Simon 0:03

Welcome back to Fraud Files. My name is Simon, and I'm the interviewer on this podcast, which brings you real life case files and forensic insights into a number of white collar frauds, financial crimes and misdemeanours that your host Edward has personally encountered, and in some cases brought to light, during his financial, corporate and business career. He shines the spotlight on both the frauds and the perpetrators. Edward, in part one of Shanghai Surprise you gave the listeners an overview of your experience, over many years, doing business in China and also your expertise in investing in real estate and in promoting real estate investment opportunities in China, particularly in Shanghai, to high net worth individuals in your home countries. In this episode, your're going to tell us about the specific details of one particular alleged fraud that you had first hand experience of.

0:57

Hi, Simon. Yes, that's right. I have had experience of a number of alleged frauds perpetrated against foreign investors in Shanghai Real Estate, which I'll be covering over the next few podcasts. And today I'm gonna focus on one particular alleged fraud.

Simon 1:13

Okay, let's have it.

1:14

Sure. Hang on. During this rollercoaster, it's gonna be some ride. Imagine investing a large sum of your money. In an overseas property only to find out that there was a huge scam taking place and that you and your fellow investors had been completely hoodwinked and deceived by the promoter of the investment.

Simon 1:35

Doesn't sound great.

1:36

The sheer audacity and brazenness of this purported scam is mind boggling.

Simon 1:41

We're all ears.

1:43

It all started in 2004 when a young Irish banker named Mark Carroll joined a company called Shanghai Vision based in Dublin, Ireland, whose principal business activities were promoting and managing investments in apartments in Shanghai, principally to cash rich, Irish and UK investors. Shanghai Vision had enjoyed considerable success sourcing apartment schemes from developers in Shanghai, and bringing a large number of investors on board. In total, the firm sold approximately 600 apartments over a few years across its various residential schemes, all of which it continued to manage at that time. Back then the Celtic tiger was roaring. And there was a large cohort of investors who were keen to invest overseas in anticipation of high returns. You have to remember that China was a very attractive destination for many of these investors given the booming economy and the buoyancy of its real estate sector, which was being driven by massive urbanization and a rapidly expanding middle class.

Simon 2:53

What was Mark Carroll's role at Shanghai Vision?

2:56

Mark was in charge of the Irish sales operation and he led the way in promoting new schemes to Irish investors, new schemes in Shanghai.

Simon 3:08

So how did he come to be a key player in this business?

3:11

Well. In 2006, so there's a couple of years after Mark had been working with the company, the initial founders of Shanghai Vision decided for reasons that are best known to themselves to exit from the business and to hand over the reigns, including new business opportunities to mark. So Mark aged 27 set himself up in the business and then established an Irish registered company called Vania Limited. This company was owned by Mark and his wife, and it operated from the same address in Dublin where Shanghai Vision had been located. Around that time, Shanghai Vision had been appraising an investment opportunity in a residential development called Financial Plaza, which was located in the Pong financial area in Shanghai Financial Plaza consisted of three blocks of apartments. Which had been built six years earlier in 2000, and an opportunity had been identified to purchase one of the blocks consisting of 126 apartments for a promotion to Irish investors. And Mark decided to run with the promotion of this investment opportunity in his newly formed Dublin based investment company. Mark was clearly a young businessman with big ambitions.

Simon 4:36

So when did you first come across Mark?

4:38

Well, as I have previously mentioned, I was running my own real estate investment business focusing on residential apartments in Shanghai, and I was of course keen to see what the competition, if you want to call them, that were up to. So I went along to a presentation at which Mark and some of his colleagues were promoting the Financial Plaza investment opportunity to prospective Irish investors. Mark was certainly giving the presentation the blue sky treatment. And he appeared professional, knowledgeable, and well organized. But little did I know what would unfold a number of years later.

Simon 5:14

Did you have any further dealings with Mark or with his Chinese operations?

5:18

Yes. A few years later I had some clients who I was advising on their Shanghai apartment investments who were becoming worried about how the then management company in Shanghai called Shanghai Vision Asset Management was handling their investments. And so on one of my visits to Shanghai, I met with the local management team of the management company. On the basis that I was representing certain specific investors who had given me the introduction and had asked me to review their investments. And so I was able undercover, so to speak, to go look at some of the apartments under management and also to ask various questions of the management team so that I could report back to my clients. Well, I began to get a sense at that time that something was rotten in the state of Shanghai. If you know what I mean, and this just accelerated the instructions. I was then given by clients to start selling their Shanghai apartment investments through my local real estate business so that they could exit Shanghai and get their money back home safely.

Simon 6:25

So specifically in relation to Financial Plaza and the investors in that development, can you tell us more?

6:31

Sure. In 2007, more than a hundred investors, the majority of whom were based in Ireland, invested a total of around 35 million into the scheme being promoted by mark of this amount. About 30 million was they thought to be spent on the purchase of the building. And the remainder of about 5 million they thought was to be spent on various costs and fees, including 1.8 million to be spent on refurbishment, upgrading and fitting out the apartments in order to put them into a proper state of condition and repair. Suitable for letting. And they were told that there would be a 5% conveyance in cost for each apartment amounting to 1.5 million in total. And of course there was also the finder's fees and ongoing management fees to be paid to Mark's company.

Simon 7:22

How was the investment structured and what were the fundamentals of the investment?

7:27

Well, the title to the block of 126 apartments was held by a company based in Hong Kong. And the shares in this company were held by the vendors through an offshore holding company registered in the British Virgin Islands. Not unusual for tax and fiscal reasons for foreign investments in China at that time. So in order to complete the acquisition, mark set up a holding company also in the BVI, in which each investor would have a stake. In proportion to their investment. And this BVI company acquired the shares in the Hong Kong property holding company from the vendor of the building in a share purchase agreement and SPA in 2007. Crucially, the investment memorandum issued in 2006 stated that the days group, which was listed on the New York Stock Exchange, would be the tenant and manager of the building and that it would provide a guaranteed rental income. At an agreed yield for the entire building. This was a very attractive feature of the investment opportunity for the Irish investors as the rental income would be paid by one company, a good covenant, which would then sublet the apartments to occupier. At that time, the day's group had a noticeable presence and a fairly significant residential leasing and management operation in major Chinese cities. They had a substantial property portfolio and managed hundreds of properties there. The memorandum, also stated that Clifford Chance Solicitors, one of the biggest law firms in the world. And Deloitte, the prestigious international accounting firm, would be acting on behalf of the investors in the due diligence, acquisition and investment process to look after their interests.

Simon 9:28

And Mark's company would earn fees for originating and promoting the investment opportunity?

9:33

Yes, that's right. As I mentioned, mark earned a finder's fee, which amounted to 10,000 euros per apartment, and also an application fee of 500 per apartment. So that's over 1.3 million euros for his fees. Not a bad day's work.

Simon 9:50

Nice one! So how did things go for the investors? Presumably they were happy with their investments?

9:57

Yes, of course. The investors had what they thought was a top-notch team, including reputable professional solicitors and accountants looking after their interests. A blue chip tenant, a strong guaranteed rental income, and a booming Chinese economy. Mark would regularly keep the investors informed about how well the day's group were doing as the tenant and manager of the entire building. What more could you ask for as an investor?

Simon 10:25

So why and how did things start to unravel?

10:28

Well, the first year in 2008, the rental payments, as reported by Mark, came in from the day group at the amount originally expected by the investors. But then later in 2008, there was the financial crisis in the us exacerbated by the collapse of Lehman Brothers, which sent shockwaves around the world and caused plummeting stock markets and asset prices, including very significant falls in property prices. In 2009, mark informed the investors that rental payments from Day's Group would unfortunately have to significantly decrease, which he blamed on the global financial crisis. He persuaded the investors to accept the reduction on the rents, which was supposed to be a temporary measure. The rents continued to drop significantly in the following year in 2010, and then continued at a reduced level for a number of years compared to the original guaranteed rent that the investors had been promised. The investors back home in Ireland start to get a little concerned, and they called an extraordinary general meeting an EGM of the investment holding company in 2010, at which it was decided. That three of the investors would be appointed to the company board to give better oversight for the shareholders. Mark had previously been the sole director of the company.

Simon 11:58

So what happened next?

11:59

Mark had fought hard to retain sole management and control of the company, and he tried to persuade the investors that now at the end of 2010. It would be a good time to sell the building and that he had a number of interested parties lined up and that he could get a very good profit on the sale of the building. But the investors, many of whom were experienced business people were having none of this. Mark knew that with the investors having three of their number now on the board of directors, they would've access to full information about the company's operations and to its books and records. So under pressure, in a bizarre turn of events at that EGM in 2010, mark made an astonishing revelation to the assembled group of investors.

Simon 12:47

Do tell us, what was that revelation?

12:49

Mark admitted at the meeting that the day's group was not, and had never been the tenant in the building.

Simon 12:59

What? Am I hearing you correctly?

13:01

Yes, I am afraid you're hearing me loud and clear. There was no involvement with Day's Group. In fact, the tenant all along had been a local Chinese company called Belgravia, which was owned and run by Zoo Way, a former associate of Mark's who had worked with him at Shanghai Vision. Remember Shanghai Vision, the originator of all these Chinese investment schemes for Irish and UK investors. Zu. We was also allegedly a close friend of Mark's.

Simon 13:34

Wow. Were there further deceptions?

13:36

Yes. It also emerged that neither Clifford Chance nor Deloitte's had ever acted in the investment process.

Simon 13:44

Wow. That must have been one hell of a surprise for the investors?

13:48

Yes, you can say that. And there were more surprises, even more outrageous still to come for them.

Simon 13:56

So what happened next? What investigations did the new directors carry out and what were their findings?

14:02

Well, the directors initiated high court proceedings for the disclosure of critical underlying transaction documents relating to the purchase of the Shanghai property. In particular, they requested that they be provided with a copy of the share purchase agreement, the SPA made in 2007, and the high court ordered mark to hand over the SPA.

Simon 14:28

What did it show?

14:30

It allegedly showed that in fact, Mark Carroll had purchased the Hong Kong holding company shares for an amount equivalent to 22 million euros before flipping those shares on to the newly formed company set up in the BVA for the Irish investors for an amount of 30 million. The investors alleged that this massive 8 million difference was an unlawfully made secret profit. Legal actions were initiated on behalf of the investors with the bulk of their claim and damages made up of the alleged secret profit and the rent reductions. Also, the directors formed the view that rather than a conveyancing fee of 1.5 million euros having been paid for the property, the applicable stamp duty came to an incidental sum of 5,000 euro. They also had serious concerns about the operation of the bank accounts and movement of funds in the various companies.

Simon 15:38

And so what precisely was your involvement in the legal proceedings?

15:42

While I was known to the directors. As being an accountant and also as having had considerable experience dealing in the real estate sector in Shanghai. So I was appointed as an expert witness in relation to various aspects of the high court proceedings in which Mark Carroll was being sued for fraud and breach of contract, and in particular for the total sum of 18.6 million Euro, which comprised the secret profit, the rent reductions, and other alleged fictitious costs and outlays.

Simon 16:18

And what work did you perform?

16:20

Firstly, I examined a copious amount of documents and invoices that had been furnished by Mark in an attempt to support the considerable amount of refurbishment and redevelopment works, which he portrayed had been carried out in the building before it could be made available for letting My review came to a number of conclusions. Firstly, that it was impossible to ascertain from the documents that had been provided, whether they supported in any way. The contention that there were furnishing costs incurred of 1.8 million euros. I also reviewed the documents that were provided in connection with the redevelopment costs of 2.2 million euros. It was just not possible to verify the authenticity or validity of much of the expenditure and whether it had been incurred at arm's length with independent third parties. The extent of the missing accounting information was staggering and raised alarm bells given that the building was constructed. And had been occupied only a few years prior to the reported redevelopment in 2007. It was difficult to fathom why the redevelopment project should have been so costly, particularly in circumstances where the investors were never informed at any stage or in the investment memorandum that any large scale redevelopment works would be required as part of my investigations when. I was in Shanghai. I physically viewed the building both externally and internally on the basis of an overall visual inspection of the exterior building. There did not appear to be any discernible differences in the structure or facade or condition between the block which the Irish vested had purchased compared with the adjacent two blocks, and there was no clear evidence that a substantial redevelopment of the block had in fact been carried out as was being claimed. I was also asked to give my expert opinion on the reduction in rent that had been forced upon the investors starting in 2009. The total rent reduction in rent shortfall from 2009 amounted to in excess of 7 million euros. In order to determine whether or not this rent shortfall was justified. I looked at a number of comparable residential developments with similar guaranteed rental yields, from my experience in dealing with residential property in Shanghai in the period from 2007 to 2011, rental yields of centrally located high-end residential properties were not adversely affected by the financial and banking crisis that hit Western economies in 2008, while rental growth in Shanghai was curtailed for a short period, there was no marked decline in market rents. And following a significant government stimulus program in 2009 and 2010, rental growth continued to rise steadily. This brought into question the rent reductions at Financial Plaza and the fact that these lower rents were being paid by a related party company, well known to Mark. This raised even more concerns.

Simon 19:36

So what was the get out of jail free card, so to speak, that mark attempted to play?

19:41

Well in the run up to the legal proceedings, mark continued to try to persuade the investors that he had suitable prospective purchases for the property at a substantial profit. He named a number of companies that were interested, and he also said that Belgravia, the actual tenant of the building, was willing to buy the building at a substantial profit. He also mentioned another company, YHH Limited, which he said was interested and would also net a substantial return for the investors. As part of my work, I attempted to see if there was any substance to this company, why HH Limited. I instructed one of my representatives in Shanghai to go to the address of one of the shareholders of the company, which was listed in its annual return. Remember, YHH Limited was going to be buying a property for an excess of 30 million euros, my representative took a photo of the location, which I included in my witness statement. This is the location of where the shareholder resided the photo. Showed a squalid rundown Backstreet Tenement building in Shanghai. So YHH Limited appeared to be another late in the day Deception by Mark.

Simon 21:00

So what happened next?

21:01

The case against Mark Carroll in 2013. Given the director's findings and given my expert witness report was very compelling and not long before the case was due to come to trial before the high court in Dublin, Mark Carroll settled with the investors for the sum of 3.2 million euros. The directors felt that it was better to take a certain cash sum now, albeit at a hefty discount to what was allegedly embezzled, rather than go through a trial that would've racked up already considerable legal costs with no guarantee of getting anything in the end.

Simon 21:50

So there was a Settlement of the legal proceedings. Was that the end of the matter from the Irish investors' perspective?

21:57

So for the hundred or so Irish investors in Financial Plaza, their participation in the investment really had turned out to be a Shanghai surprise, but there was somewhat of a happy ending as the building was eventually sold in 2013 for a small profit. But the good news was short-lived and bittersweet. After the proceedings with Mark Carroll had been settled, the investors wanted to sell and be rid of the property. I submitted a proposal to the board of directors for my real estate company to handle the sale of the building. I was called in to make a presentation to the directors at which I set out my credentials and my strong connections, Guangxi in the real estate sector in Shanghai. I stressed the importance of having trusted people on the ground to handle the sale that China's real estate market was full of smoke and mirrors, and that my people would ensure that the Irish investors got a full and transparent market price for the building. In the end, the directors decided to sell with a leading international real estate firm in Shanghai. The market value of the building when it was purchased by Mark Carroll in 2007, according to the SBA, was 22 million euros, albeit that the investors had purportedly been duped into paying 30 million for it. In 2013, the board of directors having appointed CBRE to sell the building, accepted a price in the region of 32 million euros. There was, however, a sting in the tail. Around nine months later, I received news through my sources in Shanghai that the building had been sold on again by the purchases for a price that was around 30% more than the price at which the Irish investors had accepted for the sale of the building. I felt it was incumbent on me to inform the directors and their legal advisor. When I emailed their legal advisor, who also happened to be an investor in the scheme about the subsequent flipped sale and the sizable lost profits, I received an immediate email response back to me expressing surprise with just a one word expletive.

Simon 24:27

We'll save the listeners from that and let them use their own imagination!

24:31

Of course. Anyhow, following my news update, there was then a duty for the board to inform the investors that as a group, they had lost out on a potential additional profit on the sale of the building of around 9 million euros. The directors attempted to justify in writing to their shareholders with input from the selling agents, CBRE, the price at which they had sold. I refrained from adding insult to injury by not saying to the board, I told you so.

Simon 25:07

Well, we all need to get our breath back after your telling us the details of the alleged financial scam at Financial Plaza. So what's next for our listeners?

25:18

In next week's episode entitled Chinese Takeaways, I'm going to be shining the spotlight on a number of other brazen frauds that I had firsthand knowledge of in China that were perpetrated. Against other groups of duped overseas investors, and trust me, there will be more surprises.