The claimants who took the Sense Network to court over an alleged secret £12.8m "Ponzi scheme" run by one of its appointed representatives will appeal the decision to rule in the company's favour.
Mr Justice Jacobs ruled in favour of Sense and against the 95 claimants who were clients of Alistair Greig, who owned and ran Midas Financial Solutions (Scotland) Ltd (MFSS).
The claimants alleged Sense was liable for their losses but Mr Justice Jacobs disagreed in a ruling which came just months after Tenet was found liable for the unregulated activities of one of its appointed representatives.
Robert Morfee, the lawyer at Cubism Law who represented the claimants, said they will be seeking permission to appeal the decision and a hearing is scheduled for later this month.
He said that if the ruling was allowed to stand it would mean clients who are advised by an appointed representative will not have the same protections as those who go to an IFA because clients would be hampered by the contract between the adviser and their network, which clients are not party to or able to influence.
Mr Morfee added: "The judge ruled this secret scheme was a collective investment scheme, and once you accept that it was a collective investment scheme it becomes an authorised product because Midas was authorised to sell unregulated investment schemes.
"The network has said it is not authorised under the agreement Midas had with Sense, but why should clients be affected by that?"
In explaining why he made an opposite ruling to the Tenet case, Mr Justice Jacobs said it was because the situation with Sense was the reverse.
He said the Tenet case involved an adviser - convicted fraudster Alok Dhanda - providing regulated advice to disinvest from one product and invest in an unregulated one, but in this case no regulated advice was provided.
Tobias Haynes, a solicitor at FS Legal, said: "This is a travesty of justice and flies in the face of a lot of recent authorities. The distinction [with the Tenet case] seems very artificial to me.
"This ruling is certainly susceptible to challenge. It doesn't sit right and if it is left as it is it potentially opens up a system where carefully crafted arrangements by principals and savvy appointed representatives put consumers out of pocket.
"The key thing that the principal has as a mechanism to protect themselves is the contract with the appointed representative because they can sue for damages when the appointed representative goes outside the contract."
MFSS was a financial advice business based in Aberdeen.
The scheme it operated was a continuation of a one which Mr Greig had operated when he had previously worked for a firm known as Park Row Associates Ltd.
It continued after Mr Greig founded MFSS in 2006 and after September 2007, when MFSS became an appointed representative of Sense.
As part of the scheme investors, most of whom were resident in Scotland and in particular in the Aberdeen area, were offered the opportunity to receive high guaranteed interest rates on short-term deposits.
According to Mr Justice Jacobs's ruling, when the deposit reached maturity the investors would receive or be credited with interest but in reality the interest that was paid, and any capital returned, was not the product of successful investment but came from funds subscribed by participants in the scheme.
But in August 2014 the whistle on the scheme was blown by Keith Ingram, an employee of and financial adviser at MFSS, who provided information about the scheme to Sense.
Mr Ingram's information led to a raid on MFSS's offices by the Financial Conduct Authority and the police.
At the time of the enforcement action there was about £379,000 in the firm's account but some 279 members of the public had invested £12.8m and were owed £13.6m upon the maturity of their investments.
Mr Greig is now facing criminal prosecution in Scotland.
The claimants also sought to prove Sense had failed to monitor the firm properly, but Mr Justice Jacobs disagreed and said MFSS had made "determined efforts" to hide the scheme from its network, citing testimony provided by former FCA specialist Rory Percival.
Steve Young, chairman of Sense, said the company had always maintained Mr Grieg's actions were concealed from it at all times.
He said: "Throughout this process, the claimants have alleged that Sense failed in its duty to supervise Midas. Much time, effort and money has been spent in trying to prove that allegation.
"Sense is delighted that the judge completely rejected the allegations and concluded that Sense had not breached any of the FCA rules in relation to our supervision of Midas."
Mr Young added that he felt genuine sympathy for the people who have lost money as a result of this.
He added: "It is very easy to say with hindsight that this was going on but there was no realistic way we could have known without the forensic powers reserved to the FCA or the police."
damian.fantato@ft.com
