UK High Court Finds London Capital & Finance Plc to be a Ponzi Scheme

The U.K. High Court has handed down judgement in the civil case of London Capital & Finance Plc (in administration) and others v Michael Andrew Thomson and others [2024] EWHC 2894 (Ch). London Capital & Finance was an investment firm regulated by the Financial Conduct Authority. It was also registered as an ISA manager with HM Revenue and Customs. LCF collapsed into administration in 2019, resulting in losses of around £237 million to around 11,500 mostly retail investors. LCF and its administrators brought a civil claim against those responsible for running and administering LCF's business, alleging (among other things) that: (i) representations made to LCF bondholders regarding LCF's activities were false; (ii) the defendants misappropriated sums of over £136 million from LCF and/or associated companies; and (iii) LCF was operated as a Ponzi scheme and as a result, the defendants were knowingly party to fraudulent trading and should be liable to compensate the claimants for their losses.

The court found for that: (i) LCF had made misrepresentations which amounted to fraudulent conduct of business; (ii) there had been fraudulent misappropriation of LCF's assets; and (iii) LCF had been operated fraudulently as a Ponzi scheme. As a result, the defendants were liable to LCF for knowing participation in the fraudulent conduct of LCF's business and LCF and its administrators had established equitable proprietary claims against certain of the defendants. A subsequent hearing will be held to decide the level of compensation payable by the defendants.

LCF was one of the largest scandals in financial services in recent years, triggering an independent review into the U.K. regulators' oversight of the firm led by Dame Elizabeth Gloster. The Gloster report found there to have been regulatory failures, prompting numerous reforms, including to the U.K.'s financial promotions regime and the scheme for the regulation of non-transferable bonds and other illiquid securities. The Financial Services Compensation Scheme compensated around 25% of investors. Following a judicial review case, in which the FSCS's decision not to compensate the remainder of investors was upheld, the previous government enacted the Compensation (London Capital & Finance plc and Fraud Compensation Fund) Act 2021, which compensated the remaining LCF investors for the majority of their losses in exchange for a subrogation of investors' rights in the administration. As a result, the FSCS will be the main beneficiary of any damages paid out by the perpetrators as a result of the High Court's judgement. A&O Shearman (and Shearman & Sterling prior to the merger) represented a group of representative investors on a pro bono basis in relation to all these processes.

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