UT-2022-00097 - [2024] UKUT 00352 (TCC)

The Solo Business was introduced to Mr Lawrence in August 2014. The Solo Group purported to trade in dividend arbitrage, a strategy where shares are placed in alternative tax jurisdictions around dividend dates with the aim of minimising withholding tax or generating withholding tax reclaims. The Solo Group’s trading (the “Solo Trading”) was characterised by a circular pattern of extremely large-scale over-the-counter equity trading, back to back securities lending arrangements and forward transactions.

The Applicant was one of six broker firms that participated in the Solo Trading during the Relevant Period. The combined volume of such purported trading across the six broker firms was enormous: between 15% and 61% of shares outstanding in Danish stocks and between 7% and 30% of shares outstanding in Belgian stocks. The value of Danish and Belgian withholding tax claims made, which were attributable to the Solo Group, was approximately £899.27 million and £188 million, respectively.

The Solo Business represented a significant departure from the Applicant’s usual business. The Applicant had never previously brokered a dividend arbitrage strategy. Mr Lawrence had never previously been presented with a business proposal in which a clearing broker had approached him with a large number of clients to be serviced.

The Applicant onboarded 166 Solo Clients from various jurisdictions. They were all existing clients who had been previously checked by Solo for Anti-Money Laundering purposes.

In line with the Applicant’s general trading arrangements with its brokers, the commercial opportunity for the Applicant was to receive a percentage of the commissions arising from the Solo Business. Approximately 80% of commissions invoiced by the Applicant to Solo were paid to the broker. Mr Meadows viewed the Solo opportunity as Mr Lawrence’s business project and the arrangements that the Applicant agreed with him simply reflected those that the Applicant had with its other brokers who provided their services to the Applicant through limited companies. (Mr Meadows supplied the Tribunal with a written agreement with the company of another broker. The FCA did not challenge the suggestion that this reflected the Applicant’s general approach to the work of all of its brokers.) The brokers were incentivised through the remuneration structure to be entrepreneurial and to introduce new opportunities from which the Applicant would also benefit. As a partner in the Applicant, in addition to the broking commissions he would receive, Mr Lawrence would also be owed a percentage of the commission which the Applicant retained through facilitating the Solo business.

On 10 February 2015 Mr Lawrence incorporated Hopa Financial Ltd (“Hopa”) solely to receive the payment of commissions due to him from the Solo Business. No written agreement was entered into between Hopa and the Applicant. The payments were made pursuant to an oral agreement made on behalf of the Applicant by Mr Meadows and Mr Lawrence on behalf of Hopa. Mr Meadows stated in his evidence that there was no contractual basis on which any of the commission paid to Hopa could be clawed back in the event of it being found that it had been generated in breach of relevant regulatory requirements. The FCA did not dispute this.

During the Relevant Period the Applicant received income of £448,645 in respect of the Solo Business, after deduction of certain expenses but including the monies the Applicant was obliged to pay on to Hopa. Out of this gross sum, the Applicant paid on to Hopa £307,732.93, representing some 80% of the net revenue obtained by the Applicant from the Solo Business. The Applicant therefore retained £140,912.53 from the monies it received in respect of the Solo Business. Mr Meadows confirmed that the monies received from the Solo Group by way of commissions were not held in a separate segregated account and therefore, notwithstanding the pre-existing contractual requirement to pay 80% of the commissions to Hopa, the monies concerned were available for the Applicant’s general business purposes until they were paid to Hopa. Indeed, the account into which the monies were received became overdrawn from time to time.

Mr Meadows’s view, which we accept, was that the Applicant had been targeted and identified by Solo as a vehicle to facilitate the dividend arbitrage strategy. The fact that the clients of the scheme were introduced via an authorised firm led the Applicant and its advisers to approach the Solo Business as prima facie a legitimate business opportunity. Mr Meadows accepts that, notwithstanding this, the Applicant breached Principle 2 and Principle 3, in the manner described below.