A dubious ‘hotel room’ investment scheme involving a law firm cost nearly 900 investors up to £52m, a decision of the Solicitors Disciplinary Tribunal (SDT) has revealed.
Over more than four years, Hull firm Graham & Rosen acted for 882 investors in relation to 26 developments where they bought leases of rooms in hotels, student accommodation and care homes, generally off-plan.
The returns were meant to accrue from the income generated by the eventual occupants of the rooms, but all the schemes failed, meaning investors’ deposits were lost.
In the case of an investment scheme in London’s Canary Wharf that the decision focused on, investors had to pay a 30% deposit upfront.
The insurer that would supposedly cover the deposits, which was based in the offshore island of Nevis and said to be the only insurer in the world prepared to offer insurance for the risk, failed to pay out and went into insolvent liquidation.
The details are contained in a newly published SDT decision concerning Sheena Kay Taylor, a non-solicitor fee-earner who was head of investment property at Graham & Rosen.
She worked with an equity partner at the firm, called Solicitor X in the ruling, who was head of Graham & Rosen’s hotel and property departments.
Solicitor X faced a large number of allegations over his involvement in dubious and/or illegal investment schemes, inadequate advice, a failure to safeguard client money, and a conflict of interest.
Ms Taylor was found to have facilitated the schemes, or assisted Solicitor X to do so. “Her role had been to bring investors in and so she was actively involved, not simply assisting,” the tribunal found.
There were “a large number of factors… which the tribunal was satisfied demonstrated that the schemes were dubious and bore the hallmarks of fraud”.
In relation to the Canary Wharf scheme, these included that the development company was relatively newly incorporated, “seriously undercapitalised”, and had a 29-year-old director whose experience of hotel development and commercial knowledge more generally was unclear.
It seemed deliberately designed to avoid statutory regulation as a collective investment scheme.
The SDT held that Ms Taylor also failed to advise investor clients, or cause them to be advised, adequately or at all; failed to protect investor clients’ money; acted where there was a conflict of interest; and advised investor clients, or allowed them to be advised, that they could rely on the insurance company when it should have been “abundantly obvious” to her that they could not.
The conflict of interest related to initially acting for the Canary Wharf developer and drafting documents that would be relied upon by the investor clients, and then acting for those clients without their informed consent.
However, though she had lacked integrity, the SDT did not find her dishonest, on the basis that she had relied on Solicitor X to deal with the technicalities of the schemes due to his far greater experience and seniority.
“[Ms Taylor] was more involved in the public relations and business aspect of the schemes, as was clear from the marketing materials,” the SDT said.
“She had referred a number of matters to Solicitor X, which was not consistent with her having deliberately closed her eyes to the dubious nature of the schemes.
“The tribunal accepted [her] evidence on this point and count not be satisfied beyond reasonable doubt that she knew or suspected that the schemes were dubious or bore the hallmarks of fraud.”
It also did not find her to have acted recklessly – except in relation to her advice on the insurance company – but instead to have been manifestly incompetent.
The SDT said that, had she been a solicitor, Ms Taylor would likely have been either suspended or struck off.
It made her subject to a section 43 order, meaning she cannot work for a firm regulated by the Solicitors Regulation Authority (SRA) without its permission, and fined her £15,000, reduced to £7,501 due to her limited means.
In assessing Ms Taylor’s culpability, the SDT said she had “not deliberately committed misconduct but instead had done her job badly”, breaching a position of trust and facilitating and assisting Solicitor X.
There were, it noted, “abundant opportunities to have stopped” – the warning signs “were there”.
“The damage to the reputation of the profession was huge, particularly given the scale of the losses.”
She was also ordered to pay costs of £23,500, a third of what the SRA incurred, reflecting that Solicitor X bore “greater responsibility” for what happened.
Last week, the SDT also published a memorandum of stay of proceedings dated 28 March – Ms Taylor’s hearing started on 1 April – listing Richard Frederick Palmer, Graham & Rosen’s former senior partner, as the first respondent and Ms Taylor as the second.
Without detailing the allegations against him, the memorandum said the tribunal accepted medical evidence presented on behalf of Mr Palmer, and severed his case from Ms Taylor’s.
Further, it agreed to an indefinite stay, on medical grounds, subject to Mr Palmer undertaking that he remove his name from the roll of solicitors, never re-apply for re-admission and never work in the profession in the future.
This means the allegations against Mr Palmer have not been determined.
The SRA has made warning solicitors about their role in dubious investment schemes a priority in recent times.
Last year, contributions to the Solicitors Compensation Fund more than doubled  ahead of an expected rise in claims arising from solicitors’ involvement in fraudulent investment schemes.