England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		14th July 1998

Mr. Justice Carnwath:

1. On 2nd March 1998 the Secretary of State presented a petition for the winding up of Market Wizard Systems (UK) Ltd ("the Company") in the public interest. On 5th March the Official Receiver was appointed provisional liquidator by Harman J.
2. Between September 1997 and March 1998 the company had carried on business marketing and selling a computer package known as the Market Wizard Equity Options Trading System ("the System"). The petition describes the System thus:

"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".

3. The System was sold to individuals at £7,500 and to companies at £15,000. One of the terms of the contract with customers was a 12-month "performance guarantee", under which, if a customer failed to make a profit over the year, then the company would refund the purchase price. This was subject to the fulfilment of a number of conditions, one of which was that documentary evidence should be retained to prove that the customer followed the signals provided by the System during the 12 month period.
4. The company advertised and sold the System from September 1997 to March 1998. Interest was initially attracted from prospective purchasers by advertisements in national newspapers, which potential customers were invited to follow up by telephoning a freephone number. They would then be sent a copy of a standard letter and a brochure describing the product and including an application form.
5. The Secretary of State seeks the winding up of the company on five grounds: in summary:

(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.

6. The Court's approach to such a "public interest" petition is well understood. In Walter L. Jacob and Co [1989] BCLC 345, Nicholls LJ explained that the Court has to carry out a "balancing exercise", and that, although the Court will be assisted by the evidence and submissions of the Secretary of State, supported by the expertise of his Department, it is ultimately to the Court that Parliament has entrusted the task of evaluating the evidence and deciding whether it affords sufficient reason for making a winding up order (p 353). Later in the same judgment he emphasised the importance attached by Parliament to -

"......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).

7. When making the order for a provisional liquidator, Harman J said:

"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

8. The System was originally developed for use in the Australian market by a company called Banner Trading Systems Property Limited ("Banner"), controlled by Mr Day, who gave evidence. Mr Day is now resident in Vanuatu, and has a new family company, DMT International Limited ("DMT"), which has recently taken over the assets and activities of Banner. The precise status of either company, and the detail of the transactions between them, are not entirely clear from the evidence before me, but are probably not material to the issues I have to decide. There seems no reason to doubt that Mr Day, through one or other of his companies, was able to, and did, confer the necessary rights on Market Wizard UK.
9. According to Mr Day -

"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.

10. The Market Wizard software was conceived by Banner during 1995 and another Australian company, Compvice Property Limited was used to develop a computer software programme in accordance with the concept. The System was introduced to the Australian market in May 1996 by Wizard Systems Australasia Pty Ltd ("WSA"). That company had been incorporated in February 1996. It was initially owned jointly by Mr Day and Mr Smith (or by companies or trusts controlled by them), but in October 1996 Mr Day sold his interest to Mr Smith. There was a so-called Sale of Equipment and Service Agreement between WSA and Banner, under which Banner sold WSA certain "equipment" and "services" relating to the Market Wizard system. By Clause 8 (1) of that agreement Banner confirmed that the Market Wizard "computer investment software package" was the "absolute property" of WSA, which was accordingly "entitled to deal with it throughout the world as it deems fit." Banner undertook to provide various specified support services to "maintain the functionality of Market Wizard software and system". The agreement provided for fees to be payable to Banner in accordance with the numbers of units sold.
11. In early 1997 Mr Smith and his wife, on a visit to their daughter who was living and working in London, decided to open up a family business in London, which their daughter's fiancé, Mr Kevin Necessian, would run. He had worked with the Union Bank of Switzerland as a financial computer analyst. Market Wizard Systems UK Ltd was incorporated on 9th April 1997 with the assistance of Edmund Bowen and Co, solicitors. Because of difficulties in obtaining an extension of Mr Necessian's work permit to enable him to run the business, he and Mr Smith's daughter returned to Australia. By this time Mr Smith had been introduced to Mr Wade, an English solicitor, and Mr Reichelt, who worked for him. (I shall consider their role in more detail later). Mr Smith decided that he and his wife would run the business with their help. The funds necessary to start the business were provided by Mr Smith, either personally or from his overseas companies. Offices were rented at 13-14 Queen Street, Mayfair.
12. Since Mr Smith did not have a right to permanent residence in this country, but his wife held a British passport, it was decided that she would become the sole director. There was some dispute before me about the extent to which his wife played any active part in the management of the company. However, I do not think it is necessary to investigate this question in detail. It is not disputed that Mr Smith acted as shadow director, and, having heard his evidence, I have no doubt that he was in effective control of the company. Mr Reichelt was described as "general manager"; Mr Wade as company secretary and solicitor.
13. The only formal document relating to the money advanced by Mr Smith is a so-called "loan repayment agreement" dated 16th August 1997 made between the company and "Arecki Pty Ltd as trustee for the Wizard Systems Trust" ("The Arecki agreement"). Arecki was described by Mr Smith as his holding trust family company. The agreement provided as follows:

"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."

14. That was signed for Arecki by Mr Simpson, their financial controller and Mr Smith's main financial adviser in Australia; and for Market Wizard Systems UK Ltd by Mrs Smith. As will become apparent, the funds advanced to the company included substantial amounts from Mr Smith himself, and from other companies controlled by him other than Arecki or Wizard Systems Trust. There is no equivalent agreement relating to those.
15. A brochure was prepared. The brochure included an elaborate "simulated trading model" designed to show how use of the System between July 1996 and June 1997 could have turned an investment of £12,000 into a total of over £150,000. The standard letter which accompanied the brochure commented as follows:

"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."

16. The company had no authorisation to conduct investment business under the Financial Services Act 1986. Customers were required to sign a statement acknowledging that the company did not offer financial advice. The brochure contains in a highlighted box the following:

"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."

17. The company began advertising in September 1997. Twelve "blue-chip" stocks were selected as ones which had a high turnover of shares and were representative of each of the major sectors of the economy. A typical advertisement offered the opportunity to earn "exceptional profits", whether the stock market was going down or up, with Wizard's "unique trading programme". It also claimed that "using the Market Wizard System Version 4 from 1st July 1996 until 30th June 1997 with a bank of £12,000 you could have earned £145,056 by now" . It referred to "the security of our guarantee". It invited readers to telephone a given number for a "free report".
18. In October Mr Reichelt had some discussions with Mr Cridland of Astwick and Co, with regard to the requirements of the FSA. Astwick was authorised under the FSA and regulated by the Personal Investment Authority. Mr Cridland was a long-standing friend and business associate of Mr Wade. Mr Cridland's view was that the service offered by the company did not involve giving investment advice such as to require authorisation under the 1986 Act. As he said:

"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).

19. On the other hand he considered that the advertising could be caught under the terms of section 57 of the Act, and he proposed accordingly that it should be approved by Astwick and Co. As appears for a letter from Mr Cridland dated 22nd October his advice resulted in the deletion from the advertisement of the reference to a "unique" trading programme and to the "guarantee". Apart from those points, advertisements after the beginning of November were in similar form to the earlier advertisements, but they included a statement that they had been approved by Astwick and Co for the purposes of section 57 of the FSA.
20. Mr Cridland also suggested a number of procedures to be put in place to show that the Company would be "complying with the spirit of the Act", including the appointment of a "compliance officer" to oversee the sales process. On 17th October Mr Wade confirmed that he was prepared to fulfil the role of compliance officer "to oversee the sales procedures at (the Company) and to ensure compliance with the provisions of the FSA 1986 and the directions of Astwick and Co." Standard "Compliance Forms" were prepared for completion by sales staff, and checking by Mr Wade. These were designed to ensure that customers had been questioned as to their financial ability and computer literacy, and warned of the risk of losses. There were also "compliance meetings", attended by Mr Wade, Mr Reichelt and Mr Cridland, but not Mr or Mrs Smith. There are minutes of such meetings on 3rd, 10th and 17th November; the minutes were kept by Mr Reichelt. Mr Reichelt later told the DTI that these were the only meetings of which minutes were prepared although there were several other informal meetings.
21. By the end of October, 17 sales of the System had been made to individuals for a total price of £127,500. By January this had risen to 40 sales for a total value of £300,000.
22. The Department's enquiries began on 23rd October and their representatives interviewed Mr Reichelt and Mr Smith at the company's premises on 23rd, 24th and 30th October. They also spoke to Mrs Smith on 24th October, and they obtained documents pursuant to section 447 of the Companies Act 1985. At that time the staff included seven sales personnel, a person manning the customer help-desk, a book keeper and a receptionist. A second visit was made commencing on 6th January 1998 at which they interviewed Mr Reichelt, and other staff including Mr Sengupta the company's accountant. They also obtained further documentation from Mr Reichelt pursuant to a second section 447 authorisation. Neither Mr Smith nor Mrs Smith were present at this interview, both being in Australia at the time.
23. The company continued to trade until the appointment of a provisional liquidator on 5th March. By that time sales of over 70 systems had been sold to the value of over £400,000. Following his appointment, the Official Receiver wrote to each of the 76 licence holders notifying them of his appointment. As at 16th June he had received nine responses, four of which were acknowledgements, two expressed dissatisfaction with the System or the methods by which it had been promoted, and three expressed dissatisfaction at the action taken by the DTI. One result of the appointment of a provisional liquidator was that the company ceased to be able to provide its updating service or the daily price data. This led to some complaints from those who were happy with the product, but were now prevented from using it as intended.
24. The company has produced in support of its evidence a number of letters from apparently satisfied users of the System. For example, a Mr Wolstenhulme, who describes himself as an "Account Executive" with stockbrokers Redmayne-Bentley, says:

"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."

25. Another customer, a Mr Weatherstone, says that he has traded successfully on his own account for 28 years and has satisfied himself as to the effectiveness of the System. He asks the High Court at least to "allow MWS to fulfil its existing customer contracts rather than allowing the DTI to create a total loss situation for all concerned". As the material before me stands, there is evidence of complaints from only two out of the 76 customers who have acquired the System. I have not, however, heard evidence from either side as to how the System is viewed by brokers generally or those with expertise in this market.

The Australian Securities Commission

26. The similar activities of WSA in Australia have been the subject of investigation by the Australia Securities commission ("ASC"). The Australian Corporations Act 1989 section 77 defines "investment advice business" as (inter alia) "a business of advising other person about securities". In March 1997 the ASC issued Policy Statement 118 containing guidance relating to computer software. This was in recognition of the "increasingly significant role" played by such products "influencing investment decision of investors, in much the same way as investment advice provided in other forms." In paragraph 118.31 the following is said:

"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)."

27. The ASC served statutory notices on WSA in September 1996 requiring information. This was followed by discussions of the "prescribed warnings" which would be required if the ASC was to issue a "no action" letter. These negotiations did not proceed, apparently because the ASC was involved in other litigation in the Australian Federal Court raising similar issues. Further statutory notices were served on WSA in December 1997 and March 1998 seeking further information, and a demonstration of the System took place at WSA's offices on 15th April 1998. According to the ASC's letter of 8th May, the information is currently being reviewed.
28. Mr Day and Mr Smith had previously been involved in an ASC investigation with a company called Multivest System Pty Ltd, which offered computerised systems for trading in futures. This had led in July 1996 to them consenting, without admission of liability, to orders banning them from acting as representatives of futures brokers or advisers for three years.

SIB guidance

29. Prior to the formation of the Financial Services Authority, the Securities and Investments Board ("SIB") was the body principally responsible for administering the FSA in this country . The Chief Executive's Annual Report for 1996/7 referred to the subject of "computerised trading systems" and said this:

"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.

30. Consistent with that approach, I was shown a draft of a letter which SIB has used to respond to enquiries from people offering "technical analysis". One such letter states:

"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."

31. These statements of course do not purport to offer authoritative guidance as to the interpretation of the statute, which is a matter for the Court. They do, however, indicate that the problem is one of some general importance, on which it may not be easy to draw clear-cut distinctions. I am told that this is the first case in which the issue has come for decision in the higher courts either in this country or Australia.

Unauthorised advice

32. By section 3 of FSA 1986 the carrying on of "investment business" is prohibited other than by "an authorised person". "Investment business" is defined by section 1(2) as:

"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"

33. There is no doubt that the options which are the subject matter of the System are investments as defined (Schedule 1 Part I). None of the exclusions in Part III is relevant. The issue is whether the company is giving or offering advice within the meaning of paragraph 15.
34. Like Harman J, I have no doubt that the signals generated by the use of the System constitute the kind of advice with which paragraph 15 is concerned. The signals provide guidance as to the course of action which the user should take in relation to the buying or selling of the investments. Such guidance, in the ordinary use of English, is "advice on the merits" of purchasing those investments. It matters not that the user is free to follow or disregard the advice; nor that he may receive further advice from his broker before making a final decision. The brochure itself describes what is offered as "critical guidance when you need to make intelligent, disciplined trading decision...". Similarly, the user manual (p3) describes Market Wizard as a "computerised trading tool" that "generates detailed trading advice for a specific range of exchange traded securities." Those appear to be entirely accurate descriptions of what the programme purports to do.
35. Mr Ashe, for the company, submitted that the System is "simply a matter of calculation based on historical data and the updates put in by the customer." He described it as "a sophisticated and technologically based 'calculator'". This submission would have some substance if all the programme purported to do was to provide a convenient means of extracting and analysing data as to historical movements in the market, without offering any interpretation of that information as a guide to future action. But such a limited function would be quite inconsistent with the sense of the brochure and the evidence of Mr Day. The whole purpose of the programme, as explained by Mr Day, is to reproduce in computer programme form the concepts developed by "legendary market forecasters" relating to "the use of parabolas in determining the future direction of market price". The part of the brochure dealing with the "guarantee" describes the System as "a medium to long term investment strategy". To qualify for the guarantee the user has to show that he has followed the signals provided by the programme during the 12 month period. That requirement can only make sense if the signals are intended to guide the strategy.
36. It is to be noted that the Act requires that the advice should be on the merits of purchasing "an investment". General advice on the merits of a category of investment, for example on the merits of investment trusts as opposed to unit trusts, is not caught. By contrast the System in this case gives specific signals directed to the merits of buying or selling options in each of the 12 selected companies. Mr Ashe did not seek to argue that the mere fact that the user has to select a particular option series for the selected stock makes any difference. Nor in my view does it make any difference that the purchaser is warned that what he is receiving is not intended to be treated as investment advice. If, on an objective view, it is investment advice within the meaning of the statute, the agreement of the parties cannot make it something different.
37. The only arguable issue, in my view, is whether it is the company which is "giving or offering to give" the advice. Mr Ashe submits that the words of paragraph 15 do not naturally apply to someone who simply sells a software programme which may be used by the purchaser to generate advice. The only time at which any advice is given on the merits of a particular investment is at the point at which the user generates a signal. At that point the company does nothing. Conversely, at the time the company sells the programme, it is not advising on the merits of any particular investment, but simply putting in place a system which the customer can use to obtain such advice. Mr Ashe further submits that it would be wrong to stretch the wording of what is a penal statute to cover something which is not naturally within it. If the Secretary of State wishes to control such activities, he should exercise his powers under section 2 of the FSA to extend the scope of the activities that are to constitute the carrying on of investment business.
38. Mr Ashe even went further and suggested that the advice being given was not the responsibility of the Company at all, but that of Banner, which developed the System. I cannot accept that proposition. It is quite contrary to the basis on which the programme is marketed, as shown by the brochure. The brochure strongly emphasises that it is the Company whose expertise lies behind the efficacy of the System. Thus, it claims, "the Market Wizard system is a new product based on existing international experience that we have brought to London..."; "Market Wizard System UK Ltd specialises exclusively in developing and distributing next generation Financial Trading Software"; and "as a market leader our international group delivers innovative trading technologies of the highest calibre to some of the world's top traders". Clearly the company presents itself to potential customers as providing the expertise which underlies the advice. It cannot compare itself to a mere retailer selling computer software.
39. In any event I think Mr Ashe's analysis of paragraph 15 is too narrow. The question is whether the company is carrying on the business of giving advice. It is not necessary to identify a particular point in time at which the advice is given. It is enough, in my view, that it is providing the customer with a medium by which its purported expertise in the analysis of historical trading patterns is communicated in the form of advice related to a particular investment. If the programme were being operated by the company itself to produce the signals, in response to specific requests from customers, there would be no doubt that it was the company which was providing the advice. The fact that it is the customer who is operating the programme does not change the nature of the advice or its source.
40. This direct link between the company and the ultimate advice is also reinforced by the daily Internet communication with the company. As the user manual describes it,

"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.

41. I conclude therefore, on the facts of this case, that there was a sufficiently direct link between the activities of the company and the advice received by users on the merits of particular investments, and that accordingly the company's business did involve the giving of such advice. I accept that in some cases the line may not be easy to draw. If the selling of such computer programmes is regarded as a serious problem by the relevant authorities, there may be a case for some amendment to the definition of investment business to clarify the position in borderline cases. However, I do not regard this as such a case. In my view authorisation under the Act was clearly required.

Misleading statements

42. The petition contains a number of complaints of misleading information in the brochure, the advertisements and the standard letter. In summary, it is said, the company's publicity represents the System as a proven established trading analysis system which produces consistent profits, whereas there is no evidence to support such claims. In particular, complaint is made of the often repeated representations that use of Market Wizard between July 1996 and June 1997 could have produced earnings of £145,056 on an investment of £12,000.
43. Mr Ashe points to the fact that the brochure makes clear that these figures are derived from a "simulated trading model". The "technical data" in the brochure explain the way in which the exercise was conducted, including the assumed "trading strategy" which was adopted pursuant to the signals generated by the programme. Accordingly, says Mr Ashe, a customer reading that explanation would not have been misled into thinking that this was other than a simulated exercise.
44. However, other parts of the brochure clearly represent the System as an established and proven model. For example, it is said to be -

"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."

45. Furthermore, the newspaper advertisements to which I have referred, and the standard letter sent out with the brochure, say nothing of the simulated nature of the model. The standard letter, to which I have referred, states in terms that "using Market Wizard as your guide between 1st July 1996 and 30th June 1997 had you invested £12,000 ... you could have earned £145,056." It goes on to say that "astute system traders routinely achieve these type of returns." There is no evidence to support those claims. The System was not available for use between July 1996 and June 1997. The company did not produce any evidence of what "astute system traders" routinely achieve.
46. More surprisingly, there was no evidence of any serious attempt to update the model to monitor the results of trading in the period since the System has been marketed in the UK. I found the company's evidence on this aspect difficult to understand. Mr Day claimed responsibility for the simulated model used in the brochure, which had been produced using a programme (not available to customers) specially designed by Banner for the purpose of such monitoring. He himself was not familiar with the detail of the programme and only limited explanation was given in the letter he produced from Compvice Ltd, who had developed it. Mr Day recognised that the results depended on the assumed "trading strategy" built into the programme, but he claimed that this represented a "fair money management strategy" which would be considered "prudent in the industry". Mr Day believed that subsequent monitoring had been carried out by his company using the same programme, but he was unable to produce the results of such monitoring.
47. Mr Smith produced his exhibit "NS9", which was described in his evidence as "particulars of the performance of the System since commencing trading in the UK". No source was given for it in the affidavit, and Mr Day denied any knowledge of it. It purports to show how an investment of £12,000 in March 1997 (some six months before the commencement of trade in the UK) could have shown a profit of almost £40,000 by the end of January 1998. Other than saying that it had been produced in his office, Mr Smith was unable to explain it, or the assumed "trading strategy" which had been used. Nor was he able to respond to the criticisms put to him in cross-examination by Mr Hildyard, for example that the profits were overstated by almost £20,000 because brokerage fees on sale had been added to, rather than subtracted from, profits. Accordingly, this document has no evidentiary value in support of the company's case. Rather the failure of the company to produce any evidence of reliable monitoring of the performance of its System since it has been marketed, underlines the irresponsibility of the claims originally made.
48. The strongest point in the company's favour is the lack of any evidence of serious complaint from users, and the positive support in some of the letters to which I have referred. Unfortunately, no witnesses were called to support this documentary evidence. Accordingly, it is impossible to evaluate to what extent the experience of actual customers matches the dramatic claims made in the publicity material.
49. On the evidence before me I can only conclude that the Department's case is made out and that the company has made seriously misleading statements to promote its product.
50. Although not essential to the Secretary of State's case, it is also submitted that the statements constitute a breach of sections 47 and 57 of the FSA 1986. Section 47 makes it an offence to make misleading statements for the purpose of inducing a person to enter into an investment agreement. Mr Hildyard did not in the event press this submission - rightly so in my view. The purpose of the misleading statements was to persuade customers to buy the programme, not to buy investments.
51. Section 57 contains restrictions on advertising. It provides that subject to certain qualifications

"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."

52. The company's advertisements and the brochure were clearly designed to encourage customers to believe that investing in the securities concerned was likely to be a profitable exercise, and to that extent was "calculated to lead" at least "indirectly" to them buying and selling such investments. The advertisements before 28th October 1997 were not authorised, as they should have been, nor was the brochure. To this extent there was in my view a breach of section 57.

Mr Reichelt's involvement in management.

53. Mr Reichelt was described as "general manager" of the company. He was an undischarged bankrupt having been made bankrupt by order of the High Court dated 12th December 1995. By section 11 of the Company Directors Disqualification Act 1986 it is an offence for a person who is an undischarged bankrupt to -

"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.

Re Comstrad

54. By way of background, it is necessary to refer to a judgment of my own in re Comstrad Ltd. (27th September 1996 unreported - the transcript wrongly gives the date as 1995). Comstrad was a company formed to promote various computer programmes designed allegedly to assist the selection of winners in horse races, or of score draws for football pools. I held that that was -

"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.

55. Mr Reichelt was also involved in that case. He was described in the evidence as the "general manager" of the company. At page 10 of the transcript I commented on his role in the light of the changing emphasis of the company's evidence. I said:

"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."

56. Although I was not aware of this when giving that judgment, Mr Robinson and Mr Reichelt were also involved at that time in the activities of a company called Interdata UK Ltd, which was promoting a computer programme called Alpha-XL, intended to assist customers in trading on the ordinary stock market. Interdata apparently was in business for a very short time and its activities ceased when Comstrad, which was supporting it, was wound up. I was shown a brochure which was prepared in order to explain the product. In this Mr Robinson was shown as chairman and Mr Reichelt as "general manager". Mr Wade was company secretary and Mr Cridland was described as "financial consultant". According to the brochure, that programme offered "the objective unemotional calculus of the modern computer combined with the collective minds of genius programmers."

"Concerned in the Management"

57. I was referred to a number of authorities in which the expression "being concerned in the management" has been considered. In R -v- Campbell [1984] BCLC 83 the Court of Appeal upheld the appellant's conviction for breach of an order under section 188 of the Companies Act 1948, by which he was prohibited from taking part in or being concerned in the management of a company. His role was described as that of "a management consultant". As Beldam J said:

"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)

58. Later they referred to an extract from the Judge's summing-up where he had made clear that the question was one of fact and degree for the jury, and had continued -

"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).

59. Beldam J commented that that direction if anything erred on the side of being too favourable. This was because the Judge had apparently regarded the words "concerned in" and "taking part in" as having the same meaning. Beldam J said that this was too restrictive a view. The wording of the section was -

"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)

60. In re Clasper Group Service Ltd [1988] 4BCC 673 Warner J had to consider the application of a similar expression in section 212 of the Insolvency Act 1986. He held, on the facts of that case, that the functions of the employee concerned were "too lowly" for him to come within the section. He was the son of the controlling shareholder, but according to the evidence -

"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).

61. Some assistance may also be found in the words of Shaw LJ in Re a Company [1980] 1Ch 138, 144. This case was concerned with section 441 of the Companies Act 1948, which gave certain powers to the High Court where it was shown that a person while an officer of a company had "committed an offence in connection with the management of the company's affairs". He said;

"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."

62. The fullest discussion to which I was referred was in a judgment of Ormiston J in Commissioner for Corporate Affairs -v- Bracht in the Supreme Court of Victoria (1989) 7 ACLC 40, in which he reviewed a number of authorities including the two Court of Appeal cases to which I have referred. That case concerned a statutory provision in very similar terms to section 11. The respondent, Bracht, had been involved in negotiating credit facilities on behalf of the company and had held discussions with the company's bank manager as to the obtaining of bank guarantees. The magistrate had dismissed the charges apparently on the grounds that the director to whom Mr Bracht reported had "effective or ultimate control". Having referred to R -v- Campbell and the dicta of Shaw LJ in Re a Company, the Judge said:

"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)

63. As to the expression "being concerned in" he said:

"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).

64. Before me both parties were content for me to adopt the guidance contained in these authorities, including the Australian case. The extracts which I have cited demonstrate the difficulty of achieving a succinct test. Essentially it is a "jury question". I would, however, respectfully agree with Ormiston J in emphasising that "ultimate control" is not a necessary element, and further in the emphasis he gives to those functions which are relevant to "the solvency or the probity of the corporation's administration".

Mr Reichelt's role

65. Turning to the evidence in the present case, Mr Reichelt explained the background of his involvement in those businesses and his role in the Company. He had been a solicitor in Queensland before he came to this country in 1992. Since 1994 he has been employed by Mr Wade, acting for various Asian and Australian concerns doing business in the UK. He had permission from the Department of Employment to be employed by Mr Wade as an "international legal consultant". Accordingly, such services as he provided to companies like Comstrad or Market Wizard were provided nominally in the name of Mr Wade or one of his companies. The precise nature of the arrangements between Mr Wade and Mr Reichelt were not entirely clear from the evidence. It seems that Mr Wade provided Mr Reichelt with a flat and living expenses, and additional payments which apparently varied according to what Mr Wade was able to pay.
66. Mr Wade and Mr Reichelt were introduced to Mr Smith in April 1997 by a business acquaintance. According to Mr Reichelt, Mr Smith was aware of his previous involvement with Comstrad, but not that he was bankrupt or of the disqualification which went with it. He understood that Mr Smith required simply "someone to liaise if he or his wife had to be out of the UK at the same time and that this would not frequently occur". He says that he agreed to act as general manager, provided that this did not involve anything other than strictly administrative tasks and the company was being fully managed by the Smiths. He says that his role with the company was "strictly administrative". He did not have a separate office or a secretary. He was not authorised to send letters without approval from Mr or Mrs Smith, and when they were away from the office he referred every piece of correspondence and every management decision to them.
67. Mr Wade gave evidence supporting Mr Reichelt's account. He says that Mr Reichelt was always an employee of his firm and that he was in daily contact with him. He did not mention Mr Reichelt 's bankrupt status to Mr Smith, because it did not appear to him to be of any importance, Mr Reichelt not being an officer of the company. He received all his instructions from Mr or Mrs Smith.
68. Mr Smith's view of matters was rather different. When he met them, he had been told of their involvement with Comstrad and Interdata, and it was for that reason that he thought they would be useful. As he said, they had been "involved with people that have got a very bad track record and they would know all the flaws in the business." He regarded Mr Reichelt as "a very smart man", with a good record as a lawyer and a businessman in Queensland. He regarded him as "an excellent administrator that could do anything within reason". He was "a very learned man. ... he has got very high qualifications, so I run a lot of things past Mr Reichelt all the time, because I believe he is much smarter than me." He liaised with him regularly when he was away, and treated him as his "right hand man". It was Mr Smith who chose the title "general manager".
69. Even if one accepts Mr Reichelt's evidence that he referred all management decisions to Mr Smith, it is quite clear in my view that he was at least "concerned in the management" in the sense explained in the authorities. As I have indicated, the fact that he did not have ultimate control is not critical. Mr Smith clearly relied on him in making his business decisions and in the general administration of the business. He had no reason to do otherwise since he was not aware of Mr Reichelt 's disqualification. It is also clear that Mr Smith was away for substantial periods. In particular, he was away for more than two months over Christmas 1997. Even with modern means of communication, effective management of the business would have been impossible without someone such as Mr Reichelt in charge of the office.
70. Perhaps the clearest indication of Mr Reichelt's central role is in relation to the "compliance meetings" which he attended with Mr Wade and Mr Cridland. Although he claimed that even then he was acting under direct instructions from the Smiths, there is no indication of that in the minutes which he himself prepared. Furthermore, Mr Smith had no detailed knowledge of the statutory and other requirements with which the company was seeking to comply. Thus for example in the minutes of the meeting on 3rd November it is recorded that -

"(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 ."

71. Thus, one can see that quite apart from his ordinary role as "right hand man" to Mr Smith, he was taking direct responsibility in relation to an aspect of the business which was critical to "the probity of the corporation's administration".
72. There is a separate question as to the extent to which the company should be held responsible for the breach of section 11. Although I accept that Mr Smith did not himself know of Mr Reichelt's bankrupt status, or of its consequences under section 11, he was aware of Comstrad's dubious activities and the fact that it had been closed down pursuant to Court action. Indeed, he believed that they had "pinched" some of his own publicity material. Yet it was to Mr Wade, Mr Reichelt and Mr Cridland, all of whom had been deeply involved with Comstrad and Interdata, that he deliberately entrusted the compliance aspects of his business. Had he made minimal enquiries, or even asked for a copy of my judgment in Re Comstrad, he would have become aware of the additional problem of Mr Reichelt's bankrupt status.
73. I find it difficult to understand why Mr Smith should have adopted this course particularly against the background of his difficulties with ASC in Australia. Overall, I did not find him to be an unconvincing witness. His protests that his was not a "Comstrad company" were heartfelt, and it may well be that there is more substance to the Market Wizard programme than there was to the Comstrad one. Mr Reichelt and Mr Wade on the other hand I found to be unreliable witnesses. They must have been well aware that Mr Smith, in view of his extensive business interests in Australia, required something more than an administrative clerk. Yet they accepted for Mr Reichelt the post of "general manager" without disclosing his disqualification, and without seeking any written clarification of his precise functions. It is particularly extraordinary that Mr Wade, who was supposed to be solicitor to the company and "compliance officer", could have thought it right to act in this way. An equally unsatisfactory feature of his evidence was his "failure to recall" the correspondence he had had in 1996 in his capacity as secretary of Interdata with the SIB on the Interdata system. In particular their letter of 19th April 1996 made clear their view that the programme being promoted by Interdata contravened the Act. I find it impossible to accept that he would have failed to remember it in his discussions with Mr Smith. Unfortunately, Mr Smith was won over by Mr Wade, whom he saw as "a lovely English gentleman ... a solicitor on The Strand". He must take responsibility for his credulity.

Insolvency and inadequate accounting records.

74. I will deal with these two issues together because they are linked and they can be dealt with shortly. The company's duty under section 221 of the Companies Act 1985 was to keep accounting records "sufficient to show and explain the company's transactions", and such as to "disclose with a reasonable accuracy, at any time, the financial position of the company at that time". The precise state of the company's affairs is impossible to ascertain from the documents before me. There are various different sets of accounts at different dates, but Mr Ashe, for the company, does not claim that any of them represent a complete or reliable statement of the company's affairs.
75. The company had its own accountant, a Mr Sengupta, but he was not called as a witness. There was an affidavit from Mr Simpson, who is Mr Smith 's financial adviser in Australia, but he also was not called. The accounts prepared by him are clearly incomplete. Mr Alexander of Pannell Kerr Forster was called as a witness and had prepared a report on the company's solvency. However, he had no access to any primary records of the company and was not able to provide any information to supplement that contained in the other material. The Official Receiver, on his appointment as provisional liquidator in March, extracted a computerised balance sheet and profit and loss account from the company's computer system. However, his report records that Mr Smith accepted that these records "did not accurately reflect the true financial position of the company". The company has not yet complied with its obligation to provide a statement of affairs to the provisional liquidator, as required by him pursuant to section 131 of the Insolvency Act 1986.
76. In particular there is no adequate documentation to record the amounts or status of the loans made to the company by Mr Smith or his Australian companies. The most recent information, provided to Mr Alexander by Mr Simpson in a letter of 12th June, shows a total of $561,591.53, including payments by Mr Smith direct, by WSA and by Arecki Property Ltd. It is impossible to relate these amounts to the other balance sheets. The only written agreement is the so-called Arecki agreement. However, only some $91,000 of the outstanding amount is attributable to Arecki Property Ltd.
77. There has been a clear failure to comply with section 221. Furthermore, from such information as is available, the company is insolvent by the "balance sheet test"; that is (in terms of s 123(2) of the Insolvency Act 1986) -

"The value of the company's assets is less than the amount of its liabilities taking into account its contingent and prospective liabilities."

78. The extent of the deficiency differs depending on which set of accounts one looks at. Thus, the March 1998 balance sheet reproduced in the Official Receiver's report shows net liabilities of £106,202.49, while the balance sheet attached to Mr Alexander's report, which had been prepared by Mr Simpson, showed an excess of liabilities over assets of £164,740. Mr Alexander's view was that the balance sheet test was irrelevant because, as he put it:

"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.

79. Mr Smith's response to these points was two-fold: first, any deficiencies in the company's accounting records were due to the failures of the accountant, and could and would have been rectified before the first year's accounts were audited, had the Secretary of State not intervened; and, secondly, that even if the loans were not fully documented, there was no question of Mr Smith withdrawing the money which he had invested in the company, and that in practice it was perfectly capable of meeting its debts as they fell due. There is some force in both points. No doubt was cast on Mr Smith's ability to support the company nor on his intention to do so if it is allowed to remain in business. Nor is there any evidence that anyone has been put at risk by the deficiencies in the accounting documentation. Mr Smith seems unused to drawing a very clear distinction between his own activities and those of his various companies, and he evidently depends on his Australian financial advisers to sort out the position at the end of the year. They appear to have found considerable difficulty in doing this given the inadequacies of the systems put in place by the United Kingdom accountants. If this were the only complaint, it is unlikely that it would been a sufficient reason to justify winding up the company provided there were evidence of urgent steps to rectify the accounting position and put the loans on a proper basis.

Conclusion

80. It remains for me to conduct the "balancing exercise". In this connection I note that the following undertakings were offered by the company through Mr Ashe at the end of the hearing:

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.

81. The most important consideration in the Company's favour is the lack of any evidence of actual harm to customers. Rather there is the prospect of detriment to customers whose expectation of a continued service from the company will be disappointed. It is unclear on the evidence before me what prospects they would have of recouping their investment from the company.
82. Against this, I have found that each of the complaints made by the Secretary of State is made out. Most importantly, the business which the company was set up to conduct is an unlawful business in the absence of authorisation under the FSA. There may be cases where failure to obtain authorisation at the outset is due to an inadvertent error and there is some prospect of it being corrected. In such circumstances the remedy of winding up might be unduly drastic. However, this is not such a case. All those concerned with the promotion of the company were well aware that they were entering a very sensitive field, and Mr Wade at least was aware of the SIB's previous view of the matter. They have only themselves to blame if they did not take any steps to secure clearance before they commenced the business. Furthermore, they have failed to produce any evidence to persuade me that authorisation is likely in the future. In these circumstances I see no alternative but to allow the petition.