When, at the start of 2017, New Model Adviser® revealed discretionary fund manager (DFM) Beaufort Securities had agreed with the Financial Conduct Authority (FCA) to limit its business activities, it was big news. But even we did not foresee that a year later the company would be dragged into an FBI investigation, becoming one of the biggest stories to hit the City this year.
Beaufort Securities was principally a stockbroker for private and corporate clients. It is not to be confused with Beaufort Investments, also a DFM but a completely separate company and no relation to this Beaufort whatsoever.
Beaufort Securities was a relatively well-known name in certain quarters. The firm had 114 employees and revenues of £14 million at the end of 2016. But around that time the FCA changed the stockbroker and DFM’s regulatory permissions so it could no longer carry out a regulated DFM service.
While many were surprised at a firm of Beaufort Securities’ size being hit with the FCA permission restriction, few could believe what was to come a year later.
On 2 March this year the US Department of Justice (DoJ) published an indictment of securities fraud against Beaufort Securities. Hours earlier the FCA had announced it was placing the wealth firm into administration, sending the City into a tailspin.
The indictment revealed how an FBI agent worked undercover with Beaufort Securities to uncover a $50 million (£35 million) ‘pump and dump’ share scheme in the US. ‘Pump and dump’ is a type of fraud that involves artificially inflating the price of a stock and then selling the overvalued shares. These were the tactics that infamously made the ‘Wolf of Wall Street’, Jordan Belfort, millions of dollars, before landing him in jail.
To add yet more colour to the tale, the defendants were also accused of proposing the FBI agent could purchase a Pablo Picasso painting as part of a money laundering scheme.
The defendants charged in the DoJ indictment included Beaufort Securities, along with a series of offshore companies and one individual. This was Peter Kyriacou, a 26-year-old CF30 at the London-based stockbroker.
How the US prosecutions will play out remains unclear. But let’s wind the clock back a bit. What went wrong at Beaufort’s DFM arm? And how has this played out for the IFAs using the wealth firm?
Signs things were not going well could be found in the 2016 accounts for the Beaufort group’s custodian and corporate broking arm, Beaufort Asset Clearing Services.
For the year ending 31 December 2016, Beaufort Asset Clearing Services announced a pre-tax loss of £483,472. It attributed this to ‘the market conditions surrounding Brexit’ in its results.
However, at the end of 2016 the Beaufort group was facing much more significant issues than the result of the EU referendum. In the 2016 accounts for the DFM and private stockbroking arm, Beaufort Securities, the firm alluded to some of the reasons for the FCA’s first permission restriction.
‘During 2016, the company became aware of possible suitability of investment issues in the DFM department,’ a note in its 2016 results said. ‘In recognition of this, the board agreed, voluntarily, to stop conducting such business until a review is conducted and corrective measures are implemented.’ The company said it could not quantify the losses arising out of client compensation claims at that point.
Following this restriction, 10 advice firms spoke to Beaufort Securities’ Sipp partner Gaudi about moving to a ‘preferred alternative’ in January 2017. In May last year, an email seen by New Model Adviser® revealed Beaufort was asking other Sipp providers to replace Gaudi. However, it is unclear whether it ever found anyone.
But this was not the end of the story.
Complaints and insolvency
Last September a further FCA permission restriction was placed on the firm. This meant it could not hold client money or assets in relation to Beaufort Securities’ sister company, the custodian firm Beaufort Asset Clearing Services.
At the same time as these FCA measures were put in place, the Financial Ombudsman Service (FOS) received a growing number of complaints relating to the DFM.
In one FOS decision that found against Beaufort, published in March, a client lost £71,000 through high-risk AIM-listed stock investments in his portfolio.
Fast forward to early March 2018, when the FCA declared Beaufort Securities and Beaufort Asset Clearing Services insolvent. Administrator PwC said it had ringfenced £50 million in client money accounts and frozen £850 million in client assets.
Nigel Rackham, appointed joint administrator of Beaufort Securities, said: ‘This is a significant and complicated insolvency.’ He said there were limited available funds at the firm and the ‘costs of returning client money and client assets will, in all likelihood, be deducted from clients’ recoveries’.
After the firm’s collapse, the FOS revealed it was dealing with a total of 600 complaints against Beaufort and yesterday the Financial Services Compensation Scheme (FSCS) declared the firm in default bringing the lifeboat into play.
As FOS decisions came in against Beaufort last year, the DFM looked to shift responsibility to IFAs. Beaufort directed investors to use claims management firm Legal Force to claim against advisers who had recommended the DFM.
In a letter to clients sent last October, the wealth firm told investors their problems were down to financial advisers not correctly explaining investment risks or making unsuitable recommendations.
Legal Force director Simon Helliwell told New Model Adviser®: ‘When Beaufort has identified clients who may have a claim against a third party, such as a financial adviser, they have written to the client. In this letter it outlines that one option would be to contact Legal Force. It is important to stress Beaufort is not receiving any financial benefit for doing this.’
According to Helliwell, 200 claims are in process against half-a-dozen IFAs using the DFM.
IFAs caught out
Some IFAs have already run into trouble. As New Model Adviser® reported last November, Welsh IFA Grosvenor Butterworth, which was using Beaufort as a DFM, closed down following a permission restriction agreement with the FCA.
A note on the firm’s register entry shows it had been required by the FCA to cease all pension transfers and terminate all relationships with all introducers. Grosvenor Butterworth initially suspended its advice on pension switches and transfers while a skilled persons review was completed in June 2017.
When contacted, former Grosvenor Butterworth director, Tony Cumming, blamed the firm’s issues on Beaufort. He highlighted the investments clients were placed into by the DFM.
‘[The FCA] made it clear if I did not volunteer, they would take away the permissions anyway. They suggested the advice we gave to use Beaufort [Securities] was unsatisfactory in all cases and this was the reason for the issue,’ he said.
The Beaufort Securities story has leapt onto the agendas of City news editors, replete with exciting details about FBI agents and a parochial interest in a juicy Square Mile scandal. But IFAs will be closely watching the unravelling of its DFM arm.
Attention will turn to the recommendations of IFAs that used Beaufort. Will those advisers be found to have given solid advice, only to be sadly caught up in unforeseen circumstances? Or will the FOS, FSCS and FCA conclude they all should have seen it coming?