Sector: Financial Services.
Langbar International was a company listed on the AIM market of the London Stock Exchange as Crown Corporation Limited in 2003 and represents the largest share fraud on AIM to date. It was investigated by the Serious Fraud Office, City of London Police and the Accountancy Investigation and Disciplinary Board, and was the subject of many civil legal actions in the High Court. Crown Corporation, which changed its name to Langbar International Limited in 2005, was a ‘pump and dump’ fraud, in that the company did not possess the assets it declared at listing.
Challenge
The business’s original purpose was purportedly buying underperforming companies and improving them before selling them at a profit. Some 59% of the shares in the company were purchased by Lambert Financial Investments for a total of $570 million, with $275 million presented as a certificate of deposit from Banco de Brasil and $295 million as a deferred payment. Langbar was notified that the certificate of deposit was fraudulent and the deferred funds were never paid. Other related party stockholders also failed to pay for their shares. Despite being aware of the serious financial shortcomings, Langbar misled investors as to the state of its finances, including making increasingly extravagant claims about its investment activities.
In June 2005, Stuart Pearson, managing director of Langbar Capital, travelled to Brazil to be presented with an elaborate deception aimed at convincing him that the company’s financial value was legitimate. Crown merged with Pearson’s investment firm, taking its name of Langbar International. The value of Langbar International rose with Pearson’s declarations to the market that the funds had been released from Brazil, which encouraged further investment. However, trading was suspended in October 2005 when the company’s value was questioned – just days after Mariusz Rybak, who had resigned as executive chairman, made £2.5m from one share sale – followed rapidly by the company’s collapse. Investors, most of whom purchased shares after Pearson came aboard, lost as much £100 million.
Solution
In the turnaround and investigation of Langbar David Buchler was appointed as independent chairman by shareholders later in the same month. He brought in a team led by Larry Jobsz to establish the scale of the fraud, suspected to be £365m. They were “unable to establish the existence of, or verify the company’s entitlement to, any of the funds at any time in the company’s history”. David asserted that the company, under previous management, had failed to make the appropriate disclosures – particularly during a period in which it was in takeover talks. Working with legal adviser Jones Day and the SFO, David’s team obtained a worldwide Mareva injunction and, after litigating and chasing money throughout Europe, tracked down former directors and executives leading to seven arrests in Switzerland and Spain, including Rybak’s.
Outcome
The team found and froze more than £35m. A distribution to shareholders was made through a Scheme of Arrangement. In 2007, Nabarro Wells, a London stockbroker that had advised Langbar, was fined £250,000 for due diligence failures. Pearson, charged with 13 counts of fraud, faced trial to determine how much he knew of the fraud and when he had discovered it. He was found guilty in 2011 and jailed on three counts, for making “misleading, false or deceptive or reckless” claims about the existence of the money. The blatant fraud contributed to a rewriting of company requirements on AIM.