SRA Update
Case study: "Gross recklessness" led to strike in land-banking scam
SRA Update Issue 22 – December 2011
We are concerned about a relatively new type of practice that targets the public by misleading them into investing in land for future development under false pretences. You should be wary of getting involved in any transactions of this kind.
According to the Financial Services Authority (FSA), UK investors have lost an estimated £200 million in land-banking scams.
In just such a case, on 1 March 2011 Stephen Peter David Murrell, formerly of Staple Inn Partnership, was struck off the roll of solicitors for his involvement in a Collective Investment Scheme and for breaches of the Solicitors' Code of Conduct and Solicitors' Accounts Rules. He was ordered to pay costs of £42,180.95.
The Solicitors Disciplinary Tribunal found all eight allegations proven in that Stephen Murrell had
- 1.1.
acted for a client in a collective investment scheme in relation to land banking which was unauthorised by the Financial Services Authority contrary to rule 1 (a) and (d) of the Solicitors' Practice Rules 1990 (as amended) ("the SPR") and since 1 July 2007 contrary to rules 1.02 and 1.06 of the Solicitors' Code of Conduct 2007 ("the Code");
- 1.2.
failed to disclose to investors his personal interest in Hamilton Bentley & Partners Limited for which company he acted in relation to the investments in question contrary to rules 1 (a) and (d) of the SPR and since 1 July 2007 contrary to rules 1.02 and 1.06 of the Code;
- 1.3.
breached the terms of professional undertakings contrary to rules 1 (a) and (d) of the SPR and since 1 July contrary to rules 1.02 and 1.06 of the Code;
- 1.4.
given assurances to investors (either himself or through Hamilton Bentley & Partners Limited in which he had an interest) as to the retention of their funds in his client account for safe keeping which he failed to fulfil contrary to rules 1(a) and (d) of the SPR and since 1 July 2007 contrary to rules 1.02 and 1.06 of the Code;
- 1.5.
withdrawn monies from client bank account otherwise than in accordance with rule 22 of the Solicitors' Accounts Rules 1998 ("the SAR");
- 1.6.
effected transfers between client ledgers otherwise than in accordance with rule 30 of the SAR;
- 1.7.
failed to maintain properly written books of account contrary to rule 32 of the SAR;
- 1.8.
permitted his client bank account to be used to effectively provide banking facilities for clients contrary to rule 15 of the SAR.
The tribunal was satisfied that, by his involvement with property investment company, Hamilton Bentley, he had with his firm created a scheme which appeared to have involved Hamilton Bentley receiving substantial profits and by which some investors had received leases which were effectively worthless in that they conveyed minimal rights on them. Others had received no leases, and investors had lost substantial sums of money.
The tribunal was satisfied that the respondent had displayed gross recklessness in ignoring all the evidence that the scheme should have been regulated, including numerous letters from the FSA and opinions of two counsel. As a result the hearing found that members of the public had suffered and the reputation of the profession had been severely damaged in that members of the public should be able to trust solicitors in all their actions and dealings. Stephen Murrell's lamentable failures in this regard, including completely failing to advise investors of their rights, had undermined public trust in the profession. The tribunal felt it had no choice but to strike the respondent off the roll of solicitors. Download the full findings of the tribunal: Stephen Peter David MURRELL, SRA ID 10595 (PDF 14 pages, 66K)
So how does a land-banking scam work?
Investors are approached by a company selling a plot of land with the potential that, if planning permission is later granted on it, it will soar in value. Frequently the company owning the land has divided it up into individual plots to sell on but, unbeknown to the investor, it may have planning restrictions on it, e.g. be in a green belt or conservation area where it is unlikely that development will be granted.
Not all land-banking schemes are collective investment schemes (CISs) as was the case with Stephen Murrell, but where they are, the investors were tied into a collective agreement binding them to the marketing and sale of the property by the investment company/ management company set up by the investment company.
The SRA is warning solicitors to be on their guard against unwittingly, or otherwise, getting involved in this difficult and evolving area. We would take action if we established that that the individual had not acted with integrity, or was in breach of his/her duties under the Solicitors' Code of Conduct.
Solicitors are reminded of rule 10.01—not to take unfair advantage especially where parties are not represented, and particularly when it comes to the signing of and submission to Land Registry of an AP1 Application to register. (See chapter 11 of SRA Code of Conduct 2011, outcome 11.1.)
Shareholders, expatriates or foreign nationals with money to invest, are the most likely targets, frequently through cold calls, but also by email or letter. (A mortgage is an unlikely source of funding for this type of purchase.)
Protection against land-banking scams
Companies can source their contacts from shareholder lists, which are publicly available. One-way investors can protect themselves is to register with the Telephone Preference Service which will not prevent the calls coming through but will let you know if a company is bona-fide or not. Increasingly the companies selling the land are based out of reach of UK regulatory bodies, such as in Dubai or Singapore.
More information about land-banking schemes is available from the Financial Services Authority and the Land Registry.