The Fund appears to have been sold and distributed by Connaught Asset Management Limited (an unregulated firm) (‘CAM’) and Blue Gate Capital Limited (an FSA regulated firm) as a low risk investment (a fund investing in short-term bridging finance with sensible loan to value ratios secured on saleable property assets). We query how CAM as an unregulated firm could be engaged in promotional activity as the promotion of any fund is a regulated activity. It may be alleged that Tiuta plc (a regulated firm) promoted the Fund but this does not seem to have been the case.

The Limited Partnership Agreement stated that “The purpose of the Partnership is to carry on the business of investing in short term loans secured by a first fixed charge on real estate with the principal objective of providing investors with a high fixed rate of interest.” Prima facie, it now appears that the Partnership has no enforceable security over any assets. Please click here for a copy of the Limited Partnership Agreement.

It now appears that the Investment Memorandum is misleading and ambiguous in many places. Please click here for a copy. [We have been told there are other versions of the Investment Memorandum and we would welcome copies of them.]

It says under the heading “Investment Objective”:  “The Connaught Income Fund will… [provide]… a revolving credit facility [to Tiuta plc]… to invest using strict lending criteria set out on page 16 of this document.” The Investment Memorandum gave the firm impression that most of the monies raised would be lent out on very low risk lending or low risk lending.

This turns out to be entirely misleading because we are now given to understand that the criteria related to the number of loans not the proportion of monies lent. It was also misleading because of the degree of high risk lending to developers and others.

Again, the Investment Memorandum was misleading because it said the Fund would not lend initially on certain types of high risk lending. The use of the word “initially” raises a fundamental issue. Investors were not told at any time that the risk profile of any investment in the Fund had changed very substantially from very low risk lending or low risk lending to exceptionally high risk lending.  

We now understand that there was a material omission from the Investment Memorandum because the auditors of the Fund raised concerns about the 2009 accounts and failed to approve the 2010 and 2011 accounts. This should have been disclosed to investors. It appears that monies from new investors may indeed have been used to pay off departing investors.

The main trust of the Investment Memorandum was that Tiuta plc (an FSA regulated firm) would manage a loan book for the Fund and the Fund would take security over saleable property assets. The Fund was meant to operate as a lender to persons requiring bridging finance on reasonable loan to value ratios and it would take a first fixed charge over the assets. Prima facie, it now appears that investors were misled as it was not made clear that the Fund would lent to Tiuta plc (“TP”) or any subsidiary of TP on an unsecured basis. TP is a firm which is authorised and regulated by the FSA that provides specialist mortgages such as bridging loans. The risk factors in the Investment Memorandum and did not warn investors that all lending would be to a trading business on an unsecured basis without reference to lending on particular properties.  The role of CAM as the ‘asset manager’ was to approve bridging loan applications and this gave investors the firm impression that the lending under the facility was linked to security. According to the Investment Memorandum, CAM was to ‘ensure that loan security was to be registered to the limited partnership’. This does not appear to have happened in practice.

Tiuta International Limited (‘TIL’) was until recently a wholly-owned (and wholly unregulated) subsidiary of TP. It now appears that TIL managed approximately £106m of capital belonging to the Fund. The Investment Memorandum described TP (the FSA regulated firm) as the ‘Specialist Partner’(‘SP’). Its role was ‘to assist in the management of the Partnership’s assets’ (according to the LPA). It now appears that investors have been misled because TIL acted as the SP. It appears that TP guaranteed the obligations of TIL. It is not yet become clear why TIL actually performed the SP role and that the Fund’s capital became generally comingled with that of TIL and TP. We do not understand how TIL could have undertaken the regulated activities of arranging regulated mortgage contracts (currently 5% of the portfolio) or debt for equity swaps in companies because the operator of the Fund, Blue Gate Capital Limited does not have the Part IV Permissions from the FSA to undertake this activity.

Approximately £20m of the Fund’s capital would seem to have been lost or misappropriated. Additionally, many of the loans granted fell outside the lending criteria set out in the Investment Memorandum and a number of loans would appear to have been under-secured. Monies appear to have been lent to developers in respect of high risk lending (contrary to the firm impression given in the Investment Memorandum); to persons connected with the officers of TP and/or TIL (soft loans to cronies); and the facility granted by the Fund to TP was misappropriated to fund the running costs of TP and/or TIL including salaries and bonuses.  If our grave suspicions are justified, this looks like theft. We further understand that from our sources that some of the security represented as good security relates to loans that have been repaid in the past few months. This appears to be fraudulent. The figure of £20m given above is subject to revision.  As explained below, the parties currently involved in managing the situation are deeply compromised and this matter really should be investigated by the FSA and/or the police.

It is not clear whether Tiuta Assets Limited (in administration) or Tiuta Development Limited were also (undisclosed) SPs in relation to the Fund or whether they were SPs in relation to other funds.

There has been an abject failure of governance. It appears that Blue Gate Capital Limited (the FSA regulated operator) did not put in place sufficiently robust and transparent systems and controls. It approved the misleading Investment Memorandum as a financial promotion.

As a consequence, TIL is now insolvent; it is also clear that the Fund is insolvent, and is expected shortly to go into administration. Furthermore, since the Limited Partnership Agreement (‘LPA’) governing the operation of the Fund requires the Founder Partner, CAM and TP to make good any shortfalls should investors demand repayment of their capital, it is likely that both will soon also have to appoint administrators.

We have heard from a former insider that BDO LLP was engaged by George Patellis of Tiuta Plc, the then CEO. We are given to understand that he resigned when BDO reported to Tiuta Plc and that he also made a full report to the FSA when he resigned. BDO worked with the Group and an incoming interim financial director that it recommended over the next few months to gain a better understanding of the Group’s balance sheet. Thereafter, BDO was further engaged to assess the Group’s business model going forward. The findings were presented to the FSA in the summer of 2011. Thereafter, it was alleged by BDO that stakeholders including CAM and the FSA felt that ongoing monitoring of the Group’s finances and performance would be appropriate, and BDO was engaged to report on these matters on a monthly basis. We have been informed by BDO that performance fell short of plan, as a result of which it was engaged by CAM to undertake a further analysis of the situation in the spring of 2012; it reported to CAM on behalf of the fund, and to the FSA, on 30 May 2012. Around that time, CAM acquired TIL.

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