Wallace Smith sentenced to six years for pounds 90m fraud: Abuse of trust damaged reputation of City of London, says judge

WALLACE SMITH, founder and chairman of collapsed London merchant bank Wallace Smith Trust Company (WSTC), was sentenced to six years in prison yesterday for carrying out a pounds 90m fraud.

In sentencing the disgraced Canadian-born businessman, Mr Justice Tuckey told him that it was no mitigation that the only losers were banks and other big institutions.

'Trust is still a valuable, and in some cases an essential, part of commercial life. You abused it and must inevitably have damaged the reputation of the City of London in doing so.'

Smith, who also funded the Thatcherite Bruges Group, which campaigns against Britain's membership in the European Union, siphoned off some of the money to 'live comfortably' with homes in London and Hampshire and a boat in the Bahamas, the judge told the Old Bailey court.

Mr Justice Tuckey accepted Smith had been motivated by the wish to protect WSTC from spiralling losses, rather than by personal greed, and that losses to small investors was not a factor.

Smith, 59, of Brewers Lane, West Tisted, Hampshire, was convicted last month of one charge of fraudulent trading between May 1990 and April 1991 and two of obtaining property by deception involving more than pounds 20m.

Mr Justice Tuckey praised the Serious Fraud Office (SFO) for the way it handled the investigation and the trial, as well as the police, lawyers and accountants who worked on the case.

Smith will also face another 12 months in jail if he fails to comply with a confiscation order worth pounds 49,000 within six months.

The order was connected with Smith's collection of shotguns and rifles, which he transferred to his son Paul two days before the worldwide freezing of his assets.

Smith based his fraudulent activities on a Canadian family fortune that did not exist. From the early 1980s he siphoned money out of the London merchant bank to a series of Canadian trusts, which in turn made 'capital injections' of roughly pounds 1m a year back into the bank.

As the bank's losses worsened Smith resorted to more 'bogus deals' to convince his clients, fellow directors, auditors and the Bank of England that WSTC was getting healthier. His City operation paid more than pounds 50m for Canadian government bonds that did not exist. He also took to 'double- dipping', selling certificates of deposit twice over to different parties.

He used itinerant Australian, New Zealand and South African accountants in his London office to do his 'dirty work'. Eventually Smith's fellow directors became suspicious, and, at the end of April 1991, Smith went to the Bank of England and told them the true state of affairs.

He was then charged by the City of London Fraud Office, who handed the case over to the SFO. The Bank of England shut down WSTC and appointed KPMG liquidators. KPMG is suing Royal Bank of Scotland to recover transfers worth up to pounds 418m and National Westminster Bank for pounds 71m plus interest.

The liquidators are also suing WSTC's auditors Deloitte Haskin & Sells, now merged into Coopers & Lybrand, for allegedly failing to spot the fraud.

Institutions nursing big losses from the merchant bank's pounds 90m 'black hole' include Life Assurance of Scotland, which is pursuing Smith for more than pounds 6m, Discount Bank and Deutsche Genossenschaftsbank.

(Photograph omitted)

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