Wednesday, July 11, 2012

David Langford - Cutting the incompetent Regulators down to size!

One of the constantly recurring leitmotifs that mark out most major white-collar criminal activities is the negligence and more often, the incompetence of the regulators put in place to oversee the relevant market sector. Prior to the introduction of the regime of statutory self-regulation introduced in the original Financial Services Act 1986, the financial market in the UK was regulated by the Department of Trade and Industry (DTI), later christened the Department of Timidity and Incompetence. The civil servants who comprised this huge Department were very much imbued with the need to focus on 'Policy', which all civil servants love, while being remarkably unwilling to get involved with the more basic elements of dealing with the criminal elements of their brief.
Not all DTI officials should be included in this group. One, a brilliant investigator called Chris Cooke sought to make a significant difference, but he was a man on his own, and I never felt that his robust methods were fully appreciated by his departmental colleagues.
In the case of David Langford, the incompetence and yes, arrogance of the DTI was laid bare, and for once, the good guys got the right result in this case. Its outcome however, would have ramifications in years to come which did not bode so well for financial losers in later criminal cases.
David Langford was what was called a financial intermediary, and he operated as a financial adviser by dint of his possession of a licence to deal in securities, issued by the DTI. In order to qualify for such a licence, Langford had to show that he was a 'fit and proper' person to handle other people's money, and he had to be regularly assessed by the DTI officials who were part of the Licensing Branch, to ensure his continued suitability for the licence.
I shall not dwell on Langford's business tactics, as they were remarkably mundane, and ironically, did not have a huge bearing on the case or its outcome, except in the one area of his lack of capital adequacy.
More financial intermediaries, and financial businesses, including banks get themselves into trouble and slip down into criminality because their capital adequacy is insufficient for their business needs. They start 'borrowing' from their client accounts, always firmly intending to pay back the money at some stage. I do believe that when such a practice begins, most practitioners genuinely do believe they will pay it back, and that they are only 'borrowing' the money in the short term, to tide them over a temporary difficulty in cash-flow.
This is where the regulators need to be punctilious in ensuring that the capital adequacy levels are maintained scrupulously, and not merely in a series of dubious accounting practices designed to give an impression of solvency whereas the reality is that the firm is going down the tubes!
Langford offered a form of investment strategy to people with limited means who needed to earn capital for their living needs. One technique was called 'Bond Washing'! He would offer to sell Local Authority Bonds ( normally a very secure form of investment) to clients, but instead of holding these investments for a full 12 months, when they would pay income tax on the full amount of the income from the bond, he would sell them after 6 months, and roll the proceeds over into a new bond. The profits from the half-year investment would only attract tax at capital gains rates, and this legitimate form of tax avoidance, made the practice very attractive to small investors.
What Langford's clients did not know however, was that he was already in deep financial trouble arising from the financial collapse of an earlier company, which had gone down owing significant sums of money to investors, and some very shady City spivs as well! He was already under investigation by another Department of the DTI regarding the collapse of this company.
The full facts of this sorry case can be read in my earlier book 'Fraud In The City - Too Good To Be True', but the most important element in this brief synopsis is that Langford had early on, admitted to a DTI investigation, stealing money from an existing client of his present company, to reimburse a former client in his earlier collapsed company. He admitted the theft during his interviews with DTI officials, but for some unknown reason the investigation department of the DTI did not pass this information on to the Licensing Branch of the DTI , and they renewed Langford's licence permitting him to carry on trading. In this latter period, Langford solicited a considerable amount of new investor's money, all of which was unlawfully diverted and used to defray the debts owed to yet further investors. He was robbing Peter to pay Paul at an alarming rate.
All in all the DTI investigated Langford's two companies from October 1980 until February 1983, generating a voluminous amount of correspondence, a vast edifice of buck-passing, hand-washing, denials of responsibility, assertions of the need to protect Langford's civil rights to possess a licence to deal in securities, but at no stage did anyone bother to concern themselves with the interests of the investors from whom Langford was busy stealing even more money.
Later, an official of the DTI would assert that the information about the thefts could not be used in the departmental investigation because it had was privileged information and should not have been disclosed. While the relevant officials of the DTI argued about this minutiae and how many angels could dance on the head of a pin, Langford finally burned the entire contents of his office in a skip behind his premises, and closing the building, went on the run!
I wasn't unduly worried about Langford's disappearance, although even that aspect is a whole story in itself, I always knew he would come back to notice again, so having posted him as a wanted man, I set about re-constructing the books of his business. It took me five and a half months in total, (we didn't have computers in those days), painstakingly identifying every payment, every security, every client, every client's individual funds, until I knew Langford better than I knew myself.
I was forced to undertake the enquiry on my own and without any help from the DTI, even though they had all the relevant files and papers. They claimed that these documents were privileged and that they could not be shared with Police because that would completely countermand the element of trust that company directors were permitted to expect in their dealings with the DTI. Throughout, they refused to assist me in any way, even though they must have known that their documents would have been of untold value to me.
I would later learn that their refusal was an attempt to cover up their own ineptitude and incompetence, because once these documents became police evidence, they would at some stage see the light of day in a Court of Law. So they turned their backs on my requests and ignored me. When I tried to suggest that they might be standing in the way of my getting recompense for the losers, they accused me, sneeringly, of engaging in petty 'consumerist' thinking. It was not their job to be concerned with the interests of investors, they told me, all investors needed to operate on the basis of 'caveat emptor', and they were on their own. If they lost money with Langford, that was their own stupid fault!
What had truly scandalised me were the losses caused to the latest group of investors who were solicited after the second re-granting of the licence to deal. The vast majority were men and women who had invested their life's savings, or their pension funds in Langford's schemes, believing that his possession of a licence issued by the Government meant that he was an utterly trustworthy person to handle their money. The schemes he offered were not madcap speculation, but money deposited in the bonds of municipalities, as safe, literally, as the houses they built. What they didn't know was that as soon as their money hit Langford's bank account, it was paid out to other shadowy figures to whom he owed a great deal more money arising out of some seriously speculative share dealings he had undertaken on behalf of a group of crooked merchant bankers and financiers, who were putting immense pressure on Langford to reimburse their losses.
Two of the losers and my witnesses, were elderly Welsh miners from South Wales, who had invested some significant part of their savings in Langford's schemes. They had written to the relevant Parliamentary Under Secretary of State for Corporate and Consumer Affairs, asking for official assistance in getting an investigation and recompense for their losses. The answer they received was that having reviewed the facts of the case, the Department's actions were considered to be reasonable throughout, and no assistance could be offered or would be forthcoming.
I will admit that these men, so close in background, culture, geography, and dangerous occupation to members of my own family, brought out an almost unreasoning anger in me for the attitude of the civil servants towards them and their losses. I decided that If I was going to be accused of 'consumerist' thinking, then I would do it properly.
I advised them to seek the assistance of their own M.P, and having later visited him in the House of Commons I gave him all the facts in my possession, and he then agreed, at my request, to refer the whole case to the Parliamentary Commissioner for Administration, more commonly known as the Ombudsman.
This excellent gentleman made a full enquiry into the affair, the DTI were forced to hand over all their files and papers which had been denied to me, and his report contained a series of bombshells which had never before exploded underneath the complacent DTI with such devastating force.
He found their conduct 'surprising', other actions were described as 'extraordinary', he criticised the whole Department for 'their poor performance here and for their apparent lack of regard for the protection of the public interest'. He found other failings which he believed 'merited criticism', and he considered their overall handling of matters to be 'ineffective and ill-judged'. His most telling phrase was saved for the end when he opined that '...the Department showed a lamentable lack of concern for the interests of those members of the public who had a right to assume that the DTI's licensing system offered them a reasonable measure of protection for their investments...'
David Langford re-appeared one day as I had always predicted, and he was sentenced at the Old Bailey to one years' imprisonment for various offences arising out of his management of his companies.
As a result of the Ombudsman's report. all the investors in Langford's companies were reimbursed their losses in full, together with full interest. The report had the effect of a nuclear explosion inside the DTI. I don't believe any senior civil servants' career was damaged by it unduly, no-one, as far as I know was ever disciplined for their part in this scandalous case, but it had long-lasting repercussions.
The decision in Langford's case would later be used to reimburse all the victims in the Barlow Clowes investment fraud case, and it was the catalyst for the inclusion of certain elements of the Financial Services Act 1986, which made certain that no further such cases which occurred after the Act came into force, would be allowed to be referred to the Ombudsman, but would have to take their chances under the Investors' Compensation Scheme, and even more scandalously, regulator incompetence would no longer be a reason for recompense!
For me personally, the case earned me the lasting enmity of certain senior civil servants inside the DTI, elements of which would re-appear later in my career when I dealt with another appalling DTI handling of yet another investment fraud case, of which more later. As a mere detective, I had, for the very first time, managed to shake the very foundations of arrogance and privilege which these complacent civil servants considered to be nothing more than their due, and in so doing had exposed them to public ridicule and even worse, the public exposure of their incompetence.
The case taught me another series of important lessons about the white collar criminal dimension. It taught me that no matter how elevated the public servant, he or she will fight like a cornered alley cat if their cloistered privileged existence becomes threatened. It taught me that in order to cover up their ineptitude, they will go to any lengths to deny others access to documents or papers needed to bring criminals to justice. It taught me that no regulator has the monopoly when it comes to active professional knowledge, and that they will always seek to lay claim to greater wisdom and understanding, but will never be willing to share it with other agencies. It taught me that Ministers and Parliamentarians are in so many cases, very badly served by their civil servants, but they will always defer to them and protect them rather than expose them. It taught me that civil servants actively despise the police, viewing them as a bunch of 'Plods', and will never share their information unless it is absolutely forced out of them, and it taught me that all these problems are widely exploited by white collar criminals, because they know just how ineffective the civil servants are, and they are not frightened of them!
I also learned that civil servants are not predisposed to undertake criminal investigations, despite their possession of special powers to do so in certain cases. They do not like conducting criminal investigations, they don't like dealing with criminals, and they are no good at it. They feel it puts them on a par with mere 'Plods', which they so resent, and whom they so despise. The jury system to them is a dangerous lottery and they don't like the odds of possibly losing an important case, and being subsequently criticised in the department or in the press, because it might have bad influences on career development. (We shall see this element re-appear in the Vegas Trust case). So, they will avoid bringing criminal cases wherever possible, unless absolutely forced so to do.
Their successors live on in the FSA today, and in reality, very little has changed, despite the changes in the law and the processes. Many elements of financial crime enforcement may change, but the culture of general ineptitude and a lack of willingness to use the criminal powers entrusted to them, still lives on today, the Department of Timidity and Incompetence has become the Frankly Supine Authority. They may be changing the names of the relevant Departments, but that is only to protect the guilty!


lifeafterdebt said...

Really good piece Rowan.It is clear from you observations that changing the names of these regulatory authorities does nothing to increase their effectiveness and not doubt costs a small fortune to impliment. I suspect their main purpose is to merely to exist in an effort to convince us there is adequate regulatory control in the financial sector.

AbogadoNZ said...

I agree with the previous comment - another really good piece which goes to the heart of the problem - ARSE COVERING. Whether it is public officials, regulators, lawyers, accountants or others in the financial services gravy chain, maintenance of personal position/security is paramount and supersedes the justice imperative. This may explain why Barclays are looking at an ANZ director for its next CEO. The prospect of an outsider who might actually lift the lid and ask a few questions is far too radical.