Fraudulent investment schemes are perennially tempting to the unwary and it really does make sense to take independent professional advice before parting with your money. In one case, the High Court found compelling evidence that hundreds of small investors had fallen victim to such a scheme.

About 240 investors claimed to have been lured into a fraudulent commodity trading scheme by marketing literature which promised exceptionally high, and essentially risk-free, returns. The scheme was promoted by an overseas company that was later dissolved. After the scheme was closed, the majority of the investors remained unpaid and collectively lost over 6.5 million euros.

The investors took action against a professional firm of which the company had been a client at the relevant time. The firm was alleged to have recklessly or negligently enabled the scheme and to have induced many of the investors to participate by endorsing it and affording it an air of apparent respectability.

Communications between the firm and the company, as its client, would ordinarily be subject to legal professional privilege (LPP) and treated as highly confidential. At a preliminary hearing, however, the investors argued that LPP should be waived on the basis that the firm had been instructed by the company for the purposes of furthering crime, fraud or iniquity. The firm adopted a position of neutrality in respect of the application to disapply LPP.

In ruling on the matter, the Court was satisfied that the investors had established a very strong and compelling case that the scheme was fraudulent. It bore the classic hallmarks of fraud in that, amongst other things, it offered impossibly high returns, was targeted at smaller investors and was entirely free from regulatory oversight.

Even if the company were not itself the instrument of the fraud, there was a strong alternative case that it had acted as the unwitting tool of another. The Court’s ruling that the fraud exception to LPP applied opened the way for the investors to seek full disclosure in respect of the firm’s dealings with the company.

Source: Private Client Library Content