Posts Categorized: Due diligence
January 23 2020
One of the saddest aspects of the One Coin scam perpetrated by the now missing Dr Ruja Ignatova is how unsophisticated (and, indeed, poor) savers in African countries were specifically targeted using the claim that this wonderful new cryptocurrency technology would bring easy finance (and all its many advantages) to the unbanked. OneCoin was presented as practically a social service and a revolution in finance which would transform the prospects of those whom traditional finance providers had ignored.
All too good to be true?
Of course. And what this meant in practice for those believing these claims can be heard here in the BBC’s radio documentary – The Missing Cryptoqueen. What it also meant for those involved in handling the money she made was rather more traditional – convictions for fraud and money-laundering.
Investors believed what they hoped was true and failed to ask some basic and obvious questions. If there was no blockchain how could this new currency really be a cryptocurrency? And what was the track record of the person behind it? If they had, they might have learnt that there was no blockchain and that Dr Ignatova had form, having received in 2016 a suspended sentence and fine from a German court for her role in relation to a German metallurgical factory taken over by her, asset stripped and then left to go bankrupt in 2009.
Past performance can sometimes be a guide to the future, it seems.
So what might an investor make of an opportunity to invest in a new venture which will:-
- Package new and existing mortgages into securities to be sold to investors
- The mortgages to be sold to people who have a low uptake of these products, preferring to use their savings to buy land and build property
- In a country – Ghana – with high interest rates and a very recent banking crisis, which resulted in 7 Ghanaian banks collapsing
- On the basis of a study, whose authors have not been revealed, which apparently states that there are plenty of people able to afford a $50,000 mortgage among the 9 million Ghanaians earning more than $11 a day (a munificent annual income of $4,015)
- Promoted by a convicted fraudster (responsible for the UK’s biggest fraud). Yes, Kweku Adoboli is back (though this time it is the economy of Ghana he plans to grow and the balance sheets of (presumably) the remaining Ghanaian banks he wants to expand)
- Who declines to say who his business partners are
- But expects banks to be shareholders in the new venture (assuming actual and potential conflicts of interest can be properly managed)
- And who is still being economical with the actualité of the reasons why he was convicted and imprisoned.
But it is good to see that he has developed a sense of humour – if this quote is genuine: “The day when I deliver my first profit to someone, that will be a good day.”
The injunction “Let the buyer beware” is as sound as ever.
March 31 2019
In the week in which Lyft, a company which has never made a profit, whose losses rose by 32% to nearly one billion in 2018 and which, according to its management, will not make a profit in the near-term, was listed with an initial valuation of $2.3 billion with its shares rising by 8.7% on the first day (giving it a market capitalisation of $22.4 billion, almost as much as Chrysler), we learnt a bit more about two other former stars of the business world.
First, London Capital & Finance (LCF). Perhaps not a star but starry enough – at least superficially – to persuade about 12,000 unsophisticated ordinary savers to put £230 million of their savings into fixed-rate bonds (which they thought eligible for ISAs) providing returns well above those available elsewhere. In reality, the bonds were high risk and not eligible for ISAs, were not regulated investments and the money went into a number of ventures run by persons connected to those behind LCF. The administrators are now, inevitably, probing what happened and where the money went. But this week investors were told that the administrators were having difficulty locating the assets allegedly acquired with the money, the chances of there being any recovery were low and, to add insult to injury, while investors lost money “through no fault of their own”, there was no basis for any compensation from either the FCA or the FSCS. The investors fell into the gaps between firms regulated to provide financial advice, which LCF was, and firms regulated to sell bonds, which LCF was not.
The moral of this sad story is an old one: if something looks too good to be true, stay away.
Still, those savers might well wonder what one of the FCA’s statutory objectives – protecting consumers – actually means when LCF was able to operate in the way it did in full view of the regulators without anyone taking any effective action to protect those consumers. The plethora of inquiries now taking place – by administrators, the SFO, the National Audit Office and possibly also the Financial Reporting Council – are not likely to provide those savers with much comfort.
Now to Theranos– a company which no longer exists but which is having a lucrative after-life in a book, documentary, podcast and rumoured Hollywood film. Its story is now well-known: a student leaves Stanford with a brilliant idea which will revolutionize health care (no more nasty needles taking blood – just a teeny pinprick), raises oodles and oodles of money, has a Board consisting of the great and the good (Dr Kissinger, George Schultz), appears on stage with Bill Clinton, is co-opted onto an advisory panel by President Obama, and is fêted as one of the first and youngest and prettiest female Silicon Valley billionaires. What could possibly go wrong?
Well, pretty much the most important thing: the product Theranos was selling did not work. Having an idea is great. Selling an idea knowing that the reality does not match it: not so great. Criminal charges have been laid. We will see whether this was self-delusion and a failed business or something very much worse. Still, one of the striking facts which has come out is that a lot of very experienced, very rich business people – people as far removed from ordinary savers as it is possible to be – failed to do the most elementary due diligence or ask basic questions, not even for an audited financial statement.
Maybe they were happy to take a risk without more. Or maybe, like those hopeful savers putting their money and hopes into LCF, they believed in what they hoped would be true, they believed the story, ignored the facts and/or didn’t ask obvious questions. Any similarities to investors in Lyft are, one hopes, purely coincidental.