Hedge fund’s £7.3m claim against Scots law firm ‘extinguished by prescription’

A judge in the Court of Session ruled that while the pursuer had made a relevant case, the action was time-barred because it failed to bring its claim for reparation within the statutory five-year limit.

Lord Tyre heard that the pursuer, Heather Capital, was incorporated in the Isle of Man in August 2005 and its business was to operate as a hedge fund, making investments on behalf of its own investors.

Responsibility for investment decision-making was delegated to an investment committee comprising two of its directors, Gregory King and Santo Volpe.

Paul Duffy, the pursuer’s liquidator, averred that during its operation the company and its investors were defrauded by the diversion of invested funds exceeding £90m, under the guise of “fictitious loans” to various shelf companies.

The court was told that companies owned and/or controlled by Mr King were incorporated in Gibraltar and the pursuer then entered into a number of credit facility agreements with these companies – referred to as “First Level SPVs”.

The pursuer recorded loans to the various First Level SPVs in its books of account, but in fact the money was never paid to them.

On the instructions of certain individuals, it was in fact paid out of the solicitors’ client accounts to third parties, including the bank account of a London trader named Nicholas Levene, who is currently serving a 13-year prison sentence, having pleaded guilty to 14 charges of fraud, false accounting and obtaining money by deception.

The present action concerned funds amounting to a total of £7.3 million which, according to the pursuer’s books of account, were lent to four Gibraltar companies called Bayhill Investments Limited, Brookhill Investments Company Limited, Hampsey Investments Limited and Bellwood Limited.

The defenders were instructed to act on behalf of the pursuer in respect of the provision of a template credit facility agreement and the making of the proposed loans to the four Gibraltar companies.

On the instructions of an individual who, according to the pursuer’s averments, had “no actual or apparent authority”, the defenders’ banking partner, Scott Wilson, transferred £3.3m from the firm’s client account to a bank account in the name of Mr Levene, and £4m to an account in the name of a company called Mathon plc.

Nothing was sent to any of the four First Level SPVs and the pursuer sued for payment by the defenders of the sum of £7.3 million.

It was averred that Mr Wilson – for whose actings the defenders were liable – acted in “breach of trust” by transferring funds directly or indirectly to Mr Levene.

It was also submitted that the defenders “breached a fiduciary duty” and that Mr Wilson acted in “breach of contract”, and separatim “negligently”, by failing to warn the directors of the pursuers who were not complicit in Mr King’s fraud that they had received instructions to make payments contrary to the terms of the credit facilities.

The pursuer further averred that the defenders provided “dishonest assistance” to Mr King in the perpetration of his fraud.

The defenders denied liability to make payment of any sum to the pursuer, arguing that on the pursuer’s own averments all of the sums comprising the £7.3 million were repaid to the pursuer and accordingly, that the pursuer failed relevantly to aver circumstances in which it has sustained any loss as a consequence of anything done by them.

Rejecting that contention, Lord Tyre said: “According to the pursuer’s averments in the present case, the loans to Mathon and Bathon were fictitious. Their effect was that money went round in a circle and left the pursuer no better off than it had been after the funds recorded as destined for Bayhill, Brookhill, Hampsey and Bellwood had been paid out.

“The apparent ‘repayment” was accordingly nothing of the sort. It was no more than an attempt to conceal the frauds alleged by the pursuer to have occurred when instructions were issued and accepted by the defenders to make payments to persons other than Bayhill and the others.

“The pursuer’s case, which I regard as relevantly made, is that the loss sustained when the funds were originally diverted was not recovered by the subsequent attempt at concealment.”

The firm also argued that any obligation incumbent upon them had been extinguished by the operation of prescription.

The losses in respect of which the pursuer sought reparation were said to have been sustained on 24 April and 12 July 2006, but the action was not raised until November 2014, meaning the the pursuer’s claim for reparation was extinguished more than five years before the raising of the action, in accordance with section 6 of the Prescription and Limitation (Scotland) Act 1973.

But the pursuers relied upon both section 6(4) and section 11(3) of the 1973 Act to prevent the running, or to postpone the commencement, of the prescriptive period.

The judge said the onus rested upon the pursuer to aver and prove circumstances entitling it to protection from prescription under one or other provision, but he concluded that he failed to do so and therefore granted decree of absolvitor.

In a written opinion, Lord Tyre said: “By the end of 2007 all of the directors of the pursuer were in possession of information from its auditors – and, indeed from Mr King himself – that a fraud had, at the very least, been attempted. The pursuer’s averment that ‘all avenues of enquiry were considered to have been pursued by board of directors’ does not address the question of whether the loss could, with reasonable diligence, have been discovered.

“It is not averred that the information obtained from Mr Wilson in 2012 could not or would not have been obtained earlier if he had been asked for it earlier. No explanation is offered for why this could not have been done by the company or, latterly, by the liquidator within five years after the transfers of funds in 2006. I conclude that the pursuer has failed to aver circumstances in which it could not, with reasonable diligence, have become aware of the loss until a date less than five years before the present action was raised.”