Prevention of Fraud (Investments) Act 1958 (Amendment) (Hansard, 18 December 1984)

§ Dr. Oonagh McDonald (Thurrock)

I beg to move, That leave be given to bring in a Bill to amend the Prevention of Fraud (Investments) Act 1958 to compensate investors with licensed dealers. The Bill is directed at licensed dealers in shares, a growing sector of the market in shares. There are, governing licensed dealers, nine associations which constitute self-regulatory bodies.

Last year the Department of Trade and Industry tightened up the regulations governing licensed dealers in shares. Nevertheless, in spite of that the Under-Secretary of State with responsibility for corporate and consumer affairs, admitted to me in recent correspondence that the present statutory framework could be improved and extended and that is what the Bill is about.

For a number of reasons it is necessary to protect investors with licensed dealers in shares against fraud, bankruptcy or mismanagement, by setting up a compensation fund to provide for their losses in those events. It is necessary in this case because the risks that the would-be small investor with licensed dealers in shares can face are many.

First, it is difficult for a recipient of a cold call—an unsolicited telephone call — to know whether the supposed licensed dealer is respectable. Whether he is a member of one of the proper associations and has a licence.

It is also difficult to know in what kind of trading in shares the company engage. There is a danger that a company may take a worthless share at an artificial price and set up a company abroad, say in the United States or on the continent, and push the price up by hiking up the shares in the foreign market. That creates an artificial market in Britain. That is a fraudulent manipulation of shares, yet the practice occurs. It is not clear whether the Department of Trade and Industry investigates and controls such actions rigorously enough.

Let us take Ravendale, for example. That company is owned by Mr. Singh, the second largest licensed dealer in Britain. He forged the transatlantic ties with Marsan Securities, a New York brokerage house, which, as The Observer and the Securities and Exchange Commission subsequently revealed, was a distinctly unsavoury concern. The Federal Bureau of Investigation has expressed great anxiety about trading between Ravendale and Marsan Securities. The Department of Trade and Industry, in a letter to me, claimed to have carried out an investigation, but just how rigorous it was and what form it took remains unclear.

Before Marsan ceased business, it promoted Ravendale sponsored shares and Ravendale, in turn, marketed Marsan favourites. Ravendale's offshoot, the London Venture Capital Market, planned the unlisted securities market placing of shares in Video Turf, owner of the rights to a horse race gaming machine. Camseal, Video Turf's parent, had disturbing associations with individuals connected with Signal Life and the Cavendish Life frauds. In the event, Video Turf never came to market. Camseal collapsed and recently the shares were quoted at a mere 25 cents. They were formerly valued at $30 million.

196 Other allegations have been made against Mr. Singh and Ravendale by the Checkpoint programme. Those include connections between Mr. Singh and Thomas F. Quinn, a disbarred American lawyer imprisoned for stock fraud. He is believed to have connections with the Mafia.

Chartwell Securities AG, a company with which Thomas F. Quinn appears to be intimately associated, and Zurich and Trafalgar Capital (UK) owned by one Neil Bruckman, appeared to be acting in concert to manipulate a market in shares. Abraham Margolis was a major shareholder in Ravendale Securities. He and his brother, Robbie Margolis, according to the FBI, are associates of the Mafia.

That is just a small part of the complex activities of Ravendale. But to the small investor, as the recent Checkpoint programme showed, it appeared to be a respectable firm of stockbrokers. Such firms advertise in the national press and sometimes the names chosen—for example the London Venture Capital Market — make them seem solid and respectable. They issue glossy brochures, and, as I said, they sometimes contact people cold, which is illegal and entice them to part with their money, sometimes to their loss. The Checkpoint programme recently featured a Mr. Dunstan, a disabled man who has lost all his savings.

The Bill is designed to fill a gap in the legislation by providing a compensation fund for investors with licensed dealers to reimburse them if funds have been lost either because rules have been broken or ignored, because of commercial misjudgment or because the company concerned has collapsed.

The collapse of Norton Warburg in 1981 showed the necessity for compensation. More than 500 investors suddenly discovered that the five companies in which they had invested through Norton Warburg had lost nearly £4.7 million.

The Government are determined to encourage small shareholders even if, as in the case of British Telecom, it means selling shares to them at half price. If that is the Government's aim, they must be prepared to protect small investors in the circumstances that I have described. The tightened rules for licensed dealers introduced in 1983 go part of the way. Even the Gower report points out the necessity for a compensation fund. This part of the market is growing. The privatisation of British Telecom has meant that many small investors have gone to licensed dealers because their investments are too small for a stockbroker's attention. Some licensed dealers have made a killing out of BT shares. One has carried out £18 million worth of trading so far. If that is the position, the associations of licensed dealers should be obliged to set up a compensation fund. It would probably be sensible to have just one association rather than the present nine. Setting up such a fund would not be so prohibitively expensive now as it was in the past due to recent change in the rules, forcing the separation of clients' money and investments from the firms' other money.

If the Government are determined to encourage small investors they must be prepared to ensure that the small investor is properly protected and that the part of the market in which small investors deal is properly regulated and controlled.