The Financial Services Authority has secured its first criminal conviction for a "boiler room" fraud after David Mason was sentenced to two years in prison and disqualified from being a director for six years.
The FSA regards boiler rooms – where investors are cold called to buy worthless, overpriced or nonexistent shares – as a "major menace to the public".
After a two-year investigation, Mason pleaded guilty at Southwark crown court to 13 counts of carrying on a regulated activity without authorisation, one count of making false or misleading statements and three counts of money laundering.
The FSA also took regulatory action against David Sinclair, who had unwittingly allowed Mason to use a bank account under his control and helped him set up EduVest, an investment vehicle used by Mason to lure customers to buy shares.
Some 32 people invested in EduVest after being cold called between November 2008 and May 2009 by salesmen employed by entities including Rothman Capital, Investor Relations Corp, Bernam Shore and Bishop Capital. The 32 invested £270,000, in the belief that EduVest would be listing on the Plus stock exchange in the near future.
Sinclair was fined £68,000 and banned from holding a "significant influence function" (SIF) at an FSA-approved firm. Axiom Capital Limited, which Sinclair financed and which specialised in helping companies list on the Plus market, was not subjected to any regulatory action.
Sinclair co-operated fully with the FSA and, as he settled his case at an early stage, his fine was reduced by 20%; without this, his penalty would have been £85,000. Axiom has voluntarily paid for all known investor losses and interest.
The FSA said Mason had laundered the proceeds of the boiler room operation via accounts in Switzerland and the Seychelles and had helped EduVest appear convincing by arranging for a letter to be sent from a fictional "David Branscombe" to give updates on its progress.
As he sentenced Mason, the judge, HHJ Rivlin QC, said: "I am satisfied that without your involvement this scheme could never have operated … I do believe the arrangements made by you were sophisticated … You caused distress, worry, frustration and in some cases serious disruption … You acted with blatant and I would say ruthless dishonesty which was thoroughly reprehensible."
Tracey McDermott, acting director of enforcement and financial crime at the FSA, said: "This prosecution must be seen as part of the development of our strategy in the fight against the major menace to the public posed by boiler rooms … This sentence sends a clear message that the court takes boiler room offences seriously and will hand down significant sentences to those involved in them."
The FSA is keen to deter fraudsters from setting up boiler rooms and last month fined stock market trader Samuel Nathan Kahn £1.09m for share ramping just three years after it bankrupted him for his part in a boiler room scheme.
McDermott added that while Sinclair had not made a deliberate breach of FSA rules, he had "failed to exercise the due skill, care and diligence required of an individual holding a significant influence function so must shoulder some of the blame for investors' money being paid to boiler rooms. This substantial fine and the SIF prohibition reflect the seriousness of his failings."
The FSA stressed that anyone contacted about buying shares should hang up, check whether the caller is authorised on the FSA register and if not, contract the FSA or the police.
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