£160m vanished and investors offered 5p in the pound, when does a bad investment become a scam?

Investment involves risk. Sometimes businesses fail, investments collapse and people lose money. That’s an uncomfortable reality, but it doesn’t automatically make somebody else responsible for the loss.

But what happens when an investment is alleged to have been something very different? That’s the uncomfortable question raised by the collapse of Godwin Capital.

Around £160 million was raised from approximately 2,500 investors through loan notes. The company subsequently collapsed and investors are reportedly expected to recover just 5p for every £1 they invested.

Insolvency practitioners have alleged the business operated as a Ponzi scheme and a £155 million claim has been launched against its directors alleging fraudulent trading, mismanagement and breaches of duty. These remain allegations and the directors have not publicly commented on them.

Now Lloyds, which received the investment money, has reportedly rejected at least one investor’s attempt to obtain reimbursement under banking fraud rules.

Its reasoning raises an important question.

Lloyds reportedly told the investor that the payments were investments in a “legitimate company” and that there isn’t currently evidence showing the money wasn’t invested as intended.

We should be careful here. That doesn’t mean Lloyds has done anything wrong, nor does it mean every Godwin investor is legally entitled to their money back.

But there’s a much bigger consumer issue, at what point does a failed investment become a fraud?

If I knowingly invest £20,000 in a risky business and it subsequently collapses, that’s my investment loss. But if I’m persuaded to transfer £20,000 because of false representations about where my money is going, how it will be used or the security protecting it, that’s potentially something very different.

Simply attaching the word “investment” to a transaction shouldn’t automatically end the discussion about fraud protection.

This matters because the FCA itself is warning consumers about unregulated loan notes and mini-bonds, saying investors can lose everything and may have little or no protection when things go wrong.

Consumers absolutely have responsibilities too. High guaranteed returns should ring alarm bells and nobody should invest money they cannot afford to lose without understanding where it’s going.

But personal responsibility cannot answer every question.

We need much greater clarity about where an investment loss ends and fraud begins, and what responsibilities banks have when they’re receiving enormous sums of investors’ money.

Because a bad investment and a scam are not the same thing, but neither should calling something an “investment” become a convenient way of avoiding the question.

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Dean Dunham KC presents LBC's Consumer Hour

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