Law Report: Barlow Clowes was a trustee of savers' funds: Regina v Naylor and Clowes - Court of Appeal (Criminal Division) (Lord Justice Watkins, Mr Justice Auld and Mr Justice Scott Baker), 8 July 1993

Under the terms of its contracts with investors, the collapsed Barlow Clowes investment group had been a trustee of the funds invested with it, and the diversion of those funds for the personal use of the group's managers constituted theft under sections 1 and 5 of the Theft Act 1968.

The Court of Appeal (Criminal Division) dismissed appeals by Peter Clowes and Peter John Naylor against their convictions for a number of offences of dishonesty, including theft and making false statements to induce investment, while managing the Barlow Clowes group, which collapsed in 1988. Naylor was sentenced to 18 months imprisonment, Clowes to 10 years. Clowes was also disqualified from being a company director for 15 years.

Anthony Hacking QC and Geoffrey Vos QC (Burton Copeland, Manchester) for Clowes; Anthony Glass QC and Francis Barlow (Kingsley Napley) for Naylor; Alan Suckling QC, Robin Hollington and Mark Lucraft (Serious Fraud Office) for the Crown.

LORD JUSTICE WATKINS, giving the court's judgment, said the companies operated by Clowes were alleged to have obtained millions of pounds from investors who had been led to believe their money would be securely invested in gilts. Little of it ever was, most of it being stolen and used to buy houses, farms, yachts, cars, antiques, a vineyard, and shares in other companies. Clowes masterminded the operation. Naylor was his right-hand man.

Barlow Clowes marketed investment schemes called portfolios, some of which were administered offshore. Investors' money was paid into designated clients' accounts in Jersey and other offshore places. Clients' funds were not segregated but mingled in these accounts.

Brochures containing the terms of the investments gave the plain indication that investors' cheques were to be made payable to Barlow Clowes' International Clients' Account and that Barlow Clowes was to be authorised to buy and sell British government stock on a fully discretionary basis, 'and to place any uninvested funds with any bank, local authority or other body on such terms and conditions as you see fit whether bearing interest or not'. This last term was important because Clowes argued it authorised him to invest clients' funds in any way he saw fit. The main issue was whether Barlow Clowes was a trustee of the funds invested with it under the relevant portfolio schemes. If so, the funds remained the investors' property by virtue of section 5 of the Theft Act 1968, and Clowes, in diverting the funds to his own use, 'appropriated property belonging to another' contrary to section 1.

If Barlow Clowes was not a trustee of those funds but beneficially entitled to them, and subject only to a contractual obligation to pay the guaranteed rate of return and to pay back on demand equivalent sums to those invested, then Peter Clowes, as the authorised agent of Barlow Clowes, did not appropriate property belonging to another and was not guilty of theft.

This was a question of construction of the contract in the brochures. In their Lordships' judgment, it was clear, whether the contract consisted of the brochure as a whole or just the application form, that Barlow Clowes received funds on trust to 'invest' them in British government stock and was only authorised (under the term quoted above) to 'place' them elsewhere temporarily, pending their investment or reinvestment in gilts or their return to investors. In particular, that term did not authorise the lending of investors' funds to Clowes personally as a 'mini-merchant bank' to treat as his own.

Their Lordships also dismissed Clowes' appeal against sentence.

Paul Magrath, Barrister.