Inquest begins: Green oasis dragged into a quagmire of fraud

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On 21 August, a team of securities and fund management regulators arrived at the Finsbury Circus offices of Morgan Grenfell's unit trust subdidiary, overlooking a green oasis in the heart of the City of London.

For the four previous months, they had been investigating the way shares in an obscure and highly speculative New Mexico oil exploration venture called Solv-Ex had been marketed in private placings to investors.

From that small beginning emerged the enormous scandal which has shaken the unit trust industry to its foundations this week.

The affair is threatening to drag the reputation of Morgan Grenfell through the mud again, as it was a decade ago in the wake of the Guinness share manipulation scandal.

The news was also an unwelcome shock to its parent, the giant Deutsche Bank of Germany, which is already reeling from a two year succession of scandals and losses among German industrial companies where it is a large shareholder, from Metallgesellschaft to the Schneider building companies.

So far Deutsche Bank,which sent Rolf Breuer, a German main board director, over to London this week, has put up pounds 180m to shore up the reputation of Morgan Grenfell's unit trust business, but the bill could rise by hundreds of millions if the City regulators decide that investors in the two London unit trusts and the Dublin investment fund which is also involved deserve compensation.

The fundamental problem unearthed by Imro, the investment management regulator that made the fateful visit alongside their counterparts from the Securities and Futures Authority, was deceptively simple. Some of the investments made by Peter Young, the manager in charge of two of the three funds, were worth less than they appeared in the books.

But when they looked further, they found an immensely complex series of transactions that can be traced back at least a year.

Mr Young appears to have been a prime mover in setting up a series of mysterious offshore companies which have been used to hide what he was doing with clients' money.

These companies have proved to be the ultimate owners of a substantial number of the investments in the funds Mr Young managed. But why did go to such lengths to obscure what he was doing? It is possible that it all began as an excess of zeal. Mr Young was a specialist in speculative technology-based companies. His expertise in this field was the foundation of his early success as a fund manager, taking the Morgan Grenfell unit trusts to the top of their league tables.

By all accounts he was a confident investor, sure of his own theories, but it is beginning to look as if he was prepared to go to any lengths to put them into practice. He believed that for every ten investments, even if four went bust the other six would be enough to pay off.

Unit trust industry rules forbid funds putting more than 10 per cent of their money into speculative stocks that do not have market quotations without special reason; furthermore, they are not allowed to buy more than 10 per cent of the share capital of any individual company.

Mr Young was breaking these rules, building large stakes in companies he believed in, and massively exceeding the overall investment limit for unquoted companies.

One interpretation of what Mr Young did was that he knew what was best for his clients, and was prepared to break the regulations if necessary, hiding the fact from his superiors.

Clients would benefit if more of their money went into what - at the time - he thought were good bets. The solution was to hide the rule-breaking investments in the front companies.

This also helped hide his carefully picked stocks from the prying eyes of the market, which might have bid up the price once it knew where the sector's top specialist was putting his clients' money. This is the benign interpretation. But investigators have not ruled out the possibility the deceptions began for a much simpler reason, to siphon off money from the Morgan Grenfell clients into private pockets.

This suspicion was the reason Morgan Grenfell and the Royal Bank of Scotland obtained an injunction to freeze Mr Young's personal assets on Wednesday.

But whatever the initial reason for setting up front companies last year, it is clear that in the later stages of the deception they have been used to hide large and growing losses and to deceive senior management at Morgan Grenfell and Imro.

There may have been several strands to this, and regulators are still unsure which way their inquiries will lead them.

Peter Rodgers