Article published in Investment International magazine August 2004
Basta de Gilipollezas
The above phrase – a Spanish insult – was how a firm called Sensible Options signed its email correspondence with Investment International.It’s nice to be popular.
Sensible Options, based in Spain, is marketing a capital guaranteed investment and expected returns of 12 per cent per year. In our opinion, there are attractions of the programme, but there are also some risks worth acknowledging, most notably that capital is not exactly guaranteed.
The investment programme is run by a Belize-registered firm called Investment Program Management Inc.
The guarantee comes in the form of a British Government Bond. The idea, says Sensible Options, is that investors buy a bond today with a higher future maturity value.
The 12 per cent yearly returns are achieved by a unique trading system that IPM employs. The program’s marketing literature and prospectus state that after the bond is purchased, the remaining funds are placed in a broker’s segregated client account, to which the investment adviser does not have recourse.
Literature says investors can choose between two brokers*: one is the highly-reputable Man Financial, subsidiary of Man Group plc, based in London, a FTSE-100 company. The other is Rock Financial Services in Gibraltar. These brokers are the only people to administer the money, and do so in accordance with the directives of the adviser.
SO’s website’s “administrative contact” is a chap called Andrew Linn, and Mr Linn’s business card accompanies the prospectus. SO tells us the trading strategy has been developed over a 19-year period by a multi-millionaire investor who is approaching 80 years of age, and who has used the method as much as a hobby as anything else over this time.
(SO never gave us the name of this investor and his name is not on the website or the prospectus, but we now know him to be Leonard Berney).
Berney carries out trades by instructing the two brokers on a monthly basis, aiming to capitalise on trading FTSE 100 Index options and producing the monthly returns in all market conditions.
Man Financial confirmed two things about the investment programme. One is that trades can indeed be effected in a risk free manner. Broadly, it is possible to buy options such as – but not exclusively - ‘iron collars’, the idea of which is that if the FTSE does not move outside a given range, then the options make profit, potentially big profit.
Man says these investments do work, and if they fail there is no loss greater than invested capital.
The problem is that such options cost money. In essence, this means that if IPM was to buy too many of these options on your behalf in error, and the options were unsuccessful, then ultimately, you the investor would owe the broker money.
To this point, SO says we are “nit picking”. “So, IPM’s trader could make a mistake. Well, so can any fund manager, investment advisor, IFA, etc! Are Investment International’s advertisers immune from making mistakes which could cost investors money?
“Of course not, so why even mention the possibility in this case? Do you mention this possibility when reviewing investment products which you approve of? I’ve certainly never seen this caveat of this sort mentioned in any investment publication ever! Is this really one of your main objections to the Programme? It makes for a pretty weak case if it is….
“I have asked Leonard Berney how many times he has bought too many options in the last 18 years. Once is the answer, since the computer programme he uses would have to run riot for it to happen (see, it could happen to anyone using a computer…), and IPM reimbursed the investor in question.”
Nonetheless, we don’t think this is nit-picking. It is an important factor of risk. Just because you have given IPM power of attorney, that does not mean that if there is an error, IPM must foot the bill if it makes an administrative error (Man confirmed this fact). Man or Rock will turn to you and ask you for extra funds to cover losses.
Incidentally, the actual amount of ‘trading capital’ (as opposed to the bond component) is likely to be somewhere around 13 per cent of your overall initial investment. This is because it will cost you around £82 per cent to buy £100 per cent in five years’ time. On top of this, there is a 5 per cent commission, leaving the amount being used to trade at around 13 per cent.
What this means is that 13 per cent must achieve somewhere in the region of 100 per cent returns (£12 on £100) in years one, two, three, four and five; equating to around 500 per cent – but then, big returns are the whole idea of the programme.
Man has confirmed that attempting to receive such high returns would be “high risk”, although, if the trades are executed efficiently, there is no risk of losing more than the amount invested.
Although no track record can be noted on a new product, Berney cites only 2 months over a 231 month period of investment when monthly income was affected by adverse trading conditions. The strategy is said to change slightly periodically to reflect changes in the FTSE.
In such times, monthly income can be suspended, but this is said to be the very worst that can happen as all other capital is fully guaranteed by the bond. But, as we have said, since the brokers have recourse to your assets under certain scenarios, this is not entirely accurate.
The investment adviser behind the scheme (Mr Berney) predicts that from past performance, a £20,000 investment will give a regular monthly income of £200 (plus, of course, that capital return in five years time).
There is an initial charge of 5 per cent levied and there is a monthly management fee of 0.25 per cent (more than 3 per cent annual), together with commission paid to the broker for each trade carried out. Despite all fees paid, the 12 per cent annual return will, says SO, be unaffected.
There are a few points that investors might want to think about. In 1998,
David Franks, chief executive of Blevins Franks, defended an investor in court against a broker after the broker (executing trades according to the instructions of Berney) sought access to investors’ funds after things didn’t go to plan.
The basis of the claim was that investors claimed to have been told their capital was guaranteed. But the fact the defence failed is the telling point.
The broker successfully argued that there was a clear clause stating he did have recourse to investors’ assets if things turned bad. And the broker won. And Man is now telling us there is a clear clause and scenario where it can have recourse to your funds.
To this, IPM retorts: “David Franks formed a group of (from memory) about 20 of these clients and organized a 'class action' defence. He charged £2,000 to each person in this group. In the event, he was not able to cancel or reduce their debts to Union Cal, so the only person to gain was David Franks!” Franks says he did not profit from this.
SO suggested "someone around here has an axe to grind" and that reporting the above incident would be inappropriate. We disagree.
The important point is that the basis of the claim was that investors believed their capital was secure (which is what SO is saying now).
More importantly, perhaps, in 1998 the Irish central bank warned that Belize-registered IPM was acting criminally (see http://www.centralbank.ie/documents/red/Warnnotice.pdf) by marketing to investors in Ireland without due authority.
It was one of 109 firms that the bank warned about. SO describes this as ‘iniquitous’ and said the firm only had a PO Box in the country. The CBI said the firm was “promoting itself as an Irish investment firm”.
*During the course of researching this article, we were informed by Man Financial that it would no longer act as broker for this scheme “after reviewing the [Sensible Options’] marketing material”. IPM says this is because Man does not act as broker to schemes where future returns are forecast. It has also asked us to point out that Man still acts as IPM's broker for other investment schemes.
R.C.G.W. writes: I was interested to see advertisements in Sur, the English language newspaper for southern Spain, saying: 'Invest your capital in a British Government bond and receive a regular monthly income of 12% a year'. Why is this bond not available in the UK?
Tony Heathrington of Financial Mail writes.
THERE is no British Government bond that yields 12% - here, in Spain, or on the moon. The only place you would get an investment like this is cloud cuckoo land.
The advertisement was placed by a Marbella firm called Sensible Options, run by Andrew Linn. But he is just an intermediary. If you had replied, you would have been asked to place at least £20,000 with Rock Financial Services in Gibraltar, or £40,000 with Man Direct, a London broking firm.
Part of your money goes into UK Government stock, but there is no way this can yield 12%. The monthly income is supposed to come from the other slice of your capital. Bluntly, bets are placed on whether the FTSE 100 index will rise or fall, and by how much, and when.
Your bets are placed by yet another firm, Investment Program Management. This firm is also on the Costa del Sol, but appears to be registered in South America and it is run by Leonard Berney.
In the Eighties, he was involved in a similar scheme in which investors lost about half their capital. Ten years ago, he advertised again from a Surrey address, claiming to have earned a consistent 41% from his index trading. The regulator at the time, the Securities and Investments Board, clamped down instantly and called a halt.
Most recently, in 1998, Berney was at it again. Using an address in Dublin, he offered a yield of 18%. The Irish Central Bank condemned the scheme as 'unlawful'.
In short, Berney gambles with other people's money. At one point, about three dozen of his clients were being sued by brokers for £3 million in losses he notched up in their names.
The current scheme may not get off the ground. The Gibraltar Financial Services Commission has ordered Rock Financial to halt business. And in London, Jonathan Welch of broker Man Direct told me his firm had severed links with the Spanish scheme. 'We don't approve of it, we don't like it and we don't want any business from it,' he said. 'We have seen their marketing material and we totally disapprove of it.'
Perhaps this explains why, when I spoke to Andrew Linn, he denied knowing who acted as brokers to the scheme, even though he himself dished out a prospectus naming Rock Financial and Man Direct.
The Financial Services Authority would only say: 'Sensible Options is not authorised by the FSA to do business in the UK, and is not connected with the British Government. Anybody who invests with an unauthorised firm will have no access to the UK investor protection regime.'
However, I can tell you that behind the scenes FSA officials have done more than this comment suggests to make sure that Leonard Berney and Sensible Options don't get a toehold in this country.
Don't let them get a toehold on your cheque book either.