Two directors of dealerships selling mobile phone products and services for agents such as Phones 4 U were sentenced today for abusing the introductory sales commission system. Jonathan Shulton and James Cahill, who pleaded guilty to fraudulent trading, were sentenced at Southwark Crown Court to two years, three months imprisonment and to 240 hours Community Punishment Order respectively. Directorship disqualifications apply and confiscation proceedings are underway.
How commission worked
Major mobile phone network companies, such as Orange, have agreements with a number of 'agent' companies, such as Phones 4 U, to distribute their phones, accessories and airtime contracts. The 'agents' in turn use 'dealers', who sell the phones, accessories and airtime contracts to members of the public, via mail shots, telephone sales and adverts in national newspapers. The agreements between the 'agent' and the 'dealer' provided that for every connection made by a subscriber, the respective mobile phone network company would pay an introduction commission to the 'agent'. The 'agent' in turn would pay a reduced introduction commission to the 'dealer' for each connection referred through the 'agent'.
Where the connection to the mobile network company was unsuccessful (usually where the customer changed their mind or never in fact ordered the phone) the introduction commission became repayable by the agents. This exercise was described in the industry as "a clawback".
In either of these situations, the mobile phone network company reclaimed the introduction commission paid to the 'agent', and the 'agent', in turn, reclaimed the introduction commission from the 'dealer'.
A delay occurred between the payment of the introduction commissions and the clawback. Clawbacks were taken some 14 - 90 days after the introduction commissions had been paid. A high degree of trust was involved between the parties, particularly the agent and the dealer. If the dealer failed to refund the introduction commission, the agent took the loss, as they had repaid or were obliged to repay, the mobile phone network company.
The Shulton and Cahill business operation
Shulton and Cahill managed and controlled a number of 'dealer' companies. Both men had previous experience in this industry and exploited the delays built into the clawback system which ensured that they maximised the commission payments. Shulton and Cahill were aware that by the time the clawbacks became a serious financial problem for the business the company could be liquidated leaving the debts unpaid and the creditors out of pocket. Various explanations were put forward to the liquidator for the collapse of these companies including, in the case of Bellstar Telecom Ltd, the "9/11" terrorist attacks in the USA. A new company was then incorporated and traded exactly as its predecessor. This pattern repeated itself over a number of companies whereby the location remained at the same address employing the same staff. The only real change was often the company name above the door. In more than one instance false management data was supplied to creditors (including Phones 4 U) to guarantee that the agent companies continued to trade with the dealer companies so that commission revenue could be secured.
Each corporate failure of the Global Group of Companies left a large number of creditors; Royal Mail lost over £260,000 and Phones 4 U lost nearly £210,000. Furthermore in some instances, small businesses nearly collapsed as a result of the fraudulent management of these companies. Those especially hard hit were small personnel agencies that placed staff with the Global Companies. The total loss to the creditors of the Global Group of Companies was £1,156,779 and to the creditors of Bellstar Telecom Limited the amount was £481,767, representing a total loss of nearly £1.6 million. A common feature of the investigation was the large sums of cash withdrawn from the Global Group of Companies' bank accounts before each company was liquidated.
During a time when creditors were going unpaid and chasing payment, Shulton lived an extravagant lifestyle. He lived with his family in a large detached house in an exclusive area of London, and owned expensive cars, including a Bentley, Porsche and Range Rover. He and his family enjoyed regular expensive holidays in Swiss Ski Resorts and in the USA and during the period of the fraud he spent £52,000 on foreign holidays. In addition, Shulton spent £25,000 on his company Barclaycard, again principally for his own personal benefit.
Shulton was also dishonest in relation to the retention of nearly £38,400 paid in error by Royal Bank of Scotland (RBS). This occurred in connection to unrelated, but legitimate, business transaction when RBS inadvertently paid the same sum twice into Shulton's bank account. When the error was identified Shulton's bank asked him whether they could repay the erroneous overpayment to RBS who had asked for its return. However Shulton refused and wrote back to his bank instructing them not to refund the money. He then went on to withdraw the money from his account in cash.
James Cahill became the managing director of Bellstar Telecom Ltd at the request of Shulton and acted at Shulton's number two. Cahill was one of the signatories of the company's bank accounts and Shulton was the principal share holder of the company. In addition, during the period of this company's trading life, Cahill used, without permission, an old school friend's (who had emigrated to the USA) Abbey National bank account to disguise payments being made to him and to Shulton. Bellstar Telecom Limited operated in exactly the same way as the companies within the Global Group.
Proceedings
The SFO began its investigation in August 2003. This was prompted by a referral from Hertfordshire Constabulary with whom the SFO worked very closely throughout the investigation. The two men were charged in July 2006 and pleaded guilty in July and August 2008 just before their trial was due to commence in September 2008.
Jonathan Shulton (d.o.b. 06/08/71) pleaded guilty to three counts of fraudulent trading, one count of retaining a wrongful credit and one count of acting in breach of a director's disqualification (Shulton had been disqualified as a director as a result of proceedings brought by BERR formerly the DTI as a result of his mis-management of another of his companies, International Cellular Services Limited, which traded as a mobile phone agent company). Shulton was sentenced to 18 months imprisonment (concurrent on each count) in respect of each of the three fraudulent trading counts, six months in relation to the director's disqualification count to be served consecutively and three months to be served consecutively in relation to the dishonest retention of the RBS wrongful credit, (27 months in total). In addition, Shulton was disqualified from acting as a company director for a period of eight years.
James Cahill (d.o.b. 23/12/67) pleaded guilty to one count of fraudulent trading and was sentenced to 240 hours community punishment order. He was also disqualified from acting as a company director for four years.
A third defendant, Gregory Life was acquitted on 4 July 2008 when the prosecution offered no evidence against him.
Confiscation proceedings have been adjourned until 4 March 2009.
Serious Fraud Office
Elm House,
10-16 Elm Street,
London WC1X 0BJ,
United Kingdom
Press Office tel: 020 7239 7001/7045/7000/7132
Main switchboard tel: 020 7239 7272
Mobile: 0781 807 6688
Email: press.office@sfo.gov.uk
