To What Extent Can Legal Opinion Defend Against Knowing Involvement?

To what extent can a legal opinion obtained by the defendant amount to a defence to the charge of ‘knowing involvement’?

The Financial Conduct Authority (FCA) is investigating Robin Forster for masterminding a potentially fraudulent investment scheme, which looks suspiciously like a Ponzi scheme.

In a recent hearing in The Financial Conduct Authority v Robin Scott Forster & Ors [2023] EWHC 1973 (link to Gov case law) the Court decided four preliminary issues. One of the issues was whether Mr Forster was ‘knowingly concerned’ in the contravention of the rules for collective investment schemes under the Financial Services and Markets Act 2000.

This issue is particularly interesting because Mr Forster received legal advice that the scheme was not illegal. In what circumstances can a defendant be found to have acted illegally, when he received legal advice that his actions were permissible?

Background facts

Mr Forster raised money from the public to invest in buying care homes which would be operated by Qualia Care Limited (which was also owned by Mr Forster). The investment companies were Qualia Care Developments and Qualia Care Properties.

Private investors were sold a leasehold interest in a room in rented commercial property such as care homes, student accommodation and hotels. It was attractive because Qualia guaranteed rental returns of 10% of their investment per year for the first 25 years. They were also told that their room could be sold back to the operator for at least 115% of their initial investment. 

The basic business model was that investors were offered investments on terms that they would receive a (high) fixed rate of return for a 25-year period, and would then be offered a choice between selling the investment back to the company at a fixed price (at various fixed points) or electing to move to a basis where they would receive a return of 50% of the revenue generated by the investment property. 

It is important to note that at no point were investors given any reason to believe that the source of the repayment due to them would be anything other than the profits made by Qualia Care Limited out of the operations of the homes collectively.

Can a defendant be ‘knowingly concerned’ if they received legal advice?

Arguments for

The core of Mr Forster’s case is that he was not knowingly concerned in the sale of investments, or in deceit as regards the sale of investments, because he had been advised by counsel that the transactions concerned did not involve investments.

One the one hand, ignorance of the law is no defence. The FCA’s position was that the opinion from counsel should be disregarded on these grounds.

A more nuanced position is that the legal advice is irrelevant to the question of knowing concern, but it might be relevant to the analysis of quantum of a restitution order. This was the conclusion of Mr Johnston QC in FCA v Avacade [2020] EWHC 1673 (Ch)

Clearly, there is also the consideration that a person who went to the trouble of instructing counsel for their expert legal opinion, seems to have been concerned with acting on the right side of the law.

Arguments against

On the other hand, the judge emphasised that an independent legal opinion is not a ‘get-out-of-jail-free card.’

The reason for that is the term “legal opinion” covers a wide range of advice. It could be firm, absolute advice, but other advice is conditional or tentative.

In all cases, counsel must form their opinion based on a series of factual assumptions whose accuracy is generally outside the scope of his or her knowledge.

In this case, counsel set out his assumptions in the advice for Mr Forster. The assumptions were not an accurate representation of the scheme. It was an accurate reflection of the information counsel had been given, but was not accurate in practice. The judge decided that Mr Forster must have known that this was not the way in which the scheme actually operated.

Counsel emphasised that the way assets were pooled (or not) was very important. He said “The pooling of assets is forbidden because it creates a pooling of the risk. It is not too much to say that this pooling is what makes the scheme ‘collective’ and is a crucial part of the mischief to which s235 is directed.”

Mr Forster knew perfectly well that the entire basis of the Qualia model was a pooling of income and liabilities, so that investors as a whole were paid out of revenues received as a whole.

Conclusion

Mr Forster was found to be ‘knowingly concerned’ in the contraventions of the Financial Services and Markets Act 2000. The important point in his culpability was the he knew that counsel’s opinion was based on untruths.

The judge had some sympathy with Mr Forster and thought that it was possible that he was still “trying to come to terms with the massive loss to investors which he has undoubtedly caused, and is seeking – in his own mind – to excuse himself”. But that led to the judge’s conclusion that he was not a reliable witness, and it did not excuse him in law from his actions.