Recovering Funds from a Fraudulent Investment Scheme

Nicola Sharp of Rahman Ravelli details a case that emphasised how the quality of evidence can be central to a claimant’s successful recovery of funds.
 
Recent years have seen the collapse of various high-profile Ponzi schemes, not to mention a number of cryptocurrency investment vehicles and the huge crypto exchange FTX. Such situations leave many investors looking to recover their money after the scheme where they placed their funds has collapsed.

In the recent case of Alexander Hamilton v Mark Barrow & Ors [2023] EWHC 1732 (KB), the investor managed to recover at least some of his money after investing in a fraudulent scheme. He was able to do this after producing evidence to support his case – evidence that was stronger than that produced by the defendants.

The claimant, Mr Hamilton, invested around $700,000 in an unregulated enterprise known as the Currency Club, which invested in foreign exchange futures. The Currency Club was founded and run by two of the defendants, Mr and Mrs Barrow.

The third defendant, Mr Welsh, was an introducer, who received commission from the Barrows when he introduced new investors to the scheme. It was Mr Welsh who introduced Mr Hamilton to the scheme. 

Under the scheme, a trader and economist (Daniel Arkian) was supposed to place trades on foreign exchanges. Investors would be paid the profits on ‘winning trades’.  But the Currency Club failed in 2017. Daniel Arkian vanished and no funds have ever been recovered from him. Instead, Mr Hamilton sought compensation from the Barrows and Mr Welsh. 

Breach of contract

The Currency Club operated on an ‘informal’ basis. It started with the Barrows inviting friends and family to invest. The court noted that there was a “conspicuous lack of paperwork for a venture involving such large sums of money.” There were no contracts or formal written documentation to sign when investors entered the scheme.

However, on this occasion, the court was satisfied that a contract existed, having been concluded on an oral basis. It is not easy to discern the terms of an oral contract, but the court found three clear terms on the basis of the evidence:

• Mr Hamilton’s funds would be transferred and held in a ring-fenced bank account called a “FXPRo PAMM” account, to which Daniel Arkian would only have access for trading purposes.
• 15% commission would be deducted from successful trades.
• Mr Welsh would use reasonable care and skill in administering the funds.

The court was satisfied that the terms of this oral contract had been breached and awarded Mr Hamilton damages accordingly.

Misrepresentation and deceit

Mr Welsh misrepresented that he would retain control over Mr Hamilton’s funds, when in reality he had no control over the account he held with Daniel Arkian. Additionally, he mischaracterised how profits would be returned and distributed to investors.

The court was satisfied that these misrepresentations induced Mr Hamilton to enter the contract, concluding that if the “true position” about Daniel Arkian’s unrestricted control over all investment funds been explained to him, Mr Hamilton would not have invested in the Currency Club. Nor would he have invested if he had known the ways in which his funds would be applied.

Knowing, or reckless misrepresentation was established.

Retaining evidence during the course of investments

In every case, evidence is important. But this cannot be stressed highly enough in claims that involve allegations of fraudulent investments. This case turned on the quality of either side’s evidence.

The court reminded itself that where deceit is alleged, a court will examine the evidence closely, to a degree commensurate with the seriousness of the charge: Re H (Minors) [1996] AC 563 Mr Hamilton produced persuasive documentary evidence in the form of:

• Contemporaneous notes of his meetings with Mr Welsh.
• Detailed emails describing his understanding of the scheme and asking for further information.
• Email exchanges with the defendants.

In contrast, the defendants failed to show any account recording how incoming funds were applied and where the funds were directed. In fact, they produced “not a jot” of accounting evidence at trial. There were no ledgers of funds received or any commission calculations. They even admitted that their online system was flawed.

The judge considered oral evidence, matching where possible with evidence from others and with any contemporaneous documents that existed. The claimant’s documentary evidence aligned with the witness evidence at trial and - viewed in light of the defendants’ lack of crucial documentation - was by far the more persuasive account.

Conclusion

Recovery of funds invested in a fraudulent scheme is not straightforward, particularly if those funds have been dissipated and the person in control of the money is difficult to trace. By keeping accurate records of the information given to the investors, and formalising the arrangements in contracts, investors give themselves the most robust protection against fraudsters - and a more reliable route to compensation for lost funds.