Irish investors in German ‘pyramid scheme’ have little hope

Over 20,000 investors in total committed savings into Charles Smethurst’s GPG

Charles Smethurst, a German-born son of a former British army officer, saw reality hit home last week as authorities in Hanover continued an investigation into a suspected investment fraud that has left investors globally, including Ireland, nursing massive losses.

Prosecution officials and police from the northern Germany city searched the 60-year-old's residence in a nearby village and a number of offices on March 10th, unknown to the outside world until it emerged in media reports earlier this week.

They seized computer servers and cloud data belonging to companies within the Smethurst group, as well as smartphones, files and 25 moving boxes. A spokesman for the prosecutor's office confirmed the searches to The Irish Times.

It's all linked to an investigation launched over six months ago into a wider property empire assembled by Smethurst, known by various names over the years including Dolphin Trust and, more recently, German Property Group (GPG). It collapsed into insolvency last year, owing investors as much as €1.5 billion.


The scandal, together with the implosion of once high-flying Munich payments group Wirecard last July, has left Germany questioning its reputation as a bastion of financial probity.

But for Kathleen Dineen, a Cork woman in her late 70s who has lived with multiple sclerosis for more than 40 years, the losses are more tangible. She's only one of about 1,800 Irish investors and more than 20,000 internationally that committed savings into GPG.

Risk entailed

The case also throws into focus the risk entailed in the market for loan notes, an unregulated investment product used in this case and which has proliferated in recent years on the Irish commercial property scene. More than €500 million has been raised from loan note sales in the Republic in the past decade, according to some estimates, driven most recently by the high commissions brokers can make in this area as new EU rules have made it more difficult to make lucrative returns switching clients in and out of regulated products.

"While there are good loan note investment opportunities out there, the fact that this area is unregulated gives people the opportunity to cut corners and not give all the information to clients," said Nick Charalambous, managing director of Cork-based financial advisory firm Alpha Wealth. "You could argue, of course, that this market has grown because the regulated side of the industry has become overregulated. But the Central Bank really needs to step in."

Acting on the advice of her financial broker, Dineen says she bought €127,000 of loan notes in February 2017 that were to be used by the then-named Dolphin Trust to develop and renovate listed buildings in Germany, the High Court in Dublin heard this month as the septuagenarian sought to have an Irish special purpose vehicle linked to the German group put into liquidation.

Dolphin Trust brochures highlighted that generous tax incentives for buyers of refurbished listing buildings, or apartments within them, would ensure a ready market for the developments.

All told, 1,828 Irish investors bought €150 million of loan notes issued by Dolphin Trust between 2012 and 2019

The prospect of receiving a 13 per cent annual interest payment on loan notes four years’ ago may have seemed a no-brainer to Dineen, compared to many of the alternatives.

It was a time when Irish stock market had come out of a year in the doldrums after the fateful Brexit vote - and when the highest dividend yield of an Iseq company was about 4 per cent. And in an era of ultra-low interest rates generally, the Government was raising long-term debt at a rate of just over 1.7 per cent.

All told, 1,828 Irish investors bought €150 million of loan notes issued by Dolphin Trust between 2012 and 2019, an investment administered - and, from mid-2018, distributed - in the market by Wealth Options Trustees Ltd (WOTL), based in Naas, Co Kildare. The Irish investments were channelled to the German group through two special purpose vehicles (SPVs), MUT 103 and Dolphin MUT 116, registered to the same address and each sharing the same directors as WOTL: Eanna McCloskey and Brian Flynn.

A third director, Paul Dunne, died last October. Smethurst was also a former director of the two SPVs.

Originally, the German product was distributed in the Republic through a Cork-based company called Dolphin IG. It was sold directly to investors by scores of brokers.

Financial reserves

While the going was good, there was money to be made. Brokers earned commissions of up to 20 per cent. The fees generated by Dolphin IG meant it had €4.4 million of financial reserves in May 2018, according to company filings, that would have been available for distribution, barring movements in the meantime, when the company was put into voluntary liquidation later that year. The Dolphin IG shareholders at the time were Marc Reilly, Cormac Smith and Smethurst.

Reilly, now CEO of Europe and Asia at J Streicher Global, and Smith did not respond to efforts to secure comment. A lawyer for Smethurst did not respond to a series of questions from The Irish Times.

Founded in 2008 in Hanover by Smethurst, Dolphin Trust would raise more than €1.5 billion from investors internationally, including the UK, Singapore, Russia, Korea and France. When it collapsed last year it was sitting on 70 properties, mainly run down and not developed, according to a report submitted to the Bremen bankruptcy court by a preliminary insolvency administrator, Gerrit Hoelzle, last October.

“The originally pursued business model collapsed years ago,” Hoelzle said. “Obviously as a result of the increasing financial shortage, the business model, which was initially focused on real estate transactions, gradually developed into a pyramid scheme.”

Hoelzle was succeeded as insolvency administrator by another German lawyer, Justus von Buchwaldt, last October.

When it first emerged in July 2019 that Dolphin Trust had missed interest payments in the UK, WOTL issued a letter to brokers highlighting how Irish investors were protected, saying it only passed on money to Germany “when we have security in place for a value in excess of the funds loaned”. As of that May, the “face value” of security held was about 182 per cent of loans advanced. “The security is held (or has been ordered) as a first legal charge assigned to the Irish [MUTS].”

WOTL circulated a frequently-asked questions (FAQs) document in October 2019, saying it had “investigated the operation of Dolphin Trust consistently over the past eight years”, visited the group’s offices several times a year and met its top executives at least annually.

Addressing concerns that Dolphin Trust had not filed annual accounts since 2015, normally a red flag, it offered: “The accounting system in Germany differs to that in many other countries. Audited accounts only show historical information and the system in Germany allows filing of accounts some time after their relevance. Dolphin have provided an audited cash-flow statement … to allow us to check their ability to pay coupons and repay capital.”

Within weeks, however, Dolphin Trust would tell WOLT that it was not in a position to meet coupon payments due to Irish investors in December. The Naas firm, as administrator of the MUTs, hired a number of advisers, including law firm Dentons, to try and protect the interests of the Irish investors.

A number of promised timelines for outlining proposed ways forward came and went, Mr Justice Brian O'Moore concluded in his judgment

On January 29th, 2020, it issued another update, saying MUT 103 and Dolphin MUT 116 held security more than €111 million of GPG assets, and that this had been confirmed by WOTL’s German lawyers and debt restructuring specialists Dolphin Trust was using.

“We are free to enforce this security at any time, however, our initial advice is not to rush into taking the security as realising the full value of these assets will take some time,” it said.

Meanwhile, MUT 103 defaulted on a €135,890 capital and interest payment due to Dineen when her investment matured in February 2020. She began corresponding through her son with MUT 103 and WOTL last May, but found herself “consistently fobbed off” as she sought answers, her counsel, Bernard Dunleavy SC, told the High Court on March 1st, as part of the investor’s petition to have the insolvent MUT 103 put into liquidation.

A number of promised timelines for outlining proposed ways forward came and went, Mr Justice Brian O’Moore concluded in his judgment on March 10th.

But, by then, an WOTL email to brokers five weeks ago outlined the difficulties investors face in any attempt to get hold of assets.

It said that Dentons had confirmed that certain property securities “exist”, are “largely within Dentons’ control” and “can be linked” to MUT 103 and Dolphin MUT 116. These have a “face value” of €85 million. It added that further paperwork was required to get hold of security documents over another property, which had a face value of €92 million.


However, a footnote to the letter stated that the face value refers only to the value of the security registered in land registry records. An independent valuation obtained by WOTL in 2018 suggested the valuations were about 37 per cent lower. Furthermore, the valuations were based on the completed gross development values of the properties - after the deduction of development costs and developers’ returns – and not their current state.

WOTL also warned that Dentons faced potential legal challenges enforcing security as a result of ongoing fraud investigations in Germany and as GPG is going through the insolvency process.

Investors can have no recourse to the Central Bank-run investor compensation, as these are not regulated products

Dentons options provided to the court earlier this month said the GPG insolvency administrator believes that all of the loan claims of the Irish MUTs – which owe Irish investors €107 million – against the German group’s companies are “subordinated and therefore the granted securities could be challenged”.

“I am proceeding on the basis that the directors of the company (MUT 103) have no culpability, either moral or legal, for the potential problems with the security provided to it. Nonetheless, there is a stark difference between the position on security described to the brokers by WOTL and the situation as set out by Dentons,” said O’Moore. “The security obtained by the company, central to the protection of investors, was taken on the watch of (among others) the current directors. For the purpose of enforcing this security, and seeing off any challenge to it, it would be preferable that the company now comes under the stewardship of a liquidator supervised by the court.”

The liquidator, Myles Kirby of Kirby Healy Chartered Accountants, is currently trying to get his head around MUT 103's affairs. "At this early stage, it is not possible to give any indication of the likely outcome for investors, but the aim is to maximise their returns," Kirby said, adding that the directors are "co-operating fully".

Meanwhile, the directors of Dolphin MUT 116, also McCloskey and Flynn, said they “hope to make a decision shortly” on this vehicle, which was geared towards pension investors and owes investors €65.8 million of the total €107 million.

Retirement savings

The Sunday Times reported last weekend that the Pensions Authority is investigating how retirement savings were put at risk in Dolphin MUT 116. A spokesman for the authority declined to comment, while WOTL said that it has "regulator engagement" with the agency on a number of matters.

Back in Hanover, Smethurst is reported to be co-operating with prosecutors

The wind-up of GPG will take years. Litigation may also be in store. Dentons has proposed that overseas advisers to the MUTs should be investigated. Keith Rolls, a senior solicitor with Dublin-based Coleman Legal, said he has "received instructions from clients to pursue action against a number of parties involved in the creation and selling of these products". He declined to say how many affected investors are on board.

Investors can have no recourse to the Central Bank-run investor compensation, as these are not regulated products. The bank said that expanding its role is a matter for the Oireachtas, but that brokers must clearly inform clients when they are being offered unregulated products.

Back in Hanover, Smethurst is reported to be co-operating with prosecutors.

The FAQ document sent around in late 2019, in an effort to assuage investors’ fears, offered a vignette of the man they were ultimately backing, saying the married father-of-two was a lover of nature, active football player, and a “well-read non-fiction specialist”.

For investors facing little prospect of recovering their money, their experience belongs to the financial thriller genre – without a happy ending.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times