Fraud: property investors beware

In 4VVV Ltd and others v Spence and others [2024] EWHC 2434 (Comm), the lead claimants obtained a significant victory in a complex, long-running fraud group action claim arising out of a multi-million-pound property investment scheme. This judgment was the first step in the claimants obtaining redress from the defendants, who sold hundreds of fraudulent investment properties to investors between 2012 and 2019, with damages being estimated at more than £45m. The case details 4VVV concerned investments made by 435 claimants in student accommodation and holiday properties around the UK. The claimants bought their investment properties, which were sold by companies owned or controlled by the first and second defendants, Nicholas Spence and Derek Kewley. The sales of the properties took place through marketing and estate agency companies engaged by Spence and Kewley. The claimants alleged that the investment schemes pursuant to which the properties were sold, which promised fixed returns over set periods of time (8-12% for 10 years), which did not materialise, were fraudulent following the investment returns ceasing to be paid and with some investors realising that their properties were never built. With a number of the companies involved now insolvent, the claimants sued Spence and Kewley personally for their roles, as well as a number of companies within their control. Following a 10-week trial of the 10 test cases in April 2024, the court found the defendants were liable in deceit, unlawful means conspiracy and for selling investments that were an unregulated collective investment scheme. The lead claimants are now entitled (in principle and subject to the quantum being finalised) to damages, rescission of certain leases and to seek the appropriate relief following the finding that certain investments were unenforceable under section 26 of the Financial Services and Markets Act 2000 on the basis that they were a UCIS. The judgment emphasised the considerable distress that Spence and Kewley’s deceptive business practices caused to the investors and criticised the defendants, who knowingly and deliberately conspired to deceive and thereby to cause injury to the claimants by causing them to enter into investment schemes that were both economically disadvantageous and a UCIS. Was the investment too good to be true? Although every investment carries risk, the investors in this claim were repeatedly assured, by the representations made to them, that they were entering into a secure, hands-off investment with developers who were capable of always delivering the promised returns owing to their long-standing track record and assets which backed the investment. It materialised that these representations were fraudulent and the defendants responsible for creating the scheme never had a viable investment model which could provide for the returns. The defendants were in fact relying on further sales in order to pay existing investor returns. What were the red flags in this investment? In order to minimise the risks as an investor, it is important to be aware of potential red flags prior to entering into any agreements: Always carry out due diligence – take the time to make the necessary enquiries to identify how the returns will be paid, ask to see underlying business plans or the basis for the promised rental returns, what the status of the property is and how you can exit the investment (during the term of your investment or after). Where possible, visit the property to ensure you are purchasing what you are expecting. If you cannot visit, remember that the brochures are likely to contain computer-generated images so make sure you ask to see photographs of the actual development. Alternatively, if the purchase is off-plan, ask to see examples of the developer’s previous projects; Always seek independent legal advice – it is important to spend the time and money to have a reputable conveyancer advise you on the terms of the contracts you are entering into and the status of the property, including any restrictions regarding use or permissions surrounding planning and development. In this case, it later transpired that the conveyancing solicitors were professionally negligent by failing to properly advise the investor clients. If the developer recommends the conveyancing solicitor, it is worth checking their independence. It was clear in 4VVV that the developer sought to influence what advice the conveyancer was providing. It may be sensible to appoint your own solicitor; Know who you are contracting with – pay careful attention to whom you are entering into agreements with. Here the defendants had (no doubt deliberately) created a complex web of subsidiary companies, each with similar names to the main development company, to enter into multiple contracts (purchase agreements, leases and underleases). This had the potential to confuse or distract the investor from realising which party it was contracting with, and the one that was responsible to pay the rental returns was, in fact, a separate corporate entity to the entity said to have the experience and, importantly, the assets underlying the development; Consider where the investment monies are coming from – here the investment scheme was deemed to be a collective investment scheme owing to the fact that the returns were globally pooled and divided among all investors, as opposed to the investors receiving the rental income from their respective unit(s). While this in itself is not an issue, if regulated, this scheme and the individuals who ran it were not. The 2000 Act exists to protect potential investors from the significant risks that such investments can present and ensure that investments of this kind are offered only by authorised or regulated individuals – therefore, verify the scheme/individuals on the FCA’s website; Keep track of your investment – if you do decide to make the investment then it is important that you monitor your investment, retain documentation evidencing the returns you receive (so you can verify they are right), and keep your sales documentation and what you relied on when making the investment. This will be important should the investment not work out as planned. Meera Solanki is an associate at Trowers & Hamlins LLP, which acted for the successful claimants Photo © Xyz Pictures/imageBROKER/Shutterstock