SFO inquiry into claims of £10m fraud at property company

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A property company with close ties to the UK's political elite was left red-faced yesterday after it emerged that the police and the Serious Fraud Office are investigating an alleged £10m mortgage fraud at one of its offices.

Dunlop Haywards, a subsidiary of Erinaceous, is the target of an inquiry that began last week. As wild gossip swept City dealing rooms yesterday, the company was forced to put out a statement angrily denying "unfounded rumours about the company and its directors".

Police raided the home of one Dunlop employee last week - arresting and then releasing him without charge. Dunlop Haywards has shut its Bow Lane office in the City and suspended the employee.

The fraud inquiry is an embarrassment to the Erinaceous board, which includes several senior figures from the business and political worlds.

Lord Razzall, the Liberal Democrat spokesman on Trade and Industry in the House of Lords, is one director.

Lord Poole, previously chief executive of the Lloyd's insurer Ockham Holdings and a one-time member of Prime Minister John Major's policy unit at No 10, is another.

The details of the curious £10m mortgage deal that sparked trouble for Erinaceous are not yet known. It is known that the loan was made by Cheshire Building Society. Last week Cheshire reported a loss of £2.1m for the year, a result it partly blamed on a £10m provision for a suspected fraud.

It is alleged that the man in question valued a property at much higher than its real worth.

Cheshire said of the alleged fraud: "We have been advised by our solicitors that we have a strong case. Leading counsel has now been instructed."

Untrue rumours spread across the smaller companies desks of City dealing rooms yesterday that the chairman, chief executive and finance director of Erinaceous had all been arrested.

Sources close to the company complained of "mischief making" by some dealers.

Erinaceous is a property management and consultancy company that has strong ties to the public sector. It made profit of £27m last year.

The shares fell yesterday 8p to 385p, leaving the company valued at £403m.

Neil Bellis, the chief executive, holds 7.5 per cent of the stock.