Two sentenced in trade finance fraud
David Mahood and Michael Cuzner-Charles were sentenced at Belfast Crown Court to a combined six years’ imprisonment (suspended for two years) in relation to the misuse of £2.5 million of investors’ money acquired by their merchant finance business Regal Brook Ltd. They have been ordered to pay £125,000 each by way of compensation and each disqualified from acting as a company director for seven years.
Both defendants pleaded guilty on 20 September 2004 to conspiring to defraud investors between January 1994 and September 1999. They were sentenced as follows:David Lawrence Mahood (d.o.b 28/02/39) of North Down, Northern Ireland. Sentenced to three years (suspended for two years) and ordered to pay £125,000 in compensation.
Julian Michael Cuzner-Charles (d.o.b 28/08/53) of Suffolk. Sentenced to three years (suspended for two years) and ordered to pay £125,000 in compensation.Mahood and Cuzner-Charles were directors of Regal Brook Ltd and beneficial owners of Atrium Trading Ltd, businesses engaged in the merchant financing sector. They admitted to using money invested in Atrium and advanced to Regal Brook for purposes other than as a variant of "factoring" as represented to the investors orally, in the sales information and the trader agreements , namely by purchasing stock, shares and/or goods and by making unsecured loans to other companies.
Regal Brook LtdRegal Brook Ltd was incorporated in 1989 by David Mahood and was initially based in Holywood, Co. Down. Michael Cuzner-Charles (who lived in Berkshire) became involved in the business after meeting Mahood in 1993 at a time when Mahood was looking to expand into England. The business later moved to Atrium Court in Reading, Berkshire. Merchant financing is designed for companies who supply goods or services on credit to other companies but who wish to avoid cash flow or debt recovery difficulties. The concept was that the supply company provides the goods to the customer but invoices the merchant finance company, Regal Brook, at a discount of 2-4% of the total value of the goods provided. Regal Brook would then invoice the recipient of the goods for the full amount and advance the supplier 80% of the invoice value. Regal Brook would pay the supplier the remaining 20% when it received full payment from the receiver of the goods until which time it would charge interest to the supplier for the 80% advanced. The benefit to the supplier in this arrangement is that though the supplier concedes an initial discount to Regal Brook and pays interest on the 80%, the supplier receives most of the payment virtually at the time of sale. If Regal Brook collects the money within 90 days, the money can be used 4 times a year, generating a profit, in theory, of 8% to 12% plus interest.
The fraud
In 1994 an issue relating to Withholding Tax arose which meant Regal Brook would have to deduct the Withholding Tax amount before paying any profit to investors. Consequently a tax exempt company- Atrium Trading Ltd - was set up based in the Isle of Man. This meant that profits could be paid to investors without deduction of tax. Atrium Trading was interposed to ensure that the Withholding Tax was not paid on investors returns. This did not affect the way Regal Brook traded except that investors’ funds were placed into Atrium Trading and funds were then transferred to Regal Brook by way of deep discounted loan notes, which were essentially fixed term loans of six years.In September 1999 Atrium Trading went into liquidation owing its investors over £4.1 million. At the time of liquidation, White Horse Foods owed Regal Brook £2.5 million but under the concept of merchant financing this should not be possible because White Horse Foods was the supplier rather than the recipient of the goods. Trade indemnity insurance only covered a situation if the company receiving the goods went into liquidation. In fact Regal Brook was actually buying stock for the purposes of White Horse Foods which was totally outside the concept of merchant financing. Regal Brook also provided White Horse Foods with a number of unsecured loans, some of which were capitalised to enable Mahood and Cuzner-Charles to become the effective owners of White Horse Foods.
However, because the Regal Brook scheme fell outside the scope of the Financial Services Act 1986 it meant that investors would not have certain protections by virtue of that legislation, particularly that afforded by the investors’ compensation scheme. The investors believed that transactions would be insured. However, insurance was only available for trades. Any other type of transaction was not covered. So the injection of money into White Horse Foods or the purchase of goods by Regal Brook was not covered.The Financial Services Authority, the statutory regulator of investment business initiated inquiries following the liquidation of Atrium Trading. (See note 1 below)
ProceedingsThe case was referred by the Financial Services Authority to the SFO who commenced an investigation in January 2000 in conjunction with the Police Service of Northern Ireland.
Mahood and Cuzner-Charles appeared at Belfast Magistrates Court on 24 July 2002 charged with conspiracy to defraud. The case was transferred to Belfast Crown Court. On the first day of the trial, 20 September 2004, both defendants pleaded guilty.Note to editors:
1 The Financial Services Authority (FSA), the statutory regulator of investment business, carried out an investigation at the end of 1999 into suspected unauthorised deposit-taking activities of Regal Brook Limited which indicated links to a firm of financial advisers in Northern Ireland (Aiken & Higham Limited) and to an Isle of Man incorporated company, Atrium Trading Limited. As a result of this investigation, involving close co-operation with the Personal Investment Authority and the Isle of Man Financial Services Commission who took separate actions of their own, the FSA referred the evidence gathered and its concerns about the activities of certain individuals and companies to the SFO for wider criminal investigation.Serious Fraud Office
Elm House, 10-16 Elm Street, London WC1X 0BJPress Office tel. 020 7239 7000/7001 Main tel. 020 7239 7272 Article found on a public internet domain
