4VVV Ltd & Ors v Nicholas Spence & Ors

This judgment determines first-instance liability and common issues in a large commercial fraud and mis-selling case arising from the sale of holiday and student accommodation investments. The court applied the ordinary elements of the tort of deceit (false representation; knowledge or recklessness as to falsity; intention to induce; reliance; and loss) and considered the effect of provisions of the Financial Services and Markets Act 2000 (notably s.235 and s.26) on the enforceability of contracts said to implement unauthorised collective investment schemes.

Key legal findings and grounds:

• Marketing representations were classified and adjudicated (principally the Substance Representation that promised returns were realistically capable of delivery; Asset-Backed and Modified Track Record representations; and an erroneous Buy‑Back description). Many of those brochure statements were found untrue.
• The court found that Mr Spence and Mr Kewley authorised and intended EPL to use the brochures and associated marketing; the two men (and associated Alpha Group companies) knowingly or recklessly made dishonest representations and intended them to induce investors, who did rely on them.
• The Alpha Defendants could not establish a reasonable belief that their schemes did not constitute unauthorised collective investment schemes. The court held that many of the arrangements met the s.235 definition of a collective investment scheme, and that affected agreements were unenforceable under s.26 FSMA 2000 in the relevant respects; accordingly s.28(3) relief (permitting enforcement despite illegality) was refused.
• The Claimants proved deceit and unlawful‑means conspiracy in relation to the transactions in issue. Remedies awarded included rescission for some Ilfracombe purchasers (subject to counter‑restitution), damages for deceit measured principally by the difference between purchase price and the property value determined by the court, and statutory restitution under s.26 FSMA 2000 in the alternative.
• The court directed further valuation calculations applying a Discounted Cash Flow methodology with specified corrections and detailed findings about appropriate yields and inputs; some issues (including certain consequential and tracing enquiries, and effects on third‑party freehold successors) were reserved to consequential hearings.

Background and parties: The action was brought by 435 investor claimants (this phase addressing common issues and the claims of ten Lead Claimants) against a group of companies and two principal individuals, Mr Nicholas Spence and Mr Derek Kewley (the Alpha Defendants). The investors allege deceit, unlawful means conspiracy and that certain investments were unauthorised collective investment schemes in breach of FSMA 2000. Remedies sought included damages for deceit, rescission of contracts, declarations that relevant investment contracts were unenforceable under s.26 FSMA 2000 and consequential recovery.

Procedure and evidence: The trial proceeded in phases and this judgment decides a set of common issues and the Lead Claimants’ claims. The court heard extensive witness and expert evidence (witnesses for claimants, Mr Kewley for the defendants; two property valuation experts and a forensic accountant). The trial judge made detailed credibility findings (finding the Lead Claimant witnesses honest; approaching Mr Kewley’s evidence with caution; and placing positive significance on Mr Spence’s failure to give evidence).

Reliefs sought (nature of the application):

• Damages for deceit and unlawful means conspiracy;
• Rescission of purchase contracts for transactions induced by fraud;
• Declarations that certain agreements are unenforceable under s.26 FSMA 2000 because they were implemented as unauthorised collective investment schemes, and consequential recovery of sums paid;
• Ancillary relief including tracing, restitution and further accountancy enquiries.

Issues framed by the court: The court determined (i) which representations were made, to whom and by whom; (ii) whether those representations were false and made dishonestly; (iii) reliance and causation; (iv) measure of loss and appropriate valuation methodology; (v) whether the arrangements satisfied the statutory definition of collective investment scheme (s.235 FSMA 2000) and, if so, the consequences under s.26–s.28; and (vi) whether unlawful means conspiracy was established.

Concise account of reasoning:

• The judge analysed marketing documents and contemporaneous business communications. He identified recurring categories of representation (Substance, Asset‑Backed, Modified Track Record, Buy‑Back and Effortless). He found many of those representations to be untrue and, for the most part, that Mr Spence and Mr Kewley authorised and intended them to be used in marketing the products through EPL.
• Mens rea: the judge distinguished between periods and projects; but concluded that by mid‑2014 (and in many projects earlier) the defendants lacked any honest belief in the viability of the guaranteed returns and were, in relevant respects, knowingly or recklessly misleading investors. The court attached significance to contemporaneous emails, the pattern of freehold sales and the deliberate concealment of material facts, together with failures of disclosure and breaches of court freezing orders.
• Reliance and loss: the Lead Claimant witnesses were accepted as having relied on the brochure representations. The court preferred the Claimants’ property valuation expert’s DCF approach (with specified corrections) to value loss at the date of purchase and directed re‑calculations of damages using the court’s findings on yields, rents and costs. The judge declined to award compound interest as a matter of routine but reserved particular consequential queries for later hearing.
• FSMA: on the evidence the arrangements fulfilled the s.235(1)–(3) tests in many projects (property forming part of the scheme; investors not having day‑to‑day control; pooling/management as a whole), the defendants were not authorised and could not show a reasonable belief they were acting lawfully; accordingly contracts for the affected projects were unenforceable under s.26 and statutory restitution/compensation was available to investors (with practical knock‑on consequences considered at consequential hearings).
• Conspiracy: the judge found unlawful‑means conspiracies (deceit and FSMA breaches) in relation to the projects and transactions in question. Remedies for conspiracy mirrored those available for deceit and statutory restitution were considered where appropriate.

Wider context noted: The court observed the rarity and care required when awarding compound interest and emphasised that many factual and valuation questions remained to be addressed as consequential matters. The judge also recorded the practical and forensic difficulties created by piecemeal disclosure and the defendants’ conduct.

First instance: The court allowed the claims in part. The judge found that the Alpha Defendants (principally Mr Nicholas Spence and Mr Derek Kewley, and the Alpha Group companies) had made numerous dishonest representations in marketing materials (the Substance, Asset‑Backed, Modified Track Record and Buy‑Back representations) which induced investors to contract. The court held that many of the contested arrangements amounted to unauthorised collective investment schemes within s.235 FSMA 2000 and consequently some agreements were unenforceable under s.26 FSMA 2000. The court awarded remedies appropriate to the findings: rescission of certain transactions (subject to counter‑restitution), damages for deceit (generally the difference between price paid and the court‑determined value at the date of purchase), and statutory restitution in the alternative. The court refused to allow enforcement of the unlawful schemes under s.28(3). It also found unlawful‑means conspiracies. Further valuation calculations and consequential issues were directed to subsequent hearings.