England and Wales Court of Appeal (Criminal Division) Decisions

IN THE COURT OF APPEAL
CRIMINAL DIVISION

		Royal Courts of Justice Strand London, WC2A 2LL
		3rd March 2009

1. MR JUSTICE NICOL: On 22nd September 2008 in the Crown Court at Hull, the appellant pleaded guilty to carrying out a regulated activity when he was not authorised nor exempt from the need to obtain authorisation, contrary to section 23 of the Financial Services and Markets Act 2000 (count 6) and transferring criminal property contrary to section 327 of the Proceeds of Crime Act 2002 (count 7). The Crown chose not to proceed with the other counts on the indictment which had alleged conspiracy to defraud in transferring criminal property.
2. On 16th December 2008 he was sentenced by His Honour Judge Jack as follows. On count 6 he was sentenced to 15 months' imprisonment. On count 7 he was sentenced to 9 months' imprisonment to run consecutively. In total, therefore, he received a sentence of 2 years' imprisonment. He was also disqualified under section 1 of the Company Directors Disqualification Act 1986 for a period of 8 years. He appeals against sentence with the leave of the single judge.
3. The facts of the case were as follows. A man by the name of Blake Prater set up an internet based investment scheme based in the United States. However, the scheme was nothing more than a pyramid investment scam. Extremely high investment returns were promised but there was in fact little, if any, investment made. Investors were promised double, and sometimes treble, returns on their money. Reinvestment was encouraged and that allowed the pot of money to build. The appellant was originally involved as an investor in 2002, but over time he grew closer to Prater. He became also the UK manager of the funds. The appellant set up the Wellspring Capital Group to do this. Various bank accounts were opened to operate the scheme and that took place between February and April 2003.
4. The appellant would nominally credit an investor's online account with the funds that they provided, so the investor was reassured by being able to see these credits on screen. However, those figures were not backed by assets or monies. In due course, the appellant would repay those investors such sums as they were purportedly due and which they asked for, but a number of investors simply reinvested their returns to build their supposed portfolios. In doing so, funds remained within the system to be circulated around. The appellant spoke to some of the investors personally to say that the money was safe and that everything was compliant as far as the Financial Services Authority was concerned.
5. The appellant was therefore involved in the investment business which was a "regulated activity", although he himself was not authorised to conduct that activity, nor was Prater. He had formed the company, processed the funds and manipulated the online account. However, he became concerned about the status of the scheme. He sought legal advice in July 2003. He was told that the scheme looked as though it involved regulated transactions and there were also concerns about possible money laundering regulations. He raised those concerns with Prater, but the scheme continued and the appellant continued to accept investment deposits. Very little of the money was actually invested.
6. The Wellspring UK operation had a Natwest account and it was opened in March 2003. In July, when the appellant received legal advice about the scheme, there was £96,000 in the account. By mid-July there was £160,000, but by 12th September only £67.44 was left in the account. During the 6 months that the account was open, some £423,658 arrived. Almost all of it went.
7. The appellant himself invested and, having remortgaged his house in June 2003, he invested £50,000. He did receive a return of £75,000. Over the course of his management of the UK side of the operation, he received the equivalent of about £65,000 as wages or commission.
8. The schemes operated until 5th September 2003 when the Federal Bureau of Investigation and the United States Internal Revenue Service raided the offices of the Wellspring Capital Group in the USA. Bank accounts were searched, including the appellant's Natwest account. Freezing orders were put in place. At that point the appellant knew the Wellspring Group was under suspicion, but up until that time he continued to invest.
9. On 8th September 2003 the appellant, in full knowledge that he had no right to move money at that time, transferred £10,000 from the UK bank accounts to himself. That was the subject matter of count 7. The Crown contended that he must at least have suspected that the funds were criminal property and that he had no right to the money personally. He took money which should have gone to others who did lose out from this scam.
10. After a complaint was received the police became involved, and in March 2005 they executed a search at the appellant's home address. Over the course of a number of interviews the appellant said that at all times he worked under Prater's instructions. He received daily instructions as to whom should be paid. He maintained that he had never persuaded anyone to invest and described his role as "pure manager". He said that he also had invested in the schemes and admitted that he had some concerns but had been swayed by Prater. He said he had always warned others, whom he described as co-individuals and not investors, of the risk.
11. Prater was subsequently sentenced by an American court to 10 years' imprisonment for security fraud and for money laundering.
12. In sentencing the appellant, the judge remarked that, at the age of 65, he had not been in trouble with the courts before. He had to be dealt with on counts 6 and 7. These were two serious offences. He became the UK manager of the operation which had promised huge returns on investments. This, the judge said, was fool's gold because there was no form of investment likely to provide such high returns. The court did not accept that the appellant had been sucked in by Prater as he was the UK manager and knew how the operation was being run. He knew there was no underlying investment. The appellant was no fool and knew that the operation would collapse. He had been drawn into the scheme because he was greedy. He had been financially ruined because of his greed. He had gone into the scheme with his eyes open, seeing the huge potential for profit, but there was also the potential for loss. The court had no sympathy for the predicament he had landed himself in. It had limited sympathy for the poor health of the appellant and his wife and for the stress that had resulted from the drawn out nature of the proceedings.
13. The effect of the scheme had been to draw investors in and some, no doubt, could ill afford to lose money. That was why there was a scheme of regulation in place to protect such people. The appellant had circumvented that regulation and was not authorised to carry out such activities. When the appellant had learned that the organisation was being investigated in the United States and freezing orders had been made, he withdrew £10,000. That was a straightforward dishonest action and was in effect a form of theft. It merited a consecutive sentence.
14. Mr Ferm has argued this appeal on behalf of the appellant with skill and economy, but not sacrificing any points that could properly be made on behalf of the appellant, and we are grateful to him for the considerable assistance that he has provided the court. He makes the following points. He argues that the sentence was manifestly excessive for the following reasons. He says that the judge sentenced the appellant inconsistently with the appellant's plea of not guilty to the charge of conspiracy to defraud. The Crown's case on this count was that the defendant had been a knowing party and co-conspirator in the scheme concocted by Prater. Mr Ferm argues that by abandoning that count, the Crown must be taken to have accepted that they could not show that the appellant was a knowing party to Prater's fraudulent scheme or of the non-existence of underlying investments.
15. However, we note that in opening the case, after the pleas were taken (in other words after it was known that the court need only sentence the appellant on counts 6 and 7) counsel for the Crown said this:

"The numbers on the computer screen [which the appellant entered following investment in the UK] were certainly not backed to any degree by assets or anything of that nature and no monies, in fact, actually moved, as the defendant knew, save for a few amounts that went off to America." (Emphasis added)

Count 1 would have required the prosecution to show, amongst other ingredients, notably that the appellant was dishonest. He may not have known the full extent of the scheme or been dishonest, but the judge was entitled to say, on the basis of his pleas and prosecution opening, that the appellant did know that the promise of fabulous returns was fool's gold and that there were no underlying investments.

16. Secondly, Mr Ferm argues that the sentence imposed upon the appellant was excessive in view of the case of R v Powell and Hinkson [2008] EWCA Crim 1214. For involvement in a similar scheme, they too were sentenced to 15 months' imprisonment, although they had contested their guilt while the appellant had pleaded guilty at the first opportunity. There was evidence that they had personally duped investors. The appellant, Mr Ferm reminds us, had taken some steps to obtain legal advice and had personally invested in the scheme and been a big loser. He also reminded us that some of the investors had written letters of support for the appellant and obviously did not think badly of him.
17. In our view though, the judge properly explained why he considered that the present appellant was more culpable. Powell and Hinkson had been underlings while the appellant ran the UK end of the operation. He was in a position to know that the money being given to him as Prater's representative was not being invested in any form of underlying investment. We think that the judge was entitled to draw that distinction. Besides, this court in Powell and Hinkson had to consider whether the sentence of 15 months was manifestly excessive. It did not need to, and did not, comment on whether a higher sentence would have been reasonable.
18. Third, Mr Ferm submits that, given the maximum sentence for this offence was 2 years, if the judge did indeed give maximum credit for the appellant's plea of guilty, he can have taken no account of the other mitigation. He will have pitched this offence at the very top end of this type of offending. Mr Ferm relies in particular on the appellant's age (65), his own poor state of health (he had a history of hypertension, diabetes, recurrent anxiety and some signs of osteo-arthritis), the health of the appellant's wife (she had ischaemic heart disease in November 2005 and the appellant is her full-time carer). The appellant's own financial affairs have been ruined and there had been a very long interval between the collapse of the scheme and the sentencing of the appellant.
19. We have considered all of these matters but we think that the judge was entitled to say that they carried very limited weight in the circumstances of the appellant's necessary role in a financial scheme which cost many other investors dear.
20. Fourthly, Mr Ferm submits that the additional 9 months' imprisonment on count 7 for transferring criminal property was excessive and led to a total sentence which itself was excessive. Again, we disagree. This activity took place as soon as the appellant knew about the authorities' interventions in the USA. The £10,000 was transferred to himself. As the judge said, it was a form of theft committed at the time when he must have realised, or the very least suspected, that other people's investments were in jeopardy. The appellant accepts that these were separate and consecutive episodes of criminality. The fact that this episode and the events which gave rise to the other count to which the appellant had pleaded guilty all took place over a relatively short time is, in our view, nothing to the point.
21. Nor do we think that the totality of the sentence of 2 years is excessive. Recent events have highlighted the vulnerability of the financial system and investors to scams on a much larger scale than were perpetrated by Prater or the appellant. The system of legal controls on investments is far from perfect, but the subversion of those controls still represents a public danger. Those who are guilty of such acts can expect them to be taken very seriously.
22. Finally, the appellant in the written submissions relies on the remarks of this court in the case of Kefford as to the need to reserve imprisonment for appropriate offending, particularly in view of the overcrowded state of our prisons. But like Powell and Hinkson, this appellant was guilty of recklessly greed driven behaviour for which no remorse was shown, as the Pre-Sentence Report in his case demonstrated. For all of these reasons this appeal is dismissed.
23. LORD JUSTICE AIKENS: Once again, Mr Ferm, thank you very much indeed.
24. MR FERM: I am grateful.