Dirty deeds: pitfalls for investors

The winding up of construction and property firms has unfortunately become all too familiar news. Yet a recent case to appear in front of the High Court should be a warning to anyone trying to invest in the current property market.

The Investment Building Bank of London (IBBL) was the case in hand. Between 2007 and 2008, IBBL attracted the interest of various investors through newspaper and web adverts offering top quality London commercial and residential property at knock-down prices. Studio flats in London were being offered for as low as £60,000, with a typical deposit of only around £9,000. Similar deals were also offered on commercial properties as well.

Questions began to arise as to whether IBBLs offers of properties at often half the price of low-cost property in London were really as genuine as they appeared to be. Suspicions about IBBL were further aroused when it began to claim it could create exponential growth in investments in the bank.

In October 2007, The Mirror newspaper investigated IBBLs claims to be able to turn a £1,000 investment into a £10,000 return, despite IBBL having only been running for six months in the UK and owned by two Russians – Maxim Chernov and Andrey Biba – with no known banking experience. Interviewing the bank’s manager, Art Wright, The Mirror ascertained that the investment potential was hedged on the estimated value of stock based on the planned flotation of IBBL in 2009. IBBL had no guarantees that such sums could be reached – or that investors would see their money again if the bank folded prior to flotation. Mr Wright also pointed out  that despite the name ‘bank’, IBBL wasn’t a bank: “It’s a construction company.”

 Such a clearly misleading company title would make most investors steer well clear. But IBBL plowed on with advertising for flats and investment. After all, as Mr Wright had sought to reassure The Mirror: “We’ve been operating successfully for seven years, I don’t see how it will go bankrupt.”

IBBL, supposedly worth £4bn, was wound-up in late 2009; exactly the time it had planned to float on the stock market. As the Insolvency Service moved in to recoup assets however, the bubble burst. They discovered that IBBLs claims of property ownership and investment potential were not just inflated; they were simply untrue. There were no assets to retrieve.

Chernov and Biba had reportedly abandoned their luxury Knightsbridge offices upon news of the Insolvency Service’s imminent arrival; still owing thousands of pounds to the office owners, Cheval Property, not to mention an unknown number of investors. The Insolvency Service has been unable to make contact with the pair. In the meantime, IBBLs website has since ceased operations and now appears to be up for sale.

If it had not been for the recession, perhaps this cautionary tale could have been far worse. Adverts could have continued to attract investors’ attention and inflated this scheme to disastrous proportions.

The state of the market in 2007 is far different to where we are now. Yet as some investors look to make a small but reasonable investment as an alternative to the low interest rates offered by the banks currently, they should remember to take caution. As the cases of Stanford and Madoff  have proven, a high profile or heavy advertising do not guarantee that an investment is genuine.

Incredible deals and unbelievable returns offered in any market should be enough to make investors wary of where they’re putting their money. Thus the old saying remains true – if it looks too good to be true, it probably is.