Unsurprisingly, there has some debate about what “knowingly concerned” means. Is any director of a firm automatically “knowingly concerned” in all its activities? A recent High Court decision (FCA v Forster [2023] EWHC 1973 (Ch)) has shed new light on when a person may be considered “knowingly concerned” in a breach of the FSMA. It also made clear that merely taking legal advice in advance of the breach is not a “get out of jail free” card.

The Financial Conduct Authority (FCA) brought an action to stop the sale of certain investments promoted by two companies, Qualia Care Developments and Qualia Care Properties. Under the schemes offered, investors purportedly received long leases on individual rooms in care homes managed by a property company. They paid the developer between £50,000 and £75,000 for a room lease and then sublet the room back to the firm for a return of 8-10% a year, for periods of up to 25 years.

The FCA claimed this was, in effect, a Ponzi scheme and that investors had been promised unrealistic returns on the basis of an unsustainable business model. The court agreed. It was alleged that some 380 investors had put more than £57m into unregulated collective investment schemes operated by the directors of these companies.

The FCA began legal proceedings in November 2020 against Robin Forster, Richard Tasker and Leeds-based Fortem Global Limited over alleged links to unauthorised collective investment schemes that offered investors “unrealistic” returns. Both Qualia companies have since gone into administration but, according to its website, Qualia Care Limited continues to carry on its principal business, which is the operation of care homes.

A further claim was issued by the FCA in 2021 against Forster and other group companies for schemes that preceded the Qualia investment scheme, relating to investments in other care home facilities owned by the group.

In reviewing the evidence, the court commented that Forster had been a curious witness, with an “Olympian detachment” from the actual operations of Qualia and a view that he did not get involved with the business “at that level of detail”. The court found his evidence in this respect unreliable and his account of his own lack of involvement in the activities of both the Qualia companies and Fortem not credible.

The court first considered whether the investments and the arrangements they involved constituted a collective investment scheme (CIS). The court quoted Lord Sumption who set out the fundamental distinction. On the one hand, there are cases where the investor retains entire control of the property and simply employs the services of an investment professional (who may or may not be the person from whom he acquired it) to enhance its value. On the other, there are cases where an investor surrenders control over their property to the operator of a scheme so that it can be either pooled or managed in common, in return for a share of the profits generated by the collective fund.

Next, the court had to consider whether the individuals were “knowingly concerned” in any contraventions by the Qualia or Fortem companies. It also considered whether legal advice specifically obtained on two separate occasions in 2016 and 2020 by the Qualia companies, which said that the schemes did not constitute a CIS under the FSMA, gave them a get-out. Forster said that he had relied on these opinions and also the fact that the company secretary of Qualia, who was a qualified solicitor, had never raised any concerns that the schemes needed to be authorised under the FSMA.

The court held that where intentional misconduct is alleged, cogent evidence of being “knowingly concerned” in the business activity in question is required and mere passive knowledge of the facts is not enough. The court said that the most obvious example of a person knowingly concerned in a contravention is a person who is the ‘moving light’ behind a company. (See Securities and Investments Board v Pantell SA (No 2) [1993] Ch 256 at 264D-E). It also found that the relevant knowledge must be knowledge of the facts on which the contravention depends. But there is no need for the individual to know that a contravention has taken place – ignorance of the law being no defence.

The court found that Forster had been the guiding mind of the Qualia companies and of Fortem and that he was fully involved in these activities as conducted by those companies. He was, the court found, the force behind the establishment of the Qualia scheme, and he had participated fully in the marketing process, drafting and reviewing promotional materials, speaking at seminars and engaging with individual investors. He was clearly “knowingly concerned” with all these activities, even where they might be undertaken by agents acting on behalf of the two companies on a day-to-day basis. Forster, the court found, “knew, or deliberately closed his eyes to the fact, that the business model behind Qualia was unsustainable” – ie that it was in effect a Ponzi scheme.

Pro bono counsel for Foster argued that where a lay client seeks and obtains legal advice from an appropriately qualified professional, he cannot reasonably be expected to form a view on the correctness or otherwise of the legal advice received. While stating that “in principle” this was a good argument, the court said that an independent legal opinion is not a get-out-of-jail-free card and that “there can be no hard rule as to the legal effect of ‘a legal opinion’ – everything depends on the circumstances.”

In this case, the two legal opinions were based on a number of assumptions as to the facts. The court found that Forster must have known that the assumptions set out in the opinions did not describe the way in which the schemes actually operated and that it should immediately have been clear to him that the opinion did not apply to the schemes in question and would provide no defence against a charge of being “knowingly concerned” in breaches of the FSMA.

The court concluded that, in order for a director to be “knowingly concerned” in a contravention of the FSMA, there must be some involvement that goes some way beyond the normal involvement of a director in the affairs of the company.

In this case, the court ruled that Forster was the driving force behind the activities of the Qualia companies and Fortem, and that he was aware that they were raising money on the basis of promises which were first very unlikely to be, and later incapable of being, fulfilled. These companies were engaging in business to execute a plan that he had devised, and whose implementation he supervised. In this case, outside legal opinions were of no avail.

The FCA will ask the court to determine the sums the defendants should be required to pay back to investors.