B e f o r e :
|IN THE MATTER OF MARKET WIZARD SYSTEMS (UK) LIMITED|
|IN THE MATTER OF THE INSOLVENCY ACT 1986|
Mr Michael Ashe QC and Miss Lynne Counsell instructed by Messrs Georgiou Nicholas for the Respondent.
Hearing date: 19th June 1998 to 26th June 1998
Crown Copyright ©
Mr. Justice Carnwath:
"The System is said to comprise a formula imprinted upon 11 computer disks and a 50-page operating manual, and requires a customer to have access to a telephone modem link and an IBM compatible computer. In order for the System to function, daily prices and other information must be downloaded and entered by the customer, such information being provided by the company to the customer by means of the required telephone link. The System operates by producing buy, sell or hold signals in respect of options in each of the 12 traded stocks. These signals do not indicate the amount of stock to be bought or sold, but show the customer the current positions which should be held on that day (that is, neutral, short or long positions), and whether the customer should buy, sell or hold each stock. The daily form sent to the customer includes a blank authorisation form which the customer may sign and date in order to pass on the instructions to his broker. The trade is then made through the customer's broker who needs to be licensed and a member of LIFFE".
(1) The company's business requires authorisation under the Financial Services Act 1986 ("FSA"). No authorisation has been obtained, and the company's business is therefore illegal.
(2) The company has made misleading/unlawful statements in its promotional literature.
(3) The company has allowed itself to be managed by Mr Robin Reichelt, an undischarged bankrupt.
(4) The company has failed to maintain adequate books, records and accounting procedures.
(5) The company appears to be insolvent.
"......the need for the general public to be protected against the activities of unscrupulous persons who deal in securities.... The public interest requires that individuals and companies who deal in securities to the public should maintain at least the generally accepted minimum standard of commercial behaviour, but those who, for whatever reason, fall below those standards should have their activities. stopped. .... The more unusual and speculative the investment, the heavier is the burden resting on a vendor of shares to ensure that the contents and get up of his sales literature are not misleading, either as to the nature of his interest in the shares, or as to the absence of any unusual restrictions affecting the shares, or as to his connection with the company in question, or otherwise. ..." (p359).
"It seems to me quite unarguable, I confess, that this is a system for giving investment advice, and that that is a prohibited trade, and that consequently, the prospect of the company being wound up on the ground that it has been conducting business in an illegal manner is not only probable but highly probable. Further, as it seems to me, it bears very directly upon the question before me whether a provisional liquidator should be appointed. If the public are being offered advice from an illegal source, they ought to be protected from that as soon as possible, and the public interest can only be served by the prevention of any further steps to give such advice."
History of the Market Wizard System
"The programme includes a mathematical model which produces parabolas, and it is these which determine whether the price of a stock is at a high or low point"
He says that the use of such parabolas to determine the future direction of market price had been in use by market forecasters in America and elsewhere over a long time, but that Banner has spent many years developing such concepts to be applied in computer trading systems. He says:
"We are confident no-one else in the world has been successful in combining parabolas and future timing points with the power of the modern desktop computer to produce a software programme which can isolate tops and bottoms of the price of a stock or commodity with such a high degree of accuracy".
I heard no independent expert evidence from either side which would enable me to assess the validity of these claims.
"that the funding advanced by Arecki Pty Ltd to MWS UK Ltd will be repaid on the following basis.
When the MWS UK bank account balance exceeds £90,000, 50% of the balance, i.e. £45,000 is to be repaid to Arecki Pty Ltd .
Further, for each additional £50,000, £10,000 is required to be repaid to Arecki Pty Ltd."
"Market Wizard is basically a risk management and investment trading/forecasting tool that does all the real work (technical analysis) for you. You simply collect the rewards. For example, using Market Wizard as your guide between 1st July 1996 and 30th June 1997, had you invested £12,000 in the securities exclusively monitored.... you could have earned £145,056. Too good to be true? Absolutely not. Astute systems traders routinely achieve these type of returns."
"VERY IMPORTANT INFORMATION.
1. Wizard Systems (UK) Limited is not licensed under the Financial Services Act 1986 and is not a licensed investment adviser.
2. Users are not intended by Market Wizard Systems (UK) Limited to treat information derived from the software as a source of investment advice, and accordingly if you do, you do so at your own risk.
3. Whilst the program may assist an investor in maintaining an investment portfolio it cannot necessarily guarantee success or profits or determine an investment strategy suited to the user's specific needs.
4. Whilst every endeavour has been made to ensure that the data contained in this report is accurate in every detail no responsibility will be accepted for any errors occurring in the compilation of this report."
"Our view is that the software product per se is merely an aid to enable an individual to arrive at an investment decision of their own making and this is made very clear in your company brochure where there are prominent statements that no investment advice is given or intended under the FSA 1986" (His letter of 14th October 1997).
"Every client I have spoken to about MWS seems very happy with the System and hope they can carry on business as usual after the hearing on 8th April 1998. All my clients agree that they cannot understand how a computer generated system can be regarded as giving advice! The MWS appears to be a technical analysis tool that generates signals like numerous other technical analysis systems in the UK market."
The Australian Securities Commission
"The ASC considers that persons are conducting an investment advice business within s77(1) of the law if they are in the business of providing computer software which:
(a) in addition to providing purely factual information, performs interpretative functions based on pre-determined formulae and guidelines: and
(b) gives users securities advice or recommendations directly or indirectly (eg buy or sell triggers)."
"The increasing availability of computerised trading systems causes us some concern. Various software packages have been launched, offering the user the opportunity to analyse market data with a view to making informed investment decisions. Where such systems offer solely analysis and verification of historical data, they are unlikely to fall within the FSA. Some have, however, gone further in providing automatic trading signals. Such a service is liable to constitute provision of investment advice; we have therefore acted to ensure that persons offering such services become authorised or cease business.
"In SIB's view pure technical analysis insofar as it relates to the ability to verify past trends through analysing historical data will not be likely to amount to investment advice. However, where a person uses a technical analysis method to produce investment advice then that person will require authorisation or exemption under the Act if he provides that advice to third parties. By way of example technical analysis techniques may be used as a basis for providing investment advice in the following circumstances:-
(a) where a person provides means (often by way of the provision of software services) whereby historical trends and data can be used either to predict future performance of particular investments or to generate buy, sell or hold signals or recommendations;
(b) where a person providing charts/graphs or means to produce charts/graphs gives added value by commentating on the signals which the charts/graphs may be giving and those comments/signals relate to the question as to whether or not particular investments should be bought, sold or held on to."
"the business of engaging in one or more of the activities which fall within the paragraphs in Part II of (Schedule 1) and are not excluded by Part III of that Schedule".
Paragraph 15 of Schedule 1 Part II is as follows:
"Giving, offering or agreeing to give, to persons in their capacity as investors or potential investors advice on the merits of their purchasing, selling, subscribing for or underwriting an investment, or exercising any right conferred by an investment to acquire, to dispose of, underwrite or convert an investment"
"daily update information, system updates and upgrades are sent to the user's e-mail address, creating a very efficient, prompt and cheap method of communication."
The "daily information bulletin" includes not simply market information but also so-called "security lock data". The evidence before me did not explain the precise content or function of the "security lock data". However, they are said to be
"vital to the System. If you enter them incorrectly Market Wizard will calculate incorrectly and that is likely to lead to false instructions."
The daily updating procedure is one which
"must be followed every trading day as long as you are actively using the System. Failure to follow the daily signal may cause you to miss a Market Wizard entry or exit signal. This may cause a serious loss."
Failure to do so will also invalidate the guarantee.
"an amazing tool that produces profits that will consistently surprise you, and one which Australasian and overseas private and corporate clients...rate...extremely highly on all counts: product quality, support and backup, corporate integrity and global vision."
"no person other than an authorised person shall issue or cause to be issued an investment advertisement in the United Kingdom unless its contents have been approved by an authorised person."
An investment advertisement is defined as -
"any advertisement inviting persons to enter or offer to enter into an investment agreement... or containing information calculated to lead directly or indirectly to persons doing so."
Mr Reichelt's involvement in management.
"act as director of, or directly or indirectly to take part in or be concerned in the promotion, formation or management of, a company, except with the leave of the Court".
The Secretary of State submits that Mr Reichelt took part in or was concerned in the management of the company and that the company either had knowledge of that, or, in the person of Mr Smith, "turned a blind eye" to Mr Reichelt's background.
"a business founded on a lie, the lie being that these computer programmes are scientifically based systems with a track record of producing exceptional profits, whereas the reality is that there is no track record at all and, indeed, there is no evidence that they have ever produced profits for anyone or are likely to do so."
On those grounds I granted the Secretary of State's application for the appointment of a provisional liquidator. The company was subsequently wound up on 2nd October 1996, on the unopposed petition of the Secretary of State.
"More seriously the new evidence raises a serious question mark about who in fact is managing the company. The earlier evidence, particularly that of Mr Reichelt, proceeded on the basis that he was the general manager of the company and that is consistent with the correspondence and other documentation which shows him active in that role. Mr Robinson was said at that stage to be an active director employed nearly full time advising the company."
I then referred to the Secretary of State's later evidence raising the point that Mr Reichelt was an undischarged bankrupt and drawing attention to the terms of section 11. I continued:
"The company's response in more recent affidavits of Mr Robinson and Mr Reichelt, is to claim that his role is purely administrative, and that the management of the business has been carried out entirely by Mr Robinson. I find this claim difficult to reconcile with the earlier evidence and the evidence leaves serious doubts about the management structure. However, I do not find it necessary to pursue this point in detail; whoever was in charge must take responsibility for the basic lie which as I have found has underlain this business throughout."
"Concerned in the Management"
"The thrust of this appeal is that in the circumstances of this case an independent person such as a management consultant, who is not a director or officer of a company, cannot commit this offence since he does not control the decision making process." (p84H)
The Court approved the distinction drawn by the judge in his summing up -
"between managing certain specific aspects of the company's activities, such as production sales trading and the like, and the central management of the affairs of the company, that is to say the matters normally undertaken by the directors or officers of the company ." (p85B-C)
They also rejected a submission that he should have directed the jury that "advising on financial and managing restructuring of the company" could not constitute the offence.
"In the opinion of this Court, if he had done so it would have been a mis-direction for, as we shall show advising on financial management and restructuring of a company may well amount to being concerned indirectly in the management of the company. It is the business of the directors to manage the business of the company ... and in advising directors on financial and management structures, a person may well be being concerned directly or indirectly in the management of that company." (p85 G-H)
"When I say it is a question of degree that does not mean that you have not got to decide it. ... In this case you have to say whether this defendant's conduct is proved to be and thus clearly is on the side of taking part in the management. Not merely being consulted and giving advice when called upon, but actually standing beside (the managing director) and giving him such continuous advice which is so continuously put into effect that he can only be described as taking part." (p87F-G).
"so widely cast that it is the opinion of this Court that it is intended to insulate persons, against whom an order of disqualification has been made, from taking part in the management of company affairs generally. It is cast in the widest terms '... in any way whether directly or indirectly, being concerned or taking part in the management....'. It would be difficult to imagine a more comprehensive phraseology designed to make it impossible for persons to be part of the management and central direction of company affairs." (p88B-C)
"He appears never to have risen much above the status of an office boy and messenger, although he was provided with some management training." (p678).
"The expression 'manager' should not be too narrowly construed. It is not to be equated with the managing or other director or a general manager. As I see it, any person who in the affairs of the company exercises a supervisory control which reflects the general policy of the company for the time being or which is related to the general administration of the company is in the sphere of management. He need not be a member of the board of directors. He need not be subject to specific instructions of the board. If he fulfils a function which touches the central administration of the company that is sufficient in my view to constitute him an "officer" or "manager" of the company for the purposes of section 441 of the Act."
"There must be an element of decision making, which affects the corporate enterprise as a whole, but those responsible need not form part of the board, nor even need they be executives directly communicating with the board. Nevertheless, in the ordinary course of affairs, it is only in a large company that a person outside this latter category, so far removed from the power of control exercised by the directors, may be engaged in the 'management' of a company. In a small company like the present the actions of those directly answerable to the directors may amount to 'management', for, even if those people are also engaged in routine activities of the kind not normally associated with management, it is sufficient if powers and functions are delegated to those persons which are likely in their performance to have a significant effect on the business and financial standing of the company. As it is a protective section, protective at least to the creditors and shareholders, it must have been designed to prevent the participation in management of those who might put the solvency or the probity of the corporation's administration at risk. Persons not given any significant discretion or advisory role in decision making could not therefore be intended as an object of the prohibition. It may be difficult to draw the line in particular cases, but in my opinion the concept of 'management' for present purposes, comprehends activities which involve policy and decision making, related to the business affairs of a corporation, affecting the corporation as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions may have some significant bearing on the financial standing of the corporation or the conduct of its affairs." (p47-48)
He understood the expression "take part in" to connote "active participation":
"Such participation would have to be real and direct, but not necessarily in a role in which ultimate control is exercised, although it would have to be more than the administrative carrying out of the orders of others responsible for a company's management ." (p48)
"In the present section I would see the prohibition as covering a wide range of activities relating to the management of the corporation, each requiring an involvement of some kind in the decision making processes of that corporation. That involvement must be more than passing, and certainly not of a kind where merely clerical or administrative acts are performed. It requires activities involving some responsibility but not necessarily of an ultimate kind whereby control is exercised. Advice given to management, participation in its decision making processes, and execution of its decisions going beyond the mere carrying out of directions as a employee, would suffice." (p49).
Mr Reichelt's role
"(Mr Reichelt) agreed that as general manager of MWS, in charge of office administration, he would undertake to implement recommended procedural changes and report any known breaches of agreed procedures to the compliance officer who would then decide if it was a matter which required specific reference to Astwick and company ."
Insolvency and inadequate accounting records.
"The value of the company's assets is less than the amount of its liabilities taking into account its contingent and prospective liabilities."
"If the unsecured loans from Mr Smith personally in his Australian companies, which are not currently due or payable, were excluded from the balance sheet it would show an excess of assets over liabilities .... " (report para 3.12).
That view however, was expressed on the basis that loans were all covered by the Arecki agreement, and that the lender's rights of recovery were thereby restricted. That is not the case.
1. To complete the Statement of Affairs within two weeks.
2. To complete an audit of the company's accounts within 6 weeks.
3. In so far as the company has not done so to comply with section 221 Companies Act 1985 (accounting records).
4. Not to engage the services of Mr Reichelt or Mr Wade.
These undertakings do not address the fundamental problem that the company's business is unlawful. I would in any event be unwilling to accept the undertakings without some further evidence as to how the accounting deficiencies are going to be rectified, and who in the absence of Mr Reichelt and Mr Wade is going to be responsible for the day-to-day management of the company.