Two directors of the firm have been banned for six and five years, respectively.
The case against Louis Group, a subsidiary of South Africa’s House of Louis, has been ongoing since before 2013, when the island’s high court ordered that it be wound up, as it was unable to pay its debts.
Over 700 investors from the Isle of Man, the UK and South Africa invested at least £60m ($78.6m, €69.5m).
Liquidators PwC said that creditors’ claims are “to all intents worthless” given the financial situation of the company.
The money was supposed to be invested in rental properties in mainland Europe, the UK and the Isle of Man.
Four Louis Group directors voluntarily accepted bans from the Isle of Man Financial Services Authority (FSA) ahead of the trial in October 2018 – leaving Alan Louis, John McCauley and Lukas Nakos as the defendants.
Judge Rosen was particularly damning about the conduct of Alan Louis in his lengthy judgement, delivered on 8 April 2019 and seen by International Adviser.
The two-part document runs to 33 pages.
Rosen described Louis as the ultimate beneficial owner of the company.
“[He] portrayed himself as a sophisticated scion of a business family, educated to PhD level, a professing Christian and highly experienced.
“Despite the veneer of courtesy, he was manipulative both in the documents [provided to the court] and in his control over other defendants, and in his performance in court,” Rosen wrote.
He added: “It was also obvious that Louis exercised control over all but the most mundane bank transfers […]. This was because he regarded the ultimate use of investors’ money as his by right.”
Louis’ submissions and evidence “demonstrated his dominance over the Louis Group companies involved”.
In summary, Rosen said: “The case against Louis was overwhelming and incontrovertible. He misused his companies, and continued to do so when they were insolvent, putting investors at risk as part of his Louis fiefdom to be milked dry.
“His failure to recognise this and his absurd attempts to justify his continuous, repeated, uncontrollable and far-reaching misconduct, are lamentable.”
The shortest ban “that the court can countenance for such grievous and morally culpable misconduct, is 12 years”. Rosen said.
Two other defendants
Alan Louis was not alone in court, but there was a question of how much his personal influence impacted the conduct of the other two defendants – McCauley and Nakos.
Also South African, Nakos was a director of the Isle of Man company from November 2002 until he resigned in mid-2008. The court document describes him as “Louis Group’s most important officer in the Isle of Man in 2007 and 2008” and as Alan Louis’ “then-right-hand man”.
In his submissions to court, Nakos described his former boss as a “sophisticated conman” who had “hoodwinked him”.
But Rosen wrote: “He claimed (implausibly but conveniently) to have forgotten why his own conduct was questionable.”
The judge fund that, as a senior member of Louis’ team, Nakos should have known about the distribution of investment funds and the lack of proper records, among other questionable acts.
“Nakos’ misconduct was far less extensive and ill-motivated. His role was critical for the success of Louis’ scheme, in particular in raising investment funds.”
He added: “The necessary and just period of disqualification should be half that for Louis.”
McCauley was described in the court documents as Louis’ long-serving bookkeeper and was a director of a number of Louis Group Isle of Man companies – including sole director of two companies based in the British Virgin Islands.
The judge said that “McCauley appeared straightforward and even naïve, but was misguided and manifestly abused by Louis in a role as director”, for which he admitted in court he was entirely unqualified and unsuited.
“In the court’s judgement, he was an employee dependent on and used to doing Louis’ bidding without question.”
Rosen strongly suspected that McCauley’s statements in court “were drafted on Louis’ behalf, in the hope that [he] would continue to act at his dictation”.
“The decision regarding the appropriate period of disqualification for McCauley was, in some ways, the most troubling.
“On the one hand, it may not matter as much to him, as say Nakos, given that he recognised his own unfitness, but it is still a penalty. On the other hand, this is the risk that he may be used again by Louis (or indeed someone else) in a similar way again.”
McCauley was disqualified for five years.
Regulator knuckle rap
Despite its legal success, judge Rosen dedicated the closing section of his judgement to reprimanding the way in which the Financial Services Authority handled the case.
The FSA reportedly struggled to slim down and reorganise the volume of allegations, with its amended details of claim stretching to over 100 pages.
Two documents submitted to the court, a summary list of charges and the charges summary, both ran to around 30 pages.
“It is vital for the FSA and other claimants in similar positions to distinguish between an investigation and legal proceedings.
“When the former discovers wrongdoing or evidence of wrongdoing, the latter must be focused on the chosen procedure and objective.
“Proceedings which ‘include the kitchen sink’ and have not undergone thorough analysis and selection, throw a disproportionate burden on the parties and the court and risk both procedural unfairness and a waste of resources.”
He added: “It is fundamental that hearing bundles should contain only necessary copy documents in a logical order, fully indexed and clearly organised.”
However, Rosen concluded that, while the FSA’s “organisation of the issues and materials before the trial may have left something to be desired, it caused no unfairness”.