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After x6 years the JFSC withdraw directions from one of the Horizon Trustees (Jersey) Limited (liquidated) employees

11/11/2021

ON THE 10 November 2021 the Jersey Financial Services Commission (JFSC) issued a public statement [see below] under Article 25(a) of the FS(J)L with respect to the withdrawal of directions previously issued to Mr Nicholls under Article 23 of the FS(J)L in 2015 [see below]

Background

  • On 7 November 2013, the JFSC issued a public statement in respect of the findings of its investigation into HTJL

https://www.jerseyfsc.org/news-and-events/horizon-trustees-jersey-limited/

  • The JFSC’s investigation focussed on the period from 1 January 2008 to 30 May 2012. Horizon Trustees (Jersey) Limited [HTJL] was one of a number of related companies bearing the Horizon name (the Horizon Group) and had a diverse customer base.  Whilst some of HTJL’s customers were sophisticated ultra-high net worth individuals (UHNWI), others were unsophisticated and, indeed, vulnerable individuals. HTJL provided trust company business services to a number of private fund structures.  These structures were established to provide a number of the UHNWI customers with the opportunity to invest in alternative asset classes, including shipping, property and media rights. A number of the UHNWI customers had financial exposure to a UK media rights company (the Film Co.).  The customers included the Film Co.’s principal shareholder and Chief Executive Officer (CEO).  This exposure was either by way of direct shareholder interest or by virtue of investing in a media fund (the Media Fund): one of HTJL’s private in-house fund structures which effectively operated as a joint venture with the Film Co. https://www.gov.je/gazette/pages/jfscdavidfrancis.aspx
  • Because of the above, several directors and an employee were subject to regulatory sanction.  The employee being James Nicholls - https://www.jerseyfsc.org/news-and-events/mr-james-nicholls-superseded/

The JFSC Public statement [10 November 2021] follows:-

1. Action

  • The Jersey Financial Services Commission (JFSC) issues this public statement under Article 25(a) of the FS(J)L with respect to the withdrawal of directions previously issued to Mr Nicholls under Article 23 of the FS(J)L.
  • Mr James Nicholls (Mr Nicholls) - Date of Birth: 27 February 1967 -

2. January 2015 directions

2.1   In January 2015, further to a finding of the Board of Commissioners (the Board) that Mr Nicholls had displayed a lack of competence, the JFSC issued directions to Mr Nicholls under Article 23(1) of the FS(J)L and directions under the equivalent provisions of the Banking Business (Jersey) Law 1991, the Collective Investment Funds (Jersey) Law 1988, and the Insurance Business (Jersey) Law 1996. These directions placed restrictions and controls on Mr Nicholls’ role and activities within the finance industry in Jersey. A public statement was issued in respect of the directions.

2.2   The directions prohibited Mr Nicholls from holding any key person or principal person position in the business of any registered person.

2.3   The directions also applied controls such that

(i) Mr Nicholls could not perform any function in the business of any registered person that would involve, whether singly or jointly, authority to control client assets or provide advice to or exercise discretion for or on behalf of clients, and

(ii) Mr Nicholls was required to copy all written correspondence arising from his activities as an employee of a registered person to specified senior personnel of that registered person as soon as reasonably practicable.

3. September 2015 directions

3.1   The JFSC may vary or withdraw directions upon receipt of an application from a subject under Article 23(6) of the FS(J)L and under equivalent provisions of the other regulatory laws.

3.2   Mr Nicholls submitted an application in June 2015 to withdraw the parts of the January 2015 directions that imposed the controls, after successfully completing a relevant qualification. In September 2015, the Board reviewed the submission from Mr Nicholls and agreed to remove the controls.  The JFSC issued updated directions, which meant that he was only prohibited from holding a principal or key person position within the Industry.  The JFSC also issued an updated public statement.

4. Application for withdrawal of remaining directions

4.1   Mr Nicholls made an application to the JFSC for the withdrawal of the remaining directions, in support of which he submitted substantial information and documentation for the JFSC’s review.

4.2   Following careful consideration of Mr Nicholls’ submissions, the Board agreed to exercise the JFSC’s statutory power and has withdrawn the directions in their entirety. In reaching this decision, the Board took into account the following:

4.2.1   Mr Nicholls had considered the adverse findings previously made against him by the JFSC, and produced information to demonstrate his insight into his actions.

4.2.2   He provided an explanation and evidence of how qualifications he had obtained, the continued professional development (CPD) he had undertaken and work experience he had gained, demonstrated his understanding of topics such as good corporate governance, the duties of directors, ethics, the protection of vulnerable customers, and managing conflicts of interest.

4.2.3   Mr Nicholls had completed at least 35 hours of relevant CPD each year from 2013 to 2020 inclusive, such CPD being relevant to the previous JFSC findings against him.

4.2.4   He provided evidence that since the JFSC findings, no adverse issues had been raised by his employers and he had acted with demonstrable competence during his employment, with a track record of having worked successfully for several years in financial services.  The evidence included a number of annual appraisals, which described an employee who made a significant positive contribution to his employer.

4.2.5   His experience and skill set had been enhanced through working closely with the boards and compliance personnel of different registered persons, which had impacted positively on his competence.

4.2.6   Written representations of strong support for Mr Nicholls had been made by four senior professionals, such individuals being independent of Mr Nicholls’ personal life.

5. Conclusion

5.1   The JFSC concluded it was no longer necessary and proportionate in all the circumstances that directions remained in respect of Mr Nicholls under the FS(J)L and under the other regulatory laws, and, on 3 November 2021, withdrew all directions previously issued to Mr Nicholls.

2015 PUBLIC STATEMENT Mr James Nicholls – superseded   

Mr James Nicholls ("Mr Nicholls"), born 27 February 1967.

Former employee of Horizon Trustees (Jersey) Limited (in liquidation) ("HTJL")

Financial Services (Jersey) Law 1998, as amended (the "FS(J)L")

1. Action

1.1. The Jersey Financial Services Commission (the "Commission") issues this public statement under Article 25(a) of the FS(J)L with respect to directions issued to Mr Nicholls under Article 23 of the FS(J)L.

1.2. The issuance of directions to Mr Nicholls supports the Commission’s regulatory objectives of reducing the risk to the public of financial loss and protecting and enhancing the reputation and integrity of Jersey in commercial and financial matters.

1.3. An investigation into the fitness and propriety of Mr Nicholls, in his capacity as a former employee of HTJL, has taken place and the Commission has concluded that, in all the circumstances, Mr Nicholls displayed levels of incompetence of the most serious kind, with customers being placed at unnecessary risk of financial loss.

1.4. The Commission has therefore concluded that it is necessary and proportionate, in all the circumstances of the case, that directions are issued under the FS(J)L.

1.5. The directions prevent Mr Nicholls from:

1.5.1. holding any key person or principal person1 position in the business of any registered person2;

1.5.2. performing any function in the business of a registered person whereby he has, whether singly or jointly, authority to:

  1. control client assets; and/or
  2. provide advice to, or exercise discretion for, or on behalf of, clients of that registered person.

1.6. Mr Nicholls has also been directed to copy all written correspondence arising from his activities as an employee of any registered person, to either a director or the compliance officerof that registered person as soon as is reasonably practicable.

1.7. The directions shall remain in force until such time as Mr Nicholls successfully applies to the Commission, pursuant to Article 23(6) of the FS(J)L, for a variance or withdrawal of the directions. In the particular circumstances of Mr Nicholls’s case, the directions listed at 1.5.2 and 1.6 may, and subject to all relevant circumstances, be withdrawn once Mr Nicholls has demonstrated to the Commission’s satisfaction that he has obtained appropriate further qualifications. Mr Nicholls has also been issued with directions under the equivalent provisions of the other regulatory laws4.

2. Background

2.1. On 7 November 2013, the Commission issued a public statement in respect of the findings of its investigation into HTJL5. The Commission’s investigation focussed on the period from 1 January 2008 to 30 May 2012.

2.2. HTJL was one of a number of related companies bearing the Horizon name ("the Horizon Group") and had a diverse customer base. Whilst some of HTJL’s customers were sophisticated ultra-high net worth individuals ("UHNWI"), others were unsophisticated and, indeed, vulnerable individuals.

2.3. HTJL provided trust company business services to a number of private fund structures. These structures were established to provide a number of the UHNWI customers with the opportunity to invest in alternative asset classes, including shipping, property and media rights.

2.4. A number of the UHNWI customers had financial exposure to a UK media rights company ("the Film Co."). The customers included the Film Co.’s principal shareholder and Chief Executive Officer ("CEO"). This exposure was either by way of direct shareholder interest or by virtue of investing in a media fund ("the Media Fund"): one of HTJL’s private in-house fund structures which effectively operated as a joint venture with the Film Co.

2.5. In January 2010, the Film Co.’s AIM listing was suspended due to financial uncertainty. In April 2010, a successful bid was made for the Film Co. by a company HTJL’s CEO claimed to beneficially own ("Bid Co."). A significant factor in the decision to acquire the Film Co. was the protection of the interests of the UHNWI customers, a number of whom assisted in financing the bid. The Film Co.’s equity was acquired for one penny and its Convertible Loan Notes ("CLNs") for £0.55 per £1.00 nominal value.

2.6. Subsequent to the acquisition, HTJL, a company devoid of media or film experience, was appointed to administer the Film Co. Directors of HTJL were also appointed as directors of Film Co. The acquisition and administration appointment created numerous conflicts of interest.

2.7. Shortly after the acquisition of Film Co. a New Zealand Limited Partnership ("Structure X") was created. This structure, which became a focus of the Commission’s investigation, was used as a vehicle, funded by investments from HTJL’s wider customer base, to purchase the Film Co.’s CLNs from the Bid Co. The CLNs were each sold for £1.00 despite only recently having been acquired for £0.55.

2.8. In total, £3.445 million was transferred from customer structures and invested into Structure X. The monies were not routed to Structure X but were transferred to Bid Co. and were then used to discharge the Film Co.’s numerous and pressing creditors. In essence, Bid Co. became a financing vehicle to the Film Co. which is currently in liquidation with creditor claims of circa £43 million.

2.9. Concerns over the serious financial position of the Film Co. were first documented by officers of HTJL shortly after the acquisition by Bid Co. Such were these concerns, placing the Film Co. into a company voluntary arrangement was considered only one month after Bid Co.’s acquisition, namely in May 2010.

2.10. Despite the Film Co.’s serious financial difficulties, valuations were sent to customers, during 2010 and 2011, in which their investments were recorded at cost and the financial statements of the Media Fund were signed reporting that the assets were not impaired. At no time were customers informed about the Film Co.’s serious financial difficulties.

2.11. HTJL’s customers have not been able to recover their investments or loans and it appears that substantial losses have been incurred.

3. Role

3.1. Mr Nicholls was not a principal person, he joined HTJL as a Trust Manager and was in post throughout the period of the Commission’s investigation. Given Mr Nicholls was not a principal or key person, the Commission does not consider him responsible for HTJL’s corporate governance and compliance failings.

3.2. Mr Nicholls acted as a director to a number of customer structures and was a director to the General Partner of the Media Fund.

4. Summary of Findings

Structure X

4.1. Mr Nicholls was aware the only way the Film Co. remained solvent was through the use of customer monies to discharge its numerous and significant liabilities. In spite of his complete lack of understanding of the investment structure, Mr Nicholls co-authorised 17 investments totalling £3.33 million into Structure X, thereby placing customer assets at inappropriate and avoidable risk. Mr Nicholls’s conduct lacked competence.

4.2. In some cases, the relevant trustee or directors’ meeting, in respect of the customer structure in question, was held after monies had been transferred for the purposes of investing in Structure X. Mr Nicholls frequently acted as Chairman of those meetings in which it was resolved to invest customer monies in Structure X. The Commission’s investigation revealed that the minutes and resolutions were executed in the following circumstances:

4.2.1. the decisions to invest were based purely on an instruction issued by a colleague;

4.2.2. little, if any, consideration had been given to the key documents associated with the investments;

4.2.3. no bespoke consideration had been given to the interests of the customers;

4.2.4. the investments were made in the knowledge the monies were not to be remitted to Structure X but would be transferred directly to the Bid Co. for the purposes of discharging the Film Co.’s creditors;

4.2.5. no consideration was given to the numerous and significant conflicts of interest associated with an investment in Structure X to include that the CLNs had, only a short time earlier, been acquired by the Bid Co., which he understood to be beneficially owned by HTJL’s CEO;

4.2.6. customer structures acquired their respective interests in the CLNs by paying 80% more (the difference between £0.55 and £1.00) than had been paid by the Bid Co;

4.2.7. there remained significant concerns over the previous management of the Film Co.; and

4.2.8. the investments were high risk, suitable for professional investors only and were made knowing those officers of HTJL directing the affairs of the Film Co. had no experience whatsoever of the film and media industry.

4.3. The minutes and resolutions authorising investments in Structure X were taken from a bank of pro-forma precedents, bore little or no resemblance to the facts and therefore presented a false record. The circumstances in which the investments were authorised by Mr Nicholls revealed a failure to discharge the function of a professional fiduciary. Mr Nicholls’s conduct lacked competence.

4.4. Mr Nicholls acted with a disregard to his fiduciary obligations. He knew that customers’ assets, including those of vulnerable individuals, were used to reduce the risks to which a number of HTJL’s UHNWI customers were already exposed. Mr Nicholls’s conduct lacked competence.

4.5. As a result of the conduct of Mr Nicholls and others, HTJL’s customers face the loss of very significant sums.

The Media Fund

4.6. Despite being a director to the General Partner of the Media Fund, Mr Nicholls possessed very little knowledge of the activities of this fund to include the security of significant loans advanced by the fund. Mr Nicholls’s conduct lacked competence.

5. Mr Nicholls

5.1. Mr Nicholls has acknowledged that he acted with serious incompetence and failed to fulfil his fiduciary responsibilities whilst an employee of HTJL. He has apologised for these failings and for any financial losses which may have been suffered by clients.

6. Conclusion

6.1. The Commission has concluded that, in all the circumstances, Mr Nicholls displayed levels of incompetence of the most serious kind, with customers being placed at unnecessary risk of financial loss.

7. Sanction

7.1. The directions prohibit Mr Nicholls from:

7.1.1. holding any key person or principal person position in the business of any registered person;

7.1.2. performing any function in the business of any registered person whereby he has, whether singly or jointly, authority to:

  1. control client assets; and/or
  2. provide advice to, or exercise discretion for, or on behalf of, the clients of that registered person.

7.2. Further, Mr Nicholls has been directed to copy all written correspondence arising from his activities as an employee of any registered person, to either a director or the compliance officer of that registered person as soon as is reasonably practicable.

7.3. The directions shall remain in force until such time Mr Nicholls successfully applies to the Commission, pursuant to Article 23(6) of the FS(J)L, for a variance or withdrawal of the directions. In the particular circumstances of Mr Nicholls’s case, the directions listed at 7.1.2 and 7.2 may, and subject to all relevant circumstances, be withdrawn once Mr Nicholls has demonstrated to the Commission’s satisfaction that he has obtained appropriate further professional qualifications.

7.4. Mr Nicholls will commit an offence, under Article 23(15) of the FS(J)L, in the event he fails to comply with the provisions of the directions.

7.5. Pursuant to Article 23(15A) of the FS(J)L, any person who allows Mr Nicholls to perform a function, engage in employment or hold a position knowing that such performance, engagement or holding is in contravention of the directions shall be guilty of an offence.

Jersey Financial Services Commission

14-18 Castle Street

St Helier

Jersey

JE4 8TP

Contact: Barry Faudemer, Director, Enforcement Division

Telephone 01534 822137 or e-mail: b.faudemer@jerseyfsc.org

Key person and principal person as defined in Article 1 of the FS(J)L

Registered person as defined in Article 1 of the FS(J)L

Director and compliance officer as defined in Article 1 of the FS(J)L

The Banking Business (Jersey) Law 1991, as amended

The Collective Investment Funds (Jersey) Law 1988, as amended

The Insurance Business (Jersey) Law 1996, as amended

www.jerseyfsc.org/pdf/Public-Statement-Horizon-Trustees-(Jsy)-Limited-November-2013.pdf

Issued: 23 January 2015

https://www.jerseyfsc.org/news-and-events/mr-james-nicholls-superseded/

JERSEY