Published by Jessica Weisman-Pitts
Posted on August 4, 2021
By Alex Jay, Head of Insolvency at Stewarts
Despite growing regulation and scrutiny on the finance sector over the past few years, fraudulent schemes continue to be an issue for investors. Non-professional investors are often enticed by promises of high returns to place money into schemes that turn out to be scams. These schemes adopt many guises and forms. But do they ever change, and how likely are they to emerge as the expected post-Covid economic uncertainty takes effect? Alex Jay, Head of Insolvency and Asset Recovery at UK law firm Stewarts, examines investor fraud and how the insolvency process can help victims recover some of their money.
The economic disruption and aftermath of the Covid-19 pandemic has been widely discussed. One of the outcomes predicted is a huge surge in insolvency and fraud. This is unsurprising as, historically, long-standing fraud schemes tend to emerge in challenging economic times, when investors want their money back.
Some fraudulent schemes have already emerged during the pandemic. For example, Wirecard, the German payment services operator, has been placed into an insolvency process, and the fall-out promises to run for years to come, with investor losses in that business, described as the “German Enron”, estimated to be around €12bn.
We also saw high levels of investment fraud emerge from the collapse of Greensill – the supply chain finance entity filed for administration in March and owes many billions to creditors. Greensill provided loan packages based on “future receivables” from large corporations deemed too big to default on their loans. A well-known example of this was Sanjeev Gupta’s Liberty Steel. Behind this “too big to go wrong” approach was essentially a complex investment product, similar to the collateralised debt obligations (“CDOs) which contributed in large part to the 2008 financial crash.
Whereas in the financial crash CDOs were bundled up mortgage loans sold to investors, Greensil bundled up invoices (including “future invoices”) which were then placed into funds and sold to investors via Credit Suisse. These invoice packages were deemed to be low risk as they were issued to large organisations said to be at little risk of default. This assumption turned out to be wrong – as it did in 2008 in relation to the CDOs – and had serious consequences for investors who only found out when their money was at risk and had to be written off.
Following credit crunch CDO issues, we saw the collapse of Lehman Brothers. Then came two of the largest investment frauds/Ponzi schemes ever discovered: Allen Stanford’s banking operation based out of Antigua (involving about $7bn of investor losses) and Bernard Madoff’s US investment schemes (involving about $17bn losses).
What is most significant about these three examples, is that they were all cases where an insolvency process was instigated and enabled substantial recoveries to be made for creditor victims.
The US bankruptcy trustee appointed to oversee the Madoff collapse for recovered more than $13bn, with more anticipated. The liquidators of Stanford International Bank have also recovered substantial sums, with ongoing global litigation expected to bring more funds into the insolvent bank and the recoveries made in the Lehman Brothers winding up have been so substantial that it ended up in surplus.
As we are nearing a post-pandemic life, many are predicting a further rise in investor frauds and Ponzi schemes. According to Kroll recently, 42% of pension savers (equalling circa five million people in the UK) could possibly fall victim to pension scheme which use the same tactics which investors fell for with Greensill: market-beating returns in complex products in difficult economic times.
Quite frighteningly, these schemes are more common than we think, particularly with the relatively new option for investors to withdraw a lump sum from their pensions and be persuaded into investing it into a fraudulent scheme. If we assume that each of the potential five million UK victims predicted by Kroll has £50,000 to invest, this could result in £250bn of losses to fraud schemes and if we expand that to outside the UK, this number is far greater.
On a more positive note, the wide-scale fraud schemes and collapses which have emerged over the last year will need to go through a robust insolvency process. As we saw with Lehman Brothers, Standard and Madoff these procedures can enable significant recoveries for victims who may not be in a position to seek redress independently. Insolvency practitioners have the power to properly investigate these schemes and can demand access to any company documents or information concerning corporate collapses, understand the cause of those events, and where appropriate, pursue recovery actions.
When seeking redress, litigation claims can be brought on behalf of investors who have lost their money from the collapse of a company against institutions which enabled fraud to take place for example banks or auditors. While many investors do not have the means to finance large and complex claims like these, developments in litigation funding enables other companies to step in to provide some of the funding and allow the litigation to run. Without litigation funding, many of these big fraudulent schemes would be simply go unaddressed.
In summary, we know from history to expect the economic fallout of global crises to drive an increase in investor fraud schemes. But we can also learn from history is the best options for dealing with these schemes. Utilising the insolvency processes triggered from these collapses, will be crucial for investors to make investigations into these companies and the eventual recovery of losses possible.
By Alex Jay, Head of Insolvency at Stewarts
Despite growing regulation and scrutiny on the finance sector over the past few years, fraudulent schemes continue to be an issue for investors. Non-professional investors are often enticed by promises of high returns to place money into schemes that turn out to be scams. These schemes adopt many guises and forms. But do they ever change, and how likely are they to emerge as the expected post-Covid economic uncertainty takes effect? Alex Jay, Head of Insolvency and Asset Recovery at UK law firm Stewarts, examines investor fraud and how the insolvency process can help victims recover some of their money.
The economic disruption and aftermath of the Covid-19 pandemic has been widely discussed. One of the outcomes predicted is a huge surge in insolvency and fraud. This is unsurprising as, historically, long-standing fraud schemes tend to emerge in challenging economic times, when investors want their money back.
Some fraudulent schemes have already emerged during the pandemic. For example, Wirecard, the German payment services operator, has been placed into an insolvency process, and the fall-out promises to run for years to come, with investor losses in that business, described as the “German Enron”, estimated to be around €12bn.
We also saw high levels of investment fraud emerge from the collapse of Greensill – the supply chain finance entity filed for administration in March and owes many billions to creditors. Greensill provided loan packages based on “future receivables” from large corporations deemed too big to default on their loans. A well-known example of this was Sanjeev Gupta’s Liberty Steel. Behind this “too big to go wrong” approach was essentially a complex investment product, similar to the collateralised debt obligations (“CDOs) which contributed in large part to the 2008 financial crash.
Whereas in the financial crash CDOs were bundled up mortgage loans sold to investors, Greensil bundled up invoices (including “future invoices”) which were then placed into funds and sold to investors via Credit Suisse. These invoice packages were deemed to be low risk as they were issued to large organisations said to be at little risk of default. This assumption turned out to be wrong – as it did in 2008 in relation to the CDOs – and had serious consequences for investors who only found out when their money was at risk and had to be written off.
Following credit crunch CDO issues, we saw the collapse of Lehman Brothers. Then came two of the largest investment frauds/Ponzi schemes ever discovered: Allen Stanford’s banking operation based out of Antigua (involving about $7bn of investor losses) and Bernard Madoff’s US investment schemes (involving about $17bn losses).
What is most significant about these three examples, is that they were all cases where an insolvency process was instigated and enabled substantial recoveries to be made for creditor victims.
The US bankruptcy trustee appointed to oversee the Madoff collapse for recovered more than $13bn, with more anticipated. The liquidators of Stanford International Bank have also recovered substantial sums, with ongoing global litigation expected to bring more funds into the insolvent bank and the recoveries made in the Lehman Brothers winding up have been so substantial that it ended up in surplus.
As we are nearing a post-pandemic life, many are predicting a further rise in investor frauds and Ponzi schemes. According to Kroll recently, 42% of pension savers (equalling circa five million people in the UK) could possibly fall victim to pension scheme which use the same tactics which investors fell for with Greensill: market-beating returns in complex products in difficult economic times.
Quite frighteningly, these schemes are more common than we think, particularly with the relatively new option for investors to withdraw a lump sum from their pensions and be persuaded into investing it into a fraudulent scheme. If we assume that each of the potential five million UK victims predicted by Kroll has £50,000 to invest, this could result in £250bn of losses to fraud schemes and if we expand that to outside the UK, this number is far greater.
On a more positive note, the wide-scale fraud schemes and collapses which have emerged over the last year will need to go through a robust insolvency process. As we saw with Lehman Brothers, Standard and Madoff these procedures can enable significant recoveries for victims who may not be in a position to seek redress independently. Insolvency practitioners have the power to properly investigate these schemes and can demand access to any company documents or information concerning corporate collapses, understand the cause of those events, and where appropriate, pursue recovery actions.
When seeking redress, litigation claims can be brought on behalf of investors who have lost their money from the collapse of a company against institutions which enabled fraud to take place for example banks or auditors. While many investors do not have the means to finance large and complex claims like these, developments in litigation funding enables other companies to step in to provide some of the funding and allow the litigation to run. Without litigation funding, many of these big fraudulent schemes would be simply go unaddressed.
In summary, we know from history to expect the economic fallout of global crises to drive an increase in investor fraud schemes. But we can also learn from history is the best options for dealing with these schemes. Utilising the insolvency processes triggered from these collapses, will be crucial for investors to make investigations into these companies and the eventual recovery of losses possible.
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