Busting the boiler room

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This was published 8 years ago

Busting the boiler room

By Nick Miller

It was a small gathering at the luxurious Guadalmina golfing resort in Marbella.

The agenda was padded with plenty of golf and fine dining. They were there for a good time. But they were also there on business: a three-day brainstorm on share trading, "deal flow", money laundering, and how to make money from the first and second while avoiding being pinged for the third.

Jack Flader at Crown Court in London in February.

Jack Flader at Crown Court in London in February.Credit: Louis Porter

The boiler-room set up in the wake of the meeting was simple and reminiscent of The Wolf of Wall Street. Charming sales people would cold-call Britons pitching (mostly) worthless shares through high-pressure, misleading patter.

Prosecutors alleged the shares had been bought for a fraction of the price paid by these customers, resulting in healthy profits for the organisers.

More than 1000 people would eventually discover their investments were near-worthless as the biggest boiler room scam ever cracked by British authorities unwound. All up the victims were left £70 million ($130 million) out of pocket.

Marbella seems a fitting birthplace for such a scheme. This part of Spain is often dubbed the "Costa del Crime".

Australian businessman Jeffrey Revell-Reade - with another of the Marbella group - set up the boiler room and along with several others of those involved later went to jail. One met a more grisly fate. A businessman who helped broker the original Marbella meeting with Revell-Reade died in 2004, stabbed multiple times in his office in Tokyo's seedy Roppongi district in a crime that has never been solved.

But another two members of the group, both with strong Australian connections, walked free last week, acquitted by a jury on money-laundering charges after a gripping trial.

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It was a disappointing end for prosecutors for a case that cast a spotlight on the murky world of boiler-room scams and thrust into the spotlight again one of the biggest names of the global financial crisis in Australia – Jack Flader

The reclusive Flader was accused by the corporate watchdog of orchestrating the collapse of Trio Capital, which cost investors $170 million, but, unlike others involved in the collapse, was never charged.

It seems Flader has a robust ability to lie down with dogs and get up entirely free of fleas.

Fraud was simple

The rapid-fire receipt and disbursement of funds must cease, since this is a badge of money-laundering.

Email from James Sutherland, copied to Jack Flader

Flader and Hong Kong businessman James Sutherland were charged with laundering the proceeds of the boiler rooms. Sutherland, though British born, has strong links to Australia spending half his time on the Gold Coast.

The trial had some bizarre twists – including a starring role for a Belgian kickboxer whose fake "sponsorship" contract eventually blew the lid on the whole operation.

That contract was signed by Flader, a Hong Kong businessman and Californian lawyer. But at the end of his trial at London's Southwark Crown Court last week Flader and his co-accused and former boss Sutherland were acquitted by five men and seven women in just three hours.

Sutherland came across as a gruff, meticulous accountant – a friend diagnosed him in the courtroom with autism – running a hands-off fiduciary financial services group for international clients.

Flader presented himself as a hard-graft, apple-pie, self-starting American, shocked to discover his friends and business partners were fraudsters.

Late in the trial, his bellicose barrister grumbled over the prosecution case: "That's what's called guilt by association. Something we don't have in these courts."

The jury never heard some disturbing aspects from his past – the Australian Securities and Investments Commission named him the "ultimate controller" of a network of dodgy offshore funds that ripped off $123 million in Australia's Trio Capital scam, though the commission said later it didn't have enough evidence to pin any crime to him.

Winning part of life

The eldest child of a New Jersey steel merchant and a teacher, Flader said he was a "big kid" and "very competitive – winning was a big part of our life".

His father loaned him money to buy Dr Julius Irving hightop sneakers – he paid it back with interest by delivering newspapers aged 10.

By high school he was working seven days a week in an Orlando, Florida, pizzeria, getting straight As and earning more than his father, he told the court. At an expensive university, paid through government and corporate grants, he majored in English and philosophy and started a campus laundry and dry cleaning service – taking some pleasure by putting a hefty mark-up on the bill for the sons of billionaires who arrived at university in limousines.

Jack Flader arriving at Southwark Crown Court.

Jack Flader arriving at Southwark Crown Court.Credit: Louis Porter

After law school Flader entered the business world and ended up in Hong Kong.

He said he specialised in "asset protection", where individuals and companies would put their assets in trust with companies in havens such as Belize, the British Virgin Islands or the Cook Islands. It was all perfectly legal, he said – a tool for protection against "frivolous lawsuits", for example.

In 1997 Flader joined a fiduciary services company in Hong Kong run by Sutherland. The pair had met through the local chamber of commerce, and Flader came on board as managing director, with a focus on marketing, networking and business creation.

He would travel the world to business conferences and professional meetings, living the high life, spruiking Zetland Financial Group's services and adding to his hefty collection of business cards. The pair worked together well – the outgoing lawyer and the shy accountant. Within a few years Flader had bought into the business.

Range of endeavours

Sutherland was born in Lerwick in the remote, chilly Shetland Islands. He hopes to retire soon, after four decades in business, from chartered accountancy in London to a range of endeavours including personnel and fiduciary services in Hong Kong and a stint as finance director for Matchbox, of toy car fame.

When Hong Kong went back to China his family moved to Australia and from then on he split his time between the two places. They have a horse-breeding business on the Gold Coast, called Que Sera Farm.

James Sutherland splits his time between Great Britain and Australia.

James Sutherland splits his time between Great Britain and Australia.Credit: Louis Porter

Sutherland said he and his company, Zetland Financial Group, were trusted to set up and administer corporate structures for clients – opening bank accounts, signing documents, moving funds and making payments – after a due-diligence process, of course. He provided confidentiality, tax efficiency and assistance for smaller companies making their first steps on the world stage, he said.

Rich clients would request anything from managing staff to crewing and berthing luxury yachts. A lot of clients came from Australia, especially before laws changed to make some forms of offshore structures less profitable.

Flader and Sutherland were a study in contrasts in the dock at trial: sitting far apart, a physical reflection of their obvious distaste for and mistrust of each other, Flader heavyset and animated, Sutherland sardonic and slumped, grunting with impatience.

But at least in the early days, they worked together well.

Jeffrey Revell-Reade outside his Darling Point home in 2010.

Jeffrey Revell-Reade outside his Darling Point home in 2010.Credit: Nick Moir

Brought a client

Flader had brought to Zetland a client – a contact, a friend – named Matthew Littauer, an eccentric businessman who had escaped Vietnam as a child, the day Saigon fell. "I liked his energy and enthusiasm," Flader told the court.

Littauer was at the Marbella meeting, which was convened by two of his business associates.

One was Jeffrey Revell-Reade, "an Australian individual residing in Europe at the time", whom Littauer had introduced to Flader and Sutherland a few years earlier, in connection with his Pacific Continental business.

Revell-Reade was a "deal-finder" with a "wide universe of contacts", Sutherland told the court: and "quite good fun" – sociable, charismatic, "a very bright and personable individual… (who) conducted his affairs properly". Revell-Reade had confided "some problems in the past" – which were explained away as flack from "a particularly acrimonious divorce".

Guadilmina North golf course, at the resort where the group discussed their plans.

Guadilmina North golf course, at the resort where the group discussed their plans.

Flader was close to Revell-Reade and Littauer – though Littauer was the "better friend", he said. He was called in to settle "endless arguments" they would get into, often during golf games.

"While playing golf at the 12th hole they would decide on a deal to do together, then bet money on the next hole, and come back and say, 'Jack, you have to sit in on this'," Flader said.

Sutherland didn't play golf. But he did enjoy a "general discussion about money laundering" and legal compliance, he said. Littauer gave a talk on "doing deals with non-US companies".

In June 2014 Revell-Reade was the last of nine people convicted over the Spanish boiler room fraud, of which Reade was the "lynch-pin", under which Madrid sales rooms sold shares in US-listed companies to British investors between 2003 and 2007.

Charmed, lied to and bullied

The victims were charmed, lied to and bullied into buying. But the shares had restrictions on their resale for 12 months – and when investors came to sell them, they often found them to be virtually worthless, in shell companies or companies that were not operating at all.

More than £70 million was conned out of investors over the five-year lifetime of the fraud.

Anthony May, a 58-year-old South African and attendee at Marbella who was convicted of conspiracy to defraud along with Reade, had run the day-to-day administration of the fraud, processing shares and distributing funds into off-shore bank accounts.

He did so via Zetland. Indeed, he was briefly a Zetland man, employed by Sutherland to set up Zetland European Administration, then later let go to work as a consultant.

May would regularly send instructions to Flader, Sutherland and others at Zetland on how, where and how much money should move through the companies used to distribute shares and process payments from the fraud.

Prosecutor Stuart Trimmer told the jury that Flader and Sutherland "are responsible for laundering the proceeds of that fraud".

He said the entire edifice of companies and accounts was "set up to deceive".

"The people who ran the fraud needed a safe way of making sure the money made its way out into their pockets," he said.

"That money had to make its way to them not by an obvious route."

Over seven years of investigation, fraud police had uncovered a network of offshore companies and bank accounts across Europe and the world, through which "multiple unnecessary movements of money" were used to launder the fraud's proceeds, make them clean and untraceable and then distribute them back to those involved in the fraud.

The two accused money launderers were directors and managers of that process, bank signatories and in some cases even the beneficial owners of the companies involved,

Mr Trimmer said: "Mr Sutherland was in charge, [and] to some degree Mr Flader took his orders from Mr Sutherland."

Hallmark of money laundering

He highlighted the lack of a formal contract for the web of companies that had been set up: this was a hallmark of money laundering.

"In a criminal enterprise you won't find detailed arrangements written down – who is responsible for what, who controls what. It's on the basis of trust, or word of mouth."

The regularity and bulk of money movements "made ignorance impossible", Mr Trimmer said.

The accused men's emailed demands for documents accounting for transactions was nothing more than a "back-covering" exercise.

As evidence of Sutherland's knowledge, the prosecution cited an email he sent to May in October 2005, copied to Flader, saying "the rapid-fire receipt and disbursement of funds must cease, since this is a badge of money-laundering".

As to Flader's knowledge of dodgy share sales techniques, they cited a December 2004 email in which he complained: "We are getting heat about [redacted] . . . that used to operate out of Asia. Who is selling stock? If unregulated, then I think this is not going to work. I am also beginning to feel that way about the 'loosely regulated' shops in Spain."

Email 2004

Attacked and killed

By the fraud's mid-point, Littauer was dead.

He was 35 years old in 2004 when he was attacked and stabbed to death late at night in an office building in Roppongi, Tokyo. He was reportedly found with 7000 yen still in his pocket, lying in a pool of blood by the elevator.

The Roppongi nightclub district in 2003.

The Roppongi nightclub district in 2003.

Investigative journalist David Blackall says he was one of the founders of Trio Capital, the company behind Australia's biggest superannuation fraud, and listed in the FBI White Collar Crime program.

His murder was linked to the death of another boiler-room scammer, Christopher Andrew Coppola. The Flader and Sutherland jury was not told this.

The year before his death – and the year Revell-Reade's British boiler room scam began operating – Littauer was suspended by the US NASD, which fined him $US20,000 for allowing callers to misrepresent themselves. The Flader and Sutherland jury was not told this.

Flader said after Littauer's death he was appointed trustee of his estate.

Flader fronted for erectile dysfunction company Advanced medical Institute.

Flader fronted for erectile dysfunction company Advanced medical Institute.Credit: Danielle Smith

He kept some of the business going: particularly taking two Australian companies to the US stock exchange – winery Yarraman and erectile dysfunction "specialist" Advanced Medical Institute – "a representative of the US stock exchange said he liked the idea of sex and wine", Flader joked on the stand.

About this time Flader made what he said was a regrettable but innocent mistake – but which the prosecution said was a "window" into the whole money-laundering process.

He signed a contract under which a Zetland-run company would sponsor a German kickboxer, Chalid "Die Faust" Arrab, at 700,000 euros a year.

The contract had many unusual features – not least the fact that Richmac, a more or less invisible corporation set up for technical reasons, had no obvious reason to spend so much money on a sports sponsorship.

But Mr Trimmer pointed out that, after querying the contract via email as "odd" and noting "ambiguities", Flader made a few corrections and additions, then signed it – even backdating his signature by more than six months to cover payments already made.

In fact there was no such sponsorship arrangment – the payments to Arrab were for work related to Revell-Reade's business. During the trial it was suggested he did private investigation work for him.

Flader later said he had been lied to by May – and by another person connected to the fraud, who said "his girlfriend had some sort of relationship with Chalid Arrab [and the contract] was a favour".

Once he found this out, in 2006, Flader said, the "trust was gone" and he resigned from Zetland. "That's one of the worst things a client can do," he said.

Stories diverge

This is the point that Flader's and Sutherland's stories diverge – and the reason the prosecutor's best hope for the case had probably been that they would go for each other's throats.

Flader said just before he left Zetland he was invited to a meeting at Zetland in Hong Kong, where Sutherland, May and Revell-Reade were waiting.

Flader later told police: "I told Mr Sutherland and Mr May it had nothing to do with me. I would not be spoon-fed whatever story they wanted me to tell that did not conform with the truth and I wished them good luck in a most disrespectful manner.

"I was very angry that A, they had lied to me and B, they were seeking my assistance in telling what I can only assume would have been another contrived story to cover up what was the real purpose of the agreement. It was a very tense meeting, during which I invited Mr May to visit my side of the table so I could express my displeasure. Mr May declined."

On the stand, Flader knocked his knuckles together and said "I wanted to push [Anthony May's] teeth right through the back of his neck. [It was] the most anger I've probably ever had in my career . . . I wanted to fire them, I wanted the relationship over."

He then marched out of the meeting, and out of Zetland, he said.

Sutherland remembered things quite differently. "I don't remember a confrontation or anything like that," he said.

And he also had little recollection of trouble with the sponsorship contract. "I didn't see the agreement at the time," he told the court.

Friendship ends

Under cross-examination, Sutherland's lawyer Mark Rainsford, QC, accused Flader of seizing on the issue with the contract as an excuse.

"You thought to stand on Mr Sutherland's head and drown him because you needed a smokescreen and to cover up your own wrongdoing. You stabbed him in the back, blaming him. Mr Sutherland locked you out because he thought you were involved in wrongdoing in relation to the company.

"You didn't rip Mr Sutherland's face off but you did cut his throat."

Flader replied: "If I did I'm sorry."

It was the end of a close friendship. In Flader's time at Zetland, he and Sutherland had socialised together and Flader sometimes stayed at Sutherland's Gold Coast home.

However, after the falling out Sutherland retained the Revell-Reade business. He told the court he was still unaware of anything untoward. Some years later, after Revell-Reade left Britain for Australia, Sutherland employed him and his girlfriend "as consultants for a company in Australia that I owned", around 2010.

He said he became aware of the nature of the fraud only when Revell-Reade was convicted in 2014. He had offered an affidavit at his trial and even paid his legal fees.

"It's still amazing to me that it actually happened," he said. "I was very disappointed and shocked."

Payments to Revell-Reade according to the British prosecutors

Sutherland said he had "absolutely no indication whatsoever there was anything wrong" with what Revell-Reade, May and the others were doing. The money movements his group were processing had all appeared to be common business transactions – payments to consultants, expenses and the byproducts of share sales. He had thought Revell-Reade to be honest and was "chastened" to discover otherwise.

"I always thought that everything coming in was proper and above board," he said. "We were simply providing payment processing services . . . we always believed the business to be a bona fide business conducted properly."

While he had thought the business structure "overly complicated", it had been explained to him as desirable for accounting purposes.

'Full of dead ends'

At one point he complained the case against him was "full of dead ends and red herrings".

Sutherland and Flader both knew the fraudsters were selling high-risk shares, but they believed they were doing so legally.

Said Flader: "It was part of our job to be concerned on an ongoing basis. The fact I am concerned at all times and I ask questions now and again to try to do our job properly demonstrates we were doing our best."

In the end it was the clients' prerogative, via an "implied trust", what they did with their money, he said.

Mr Rainsford told the jury there was "no evidence whatsoever that Mr Sutherland knew that criminal property was passing through his organisation. Absolutely not a jot of evidence."

It was a "nonsense" case, he said, that depended on little fragments of evidence taken out of context. The "appalling" behaviour of the Spanish share salesmen was invisible to his client.

And Flader's lawyer, George Carter-Stephenson, QC, said that "guilt by association" was "something we don't have in these courts".

"There is no smoking gun, is there, in this particular case?" he told the jury. "When is it said Mr Flader knew about what was going on? Where is there a shred of evidence he knew about what was going on? There isn't any. There's just no evidence at all."

Flader was "a man of integrity and a man of principle", he said.

The jury was not told of Flader's alleged connection to the Trio Capital collapse, in which more than $170 million in superannuation funds were siphoned into untraceable overseas bank accounts.

Instead both men were lauded for their honesty and trustworthiness by a series of character witnesses – including a financial controller who "assisted Donald Trump to turn into the real estate business" and described Flader as "the most ethical person I know".

The jury were not told about the Trio Capital collapse.

The jury were not told about the Trio Capital collapse.Credit: Orlando Chiodo OCZ

A charmer

Flader is a charming man. During pauses in the trial he chatted to this reporter about Hong Kong politics, Chinese food safety and Scottish Enlightenment thinker David Hume. He loves a philosophical discussion on the nature of ethics – much to the impatience of his lovely and devoted wife, Marina.

In short, he can turn it on when he needs to. And on the witness stand, he did.

Flader told the court he retired in early 2010 because of a health scare – a doctor told him he had a congenital heart condition and "I am at risk of basically dying on the spot".

However, the expenses of the trial have hurt his savings. "I am actually talking to people about going back to work," he said.

In a break from his trial, Flader told this reporter about his time studying philosophy at university.

He was fascinated by a course in "self-knowledge and self-deception", he said, where the professor told a story about how he knew cigarettes were bad for him, but he smoked them anyway.

And once he wrote a paper in which figures like Gandhi and Jesus talked about altruism.

"Altruism isn't real," Flader told me, earnestly.

"Because even altruistic people are just doing it because it makes them feel good."

It was only in these rare moments at Southwark Crown Court where he revealed a glimpse of the man linked to so many scams, frauds and criminals. To the relentless movement of money from the gullible or misinformed, into the offshore coffers of trans-national bandits.

For example, this gem, delivered from the witness stand: "Nobody gives back money. That's generally a concept that human beings don't engage in."

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