Anyone can be taken in by fraudsters promising the world. Merryn Somerset Webb looks at how we can fight financial crime, and how to safely invest in unlisted companies.
Always hang up on cold callers, however charming they sound
The phone rings. You pick it up. At the other end is a charming-sounding man. He tells you about a company he thinks you might be interested in. It's in the renewable energy business; it has a novel technology that could be game-changing for the industry and your financial future. It operates out of a well-known science park and seemingly has the backing of brilliant academics.
Buy into it now, says the nice man, and you will be supporting a possible part solution to global warming as well as giving yourself the chance of making returns beyond most people's wildest dreams. What do you do?
You hang up. This is your only choice regardless of how rude or self-sabotaging it might seem.
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Incorporated in 2013, Oxford Renewable Fuel (ORFL) had as its sole director Adrian Eyre. He claimed the company was able to use bacteria to produce methane; that this biogas could be used as energy; and that the technology had been tested by fuelling a small jet engine.
Investors were told that directors of the company had already sunk £1.5m into the firm; that they had a "consultancy team of more than 40 scientists" and that they were raising £2m via the issue of new shares (a primary issue) to commercialise the whole thing. This would involve paying the brokers in the deal a commission of 10% along the way.
Numerous glossy brochures were produced to explain these details. None of them were true. No engine; no consultants; no novel technology; and, crucially, much of the time, no primary issue.
Many of the shares apparently available had already been issued at nil cost to Eyre, who was selling them on for £1 each in the full knowledge that they were entirely worthless. Eyre eventually raised about £7m from 340 people. Commissions paid to brokers were, at times, not 10%, but a whopping 50%.
Eyre is not getting to keep his part. Two weeks ago he was convicted of fraud at Bristol Crown Court.
We need more resources to investigate financial crime
That's good news. But I do not want you to take the conviction as any kind of reassurance that our justice system keeps you safe from this kind of financial predator. I want you to take it as a warning that it currently doesn't.
The victims were not idiots some were financially experienced and several asked all the right questions. But these scams are remarkably easy to fall for when they come with glossy brochures and brokers from Financial Conduct Authority-registered organisations. There are plenty of them about but the FCA is too understaffed to keep an eye on all of their activities, and given the time it takes, our horribly busy police force has very little incentive to investigate complicated scams properly.
Prosecuting this case involved a three-year investigation by one outstanding officer, a ten-week trial, hiring expert witnesses and educating a jury in the nature of the limited company with the conclusion being a single conviction. It's not exactly a quick win for a police force judged on results.
The investors in ORFL will get some money back Eyre's assets will be "restrained" and divvied up pro rata. The state will also be able to charge the costs of prosecution to his estate. But in most cases, the time and expertise needed to investigate means that there is no prosecution and hence no recovery. This could and should change.
The police should have more resources and better systems. A police officer can sift through 300 pages of possible evidence every day; artificial intelligence could do 600,000. Chief Constable Sara Thornton had a point when she demanded that the police spend more time on "proper" crime.
And both the FCA and the police might do better if they were made to focus not on the data point of convictions but on the number of victims each conviction covers. That would make investigating this kind of crime, with its hundreds of victims, look much better in the results statistics.
Still, while we wait for the authorities to reassess how these particularly unpleasant and brazen crimes are dealt with, how can you protect yourself?
How you can protect yourself from fraudsters
The first and firmest piece of advice I have for you is about cold calls. Most of the people caught up in this kind of scam have picked up the phone to someone they don't know and listened to them for a little bit too long long enough to get caught up.
Don't. There is no circumstance I can think of in which a cold caller will be ringing with a genuinely good offer. Second, watch out for the kind of brokers involved. Have you heard of them? Where are they based? Are they likely to have done their due diligence correctly? Being FCA-regulated doesn't mean being trustworthy.
If you are considering investing in an unlisted company, do your own due diligence. Call the office number and ask if it is a virtual office (this is a pretty clear warning). Beware of scientific-sounding companies claiming to be somehow connected to Oxford or Cambridge, as the universities have no copyright over the names of their cities. Look to see if there is another company with a very similar name scammers like to piggyback on the reputations of the reputable.
Check the directors. Google them carefully using the Companies House database how many firms have they been directors of in the past and how long have those organisations lasted for? If there is only one director, be surprised that's not normal. Finally, ask to see the accounts: the lies will be hidden all through them.
Better still, if you want to invest in unlisted companies, do so via a fund run by managers who know what they are doing. I am infuriated by the silly fees charged by most venture capital trust funds, but at least your money gives you genuine tax relief and some proper due diligence.
For better value, go for the fund managers who are adding private companies into their portfolios. Baillie Gifford is hugely experienced (disclaimer I am a non-exec director of its Shin Nippon Trust) as is Max Ward's Independent Investment Trust which can have 10% of its holdings in unlisted companies.
There is also an interesting new launch on the way. Merian Global Investors (the new name for Old Mutual) is launching a £200m fund to be run by two members of their small-cap team Richard Watts and Nick Williamson and invested in private companies thought to have long-term growth rates substantially better than those of the average UK company.
It might outperform. It might not. But it will be fairly priced (0.5%, plus an only mildly irritating performance fee). However it fares, you stand to lose significantly less money on this sort of investment than you would have lost with Adrian Eyre.
This article was first published in the Financial Times
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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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