Select Committee on Treasury Minutes of Evidence

Examination of Witness(Question Number 252-259)




  252. Good morning, Mr Alexander, and welcome to the Committee. You look like a lonely figure, sitting there. For the sake of the shorthand-writer, could you introduce yourself, please?
  (Mr Alexander) Yes, indeed. My name is Stephen Alexander. I am a partner of Class Law Solicitors in London.

  253. Fine; thank you very much, and thank you for coming along to help us with our inquiry into the split capital investment trusts. We are having this meeting today and another meeting next week, and thereafter we will be seeking written evidence from the entire investment community on the issue of split capital investment trusts, and we will be returning to the issue after we have received that written evidence and having other witnesses in as a result of it. The main aims of our inquiry are to look at this issue from the consumer's point of view, many consumers have written to us expressing anguish at what has happened to their savings and funds; and we are also looking at it from the industry point of view to ensure that good corporate governance exists in the industry. So you are the first of a number of witnesses along those lines. In your submission to us, Mr Alexander, you mentioned in your last paragraph that "there may be important evidence to give to the Committee on the knowledge of the FSA long before the crisis emerged."[1] Now just two or three minutes ago we were handed a document entitled "Documents supplied to Class Law by the BBC obtained from Guernsey Financial Services Commission", and my attention, in the brief time I have had this document, was focused on a paragraph which stated that "Prospective investors should be aware that many of the split capital or high income investment trusts and companies in which the Company invests may themselves have cross holdings in the same split capital or high income investment trusts and companies. This may be considered to give rise to a systemic risk should there be failures within the sector." How significant is that paragraph and the document in its entirety?

  (Mr Alexander) I was handed these documents late on Friday night, and, having considered them over the weekend and also with leading counsel, I think the significance of these documents actually is far greater than merely the possible effect it has on the FSA, and I would like actually to look at it from the point of view of all the parties involved. There were a number of funds that were floated in Guernsey, and it is interesting to note that it is only the Guernsey regulator who insisted upon this sentence: "This may be considered to give rise to a systemic risk should there be failures within the sector." Now the first point, and it is a very important and serious point, is this, that, according to the evidence I was given, these documents were sent to the FSA. It is of extreme concern as to why, when those documents were handed to the FSA, serious, immediate action was not taken to notify the public in the strongest possible terms; because it is my view that that one small sentence indicates that these investments were of high risk, yet right up until July, August 2001 we were continuing to see low risk, medium risk documents being put out to the market-place. And it is quite fair to say that many of the people that have instructed us only invested during the spring, summer of 2001, when there seemed to be a frenzy of raising more and more money to keep the thing going. Now the effect of that is the following, that it is our view that there may well be issues involving misfeasance in public office on behalf of the FSA; it would seem to satisfy the tests laid down by the House of Lords in the Three Rivers case, about recklessness and failure to act. If that is right, in my view, it brings into question whether or not the FSA can properly continue with investigations. It is well known that you cannot be a judge in your own cause, and equally as well, from those complained about and for those complaining, if you have got a party involved in the investigations who themselves may now have to answer questions and give explanations and may be party to a possible suit, if it is found that they have, in fact, not acted correctly, then I would just raise with the Committee the possibility that there needs to be some other form of inquiry into this. Because, clearly, for a period of time, and it may well have been, according to the document, certainly from, I think, sort of December, January, December 2000 through to when the thing finally blew up, there is a period of time when the FSA themselves may be under serious inquiry. So that is the first point in relation to the FSA. The second points relate to the actions of directors. What we also have now is certain directors signing themselves to this statement related to systemic risk, yet they were part of companies in the UK that were continuing to put out marketing material that was not in keeping with the prospectus. It also raises a question of the auditors, because the auditors were signing off on this document, and they themselves were auditors in relation to other UK funds. So I think the whole question of these Guernsey documents, which, as I said, have only just come to light, raises whole issues as to how many other people, who perhaps up until now have not been, shall we say, directly involved, may be directly involved. There is a lot more to be done, these documents are not readily available from Guernsey, these were only extracts supplied, and so we are now trying to obtain the full set, for you and for ourselves. So that is the evidence that arose over this weekend.

  254. Fine; thank you very much. In terms of the date of the document, this is a photocopied document and there is 24 August on it; is it 24 August 2001?
  (Mr Alexander) I think that is 2001. I think the earliest one is the BC Income and Growth, which seems to be 23 February 2001, but until we get the final printed forms I think it would be unwise to comment on it.

  255. On how many clients' behalf is Class Law acting?
  (Mr Alexander) Currently, about a thousand, and rising by the day. It is across the board, it is ranging from those that have lost millions down to those that have lost five or six thousand pounds; it is not a respecter of any social group.

  256. What trusts and management groups feature most frequently?
  (Mr Alexander) Obviously, in most of the complaints, it relates to a number of Aberdeen funds, BFS funds, Exeter funds, those are the principal three, although there are others. In terms of advisers, it relates to Brewin Dolphin, who, as the Committee are aware, were not only discretionary fund managers for a lot of people but were also brokers to some of these trusts, probably, out of all the brokers and advisers, we have the largest number of complaints against them, many other of the private client stockbrokers in London, right the way through to small IFAs in the provinces; across the board.

Mr Laws

  257. Mr Alexander, you have provided us with this chart,[2] which is just to the right of the Chairman; without going into too great a detail about it, could you just summarise the significance of it for your clients?

  (Mr Alexander) What we attempted to do was try to plot some of the cross relationships, focusing not so much on the cross holdings themselves in companies but actually the cross relationship between the directors; and we did not put every single one of them, because it would be simply too big and too complex and hard to understand, but we focused perhaps on some of the people, such as Mr Fishwick, Mr Read and Mr Gilbert, to name three, who feature quite heavily on the chart. The implications are, with all these cross relationships and sitting on each other's boards, it brings into question, on a corporate governance issue, the independence and objectivity of directors; because, in my view, if you have got directors sitting on different companies' boards, making investment decisions, to invest effectively in each other, how can those directors be independent and not have a conflict of interest. It is a normal part of company law that if you are a director with an interest in a contract you cannot vote on it at a board meeting. So I think one of the important questions to be asked of these people is, what was the actual decision-making process when investment decisions were made; because what this chart is showing is there were too many people sitting on boards with conflicts.

  258. And do you have any evidence of collusive behaviour?
  (Mr Alexander) Evidence of collusive behaviour; to a degree. All one can point to is the fact that the same people keep cropping up, in the same companies, all the time; and if you look at the shareholdings, if you look at even some of the later shareholdings, it is the same people, with substantial shareholdings in each other's companies. If you look at BFS Managed Properties, which came out of Guernsey, they have Mr Hyman, an Aberdeen director, on that board, and Mr Read on that board, and if you look at the shareholdings it is Aberdeen, it is BFS and others. So, in terms of do I have a specific thing showing it, no, but I think it is fairly clear, from the searches, from the records, that the same people keep investing in the same companies time and time again.

  259. And does that give you just a general concern for the interests of your clients, or do you think that they may have been engaging in activities which the FSA or any other regulatory body would consider to be inappropriate and outside of the law or regulation that is relating to this area?
  (Mr Alexander) I think there are grave concerns about it. I think you have to look not just at the way they invested but the fact they continued to invest in the same—if you think about it, with all the investments out there in the market-place, with all the good splits that there were around, because there were some good splits around, why did they keep investing in the same things, time and time again. So you have actually, seriously to question the motivation. It is quite clear that some of these fund managers were paid a great deal of money, dependent on the value of the funds, the performance of the funds; and obviously that is also an area of great concern. Because what is their motivation, is it to earn large sums of money, in terms of increasing the value of the company, or is it to look after the interests of the people investing, because, obviously, the more the funds went up, the more they purchased each other's shares, the greater they earned out of the funds. So I think that is a matter of great concern.

1   Ev 127, para 6. Back

2   Not printed. Back

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