Suing Directors: When the unwitting frontmen in a fraud fell down
21 March 2023
A retired gentleman, called Mr Powers, did not have enough money to sustain himself and his family in retirement.
So Mr Powers, now in his 70s, went on the internet, to find investment opportunities. He invested (so he thought) $124,027 of his life savings in a company that he found on the internet, based in Ireland. He thought that the company would use his money to trade in something called “binary options” – something he first heard about when watching a financial show on CNBC television.
The company was called Greymountain. Greymountain appears to have been more of a black hole than an investment opportunity. It is now in liquidation in Ireland.
Greymountain never invested Mr Powers’ money in anything, let alone “binary options”. There were a couple of brothers overseas, who syphoned it off for their own use and enjoyment. They also took a lot of money from other people. Apparently, they took something in the region of $186 million.
The American retiree in Irish proceedings
This led to a case in Ireland, called William Powers v Greymountain Management Ltd (In Liquidation) & Others  IEHC 599. Although it is a decision of the Irish courts, the judgment referred to and relied (among other things) on the dicta of an English decision, called Re Barings plc & Others (No. 5)  1 BCLC 433 as to the duties of a director.
While any case will depend on its particular facts, we anticipate that the same result would have been reached in England, relying, in the same way, on the Barings decision.
The fraud on the Americans
The judge in the Irish proceedings described Greymountain as: “a key middleman in a chain of payments which defrauded unsuspecting members of the public, primarily based in America, out of millions of euro”. Greymountain kept 10% of the money that it received from members of the public, and passed the remaining 90% to two brothers, based overseas.
The retired gentlemen, together with a number of other unsuspecting members of the public, lost their money. As indicated in the summary, above, some $186 million flowed through the accounts of Greymountain, for the benefit of the brothers who were the masterminds of the fraud. At the time of the subsequent trial in Ireland, Greymountain, now in liquidation, had a cash balance of a mere €600,000, or thereabouts.
So who to sue?
There were a couple of directors of the company, who had formally been appointed as such (what are known as “de jure” directors), who might also be described as “frontmen” for the two fraudster brothers.
The fraudsters, in turn, were “de facto” or shadow directors. While they had not formally been appointed as directors, this is because, in fact, they effectively controlled the company’s affairs as if they were directors.
Proceedings were therefore brought against all four directors – as well as Greymountain (although the liquidators did not play any significant part in the action, which was directed against the directors personally).
Judgment against the unwitting and the fraudulent directors
The frontmen and the fraudsters were ultimately found liable to Mr Powers, but for different reasons.
The fraudsters, of course, had committed a fraud. But there was no evidence to indicate that either of the de jure directors knew that Greymountain was being used as an instrument of fraud, or that it was being used as a key component in a multi-million-dollar international fraud.
One of the de jure directors was a young man, and a student. He said that he became a director because his mother had suggested it, and because his directors’ fees would cover his “college fees and costs” of moving to Dublin as a student. He was a full-time student, who took on the directorship in name only. The judgment records him has having said: “[My] mam felt there was no issue with me being a director as David Cartu [one of the brothers] had disclosed himself as the owner of Greymountain”.
The other de jure director was an older man, who had acted as a director for many companies during his career. He said that he had no knowledge of, and did not have any role in, the alleged fraud. This was because his role as a director was what he described as an “administrative” role, comparable, in his view, to that of a company secretary, rather than that of a normal director.
The student and the administrator, the two unwitting frontmen, knew nothing of the alleged fraud for the simple reason that they had abrogated their duties as de jure directors, in favour of the fraudsters. The difficulty, for them, is that, in Ireland – just as much as in England – a director of a company has a duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable him or her properly to discharge their duties as directors.
The court nevertheless had considerable sympathy for them. The judge said that there will be many cases where a director hands over the management and control of a company to honest and responsible third parties, many cases in which “their dereliction of duty will not facilitate a massive international fraud”.
But, the two unwitting frontmen – the student and the administrator – did not avoid liability. As the judge said, Mr. Powers was even more unlucky than those two directors, because he had sent his money to a company which they were supposed to control and manage. Unlike them, Mr. Powers was completely blameless in the loss of his money.
The two unwitting frontmen were both “in complete dereliction” of their duty to be aware of what the company, of which they were directors, was doing; they had abrogated their responsibility as directors to the fraudulent brothers, who had used that opportunity to defraud people like Mr Powers.
In these circumstances, and despite the sympathy that the court had for the position in which they found themselves, the judge said that the court was forced to conclude that this impropriety and dereliction of duty, on their part, was of such a degree as to justify both Mr. Coates and Mr. Grainger being held personally liable to Mr. Powers for the return of the sum of $124,027.
The moral of the story?
Mother does not necessarily know best.
Don’t forget it, you’ll regret it. In the words of the song from Tangled, “It’s a scary world out there”, and sometimes some things may go wrong. In this case, that was demonstrably shown by the student who did what his mother had told him, someone who ended up with a judgment against him, one that was bigger than any student debt might reasonably have been expected to be.
If you are an administrator, and do not want the responsibility of being a director – make sure you are only appointed as an administrator.
The student and the administrator, the unwitting frontmen, now have a judgment against them for $124,027. It will be interesting to see what costs order might be made against the directors (not least the unwitting frontmen, who had defended the proceedings, and thereby put Mr Powers to additional expense); and, indeed, if any of the other people who lost money, in a total of around $186 million, will seek judgment against them.
Will the directors seek some sort of settlement with the other people whose money was lost, or will they become bankrupt? Only the future will tell – a future in which hindsight might suggest that the fees and costs of moving to Dublin as a student might have been better covered from other resources.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at March 2023.