Mini-bond firm London Capital & Finance was just a Ponzi scheme according to the rules

An investment firm that went bankrupt because its lenders owed millions of pounds was a Ponzi scheme that ‘deliberately created a false impression about the company’, a court has ruled.

London Capital & Finance (LCF) raised £237m from around 11,600 individual investors before it collapsed in 2019, promising them healthy returns from selling risky ‘mini-bond’ products.

But yesterday a High Court judge said in a ruling that the company had engaged in “fraudulent conduct of business” and had misrepresented itself in a “widespread, fundamental and systematic” way.

The judge also found that LCF’s former boss Michael ‘Andy’ Thomson and Spencer Golding, a shareholder in LCF-linked companies, were liable for breaching their duties as directors.

Three other employees, Paul Careless, John Russell-Murphy and Robert Sedgwick, were also found to have ‘knowingly participated in the fraudulent conduct’.

The men are faced with a hefty bill for damages. Three former co-defendants have reached an out-of-court settlement.

The court found that LCF had operated as a Ponzi scheme, a scam that uses money from new investors to pay existing investors to create the illusion of profit.

Mr Justice Miles, the judge in the case, ruled that a ‘significant proportion’ of the funds invested in the company were not used to provide loans to small and medium-sized businesses as promised, but were instead ‘misappropriated’ and used to make payments to people associated with the company.

Some of the money was spent on horses and Porsches, among other things.

Thomson had ‘wanted to withdraw as much money as possible’, was ‘recklessly indifferent’ to bondholders, had lied, forged signatures and knowingly misled accountant PwC, the judge said.

A hearing will take place to determine how much compensation will be paid. Administrators are seeking more than £177.5m. A £120 million compensation scheme has already been set up, paid for by taxpayers.

The sentence came after Thomson was given a 10-month prison sentence last year, suspended for two years, after breaching a restraining order over his assets imposed by the Serious Fraud Office.

In May, the Financial Reporting Council (FRC), the accounting watchdog, fined the ‘Big Four’ firms PwC and EY £4.9 million and £4.4 million respectively for failing to tackle the scam to come to light during their audits of LCF.

The city’s watchdog, the Financial Conduct Authority, also came under fire in a 2020 review which found it had ‘completely failed’ in its handling of an investigation into the collapse of the LCF.