Considering an Investment? Legal Informality is Always a Red Flag


Unregulated investment schemes tend to grow at a phenomenal pace, with unwary investors falling over themselves to partake in apparently high returns. As a High Court ruling showed, however, informality and an absence of proper legal documentation should always be taken as a telling red flag.

The case concerned a so-called ‘club’ through which numerous private individuals sought to invest profitably in the foreign exchange (FX) market. The club’s origins were prosaic: according to its founder, a colleague (the trader) asked him out to lunch and told him that he was engaged part time in FX trading in an unregulated way but through a reputable trading organisation.

The founder accepted the trader’s invitation to join his list of clients and, after making an investment himself, mentioned the scheme to some of his own clients and friends. From that small beginning, the club grew extraordinarily quickly: a leadership structure was established and introducers were engaged to bring in new investors. The club operated for a few years before abruptly folding. One investor, who lost a six-figure sum, launched proceedings with a view to recovering his money.

Ruling on the matter, the Court expressed deep concern that the club appeared to have had millions of dollars of private individuals’ funds invested, with negligible documentation, traceability or accountability on the part of those running it. In the light of what was now known about the trader, there was a very real question mark over whether there ever were any FX trades or whether he was simply operating a fraudulent scheme from the outset.

The Court found that the club was a partnership made up of the founder, his wife and its leadership team. The investors were its clients. One member of the leadership team had made misrepresentations to the investor. Amongst other things, a picture was painted of the member retaining some control over the investor’s funds whereas all such control was in fact relinquished to the trader.

The investor was, the Court found, unaware that his money would be used to fund withdrawals from the club by other investors or to pay commissions. However keen he may have been to join the club, the Court was satisfied that, had it not been for the misrepresentations, he would not have invested his money during the relevant period.

The Court was unable to conclude on the evidence that those in charge of the club had engaged in an unlawful means conspiracy to mislead him or other investors. As partners in the club, however, the founder and his wife were, together with the member, jointly and severally liable for the latter’s misrepresentations. The investor was awarded damages equal to the amount of his investment, plus interest.

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