On 27 September 2024, Mr Justice Foxton ("Foxton J") gave judgment in 4VVV Ltd & Ors v Spence & Ors [2024] EWHC 2434 (Comm). He found in favour of ten lead claimants in claims arising from the collapse of a multi-year fraudulent property investment scheme.
The successful claims were for deceit and unlawful means conspiracy. The claimants also obtained a declaration that certain investments were unenforceable under s.26 of the Financial Services and Markets Act 2000 (“FSMA”) on the basis that they constituted unauthorised collective investment schemes.
The judgment, which runs to 171 pages, considers a panoply of practical issues relating to witness evidence and disclosure that litigants must consider when approaching complicated disputes involving fraud.
Background
Between 2012 and 2019, a group of companies ("Alpha Group") controlled by Mr Nicholas Spence and Mr Derek Kewley (together, "Alpha Defendants") operated a property investment scheme focused on North Devon holiday properties and student accommodation across England and Wales. The premise was that investors would buy one or more units in a site in return for fixed returns over a fixed period.
The scheme was unsustainable. As Foxton J put it: "properties were sold off the back of unsustainable rent guarantees, which were paid using reservation fees and sale proceeds for further properties sold of the back of unsustainable rent guarantees, until the inevitable point when the plates stopped spinning". It was also deceptive. It attracted prospective investors using fraudulent representations, including that: (i) investors would receive a promised return; (ii) promised benefits were realistically capable of delivery; (iii) companies involved had proven track records; (iv) promised returns were underwritten and/or asset backed and therefore secure; and (v) promised returns would be paid without any effort or involvement on the part of the investors (together, the "Representations"). It was shown at trial that many of the Representations were fraudulent and authorised by Mr Kewley and Mr Spence in the knowledge that this was the case.
The claims
Deceit
Successful claimants in deceit claims are entitled to recover all losses directly flowing from the deceit, whether or not reasonably foreseeable. This will include consequential losses. However, the claimant but must also give credit for any gains they have made as a result of the relevant transaction(s). Rescission may also be sought, and was sought in this case.
Deceit claims therefore offer a more favourable damages regime than contract or tortious claims. However, deceit claims are typically difficult to prove. In this case, each lead claimant had to prove that: (i) the Representations had been received and relied upon at the point of investment; (ii) the Representations were false; (iii) that Mr Kewley and Mr Spence believed that the Representations were false; and (iv) that Mr Kewley and Mr Spence intended the Representations to induce investment. The lead claimants satisfied these thresholds through extensive analysis of two holiday and 14 student accommodation sites.
Unlawful means conspiracy
An unlawful means conspiracy is actionable where "the claimant proves that he has suffered loss or damage as a result of unlawful action taken pursuant to a combination or agreement between the defendant and another person or persons to injure him by unlawful means, whether or not it is the predominant purpose of the defendant to do so". Foxton J was satisfied that Mr Spence and Mr Kewley were party to a series of unlawful means conspiracies to cause loss to investors by inducing them to enter into disadvantageous investments through dishonest statements.
Collective Investment Schemes
Foxton J also concluded that the scheme operated by the Alpha Defendants was a 'Collective Investment Scheme' for the purposes of s.235 of FSMA.
Collective Investment Schemes may only be operated by authorised or exempt persons. The Alpha Defendants were neither authorised nor exempt, and accordingly had breached the general prohibition in s.19(1) of FSMA by operating such a scheme. This meant that the claimants could recover money or property transferred to the scheme, and also seek compensation for any losses arising from their investments.
Certain recoveries were made on units in Ilfracombe, but as loss was recoverable in deceit (a more generous measure for the claimants) little consideration was given to the FSMA remedies.
Evidence
The judgment sets out a painstaking analysis of the Alpha Defendants' operations, the Representations, and the claimants' investments, down to Mr Spence's multiple "Blimey" reactions to adverse news.
Witness evidence
The Court heard evidence from all of the lead claimants. Foxton J held that, notwithstanding strong feelings about unfortunate investment experiences, the claimant evidence was honest and reliable in the face of sensitive and objective cross examination, on which Foxton J commended the Alpha Defendants' Counsel.
Oral evidence was heard from four defendant witnesses, including Mr Kewley, who was subjected to "gruelling cross-examination", and whom Foxton J considered showed "no signs of having a moral compass". Mr Spence, on the other hand, did not give oral evidence despite giving the impression that he would do so up to and during the first 12 days of trial. Mr Spence was involved in all of the projects, and his state of mind was important to determining deceit. No explanation was offered for his failure to give evidence, and documents revealed numerous instances where Mr Spence had misled others.
In these circumstances, Foxton J was content to draw adverse inferences from Mr Spence's failure to attend trial. He also placed greater weight on documentary evidence than Mr Spence's written evidence. In doing so, Foxton J followed Lord Leggatt (in Efobi v Royal Mail Group Ltd [2021] UKSC 33 at [41]) in moving away from "overly legal and technical" criteria, and towards making a judgment premised on "ordinary rationality", context, and circumstances.
Foxton J, however, could not draw adverse inferences against Mr Kewley as a result of Mr Spence's absence. As Mr Kewley had attended and given evidence under cross examination, no such inferences could be drawn against him.
Foxton J's comments on witness evidence shows the importance of maintaining witness credibility. A judge's impression of character may influence the outcome of the case; as is apparent from his adverse findings, Foxton J did not hold the Alpha Defendants in high regard.
Documentary evidence
The scale of the disclosure and investigations undertaken by the claimants in order to reconstruct events was significant. The claimants also tried to exploit apparent deficiencies in the Alpha Defendants' disclosure, and their approach thereto, to persuade the court to draw further adverse inferences against the Alpha Defendants.
The Alpha Defendants gave eight tranches of disclosure over the course of the proceedings. These disclosures continued into trial, a fact the claimants sought to use to attack the Alpha Defendants' entire disclosure process. Foxton J agreed that this piecemeal approach to disclosure had had practical impacts on the proceedings, especially at trial. However, he was satisfied that the issues resulted from administrative or technical issues, rather than any personal fault on the part of Mr Kewley or Mr Spence.
While supplemental disclosure can be inevitable and acceptable (disclosure is an ongoing obligation on parties to English litigation), parties should aim to complete their disclosure in one tranche by the deadline to avoid any impression that they wish to conceal documents or have not conducted a thorough investigation. While in this case Foxton J did not draw adverse inferences from these instances, a party's pressure on disclosure can have a material impact on the outcome of the matter.
The claimants also sought to draw adverse inferences and imply a deliberate suppression of disclosure by pointing to the absence of certain classes of documents. The claimants attempted to do so with respect to 'contemporaneous modelling' documents. However, it was held that there were no such documents and so their absence did not give rise to any inferences. Further, the lack of direct written communications between Mr Spence and Mr Kewley was not suggestive of "systematic pruning of material from disclosure" – enough of these sorts of documents, including a significant number of adverse documents, were disclosed to suggest otherwise.
The claimants pointed to an absence of internal records on actual rental and running costs, bank statements, and accounting information and invited the Court to draw adverse inferences. In these instances, Foxton J criticised the Alpha Defendants as no satisfactory explanations were offered, and inferred that the absence of such material reflected the fact the disclosure of such documents would have been unhelpful. More generally, Foxton J held that record keeping within the Alpha Group was very poor, which reflected the "chaotic" nature of the Alpha Group's management and a "very cavalier attitude to financial reporting".
Lessons for claimants in fraud proceedings
In hard fought, high value litigation, parties apply intense scrutiny to one others' disclosure. It is important that before and during proceedings parties preserve and collect documents and record the steps they take. This is especially important in cases involving parties in liquidation or administration, and for individuals who need to prove express reliance on specific documents. The absence of reasons why documents are not disclosed can influence outcomes, in terms of perceptions at a minimum.
Once disclosure has taken place, parties must then be prepared to trawl through and analyse reams of correspondence and company records to reconstruct events. Where individuals are involved, personal devices and communications may also need careful consideration. To satisfy the factual thresholds to make out the claims and provide a framework for witness evidence, establishing a chronology is essential. Parties may now resort to technology to assist with these tasks.
With respect to the lead claimants, Foxton J considered the promotional materials they received in conjunction with their witness evidence to assess reliance on Representations and in turn the Alpha Defendants' deceit. In group litigation document preservation and disclosure duties, as well as the need for measured and effective witness statements in what are trying and difficult circumstances, are no less important than in other claims. In this connection, Foxton J commented that it was "only with the formation of a committed action group, and considerable tenacity, that the scale of the Alpha Defendants' deceit has been laid bare".
As for the Alpha Defendants, communications and internal corporate records were interrogated to assess control and authority within the Alpha Group, as well as the state of mind of Mr Spence and Kewley.
Conclusion
The judgment shows that claimants can achieve redress from fraudulent investment schemes, as well as the individuals behind them (subject, of course, to appeals and enforcement). Doing so, however, inevitably takes significant time, resources, and dedication.