£600m split cap case on the brink

David Thomas hardly appears the dangerous type, but the portly 71-year-old former stockbroker is about to set off a bomb under the Financial Services Authority. Thomas is directing his anger against the City regulator's decision to prevent him from returning to the financial services industry.

The battle between the doddery septuagenarian, nicknamed Dotty, and the regulatory titan begins on July 22 when Thomas appears before the independent Financial Services & Markets Tribunal to appeal against the FSA's decision.

The case has assumed huge importance because Thomas is widely regarded as the leading architect of the split capital investment trust market.

Thomas made £3.4 million between 1998 and 2001 for devising the funds, but thousands of investors lost more than £600 million when stock markets began to slide.

But if his claim proves successful, it could undermine the FSA's case against 21 firms and 29 City bankers under investigation for their role in the splits debacle. One insider said: 'The whole edifice seems to be falling down.'

Even some members of the FSA's legal team privately admit that its defences might not be strong enough, even though the regulator finally filed its amended case on Friday, minutes before a 5pm deadline.

The FSA is already reeling from criticism over its handling of the saga by the influential Treasury Select Committee, which has threatened to call representatives of the 21 firms to a hearing in the autumn to sort out the affair.

It also comes as the 21 firms once again ignored a deadline from the FSA to enter mediation proceedings to discuss compensation for investors who lost money. The firms have already offered an ex-gratia payment of about £120 million, but the regulator wants £350 million.

Friday's deadline, the fourth set by the FSA, comes a month after the regulator ordered the firms to sign up within 48 hours or face the consequences. The FSA offered a further extension last week on condition that it could issue a Press release saying that talks were progressing. That offer was refused. It is believed that no firm is currently in mediation.

One senior executive said: 'Why would we do anything now until we see how Dotty's case ends up? This could be hugely damaging to the FSA's case.'

Thomas, who worked in the investment trust industry for more than 30 years, retired in January 2003 from Brewin Dolphin, a small stockbroking firm that raised more than £1.1 billion through eight splits. Several of those have since collapsed. Thomas was described as a 'champion of splits' when he appeared before MPs at the Treasury Select Committee.

But he admitted that 'in common with everyone else', he had failed to realise that cross-investing in split capital trusts increased the risks.

'With the numbers at that time, this did not show up at all,' he said.

One former colleague said: 'I defy anybody to have a session with David Thomas and actually understand what he's talking about. He gets so carried away with the technicalities.'

Thomas automatically lost his City authorisation when he retired, but was shocked when the FSA blocked his return. The Financial Services & Markets Act effectively allows the regulator to turn down anyone it has doubts about, and Thomas was then being investigated for his role in splits.

One observer said: 'Thomas's former colleague, who worked with him on splits, is still at Brewin Dolphin and is authorised, even though he is also being investigated about his role in the market.

'But the FSA can't take away his licence and just declare he is not fit and proper. It has to prove such a claim. Yet that is

exactly what the regulator has done to Dotty and it hasn't proved anything.'

Thomas is represented by Michael Blair QC, a former general counsel to the Securities & Investments Board and the board of the FSA. He therefore knows how the regulator works and is believed to be in regular contact with former colleagues.

Brendan Murphy, Thomas's lawyer at Sprecher, Green and Halbiston, said: 'The FSA's evidence against him does not justify the position they have taken.'

Thomas declined to comment and the FSA said: 'The tribunal will decide if the case is good or not.'