countersigned a confidential client questionnaire on a standard form of Alternate which was filled in by Le Fustec. His "financial and personal objectives" were stated to be "to ensure a financially secure retirement and to spend time on voluntary work in Kenya". His savings and investment requirements were stated to be: "£10,000 available for retirement enhancement".
105. Like Mr and Mrs Investor 1, Mr Investor 2 was not an existing customer of BoI. BoI on 29 August 2000 sent him documents for signature including an offer letter, a mortgage of life policies and a new application form. The offer letter was in substantially the same form as that sent to Mr and Mrs Investor 1 (paragraph 89 above). Since the "gearing" ratio was 92.43%, the likelihood of Mr Investor 2 being called on by BoI to deposit either money or further security was high. Mr Investor 2 signed the offer letter on 5 September 2000, and also confirmed on the same day a drawing from the loan of £28,627.52. The Court has not seen the application form. The Court repeats paragraph 99 above in relation to the conduct of BoI vis à vis Mr Investor 2. However in January 2001 the BoI loan was paid off and replaced by a loan from Newcastle Building Society ("NBS").
106. The Court has not seen a copy of a "reason why" letter to Mr Investor 2 dated in August or September 2000. But what is in evidence is a reason why letter which shows the following:
(i) The first page is addressed to Mr Investor 8 (another of the investors), and dated 23rd August 2001, in typescript. The address and date have been crossed out and replaced in manuscript by Le Fustec with the name and address of Mr Investor 2 and the date "7-01-02".
(ii) The main text of the letter is in general terms and could apply equally to Mr Investor 8's and Mr Investor 2's TIPPs.
(iii) But the third page contains a schedule of figures relating specifically to Mr Investor 2's first TIPP which the Court is now considering, and refers to BoI as the lender, not NBS.
(iv) There is also a "reason why" letter dated the same date, 7 January 2002, relating to Mr Investor 2's second TIPP (which was purchased in December 2001) in somewhat different terms.
107. The Court has not received any detailed explanation of the first letter, though it notes that in paragraph 147 of the Order of Justice it is pleaded that
"It appears from Alternate's client file that "Reason Why" letters were sent to [Mr Investor 2] in respect of both TIPPs in January 2002 at the time of purchase of the second TIPP. The Commission will invite the Court to infer that the same or substantially similar statements as set out in the "Reason Why" letters were made by Alternate to [Mr Investor 2] at the time of purchase of the first TIPP."
The suggestion that a reason why letter was sent in January 2002 in respect of a TIPP entered into in October 2000 seems to the Court to be improbable, particularly since the letter sent in January 2002 in respect of the second TIPP was in different terms. What the Court deduces from the evidence before it is that the second and third pages come from a reason why letter sent to Mr Investor 2 at the time when the first TIPP was entered into, and that the manuscript jottings on the first page (a copy of a letter sent to Mr Investor 8) represented the first stage of Le Fustec's drafting of his letter to Mr Investor 2 of 7 January 2002 in respect of the second TIPP. The Court also deduces that the first page of the letter concerning the first TIPP would have been similar to the first page addressed to Mr Investor 8 in 2001, since the other cases before us show that that was a common form of Le Fustec's reason why letters sent on Alternate's behalf.
108. Assuming that the Court's deductions are correct, in the letter sent in relation to the first TIPP Le Fustec drew attention to "two main areas of risk". The first was that interest rates would increase and the cost of borrowing would exceed the rate of growth of the TEPs surrender values. This was put as a low risk. Le Fustec stated that increasing interest rates would lead to increased bonus rates, a mistaken proposition, because interest rates and equity market prices are to a certain extent linked, rises in interest rates often leading to declines in equity values. He also stated that if "interest rates should rise to an unacceptable level, then it would be possible to unravel the plan by re-trading the policies", which would have grown in value. The implication from this statement was that the TIPP could be re-sold without loss - which was a misleading suggestion. The second main area of risk was that the level of bonuses would be less than the cost of borrowing: this was in truth the same as the first. On the third page it was stated that
"The plan is flexible enough for us to unravel at any time by re-trading the policies in order to protect the capital."
This statement was misleading as is shown by Mr Trevor Gray's evidence, and the experience of some of the investors who have sought to re-sell and have encountered difficulties.
109. The Court thus considers it most probable that these misleading statements were made in a reason why letter by Alternate at the time of the first TIPP invested in by Mr Investor 2. However, the Court cannot conclude that the matters required to be established by the JFSC in this regard have been established to a sufficient degree so as to enable the Court to find that Alternate made reckless statements inducing Mr Investor 2 to enter into his first TIPP.
Mr and Mrs Investor 3
110. Mr Investor 3 gave written evidence in chief and was cross-examined by Mr Robertson. Mr Investor 3 was 39 years old and Mrs Investor 3 38 years old in early 2001. He was a building site foreman earning about £26,000 a year, and she was a forecourt supervisor earning about £9,000 a year. They had twin boys aged 14 years. In 1995 they had moved to Jersey, and rented out their property in Exeter. In Jersey at first they rented a property from her family. In 2000 they bought out the family property in Jersey in part, raising a mortgage of about £40,000 for this purpose. They also spent about £9,000 on improvements and repairs. In late 2000 or early 2001 they sold their property in Exeter, leaving them with about £25,000 from the sale. They wanted to invest this sum for six to seven years, and then use the proceeds to restart Mr Investor 3's own business, which he had previously run with his father. Both were described by Mr Investor 3 as "financially naïve about investments".
111. Le Fustec had previously met Mr and Mrs Investor 3 socially. In March 2001 Le Fustec phoned Mr and Mrs Investor 3 having heard that they had funds to invest. He visited them at home shortly afterwards. They explained to Le Fustec that they had already spoken to a financial adviser, but had taken the matter no further because of their concerns about the levels of risk with stocks and shares. They gave full details of their financial position as above. Both contributed to work-related pensions, and to four small investment policies due to mature between 2012 and 2021. Le Fustec made notes during the meeting on a confidential client questionnaire from which was stated to have been completed on 14 March 2001, the day on which both Mr and Mrs Investor 3 and Le Fustec signed the form. On the questionnaire form their "Risk Profile" was marked as both "Cautious" and "Balanced". At this first meeting investments were discussed only in broad terms and at no great depth.
112. At a second meeting with Le Fustec he talked in general terms about investments with expected interest rates as high as 14-15% per annum. Mr Investor 3 made it clear to Le Fustec that they were not concerned to get the highest possible rate of interest. Instead their aim was to make a stable investment with a low level of risk so that in a few years Mr Investor 3 could re-start his business. They talked through investing about £4,000 in a medium risk investment to try for a higher rate of return, but without risking the bulk of their money available for investment.
113. At this second meeting Le Fustec concentrated his advice on a TIPP. He told them that buying a TIPP cost a minimum of £60,000. He explained that they could use their £20,000 to buy a £60,000 TIPP by getting a bank to provide the rest of the money (£40,000). The statement that the minimum required for a TIPP was £60,000 was untrue and seriously misleading. It appears to the Court to have been made solely in order to push Mr and Mrs Investor 3 into borrowing £40,000. The Court notes that on 15 May 2001 Rochford sent to Alternate a commission cheque for £1,825.17 - apparently based on the size of the transaction. Mr Investor 3 recalled Le Fustec saying that they would "leverage" the money to buy the TIPP. Mrs Investor 3 said to him that it sounded as if the bank would be lending the balance of the money to Mr and Mrs Investor 3. They told him in detail that they had experienced financial difficulties during the recession in the 1980s, when as part of his partnership with his father Mr Investor 3 had owned property which fell sharply in value. So they had decided to end that business, and they had had to raise a substantial mortgage against their Exeter house to clear the debts. The pressure of making repayments of the mortgage debt had made life a real struggle for them, as a result of which they had agreed that they would never borrow money again.
114. Le Fustec categorically said that it was not like borrowing money at all. He repeatedly assured them that it would not involve them being required to make any payments in the future. The bank would arrange the whole thing. The bank had confidence in it and were prepared to make a loan without any security. These statements made the Mr and Mrs Investor 3 feel that there was no need to worry, and they believed what Le Fustec told them. Mr Investor 3 appreciated that the bank would be paying money on their behalf; but they viewed it as part of a special package which they would enter with the bank, and did not consider it a loan in the ordinary sense. Le Fustec assured them that they would not be required to "furnish" the loan.
115. At a third meeting Le Fustec explained two alternative investments as set out in a document which he handed to them (in this document he incorrectly stated the amount for investment as "£25,000 to £30,000" though they had only £25,000, and the objective as "To build additional funds for retirement or property development", though no question of retirement arose). The second alternative was a With Profits Investment Bond, which might have been a safe investment for them, and certainly would have been safer than a TIPP. This second alternative was not clearly explained by Le Fustec to them. Le Fustec persuaded them to go for the first alternative, a TIPP. In the document handed to them Le Fustec stated (inter alia):
"Utilise £25,000 to gear up purchase Traded Endowment Policies. Gear up by means of loan facility arranged with Bank of Ireland. This allows for between £63,000 and £74,000 of TEPS to be bought.
All premiums & costs associated with the purchase of the portfolio are provided for within the loan arrangement.
The loan is secured in total against the surrender value of the TEPS, this ensures that the likelihood of recourse is extremely small.
The loan rate is variable, however the current trend is towards lower rates for the foreseeable future and if interest [rates] rise then bonus rates tend to rise also.
Whereas the loan is secured against the surrender value of the policies, the market value of the TEPS tend to be 10-30% higher, providing an even greater margin of comfort for the investor."
These statements were misleading, because
(i) The likelihood of "recourse", i.e. of having to pay more or provide more security could not properly be described as "extremely small": if the policy values fell, such "recourse" was probable.
(ii) The statement that "if interest [rates] rise then bonus rates tend to rise also" was, as already indicated, an improper over-simplification, not least because increases in interest rates may be accompanied by declines in equity market values leading to lower bonus rates, as occurred soon after this.
(iii) The statements were misleadingly over-optimistic, without any proper assessment of the risk of loss. As Mr Trevor Gray stated in paragraph 7.11.7 (see paragraph 70 above), if a TIPP was such a good investment and the promised returns could be achieved by a low risk investment, "then everybody would be doing it". Le Fustec for Alternate ought to have been asking himself why so few were investing in TIPPs.
116. At this third meeting Le Fustec explained that the TIPP would mature in six years or so by which time it was expected to be worth in the region of £125,000. They agreed to invest in a TIPP, and Le Fustec agreed to take the necessary steps to arrange this. As they were happy that this represented only a minimal risk, they agreed to pay £22,764 into the TIPP.
117. They had a fourth meeting with Le Fustec at which he completed the paper work. They signed the contract notes with Rochford and the cheque for that sum on 28 March 2001.
118. They received a reason why letter dated 3 April 2001 from Alternate signed by Le Fustec. The Court will return to this letter shortly.
119. The Portfolio Cash Flow List, which it appears was not seen by Mr and Mrs Investor 3, showed (inter alia) a remarkably high rate of assumed growth of surrender values at 14% per annum, an estimated maximum bank balance of £73,803 (as compared with an initial loan amount of £38,075 - which may have been £38,570: see paragraph 120), an estimated maturity value of £125,730 with an estimated profit of £27,514, and a gearing at 87.57%. Such a gearing was high enough to make the risk that Mr and Mrs Investor 3 would have to deposit more money or more security a high risk. Le Fustec did not inform them of this degree of risk. The price of the TEPs was £60,839 as compared with the surrender value of £44,273.
120. On 23 April 2001 BoI wrote an offer letter in respect of the loan of £38,570.56. The terms of this offer letter were substantially in terms similar to those of the offer letter to the Mr and Mrs Investor 1, in particular so far as concerned reviews of the loan and the steps BoI could take if the loan was likely to exceed 90% of the projected surrender value of the mortgaged policies. Mr Investor 3 was asked more than once in cross-examination whether he was aware of and understood this provision and that he and his wife might have to deposit further money or policies. His answers were that he asked Le Fustec about this, saying that they had no more money to invest, his understanding was that they would not be required to pay more money, and they were assured by Le Fustec that it was never going to be the case that they would have to pay more. These statements by Le Fustec were seriously misleading, particularly in light of the gearing figure of 87.57%. It was because of these statements by Le Fustec that, when on 1 October 2002 BoI wrote demanding more money, this was to him and his wife, as he stated, "a complete shock". When asked about his use of this phrase, he repeated that he had known of the potential risk from BoI's letter of 23 April 2001, he had raised the point specifically with Le Fustec and Le Fustec had indicated that there was no risk of this happening at all - stating that the only risk was as to the size of the growth in the value of the policies. Such statements were misleading and plainly false.
121. The Court now returns to Alternate's reason why letter of 3 April 2001 signed by Le Fustec. As in the cases of the investors already considered, in this letter Alternate made a number of statements of a highly optimistic nature as to the prospects of a successful investment in a TIPP. No attempt whatever was made to explain the potential risk of loss. Statements such as that "the likelihood of recourse is extremely small" were both false and misleading as Mr Trevor Gray's report shows. Alternate stated that
"In the event of an investor having to terminate the arrangement in mid term, then the policies may be traded back on to the market. Depending on the time elapsed since purchase, the policies should have grown in value and their attractiveness increased. Given the continuing growth of this market and the limited availability of suitable policies, then the investor should be able to at least make good his initial investment."
In making this statement Alternate ignored the problems in resale of the policies set out by Mr Trevor Gray, and the potentially major problem if the price on resale was materially less than the total amount then owed to BoI. It is unnecessary to quote the further over-optimistic statements made to Mr and Mrs Investor 3 in this letter.
122. On 1 October 2002 BoI wrote the letter already referred to demanding a deposit of either £3,000 or additional unencumbered policies with an aggregate surrender value of not less than £3,750. This was the letter which came to Mr and Mrs Investor 3 "as a complete shock". Le Fustec told them to ignore the letter. But being very concerned Mr Investor 3 phoned BoI: he was told either he must comply with the letter or BoI would foreclose and sell the mortgaged policies. In the end they had to pay £1,500 and deposit a further policy as security.
123. On 21 February 2003 BoI made a further demand that on or before 15 March 2003 Mr and Mrs Investor 3 paid a further sum of £3,200 or deposited as security further policies with a surrender value of £4,000. On 7 March 2003 BoI wrote a further aggressive letter stating that unless this was done by 15 March 2003 the policies might be sold or surrendered. On 20 March 2003 BoI demanded full payment of the then amount of the loan - £47,303.88. On 7 April 2003 Mr and Mrs Investor 3 paid £4,300 to BoI and agreed to pay £530 monthly from then on. On 8 March 2004 they paid a further sum to BoI from Mrs Investor 3's post office saving of £13,000 to reduce the loan.
124. Mr Investor 3 ended his evidence in chief with this paragraph:
"23. The whole experience has seriously affected our quality of life. We are under constant pressure because we have no money. It has forced my wife to continue working full-time and has also had a big impact on me. I was initially due to study for a degree in Building Studies as part of a day release scheme but have been unable to afford the fees. The programme only runs every other year and I will be too old to start the programme by the time this is all behind us."
In this paragraph Mr Investor 3 fairly summarises the effect on a married couple with savings of only £25,000 available for investment, of being advised by Alternate to make a high risk investment which Alternate through Le Fustec represented to be a low risk investment, despite the high degree of gearing involved.
125. The Court turns to the matters which the JFSC has to prove as regards liability in the case of the Mr and Mrs Investor 3. In this connection the Court finds that the relevant facts relating to Mr and Mrs Investor 3 are correctly pleaded in paragraphs 78-86 of the Order of Justice:
(i) The Court finds that Mr and Mrs Investor 3 entered into a relevant transaction with Alternate for the purposes of buying a TIPP and taking a loan for that purchase.
(ii) Mr and Mrs Investor 3 were induced to enter into such transaction by Alternate's statements, as Mr Investor 3's evidence shows.
(iii) Those statements, which are summarised above, and pleaded in more detail in paragraph 81 of the Order of Justice, were false and misleading in the respects already indicated, and as pleaded in further detail in paragraph 84 of the Order of Justice.
(iv) Such false and misleading statements were made by Le Fustec on Alternate's behalf recklessly. The Court repeats, mutatis mutandis, paragraph 97(iv) above.
(v) Alternate made such statements for the purpose of inducing Mr and Mrs Investor 3 to enter into the transaction and to buy the TIPP, and they were so induced. The Court repeats mutatis mutandis, paragraph 97(v) above.
Relief will be dealt with at the end of the judgment.
126. The Court repeats in relation to Mr and Mrs Investor 3, mutatis mutandis, paragraph 99 above and its observations as to the apparent conduct of BoI. In particular, BoI seem to have made no enquiries as to Mr and Mrs Investor 3's financial circumstances, and to have failed even to ascertain whether or not they lacked the resources to make early repayment if the mortgaged policies reduced in value. If BoI had made such enquiries, it seems to the Court that Mr and Mrs Investor 3 would not have been able to proceed with the investment, and in any event BoI would not have made the loan. So this regrettable case would not have arisen. The Court will return to this point below.
Mr and Mrs Investor 4
127. As indicated in paragraph 23 above, this is one of the most tragic cases with which this Court is concerned. Mrs Investor 4 gave evidence in chief in writing and was cross-examined by Mr Robertson. She and her husband had known Le Fustec from 1992 when he began to advise them. In 1993 they obtained a States loan of £70,000 to buy out the rented property in which they and their daughter born in 1991 were living: they themselves could contribute only £2,000. Following traumas over the birth of a stillborn child in 1996 and a miscarriage in 1997, their son was born in 1998. But during the pregnancy Mrs Investor 4 had to spend three months in hospital, and had a series of operations after the birth. Throughout this time they counted Le Fustec as someone they could entirely trust. In 1999 Le Fustec advised them to replace their States loan with a commercial mortgage. He also advised them to take out critical illness cover. This was because Mrs Investor 4 had spent a long time in hospital, and, more important, Mr Investor 4 has a degenerative condition of his spine. Medical advice has always been that one day he will end up in a wheelchair. In 2000 his condition deteriorated, and in October 2000 he was made redundant, and found it very difficult to find other employment. The critical illness cover obtained for them by Le Fustec did not in the event protect them. They could not keep up the mortgage payments, and had to sell their home. In November 2000 the Housing Department arranged for them to be re-housed because of Mr Investor 4's medical condition, and insisted that the surplus from the proceeds of sale be invested to give them some protection against the day when Mr Investor 4 could no longer work. The property was sold in March 2001. They were left with equity of £40,000, and £15,000 which they kept in a bank account against immediate need. Their children were then aged 2 and 10 years. Mrs Investor 4 had shingles following the move. Mrs Investor 4's spinal condition was worse. The poor conditions in their new flat and the level of anti-social conduct in the area created a great deal of stress for all Mr and Mrs Investor 4's family. Mrs Investor 4 was 31 years old and her husband was aged 33. They had no experience at all of investing money. It was at that stage that they asked Le Fustec for Alternate to advise them as to the investment of their £40,000 so as to provide some degree of security for their future.
128. The Court has set out the circumstances in which Mr and Mrs Investor 4 found themselves in the spring of 2001, for these two reasons:
(i) Le Fustec was well aware of all these circumstances as a friend of Mr and Mrs Investor 4's family;
(ii) such circumstances pointed to the need for the most careful placing of their sole financial resources, so that the money remained entirely safe and available to provide some alleviation if Mr Investor 4 ceased to be able to work, and this was equally well known by Le Fustec.
129. Le Fustec visited them at their new flat in early April 2001. (The Court notes that the persons in Alternate made a practice of visiting clients in their homes, rather than conducting more business-like meetings in Alternate's offices. Whether or not this practice was appropriate, it probably made easier the persuasion of clients to invest in TIPPs.) Mr and Mrs Investor 4 explained all about their personal and financial circumstances to Le Fustec. He wrote the entries in Alternate's confidential client questionnaire form on 3 April 2001 which Mr and Mrs Investor 4 both signed on 10 April 2001. Le Fustec noted their "Financial and Personal Objectives" as "To secure early retirement on account of ill health", and their "Saving/Investment Requirements" as being "To invest £40k to secure early retirement on account of [Mr Investor 4's] disability". He noted that they had no pension arrangements. On 11 April 2001 (and therefore apparently after this form had been signed by Mr and Mrs Investor 4 and taken away by Le Fustec) he inserted these observations:
"[Mr and Mrs Investor 4] have sold their flat, repaid mortgage and have £55,000 equity - £15,000 on deposit for holidays etc. They are using £40,000 to invest to ensure a reasonable fund available if [Mr Investor 4] has to retire on ill health grounds. Homeplan may pay out in such circumstances. If not, maturity value at 65 will be £100k. TIPP should gross at £190k."
130. At this meeting Mrs Investor 4 explained to Le Fustec that they wanted an investment which was safe, and which would be there for Mr and Mrs Investor 4 whenever the day came that her husband had to stop work. She told Le Fustec that they wanted nothing to do with stocks and shares, and that they were not worried about getting the highest possible rate of interest. She explained clearly to him that they did not want to take any risk, and that they were happy to accept a lower return in order to know that they would not lose the money.
131. Le Fustec explained to Mr and Mrs Investor 4 primarily one type of investment - a TIPP, though he also mentioned with profit bonds, but without any detailed explanation. He told them that they could get a better TIPP if money was borrowed from a bank. Mrs Investor 4 asked him whether there were any risks involved. Le Fustec told them that "nothing was ever 100% protected, but that a TIPP was very, very safe": this was another misleading statement. He told them that a TIPP was a long term investment which could not be touched in the early years, but could be used to take an income in the future for things like school fees. This was misleading, because taking any such "income" would increase the loan and the interest charges, and therefore increase the risk of loss. Neither Mr and Mrs Investor 4 understood the way in which a TIPP worked. But they completely trusted Le Fustec to protect their interests. He assured them that a TIPP had nothing to do with stocks and shares (though in fact most endowment funds were invested in equities to at least 60%). The assurance was false and misleading. He gave them an information sheet which, Mrs Investor 4 said, gave her assurance because she understood it to mean that their money was "95% to 100%" safe. The sheet contained a number of misleading statements:
(i) The likelihood of recourse (i.e. having to provide more money or other security to the bank) was stated to be "extremely small". In reality, if policy values fell, as they might well do, the likelihood of such recourse was high.
(ii) It was stated that "if interest rates rise, then bonus rates tend to rise also". For the reasons already set out that was seriously misleading.
(iii) It was stated that
"The important issue is that the rate of return (the bonus rate) on the policies always exceed the interest rate suffered on the loan"
This was a false point, since there could be no guarantee at all that bonus rates would outpace interest on the loan, particularly since the annual increase in surrender values (needed to outpace the increase in the loan) was put at 12%.
(iv) It was indicated that policies could be surrendered or sold with little loss, and perhaps with profit. In truth, there was no certainty that the policies could be sold, as Mr Trevor Gray's evidence above shows, or that they could be sold or surrendered without material loss.
(v) It was also indicated that income could be taken from a TIPP, by borrowing from the bank. Alternate failed to make clear that this could only worsen the position of the borrowing investor, or that the bank might refuse to make any further loan without more security.
132. Thereafter Le Fustec visited them in their flat to obtain their signatures, including a cheque for £40,000. They did not understand what they were signing and relied entirely on Le Fustec to take care of their interests at what was a very difficult time for the Mr and Mrs Investor 4. On 11 April 2001 Le Fustec for Alternate wrote acknowledging receipt of their cheque, and stating that a "Reason Why" letter would follow as well as the loan documentation. The reason why letter, though dated 3 April 2001 was, therefore, sent after 11 April 2001. The letter contained further misleading statements:
(i) It was stated that
"Maximising the return on your capital with a minimum of risks was your first priority".
This statement was wrong anyway, since Mr and Mrs Investor 4's first priority was the absolute minimum of risk, and not maximising the return. The statement by implication represented that the TIPP was a minimal risk: that was untrue and seriously misleading.
(ii) Having stated that their investment was £40,000 which with the bank loan of £48,654 made a total TIPP portfolio of £88,654, it was stated that the net profit after deduction of the initial investment was projected to be £152,598, representing an annualised growth rate of 14.42%. There followed a warning that this was only a projected figure as future figures depended on bonus declarations. This gave a misleading impression of the likely profitability of the TIPP investment. Though this was a highly geared investment, it was represented that a large profit was likely.
(iii) Overall, the letter focused entirely on potential advantages without any proper indication of the potential disadvantages.
133. The Portfolio Cash Flow List (which appears not to have been shown to Mr and Mrs Investor 4) showed a maximum bank loan of £151,652 (from an initial loan of £48,654), an estimated profit of £152,598 on the basis of a price discount rate of 14.42%, and an annual growth rate in surrender values at 12%. In the Court's judgment no competent investment adviser, knowing (as Le Fustec did) of the detail of Mr and Mrs Investor 4's very adverse circumstances and especially of their vital need for an entirely safe investment of most of their worldly assets, could possibly have allowed them to invest in this way in an investment which was obviously a high risk investment. The policy cost of £88,654 is to be contrasted with the surrender value of £64,767.
134. On 30 April 2001 BoI sent to Mr and Mrs Investor 4 an offer letter in respect of a loan of £38,926.83 (not £48,654 as referred to above). Receipt of this letter came as such a surprise to Mr and Mrs Investor 4 that the wife phoned BoI to say that they did not have a loan with BoI. Though they knew of the involvement of BoI (as Mrs Investor 4 accepted in cross-examination), they had not expected to have any dealings with BoI until maturity. She then phoned Le Fustec, who told her not to take any notice because it was not a normal loan and that it was all part of the investment. That statement was untrue and seriously misleading. The offer letter was in substantially similar form to the one sent to the Mr and Mrs Investor 1 (see paragraph 89 above). It related to an entirely "normal" loan, and gave BoI the power to require the further deposit of money or further policies as security if the loan was likely to exceed 90% of the projected surrender value of the already mortgaged policies. The Court has not seen a signed copy of this offer letter, but in view of later events it assumes that Mr and Mrs Investor 4 were persuaded to sign it. Mrs Investor 4 said in cross-examination that she signed where she was told to by Le Fustec, and she could not recall exactly what documents she had signed. The Court has also not seen any form of application for the loan to BoI, or any mortgage of the policies in favour of BoI. As to the provision enabling BoI to call for further money, Mrs Investor 4 said that they did not have further money to pay in, and Le Fustec knew that.
135. In May 2001 Mrs Investor 4 visited her mother in England for a few weeks to try and gain some strength. After her return the whole of Mr and Mrs Investor 4's family found their living conditions intolerable, and spent all day out of their flat. The level of disturbance prevented all of them from sleeping, and Mr Investor 4 started to suffer from depression. In July 2001 they decided to move to England. They visited Alternate and told Le Fustec that they wanted their money back for these reasons. Le Fustec told them that this was too soon, and they should come back after six months. When they then went back Le Fustec again told them that it was too soon. Since by then the decline in equity markets was well under way, it appears that Le Fustec failed to give them a proper explanation of the problems.
136. By July 2002 Mr Investor 4's condition had seriously deteriorated, and he was unable to work. He started to retrain in computing, but was unable to sit for long periods. Mrs Investor 4 took up employment as a secretary. In November 2002 they again asked Le Fustec to recover their money, or at least to take some income, which they needed to enable their daughter to take up a scholarship at Jersey College for Girls. Le Fustec told them that it was still not possible to get their money back, failing again to give a proper explanation. He suggested trying to get a loan, but that was refused because of Mr Investor 4's health. Mr and Mrs Investor 4 then received notice that their life insurance was not performing well. She asked Le Fustec whether their TIPP was doing alright. He told them "that it was a slow and boring investment with locked in benefits and that everything was fine." That statement was false and misleading, since the TIPP value was already in process of falling below BoI's 90% requirement. Mr and Mrs Investor 4 had to cash in their life policy to pay the school fees.
137. On 3 February 2003 BoI wrote a warning letter to Mr and Mrs Investor 4. BoI stated (inter alia):
"A number of Life Offices have made further cuts to bonus rates since 1 January 2003 in response to continued poor investment market conditions. It is likely that other Companies will announce cuts over the next few months. These bonus cuts are likely to result in a reduction in the Surrender value of your TEPs."
These facts were no doubt known to Alternate, but Alternate failed to inform the Investors 4 and explain the position to them. BoI warned Mr and Mrs Investor 4 that they would be likely soon to be required to reduce the amount of their loan.
138. On 21 February 2003 BoI wrote to Mr and Mrs Investor 4 demanding that by 15 March 2003 they paid £7,900 to BoI or deposited additional unencumbered policies with a surrender value of not less than £9,875. They contacted Le Fustec who said that "it was due to the 9/11 terrorist attacks". Mrs Investor 4's evidence, which the Court accepts, is that Le Fustec
"had never told us that we would have to make any further payments or that there was even a risk of this happening. We would never have agreed to make the investment if we had known these risks. He knew that we simply did not have money to make any additional payments towards the investment."
In cross-examination Mrs Investor 4 explained that "we had just sold our home because we could not pay the mortgage". The last thing they wanted was to enter into more bank borrowing. Mrs Investor 4 began to develop panic attacks. Following a letter from BoI of 7 March 2003, BoI wrote on 20 March 2003 demanding payment of the whole loan account of £61,734.81.
139. It became impossible for Mr and Mrs Investor 4 to contact Le Fustec. In mid-March 2003 they took advice from Rossborough Financial Services whose senior advisor was horrified at the position in which Mr and Mrs Investor 4 found themselves. It was only at that stage that the concept of gearing and the real nature of the investment were explained to Mr and Mrs Investor 4. Alternate secured a sale of all their policies in April 2003, and Mr and Mrs Investor 4 as a result recovered £7,000 out of their original £40,000.
140. The Court now turns to Mr Trevor Gray's expert evidence in relation to Mr and Mrs Investor 4, in which he mainly commented on the "reasons why" letter dated (but incorrectly) 3 April 2001. Mr Trevor Gray observed that the letter was misleading because it was nowhere stated that surrender values might fall. The statements made in that letter were equally misleading because they failed to take into account (or draw the attention of Mr and Mrs Investor 4 to) the high level of gearing, and the risks that this brought into the investment. In advising investment in a TIPP, Alternate misled Mr and Mrs Investor 4 into thinking that, as known very low risk investors with limited funds, Alternate was putting them into an investment which involved a low level of risk. Alternate also misled Mr and Mrs Investor 4 by failing to emphasise that the mortgaged policies had to produce significantly high returns if Mr and Mrs Investor 4 were not to suffer a loss. Alternate misled Mr and Mrs Investor 4 into thinking that it was safe to put the great majority of all the money they had into one investment, which in fact involved a high risk of loss. Alternate also misled Mr and Mrs Investor 4 by telling them they could unravel the TIPPs at an early stage without loss. As Mr Trevor Gray pointed out, the purchase price of the policies was £88,654 while the surrender value at the time was £64,767. Mr Trevor Gray's opinion, which the Court considers to be correct, is that the statement, that unravelling at an early stage was possible without loss, was "nonsense". In this as in almost all of the cases the purchase price was substantially higher than the surrender value. Given the matters set out in paragraphs 59-60 above, there would need to be a material increase in the surrender value before the investor would have any chance of selling the policies at other than a loss. Early trading in of the policies was highly likely to result in a loss.
141. The Court finds that the case relating to Mr and Mrs Investor 4 is correctly pleaded in paragraphs 12-19 of the Order of Justice, and that the JFSC has established the following as regards liability:
(i) Mr and Mrs Investor 4 entered into a relevant transaction with Alternate for the purposes of buying a TIPP and taking a loan.
(ii) Mr and Mrs Investor 4 were induced to enter into such transaction by Alternate's statements.
(iii) The statements set out above were false and/or misleading in the respects already found by the Court.
(iv) Such statements were made by Le Fustec on behalf of Alternate "recklessly". Le Fustec was well aware of the risks involved for Mr and Mrs Investor 4 in entering into their TIPP arrangements, and unreasonably chose to represent such risks as being low and commensurate with Mr and Mrs Investor 4's clearly expressed wishes for a low risk transaction.
(v) Alternate made those statements for the purpose of inducing Mr and Mrs Investor 4 to enter into the transaction and to buy the TIPP. (The Court repeats, mutatis mutandis, paragraph 97 (v) above, and this repetition will apply to each of the investors' cases.)
142. This was a paradigm case in which no competent investment adviser could with any propriety have advised Mr and Mrs Investor 4 to enter into such a TIPP purchase.
143. The Court repeats in relation to Mr and Mrs Investor 4, mutatis mutandis, paragraph 99 above and its observations as to the apparent conduct of BoI. If BoI had made enquiries as to the financial position of Mr and Mrs Investor 4 who were becoming BoI's customers for the first time, the Court has no doubt whatever that the TIPP purchase and the loan would not have proceeded, because it would have become immediately apparent that Mr and Mrs Investor 4 were in no position to meet any call by BoI for a further deposit of moneys or policies. As already indicated, the Court cannot in this action reach any conclusion as to whether or not BoI did make any such enquiries, enquiries which any reasonably competent bank must make before lending a substantial sum to a new and previously unknown customer of unknown resources. But if BoI did make such enquiries, it is difficult to understand on what basis BoI could have lent so large a sum to Mr and Mrs Investor 4.
Mr and Mrs Investor 5
144. By the consent order of 31 October 2006 it was ordered that the affidavit of Mrs Investor 5 confirming the contents of her witness statement (which Mr Investor 5 also confirmed) was to stand as evidence, because of her and her husband's poor state of health, both physical and psychological. The Court treats her evidence with due appreciation that she was not able to give oral evidence, but that even if she was, she would in the event only have confirmed the truth of her witness statement orally in the witness box, and would not have been cross-examined, since by then the settlement and other developments in the trial had occurred.
145. At the time when Mr and Mrs Investor 5 entered into a TIPP in May 2001 on Alternate's advice, Mrs Investor 5 was 72 years old and Mr Investor 5 was aged 66. They have one adult daughter. They were both retired and not in good health. Before retirement she had worked for Woolworths as an office clerk and retired in 1996 or 1997, while he was a painter and decorator at the General Hospital from which he retired in about 1999. Both receive a States pension, and he receives a Hospital pension. They own their own house. One result of the TIPP investment has been to cause each of them increasing worry and this has contributed to their ill health.
146. They became clients of Le Fustec in 1985 when he was at Principal Financial Services Ltd, remained clients when he moved to other companies including his own company Advance, and after he joined Alternate from Advance, became clients of Alternate. Investments which they made on Le Fustec's advice included four bonds with good Life Companies. They were cautious and small investors. They did not like to take risks. Le Fustec knew this.
147. A confidential client questionnaire prepared by Le Fustec for his previous company (and therefore before August 2000) showed that Mr and Mrs Investor 5 had existing investments of low risk kinds totalling in value just over £200,000. In May 2001 he suggested a new type of investment to them called a TIPP, which he did not explain in detail; but he did advise that they could use their existing investments as security. If he had advised Mr and Mrs Investor 5 that the TIPP would involve a loan, Mrs Investor 5's evidence is that they would not have proceeded, because the only loan they had ever had was their house mortgage which they had succeeded in paying off. Le Fustec did not explain what a TIPP meant, and did not mention the word "gearing": Mrs Investor 5 had not heard that word before and still does not know what it means. Le Fustec advised them to enter into a TIPP. As a result of his explanations Mrs Investor 5 thought that the TIPP was like a mortgage, and did not appreciate that they were signing up to a bank loan, to the best of her recollection. They considered him a friend and trusted him implicitly.
148. On 15 May 2001 a confidential client questionnaire on Alternate's standard form was completed by Le Fustec and signed by each of Mr and Mrs Investor 5. This showed their combined pension income to be £21,700 per annum (though it appears that this section was not completed until 12 June 2002). It appears that a list of their existing investments was attached, but the Court has not seen this.
149. The nature of the TIPP can be seen from the Portfolio Cash Flow List dated 24 May 2001, and subsequent documents:
(i) £100,000 was to be borrowed from Royal Bank of Scotland International ("RBSI") against the security of a Scottish Mutual with profits bond;
(ii) a further sum of £119,210 was to be borrowed from RBSI against the security of TEPs to be purchased;
(iii) a total of £219,210 was to be spent in buying TEPs which would be mortgaged in favour of RBSI;
(iv) the assumed growth in the surrender values of these TEPs was 12% per annum;
(v) the TEPs would mature at dates from 2007 to 2015 and were forecast to produce maturity values totalling £778,297;
(vi) the maximum bank balance in the TIPP was forecast to be £220,689;
(vii) the profit on the investment was forecast to be £273,108;
(viii) the gearing ratio was reckoned to be 88.71%.
Rochford's list of the TEPs shows a purchase price of £218,233 as contrasted with a surrender value of £136,215, and premiums to be paid until maturity of £59,846.
150. The Court observes that
(i) the gearing was a high gearing and the risk of having to put up more money or more security was accordingly a high risk;
(ii) given the then ages of Mr and Mrs Investor 5 at 72 and 66, by the time the first policy matured in 2007 their ages would be 78 and 72, and when the last policy matured in 2015, their ages would be 86 and 80; though Alternate tried to justify the arrangement on the footing that it would pay for long-term care in old age, the gearing was so high that in any event it was wholly inappropriate for Mr and Mrs Investor 5, and it put at risk their other existing investments gained by thrifty living;
(iii) the assumed growth in surrender values was high, and was yet another factor making the risk a high one;
(iv) the surrender value growth needed to be high, if substantial loss was to be avoided.
151. On 24 May 2001 Rochford sent a proposed portfolio of TEPs for Mr and Mrs Investor 5 to Alternate. The criteria were stated to include income of £20,000 per annum drawn down from 2008 to 2014, i.e. a total of £140,000 to be drawn, as income, from the proceeds of making policies over that period. Given the ages of Mr and Mrs Investor 5 at those dates, and the fact that this would result in the debt to the bank being larger and remaining outstanding so much longer, these were yet further reasons why the TIPP was inappropriate for Mr and Mrs Investor 5.
152. On 30 May RBSI, Guernsey Branch, wrote to Alternate concerning the loan facility for Mr and Mrs Investor 5. It is apparent that RBSI wished to ascertain some appropriate information about them, and they had to fill in a personal application form for RBSI. In this form signed by them on 11 June 2001 it was stated by them (inter alia) that
(i) Their combined income was £20,000 per annum;
(ii) Their own bank was Lloyds TSB, St Helier;
(iii) They required a loan of £100,000 secured by a Scottish Mutual with profits policy;
(iv) Their house was worth £450,000 and they had other assets totalling about £100,000.
On 12 June 2001 Le Fustec wrote to RBSI stating that they had nearly £250,000 "in liquid and semi-liquid assets". The purpose of the TIPP, he stated, was to secure their long-term care requirements, and to ring-fence their real and personal property to ensure succession (presumably to their daughter).
153. On the same day Le Fustec for Alternate wrote a reason why letter to Mr and Mrs Investor 5. He referred to the arrangement as a "Leveraged Investment Scheme" ("LIS") in conjunction with a TIPP. On the first page he sought to justify advising them to enter into this arrangement on the footing that they would need it to ensure that they could meet the costs of long-term care in old age, while also being able to leave their house unencumbered to their daughter. He then tried to explain that
(i) The LIS would involve RBSI in lending up to two-thirds of the surrender value of the Scottish Mutual bond;
(ii) This would release money to be used to buy a TIPP, to which would be added a further loan by RBSI.
154. In this reason-why letter Le Fustec for Alternate made a number of statements which were either false or misleading or both:
(i) In relation to the so-called LIS, it was stated that the money borrowed could be used to acquire an investment "thereby increasing the potential return on the investment". This was misleading because Le Fustec failed to point out that it would equally increase materially the potential loss on the investment.
(ii) Again in relation to the LIS, it was stated that "the collateral asset stays fully invested so therefore it continues to increase in value". This was misleading because the asset might decline in value.
(iii) Similarly in relation to the LIS it was stated that
"The advantage of using a with profits bond is that the underlying capital is very secure as there is very little volatility, therefore the value does not see-saw as is the case with equities."
This was misleading, because the funds underlying the bond may be invested up to 60-70% in equities, and therefore its value may fall, not rise.
(iv) In relation to the TIPP it was stated that
"no other assets are at risk providing the value of the policies remain the same or increase."
This was misleading in the absence of a clear statement of the risk that surrender values might fall.
(v) It was also stated that:
"Every investment carries with it a degree of risk - even cash deposits will have their value eroded by inflation, or the institution where the monies are deposited may fail. This represents a degree of risk however small."
The comparison of a TIPP which is a high risk investment with the relative high safety of money on deposit with a large bank was seriously misleading and a false comparison.
(vi) There followed a passage which had appeared in the reason why letters already considered by the Court, and in which Alternate dealt with two risks (in truth, only one) at some length. This passage was also misleading for the reasons set out above.
(vii) Among "further factors" set out in the letter was
"(3) Should returns from equity investment be lower than previously enjoyed as a result of the general economic climate, then the cost of borrowing is usually lower."
For reasons already set out above, this was both false and misleading because often a rise in cost of borrowing is linked to a reduction in equity values.
(viii)The last of these "further factors" was
"(4) The plan is flexible enough for us to unravel at any time by re-trading the policies in order to protect the capital. The lending institution, in this case The Royal Bank of Scotland International, has built in trigger points within the scheme at which action should be taken in the highly unlikely event of borrowing exceeding the preset limits laid down by RBSI."
As already set out, "retrading" policies sometimes may not be possible, and often is difficult to achieve, particularly at prices which enable the borrower to avoid a major loss. This statement was therefore false and misleading.
(ix) The letter as a whole was misleading because it concentrated almost entirely on the alleged advantages of a LIS and a TIPP, and failed either to balance this with a statement of the disadvantages, or to spell out the high risks involved.
155. The Court has not seen the agreement between Mr and Mrs Investor 5 and RBSI, except for the cover page. It appears that the agreement enabled RBSI to call for more money or more security if surrender values fell so that the total loan was greater than 90% of the surrender values. This was amended by agreement on 12 June 2002 so as to provide that the loan would not exceed 90% of the surrender value immediately after drawdown. On 22 January 2003 RBSI wrote to Alternate referring to the decline in surrender values (including an average 20% fall in Standard Life surrender values since October 2002) and requiring Mr and Mrs Investor 5 to pay £23,000 to bring the TIPP loan back to 85% of the surrender values. As a result Mr and Mrs Investor 5 had to provide further policies as security. Further, between May 2004 and October 2006 Mr and Mrs Investor 5 had to pay to RBSI sums totalling £53,949.63 (including two payments by means of a surrender of bonds).
156. It is relevant to the general point covered in this judgment, that surrender and market values of endowment policies are dependent to no small extent on the state of the equity markets, to quote what RBSI wrote to Mr and Mrs Investor 5 on 3 February 2004 (inter alia):
"You will be aware of very difficult market conditions over the last few years and the performance of Endowment Policies, as an investment, has suffered along with many other alternatives. When the poor performance of Traded Endowments is linked to geared lending for the purchase of the investment it has often been the case that performance has been insufficient to maintain the borrowing within agreed parameters. We ordinarily refer to these parameters as Loan to Surrender Value (LTSV) percentages.
We have many clients who have invested in Traded Endowments Policies and those who are more highly geared have, typically, had to take action if they wish to persevere with their investment and maintain it to maturity. Some have decided that they do not wish to support their scheme any further and have chosen to exit entirely."
Mr and Mrs Investor 5 were, contrary to the false and misleading statements made to them by Alternate, amongst the RBSI clients who were "highly geared", though that was entirely inappropriate for persons of their age and health. Mr and Mrs Investor 5's investment which Alternate advised them to make has been an unmitigated disaster for them, as appears later in this judgment where the Court considers their serious losses.
157. The Court turns to the matters which the JFSC has to prove as regards liability in the case of Mr and Mrs Investor 5. The Court finds that the relevant facts in relation to this case are correctly pleaded in paragraphs 96-105 (except for the word "Investors 19" in paragraph 103.c). The JFSC has in the Court's judgment proved that:
(i) Mr and Mrs Investor 5 entered into a relevant transaction with Alternate for the purpose of buying the TIPP and taking a loan from RBSI.
(ii) Mr and Mrs Investor 5 were induced to enter into such transaction by Alternate's statements.
(iii) Alternate's statements as set out above were false or misleading or both in the respects already found by the Court.
(iv) Such statements were made by Le Fustec on Alternate's behalf recklessly. Le Fustec was fully aware that for Mr and Mrs Investor 5 to enter into the LIS and TUIPP arrangements involved risks of loss, and unreasonably chose to represent the risks as being low risks.
(v) Alternate through Le Fustec made such statements for the purpose of inducing Mr and Mrs Investor 5 to enter into the transaction and to make the LIS and TIPP arrangements.
The question of relief will be dealt with at the end of this judgment.
158. RBSI did obtain some information from Mr and Mrs Investor 5 as to their financial resources (paragraph 152 above). But given the ages of Mr and Mrs Investor 5 and the obvious risks involved in the whole arrangement, the Court considers that it is very difficult to understand how a bank such as RBSI could have allowed these new and elderly customers to enter into such an improvident and obviously unsuitable arrangement, one result of which, if surrender values fell, might have been the loss of their house as well as their other assets.
Mr Investor 6
159. In June 2001 Mr Investor 6 was 56 years old. He had worked for many years, off and on, at Le Quennevais Camp Site, latterly as manager from 1985 to 1996. Since then he has been employed by Les Ormes Golf Club in charge of maintenance of the Club and of the houses owned by the Bosdet Foundation which also owns the Club. His basic salary is £16,000 a year, with some overtime. He has a life tenancy of a cottage owned by the Foundation, and an annuity from the Foundation of about £10,000 a year. Le Fustec began to act for Mr Investor 6 in 1984 or 1985 when Le Fustec arranged an investment for him, which matured in about 1997-98 worth about £16,000. He inherited about £120,000 from his mother and used that money to make a number of investments through Le Fustec, the main one being a Scottish Mutual policy.
160. Mr Investor 6 was not an experienced investor, and relied entirely on Le Fustec's advice. As far as he recalls, Le Fustec took no written record of his financial position. They met usually over a meal at Les Ormes Golf Club. These matters are set out in Mr Investor 6's written statement which he confirmed on oath at the trial.
161. He states that on one occasion, which appears to have been in early June 2001,
"Mr Le Fustec rang me saying, "I need to see you". He told me that he had an excellent investment for me. He said it couldn't go wrong and that this investment was as sound as you were ever likely to get. He said he needed to see me as soon as possible."
These were the first relevant statements by Le Fustec to Mr Investor 6. The statements that "it couldn't go wrong" and "this investment was as sound as you were ever likely to get" were false and seriously misleading, given that it could "go wrong" if surrender values fell, and that the gearing involved in a TIPP meant that it was a high risk investment.
162. Mr Investor 6's evidence is that Le Fustec
"came to the Golf Club to talk to me about this new investment. I said that I was happy with the Scottish Mutual policy. I explained that I was unwilling to tie up my assets. I said that I was thinking of getting a house in France. In addition, Mr Le Fustec knew that I wanted my finances to be absolutely safe. That was my whole lifestyle."
The Scottish Mutual policy was a large investment into which Mr Investor 6 had put much of the money inherited from his mother. Mr Investor 6's evidence continues:
"Mr Le Fustec explained that the new investment was an excellent opportunity. He made me feel very comfortable. He gave me the impression that this new investment would be absolutely secure. He said that this new investment could not really go wrong. Mr le Fustec mentioned that the new investment would involve the Royal Bank of Scotland International. He said that the Royal Bank of Scotland International would be providing money for the purpose of the new investment and that my Scottish Mutual policy would be put forward as some sort of guarantee. I did not understand that I was taking out a loan. My understanding was that my money in the Scottish Mutual policy was simply acting as a guarantee. I recall distinctly Mr Le Fustec saying that I did not need to read the forms "because that's what I get my commission for". He said that he was paid to do the work for me. I thought that he knew what he was doing, so I signed the forms and Mr Le Fustec set up this new investment. It has since become clear to me that Mr Le Fustec did not explain things properly. He did not mention anything about gearing to me, and I was not made aware of the risks."
Le Fustec's statements to the effect that the TIPP "would be absolutely secure" and "that this new investment could not really go wrong" were false and misleading: see paragraph 160 above.
163. Le Fustec for Alternate arranged for a purchase from Rochford of policies maturing from 2007-2011, allowing for annual payments of £5,000 to be drawn down from a loan from May 2007. The Portfolio Cash Flow List dated 18 June 2001 (which it seems Mr Investor 6 did not see) shows the following:
(i) An investment of £90,000, which was to be obtained from a loan by RBSI backed by the security of the Scottish Mutual policy.
(ii) A further loan of £117,795, which was to come from RBSI, secured on the TIPP policies bought with the loaned money.
(iii) An assumed annual growth in surrender values of 12%.
(iv) A maximum loan of £222,807.
(v) A gearing ratio of 84.45%.
(vi) A forecast profit of £171,187.
Rochford's schedule of the policies showed the purchase price of £207,795 as contrasted with the surrender value of £142,233, and premiums to be paid to maturity of £47,841. The Court observes that this meant that the total cost of the policies to Mr Investor 6 was over £250,000, and there had to be substantial growth in the surrender value up from £142,233, if he was to break even, let alone make a profit.
164. The Court has seen a copy of a "reason why" letter to Mr Investor 6 from Alternate, but without the third and any following pages. This letter was in substantially similar form to the equivalent letter sent to Mr and Mrs Investor 5, and the Court repeats paragraph 154 above in relation to Mr Investor 6. The letter contained statements which were false or misleading or both as set out in paragraph 154.
165. On 31 August 2001 RBSI sent relevant documents relating to the loans to Alternate to be signed by Mr Investor 6, and Le Fustec noted on this letter that the documents had been signed and returned. Mr Investor 6's evidence is that he did not appreciate that he was taking out a loan, and that he was told by Le Fustec that he did not need to read the forms he was signing (paragraph 161 above). He adds that
"It has since become clear to me that Mr Le Fustec did not explain things properly. He did not mention anything about gearing to me, and I was not made aware of the risks."
166. Mr Investor 6 borrowed a total of £217,795 from RBSI, against the security of his existing Scottish Mutual policy and the TEPs bought with part of this loan. In the Court's judgment any competent financial adviser would have been bound to advise Mr Investor 6 that the risks involved in such investments built entirely on borrowed money were very high indeed, and therefore also to advise Mr Investor 6 that this was an improvident and unacceptable risk for him to undertake, not least because with a gearing as high as 84.45% the likelihood of having to pay more or give more security if surrender values failed to increase at the forecast rate of 12% per annum was a high likelihood.
167. That is exactly what happened. Following the execution of fresh agreements in relation to the two loans in November 2002, in February 2003 Mr Investor 6 discovered that he was being required by RBSI to pay as much as a further £25,000 to them to maintain the loans and the investment. Mr Investor 6 then "asked Le Fustec whether there was a chance of losing all the money. He said that there might be a risk". It is to be noted that Le Fustec and Alternate had given no such warning when Mr Investor 6 was being advised to enter into the TIPP arrangements. As Mr Investor 6 stated in his evidence he eventually lost his Scottish Mutual policy (which represented most of his inheritance from his mother), his girl friend lost a policy worth £7,000 which had been given to RBSI as additional security, and after the policies had been sold, he sustained a large financial loss.
168. The Court finds that the case against Alternate is correctly pleaded in paragraphs 28 to 38 of the Order of Justice, subject only to consideration below of the precise amount of Mr Investor 6's loss. The Court finds that (subject to the same point) the JFSC has established the five matters which it is necessary to be proved to establish its case on liability in relation to Mr Investor 6, and repeats (mutatis mutandis) paragraph 157 above.
169. The Court has not seen any application form completed by Mr Investor 6 and revealing to RBSI any details of his financial resources such as was completed by Mr and Mrs Investor 5 (see paragraph 152 above). If (and the Court stresses "if") no such form was completed, RBSI had no accurate assessment of Mr Investor 6's ability to service the two loans if surrender values fell. But even if Mr Investor 6 did fill in such a form, it seems reasonably clear that the whole arrangement was an improvident one in any event, and the Court considers that it is difficult to understand how a bank such as RBSI could have allowed a new customer to enter into such an improvident arrangement, when such new customer had so few further resources from which to service the two loans if surrender values fell.
Mr Investor 7
170. Mr Investor 7 confirmed on oath his written witness statement. He was not cross-examined. In June 2001 Mr Investor 7 was about 65 years old and his wife 67 years. He suffered from cardia arrhythmia. He had come from North Italy to Jersey in 1959, and worked from 1959 until retirement as a baker, latterly for Tanners bakery. They always found it difficult to save money from their earnings. They do not own a property and live in States accommodation. They were advised by Le Fustec from about 1975 onwards, and invested in small life policies. These matured in 2001 in the sum of about £30,000. It appears that Mr Investor 7 met Le Fustec at Alternate's office in late May 2001 or early in June 2001. At that stage, as Le Fustec knew, their combined monthly incomes were about £670 a month or £8,000 a year, and they had about £40,000 in a bank account (the life policies proceeds, plus a further £10,000). Le Fustec tried to explain a TIPP investment, but Mr Investor 7 understood little of what he was told. Le Fustec explained that
"by borrowing money I could increase the value of the investment by buying more policies. I asked him whether it was safe and he told me very clearly that it was safe."
That statement was seriously misleading. The evidence is that Le Fustec knew that Mr Investor 7
"did not want anything that involved taking risks. The proceeds of my life insurance was a very large amount of money to me. I placed 100% trust and confidence in Mr Le Fustec. I was not experienced at making investments and wanted something that was simple and straightforward. I thought Mr Le Fustec would only recommend something that was a good idea and agreed to go ahead for the full amount of £30,000."
171. On 4 and 5 June 2001 Rochford (presumably in response to a request from Alternate) sent to Le Fustec details of a TIPP plan portfolio of policies for Mr Investor 7, and six contract notes for his signature. The total price for these policies, maturing between 2006 and 2011, was £71,982, which is to be contrasted with the surrender value of £50,022.01. On 7 June 2001 a confidential client questionnaire for him was completed and signed by him. His "Savings/Investment requirements" were stated as:
"£30,000 from Life Policy maturity available to invest 5/10 [years] to supplement Retirement Income. Income not required for 5 years."
His "Risk Profile" was stated to be "Cautious". On 19 June 2001 BoI sent to Alternate for Mr Investor 7 documents relating to a loan amounting to £42,547.68. The terms of the offer letter, which he accepted on 21 June 2001, provided for money to be deposited with or further policies assigned to BoI if the total loan exceeded or was likely to exceed 90% of the projected surrender value of the assigned policies.
172. Alternate by Le Fustec sent a standard reason why letter to Mr Investor 7 containing (inter alia) the false and/or misleading statements pleaded in paragraph 177 of the Order of Justice. His desired objective was stated in that letter to be
"Using £30,000 of your existing capital, which you have accumulated through maturing endowment policies, you wished to maximise returns in order to provide additional income in the future (after five years) to ameliorate your standard of living in retirement. Security of capital was a major consideration."
For an investor who wished to increase income after 5 years, a TIPP investment under which any such income might have to be borrowed as a further borrowing from BoI was wholly inappropriate, as Alternate and Le Fustec ought to have known.
173. On 22 October 2002 BoI wrote to Mr Investor 7 requiring payment of a deposit of not less than £4,000 or TEPs with surrender values of not less than £5,500. Eventually on 1 January 2003 he had to pay £6,000 to BoI. On 18 June 2003 BoI made a similar demand for payment of £4,600 or deposit of policies with a surrender value of £5,750. He paid £2,000 in about September 2003: as he states in his evidence: "This was all that I could give." It also appears that an attempt was made to sell some of the policies, though without success.
174. The Court finds that the JFSC's case in relation to Mr Investor 7 is correctly pleaded in paragraphs 174 to 184 of the Order of Justice, and that the JFSC has proved the five matters in that regard which the JFSC needs to prove to establish its case on liability. The Court repeats (mutatis mutandis) paragraph 157 above in relation to Mr Investor 7.
175. In respect of BoI the Court repeats (mutatis mutandis) in relation to the case of Mr Investor 7 paragraph 99 above. His financial position as a new customer of BoI almost cried out for a proper assessment by BoI, since he did not have more than a small amount of further money available to service the loan if surrender values fell, as they did.
Mr Investor 8 (First TIPP)
176. In August 2001 Mr Investor 8 was 64 years old. He has lived in Jersey for 46 years. Until 2004 he worked as a self-employed plasterer, and earned about £15,000 a year. He is unmarried and without family or close relatives. He lives in accommodation rented from the Jersey Housing Trust. At about that time a life policy taken out with Le Fustec 25 years earlier matured with a value of £16,000-£18,000. Le Fustec for Alternate wrote to him asking whether he needed advice on investing these proceeds. He saw Le Fustec at Alternate's offices apparently about the middle of July 2001. Mr Investor 8 has confirmed his written statement on oath, and was not cross-examined.
177. Mr Investor 8's evidence is that
"I was near retirement age at the time and wanted to invest around £15,000 of the maturity proceeds. I explained to Mr Le Fustec that I required a very low risk investment that was short term. In particular, I wanted something that would mature every 5 years or thereabouts in order to supplement my income during retirement. I was looking for something that would give me a better rate of interest than was being offered by the high street banks."
On 18 July 2001 Rochford sent to Le Fustec for Alternate a TIPP portfolio for Mr Investor 8's investment, contract notes, and a Portfolio Cash Flow List which showed:
(i) an investment of Mr Investor 8's £15,000 plus a loaned amount of £20,066, a total of £35,066 as the purchase price of the policies, as contrasted with the surrender value of £26,824;
(ii) an assumed surrender value growth rate of 12% per annum;
(iii) a maximum bank loan of £35,352;
(iv) a gearing ratio of 82.26%;
(v) a forecast profit of £12,615.
178. Four days later, on 22 July 2001, a confidential client questionnaire was prepared by Le Fustec and signed by Mr Investor 8 the next day. In this Mr Investor 8's earnings were exaggerated. His Financial Objectives, stated to be "Very Important", were "planning for retirement", "increasing retirement income", "building up capital through savings", and "investing capital for growth". On 23 August 2001 Alternate sent to Mr Investor 8 one of its standard "reason why" letters, which was in Alternate's usual misleadingly over-optimistic wording without any regard to the likelihood of loss. It contained (inter alia) the misleading and/or false statements pleaded in paragraph 208 of the Order of Justice. The Court quotes only the first section of the letter by way of example:
"How does a TIPP work?
A portfolio of TEPs is purchased in excess of the initial investment by means of gearing. The TEPs are used as collateral for borrowing up to a maximum of 90% of their surrender value. No other assets are at risk, providing the value of the policies remain the same or increase. All associated costs, including interest and capital are rolled up within the TIPP, and are paid when the policy proceeds are taken or the investment is liquidised. The standard term of a TIPP is usually five years with the option to roll over for up to further five year periods. During this time the collateral asset stays fully invested so therefore it continues to increase in value. Once a bonus is declared, it is added to a policy and cannot be taken away and smoothed returns are provided for the investor. Bonus rates are currently outstripping lending rates over the medium to long-term. The advantage of using with profits policies is that the underlying value is very secure as there is very little volatility, therefore values does not seesaw as is the case with equities."
"Gearing" was not explained. The suggestion that "other assets" were not at risk "providing the value of the policies remain [sic] the same or increase" was false and misleading. If the values remained "the same", it was highly likely that the security would be insufficient and that "other assets" would then be at risk. The sentence "During this time the collateral asset stays fully invested so therefore it continues to increase in value" was false and misleading, because the "asset", i.e. the mortgaged policies, might decrease in value. The statement that "values does [sic] not seesaw as is the case with equities" was also false and misleading, because the investments underlying the with profits policies were likely to be equities to the extent of 60% or more. As Mr Investor 8 states:
"There is nothing in the letter which alerted me to the fact that the investment carried a real degree of risk."
179. Mr Investor 8's evidence shows that he understood that there would be a bank loan. But he states:
"I have never borrowed money before as I had not needed to do so. I was concerned that the investment had to be low risk and understood this to be the case. I am not an experienced investor and trusted what Mr Le Fustec told me."
180. On 24 August 2001 BoI wrote an offer letter to Mr Investor 8 of an initial loan of £20,392.30 in the standard form sent previously to others of the investors (see above), and containing provision for Mr Investor 8 to be required to put up more money or more policies if the loan exceeded or was likely to exceed 90% of the mortgaged policies' surrender value.
181. The Court will consider the second TIPP into which Alternate induced Mr Investor 8 to enter at its proper chronological place, below.
182. In relation to this first TIPP the Court finds that what is pleaded in the Order of Justice in paragraphs 204 to 213 is correctly so pleaded, and that the five matters which the JFSC needs to prove to establish its case on liability are proved:
(i) that Mr Investor 8 entered into a transaction with Alternate for the purposes of purchase of the TIPP;
(ii) that Mr Investor 8 was induced by Alternate to enter into this transaction by their statements;
(iii) that such statements included false and misleading statements in the respects already found;
(iv) that such false and misleading statements were made by Alternate "recklessly" for the purposes of Article 30; such recklessness has already been spelled out by the Court above (see especially paragraph 97(iv) of this judgment);
(v) that such statements were made for the purpose of inducing Mr Investor 8 to enter into the transaction.
As in all the other cases, appropriate relief will be considered later in this judgment. The Court also repeats (mutatis mutandis) paragraph 99 above in relation to BoI.
Mr Investor 9
183. Mr Investor 9 gave evidence both in writing and orally, and was cross-examined by Mr Robertson before he departed from the action. Mr Investor 9 was aged about 50 years in October 2001. He was a chartered accountant who had known Clark of Alternate for about 25 years, and his relationship with Clark was not an entirely commercial relationship. Over the 25 years he had on the advice of Clark bought only five or six with profits policies as long-term investments. In 2001 he commuted his pension from Ernst & Young, to obtain an annuity and a lump sum of £40,000. It appears that he met Clark in September 2001 to discuss the investment of this lump sum. £20,000 was invested in standard endowment policies. Clark recommended a TIPP investment for the other £20,000. Clark advised Mr Investor 9 to invest £20,000 of his own money and to borrow £30,000 from BoI so as to make a total investment of £50,000. Mr Investor 9 made it clear to Clark that it must be a low to medium risk investment as he did not have money to lose. Clark assured him that it was a very safe investment and that he would not lose any money. These were both seriously misleading statements, and the statement that it was a very safe investment was false, given that the investment was a high risk one.
184. Mr Investor 9 did not recall seeing Rochford's Portfolio Cash Flow List dated 27 September 2001, which showed (inter alia):
(i) a total investment of £50,069;
(ii) a forecast growth rate of the surrender values of 11% per annum;
(iii) a forecast maximum bank balance of the loan at £76,927;
(iv) a forecast profit of £66,678;
(v) a gearing ratio of 85.24%.
Mr Investor 9 said that he trusted what he was told by Clark about the growth potential of the TIPP. He recalled the offer letter from BoI dated 31 October 2001 offering an initial loan of £30,675.39 which he had signed on 6 November 2001. This letter contained (inter alia) BoI's standard requirement for more money or security if the loan amount exceeded or was likely to exceed 90% of the surrender values of the mortgaged policies, which Mr Investor 9 had accepted. Clark had told him at the outset that he could not lose his investment and that he would not have to put more money in. Such statements were misleading. He had put the utmost faith in Clark's advice as he had known Clark so long. He understood from Clark that there was no possibility of anything going awry (a seriously misleading statement). Clark advised him that there was no potential risk (a further misleading statement), and trusting this he signed the documents. It appears that Mr Investor 9 signed a standard BoI application form "for Traded Endowment Policy Loan" in which BoI sought no relevant information as to the financial position of their new customer.
185. Mr Investor 9 said in evidence that he did not recall whether he had seen a "reason why" letter from Clark for Alternate dated 12 December 2001, which was in terms similar to those in the reason why letters sent to the other investors whose cases have already been considered by the Court. Mr Investor 9 told the Court that it could not be assumed that he had seen this letter, which was not in his file at his home. But it was possible that Clark was in this letter simply summarising advice which he had already given to Mr Investor 9. Mr Investor 9 had acted on Clark's earlier verbal advice, as set out above, and had bought the TEPs from Rochford through Alternate as his agent.
186. On 22 October 2002 BoI wrote to Mr Investor 9 requesting a deposit of either £4,000 or additional unencumbered TEPs with surrender values of not less than £5,500. Mr Investor 9 said in evidence that he could have raised the sum of £4,000, but he had understood that his involvement would be limited to the initial £20,000. So he decided to abandon the scheme, dispose of the policies and repay the loan, because he feared that if matters became worse he might even lose his house. In taking this course he went contrary to the advice Clark was then giving him; but he ensured that his losses did not worsen.
187. In the light of Mr Investor 9's oral and written evidence the Court turns to the matters which the JFSC has to prove as regards liability:
(i) Mr Investor 9 entered into an agency agreement with Alternate whereby Alternate was to make the necessary arrangements for the TIPP purchase, including the loan by BoI. This was for the purposes of this action a relevant transaction.
(ii) Mr Investor 9 was induced to enter into this transaction by the statements made orally by Clark on behalf of Alternate, and set out in paragraphs 183 and 184 above.
(iii) Such statements included false and misleading statements in the respects which the Court has already found.
(iv) Such false and misleading statements were made by Clark for Alternate "recklessly" for the purposes of Article 30. Clark like Le Fustec knew that surrender values might go down as well as up, knew of the risk of a decline in value (see the terms of his "reason why" letter of 12 December 2001), but falsely and misleadingly represented to Mr Investor 9 that there was effectively no such risk.
(v) Such statements were made for the purpose of inducing Mr Investor 9 to enter into the transaction, by virtue of which Alternate gained remuneration in the form of substantial commission paid by Rochford, both on the purchase of the policies and on their sale.
188. The Court also observes that by the time Mr Investor 9 entered into the TIPP, the twin towers tragedy in New York had occurred, and the decline in the equity markets had begun. A competent adviser would have considered the effect of such decline on the funds underlying the TEPs, and therefore on the likely declarations of bonuses and the surrender values of the TEPs, and would have given specific advice to Mr Investor 9 as to the increased risk of loss.
189. In paragraph 15 of the Order of Justice the JFSC relies on statements made in the "reason why" letter, and not on the oral statements of which Mr Investor 9 gave evidence. If the Court is to find in favour of the JFSC in relation to Mr Investor 9's case, it will be necessary for this paragraph to be amended. The Court will be prepared to consider an application for leave to amend, having indicated to Mr Hoy during the trial that some amendments of his pleading might be necessary.
190. As the Court has observed, it appears that BoI did not seek from Mr Investor 9, as a new customer, relevant information as to his financial position. If that is right, then the Court repeats (mutatis mutandis) paragraph 99 above.
Mr Investor 10
191. Mr Investor 10 confirmed his written statement in oral evidence, but he was not cross-examined. In November 2001 Mr Investor 10 was 57 years old and his wife was 55 years. They had no children. He had set up his own company, in about 1985, doing renovation and other building work. His wife dealt with the accounts and the wages. From the early 1980s Le Fustec had acted for them and had advised on various investments, especially life insurance policies and pension arrangements. They saw Le Fustec at their home from time to time. He helped Mr Investor 10 to set up a company pension scheme, but following illness in the early 1990s this scheme was closed down. In the late 1990s Mr Investor 10 found the running of that company too stressful, so he wound up the company, and formed a new company in 2000, solely to trade on his own account doing small jobs. He knew that his days of earning larger amounts were over, and told Le Fustec that he wanted to have annual reviews of his investments as before; but he would not be able to invest so much. He explained to Le Fustec that his aim was to maximise everything for his retirement, and there was no way he could afford to be dipping into his capital. The Court has seen a confidential client questionnaire completed in relation to Mr Investor 10 and his wife by Le Fustec on a standard form of his previous company Advance Financial Services Ltd, which is stated to have been "Existing pre 30/6/99" and reviewed on 14 April 2000. This showed their continued incomes as £24,500 per annum, their "Financial & Personal objectives" as "To have substantial funds available at retirement and minimise tax", and their "Life/Protection requirements" as "None. No liabilities and sufficient other assets, i.e. investments, bank accounts etc."
192. On one occasion when Le Fustec visited them, he told them about TIPP investments and explained to them about these. Mr Investor 10's evidence in this regard is that:
"[Le Fustec] asked me how I would like to earn £60,000 without it costing me a penny. I said, "Bloody hell, Bob. That sounds too good to be true". He asked me if I would like him to tell me about it, and I asked him to explain. Mr Le Fustec explained that the new investment would involve "leverage". He said that it would be necessary for me to put up "collateral". He explained that I would then be given a loan at a very low interest rate and that I would use the loan to buy a portfolio of second-hand endowments. He said that the attraction of this new investment was that I would be investing in something without actually having to put in my own money. Instead the money would come from a financial institution. As a result of this explanation, I understood that I would be taking out a loan in my own name, and I knew that I would need to put up some sort of collateral. Mr Le Fustec explained that we could use some of my existing investments as collateral................ He worked out all the figures, and it looked very attractive.
Mr Le Fustec was quoting bonuses and so on at 12 per cent or something on the second-hand endowments, and he said that the interest on the bank loan would be 6 per cent, so obviously there would be some profit to be had there. I asked Mr Le Fustec what would happen if interest rates went up on the bank loan. Mr Le Fustec explained to me that we could unravel the investment if necessary by selling off the second-hand endowment policies to pay off the loan. It all sounded very good.
I looked again at the figures. According to Mr Le Fustec, the second-hand endowment policies would mature with high values. These would pay off the loan and a good sum of money would be left over for me. Mr Le Fustec explained that nothing could go wrong, because it would always be possible to unravel the investment. He said at the worst I would get my money back. Those were his exact words. I felt reassured by that."
Le Fustec's explanation included some false and misleading statements:
(i) The statement that the TEPs could be sold "to pay off the loan" was misleading, because it ignored any potential difficulties in securing a sale of the TEPs, and the risk that the sale price of the TEPs would not suffice to pay off the loan
(ii) The statement that the TEPs "would mature with high values" entirely ignored the risk that the TEPs might decline in value.
(iii) The statements that "nothing could go wrong, because it would always be possible to unravel the investment" and that "at the worst I would get my money back" were false and misleading for the same reasons as (i) and (ii) above.
193. On 29 November 2001 Rochford sent Alternate contract notes for the purchase of the TEPs by Mr Investor 10. They also sent a list of the TEPs which showed maturity dates from October 2004 to December 2010, the purchase price as £119,286 and the surrender value as £88,024, a difference of over £31,000. The Portfolio Cash Flow List dated 27 November 2001 showed:
(i) An estimated maximum bank loan of £124,960;
(ii) A forecast profit of £116,415;
(iii) A gearing ratio of 82.31%;
(iv) An assumed annual growth rate of the surrender values of 9%.
That the forecast surrender value growth ratio had fallen from 17.5% in August 2000 (see the case of Mr and Mrs Investor 1 in paragraph 87 above) to 9% in November 2001 would have shown to a competent financial adviser in any event (whatever the adviser might have believed) that the likely potential for TIPP investments had changed adversely, and that, with the added factor of the decline in equity markets after the 11 September 2001 tragedy, the risks of loss were even higher than before.
194. On 4 December 2001 (the date appears on Alternate's compliance record sheet) Alternate sent to Mr Investor 10 a standard "reason why" letter. This contained statements which were false or misleading or both as (inter alia) pleaded in paragraph 247 of the Order of Justice. The Court has already set out the respects in which statements of these kinds were false and/or misleading in considering the cases of other investors above, and therefore refrains from repetition.
195. On 14 January 2002 Mr Investor 10 signed a policy loan agreement with Newcastle Building Society ("NBS") for a loan of £118,146 secured by three life policies. It is clear that there will have been other documentation relating to the NBS loan which has not been found in the files of either Mr Investor 10 or Alternate.
196. In 2002 or 2003, according to Mr Investor 10's evidence, he began to receive bonus statements showing extremely low figures. He states:
"I started to get worried. Alarm bells started ringing. I rang up Mr Le Fustec and said that I was worried about the TIPP investment. He told me that everything would be fine and that I shouldn't worry. He told me that I could always be confident of getting my money back. According to Mr Le Fustec, the worst-case scenario was simply that I wouldn't actually make a profit."
The Court cannot understand how Le Fustec could, in 2002 or 2003, have made such false and misleading statements. Mr Investor 10's collateral with NBS apart from the TEPs was all cashed and the proceeds paid to NBS in reduction of the loan, leaving a substantial debit balance secured by the TEPs.
197. The Court finds that the JFSC has proved the five matters which it has to prove to establish its case on liability in relation to Mr Investor 10, and repeats (mutatis mutandis) paragraph 157 above. In particular, the Court emphasises that Le Fustec for Alternate recognised that there were risks involved for Mr Investor 10 in entering into the TIPP (see for example the "reason why" letter of 4 December 2001), and chose to represent those risks to Mr Investor 10 as very low risks, though a competent adviser would have represented them as high risks: see Mr Trevor Gray's evidence summarised above.
198. The Court has seen no documents from or to NBS indicating that NBS obtained relevant information as to Mr Investor 10's financial position before making such a substantial loan to a new customer, though such documents may be amongst the missing documents relating to the NBS loan. The Court repeats (mutatis mutandis) paragraph 99 above in respect of NBS.
Mrs Investor 11
199. The Court has already indicated in paragraph 23 (i) above that Mrs Investor 11's case is one of the most tragic involved in this action. Mrs Investor 11 gave evidence in chief both in writing and orally, and was thoroughly cross-examined, despite her circumstances, by Advocate Robertson.
200. In November 2001 Mrs Investor 11 was aged 32 years. She was a widow, her husband having died in September 1999. She had three small children, aged 7, 6 and 4 years. She had known Le Fustec for almost all her life, and considered him "to be like a second father figure to me". Le Fustec was a close friend of her husband and was his best man at their wedding. Following her husband's death she received the proceeds of life insurance policies totalling about £140,000 to £145,000 which were paid into her savings account at Lloyds TSB. She used some of this money to pay their joint debts including those to family members. Apart from these life insurance payments she had no other savings and no real assets. She and her children were living in States accommodation of a low level. As she states:
"It was a real struggle to meet the financial needs of us all from the small income we had."
Le Fustec mentioned that he wanted to talk with her about investing the life insurance proceeds. She was contacted also by Lloyds TSB who offered to give financial advice, but she declined, as she "had complete trust in Mr Le Fustec".
201. Initially Le Fustec advised her to invest in a Scottish Mutual Assurance with profits bond and a Prudential with profits bond, which together gave her an income of about £746 per month. She also bought critical illness and permanent disability cover. She made it clear to Le Fustec that the money was needed to provide an income to bring up her children as she was unable to work. She had never invested any money before, and was completely reliant on Le Fustec.
202. Le Fustec had a confidential client questionnaire for Mrs Investor 11 prepared originally on a form of his previous company Advance on 28 September 1999, and reviewed on 22 August 2000, 29 January 2001 and 20 October 2001. This showed that her weekly expenditure for the family exceeded her income from widow and family allowances, and that her "Financial and Personal objectives" were "To have sufficient income without having to go to work, while children are young, following death of partner." On the form it was also stated that
(i) "Although there is sufficient income from death maturity and state benefits, in the event of [Mrs Investor 11's] death or critical illness, additional funds will be needed for (1) care of [Mrs Investor 11], (2) care of children."
(ii) Her "Savings/Investment requirements" were "To invest maturity to provide supplementary income while children are a responsibility. Replace lost potential of husband's earnings and future pension entitlement".
(iii) Her risk profile and rating were "Cautious" and "Low".
The documents before the Court show that before Mrs Investor 11 was advised to and did enter into the Scottish Mutual and Prudential bonds, no little care was taken by Le Fustec with her to see that the income from these bonds would, initially at any rate, suffice to meet her pressing need for additional income. As will become clear below, no such care was taken when her entire future finances were placed at risk in a TIPP investment, though it is clear that Le Fustec was fully aware of her pressing need for income and for the total conservation of her small capital.
203. In about late September 2001 Le Fustec at a meeting with Mrs Investor 11 said that "there was something we should discuss that would increase the performance of the bonds". So soon after she visited Le Fustec's office at Alternate. Her description of this meeting is as follows:
"16. It was at this meeting that Mr Le Fustec introduced me to the concept of TIPP investments. I recall that he roughly outlined how a TIPP investment operated. This was the only type of investment that he suggested to me. He referred to "gearing" as a way of using the money in my bonds to borrow additional money which would allow me to buy more policies. At the time I vaguely understood that this involved borrowing money from Newcastle Building Society who would pay the premiums on the policies and that, at the end, they would recover the loan plus interest and the rest would be mine.
17. I remember telling him bluntly that I had not fully understood the description of how it all worked. I specifically asked whether it was risky because that was the only thing I was worried about. He told me that there was a little risk, as with everything, but that it was a very low risk. He told me that a lot of people were starting to make this type of investment and I felt reassured after he told me this.
18. Mr Le Fustec outlined the projected figures which were very attractive. I understood that entering the TIPP investment would mean the payments from the Prudential policy would come to an end. At that time I was just able to get by financially without that source of money. Mr Le Fustec told me that it would mean I could draw a further £5,000 per year in five years time to pay living expenses when my children were older and, in particular, to pay my oldest son's school fees when he turned 12 years of age. He was doing well at school and it was thought he may be able to attend Victoria College on a part-scholarship which ultimately hasn't happened. I also hoped that if it made more money I would be able to give £25,000 to each of the children when they reached 25 years of age so that I could say it was a gift from their Dad. I remember discussing all of this with Mr Le Fustec.
19. At the end of our discussion Mr Le Fustec said that he would send me a letter explaining the reasons why it was appropriate to make the investment. I told him not to bother because I would not understand it. Mr Le Fustec said that he was legally required to send the letter to me.
20. I believe that we met on two or three further occasions to discuss the investment and complete all the necessary paperwork. I always signed whatever Mr Le Fustec asked me to sign without reading any of the content. I did this because I placed complete trust in him. [A letter from Mr Le Fustec dated 7 February 2000 did arrive at my home. I skimmed through its content but did not understand any more than I had during our discussions.] [Note. The Court has placed these two sentences in square brackets because the letter of 7 February 2000 related to the earlier purchase and not to the TIPP.]
21. It is only more recently that I have talked it through with various individuals that I have come to understand the true nature of the TIPP investment. I agreed to go along with Mr Le Fustec because I was assured that my money would grow and that at the end I would have a nice amount left over.
22. At the time I thought that if Mr Le Fustec recommended making this type of investment and confirmed that it was very low risk then there was no reason why I should not go ahead. Mr Le Fustec was well aware that I had already experienced financial worries when my husband was alive and there was no way I would have put myself and my children in that situation again. I had absolutely no idea that it could result in my family losing all of the money. There is no way that I would have agreed to follow his advice if all the risks had been made known.
23. At no stage did Mr Le Fustec explain to me that if the value of the loan increased faster than the value of the policies it could lead to a loss."
204. We have quoted Mrs Investor 11's account in full, because it makes clear that Le Fustec in the course of the meeting made some false and misleading statements, and also misled her by the significant omissions. The Court refers to, in particular:
(i) his statement "that there was a little risk, as with everything, but that it was a very low risk";
(ii) his statement that she "could draw a further £5,000 per year in five years time" without making clear that any such drawing would merely increase the loan;
(iii) his assurance "that my money would grow and that at the end I would have a nice amount left over";
(iv) his failure to spell out the obvious high risks involved in the gearing of the investment;
(v) his failure to "explain to me that if the value of the loan increased faster than the value of the policies it could lead to a loss."
205. On 4 October 2001 Rochford sent to Alternate for Mrs Investor 11 15 contract notes relating to 15 TEPs which she was to purchase with loans provided by NBS. The Court has not seen the Portfolio Cash Flow List. But the portfolio schedule shows that the total surrender value of these 15 TEPs was £108,269, and the price paid by Mrs Investor 11 was £161,746, a difference of £53,477, and a mark-up over the surrender value of just under 50%. Mrs Investor 11's purchase price included the cost of the commissions paid by Rochford to Alternate (as was true in relation to all the thirty TIPPs the Court is considering) and for these fifteen TEPs the commissions paid to Alternate totalled £4,852.38.
206. On 8 November 2001 Mrs Investor 11 signed a policy loan agreement with NBS for a loan of £161,746. The amount of this loan, by itself, and ignoring all other features of this TIPP arrangement, showed that it was totally unsuitable for a young widow with three young children, and with no assets of any substance except for the life policy proceeds which were her only capital asset available for her and her children's future livelihood.
207. The Court has before it also a copy policy loan agreement with NBS for a further loan of £65,518. This has not been explained by Mr Hoy. But Mrs Investor 11 in her evidence states that it appears to have been taken out some time later than November 2001.
208. On 7 January 2002 Le Fustec for Alternate wrote a long "reason why" letter to Mrs Investor 11 (though at the time she told him that she would not read the letter, it appears that she was aware of its terms) which contained this initial paragraph:
"During our recent review of your portfolio, which consists of low to medium risk products, all with profit bonds in fact, I felt it was important that we considered how we could maximise both your income and enhance the capital growth of the bonds without increasing the risk factor significantly. Particularly do we need to address the fact that as the children grow older, their needs will change and they will cost more to satisfy. Another factor to be considered is the cost of education, especially as there is a real possibility that both Ian and Charlie may qualify for Victoria or Ladies College".
This paragraph was consistent only with making an investment on Mrs Investor 11's behalf which ensured that her capital was sufficiently safe, as was the position with her existing investments in the Scottish Mutual and Prudential with profits bonds. But in the letter Le Fustec for Alternate went on to make statements that were false or misleading or both in relation to the TIPP investment. Such statements (which were in a form standard to Alternate) include those pleaded in paragraph 226 of the Order of Justice. The Court has already considered the same or similar statements a number of times already and will not repeat what has already been said about the false and/or misleading nature of those statements which is correctly pleaded in paragraph 232 of the Order of Justice.
209. But the Court on this occasion, because of the remarkable inappropriateness of this investment and its extremely high risks for Mrs Investor 11 (given her adverse position set out above), quotes the Plan Details set out at the end of the letter:
|
|
"Plan Details |
|
|
Value of policies purchased: |
£ 161,746 |
|
|
All projected associated costs (LIS & TIPP): |
£ 160,172 |
|
|
Annuity payments to yourselves: |
£ 40,000 |
(commencing in year 5 of plan at £5,000 pa) |
|
TOTAL COSTS................................... |
£ 361,918 |
|
|
Projected maturity value of TEPs: |
£ 666,221 |
|
|
Projected maturity value of With Profits Bond: |
£ 135,371 |
(assuming 6% pa AGR and income taken at 5% PA) |
|
Total Maturity Values: |
£ 801,952 |
|
|
Total paid to yourselves after all costs: |
£ 479,674 |
(12% pa AGR) |
|
PROFIT ON ORIGINAL INVESTMENT: |
£ 354,674" |
|
It is noted that the last three figures are arithmetically incorrect. This set of figures purported to convey to Mrs Investor 11 that she would make a profit of £354,674 despite (i) not having put money in herself and having merely provided security in the form of her existing investments and the TEPs bought with the loans; (ii) having borrowed £361,918 to pay for the policies, for continuing premiums, for interest on the loan and annuities of £5,000 per annum for 8 years; (iii) the decline in the equity markets following the 11 September 2001 tragedy; and (iv) the high risks that the maturity values of the TEPs with maturity dates in 2012 and 2013 might be substantially less than the figure of £666,221 given to her (to be contrasted with the surrender values in 2001 of £108,269). The purported "Profit" was not even stated to be an estimate or a forecast. This was so in the case of each of the investors, but even more in cases such as Mrs Investor 11's, it was a seriously unprofessional and reckless way of presenting the figures to an unsophisticated and inexperienced investor.
210. Mrs Investor 11 was soon in serious difficulties. By 19 March 2004 NBS was writing to warn her of a projected shortfall of over £16,000 which she would have to meet after all her security had been realised. On 18 April 2005 NBS wrote to her to warn that the projected shortfall had reached over £47,000.
211. The consequences for Mrs Investor 11, both in the life of her and her children and in her finances, have been disastrous. Her evidence is as follows:
"29. This has forced me to seek employment. I am unable to work full-time because there is no-one to look after my children and it is not viable to pay for full-time childcare. In the future it will be necessary for me and the children to live off the state allowance for widows and a family allowance, together with my limited earnings.
30. This has had a terrible impact on me. For example, I have been required to cancel my private health care insurance. It has made me feel like I have let down my children and my husband. Mr Le Fustec knew all my personal circumstances at the time he gave me financial advice. I trusted him to take care of the money which I was relying on for our future. I only find myself in this situation because I did everything that Mr Le Fustec suggested to me. If I had known the real level of risk involved there is no way that I would have agreed to proceed."
212. The Court finds that all the matters which the JFSC has to prove to establish its case in relation to Mrs Investor 11 are proved, and does not repeat them further. They are correctly pleaded in the Order of Justice. The Court adds only in regard to recklessness, that Le Fustec showed in the "reason why" letter of 7 January 2002 that he was aware that there were risks involved in the TIPP, and that it was entirely unreasonable for him to advise Mrs Investor 11 that any such risk was small and to induce her to enter into such a highly geared arrangement which carried such a high risk of loss of the only capital asset she possessed.
213. It appears from the policy loan agreement with NBS of 8 November 2001 that Mrs Investor 11 is likely to have signed an application form in order to obtain the loan. If so, NBS may have ascertained some details as to her circumstances. The loan of £161,746 was being made to a new customer not previously known to NBS, and it was incumbent on NBS before lending so large a loan to a previously unknown person to make detailed enquiries so as to satisfy itself that she would be able to repay the loan. If NBS had made such enquiries, the loan transaction could not have proceeded, because NBS would have immediately discovered how inappropriate the transaction was for her, and for NBS itself. The Court repeats paragraph 99 above, mutatis mutandis.
Mr and Mrs Investor 12
214. Mr Investor 12 gave evidence in chief in writing and orally, and was cross-examined. In November 2001 he was aged 69 years and his wife 58 years. They were retired, and had two children who were married. They owned their home. Previously they had invested in shares and lost money. They were cautious investors who did not like risks, and he described them also as prudent investors. They had their state pensions and further income of £7,500 per annum, and a few modest investments.
215. In 2000 Le Fustec, who was a long-standing friend of Mr Investor 12, advised him to invest about £50,000 in a Scottish Mutual with profits fund. He agreed this with Le Fustec on the basis that they could withdraw 7.5% a year when needed, i.e. about £3,500. He told Le Fustec that he was cautious and did not want to undertake a risky investment. A confidential client questionnaire was completed on Alternate's standard form on 4 October 2000. This showed that they wanted to invest "to provide capital growth and future retirement income". On 18 November 2001 the questionnaire was added to with a reference to the TIPP investment then made. In early November 2001 Le Fustec visited them at home. They discussed the Scottish Mutual investment which was not doing very well, and bonuses had ceased to be declared.
216. Le Fustec recommended a TIPP investment which involved "gearing". Mr Investor 12 understood this to mean that a loan would be obtained from NBS against the £50,000 they had put into Scottish Mutual. He again told Le Fustec that they wanted to be able to take out 7.5% a year. Le Fustec did not tell them that there was a risk that they might have to pay additional money to NBS. He did not recall them being told by Le Fustec about Rochford. If they had been told that the TIPP involved borrowing a large sum from NBS and putting it into the stock market, there would have been no way they would have agreed because they would have considered this far too risky. He did not understand exactly how the TIPP worked, but felt assured by Le Fustec, who did not at any stage mention that there were any risks involved. Le Fustec also did not mention that the TIPP would finally mature in 2011 when he would be nearly 80 years old. He would not have agreed if Le Fustec had explained all the risks, which Le Fustec did not do.
217. On 8 November 2001 Le Fustec for Alternate sent Mr and Mrs Investor 12 a long "reason why" letter. This was in a form similar to the ones already considered by the Court, and similarly contained a number of false and/or misleading statements, including those pleaded in paragraph 137 of the Order of Justice which were false and/or misleading in respects including those pleaded in paragraph 140a and d-f of the Order of Justice. The Court repeats its observations above on the other "reason why" letters in relation to this one sent to Mr and Mrs Investor 12. Mr Investor 12 said that he did not consider it in detail, as he did not entirely understand the transaction. But the letter clearly played a part, together with Le Fustec's oral statements, in inducing them to enter into the TIPP. The "reason why" letter ended with the usual figures purporting to show a large profit from the TIPP.
218. On 13 November 2001 Rochford sent a number of contract notes for the purchase of TEPs which were signed by Mr Investor 12 on 18 November 2001. The Portfolio Cash Flow List dated 5 November 2001 (which, it appears, Mr and Mrs Investor 12 were not shown by Le Fustec) showed:
(i) an initial investment by them of £52,000;
(ii) an initial loan of £71,882;
(iii) an assumed growth of the surrender values at 11% per annum;
(iv) annuity payments totalling £14,400;
(v) a forecast maximum bank balance of £135,040;
(iv) a forecast profit of £107,839.
The list of the TEPs in the portfolio showed that the price to be paid by Mr and Mrs Investor 12 for the five TEPs was £71,882, as contrasted with the surrender value of £47,038.
219. On 18 November 2001 Mr and Mrs Investor 12 signed an application form from Rochford for an "Endowment with profit Gearing Facility". The copy of the policy loan agreement with NBS is unsigned and undated, and showed a loan of £86,699. The Court has not seen the signed agreement which the correspondence shows was signed between 2 and 9 January 2002. The terms of the agreement provided that interest was to be rolled up and "no repayments will be required until the individual policies mature." This prevented NBS making a demand for further payment during the term of the TIPP; but at final maturity if the maturity values did not suffice, at that stage Mr and Mrs Investor 12 would have to pay any balance of the loan outstanding.
220. On 26 August 2004 NBS wrote to Mr and Mrs Investor 12 warning them of a potential shortfall at maturity, and suggesting that they make relatively small monthly payments over the remainder of the term to 2011 as a prudent provision against the risk of having to repay a larger shortfall then. At 31 December 2005 their loan stood at £98,461.32.
221. The Court finds that the JFSC has proved the five matters which it requires to prove to establish its case on liability in respect of Mr and Mrs Investor 12:
(i) Mr and Mrs Investor 12 entered into a relevant transaction with Alternate for the purpose of the purchase of the TIPP.
(ii) They were induced to enter into this transaction by Le Fustec's statements on Alternate's behalf.
(iii) These statements were false or misleading as set out above.
(iv) The statements were made recklessly, since Le Fustec for Alternate knew of the risks involved and their potential consequences, but chose to discount the risks unreasonably in his advice to Mr and Mrs Investor 12.
(v) The statements were made to induce them to enter into the transaction and they were so induced.
222. The Court has seen no evidence that NBS made any detailed enquiries before lending so large a sum to Mr and Mrs Investor 12. The Court repeats paragraph 99 above, mutatis mutandis.
Mr and Mrs Investor 14
223. Mr Investor 14 confirmed on oath his written witness statement: he was not cross-examined.
224. Mr Investor 14 was in November 2001 aged 49 years and his wife was also 49 years. They have the one son. Mr Investor 14 had worked in the silk screen printing business for 25 years, before changing his occupation. His wife worked part time. They were together earning just under £27,000 a year. They had built up savings of about £43,500, held in a Post Office savings account. They lived in rented accommodation.
225. He had known Le Fustec all his life and they were good friends who met regularly at weekends and for meals. Le Fustec always had a reasonable idea of Mr and Mrs Investor 14's financial position. In about 1997 they went to Le Fustec's office with their son to discuss their savings. They made it clear to Le Fustec that they were happy with having their money safe in the Post Office, and that
"our priority was always to be careful with our savings. We could not afford to lose our savings, because our savings were our provision for retirement. We told Mr Le Fustec that we could not agree to anything that involved any risk."
In 1997, however, they were persuaded by Le Fustec to buy two TEPs for £18,500. In about March 1998 Le Fustec met Mr and Mrs Investor 14, and asked them if they would consider buying another TEP. They followed his advice and bought one for £6,000 from their savings. In 1999 they took out life policies with Scottish Widows and Clerical and Medical.
226. On 27 November 2000 a confidential client questionnaire on Alternate's standard form for Mr and Mrs Investor 14 was completed; but it was not signed by them until 21 August 2001. In this document it was noted (inter alia) that
"As they have no financial liabilities very little protection requirement emphasis on building retirement capital"
On 3 October 2001 Le Fustec for Alternate wrote to Rochford in respect of Mr and Mrs Investor 14 referring to the idea to use the TEPs bought by them in 1997 as collateral to set up a TIPP maturing in 2007/08. At about this time they met Le Fustec in their home and their son, Mr Investor 13, was present. Le Fustec discussed their existing investments, and Mr Investor 14's evidence is that Le Fustec
"told us that we had a very good portfolio. He said that he would help us use the portfolio to make more money by using the TIPP system. He more or less guaranteed us that the TIPP system would virtually double the value of our investments. I recall that Mr Le Fustec was only positive about the benefits of the TIPP system.
18. Mr Le Fustec explained to us that a bank (which turned out to be the Bank of Ireland) would take out a loan and our existing second-hand endowment policies would go into the Bank as security. The loan taken out by the Bank would be used to buy more second-hand endowment policies, which would double our investment.
19. We were concerned about the idea of a loan, because we have never taken out any loans before, although I recall taking out a small loan when I was about 18 to purchase a car. We dislike the idea of being in debt, and as a general rule we do not owe any money at all. We asked Mr Le Fustec to explain how the loan worked.
20. Mr Le Fustec assured us that the Bank would be taking out the loan and that the Bank would be responsible for paying all the premiums on all the endowment policies. He said that this was obviously better for us, because at that stage we were paying the premiums on the second-hand endowment policies ourselves. Mr Le Fustec said that we would not have to worry about paying any premiums any more, because the Bank would be paying them. He said that one of the benefits of the TIPP system was that we would not have to pay out any of our own money.
21. As a result of Mr Le Fustec's explanation, it was my understanding that the Bank was taking out a loan. Mr Le Fustec emphasised repeatedly that the Bank would do everything for us. He told us to trust him on this one. He explained that the Bank would take over all the payments and that we would be able to sit back and let the Bank do everything for us. He told us both to "trust me; I know what I am doing".
22. Mr Le Fustec also explained that the second-hand endowment policies would eventually pay out such big amounts that the Bank would be able to repay the loan and there would be a large sum of money left over for us. This was the system which would enable us to double our money. I recall that Mr Le Fustec showed us some calculations. He said that our existing investments would give us £47,810 and that the TIPP system could increase our money to £92,854.
23. Mr Le Fustec did not tell us that we would be taking out a loan ourselves. If he had told me that a loan would be taken out in my name and that I would be responsible for it, there is no way that I would have even considered the TIPP system. I would never have been willing to put myself in that sort of position. I would not have agreed to any risk.
24. Mr Le Fustec did not explain anything about interest rates, although I do recall him spending a lot of time talking about bonuses. He said that these big bonuses would be paid out and that these would be added to our investment.
25. As far as I recall, there was absolutely no mention at all of any initial loss of our investment. In fact, he gave us the impression that the TIPP system was a very low risk investment."
227. As appears from this account of what Le Fustec said, it involved false and/or misleading statements, including
(i) the statement that they "would not have to pay out any of our own money", when in reality BoI would be lending the amount of the premiums which they would pay for and in addition pay substantial interest on the amount of the premiums until maturity;
(ii) the statement that the TEPs "would eventually pay out such big amounts that the Bank would be able to repay the loan and there would be a large sum of money left over for us. This was the system which would enable us to double our money" was grossly misleading and entirely ignored the high risk that they would lose their money and gain nothing;
(iii) the statement that "these big bonuses would be paid out and that these would be added to our investment" ignored the danger of a reduction in bonuses which in October 2001 was a present danger;
(iv) the "impression" given by Le Fustec "that the TIPP system was a very low risk investment" was also grossly misleading since as Mr Trevor Gray's evidence shows, it was a high risk investment.
228. On 23 October 2001 Rochford sent to Alternate contract notes for Mr and Mrs Investor 14 to buy five TEPs. The price was £108,090 as contrasted with the then surrender value of £79,833. The commissions to Alternate for which they were paying totalled in excess of £2,000. The Portfolio Cash Flow List of 5 November 2001 (apparently not shown to Mr and Mrs Investor 14) showed:
(i) an investment of £41,190 (which was borrowed against their existing investments);
(ii) an initial loan of £66,900 (which was in reality a further loan secured by the purchased TEPs);
(iii) an assumed growth of the surrender values at 11%;
(iv) a forecast maximum bank balance of £108,922;
(v) a forecast maturity value of £203,286 against a cost of £108,090;
(vi) a forecast profit on investment of £54,956;
(vii) a gearing ratio of 84.64%.
The copies of the contract notes which Mr and Mrs Investor 14 signed on 7 November 2001 omitted any mention of the commissions payable to Alternate.
229. On the same day (7 November 2001) Mr and Mrs Investor 14 signed an application for a loan to BoI. This provided BoI with no relevant information about their financial circumstances.
230. On 7 January 2002 Le Fustec for Alternate sent a "reason why" letter to Mr and Mrs Investor 14. Mr Investor 14's evidence is that he recalls receiving the letter, of which they have a copy at home, and that, given that they trusted Le Fustec implicitly, they probably did not read it in detail. The letter contained some mistakes; for example, it wrongly suggested that they needed more capital "for future house purchase", and it referred to NBS, rather than BoI, as the lender. It contained (inter alia) the statements pleaded in paragraph 157 of the Order of Justice which were false or misleading or both in (inter alia) the respects pleaded in paragraph 162 of the Order of Justice.
231. It appears from the documents before the Court that at or about this time Alternate was instrumental in putting money of Mr and Mrs Investor 14 into one or perhaps two further investments (in addition to the TIPP). We have seen an agreement with "currencies4less" signed by Mr Investor 14 on 9 January 2002, and an Alternate "Compliance Record Sheet" which is headed "Plan - Viatical" and "Company - MUTBENS", and which shows that a "reason why" letter was issued on 6 April 2002, and that confirmation documents were issued on 30 April 2002. A letter of 13 September 2005 to Mr James Mews from Mr Investor 14 referred to a Viaticals policy and to the company being under investigation and the money having been frozen. This transaction or these transactions are not referred to in the Order of Justice or the evidence of Mr Investor 14: the reason for this is not apparent from the documents.
232. On 22 October 2002 BoI wrote to Mr and Mrs Investor 14 requiring a deposit of £12,000 or of unencumbered TEPs with a surrender value of not less than £16,000. As a result they were persuaded to mortgage to BoI five endowment policies. In November 2002 Alternate tried to sell one of their policies through TEP Exchange, but failed to find a buyer. On 3 February 2003 BoI sent a further warning letter, followed on 21 February 2003 by a letter requiring the deposit of a further £10,700 or TEPs with a surrender value of not less than £13,375. They paid £10,700 from their savings. Mr Investor 14's evidence is that they were misled by Le Fustec and did not realise that this sum was simply going to repay the loan and would be effectively lost. If they had appreciated this, they would have considered whether to bring the TIPP to an end. In December 2003 their Clerical & Medical policy matured at £8,450 and that sum was paid to BoI. On 1 September 2005 BoI wrote demanding £7,450 or further TEPs, and they paid £8,000 from their savings.
233. In the judgment of the Court the five matters to be proved by the JFSC to establish their case on liability relating to Mr and Mrs Investor 14 have been proved, as pleaded in the Order of Justice. The Court finds that Alternate acting by Le Fustec was reckless to a degree approaching dishonesty in persuading them to enter into an entirely inappropriate TIPP arrangement which involved effectively all their savings, putting all their hard-earned eggs into one basket, while falsely and misleadingly he represented to them that the obviously high risks were very low risks.
234. In relation to the conduct of BoI, the Court repeats (mutatis mutandis) paragraph 99 above. The Court has difficulty in understanding how a bank such as BoI could lend a sum to persons such as Mr and Mrs Investor 14 which, in the absence of their substantial further payments amounting to £29,656.40, would have exceeded £100,000. If it be the case that BoI failed to make full enquiries then serious questions arise as to BoI's conduct.
Mr Investor 13
235. Mr Investor 13 confirmed his witness statement on oath: he was not cross-examined. He is the son of Mr and Mrs Investor 14, and was 25 in November 2001. He was working as a window cleaner with an income of about £17,500 per annum. He was then not married, but subsequently married on 2 August 2003. He was, as stated above, present at meetings between his parents and Le Fustec for Alternate.
236. In late 1997 he bought a Standard Life TEP on Le Fustec's advice, using for this purpose half of all his savings. Le Fustec knew this was a large proportion of his savings, and that he did not want to jeopardise it in any way.
237. A confidential client questionnaire was completed on Alternate's standard form for Mr Investor 13 on 27 November 2000, and signed by him on 21 August 2001. His "Financial and Personal objectives" were stated to be "Build up savings and investment to provide for future house purchase." This document was updated on 20 November 2001 to take account of his then existing savings, and the proposal that he should use his existing TEP to "gear up investment return" by means of a TIPP. His evidence is that, as he told Le Fustec, he "was not prepared to place my money at risk", as he "had worked hard for the money and did not want to lose it."
238. In about November 2001 he attended an informal meeting with Le Fustec at his parents' house where he was then living. His evidence is that:
"During the meeting Mr Le Fustec recommended that we buy more second hand endowment policies. He explained that we could use our existing endowments to acquire similar policies of greater value and that it would all be arranged through a bank. He did not mention a loan and he did not advise me that I would have to contribute any funds towards the loan. I understood that the existing endowment policy facilitated the purchase of other policies."
He met Le Fustec again, and was presented with a Portfolio Cash Flow List dated 14 November 2001 which showed (inter alia):
(i) An initial loan of £23,777;
(ii) A maximum bank balance of £40,939;
(iii) A maturity value of £66,698;
(iv) A profit of £14,840;
(v) A gearing of 84.84%.
Le Fustec appears not to have explained either the significance of the high gearing, or the risks of loss. Le Fustec told him that
"I would be able to draw on money under the proposed investment."
But Le Fustec appears not to have explained that this would merely be added to the loan and incur a substantial interest charge until maturity. He agreed to go ahead and to use his Standard Life and Refuge Assurance policies for this purpose. He did not then understand that the proposal involved taking out a loan or that he would no longer have to pay the premiums on the existing policies. He understood that the investment did not involve the payment of premiums. If he had thought it involved anything as risky as a loan he would not have agreed to go ahead. His evidence as to the loan agreement with NBS is as follows:
"I am aware that I signed a loan agreement with Newcastle Building Society dated 14 January 2002. I do not remember signing this document. It is likely that Mr Le Fustec will have asked me to call into his office as this was the usual way in which I completed paperwork. At the time I had no idea that I was taking out a loan or that it was in the sum of £30,337.00 with monthly repayments of £140.56. I do not believe that Mr Le Fustec gave me any explanation of the nature of the document when asking for my signature. He would ordinarily show me the place to sign and I would follow his direction. I trusted Mr Le Fustec and did not believe there was any need to question what he asked me to do."
The Court observe that in a number of these cases it appears that Le Fustec obtained the signatures of his clients on documents which he had not explained, and the nature of which they did not appreciate.
239. On 7 January Le Fustec for Alternate sent a "reason why" letter to Mr Investor 13. His evidence concerning this letter is that:
"I did not read the entire letter because it was very difficult to follow. The letter uses a lot of long financial terms that I found confusing. This was typical of the style that Mr Le Fustec adopted when explaining an investment. The letter did not lead me to believe that I was about to enter a loan.
The letter from Mr Le Fustec led me to believe that I would make around £6,000 additional profit as a result of entering the investment. I had originally purchased the Standard Life policy for £5,233 and it had a surrender value of £8,950 at the time. The projected figures produced by Mr Le Fustec were not too good to be true. If they had been it may have made me cautious. Instead the figures made [me] believe that it was a sensible investment. I believed that it was a safe way to invest and that the money was secure. Mr Le Fustec had led us to believe that endowment policies were almost guaranteed to rise at a healthy rate and that they would obtain a substantial bonus on maturity."
This reason why letter was in Alternate's nearly standard form. It contained (inter alia) the statements pleaded in paragraph 197 of the Order of Justice which were, in the judgment of the Court, false or misleading or both in the respects pleaded in paragraph 201 of the Order of Justice. In the letter Alternate made no attempt at balanced advice, and spelled out only the suggested advantages of the TIPP without any proper indication of the high degree of risk involved.
240. Having heard nothing from NBS except receipt of annual statements (which Mr Investor 13 had misunderstood as stating the value of his policies rather than, as in fact, the amount of the loan due to NBS), he contacted NBS for the first time in about July 2005, to be told that he had a substantial loan amounting then to about £32,200. He also discovered for the first time that the loan amount was higher than the value of his policies. He has been told that there is unlikely to be a maturity bonus on either of his policies. His evidence on this is that:
"Mr Le Fustec led my father and I to believe this was virtually guaranteed. Even if the market picks up I understand that the values of the policies will not substantially increase from their present levels.
At one point in 2005 the loan was almost £5,000 higher than the value of the policies. It is now clear to me that the letter dated 7 January 2002 suggested that Newcastle Building Society would put in place triggers to make sure that the value of the loan could not increase beyond the value of the policies without action being taken. I have no idea why I received no warning about how things were going from either Newcastle Building Society or Alternate.
On 19 September 2005 I paid a lump sum of £5,000 to keep the loan down. On 12 October 2005 I paid a further sum of £16,000 and have been paying the monthly premiums on the two policies since that time. These payments amount to approximately £100 per month (£22.72 for the Standard Life policy and £74.96 in respect of the Royal London policy)."
241. In the judgment of the Court the JFSC has proved the five matters which it is required to prove to establish its case on liability in relation to Mr Investor 13 as pleaded in the Order of Justice. The Court will not repeat them in detail. As in others of these cases, the Court considers the recklessness of Le Fustec for Alternate, in placing him into this TIPP investment with its high degree of risk, to be clear and wholly unreasonable.
242. In relation to NBS, the Court has seen no evidence that any detailed questions were asked by NBS to establish to its satisfaction the circumstances of its new customer. The Court repeats paragraph 99 above, mutatis mutandis.
Mr Investor 15
243. Mr Investor 15 gave evidence in chief in writing and orally and was cross-examined. In December 2001 he was 63 years old. He had lived in Jersey all his life, had not married and lived alone, but had a dependent sister living in a nursing home. He had been a self-employed marine engineer trading from a workshop on Victoria Pier; but in late 2000 he had to stop work due to ill health - an illness making him susceptible to breaking tendons, as well as a heart condition and pleurisy. He then decided to sell his business for £25,000, to be paid by annual instalments of £5,000 a year. He formally retired in 2003.
244. He had known Le Fustec for about 20 years and had often obtained financial advice from Le Fustec. He bought three Royal and Sun Alliance investment with profits bonds, which Le Fustec described in a letter of 13 November 1997 as "excellent low risk investments" and as fitting "into the Cautious, Managed risk category which you would require for your investment". Mr Investor 15 had explained to Le Fustec that
"I wanted an investment where I could not lose the capital but was able to draw on "the money if necessary."
On 25 August 2001 Le Fustec for Alternate wrote to Mr Investor 15 concerning another purchase of a Royal and Sun Alliance bond confirming that
"Security of capital was paramount as you wish to use the investment to supplement your retirement income."
Throughout Le Fustec was well aware of Mr Investor 15's risk-adverse attitude.
245. Earlier, on 6 December 2000 a confidential client questionnaire in Alternate's standard form had been completed by Le Fustec, showing Mr Investor 15's total income as £13,600 a year, his "Financial and Personal Objectives" as being "Due to ill-health currently on sickness benefit wishes to secure retirement at 65, using current assets to supplement income", and under "Pensions" stating "Requires income to supplement retirement income:
(i) Will split home in two to create 2 units to provide rental income to support sister currently in nursing home.
(ii) Will take ppp with profits, benefits now [either] as cash if permissible (de minimis).
(iii) Cash value of AXA m/v - into RSA wpb to build capital fund to drawn down income as required in future".
246. Some time probably late in November or early in December 2001 Le Fustec visited Mr Investor 15 at his workshop. He remembers saying to Le Fustec that he "was a cautious investor". His evidence concerning this occasion is that:
"Mr Le Fustec told me that I could make use of the existing policies in order to make money. In particular, he explained that I could use the policies as security for a loan that would allow me to buy some other type of investment.
I remember telling him it would have to be something very low risk. Mr Le Fustec assured me that it would be very low risk. He did not tell me that I was guaranteed to make a certain amount of money but said that I could end up with a profit of around £20,000, which seemed good. I agreed to make the investment. Due to my health I was low at the time and believe that I was easily talked into it by Mr Le Fustec.
I do not recall Mr Le Fustec explaining that I could be required to pay additional money as a result of making the investment or that I could end up losing the bonds if the investment did not do well."
What Le Fustec said to him was false and misleading since the TIPP was not "very low risk", but on the contrary a high risk investment, and Le Fustec failed to explain any of the disadvantages, especially the risk that more money might need to be paid, and the risk that his existing bonds given as security could be lost.
247. In cross-examination part of Le Fustec's witness statement relating to this meeting was put to Mr Investor 15. In paragraph 55.7 Le Fustec stated that he "used the analogy that I often made, of the release of equity by an owner of property referred to earlier in this Statement." That was a reference to paragraph 38 of Le Fustec's witness statement which reads:
"38. In cases where an investor did not have a lump sum to invest rather an existing WPB, the lender would generally lend up to 66% of the surrender value of that policy in order that an investor could acquire a deposit for the TEPs. A further level of gearing would then be raised against those TEPs (up to 90% of surrender value). This was to fund the acquisition of further TEPs for the portfolio. In order to explain this arrangement to clients, I would use an analogy. As most investors were home owners they understood the comparison of a house unencumbered by a mortgage (as representing the WPB or other "With-Profits" product). I presented the scenario of that house being next door to another (part built) house which the neighbour could not afford to finish. By raising a loan against the house one could acquire the part built house. Then that house could be put up as further collateral to raise a further loan to fund the building costs to enable the purchaser to complete the second house and thereby increasing the value of that asset and making a profit for the purchaser."
This was a false and misleading analogy, because, if the value of the properties fell, the owner might have to sell the second property and either sell his home or mortgage it to meet the balance of the loan not paid off by the sale price of the second property. Such a gearing of properties can lead to disaster, as it has in recent years for property owners who have bought second properties on mortgage to let. See Mr Trevor Gray's evidence: paragraph 65 above.
248. On 5 December 2001 Rochford sent contract notes for the purchase of the TEPs to Alternate. The list shows that the price was £40,614 and the then surrender value was £23,775, with premiums of £9,987 to be paid to maturity. The Portfolio Cash Flow List (which Mr Investor 15 did not recall having seen) dated 4 December 2001 shows:
(i) an initial and total investment of £37,499;
(ii) an initial loan of £40,614;
(iii) an assumed surrender value growth of 9% per annum;
(iv) annuity payments of £12,000;
(v) a forecast maximum bank balance of £70,3327;
(vi) a forecast profit of £47,616;
(vii) a gearing ratio of 74.52%.
Mr Investor 15 signed a form of application to NBS for a loan on 12 December 2001, with no amount stated for the loan. The application form did not require the disclosure of any relevant information as to his financial or other circumstances. In a letter to Alternate of 14 January 2002 (mistyped as "2001") NBS stated that the amount of the loan required to be sent to Rochford was £50,069, i.e. nearly £10,000 more than the amount in (ii) above. On 17 January 2002 Mr Investor 15 signed a policy loan agreement with NBS for a loan of £50,069. The special conditions included (inter alia) this one: "Applicant(s) to note £20,089 of this advance relates to the purchase of policies and £11,505 will be advanced over the period of the loan direct to life assurance companies for the payment of premiums."
249. On 18 January 2002 Le Fustec for Alternate sent a "reason why" letter to Mr Investor 15. This was in substantially similar standard form to the other "reason why" letters considered by the Court above. At the start it was stated under the heading "Investment Objectives"
"Increasing your capital for retirement was your primary objective and you wished to do this in [as] low risk manner as possible."
The Court emphasises the words "in low risk manner as possible" because what Alternate was advising Mr Investor 15 to enter into was the opposite - a high risk investment due to the substantial degree of gearing. The "reason why" letter contained (inter alia) the statements pleaded in paragraph 90 of the Order of Justice, and such statements were false or misleading or both for the reasons already spelled out by the Court and as pleaded in paragraph 93 of the Order of Justice. Mr Investor 15 in his witness statement stated that he recalled receiving this letter which "refers to leveraged investment schemes and TIPPs. I did not understand the meaning of these terms and this remains the same today. They were not explained to me in any detail by Mr Le Fustec. It would be fair to say that he used quite a lot of jargon and I found it difficult to follow. This did not concern me at the time because I trusted Mr Le Fustec and felt assured that it was a very low risk investment."
250. Mr Investor 15's evidence of subsequent events is as follows:
"I started to become concerned after receiving correspondence from Newcastle Building Society which showed how much interest was accruing on the loan. At the time it was around £45,000 and I understood that it could go up to £100,000 by the time the investment matured in 2010. This worried me greatly.
I went to see Mr Le Fustec asking to cancel the investment. He could not understand why I was concerned and told me that everything was fine. I did not pursue matters further at that point but returned to see him on another occasion as my concerns remained just as strong. Unfortunately, I cannot recall the date of this meeting. I explained to Mr Le Fustec that I was not happy and wanted to sell the investment. Mr Le Fustec told me that he would look into it and get back to me. I did not hear any more from him. I continued to make attempts to contact Mr Le Fustec. On a few occasions I was told by Douglas Clark ("Mr Clark") of Alternate that Mr Le Fustec was dealing with it. I rapidly lost confidence in both of them.
This has been a very unpleasant experience. If I had known about all the risks there is no way I would have agreed to make the investment."
251. In the judgment of the Court the JFSC has proved the five matters which it is required to prove to establish its case on liability in respect of Mr Investor 15, and as pleaded in its Order of Justice. The Court adds only that for Alternate to represent to him that the TIPP was a "very low risk investment" was wholly unreasonable, and the recklessness of Le Fustec for Alternate was clear.
252. The Court has seen no evidence of enquiries being made by NBS as to the circumstances of its new customer to whom it was lending so large a sum. The Court repeats, mutatis mutandis, paragraph 99 above.
Mr Investor 2 (Second TIPP)
253. The Court has considered Mr Investor 2's first TIPP investment in paragraphs 100-109 above, and has concluded that the JFSC has not made out its case on liability against Alternate in respect of that first TIPP.
254. The Court now turns to Mr Investor 2's second TIPP. There is a Portfolio Cash Flow List for this dated 4 December 2001 showing
(i) An initial investment of £33,518;
(ii) An initial loan of £48,877;
(iii) An assumed surrender value growth rate of 9% per annum;
(iv) A forecast maximum bank balance of £95,302;
(v) A forecast profit of £66,326;
(vi) A gearing ratio of 76.30%.
255. On 7 January 2002 Le Fustec for Alternate sent to Mr Investor 2 a "reason why" letter. This was in Alternate's virtually standard form, and contained similar false and misleading statements to those considered in the other cases above. Mr Investor 2 signed on 23 January 2002 a policy loan agreement with NBS for a loan of £61,232 for an estimated term of 9 years, secured by a mortgage of four life policies. Mr Investor 2 signed a further policy loan agreement on 27 June 2002 which appears to have replaced his loan agreement with BoI on his first TIPP.
256. There is no evidence from Mr Investor 2 as to the circumstances connected with his second TIPP investment. In the absence of any cogent evidence that he was induced to enter into this by the "reason why" letter or any other statements made by Alternate, the Court is unable to conclude that the JFSC has made out its case in relation to Mr Investor 2.
Mrs Investor 16
257. It was ordered by consent on 31 October 2006 that Mrs Investor 16's affidavit confirming her witness statement should stand as evidence. The Court has taken account of the absence of Mrs Investor 16's oral evidence, and as with others of the investors the lack of any cross-examination.
258. At January 2002 Mrs Investor 16 was aged 50 and owning and managing a restaurant at St Ouen. She has since moved to live in Spain with her husband. Mr Clark acted for her about 20 years in advising her on insurance and financial matters. Her evidence of her discussions with Clark leading up to her TIPP investment in January 2002 is as follows:
"9. As a result of our discussions [in earlier years] Mr Clark knew that the money had to take care of me in later years. I have previously explained to him the money must not be placed at risk. I was hoping to make some profit by entering the investments but the main aim was to keep it out of reach until retirement.
10. I know very little about investments and have always trusted Mr Clark to tell me what needs to be done. Whenever I have received correspondence from one or other bank I have always handed it to Mr Clark who kept my records for me. I would rarely if ever look at any of the correspondence to see how the investment was performing.
11. I recall that on one occasion Mr Clark called on me at home. I do not remember the date but know that he had moved to Alternate by this stage. Mr Clark said that he wanted to explain a particular type of investment which he thought I should make. Mr Clark explained that I could buy other peoples' endowment policies and keep paying the premiums until they matured. He said that it was possible to buy them cheaply and that it was a good investment.
12. I remember asking Mr Clark whether it would cost me anything and explaining that if it did then I wasn't interested. He said that it would not cost a penny because he would raise a loan against my other investments to purchase the endowment policies.
13. I asked him if there was any chance that I could lose money. Mr Clark told me that I could not lose money. He said that when the policies matured they would pay off the loans and leave me with a nice profit. He explained that my other investments would be used as security but they would still be mine. I understood from what Mr Clark told me that my other investments were safe.
14. Mr Clark gave me a document [a "reason why" letter in Alternate's standard form] explaining how the investment worked. He did not ask me to read it and I never did. I trusted his word when he said that it was a good investment that would not cost me anything and was safe. I had always trusted Mr Clark to take care of my financial affairs. I agreed to make the investment and signed all the documents which Mr Clark needed me to sign. I do not recall receiving a letter at any point explaining the reasons why Mr Clark advised me to make the investment.
15. At the time I was not aware of the size of the loan that Mr Clark intended to obtain and did not know which of my investments were due to be used as security. At no point did Mr Clark use or explain the term "gearing" or "TIPPs". I do not believe that I had heard of these terms before becoming involved in these proceedings. At no time has Mr Clark or anyone else ever asked me for information relating to my income, expenditure or savings.
16. I understood that the loan would be provided by Newcastle Building Society and occasionally received letters which I passed to Mr Clark without looking at them. Mr Clark did not make any comments about the letters and I did not take any notice. I fully relied on Mr Clark."
259. The discussion with Clark to which Mrs Investor 16 refers must have taken place shortly before 23 November 2001 when a Portfolio Cash Flow List was provided by Rochford. In the discussion as described by Mrs Investor 16 (whose evidence in this regard the Court accepts) Clark made some false and misleading statements:
(i) his statement (see her paragraph 12) that "it would not cost a penny" because a loan would be taken out was simply false: the loan would and did cost Mrs Investor 16 a considerable amount in interest and other charges;
(ii) the statement by Clark (see her paragraph 13) that she "could not lose money" was seriously misleading for reasons fully outlined above;
(iii) his statement (see her paragraph 13) that "when the policies matured they would pay off the loans and leave me with a nice profit" was similarly misleading, because she could equally as well have ended with a loss, as in fact she has;
(iv) his statement (see her paragraph 13) that her "other investments" mortgaged as security for the loan "were safe" was false and misleading, since (as has in fact occurred) those investments might have to be surrendered or sold to pay off the loan.
260. The standard "reason why" letter handed to her by Clark contained the same false and misleading statements as have been described by the Court above. But Investor 16's evidence is that she never read the letter, and therefore could not have relied on it. The letter refers to BoI as the lender; but in fact NBS lent the money required for the purchase of six TEPs at a price of £69,182 (against a surrender value of £43,734). The Portfolio Cash Flow List dated 23 November 2001 showed:
(i) An investment of £39,500;
(ii) An initial loan of £43,182;
(iii) A forecast maximum bank balance of £76,179;
(iv) A forecast profit of £70,846;
(v) A gearing ratio of 81.96%.
These figures do not precisely represent the amounts in the event borrowed and paid for the TEPs. The evidence before the Court shows that Mrs Investor 16, in order to maintain and then pay off the loan from NBS, had to surrender two of her existing investments (a Scottish Widows policy and a Norwich Union policy) for a total of £43,935.57 and pay in a total of £33,172.70 as well.
261. The Court finds the five matters proved which the JFSC has to prove to establish its case on liability in relation to Mrs Investor 16 as follows:
(i) Mrs Investor 16 entered into a relevant transaction with Alternate for the purpose of entering into a TIPP.
(ii) Mrs Investor 16 was induced to do so by the oral statements made by Clark on Alternate's behalf. The Court is prepared to consider an application to amend the Order of Justice in this respect, as indicated at the trial.
(iii) Those statements were false or misleading or both as set out in paragraph 259 above.
(iv) Those statements were made to Mrs Investor 16 by Clark for Alternate recklessly. Clark knew that there were risks in the TIPP, as was recognised in the "reason why" letter, and wholly unreasonably chose to represent to Mrs Investor 16 that those risks were small, when in fact any reasonable and competent financial adviser would have appreciated that the gearing made the TIPP a high risk investment, particularly in the light of the down-grading of bonuses by leading life companies in previous months.
(v) Clark for Alternate made the statements specifically to induce Mrs Investor 16 to enter into the transaction with Alternate by virtue of which Alternate gained commission.
The Court will deal with relief below.
262. Most of the relevant NBS documents have not been seen by the Court. The Court repeats (mutatis mutandis) paragraph 99 above.
Mr and Investor 17
263. Mr Investor 17 confirmed his witness statement on oath. He was not cross-examined. In February 2002 Mr Investor 17 was 53 years old and Mrs Investor 17 was 50. He was employed as a truck driver earning about £20,000 a year. Mrs Investor 17 was employed part-time as a nurse (SRN) earning about £16,000 a year. Their two children were grown up. They lived in rented accommodation and had no substantial savings or other assets.
264. They had known Le Fustec for at least 30 years as members of the same congregation of Jehovah's Witnesses. It is apparent that a number of the other investors are Jehovah's Witnesses and know Le Fustec through that connection; but the Court does not have exact information as to all of such investors.
265. In about 1990 Mr and Mrs Investor 17 arranged life insurance through Le Fustec with AXA Life. In 1998 Mr and Mrs Investor 17 had a little more spare cash, their children having left home. Mr Investor 17 asked Le Fustec about the best way to save for the future as neither Mr or Mrs Investor 17 had a private pension. A confidential client questionnaire was completed on a standard form of Advance. Their "Financial & Personal objectives" were stated simply as "save for retirement". Their "Saving/Investment requirements" were stated to be "£30 per month to provide rainy day/retirement fund with a view to increasing in the future". They took out a long term Standard Life Protection and Savings Plan at £29 per month. Subsequently they took out a further plan with monthly payments of about £25.
266. In early 2002, when Le Fustec visited them at home, Mr Investor 17 mentioned that they had about £13,000 and were looking for guidance as to how to invest. Some of this had been saved and the rest was a gift from Mrs Investor 17's mother. They wanted a small investment which would mature 10 years later. Le Fustec said that he would think further about this. At about that time another confidential client questionnaire on Alternate's form was completed by Le Fustec and dated by him 11 February 2002. In this Le Fustec recorded that their "attitude to risk for regular contributions" was "Balanced" to "Adventurous". Though Mr and Mrs Investor 17 signed this form on 18 February 2002, Mr Investor 17 does not accept that this was a fair statement of their need for an investment without risk.
267. Mr Investor 17's evidence of what then happened is as follows:
"11. A few days later he came back and told us about a type of investment which I now understand is known as a TIPP. He explained that a lot of people had life insurance policies and didn't want to carry on with them. He suggested that we should buy some of these policies. I believed that it involved paying a single lump sum and then doing no more than waiting until the policies matured at which point we would collect the proceeds. He told us that everyone was doing it.
12. I recall Mr Le Fustec asking me what level of risk we were prepared to take. My wife was in the kitchen at this point in time and we were in the lounge. I was responsible for deciding whether to invest the money as my wife was recovering after spending a few months in hospital receiving treatment for depression. I told him that we were not prepared to take any risk. I said that we would prefer to put the money in the bank than put it at risk. He told me buying the policies was a safe investment and that there was no need to worry.
13. A few days later Mr Le Fustec came back and told us that he had sorted out a package which included a loan to buy the new policies. This was the first time that Mr Le Fustec mentioned a loan. He said that the outstanding money, including all the interest, would be repaid when the policies matured. Mr Le Fustec presented it as a done deal and I believed that the loan had already been arranged by the time he mentioned it to us. As to the loan, I was a little surprised but Mr Le Fustec assured me it would make little difference. I would now have an extra policy.
14. Mr Le Fustec explained that the investment would mature around 7 years later by which time [he] verbally confirmed that we would receive in the region of £34,000. He said that it was not possible to give an exact figure because bonuses go up and down but that it should be around that amount. I asked Mr Le Fustec whether it would cost us any money after the initial investment. He said that it would not. He told us all that we had to do was pay the initial sum of £12,500 and then wait for it to mature. The figures that he mentioned sounded very good and I asked him whether there was a catch. He said there was no catch and that we would be "quids in" if the person died. I believed what he said without question.
15. We had a fairly close relationship with Mr Le Fustec. He was aware of our financial position and that we were trusting him with all of our savings. I have seen a copy of a completed client questionnaire at pages 1 - 9 that has been signed by us, albeit we did not date it. I am aware that the client questionnaire described us as having a balanced to adventurous approach to risk in relation to the regular contributions that we made to our other policies. I do not think this accurately reflects our attitude towards risk. We were cautious."
268. What Le Fustec said at the meeting included these false and misleading statements:
(i) His indication (see Mr Investor 17's paragraph 12) that the TIPP was "a safe investment" and met Mr and Mrs Investor 17's requirement for no risk at all.
(ii) His statement that it would not "cost us any money after the initial investment" (see Mr Investor 17's paragraph 14).
(iii) His general indication that the TIPP was a risk-free investment meeting the needs of Mr and Mrs Investor 17 for the investment of all the money they had for investment.
269. Mr and Mrs Investor 17 received from Le Fustec for Alternate a standard "reason why" letter which bears the date of 20 February 2002 in Le Fustec's handwriting. The letter incorrectly referred to BoI as the lender. This letter contains a number of statements which were false or misleading or both, as the Court has previously described. Mr Investor 17's evidence in relation to this letter is as follows:
"16. At pages 10 - 13 is a letter dated 20 February 2002 which explains the reasons for making the investment. I have difficulties with reading but recall briefly going through this letter. It did not make much sense to me or, I believe, to my wife. We did not ask any questions because we trusted Mr Le Fustec and did not think that he would recommend anything that could harm our interests. As far as we were concerned the investment was as safe as putting the money in a bank. We didn't complete or read any of the documentation and simply signed where we were asked to do so. He did not take us through the forms and simply said they were something that needed to be signed.
17. I do not believe that Mr Le Fustec explained the investment to us properly. Mr Le Fustec did not tell us that it could make a loss if the value of the loan increased faster than the value of the new policies. We did not understand that the loan was being taken out in our name in order to make payments relating to the policies or that we could be liable to repay it. If I had known all of the risks involved I do not believe we would have agreed to make the investment. I would have liked to have made an investment that did not involve a loan but this was not presented to us as an option."
The Court concludes that though Investors Mr and Mrs Investor 17 were not able to follow all of what was said in the letter, Mr and Mrs Investor 17 did gain from it confirmation of what Le Fustec had said as to the safety of the TIPP and the absence of risk.
270. Rochford sent to Alternate a list of the two TEPs to be bought at a price of £24,216 (as contrasted with a surrender value of £16,128). Rochford also sent a Portfolio Cash Flow List showing
(i) Mr and Mrs Investor 17's investment of £12,500;
(ii) an initial loan of £11,716;
(iii) an assumed rate of growth of the surrender value of 9% per annum;
(iv) a forecast maximum bank balance of £24,245;
(v) a forecast profit of £17,384;
(vi) a gearing ratio of 75.14%.
Mr and Mrs Investor 17 paid Rochford £12,500 by cheque dated 25 February 2002 (wrongly dated "2001"). Mr and Mrs Investor 17's application form to NBS was signed by them on 11 March 2002: it disclosed no relevant information as to their financial or other circumstances. The loan agreement was sent by NBS to Alternate for Mr and Mrs Investor 17 to sign in respect of a loan of £15,636, which they signed (the copy before the Court is not dated).
271. The Court finds that the JFSC has proved the five matters which it needs to prove to establish its case on liability in relation to Mr and Mrs Investor 17. It does not repeat those five matters here, but adds these two points:
(i) The Court has taken account of the oral statements by Le Fustec for Alternate which were misleading and/or false as well as the statements in the "reason why" letter in so far as they confirmed the oral statements.
(ii) The Court concludes that the statements made to Mr and Mrs Investor 17 were as reckless as any made by Alternate to any of these investors. Mr and Mrs Investor 17's £12,500 represented virtually their only asset, and to invest their only asset in a high-risk, geared investment was unreasonable and irresponsible.
272. The NBS appear to have made no enquiries to ascertain what were the financial and other circumstances of Mr and Mrs Investor 17. The Court repeats paragraph 99 above (mutatis mutandis).
Mr and Mrs Investor 18
273. Mr Investor 18 gave evidence in chief in writing and orally, and was cross-examined. In February 2002 he was 58 years old and his wife was aged about 64 years. Both were born in Spain. Both had suffered minor strokes from which they had not fully recovered. He had a disorder of his ears which made him deaf and sometimes affected his balance. He had worked as a carpenter for a hotel group earning about £18,000 a year. His wife was forced to retire from work because of a back condition. Their son is 28 years old. They live in rented accommodation, and he undertakes all the repairs.
274. They have known Le Fustec as a friend for many years. Around 1990 they opened a TSB Harvest Bond into which they paid about £60 - 65 a month to build up savings for their retirement. This matured around 2000 with a sum of £19,000. They had £1,000 in a Lloyds TSB account, and were unsure how to invest this £20,000. In August 2000 he asked Le Fustec to visit them and advise. At this meeting, Mr Investor 18 recalls:
"We told him that we wanted the money to be invested safely because it was all we had for retirement. The importance of keeping the money safe was also stressed by my wife. We were cautious investors and Mr Le Fustec knew as much.
Mr le Fustec was well aware of our financial position and that we were both suffering from periods of poor health. We answered all the questions that he asked relating to our financial position."
A confidential client questionnaire on Alternate's standard form was completed by Le Fustec on 16 August 2000. This showed their "Financial & Personal objectives" as being "To build up as much as possible for retirement". Under "Observations" it was stated:
"August 2000
(i) Suggested to clients that it would be prudent to consolidate current value of Harvest Plan (equity-linked) and use with profits bond for that reason.
(ii) Suggested effect Standard Life VIP for 10 years. This would provide life cover on E to protect C, but also build further funds for retirement using with profits fund as this their major concern."
Le Fustec appears also to have provided a brief written report. On 22 November 2000 Le Fustec for Alternate sent them a "reason why" letter from which it can be seen that the purchase was of a Scottish Mutual with profits bond. Le Fustec sent a second "reasons why" letter on the same day (22 November 2000). This stated Mr and Mrs Investor 18's objective as being "Saving for the future, particularly retirement, was your primary consideration." This letter related to a Standard Life versatile investment plan to which they would contribute £100 a month at the start. In his cross-examination Mr Investor 18 stressed that that was their second objective, the primary one being to safeguard their savings. This is confirmed by Alternate's "reason why" letter of 20 February 2002 which mentions only "security of capital" as a major consideration. To Mr and Mrs Investor 18 that was the consideration, and Mr Investor 18's evidence is that they made this clear throughout to Le Fustec.
275. In early February 2002, according to Mr Investor 18's evidence, Le Fustec visited them, apparently for an annual review which led to him updating the client questionnaire. At this meeting he began the process of recommending that they used their Scottish Mutual bond as security for a loan to fund a TIPP. There is a file note by Le Fustec dated 26 February 2002 which records two meetings for the annual review at which Le Fustec made this recommendation, and he "provided illustration of projected returns from Rochford Policies". As early as 15 February 2002 (that is, well before the Mr and Mrs Investor 18 consented to go ahead with the TIPP) Rochford sent contract notes for the purchase of TEPs to Alternate for the Mr and Mrs Investor 18 to sign. This is a pattern of conduct which Le Fustec seems to have adopted in the process of persuading a number of these unsophisticated clients to enter into TIPPs. Rochford also sent a list of these TEPs showing a purchase price of £25,727, as contrasted with the then surrender value of £18,110, and a Portfolio Cash Flow List dated 18 February 2002, which showed:
(i) an investment of £18,801, presumably to be borrowed against the Scottish Mutual Bond and the TEPs;
(ii) an initial loan of £25,727;
(iii) an assumed growth rate of the surrender value at 9% per annum;
(iv) an estimated maximum bank balance of no less than £44,836;
(v) a forecast profit of £22,057;
(vi) a gearing ratio of 142.46%.
276. This is the highest of all the gearing ratios with which Alternate's clients were unhappily saddled. With so high a ratio, it was inevitable that Mr and Mrs Investor 18 would lose part or all of their original Scottish Mutual investment if surrender values fell. It appears from Le Fustec's file note of 26 February 2002 that he may have shown this document to Mr and Mrs Investor 18, though Mr Investor 18 does not recall it, and the evidence shows that he would not anyway have understood it. Mr Investor 18 made clear in his evidence that he did not understand what "gearing" was and still does not. In the file note it was stated by Le Fustec that they discussed "flexibility" and "risk factors". In cross examination Mr Investor 18 accepted that Le Fustec may have discussed these. The file note indicates that the decision to go ahead was made on 26 February 2002.
277. Le Fustec gave or sent to them the "reason why" letter dated 20 February 2002. In his witness statement Mr Investor 18 stated that he did not recall receiving this letter or reading it. In cross-examination, however, he indicated that the letter was on Mr and Mrs Investor 18's file, and that the reference to "security of capital" came from Mr and Mrs Investor 18, as they emphasised to Le Fustec that he "was to make sure that our money was invested safely." Mr and Mrs Investor 18 did not understand what TIPPs were, or what risks there might be in TIPPs or other investments. Mr Investor 18 stressed that their decision to go ahead was based on Le Fustec's advice, and not so much on the letter or his technical explanations. It appears from the evidence that the advice Le Fustec for Alternate gave to them was that
(i) the capital of their savings would be safe when invested in a TIPP;
(ii) the risks would therefore be low;
(iii) a TIPP was an appropriate investment to ensure modest growth of their savings for retirement.
In each of these respects the statement was false and misleading having regard to the high risks involved.
278. The "reason why" letter of 20 February 2002 was in other respects the standard letter which the Court has already considered in relation to others of the investors, and contained the same false and misleading statements as already set out. But it is not clear how far Mr and Mrs Investor 18 were able to understand, and therefore fully to rely on, this letter. As regards the loan as part of the TIPP, Mr Investor 18's evidence is that:
"At the time I did not understand that the investment involved us obtaining a loan from Newcastle Building Society or any other bank for that matter. If we had understood that it involved a loan we would not have gone for it. Approximately 35 years ago I borrowed around £500 to buy a car but that was the last time we have been in debt. We did not have any choice back then because we needed transport and were unable to buy a car outright. Neither my wife nor I would have wanted to take out a loan for the purposes of making an investment."
Mr and Mrs Investor 18 signed an application to NBS for a loan on 26 February 2002 and a loan agreement for a loan of £30,562 on 29 March 2002. His evidence is that, though they signed, they did not appreciate what they were signing because they trusted entirely in Le Fustec and signed whatever he put before them, thinking that this was only part of the process of investing their own money. Having seen Mr Investor 18 in the witness-box, and cross-examined thoroughly by Advocate Robertson, the Court accepts his evidence including this part of it. The reality is that, as unsophisticated investors, they were at the mercy of a persuasive friend.
279. The Court finds that the JFSC has proved the five matters which it needs to prove as regards liability, but the Court repeats (mutatis mutandis) points (i) and (ii) in paragraph 271 above in relation to Mr and Mrs Investor 18.
280. The Court also repeats in relation to NBS paragraph 272 above.
March 2002
281. By March 2002 Clark and Le Fustec as the principal persons acting for Alternate knew that there had occurred the first occasion on which, to their knowledge, one of the investors' TIPPs had exceeded the maximum level of gearing permitted by the lending bank: see paragraph 75 of this judgment. They also knew of the weakening in the equity markets which began to cause life companies to reduce their bonuses. Because of this development it should have become even more clear to Clark and Le Fustec that to advise any client to invest in a geared TIPP was unreasonable and irresponsible, unless
(i) the client was financially sophisticated;
(ii) the client was wealthy;
(iii) the client fully understood all the serious risks involved;
(iv) the TIPP could not end with the loss of more than a modest proportion of the client's total wealth.
None of Alternate's clients who were persuaded to invest in TIPPs matched that description at all.
Mr and Mrs Investor 19
282. Mrs Investor 19 gave evidence in chief both in writing and orally, and was cross-examined. In March 2002 she was aged 54 years and her husband 56 years, and they intended to retire within the next 5 - 8 years. She was then employed part-time as a reconciliation clerk at Standard Bank (having before that worked at other banks checking dividends), and her husband worked in the Health and Social Services Department. Their total income was then about £50,000 a year, but since 2002 she has ceased employment. They have three grown-up daughters; while their daughters were at university, the financial support placed them under considerable strain. They have an unencumbered home. In about 1998 Mr Investor 19's father gave him £130,000, and they decided to invest this to supplement their income during retirement. They were both very cautious in financial matters, particularly Mr Investor 19. Initially they thought of buying a flat but decided that the mortgage would involve too much of a risk. Instead they invested some of the money in an AXA bond. They were introduced to Harrison who was then employed at L S Insurance, and who advised them to place other tranches of the money in a Clerical & Medical bond and a Friends Provident bond. Some of the rest was placed in a fixed deposit account.
283. In early 2002 Mr and Mrs Investor 19 were visited by Harrison who had moved to Alternate, and who asked them to transfer to Alternate as their advisers. Mr and Mrs Investor 19 knew that Harrison had been in trouble for failure to pay income tax, and they thought that he had not been honest about the reasons why he had moved to Alternate. He explained TIPP investments to them, and (inter alia) stated that
(i) "as an investment they represented very little risk";
(ii) "we could get out whenever we wanted by unravelling the investment";
(iii) "we could draw on money from the investment if we preferred".
Each of these statements was misleading and statement (i) was false. They decided to decline his offer to advise politely and told him they were not interested at that time.
284. Thereafter Harrison visited them with Le Fustec. Their growing dislike of Harrison was balanced by their estimation that Le Fustec was more open and trustworthy, and as time went by they came to know him better and feel comfortable with him as an adviser. Le Fustec did not prepare a confidential client questionnaire for Mr and Mrs Investor 19. He showed them a Portfolio Cash Flow List dated 6 February 2002 prepared for Mr and Mrs Investor 26 (the Court notes Le Fustec's breach of the duty of confidentiality owed to Mr and Mrs Investor 26 in this respect). Le Fustec explained that "a lot of Alternate's clients had signed up to purchase TIPPs and that it was definitely the way to go". He told Mr and Mrs Investor 19 that "this type of investment could be unravelled at any stage" - this was a misleading statement for the reasons already stated by the Court. In cross-examination Mrs Investor 19 agreed that Le Fustec had explained TIPPs in some detail, and she had asked questions. Though she had a fair grasp of standard investments such as stocks and shares, she needed help from a professional in relation to TIPPs. She understood Le Fustec's explanation, but her husband did not. Le Fustec proposed that their two bonds be used as security for a loan with which to buy TEPs. She asked for a cash flow forecast related to what Le Fustec was proposing. But at that stage they decided not to proceed.
285. At a further meeting a while later Le Fustec and Harrison presented a proposal, which they rejected as it would involve a large loan which made them uncomfortable.
286. Towards the end of March 2002 Le Fustec and Harrison visited them again. They had reduced the number of TEPs to four in total. In basic terms Harrison told them that "as an investment it couldn't fail to make money": that was a false and seriously misleading statement. Le Fustec indicated that a TIPP "did not involve any substantial risk", which was also false and misleading. Mr and Mrs Investor 19 made it clear to Le Fustec and Harrison for Alternate that increasing their capital was their primary objective, and they wished to do this "in as low risk a manner as possible", as Le Fustec confirmed in his "reason why" letter. Harrison and Le Fustec indicated to them that the TIPP would meet their requirement of such a low risk, and that was a further false and misleading statement. They were shown a list of the proposed TEPs, which gave a purchase price of £71,828 and a surrender value of £50,286, and which they retained. Mrs Investor 19 did not recall having seen the Portfolio Cash Flow List (and there was no copy on her file): this showed:
(i) an investment of £51,736;
(ii) an initial loan of £71,828;
(iii) an assumed surrender value growth rate of 7% per annum;
(iv) a forecast maximum bank balance of £110,938;
(v) a forecast profit of £65,280;
(vi) a gearing ratio of 80.39%.
It is noteworthy that the surrender value growth forecast by Rochford and Alternate had by this time decreased from 17.5% per annum in the early TIPP investments to 7% per annum. This reflected, though inadequately, the developing adverse trend in regard to bonuses declared by the Life Companies.
287. A few days later Mrs Investor 19 phoned Le Fustec to discuss the pros and cons. He did not mention any risks or contradict what Harrison had said, and indicated that it was a sensible investment for them to make. This was in itself a false and misleading thing for Le Fustec to say. Based on Le Fustec's reassurance, they decided to proceed and she emailed Le Fustec to that effect on 26 March 2002. Mrs Investor 19 explained their decision to proceed in this way:
"At no stage did they explain that there was a risk we may be required to pay additional money if the loans rose faster than the value of the policies. They were very bullish and Mr Harrison said we couldn't lose anything by going ahead. This was combined with the projected figures which suggested that we stood to make a large amount of money. Mr Harrison told us that we could expect profit of about £30,000 which would have given us a very comfortable retirement. In the end we felt like we couldn't lose. If we had known what could happen in relation to the loan and the policies we would not have gone near it."
288. Mr and Mrs Investor 19 signed an application form to NBS on 3 April 2002. This gave to NBS no relevant information as to Mr and Mrs Investor 19's financial circumstances. Before they signed the NBS loan agreement they received from Le Fustec for Alternate a "reason why" letter dated 16 May 2002. This confirmed Alternate's understanding of their need for "as low risk a manner as possible": see paragraph 286 above. In cross-examination Mrs Investor 19 confirmed that she did read this letter at the time, and she thought it a fair summary of the advice which Alternate had given, in particular confirming
"that it was possible to unravel the investment and that it only involved a low level of risk."
The reason why letter was in the standard form already considered in this judgment and contained a number of statements which were false or misleading or both. The Court does not repeat its analysis again. Mr and Mrs Investor 19 signed the NBS loan agreement for a loan of £82,188 on 18 May 2002.
289. As a result of the incompetence of NBS in dealing with the payment of premiums, on 1 October 2002 Mrs Investor 19 phoned NBS to say that they wished to withdraw: she was told that was not possible. On 3 October 2002 NBS wrote to Mr and Mrs Investor 19, pointing out (inter alia) that the difference between the purchase price and the surrender value at the time of purchase left a shortfall of £21,585, and the current loan balance in October 2002 was £24,152. On 8 October 2002 they wrote to NBS seeking a cancellation without loss, to which NBS replied on 22 October 2002 that this was not possible. It is plain that Le Fustec and Harrison failed adequately to explain the disparity between purchase price and surrender value, and that their misstatements about the ability to unravel at any time had seriously misled Mr and Mrs Investor 19.
290. In the judgment of the Court the JFSC has proved the five matters which it needs to prove to establish its case on liability in relation to Mr and Mrs Investor 19. The Court adds only these further points:
(i) Mr and Mrs Investor 19 received, and were misled by, statements made orally as well as in the "reason why" letter;
(ii) given that there had been one example of the value of investors' security failing to keep pace with the growth of their loan account, it was totally unreasonable and reckless of Alternate to advise entry into this TIPP.
291. It appears from the evidence that NBS obtained no information about Mr and Mrs Investor 19's financial or other circumstances. The Court repeats paragraph 99 above (mutatis mutandis).
Mr and Mrs Investor 20
292. Mr Investor 20 confirmed on oath his written witness statement: he was not cross-examined. He was aged 48 in April 2002. He and his first wife had been divorced in 1999, and he and his second wife were married on St Valentine's Day in 2002. They live in privately rented accommodation. Their combined earnings from about April 2002 from their work as a chef and as a hotel receptionist totalled about £32,000. He had known Le Fustec from 1982 as an insurance agent. In 1983 on Le Fustec's advice he took out a savings plan in the form of a Clerical & Medical with profits bond. From 1988 Le Fustec has lived next door to Mr and Mrs Investor 20. Over the years he has entered into other investments on Le Fustec's advice including, in 1996, a Standard Life versatile investment plan, and in 1999 a Scottish Widows savings plan.
293. On 7 February 2002 Mr and Mrs Investor 20 signed a confidential client questionnaire on Alternate's standard form. This stated no "Financial & Personal objectives" or "Observations": it included lists of his existing policies and investments. Mr Investor 20 described the process by which Le Fustec for Alternate persuaded him and his new wife to enter into the TIPP in this way:
"15. Around the time that I married my wife in February 2002 Mr Le Fustec visited us at home. He explained that we could use my main policy with Clerical Medical as collateral to get a loan that would enable us to buy four endowment policies. I understood that they were other peoples' life policies which I could buy and continue to pay the premiums until they matured. He explained that the policies would mature when I was aged around 55 years old.
16. Mr Le Fustec brought projected figures with him that he had printed for me. The figures were very attractive. They indicated that my main policy with Clerical Medical was worth about £29,000 and that it was due to mature in 2008 with a profit of roughly £60,000. Although there were only six years to go until that time, Mr Le Fustec suggested the proposed investment would lead to an additional profit of £20,000 to £25,000 without any further money being required from us.
17. At first I did not agree to enter the investment. I trusted Mr Le Fustec and did not have any real doubts but wanted to talk it through with my wife. Mr Le Fustec approached me on three or four further occasions over the next month before we eventually agreed to sign up. He is a good talker and we felt comfortable with his assurances that it was a sensible investment.
18. I recall that our conversations took place after the terrorist attacks on 11 September 2001. I was aware that they had a significant impact on the world's economy and discussed this with Mr Le Fustec. He told me this type of endowment policy should not be affected to any substantial degree by the negative effect on the economy that arose from the terrorist attacks.
19. On each occasion that we talked about the proposals Mr Le Fustec was always very positive. He said that it was a good investment and did not mention anything about there being risks involved. Indeed he did not suggest that there were any possible drawbacks or disadvantages. I never thought to ask whether it was high risk. I had known him so long that I was sure he wouldn't be recommending something that was risky."
Mr Investor 20 then deals with the questionnaire and continues with a reference to it:
"22. I am aware that Mr Le Fustec did not complete the box which addressed the level of risk we were prepared to take. I believe that we were simply shown the final page and asked to sign. If Mr Le Fustec had asked about our appetite for risk we would have said that the money had to be kept safely. We were relying on the proceeds of my Clerical Medical bond for the future and did not want to gamble with it.
23. Although I discussed the loan with Mr Le Fustec he did not mention that it could get so large. At no time did he suggest that the loan could increase faster than the value of the policies. Neither did he tell us that there was a risk we may have to contribute additional funds. Everything happened without any real attention being drawn to the loan. There were no lengthy forms to complete and I was not even aware that Newcastle Building Society would be the lender.
24. Mr Le Fustec did not raise any other investments with us. He simply said that his proposal was a good way of making extra money. I tried to understand all the financial jargon that he was using but it was very difficult to follow. In reality I did not really understand the mechanics of the investment."
It is not surprising that Mr Investor 20 who worked as a chef should have had difficulty in understanding all the implications of a TIPP investment.
294. The oral statements by Le Fustec for Alternate included several which were false or misleading or both:
(i) "his assurances that it was a sensible investment": any reasonably competent adviser would have told Mr Investor 20 that it was far from being a "sensible investment";
(ii) Le Fustec's statement that the type of policy "should not be affected to any substantial degree by the negative effect on the economy that arose from the terrorist attacks" on 11 September 2001. This was both false and seriously misleading, since that was the time when the event described in paragraphs 75 and 281 above occurred.
(iii) Le Fustec's over-optimistic statements (see Mr Investor 20 at his paragraph 19) were plainly misleading.
(iv) Le Fustec failed to ascertain what degree of risk Mr and Mrs Investor 20 could entertain. But given their circumstances, including their recent marriage, and their limited resources, it was misleading to represent that the TIPP was a sufficiently risk-free investment for them.
(v) Le Fustec failed to explain the loan, its size, or the risk that the loan might outgrow the mortgaged policies. That omission was misleading.
(vi) Finally, to describe the TIPP to persons in the position of Mr and Mrs Investor 20 as "a good way of making extra money" was lamentably misleading.
295. Rochford's list of the TEPs showed a purchase price of £91,955 and a surrender value of £67,582: this difference appears not to have been explained by Le Fustec. The Portfolio Cash Flow List showed (inter alia)
(i) initial loan of £52,413;
(ii) an assumed surrender value growth rate of 9% per annum;
(iii) a forecast maximum bank balance of £92,086;
(iv) a forecast profit of £46,921;
(v) a gearing ratio of 80.05%.
This does not appear to have been explained to Investors 20 and 20A.
296. On 4 March 2002 Le Fustec for Alternate sent to Mr Investor 20 one of Alternate's Standard form "reason why" letters. At the start it included these paragraphs:
"Utilising the notional surrender value of £29,702 from your existing Clerical Medical Endowment With Profits you wish to maximise your investment returns in order to provide additional capital to ameliorate your standard of living in retirement. Security of capital was a major consideration.
After some discussion it was agreed that a TIPP would fulfil your requirements effectively."
Alternate were thus representing that the TIPP was appropriate to ensure "security of capital": that statement was false and misleading. The rest of the letter was in standard form and contained statements which the Court has already considered and found to be false or misleading or both. The Court will not repeat again what it has already said in this respect.
297. It appears that Mr Investor 20 signed the loan agreement with NBS for a loan of £66,342 in late March or early April 2002.
298. In 2004, when Mr Investor 20 became redundant on a change of ownership of the hotel where he worked, he asked Le Fustec
"over the garden wall about whether it was possible to get any money out the investment. He told me it was not possible and that we would have to wait until they all matured. I had understood previously that the investment could be unravelled and this came as a surprise to me."
This was another respect in which Mr and Mrs Investor 20 had been misled by Alternate through Le Fustec.
299. The Court finds that the JFSC has proved the five matters which it needs to prove to establish its case on liability in relation to Mr Investor 20, and the Court makes only this further observation. For Alternate to advise Mr Investor 20 to enter into such a high-risk investment, given the circumstances of Mr and Mrs Investor 20 and the background of world events and their effect on equity markets, and Alternate's knowledge that the event described in paragraphs 75 and 281 above had occurred, was unreasonable and irresponsible to a high degree, and plainly reckless.
Mr and Mrs Investor 21
300. Mrs Investor 21 confirmed her written witness statement on oath: she was not cross-examined. In May 2002 she was aged 37 years and her husband 38 years. They lived in their own home mortgaged in favour of Barclays Bank. Mrs Investor 21 was employed as a herdsman by Classic Herd Limited, and Mrs Investor 21 as an asset restriction supervisor at Merrill Lynch. Their combined incomes were about £53,000 a year.
301. They had received financial advice for a number of years from Le Fustec. In early 2002 they were due to receive the proceeds of a maturing policy totalling £10,000, and they wanted to re-invest this money in a secure manner for their retirement. They spoke to Le Fustec about the best way of re-investing. They were aware of TEPs and asked Le Fustec whether they were a good form of investment. Le Fustec recommended a TIPP which, he explained, involved getting a loan to buy TEPs. Le Fustec completed a confidential client questionnaire dated 25 February 2002 which was not signed by Mr and Mrs Investor 21, and which Mr and Mrs Investor 21 did not see until this action had commenced. Mrs Investor 21 stated in her evidence that the majority of the information in the questionnaire is wrong. Le Fustec made several more visits to Mr and Mrs Investor 21 at their home. By 25 March 2002 he was writing to Rochford, apparently indicating that Mr and Mrs Investor 21 had decided to enter into a TIPP. On 8 April 2002 Le Fustec wrote a "reason why" letter to Mr Investor 21 concerning a pension plan.
302. In early May 2002 Le Fustec visited Mr and Mrs Investor 21 and produced what Mrs Investor 21 described as "a copy of some projected figures which he did not leave with us." This was presumably the two Portfolio Cash Flow Lists dated 3 May 2002, one of which was in a different form to those previously considered by the Court. It showed a monthly position from June 2002 to December 2007 of a bank loan account value, estimated surrender value, and a gearing ratio which was estimated to start at 68.36%, to rise to 78.02% and then decline. The other list was in a similar form to the previous ones, and showed
(i) an initial loan of £17,202;
(ii) an assumed surrender value growth of 7% per annum;
(iii) the cost of buying the TEPs as £33,263;
(iv) an estimated maximum bank balance of £33,306;
(v) an estimated profit of £14,898;
(vi) a gearing ratio of 78.02%.
Though Mr and Mrs Investor 21 had reservations about making the TIPP investment, they were persuaded by Le Fustec for Alternate to do so, "based on Mr Le Fustec's assurances in relation to the security of the investment and the potential return that he suggested we would make."
303. Le Fustec for Alternate sent to Mr and Mrs Investor 21 a "reason why" letter dated 16 May 2002. In this he stated their "Investment Objectives" as being
"Increasing your capital for retirement was your primary objective and you wished to do this in as low risk a manner as possible."
Mrs Investor 21's evidence is that this "confirmed our belief the investment was low risk." The assurances given by Le Fustec for Alternate that the TIPP investment was low risk and was therefore the secure investment for which they were looking were false and misleading for the reasons already set out. The "reason why" letter was in similar standard terms to those already considered, and contained similarly false and misleading statements.
304. Mr and Mrs Investor 21 paid £10,000 towards the cost of the TEPs. They signed the formal loan agreement with NBS after 11 June 2002 for a loan of £21,810, £17,202 for the purchase of the TEPs, and £4,608 to cover payment of the premiums to maturity. Problems arose over payment of the premiums, and from 1 January 2004 Mr and Mrs Investor 21 paid these, not NBS. On 1 July 2004 Mr and Mrs Investor 21 wrote to the JFSC enclosing a copy of their letter of that date to Alternate complaining about the TIPP investment on the ground that it had not been appropriate for them and was not "a lower risk investment as we requested in 2002". The correspondence indicates that this letter was referred to Alternate's insurers. Clark for Alternate replied on 2 September 2004; in his letter he stated in relation to the gearing:
"During the late nineties, a new concept was added: that of 'gearing or leverage'. Because of the low volatility and underlying security of with profit endowments certain market makers in traded endowments offered this facility, usually 'gearing up' to a maximum of 2 times in conjunction with a bona fide lender.
At the time of your investment, this level of 'gearing' was not considered excessive or inappropriate for this asset class and was not seen at that time to increase the risk profile significantly. In any event your investment was projected to be geared to a maximum of 108% during the term. The amount of 'gearing' available is usually governed by a loan to value ratio maximum of 85% of the surrender values of the policies purchased. In your case, the loan to value was projected to a maximum of 78% during the term of the investment."
This level of gearing was, in the judgment of the Court, plainly inconsistent with the low level of risk stated by Le Fustec. In relation to the market position, Clark stated:
"There are variable elements that can only be estimated in this type of scheme: interest rates, surrender values and final maturity values. The cash flow forecast makes some assumptions, i.e. that surrender values will continue to rise at a given rate and that interest rates will be maintained at the same level as inception. Maturity values are projected on the basis of a like policy maturing at the time of the plan's inception.
Unfortunately, since 2002, the investment environment deteriorated to such a degree that surrender values were drastically reduced, some providers suspended or made very small bonus additions to policies, projections of future maturities have also been reduced and there has been a number of small increases in interest rates.
However in 2004, there has been some improvement. Surrender values have started to rise, some companies have resumed bonus declarations and reduced market value adjustments. There is cautious optimism in some quarters that the situation will continue to improve."
In relation to Mr and Mrs Investor 21's options, Clark gave as one option:
"(3) Re-trade the policies. This is possible. However a by-product of the fall in surrender values during 2003, was the reduction in value of with profit policies generally, further exacerbated by a large number of policies being offered for sale, which in effect created a glut of TEPs. The market is recovering, albeit slowly, but investors who bought immediately prior to 2003 may not see their policies improve or even match their original purchase price if offered for sale at this time. However, the CIS policy may provide a profit as it was not purchased and was purely used as collateral."
The potential for such a decline in surrender values which rendered a geared TIPP investment a high risk one was not explained by Le Fustec to Mr and Mrs Investor 21: on the contrary he represented that the risk was low.
305. Mr and Mrs Investor 21 responded by letter of 21 September 2004, in which they recorded Le Fustec's advice as follows:
"We also stressed to Mr Le Fustec that we wished to utilise lower risk products. Mr Le Fustec advised that a much better return was available if a 'gearing' arrangement was put in place with second hand endowment policies. Several visits to demonstrate how gains could be made on the arrangement were made, as we were very unsure of the structure, never having heard of anything similar. However, we eventually agreed to put the structure in place some months later, although we were advised that it was not possible for us to pay the monthly policy premium payments ourselves."
Following a further letter from Clark, Mr and Mrs Investor 21 replied on 8 December 2004 stating (inter alia)
"We still are struggling with the concept of how this investment fits into the realms of a low risk investment as requested by us at the outset, and acknowledged by Mr Le Fustec in his "Reason Why" letter dated 16 May 2002. There seems to be so much potential for us to lose money with this relationship, despite the fact that we have taken over making the policy premium payments, thus preventing the loan increasing by a further £76.47 per month."
Again, following a letter from Clark, Mr and Mrs Investor 21 replied on 18 February 2005 (misdated "2004"), inter alia:
"We will also be grateful if you would actually answer the query how a plan that was intended to increase our capital for retirement in as low a risk manner as possible (please see Mr Le Fustec's letter dated 16 May 2002), has the potential to lose so much money.
We would be interested to hear if you feel this plan is still considered as a low risk investment, as we have found details of a similar plan offered by the Bank of Scotland (please see enclosed print) that indicates this is a higher risk investment.
We would like a full explanation why we were sold this type of investment having made it very clear to Mr Le Fustec that we wanted a low risk investment."
On 9 March 2005 Clark indicated that Alternate's insurers had to be consulted. On 22 March 2005 Clark replied, indicating that in May 2002 the TIPP investment "was considered to be a slightly higher risk than non-geared traded endowments". The Court observes that:
(i) that was not how Le Fustec for Alternate presented the TIPP to Mr and Mrs Investor 21;
(ii) as Mr Trevor Gray's evidence shows, it was not correct to describe such a highly geared TIPP as anything other than a "high risk investment".
306. In the Court's judgment, the JFSC has proved the five matters which it needs to prove to establish its case on liability in relation to Mr and Mrs Investor 21; the Court will not repeat here these five matters which plainly have been proved by the JFSC. But the Court does observe that for the reasons set out in paragraph 299 above (mutatis mutandis) Alternate's statements of advice to Mr and Mrs Investor 21 were unreasonable and irresponsible to a high degree, and plainly reckless.
307. The Court repeats its observations in respect of NBS's conduct, and paragraph 99 above (mutatis mutandis).
Mr Investor 24
308. Mr Investor 24 confirmed his witness statement on oath: he was not cross-examined. In 2002 he was aged 47 years and was divorced from his wife. They have three children, then aged 20, 18 and 13. He and his wife with two other trustees hold assets in trust for their children to meet educational costs, including (under a deed of settlement dated 3 February 1994 and a deed of appointment dated 30 March 1994) five life policies on their lives with Clerical Medical and General Life Assurance Society. He was a director of a company dealing wholesale in soft drinks, Carol Enterprises Limited, with a salary stated to be £30,000 a year. Mr Le Fustec had advised him for over 20 years, and in 2002 did so on behalf of Alternate. Mr Investor 24 throughout trusted Le Fustec implicitly and totally to give appropriate professional advice.
309. In 2002 he met Le Fustec at Alternate's office. Le Fustec advised him that he "could use the trust assets to obtain a better return. [Le Fustec] told me that the proposed investment which I now understand to be a TIPP was a very good investment."
That meant "a very good investment" for investing funds needed to pay school and university fees for the three children. He understood that the trust assets would be used as security. Le Fustec knew that Mr Investor 24 was seeking to secure a better return, and was aware that Mr Investor 24 himself was a medium risk taker, but that he would not risk all the trust assets. Mr Investor 24 cannot recall otherwise the advice Le Fustec gave him, and though Le Fustec for Alternate sent him a "reason why" letter in standard form on 6 May 2002, Mr Investor 24 cannot recall receiving or reading this or any other correspondence, and if he did receive that letter or others he would not have read them in any detail. The reason why letter was in fact put by Le Fustec on the footing that Mr Investor 24 wished:
"To maximise your investment returns in order to provide additional capital to ameliorate your standard of living in retirement".
But that was entirely inconsistent with the use of the trust assets as security.
310. A Portfolio Cash Flow List was provided by Rochford in January 2002 showing:
(i) an initial loan of £39,804;
(ii) an assumed surrender value growth at 9.5% per annum;
(iii) a forecast maximum bank balance of £94,125;
(iv) a forecast profit of £73,341;
(v) a gearing ratio of 82.04%.
311. A confidential client questionnaire was completed and signed by Mr Investor 24 on 14 January 2002. This related solely to Mr Investor 24's personal finances. Mr Investor 24 signed an application for a loan on NBS's form on 16 January 2002. This revealed no relevant details of Mr Investor 24's circumstances, and could only be read as an application by Mr Investor 24 for a personal loan, not a loan to the four trustees of the settlement. The consent to the policy loan to be secured by the trust's five Clerical Medical policies was signed on 17 April 2002 by Mr Investor 24 and his wife, and not by the other two trustees. The loan agreement with NBS for a loan of £51,311 (for which the security was stated to include two Standard Life policies as well as the Clerical Medical one) was made and signed by Mr Investor 24 alone and without any reference to the trust.
312. Given the above facts, it appears to the Court that it might have been the position that the loan by NBS was made to Mr Investor 24 in his personal capacity, and not as a trustee of the trust; and that, perhaps improperly, trust assets were allowed to be used to secure a personal loan to him. The Court has not seen the mortgage or mortgages of the policies in favour of NBS. However, the Court has to proceed on the footing as explained by Mr Investor 24 that the loan was to the trust and properly secured by the trust assets. The Court has some concern whether this is a correct assumption. The parties involved, and especially NBS, seem to have dealt cavalierly with trust assets held in trust for the three children. It seems that all the parties may have been involved in a breach of trust, but that is not an issue which the Court can decide in this action. Le Fustec was aware that the five Clerical Medical policies were held in trust for the children, and therefore his reference in the reason why letter to making provision for Mr Investor 24's retirement was presumably a mistake.
313. In the judgment of the Court the only relevant statement on which the JFSC can rely was that by Le Fustec for Alternate to the effect that the TIPP "was a very good investment," apparently for the children's trust. The TIPP was a high-risk investment, and in the Court's judgment wholly inappropriate for trust assets held for children. This statement by Le Fustec was false and misleading in respects including those pleaded in paragraph 191 of the Order of Justice.
314. In the Court's judgment the JFSC has proved the five matters it needs to prove to establish its case on liability in relation to Mr Investor 24 and his children's trust assets. But it has done so on the basis of Le Fustec's oral statement, and not the reason why letter. The Court will be prepared to consider an application for leave to amend the Order of Justice, as in the other cases in which the JFSC has succeeded on the footing of oral statements rather than those in reason why letters.
315. NBS's apparent conduct in this case seems to have been inappropriate. The enquiries made in relation to Mr Investor 24 and the children's trust appear to have been insufficient. The Court repeats paragraph 99 above, mutatis mutandis.
Mr and Mrs Investor 22 and their company
316. Mr Investor 22's affidavit confirming his witness statement was admitted in evidence by consent, because he was too ill to give evidence orally at the trial.
317. In May 2002 Mr Investor 22 was aged 72 years and Mrs Investor 22 45 years. Their company was a private investment company incorporated in Jersey in May 1971, with investments in 2002 valued at slightly over £1 million. Mr and Mrs Investor 22 are the directors and beneficial owners of the company. Mr Investor 22 gave evidence on behalf of the company.
318. In the period 2001-2002 Mr and Mrs Investor 22 were concerned that after maturity of their existing investments in corporate bonds the income from re-investment of the funds would be substantially less. They met Le Fustec at their home on a number of occasions in early 2002, in which Mr Investor 22 explained to Le Fustec that
(i) their main aim was to secure an ongoing income of £75,000 a year while protecting the value of the company's capital;
(ii) they were not much concerned about increasing the capital value of the company's assets, as long as the income target was satisfied;
(iii) the investments had to be monitored and they must be able to be readily changed.
Le Fustec appears to have prepared a confidential client questionnaire on Alternate's standard form, which is undated and was not shown to Mr and Mrs Investor 22.
319. On 2 May 2002 Le Fustec for Alternate wrote a letter of advice to Mr Investor 22. He stated their investment aim as follows:
"You expressed the desire to continue enjoying the same level of income - if possible and that capital growth was not necessarily paramount, although you would obviously like to secure your original investment."
He then commented on the current portfolio of the company, stating (inter alia) that
(i) there were too few individual holdings which should number at least ten;
(ii) the assets were all in the banking sector, but should be spread more widely;
(iii) "Any good portfolio benefits from investment flexibility and the ability to reposition with a degree of speed to take advantage of changing market conditions." But this could be time-consuming and expensive and it was therefore best to use pooled investments.
Le Fustec then recommended certain investments including with profit bonds, and in particular TIPPs. He described TIPPs in similar terms to those used by Alternate in its "reason why" letters already considered by the Court, and his description included, as in those letters, a number of statements which were false or misleading or both. In particular he indicated that TIPPs could be unravelled at any time by retrading the underlying TEPs, and income could be obtained by a return of capital from the loan account: both statements were thoroughly misleading.
320. Mr Investor 22's evidence is that he particularly stressed to Le Fustec that any investment must be flexible and capable of being unravelled easily. Le Fustec stated to him that Alternate would monitor the investments and if this showed any problems the investments could be unravelled without reference to Mr Investor 22. Mr Investor 22 did not fully understand how TIPPs worked, but he relied, importantly, on what Le Fustec told him.
321. On 13 May 2002 Le Fustec for Alternate wrote to Mr Investor 22 referring to a Rochford portfolio of TEPs. He told Mr Investor 22 that a lender would lend up to 65% of the surrender value of the with profit bond
"which means that we can take an income from the bond, an income from the TIPP and also enjoy capital growth from the TIPP as a result of the increased returns from gearing".
All these statements were misleading, not least because in them Alternate ignored the high risks of loss (just as much as of profit) as a result of the gearing. He enclosed a Rochford list of TEPs, of which the Court has seen only the first page referring to nineteen TEPs with a purchase price totalling £341,299, and a surrender value totalling £225,770, a difference of as much as £115,52l9. Mr Investor 22 evidence is that in the end thirty-four TEPs were bought for Investor 22, and he was unaware that this purchase was being made in part with loans from NBS of £324,601 and £247,484 (totalling £572,085). The Portfolio Cash Flow List (which it seems was not shown to Mr or Mrs Investor 22) showed
(i) an initial loan of £572,085;
(ii) an investment of the company's money of £540,000;
(iii) an assumed surrender value growth of 7% per annum;
(iv) a forecast maximum loan of £944,575;
(v) a forecast profit of £840,082;
(vi) a gearing ratio of 83.34%.
Thus the major part if not all of the existing value of the company's investments was put at risk by entry into this TIPP arrangement. Mr Investor 22, no doubt because of his age, was persuaded by Le Fustec (whom he entirely trusted) to give Le Fustec "an active role in its [the TIPP's] management without needing to revert in relation to every minor detail", by an agreement of 10 June 2002.
322. On 23 May 2002 Mr and Mrs Investor 22 signed an application form to NBS on the company's behalf: this disclosed to NBS no relevant information as to the company's or Mr and Mrs Investor 22's circumstances. They also signed an application form relating to a Clerical Medical Portfolio Bond on 23 May 2002, in which on the last page Le Fustec wrote that "This particular portfolio is main source of income". This was seriously misleading to Mr and Mrs Investor 22, because much of any such "income" would simply be additional borrowing from NBS which was at serious risk of not being covered by any sufficient increase in the value of the TEPs. An agreement for a loan of £701,041 by the company from NBS was signed by Mr and Mrs Investor 22 in July 2002.
323. The written statements by Alternate to Mr and Mrs Investor 22 are pleaded in paragraph 271 of the Order of Justice, and the respects in which such statements were false or misleading or both in paragraph 275 of the Order of Justice. The Court finds that such matters are correctly pleaded in the Order of Justice. The Court also finds that the oral statements by Le Fustec set out above were false and/or misleading as there set out.
324. The Court finds that the JFSC has proved the five matters which it needs to prove to establish its case on liability in relation to the company.
325. On the evidence before the Court NBS obtained no relevant information as to the company before agreeing to lend to it £701,041. The Court repeats paragraph 99 above.
Mrs Investor 23
326. Mrs Investor 23 was expected to give evidence in the trial between 30 October and 10 November 2006. As a result of the developments referred to in paragraph 25-27 above, her evidence could not then be heard, and she had to be off the Island on 20 November 2006 when she was due to give evidence. The Court ordered that her witness statement be admitted as evidence under the hearsay provisions.
327. In 2002 Mrs Investor 23 was aged 58. Her husband is now dead. She has two daughters. She has worked in many occupations, including as a secretary, shopkeeper and most recently running a nursery for small children. Until 2002 Harrison had advised her about investments. She was happy to use her capital to receive an income, provided that her capital was always safe. In the first half of 2002 Harrison told her that he would be bringing Le Fustec to explain something called "TIPP gearing". It appeared to her that Harrison did not understand it, and needed Le Fustec to explain it. Mrs Investor 23 describes this meeting as follows:
"11. Subsequently Mr Harrison and Mr Le Fustec came to my house. This was the only time I ever met Mr Le Fustec. He never asked me about my financial status. He did not ask me any questions about my income or my assets, but I assume that he had some idea about my financial situation from speaking to Mr Harrison.
12. Mr Le Fustec told me that the TIPP investment would cost me a certain amount of money now. It was my understanding that the money would be invested and that I would be repaid my capital at the end of the period plus a reasonable rate of interest. It was my understanding that the TIPP investment was basically the same as the other investments that I had taken out over the years. I was given the impression that there was no risk to the TIPP investment.
13. I said that I would do the TIPP investment so long as it did not cost me any money. I said that I would not mind much if I did not make any money but that I was unwilling to lose any money. I knew that a Prudential bond of some type would be paid into the TIPP investment. Mr Le Fustec mentioned that the Prudential bond was some sort of security, but I did not really understand how this aspect worked.
14. I was not told that there was any borrowing or any loan involved. This was not explained to me at all. I did not understand the meaning of the term 'gearing'. To be honest, I do not really understand today what the term 'gearing' means in this context."
Mrs Investor 23's description of the meeting shows that she was gravely mislead about the TIPP she was being advised to invest in, because
(i) she was given the impression that there was no risk;
(ii) she was not told about the loan aspect which was not explained to her;
(iii) the "gearing" of the TIPP was not explained to her;
(iv) it was not explained that the TIPP investment was different in kind, and risk, from her previous investments.
328. On 6 March 2002 Rochford sent to Alternate contract notes for the purchase of TEPs by Mrs Investor 23, for which the purchase price totalled £78,973 and the surrender value only £52,425. The commission to be received by Alternate totalled £2,345.76. The Court has not seen a Portfolio Cash Flow List for her TIPP, and if there was one, it is clear that it was not shown to Mrs Investor 23. On 16 May 2002 Le Fustec for Alternate sent to her a "reason why" letter in which he stated her "Investment Objectives" as: "Increasing your capital for retirement was your primary objective and you wished to do this in as low a manner as possible". The letter was in Alternate's standard form and contained misleading and/or false statements as already described by the Court above. Mrs Investor 23 states in relation to this letter:
"I did not really understand the letter, so I put it to one side and did not look at it again. I was more reliant on what Mr Le Fustec had said at the meeting than on what he set out in that letter."
It is the Court's understanding that in the meeting Le Fustec had dealt with Mrs Investor 23's purposes for her investment in the same way as set out in this subsequent letter, i.e. that the TIPP, as he assured her, would be as low risk as possible and would be designed nevertheless to increase her capital. That was equally misleading. Mrs Investor 23 states that she received documents from NBS which mentioned a loan
"but I had no need to borrow any money, so I was not at all concerned. I did not realise that I had any loan."
329. It appears from a letter dated 5 March 2004 from NBS to Alternate that by 1 February 2004 her loan account balance with NBS had risen to £89,988.98. By August 2005 it stood at £98,775.00: per the letter of 24 August 2005 to Mrs Investor 23 from Mr S Clayton of European Insurance Brokers Limited.
330. In the judgment of the Court the relevant statements on which JFSC can rely are:
(i) the oral statements by Le Fustec: see paragraphs 327 and 328 above;
(ii) the statement at the start of the "reason why" letter of 16 May 2002 as to Mrs Investor 23's "Investment Objectives" and the implicit assurance that the TIPP met those objectives: see paragraph 328 above.
These were false and/or misleading statements.
331. In the Court's judgment the JFSC has proved the five matters it needs to prove to establish its case on liability in relation to Mrs Investor 23. But it has done so only on the basis of the above statements, and the Court will be prepared to consider an application for leave to amend the Order of Justice, in so far as necessary. The Court observes also that by May 2002 the recklessness of Alternate in inducing Mrs Investor 23 to enter into the TIPP was plain, since no professional or responsible adviser could at that stage have advised a client such as her to embark on an investment so largely dependent on a large loan, at a time when the future values of TEPs were particularly uncertain.
The Court has seen no evidence that NBS made any enquiries as to Mrs Investor 23's circumstances. Paragraph 99 above is repeated, mutatis mutandis.
Mr and Mrs Investor 25
332. Mrs Investor 25 confirmed her witness statement on oath: she was not cross-examined. In 2002 she was aged 62 years and her husband 66 years. Mr Investor 25 died in January 2005, having suffered from many serious health problems, including a stroke in 1992 and other heart problems, and bowel cancer diagnosed in 2003. She has two grown-up children. From 1974 they ran the business of baker and confectioner, with two shops. Mr Investor 25 built up the wholesale business, and Mrs Investor 25 helped out in the shops. They sold the business in about 2000, retaining the Bath Street property which was let to the new owners of the business. Mrs Investor 25 then started to run a tearoom. Mrs Investor 25's description of her and her husband's attitude to investment is:
"My husband and I were very old-fashioned people in financial terms. We never went in for stocks and shares. I think my husband may have bought a few shares in BT at some stage, but that was an exception. Usually we put our money in the bank, and we bought property in connection with the business. We took out some life insurance policies, and we had some 'with profit' bonds with /Scottish Widows and Royal & Sun Alliance. We were comfortable, provided that we were careful with our money. We did not like to take risks."
333. Clark of Alternate apparently had looked after Mr and Mrs Investor 25's investments. It appears that he first advised them to invest in a TIPP shortly before 17 December 2001 at what Mrs Investor 25 describes as the first of two meetings. It also appears that it was at this meeting that Clark filled in a confidential client questionnaire which they signed. Mrs Investor 25 describes the first meeting in this way:
"As far as I recall, we had two meetings with Mr Clark in connection with the TIPP investment. The first meeting was when Mr Clark came to our house to put the TIPP deal to us. It was in the evening in January, and it was dark. I remember him sitting there. He said that we could use our existing bonds to make further investments. He explained that the deal would be for a certain number of years. I remember clearly that the TIPP deal was presented to us as a very low risk investment. I remember that Mr Clark was very optimistic. He said that we would have a large sum of money when the policies matured. I remember him mentioning the sum of £500,000. He emphasised that the TIPP investment was not at all risky. I understood that the investment involved a loan, but Mr Clark [said] that the loan would be offset against the endowment policies and that everything would be safe. As far as I recall, Mr Clark did not discuss any investments or proposals other than the TIPP deal."
The Court finds that at this meeting Clark for Alternate made these false and/or misleading statements:
(i) the TIPP was "a very low risk investment", though in reality it was a high risk investment;
(ii) they would "have a large sum of money when the policies matured" and "the sum of £500,000" was mentioned: this ignored the risk that they might make a substantial loss;
(iii) "the TIPP investment was not at all risky";
(iv) "the loan would be offset against the endowment policies and that everything would be safe".
The Court notes in this connection paragraphs 14 and 15 of Mrs Investor 25's statement in which she stated:
"14. My husband and I would never have agreed to a high-risk investment. There was no way we would have taken out anything that could result in us losing money. We were not that type of people.
15. It has become clear to me that [my husband] and I did not understand the TIPP investment properly. With hindsight, I can see that not everything was explained to us at the time. However, we entered into the investment because we trusted Mr Clark. We thought that he had our best interests at heart."
334. The Court has seen a portfolio cash flow sheet dated 17 December 2001, but that represents an investment which in the event was not proceeded with.
335. On 16 January 2002 Clark for Alternate sent a "reason why" letter to Mr and Mrs Investor 25 in the Alternate standard form similar to those considered by the Court above. It contained similar statements which were false or misleading or both. As regards Mr and Mrs Investor 25's approach to investment Clark stated: "Security of capital was mentioned as a major consideration". However, Mrs Investor 25 states that she does not recall having seen this letter before.
336. On 19 March 2002 Rochford sent contract notes for Mr and Mrs Investor 25 to purchase a number of TEPs. On 19 March 2002, it appears another meeting with Clark took place. This appears not to be the second meeting described by Mrs Investor 25, but a further one. On that day Clark for Alternate wrote to them, referring to the meeting that day, and confirming their instructions to go ahead with a TIPP on a slightly different basis from the one proposed in January 2002. Clark referred, it appears, to a portfolio cash flow list of the same day (19 March 2002), which showed:
(i) an investment by [Mr and Mrs Investor 25] of £153,832;
(ii) an initial loan of £243,789 to fund investment;
(iii) an assumed surrender value growth of 7% per annum;
(iv) a forecast maximum bank balance of £277,715;
(v) a forecast profit of £133,659;
(vi) a gearing ratio of 81.40%.
The schedule of TEPs to be purchased showed a total purchase price of £243,789 as contrasted with a total surrender value of £180,811. Mr and Mrs Investor 25 signed a form of loan application to NBS on 16 April 2002: this gave NBS no relevant information about their financial circumstances. The loan agreement was sent by NBS to Alternate on 16 May 2002 for signing by Mr and Mrs Investor 25, and they signed it on 22 May 2002. This appears likely to have been the occasion referred to by Mrs Investor 25 as "the second meeting" and described by her as follows:
"The second meeting with Mr Clark in connection with the TIPP deal was when he came back to our house for us to sign the paperwork. As far as I can recall, we signed the documents without reading them. We trusted Mr Clark to handle things for us. I recall that Mr Clark gave us copies of some documents, and he told us to keep them in a safe place."
The loan agreement was for a loan of £266,131.
337. Mr and Mrs Investor 25 had a house in Germany, which was sold after he died, and Mrs Investor 25 was left with £125,000 to invest. This entire sum had to be paid to NBS to reduce the loan.
338. In the judgment of the Court the relevant statements on which the JFSC can rely are the oral statements by Clark for Alternate set out in paragraph 333 above, but not the written statements in the "reason why" letter which Mrs Investor 25 does not recall. The Court finds that the JFSC has proved the five matters it needs to prove to establish its case on liability in relation to Mr and Mrs Investor 25, and repeats (mutatis mutandis) its observations in paragraph 331 above.
339. The Court has seen no evidence that NBS made any relevant enquiries as to Mr and Mrs Investor 25's financial circumstances before agreeing to the loan of so large a sum as £266,131. The Court repeats (mutatis mutandis) paragraph 99 above.
Mr and Mrs Investor 26
340. Mr Investor 26 was too unwell to give evidence orally at the trial, and on 24 October 2006 the Court ordered that his witness statement be received in evidence at the trial.
341. In 2002 Mr Investor 26 was aged 72 years and his wife 68 years. Mr Investor 26 has been self-employed for many years as an electrician, decorator and gardener. They own their home unencumbered. Mr Investor 26 described their investment experiences before 2002 as follows:
"7. In the early 1980's we received financial advice to put some money in an investment with Royal Sun. I am unable to recall the name of the financial advisor or the firm that gave us this advice. The investment related to the stock market and it was badly hit in the crash of 1987. As a result we lost £30,000. I did not understand the nature of the investment and believe it may have been high risk. This experience made us both want to minimise risks when investing our money.
8. In 1993 we purchased the property in which we currently live. We were not able to sell our previous property ("J L") at the time. Thus it [was] necessary for us to arrange a short-term bridging loan. The process turned out to be an unpleasant experience for my wife and I as the financial adviser we employed subsequently was declared bankrupt. We considered ourselves very lucky to have extracted our money from the financial adviser before he went bankrupt. We were therefore very wary of such people.
9. Following the sale of J L in 1997, we held approximately £100,000 that we wanted to invest. After receiving the £100,000 I was talking to a fellow member of the Jehovah's Witnesses about the difficulties that we had previously experienced in obtaining sound financial advice. He suggested that we try Mr Le Fustec who is also a Jehovah's Witness. I thought that this was a good idea and made contact with Mr Le Fustec.
10. Mr Le Fustec came to visit us at home. I explained the problems we had faced with our previous adviser and the previous loss of £30,000 in the 1980s. I told him that we had a lump sum of £100,000 which we wanted to invest in something safe.
11. At the time I was about 65 years of age and did not have any other substantial investments apart from our house. I was earning money and was not planning to retire. I was not concerned about obtaining a high rate of interest. I simply wanted financial security. It was also important to be able to access the money at any time if, for whatever reason, it was needed."
By two letters dated 15 January and 18 April 1997 Le Fustec advised Mr and Mrs Investor 26 as to the purchase of investments in a Clerical Medical with profits fund and a Scottish Mutual with profits bond. It appears that the concerns due to the bad experience which Mr and Mrs Investor 26 had had as regards investing and investment advisers were made known to Le Fustec.
342. In early 2002 Le Fustec phoned them and asked to visit them "because he wanted to explain how we could do better with our money". This meeting and two further meetings with Le Fustec for Alternate are described by Mr Investor 26 in this way:
"14. At the appointment Mr Le Fustec told us about traded endowment policies which I understand are known as TIPPs. He was rattling off a lot of information which I was unable to follow. I felt that he used a lot of financial jargon that was difficult to understand. In particular, I recall Mr Le Fustec mentioning terms such as collateral and gearing. My wife and I did not understand these expressions.
15. I asked Mr Le Fustec whether we would be able to draw on our money under his proposed investment because I wanted to make sure that we could freely obtain access. This was very important to me. He told us that it was possible. As a result I was not concerned that the policies were not due to mature for a number of years. I remember Mr Le Fustec mentioning anticipated levels of profit to us, which seemed to be very good.
16. I do not specifically recall discussing the level of risk with Mr Le Fustec. I felt sure that he would not have raised TIPP investments unless they were low risk. I say this because he was fully aware of our attitude towards this issue. We were cautious investors. I believed it was a safe investment and had potential to make a little bit more money than the existing arrangements. We only acted due to the recommendation of Mr Le Fustec and had no independent desire to change matters from how they stood.
17. At the time I was approximately 72 years old and my wife was around 68 years old. We did not have any substantial assets apart from our home and the two policies purchased through Mr Le Fustec. We had cash in the region of £15,000 in a bank account, but neither of us had a pension policy. I was earning in the region of £1,000 per month which was sufficient to meet our living expenses.
18. My wife was not interested in financial matters which meant that the ultimate decision rested with me. I believe we had approximately three meetings with Mr Le Fustec before committing to the investment. At the first meeting Mr Le Fustec proposed that we take out 10 year policies. Given my age this seemed ridiculous. At the second meeting he proposed the five year policy which we currently own. At the third meeting we signed up to the investment. I am unable to recall providing Mr Le Fustec with financial information during any of these meetings. I trusted Mr Le Fustec to give us sensible advice in view of our age, circumstances and attitude towards risk."
343. On 20 February 2002 Le Fustec for Alternate sent a "reason why" letter concerning a TIPP investment. He stated their objective as follows:
"Utilising the notional surrender value of £117,753 from your existing Scottish Mutual With Profits Bond and Clerical Medical Guaranteed Growth Fund you wish to maximise your investment returns in order to provide additional capital to ameliorate your standard of living in retirement. Security of capital was a major consideration."
The rest of the letter was in Alternate's standard form containing similar false and/or misleading statements as already described above. Mr Investor 26 in his witness statement does not, however, refer to this letter.
344. On 1 March 2002 Rochford sent contract notes for Mr and Mrs Investor 26 to purchase TEPs. On 4 March 2002 Le Fustec completed a confidential client questionnaire which Mr and Mrs Investor 26 signed. Mr Investor 26 does not accept that the list of financial objectives was correctly filled in. On the same day Le Fustec for Alternate signed a receipt for their Clerical Medical and Scottish Mutual bonds which were to be used as security for the TIPP loan. Also on the same day Le Fustec sent a "reason why" letter in the same terms as the earlier letter of 20 February 2002, except that the figures on page 4 are different. It contained the same statement of their objective (see paragraph 343 above), and contained the same misleading and/or false statements. Mr Investor 26 states as follows in respect of this letter:
"I believe that I may well have looked at the letter at the time. It mentions the level of risk involved, which I always understood was very low. I also understood that we would be able to access the money. I accept that the letter refers to a loan, however I did not realise that the investment involved taking out a loan until this was explained to me by a representative of Orbital. If Mr Le Fustec had mentioned any type of loan in relation to this investment, we would not have entered into it. The only other loan that I had ever received was the States loan that we used to purchase our first house.
345. The portfolio cash flow list dated 26 February 2002, which it appears was not seen by Mr Investor 26 showed:
(i) an initial loan of £171,489;
(ii) an assumed surrender value growth rate of 7% per annum;
(iii) an estimated maximum bank balance of £250,837;
(iv) a forecast profit of £118,022;
(v) a gearing ratio of 80.04%.
The Court observes that, as in almost all of these cases, the potential size of the maximum loan was entirely out of keeping with the asset base of the investors. To subject Mr and Mrs Investor 26 with their small assets to a potential loan of over £250,000 was unwise in the extreme. The TEPs had maturity dates in 2007 and 2008 when Mr Investor 26 would be 77 or 78. The ability to draw income could only be achieved by borrowing more. It is also noteworthy that the price of the TEPs was £171,489, while their surrender value was only £127,545. To put this elderly couple into so large and high risk an arrangement was, in the judgment of the Court, wholly unreasonable and irresponsible. Mr and Mrs Investor 26 signed a loan agreement with NBS on 21 March 2002 for a total loan of £194,182.
346. By March 2005 the TIPP was proving an unfortunate investment. On 17 March 2005 Le Fustec, then at Orbital Insurance Brokers Limited, wrote to Mr and Mrs Investor 26. In this letter he referred to difficulty in selling TEPs in these terms:
"The traded endowment market has been difficult over the last few years as a result of low demand, over-supply and falling surrender values and bonus rates. However surrender values are starting to rise and some Life offices are again adding bonuses as a result of a modest recovery in the equity markets. Therefore interest in this type of investment is slowly recovering."
The Court understands that Le Fustec was right in stating that the TEP market had been "difficult over the last few years", and certainly in 2002. So the statements in the "reason why" letters about unravelling the TIPP were for this reason both false and seriously misleading.
347. In the judgment of the Court the statements made to Mr and Mrs Investor 26 included those pleaded in paragraph 127 of the Order of Justice, which were false or misleading or both in the respects pleaded in paragraph 131 of the Order of Justice. The Court finds that the JFSC has proved the five matters which it needs to prove to establish its case on liability in respect of Mr and Mrs Investor 26. The Court has already noted the unreasonableness and irresponsibility in the making by Alternate of those statements. As to the loan from NBS, the Court repeats (mutatis mutandis) paragraph 99 above.
Mr Investor 27
348. Mr Investor 27 gave evidence in chief both in writing and orally and was cross-examined. In June 2002 he was aged 63. He had had a quadruple heart by-pass operation in about 1996. He was married with three children including one then aged 10 years. He had lived in Jersey since 1957. For many years he owned and managed a restaurant in St Helier, from which he retired in about 1998. By mid-2002 he had saved £50,000 which was in a bank deposit account with a low rate of interest. A friend introduced him to Mr Cronin of Alternate, having discussed between themselves the purchase of second-hand endowment policies as a form of investment.
349. He met Cronin at his friend's restaurant. Cronin was employed by Alternate, but he was not fully qualified and could not complete the paperwork involved in the purchase of policies by customers of Alternate. Mr Investor 27's aim was to buy second-hand endowment policies through Cronin. He had not used the abbreviation "TEPs", but it is convenient to continue to use this. This first meeting with Cronin is described by Mr Investor 27 as follows:
"7. On the same day or possibly the day after I met Mr Cronin at my friend's restaurant, I explained that I had £50,000 and was interested in purchasing traded endowment policies. I told him that I expected another £50,000 to be available for an additional investment in the near future. Mr Cronin said that a traded endowment policy was a good investment and that it should achieve a very high rate of return. I wanted the money to be guaranteed as there was no way that I was prepared to risk the £50,000. Mr Cronin assured me there was no chance that I could lose the money. He told me that it can't go wrong.
8. I explained to Mr Cronin that the money could only be invested for 5 or 6 years at most because I did not want anything to be left outstanding by the time I reached 70 years of age. I wanted to relax and enjoy my retirement. He explained that if I invested all of the £50,000 for this period of time it would be likely to make a total return of around £78,000 to £80,000 including the original sum. This seemed like a good profit. Mr Cronin did not explain anything about the investment or how it worked. He did not say that there was any chance it could make a loss on the original £50,000. If he had suggested this was a possibility I would not have invested my money. I would describe myself as a very low risk investor. Mr Cronin was highly recommended to me and I trusted him without reservation. I did not think he was placing my money at risk.
9. I agreed to purchase around four traded endowment policies with various maturity dates between four and six years later."
In cross-examination Mr Investor 27 emphasised that the first thing he said to Cronin was that his capital must be safe. He was prepared to invest for 5 - 6 years, and thereafter wanted to be clear of worries.
350. It appears that this first meeting was in about the middle of June 2002. There must have been a second meeting on 27 June 2002, because on that date Mr Investor 27 signed copies of contract notes from Rochford (bearing the same date, and apparently faxed to Alternate that day) for the purchase of TEPs. Mr Investor 27 described the second meeting as follows:
"I believe that it was around one week after our initial meeting that Mr Cronin visited me for a second time at the restaurant. We had a cup of coffee and he presented me with a number of documents which we both signed. I did not examine the documents in any detail or ask any questions as I had complete trust in Mr Cronin. I made out a cheque for £50,000 in the name of Rochford Policies. I did not understand their role in the investment but, again, for the reasons I have explained, did not ask any questions."
At the same meeting, it appears, Mr Investor 27 signed other documents, including a Regulated Introducer Certificate on a form of NBS concerned with the Money Laundering Regulations. On this form it was stated that Mr Investor 27 had been "known to Alternate 25 years", which was untrue. Mr Investor 27 was cross-examined about this document. He accepted that he had signed it without reading it and entirely trusting Cronin, and that he had been stupid to do so and was embarrassed to have done this.
351. Mr Investor 27's evidence was that he had not appreciated that a loan from NBS was involved, and that if he had known this, he would not have gone forward with the TIPP. In his witness statement he stated:
"10. I believed that most of the £50,000 would be used to buy the policies and that the balance would be used to pay the ongoing premiums. At no time did Mr Cronin tell me that the investment involved taking out a loan. If Mr Cronin had explained this to me then I would not have agreed to go ahead. I would have told him that if the investment required more money he should wait until the next sum of £50,000 was available or change the plan so that it worked without a loan. I have never borrowed money in the course of my business activities except when buying out my partner's share around 1986. I do not feel comfortable borrowing money."
On the same day (27 June 2002) Mr Investor 27 also signed an application to NBS for a loan and other documents. The Court concludes that at the time Mr Investor 27 did appreciate that some form of loan was involved, but that this had made little impression on his mind, and so he soon forgot this. The same applies to his signature of a loan agreement with NBS for £77,001 in August 2002.
352. On the next day (28 June 2002) a confidential client questionnaire on Alternate's standard form was completed by Cronin, dated that day, and signed by Mr Investor 27. In his evidence Mr Investor 27 denied having been asked the questions, answers to which were set out in the questionnaire. He also observed that a number of the recorded answers were incorrect. He accepted that he had signed the form, but denied having read it in any detail, and said that he had signed on the basis of trusting Cronin implicitly. He said that he did not know of its contents until he prepared his witness statement, and then saw it.
353. A portfolio cash flow list dated 20 June 2002 was on Alternate's file, but appears not to have been shown to Mr Investor 27. This list indicated:
(i) an investment by [Mr Investor 27] of his £50,000;
(ii) an initial loan of £63,215;
(iii) an assumed surrender value growth rate of 7% per annum;
(iv) a forecast maximum bank balance of £113,373;
(v) a forecast profit of £53,777;
(vi) a gearing ratio of 82.99%.
The schedule of TEPs shows a purchase price of £113,215, as contrasted with a surrender value of £83,981. A copy of a "reason why" letter dated 27 September 2002 written by Le Fustec for Alternate to Mr Investor 27 was in evidence. The copy was not signed. Mr Investor 27's evidence was that he did not recall having received the letter at all, and had not read it until he was preparing his witness statement. He never met Le Fustec and did not know him. The letter was addressed to him by his first name, and referred to "our recent meeting" and to reviewing "our discussion". Mr Investor 27 in cross-examination stated that there had been no such "recent" meeting, no meeting with Le Fustec, and that he had met only Cronin from Alternate. The Court concludes that the letter was not sent to Mr Investor 27. In any event the JFSC cannot rely on this letter for any statements it contained.
354. Mr Investor 27's evidence was that Cronin did not explain to him that if the loan increased faster than the value of the TEPs there would be a loss on the investment. He added that
"Mr Cronin did not explain the concept of "gearing". I still do not know what this term means. It would be fair to say that I had very little understanding about the mechanics of the investment."
355. As regards the statements made orally by Cronin to Mr Investor 27, the following were false and/or misleading:
(i) that a TIPP "should achieve a very high rate of return": this was seriously misleading, because Cronin failed to draw attention to the high risk which naturally included the risk of substantial loss;
(ii) that "there was no chance that I could lose the money", i.e. his £50,000: because of the obvious risk of loss, this was also seriously misleading, and false;
(iii) that "it can't go wrong": this was equally false and misleading;
(iv) that [Mr Investor 27's] capital would be safe, which was similarly misleading;
(v) Cronin's failure adequately to explain the loan as an essential part of the TIPP.
356. In the judgment of the Court the JFSC has proved the five matters which it needs to prove to establish the liability of Alternate in relation to Mr Investor 27. The Court emphasises that the JFSC cannot rely on the "reason why" letter, and will be prepared to consider an application for leave to amend the Order of Justice.
357. On the evidence the Court has seen, NBS obtained no information relating to Mr Investor 27's financial position. The Court repeats paragraph 99 above.
358. As in the case of the other investors induced to invest in TIPPs from March 2002 onwards, the Court also emphasises the unreasonableness of Alternate in putting these investors into TIPPs without drawing attention to the declines in surrender values, and fully explaining the risks involved in a TIPP at this period.
Mr Investor 28
359. Mr Investor 28 confirmed on oath his witness statement: he was not cross-examined. In July 2002 he was aged 44, married with a stepson and a young daughter. He had sold shares in his company and wished to invest £70,000 in a low risk capital growth vehicle. NatWest Bank advised him to invest in the with profit fund of the Prudential Prudence Bond for a five year term. He had known Clark since about 1999, and Le Fustec since about 1997, and had taken out some savings plans with Le Fustec.
360. He met Clark for Alternate on 30 June 2002. A confidential client questionnaire on Alternate's standard form was prepared by Clark and dated 30 June 2002, but this was not shown to Mr Investor 28. Mr Investor 28 described the meeting as follows:
"I said that I wanted to invest £70,000 in a low-risk capital growth vehicle. I said that my feelings towards new investments was generally cautious and that I was unwilling to take any significant risks with my capital.
Mr Clark recommended something called a traded endowment policy ("TEP") scheme. A copy of his letter of 1 July 2002 explaining this recommendation appears at pages 18 to 21. It was my understanding that the TEP scheme was a low risk investment. It was also my understanding that the TEP scheme was flexible and that I could unravel the investment to take my money out if I wished to do so.
I knew that the investment involved a loan with the Bank of Ireland. However Mr Clark advised me that I would not be required to make payments towards the loan. I believe the loan was for about £120,000.
Having considered Mr Clark's advice, it seemed to me that the TEP scheme matched my financial objectives of low-risk capital growth. Therefore I decided to go ahead with Mr Clark's recommendation instead of NatWest's proposal."
It appears from this evidence that Clark told him that
(i) the TIPP would not involve "any significant risks" with his capital, and was "a low risk investment";
(ii) the TIPP would be "flexible" and he "could unravel the investment" to take his money out if he wished to do so;
(iii) he "would not be required to make payments towards the loan".
Each of these statements was seriously misleading.
361. The letter of 1 July 2002 from Clark for Alternate was a "reason why" letter. Clark confirmed that Mr Investor 28 wished "to invest £70,000 into a low risk capital growth vehicle" (our underlining). The rest of the letter was in Alternate's standard form, and contained several false and/or misleading statements as previously considered in this judgment. The letter contained no reference to the high risks involved, or to the adverse experience of other investors by that date, or to the declines in the equity markets and in the market for TEPs.
362. On 8 July and again on 10 July 2002 Clark wrote to Mr Investor 28 confirming instructions to proceed with Policy Plus (instead of Rochford: this is the only instance involving Policy Plus). Clark confirmed that his £70,000 together with a loan from BoI would purchase policies to the value of £188,640. The schedule of TEPs which the Court has seen shows a purchase price of £188,640, but a surrender value of £145,936. In referring to the purchase price as the "value", and without explaining the relation between price and surrender value, Clark for Alternate mislead Mr Investor 28.
363. On 10 July 2002 Policy Plus sent contract notes for each of the TEPs to be bought by Mr Investor 28. On 15 July 2002 he signed an application for a loan to BoI, which appears to have provided BoI with no relevant information about his finances. An offer letter was sent by BoI dated 29 July 2002 in respect of an initial loan of £120,018.15, with a provision enabling BoI to call for money or additional policies as security if the loan were to be projected to exceed 90% of the surrender value. It is assumed that Mr Investor 28 signed this, as he did the mortgage of life policies and other BoI documents.
364. On 13 November 2002 BoI wrote to Mr Investor 28 requiring payment of at least £8,000 or deposit of policies with a surrender value of not less than £11,000, because the loan represented 91.15% of the current surrender value. Following a meeting between Clark and Mr Investor 28, Clark wrote on 17 December 2002 making a number of statements which showed how Clark had previously mislead Mr Investor 28:
"(i) As you are now aware, because the Stock Markets continue to under-perform, Life companies' profits and surrender values have reduced." This should have been explained in July 2002.
(ii) He should not consider selling any of the TEPs as he "would not get a good price for it". Again this was contrary to what he had been told in July 2002.
(iii) BoI "can only use the surrender value, as it is the only known value of a policy today". But in July 2002 Clark had used the much higher purchase price as the "value" when writing to him.
Clark tried to persuade him to buy another with profits bond as additional security for the loan. He declined, and paid £15,000 against the loan in February 2003. In June 2003 BoI wrote again as the loan exceeded the 90% limit, and Mr Investor 28 had to mortgage a Scottish Widows Plan to BoI. In August 2004 he wished to withdraw £50,000 to pay for a business venture. Clark for Alternate told him that the portfolio was not designed for such withdrawals, and he should keep all his money in the TIPP until final maturity. This also was contrary to what he had been told by Clark in July 2002.
365. The statements made in writing by Alternate to induce Mr Investor 28 to enter into the TIPP investment include those made in the "reason why" letter of 1 July 2002 and pleaded in paragraph 61 of the Order of Justice. Those statements were misleading or false or both in (inter alia) the respects pleaded in paragraph 64 of the Order of Justice. There were further misleading statements made by Clark for Alternate orally: see paragraph 360 above (and see also paragraph 364).
366. In the judgment of the Court the JFSC has proved the five matters which it needs to prove to establish the liability of Alternate in relation to Mr Investor 28. The Court adds only this observation, that in the light of the problems already being met by others of the investors by July 2002, and of the problems in the equity and TEP markets during the first half of 2002, for Alternate to present the TIPP investment to Mr Investor 28 in the way Clark did was entirely unreasonable and irresponsible, and plainly reckless. To represent a high-risk investment with existing known problems as a low-risk one was unacceptable conduct.
367. On the evidence before it, BoI does not appear to have obtained any evidence as to the financial circumstances of Mr Investor 28. The Court repeats paragraph 99 above.
Mr Investor 8 (Second TIPP)
368. Matters relating to Mr Investor 8 and his first TIPP investment are set out above in paragraphs 176 to 182, and are not repeated.
369. Probably in early November 2002 Mr Investor 8 asked Le Fustec whether it was possible to enter into another TIPP. He did so, relying on what Le Fustec had told him at the time when he was considering entering into his first TIPP. He describes their meeting in this way:
"I met Mr Le Fustec who explained that I could make another TIPP investment without providing any additional money. He explained that I could use the Prudential bond and the Scottish Mutual bond as security. I recall Mr Le Fustec mentioning the Newcastle Building Society as being reliable. I understood that the Newcastle Building Society were dealing with the new TIPP. I did not appreciate however that this involved me taking out a loan with the Newcastle Building Society. Until recently, I had believed that the new TIPP would be funded through the original TIPP. I do not know why I was under this impression but understood that it would not be necessary for me to contribute any further money."
He also states that:
"I am not a gambler. If I had ever thought the money was at risk I would not have invested in TIPPs. I had earned the money the hard way and merely wanted to provide as best I could for my retirement. I trusted Mr Le Fustec who told me it was low risk and I believed him."
370. On 13 November 2002 Rochford sent to Mr Investor 8 c/o Alternate contract notes for the purchase of TEPs. The schedule of policies sent by Rochford to Alternate on the same day showed a surrender value for the policies of £12,818 and a purchase price of £17,239. The portfolio cash flow list dated the same day (which it appears was not shown to Mr Investor 8) included:
(i) An initial loan of £17,239;
(ii) an assumed surrender value growth rate of 7%;
(iii) a forecast maximum bank balance of £23,678;
(iv) a forecast profit of £11,910;
(v) a gearing ratio of 83.53%.
371. NBS sent documentation for Mr Investor 8 to sign on 11 December 2002. He signed an NBS loan agreement on 16 December 2002 in respect of a loan of £19,286.
372. On 21 March 2003 Le Fustec for Alternate sent a "reason why" letter to Mr Investor 8 in the standard form which the Court has considered above, containing the false and/or misleading statements already described. The letter was sent so long after the TIPP was entered into that Mr Investor 8 could not have relied on it for that purpose, if indeed he had read it which is unclear. What is, however, of importance is the reference to his "Investment Objectives" which were stated to be:
"Increasing your capital for retirement was your primary objective and you wished to do this in as [a] low risk a manner as possible."
It is plain, therefore, that Mr Investor 8 had impressed this requirement on Le Fustec, and had been assured by Le Fustec that the TIPP would meet the requirement.
373. For Alternate to represent to Mr Investor 8 in November/December 2002 that the TIPP was a means of investing "in as low risk a manner as possible" was unreasonable, and thoroughly reckless. By that time Le Fustec and Clark acting for Alternate knew that
(i) others of the investors were in difficulties because their loans (especially those from BoI) had exceeded the limit of 90% of the surrender value of the TEPs;
(ii) surrender values were falling and had been falling for some time: thus in a letter of 10 June 2003 to Mr Investor 28, BoI had stated:
"Most Life Companies have significantly reduced the surrender value of their endowment policies over the past 12 to 18 months. For example, Standard Life reduced the surrender value of most of their policies by around 30% since October 2002."
(iii) The equity markets had fallen sharply;
(iv) Investment uncertainty had made it difficult to sell TEPs, as Alternate's experience with others of the investors who wished or needed to sell had shown.
On the evidence before the Court, it seems clear that in any event no small investor such as Mr Investor 8 should have been advised to enter a TIPP at the end of 2002.
374. In the judgment of the Court Mr Investor 8 was induced to enter into this second TIPP by Alternate, by
(i) the statements made to induce him to enter into his first TIPP (see paragraphs 176 to 182 above) which included the false and/or misleading statements there referred to;
(ii) the statement that the second TIPP was a low risk investment: see paragraphs 369 and 372 above.
375. The JFSC has proved the five matters which it needs to prove to establish its case on liability in relation to Mr Investor 8 and his second TIPP:
(i) Mr Investor 8 entered into a transaction with Alternate by which Alternate undertook to make all the required arrangements for the second TIPP, in return for substantial commission which Alternate received from Rochford;
(ii) Mr Investor 8 was induced to enter into this transaction as a result of the statements made by Le Fustec for Alternate;
(iii) those statements included statements which were false or misleading or both as set out above;
(iv) the false or misleading statements were made by Le Fustec for Alternate recklessly, because Le Fustec was well aware that there were risks involved in the second TIPP, but chose to present those risks to Mr Investor 8 as being low risks when as a professional he ought to have presented them as being in reality high risks (and by December 2002 very high risks), and did so entirely unreasonably.
(v) Those statements were made by Le Fustec for Alternate for the purpose of inducing Mr Investor 8 to enter into the second TIPP.
It appears that NBS did not obtain relevant information as to Mr Investor 8's circumstances, or if NBS did obtain such information, NBS failed to take account of that information.
Summary on Liability
376. The Court's conclusions on liability can be summarised as follows:
(i) The necessary conditions are satisfied and proved by the evidence adduced by the JFSC for the making of an order under Article 26(2) in relation to all of the investors and all the TIPPs, with the exception of Mr Investor 2 and the two TIPPs into which he entered.
(ii) Subject to this exception, the JFSC has proved that Alternate through Clark, Le Fustec, Cronin and Harrison entered into transactions with the investors, who were induced by statements made on Alternate's behalf which were made for the purpose of inducing the investors to enter into TIPPs, which were false or misleading or both, and which were made recklessly by those persons on Alternate's behalf and for which Alternate was paid substantial commissions.
(iii) The fundamental points on recklessness are that those persons were well aware that TIPPs involved risks for the investors, but unreasonably and unprofessionally chose to represent those risks, not as the high risks which were clearly involved in the borrowing of large sums to buy speculative investments, but as "low" or "very low risks" which would not endanger the capital resources of the investors.
(iv) The degree of recklessness on the part of Clark and Le Fustec in particular was serious, and it may be fortunate for them that no case based on dishonesty has been brought by the JFSC. But on the case as brought by the JFSC alleging recklessness short of dishonesty, the Court concludes that Clark and Le Fustec knew that the TIPPs involved investment risks for their clients because of the substantial loans used to pay for the TIPPs, but chose to represent these risks as being low or very low risks (though any competent and responsible investment adviser would have advised that the risks were high). Such misstatements of the level of risk were entirely unreasonable and involved a high degree of recklessness on the part of investment advisers in Jersey. The Court accepts the evidence of Mr Trevor Gray in this respect, as in all other respects.
(v) In his opening address to the Court on behalf of the Defendants Mr Robertson indicated that one line of defence would have been that Clark and Le Fustec had studied brochures of TEP sellers such as Rochford and Policy Plus, and had had detailed discussions with representatives of such TEP sellers. The Court cannot express any formal view about this, because it has not heard the Defendants' evidence. But as a guide for the future it wishes to give this cautionary note. The TEP sellers were engaged in seeking to persuade Alternate (and other financial advisers like Alternate) to increase the TEP sellers' market by in turn advising clients to buy from the TEP sellers. Marketing statements, whether written or oral, are no substitute for seeking out and studying an independent and expert assessment of the realities of the market in TIPPs, a step which, it appears, no one in Alternate took.
Relief
377. The Court has already considered the interpretation of Article 26(2) in paragraphs 47 to 52 above, and concluded that it has power to order Alternate to pay money to each of the investors (except Mr Investor 2) to restore them to their previous financial position. To do this, account must be taken of the value (if any) obtained by an investor from the TEPs which they were persuaded by Alternate to buy. Account of this value could be taken by ordering Alternate to pay an appropriate sum to the investor, and by ordering the investor to pay to Alternate the value of the TEPs. But our view is that that would anyway ultimately result in a set-off of the amounts ordered either way, and that a more appropriate process is for the Court simply to reduce the amount to be paid by Alternate by the value of the TEPs in so far as still held by the investor. As Mr Hoy has submitted, in any event Alternate is without means to pay whatever it may be ordered to pay and may be insolvent, and therefore this process is in the present case clearly appropriate.
378. The investors fall into three categories:
(i) Category 1 Those who have paid off the loan but retained the TEPs and any other collateral - Mr and Mrs Investor 3 and Mrs Investor 16.
(ii) Category 2 Those whose TIPPs have matured or who have surrendered the TEPs - Mr and Mrs Investor 4, Mr and Mrs Investor 1, Mr Investor 6, Mr Investor 9 and Mr and Mrs Investor 21.
(iii) Category 3 Those for whom their TIPPs remain active, because not all of the TEPs have matured or been surrendered - all those investors not in the other two categories (excluding Mr Investor 2).
One question of principle needs to be considered at the outset. For the purpose of assessing the value of TEPs still held by an investor (but mortgaged to a lender), Mr Hoy submits that the up-to-date surrender value of a TEP is the correct value to be taken into account. In his opening address Mr Robertson submitted that market values should be taken. He relied on the fact that market values may be and often are higher than surrender values. An example of this could be seen in the disparity between surrender values and the prices which investors had to pay to buy the TEPs. The Court has drawn attention to this disparity in considering many of the thirty TIPPs above.
379. The Court's conclusion is that Mr Hoy's submission is right and more appropriate in the present case. In his evidence Mr Trevor Gray explained how a market price might be arrived at (see paragraph 59 above) with a mark-up of 20% above surrender value. Most of these elements of the mark-up do not represent extra value to the investor selling the TEP. Not all TEPs are capable of being sold, or of being sold within a reasonable period. There are examples of this in a number of the cases the Court has considered. Market prices are subject to movements up and down according to market sentiment. We conclude that the value which the life company places on the TEP for purposes of surrender is more appropriate, less subject to the vagaries of the market place, and anyway excludes those elements which, as Mr Trevor Gray pointed out, do not realistically represent value to a selling investor.
Category 1
380. For those investors who have paid off their loans and retain TEPs and other collateral, the method of calculation which the JFSC submits as being the correct method is as follows. On the one hand the value still available to the investor is taken as the surrender value of the TEPs they hold, plus any surplus in their loan account. On the other hand there are taken the payments made by the investor, including any original payment made when the TIPP was entered into, plus any sums paid to maintain the continuance of the loan, and also any sums paid in respect of premiums on the TEPs. Taking the case of Mr and Mrs Investor 3 as an example (as the JFSC has done):
|
(i) the surrender value of the TEPs they hold is at 16 November 2006
|
£36,096.00 |
|
(ii) the credit balance in their loan account (this takes account of the proceeds of 2 TEPs - which matured in 2006 - paid into the loan account) is |
£ 6,827.67 |
|
(iii) the total positive value is |
£42,923.67 |
|
(iv) minus the payments they made, both the original payment and later payments into the loan account |
£41,564.00 |
|
(v) minus the payments of TEPs premiums they made is |
£21,320.00 |
|
(vi) the total negative amount is |
£62,884.00 |
|
(vii) so the amount required to put them back into their former position (subject always to interest) is |
£19,960.33 |
|
(viii) the JFSC then ask for statutory interest on the sums paid by Mr and Mrs Investor 3 from the various dates of payment, amounting to |
£14,433.28 |
|
(ix) so the total claimed by the JFSC in respect of Mr and Mrs Investor 3 is |
£34,393.61 |
If the original collateral assigned to the lender was or included policies already held by the investor, these are excluded from the calculation, because the investor already had this investment before entering into the TIPP.
381. Subject to one point, the Court concludes that the calculations by the JFSC are correct in Category 1. The point of exception is that the JFSC should give credit for the amounts of the share allocation by Standard Life by reference to TEPs bought by the investors. This has made necessary some adjustments to the JFSC's figures. The totals ordered in respect of Mr and Mrs Investor 3 and Mrs Investor 16 are set out below.
Category 2
382. These investors have TIPPs which have fully matured or the investors have surrendered the TEPs to pay back the loans. Taking the case of Mr and Mrs Investor 1 as an example:
|
(i) the money received by them from the loan account after all the TEPs matured or were surrendered amounts to |
£21,336.05 |
|
(ii) minus the payments made by them including their original payment to set up the TIPP and a sum obtained by the surrender of a TEP |
£51,886.29 |
|
(iii) the net amount to be paid by Alternate is |
£30,550.24 |
|
(iv) JFSC ask for statutory interest on the sums paid by Mr and Mrs Investor 1 |
£ 3,875.13 |
|
(v) So the total claimed by the JFSC is |
£34,425.37 |
383. As stated above, where the original collateral included policies already held by the investor, these are excluded from the calculation, as for Category 1.
384. Subject to the point about Standard Life share allocations, the Court concludes that the calculations on this basis are correct for the investors in Category 2. The totals ordered are set out below.
Category 3
385. This concerns all the other investors (except Mr Investor 2), whose TIPPs remain active. Taking the case of Mr and Mrs Investor 12 as an example:
(i) the surrender value of their TEPs at 16 November 2006 is |
£66,211.53 |
|
(ii) minus the sums paid by Mr and Mrs Investor 12 during 2006 |
£52,998.70 |
|
(iii) minus the amount outstanding on their loan account |
£50,971.454 |
|
(iv) plus value received from the Standard Life share allocation |
£ 1,949.400 |
|
(v) the amount required to restore their former position is |
£35,909.22 |
|
(vi) the JFSC claim statutory interest on the sums paid from the dates of payment |
£1,011.62 |
|
(vii) the total claimed by the JFSC in respect of Mr and Mrs Investor 12 |
£36,820.83 |
386. In other cases within this category, the investors have also paid premiums on the policies, and the amount so paid is included in the calculations, as well as statutory interest on such sums from the dates of payment.
387. Where policies or other investments held before the TIPP was entered into were used as collateral for the loans, the values of these investments have been excluded from the calculations, as in Categories 1 and 2.
388. Where in this Category some of the TEPs have matured or been surrendered, then if the money obtained has gone to pay part of the loan such TEPs are not included separately in the calculations, because their value has been taken into account as a reduction in the loan. Otherwise they would appear in the calculation as a specific item. The point relating to Standard Life share allocations applies in this Category also.
389. The totals ordered in respect of all the investors in Category 3 are set out below.
Amounts to be paid by Alternate
390. The amounts which the Court orders to be paid by Alternate in respect of each investor (except Investor 2) and the totals are as follows:
|
Name |
Restoration Amount |
Statutory Interest |
Total |
|
Mr and Mrs Investor 3 |
19,960.33 |
14,433.26 |
34,393.61 |
|
Mr and Mrs Investor 4 |
31,036.42 |
13,381.04 |
44,417.46 |
|
Mr and Mrs Investor 12 |
35,809.22 |
1,011.61 |
36,820.83 |
|
Mr and Mrs Investor 22's company |
308,283,08 |
NIL |
308,283.08 |
|
Mr and Mrs Investor 1 |
30,550.24 |
3,875.13 |
34,425.37 |
|
Mr Investor 27 |
52,958.81 |
10,556.76 |
63,515.57 |
|
Mrs Investor 11 |
74,178.36 |
NIL |
74,178.36 |
|
Mr and Mrs Investor 19 |
26,224.76 |
440.84 |
26,665.60 |
|
Mrs Investor 16 |
21,665.17 |
4,182,66 |
25,847.83 |
|
Mr Investor 15 |
24,385.58 |
NIL |
24,385.58 |
|
Mr and Mrs Investor 18 |
12,112.25 |
NIL |
12,112.25 |
|
Mr Investor 24 |
21,862.80 |
NIL |
21,862.80 |
|
Mr Investor 8 (First TIPP) |
4,666.22 |
NIL |
4,666.22 |
|
Mr Investor 8 (Second TIPP) |
5,396.48 |
4,773.52 |
10,170,00 |
|
Mr and Mrs Investor 25 |
88.056.95 |
12,877.48 |
100,934.43 |
|
Mr Investor 6 |
123,161.00 |
32,889.29 |
156,050.29 |
|
Mr Investor 9 |
20,000.00 |
5,231.03 |
25,231.03 |
|
Mr Investor 28 |
57,423.77 |
22,490.35 |
79,914.13 |
|
Mr and Mrs Investor 26 |
82,110.28 |
2,292.64 |
84,402.92 |
|
Mr Investor 20 |
25,033.77 |
NIL |
25,033.77 |
|
Mr and Mrs Investor 17 |
9,028.53 |
2,851.63 |
11,880.16 |
|
Mr Investor 13 |
12,007.09 |
1,558.21 |
13,565.30 |
|
Mr and Mrs Investor 14 |
39,551.95 |
4,522,90 |
44,074.85 |
|
Mrs Investor 23 |
44,191.91 |
NIL |
44,191.91 |
|
Mr and Mrs Investor 5 |
180,888.87 |
3,019.78 |
183,908.65 |
|
Mr Investor 10 |
39,208.78 |
5,601.75 |
44,810.53 |
|
Mr and Mrs Investor 21 |
4,106.61 |
4,971.89 |
9,078.50 |
|
Mr Investor 7 |
24,008.85 |
11,983.99 |
35,984.84 |
|
Totals |
1,417,868.08 |
146,260.48 |
1,564,128.56 |
Accordingly the Court orders Alternate to pay to JFSC the total sum of £1,564,128.56.
Conditions
391. The issue as to conditions will be a matter to be considered at the delivery of this judgment, if JFSC wish to pursue this.
Further Observations
392. The Court wishes to make some further observations on matters arising out of this action, which strictly go outside the issues which the Court has to decide. This is done in an effort to assist those involved directly or indirectly in these issues for the future.
The Jersey Financial Services Commission
393. In the course of the hearing the Court expressed concerns regarding the regulation of financial advisers operating in Jersey. Alternate was registered in Class D, i.e. as an advisory only business which could not handle clients' assets. Initially the Investment Business (Jersey) Law 1998 provided for regulation by the JFSC. This law was re-named the Financial Services (Jersey) Law 1998 in 2001, with some re-numbering of the Articles to allow for the introduction of provisions for the regulation of trust company business. Codes of Practice were issued on 1 March 1999 and were updated in March 2001. Relevant provisions in the Code relating to such Class D persons do not require such persons to have two or more principal persons who hold the minimum investment qualifications. Rather, in pursuance of the "Four Eyes" principle, they require a Class D licence holder to have at least two principal persons who "are able to demonstrate a balance of appropriate qualifications, skills and experience. These need not all be qualifications from the Codes of Practice, but must recognise the needs of the business". Paragraph 3.4 of the Code sets out the minimum examination requirements expected of investment employees, and the Court notes that it is there stated that further qualifications would be required by any investment employee advising in the specialised area of "long-term insurance products". The Court has not seen any document showing what such further qualifications might be.
394. There was a transitional period to give those who practised in this area a reasonable period of time to meet the new minimum standards required by the 1998 Law and the Codes. Applicants who applied to be registered persons under Article 7 by 1 July 1999 were allowed to continue carrying on their businesses until the JFSC granted or refused their application. During this transitional period some of the Code requirements for financial advisers, including the examination requirements in paragraph 3.4, did not need to be met until 31 December 2000.
395. Alternate applied for a Class D Licence on 17 June 1999, and this was granted on 13 August 2001 on the basis of Clark, Le Fustec and Cronin being Alternate's principal persons. Le Fustec had passed the Financial Planning Certificate ("FPC") of the Chartered Insurance Institute in 1994 and worked in the insurance sector for over 20 years. Clark had worked in financial services as an independent financial adviser for over 20 years, and had passed 2 out of the 3 stages of the FPC by 13 August 2001. The Court is concerned to note that the position as regards Cronin is as follows. Alternate applied to the JFSC on 6 April 2000 on the footing that Cronin would be a "principal person" of Alternate. The JFSC replied by letter of 7 June 2000 stating that it did not object to Cronin being a principal person of Alternate, but as Cronin would "not hold a major shareholding or be appointed a Director", the JFSC required a signed declaration from Cronin confirming that he was a principal person and shared responsibility for the direction of Alternate. It appears that Cronin may not have signed any such declaration. The Court does not know the position as regards further qualifications for those who in advising on TIPPs were advising on "long-term insurance products".
396. The JFSC made on-site spot checks at Alternate on 14 December 1999, 9 April 2002 and 26 March 2003. It appears that on the second and third of these visits the files relating to TIPPs were not examined. This is by no means surprising since only 28 clients of Alternate were advised, wrongly, to invest in TIPPs, out of a client base of around 1,000 clients. The Court, however, repeats in relation to Mr and Mrs Investor 14 the point raised in paragraph 231 above, because there may be other investments advised on by Alternate which called for investigation.
397. One problem for the JFSC is that the principal persons of Alternate did seem to understand the risks involved in a single purchase of a Life company policy or bond. But they completely failed to explain to their clients the nature of the high risks where any investing by an investor of small or modest means, whether in property or TIPPs, or other investments, is either based wholly or substantially on borrowed money, or involves the whole or a large proportion of the investor's available money, or both.
398. It is not for this Court to engage in criticism of the working of the JFSC. But the Court does recommend that a full review is now made as a matter of some urgency, so as to learn as many lessons as possible from what has gone wrong in this regrettable affair. This recommendation is made because it is not acceptable that unsophisticated, small investors in Jersey can be so badly advised in relation to their small resources, and then find, as might be the case here, that they have no redress. The question of redress is one to which the Court will return below.
399. Before any such review can be concluded, there is one aspect on which the regulation of Alternate can be seen to have failed. The Court has been told that Alternate's insurers have treated the insurance policy as void on the ground of late notification of claims, or more likely of events which might give rise to claims.
400. In the view of this Court it would be simply unacceptable if persons operating in Jersey financial services were not to be insured to a sufficient amount of cover under terms which are firmly binding on the insurers, are recognised by the insurers to be binding, and cannot be treated as void whether for late notification or any other ground. Since that appears to be the case in relation to Alternate, it may be the case with other licensed entities and individuals. Paragraph 5.4 of the Code requires insurance, but does not cover the above points. The JFSC should consider with even more urgency what can be done to ensure that all those whom it regulates are fully insured in every respect.
401. An alternative would be to establish a mutual scheme for insurance, such as some professions in England and Wales and elsewhere have long established. But that would take some years to establish successfully.
The States of Jersey
402. If it be the case that Alternate is not insured, so that the sums ordered by the Court to be paid cannot be recovered from Alternate's insurers, then the question might be asked why the States have not yet exercised the power given to them by Article 27 of the 1998 Law to establish by Regulations a suitable Compensation Scheme or Schemes: see paragraph 6 above. In the absence of any effective system for ensuring that persons registered under the 1998 Law are firmly insured with adequate cover, that question becomes the more pertinent. The investors would be entitled to ask that question, because in the absence of insurance of Alternate, they would be left without redress, and the States might consider that the circumstances of the investors, including Mrs Investor 11 and Mr and Mrs Investor 4 and others, require redress, a point to which we will return below.
403. For the future, however, the Court recommends that the issue, whether a compensation scheme or schemes should be established, should now be addressed. We emphasise that for investors such as these to be left without compensation would not redound to the good reputation of Jersey and its investment community.
The Financial Services (Jersey) Law 1998
404. In the course of the hearing the Court expressed some concerns about the drafting of the 1998 Law. The main points are these:
(i) Under Article 26(2) the JFSC is empowered to act on behalf of investors only if there is dishonesty or non-dishonest recklessness. But it is in cases involving negligence or failure to meet appropriate professional standards that there is likely to be the greatest need for the JFSC to be able to act on behalf of investors. Both may result in investors losing much of their money. But neither is covered by Articles 26(2) or 30. If, as here, the investors for the most part have little money and are unsophisticated investors, they are likely to be unable to bring legal proceedings themselves through lack of money or other resources. It may be thought that this is a loophole which needs to be closed.
(ii) The Court has dealt above with the arguments about the interpretation of Article 26(2), especially as regards the meaning of "transaction", the circumstances in which relief can be given, and what form of relief. It would be difficult to find a set of provisions so opaquely drafted, and so little adapted to the particular circumstances of this Island. Merely to copy an English statute is not the best way to legislate in Jersey where the circumstances are materially different.
(iii) Article 24(2) seems to cover much of the ground covered by Article 26(2), but the 1998 Law gives no clue as to how these provisions interconnect. The Court appreciates the reluctance of the JFSC to put all their eggs in the Article 24(2) basket. But it might have been thought appropriate for the JFSC to proceed under both Articles. This is another example of a statutory provision the purpose of which is wholly opaque.
Bank of Ireland, Newcastle Building Society and Royal Bank of Scotland International
405. It is, the Court understands, a fundamental element in good practice of banks and building societies to "know the customer"; particularly when a bank or a building society is asked not by the prospective customer, but by an intermediary, to lend a large sum of money (or one which may be large for the prospective customer) to a prospective customer about whom the bank or the building society have no previous knowledge or experience. The Court emphasises again, as it did in paragraph 99 above and elsewhere, that BoI, NBS and RBSI are not parties to this action, and the Court probably has not seen all the documents passing between them and the investors. The documents which the Court has seen appear to indicate these banks and building society agreed to lend large sums to these investors with virtually no knowledge whatever of the circumstances of the investors.
406. If the banks and the building society failed to secure adequate knowledge of these new customers, their conduct is open to criticism. In this regard the Court is concerned about an apparent pattern of dealing which involved
either (i) Not obtaining any detailed information about their new customers at all
or (ii) Where information was sought and obtained (as for example some was in the case of Mr and Mrs Investor 5) not obtaining sufficient information to enable the bank or building society to judge whether the loan transaction was appropriate for the bank or building society itself to enter into, or whether it was an improvident and unacceptable borrowing by the new customer.
If on the other hand the banks and the building society did obtain full information about any of the investors' financial circumstances, the Court is unable to understand how the loans to those investors could have been made.
407. We take one example. BoI seems to have had a TEP Office in London devoted entirely to lending money for TIPP transactions such as those involved in this action. On what the Court has seen it was normal practice when an intermediary such as Alternate, together with a TEP provider such as Rochford, approached the TEP Office for a new transaction, simply to send out standard form documentation, to receive it back signed by the new customer and then to open a loan account and lend the money asked for. We have not seen any indication that the TEP Office of BoI ever asked any of the questions which in ordinary good banking practice would be asked before a bank would agree to grant a substantial loan. NBS's practice seems not to have been materially different, and similarly with RBSI, though there are fewer transactions involving that bank.
408. The context in which the Court raises these matters includes the following:
(i) if the investors' ordinary banks had been asked to make the loans, it is probable that they would have refused and would have pointed out to their clients the improvident nature of the TIPP investments; it was because their ordinary banks were by-passed, and BOI or NBS or RBSI's Guernsey branch were introduced, that the TIPP investments were enabled to go forward;
(ii) if, contrary to the impression which the Court has gained, BoI or NBS or RBSI did ascertain sufficient information about the investors as their new customers, it appears that they did not do what the investors' existing banks would probably have done (see (i) above);
(iii) BoI, NBS and RBSI were lending money to residents in Jersey, and such activity involving Jersey residents needs to be regulated, either by the JFSC because Jersey residents are involved, or by the FSA in the United Kingdom, or by the Irish regulator; any financial service provider which trades into Jersey from outside must be regulated in respect of that trade either where its centre of business is or by the JFSC. The Court has seen no indication of any activity by any regulator in respect of the loans to these investors. If there has been no such activity, then this seems to be a "black hole" which needs to be filled;
(iv) the Court understands that each of BoI, RBSI and NBS carry on business in this Island either themselves or through a subsidiary. The Court recognises that in this section it has raised a number of issues concerning BoI, NBS and RBSI, which will be for the JFSC to take forward in relation to these investors and for the future.
Making good the investors' losses
409. If Alternate's insurers do not pay the amount of this judgment, and cannot be compelled to pay, the question will then be raised as to how the investors' losses are to be made good. To this Court it seems inconceivable that investors such as Mrs Investor 11, Mr and Mrs Investor 4 and the others should be left uncompensated for their serious losses, because that would show that small investors in Jersey were wholly unprotected against the consequences of reckless investment advice by registered investment advisers regulated by the JFSC. The Court recommends that in those circumstances (though preferably in the immediate future) a fund be established to make good those losses, and that all involved (the States, the JFSC and the lenders - BoI, RBSI and NBS) contribute so as to ensure that such fund is adequate for the purpose. Such fund could be the precursor to the compensation scheme or schemes to be established to cover investors in the future: see paragraphs 402-403 above.
