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Ponzi Scheme Victim Loses £26 Million Claim

In a case which underlines the wisdom of taking impartial investment advice, a former hedge fund manager who was persuaded by a family friend to plough his personal fortune into what turned out to be a fraudulent Ponzi scheme has suffered defeat in his £26 million compensation claim. Allegations of dishonest assistance, deceit and negligence levelled against an employee of a high street bank were dismissed by the court.

The businessman and a private company that managed his personal wealth (the claimants) had invested the fruits of his successful financial services career in a company which purportedly provided large volumes of electrical goods and related services to leading hotel groups. The company’s business model was in fact ‘wholly fictitious’ and it merely circulated very substantial sums of money between investors so as to create the illusion of spectacular returns.

The claimants sought to lay the blame for the debacle on one of the bank’s relationship managers, claiming that he had negligently failed to spot fraudulent use of an account or to raise the alarm before substantial losses were incurred. It was alternatively submitted, inter alia, that he had offered dishonest assistance to the fraudsters, had engaged in a deceitful conspiracy and that the bank was vicariously liable for his actions and had been unjustly enriched.

However, exonerating the bank and its employee, the court ruled on the evidence that the manager was ‘an honest man’ who had not knowingly set out to deceive the claimants by anything that he had said or done. There had been no carelessness on his part; he had made no false representations to the claimants and he had been ‘as shocked’ as they were on discovering the fraud.

Dismissing arguments that the bank had acted in bad faith or negligently, the court ‘found it natural’ that such a large institution should rely for active review of accounts on its automated systems rather than on manual scrutiny of transactions by individual relationship managers who commonly had large numbers of clients to deal with. Also finding a significant element of contributory negligence on the part of the claimants, the court noted that they ought themselves to have ‘conducted more careful checks’ before investing such large sums in the bogus business.