Author: Phoenix

Cauta Capital publishes 2019 accounts, £8.7 million now raised

~ Phoenix ~ 2 Comments

Cauta Capital, whose bonds paying 7-9% per year were reviewed here in January 2018, has published its accounts for the year ending in April 2019.

As in last year the accounts were unaudited and limited information is available, due to Cauta making use of small company exemptions. Creditors were reported to have increased from £6.8 million to £8.7 million.

When reviewing Cauta’s 2018 accounts I noted that £70 million in “investments”, described as “listed shares” had been parachuted into the company seemingly from nowhere (certainly it had little to do with the bondholders’ money). Originally as a £40 million injection in 2016 which was then revalued dramatically upwards over the next two years.

Somehow, from April 2018 to April 2019 this £69,949,449 in listed shares has remained exactly the same at £69,949,449. Despite the fact that listed shares will by nature fluctuate considerably in value.

I don’t have the evidence to suggest that £69,949,449 is a made-up number, even though it certainly looks like it was produced by hammering 4 and 9 a few times and calling it a day. But claiming that the company owned £70 million in shares despite raising only £7 million from investors was a glaring inconsistency twelve months ago (if it had that kind of money, then why bother raising £7 million from investors and paying 25% in commission to do so?) and now it’s an even bigger one.

When I last reviewed the accounts in early 2019, Cauta was promoting itself with 24 paid search terms, of which the top 5 were all in the French language. Its promotional activity has reduced considerably; according to Similarweb it now only receives traffic from one paid search term, again in French. (For “buy government bonds”, despite Cauta not being a government entity.)

Reading Cauta’s website it’s like the failure of LCF never happened; their website, which continues to promote its unregulated bonds directly to the public, is full of misleading rubbish like “This rate is fixed for the term of the bond giving investors peace of mind their future is secure” and “We pride ourselves on offering our investors the maximum protection” that fails to make clear the high-risk nature of their unregulated bonds.

Jade State Wealth is the Security Trustee for Cauta’s bonds, which performs the same role for a number of other UK-based unregulated investments.

Alert: Fake Bond Review Facebook pages

~ Phoenix ~ 10 Comments

I have been made aware of two Facebook pages that pretend to be me; a personal profile at bond.review.1 and a group set up by the same account at group no. 722140201642740 (no direct links to avoid boosting them on Google). The account is not run by me, and has used my logo and reposted Bond Review articles without permission, even after being asked to stop. The account has been reported to Facebook.

Bond Review currently has two active channels: this website (and its email / RSS newsletter), and my Twitter profile @BondReview.

There are three ways to initiate contact with me: the Contact link above, the Twitter profile and via the comments on this website.

Anything else should be assumed to be unauthorised and nothing to do with me.

I previously used a Facebook profile to post in a few groups as an individual but have not used this for some months.

Astute Capital ditches unregulated introducers; lending arm overdue with accounts

Astute Capital logo
~ Phoenix ~ 13 Comments

Astute Capital has filed interim accounts for the half-year ending September 2019.

As at September 2019 the company was on the edge of solvency with £6,000 in net liabilities.

According to director Richard Symonds, in April 2019 the company closed operations in Leeds and terminated all relationships with unregulated introducers. By this point of course the company had already raised £15 million.

Compliance support consultant Thistle Initiatives were hired to ensure Astute Capital “remained fully compliant throughout the entire investor marketing and on-boarding process”.

Whether Thistle had anything to say about Astute Capital’s risk-warning-deprived Google ads direct to investors is not known.

google advert

Nor is it known whether Thistle had any say in Astute’s marketing strategy of scrubbing the Internet of posts critical of the company, which we know from the evidence it left took place between June 2019 and November 2019 (when I noticed it).

Astute has provided the FCA and other unspecified third parties with “due diligence packs” prepared by Thistle, and apparently intends to consider becoming FCA regulated in 2020. Good luck to them with that.

Astute has been hit by the collapse of Reyker Securities, which acted as custodian for a large number of Astute investors. No investor funds are missing as a result of Reyker’s failure according to Astute’s director.

Investor funds are on-lent to Astute Capital Advisors. At time of writing ACA is nearly a month overdue with its accounts.

Blackmore investors approach restructuring and insolvency specialist

Blackmore logo 2019
~ Phoenix ~ 13 Comments

According to the Times, a group of Blackmore Bond investors has approached restructuring and insolvency specialist Duff & Phelps in the hope of getting answers about their investment.

Blackmore has been in default of interest payments since October. It has told investors recently that payments will be made “imminently” once it has sold some of its properties.

Investors have asked Blackmore to appoint Duff & Phelps to carry out a review of Blackmore’s business. Blackmore has declined.

Regular readers may be familiar with the name Duff & Phelps as they have been appointed administrators of the Carlauren Group, a £76 million unregulated care home investment scheme which collapsed last year under allegations of Ponzi fraud.

As it stands Blackmore is in default of its loans from investors but is not insolvent or in administration.

That a group of investors are speaking to a restructuring and insolvency practitioner is a serious development. Even if Duff & Phelps are appointed in an advisory capacity, they will not come cheap.

And if they had a magic solution that would allow Blackmore to turnaround its business and start generating the 15% per year returns it requires to make its interest payments to investors after accounting for the cost of commission paid to its introducers, they wouldn’t be in the restructuring and insolvency business. If they knew how to generate 15% per year returns, every business owner in the country would be beating down their door.

Anyway, as it stands Blackmore insists that it doesn’t need any magic solution, and that it will get back on track with interest payments as soon as it has sold some property.

Having been rebuffed by Blackmore, the investor group which contacted Duff & Phelps now has to decide whether to use their missed interest payments to take Blackmore to court and force the issue, or leave Blackmore directors Philip Nunn and Patrick McCreesh in charge and cross their fingers.

Wellesley Finance £9 million in the red, material doubt over going concern status

Wellesley logo
~ Phoenix ~ 3 Comments

Wellesley Finance has filed accounts for the year ending December 2018.

The company made a £10.2 million loss in 2018, and at the end of the year, its balance sheet stood at minus £9.2 million in net liabilities. Despite the loss, the directors say they are “satisfied with the overall direction of the business and are hopeful for its future performance”.

Wellesley says it has adjusted its lending strategy to focus on more established borrowers, a strategy which it says has resulted in no losses so far, and the directors “forecast a return to profitability in the near term”. Unaudited accounts suggest that company earnings were slightly positive in 2019, according to the directors.

Nonetheless Wellesley’s auditors have drawn attention to its net loss and net liabilities, and stated that “there is a material uncertainty that the company that may cast significant doubt over the company’s ability to continue as a going concern”. This is standard accountant-speak for “it might go bust but then again it might not”.

In particular, both the directors and auditors make clear that, as part of the new strategy, Wellesley is reliant on a smaller number of larger developers, which creates the risk that Wellesley runs into trouble if one of them doesn’t pay back as expected.

Almost £19 million is owed to Wellesley Finance plc by related companies. Wellesley’s ultimate parent is IFX Group Trust, which is based in the Isle of Man.

As at December 2018 Wellesley had raised a total of £137 million via its fixed term bonds, including £98 million in unlisted minibonds. It currently raises funds through listed bonds on Euronext.

Since 2014 Wellesley has raised money by advertising directly to the public, e.g. via TV adverts. While its current literature is difficult to fault in terms of making clear that capital is at risk, it previously used practices that the FCA has now made clear is misleading, in particular comparing the rates on its capital-at-risk unregulated bonds to cash accounts.

FSCS employs magic-based logic to compensate 159 LCF bondholders

London Capital & Finance logo
~ Phoenix ~ 5 Comments

Last week I reported on the FSCS’ decision to compensate only 159 London Capital & Finance bondholders.

The decision to compensate only those who transferred stocks & shares ISAs to LCF, and not those who transferred cash ISAs, over a technical interpretation of the compensation handbook, has been a particular point of controversy.

The FSCS’ explanation in its LCF Q&A was

Arranging a transfer out of a regulated investment, such as a stocks and shares ISA, is a regulated activity.

As veteran investor activist Mark Taber pointed out to the FSCS on Twitter, cash ISAs are also regulated. The FSCS replied that what they meant to say was not regulated investment but designated investment.

We apply different sets of rules to different types of claim. If a bank fails, under the applicable Depositor Protection rules, a cash ISA qualified as a type of deposit that FSCS can protect.

However, for investment claims, under the applicable COMP rules, there is a strict requirement for there to be a ‘designated investment’ (see COMP 5.5.1(1)).

So there you have it – stocks and shares ISAs are “designated investments” under the FCA and FSCS handbooks but cash ISAs are not. Therefore compensation is payable where LCF transferred a stocks and shares ISA to its own invalid ISAs but not where it transferred a cash ISA. Does that explain everything?

No it doesn’t. If you’ve ever read a pulp fantasy novel, a Lord of the Rings knockoff, you will probably have read a paragraph like the following:

“The High Elves can use fire magic,” explained the wise wizard Fladnag to Odorf, “because their earliest ancestors were created from a star that fell from the sky, and the fire in that star remains in their blood. But the Wood Elves were made from the trees of the forests so they can only use the magic of nature.”

In the confines of fantasy novels this serves as an explanation as to why High Elves can do magic with fire. In reality it explains absolutely nothing. Using the words “because” and “so” doesn’t make it an explanation. At no point does the wizard explain what it is about your distant great-grand-parents being made from a star that gives you the ability to make magic fire. All the steps in between “great grandparent made from star” and “can summon fire” are missing. It is not an explanation, but random facts about elves.

This is fine in a pulp fantasy novel, as it’s a waste of energy coming up with actual scientific explanations, explanations where the steps in between aren’t missing, for things that aren’t real.

But the FSCS is doing exactly the same thing with ISAs in place of elves. “Stocks & shares ISAs are a designated investment but cash ISAs are only a regulated deposit” is not an explanation, it is random facts about ISAs. And this isn’t good enough, because it’s real life and whether compensation is awarded or not has a dramatic effect on real people’s lives.

What makes these facts irrelevant and random is that by the time the funds reached LCF’s hands, they were neither stocks & shares ISA funds or cash ISA funds. When a stocks & shares ISA was transferred to LCF, it was not LCF that sold the investments into cash but the original ISA manager. Any distinction between cash ISA funds and stocks and shares ISA funds had disappeared by the time they reached LCF’s hands for LCF to perform regulated activities upon them.

No part of the FSCS’ pseudo-explanation has managed to explain this away.

Cynicism abhors a logical vacuum

There is of course a real distinction between stocks & shares ISA LCF victims and cash ISA LCF victims that does provide a logical explanation for why only the former might get compensation.

There’s a lot fewer of them.

How many cash ISA LCF investors there are hasn’t been stated as far as I know. However, the archetypal LCF investor was your classic unsophisticated saver, sick of cash interest rates but lacking any experience of how to obtain real asset-backed returns without taking the risk of permanent loss. They went Googling for terms like “best interest rates” which LCF’s marketing provider Surge had sat on, and the rest is history.

Anyone with a stocks & shares ISA was inherently less likely to invest in LCF. They were already receiving potential returns higher than cash which takes away the main driver to go looking for LCF. They had at least some experience of capital-at-risk investments, via their stocks and shares ISA, and a higher ability to understand that LCF had an inherent risk of 100% loss, and giving them all your money was a bad idea for the same reason it is a bad idea to invest all your money in Lloyds shares.

Why 159 stocks & shares ISA investors managed to invest in LCF anyway is for them to come to terms with (fear of losses leaving them open to an investment that gave a false assurance of no volatility, maybe). It doesn’t matter as the point is that there are almost certain to be far fewer of them to compensate. 159 investors translates into a mere £3 million or so, assuming the typical average investment in LCF of c. £20,000.

Back in June 2019 when the FSCS was still dangling the prospect of compensating investors on the basis of misleading advice, I pointed out that this risked a number of unfair outcomes, including compensating richer investors who received personal visits from LCF salesmen while hanging poorer ones who didn’t out to dry.

I cynically suggested that the main benefit of rewriting the definition of “advice” in this way would be to remove the most organised and well-resourced investors from the investor groups – “divide and rule”.

Now we have the FSCS choosing to compensate a group who were by nature less unsophisticated and more experienced with investments than the average LCF investor, by virtue of the fact they already held capital-at-risk stocks and shares ISAs.

Those who had very little excuse for not understanding that LCF had an inherent risk of 100% loss are getting bailed out by the general public. Those who’d never held capital-at-risk investments before and likely had zero knowledge of how to diversify are still twisting in the wind.

There is no rational explanation for this, no matter how much the FSCS bleats about subsection C and paragraph 5.

Investor confidence

This isn’t a call for cash ISA investors to be compensated as well, and nor am I trying to piss on the lucky 159’s chips by saying they shouldn’t have been compensated.

This is about investor confidence. (I don’t expect LCF investors to care about macroeconomics over their own losses so they can put this article down if they’re still reading.) A financial compensation scheme needs to a) give retail investors enough confidence in the system not to hide their money under the mattress, and b) discourage retail investors from putting their money in the unregulated underbelly, where it is highly likely to be wasted, in the belief that it’s a risk-free bet.

By dangling the prospect that LCF investors might be compensated en masse over “misleading advice”, despite LCF not being an advisory firm, employing no financial advisers, and having no permissions to advise retail clients, the FSCS gave false hope to LCF investors for months. The nonsensical technical decision over stocks and shares ISA investors compounds the impression of a system in chaos.

The failure of the UK to regulate all investment securities offered to the public has created a fractured system where some unregulated investments are eligible for compensation and some aren’t, with no discernible logic.

The loopholes engineered by the current UK regulatory system allowed a business which was both unregulated and regulated, and offered high-risk unregulated securities that somehow still manage to be FSCS-protected in extremely limited circumstances, to exploit this lack of clarity for three years.

This is a shambles. A slaughterhouse into which investors will continue to be led until the system is reformed from the top down.

Adelpha Bond files accounts, says no money taken in

~ Phoenix ~ Leave a comment

In November 2018 I reviewed Adelpha Capital which was offering bonds paying up to 7.6% per year via the company Adelpha Bond plc.

In June 2019 Adelpha Bond plc converted to a private Ltd company. It has now filed accounts up to October 2019 which appear to suggest it has taken no money in and made no trading activity; its accounts show nothing other than the £12,500 in paid share capital it was set up with.

Adelpha Capital’s website remains up, offering loans to small businesses, but any mention of investment offered to the public has been removed.

This would appear to suggest that Adelpha had second thoughts about joining the minibond gold rush, but if any readers know otherwise, let us know.

FSCS announces compensation for only 159 London Capital and Finance bondholders

London Capital & Finance logo
~ Phoenix ~ 20 Comments

The hopes of most victims of FCA-authorised Ponzi scheme London Capital & Finance were dashed last week when the FSCS announced it would not compensate them on the basis of having received misleading advice.

It said that investors had merely been given incorrect information, which doesn’t generate a liability that is covered by the FSCS’ “protected business” rules.

That the FSCS has eventually taken this decision is disappointing for investors but ultimately not surprising. London Capital Finance was not authorised to give advice to retail investors, employed no qualified financial advisers, and its call centre staff were generally trained to avoid crossing the line from information to advice – as in any other non-advisory finance company. (Although some went off-piste and crossed the line into the “I’d tell my own mother to invest in this” school of advice.)

The surprising part is that the idea was floated by the FSCS and allowed to give false hope to tens of thousands for months.

That a suggestion that investors might be compensated on the basis of bad advice was even contemplated says a lot about how the industry and the public have been conditioned to accept the idea that the general public is liable for the losses of investors in high-profile scandals.

The unwritten rule in force in the UK is that if enough people believe an investment is risk-free, the Government has to spend everyone else’s money to make it so. This principle resulted in the bailout of defined benefit pension schemes, Equitable Life,  Barlow Clowes, IceSave and Northern Rock.

London Capital and Finance has not yet crossed that threshold but investors are unlikely to give up here.

Stocks & shares ISA investors compensated

A sliver of LCF investors – 159 in total – will be compensated by the FSCS due to the fact that they transferred stocks & shares ISAs to London Capital & Finance. LCF claimed to offer ISAs but in reality their ISAs were invalid as the LCF bonds they invested in were non-transferable.

Those who transferred cash ISAs to LCF are however not eligible for compensation.

The fact that stocks and shares ISA investors get bailed out but those who transferred cash ISAs don’t merely highlights the arbitrariness of the FSCS’ decision.

Why the grounds on which stocks & shares ISA investors get compensated don’t apply to cash ISA investors is something I’m struggling to understand. I can only imagine it has something to do with the fact that advising on cash ISAs is not a regulated activity whereas advising on stocks & shares ISAs each, but LCF didn’t give advice, so… anyway, if I don’t understand it you certainly can’t expect the average LCF investor to.

A financial compensation scheme needs to accomplish two aims: it needs to give the person in the street confidence to put their money into the regulated financial system instead of under the mattress, so it can be put to best use. And it needs to make sure they know that if they go outside the regulated financial system, they’re on their own, because the unregulated financial system tends to piss money down the drain unless investors know exactly what they’re doing.

At the moment the FSCS is failing at both.

As it enters 2020 the UK’s financial system is overseen by a leaderless FCA that refuses to enforce existing rules and backed by a compensation scheme that makes up the rules as it goes along. Still, it’s not like the UK should be particularly worried about investor confidence right now.

Blackmore Bonds – the important questions answered

Blackmore logo 2019
~ Phoenix ~ 24 Comments

Troubled minibond provider Blackmore hit the news again over the Christmas period after missing a third consecutive interest payment and falling overdue with its annual accounts.

Rather than regurgitate the last two articles, we’ll examine the important issues in depth.

Q: Why has Blackmore stopped paying interest?

A: Blackmore has defaulted on three quarterly interest payments, starting in August. August’s was eventually paid a week late; Blackmore blamed a clerical error.

September and December’s payments remain unpaid. Blackmore has now blamed Brexit and delays in selling property.

Q: Why is there so much media interest?

A: An obscure small business (Blackmore raised over £25 million; a £100 million company in the UK is considered micro-cap) being unable to pay its debts on time is normally a “dog bites man” story, as anyone who has lent money or extended credit to a small business knows.

Blackmore however has excited media interest due to unfortunate parallels between itself and London Capital Finance. Both companies paid commissions of c. 20% to Surge Financial. After LCF was shut down by the FCA, Blackmore briefly replaced LCF on comparison sites run by the Surge group of companies.

As discussed in our original December 2017 review, investment in Blackmore was only suitable for high-net-worth and sophisticated investors who could swallow the inherent risks of lending their money, and for whom it made sense to loan a small part of their money to unlisted small businesses. It is clear from Blackmore’s deteriorating Trustpilot rating that a significant number of Blackmore investors were not in fact mentally prepared for the inherent risk of default.

This is not surprising given that Blackmore used the same marketing channels as LCF, which was also promoted to unsophisticated investors.

Q: Where are the accounts?

A: As a PLC, Blackmore should have filed its accounts for December 2018 by June 2019. It has twice used a loophole in the Companies Act to extend the deadline, and now appears to have missed it entirely. Companies House shows the due date as 27 December which was over a week ago.

There are two obvious reasons why it didn’t use the loophole a third time: 1) Blackmore has grown a conscience about using the loophole 2) nobody in the company cares enough anymore to submit the filing necessary to use the loophole.

Q: What does this mean for Blackmore’s attempt to raise money outside the UK?

A: In April 2019 Blackmore briefly closed to new business. When it reopened it had stopped accepting money from within the UK. There remains no legal prohibition on it accepting investment from UK investors (though there are restrictions on how its unregulated bonds can be promoted).

In May Blackmore opened an office in Dubai with plans for further offices in Hong Kong and Tokyo.

The Emirates, Hong Kong and Japan all have one thing in common; they don’t use the Roman alphabet, meaning investors in those countries Googling for Blackmore are less likely to see negative publicity in the UK.

How much investment Blackmore has taken in from outside the UK is unknown, partly due to its failure to submit accounts in a timely fashion.

Q: What is the Financial Conduct Authority doing?

A: Probably nothing. Or nothing visible to the public, which in relation to an investment formerly promoted to the public is as good as the same thing.

Over the last five years the FCA has consistently taken the view that unregulated investments are not its problem (despite its statutory objectives to preserve confidence in the markets and protect consumers). After the departure of Andrew Bailey it is currently rudderless.

Although the FCA intervened in London Capital and Finance over its misleading promotions, which was swiftly followed by the collapse of the scheme, its powers to intervene in Blackmore are more restricted as Blackmore is not an FCA-related company.

At present the FCA appears content to let things run their course.

The consistent failure of the UK to bring its securities laws out of the 1920s, and of the FCA to enforce the requirement for companies relying on “high net worth / sophisticated investor” exemptions to prove that their investors qualify as such, means companies like Blackmore are free to raise money from UK investors without oversight from the FCA or meaningful disclosure requirements.

This is not a scandal as scandals have an element of the unexpected. This is the expected and intended consequence of deliberate regulatory and government policy.

Q: Are Blackmore investors likely to get their money back?

A: Due to the lack of public information on Blackmore’s finances it is impossible to say which will happen from the outside.

Blackmore’s bonds had a minimum term of 3 years and the first capital repayments fall due in 2020.

Small companies can and do recover from temporary cashflow issues. It is also an inherent risk that a loan to a small company results in a 100% loss. The fact that Blackmore’s loans were promoted as “secured loans” does not change that as there is an inherent risk that the security is not enough to cover the administrator’s fees.

Long term, Blackmore needs to generate returns of up to 16% per year after all overheads and costs in order to successfully repay its investors (the return required to sustain 20% upfront commission and 7.9% per year to the investor over three years). The risk that it fails is inherently extremely high.

Q: What can investors do?

A: If you loan money to a company and they stop paying it back, there are only two options: 1) Write it off, forget about it and treat any return as an unexpected bonus 2) Consult a solicitor and run the high risk of throwing good money after bad. All other options are more stressful and less productive versions of 1) and 2).

Investors who were advised to invest in Blackmore by an FCA-regulated financial advisor or used an FCA-reguated SIPP provider may have recourse to the Financial Ombudsman and Financial Services Compensation Scheme.

If investors are contacted out of the blue by people claiming they want to buy their investment in Blackmore, it is probably a scam.

Unregulated Irish pension trustee threatens to foreclose on Dolphin Trust; fallout hits South Korean banks

~ Phoenix ~ 5 Comments

Unregulated German property scheme Dolphin Trust (now known as German Property Group; for clarity we will continue to use its less unnecessarily generic name) continues to struggle with repayments, according to media reports.

Wealth Options Trustees, an “investment wholesaler” based in Kildare, Ireland, has threatened to foreclose (presumably on behalf of Irish pension investors) in the event of non-payment.

Dolphin Trust’s CEO Charles Smethurst has admitted to “short-term cash-flow difficulties” according to WOT.

Dolphin Trust’s short-term difficulties started in the latter half of 2018, according to unpaid investors who spoke to the BBC last year.

WOT runs small pension schemes for members in Ireland, serving the same function as a SIPP / SSAS provider in the UK. How much it facilitated being invested into Dolphin Trust is not known.

Over in South Korea, Korean banks are facing lawusits from aggrieved investors for facilitating investment into Dolphin Trust via a product called “German Heritage DLS”.

German Heritage DLS is based on funds managed by Singapore’s Banjaran Asset Management that invest in historic site remodeling projects conducted by German Property Group, formerly Dolphin Trust. But the company failed to pay the investments back and keeps extending maturities due to the delay in receiving authority’s approval for the projects.

Shinhan Bank, KEB Hana Bank and Woori Bank are alleged to have sold a total of 473 billion won (£312 million) worth of investment in German Heritage DLS / Dolphin Trust, according to Pulse News.

Dolphin Trust’s unregulated bonds, which pay returns in the region of up to 12% per year, have been extensively sold by unregulated introducers in the UK and have also been used as the underlying investment of pension liberation fraud schemes such as London Quantum. (To clarify: the schemes were fraudulent because they claimed members could legally access their pensions before they were eligible to do so, not because of anything to do with the underlying investments.)

Dolphin Trust paid commission of up to 20% to introducers, according to the BBC.

Last year Dolphin attempted to launch a spin-off in the UK called Grounds Investments. The company withdrew and returned investors’ money in August, citing Dolphin’s negative publicity and the collapse of P2P platform Lendy and FCA-authorised Ponzi scheme London Capital and Finance as its reasons for having second thoughts about raising money in the UK.