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The author of his own misfortune
(Estates Gazette Via Thomson Dialog NewsEdge)
So said the counsel for Gerald Smith, the man behind the property company Orb, who started an eight-year prison term for theft and false accounting on Monday. Piers Wehner and Christian Metcalfe unravel the web of deceit surrounding the theft of 35m that led to an SFO investigation
Four years ago, Dr Gerald Smith was a wealthy financier with grand ambitions. Orb Group, the web of companies that he controlled, had an estimated value of 1.5bn. His own personal fortune stood at 110m. He had a wife, two daughters, and a millionaire's mansion on Jersey.
This Monday, Smith, 51, began an eight-year prison stretch. He has been found guilty of the theft of 35m from the shareholders of failed dotcom company Izodia. His company is in liquidation and he has been declared bankrupt. His wife is seeking a divorce and his St Helier home could be seized to compensate the victims of his crimes.
Smith's counsel, Alan Newman QC, admitted in Cambridge Crown Court on Monday that Smith was "the author of his own misfortune".
The eight-year sentence is the culmination of a 45-month investigation by the Serious Fraud Office and Thames Valley police, an inquiry which has cost 167,354.
The inquiry began in November 2002, following a complaint from Royal Bank of Scotland. The bank's investment division in Jersey had become concerned about the transfer of millions of pounds from Izodia's account into separate accounts held by a company called Lynch Talbot. Because of the size of the sum -- a total of 35,088,518 -- the SFO launched an investigation.
RBS was right to be concerned. The money, the SFO found, had been "taken without authority and used by Dr Smith for his own commercial interests and his own personal use". Not only did Smith help himself to the cash once, he covered his tracks and then did it again. "He treated cash balances as his own personal treasury," said the SFO's QC.
Helped himself to cash
In his defence, Smith maintained that he had not purloined the cash for his own ends, but had used the money to stop both Orb and Izodia from going bankrupt. The cash, his counsel said, had been used to pay the millions of pounds of debts amassed by Orb in its purchase of a portfolio of Thistle hotels in early 2002.
Orb first came into contact with the hotel chain in 2001, when it bought the Thistle hotel in Poole. Orb planned to demolish the hotel and use the site as part of its grandiose vision for the regeneration of Poole Harbour (see p81). In March 2002, the plans had escalated. Market sources tipped Orb to be the purchaser of 37 of Thistle's hotels, with an estimated price-tag of 450m. By May, the deal was complete, but the cost was 600.4m. Orb had been obliged to borrow heavily from its backers, including Morgan Stanley, to fund the deal.
By mid-2002, some of that debt needed to be repaid. Smith attempted to offload the portfolio at a profit. In May 2002, he approached Izodia. The software firm had been a darling of the dotcom boom. But after the bubble burst, Izodia was little more than a cash-shell, with approximately 35m in the bank. Smith had plans to transform the company into a property investment vehicle, and attempted to persuade Izodia's shareholders, which included Morely, Prudential and Laxey, to buy Orb's recently acquired portfolio of Thistle hotels for 900m.
The shareholders, discovering how much Orb had paid, baulked. At the time, Smith said the price was fair but the deal had been scuppered by "shareholder activism". Smith's response was to buy 29% of Izodia for Orb, and attempt to force through a deal.
This too failed. There was no other buyer on the horizon for the Thistle hotels and Morgan Stanley wanted the first instalment of its money -- some 17m. The payment was due on 5 August. A second payment, of 10m, was due on 5 November. Facing the ruin of his plans, Smith became desperate.
However, thanks to the stake it had taken, Orb had been able to put two Orb allies, Jarlath Vahey and Peter Catto, on Izodia's board. According to the judge's sentencing, they simply acted as "stooges" for Smith, who was, in effect, a "shadow director".
Cash transferred to Jersey
A different plan emerged. At the beginning of August 2002, Smith persuaded the now more friendly board to transfer 27.3m from Izodia's RBS account in Reading to a new account at RBS Investment in Jersey. The reason for the transfer, he explained, was because the Jersey account offered a higher rate of interest.
On 2 August, the board agreed to the transfer, believing that the money would still be under Izodia's control.
What Izodia's shareholders did not know was that both Orb and its parent company Lynch Talbot also had accounts at the Jersey branch. These accounts were effectively in the hands of Gerald Smith.
Also, shortly before they had become directors of Izodia, Vahey and Catto had, "under the instruction of Dr Smith" and without the knowledge of Izodia, instructed RBSI in Jersey to give Lynch Talbot electronic access to the Izodia account.
Three days later, on 5 August, the day Morgan Stanley was due to be paid, the money was moved from the Reading account to Jersey. The same day the electronic access was used to transfer the 27m from Izodia's account to Lynch Talbot's at the same branch.
But Izodia's board was becoming suspicious. Former Lord Mayor of London Sir Anthony Jolliffe, who had become Izodia's chairman in 2002, planned to re-list the company on AIM. To do this, he needed confirmation from RBSI that Izodia had cash in its account. Smith prevaricated, but on 18 September he presented the confirmations to the board. The documents showed that the 27m was still safely in Izodia's account in Jersey. They were, however, entirely fake.
Jolliffe's suspicions grew. After all, Smith had previous form. In 1993, Smith had served 11 months in jail for the theft of 2m from the pension fund of Farr, the construction firm he chaired. Smith used the money to prop up Farr, but also to pay for his luxurious lifestyle.
In November 1993, Smith had been convicted at Southwark Crown Court on seven counts of theft and one count of forgery, having also doctored papers to cover his tracks. After the event, Smith said in an interview that he had simply got the paperwork wrong and would do it again.
At Izodia, Jolliffe insisted that the money be transferred back to Reading, and on 30 September the company secretary, Corin Maberley, asked RBSI to make the transfer.
Smith acted quickly to deflect suspicion. He cast doubt on Maberley and accused him of making an unauthorised request to move the money back to Reading. Later Maberley was sent to Singapore "to get him out of the way". Jolliffe now confronted Smith. He demanded to know if Smith had stolen the money. Smith replied coolly that there was "a problem". The next day, before the Izodia board meeting, Smith asked Jolliffe to lie to Izodia's financial advisers. In return, Smith said, "name your price".
Police contacted
This was the final straw for Jolliffe. On 4 October, he resigned as chairman. Concerned about Smith and the whereabouts of the 27m, he contacted his solicitors and went to the police.
But Smith had not finished relieving Izodia of its cash. A further 10m was due to be repaid on 5 November. Because of other spending, there was not enough in the Lynch Talbot account to cover the payment. Between 23 October and 15 November, a further 8m was transferred from the Reading account to Mitre Property, which was part of the Orb empire. Smith told RBS that the money was an approved loan. Money flowed out of the Mitre account to meet the debts of the Orb Group. "It was remarkable, after all that had happened in August with the disappearance of 27m, that Dr Smith returned to plunder more of Izodia's cash," said Jonathan Caplan QC, speaking for the prosecution on Monday.
By November, RBS was also suspicious. It registered a complaint with the police, and, because of the scale of the theft, the Serious Fraud Office was notified.
On 16 December, police searched Smith's home in Jersey and Lynch Talbot's offices. Smith claimed that the 35m had been transferred as part of loan, but was unable to produce any documents.
The same day Izodia's shares, then valued at 56p per share, were suspended. In November 2003, its listing was cancelled.
The investigation into Smith and Orb continued for nearly four years. A team of lawyers and four officers from the Thames Valley police spent 45 months on the case. Trials were rescheduled and evidence challenged. Meanwhile, Orb was going into freefall. Thistle was suing for 50m, claiming that it had not been paid 15m due under the original deal. By June, three of Orb's subsidiaries, which owned Poole Pottery and the town's waterfront development, were put into administration. Poole council threatened to sue Orb for 500,000 for an unpaid contribution to a park-and-ride scheme.
As Orb slipped into administration, Smith's stooges, Vahey and Catto, resigned as directors of Izodia. In February, Orb failed to pay its 10m instalment to Morgan Stanley, which threatened to call in receivers unless the Thistle portfolio was sold.
In March, two bids emerged to buy the Thistle portfolio -- one from Heron, REIT Asset Management and Apollo Real Estate Advisors, and another from Newcastle businessman Allan Rankin. By April, both bids had collapsed. But in May 2003, Birmingham businessman Andy Ruhan, through Atlantic Hotels, made an offer for the Thistle portfolio -- a total of 700m, including 155m in cash and 531m in securitised debt.
Atlantic agreed not only to pay Orb's 121m overdue debts, but also promised to pay back Izodia's missing money -- albeit it only in 2013, and at 4.5% interest.
Smith's defence claimed that he had showed good faith in persuading Ruhan to settle the debt even though he claimed he had "no obligation to do so". Smith said he "hoped or thought" he would replace the money and regarded it as a loan.
But by now the investigation had turned up more skeletons in Smith's closet. In June 2003, Smith was fined 10,000 for failing to supply documents to the investigation.
In August 2002, it was revealed, Smith had removed 2.3m from the Lynch Talbot account for his own use. Around 1.8m of that was used as a deposit for a luxury yacht Oceanfast, being built in Australia. Smith's counsel claimed, again, that this was for the good of Orb and Izodia. The yacht, he claimed, was not a private acquisition. Smith always intended to charter it, and turn it into an income stream.
Plea changed at the last minute
The net was drawing in.
In November 2005, Smith had himself declared bankrupt. On 13 December, after breaking the conditions of his bail, Smith was sent to jail for 92 days. In April this year, Smith finally pleaded guilty to 10 acts of theft and one of false accounting. "He took it right to the wire," says an SFO source. "He waited until the trial before pleading guilty. If he had done so earlier his sentence might have been lower."
Sentencing was scheduled for 25 May, then moved to 18 July. On the day, Smith appeared in Snaresbrook Crown Court in a wheelchair. He claimed there was a problem with his leg, and the judge deemed him too ill to be sentenced. On Monday, the wheelchair was not present. Smith was duly sentenced to eight years in prison. The court will reconvene in November and December to decide how his assets will be used to compensate the victims. According to the prosecution, Smith still has 20m of assets. The defence insists this is untrue and that any assets are in the name of his estranged wife.
On Monday, Smith's counsel painted a picture of a man ruined by his own poor judgment. "He has lost everything. He is the author of his own misfortune. He has lost everything as a result of what happened. He is ill, his wife has left him. He is now completely penniless."
As deputy circuit judge George Bathurst Norman handed down the sentence -- eight years imprisonment, half on licence, and a 15-year ban on him being a company director -- he said Smith was "clearly talented and capable of great generosity, but has chosen to totally misuse his talents".
Smith, who maintained a cool silence throughout the hearing, responded with a nod before being led from the court to start his sentence.
How ORB collapsed
At the time the SFO began its investigation into Gerald Smith, Orb, his sprawling web of companies, could claim around 1.5bn of assets and interests from Poole in Dorset to the oilfields of Kazakhstan.
In 1999, Orb Estates bought the world-famous Poole Pottery. Orb was really interested in its waterfront site. It moved the pottery into the town centre and set up three companies to transform the site into a luxury waterfront development.
The year after, Orb ended up in the ownership of Lynch Talbot, a British Virgin Islands-based company which reputedly handled the investments of "four wealthy individuals". In 2000, Orb bought Quays Group, through another BVI company called Craiglan Estates Overseas. Quays once had plans to turn Poole into England's St Tropez. In 2000, like Izodia, it was a cash shell.
By 2002, Orb had interests in biotech firms, lingerie shops, oil, and, of course, Thistle hotels. When things began to fall apart in 2003, the whole edifice collapsed like a house of cards.
Copyright 2006 Reed Business Information - UK. All Rights Reserved.
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