Sunstone Holdings Ltd. and De Lec Ltd. – ex gratia payments to investors (P.90/2013) – further report of the Council of Ministers

STATES OF JERSEY

SUNSTONE HOLDINGS LTD. AND DE LEC LTD. – EX GRATIA PAYMENTS TO INVESTORS (P.90/2013) – FURTHER REPORT OF THE

COUNCIL OF MINISTERS

Presented to the States on 10th March 2015 by the Council of Ministers

STATES GREFFE

2015   Price code: D  R.26

REPORT

Background

On 4th June 2014 the States Assembly rejected P.90/2013 in full. P.90/2013 [Sunstone Holdings Ltd. and De Lec Ltd. – ex gratia payments to investors] was a proposition calling  for  compensation  to  be  paid  to  investors  who  had  lost  money  due  to investments  in  what  transpired  to  be  fraudulent  property  schemes  in  respect  of 2 companies – Sunstone Holdings Limited and De Lec Limited.

In advance of that matter being debated, the Council of Ministers presented additional comments on P.90/2013 (attached as Annex 1 to this report), following the publication of an expert report on the matter prepared by Mr. David Thomas1 (also attached as the Appendix to Annex 1).

In paragraph 12 of those comments, the following statement was made –

"The Council of Ministers are, however, aware from the report that there is the suggestion that a number of investors might not have invested money or increased an existing investment if issues had come into the public domain in early 2007 which would have had a significant impact on the reputations of Cameron, Foot and Lewis . It is for consideration whether in the light of this a case can be made for this group of investors to be recompensed in some way and the Chief Minister will undertake to report the outcome of further work on this matter to the States at the earliest opportunity."

Further report by David Thomas

Following the rejection of P.90/2013 by the States, Mr. Thomas was asked to carry out further work on this matter. The terms of reference as to that further work are attached to this Report at Annex 2.

Mr. Thomas delivered his further report in December of last year.

Mr. Thomas wrote to all of the investors who had been identified in the work leading up to his previous report. Mr. Thomas received in response 5 claims from investors who said they had put in new money after 31st March 2007. The date 31st March 2007 is  based  on  the  conclusions  that  were  reached  in  paragraph 9.4  of  Mr. Thomas' original report.

The  total  of  these  claims  was  £269,834,  of  which  one  claim  is  for  £134,691. Mr. Thomas was able to satisfactorily establish the claims with evidence in 4 out of the 5 cases. The fifth case (of an investment of £10,143) would have to be established with further evidence if ex gratia payment was to be made.

1 David Thomas is an experienced financial ombudsman. After practising for 28 years as a

Solicitor, he was appointed the Banking Ombudsman in the UK in 1997. He then became Principal Ombudsman and subsequently Chief Ombudsman of the Financial Ombudsman Service. At the time of undertaking both the initial report and the further report, he was acting as a part-time consultant to the new Chief Ombudsman in the UK with the title of Lead Ombudsman (Strategy). He has more recently been appointed Chairman of the Channel Islands Financial Ombudsman Service.

Therefore  the  total  amount  in  consideration  for  ex gratia  payment  would  range between £259,691 and £269,834 – depending on whether the fifth claim could be verified.

Consideration of ex gratia payment

Mr. Thomas was asked to carry out his further report so that the Council of Ministers could be fully informed with all information when considering whether a case can be made for any group of investors to be recompensed ex gratia from the public purse.

As was stated by the Council of Ministers in their comments relating to P.90/2013: "any decision on whether the taxpayer should compensate the investors should depend upon whether the circumstances can be seen as sufficiently exceptional in terms of the hardship suffered to justify public support." The matter of an ex gratia payment has been considered with this constantly in mind.

Although the position of individual investors is not known, it is understood that some of  the  50 investors  defrauded  in  relation  to  Sunstone  and  De Lec  have  suffered hardship and difficulty as a result of the fraudulent activities of those responsible for these schemes. However, while there are 5 investors who may not have made an investment  if  they  had  had  earlier  information,  there  is  no  evidence  available  to suggest that they have suffered greater hardship than other investors.

In  the  view  of  the  Council  of  Ministers,  when  considering  the  position  of  all 50 investors involved in the schemes, making a decision to compensate 5 of those investors based solely on whether they invested before or after a certain date would be unfair on a large group of investors, and in particular those who may have suffered greater hardship.

In order to justify the high test for ex gratia compensation from the public purse, the situation must be sufficiently exceptional in terms of the hardship suffered to justify support. The Council of Ministers are of the view that this requirement is not met in this case, and share the view expressed by the Council of Ministers last year that an ex gratia payment to any of the investors cannot be justified.

The Council of Ministers appreciates that the conclusion reached in this matter will be disappointing to a number of investors in these schemes. However, the Council of Ministers are firmly of the opinion that ex gratia compensation from the public purse should be reserved for only the most exceptional cases where it would not be deemed unfair or discriminatory.

10th March 2015

NOTE: Mr. David Thomas' further report

Due to the fact that Mr. Thomas' further report contained specific confidential information regarding individual investments and evidence obtained to establish claims, it is not appropriate for the further report to be published. The overall conclusions of that report are, however, contained in this report.

ANNEX 1

ADDITIONAL COMMENTS

1. In  September  2013  the  States  debated  a  proposition  lodged  by  Senator

A. Breckon (P.90/2013) that –

• ex gratia  compensation  should  be  paid  to  investors  who  suffered financial loss as a result of investments in Sunstone and/or De Lec;

• the compensation should be subject to a maximum of £48,000 per investor (100% of the first £30,000 lost and 90% of the next £20,000);

• the compensation should be paid from central reserves, but legislation should be introduced to recover it from the Jersey Financial Services Commission (JFSC); and

• the Chief Minister should bring forward proposals under Article 27 of the  Financial  Services  (Jersey)  Law  1998 to  establish  an  Investor Compensation Scheme in Jersey.

2. The debate was adjourned on the grounds that a number of States members did not feel they had sufficient information upon which to base a decision and the Chief Minister indicated that in the light of this he would initiate an independent review to clarify various points raised in the debate.
3. In November 2013, the Chief Minister invited David Thomas, who has held the position of Chief Ombudsman of the UK Financial Ombudsman Service and other relevant roles, to undertake an enquiry. The terms of reference were agreed with Senator Breckon and were, whether –

• the JFSC should have been aware of warning signs/irregularities, and taken  action  concerning,  the  incorporation/operation  of  Sunstone Holdings Ltd. and De Lec Ltd. by the regulated Principals;

• the JFSC were aware and should have taken action before 2008. In particular whether 2 investors expressed concerns to the JFSC in 2006 or 2007;

• if the JFSC should have been aware and should have taken action before January 2008, that would have made any difference to the loss incurred by investors; and

• there were regulatory breaches on behalf of Goldridge Stone, and whether the JFSC enforcement actions were sufficient.

4. All the investors were given an opportunity to make representations to David Thomas.
5. His report is attached as an Appendixto these comments. In response to the terms of reference, and also to points that Members raised in the debate, his conclusions are summarised as follows –

• Did 2 investors express concerns to JFSC in 2006 or 2007?

No

• Was JFSC aware, and should it have taken action before 2008? No

• Should JFSC have been aware of warning signs/irregularities, and taken action concerning the incorporation/operation of Sunstone and  De  Lec  by  the  regulated  Principals  [Cameron,  Foot  and Lewis ]?

No

• Were there regulatory breaches on behalf of Goldridge?

I am prevented by law from adding to the JFSC's 2008 statement (in Annex A).

• Were  JFSC  enforcement  actions  in  respect  of  Goldridge sufficient?

If  JFSC  had  taken  timely  and  sufficient  action,  issues  including Goldridge  (unconnected  with  Sunstone/De  Lec)  would  have  been likely to become public by January 2007.

If JFSC had possessed a wider range of graduated powers these issues could have become public at a much earlier date.

• If JFSC should have been aware and should have taken action in respect of Goldridge before January 2008, would that have made any difference to the loss incurred by investors in Sunstone and De Lec?

Investors would have been unlikely to invest, or increase an existing investment in Sunstone and De Lec after March 2007; but it would have made little or no difference to the losses incurred by those who had already invested by March 2007; and (for the removal of any doubt) it would have made little or no difference to those who had invested by March 2007 but rolled over their existing investments at a later date.

6. To gain access to restricted information held by the JFSC, David Thomas was appointed as an agent of the Commission. He could not look into the JFSC's actions without studying information received by the JFSC that is legally confidential.  It  would  be  a  criminal  offence  for  him  to disclose  that information and so it is not possible for him to include in his report the full reasons  for  some  of  his  conclusions.  Nothing  in the  report  should  be interpreted as constituting such confidential information, or disclosing the existence or absence of such information.

7. The comments of the Council of Ministers on P.90/2013 in September 2013 are attached. Ministers remain of the view that –

• the circumstances of the Alternate Insurance Services Limited case are so significantly different from those of Sunstone and De Lec that the former does not establish a precedent of which advantage can be taken in the case of the latter;

• the JFSC acted immediately upon notice in January 2008;

• when investment is contemplated in high risk areas such as off-plan foreign property purchases, investors should always seek independent advice separate from those promoting the investment scheme. The fact that  the  principals  marketing  the  scheme  had  been  separately approved  by  the  JFSC  as  fit  and  proper'  for  different  regulated purposes is not a sufficient reason for not taking proper investment advice,  nor  for  justifying  compensation  by  the  taxpayer  if  the investment decisions taken should prove to be faulty;

• as the JFSC has no statutory responsibility for the scheme there is no case  for  the  Commission  to  be  called  on  to  meet  the  claim  for compensation; and

• any decision on whether the taxpayer should compensate the investors should  depend  upon  whether  the  circumstances  can  be  seen  as sufficiently exceptional in terms of the hardship suffered to justify public support.

8. In their previous comments the Council of Ministers expressed the view that it was extremely unlikely that, if the same circumstances had prevailed in the UK,  compensation  would  have  been  forthcoming  under  the  UK  investor protection scheme. On the information that David Thomas had available to him,  that  was  not  available  to  the  Council  of  Ministers  at  the  time  that previous comments were lodged, it appears a group of investors might have been subject to compensation under the UK investor protection scheme if the same circumstances had prevailed in the UK. This is detailed in Section 5.5-
   7. of the Report.
9. Jersey currently does not have an investor protection scheme. The reasons why an investor protection scheme has not been introduced in Jersey to date were set out in the comment of the Council of Ministers in September 2013. In summary such a scheme, if it isto be funded by investment advisers, could force  many  out  of  business  and  in the  absence  of  a  similar  scheme  in competitor  jurisdictions,  such  as  Guernsey  and  the  Isle  of  Man,  business would be lost. For these reasons the introduction of an investor protection scheme in Jersey is not supported at the present time.
10. It is therefore the view of the Council of Ministers that, notwithstanding that it could be said that some of the investors may have fallen within the UK investor protection scheme if their same circumstances had prevailed in the UK, this is not sufficient grounds for suggesting they be compensated in Jersey.  Compensation  would  set  a  precedent  for  introducing  an  investor

protection scheme in Jersey which is undesirable for the reasons outlined above. Alternatively, compensation in this matter could set a precedent which would  lead  to  future  applications  being  made  to  the  States  Assembly  to effectively act as a compensation scheme funded by the taxpayer. The Council of Ministers are of the view this would be fundamentally wrong.

11. In the light of the foregoing the Council of Ministers remain of the view that P.90/2013 as presented should be rejected.
12. The Council of Ministers are, however, aware from the report that there is the suggestion that a number of investors might not have invested money or increased an existing investment if issues had come into the public domain in early 2007 which would have had a significant impact on the reputations of Cameron, Foot and Lewis . It is for consideration whether in the light of this a case can be made for this group of investors to be recompensed in some way and the Chief Minister will undertake to report the outcome of further work on this matter to the States at the earliest opportunity.

APPENDIX [TO P.90/2013 Com.(2)]

ANNEX 2 Terms of Reference

These  terms  of  reference  constitute  an  amendment  to  the  contract  between  the authority and the consultant dated 3rd March 2014 ("the contract"). They should therefore be read in conjunction with and in addition to the contract.

The Terms of Reference follow the debate and rejection of P.90/2013 by the States Assembly  on  4th  June  2014.  As  part  of  the  process  of  P.90/2013  a  report  was produced by Mr. David Thomas ("the Report").

In  comments  presented  to  the  States  Assembly  by  the  Council  of  Ministers  on 29th May 2014 the following was stated –

"The Council of Ministers are , however, aware from the report that there is the suggestion that a number of investors might not have invested money or increased an existing investment if issues had come into the public domain in early 2007 which would have had a significant impact on the reputations of Cameron, Foot and Lewis . It is for consideration whether in the light of this a case can be made for this group of investors to be recompensed in some way and the Chief Minister will undertake to report the outcome of further work on this matter to the States at the earliest opportunity."

Part 9 of the Report deals with the question: "Should JFSC have taken earlier action on Goldridge?". Paragraph 9.2 states: "Whether the JFSC took timely and sufficient action in respect of Goldridge is a question of judgment – rather than a question of fact. In my opinion, however, JFSC did not take timely and sufficient enforcement action in respect of Goldridge.".

Paragraph 9.4 of the Report states –

"In my opinion, if JFSC had taken timely and sufficient action in respect of Goldridge:

• Issues  concerning  Goldridge  (unconnected  with  Sunstone/De  Lec) would have been likely to become public by Jan 2007;
• Those issues would have been likely to have significant impact on the reputations of Cameron, Foot and Lewis ; and
• (allowing time for news to spread) investors would have been unlikely to invest, or increase an existing investment, in Sunstone or De Lec after Mar 2007 but;
• It would have made little or no difference to the losses incurred by the majority who had already invested by Mar 2007; and
• (for  the  removal  of  any  doubt)  it  would  have  made  little  or  no difference to those who had invested by Mar 2007 but rolled-over their existing investments at a later date.".

The  terms  of  reference  for  the  further  work  noted  in  the  Council  of  Ministers' statement of 29th May 2014 are as follows –

• To identify individually those investors who invested in Sunstone or De Lec for the first time after 31st March 2007 and itemise the value and timing of their investment? Identification should be limited to those investors who have already been identified through the course of the initial inquiry (from the papers provided by the JFSC, from papers provided by the States of Jersey Police and through Senator Breckon).
• To identify individually those investors who increased/added to an existing investment in Sunstone or De Lec after 31st March 2007 and itemise the value and timing of their investment. This excludes those who had invested by March 2007 but rolled-over their investments at a later date.
• To independently  verify  the  value and timing  of the  investments through access to Sunstone/De Lec documentation or other relevant documentation?
• To investigate whether and to what extent investors who invested for the first time  or  increased/added  to  an  existing  investment  after  31st  March  2007 reclaimed  any  of  the  funds  invested?  This  should  involve  not  simply  an examination of the documentation already available but investigation with any other official bodies that the consultant feels is appropriate.

During the course of this further work, and where it is considered the investigations would be assisted thereby, all relevant investors should be given an opportunity to make representations.

3rd July 2014