Truly novel frauds are a rare thing. Fraudsters target easy money, and most frauds are variations of illicit practices that have been used for centuries.
It comes as no surprise that private credit-funded vehicles are giving rise to some of the largest fraud cases in recent times.
A drive for yield led to a highly competitive lending environment, resulting in vast sums of money being advanced on a covenant-light basis. This provided easy pickings for unscrupulous players offering the illusion of well-managed businesses behind which fraudulent operations were concealed.
Light-touch lending terms, the speed at which lending was advanced and the existence of intermediaries between “traditional” lenders and the ultimate borrower undoubtedly contributed to the ease with which frauds could be perpetrated. Pledging the same asset multiple times, obtaining borrowing against fictional invoices and shuffling money from different lenders around structures to provide illusory liquidity appears to have been surprisingly easy.
Lenders often lacked the ability to properly monitor or intervene in the underlying businesses. It seems probable that with different lending terms, some of the larger frauds would not have been able to grow so substantially before being exposed.
Achieving investor recoveries when fraud is involved can take considerable time and involve painstaking work by cross-disciplinary teams, including specialist lawyers , investigators, asset tracers and insolvency practitioners. The assets against which a lender thought it had security may not exist, or may not be adequately secured, and those perpetrating the fraud have often done their best to conceal assets. Freezing injunctions are often deployed to secure what assets may remain and get invaluable document disclosure, and investigations often take place across multiple jurisdictions to trace proceeds. England remains one of, if not the best, forum for this type of claim because of the English court’s powers.
Even for entirely legitimate structures, there are now considerable stresses as overly rosy assumptions about future earnings and low interest rates are tested.
Lawyers are engaged to scrutinise every piece of paper as parties look for ways out of future commitments or seek redress as they realise that promises made and forecasts received are not matching up with reality. The available claims are always fact and structure-specific. However, the cosy business relationships between companies, investors and lenders of a couple of years ago are increasingly being replaced by hard-nosed legal realities as parties seek to protect their positions and enforce their rights.
This article was originally published on Investment Week.
