What is a ‘Ponzi’ scheme and is the Connaught Income Fund a ‘Ponzi’ scheme?

Posted on August 14, 2012


These are our most frequently asked questions received by the Action Group here in the USA from you guys in Great Britain.

Explanation of a ‘Ponzi’ scheme

Charles Ponzi was a fraudster in the early 1920s. He ran an investment scheme which offered high returns to investors across the length and breadth of the USA. We Americans fell for the promise of higher returns than other investments. Sounds familiar?

The Madoff funds were a classic recent example. The “income” returns paid to investors were not real. Instead, the money used to pay “income” came either from new investors or were in fact repayments of investors’ capital.

 

Is the Connaught Income Fund, Series 1 another ‘Ponzi’ scheme?

Frankly, we fear the worst. Our analysis is based on the information that we have managed to piece together so far. Therefore you have to treat this explanation as well informed speculation, but it has been bolstered by information disseminated by Duff & Phelps at the meeting with investors on 13 August 2012.

We are given to understand that the Fund’s cash was invested by Tiuta International into bridging loans to third parties. Allegedly Tiuta International registered a charge over each property and the Fund was registered with a sub-charge.

It is alleged that these loans were repaid to Tiuta International. The next step involved alleged fraud, false accounting and money laundering. It is alleged that although the original loans had been repaid, the books of the Tiuta International and the Fund no longer reflected the loan repayments.

It is suspected that Tiuta misappropriated the cash for a variety of different purposes. These may include: (1) payment of Tiuta’s operating expenses such as payment of salaries, bonuses, pension contributions, suppliers, etc; (2) repayment of loans to RBS and other lenders to Tiuta; (3) payments of “interest” and redemption monies to investors in the Fund and possibly the other Connaught funds; (4) loans to the brother of a director and cronies or co-investments with cronies or unconnected third parties.  In other words, we have evidence to suggest that Tiuta treated the Fund’s money as an unsecured loan facility. The Fund had no security over property in reality once the original loans had been repaid.

There is no such thing as a perfect fraud. The external traces of the alleged fraud lie outside Tiuta. It is alleged to us that large numbers of borrowers clamoured to demand that Tiuta and the Fund formally released charges registered at the Land Registry. However, our information is that this process was dragged out for month after month after month until finally in each case Tiuta was threatened with legal action or with other measures. The considerable delays until Tiuta/the Fund was forced to de-register the charges meant that millions of pounds of cash could be re-used by Tiuta on an unsecured basis. As set out in a previous update, we are appealing for further evidence from third party borrowers and their solicitors.

We heard that Duff & Phelps made a presentation on 13 August 2012 to investors where the misappropriation of monies paid to Tiuta International was labelled as “recycling”. The investors in the room were astonished that the “f word” was not used. After all, this looks  like fraud.

At the meeting on 13 August, there was much discussion of the role of BDO who apparently knew about the recycling fraud and the acute financial difficulties at Tiuta in January 2011 and did not report it to the police. There was also much discussion of the role of Connaught. It appears that Mike Davies knew of the recycling fraud in late 2010 and he did not report it to the police. Instead, BDO, Tiuta, and Connaught worked on a plan to provide additional security to the Fund to make up the shortfall arising from the re-cycling fraud. The Fund ended up with a series of second charges over assets owned by Tiuta Assets Limited. The second charges were not within the objectives of the Fund as set out in the Investment Memorandum or the Limited Partnership Agreement. Duff & Phelps thought that these second rate assets had probably lost half of their value since the rescue plan was implemented (before costs). We consider that BDO, Tiuta, Connaught and Blue Gate have not carried out their civic duties to report a suspected crime to the police. They have also been complicit in hiding what happened from investors. This has led to widespread distrust of these parties.

Duff & Phelps also revealed suspected criminal activity of which we at the Action Group were unaware. The “sting” went like this. First, Tiuta International would make a loan application to Connaught. This would meet the lending criteria and the loan would be approved and the loan would be drawn down from the Fund. The loan monies were then misappropriated by Tiuta International for completely different purposes. We understand that investors at the presentation were left in no doubt that this was prima facie evidence of theft. Again, it is mystifying why the ‘t word’ was not used by Duff & Phelps, although it volunteered that there was a failure by Connaught to ensure that proper security was taken by the Fund. It became clear to those present at the meeting that BDO has been with-holding evidence of widespread wrongdoing by Tiuta International from Duff & Phelps. This is nothing short of a scandal.

At the meeting on 13 August, Alistair Mawdsley of Connaught could not provide any details of an alleged direct investment by the Fund in a property in the West End of London. Prima facie, this appears to be a direct diversion of the assets of the Fund for purposes that were not intended. There are rumours that £10 million has been ‘invested’ in the property (indirectly) by the Fund. The failure of Connaught to confirm or deny the rumours highlights the inappropriateness of its continued involvement in the affairs of the Fund.

If our analysis is correct, this is a really sophisticated Ponzi scheme. It worked on more than one level. The interaction between Connaught, Tiuta, Blue Gate Capital and the Fund is genius. Tiuta was in a position to pocket money belonging to the Fund. We have to hand it to you Brits! Obviously these allegations are matters for further investigation and we would advise you not, repeat not, to do anything that you might regret.

 

What should happen next?

Criminal

In the USA, Bernie Madoff and before him, Charles Ponzi were tried in criminal courts and put behind bars. Madoff was recently sentenced to 150 years. We hear that in Britain white collar criminals often go free. Therefore, we have a few suggestions. First, please contact us if you are an investor or adviser and would like to support us in our dealings with our new buddies at the City of London Police. Secondly, do you want to join US investors in the Fund to campaign for extradition of the suspected criminals to the USA? After all, if the Brits decide not to touch this case, the US would sure love to give them a place to sleep at night, possibly in the same prison facility as Bernie Madoff.

We call upon DBO and Connaught to volunteer evidence to the Police. BDO should provide to the Police evidence of what it knew in January 2011 onwards. Whatever those parties might do, we would urge the Police to seize all evidence at BDO, Connaught and of course, Tiuta.

 

Civil

When it comes to civil actions, the US excelled itself after the collapse of the Madoff funds. Those involved lost their luxury homes, jewellery, cars, etc. Don’t be a sucker. Make contact with the Action Group and together we can work together.

 

Regulation

In the USA, the FSA was criticised for not investigating Madoff much earlier. The returns were too good to be true. The explanation as to how the returns were made did not really make sense to some of the boys on Wall Street. Somehow none of the queries raised with the SEC were followed up properly. This does not make us Americans feel proud. At least Madoff was arrested when his sons turned him in to the authorities.

By contrast, we understand that the ex-CEO of Tiuta reported the fraud at Tiuta to the FSA in March 2011. Yes, this should make you feel mad or feel sick. He turned over evidence of fraud at Tiuta to the appropriate regulator in the UK. What did the FSA do? Guys, the answer is nothing! This just might fire you up to write to Lord Turner, Chairman of the FSA. The FSA has overlooked in this case that it has a statutory objective to protect investors. We think that it has acted in breach of its statutory duty and it should have its arse kicked. This is yet another screw up to add to all the others. Apologies for the language !

Please see the suggested letter of complaint on our home page.  You can also ask Lord Turner:

  1. Who are the key conspirators?
  2. Who are the key compromised advisers?
  3. Why did the auditors of Tiuta not spot any issues with the flows of cash?
  4.  What did BDO know and when did it know it?
  5. What did Blue Gate Capital know and when did it know it?

Lord Turner should be demanding action to secure the evidence at Tiuta in particular from his underlings. Blue Gate Capital, Tiuta and BDO are FSA regulated. Some of the alleged fraudsters are FSA approved persons. Why has a reported fraud involving these guys not been investigated? Why did the FSA not stop the flow of new investors’ money into the Fund in March 2011?

Why do we mention Lord Turner when he is the Chairman of the FSA? The answer is obvious. He is the one at the FSA who has shown that he has independence of thought and he can hold the CEO and others to account.

 

Insolvency Proceedings

It is our view that:

  1. the Fund should be put in the hands of an independent insolvency practitioner acting as administrator and/or liquidator;
  2. the Fund should seek to wind up Tiuta plc. We understand that Connaught says that the original Tiuta guarantee (to cover shortfalls in the Fund) still exists whereas Tiuta claim that it has been released (as per its recently filed audited accounts). Any administrator or liquidator of Tiuta plc should pursue those persons reasonably believed to have acted as directors of Tiuta plc and have been “in the know” concerning the fraud on the Fund and any wrongful or fraudulent trading.
  3. the Fund should seek to wind up the general partner, Connaught Administration Limited under the limited partnership agreement or otherwise as it has clearly failed in its duties;
  4. BDO as a compromised party should be replaced as administrator/liquidator of Tiuta International Limited by the same independent firm of insolvency practitioners appointed over the Fund. BDO’s contract to engage Connaught Asset Management Limited to manage the portfolio of the Fund should be terminated forthwith and the insolvency practitioner should work with a reputable firm of short term lending experts to ‘work out’ the loan book;
  5. The Fund should commence litigation against Connaught Asset Management and Blue Gate Capital for inadequate systems and controls over the management of the Fund leading to the appointment of administrators/liquidators of those entities (hopefully the same firm overseeing the insolvency at Tiuta and the Fund).

 

Apology

Sorry to give you so much bad news in one hit.

Have a nice day and mind how you go!

 

Important Note

The suspicions of the Action Group are raised in good faith and in the exercise of our constitutional right to free speech. We have made allegations based on evidence received which is subject to further verification. As we have made clear, the leading guys at Tiuta and Connaught have many serious questions to answer and in our view, some of them should be in the “dock” at the “Old Bailey” or over here in the USA.

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