Analysis: Spotlight falls on unregulated loan note investments in Ireland  

The wheels were coming off the German Property Group months before 1,800 Irish investors were to learn that their €107m was at risk

The corporate headquarters of German Property Group, formerly called Dolphin Trust, which filed for bankruptcy last July, leading to a scramble among Irish and global investors to secure their investments. Picture: Alexander Koerner/Getty Images

There were signs that the wheels were coming off the German Property Group months before 1,800 Irish investors here were to learn that their €107m was at risk.

By the summer of 2019, German media reports had put the spotlight on the lifestyle of Charles Smethurst, the principal director behind the German Property Group, raising red flags about the €1bn he had to collect around the world to pump into properties across Germany. 

It would still take some time more before Irish investors would learn that their investments were potentially at risk.   

In a meeting in Berlin in November 2019 attended by a representative of distributor Wealth Options Trustees Ltd (WOTL) and Irish brokers, Mr Smethurst dropped the bombshell news that there would be a temporary delay in payments to Irish investors. 

But there would be no other payments ever made by the German Property Group and by July last year the investment firm that had become well known in Ireland had collapsed into a court-appointed administration in Bremen. 

A scramble among global investors from Korea, France, the UK, as well as from Ireland, to secure their investments had begun.   

Mr Smethurst's German Property Group, also known under its former names of Dolphin Capital and Dolphin Trust, had a long relationship with Ireland, and Munster in particular.   

Over a decade ago, it had started out selling investments through a distributor in Cork, which had subsequently moved on.    

The role of WOTL based in Kildare, which had at an early stage provided administration services to the German company, had developed by 2018 for it to take over as distributor for the German property firm, selling through a network of brokers in Ireland.    

WOTL held the Irish funds in two Irish-based vehicles, called MUT 103 and MUT 116, from which the investments were transferred to buy into properties identified by Mr Smethurst's German company.   

One of those investors, Kathleen Dineen, a 78-year-old pensioner from Ballincollig, Co Cork, brought the case for the High Court to appoint a liquidator to one of the Irish-based companies, MUT 103.

The purpose was to help to throw light on the effectiveness of the ways security was taken out over the German assets. 

WOTL's case was that the German Property Group had never missed a payment or missed a coupon payout before late 2019 and it should continue to work for Irish investors in the German administration.             

Judgement

In a judgement on Wednesday, Mr Justice Brian O'Moore ruled that a liquidator should be appointed over MUT 103.

The liquidator could work on behalf of investors in Ireland with investments made through that company. 

The judgement said that, although not being the basis of the decision, WOTL had continually advised investors since the administration that assets were fully secured, but that position may be much more uncertain. 

The judgement said that WOTL's efforts appear to have achieved little for the Irish investors, despite receiving "profoundly worrying allegations" about the German Property Group in July 2019 and, subsequently, after the German firm's insolvency in July last year. 

However, the judgement said that the directors of MUT 103 "have no culpability, either moral or legal, for the potential problems with the security provided to it".       

The judgement does not involve MUT 116, through which Irish pension investments were made, and discussions over MUT 116 may involve the liquidator in the coming months.                 

But the case has put a spotlight on the way millions of euro are pouring into unregulated loan note investments in Ireland. 

The German Property Group managed to raise an outsized amount from Irish investors, given its widespread fund-raising around the world.  

Leading brokers have told the Irish Examiner that the loan note investments, in general, give little protection for small investors should things go wrong. 

The brokers said many of the projects are likely to be viable but that individuals are increasingly likely in the era of low interest rates to take on risks they would never have contemplated in the past.

On the selling side, the brokers have said the brokerage industry is being offered commissions to sell unregulated investments by the principals driving the unregulated schemes that can dwarf anything they will earn from regular investments.

And in the minds of ordinary investors, there can be a blur of confusion about investment firms that as corporate entities are heavily regulated by the Central Bank when they sell regular investments, but are also selling loan note investments that are not regulated.