In a highly critical Commercial Court judgment, Mr Justice Knowles has described two investment funds’ allegations of fraud against a forex trading firm as “an elaborate and expensive, unmeritorious attempt” to "throw off their responsibility onto the shoulders of the defendants”.
The claimants’ business model was to offer investors equity in investment companies, with the subscription funds being pooled and traded on online forex platforms.
Trades were to be carried out on platforms licensed by GStar FX Inc (“Gstar”) from a company in the Ikon Finance group. Gstar had been incorporated in 2012 by George Daskaleas, who has since faced criminal charges for fraud in Greece in connection with matters relating to this Commercial Court dispute. The defences of GStar and Mr Daskaleas were struck out early in these proceedings and neither participated at trial. That left claims against companies in the Ikon Finance group (the “Ikon Defendants”) and its CEO, Mr Jagannath, of dishonest assistance and unlawful means conspiracy that they had assisted Mr Daskaleas in his alleged fraudulent scheme by taking large sums of subscription funds received from investors and, instead of actively trading the money received, had allegedly defrauded the claimants.
The claimants asserted that monthly statements were received on GStar’s platform, which purported to show consistently increasing account balances as a result of successful forex trading. In addition, a number of reference letters were provided by the Ikon Defendants to Mr Daskaleas and GStar, which, on their face, appeared to confirm substantial balances held within the trading accounts. Those balances were further verified by Mr Venetis, an external auditor from Grant Thornton, commissioned by Mr Daskaleas to “conduct independent due diligence … in order to set up a modern system of corporate governance” at GStar.
As it turned out, however, for much of the relevant period, the investors’ funds were not being traded at all. The large profits reported to the claimants’ investors were in fact non-existent, because the monthly statements and reference letters pertained to notional “demo accounts”, set up for experimental testing purposes.
The claimants claimed that they were misled by the Ikon Defendants because they understood the large balances (in excess of $350 million) to represent actual money and, in reliance on those balances, the claimants had continued to operate as an investment fund, accepting approximately $19 million in further moneys from new and existing investors.
The Claimants’ allegations were held by the court to have failed “in every material respect”. Mr Justice Knowles was wholly unpersuaded by the claimants’ witness evidence, which he said “presented a very confused and incomplete picture”. He considered the claimants to have been fully aware that the relevant balances represented demo accounts. The court found no dishonesty or deceit on the part of the Ikon Defendants and did not consider that any of their actions were ultimately relied on by the claimants.
The Judge also did not accept that the claimants believed at any point that the actual balances in the accounts were anything like the magnitude referred to in correspondence from the Ikon Defendants, because “nothing like those sums had been transferred to the accounts and nothing like those sums could, in the circumstances of this case, credibly have been made from trading with sums that were transferred”.
The Judge said that Mr Litinas, an associate of the claimants, who encouraged individuals to invest in the claimant companies, was not frank when giving evidence on the ways in which the higher the figure claimed for the value of a fund the more he benefitted financially.
Indeed, His Lordship remarked that the claimants “have themselves much to answer for to those who may have invested at one time or another”.
The case shows the risks to investors of investment funds and trading platforms providing information relating to demo accounts as if they were real indicators of trading performance. The Judge considered it inappropriate for Mr Daskaleas, Mr Jagannath and Mr Venetis to have created correspondence which could have misled investors. However, that was not an issue for determination since this case was not a claim by investors who were purchasers of shares in the claimant companies.