Anderson & Ors v Sense Network Ltd

The claim arose from a long-running Ponzi-style deposit scheme run by Alistair Greig and Midas Financial Solutions (Scotland) Limited (MFSS) while MFSS was an appointed representative of Sense Network Ltd. The court applied statutory and common-law principles governing appointed representatives (FSMA s.39 and the Appointed Representatives Regulations), the definition of a collective investment scheme (FSMA s.235), the supervisory duties in the Handbook (SUP 12), and common-law concepts of actual and apparent authority and vicarious liability.

The judge found (i) the underlying scheme was a criminal Ponzi scheme and, on a proper reading of FSMA s.235, fell within the statutory definition of a collective investment scheme; (ii) however, Sense had not accepted responsibility for the deposit-taking scheme under s.39 because the authorised scope in the Appointed Representative Agreement was confined (notably by the requirement to use a Company Agency) and did not authorise accepting or holding client money or operating the scheme; (iii) claims based on actual or apparent authority failed because there was no representation by Sense that advisers were authorised to run the deposit scheme; (iv) the claimant’s argument that Sense’s knowledge should be fixed by attribution of the knowledge of MFSS’s internal T&C supervisor (Mr Ingram) failed because SUP 12 is directed at the firm’s management and the statutory attribution required by policy did not justify imputing an employee-of-the-AR’s knowledge to the principal; (v) vicarious liability did not arise because MFSS and its advisers were recognisably independent businesses and the commission of the wrongdoing was not a risk created by Sense assigning activities to them; and (vi) Sense’s monitoring and investigative steps (file reviews via I/O, audits and bank reconciliations) were not shown to be so deficient that they breached SUP 12 or that any deficiency caused the losses. The claim was dismissed.

This first-instance Commercial Court judgment concerned 95 retail claimants who lost money in a short-term deposit scheme run by Mr Alistair Greig and MFSS. MFSS had been an appointed representative of Sense Network Ltd between 2007 and 2014. The claimants sought to recover losses from Sense by a number of routes:

• statutory liability under FSMA s.39 based on the contention that the scheme was a collective investment scheme (CIS) within s.235;
• common-law liability based on advisers' actual or apparent authority;
• breach of supervisory duties under the Handbook (SUP 12), including attribution to Sense of the knowledge of MFSS’s Training & Competence (T&C) Supervisor, Mr Ingram;
• vicarious liability for torts of MFSS advisers; and
• breaches of supervisory duties for inadequate monitoring and failure to investigate warning signs (notably information from Accord Mortgages and conduct of particular advisers).

The court framed and decided the main issues as follows:

• Whether the scheme fell within the statutory definition of a CIS (FSMA s.235). Applying the Supreme Court’s approach in FCA v Asset Land, the judge concluded the scheme did fall within s.235: the arrangements (broadly understood) involved pooling/management of money and participants receiving returns.
• Whether Sense had accepted responsibility under FSMA s.39 for the business in question. The court emphasised that the scope of what the principal accepted must be read against the written AR agreement and contractual limitations (notably the Company Agency requirement and express prohibition on handling client money). The judge held the scheme lay outside the business for which Sense had accepted responsibility under the ARA, and s.39 did not therefore make Sense liable for the scheme.
• Whether the claimants could establish actual or apparent authority. The court found no basis to treat MFSS advisers as having been authorised by Sense to accept or hold client money or operate the scheme, and the routine footer/status wording did not found a representation sufficient for apparent authority.
• Whether Mr Ingram’s knowledge should be attributed to Sense for the purposes of SUP 12. The court applied the modern attribution approach (Meridian/Bilta) and held that SUP 12 is directed to the firm’s management and to duties assessed by reference to the principal’s reasonable-care obligations; it was not appropriate to fashion an attribution rule that fixed the principal with the knowledge of an AR employee in the absence of wholesale delegation to that person.
• Whether Sense was vicariously liable. The court applied the modern tests (Cox and subsequent authorities) and concluded MFSS and its advisers were recognisably independent and that Sense had not created the risk by assigning activities in a way that would give rise to vicarious liability.
• Whether Sense breached SUP 12 by inadequate monitoring or by failures properly to investigate particular matters (Accord Mortgages, Knowles). The court accepted Sense’s account of its compliance architecture (I/O file reviews, remote reviews, audit and bank reconciliations) and, on the facts, concluded Sense’s supervisory controls and the investigations carried out were not shown to be so deficient as to cause the claimants’ losses; even had some additional steps been taken, the court considered it unlikely the carefully concealed scheme would have been revealed earlier.

The court therefore dismissed the claim. The judgment includes detailed findings on witnesses, expert evidence on supervisory practice, and discussion of causation and contributory negligence (the court holding that contributory negligence did not justify reduction of damages, but that point was academic because liability failed).

The claim is dismissed. The court held that although MFSS’s activities comprised a Ponzi/deposit scheme that could be characterised as a collective investment scheme under FSMA s.235, Sense had not accepted responsibility for that business under FSMA s.39 because the Appointed Representative Agreement confined the scope of responsibility (notably by requiring use of Company Agencies and prohibiting handling client money). Claims based on actual or apparent authority failed, attribution of MFSS employee knowledge to Sense for SUP 12 purposes was inappropriate on the facts and policy, vicarious liability did not arise because MFSS was a recognisably independent business, and Sense’s supervisory systems (I/O file reviews, audits, bank reconciliations and investigations) were not shown to have been so defective that they caused the claimants’ losses.