In a recent judgment in London's Insolvency and Companies Court, concerning an alleged fraudulent art investment scheme, the joint liquidators of Smith & Partner (trading as Art Assets London), sought to continue freezing orders over Luke Sparkes, one of his companies, Zeno Fine Art, and Callum Ahearne, who was alleged to have been a shadow or de factor director and senior employee at the material time of the alleged fraud.
Zeno Fine Art received payments from Smith & Partner, which was at the material time wholly owned by Mr Sparkes, and its sole director. Mr Ahearne did not challenge the freezing orders.
Smith & Partner Ltd was wound up on 18 July 2023 and was involved in selling "limited edition" fine art prints to "investors". It failed to resell them, causing significant investor losses. Freezing orders were initially granted ex parte on 11 January 2024.
The liquidators brought claims under sections 213 (fraudulent trading) and 212 (misappropriation and breach of duty) of the Insolvency Act 1986 and claimed that over 1,000 investors were affected, with claims totalling £9,099,570 as of May 2024. The liquidators sought £13.8 million in equitable compensation and asserted proprietary claims for £5.9 million.
Mr Sparkes argued that the liquidators did not have a "good arguable case" to continue the freezing orders; there was no risk of asset dissipation; and the liquidators had failed to provide full disclosure. A considerable proportion of the decision of Sir Justice Flaux, the Chancellor of the High Court, was dedicated to whether the liquidators had a "good arguable case" and six arguments were submitted by Mr Sparkes and Zero Fine Art.
The six arguments discussed were as follows:
- What the company did. The Liquidators submitted that Smith
& Partner gave investment advice and acted as a broker, which
was supported by brochures. Mr Sparkes claimed the company was just
a retailer. The brochures advertised management of a
"portfolio" and offered "access to wealth management
facilities" and that it acted as intermediary, not a seller.
The brochures referred to "client returns" and
"investment goals" and said that clients would be
assigned "an adviser" and "a personal broker"
or "dedicated broker" or "expert art broker".
The company offered to provide "personalized investment
plans" on the basis that it had "expertise in finance and
investment". The brochures also promised that an investor
would be informed of the best time to sell and that it could bring
a return potential of 64.6% in a year. The brochures also
recommended that investors dealt with a company which was a member
of the Fine Art Trade Guild, said to be regulators of the Limited
Edition Print Market. The costs were said to be an upfront fee of
2% on the sale of the art piece and a charge of 5% on the
profit.
- There were no genuine sales of investors' prints on the
secondary market but all "sales" were "buy
backs" by Smith & Partner at an increased price. It was
said that there was no genuine profit for the investors because
there was no genuine increase in the market value. Mr Sparkes
accepted that there had been no sales in the secondary market and
the potential profit of 64.6% was based on one transaction
involving the purchase of a Steven Dews print for £360. The
investor made a "sales request" and the company acquired
the print back from the investor for £650. Having acquired
works, investors were told that the chances of their portfolios
being sold at auction were improved with further acquisitions of
prints.
- Investors were misled as to how the company made a profit. Its
profit were said to be from charging 2% on each sale and 5% on the
profit of any resale. Smith & Partner argued that it made a
profit from a significant mark up on the wholesale price of prints
it acquired from its suppliers, Rosenstiels and Zeno Fine Art.
Prints were initially sources from Rosenstiels but gradually the
vast majority of the prints were supplied by Zeno Fine Art. Mr
Sparkes charged 100% mark up on the wholesale price which was said
to be standard. However, it was claimed that the mark up was
actually, on average 495% and no reference had been made to the
investors about this.
- The sales at grossly inflated prices. The respondents'
expert was Charlie Scott of Art Advisory Group. His report
explained that MyArtBroker specialised in the private sale of
prints was a suitable source for value that the prices at which
Smith & Partner was selling were in line with what other
retailers were selling at but the Liquidators argued this was the
wrong point as investors were focussed on resale prices The
Liquidators' expert was Peter Greenway of Roseberys, who
reviewed past auction results. In relation to one of the artists,
Stuart McAlpine Miller (who had a contract with the second
respondent) he found one print, "Split Personality", sold
for £5,500 which was sold below estimate. One print of
Deborah Azzopardi's was sold for £36 in 2021 but none of
the other prints sold by the company had been sold publicly.
Photographs but no prints of Miss Aniela's had come up, selling
for no more than £75. Mr Controversial had no publicly
available sales. Steven Dews prints sold between £6 and
£200 but only three relevant to Smith & Partner ad been
sold. Sidney Maurier had three sales at £150-£180 but
none were sold by Smith & Partner.
The Liquidators also referred to the inventory list of the prints kept in storage which contained values for the artwork. Smith & Partner sent the warehouse an invoice for prints which gave a total price or value and they would divide that overall figure by the number of prints and those were the figures that went into the inventory list as the value per print. The invoice was for 216 prints in 34 boxes and tubes with a "total price" of £12,855 which amounted to just over £59.50 per print.
Investors also complained that when they contacted auction houses about resale values the prints did not meet the minimum threshold for sale at auction.
- Complaints by investors about high pressure sales techniques.
Three years ago its bank account was frozen and it was subject to
an investigation by Trading Standards. Sometime after that, Tony
Hetherington reported in the Mail on Sunday allegations of
mis-selling; the art had "rocketed in value", that in
order to sell works at auction they needed to invest further sums
but sales did not materialise despite assurances that their prints
could be sold in a short period of time. When sale were requested,
sales staff provide difficult to find. Later articles described it as a scam. It is not
recorded in the judgment but one of the articles described how Mr
Sparkes compensated any investor who complained to Mr
Hetherington.
Last year Mr Sparkes resigned as a director and transferred his shares in the company to a third party for £10. The same day Mr Sparkes had the company enter into an agreement for the supply of marketing services for £7,000 per month and an exclusive supply agreement. Mr Sparkes duly received some £400,000 from the company and had his director's loan written off.
- Mr Sparkes' knowledge of mis-selling, having dismissed staff for that reason. Yet he received £5.9 million in dividends and a number of his corporate vehicles, relatives and the third respondent. The Liquidators argued that the dividends and payments out were unlawful and paid in breach of duty because they represented the proceeds of a fraudulent scheme. Mr Sparkes denied this.
The Court confirmed that the bar for establishing a good arguable case was low, which is set by the Niedersachsen test: what is required is a case: "which is more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50 per cent chance of success" but in any event held that the Liquidators' case went way beyond the threshold. The Court was unimpressed with the number of arguments put forward which had created a mini trial.
The Court was heavily persuaded by the information in the brochures, the sales pitches and the inventory list which shows prices for the prints being stored far below the prices at which the company had sold them to the investors. The Judge also referred to the enquiries made by investors of auction houses, which in the case of Chiswick Auctions was as low as £100.
The Court also accepted the risk of dissipation and rejected the claim there had been lack of disclosure by the Liquidators.
The decision is interesting even though it arose out of an interlocutory application in connection with freezing orders as art fraud claims do not often make it to a final court hearing. The brochures and subsequent sales pitches boasted unrealistic returns for investments of unseen art stored in a foreign jurisdiction within a year for a modest fee. Investors spent thousands on each work but individually it would have been difficult if not impossible for any individual investor to make a claim to recover sums diverted to Mr Sparkes or his company. It is concerning that the Liquidators' progress report issued in July this year noted that follow up scams were occurring with "agents" claiming to be from the Insolvency Office were contacting investor creditors of Smith & Partner, seeking details of the claims and requesting payment for the "release of funds".
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