The Financial Conduct Authority (FCA) v Anderson & Ors

When directing distribution under section 382 of the Financial Services and Markets Act 2000, the court must consider the statutory purpose, the persons who qualify, and fairness. Where recoveries are substantially below losses, fairness may require a simple, rough-and-ready scheme. Out-of-pocket losses ordinarily take priority over lost expectations of profit. The court may maintain separate distribution pools for separate schemes where the schemes have distinct identities and personal guarantees, even though their transactions are connected. Proportionality justifies avoiding complex investigations or administration that would consume a disproportionate part of the available funds. A liberty to apply may preserve the ability to address later claims, duplication, calculation errors or changed circumstances, but applications should be made only where the likely benefit justifies the costs.

The FCA applied under section 382 of the Financial Services and Markets Act 2000 for directions concerning the distribution of sums recovered from three defendants who had operated interconnected Ponzi schemes. Earlier judgments had established that the defendants carried on regulated activities without authorisation and had assessed the sums payable by way of restitution. The available recoveries were considerably smaller than the losses claimed by depositors.

The court had to determine the qualifying class, the appropriate basis for calculating individual entitlements, whether the recoveries should be pooled, and how to address possible future claims, duplication and errors.

1. Application granted in principle. The court exercised its discretion under section 382(3) of the Financial Services and Markets Act 2000 by reference to three non-exhaustive considerations: the statutory purpose of the payment, whether proposed recipients were qualifying persons, and whether the distribution was fair.
2. Under section 382(8), a qualifying person may include someone who benefited from the contravention or someone who suffered loss because of it. In circumstances of an enormous shortfall, however, out-of-pocket losses were more deserving of compensation than expectation losses. The distribution class was therefore limited to persons who had suffered actual loss.
3. Perfect compensation was impracticable because the schemes involved short-term contracts, repeated reinvestment, incomplete reconstruction of interest payments and uncertain bankruptcy recoveries. A simple scheme based on recorded capital loss, less interest received, with recoveries scaled down pro rata, was fair enough in the circumstances. Attempting greater precision would risk disproportionate expense and further unfairness.
4. The sums recovered from each defendant were to be allocated to depositors in that defendant’s scheme rather than pooled. The court began by respecting the separate identity of the schemes. Although two schemes fed into the third, each defendant had given personal guarantees to depositors and there was no practical difficulty requiring pooling. Re BCCI (No 3), [1993] BCLC 106, was treated as an exceptional analogy concerning hopelessly intertwined affairs, but the present facts did not justify that course.
5. The scheme included liberty to apply for late claims, calculation errors, duplication or changed circumstances. The court emphasised finality and proportionality. Applications should ordinarily be dismissed where delay lacked cogent justification or where the likely benefit did not justify the costs.

The judgment describes earlier decisions in the same proceedings. On 25 March 2010, Lewison J gave summary judgment, [2010] EWHC 599 (Ch), finding that the defendants had carried on a regulated activity without authorisation or exemption. On 29 June 2010, Vos J assessed the restitution sums, [2010] EWHC 1547 (Ch). The present first-instance application concerned directions for distribution of the sums recovered.